吉利德科學 (GILD) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Gilead Sciences' third 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.

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

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

As a reminder, this conference is being recorded Thursday, October 21st, 2004.

Your speakers for today are John Milligan, Executive Vice President and CFO, John Martin, President and Chief Executive Officer, Mark Perry, Senior Business Advisor and Kevin Young, Executive Vice President, Commercial Operations.

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

Please go ahead.

Good afternoon.

And welcome to Gilead's third quarter 2004 conference call.

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

The press release is also available or our website.

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

I'll begin the call by briefly reviewing the third quarter financial results, and will provided updated guidance for the full year 2004.

Then John Martin, Mark Perry, and Kevin Young 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 developments.

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 in the third quarter as sales, earnings and operating cash flow all improved significantly.

Net product sales were up 60% compared to the same period last year, driven primarily by higher revenues from our HIV products and Hepsera revenues.

GAAP net income grew to 25 cents per share fueled primarily by higher product revenues, royalty and contract revenues and controlled spending.

Operating cash flow was also strong at $166.6 million.

Now turning to specific results for the quarter.

The company reported net income of $113.2 million or 25 cents per share on a fully diluted basis for the three months ended September 30th, 2004.

This compares to net income in the third quarter of 2003 of $73.1 million or 17 cents per share.

As you're aware, we implemented a two-for-one stock split effective September 7th, 2004.

All prior period EPS numbers have been adjusted to reflect the impact of this split.

Our earnings were driven by strong operating results, primarily higher HIV product revenues and controlled spending, which were partially offset by a higher effective tax rate.

After further review of our income tax provision for the year, we adjusted our effective tax rate up to 32% from the 31% recorded in the last two quarters.

This increase was due to stronger than forecasted profitability, which increased the utilization rate of our NOLs and R&D tax credits.

Looking forward to the rest of the year, our actual income tax rate will depend upon a number of factors, including actual operating performance and the impact of recently passed legislation.

At this point, we remain comfortable with our current tax rate guidance of 31 to 32% for the full year.

It's important to note, however, that our actual cash taxes paid this year continue to be substantially lower than our booked tax expense due to the utilization of our remaining net operating loss carry forward and the benefit of employee stock plans.

Our effective tax rate for the third quarter of 2003 was 5%.

Due to the difference in tax rates between the current and prior year quarters, we believe that an important metric for comparing year-over-year operating performance of our business is pre-tax income.

On a pre-tax basis, our third quarter income has increased 116% compared to the same quarter last year, reflecting significant improvements in sales and operations.

Now turning to revenue.

Total product sales for the third quarter 2004 were $310.7 million, a 60% increase over the same period last year.

This growth was driven by substantially higher HIV product revenues.

Royalty and contract revenue also increased as a result of royalties received from Fujisawa on US sales of AmBisome, milestone revenue recognized under our collaboration agreement with EyeTech Pharmaceuticals, and additional revenue earned from a royalty buyout arrangement with Medarex.

HIV product sales grew to $228.1 million, compared to 121.4 million in the third quarter of 2003, an increase of 88%.

This year-over-year growth is driven by many factors, including substantially higher prescription volumes in both the US and Europe, the US and EU launches of Emtriva, the US launch of Truvada, increased sales of Viread outside the US and Europe, and a favorable currency environment in Europe, compared to the same quarter last year.

US HIV product revenues increased by approximately 113% with third quarter 2004 sales of 139.4 million, compared to 65.4 million for the same period last year.

This increase was driven by higher prescription volumes and year-over-year changes in US wholesale inventory levels.

On the demand side, US prescription volumes remained strong.

According to the latest NDC data, total retail prescriptions for HIV products in the third quarter 2004 have increased by 53% compared to the same period last year and 9% compared to the second quarter of 2004.

This increase reflects both higher numbers of patients being treated with Viread and the addition of Emtriva and Truvada to our HIV franchise.

On the US wholesale inventory side, there are three primary drivers of the year-over-year changes we are seeing.

First, as you may recall, the three major wholesalers significantly decreased their US distribution channel inventory levels of Viread during the third quarter of 2003 following speculative purchasing during the second quarter.

As a result, the third quarter 2003 Viread revenues were lower than underlying customer demand.

Second, as we projected during our conference call last quarter, Gilead experienced additional distribution channel inventory reductions during the third quarter of 2004 as the major US wholesalers brought inventory levels into compliance with the terms of the inventory management agreements we entered into in July of this year.

Based upon the data we now receive from wholesalers, we believe that as of the end of September, 2004, US wholesale inventory levels for all Gilead products were below one-month supply, and importantly, all suppliers with whom we have an agreement were in compliance.

Third, with the approval of Truvada in August of this year, we're seeing a product mix change as patients currently taking Gilead and/or Emtriva are switching to Truvada.

As a result, while we continue to see growth in our overall HIV portfolio, we believe the comparison of individual products will become a less relevant metric than growth of the overall portfolio.

Outside of the US, HIV product sales grew to $88.7 million from $56 million during the same period last year.

This is an increase of 58% due to significant increases in prescription volume, higher sales outside the US and Europe and a favorable foreign exchange environment.

One or more of our HIV products are now marketed in 28 countries around the world.

For the third quarter of 2004, HIV product line in the European Union and Australia grew by 55% compared to the third quarter of last year.

Foreign exchange also contributed to international growth of HIV product sales, adding $5.9 million of revenues compared to the third quarter of last year.

This is due primarily to stronger European currency in relation to the US dollar compared to the same period of 2003.

