吉利德科學 (GILD) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Gilead Sciences' first-quarter 2004 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 call is being recorded Thursday, April 22, 2004.

Your speakers for the day 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.

Good afternoon and welcome to Gilead's first-quarter 2004 conference call.

We issued a press release this afternoon providing results for the first quarter ended March 31, 2004 and describing the Company's quarterly highlights, which is also available on our Web site.

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

I will begin the call by briefly reviewing the first-quarter financial results and I will provide updated guidance for 2004.

Then John Martin and Mark Perry will take you through the corporate and product-related 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 development.

These statements are subject to the occurrence of many events outside 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 first quarter, as sales, earnings and operating cash flow all improved significantly.

Net product sales were up over 77 percent compared to the same period last year, driven by higher Viread and AmBisome revenues. (indiscernible) net income grew to 5o cents per share, fueled by higher product sales and royalty revenues, improved margins and an increase in the fair value of our investment in high-tech pharmaceuticals following their successful IPO in January.

Operating cash flow was also strong, exceeding $98 million.

Now, turning to the specific results for the quarter, the Company reported net income of $114.4 million, or 50 cents per share, on a fully diluted basis for the three months ended March 31, 2004.

This compares to a loss in the first quarter of 2003 of $438.1 million, or $2.21 per share, which includes the impact of the in-process Research and Development charge for the Triangle acquisition.

Our earnings were driven by strong operating results, which will be discussed later in this call, and by income from the increase in value of our equity investment in Eyetech pharmaceuticals.

As you are aware, Eyetech Pharmaceuticals completed its Initial Public Offering on January 30th.

Just prior to the end of the quarter, we exercised our warrant on a net basis and received approximately 647,000 restricted common shares of Eyetech.

We recognized a gain of $20.6 million related to this transaction, or approximately 5 cents per share on an after-tax basis.

These shares are subject to a 180-day lock-up period, which will expire in early August.

Excluding this gain, our non-GAAP net income increased over 87 percent to 45 cents per share on a fully diluted basis, compared to 24 cents per share last year.

As you recall, in the fourth quarter of last year, Gilead reversed valuation allowances of its deferred tax assets in accordance with FAS 109 and will be recording a normalized tax rate for financial reporting purposes, going forward.

For the first quarter, we recorded a 31 percent effective tax rate provision, compared to a 5 percent provision last year.

It's important to note, however, that our actual cash taxes paid this year will be substantially lower than our book tax expense, as we continue to utilize our net operating loss carry-forward.

As a result, we believe that the most appropriate metric for comparing the year-over-year performance of our business is pretax income.

On a pre-tax basis, our non-GAAP income has increased 173 percent, compared to the same period last year, reflecting significant improvements in sales and operations.

Now, turning to the specifics for the quarter, during the first quarter of 2004, Gilead passed another significant milestone, as we exceeded 300 million in total revenues for the first time.

Total revenues for the first quarter of 2004 were $309.1 million, an 87 percent increase over the same period last year.

This growth is driven by substantially higher product revenues, particularly for Viread, and higher royalty revenue from sales of Tamiflu.

Viread sales grew to $193.1 million, compared to $107.3 million for the first quarter of 2003, an increase of 80 percent.

Sales in the U.S. were $115.9 million and $77.2 million outside of the U.S.

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

As we discussed during our January conference call, we have put into place an internal system to begin to manage U.S. wholesaler inventory growth.

We believe that this system has slowed wholesaler stocking and in fact has resulted in a significant number of Viread orders not being shipped in the first quarter.

However, there was a modest increase in U.S. wholesaler inventory levels during the first quarter in addition to the increase we saw in the fourth quarter.

The U.S. sales growth was also driven by increased demand, as shown by significantly higher retail prescription volumes and non-retail unit sales, which each grew by over 50 percent compared to the same period last year, based on NDC data.

Outside the U.S., sales growth was driven by significant increases in volume and a favorable foreign exchange environment.

Viread is now marketed in 22 countries around the world.

For the first quarter of 2004, Viread volume in the European Union and Australia grew by more than 83 percent, compared to the first quarter last year, and was up 13 percent, compared with the fourth quarter of 2003.

Foreign exchange also contributed to higher revenue, adding $9.8 million, compared to the first quarter last year, due to the stronger euro relative to the U.S. dollar.

Viread sales in France were higher-than-expected due to a delay in the long-anticipated price decrease as the product converts from a hospital-based product to retail-based product.

This conversion occurred late in the quarter and, moving forward, we expect to see pricing in France trending downward by approximately 25 percent over the next few months.

France currently comprises approximately 10 percent of the total Viread sales on the dollar basis.

Emtriva recorded sales of $12 million during the first quarter, up from 4 million in the fourth quarter of 2003.

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

While we have begun launching Emtriva in the European Union, the majority of sales occurred in United States.

Based on NDC data, prescription volume in the U.S. was up 70 percent in the first quarter of 2004, compared to the fourth quarter of 2003.

We do believe that the majority of Emtriva sales growth was due to increase in demand.

In addition, we also believe there was a modest increase in U.S. wholesaler inventory levels of Emtriva during the first quarter, as wholesalers might have begun to anticipate a price increase.

