吉利德科學 (GILD) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank for standing by and welcome to the Gilead Sciences third quarter 2003 earnings conference call.

At this time, all participants are in a listen-only mode.

Later, we will conduct an electronic question and answer session.

At that time, if you have a question, simply press star one on your key pad.

If you would like to withdraw your question at any time, press the pound key.

As a reminder, this conference call is being recorded on Tuesday October 28, 2003.

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

Now, I would like to turn the call over to Dr. Milligan.

Please go ahead, sir.

Good afternoon.

Welcome to Gilead's third quarter 2003 conference call.

We issued a press release this afternoon providing results for the third quarter ended September 30th, 2003 and describing the company's quarterly highlights.

This press release, along with the additional financial and statistical information that will be discussed on our call today can be found at our web site at www.gilead.com.

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

I'll begin the call by reviewing the third quarter financials, then John Martin and Mark Perry will take you through the corporate and commercial highlights of this quarter.

We'll keep our comments relatively brief to allow time at the end of the 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 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 various risks that could cause the results to differ materially from those expressed in any forward-looking statements.

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

Gilead had strong financial performance in the third quarter as sales, gross margins and net income all improved significantly from one year ago.

Product sales are up 60% compared to the same period last year.

Gross margins of product sales expanded over three percentage points and net income grew by more than 250% to $73 million.

We also continue to have strong positive cash flow with another $54.3 million generated from operations this quarter.

Our sixth consecutive quarter of positive operating cash flow.

As we described in our conference call last quarter, Gilead experienced increased stocking by U.S. wholesalers during the second quarter this year resulting in Viread revenues higher than estimated demand would suggest.

We initially estimated the impact of the activity at 25 to $30 million and expected this would reverse during the third quarter resulting in lower Viread third quarter revenue.

We believe the impact of this activity was higher than initially forecasted.

After reviewing prescription trends, IMS inventory data, and our actual sales during the third quarter, we now estimate that the impact of sales on wholesaler destocking in the third quarter was in the 33 to $37 million range.

We're continuing to provide a range because there are a variety of ways to estimate the impact on third quarter revenues using the publicly available information.

I would like to point out that there are inherent limitations in the accuracy of these data sets.

The most recent IMS data indicates wholesaler inventory levels of Viread decreased by approximately 1.2 months worth of inventory between June and September from 1.7 months to 0.5 months.

While IMS data are estimates only, based on the survey of some wholesalers, we do believe they are worthwhile in evaluating trends.

Looking forward, we believe that this wholesaler inventory issue is now behind us and that we return to a more normal sales growth pattern during the fourth quarter.

In fact, for October to date, Viread sales to wholesalers have been stong.

We believe we'll be able to achieve our forecasted sales for the year at the lower end of the range provided in July.

As I'm sure you are aware, wholesaler speculative buying during the past year has had a significant impact on product sales for a number of biotech and pharmaceutical companies.

Gilead is particularly vulnerable to speculative buying because in the U.S., we sell Viread exclusively through the wholesaler distribution channel.

Therefore, we are currently evaluating methods to minimize the financial impact of this phenomena in the future including inventory management agreements with wholesalers and potentially selling directly to major U.S. accounts.

We've not made any decision on these at this point and will keep you posted regarding the outcome of our review.

Turning to the specific results for the quarter.

For the third quarter 2003, the company reported net income of $73.1 million or 33 cents per diluted share.

This is up from the same period last year where Gilead reported net income of $20.8 million or 10 cents per diluted share.

During the quarter, we settled a contractual dispute with a vendor relating to the second year of the data from study 437 for Hepsera that resulted in a one-time reimbursement of $13.2 million.

This amount was recorded as a reduction of research and development expense.

Also, as you may recall in the same quarter last year, we had a nonrecurring loss of 16 million associated with the disposition of our remaining sales in OSI Pharmaceuticals.

Excluding these items, nonGAAP EPS increased by 56% to 28 cents per diluted share from 18 cents per share on a year over year basis.

Total revenues for the third quarter for 2003 were $200.4 million.

A 50 percent increase over the same period last year.

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

Net product revenues for the third quarter were $194.1 million, which compares favorably with the third quarter last year when we reported $120.2 million in net product revenues.

Viread revenues grew to $115.4 million compared to $68.9 million in the third quarter of 2002, an increase of 67%.

Sales in the U.S. were $59.4 million and revenues outside of the U.S. were $56.0 million.

Since year over year growth is impacted primarily by two offsetting factors, higher prescription volumes to both the U.S. and in Europe and the estimated 33 to $37 million impact due to distribution channel inventory reductions which I discussed earlier.

In the U.S., prescription volume continues to increase.

For the third quarter 2003, prescription volume in the U.S. is up 89% compared to the same period last year and 13% compared with the second quarter 2003.

Additionally, we're seeing strong sales performance during October as wholesaler buying patterns returned to a level more reflective of actual prescriptions.

Outside the U.S., sales were driven both by rapid volume expansion and a favorable foreign exchange environment.

We now sell Viread in 18 countries in Europe as well as Australia.

Whereas, last year at this time, Viread had been launched in only in 13 countries outside the U.S.

For the third quarter of 2003, Viread volume in the European Union and Australia grew by more than 220% compared to the third quarter last year and was up 8% compared to the second quarter 2003.

Monitoring our overall exU.S. gross somewhat were seasonality issues and August heat wave across portions of Europe.

