吉利德科學 (GILD) 2003 Q4 法說會逐字稿

Welcome to the Gilead Sciences fourth-quarter 2003 earnings conference call.

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

Later we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today, Thursday, January 29, 2004.

Your speakers for the call are John Milligan, Executive 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.

Welcome to Gilead's fourth-quarter conference call.

We issued a press release this afternoon providing results for the fourth quarter and year ended December 31, 2003, and describing the Company's quarterly highlights, which is also available on our Website.

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

I will begin the call by briefly reviewing the fourth quarter and full year financials and will provide guidance for 2004.

Then John Martin and Mark Perry will take you through the corporate 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 out of Gilead's control and are subject to 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 during the fourth quarter as sales, earnings and operating cash flow all improved significantly.

Product sales were up over 84 percent compared to the same period last year, driven by higher Viread and AmBisome revenues.

GAAP earnings go to 85 cents a share, fueled by higher revenues, improved margins and a onetime income tax benefit to be discussed later.

Operating cash flow also improved during the quarter to a record $99.9 million; as a result we have positive cash flow from operations for both the quarter and the full year.

Now turning to specific results for the quarter.

The Company reported net income of $192.6 million or 85 cents per share for the three months ended December 31, 2003.

This compares to net income in the fourth quarter 2002 of $35.5 million or 17 cents per share.

Our earnings were driven by strong operating results, which we discuss later in this call, and by a couple of significant unusual items which I will discuss here.

First I would like to discuss changes to our productline and research activities.

During the fourth quarter of 2003, Gilead incurred one-time, non-cash impairment charges against certain long-lived assets of $10.2 million, plus $0.7 million of other asset write-downs.

These charges were primarily driven by our decision to terminate liposome research and development activities in San Demas (ph) and to discontinue the DaunoXome productline.

In addition, we expect to incur severance costs of approximately $1 million during the first quarter of 2004 related to these activities.

The second item I would like to discuss relates to income taxes.

During the fourth quarter, in accordance with FAS-109, we recorded an income tax benefit of $111.6 million related to the reduction of the valuation allowance on our balance sheet for certain of our net deferred tax assets.

This action was driven by Gilead's strong financial performance in 2003 that utilized our remaining NOLs more quickly than anticipated and by our favorable operating trends looking forward.

The impact of this action on 2004 and beyond is that Gilead will move to a normalized tax rate, which will be discussed later in this call.

I will, however, point out that it is likely that actual taxes paid by Gilead in 2004 will be substantially less than those reported under GAAP due to the benefits of deducting stock option expenses on our tax reporting.

Excluding the impact of these two items just discussed, non-GAAP EPS increased a strong 147 percent to 42 cents per diluted share from 17 cents on a year-over-year basis.

For the full year ended December 31, 2003, the Company reported a GAAP net loss of $72 million, or 36 cents per share.

This includes the impact of the first quarter in-process research and development charge of $488.6 million for the Triangle acquisition and the third quarter reimbursement of $13.2 million of R&D expenses.

This compares to net income of $72.1 million, or 35 cents per share, for 2002.

Total revenues for the fourth quarter 2003 were $263.5 million, an 82 percent increase over the same period last year.

For the year ended December 31, 2003, we reported revenues of $867.9 million compared to revenues of $466.8 million in 2002, an increase of 86 percent.

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

Viread revenues grew to $176.8 million compared to $85 million in the fourth quarter of 2002, an increase of 108 percent.

Sales in the U.S. were $112 million and $64.8 million outside of the U.S.

This year-over-year growth was primarily driven by higher prescription volume in both the U.S. and Europe, and to a lesser extent, a favorable European currency environment compared to the same quarter last year.

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

For the fourth quarter of 2003 prescription volume in the U.S. is up 61.4 percent compared with the same period last year and 7.4 percent compared with the third quarter of 2003.

Additionally, we did see an increase in U.S. wholesaler inventory position during the fourth quarter as estimated by IMS, with 1.3 months on hand at the end of December compared with 0.5 months at the end of September.

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

Viread is now marketed in 22 countries around the world.

For the fourth quarter 2003, Viread volume in the European Union and Australia grew by more than 123 percent compared to the fourth quarter last year, and was up 12 percent compared with the third quarter 2003.

Foreign exchange also contributed to higher revenues, adding $6.6 million compared to the fourth quarter last year due to the stronger euro relative to the U.S. dollar.

Emtriva recorded revenues of $4 million during the fourth quarter and $10 million for the full year 2003.

This is in line with our expectations for a slower launch profile for this HIV therapeutic before the launch of the combination product in early 2005.

HepSera revenues continue to do well.

In its fifth full quarter on the market, sales from HepSera for the treatment of chronic Hepatitis B were $15.8 million, down slightly from 16.4 million during the third quarter.

This decrease was primarily driven by reductions in U.S. wholesaler inventory levels during the fourth quarter, which partially offset quarter-over-quarter prescription growth of 18.2 percent.

According to IMS, U.S. wholesaler inventories increased from 2.1 months at the end of the third quarter to 0.9 months at the end of the fourth quarter in response to a price increase announced in early November.

We are pleased with the continued progress in launching HepSera, which we now market in 12 countries, and with the rapid progress of our now dedicated U.S.

HepSera sales force and educating physicians of the favorable attributes of this product.

Finally, sales of AmBisome were a record $54.5 million for the quarter, a 10 percent increase over the same period in 2002.

This growth was driven primarily by a favorable foreign exchange environment and supply constraints on Amphotericin B drugs in certain markets, which offset slightly lower European volume.

The total foreign exchange impact on AmBisome sales was $4 million compared to the same quarter last year, while volume declined by approximately 1 percent in Europe.

For the full year, the Company reported net product sales of $836.3 million.