Hepsera for the treatment of chronic Hepatitis B had sales of $29.7 million in the third quarter of 2004, up from $28 million in the second quarter of 2004, and $16.4 million in the third quarter of 2003.

Sales in the US and the rest of the world were $14.6 million and $15.1 million respectively.

In the US, we did see slight reductions in channel inventories for Hepsera in the third quarter of 2004, similar to those I described earlier for our HIV products, which we believe reduced sales somewhat below actual end-user demand.

As I stated earlier, based upon the data we now receive from wholesalers, we believe that inventory levels were at their contractually defined levels as of the end of September.

I'm pleased with the continued progress in launching Hepsera, which we now market in 17 countries including the US and all major countries of the European Union.

Finally, sales of AmBisome were $49.8 million for the quarter, a 3% decrease over the same period in 2003.

This decrease was driven primarily by lower sales volume as a result of competitive pressure, offset in part by a favorable foreign exchange environment in Europe.

In Europe, sales volume deceased 2% versus the same period last year.

This decrease was partially offset by the favorable foreign exchange environment and by higher sales volumes in Latin America and Asia.

In total, the foreign exchange impact on AmBisome was $2.8 million when compared to the same period last year.

For the third quarter of 2004, Gilead recognized net royalty and contract revenues of $15.5 million compared to $6.3 million for the same quarter in 2003.

This growth was due primarily to royalties on US sales of AmBisome by Fujisawa, which generated 3.6 million of revenue during the third quarter of 2004; and a $2.9 million milestone received from EyeTech due to the NDA filing for Macugen in Europe; and $2.1 million received from Medarex in conjunction with a royalty buyout agreement associated with a patent of state previously held by NeXstar.

Product gross margins remained relatively flat at approximately 87% when compared to the third quarter last year.

Now turning to expenses.

Research and development expenses were $49.2 million for the third quarter of 2004, an increase of $13.2 million compared to the same period last year.

I'd like to point out, however, that after adjusting for a vendor reimbursement, which was received last year and the reclassification of certain clinical expenses from sales and marketing to R&D, which was discussed last quarter, overall R&D spending was flat year-over-year.

Compared with last year, we've seen higher spending in research primarily associated with our prodrug technology and Hepatitis C programs offset by a lower level of clinical trial activity.

SG&A expenses in the third quarter of 2004 were $72.4 million, up 22% from the same quarter of 2003 after adjusting for the reclassification of clinical costs I just mentioned.

The increased spending in SG&A for the third quarter of 2004 is principally due to increased global marketing costs, significant expansion of our US and European sales forces, which began in the latter part of 2003, increased infrastructure cost, the launch of Truvada in US 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 US dollar, as compared to the same period last year.

The total net impact of foreign exchange on our pre-tax earnings for the third quarter and for the first nine months of 2004 was 7.9 million and $23 million respectively.

This includes the foreign exchange impact on revenues ex-US 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 more than tripled to $166.6 million this quarter compared with operating cash flow of $54.3 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 this strong cash flow performance, the proceeds from the sale of all of our EyeTech common stock, as well as the proceeds from the sale of Gilead stock through our stock option and employee stock purchase plan, the balance sheet at September 30th, 2004 shows cash, cash equivalents and marketable securities of $1.15 billion, an increase of $441.4 million from December 31st, 2003.

Now I'd like to provide an update on our financial guidance for 2004.

For our entire HIV franchise, which includes Viread, Emtriva and Truvada, we are increasing our guidance for net product sales for the franchise to 870 to 890 million for the full year.

For AmBisome, while we continue to remain cautious due to the increasingly competitive landscape, we're increasing our guidance for net product sales to 195 to $205 million for the full year.

We'll still not be providing guidance for our potential revenues for Hepsera at this time.

We have slightly increased our gross -- our product gross margin guidance to approximately 85 to 86% for the full year 2004.

Turning to expenses, we have tightened our guidance for R&D expenses for 2004 to 210 to $220 million, which includes the reclassified phase IV clinical trial expenses.

I would like to confirm this guidance includes the impact of our recently announced deal with Genelabs, which includes a onetime payment of $8 million, as well as R&D funding of $900,000 per quarter.

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

We're also lowering our capital expenditures guidance down to 45 to $55 million for the full year.

As you may recall, we recently announced the redemption of our 2% convertible note.

In conjunction with this redemption, the company expects to record a non-operating charge of approximately $7.4 million during the fourth quarter of 2004 as other income or expense.

And finally, we're maintaining our tax rate guidance for the full year 2004.

We expect our effective tax rate to be 31 to 32% range for the full year.

In summary, as Gilead looks ahead, we'll continue to make the investments we believe necessary to build a strong and independent global business, promoting our product lines, particularly our HIV franchise, AmBisome and Hepsera.

This concludes the earnings reporting section of this conference call.

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

I'll begin by briefly describing a few of our recent business highlights as well as the announcement we issued today regarding our two early stage HIV compounds.

Next, Mark Perry will review our sales and marketing efforts, and Kevin Young will wrap up the call with an update on our commercial organization.

Gilead had a productive third quarter and achieved many important corporate and product milestones.

On September 7th, Gilead implemented our third two-for-one stock split.

This split is a reflection of our confidence in the long-term growth opportunities for the company and our commitment to delivering value to our shareholders.

As you know, on August 2nd we received approval of Truvada, our third once-daily HIV therapeutic and fourth once-daily antiviral approved by the FDA in less than three years.

Within a week of approval, Truvada was shipped to our distributors and delivered to pharmacies.