Foreign exchange contributed higher revenues adding $5.5 million compared to the third quarter last year due to the stronger euro, relative to the U.S. dollar.

In summary for Viread, we believe the inventory stocking issue is behind us at this point and that we resume more normal growth patterns going forward.

Hepsera revenues continue to grow as well.

In its fourth full quarter on the market, sales from Hepsera for the treatment of chronic hepatitis B were up 32% in the third quarter to $16.4 million from $12.4 million during the second quarter.

We're pleased that the recent progress of launching Hepsera which is now available in 11 countries and with the rapid progress of our now dedicated U.S.

Hepsera sales force in advocating positions for the favorable attributes of this product.

Finally, sales of AmBisome were a record $51.6 million for the quarter, a 6% increase over the same period in 2002.

This result was driven primarily by a favorable foreign exchange environment and supply constraints on competing drugs in certain markets which offset slightly lower volume.

The total foreign exchange impact on AmBisome sales was $6.1 million compared to the same quarter last year while volume declined by approximately 1% in Europe.

For the third quarter, 2003, Gilead recognized royalty and contract revenues of $6.3 million compared to $13.8 million for the same quarter in 2002.

The decrease from last year is primarily due to a licensing payment of $8.1 million which was received for our Chemex Corporation during the third quarter of last year as a final payment for licensing a portion of the Celax process patent estate.

Gross margins were 86.6% up by more than 3 percentage points versus the third quarter last year.

This improvement was largely driven by a favorable product mix and [indiscernible] and Hepsera accounted for approximately 68% of our product sales in the third quarter of 2003.

And by the favorable currency environment.

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 head count and the timing of various R & D and sales and marketing programs.

Research and development expenses were $31.7 million, including the $13.2 million reimbursement for the third quarter of 2003.

Excluding the reimbursement, research and development expenses were $44.9 million, up 27% compared to the same quarter in 2002.

The increase in R & D expenses for the third quarter 2003 is primarily attributable to increased head count, license fees associated with acquiring a nonexclusive license from Chiron for the research and development of the treatment of hepatitis C infection, and clinical trials associated with the development of the drug candidates in Triangle's antiviral portfolio.

SG&A expenses in the third quarter of 2003 were $63.6 million, up 50% from the $42.3 million spent in the same quarter of 2002.

The increased spending in SG&A for the third quarter was primarily attributable to Gilead's increased global marketing effort, expansion of the U.S. and European sales forces, and expenses associated with the U.S. launch of Emtriva.

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

The lower spending is due to timing issues related to certain expenses such as delays in marketing programs.

It's also due to permanent differences such as lower than expected head count resulting from the lower hiring ramp than initially forecasted.

As discussed, foreign exchange was favorable during the quarter due primarily to a strengthening euro relative to the dollar.

The total net impact of foreign exchange on our earnings for the third quarter was $6.4 million compared to the same quarter last year.

This includes a foreign exchange impact on revenues, [indiscernible] spending and the results of our hedging program.

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

Operating cash flow was strong this quarter at $54.3 million.

This marks our sixth consecutive quarter positive operating cash flow.

We also completed the purchase of our foster city campus for $123 million in cash during the third quarter and completed our acquisition of Triangle in January of 2003.

As a result, total cash, cash equivalents and marketable securities is now at $620.9 million as of September 30th, 2003 compared to 942.4 million at December 31st, 2002.

Now I'd like to provide updated guidance for 2003.

Starting with revenues, we are narrowing our guidance for Viread based upon the impact of the U.S. wholesale inventory build and subsequent drawdown.

Our revised forecast is 550 to $570 million versus last quarter guidance of 550 to $600 million.

For AmBisome, we continue to remain cautious due to the increasingly competitive landscape and particularly the launch of [indiscernible] in Europe and the U.S. and the recent [indiscernible] data release.

However, we are slightly increasing our guidance for AmBisome to 180 to $185 million mainly based on the prospects for a strong euro, relative to the U.S. dollar, and continuing supply constraints in conventional AMBisome in certain markets.

We will not be providing guidance for potential revenues for Hepsera or 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.

We are tightening our guidance for product gross margins to approximately 86% for the full year 2003 based on a run rate to date.

Turning to expenses.

We're lowering our guidance for R & D spending in 2003 to the range of 155 to $160 million.

This decrease from last quarter's guidance in expense is principally associated with the reimbursement of $13.2 million from a vendor due to a contractual dispute.

We are tightening our guidance downward for SG&A expenses for 2003 to the range of 240 to $250 million from the previous guidance of 240 to $260 million.

And finally, I'd like to make a couple of comments about our tax rates going forward.

For the remainder of 2003, we reiterate our previous guidance for our effective tax rate which we expect to remain in the mid single digit range for the full year.

Beyond 2003, however, we anticipate moving to an effective tax rate of about 30%.

This change in tax rate is principally due to our strong profit performance in 2003 resulting from higher revenues and lower spending than initially forecasted which is rapidly exhausting our net operating losses.

We will be providing more information on this during our January conference call.

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

Look looking ahead, Gilead will continue to make the investments we believe necessary to promote our product to promote a strong and independent global business.

This concludes the earnings portion section of this conference call.

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

Thank you, John.

Good afternoon, everyone and thank you for joining us.

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

I'll 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.

First, I'm very pleased to announce that today Emtriva for HIV has received European marketing authorization in all 15 member states of the European Union.

