吉利德科學 (GILD) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Gilead Sciences second quarter 2003 earnings conference call. (CALLER INSTRUCTIONS) As a reminder, this conference call is being recorded, Thursday, July 31st, 2003.

Your speakers for the day are John Milligan, Senior Vice President and CFO, John Martin, President and Chief Executive Officer, and Mark Perry, Executive Vice President of Operations.

I would now like to turn the call over to Dr. Milligan.

Please go ahead, sir.

Good afternoon.

And welcome to Gilead's second quarter 2003 conference call.

We issued a press releases this afternoon providing results for the second quarter ended June 30th, 2003 and describing the Company's quarterly highlights.

This press release, along with additional financial and statistical information, will be discussed today in our call, and can be found on our website at www.Gilead.com.

Also joining us on today's call are Susan Hubbard, Director of Investor Relations, and Mike Aguar (ph), Vice President of Finance.

I will begin the call by reviewing the second quarter financials.

Then John Martin and Mark Perry will take you through the corporate and commercial highlights for the quarter.

We will keep our comments relatively brief to allow time at the end of this call to answer your questions.

First, let me start with the standard Safe Harbor statement.

I would like to remind you that we will be making forward-looking statements relating to the financial results and clinical and regulatory developments.

These statements are subject to the occurrences of many events outside of Gilead's control, and are subject to the various risks that could cause our results to differ materially from those expressed in any forward-looking statement.

I refer you to our publicly filed SEC disclosure documents for a detailed description of the risk factors affecting our business.

Gilead had a strong financial performance in the second quarter as sales, gross margins and operating cash flow all improved significantly.

Product sales were up 146 percent compared to the same period last year.

Gross margins on our product sales expanded by 5 percentage points.

And cash flow from operations increased by $58 million.

When comparing the second quarter over the first quarter of 2003, the growth of product sales was 48 percent.

Now turning to the specifics for the quarter.

For the second quarter 2003, the Company reported net income of 100.4 million or 46 cents per diluted share.

This compares to an income in the second quarter of 2002 of $19.7 million or 10 cents per diluted share.

Total revenues for the second quarter of 2003 were $238.9 million, a 118 percent increase over the same period last year.

This growth was driven by substantially higher product revenues, particularly for Viread.

Net product revenues were $230.7 million during the second quarter, which compared favorably with the second quarter last year when we reported 93.8 million in net product revenues.

Viread revenues grew to $167 million compared to $44.7 million in the second quarter of 2002, and $107 million last quarter.

Sales in the U.S. were $115.6 million.

And revenues outside of the U.S. were $51.4 million.

This strong growth in both the U.S. and Europe was driven primarily by higher prescription volumes, a favorable currency environment in Europe, and a significant increase in U.S. wholesaler inventories.

In the U.S., prescription volumes continues to increase as more physicians recognize the benefit of prescribing Viread to their patients.

For the second quarter of 2003, prescription volumes is up 116 percent compared to the same period last year, and 15 percent compared with the first quarter of 2003.

Outside the U.S., sales growth was driven both by rapid volume expansion and a favorable foreign currency environment.

We now sell Viread in all countries in the European Union, as well as Australia, whereas last year at this time we were only launched in the United Kingdom, France, Germany and Portugal.

For the second quarter 2003 Viread volume in the European Union and Australia grew by more than 400 percent compared to the second quarter last year, and was up 33 percent compared to the first quarter of 2003.

Foreign exchange also contributed to higher revenues, adding $5 million compared with the second quarter last year, due to the stronger Euro relative to the U.S. dollar.

Of significant note, we believe that a substantial inventory build occurred in U.S. distributor channel during the second quarter as wholesalers anticipated the Viread price increase announced on June 27th.

Though difficult to determine the exact figure for this inventory build, we estimate that wholesaler inventories increased by 25 to $30 million during the quarter.

In summary, global Viread performance improved by 56 percent on a revenue basis, and by 57 percent on a volume basis compared to the first quarter of 2003.

Hepsera revenues continue to grow as well.

In its third full quarter on the market, sales from Hepsera for the treatment of chronic hepatitis B were $12.4 million, up from $5.8 million last quarter.

We're pleased with the recent progress in launching Hepsera, which is now available in six countries.

Finally, sales of AmBisome were $51.2 million for the quarter, a 7 percent increase over the same period in 2002.

This result was driven primarily by a favorable foreign currency environment which offset slightly lower volumes.

The total foreign exchange impact on AmBisome sales was $7 million compared with the same quarter last year, while volume declined by approximately 4 percent in Europe.

For the second quarter of 2003 Gilead recognized new royalty revenues of $7 million compared to $6.7 million for the same quarter in 2002.

Tamiflu royalties from Hoffmann-La Roche were $3 million.

And AmBisome royalties from Fujisawa for sales in the U.S. for the second quarter were $3.3 million.

For the second quarter of 2003 Gilead recognize net contract revenue of $1.2 million.

This compares to 8.8 million in contract revenue for the same quarter in 2002, which included 8 million of milestone revenue, which was recognized for the European approval of Tamiflu.

Gross margins were 86.1 percent, up 5 percentage points versus the second quarter last year.

This improvement was largely driven by a favorable product mix, as Viread and Hepsera accounted for approximately 78 percent of our product sales.

The favorable currency environment also contributed to gross margin improvement.