And after only nine full weeks since launch, the product has already gained significant market share in the NRTI class.

While very early, we are pleased with Truvada's market performance in the US, and expect to launch in the European Union toward the middle of next year, following regulatory approval.

In the data driven HIV market in which we operate, we continued to focus on generating important clinical data to provide physicians with the information they need to distinguish between the growing number of available treatment options.

In late August we announced positive preliminary data from a planned 24-week interim analysis of Study 934, our head to head study of Viread, Emtriva and Efavirenz versus Combivir and Efavirenz in more than 500 treatment-naive patients.

The 24-week data will be presented in greater detail as a late breaker at the ICAAC later this month in Washington, DC.

In addition to launching Truvada in the US, we are also proud to make this important product available to developing countries through Gilead’s Global Access Program.

The program will provide Truvada for 99 cents per day in 68 resource-limited countries.

Also Gilead's Advancing Access Program offers Truvada to patients in the United States who cannot obtain reimbursement or afford to pay for the product.

We will continue our efforts to ensure that Truvada is available as broadly as possible to those individuals who may benefit from its attributes.

Additionally, we are continuing our discussions with Bristol-Myers Squibb and Merck about the potential co-formulation of Truvada and Efavirenz.

In the meantime, we have made significant progress on the co-formulation, and have designed a prototype of the pill that we will move forward with if and when the deal is signed.

Turning to today's announcement, as you know, Gilead maintains a high internal (inaudible) for moving product candidates into the clinic and through the development process.

After reviewing the profile and potential of GS 7340 and GS 9005 for the treatment of HIV, we have decided to discontinue the development of these two early stage compounds.

As you may recall GS 7340 is a novel prodrug of tenofovir, the active drug also in Viread.

Earlier this year as a result of positive data from a small phase I/II study of GS 7340, we began designing a phase II program to determine the safety and efficacy of the compound in treatment-naive patients and in highly treatment experienced patients.

Since that time we have witnessed the increasing use of Viread across all HIV patient populations, and we have also received approval for and launched Truvada.

Based on our internal business review and ongoing review of the scientific data for GS 7340, we came to the conclusion that it would be unlikely that GS 7340 would emerge as a product that could be highly differentiated from Viread.

With regard to GS 9005, we have recently completed the phase I/II bioavailability and dose ranging efficacy studies.

The data from these studies demonstrates that GS 9005 has relatively low oral bioavailability, and therefore insufficient to antiviral activity to justify developing it further.

As you know, it is our goal to develop a protease inhibitor that could be dosed as a once-daily pill, which would be complimentary to our existing HIV portfolio.

Based on the phase I/II data, GS 9005 does not meet our objective.

Although we are discontinuing these two programs, we remain confident in our ability to produce promising (ph) (technical difficulty) compounds through our active research efforts in a variety of HIV classes, including NRTIs, NNRTIs, protease integrated (ph) (technical difficulty) and fusion inhibitors.

And as always we are looking for opportunities to in-license HIV compounds and programs.

In addition to our continuing efforts in HIV, we have active research programs in diseases of the lymphatic system and hepatitis C. On the Hepatitis C front, we have been working on protease and polymerase targets in the HCV research field for over a year, following progress we made through some surrogate partners (ph) (technical difficulty).

We are pleased to announce, in the third quarter, that we have entered into a collaboration and license agreement with Genelabs Technologies for the development of novel Hepatitis C compounds.

The compounds in Genelabs’ HCV portfolio compliment our internal program.

We believe that the HCV treatment market may evolve in a manner similar to HIV, ultimately involving combination therapy with multiple drugs targeted at multiple products.

Genelabs’ lead candidates, which are nucleoside analogs targeted at the polymerase enzyme, will require additional pre-clinical evaluation before we could select one or more IND (ph) candidate.

Importantly, this collaboration furthers our commitment to developing therapies for diseases with unmet medical needs, as great as that exists with -- in HCV.

We believe that our expertise in developing and commercializing antiviral products will allow us to make significant progress in HCV, and we look forward to keeping you updated on our progress in this area.

Finally, I'd like to say how pleased we are to welcome Kevin Young to the Gilead team as Executive Vice President of Commercial Operations.

Kevin brings a wealth of global experience to Gilead, having spent 20 years in the industry most recently with Amgen.

Kevin will have responsibility for Gilead’s Global Commercial operation and our product portfolio strategy.

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

We look forward to updating you on our full year 2004 performance in January.

I will now turn the call over to Mark Perry to review our commercial product efforts.

Mark.

Thank you, John.

The third quarter marked another period of significant achievement, in particular for our HIV franchise.

As you know, on August 2nd of this year, we received US approval of Truvada in advance of the September 12th producer (ph) (technical difficulty) date.

We are pleased with the final label for the product, which contains several key components that have and will continue to support the successful launch of Truvada.

In spite of the earlier than anticipated approval, we were able to ship the product to wholesalers quickly, and the first prescriptions of Truvada were filled by pharmacies around the country within days of approval.

While still early in the launch we were very pleased with the performance today.

After nine full weeks Truvada has captured 7.2% of the new prescription market and 3.4% of the total prescription market in the NRTI class.

We believe that approximately 9500 patients are currently on the drug.

Even though the majority of Truvada use has been the result of conversion in patients already using Viread in combination with either Emtriva or Lamivudine, the launch has clearly increased the overall utilization of the Gilead HIV products.

This is true whether one looks at the combined new prescription market share of our HIV product or the molecule share of both Viread and Emtriva, the truest measure of growth in markets containing combination products.