The product is indicated for the treatment of HIV infected adults and children in combination with other anti-retroviral medications.

We'll begin making preparations for Emtriva's launch immediately in the countries of Europe and we'll update you as we obtain reimbursement.

Now turning to the third quarter.

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

Although Viread sales were down due to inventory drawdowns by U.S. wholesalers, we saw continued prescription growth during the quarter.

AmBisome sales were strong in the face of increasing competition, and Hepsera's making a larger financial contribution with sales from the U.S. and ten countries in Europe.

Finally, with Emtriva's recent U.S. approval and the EU approval just announced today, we believe we're on track to achieve our financial and operating goals for 2003 while continuing to build a worldwide anti-infective franchise.

To further our efforts to make our products available to HIV infected patients worldwide, in July, we announced a licensing agreement with Japan's Spackle [ph] under which they will commercialize products in get Gilead's HIV portfolio in Japan.

Our key reason for choosing Japan Spackle [ph] was because of their commercial success in [indiscernible] in Japan.

Our agreement with them covers Viread, Emtriva and the future co-formulation of the two products.

Japan Spackle [ph] will submit application for Viread and Emtriva to Japanese regulatory authorities in the near future and expects that the products will be on the market next year.

In August, we announced that we have entered into a nonexclusive licensing agreement with Chiron Corporation for the research, development, and commercialization of all molecule therapeutics.

Again, selected hepatitis C virus drug targets.

Under the agreement, we have received nonexclusive rights to Chiron's HTV technology for drug screening purposes.

We have initiated a major effort in this area because hepatitis C remains a challenging disease to treat, even with the considerable progress that has been made in improving Interferons through [indiscernible].

The only approved small molecule for hepatitis C, [indiscernible] does not result in sustained responses when used as monotherapy and is therefore indicated for use only in combination with Interferon.

Our goal is to develop small molecules, anti-virals that may be effective as mono therapy or in combination with Interferons or other anti-virals.

While the research program is still in its early stages, we have identified some interesting compounds that have activity against surrogate viruses.

With the Chiron license, we can now begin to screen them against hepatitis C virus.

We are focusing our efforts on the targets of HTP [indiscernible] and [indiscernible] and will keep you posted on our progress.

As always, it is our focus and commitment to continue to build Gilead's product portfolio through in-licensing, acquisition, and internal research emissions.

As you may know, Gilead's had its headquarters in Foster City since the company's inception in 1987.

Over the years, we have expanded our operations here by entering into leases on neighboring buildings.

In September of this year, we announced the purchase of our campus for $123 million, including 16 buildings and 33 acres of land.

This purchase solidifies our intent to maintain our headquarters in the San Francisco bay area, which is among the best locations for recruiting talented employees and collaborating with premier academic institutions.

Additionally, we believe this purchase is preferable to leasing from a financial point of view both near term and long term and protects the capital investments we've made and will make in laboratories and small scale manufacturing capability.

I'd also like to give a brief update concerning our ongoing commitment to global health.

As you know, in April of this year, we announced the commencement of the Gilead access program.

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

We've had a substantial initial interest in this program and have begun supplying drugs to treatment programs in 13 countries including South Africa, Cambodia, Rwanda and Nigeria.

In addition, we are partnering with a variety of 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 to patients in Uganda.

Just a few weeks ago, the first shipment of Viread and Emtriva arrived at AHS AIDS treatment clinic in Musaka and the first patient began receiving treatment.

Last month, Joe Steele, Gilead's Vice President of Commercial Development visited the AHF clinic in Uganda followed in October by a visit to Gilead from the chairman of Musaka, who came to share his country's experience in battling aids.

Musaka has been one of the regions in Uganda hit hardest by the epidemic.

We are proud to be involved in the programs.

They are helping to address the global HIV epidemic.

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

Thank you, John and good afternoon everyone.

Turning to our commercial operation, Viread sales in the third quarter totaled $115.4 million, including $59.4 million in the U.S. and 56 million from sales outside of the U.S. including Europe and Australia.

As John Milligan described earlier, the inventory buildup and the second quarter by U.S. wholesalers and the subsequent drawdown in the third, resulted in the substantial decrease in our Viread sales for the quarter.

However, our prescription growth trends have continued and we're confident we can achieve our revised worldwide sales guidance for Viread in the range of 550 to 570 million for the full year.

In the U.S., for the week ended October 17, 2003, Viread new prescription market share for the NRTI class is 19.2%.

Total market share for this class increased to 19.1%.

Viread, for the first time, now leads the class in market share of new prescriptions and is second only by a few scripts in total prescriptions to Epovire, which is for now the number one prescribed anti-retroviral in the U.S.

During the third quarter, total prescriptions for Viread increased by 13%.

We're seeing even higher penetration at the individual prescriber level in many territories around the country with some as high as 50%.

Because the physicians prescribing at this level tend to be the faster adopters of new products, we are leveraging these success stories with targeted marketing and educational initiatives to push market share levels higher with more conservative positions who tend to be slower adopters of newer therapeutic options.

The primary focus here is to displace GSK's Comnivere [ph] and Trizover [ph] which continue to be widely used in early treatment regimens.

In addition, several recent events will enable us to continue the commercial momentum of Viread both in the U.S. and abroad.

As we detailed in the fist quarter conference call, in April of this year, we created separate sales forces for our HIV and hepatology/oncology franchises.

These new sales forces have now been trained and in the field for several months.