Now turning to expenses.

Total spending was below our previous guidance on an annual run rate basis.

The primary drivers of this favorability were lower-than-expected headcount, and the timing of various R&D and sales and marketing programs.

Research and development expenses were $38.8 million for the second quarter of 2003, up 26 percent compared to the same quarter in 2002.

The increase in R&D expenses for the second quarter of 2003 is primarily attributable to the clinical trials associated with the development of Emtriva and the other drug candidates in Triangle's antiviral drug portfolio.

Our actual R&D spending in the second quarter was significantly below prior guidance due to lower than anticipated spending on the trial in Triangle products, particularly Proclivity (ph) for hepatitis B, which we are in the process of returning to Boquan (ph) Pharmaceuticals, and Amdoxovir for HIV, as we delayed the start of the phase 2 study, pending redesign of the clinical program.

These changes have implications on our full year guidance for R&D spending, which I'll update for you in a moment.

SG&A expenses for the second quarter of 2003 were $60.2 million, up 45 percent from the $41.6 million in the same quarter of 2002.

The increased spending in SG&A for the second quarter of 2003 is primarily attributable to Gilead's increased global marketing efforts to support the commercial launches of Viread and Hepsera, and higher G&A expenses associated with the additional infrastructure investments required to support our recent and projected growth.

On an annual run rate basis, SG&A spending is below our previous guidance for the full year of 2003.

This lower spending is due to timing issues related to certain expenses such as the postponement of two major conferences, and delays in marketing programs.

It is also due to permanent differences such as lower-than-expected headcount due to slower hiring activities during the first half of year.

We continue to expect expenses to ramp up in the second half of the year due to increased sales and marketing costs, such as the reason expansion of the sales force, and the projected increases in promotional programs throughout the year for Viread, Hepsera and Emtriva.

As discussed, foreign exchange is favorable during the quarter due primarily to the strengthening Euro relative to the dollar.

The total net impact of foreign exchange on our earnings for the second quarter was $8.9 million compared to the same quarter last year.

This includes the foreign exchange effect on revenues X U.S. spending, and the results of our hedging program.

The last item I would like to highlight in our income statement is the share count used to calculate our fully diluted EPS.

As you probably noticed, the shares used to calculate fully diluted EPS grew to approximately 230 million from approximately 198 million last quarter.

This increase reflects the impact of the FAS 128 calculation, which now includes the dilutive impact of both of our outstanding convertible securities offerings and our employee stock options, due to our higher earnings and the fact that these converts are now in the money.

Finally, for our currently results I would like to turn to the cash-flow statement and balance sheet to highlight our strong, cash-flow performance for the quarter.

Operating cash flow improved to $59.4 million for the second quarter, compared with $1.2 million for the same period last year.

As a result of this improvement, total cash, cash equivalents and marketable securities is now in excess of $680 million.

Now I would like to provide guidance for 2003, starting with revenues.

We're increasing our guidance for Viread based on solid year-to-date results and favorable market trends.

Our new forecast is 550 to $600 million, up from last quarter's guidance of 475 to $500 million.

Based on the U.S. inventory build seen in the second quarter, we anticipate Viread sales for the third quarter will be at or below the sales level recognized this second quarter.

We expect these inventories to be drawn down to more normal levels during this quarter.

For AmBisome, we continue to remain cautious due to the increasingly competitive landscape.

In particular, the launch of Vfend in Europe and the U.S.

However, we are slightly increasing our guidance for AmBisome to 170 to $180 million, mainly based on the prospects for a strong Euro relative to the U.S. dollar.

We will not be providing guidance on Hepsera or on potential revenues for Emtriva at this time.

We reiterate our contract revenue for the year, which is expected to be in the range of 4 to $6 million, spread fairly evenly quarter over quarter.

Product gross margins are projected to be approximately 84 to 86 percent for the full year 2003.

This guidance is unchanged from last quarter.

While margins were slightly higher than this during the second quarter, we anticipate that margins will moderate slightly during the remainder of year as the government mandated price reductions for Viread in Europe during the second half of year offset a more favorable product mix.

Now turning to expenses.

We're lowering our guidance for R&D spending in 2003 to the range of 165 to $180 million.

This decrease from last quarter's guidance in expenses is principally associated with the termination of our license agreement with Boquan (ph), the development of Clevudine, the delay in the development of Amdoxovir for HIV pending redesign of the phase 2 clinical program, and a more rapid rationalization of the expenses associated with our derm (ph ) operations than we had anticipated.

We are reiterating our guidance for SG&A expenses for 2003 to the range of 240 to $260 million.

And finally, because of our ability to utilize our NOLs, we reiterate our previous guidance for our tax rate, which we expect to remain in the mid single digits for the full year.

In summary, Gilead had a strong financial quarter based on increased product sales and decreased expenses.

Looking ahead, Gilead will continue to make the investments we believe necessary to promote our products and to build a strong and independent global business.

This concludes the earnings reporting section of this conference call.

At this point, I would like to turn the call over to John Martin and Mark Perry, who will review our corporate and commercial highlights for the second quarter.

Thank you, John.

Good afternoon everyone and thank you for joining us.

We are pleased to share with you today Gilead's many accomplishments in the second quarter of 2003.

I will begin by briefly reviewing our business highlights, then Mark Perry will review our commercial and pipeline products and cover our goals for the coming months.