After nine weeks Gilead’s HIV franchise of three products represents 28% and 27.5% of the new prescription and total prescription NRTI market respectively, up from 25.8 and 25.5% the previous quarter.

And to-date, Viread's market share has remained relatively stable with third quarter new prescriptions decreasing slightly by 0.6% and total prescriptions increasing by 3% over the second quarter of 2004.

Emtriva's market share grew during the third quarter with an increase in new and total prescription market share of 8.3 and 17.9% respectively since the end of the second quarter.

We anticipate erosion of these individual products, however, as Truvada market share and our overall franchise grows.

As you know, in September, we released interim data from Study 934, our head to head study of Viread and Emtriva against GSK's Combivir both with a background of Efavirenz.

The preliminary results show a statistically significant difference, favoring Viread and Emtriva in the percentage of patients who achieved and maintained HIV RNA less than 400 copies per milliliter at 24 weeks based on the time to loss of virologic response algorithm, the FDA mandated endpoint for new HIV products.

We are very pleased that the 24-week data from Study 934 has been accepted as a late breaker presentation at the ICAAC Conference taking place in Washington, DC at the end of this month.

We will be providing additional data at that time, including the difference between the two arms of the study in patients below 50 copies per milliliter and CD4 count cell increases, as well as resistance data.

We believe these data will be important in our efforts to take market share from Combivir.

We estimate there are approximately 100,000 patients in the US currently on a Combivir containing regimen.

There will also be several additional presentations on Viread and Emtriva at ICAAC, as well as on Hepsera and AmBisome.

This conference will be an important opportunity for us to showcase the attributes of our HIV portfolio and to officially launch Truvada to the US treatment community.

Please contact our Investor Relations department if you'd like a schedule of our product related posters (ph) and presentations.

Turning to Hepsera for chronic Hepatitis B, we reported sales of 29.2 million during the third quarter with 14.6 million occurring in the US and 15.1 million in marketed territories outside the US.

As we anticipated, the implementation of inventory management agreements in the US in early July resulted in a modest decrease of wholesaler inventory levels of Hepsera during the quarter to reach our agreed upon inventory levels.

We are continuing to grow the market of patients with Chronic Hepatitis B treated with antiviral therapy, both in the US and internationally.

Hepsera volumes increased 51% in the US to date.

In European Union approximately 8,000 or 23% of patients are being treated with Hepsera, out of a pool of 36,000 total patients treated with antivirals for HBV.

The Mediterranean countries of Italy, Greece and Turkey represent the largest growth opportunity for Hepsera.

We hope to further change the HBV treatment paradigm by generating long-term clinical data such as the 144-week data from study 437, which will be presented at AASLD later this month.

These positive efficacy data, including viral load levels, as well as sero-conversion rates along with favorable tolerability and safety data in treatment-naive “e” antigen positive patients, will further allow us to communicate to physicians the attributes that make Hepsera an important option for first line therapy.

We have a unique opportunity in the area of Chronic Hepatitis B therapy.

With Hepsera, we currently market a proven therapy to treat this disease.

We also have additional compounds in our portfolio that have potent activity against HBV.

And we plan to initiate studies to determine which of these therapies is the best first line treatment or combination of treatments for Chronic Hepatitis B. We are in the process of discussing with the FDA the proper clinical trial design to evaluate Viread, Truvada, and Hepsera in Chronic Hepatitis B. And in the future, we'll provide you with an update as to the results of those discussions as well as any plans to initiate new clinical studies.

Turning to AmBisome, AmBisome recorded a strong sales volume during the third quarter with unit sales growth of 3% compared to the third quarter of 2003.

Greece and Turkey continued to be growth drivers for AmBisome, helping to offset competitive pressures from Merck's Cancidas and Pfizer's Vfend in other European markets, particularly in the United Kingdom.

Sumitomo, our partner for Japan, recently submitted a JNDA for AmBisome.

This represents another milestone for AmBisome and highlights the continued importance of this therapy in a worldwide setting.

As we have stated previously, we remain committed to generating important clinical data in support of this product.

At ICAAC later this month, three presentations will include data from Gilead's sponsored studies of AmBisome.

Finally, we've just completed enrollment of 225 patients in our AmBiLoad study, a study evaluating the effect of higher loading doses of AmBisome early in treatment.

After a 12-week follow-up period, we'll conduct the necessary case report evaluations and statistical analysis.

We will provide you with you an update on where and when next year we plan to present the study results.

Turning very briefly to Tamiflu, as you know flu has been in the headlines in the last several weeks.

There is a significant public health concern due to the shortage of vaccines in the US, as well as an increasing recognition of the importance of pandemic planning on a global basis.

Roche, who has global commercialization rights for Tamiflu, commented in their quarterly conference call last week that they have developed a pandemic plan for influenza and have shared this plan with world governments.

Roche also reported that it has taken steps to increase Tamiflu manufacturing and it has approximately 4 million treatment courses of Tamiflu available for prescription in the US for the 2004/2005 flu season, three times the amount prescribed during last year's season.

Roche reported third quarter Tamiflu revenues of 110 million Swiss francs or approximately $88 million US.

Roche did stress that they do not expect a dramatic upswing in Tamiflu's sales as a result of the shortage of vaccines in the US.

It's impossible for us to gauge at this time how any of these events will impact Roche's sales or our royalty, which we receive on a one quarter lag.

But we'll keep you informed as we learn more.

And finally I'm pleased to say that we have completed most of our commercial reorganization announced earlier this year.