This compares to net product sales of $423.9 million in 2002, a 97 percent increase over the prior year.

Sales of Viread totaled $566.5 million for 2003, which is at the upper end of our third quarter guidance of 550 to $570 million.

U.S. sales were $355.9 million and rest of world sales were $210.6 million.

Sales of AmBisome were a record $198.3 million in 2003, which exceeds our guidance of 180 to $185 million.

This represents a 7 percent increase over sales in 2002.

Excluding the impact of the increase in foreign currencies relative to the U.S. dollar, AmBimsom sales declined 5 percent versus 2002.

HepSera sales for the full year 2003 were $50.5 million.

For the fourth quarter 2003, Gilead recognized net royalty and contract revenues of $7.9 million compared to $5.8 million for the same quarter in 2002.

This growth was primarily due to higher Tamiflu royalties, resulting from lower-than-expected product returns.

Product gross margins improved 87 percent, up 1 percentage point versus the fourth quarter last year.

This improvement was largely driven by a favorable product mix, as Viread and HepSera accounted for a higher percentage of our product sales during the quarter, and also due to the favorable currency environment.

For the full year, gross margins expanded 2.9 percentage points to 86.5 percent for the reasons just noted.

Fiscal year performance is favorable to our most recent guidance of 86 percent.

Now turning to expenses.

Research and development expenses were $53.3 million for the fourth quarter of 2003, up 52 percent compared to the same quarter in 2002.

The increase in R&D expenses for the fourth quarter 2003 is primarily attributable to clinical trial (indiscernible) treatment, costs associated with the (indiscernible) of the co-formulation of Viread and Emtriva; and to increase research activity, particularly in the Pro (ph) drug arena.

One area of higher clinical spending I would like to highlight is the Viread-Emtriva study, Study 934.

We completed enrollment in the study much more rapidly than we had originally anticipated and we expanded the study to allow for the enrollment of 200 more patients.

For the full year, R&D spending was $164.9 million, which is slightly higher than our most recent guidance of 155 to $160 million, primarily due to the items just discussed.

SG&A expenses in the fourth quarter of 2003 were $78.8 million, up 37 percent from $57.6 million in the same quarter of 2002.

The increase spending in SG&A for the fourth quarter of 2003 is attributable to launch costs from Emtriva, expansion of our U.S. and European sales forces, and the impact of foreign exchange on euro-based spending.

For the full year, SG&A costs were $250.2 million, which is in line with our most recent guidance of 240 to 250 million for the full year.

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 fourth quarter was $4 million compared to the same quarter last year. (indiscernible) of foreign exchange impact on revenues X U.S. spending and the results of our hedging program.

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

Operating cash flow improved to a record $99.9 million for this quarter compared with operating cash flow of $35.5 million for the same period last year.

This marks our seventh consecutive quarter of positive operating cash flow.

Operating cash flow for the full year was $234.6 million compared with operating cash flow of $74.4 million last year.

Based upon this strong cash flow performance, the balance sheet at December 31, 2003 shows cash, cash equivalents and marketable securities of $707 million.

One final note about the balance sheet.

During the fourth quarter, Gilead significantly strengthened its balance sheet by converting the outstanding $250 million 5 percent convertible note to approximately 10 million shares of common stock.

As a result, our debt has decreased from $595 million in the third quarter to $345 million as of the end of the year.

Now I would like to provide guidance for 2004.

Starting with revenues.

We expect to be able to achieve worldwide sales of Viread in a range of 700 to $750 million, up approximately 25 to 30 percent versus 2003.

I would like to note that this forecast assumes a first-quarter 2005 launch date for the Viread-Emtriva combination product.

We do expect cannibalization of Viread revenues following this launch as patients switch off the individual products to the co-formulated products, but expect the overall Viread franchise to grow as a result.

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

In particular, V-fen (ph) and Canstides (ph) continue to grow market share, as Merck and Pfizer release additional data.

We expect AmBisome sales to be in the range of 160 to $180 million, down between 10 to 20 percent versus 2003.

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

Product growth margins are projected to be approximately 84 to 86 percent for the full year 2004, slightly down from 2003 as we experience more European pricing pressure and as Emtriva sales increase.

Now turning to expenses.

Our guidance for R&D spending for 2004 is 200 to $220 million, up approximately 20 to 30 percent over last year.

We expect SG&A spending for 2004 to be in the range of 310 to $300 million, up between 25 to 30 percent over last year.

For the first time, we are providing guidance on capital expenditures.

We expect capital expenditures to be in the range of 55 to $55 million.

Finally, I would like to make a couple of comments about our tax rates going forward.

For 2004, we expect our effective tax rate to be in the 32 to 35 percent range for the full year, reflecting the impact FAS-109 elections I discussed earlier.

In summary, as Gilead looks ahead, the Company will continue to make the investments we believe necessary to build a strong and independent global business promoting our productline, particularly Viread, AmBisome, HepSera and Emtriva.

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 fourth quarter 2003.

Good afternoon, everyone, and thank you for joining us.

We are pleased to summarize for you Gilead's many accomplishments in the fourth 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 year.

Gilead completed 2003 with another very productive quarter, executing on many important milestones both in the U.S. and internationally.

Over the course of the last few weeks, based on U.S.

NDC (ph) data, Viread for HIV has become the most widely prescribed branded anti-retroviral in its class, achieving more new and total prescriptions than Glaxo SmithKline's Napovir (ph), the leading branded anti-retroviral during most of 2003.

Fully launched in the U.S., Australia and Europe, we expect continued growth of Viread through greater penetration into a variety of treatment settings and further market share erosion of competing NRTI products.

With our expanded employee-dedicated HIV sales forces in place, the launch of Emtriva underway, and the robust data set we have in hand, we believe we are well poised to achieve this goal.