Gilead had another very productive quarter executing on many important milestones, both in the U.S. and internationally.

Fueled by the continued commercial success of Viread, the contribution of AmBisome in the face of increasing competition, the launch of Hepsera now in the U.S. and several countries in Europe, and the recent U.S. approval of Emtriva, we believe that we're well-positioned to achieve our ambitious financial and operating goals for 2003, while continuing to build a worldwide anti-infective franchise.

In order to focus on our pipeline products that have the greatest potential to address unmet medical needs, we announced in June our intent to end our license agreement with Boquan for the development and commercialization of Clevudine, or LFMAU.

As you may know, Clevudine was one of the compounds we received from the acquisition of Triangle Pharmaceuticals earlier this year.

While the compound appears to have interesting attributes, we believe that with the introduction of Hepsera for chronic hepatitis B in the U.S. and Europe, patients and physicians now have an option to treat this challenging disease.

I would also like to talk briefly about our ongoing commitment to global health.

In an effort to address the need for access to HIV treatment in developing parts of the world, we announced the commencement of the Gilead Access Program in April.

We made this announcement on the morning that we had the honor of opening the NASDAQ market.

Under this program we will provide access to Viread at no profit to every country in Africa, and in 15 additional countries in other parts of the world classified as least developed nations.

We have already received applications requesting Viread from several countries, and have begun the process of supplying drug to qualifying treatment programs in these areas.

In addition, we're partnering with a variety of both government and nongovernmental entities to provide, as well as study, the impact of Viread in developing parts of the world.

Most recently, we initiated a collaboration with the AIDS Health Care Foundation, the largest AIDS organization in the U.S., to provide free of charge Viread and Emtriva, our second HIV product just approved in the U.S. this month, to 1000 patients currently under care at ASH AIDS treatment Clinic in Uganda.

With their efficacy, strong safety profile and simple one tablet, once-daily dosing, both Viread and Emtriva have attractive profiles for use in developing parts of the world.

We're proud to be a part of the effort to address the global HIV epidemic.

To further our efforts to make our products available to HIV-infected patients worldwide, this morning we announced that we've entered into a licensing agreement with Japan Tobacco, under which they will commercialize products in Gilead HIV portfolio in Japan.

The agreement covers Viread, Emtriva and the future co-formulation of the two products.

Under the terms of the agreement we received an upfront fee and are entitled to receive additional cash payments upon achievement of certain milestones.

We will also receive a significant royalty from Japan Tobacco based on product sales.

Japan Tobacco will submit applications for Viread and Emtriva to Japanese regulatory authorities in the near future and expects that the products will be on the market next year.

We're very pleased to have entered into an agreement with such a capable partner as Japan Tobacco, which has a proven track record with the successful commercialization of Viracept in Japan.

I will now turn the call over to Mark Perry to review our commercial products and discuss our upcoming milestones.

Thank you, John.

And good afternoon.

Turning to our commercial operation, Viread sales in the second quarter totaled $167 million, including 115.6 million in the U.S. and 51.4 million from sales outside the United States, including Europe and Australia.

We're pleased with the second quarter results and believe that we're on track to achieve our revised guidance for Viread in the range of 550 to $600 million for the full year, as John Milligan described earlier.

In the U.S., for the week ended July 18, 2003, Viread new prescription market share for the NtRTI class is 19.3 percent.

And total market share for this class increased to 18.9 percent.

By both measures, Viread market share now exceeds that of all approved NtRTIs except Epivir.

Viread is within a few prescriptions of passing Epivir, which is the number one prescribed antiretroviral in the U.S.

We estimate that there are about 150,000 patients on Viread currently in the U.S. and Europe resulting in a combined patient care of about 25 percent.

Viread's profile continues to be one of the best of any antiretroviral on the market.

Based on the clinical data we have generated, Viread's advocacy, safety, tolerability, convenience and resistance profile support its use in all stages of a patient's HIV disease.

Several recent events will enable us to continue the commercial momentum of Gilead and Viread both in the U.S. and abroad.

First, earlier this month Gilead participated in the International AIDS Symposium in Paris.

This week after we received authorization from the European Commission to expand the indication of Viread to include treatment-naive patients through.

This, coupled with the fact that we presented positive 96 week efficacy, safety and resistance data from Study 903, gave us an opportunity to educate the international treating community about the unique attributes of Viread.

Study 903, as you will recall, is our ongoing clinical study in 600 treatment-naive patients.

Comparing Viread to BMS's D4T, with a background therapy of GSK's lamivudine and BMS's Afaberine (ph).

Gilead will also benefit from the recent publication of revised guidelines for the treatment of HIV from the U.S.

Department of Health and Human Services.

These guidelines position Viread as part of a preferred initial regimen among NtRTI based combinations for naive patients.

Viread's inclusion in the guidelines is of particular important as we continue to target mid defile (ph) prescribers in the U.S.

We tent to be slower adopters of new anti retrovirals.

In addition, we expect that 48 week data from Study 903 will soon be included in our U.S. package insert, which will allow our sales reps to proactively detail the favorable results.

Another potential growth driver for Viread is the recent approval of Emtriva, which occurred on July 2nd.

Based on positive data from clinical trials in both treatment-naive and treatment experienced HIV patients, Emtriva is indicated for the treatment of HIV infection in adults in combination with other antiretroviral.