Our focus has been on expanding and realigning that group, making it adaptable and scalable as Gilead's business continues to grow in creating functional specialization.

The preparation for and ultimate successful Truvada launch, we believe, is a testament to the strength and depth of our commercial team.

I'll now turn the call over to Kevin Young, our new head of Commercial Operations, who'll discuss his new role in greater detail.

Kevin.

Thank you, Mark.

Let me begin by saying that I'm very excited to be here at Gilead.

There's probably not a better commercial job in the industry.

Gilead has experienced many successes over the last three years.

And with four launches in that timeframe has become one of the most productive and accomplished biopharmaceutical companies in the industry.

Today, I would like to commend Mark and his team, who have built a solid sales and marketing organization that has generated this commercial success thus far.

My focus at Gilead will be to maximize the potential for both our HIV and Hepatitis franchises.

The near term and long term opportunities for our products are very attractive both in the US and Europe, as well as the rest of the world.

I will strive to ensure operational excellence in order to compete successfully on a global basis and to hire and retain world-class commercial talents and to contribute to our long term business and corporate strategy.

As Mark mentioned, we are well on the way to completing the restructuring of the commercial organization.

And I'm particularly pleased to announce today, that we have just hired Howie Rosen, who was previously the President of ALZA Corporation, to fill the newly created position of Vice President of Commercial Strategy.

These are undoubtedly exciting times for Gilead.

I look forward to working with the talented team here and leveraging my experience in and understanding of the global marketplace to further our efforts and successes.

I will now turn the call back to John Milligan for closing comments.

Thanks, Kevin.

We're product of the financial, commercial and R&D accomplishments Gilead recognized in the third quarter.

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

We remain focused on investing wisely in our pipeline and 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.

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

We will call on you in order --- 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 "star" followed by the number "two".

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

We'll pause for a moment to compile the Q&A roster.

Our first question comes from Meg Malloy from Goldman Sachs.

Please proceed.

Thank you very much.

I wondered if you could give us a little bit more clarity on the inventory draw downs in the quarter.

It's my understanding -- correct me if I'm wrong, as we exited last quarter, I thought there was about a week or so of inventory in the channel.

Is that fair?

And can you quantify what amount of draw downs you think may have occurred during the quarter?

Meg, it's John Milligan.

We weren't that specific as to how many weeks of inventory it was for a couple of reasons, one of which is, what a week's inventory is is a moving target.

So what we had said was there was more than a month and that we were going to draw it down to less than a month, without anymore specificity to that other than what we were trying to communicate is there was still a little bit more to go, which I think is almost exactly the way I said it last quarter.

Right.

So what we have done is we've now been able to bring it down to this contractually mandated level.

And on a go forward basis, we don't expect any significant fluctuations quarter to quarter, with the exception of changes in product mix which can affect the Viread and Hepsera as well as Truvada levels going forward.

OK.

So the increased guidance for the year, and then it's kind of just marginal increase over your prior guidance, which I think was about 8 50 to 8 75, would that be reflective of what you think that difference reflective of the order of magnitude of draw down?

I don't think the change in guidance reflects one-quarter level (ph) (technical difficulty) of sales and the fact that we now have Truvada into the mix really is the change.

OK.

Thanks.

If I may for the follow-up on the second question, I mean obviously, you've had some very nice margin performance in the quarter and it looks like you have ratcheted that guidance up a little bit.

Can you tell us what is driving that?

And if Truvada becomes a greater than expected proportion of the mix would that be vulnerable for the year?

Well, we have just given guidance for the year, so I would say that two things really driving it have been product mix and foreign currency has helped us quite a bit in terms of our margin, as well as slightly greater operational efficiencies.

You are correct in thinking that as Truvada ratchets up, there is a significant royalty payment to the Emtriva portion of that which could cause the softening of the margins going forward.

OK.

Thanks a lot.

Our next question comes from Ian Somaiya from Thomas Weisel Partners.

Please proceed.

Thanks for taking my question.

Just related to Truvada, I know the launch is relatively young, but I was hoping you could share your experience on just how the drug is being used today.

And then I just have one follow up question.

Ian, hi, it's Mark Perry.

We don't have quantitative data yet.

We will in the future.

But it --- we think most of the use of Truvada to date has been either in new patients initiating therapy or switches of patients on Viread based regimens -- Viread plus Emtriva or Viread plus Lamivudine.

We know anecdotally that there's (sic) also switches from Combivir and from other agents but we can't quantify that yet.

And our expectation is that's not going to be a big part of the mix in the first couple of quarters on the market.

I think -- it might be a good opportunity for me to turn it over to Kevin to talk a little bit about how we're going to make that happen going forward.

We're pretty bullish on that potential market - market growth source that is the Combivir market.

Hi, Ian.

Obviously, we're very excited about the 934 data, which as we said will be a late breaker at the ICAAC meeting in a little over a week.

So that's scientifically, I think, going to provide some really interesting data to key clinicians.

Obviously, we have our field force very excited about these products and they are in full swing with their product promotion.

And we are supporting in and around our sales force efforts with I think a very comprehensive marketing mix.

And we did mention to you, I think on the last call, that we have a direct to the patient campaign and that has just recently started which is a collection of activities.

You may start to see advertisements, for example, appear.

So I think we have a full and comprehensive set of activities to support Truvada.

OK.

And then one follow-up I had was on the triple combination agreement with Bristol.

I guess we haven't heard anything since the initial announcement in May.

I just wanted to know where we stand from a timeline perspective.

Again, we're not going to give time lines.