We are also pleased to announce that late last week, our partner, Japan Tobacco (ph) completed the filing of a rolling new drug application seeking approval of Viread in Japan.

We expect approval of this product by midyear, which will trigger a milestone payment from Japan Tobacco.

Gilead will then begin receiving royalties from sales of Viread in this small but important market, where it is estimated that 5000 to 6000 patients are currently receiving anti-retroviral therapy.

Emtriva for HIV is now marketed in the U.S. and launching in Europe following its approval in October of 2003.

The product is making steady inroads into use in treatment (indiscernible) patients, most often in combination with Viread.

The rollout and uptick of HepSera for chronic Hepatitis B continues in the United States and 12 countries in Europe, where it is being marketed by Gilead.

We expect to launch HepSera in the important markets of Italy and Turkey during the first half of the year.

These markets offer significant growth opportunities, with an estimated 3 million individuals infected with chronic Hepatitis B. Glaxo SmithKline, our partner in Asia and South America, has launched HepSera in Hong Kong and Singapore, and expects approvals in the larger markets of Korea and Taiwan this year, with China and Japan to follow in 2005.

Gilead will receive royalties on net sales of HepSera in these markets booked on a one-quarter lag.

AmBisome sales were strong in the face of increasing competition, achieving record sales levels once again, although volume was down slightly over 2002.

As I am sure you are aware, the flu season in the U.S. was one of the worst in several years.

Hoffman LaRoche (ph) is our worldwide partner for Tamiflu, the only oral antiviral product available for the treatment and prevention of all strains of influenza A & B. Based on IMS U.S. prescription data, more than one million prescriptions were filled for Tamiflu in the month of December alone.

Mark will go into more detail about the royalty potential for the flue season later in the call.

Turning to our products and development, the co-formulation of Viread and Emtriva is on track for U.S.

NDA filing in the first half of this year, with the expected launch in the early 2005 time frame.

To continue fueling our pipeline, we are very excited about the potential opportunities we have to exploit with the application of our novel and proprietary Pro Drug technology.

This technology enables compounds to selectively target and be retained in lymphatic tissue.

GS 7340, a novel pro drug of Tenofovir and GS 9005 are early stage HIV protease inhibitor are the first potential products that incorporate this technology.

Following positive results from a small Phase I/II study of GS 7340, we are in the process of designing a Phase II program to determine the safety and efficacy of the compound in treatment naive patients and in highly treatment experienced patients with multiple resistance mutations associated with the thymidine analog drug AZT and D4T.

And as we announced two weeks ago, we have filed an NDA with the US FDA to begin clinical testing of the protease inhibitor GS 9005.

GS 9005 has the potential to be dosed as one pill once daily and, from early preclinical work, appears to have a resistance profile that is unique from the commercially available protease inhibitors.

We are also focusing our discovery and medicinal chemistry efforts on developing additional pro (ph) drugs that address other diseases of the lymphatic system beyond HIV.

Based on our successes in 2003, we believe that we are poised to achieve the financial and operating goals for 2004 that John Milligan has described to you, while continuing to build a worldwide anti-infective franchise.

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

Thank you, John.

Turning to our commercial operation.

In the US for the week ending January 16, 2004, Viread new prescription market share for the NRTI class of 20.4 percent, and total market share for this class increased to 20.3 percent.

As John mentioned, Viread is now the number one branded anti-retroviral as measured by new prescriptions as well as total prescriptions.

In the fourth-quarter of 2003 total prescriptions increased 7.4 percent over the third quarter.

We are seeing an even higher penetration at the individual prescriber level in many territories around the country with some treaters as high as 50 percent.

Because the physicians prescribing at this level are faster adopters of new products, we are leveraging these success stories with marketing and educational efforts targeted towards lower (indiscernible) or more conservative physicians who are slower adopters to newer therapeutic options.

Our primary focus is to displace GSK's combination therapies, Combivir and Trizivir, which continue to be widely used in early treatment regiments.

In the European Union our market research shows that Viread patient share grew significantly in all territories with an average of 20 percent of all patients in Europe receiving Viread as part of their anti-retroviral therapy.

In Germany Viread is used in more than 33 percent of patients with the United Kingdom close behind at 28 percent followed by Spain at 25 percent.

In France patient share increased more modestly to about 20 percent.

We obviously still have significant opportunities for growth in these territories, particularly in countries where we have launched more recently such as Italy, a market similar in size to Spain and France.

Several recent events should enable us to continue the commercial momentum of Viread, both in the US and abroad.

Last November the US Department of Health and Human Services issued their revised guidelines for the treatment of HIV.

These guidelines provide important information to help guide the prescribing decisions of HIV physicians in the US and internationally.

Viread was given favorable positioning and is now recommended for use in treatment naive patients in combination with another NRTI including Emtriva as one of the choices as well as with an NNRTI.

What was somewhat surprising, only because the product has been approved so recently, is that Emtriva was included in this update.

Emtriva is now recommended in the guidelines as a first line therapy for HIV, and as an alternative to Glaxo SmithCline’s 3TC in a two drug nucleoside reverse transcriptase inhibitor backbone for combination therapy.

The guidelines highlight Emtriva's comparatively long half-life which makes possible the drug's once daily dosing, and indicates that it may be used as an alternative to lamivudine.

In addition last October at a European AID's conference Abbott presented 24 week data from a study evaluating once daily verses twice daily Kaletra in a background of Viread and Emtriva.

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

This is the first controlled clinical study in which Viread and Emtriva have been used together, and also provides important data on their use with a protease inhibitor.

Feedback we've received from this conference suggests at the increasing importance of once daily regimens.