This approval marks our second once-daily antiretroviral for HIV, and our third antiviral to receive FDA approval in less than two years.

We're launching Emtriva in the United States through our recently expanded sales force of 65 specialty sales reps supported by 8 medical science liaisons, all dedicated to our HIV franchise.

We priced Emtriva at a wholesale acquisition cost of $252.83 per bottle of 30 pills, or roughly $3,000 per a year's course of therapy.

The price is on parity with GlaxoSmithKline's price for Epivir.

Emtriva has already been added to the eight (inaudible) formularies in 28 states, including California, New York, New Jersey and Florida.

On the European front, we announced last week that the European Union's Committee for Proprietary Medicinal Products, which is the scientific committee of the EMEA, has recommended granting marketing authorization for Emtriva in the 15 member states of the European Union.

We expect final action from the European Community regarding approval of the drug before the end of this year.

Because of their profiles, we believe that a regimen containing both Viread and Emtriva offers patients an effective, safe and tolerable backbone of therapy that is conveniently dosed at two pills, once a day.

As you know, we're working on a co-formulation of the two products, which will result in two drugs in one pill dosed one today.

We have completed the co-formulation work, and had begun the stability studies required for approval.

We will also be initiating this quarter the bio-equivalent study that is necessary to demonstrate that the co-formulated pill provides the same blood levels as both drugs given separately.

Our discussions with the FDA regarding what will be required for regulatory approval of the co-formulated product can begin now that increased Emtriva has been improved.

Our current expectation is that we will launch the co-formulated product in early 2005.

We will update you after you've had a chance discuss the filing and review requirement with the FDA and the EMEA.

To support marketing of the co-formulated product, we are initiating a study in 300 treatment-naive HIV-infected patients, comparing Viread and Emtriva head-to-head with Combivir, with efavirenz in both arms of the study.

Patients on the Viread and Emtriva arm will be switched from the individual drugs to the co-formulated product following the review of the bio-equivalent study by Gilead and the FDA.

Turning now to Hepsera for chronic hepatitis B. In the United States, Hepsera has garnered 38 percent of the new prescription market and 36 percent of the total prescription market, relative to the other antiviral on the market, lamivudine.

At the end of the second quarter we believe there were approximately 7,500 patients on Hepsera in the U.S., up from about 5,000 at the end of the first quarter.

We continue to launch Hepsera in Europe and now we are in the market in the United Kingdom, France, Germany, Portugal and Ireland.

In addition to these countries, we have obtained pricing and are about to launch Hepsera in Norway, Austria and Sweden.

We anticipate these launches will be followed by the important southern European markets of Spain, Greece and Italy, where we expect to obtain pricing in late 2003 and into 2004.

In addition, we have received regulatory approval for Hepsera in Australia, and have applications under review in Canada, Switzerland and Turkey, countries where we have retained rights for the drug.

We reported sales for the second quarter of 12.4 million, 9 million in the U.S. and 3.4 million in Europe.

At this early stage in the launch, we're pleased with the performance of Hepsera.

In territories where GlaxoSmithKline has rights to the drug, it is anticipated that the first launches of Hepsera will occur in next few months in Singapore and Hong Kong.

In other key Asian markets, including Taiwan, Korea, China and Japan, we anticipate launches to occur through 2004 and 2005 following completion of the regulatory review processes.

At the 11th International Symposium of Hepatitis Liver Disease in Sidney Australia in April, we presented results from pivotal Study 438 showing that at 96 week Hepsera reduced liver damage and improved liver function in more than 70 percent of the patients with hepatitis B, E antigen negative disease (ph).

Importantly, we're seeing less than 3 percent resistance development to Hepsera at the two-year endpoint.

Our data continues to show that driving down HBV viral load with Hepsera therapy can have a long-term positive impact in the function of the liver.

And the 96 week data provides us with an additional tool we can use to educate physicians on the clinical benefits of treatment with Hepsera.

We continue to see a gradual increase in first-line use, as well as proactive switching from lamivudine to Hepsera, although a majority of U.S. sales continue to be either in lamivudine failures or in combination with lamivudine.

We anticipate we will present 144 week data from Study 461, which is our study in HIV HBV co-infected patients, later this year, possibly at AASLB in Boston this October.

The generation of long-term data that continue to demonstrate Hepsera's impact on the improvement of the liver, coupled with a low resistance rate and a very clean safety profile, will be important in changing the way this disease is treated, from a disease of the liver to a viral disease.

Hepsera is now listed on a significant number of the major formularies in the United States and has been assigned reimbursement tier status that, in general, is on par with lamivudine in most cases.

As we announced at launch, the wholesale acquisition cost for Hepsera in the U.S. is $5,353 per year or approximately $440 per month.

X factory pricing in Europe, in countries where Hepsera has launched, specifically Germany, France and the UK, ranges from approximately 5,800 a year to 6,500 year, with Germany at the high-end.

We expect pricing to be in the lower in the other European countries.

Moving to AmBisome, second quarter sales were 51.2 million, an increase of 7 percent over the same quarter in 2002.

After accounting for the favorable impact of foreign currency, AmBisome sales decreased by 4 percent on a volume basis in our most important market of Europe, when compared to the second quarter of 2002.

