吉利德科學 (GILD) 2004 Q2 法說會逐字稿

Ladies and gentlemen thank you for standing by.

Welcome to the Gilead Sciences second quarter 2004 earnings conference call.

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

Later, we will conduct a question-and-answer session.

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

If you would like to withdraw your question, please press star, then the number two.

As a reminder, this conference is being recorded, Thursday, July 29, 2004.

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

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

Please go ahead.

Good afternoon.

And welcome to Gilead second quarter 2004 conference call.

We issued a press release this afternoon providing results for the second quarter ended June 30, 2004, and describing the company's quarterly highlights.

The press release is also available on our Web site.

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

I will begin the call by briefly reviewing the second quarter financial results and will provide updated guidance for the full-year 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 the call to answer your questions.

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

I would like to remind you that we will be making forward-looking statements relating to the financial results in 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 actual results to differ materially from those expressed in any forward-looking statements.

I refer you to our latest form 10-K, and other publicly filed SEC disclosure documents for a detailed description of the risk factors affecting our business.

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

Net product sales were up 30% compared to the same period last year, driven primarily by higher Viread and Hepsera revenue and the addition of Emtriva to our product portfolio.

GAAP net income grew to 49 cents per share fueled primarily by higher product sales and royalty revenues and controlled spending.

Operating cash flow was also strong exceeding $122 million.

Now, turning to the specific results for the quarter, the company reported net income of $111.5 million, or 49 cents per share on a fully diluted basis.

For the three months ended June 30, 2004.

This compares to net income in the second quarter 2003 of $100.4 million, or 46 cents per share.

Our earnings were driven by strong operating results, offset by a higher effective tax rate.

As we discussed last quarter, Gilead began recording a normalized 31% effective tax rate provision starting in the first quarter 2004 as compared to a 5% 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 remaining net operating loss carry forwards.

As a result we believe that an important metric for comparing the year-over-year operating performance on of our business is pre-tax income.

On a pre-tax basis our second quarter GAAP income has increased 53% compared to the same quarter last year reflecting significant improvements in sales and operations.

Now turning to revenue, total revenues for the second quarter of 2004 were $319.7 million, a 34% increase over the same period last year.

This growth was driven by substantially higher product revenues, particularly for Viread and Hepsera, by higher royalty revenue from sales of Tamiflu and by milestone revenue recognized under our collaboration agreement with Eyetech pharmaceuticals.

Viread sales grew to $197.2 million compared to $167 million in the second quarter of 2003, and an increase of 18%.

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

U.S.

Viread revenues were $109.2 million, compared to the same period last year, when we recorded 115.6 million in U.S. revenue.

This decrease was driven by wholesale restocking during the second quarter of 2003, in anticipation of a price increase, and was offset in part by higher prescription volumes this year.

Just to be more clear, as you may recall in July of last year, Gilead disclosed that during the second quarter of 2003, there had been a significant increase in U.S. wholesale at inventory levels as a result of speculative purchasing to increase U.S. revenues above underlying customer demand.

Since then we have implemented several mechanisms to reduce this type of activity, including limiting wholesaler orders and recently entering into inventory management agreements with the major U.S. wholesalers as described in our July 12, press release.

As a result during the first half of this year, a significant number of Viread orders were not filled or only partially filled resulting in wholesale inventory levels decreasing throughout the quarter.

While I cannot go into the specifics of these agreements, and based on the reports we now receive on a regular basis from the wholesalers, we believe that wholesaler inventory levels decreased to about one month on hand at the end of the second quarter.

Under the agreement, aggregate inventory is targeted at somewhat less than one month of estimated demand which is based on actual purchases made over the last 90 days.

And we anticipate inventory to be at this agreed upon level by the end of the quarter and then should remain at approximately this level going forward.

On the demand side, U.S. prescription volumes remain strong.

According to NDC data total retail prescriptions through the second quarter of 2004 have increased by 39% compared to the same period last year, and 6.3% compared to the first quarter 2003.

Outside the U.S., sales grew to $88 million from $51.4 million during the same period last year, an increase of 71%, due to significant increases in volume and a favorable foreign exchange environment.

Viread is now marketed in 24 countries around the world.

For the second quarter of 2004, Viread volume in the European union and Australia grew by more than 51% compared to the second quarter last year, and was up 10% compared with the first quarter of 2004.

Foreign exchange also contributed to an international sales growth of Viread adding $5.8 million to revenue compared to the second quarter of last year.

This is due to the fact that the U.S. dollar was substantially stronger during the same period of 2003, especially against European currencies.

Emtriva recorded sales of $16.5 million during the second quarter of 2004.

Up from $12 million in the first quarter of 2004.

While we have begun launching Emtriva in the European union, the majority of sales occurred in the U.S.

This growth was driven by higher prescription volume, and remains in line with our expectations for slower loss profile for this HIV therapy, before the anticipated launch of the Viread and Emtriva fixed dose co-formulation.

Based on most recent NDC data prescription volume in the U.S. was up 42% in the second quarter compared to the first quarter of 2004.