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

We expect Abbott to release 48 week data from this study in the near future.

This month we completed enrollment with 514 patients in study 934, which is a head-to-head study of Viread and Emtriva verses GSK's Combivir, both in combination with Efavirenz.

This study is a multinational study with sites in the United States and throughout Europe.

It's clear that clinical research influenced practice, and this study will enable many physicians and patients to gain experience with Viread and Emtriva in advance of the projected approval of the co-formulated product.

We have decided to take a 24 week cut of the data and either release it through a press release or present it at an appropriate scientific conference sometime in the second half of this year.

We also expect to release 144 week results from study 903 shortly.

In this study we evaluated Viread verses Bristol-Myers Squibb's d4T in a background of 3TC Nefabrin in 600 treatment naive patients.

This is the first controlled clinical study of any anti-retroviral regimen for this duration.

We believe the data will further demonstrate the long-term safety advances of Viread over d4T, particularly with respect to the effect on lipid levels and lypoatrophy.

We plan to present these and other long-term data that profile Viread's unique attributes at several major domestic and international medical conferences throughout 2004.

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

Our recently expanded team of national accounts managers is making considerable progress creating awareness of Viread in correctional facilities and the specialty pharmacies that sell to them.

They're also focused on establishing relationships with methadone clinics and discharge planning centers to help ensure that once patients 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 reimbursements and formulary uptake for all three of our most recently launched drugs, Viread, Eftera (ph) and now Emtriva.

In order to capitalize on the growing opportunity for Viread and Emtriva use in the correctional setting, and to maximize our effectiveness in obtaining favorable reimbursement for all of our products, we are in the process of doubling our staff to 19 people and creating two teams of national account managers, one to focus on managed care and one dedicated to correctional facilities and community and patient initiatives.

While we're still awaiting data for the fourth-quarter 2003, it's worth pointing out that our sales growth to correctional facilities was up 33 percent third-quarter over second-quarter compared to 12 percent for the previous quarter.

We believe this is a direct reflection of the efforts made by our recently expanded team of national account managers.

As we discussed in our third-quarter 2003 conference call, we are evaluating the number of methods to control excessive inventory build based on speculative purchasing at the US wholesaler level.

While we have not entered into any inventory agreements with the three major wholesalers at this point, we are in discussions with each of them to determine if there's a mutually acceptable negotiated outcome.

Publicly available IMS inventory data for the fourth-quarter indicates that inventory levels increased to 1.3 months at the end of December, up by 0.8 months relative to third-quarter levels.

Inventory levels were estimated by IMS to be about half a month at the end of the third-quarter, a relatively low level due to the significant drawdown over the course of the third-quarter.

In the fourth-quarter we increased our monitoring of individual distributor buying patterns, tying them to historical purchasing data and our own internal forecasting.

We do not believe -- excuse me, we do believe there was some speculative buying in the fourth-quarter on the assumption there would be a price increase in the first quarter.

This growing purchasing trends has continued in the month of January and as a result we've recently notified wholesalers that we reserve the right to not fill orders that appear to be in excess of demand, and there have been several instances in the month of January that we (inaudible).

Additionally we may implement smaller, less predictable price increases for Viread in an attempt to limit speculative buying.

We will continue to monitor the situation closely and update you as this strategy evolves.

It's important to point out that IMS inventory data in 003 only reflected information from two of the three major wholesalers.

One of the two wholesalers supplying information to IMS has decided to terminate its contract and as a result IMS is discontinuing this product for 2004.

Gilead will continue to monitor the wholesalers buying patterns closely to try to ensure that purchasing mirrors demand as closely as possible.

We'd like to caution you however, that estimating both demand and inventory levels is at best an inexact science and is based on incomplete information from third party sources.

Another potential growth driver for Viread is its use in combination with Emtriva, which we are actively promoting in advance of the co-formulated product launch.

Sales for the second-quarter on the market were 4 million, down from the third-quarter as a result of typical wholesaler inventory build for a new product following its launch in July.

Prescription growth was up 92 percent fourth-quarter over third-quarter, and as expected it appears that Emtriva's initial uptake is in treatment naive patients, usually prescribed in combination with Viread and one other anti-retroviral.

On the European front Emtriva received centralized European approval early in the fourth-quarter.

We have launched the product in the UK, Germany and France with pricing somewhat higher in these countries than in the US.

Launches will occur in the remaining countries of Europe throughout 2004 as pricing is obtained.

We expect the uptake of this product to be more gradual than that of Viread both in the US and in Europe for several reasons.

First, we are unable to initiate an expanded access program for Emtriva prior to approval because it did not meet an unmet medical need due to the large number of anti-retrovirals already in the market.

And second, as Emtriva is similar in many respects to 3TC with the exception of its longer half-life, it's challenging for us to proactively convert patients to Emtriva who are on a 3TC containing regimen that is controlling viral replication.

We believe data from study 934 will help address these two challenges as more physicians gain experience using Viread and Emtriva together.

We have the potential to see a safety or tolerability benefit over Combivir because of the toxicities associated with AZT.

We also believe that the availability of the Viread Emtriva co-formulation product in 2005 will substantially increase the use of Emtriva.

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

We will submit the new drug application for this product in the coming months. the data package will include a minimum of six months data for all three stability batches and results for the bioequivalent study that demonstrates the co-formulated pill provides the same blood levels of drug as both drugs given separately.

We intend to submit these data for presentation at a scientific conference later this year.

And assuming a traditional 10 month review by the FDA we would be in a position to launch the co-formulated product in the US in early 2005 with a European launch later that year.

Turning now to HepSera for chronic hepatitis B. We were pleased to report sales for the fourth-quarter of $15.8 million, 9.7 million in the US and 6.1 million in countries outside the US.