We're beginning to see the positive impact of having two focused teams for all of our products, including AmBisone.

Also, we have had the opportunity to present additional long-term data that profile Viread's unique attributes at several major domestic and international medical conferences throughout the quarter.

The first was the International AIDS Society meeting in Paris where we presented positive 96-week efficacy, safety and resistance data from study 903, a trial comparing Viread to Bristol Myers D4T [ph] and a background of 3TC Nefavrin [ph] in 600 anti-retroviral naive patients.

In addition, this conference served as a significant opportunity to introduce physicians to the recently expanded Viread label in Europe, which now includes treatment in 98 patients.

We also had a strong commercial and scientific presence at the ICAQ [ph] the conference that took place in Chicago in September.

Shortly before the conference, the 48-week data from study 903 was included in our U.S. package insert, allowing our team to proactively detail these favorable results with U.S. physicians during the conference.

One key poster presentation profiled additional data from study 903 showing that the Viread containing [indiscernible] study had a similar renal safety profile to the armed continued D4T [ph] through 96 weeks.

And this week at the ninth European AIDS conference in Warsaw, Poland, we're presenting data on the long-term safety profile of Viread from our study 910.

Study 910 is a rollover study from our pivotal clinical studies of Viread.

The presentation indicates the treatment of Viread for up to four years in highly treatment experienced patients, does not result in clinically significant renal effects.

Also, being presented at Warsaw is interesting scientific data from a Spanish trial known as the Recover Study showing the beneficial impact on lipid level for patients switching from D4T [ph] to Viread.

These data confirm our findings from our study 903 in which we showed a statistically significant increase in lipid level in patients receiving D4T [ph] compared to those receiving Viread.

Finally, Abbott presented data yesterday for the first study using Viread and Emtriva as a backbone in their evaluation of Calatra once a day versus twice a day.

Patients in both arms of the study achieved similar viral load responses and the regimens were well tolerated.

Feedback we received from the conference suggests the increasing importance of once daily regimens.

Data such as these coupled with the availability of both Viread and Emtriva provides physicians with a proven backbone for constructing once daily regimens.

Other areas of continued growth in the U.S. include Viread's increasing penetration into the correctional system.

A recently expanded team of national account managers is making considerable progress creating an awareness of Viread in, not only the correctional facilities, but also with the speciality pharmacies that sell to them.

They are focused on establishing relationships with methadone clinics and discharge planning centers to help ensure that once people get out of prison they stay on their medication.

Historically, our national account managers have had the broad responsibility of correctional facilities and managed care which includes obtaining reimbursement and formulary uptake for all three of our most recently launched drugs, Viread, Hepsera and now Emtriva.

In order to capitalize on the growing opportunity for Viread and also Emtriva use in the correctional setting, and to maximize our effectiveness in obtaining favorable reimbursement for all of our products, early next year we'll be creating two teams of national account managers.

One to focus on managed care and one dedicated to correctional facilities.

Another potential growth driver for Viread is the recent U.S. 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 anti-retrovirals.

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

We priced Emtriva to wholesale acquisition costs of $252.83 per bottle of 30 pills.

Or roughly $3,076 for a year's course of therapy.

The price is on par with GlaxoSmithKline's price for Epovir.

Emtriva has already been added to the ADAD formularies in 49 states.

Our sales for Emtriva's first quarter on the market were 6 million, a portion of which we believe represents typical wholesaler inventory build for a new product.

As expected, it appears Emtriva's initial uptake is in treatment naive patients often prescribed in conjunction with Viread and one other anti-retroviral.

On the European front, as John Martin mentioned earlier, Emtriva has just received European approval in the 15-member states of the European Union.

We are making preparations for launch and expect to be on the market in the UK, Germany and France by year end with launches in the remaining countries in Europe in 2004 as reimbursement is obtained.

As you know, we successfully completed co-formulating Viread and Emtriva into a single pill that can be dosed once a day.

We have initiated the three necessary stability studies required for approval and have recently completed the bioequivalent study that is necessary to demonstrate that the co-formulated pill provides the same blood levels of drugs as both drugs given separately.

The data from this study will be released sometime next year.

Our discussions for the FDA regarding what will be required for regulatory approval of the coformulated product have begun and we maintain our goal to file for approval of the product in the first half of next year.

Assuming the traditional 10-month review by the FDA, we would be in a position to launch the coformulated product in the U.S. early 2005 with the European launch later that year.

To support marketing and the co-formulated product, we have initiated a 48-week study and 300 treatment naive HIV infected patients comparing Viread and Emtriva head to head with Combivir with a [indiscernible] 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 bioequivalence data by both Gilead and the FDA.

Today, we've enrolled 185 patients.

Our goal is to have data from this study available for presentation around the time of the U.S. product launch.

Turning now to Hepsera for chronic hepatitis B. We were pleased to report sales for the third quarter of $16.4 million, $11.4 million in the U.S. and $5 million in countries outside the U.S.

Overall this represents 32% growth over the second quarter of the year.

In the United States, Hepsera has garnered 45% of the new prescription market and 43% of the total prescription market relative to the other anti-viral on the market.

At the end of the third quarter, we believe there are approximately 8500 patients on Hepsera in the U.S., up from about 7500 at the end of last quarter.

We continue to see a gradual increase in first line use as well as proactive switching to from [indiscernible] Hepsera although the majority of U.S. sales continue to be in either [indiscernible] failure or in combination with [indiscernible].