I guess it's fair to say that things are progressing and they were down to a couple of really key issues.

But we and Bristol-Myers are learning that in some ways this is somewhat of precedent setting kind of collaboration.

And so we are approaching this carefully and cautiously so that we get everything right.

And so I have certainly been in negotiations that have taken much longer than this.

But it's rare that people know you're in negotiations, so it may appear to be slower than normal.

And from a clinical standpoint are you guys moving forward?

Well we are moving -- certainly 934 as a clinical trial with the larger supportive trials moving ahead and then also all the work that is going into the -- putting together the batches, preparing all the data that would be necessary for the IND and then the NDA is continuing on the original timeline, yes.

The stability studies of trials have started?

The post stability studies have not yet started but they’re -- we are very close.

OK.

Thank you.

Our next question comes from Damien Wood (ph) from Smith Barney.

Please proceed.

Hi, thanks taking the question.

I just had a question in regards to Truvada.

Following the launch, I wonder if you have seen any degree of cannibalization and if so, if that is something you can quantify.

And then I just had a follow-up question after that.

I'll take a shot at that, Damien.

It's Mark Perry.

Really the only way we can quantify it is by looking at prescription trends.

And what we saw in Viread in -- most importantly quarter-over-quarter in total prescriptions is actually a slight increase; about a 3% increase in total prescriptions for Viread and about an 18% increase in total prescriptions for Emtriva.

And again this is total prescriptions.

In new prescriptions however we did start to see a little bit trend down in Viread, down about -- less than about a 0.5% quarter-over-quarter and Emtriva was up 8%.

So I guess we're a little surprised that we didn't see more cannibalization the first quarter.

But it is still very early.

We would expect to see more of that going forward.

But we really are not in a position to quantify it other than to follow the script trends the same way you're doing at this point.

Hey Damien it's Kevin speaking.

It’s very, very early days.

We have literally got nine weeks of NDC prescription data, so it's very, very early.

The expectation is that we will see some erosion of Viread.

But it's just very early days, so difficult to comment more than what Mark said.

Right.

Thanks.

And my follow up was in regard to Tamiflu.

I guess going into this flu season, have you guys seen any stocking of the drug coming out of Q3 and going into Q4?

You know Damien, we don't have any vision of what's going on since Roche controls all that, and so they don't share that kind of data set with us.

So unfortunately we don't have anything to share with you either.

OK.

Thanks.

Our next question comes from Jeff Porches (ph) from Sanford Bernstein.

Please proceed.

Well thanks for taking the question.

Just a couple quick questions on the -- going back the inventory thing.

Mark, you mentioned 3% sequential script volume growth.

And if you take the 5% price increase, it suggests that you should have had about 8% sequential growth -- translates into about 10 million that you'll lack (ph) because of the channel draw down.

Is that a reasonable estimate of how much has come out of the channel?

And then related to that, how much of the Truvada revenue do you estimate was attributable to channel stocking?

And how does that look to you going forward?

And I wanted to follow-up with something about Europe and Viread.

Thanks.

A couple of different ways to think about that.

So in terms of the price increase plus the sequential script growth, remember the price increase gets implemented immediately in some payer segments.

And then it raises this consumer price index rate as other.

So the effective price increase of a 5% price increase would really be about 2.5%, so that the math works more closely aligned with that.

I'm not going to give any comment to the specific dollar number of inventory, because we haven't commented on that, but you guys can figure out the math there.

On the second part with regard to inventory levels for Truvada, we think that about a third of what went into the -- a third of reported sales were probably in the inventory system at the end of the quarter.

OK.

And could I just ask about the situation in Europe?

It looks as though Viread was sequentially -- essentially flat in Europe, and it’s the first time we have seen that.

I wonder if you could comment about what's going on.

What's behind that?

Do you have price decreases?

And what's the outlook going forward?

Thanks.

I would say a couple of things there.

This is a rest of world number, not specifically Europe.

So in the second quarter we commented that there were particularly high sales in Latin America.

And we had orders that were received in it sooner than we had anticipated in fact, in the second quarter.

And so there were higher orders in the second quarter, which resulted in slightly lighter orders in the third quarter.

And I think the largest difference was just attributable to that timing difference.

And how does that look going forward then?

Well we haven't given guidance on a regional basis for any of our products.

We did see in the third quarter of last year, and probably some impact of the third quarter of this year, some decrease in activity related to the summer in Europe.

And that's hard to quantify but that could have been a factor this time around.

And we also now have of course the full impact of the sales -- the price reduction in France that happened at the end of the first quarter impacting our third quarter and of course will impact our results going forward.

But beyond that, we can't really comment on what the outlook is.

Just an observation, in my early days here at Gilead, Jeff, all I can say is the European organization is as enthusiastic as the organization here.

And they are very committed to the promotion of Viread right now until we get into 2005 and hopefully the approval of Truvada.

So all our major markets are very much on -- in high gear with Viread.

One further thought on that point is we're at about a 35% patient share in the US.

It's more like 26, 27% share, as best we can estimate it, patient share in Europe.

So we think there is quite a bit room to go there.

OK.

Thanks.

That's very helpful.

Our next question comes from Thomas Wei from Piper Jaffray.

Please proceed.

Thanks very much.

I had a question about the longer term here and if you can address now with the two clinical setbacks that you have had to date.

Do you think that you can sustain growth here without an acquisition?

And if not, can you help us understand by what timeframe you believe you will need another product launch to keep the growth rate going?

Thomas, actually I -- while these were unfortunate setbacks, I think in some ways I'm more bullish than I have been in the long-term about our pipeline and our ability to bring products out, which might seem a surprising turn of events.