As John Milligan mentioned, there was a slight price increase in the US in November of this year and we believe this led to an inventory drawdown at the wholesaler level over the course of the remainder of the fourth-quarter.

In the United States HepSera has garnered 46.3 percent of the new prescription market and 46.4 percent of the total prescription market relative to the other antiviral on the market, lamivudine.

We continued to see a gradual increase in first-line use as well as proactive switching of patients with lamivudine resistance to HepSera, although we're still seeing some use in combination with lamivudine.

In order to increase awareness of the disease and, importantly, increase awareness that there is an approved new treatment option available, we are in the process of hiring six community liaisons who will focus their efforts on the Asian community in the United States where the disease is most prevalent but also significantly under treated.

Just a few weeks ago we launched a hepatitis B awareness campaign called Blocking the Invisible Enemy with Houston as the first city to preview the national effort.

Leading up to the event representatives from Gilead met with several Vietnamese, Chinese, and Korean community groups in order to collaborate as partners in this event.

These organizations handed out fliers and brochures to their community members and placed posters in their centers to raise awareness prior to the event.

In the days leading up to the event local physicians spoke with mainstream and Asian language publications in Houston to help educate consumers about the disease.

Importantly, Gilead was able to work with the Texas Liver Coalition to have the mayor of Houston proclaim the week of January 11 through the 17 as hepatitis B awareness week.

On the publication front we have recently been notified that a manuscript detailing new treatment algorithm has been accepted for publication by a major scientific journal.

For the first time describing a more aggressive approach and straightforward guidelines for the treatment of chronic hepatitis B. We believe initiatives and publications such as these will support growing use of HepSera in the United States.

In Europe the HepSera launch continues and the product is now on the market in 12 countries, including the important Southern European market of Portugal, Spain and Greece.

We anticipate being on the market in Italy in the first half of this year.

France and Germany were the greatest contributors to sales in 2003 with Spain increasing since its launch last quarter.

We have also received regulatory approval for HepSera in Australia, Switzerland and Canada, countries where we've retained rights for the drug.

As John mentioned Glaxo SmithKline has launched HepSera in five Asian countries including Singapore and Hong Kong.

In these territories HepSera is priced at a premium to lamivudine.

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 process.

We will 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 of 2004.

Over the course of the year we will present additional long-term data from our ongoing studies of HepSera.

In particular, we expect to present very important 144 week data from our two pivotal studies, studies 437 and 438.

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

(indiscernible) AmBisome.

Fourth-quarter sales were $54.5 million, an all-time high and an increase of 10 percent over the same quarter in 2002.

While there was a significant positive impact due to favorable currency exchange rates, we do now see AmBisome continuing to hold up very well in the face of growing competition.

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

We continue to see a shortage in supply of convention Amphotericin B from Bristol Myers Squibb in some European markets.

With increasing competition from Merck and Pfizer, we are focused on maintaining our market share by leveraging our existing dataset through presentations at various scientific forums and to publications that continue to highlight AmBisome as the gold standard in the treatment of serious invasive fungal infection.

We will also continue to enhance our data with new clinical studies including the multinational AmBiLoad study as well as a number of (indiscernible) course studies in individual markets.

Turning now to Tamiflu, as John pointed out earlier, the flu season in the United States was one of the worst in years, over one million prescriptions for Tamiflu in the month of December alone. while the season appears to be waning in the US and has not been significant in Europe, we're hearing that there may be an increase in infection rates in Japan.

It is of course impossible to predict how severe the flu will be in Japan for the full season.

There also has been a recent emergence of the lethal H5N1 strain seen in Asian countries.

This is the avian influenza strain that moves directly from birds, mainly chickens, to people, but the strain does not appear at this point to be transmissible from person to person.

While the World Health Organization has recommended the killing of all poultry in affected areas, there is also work ongoing to develop a vaccine which could take months to produce.

In the meantime, the CDC has begun to test anti-virals against the virus.

It appears that the older medications, amantadine and rymantadine, are not affective against this strain.

However, based on preclinical screening work a few years ago, it is believed that Tamiflu has activity against H5N1.

While Gilead is not directly involved in these discussions, Roche is working with various health organizations should the need arise for a large distribution of Tamiflu, and in fact the Japanese government recently donated $20 million worth of Tamiflu to Vietnam.

Regarding our royalty arrangement with Roche, we recognized a 7 percent royalty on worldwide Tamiflu net sales for the first nine months of 2003.

The royalty rate was lower than the royalty rate we received in prior flu seasons because we are contractually obligated to share in the cost of (indiscernible) burden for the product if such costs exceed a defined threshold.

Due to a variety of manufacturing and recall issues surrounding Tamiflu, our royalty rate was reduced from the historical 14 percent to the minimum level of 7 percent.

There is potential for us to recognize an additional retroactive revenue payment from Roche if Tamiflu's actual cost of goods was less than Roche projected for 2003.

We would book any potential additional revenue from Roche during the first quarter of 2004.

At this time we do not know whether this will occur or to what magnitude.

We will book royalties on the worldwide net sales of Tamiflu that occurred during the fourth-quarter of 2003 in our first-quarter this year.

As we announced yesterday, Gilead will return rights to amdoxovir, also know as DAPD, to Emery University and the University of Georgia.

Gilead gained the rights to this anti-HIV compound through its acquisition of Triangle Pharmaceuticals in January, 2003.

To date DAPD has been evaluated in Phase II studies.

Although the profile of DAPD is interesting and may be appropriate for salvage patients, we are concentrating our efforts on our earlier stage HIV pipeline products, including GS 9005 and GS 7340.

As John mentioned earlier in the call, we recently filed an IND for GS 9005, our novel protease inhibitor, and expect to take this product into the clinic later this year.