Hepsera is now listed on a significant number of the major formularies in the United States, and has been assigned reimbursement tier status on par with [indiscernible] in the majority of cases.

Our efforts to make in-roads into formularies has been greatly enhanced by the efforts of third party organizations such as the American Liver Foundation to increase awareness of the significance of this disease and the availability of products such as Hepsera to address it.

In Europe, the Hepsera launch continues and the product is now in the market in ten countries including launches this quarter in the importance of southern European markets of Spain and Greece.

We anticipate being on the market in Italy in early 2004.

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

Late last week, GlaxoSmithKline announced the launch of Hepsera in Hong Kong marking the GSK first launch of the product.

We expect the drug to be on the market in Singapore shortly as well.

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

We'll recognize royalties from GSK on a one-quarter lag.

So we should begin to see an initial royalty contribution from GSK's efforts in the first quarter 2004.

As you saw, this morning we issued a press release detailing the data from the 144-week study from the Hepsera in [indiscernible] resistant hepatitis B patients coinfected with HIV which is being presented at the AAFLB meeting taking place this week in Boston.

These data demonstrate that Hepsera treatment in these 35 patients resulted in significant and sustained reductions in serum, HBV, DNA, and ALP levels and that the magnitude of these reductions was greater with increasing duration of treatment.

As we anticipated, the longer a patient is treated with Hepsera in the study, the better the outcome.

Importantly, long-term treatment was well tolerated with no evidence of nefrotoxicity or ALT flares.

Also no Hepsera associated resistance mutations were identified and no loss of suppression was seen with three years of therapy.

In addition to this presentation, we have two other oral presentations and five posters on Hepsera.

The data from this conference will provide important support for our efforts to educate physicians on the clinical benefits of treatment with Hepsera.

We will continue to follow our various studies over time because the generation of long-term data that continues to demonstrate Hepsera's impact on its improvement of the liver, coupled with a low resistant rate and a very clean safety profile, will be important in changing the way this disease is treated from a disease to the liver to a viral disease.

Moving to AmBisome, third quarter sales were $51.6 million, an all-time high and increase of 6% over the same quarter in 2002.

After accounting for the favorable impact of foreign currency exchange, AmBisome sales decreased by 1% on a volume basis in the most important market of Europe when compared to the third quarter of 2002.

We continue to see an increase in AmBisome sales in some markets due to a shortage in supply of conventional [indiscernible] from Bristol Myers Squib.

This, coupled with the favorable foreign currency environment, has led to our revised guidance of AmBisome for the year for the year of 180 to $185 million.

On the competitive front, Merck recently presented results from their head to head study of their [indiscernible] versus AmBisome and in September at the ICAQ [ph] conference Chicago.

These data show that [indiscernible] met its point of noninferiority, but did not show improvement over AmBisone in overall treatment itself.

In the face of increasing competition from Merck and Pfizer, we are focused on maintaining our market share by leveraging our existing data set and enhancing our data with new clinical studies including the multinational study Ambiloe [ph] study as well as a number of phase IV studies in individual markets.

Turning briefly to our product price line, FTC or [indiscernible] is in development for the treatment of chronic hepatitis B. We expect data to see data from an ongoing phase III study very shortly and we'll update you on the regulatory strategy following unblinding of review of these phase III data.

GS 7340, a novel emanate pro-drug of tonofavier [ph]the active ingredient in Viread is in an ongoing phase I/II study.

Through this early early proof of concept study of our product 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.

The initial data from this study looks promising and we anticipate releasing the full data set and updating you on our plans for further development in the coming months.

Rounding out our HIV pipeline portfolio is GS 4338, our novel HIV proteate inhibitor, which appears to be a 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 in the midst of IND workup for this potential product and plan to begin clinical studies early next year.

As we complete our evaluation of the current pro-development program, we'll provide you with more guidance on our pipeline products in our year-end call in January.

In summary, while U.S. wholesaler stocking patterns for Viread reduced our third quarter revenues more than anticipated, we believe this issue has been resolved.

The increasing demand and opportunities for significant growth of this product are clear.

Reflective of our commitment and focus on our business, we continue to deliver on our drug development and commercialization for all of our products this quarter.

We look forward to resuming strong revenue growth and continuing EPS growth driven by Viread, Hepsera, AmBisome and Emtriva while maintaining our focus on careful expense management in order to continue to increase shareholder value.

I'd now like to turn the call back over to the operator so that we can take your questions.

Operator?

Thank you, sir.

To ask a question today, please press star one on your Touch-Tone phone.

Please be aware, you will be limited to one question and one follow-up.

Additional questions will be taken if time permits.

Once again that is star one to ask a question.

I'll pause a moment to assemble the question queue.

Our first question comes from Caroline Copithorne with Morgan Stanley.

Thank you.

I wanted to know if we could back up a little bit and walk through the different components of the U.S. sales numbers.

And I guess if first of all it wasn't clear to me whether you are revising estimate of the inventory billed up to the 33 to 37 or just that's what you saw as the drawdowns?

But if you could then walk through, you know, the 5.5% price increase and what the unit growth was and then the inventory impact.

There is a wide range when you try to back out all of the inventory numbers.

Hi, Caroline, it's John Milligan.

That in fact is more information than we typically disclose.

That's why we're providing a range of guidance for the inventory drawdown that occurred of the 33 to 37 million.

Because we know what we ship to wholesalers.

We don't know what comes out of wholesalers.