We saw an increase in AmBisome sales in some markets due to a recent shortage of supply of conventional amphotericin B from our competitors, primarily Bristol-Myers Squibb.

We do not anticipate encountering any shortage in our supply of amphotericin B or any interruption in our production of AmBisome.

On the competitive front, Merck has announced they will be presenting results from their head-to-head study of voriconazole verses AmBisome in September at the upcoming Hiceye (ph) Conference in Chicago.

The abstract indicates that Cancidas meet its endpoint of non-inferiority, but did not show improvement over AmBisome in overall treatment success.

We have not yet seen the complete data set.

The European labels from Merck's Cancidas and Pfizer's Vfend do not have indications as broad as AmBisome.

In addition, the Vfend label does not include a claim of empiric therapy, which AmBisome maintains in 22 countries.

In the face of increasing competition we're focused on maintaining our market share by leveraging our existing data set and enhancing our data new clinical studies.

Enrollment is ongoing in the Amboload (ph) study that is designed to evaluate the use of AmBisome earlier in treatment and at a high loading dose to determine its impact on improving survival.

Twenty-seven sites have been initiated in this multinational study.

And it is our goal to enroll 200 patients that have confirmed fungal infection.

We do not expect to have final data from this important study until sometime in 2005.

In addition to the Amboload study, we continue to be active in supporting key opinion leaders who are including AmBisome in new research studies through our phase 4 programs, primarily in Europe.

Turning briefly to Tamiflu.

In June, Tamiflu received approval in Japan to extend the shelf life of its suspension formulation for one year to two years.

In addition, an NDA omission was recently made in Japan to expand the indication of Tamiflu to include the products used as prophylaxis.

Turning now to our product pipeline, FTC, or Emtricitabine, is in development for chronic hepatitis B. We expect to see data from an ongoing phase 3 study around the end of this year.

We will update you on our regulatory strategy following a review of the phase 3 data.

Amdoxovir, or DAPD, is a nucleoside analog in phase 2 clinical studies for the treatment of HIV.

DAPD has demonstrated unique activity against resistant HIV with thymudine (ph) analog mutation, or Tam, associated with D4T and AZT therapy.

Currently there is an unmet medical need in treating experienced patience with multiple Tam, therefore, we're designing a phase 2 study to evaluate the drug's efficacy in this patient population.

We will begin this the study following the review of data from two ongoing AZTG sponsored studies evaluating DAPD in treatment experienced patients.

GS 7340, a novel (inaudible) of tenofovir, the active ingredient in Viread, is in an ongoing phase 1/2 study.

Through this early proof of concept study of our pro-drug technology we hope to show that GS 7340 retains Viread's beneficial side effects and convenience profile, while providing an even greater level of potency.

Should this be the case, we will evaluate this pro-drug technology applied to other compounds in the Gilead library, targeting a variety of viral diseases.

We anticipate releasing data from this study and making a decision about further development of GS 7340 later this year.

Based in our pre-clinical studies, GS 4338, our novel HIV protease inhibitor, appears to be very potent, with a resistance profile that is distinct from the approved protease inhibitors and can be dosed as a single pill once-daily.

We are currently in the IND workup phase with this potential product and hope to file an IND by year-end and begin clinical studies early next year.

As we the complete our evaluation of the current development programs, we will provide you with more guidance on the pipeline.

In summary, this quarter has been a very productive one for Gilead.

The company is built on its position as a global leader in antiviral drug development and commercialization.

We look forward to continued strong growth driven by Viread, Hepsera and AmBisome and to the initial contribution of Emtriva which has taken Gilead's product portfolio to seven marketed products.

We will also maintain our focus on careful expense management in order to continue to increase shareholder value.

I would now like to turn the call back over to the operator so that we can take any questions.

Operator.

Thank you. (CALLER INSTRUCTIONS) Caroline Copithorne with Morgan Stanley.

My question has to do with the Viread guidance and the run rate.

If I take the 167 in this quarter and back out the inventory number, add on the 5.5 percent price increase that you'll have for the second half, and then add the first quarter that you already reported, but annualize those numbers.

You come to about 566 million for the year.

So I'm just curious with all the catalysts and drivers that Mark mentioned, how much inventory is going to be offsetting that in terms of inventory reductions in the third quarter, or whether that is just kind of conservative, at the low end of the guidance?

We think the inventory number, as we said, is around 25 to 30 million.

It is a little bit difficult to know precisely because we don't have any history long enough to determine what proper inventory levels are for this product.

So it is a little bit of a guesswork from it.

I think what we're seeing is a continued run rate for the rest of the year that is consistent with the pattern we have seen.

There also some potential price decreases that would occur in Europe later this year, which could be substantial.

And so while the volume rate will go up, some of the dollars flowing out of your Europe may decrease in the second quarter on a price per bottle basis.

And so that offsets some of the growth that we would have seen otherwise.

And so would you expect the inventory to come to about 4.5 weeks?

Is that reasonable for maybe six and a half weeks now?

We were at about .7 as we entered the quarter.

We were at 1.5 months of inventory roughly as we entered the quarter.

And I don't know what the right number is, because we have seen inventory ranges from .2 to 1.5 now over the course of this product.

And so it depends a little bit on what the proper inventory levels are from our major wholesalers.

Eric Ende with Merrill Lynch.

You may have actually talked about this a little bit, and I might have missed it.