Based on positive Phase I/II results, we're designing a Phase II program to evaluate GS 7340 in both treatment naive and treatment experienced patients with multiple resistance mutations.

We expect to commence those studies in the second half of this year.

We're enthusiastic about the potential of our proprietary prodirect (ph) technology and have already begun applying this concept in research to compounds that may help address other diseases of the lymphatic system.

And finally I would like to provide a Macugen update.

Macugen, as you know, is a product in late stage development for the treatment of age related macular degeneration.

This product came to Gilead as part of the NeXstar acquisition in 1999, and we out licensed this compound to Eyetech Pharmaceuticals in 2000.

As part of our agreement, Gilead received a warrant to purchase 791,667 shares of common stock of EyeTech at a price of $6.00 per share.

EyeTech has filed its initial public offering and we believe they are pricing the deal today.

The IPO filing range for the deal was $18 to $20 per share which would yield a post IPO valuation for EyeTech of more than $800 million.

We intend to exercise our warrant following the expiration of a 180 day lockup agreement, and will likely sell those shares immediately depending on market conditions.

In addition, Gilead is entitled to milestone payments associated with regulatory filings and approval in the US and Europe and royalties on potential worldwide net sales of Macugen.

This royalty nets out in the high single digits.

EyeTech has not yet filed for FDA approval of this product and we believe that will occur later this year.

Reflective of our commitments and focus on our business, we continue to meet our drug development and commercialization milestone for our products this past quarter and over the course of 2003.

We look forward to continuing strong revenue and 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 we can take your questions.

(OPERATOR INSTRUCTIONS) Mark Augustine of Credit Suisse First Boston.

I wanted to ask what the company has on tap for the retrovirus conference coming up.

We haven't announced that at this time, but there will be a variety of presentations associated with our compounds.

If you would please just comment on the European Union pricing environment for Viread and the magnitude of price reductions and things like that?

As you know, we experienced price reductions in a number of countries last year for Viread, and, as we previously described, we expect a price reduction in France which is our largest market in Europe in the month of January.

That's going to happen any day now we believe and it's going to be in the range of 25 percent down from the price we were at at the time of launch.

And that reflects the product going from a hospital-based product to a retail based product.

So that you should assume same is going to happen now and will last throughout the year of course.

We may have a price reduction in Germany as well through the year.

To the extent Viread is considered a retail drug in Germany that would probably be more in the single digit range.

We're not sure about that yet.

Beyond that we're not aware of any specific pricing reductions, although I would not be surprised given the pharmaceutical pricing environment that we would see some further movement downward in some of the European countries.

Thanks very much.

Caroline Lowy (ph) of Morgan Stanley.

I just wanted to confirm, it would seem from the 0.8 month increase in inventory that that would be about 25 to 30 million in addition in 4Q, if you could confirm that?

And that would put us at 154 million run rate.

We're not going to quantify exactly how much that is.

Certainly these measurements are imprecise -- the IMF measurements are imprecise.

As Mark pointed out, only two of the three wholesalers provide data, and so that gives a level imprecision (ph).

Also we don't know and it's very hard to calculate exactly what the flowthrough is in each of these wholesalers.

That will become less transparent this year, so we won't have any measurement.

We've specifically not given a dollar range or guidance in that range for the quarter.

The other tricky part of this of course is we don't know what the actual normal baseline is for the wholesalers, and each of them are acting sort of sporadically these days, so that guesstimate has gotten too difficult to do accurately and we don't want to go public with that number.

Is there anything additional you can tell us about your conversations with the wholesalers of what kind of agreements you might work out?

I know -- I think on an earlier call you targeted 1Q for reaching agreements and whether that might affect the profitability.

I know in most cases you have to have some sort of give back in order to get them to lock in to certain order patterns?

In terms of the process, we are currently in discussions with each of the -- there are some we've had meetings with, others we will have meetings with in the not too distant future.

We are under discussions about the complexity of their business model and what they need in order to be able to provide information to us and more certainty.

It would cost money, and that's somewhat factored into our guidance for the year and we'll see how that plays out.

The range is larger than we would like it to be but on the other hand I think there's a reasonable course of action for us going forward.

Great, thank you.

Meg Malloy of Goldman Sachs.

I was wondering if you could speak to your perception of the underlying demand for Viread in terms of high prescribers and medium prescribers.

I mean, you talked about maybe getting to the left low hanging fruit.

Can you characterize the market a little bit in terms of what the penetration is by decile prescribers?

Secondly, if you could comment on what kind of comebacks you expect from the competition, in terms of how they would position relative to you, particularly with respect to Combivir and Trizivir and some of the new products coming in combination?

This is Mark.

I'll take a shot at that and maybe turn it over to John.

We are seeing now what we have seen since the launch of Viread, and that is a stratification on youth in general in the U.S., so that the top decile prescribers are well over 20 percent down to the lower decile prescribers are in the teens.

And each of those categories has moved up over time; they're all using more of the drug.

But the disparity continues between -- lump then into 3 different groups.

And then we have individual prescribers or pockets of clinics or pockets of prescribers that have 50 percent or more market share.

We believe those are the kinds of levels we can achieve more broadly through additional efforts and additional data.

So that has really been our effort is to take the higher prescribers on the road, in effect, and have them share their stories with their peers.

That is having an impact, no doubt.

Plus longer time on the market and more familiarity with the drug just adds a greater comfort level for (indiscernible).

Could I maybe ask a question in the context of the guidance that you gave of 700 to 750, what would that imply in terms of change in prescription patterns for the lower prescribers?

It implies -- I'm not going to quantify it, but it implies growth across all of those segments, and probably some of the groups coming a little closer together.

But we need more prescribers in the 30, 40, and 50 percent market share range for that to happen than we have today.