It's very difficult to get us that information through currently available public databases.

So we triangulated that a number of different ways and have come up with that range.That is what we estimated to have come back down out of the pipeline over the course of the third quarter.

So if you assume you did 25 to 30 million in billed in 2 q and 33 to 37 million in drawdown --

That's not what we're saying.

Okay.

It went in and came back out is what you're saying.

Probably roughly equivalent amounts in the second and third quarter.

Okay so that means then the net gross quarter over quarter was 13 to 23% including the price?

The gross, if you just put -- take 35 million out of the second quarter just to pick a number and you add that in the third quarter, the growth would be about 15% in the second quarter and about 19% in the third quarter which is equivalent to the prescription growth of 13% in the third quarter.

So they all sort of line up given all of the assumptions we've been talking about.

Okay, thank you.

Thank you.

Your next question comes from Elise Wang of Smith Barney.

Hi.

Just to follow up in general about the market demand.

Can you give us a sense of how many patients are on Viread in the U.S. and Europe and what you estimate your patient market share number is right now?

We've kind of gone away from the patient numbers because we think that's an assumption built on an assumption to tell you the truth.

We know it's over 100,000 in the U.S.

And instead, we've been looking at patient share and prescription numbers as the better measurement of growth.

We talked a little bit about the prescription number.

The patient share number is in the 25 to 30% range in the U.S.

And in Europe, it ranges from really from 20 to 30% in the major countries where we've already launched.

Okay.

And then just a quick housekeeping question.

In regards to the as converted approach here, there was 4.6 million in interest that was added back to the bottom line.

Is that the number that we should continue to utilize going forward here?

The number for interest income?

Yes, that would be correct.

And that reflects both of our converts that are out there today.

The 250 million dollar note and the $345 million note.

Thank you.

Our next question comes from come is Thomas Wei with Piper Jaffery.

Thanks.

Just on the European front, can you give us a sense on the individual country basis where you saw or which countries you saw most affected by the summer slowdowns?

I'll try to do that in a general way.

The -- all of the countries were down in the month of August.

We would expect that to some degree.

There's some overprescribing in July to deal with summer vacation.

But we saw it to a great degree than we thought because of the heatwave that hit and it was worst in France.

Okay.

And then just a quick follow up.

Oh, actually, were you done with the answer?

Yeah, I think so.

It's hard to get more specific than that.

All of the countries were down in August.

And then in October, have you seen things rebound?

Yes.

Thank you.

Thank you.

And our next question comes from Mark Augustine with Credit Suisse First Boston.

Thanks.

I wanted to ask for a little bit more color on the design of your 48-week treatment naive in the head to head study.

Specifically what you are hoping to demonstrate in that study?

Thanks.

It is a 300 patient study and treatment naive randomized 1 to 1Combivir versus our two drugs with a background of Efaverin [ph] to look at a 48 week end point percent below undetectible and we're looking for an equivalent on the efficacy.

Okay.

And the follow-up would just be a tax related question.

It was mentioned that you'd be tracking toward a 30% tax rate.

Is that a rate that we should be thinking about in '04?

Yes that's the '04 tax rate.

All right.

Thank you.

Thank you.

Our next question comes from Joel Sendek from Lazard.

Just to be clear, on the Viread sales, so if you add 35 million to 115, that would come in at around 150.

You are saying that is around a 13% increase over an adjusted Q2 number of 130.

And the 13% is also consistent with the prescription growth that you are seeing?

This is just simple math to give you a sense for trends, but what I did was took the 115 we saw in the second quarter in the U.S. and subtracted 35 and got 80.

And that gives you a 16% growth rate in 2Q over 1Q.

If you add that back in in the third quarter to the 60 million you saw in the U.S. you get 95 and that gives you a 19% growth rate 3Q over 2Q.

And then just to take it one step further, the guidance we've given for the full year is 550 to 570 worldwide.

And if you just apply the same kind of percentages that gives you roughly 110 million in the U.S. in the fourth quarter as, you know, sort of the median number.

That would be a 16% growth of fourth quarter over third quarter.

So roughly the same percentage growth in each quarter if you adjust for the wholesaler inventory stocking and destocking.

Those numbers are more or less equivalent with the prescription growth we've been seeing, which was 13% in the third quarter.

If I could quickly on Hepsera, are you seeing much front line usage?

You mentioned that it has 45% of the new prescription market.

Does that correspond to front line usage?

No.

No, most of that is still in the [indiscernible] resistant patients or in combination with [indiscernible].

We don't have data specifically on how much is frontline but I think it's probably a pretty small percentage at this point

Think you.

We now move to Jeffery Portis with Sanford Bernstein.

Hi.

Thank you for taking my question.

My questions relate to [indiscernible] Viread.

On previous use conference calls, you alluded to the fact you may be able to file with six months stability data.

Is that still a possibility and if it was, what the potential timing of that filing could be.

Secondly, should we assume from your comments that the viability data in the three studies is okay and that you are sort of proceeding down with that filing on that basis?

All we can say on what's going to be required for the filing, those discussions are still under way, but we still think we'll be able to file in the first half of next year.

So we don't know exactly how many months that's going to require but within the range of the six months of the first half of next year.

The six or nine months or 12 months of stability.

So you'll have 12 months of stability in the first half of next year?

Towards the end of it, yeah.

Okay.

And in terms of the bioequivalent study, we hope to release that shortly.

We completed the study.

Thank you.