Hepsera for the treatment of chronic hepatitis B continues to do well with sales of $28 million in the second quarter of 2004 up from $18.9 million during the first quarter of 2004 and $12.4 million in the second quarter of 2003.

Sales in the U.S. and the rest of the world were 15 and $13 million respectively.

We are pleased with the continued progress in launching Hepsera which we now market in 14 countries including the U.S. and all major countries of the European union.

Finally, sales of AmBisome were a strong $55 million for the quarter, a 7% increase over the same period 2003.

This growth is driven primarily by a favorable foreign exchange environment and higher sales volumes in Latin America and Asia.

In Europe, volume decreased 5% versus the same period last year.

The total favorable foreign exchange impact on AmBisome sales was $3.5 million compared to the same period of last year.

For the second quarter of 2004, Gilead recognized net royalty and contract revenue of $20.4 million compared to $8.2 million for the same quarter in 2003.

This growth was due to royalties on the worldwide sales of Tamiflu by Roche which generated $9.7 million of revenue during the second quarter.

And by a $4.8 million milestone received from Eyetech due to the NDA filing from Acugen.

Product gross margins remain relatively flat at 85.9% when compared to the second quarter of last year.

Now, turning to expenses.

Research and development expenses were $45.6 million for the second quarter of 2004, up 5% compared to the same quarter in 2003.

I would like to point out that we are now recording certain European Phase IV clinical trial costs in R&D, consistent with the treatment of Phase IV expenses in the United States.

In previous quarters these expenses were recorded as sales and marketing expenses.

For comparative purposes R&D expenses for the second quarter of 2003 under the same methodology would have been $43.3 million.

This year-over-year R&D spending increase of approximately 5% was primarily due to higher head count, and increased spending on our lymphositic targeting technology.

SG&A expenses in the second quarter of 2004 were $73.8, up 33% from the same quarter of 2003.

After adjusting for the European Phase IV trial costs I just described.

The increased spending in SG&A for the second quarter 2004 is attributable to increased global marketing costs, expansion of our U.S. and European sales forces, increased infrastructure costs, 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 the same period last year.

The total net impact of foreign exchange on our pre-tax earnings for the second quarter and for the first six months of 2004, was 4.4 and $15.1 million respectively.

This includes the foreign exchange impact on revenues, extra spending and the result 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 strong performance in the quarter.

Operating cash flow more than doubled to $122.5 million this quarter, when compared to operating cash flow of $59.4 million for the same period last year.

This strong performance is primarily due to significantly higher pre-tax earnings compared to last year, and improved working capital performance.

Based upon the strong capital performance and the proceeds from the sale of all of our Eyetech common stock, the balance sheet at June 30, 2004, shows cash, cash equivalents, and marketable securities at $975.6 million, an increase of $268.6 million from December, 2003.

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

With the anticipated approval of the fixed dose co-formulation of Viread and Emtriva this quarter, we will be providing guidance for our entire HIV franchise including Viread, Emtriva, and the future fixed dose combination rather than the individual components of the franchise.

Our full-year guidance for the franchise is 850 to $875 million.

When we report third quarter results, we will provide you with the actual total franchise sales as well as sales of each of the individual products.

For AmBisome, while we continue to remain cautious due to the increasingly competitive landscape and are reiterating our guidance of 170 to $190 million for the full year 2004.

We will still not be providing guidance on potential revenues from Hepsera at this time.

We reiterate our product gross margin guidance of approximately 84 to 86% for the full year 2004.

Now, turning to expenses we reiterate our guidance for R&D spending of 2004 of 200 to $220 million up approximately 20 to 30% over last year which now includes the reclassified Phase IV clinical trial expenses.

For our SG&A spending, we are lowering our guidance for the full year to 300 to $320 million, from 310 to $330 million.

This is the result of the reclassification of European Phase IV clinical trial expenses from SG&A to R&D, which I described earlier, as well as from some cost savings associated with promotional activities.

We reiterate that our capital expenditures will be in the range of 55 to $65 million.

And finally, we are maintaining our tax rate guidance for the year 2004.

We expect our effective tax rate to be in the 31 to 32% range for the full year, slightly lower than the guidance we provided you in January of 32 to 35%, but in line with our April guidance.

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 line, particularly AmBisome, Hepsera and our HIV franchise.

This concludes the earnings reporting section of this conference call.

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

I will begin by briefly reviewing our business highlights, then Mark Perry will review our commercial products, as well as goals for the rest of the year.

Gilead had a very productive second quarter and achieved many important corporate and product milestones, both in the U.S. and internationally.

As you know the company has experienced tremendous growth over the last several years.

As a result of the recent extensive analysis of our commercial operations, in April we announced that we are expanding and realigning that group.

Making it adaptable and scalable as Gilead's business continues to grow, and creating greater functional specialization.

The infrastructure to support our expansion is crucial to the ongoing success of Gilead's current and future products.

We are making significant progress on this front, as evidenced by our preparations for the launch of the fixed dose combination product.

In May, following comments by U.S.

Secretary of Health and Human Services Tommy Thompson, on the need for increased treatment options for people with HIV/AIDS and the developing world, we announced that we are in discussions with Bristol-Myers Squibb and Merck about the potential co-formulation of Viread, Emtriva and of (INAUDIBLE) these discussions are continuing and we will provide an update if and when we sign a collaborative deal.