Okay.

And we are under intense competitive pressure, primarily from GlaxoSmithKline but also from Bristol-Myers Squibb, and others.

We're on everyone's radar screen as now the number one brand in anti-retroviral.

In many cases we partner with those companies, of course, but I think most -- the bigger threat to GlaxoSmithKline as this point, particularly with our combination drug coming on the market in the early part of 2005.

As you know, GSK has their own new combination under review, and we expect it would launch in the August or September time frame, of abacavir and lamivudine, which would be a once-a-day combination therapy.

We think we have advantages over that combination, particularly with the liabilities associated with abacavir, and we will fight that battle in the marketplace.

But frankly, abacavir has not taken significant market share on its own or as part of Trizivir to date.

So we think our competition, our primary competition will continue to be Combivir, where we have advantages of the Viread component versus the AZT component, plus the once-a-day advantage.

Thank you.

Elise Wang of Smith Barney.

I was wondering if you could just clarify some of your guidance on the expense side?

If you would just, first of all, repeat what you said about guidance on SG&A, and then also add some color as to whether or not the run rates we saw in what you just recorded for Q4 for both SG&A and R&D are appropriate for going forward per quarter?

Both for R&D spending for the year, our guidance -- R&D spending, our guidance is 200 to $220 million;

SG&A is 310 to $330 million.

Historically, we have spent more in Q4 than any other month, but you can kind of figure out where we are relative to the guidance now, based on the numbers we put out today.

I would use those pro forma numbers.

There were a number of charges in there in Q4 in particular.

Also just to clarify, obviously, you did convert that $250 million convert, and you indicated 10 million shares have been issued.

So just to clarify that, what are you anticipating for the shares outstanding for this year now?

Total shares outstanding, we are right around 230 million currently.

We have not given guidance to how that would increase over time.

But we should take into account the conversion, the converted debt that you mentioned?

The converted debt was already counted in the share count last year.

Using the converted method, we are already there, so we are counting it.

And that is into the share count for the end of this year.

Okay.

You obviously expanded the enrollment in the bioequivalence study that you are doing with the Viread plus Emtriva capsule.

Could you just discuss a little bit about the rationale behind that (indiscernible)?

Just to be clear, we increased the enrollment in the head-to-head study of Viread Emtriva versus Combivir and back onto Sustiva.

We were going to enroll 300 patients.

It went very quickly.

We ended up enrolling over 500; 512 patients, I believe, patients were in that trial at the end of the day.

So that came in pretty quickly.

The rationale was partially to get more experience with the product in Europe.

We had enrolled so quickly that many of the European sites were unable to get through their ethics committees by the time we hit the cutoff.

So we decided to extend that and get more experience with more patients, primarily in Europe.

We put a cutoff at the end of the year and ended up actually hitting our top end of the range, largely so that we could have the data available, both at the 24-week and full-year data available at the time of the launch in early 2005.

Okay, thank you very much.

Thomas Way (ph) of Piper Jaffray.

I wanted to ask about 12 percent sequential prescription growth in the EU.

Did you see a rebound from the heat wave effect that affected the third-quarter numbers?

And if you were to normalize, what do you think the growth would have been like in Europe?

The cause and effect is always very difficult to figure out.

I don't know if this is a rebound from the heat wave or just a more typical rebound from the summer when a lot more individuals on vacation and less prone to switching therapies.

So I think it is impossible to predict what the rate would have been, and it is also are to predict in the future.

I think as Mark pointed out, we have made some pretty strong inroads in certain markets with high percentage market share, and we're continuing to try to grow in markets where we haven't gained as much market share and have a ways to go, such as France, and particularly in Italy where we're gaining quite a bit of momentum and are early in the launch phase.

I think that's an area where we have quite an opportunity.

Then I had a question on the balance sheet.

There was a very big jump in current assets from the third quarter to the fourth quarter.

Is that a receivable of some sort?

What exactly was driving that?

One of the big pieces in there, obviously, is the purchase of the facilities.

We have completed that.

I think we could probably (indiscernible) this out.

There's really no magic going on there.

We will give you a call afterwards and kind of go through that.

(OPERATOR INSTRUCTIONS) Geoffrey Porges of Sanford Bernstein.

A question on the stability data for the coformulated product.

Could you comment when that stability study or when the six-month point is for that study, and then what is the process for moving to a filing after that data is available, and is there are any obstacle to filing that almost immediately afterwards?

And I have a follow-up question on the penetration for Viread.

I actually don't know when the last date is in the six-months stability study.

I don't really think of it that way.

We have three batches and it's an ongoing process of pulling out the data, analyzing importantly what happens at that six-months time point, then writing up the report and putting that into the NDA filing.

So there is a barrier in terms of just getting the work done and signed off and put into the application.

As we said, that time point will allow us to file this half of the year, and beyond that we can't give you any specific guidance.

Just one quick follow-up the.

You mentioned on an earlier question that there were certain accounts where you had a 50 percent share with Viread.

Should we think of that as just sort of peak penetration for Viread plus the coformulated product when you have the two in the market?

In terms of accounts, we've said that certain doctors have 50 percent or -- 50 percent of the patients.

We don't know what the barrier is at the top of the market.

We just know that that's where certain doctors are today.

You can think about Efavir, that in its three different formulations, there's a better than 50 percent patient share.

Those are the kinds of targets we are shooting at, but we really can't project where we are (indiscernible).

Okay, thanks a lot.

Mirav Shevav (ph) of UBS.

I was wondering about Tamiflu.

You talk about getting 7 percent royalties for the first three quarters of '04.

I was wondering what is going to be the royalty rate for the fourth quarter of '03?

My other question is relative to how we assess inventory, we are coming up with $12 million of inventory addition relative to the scripts data for IMS.