HepSera, for the treatment of chronic Hepatitis B, continue to do well with sales of 18.9 million in the first quarter of 2004, up from 15.8 million during the fourth quarter of 2003 and 5.8 million in the first quarter of 2003.

Sales were almost evenly split between the U.S. and the rest of the world at 9.4 million and 9.5 million, respectively.

We are pleased with the continued progress in launching HepSera, which we now market in 14 countries, including Italy, where the product has just launched.

Finally, sales of AmBisome were a strong $51.9 million for the quarter, a 26 percent increase over the same period in 2003.

This growth was driven primarily by a favorable foreign exchange environment and to a lesser extent by higher European volume.

The total favorable foreign exchange impact on AmBisome sales was $7.3 million, compared to the same quarter last year, while volumes increased by approximately 6 percent in Europe as we have stabilized some of the anticipated volume erosion from competing products and have seen higher sales in our distributor countries.

For the first quarter of 2004, Gilead recognized net royalty and contract revenues of $32.5 million, compared to $9.1 million for the same quarter in 2003.

This growth was due to significantly higher royalties associated with Hoffman-La Roche's sales of Tamiflu, our oral antiviral for influenza A and B.

Roche reported fourth-quarter sales of Tamiflu of 317 million Swiss francs, or approximately $236 million, as a result of the early and significant flu season, particularly in the United States.

As a result, we recorded record royalty revenue in the first quarter of $27.4 million for Tamiflu.

The full-year 2003 royalty rate for Tamiflu was approximately 10 percent and was trued-up during the first quarter, consistent with the contract and our policy of recognizing its royalties on a one quarter lag.

The increase from the previously recognized royalty rate of 7 percent was primarily due to higher sales, which drove the royalty rate up to the next tier for a portion of the revenue and to a slightly lower cost of goods sold adjustment.

Product gross margins improved to 87.4 percent, up approximately 1 percentage point versus the first quarter of 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.

Now, turning to expenses, Research and Development expenses were $53.7 million for the first quarter of 2004, up 30 percent compared to the same quarter in 2003.

The increase in R&D expenses for the first quarter of 2004 is primarily attributable to increased headcount, increased costs associated with the development of co-formulation of Viread and Emtriva and an increased research activity particularly relating to our proprietary (indiscernible) technology.

SG&A expenses in the first quarter of 2004 were $76.1 million, up 60 percent from the $47.6 million in the same quarter of 2003.

The increased spending in SG&A for the first quarter of 2004 is attributable to launch costs for Emtriva and HepSera, expansion of our U.S. and European sales forces in 2003, and the adverse impact of foreign exchange on Euro-based spending.

As discussed, foreign exchange was favorable on an overall basis during the quarter, due primarily to a stronger euro, relative to the dollar, as compared to last year.

The total net impact of foreign exchange on our pretax earnings for the first quarter was $10.6 million, compared to the same quarter last year.

This includes the foreign exchange impact on revenues, ex-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.

Operating cash flow improved to $98.2 million for the quarter, compared with operating cash flow of $20.9 million for the same period last year.

This strong performance is primarily due to significantly higher earnings compared to last year.

Based upon the strong cash-flow performance and the conversion of our Eyetech investment from a warrant into marketable securities, the balance sheet at March 31, 2004 shows cash, cash equivalents and marketable securities of $837.6 million, an increase of more than $130 million from December of 2003.

Now, I would like to provide an update on our guidance for 2004.

Starting with revenues, we are raising our guidance for worldwide sales of Viread to a range of 725 to $775 million.

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

Emtriva combination product.

We do expect some erosion of Viread revenues following this launch, as (indiscernible) switch off the individual products to this co-formulated product, but expect the overall Viread and HIV wholesales from current levels and the cost of potential inventory management agreements currently in negotiation with U.S. wholesalers.

For foreign exchange, we've assumed rates roughly similar to the current environment.

For AmBisome, while we continue to remain cautious due to the increasingly competitive landscape, we are raising our guidance from a range of 160 to $180 million to 170 to $190 million for the full year of 2004, reflecting stronger than expected demand.

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

We reiterate our product gross margin guidance of approximately 84 percent to 86 percent for the full year of 2004, slightly down from 2003 as we will experience the impact of price decreases in France and as Emtriva sales increase, which has less favorable margins than Viread and HepSera.

Turning to expenses, we reiterate our guidance for R&D spending for 2004 of 200 to $220 million, up approximately 20 to 30 percent over last year.

We also reiterate our SG&A spending for 2004 of 310 to $330 million, up 25 to 30 percent over last year.

Our Capital Expenditures will be in the range of 55 to $65 million.

Finally, we're updating our tax rate guidance for the year 2004.

We now expect our effective tax rate to be in the 31 to 32 percent rate for the full year, slightly lower than the guidance we provided in January of 32 to 35 percent.

This revised guidance reflects a portion of foreign earnings being currently reinvested abroad and a better-than-anticipated utilization of net operating losses which were acquired from Triangle Pharmaceuticals.

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

This concludes the earnings reporting section of the conference call.