Also in May the company announced that the U.S.

Food and Drug Administration granted expedited review status for the new drug application for the fixed dose co-formulation of Viread and Emtriva.

The action date by the FDA -- the action date by which the FDA will make a decision is September 12, 2004, which will allow us to bring this once daily medicine to the market sooner than originally expected.

On June 30, we were very pleased to be added to the S&P 500 which represents an important recognition of Gilead's solid presence in the financial marketplace.

As and as a further indication of the strength of our organization, yesterday we announced a two for one stock split to be effective September 7.

This third split reflects the continued confidence we have in Gilead's long-term growth opportunities.

Turning to Viread, we achieved another record high with total sales of $197 million for the quarter.

Viread continues to be the market leader in the U.S. for branded HIV therapeutics in both the retail and nonretail settings.

And on a unit basis, and in Europe, continues to gain market share, as the use of once-daily regimens has grown significantly in the past year.

We further strengthened Viread's leadership position in the scientific community by publishing important three-year clinical data in the Journal of American Medical Association special issue, published during the 15th annual international AIDS conference a few weeks ago.

These data were also presented at the conference in Bangkok.

Positive data from the pivotal study of Emtriva were also published in the same issue of JAMA.

In a data driven therapeutic market the high profile exposure of two of our HIV products in a well respected peer review journal helps us further position Viread and Emtriva as the NRTI backbone of choice to prescribing physicians.

Along with these publications, both products were favorably positioned in updated international AIDS society antiretroviral treatment guidelines, which also appeared in JAMA.

As a result of continued improvements in the manufacturing process for Viread, and increased economies of scale, Gilead is now able to offer Viread at a 37% reduction from the original no profit price to patients in the 68 nations of the developing world, including every country in Africa, and 15 additional countries in other parts of the world, classified as least developed by the United Nations.

Gilead provides Viread to these countries through the Gilead access program.

We are very pleased to be -- to pass on this cost savings to those who need it most.

We continue to raise the global profile of Hepsera, including presenting positive 144 week data from study 438 at the European association for the study of the liver in Berlin, Germany.

Hepsera is now being used as a chronic hepatitis B treatment in more than 12,000 patients in the United States and 8,000 in the European union.

GSK, our partner in Asia, and Latin America, received approvals for Hepsera in Philippines, Malaysia, Columbia, and Peru during the quarter, and now has approvals for Hepsera in 14 countries and their territories.

AmBisome sales provided a solid contribution to second quarter product revenues and achieved record sales as unit volume increased 7% over the second quarter of 2003.

This product has continued to perform steadily in spite of increasing competition in the marketplace.

Earlier this month, Chuguy pharmaceuticals, Roche' Japanese subsidiary, received a prophylaxis indication for Tamiflu, our oral antiviral for the treatment and prevention of influenza of A&B in Japan.

This event triggers a milestone payment of $1.6 million, that we will recognize in the third quarter, and represents last milestone payment we will receive from Roche for this product.

In total, we have received 50 million in milestone payments from Roche and to date, according to Roche, more than 21 million patients around the world have been treated with Tamiflu.

Turning to our pipeline, as you know, we have two products in early stage for the treatment of HIV, GS 7340 and GS 9005.

In addition, we have several small molecule lead compounds that resulted from our research program in hepatitis C. While these compounds are still at an early stage, we believe we are making progress toward the clinic.

Because of our tremendous second quarter performance, we believe that we are well on our way to achieving the 2004 financial and operating goals that John Milligan set forth earlier in this call.

We look forward to updating you on our progress during the second half of the year.

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

Thank you, John.

This is another quarter of positive momentum for our HIV franchise.

As you know, the 15th international AIDS conference just wrapped up in Bangkok, Thailand, with an important showcase for Viread as well as Emtriva.

First, the Journal of the American Medical Association published the positive clinical data from Viread study 903 and Emtriva study 301A in its July 14, edition.

A special issue published to coincide with the world AIDS conference.

Study 903 and 301A compared Viread and Emtriva respectively.

Both of which are dosed as one pill taken once daily in combination regimen, with Staph AD which is dosed twice daily and was the top prescribed NRTI in the United States at the time the studies were initiated.

Also published in this edition of JAMA were the revised international AIDS society guidelines which elevated Viread and Emtriva to the status of recommended components for initial antiretroviral regimens.

Importantly the authors also recognized that and I quote, it is now possible to say that it's certain initial regimens are generally preferable to others based on data and controlled clinical trials.

These guidelines also no longer recommend BMS's Zerit and GSKs Trizavire for initial treatment.

Trizavire is now slotted for special circumstances only.

The 144-week data from study 903 was also presented both in the scientific session and in the JAMA press conference by Dr. Joe Gallant of Johns Hopkins University School of Medicine who was the study's principal investigator as well as the lead author of the article published in JAMA.

As we announced in our first quarter conference call, Gilead successfully negotiated pricing for Viread on a par with U.S. prices in Canada.