In terms (indiscernible) that is significantly less than what IMS is reporting based on their inventory data.

So I was wondering if you can give a little bit of color in terms of which direction is it going?

I'll try the first and pass the second to John Milligan.

The royalty rate on Tamiflu is set at the beginning of each year based on the cost of goods adjustment from historical information.

So for 2003, it was set at 7 percent, which is the minimum it can get to based on a relatively high cost of goods because of recall and return activity, and that 7 percent applies throughout the year including the fourth quarter, which we will book in our first quarter.

But after the end of the year and some point over the next few months, Roche will do a new calculation.

And if it turns out the actual cost of goods was lower than it was the previous year, we will get an adjustment and, in affect, a retroactive payment sometime in our second quarter that would make up the difference if the royalty rate should have been higher.

But isn't it assuming the worst-case scenario relative to the script level observed in the fourth quarter, what do you think that royalty amount could be, even assuming only 7 percent?

We don't have enough information to know that.

I wish we did.

Thanks.

Your second question was asked us to comment on your methodology for estimating inventory, and I'm afraid we're just going to be unable to comment on any number or range of numbers around what the inventory may be.

As you and we know, there are many ways to calculate these things and there is great disparity in those numbers.

Bud I would assume that you guys would have taken action long before the inventory was indeed going to 1.3.

You would have taken action long before it got there.

What we did do was limit some orders.

But we have not yet entered into any contractual arrangement, so we are sort of in that in-between stage right now and we've continued to limit some orders in the month of January as well.

That is based on our own internal estimates of what actual demand is, what historical purchasing patterns have been, and we're trying to match those two as closely as we can, understanding that those are all estimates.

Craig Parker of Lehman Brothers.

Did your Viread forecast for '04 assume positive data from the head-to-head study and assumed that it is reported in time to positively affect demand for Viread in '04?

No, that's not part of our current assumption.

Do you have data on the Q3 Emtriva inventory levels and the Q2 HepSera inventory levels?

Q3 inventory levels for Emtriva was about 1.9 months, but that's a tough number because we launched with no demand, so the month is a hard thing to say.

We kind of ended up, we think, at about 0.9 months at the end of the year, so it definitely loaded up and came down.

And the script trend is up nicely, so how many months on hand is almost irrelevant.

We are just loaded up and now we're starting to see flowthrough as demand is increasing, and that's what it will look like through Q4.

And how about Q2 for HepSera so we can sort of figure out underlying demand there?

Q2 HepSera was about 2.1, and that went down to about zero.

I'm sorry, Q2 was 0.6 and Q3 was about 2.1.

Does that answer your question?

It does, thank you very much.

Eric Schmidt of SG Cowen.

I think I just have one more question probably best suited for Mark.

It's on prescription trends where over the last couple quarters, we have seen a deceleration for Viread in the U.S. from 10 or 15 percent, and I think 9 percent in Q3 and 7.4 percent quarter-over-quarter growth in Q4.

Just kind of wondering where you think that trend is going and whether stabilization at 7.4 percent is required to sort of get into your guidance or whether we might actually see a rebound, and specifically in Q4 is there a reason that things trended down where holidays had an impact or anything like that?

There may be some holiday impact, but we are not surprised by some of the trending down we saw in the fourth quarter.

There is a bit of a lumpiness to what goes on here based on data presentation.

We will have some of those this year for Viread, which we think will affect growth rates.

So I guess I have to say we are not assuming a flat growth rate quarter-over-quarter for this year to get to our guidance.

There is some jump in there.

I can't get more specific than that.

So are you suggesting we'll go above 7.4 to get to your guidance?

Does the guidance assume that we should see a rebound from the 7.4 percent quarter-over-quarter growth?

I can't give you more specific guidance than the dollar guidance we've given you.

We're not at this point prepared to give quarterly guidance, other than to say it won't be the same number each quarter.

We're not assuming that that number flattens out necessarily.

Okay, thanks a lot.

A new question from Dennis Harp of Deutsche Bank.

A question regarding the mandatory price reductions in Europe and the implications for the pricing of the coformulated product; will you be limited by whatever the prevailing price is for Viread and Emtriva in Europe, or do you get an opportunity to reset the price level when you introduce that coformulated product?

No, as a practical matter we are limited to what the current market prices markets are when we price the coformulated product in all markets.

Then on the introduction of the coformulated product, you indicated you expect a standard 10-month review.

Given that what the FDA needs to consider for two already approved products is fairly limited, would you be prepared to launch sooner than 10 months if approval came sooner than 10 months?

That is a good way to ask that question.

The answer is there will be a 10-month PDUFA date.

There is no accelerated approval for this product, given that both components are on the market.

There's always a possibility it could be earlier, and so we have to plan for that, both from a manufacturing and a marketing point of view, and we will be prepared if there is an earlier approval, although we don't expect it.

Thank you.

Joel Sendek of Lazard.

On your Viread guidance, can you give us any feel for growth rates for the U.S. versus ex-U.S. for '04?

No, I'm sorry, Joel, we are not going to be able to break out our guidance in either form.

Okay, fine.

On Emtriva, how important is it to have some sort of an installed base level of sales prior to the introduction of the coformulation?

Is that important or do you think it is not as important?

More is better; there is no question about that.

But really it is the established base of Viread that we think we'll play off of with this.

And also the opportunity to allow physicians now to switch from Combivir to another fixed dose product will play heavily into the success of that product.

So that would be more important than watching the actual ramp-up for Emtriva for the next 12 months or so.

Yes, absolutely.

Thank you.

Dr. Martin, there appear to be no more questions at this time.

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.

Ladies and gentlemen, thank you for joining us today.

You may now disconnect.