Next we move to Craig Parker with Lehman Brothers.

Hi.

A couple of questions unrelated to the inventory believe it or not.

It looks from the recent IMS trends like you guys are starting to get traction with the positioning of Viread against Combivir.

Is that the right interpretation?

Yes, Craig.

It's early days, Combivir still, I'd have to say dominant in the first line use.

If you look at the top ten regimens out there, Combivir is most of them and Viread is not.

Clearly, the primary target going forward, and has been for actually the last six or eight months, has been Combivir.

We're making inroads now with the data on the individual components, that is Viread and Emtriva.

We hope to make more inroads as we get the 934 data available.

Right.

Is there any possibility and if so, what would the timing be of the HHS guidelines including Viread with pro-tease as the first line?

I guess we don't know that.

You know, that just came out several months ago without Viread as a pro-tease.

Viread with [indiscernible].

Thank you.

Next we move to Greg Wade with Pacific Growth Equities.

I was wondering if you could help us to understand pricing for Emtriva in Europe and remind us of the terms of the licensing agreement with Mitec [ph] or Macigen, [ph] please.

Okay.

I'll take the first one.

We priced Emtriva equivalent to limiting in the U.S.

And in Europe, we're just, obviously we just got our approval to start that process, but we would anticipate we'll be at or at a slight premium to [indiscernible] or Epovir. [Inaudible] there are slightly different dynamics in each country.

So that's about all we can say at this point.

I'll ask John to respond on the Macigen.

With regard to the Macigen license at [indiscernible] I think the best way to think of it is we'll net out the payments to the universities we'll have to make, but it will be a tiered royalty starting the high single digits going to low double digits.

In then in addition, of course, there are significant milestone payments which will be due Gilead based on continued clinical and regulatory successes.

Unlike many of our contracts, once you recognize these payments as they are achieved, and we don't have to amortize them because of the timing of when we did the licensing agreement.

Thank you.

Next we move to Eric Smith with SG Cowen.

Good afternoon.

A couple questions financially.

First on the quarter over quarter cash balance was down looking for the explanation there.

We purchased our facility for 120 [inaudible] in September.

And the tax rate for '04 was a little unclear to me whether you expected a 30% tax rate beyond '04 as well?

We haven't made projections beyond '04 and it will depend in part upon how much our revenue ramped up in Europe relative to the U.S.

Thank you.

Our next question comes from Jason Kantor with WR Hambrecht.

Hi, guys.

Thanks for taking my call.

Again, a question about the tax rate.

Are you expecting to start that tax rate in the first quarter or is this something that will ramp up over time?

Could you break out how your royalties are between products, please?

We do, again, we will essentially exhaust all of our NOLs by the end of this year.

And so we will expect that full tax rate to go effective full year for next year.

And then you wanted to break out all our royalties on all our products?

You have a couple of major ones if you could just one through those?

Jason, that's a more complicated question.

Okay.

Maybe while you are looking at that, you can answer how did you come to your original stocking assumption because when I looked at the IMS trends at the time, it looked like your 20 to 25 million was, or I guess 25 to 30, whatever it was, seemed a bit low considering how strong it was.

And I'm wondering, you know, how you did that and how you think looking back at it you didn't get it right?

You know, the wholesaler data is inexact.

Even now looking back at it, it's pretty clear that IMF does a survey and omits one of the major wholesalers.

So things that go in and out of that wholesaler, we can now figure out.

Can be misrepresented by the overall data set.

That is to say they try to do an abstraction for that wholesaler based on historical trends.

When they deviate from trends, and they did, it wasn't possible for to us figure out exactly what was coming out of the wholesalers over the month.

So a little bit more went in, and part of that was over time they built up more slowly than they typically do, that is over several months of building of inventory.

So that led to an overestimation in our minds of the exact growth rate of the patient number which led us to understatement the amount of sales that went out.

I'm sorry, underestimate the amount of wholesaler stocking that occurred over the course of the quarter.

Thank you.

Our next question comes from Eun Yang with Needham & Co.

Thank you for taking my question.

My question is on the coformulated product of Viread and Emtriva.

Glaxo is developing a coformulated product for Abacavir and 3TC which is also one pill once daily.

According to the company, they are filing an FDA by end of this year.

So it looks like that product is going to be on the market ahead of Viread and Emtriva product.

So my question is if you could comment on the advantages of your product versus Glaxo's product to one pill once daily?

Sure.

I'll take a stab at that.

We think, in fact, Glaxo has already filed for that just in the last few weeks.

So that product, if approved, will clearly be on the market before our co-formulated product.

And, of course, the two components of that product and the two components of our product are all available now and have data available as separate products.

We are, in fact, selling against to some degree Abacavir already.

That will be where the battle is and there's -- Abacavir's most significant weakness is a hypersensitivity reaction that occurs in a relatively small number of patients but can be fatal and can be difficult to diagnose.

So there's quite a bit of fear about prescribing them particularly in first line use.

And not being able to recognize that hypersensitivity reaction which shows up as a rash and rash is of course a side effect of many therapies.

So that has limited the use of Abacavir as a stand alone and we believe will limit it to --as part of a combination therapy as well.

That will be the primary basis on which we will be competing as well as on the individual attributes of Viread and Emtriva.

In fact, we're doing that well before our products are available.

To be frank with you, we don't think that product will be as formidable a competitor as Combivir already is.

And we're competing against Combivir on the benefits of Viread over AZT.