I think from the licensing perspective there's interesting opportunities that abound right now.

So I do feel like we can fill our pipeline with a combination of organic growth and licensing without the need for a -- an acquisition, the caveat being if something interesting became available and the terms are right and the philosophy of that company, our copyrights (ph) and something like that could certainly happen.

But we don't see it as a necessity certainly over the next couple of years.

And I had a question on SG&A.

To get into new guidance range we would need pretty substantial increase in the fourth quarter SG&A.

Should we think of that as a good run rate going forward to support the Truvada launch?

Or are there one time expenses that you are going to be incurring in the fourth quarter that make that not a good run rate for 2005?

Yes, that's a good point.

The fourth quarter is expected to be slightly higher than the third quarter.

And some of the drivers of that are operations, but two of the big drivers are the big meetings that are occurring all in the fourth quarter this year.

So ICAAC, which is typically a third quarter event, is now a fourth quarter event.

And now there's also ASLD and ASH and these are big events for Gilead.

And those expenses all fall in the fourth quarter this year.

So its not a -- I wouldn't consider that the accurate run rate for the rest of the -- as we go into next year.

Our next question comes from Eun Yang from Wells Fargo.

Please proceed.

Thank you.

First of all looking at the revised HIV product sales guidance, the 870 to 890, and given what you have generated for the first nine months it looks like in the fourth quarter you might be expecting a slight decrease.

Should we think of that one as inventory draw down?

There will be no additional inventory draw downs, no.

So I mean, you know, at $870 million we are looking at about $5 million less than third quarter HIV products sales.

So could you comment on that, why you might expect HIV sales could go down slightly from third quarter and the fourth quarter?

It's a good point Eun.

The thing that we are trying to do is give an accurate upper end to that range as well as some potential for decreases in other areas.

We don't really expect that to happen on the lower end.

OK.

And also could you comment on European launch on Truvada?

And the last question is Bristol-Myers-Squibb -- they recently filed for their HBV drug Entacavir.

And I'm wondering if you could comment on how, if a drug gets approved, how that might impact on sales going forward?

Thanks.

I had difficulty hearing you.

So your (multiple speakers)

Eun this is Mark Perry.

We haven't -- our guidance all along has been mid 2005 launch approval and initial launches for Truvada.

We don't have any further color on that.

We're in the regulatory process now.

Of course the launch will be a roll out, as all our launches have been initially in the pre-pricing countries of the UK and Germany and then followed by France and the other countries as we negotiate and obtain reimbursement.

So think of that as a mid 2005 event and we'll update you if we get further guidance from the regulatory authorities.

Thanks.

How about Entacavir?

Then Entacavir, we don't know all the data for Entacavir.

Actually ASLD will be a good chance for us to get some exposure to the data sets and see what the drug is all about.

We do expect a number of things to happen in the future.

One, more products will come to market for Hepatitis B. This will increase the competitive landscape.

It's also likely to increase overall the number of patients on therapy.

And we are clearly very interested in maintaining market segment here, whether it be through Hepsera or potentially the use of our other Hepatitis drugs, for example Viread or Truvada, both of which would be expected have significant HBV reactivity.

So we are anticipating ways to maintain market share overall for Gilead in the Hepatitis area.

We obviously take any competitive launch very seriously.

But as John said, the good news is just the level of noise in the treatment of Hepatitis B will be a market driver in itself.

Thank you.

Our next question comes from Sapna Srivastava (ph) from Morgan Stanley.

Please proceed.

Thank you.

I have two questions.

One, can you just give us a little bit more color on the kind of in-licensing that you're looking at to enrich your pipeline, which perfect (ph) (technical difficulty) areas or if it’s state of the compounds, what should we be looking for?

And secondly, it just sounded that it was slightly more negative in the Bristol-Myers deal then you have been in the past and if there's any reason for that --?

I'll take those in order.

On the first one, so what are we looking for?

Clearly, hepatitis C compounds, the Genelabs deal speaks to that.

We do think that there is a strong likelihood it will be a combination market in the future.

And so we continue to look at our own products as well as others to develop a franchise in that area.

Obviously, things in the HIV area make a lot of sense for us.

And anything in the antiviral area, quite frankly, is interesting to me.

And we're starting to take a look at some other areas.

But I would say principally for now our focus is on antivirals.

And then I don't -- if I sounded more pessimistic, I didn't mean to be.

I'm just trying to be a realist in this area that these things take time and it takes a lot perseverance to get a completed contract together such as this.

And could you just walk us through some of the complications in the contract that have been a sticking point or that you're trying to resolve or --?

Unfortunately we can't talk about any of those things.

OK.

Thank you.

Our next question comes from Joel Sendek (ph) from Lazard.

Please proceed.

Thank you.

I'm curious as to why your SG&A margin, it appears, is at all time low in the midst of a new launch.

And I am wondering whether that's because you're waiting to -- waiting for ICAAC to really push it?

What you mean is that our SG&A spend is low as a percentage of revenues?

Right.

Part of it is in a growing product environment, it's very difficult for those to keep pace.

Obviously, we are going to spend some money on ICAAC.

It's a big event for us.

But also I would say with the sales and marketing reorganization we probably have been a little bit more cautious with our spend, trying to get the most bang for our buck for the launch of this product.

I just like to think of us being sort of lean in operation and efficient at all times and I wouldn't expect that to change necessarily in the future.

I think we can add to that.

The launch expenses in and of themselves are not dramatically high.