At this point, I'd like to turn the call over John Martin and Mark Perry, who will review our corporate and commercial highlights for the first quarter of 2004.

Thank you, John.

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

We are pleased to summarize for you today Gilead's many accomplishments in the first quarter of 2004.

I will begin by briefly reviewing our business highlights, including progress in our Research programs.

Then Mark Perry will review our commercial products and goals for the rest of the year.

Gilead began 2004 with a very productive quarter on the commercial front, executing on many important milestones, both in the U.S. and internationally.

Total sales of Viread reached an all-time high of $193.1 million.

As Viread enters its third year on the market, we maintain our focus on generating important clinical data and continuing to gain market share.

In the United States, Viread is now the market leader in both the retail and non-retail settings on a unit basis and we believe it is being used as part of combination therapy in over 30 percent of HIV-infected patients.

Emtriva was launched in eight additional European countries during the quarter, bringing the total number of markets the product is available to 12, including the U.S.

We have made progress in positioning Viread and Emtriva as the NRTI backbone therapy of choice.

In January, we completed enrollment and in study 934, a clinical trial evaluating R2 reverse transcriptase inhibitors versus GSK's Combivir in a background (indiscernible).

We anticipate that 24 week data will be available prior to year-end.

Positive data from this study will further our efforts to promote Viread and Emtriva used together as individual agents and support the launch of the fixed-dose co-formulation following its approval.

In March, we were pleased to announce the filings of the NDA and MAA for the co-formulation of Viread and Emtriva in the United States and European Union.

We expect a 10 month review cycle in the United States, which would place the launch of the product in early 2005.

We've continued to make progress with the look European launch of HepSera, including introducing the product in the important market of Italy during the quarter.

Gilead now markets HepSera in the U.S. and 13 countries in Europe.

GlaxoSmithKline, our commercialization partner in Asia and South America, received approvals for HepSera in Korea, Taiwan, Argentina, Brazil and the Dominican Republic during the quarter.

GSK now has approvals for HepSera in ten countries.

AmBisome sales remain strong as unit volume increased slightly over the first quarter of 2003 in spite of an increasingly competitive environment.

We reported royalty revenue of 27.4 million received from Hoffman-La Roche for the fourth quarter of 2003 sales of Tamiflu, our oral antiviral for the treatment and prevention of influenza A and B.

Moving to our product pipeline, we're making progress with our prodrug candidates that selectively target lymphatic tissues through our proprietary M&A (ph) prodrug technology.

A Phase II program is being designed for GS 7340, a novel prodrug of tenofovir, to determine the safety and efficacy of the compound in treatment -- (technical difficulty) -- patients and highly experienced patients with multiple-resistant mutations associated with the (indiscernible) and analog drugs AZT and d4T.

We expect to commence these studies during the second half of this year.

We have initiated enrollment in the first phase 1/2 program study for GS 9005, our novel HIV protease inhibitor.

This study is a pilot dose ranging study to evaluate the safety, tolerability and pharmacokinetics of GS 9005 in healthy volunteers.

In addition to its application for antivirals, we are leveraging our amidate technology to develop prodrugs that address other diseases of the immune system.

We have filed a large number of patent applications in the U.S. and in the European Union covering this proprietary technology, as well as specific compounds.

We will keep you apprised of our progress in this exciting new field of research.

Finally, we continue to make progress in our research programs focusing on Hepatitis C protease and (indiscernible) targets and have several potential lead compounds that we have begun screening.

Because of our strong first-quarter performance, we believe we're well on the way to achieving the financial and operating goals that John Milligan set forth earlier in the call.

We look forward to updating you on our progress through the year.

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

Mark?

Thank you, John.

Turning to our commercial operation, our HIV franchise continues to gain momentum, led by the increasing uptick of Viread, the gradual-but-growing adoption of Emtriva, the submission of marketing applications for the fixed-dose combination of Viread and Emtriva in the U.S. and European Union, and the IND filing for GS 9005, our novel protease inhibitor.

In the U.S., for the week ended April 9, 2004, Viread total retail market share for the NRTI class increased to an all-time high of 21.4 percent.

In the first quarter of 2004, total retail prescriptions increased 7.4 percent over the fourth quarter of 2003.

As John mentioned, Viread is now the number one branded antiretroviral for the treatment of HIV infection in both the retail and non-retail segments of the market, based on data from NDC.

The nonretail segment includes government institutions, correctional facilities and certain hospitals and clinics, and now accounts for approximately 30 percent of our U.S. sales on a volume basis.

Quarter-over-quarter, our estimated growth in the nonretail setting was 7.5 percent.

In the European Union, Viread market share continues to grow.

We estimate the drug is being described as part of antiretroviral therapy in approximately 25 percent of patients.

In Germany and the UK, it has over 30 percent patient share.

Earlier this month, our partner, Japan Tobacco, announced that it has launched Viread in Japan, a small but important market.

It is estimated that there are 4000 to 6000 HIV patients on therapy in Japan.

Finally, on the Canadian front, we are pleased to have successfully negotiated a price for Viread on par with our price in the U.S.

We are beginning to launch the drug in several Canadian provinces.