Over the course of the second quarter we began launching the product in Canada with introductions in Alberta and British Columbia.

The market in Canada, while relatively small is an important one.

In April, the Torey pharmaceutical division of Japan tobacco began launching Viread in Japan.

Gilead will receive royalties based on sales that product on a one quarter lag.

As John mentioned earlier in the call, we have now entered into inventory management agreements with our three major wholesalers Amerisource, Cardinal, and McKesson which distribute approximately 90% of our products in the United States.

We are pleased with the final terms we have negotiated with the wholesalers.

The fees that we are paying to the wholesalers are in line with our expectation.

When we initiated our discussions earlier this year.

And will not have a material impact on our financial results.

In fact, we anticipate that the impact of the wholesaler fees will be financially equivalent to the historical impact of speculative purchasing.

Importantly, we now have much greater transparency on actual demand and we are receiving detailed distribution information providing us with better tools to measure the impact of sales and marketing initiatives, in specific geographies.

We are also pleased that aggregate inventories for Viread were reduced to approximately one month at the end of the second quarter, which is consistent with target inventory levels for other marketed HIV products or products for chronic diseases that involve long-term therapy.

Moving forward, we expect wholesaler purchases to be consistent with customer demand.

On July 1, 2004, we implemented a price increase of 4.7% to the wholesale acquisition costs for Viread.

The current wholesale acquisition cost is $4,776 per year.

Because we want to ensure that patients who rely on AIDS drug assistance programs have access to Viread as part of the therapy we have kept the price of Viread stable for these programs nationwide through rebates and discounts.

Viread is now approved and launched in 24 countries around the world.

Emtriva has now launched in additional countries in the European union bringing the total number of EU countries the product is marketed in to 10, including France, Germany, U.K., Denmark, Finland, Iceland, Netherlands, Norway, Portugal, and Sweden.

As John highlighted, the FDA is conducting an expedited review of the NDA for our fixed dose co-formulation of Viread and Emtriva, and we expect a decision by September 12.

This is almost four months sooner than we would have originally anticipated under the standard review time line.

From both a marketing and a supply point of view, we are now prepared to launch this product within days of approval.

We have trained the 68 representatives in the HIV sales force on the fixed dose.

These reps will continue promoting both Viread and Emtriva following the approval of a fixed dose.

This sales force is supported by our group of nine medical science liaisons, as well as 16 national accounts managers, who are already working with payors and correctional facilities, to get the product onto formulary quickly after it is approved.

We are also developing detailed sales and patient educational materials for review by the FDA so that they are available to our reps to support the launch of the drug as soon as possible after the approval.

I would now like to take a few minutes to outline where we see the immediate and more long-term opportunities to the fixed dose once it's approved.

Our market research projects that currently 34% of the 370,000 patients on antiretroviral therapy in the U.S. are on a Viread containing regimen.

Of these 126,000 patients, approximately 18,000 are also receiving Emtriva, with the majority of the use in first-line regimen.

This represents our most immediate opportunity for conversion to the fixed dose.

Most patients are given a prescription for three months of drug supply, so we expect a several-month transition period as these patients convert over to the fixed dose.

An important opportunity for the fixed dose is the patients who are also receiving Efovir along with Viread.

While we believe that the convenience of taking our two drugs in one pill as part of combination therapy the fact that both drugs in the fixed dose have overlapping pharmacokinetic profiles and the opportunity for one co-pay for two drugs will provide physicians and patients with a strong rationale to proactively switch to our fixed dose co-formulation.

Our market research estimates that this population is approximately 48,000 patients.

And third, the segment. of the patient population we believe represents the most significant longer term opportunity for our fixed dose is those patients receiving Combivir as part of their antiretroviral therapy.

The current estimates that number of patients is approximately 100,000.

We believe the commercial availability of the fixed dose, our pool of clinical data on Viread and Emtriva, and importantly, the upcoming 24-week results of study 934, will be very helpful in taking market share from Combivir.

Study 934, as you know, is our head-to-head study of Viread and Emtriva versus Combivir, with both regimens containing the Sofiva backbone.

The study enrolled 514 patients, and the 24-week data from the study will be available sometime this fall, either through a press release or potentially at a major scientific meeting such as (INAUDIBLE).

The study is designed as a noninferiority study and we hope to extinguish our regimen from the Combivir arm based on differential side effects and discontinuation rates.

How quickly and effectively we can capture market share from these three segments of the patient population depends on many factors, but we believe the profile of our fixed dose will ultimately allow us to accomplish our ambitious goal.

As you know, we filed both in the U.S. and the European union on March 12, and the review in the EU is ongoing.

We expect the final decision by European regulators sometime in the middle of 2005.

Although primary focus is on the launch of the fixed dose co-formulation of Viread and Emtriva once approved, we will continue to fully support the momentum of Viread in as a stand alone agent, both the U.S. and the EU.

Because of its activity in patients with multiple mutations and its ability to be used in combination with all drugs across the classes of antiretrovirals, Viread will remain an important component of therapy in patients in the later stages of treatment.

Moving to Hepsera for chronic hepatitis B, we reported worldwide sales of $28 million, an increase of 48% over the first quarter of this year.