But Hepsera in Asia, did we get an update on that?

Just a brief one, Eric.

This is Mark.

Progress has gone great with GlaxoSmithKline.

We launched -- they got approval now and they are about to launch, I should say, in Singapore and Hong Kong, which is ahead of what we had expected.

Just flipping through my notes here.

We expect to have launches in the major markets of Taiwan, Korea, China and Japan pretty much in the timeline we gave you initially, which is in 2004 and into 2005.

Okay.

And then the second question I have relates to NOLs.

I was wondering what your total NOLs are and do you believe that by 2004 you will be fully through that?

And at what point in time during 2004, if that is the case?

Yes, Eric, we haven't revealed our full NOLs.

We are just finishing off the Triangle study.

We get expect to get something on the order of 20 to 25 million in NOLs on an annual basis from that Triangle piece.

And the question is for how many years that will go out, certainly well beyond the end of the next 10 years.

We do expect, based on our current profitability, that we will burn through the NOL sometime next year.

We will be providing further guidance to that as we understand it a little bit better.

What are the Gilead NOLs?

Eric, I don't have that number off the top of my head.

Eric, this is Mike Aguar.

I think the best advice I could give right now we did disclose that at the end of the year in our K, and we haven't updated it since then.

So we can go back and you can make some calculations on the earnings you have seen to date again that.

But we typically don't provide any interim guidance on that.

So go back and take a look at the 10-K and then kind of work back from there.

Meg Malloy with Goldman Sachs.

Just a couple of quick questions.

One is could you just help us understand the method that you used to get to 25 to 30 million in inventory estimates?

And secondly, could you give us a little bit more detail on this price decrease in Europe, you know how much should we expect?

And what countries would be impacted?

And then finally could you break out U.S. and X U.S. sales of Viread please?

Sorry.

The last question, Meg, was X U.S. sales of...?

Of Viread.

Okay.

To begin with the methodology, we based it on the prescriptions that we're seeing over the course of the month.

So we created a run rate based on the patients who are coming in based on our IMF data, and also we use a way to true that up to where we think we can get to the patient numbers we need.

And from that we back out the amount that was put into the wholesalers -- we subtract that number from the out that went into wholesalers.

And from that we came up with a range of 25 to 30 million in wholesaler inventory.

So that was the methodology.

Your question on X U.S. sales, the of U.S. sales was 115.6.

The X U.S. sales were $51.4 million.

There are no wholesalers of note in Europe, so there is no such inventory issue there.

And then your final question was with regard to price decreases.

We are expecting sometime this year, we're not exactly sure when, to have a price decrease in France in particular.

France is our highest priced market.

And it is typically the market where products start in the hospital and then they go through the pharmacy at some time in their lifecycle, and it is typically AIDS products, and at that point there's a mandated price decrease.

And it could be up to 30 percent.

Elise Wang with Smith Barney.

I was wondering if you could answer or give us some color on this announcement that came out from the EMEA regarding a warning regarding a study that involved the use of Ziagen, Epivir and Viread that was out there today.

If you could give us some color on that particular warning?

Certainly, this is John.

That study was first -- I don't think everyone is aware that study was an experimental regimen of Ziagen, or Vasofir (ph), where it was given once-daily with its approved BID, of course.

And then it is also what is called a triple nuke (ph) study, which I think everyone recognizes those as being typically less potent.

In fact, we did a pilot study rather than doing a large study in this area and had a very similar result. (inaudible) initiated study we support it.

And the (inaudible) actually presented that in an oral presentation at the IS meeting in Paris earlier this month.

And so what we're seeing now that falls exactly from a previous study with Trizivir.

It was called AZT G protocol 5095, where I noticed suppositions was put out on March 10 saying that Trizivir needed to be boosted with another drug like efavirenz or, for instance, tomoxifir (ph).

So it appears that when one uses three nukes in a regimen, it is not as optimal as two nukes in (inaudible).

Okay.

And just to clarify, so this was a study that was run by -- sponsored by Glaxo?

Correct.

Okay.

Great.

And then if you can also just clarify for us-- obviously you have yet to meet with the regulatory agencies in regards to the co-formulation.

But is there a scenario under which you may have an opportunity for a more accelerated development path for the co-formulation versus what your current timeline is at the stage?

What else is there that -- or what is an alternative approach, I guess one can say, or look for, that might allow you to do something of that nature?

Elise, the timeline that we have out there now is our best guess.

And there are probably scenarios that could be faster.

There also scenarios where it could be slower.

But that is our best guess, and we're working very hard to achieve that goal.

Craig Parker with Lehman Brothers.

Do you guys have inventory management agreements in place with the major wholesalers and distributors right now?

No, Craig, we do not.

Those typically come at a price, and we haven't been willing to discount in order to get those.

I well know the price.

Okay.

Do you have any expectations that Viread will be added to Colitra (ph) in the HHS guidelines for protease inhibitor regimens?

Well, we don't have any -- I would say we don't have expectations yet because the data are not out yet.

Right.

So that is something that would have to come out first.

And of course that is an Avid (ph) study, and they will control the timing and submission of that dataset.

Okay.

And on the issue of timing of data, could you provide an update on the study of Emtriva, Viread and efavirenz compared to Combivir and efavirenz?

What is the accrual currently?