Until it is commercially available in each province we're providing Viread free of charge to the nearly 1500 patients who have been receiving it through our expanded access program.

These patients represent approximately 10 percent of the treated HIV population in Canada.

Emtriva for HIV continues to meet our growth expectations.

Sales for Emtriva in its third quarter in the market were $12 million, triple our sales for the previous quarter.

According to NDC, as of April 9, 2004, Emtriva's new prescription share grew to 3.6 percent of the NRTI class and total prescription share increased to 3.1 percent.

As we expected, the majority of Emtriva's uptake has been in treatment-naive patients, most often in combination with Viread and one other antiretroviral.

In the European Union, Emtriva is now commercially available in 11 countries.

During the quarter, we launched the product in the Nordic countries as well as Portugal and Ireland.

We will continue to launch Emtriva in additional countries in the EU throughout the remainder of the year.

We believe that the inclusion of Emtriva in the most recent U.S.

Department of Health and Human Services HIV treatment guidelines is contributing to the product's increasing use.

However, we expect more significant uptake of Emtriva when the fixed dose co-formulation is on the market.

Turning to the status of the fixed-dose co-formulation of Viread and Emtriva, as John mentioned earlier, we filed a New Drug Application in the U.S. and a Marketing Authorization Application with the EMEA in March.

The filing packages include the results from the bio (indiscernible) study and at least six month's data from each of three stability batches.

The results of the (indiscernible) study were presented at the Fifth International Workshop on Clinical Pharmacology of HIV Therapy in Rome, Italy in April.

These data demonstrated that the fixed-dose pill achieved the same blood levels of drug as Viread and Emtriva given separately.

Later this year, we will supplement the filing packages with 12 months of stability data for all three batches.

Our U.S.

PDUFA date is mid-January, 2005, and we expect to launch the drug shortly after approval.

We have recently received notice from the EMEA that our European application has been validated and the review cycle has commenced.

We expect final action on our European filing in the middle of 2005.

To support the launch of the fixed-dose product, we initiated enrollment in Study 934 last fall.

We completed enrollment with 514 patients in early January.

Study 934 is designed as a 48-week open label non-inferiority clinical trial, comparing once-daily Viread and Emtriva with a background of Efavirenz to twice daily Combivir with a background of Efavirenz.

We plan to take a 24 week cut of the data and hope to present the preliminary results at Scientific Conference later this year.

Prior to the launch of the fixed-dose product, we believe we can continue to grow market share for both Viread and Emtriva.

As you know, in February of this year, we released preliminary three-year data from our ongoing Study 903.

These data suggest that patients treated with Viread results in similar levels of viral load suppression and a similar renal safety profile when compared to treatment with Bristol-Myers Squibb's (indiscernible) zarob (ph).

At 144 weeks, treatment (indiscernible) was associated with greater elevation in fastering (ph) triglyceride and cholesterol levels and a notably higher incidence of lipodystrophy compared to treatment with Viread.

These findings further extend the data from the 48 and 96-week analysis.

We will present full data from this study at the Scientific Conference later this year.

The 48 and 96-week results from this study enabled us to take significant market share from Zerit, driving it down from its high of 25.7 percent to about 11 percent today.

We believe there remains considerable opportunity to gain additional market share from Zerit, particularly with the mid to lower (indiscernible) prescribers.

We estimate there are still about 50,000 patients who are receiving Zerit as part of their regimen.

The three-year data should help us convince these physicians of the advantages of Viread and we're working to get this important data into our U.S. and European tables as quickly as possible.

As we've previously stated, we're not waiting for the launch of the fixed-dose co-formulation of Viread and Emtriva to target about 175,000 patients that are currently receiving competitive fixed-dose combination products.

We have plans in development for a direct-to-patient effort that will help raise awareness of Viread and Emtriva and their respective attributes.

Finally, we believe additional growth opportunity remains in the nonretail setting, an important market for our HIV franchise, given the attributes of our drugs.

Our dedicated team of national accounts managers are focused on increasing awareness of Viread and Emtriva in correctional facilities and the specialty pharmacies that sell to them.

They are 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 medications.

Moving to HepSera for chronic hepatitis B, we reported worldwide sales of 18.9 million, an increase of 19.6 percent over the fourth quarter of last year.

HepSera sales in the U.S. were 9.4 million and 9.5 million in our marketed territories outside the U.S.

In the U.S., we believe that there was a drawdown in inventory levels during the quarter following a price increase in the fourth quarter of last year.

As of April 9, 2004, HepSera had 48.8 percent of the new prescription market and 47.9 percent of the total prescription market for the U.S. antiviral hepatitis B market share.

We believe that the majority of descriptions are being written as monotherapy, with approximately 10 percent in combination with Lamivudine.

During the course of the quarter, we began increasing the size of the U.S. hepatology and oncology sales force from 19 to 28 representatives in order to build the infrastructure necessary for future growth.

We are focusing our efforts on growing the treated chronic hepatitis B market by raising disease treatment awareness, encouraging patient diagnosis and educating physicians on the benefits of Hepsera.

In February, a new hepatitis B treatment algorithm, written by eight key opinion leaders, was published in Clinical Gastroenterology and Hepatology.