Hepsera sales in the U.S. were 15 million and 13 million in our marketed territories outside of the U.S.

As of July 2, 2004, Hepsera had 50% of the total prescription market for the U.S. antiviral hepatitis B market.

Hepsera continues to demonstrate growth with a 13% quarter over quarter increase in total prescriptions.

During the second quarter, we leveraged the recently expanded U.S. hepatology/oncology sales force to achieve greater reach and call frequency to the HBB 3 communities.

Our tragedy continues to focus on targeted market development in key U.S. cities where chronic hepatitis is most prevalent.

On July 1, we implemented a price increase of 2.5% to the wholesale acquisition cost for Hepsera.

The current wholesale acquisition cost is $5,463 per year.

Hepsera's largely covered by most U.S. insurance plans and isn't generally on a par with in Lividity (ph) in terms of coverage.

In the European union we have begun to see uptake of Hepsera in Italy and the middle Mediterranean countries.

We believe Hepsera's opportunity to achieve market penetration in these countries will be an important future growth driver.

As the chronic hepatitis B treatment market paradigm in Europe continues to evolve we further believe that Hepsera's superior resistance profile and long term positive clinical data will make it well positioned for first line therapy.

As John mentioned Glaxo Smith Kline received approvals for Hepsera in four additional countries in Asia and Latin America during the second quarter.

We are booking royalties associated with GSK's net sales on a one quarter lag.

Turning to AmBisome for severe fungal infection, we achieved record sales of $55 million in the second quarter.

With unit sales growth of 8% compared to the second quarter of 2003.

Even with competitive pressures for Merck and Pfizer, AmBisome has maintained its position in Europe and continues to perform well in the markets in Spain, Greece and Turkey.

And some European marks however including Germany and the U.K.

Concedus and Defend have begun to impact AmBisome's market share.

In the United States, the expansion of our hepatology sales force from 19 to 28 specialists during the second quarter has allowed us to broaden our collaborative sales effort with our U.S. partner Fuji Sawa and we are beginning to see the positive impact of these efforts including dollar sales.

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

We look forward to continued strong product revenue performance driven by our growing HIV franchise as well as Hepsera and Ambisome and we remain focused on investing widely in our pipeline and our marketing and sales programs while continuing to deliver earnings for our shareholders.

I would 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.

Anyone wishing to ask a question may signal us by firmly pressing the star key, followed by the digit one on his or her touch-tone telephone.

We will call on you in the order that you signal us.

If you find that your question has been asked, you may remove yourself from the roster by pressing the star key followed by the two.

As a reminder we will take -- we will be taking a maximum of two questions per person at one time.

We will pause for just a moment to compile the Q&A roster.

Your first question comes from Satna Sirafoscova of Morgan Stanley please proceed.

Congratulations on a good quarter.

My first question on study 934 on interim data, do we expect to see the benefit in the sideback profile in 24 weeks or do you think it's more reasonable to expect that in 48 weeks?

Our expectation is if we see a difference there, we would see it at 24 weeks.

And the second question is, just what are the time lines for the agreement with Bristol Myers, when do you think you can come, to, you know, terms on a deal?

We're not giving any guidance on the time lines.

This is an ongoing negotiation, and as you can imagine, there is a lot of difficulty in getting two companies to work together and probably even harder with three companies.

So it is going to take us quite a bit of time I think.

Thank you.

And your next question comes from Mark Augustine of Credit Suisse First Boston.

Please proceed.

Thanks, I wanted to ask about your hepatitis C pipeline candidates.

Are you able to tell us if it is protease, prelimerase, active or Alistair type inhibition.

Thanks.

We haven't disclosed the mechanism of action of these products at this time.

We are working on a variety of molecular targets so--

Mark, you may be aware that we did take a license from Chiraron (ph) so protease and form rates were he two molecular targets that we have a license.

Just give us -- can you give us a sense for when you might talk about them again or set any time line out for us?

I think it is likely that we will start to talk about it around the time it enters the clinic.

I don't know what that time line is right now.

Okay.

Thank you.

And your next question comes from Meg Malloy of Goldman Sachs.

Please proceed.

Thanks very much.

I was just curious if you could comment a little bit on what drove the international expansion, especially in Europe, you know.

The price decline that we were expecting earlier in the year didn't occur until late March but you still had a very strong showing, so I was hoping you could talk about that, and do you have any sense about penetration numbers as you've kind of given for Viread in the U.S. in terms was Europe?

Meg, that is a good question.

If you look at our rest of world numbers, they were quite strong.

But you have to remember that we're expanding to a number of territories, so for example, we're starting to see significant sales, as you mentioned in Canada, also into Latin America, and other countries, so that is becoming an increasingly important component of that.

And then secondly with regard to the penetration rate, we think in Europe, we've got about a 27% patient share based on the feedback from our affiliates.

Great, and can I follow-up with one number I didn't quite catch, and that was the patient number -- patients, estimated patients getting Emtriva who are also getting Viread.

That was those 18,000 patients.

Okay.

Thanks very much.

And your next question comes from Ian Somaiya of Thomas Weisel Partners.