And is the primary endpoint in that study 24 week data?

We haven't initiated the study yet, Graig.

We are signing up sites.

So it could initiate sometime in the next month or two.

It is 300 patients, one-to-one randomization.

And it is a 48 weeks study in 300 naive patients, 48 weeks.

Eric Schmidt with SG Cowen.

Good afternoon, Mark, I was wondering if you could provide some more detail on the European HIV market, and how your new label may help out there?

Do you have any sense on the percentage of patients on Viread who were naive versus non-naive, and how that might relate to other drugs in the U. market?

No, we don't really have that kind of data.

I am sure that more of the uses in treatment experienced then in naive, and that is about as far as I can go.

In some countries the label is very important and most physicians prescribe within label.

And in other countries the label is ignored and physicians rely on the data that is out there generally.

Of course, the data in the scientific literature is always far advance of what is in the regulatory package.

So we were seeing differences in treatment patterns in different countries in Europe.

And so I think in some of those more conservative countries now that the label is expanded, we will see a pickup in use.

More importantly, it allows our commercial group throughout Europe to promote off of the 903 study, which of course has very favorable variant data.

But I can't quantify for you what the naive percentage is.

It is well under 50 percent of the U.

I guess a big picture question for John, if I may.

It seems like you're going to end '03 spending a little less back into the R&D engine than most of your biotech peers.

Is there a level of R&D spending as a percentage of revenue or some other metric that you think you are comfortable with, and you think provides enough long-term growth potential for the Company?

That's a good question.

We talk a lot about it and have involved it in some aspects of our strategic plan.

And clearly, as our revenues increased and our earnings increased, we expect over the next couple of years to need to bring the R&D expenditures up to maintain the future growth.

Exactly what you are saying.

We have not picked a specific number at this time.

And that evolve as we move forward.

And what you'll see you with Gilead is what you have seen to date is that we set a very high hurdle bar to invest in a product in development because of the great expense there.

And we aim to continue to focus on significant unmet medical needs.

Bob Thurwich (ph) from Wellington Management.

I wonder if you can talk a little bit bout the use of Viread with protease inhibitors, and the extent to which it is being used with them, and how you are teaching physicians to navigate the issue of blood levels?

Bob, Viread is used broadly with protease inhibitor, even though as John indicated earlier, a specific study with Viread and Acletra (ph) is coming out in the future.

We had in our earlier studies, the studies that were approval tracks for those phase 3 studies, extensive use with protease inhibitors and didn't have a lot of analog data.

We've gotten done a lot of interaction studies.

The one place where we and Bristol-Myers believe we have significant interaction is with their new protease inhibitor, Adizanifir (ph).

And in that case co-administration with Viread results in lower blood levels or about a 40 percent reduction.

And so probably what the strategy seems to be that Bristol-Myers is recommending there is based on their work would be to administer the 300 mg as opposed to the 400 mg dose, co-administered Retonifir (ph).

And that actually boosts the blood levels of Adizanifir higher than they would have been without the Viread administration.

So that appears to be how that combination is used.

With other protease inhibitors, we do not have significant interactions to require that type of dosage adjustment.

So is that likely to also hold true for 908 for Claxclose (ph)?

The new protease inhibitor?

(inaudible) pro-drug?

(inaudible) pro-drug.

Don't have any data on that.

Okay, and one other question if I may.

What is the current pricing for Viread in the U.S.?

The gross price is $380 per 30 count bottle.

And then we give discounts to that that bring it to a blended net price of 14 percent less than that.

It is about $326 per bottle.

Jason Kantor was WR Hambrecht.

Most of my questions have been answered.

But just a couple of smaller things.

The Japan Tobacco announcement that you just had, can you give us some sense of how big that payment is?

How you will recognize that in terms of upfront and milestones?

And also, just more strategically, you spent the last couple of years focusing the business really on the antiviral HIV and HBV.

Where do you look to build the Company further?

Do you have any opportunities to move into hepatitis C, or any other viral indications that make sense to you?

This is John Milligan.

I will take certainly the first one, maybe the second as well.

With regards to Japan Tobacco we didn't disclose the upfront payment.

As you might imagine, the Japanese market for HIV is a relatively small market.

There is estimated to be maybe 6 to 7,000 patients on therapies, somewhere between maybe 10 and 12,000 total infected HIV individuals.

Although the prices in Japan tend to be high, so it is a fairly lucrative market.

I would say I would say the upfront was proportionate to the size of the market.

It is also something that will be amortized over the life of the agreement, so the impact on our P&L is negligible.

There are also clinical milestones which are also appropriate.

Importantly, in this deal we focused on the royalty structures, so that we receive a fairly generous royalty in what might be approximating a 50-50 profit split for the two companies.

We also are pleased to work with Japan Tobacco.

They have the largest market share of any product in (inaudible).

They have a very good sales force.

They believe they can have this product launched by early next year.

So, your second question was about our opportunities in other areas.

I think it is fair to say that we are focused in our expertise in antiviral areas.

And that will include a broad range of antiviral areas.

It may someday include HCV.

We currently don't have any programs in that area.

But we will continue to develop HIV products.

And I think we have a number of new targets and new ideas in this area, which could continue to grow our brand and our strength in the HIV area.

And we will, of course, continue to explore other antiviral areas as they come forward.

Additionally, we are starting to explore other therapeutic categories using some technology we have.