The goal of this publication was a develop a practical and comprehensive algorithm for the diagnosis, treatment and monitoring of chronic hepatitis B and to provide guidelines for the practicing gastroenterologists, who may not be as familiar with treating HPB as a hepatologist.

Also, AASLV published its updated HPB treatment guidelines in the March issue of Hepatology.

Both treatment guidelines favorably position HepSera, which we believe will be helpful in familiarizing more physicians with the product's profile.

In Europe, we launched HepSera in Italy during the first quarter.

We believe that HepSera's potential to achieve market penetration in the Mediterranean countries, where the prevalence of people infected with chronic hepatitis B is greater than in the United States, will be a growth driver in 2004 and beyond.

The presentation of 144-week HepSera efficacy, safety and resistance data at the European Association for the Study of Liver Conference in Berlin last week, further supports our marketing initiatives in the European Union.

As John mentioned, our partner in Asia and South America, GlaxoSmithKline, received approvals for Hepsera in Korea and Taiwan.

Once pricing is established, we anticipate launches in these countries in the second half of 2004.

GSK also submitted a New Drug Application in Japan in February for the approval of HepSera as a treatment for Lamivudine-resistant hepatitis B. GSK expects Japanese approval in 2005.

We will be booking royalties associated with GSK's net sales in these territories on a one-quarter lag.

Turning to AmBisome for severe fungal infections, we achieved sales of 51.9 million in the first quarter with unit sales growth of 6 percent compared to the first quarter of 2003.

Our Phase IV AmBisome study continues to make progress.

The study now has enrolled 137 evaluable patients with the goal of 200 total evaluable patients.

The study is evaluating the use of higher loading doses of AmBisome with the initial onset of treatment.

We expect to announce results of this study in 2005.

We are proud of the financial, commercial and R&D accomplishments Gilead made in the first quarter.

We look forward to continued strong product revenue performance driven by our ongoing HIV franchise, as well as HepSera and AmBisome.

We remain focused on wisely investing in our pipeline and in our marketing and sales programs while continuing to deliver earnings for our shareholders.

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

Operator?

Today's question and answer session will be conducted electronically. (OPERATOR INSTRUCTIONS).

Caroline Loewy of Morgan Stanley.

Thank you and congratulations on a nice quarter.

Just a quick question regarding pricing for both Viread and Emtriva, whether you've taken any price increases either in Q1 or to date in Q2.

Then, absent any price increases, whether there's a mechanism in your current inventory control system that would trigger the decrease in inventories that you are assuming in your guidance that you just gave?

Caroline, first of all, we have not instituted any price increases.

We don't know when or if we will increase prices during the course of this year.

Our assumption in the future is that, if we work to increase prices, that the inventory would come down at that point in time or potential through an inventory management agreement, where we would work on a more systematic way to bring things down.

That's a little bit theoretical because we don't have any such agreements in place.

Within the current system and until you get an inventory management agreement or a price increase, we wouldn't see the inventories come down again?

I would not expect it to come out without one of those two things happening.

Meg Malloy of Goldman Sachs.

Thanks.

I just want to follow up on that and also congrats on a nice quarter.

Could you give us an idea what you think the inventory levels are?

Because there was a build in the fourth quarter and you allude to another build now.

I'm just having a hard time understanding why you are comfortable that there won't be draw-downs.

I just want to get a handle on what the magnitude of change was as far as you could tell.

Then my follow-up would be, are you planning to do an IMA?

I thought you alluded to that.

If not, could you help us understand why?

For the first part, I don't think we're saying we are comfortable there won't be a draw-down.

There's usually some event that triggers the draw-down, so in the absence of a price increase or some IMAA, I wouldn't expect such a thing to happen.

We clearly don't control that, so there could the inventory going up or down, depending on demand, depending on other needs of the wholesalers.

That's entirely outside of our control, so I don't know how that would happen.

It's just that, historically, there's been some trigger point that draws down inventory and it's usually one of those two things.

Meg, part of your question was trying to quantify what we think the inventory build-up was, and we're not going to do that.

We have our own internal mechanisms, and there's a lot of assumptions that go into them, as you know, based on the incomplete information, so we're not comfortable trying to quantify that for people.

We do believe there was some increase, though, in this quarter and some increase in the fourth quarter, based on our own internal monitoring system, which looks at historical buying patterns and script data as well as nonretail data.

That system that we put in place internally at the start of the quarter we think worked well.

We were able to monitor sales during the quarter and we did, in fact, not fill some orders that we thought were in excess of demand.

Just to follow up on your IMA question, we are, in fact, in negotiation with the three major wholesalers.

We submitted a Gilead proposal to each of the three that was identical.

We can't share the details of that proposal with you other than to say that, in the IMAs that we've proposed, we would get specific services itemized from the wholesalers, including a guaranteed level of inventory, a maximum level of inventory, that we would be able to monitor and audit.

In return, we would pay each wholesaler a fixed fee on sales, as well as continue our 2 percent discount for early payment -- payment within 30 days -- as we've always done.

We are in negotiation with each of the three.

I have to say, we probably have an agreement in principle with one of them and can't predict where we're going to come out with the other two at this point.