Please proceed.

Thanks for taking my questions.

Congratulations on a good quarter.

Two questions.

First is relating to the -- related to the guidance that you've given for the year and for the HIV franchise.

It seems if we look at the first half sales, Viread and Emtriva alone, are tracking along the 850, 875 revenue range for the year, is this -- is the guidance for the year just purely conservatism or is there something else I should be considering?

Ian, if you double the number for the first half you get to about 837 million in sales.

As I mentioned, there is still a little bit of excess inventory, so we have to take that into account in our guidance and so, you know, I think this is in line -- I can't say it's conservative or not, it's just in line with our expectations for the products for the remainder of the year.

Okay.

And just to follow up, in the market research you've done, can you just share data as it relates to Vistide and what the likely impact Vistide would have on adoption of the combination pill?

For clarity you want to know how many patients are taking Vistide or how many patients are being used --

Right, yeah.

Ian, we're scrambling to get that number.

We may have to get back to you you.

If you think about the sales of Viread versus Vistida last year, they were just about on par in Europe and the United States.

Perhaps it's even a little bit closer because it goes in other territories.

We think that on a prescription basis in the United States, Viread is currently -- has more prescriptions than Vistide.

I don't have any data on that in Europe so I would say that, you know, it's in fewer patients than Viread and on a forward growth trajectory.

We don't know exactly how many patients are on the combination product currently -- I'm sorry on the product of Viread and Emtriva, but one thing that is clear that, you know, Vistide as a third component is becoming increasingly popular so we certainly think that first line of Viread and Emtriva, Vistide combination would be a very attractive alternative and obviously the fewer pills, the easier it is for patients to take them, the more patients we would see adopt that strategy.

Okay.

Thanks.

And your next question comes from Joel Sendek of Lazard.

Please proceed.

Thanks a lot.

I have a question on the gross margin guidance, if you look at the first six months, I see your guidance for the full year implies I guess that Emtriva is a higher cost product than Viread, and if that is the case, can you discuss how the gross margin will trend over time as co-formulation sales increases as a percentage of HIV franchise revenue?

Thanks.

Joel, you're correct.

Emtriva is -- has a higher cost associated with it.

And you remember, we owe a royalty, a pretty substantial royalty to Emery University and that's one of the reasons for that.

We also launched it with a fairly high cost of goods and hopefully that will come down over time as we change the manufacturing process to an all chemical route.

So in terms of our guidance we are still only giving guidance for this year at 84 to 86% and I think you're correct in thinking that the higher this goes, the worse the margin may get, but we just have to take a look at next year and see what the overall product mix is going to be and we won't be able to provide that guidance until we're through with the budgeting cycle at the end of this year.

Okay.

Thank you.

Uh-huh.

And your next question comes from Thomas Wei of Piper Jaffray.

Please proceed.

Thanks very much.

I wanted to ask about historical wholesaler inventory levels, if you have gotten good information on that from the wholesalers and if you can tell us how much inventory there was at the end of the first quarter, and maybe at the end of the fourth.

And then also, on the Bristol and Merck agreement, you mentioned in the press release that there are significant issues that the three of you are working out.

Can you just give us a little more color on what that means?

Thomas, this is Mark.

I will answer the first question.

We don't have wholesaler or inventory information historically.

We only got that information on a current basis when we signed the agreements we signed, two agreements in the end of June and one agreement the beginning of July so we don't yet -- we will not have that information historically.

We just have it as a really the end of the second quarter and now on a going forward basis.

And as John indicated we're at about one month at the end of the second quarter.

And then Thomas, your second question about the difficulty.

I just -- I think it is natural that negotiations between companies on a complicated mix of products like this is -- takes time and there is a lot of issues to hammer out.

It is much more complex than you would -- you would think it needs to be going forward and we're trying to simplify it, but there is just a lot of division of labor issue, and who does what, and who controls what, and those are still things we're negotiating on.

I would want to point out, though, that in the meantime, we are continuing to work on the co-formulated product.

So Bristol-Myers has at least been able to -- it has been able to ship material to us and so we have been able to make a co-formulated pill that we can now test for the potential to be the product at the end of the day.

So we are making good progress on that.

And so while the agreement may take some time, the real meat of the work is continuing to go forward.

And importantly, the 934 study continues to go on and which will have the important clinical data to support the use of this product in the future.

And your next question comes from Elise Wang of Smith Barney.

Please proceed.

Hi, thanks for taking my question.

Just to come back to the inventory issue, you mentioned that there was still some level of excess inventory in the system.

Can you give a sense of how to quantify that?

I know that at least from the first to second quarter, there was a sequential downtick in U.S. sales and I'm assuming that relates to some adjustment in inventory.

Can you just give us a little bit of color from the second quarter in which you think there is left on a dollar basis going forward, and did you actually will have a buy-in in advance of the price increase that you instituted in July?

There was somewhat of a decrease, as you see the decrease second quarter over first quarter in U.S. sales was related to us limiting orders in the second quarter to get inventory levels down.

We're at -- as I said, we're at about a month as of the end of the second quarter, and our contractual limitations in the agreements provide for somewhat less than a month.