Thank you.

Next we move to Ian Somaiya with Thomas Weisel Partners.

Hi can you hear me?

Yes.

All right.

The one question I had was on this inventory management and what steps are you taking going forward and when would they be in place?

Ian, we're evaluating a couple of things.

In fact, we've been through this in the past.

These are imperfect.

There are different ways you can essentially conceive some of the economics of your product to wholesalers in exchange for greater inventory management.

We're learning these are not guarantees and have had problems in the past with [indiscernible] long ago which is why we shied away with it this time.

So we're back to the table to try to figure out a way to at least get more favorable data from these wholesalers.

If not, get concessions to manage inventory more appropriately.

Quite a bit of the profit is derived from this way as you can tell from the trend in the industry over the last few months.

So it may be impossible for us to contractually control that, although we're working on it.

Another alternative for us is to sell directly to some of our major accounts.

This is a way to bypass the wholesale system.

That's something we're looking at.

We would expect to have something for -- in place probably by the end of the first quarter of next year.

And what sort of impact would you have on the margin for the drug?

Don't know at this point.

Okay.

I'm sorry.

Next we move to Meg Malloy with Goldman Sachs.

Thanks very much.

Two quick questions.

One, could you talk about the distribution channels in Europe and how well you're able to monitor those.

And then secondly, what's causing gross margins to be slightly better?

Meg, I'll try to address the first.

This is Mark.

We don't -- in general we don't use wholesalers in Europe.

In some countries we do kind of use physical distribution agents.

That is warehouses and we pay a 2% fee to do that, 1% or 2% to do that.

But we don't have wholesalers in the sense of people that buy our product and resell it for a profit in Europe.

So we don't have this issue.

And we have much better -- sales much better represent actual use of the product.

And the second part for the gross margins was that we have a better product mix and pricing has increased in the U.S., and we've been able to maintain our pricing better in Europe than we anticipated.

That's what the higher gross margins were.

Thank you.

Or next question comes from Tom Shrader with Harris Nesbitt Gerard.

Thanks for taking my question.

It really boils down to where your confidence comes from that two weeks is steady-state inventory.

Seems very low.

I've never had anybody quote a number that low.

The industry average is more like two months or 55 days.

I'm just -- are we about to go back to wholesalers' stocking?

Or do you have numbers for the [indiscernible]?

Just curious where your comments come from.

Number one, I don't know that we stated that we were confident that .5 is steady state.

We have not seen any consistent pattern with Viread.

We've been as high as 1.7.

My guess is we were actually higher than that based on what we now know down to .5.

So I don't know if we're going to increase inventories.

If .5 is steady state or if it's high.

We frankly don't know that.

I would be surprised if it went low -- if it went lower than where it is.

On the other hand, we can't control what the wholesalers are doing.

On the other hand, there's no dollar incentive for these guys to do that right now.

Where several of the wholesalers have already gone through their fiscal year end during the course of this year.

Right.

So there might have been an incentive to do this near that end.

We don't see any such trend coming forward.

So at least in the short term, I think there's no incentive to do that.

So you have no best guess as to a target inventory?

We typically think for HIV products it's somewhere between half a month and a month.

And it's because it is a chronic disease and in part because of our responsiveness.

We can give drugs to patients within a few days of the order.

Thank you.

Our next question comes from Jim Reddoch with Friedman, Billings.

Thanks.

Can you give us your perspective on why the triple nuke trials performed so poorly.

And I guess part of that question is what do you think the sort of rate of the K65R mutation is out there since it appeared to be a little bit tiring in some of the trials?

Thanks.

Well, we're actually carrying out our theorizing and studying as part of our involvement with the other companies with triple nukes to try to determine what is exactly going on there.

Clearly, what we've seen across the board is, is if you take three nukes, it doesn't matter which they are, you see what you might call a suboptimal response.

A number of patients still do well but not as many as you have if it's two nukes and either a PI or an NNRGI.

And there could be a variety of reasons.

One could be the fact that the nucleus tide class.

All the drugs need to be metabolized to the tri-phosphate level and that could occur differentially in different tissues.

It sort of gets back to it may follow the time of sanctuary argument where a virus can replicate.

It could be that just trying to block back to the site of first transcriptates [ph] with three drugs competing for that same binding site.

You reach a point of diminishing returns.

So we don't know.

It's something we're working on, but it's clearly a concern that was first uncovered earlier this year [indiscernible] through an IA sponsored study.

K-65R is a rare occurrence.

That is the mutation that develops on patients if they develop a mutation due to Viread treatment.

That is a rare occurrence in patients who are fully suppressed.

So to go with therapy to fully suppress patients, we typically see that at a very low level.

And when we do see it, the full change of sensitivity is about threefold if there are no other mutations.

In our study 903 at two years, we saw about eight patients develop this mutation.

The full change ranged from .9 to 2 because of other mutations occurring.

So in fact, all of those patients retain some level of sensitivity of Viread.

So that, in fact, is a very strong message about Viread.

Now on patients who are failing, you see a higher rate of all mutations, 184s, higher prints and some K65R but we definitely see K6R, too, in patients who are failing.

That is one of the issues, of course, with triple nuke therapy as the development of mutation or the use of any regimen where patients fail due to lack of potency or lack of compliance issues.

That is all the time we have for questions today.

I'll now turn the call back to our speakers for any closing or further comments you might have.

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 teleconference.

We thank you all for your participation.

You may now disconnect.