We will keep your updated if and when we get to definitive agreements with any of them, but I'm afraid we're not going to be able to share what the terms of those agreements are other than to say that the Viread guidance that John Milligan gave earlier in the call incorporates a wholesaler fee into the guidance.

The way we would account for any fee we end up paying would be from growth in net sales, so in fact, it would not show up on our income statement; it would just reduce -- or increase the reduction from growth to net.

Therefore, the net number that John gave you does incorporate what we assume we will end up paying under IMAs.

I hope that long-winded answer addressed your question.

That helps a lot.

If and may just make sure I understand this?

So, outside of a change in price, you wouldn't expect major inventory draw-downs.

There may be some when these IMAs are instituted but that's factored into your guidance?

That's our expectation.

In fact, if and when we enter into IMA, a part of each of those IMAs would be a procedure to draw inventories down to the maximum level that we would allow in the contract.

So, it would happen in an orderly way over a period of months.

Mike King, Banc of America Securities.

Congratulations on a great quarter.

I sorry to stay on the inventory issue, but can you just talk about Emtriva a little bit?

You had very strong sequential quarter script growth, but it seems like the end-user sales were higher than the script growth.

So, I'd just wondering if you can give us a little more color on what you think the inventory stocking was.

I was wondering also, related to that, could you comment on what effect the IMAs are going to have on your margins on the combo pill?

Because I know the cost of goods is much higher on Emtriva than it is on Viread.

On the first question, Mike, I'm afraid I'm going to give you the same answer; we do think there was probably a modest build-up in inventory in Emtriva during the quarter, but we can't quantify it for you.

There was also, as you saw, an increase in scripts during the quarter.

The second question on IMAs, I'm sorry, was?

Was how is it going to affect the margins on the combo pill?

Because the cost of goods, it is my presumption on -- and Emtriva cost of goods is much higher than it is on Viread, so net effect on the margin on the combo pill -- are the IMAs going to hurt that gross margin?

The actual fees that we'll end up paying in IMAs won't show up in the margins at all for either standalone or the combination product.

They are a reduction from gross to net sales, so they would affect the guidance we give on net sales, and in fact, had been incorporated in our guidance on Viread.

But again, it wouldn't affect the margins.

Just to clear on that, Mike, it won't affect the margins.

The IMAs that we are putting -- the IMAs we're contemplating are for all products, so it would be across Viread, HepSera and Emtriva.

As we go to the combination product, should that be approved of course, we will then have the same discount relative to the individual products, so it shouldn't be any different.

Thanks.

John Milligan, I'm wondering if you could comment on hedging strategy in the quarter.

Because it seems like you had a pretty big bump from for-ex gains more than you've had in the most recent quarters.

Yes.

We lock in a certain percentage of revenue, which is roughly 50 percent of our foreign revenue, on a forward basis.

We took that hedging strategy, beginning in December, which was about the high of the euro relative to the dollar, so we do lock in a certain percentage.

Then we true it up on a quarterly basis, so as we're looking forward, we will get more and more.

So we have a pretty high level of comfort that we will lock in a certain percentage of it and then we true it up each quarter.

Right now, we are a little bit above 50 percent for revenues hedged for the year.

Ian Somaiya of Thomas Weisel Partners.

Thanks for taking my question.

I had a question on the Viread guidance for the year.

The high end of your guidance assumes basically no growth for the rest of the year.

I was wondering if that's in fact what we should expect, or would there be some sort of a decline as we see -- I guess not the inventory management but if we see a price increase come through?

When should we expect that?

I don't know when to expect it, so we don't know when or if these agreements will come into play.

We don't know when or if there will be a price increase during the course of the year.

So, we don't know if there will be an inventory draw-down during the course of the year.

We do think it would occur if either of those two things happen.

So, for our guidance purposes and for the full year, we have factored in some draw-down of that inventory back to a more normalized level, whatever that is that we choose to sign with the wholesalers.

So, that is factored into our guidance if there would be that.

We just don't know when or if that will occur, but it is part of our current guidance, along with some softness around the remainder of the foreign currency we don't hedge, and also with the cost of the agreements.

Finally, there's the lower-price in France for the three remaining quarters of the year, relative to the first quarter.

Okay.

Just a follow-up question I had was just on Emtriva and HepSera -- what would trigger you to give guidance for those two drugs?

Typically, I would say, for HepSera, once we get launched in all countries, have pricing established, then we would probably have a better idea what the long-term growth potential is, once we get a little bit more information.

So we may feel comfortable, next year, giving guidance on that.

I think, for Emtriva, it's unlikely that we will give guidance now or in the future but rather, we'll start to talk more about the fixed-dose combination, because we believe that product will largely takeover -- will represent a majority of the Emtriva sales based on that product.

So, we will think about when to give guidance about that product.

Dennis Harp of Deutsche Bank.

Hello?

It's actually Damien.

Dennis is actually off.

Congratulations on a great quarter, guys.

I just had a few quick questions.

I know you guys spoke about the IMAs earlier but I kind of missed that part.

I'm just wondering if they are specifically in regards to Viread or across the entire product line.