So it's not a lot but we do need to get a little bit more out of the system during this quarter.

And I can't quantify really any more than that.

And in terms of a buy-in, we have not made any -- we're in confidential obligations with each of the three wholesalers on the financial terms of the agreement, so I can't describe what we've done there.

But I would just, just to be clear, Elise, there was no second quarter buy-in, so we did -- inventory level did go down during the course of the quarter.

Okay.

That's very helpful.

And then in regards to the co-formulation of Viread, Emtriva and Vistide can you talk a little bit about what some of the technical hurdles that you will have to deal with on that front and how far you are I guess in coming up with that single capsule containing those three.

I guess it's fair to say you never know what the ultimate technical hurdles are going to be.

It turns out that these products at least on the short term are fairly compatible so we do have prototype pill, prototype tablets that are a size that would be acceptable to the general market, we believe.

Very early prototype, though.

Okay.

Thank you very much.

And they're not capsules, as John said, they're tablets.

Thank you.

And your next question comes from Jeffrey Porches of Sanford Bernstein.

Please proceed.

Thanks for taking the question.

Congratulations on a very good quarter.

Couple of quick factual questions.

Firstly, you mentioned the 100,000 patients on Combivir and could you just confirm that that is your estimate of the patients on Combivir, not already also on Viread?

And secondly, could you give us a sense of what the number of patients who are out there on Combivir and Viread are?

Second question is, will the royalty that you pay to Emery also be paid on Viread and Emtriva at the same rate it is paid on Emtriva and if not how will you prorate that.

And then I was just wondering what you're seeing in terms of the frequency of K 65 R resistance mutations in newly diagnosed patients.

Thanks.

I will start with the first part of this.

I don't have Combivir/Viread broken out.

I do have sort of a combined category of Combivir or Trisivir with Viread.

I think the majority of this is probably Trisivir and it's about 18,500 patients we estimate currently.

The 100,000 number was Combivir.

Was all Combivir.

So that includes patients who were on Viread as well?

It could -- yes.

Second question?

Royalty rates.

Oh, thank you.

The royalty rates to Emery is based on what the portion of Emtriva is as a fixed dose combination, so economically to us it's neutral whether it's the individual or any fixed dose combination for the future.

Okay.

And then just about the K 65 R that was the one thing in the JAMA piece.

Any data on the frequency of that in newly diagnosed patients?

Yeah.

Study 903.

Study 903, that we had -- if I can remember this, we had seven patients on a denominator of about 300 that got K 65 R after one year, we had one patient the second year, and none the third year.

So where that first mutation came from, I'm not exactly sure if this was already existing in the population or if it was selected for, but that's the most -- the best control data we have.

So patients who take all their pills typically don't get K 65 R at a very high rate.

And you're not seeing that in patients who are now just presenting for therapy?

That was a study in naive patients so that's -- that's, you know, control data that it tells us exactly what happened.

Okay.

Thanks very much.

That's helpful.

And your next question comes from Eric Schmidt of SG Cowen.

Please proceed.

Congratulations on the Vistide collaboration, is your confidence changed either for better or worse since the May release and ultimately getting a deal done with Merck and Bristol?

I think our confidence is just about the same.

Okay.

And then I was hoping perhaps John Martin could speak to the philosophy of long-term growth.

Your R&D expenses is sort of ramped downward as a percent of the top line, and you know, you have a pipeline, but it's similarly early staged.

Could you talk about what you're going to do in terms of maybe acquisitions, or in-licensing or other things that you might do to bolster the R&D engine?

Yeah we've actually have done quite a bit of expansion of research over, you know, the recent period of time, but obviously, the rate of growth and revenues has outstripped that rate of growth.

But we have a lot going on in research that we're quite excited about.

We also as you indicate or I guess suspect, we're very interested in external opportunities, especially once we get through the launch of the next product, and sort of get time to focus more on that, that's going to be an area of activity for us, clearly.

And your next question comes from Jason Kantor of WR Hambrecht.

Please proceed.

Hi, thanks for taking my questions.

I have a couple of questions.

First, what do you think you guys are doing wrong in terms of forecasting the potential for AmBisome, it seems every quarter that you have -- you know, you find yourself surprised.

I'm wondering how that happens.

And also, you mentioned that you're now able to sell Viread cheaper in the developing world, some 37%, manufacturing improvement.

Does that translate also to your cost of goods line in the U.S. and Europe?

Should we be modeling that in going forward?

I will take those questions.

Well, why don't we start with the AmBisome forecasting.

It has been a really interesting and dynamic market so we've had a couple of things going in our favor, of course, and one thing we couldn't have predicted would be the change in the euro relative to the dollar, so that's clearly been very favorable to us.

But also, we've seen quite a change in the mix of where we're selling the product.

So for example in Germany we're not doing very well at all because Concedus and Defend have taken the majority of the market share.

We are also starting to see erosion in other parts of sort of the core of Europe and that's what you would expect, because these products are -- the other products are gaining momentum and have had significant label changes over the last year or so.

So I think we're concerned about the competition.