And of course, always interested in licensing or acquisition opportunities where we can bring in additional therapeutic strength to Gilead.

Dan Schik (ph) with T. Rowe Price.

It is actually Chris Jenner (ph).

Mark, you may have mentioned this, could you just discuss the reference pricing system in Germany and how you're thinking about that for the various products next year?

You're going to have to give me more background, Chris.

Well, I was hoping you could give me some details on it, but my understanding is that Germany is going to some...

You're referencing other countries?

Yes, the reference pricing system that is going to be introduced in Germany, I think, coming this fall.

We don't know how that is going to impact drugs already on the market.

Germany has been a free pricing country historically.

And we've been able to launch at a market price and at a high price for Viread, Hepsera and we anticipate for Emtriva, but we haven't done that yet.

And we don't know what countries and how we would apply -- A. we don't know what countries are referenced.

And B. we don't know if it will be applied retroactively to products already on the market.

So I guess I don't have much of an answer for you there.

Well...

We are well relatively high priced in Germany compared to other European countries now for Viread.

Could you give us any sense about how much business you do in Germany relative to your total business in Europe?

It is not in the top four countries.

It is probably fifth or sixth on the list for each of our therapeutic areas.

It will be less than that for Hepsera.

But for HIV, it is probably fifth or sixth on the list.

Edward Nash with Legg Mason.

I wanted to follow up a little bit on Elise's question on that Glaxo 30,009 (ph) study with Ziagen, Epivir and Viread arm.

I actually found out that they are actually going to be putting out a dear doctor letter about that because of the fact that since Ziagen and Viread are the only two nukes that can further the case to (inaudible) mututation.

I just wanted to ask you guys maybe to pull out your crystal ball a little bit and to see if -- the inexperienced physician that I speak with that treat HIV patients don't seem to think of the K65R as being much of an issue.

But the more experienced doctors I speak with, they definitely look out for it, as much as they are watching it in (inaudible) mutations.

Just wanted to see if you guys saw it going forward, if you see K65R actually being another year out in Viread sales?

If you see K65R becoming more of an issue with practitioners, and maybe you're going to start getting a lot more questions and issues surrounding that?

Yes.

I think you had a series of questions there.

One, first was concerning a dear doctor letter.

You know, Glaxo did put out a dear doctor letter, as I indicated earlier, on their use of Trizivir -- three nukes.

And so it is pretty clear that physicians need to be aware that if they are using a three nuke regiment, and there are trade-offs for why you might want to use a three nuke regiment, that you need to watch more closely and make sure you don't have a viral load rebound.

If it starts to move, you'll want to modify therapy.

So that is important information for physicians.

The K65R, it is kind of like 184, the majority of AIDS patients in this country have 184 now, yet it is a high frequency.

With K65R it is much less.

And the important thing to recognize, though, is that what one wants to do, and this why this triple nuke think is an issue, is fully suppress the virus with a potent regiment, and that is why we use three drugs together, to minimize the production of resistance mutation.

That being said, with K65R it has been rare.

And it has a reduction -- it doesn't have a large reduction sensitivity to tenofovir or Viread.

And in addition to that, if one has the 184 mutation plus the K65R mutation, the sensitivity of the virus is actually close to wild type (ph) in most of the isolates we have tested.

And so even in the large clinical study that we did in naive patients, even when the few patients that developed K65R did, some of those patients were maintained on regiments, including Viread, and achieved a viral load (inaudible) protection.

And we will take our final question from Joel Sydec (ph) with Lazard.

A few questions.

First just following up on Eric Schmidt's question about R&D as a percentage of sales.

You answered it that R&D numbers will be going up.

Was that based on a percentage of sales basis, or just going up on a year-over-year dollar basis?

We are not -- that is projected in the future.

And we're not going to give that type of specific guidance.

But it is important.

I think the concept is an important one to recognize is that we do feel it is important to expand our R&D efforts over time to maintain growth of the Company.

And then just a quick big picture question on Viread market share.

You know, you keep gaining share and leaving your competitors in the dust.

I wondered if there's any viewpoint -- internal goals as to what your plan is to capture share for the overall market after you have -- once you eventually become the market leader?

Do you have an internal goal as far as marketshare is concerned?

I'll try a partial response to that, and one is we are at about 20 percent of the NtRTI market now, but that is confusing because of triple combination therapy.

And although we're at the same at level Epivir is at, it is a single branded agent.

Epivir is in two other drugs.

And so it is really in about 50 percent or more of the patients.

So there is -- we don't think 20 percent is the threshold at all.

And with some of the growth drivers I talked about, and particularly co-formulation or even co-administration with Emtriva, we think would you get to those kinds of numbers with this is a backbone therapy.

So we don't see any sort of limits on use there.

And the most important thing is data in a variety of settings, a variety of patients types, a variety of regimens to increase comfort level for using this drug in different settings.

And that is what we have been focused on with our phase 4 program.

That does conclude our question-and-answer session for today.

I will turn the conference over -- back over to Dr. Martin for any closing comments or remarks.

Thank you, operator.

And thank you all for joining us today.

We appreciate your continued interest in Gilead, and look forward to providing you with updates on our future progress.

Thanks.

That does conclude today's conference call.

We do thank you for your participation.

(CONFERENCE CALL CONCLUDED)