The second question was, I think you guys said you had 10 percent sales for France.

Was that for worldwide sales, or is that just of European sales?

Second question first, that's for worldwide sales, 10 percent on a dollar basis of our worldwide sales has been historically in France.

On the IMAs, we don't have any in place yet.

We are in negotiation with the three majors, and the IMAs would cover all of the products that we sell in the U.S., so that's all the product (indiscernible).

Thanks a lot.

Including, presumably, future products, such as our fixed-dose combination.

Thomas Wei of Piper Jaffray.

The first question, on these proposed IMAs, can you give us a sense as the difference between the high-end and the low-end of the inventory range that's written into the contract?

No, there's a number of terms -- first of all, we don't have them in place, so none of the terms are set yet but the terms are going to be confidential between us and each of the wholesalers.

Okay.

Then on your guidance for Viread and the wholesaler inventory levels that are being assumed there, you're talking about drawing down to a more normalized range or something that might be proposed in one of these IMAs.

I'm just trying to understand.

If you exited the year with a relatively high level of inventories, does that mean that, implicit in the guidance, is an exit in 2004 that would actually be at a lower level of inventories than not?

That's correct.

Is that more normal range what we would normally think about, like three to four weeks?

We really don't want to get into what either the specific assumptions were that went into our guidance, or the specific terms of the inventory agreements other than to say, that in putting our guidance together, we assumed that we have inventory management agreements and we assume that each of the wholesalers would be brought down to the contractual level of inventory over an orderly period once we sign those agreements.

I'm afraid I can't tell you what those specific numbers are at this point.

Greg Wade of Pacific Growth Equities.

Greg Wade.

Thanks and congratulations on your maintaining pricing.

A quick question about the inventory -- perhaps you can help us out here a little bit.

In thinking about inventory levels, obviously there's the potential for speculative buying as well as having enough inventory on hand to meet demand.

With respect to where the inventory levels are presently and you're tracking of that, could you give us a sense of how much, on a percentage basis, you might think is speculative buying (inaudible) a price increase and how much, on a percentage basis, is what would be normally be expected to be in the channel to meet the demand?

It's really the same question we've been declining to answer for the last fifteen minutes.

We really can't give you those numbers.

Again, we have our own internal estimates and I have to say we have a range of internal estimates based on that line of assumption.

Yes, I was looking for the specific amount of inventory that was in the channel, but your assessment as to the percentage, which is speculative buying versus what should be there.

Yes, the same thing -- we can't really give you that.

We do think there is a percentage that is speculative buying because there is buying that was somewhat in excess of what our own internal monitoring system showed should be true demand, but again, that is an estimate on top of an estimate.

Greg Wade.

Thanks.

Just a quick follow-up -- could you tell us what Accounts Receivable were at the end of the quarter and perhaps some commentary around the speed of collections for Europe?

Sure.

We will turn the call over to Mike Aguair, our VP of Finance for that answer.

Yes, the DSO was basically flat with last quarter.

We haven't really seen any substantial changes on that.

Obviously, the numbers are going up quite a bit, as are our volumes going up, but I don't think you've seen any change at all in the actual number -- or excuse me, in the DSO.

The actual number I have is 257.5 for the end of the quarter, and that is up about $20 million versus the end of the year but again, DSO is very flat.

Jim Reddoch of Friedman, Billings.

Thank you.

A different kind of question -- bigger picture.

What percentage of Viread is actually given with Emtriva right now?

Is it co-administration?

I assume that doctors are aware of the pending co-formulation.

Are they excited enough about that to start using the co-administration right now?

Why wouldn't doctors, since the two pills are available right now, be giving Viread plus Emtriva in previously untreated patients?

You're reading our market materials.

The percentage, we don't know -- I'm sorry, not the specific percentages but we think the vast majority of Emtriva that is being prescribed is being prescribed with Viread.

Of course, that's only a fraction of the Viread use, and Viread has use in a broad segment of patients, really all patient types.

Most of the Emtriva use we're seeing is first-line, and most of that is with Viread and one other agent.

So those are the early adopters of our concept of providing the best NRTI backbone for HIV therapy.

That's what we're leveraging off of.

We now actually have very broad and I should say wide and shallow uses of Emtriva.

In other words -- (technical difficulty) -- at least one, but we don't have very deep use of it yet.

So, that's a good news, and we now have people trying it and we're leveraging those experiences to get them to use it more initially in first-line therapy but also in first-switch therapy off of, in particular, another combination product.

We think that's where the growth is going to be.

Many people appear to be waiting for the fixed-dose combination to be available, although we think, today, we offer most of the benefit of that.

The main additional benefit, once we have the fixed-dose available, is you get to one pill once a day and one co-pay for two drugs.

But we already offer, obviously, the efficacy and safety benefits and most of the convenience advantage with the two drugs today.

So, that's what we're pushing, but it's a slow push.

Do you think the biggest impediment to co-administration is the two co-pays?

I think that's a very significant factor from the patient point of view and therefore, for many of the physicians as well is a significant factor, yes.

Okay, great.

Thank you.

Marshall Gordon (ph) of Sanford Bernstein.