On the other hand, our team has been working and trying to expand sales into other parts of the world and so we've seen good growth into for example, some of what were previously eastern European countries, now many parts are -- now many are part of the EU into Latin America into parts of Asia, for example, and so we've been able to offset that by having success in other parts of the world, but that's in fact very difficult to predict.

And then the second part was about the manufacturing efficiencies, and so yes, you're right that those manufacturing efficiencies will flow through to us beginning next year as that product is made more cheaply than it had been made in the past.

Great.

And in terms of the combination pill, is there anything else that you need to submit to the FDA?

Is there -- and if not, is there a chance that they could rush this through, even faster, and would you be pricing this at a premium to the two drugs separately?

Well, Jason, in terms of additional submission on the fixed dose combination, we have put in all the interim reports, and so now it is under review.

It is a natural back and forth that occurs every day in these sorts of applications, but in terms of significant pieces of data, there is nothing else that is due to go in.

But I can't comment on whether the FDA can do things faster or not.

It is up to them to do things on their time line.

And somehow I think you got a fourth question in there, Jason which was the --

The pricing.

Oh, the pricing I think the only way to think about that is that the price is the sum of the individual parts.

Thank you.

And your next question comes from Jim Reddoch of Friedman Billings.

Please proceed.

Thanks, a quick modeling question.

Where do we put the IMA fee?

Is that a cost of goods or SG&A expense.

It is a change from gross to net.

Okay.

Thanks.

And actually, if -- since I was that fast, one more.

Are you still expecting or is there the possibility of Viread plus Emtriva to be co packaged with Vistide before it is totally co formulated and is that -- what sort of additional testing might that need?

Thanks.

Yeah.

There is different ways that you could go do that.

That is a good question.

You can for example, there are examples out of there of co packaging where you would put two bottles together so you would have a Viread/Emtriva fixed dose in one bottle and then you would have Vistide in another bottle and put it in a box.

There is another example out there where you could put it in blister packs and you could put one blister of the fixed dose plus one blister of Vistide so each day you would just have one thing to break off.

And so those are both things what we're exploring currently.

Obviously the bottles are the easiest ones to do.

We are not sure what patient reference would be for that.

We think it could be useful in the United States.

Probably really interesting for the developing world where procurement and other issues make it hard for doctors to have all the components they need at the same time and that would certainly solve it.

The blister packs would take additional data and so that is something that we're working on.

There is plenty of Vistide blister packs but we don't have any blister pack data on the fixed dose Viread/Emtriva combination but we're working on that.

Okay.

Thank you.

Thank you.

Your next question comes from Eun Yang of Wells Fargo.

Please proceed.

Thank you.

I have a couple of quick questions on Emtriva.

I'm just wondering whether you have decided to pursue an NDA filing for Emtriva for the treatment of hepatitis B. And also from the current Emtriva sales, is some of the sales actually coming from UCG in the hepatitis B or is it entirely HIV?

Thank you.

You know, I think it is fair to say that we have three drugs that have in vitro activity against hepatitis B so that all the molecules in Hepsera, Viread, and Emtriva, and we're currently sort of reviewing those three products to see what the right next step might be in hepatitis B field but we haven't made any decisions on what to do.

But it's an ongoing process here at Gilead.

And in terms of use of Emtriva and hepatitis B, we're not aware of any.

Thank you.

Thank you.

And your next question comes from Eric Shan of Gilead.

Please proceed.

Hi that's of RCM, actually.

Congratulations on a great quarter.

Quick question on the launch of the combination pill if it gets approved this year.

Are you expecting significant amount of stocking of the combination pill for a launch this year?

We're not going to provide specific incentives to increase stocking beyond what is necessary to make sure that access is widely available when the drug is launched so we are working with the wholesalers now.

One of the benefits of signing these agreements is we have much closer working relationships with our major wholesalers and we're talking with them about what the right allocation of product is through the wholesalers and into the retail chain.

But our goal there is to make sure that access is available everywhere.

We're not looking to provide incentives to increase stocking.

So I don't think there will be a large stocking component to our initial sales.

Thank you.

And your next question comes from Kelsey Chen of Putnam investments.

Hello, Kelsey Chen?

Your next question comes from Rachel Hueber of ING.

Please proceed.

Hi, thank you for taking my question.

It's sort of a general one.

And I understand that you can't really provide much detail about the IMAs that you have with the major wholesalers for competitive and other reasons, but is there any possibility of your telling us about how long they last in duration?

I mean is this something that, you know, you would have to go back and renegotiate after, you know, three years or is it something that goes on in perpetuity?

Or you know, what are the sort of the dynamics around that?

As I said in response to the last question, our expectation is now that we have established working relationships and we will continue those indefinitely for all of our products in the U.S. with the wholesalers.

The actual terms of the contracts tend to be one year and renewable thereafter.

So in effect, you have the potential for renegotiation at any point in time.

But I don't see that as a likely outcome.

I think we will adjust the contracts as circumstances change over time.

But I think we've set the baseline for our relationships with these wholesalers going forward now indefinitely.

Great.

Thank you very much.

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

Thank you, operator and thank you all for join joining us today.

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

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.