Thanks for taking my question.

I have two quick ones.

Can you give us any update on the incremental promotional investment that you expect for the combination product in 2005?

What are the current scope (sic_ of applications for your candidate amidate technology?

What disease opportunities might you pursue in the future?

We haven't yet given any additional guidance on what the promotional spend would be for 2005.

We are obviously closely monitoring the approval process and we're going to have some incremental spend that would be associated with that.

I think most of what we have is already in place because we are promoting the individual agents, we're getting great awareness and we have the sales force in place to do that, so I'm very comfortable that the increment would not be too large.

The second part, in terms of the amidate program technology, we've talked about this as being particularly good at targeting lymphatic tissue.

A good example is GS 7340 where we know we can target lymphatic tissue, which is the site of AIDS/HIV replication, and get greater potency.

Similarly, with GS 9005, we've applied it to another kind of drug and achieved similar kinds of targeting in animal models.

So, you can think about a lot of different diseases that are associated with lymphatic tissue; it could be things like immuno-suppressors (inaudible) potentially transplantation; it could be anti-inflammatory; it could be the things associated with lymphatic cancers, for example.

So, those are just three examples where you could use it.

We're trying to explore different ways to see where we can improve molecules -- where we can discover molecules which would improve the therapeutic index over existing drugs, or alternatively bring in a whole new class of therapies.

Thank you very much.

Jason Kantor of WR Hambrecht.

Thanks for taking my call.

I'm not going to ask you about your inventories, but what I would like to know is, what new information did you get that's bringing you -- causing you to bring your tax rate guidance down?

You had raised it on the last call.

Additionally, for AmBisome, last year, we saw the same thing; this guidance starting out low and on all subsequent calls was increased one quarter at a time.

What gives you confidence in your guidance at this point?

Let me start with the first one on the tax rate.

I think there were really two things that happened.

One is we finished one of our NOL studies this quarter.

We got favorable rulings that we could utilize more of the Triangle NOLs than we had predicted at the end of last year.

That was just a function of time and getting through all of the paperwork and the back issues associated with acquisition.

So we're comfortable that we have greater utilization; that helps bring it down.

Also, we have completed a study and have now established what our offshore investment rate will be, and so how much money you keep onshore to permanently invest does factor into your tax rate.

We were able to comfortably establish a rate that brings our tax rate down.

So, it was really those two factors that led to the decrease in the number.

Jason, on AmBisome, you are correct that we brought up our numbers last year and we're starting to do the same this year.

There is a foreign currency element this year that's raised those numbers, but we've been surprised on the positive side on the volume.

In fact, we are up slightly quarter over first quarter '03 on volume, down slightly fourth quarter '03 to first quarter.

So we seem to have stabilized at a level and extrapolating from there and making assumptions about foreign currency, we are able to bring the guidance up a little bit.

We will just have to see how the rest of the year plays out.

In terms of the guidance of both Viread and AmBisome, you're assuming currency rates stay fixed at this point, going forward, for the rest of the year?

Roughly what we have got so far and that's in part because we have got a significant portion hedged already.

Okay, thank you very much.

Craig Parker of Lehman Brothers.

Good afternoon, guys.

I have, I guess, a twist on Jim's excellent question.

Do you know what -- of the U.S.

Viread sales, what the share is for first-line use or treatment-naive patients versus treatment-experienced patients?

Because it seems to me your area of vulnerability for cannibalization will be in those patients receiving Viread who are treatment-naive.

I think that's correct, Craig.

We don't know and we've never known what the numbers are except to the extent we do market research and extrapolate.

So we don't know what those numbers are but we think where most of the cannibalization of Viread will be is in first-line use.

And that's why we think Emtriva will be largely capitalized by the fixed-dose, whereas Viread will have a significant role in later-stage therapy with (inaudible) stand-alone therapy or as an add-on therapy to other regimens.

But we can't quantify that.

But Craig, there are a high percentage of patients.

It was earlier last year about 50 percent.

I don't know if that's still true who are on Viread and lamivudine.

I think that's a great opportunity for us to start to really accelerate the switch from Lamivudine to Emtriva when the combination product comes on board.

Then I have a question about the 934 study.

I understand the primary endpoint is non-inferiority.

Is that on percent undetectable -- percent of patients undetectable?

Yes.

I assume, then, that there's a secondary endpoint, which is a simple analysis of variance between the percent undetectable between the two groups, which might -- I understand the study wasn't empowered to do this -- but which might show a statistically significant difference.

Again, on just a simple analysis of variance, the implication being that the fixed-dose arm could be superior.

You are right; the study is not powered to do that.

I want to mind you that Study 903 was a non-inferiority study too, and it turned out that the two drugs are equivalent, but where we had the advantages were the safety aspects of the drugs.

But is that a secondary end point, a simple analysis of very variance, a calculation between the two arms?

I don't know if that's a secondary end point.

I mean, it seems fair to say we will do every analysis we can once we have the data, and whenever shows something meaningful, we will publish get out there, but I don't know specifically whether that's in the protocol.

Your final question comes from Mandy Forbes (ph) of Argus Partners.

My question has been answered, I'm sorry.

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.