For instance, our direct to patient campaign is not a TV based campaign.

It's relatively cost efficient media based campaign that's not tens of millions of dollars.

So that plus the fact that we enhanced our sales forces US and Europe really at the end of last year, and those expenses are already in our run rate, didn't create a big bump for the launch of Truvada per se.

Yes.

Just add to Mark's comment, obviously we're operating in the same arena, so we can build on the expertise and leverage the expertise that we have there.

Rest assured that my role is going to be making sure that we optimally invest in the great opportunities that we have.

You know, we'll look to be targeted and look to be prudent in the way we use our expenses.

Got it.

Then the follow up on that -- the way you answered an earlier question with regard to SG&A expenses for the fourth quarter, you said it would increase.

Is that on a dollar basis, on a percentage of revenue basis or both?

It's on an absolute dollar basis.

I haven't, frankly, thought about it on a percentage basis.

But it's just simply driven by the events that will be occurring over the course of the third -- I am sorry fourth quarter.

And when you think about the percentage basis you're just seeing the benefits of our operational leverage in this area.

Thank a lot.

Our next question comes from Bill Tanner from Leerink Swann.

Thanks.

I had a question on the Truvada/Efavirenz program.

I'm sure you guys have thought about the feasibility.

I am curious as to comments.

Is this going to be one pill?

I mean, I guess you're looking at something north of a gram of compound, so is it contemplated it's going to be one pill or what?

We have a prototype that's approximately 1.4 grams.

It is, I think, a reasonably sized/shaped pill that can be swallowed based on the prototype.

And we're very confident that it will be successful in the market.

What might not be known is the current Efavirenz presentation itself is about 1.2 grams.

So it's only slightly bigger than Efavirenz itself.

So it's a -- technically it turns out to be quite a compatible three pieces, so we are very fortunate in that respect.

OK.

And then I guess as a follow-up, just curious if somebody could provide the timeline on the 934 data with respect to how it actually can be used to, I guess, help market Truvada, when it might be added to the package insert, so on and so forth?

Sure.

It varies by territory.

So the 24-week 934 data were submitted to the EMEA as part of the ongoing review of Truvada.

So there's a potential that the SMPC in Europe would have the first data set -- useful data set for us for promoting the 934 data.

In the US we will have to file those data next year sometime and we would anticipate probably a standard 10-month review under normal circumstances.

However, because we have the potential to put the co-formulated product into the FDA next year, we might have the potential for an accelerated timeline based on the current guidelines.

However, we haven't had this discussion with the FDA.

So the most conservative feeling is that you won't have the data set out until the end of '05 or early into '06.

OK.

Thank you.

Our next question comes if Eric Schmidt from SG Cowen.

Please proceed.

Good afternoon.

Just wondering if you have any market intelligence on Espicom, specifically as the discounting program has an impact on the marketplace and also whether they are also going after Combivir for new switches?

Eric it's Kevin speaking.

All we can say right now is that their latest script data -- they have a share of at least 3.3% compared to Truvada that's now at 7.2% in terms of NRX.

Obviously, you know, Glaxo, we very much respect them as a competitor.

Do I have any specifics on the type of patient group they are going for?

Not right now, Eric, no.

Thank you.

Our next question comes from Jason Kantor from WR Hambrecht.

Please proceed.

Hi.

Thanks for taking my question.

Most of them have been answered.

But I’m wondering if your revised R&D is a result of the programs that were cut and maybe if you could comment now on sort of where most of your R&D dollars are going?

The changes in the programs that we just announced will have very little effect on this year as we tend - we'll be still winding down things.

So there's an awful lot of work that's still on going with the existing products including studies like 934 and the AmBiLoad study and the continued support of our marketed products.

So that is going to continue into next year.

And then importantly, we are gearing up our research efforts in a number of areas.

So that's certainly -- more researchers working on more programs is where a lot of our dollars are going today.

How are you thinking about managing the R&D in terms of percentage of sales, going forward as the business grows?

You can think about it, but it turns out to be a pretty tough metric to keep track of because with the revenue growth that we have had over the last few years, it's virtually impossible to hire and bring in people to keep pace with that.

So you have a two choices, one is to let it fall behind a little bit and then catch up in a more thoughtful way or try to use licensing as a way to bring in more products and to spend those dollars wisely.

So our strategy is going to be to grow thoughtfully but then to use the licensing to try to bring in more products and accelerate things into the clinic and then into the market.

Do you believe you're likely to bring in more of a clinical stage product candidate in the next six months?

Well, I -- more likely than what I guess I was thinking, but I'm not -- we are certainly looking.

It would be great to have more things in the clinic but I can't make any promises at this point in time.

Thank you.

Our next question comes from Tom Shrader from Harris Nesbitt.

Please proceed.

What feedback have you been getting as to why AmBisome is so incredibly stable as a drug?

Are people just not that excited about the new anti fungals?

I think it depends mostly on the market segment is my personal view.

I don't know if, Kevin, you wanted to weigh in.

But there's a certain -- there is a spectrum issue with some products, so Vfend and Cancidas work well in some settings, particularly some of the resistant candida strains.

They work on some Aspergillus strains.

Then as you get into some of the more exotic mycoses that show up around the world, they just don't have an effect.

And when you really want to be sure and you know you have some of these things in your hospital, you'll go with AmBisome.

We really had a great success in those settings.

And in some ways as you use those products, remember you’re going to start select for Vfend and Cancidas resistant organisms.

And so over time it pushes – remember, these are mostly nosocomial infections.

So they will push a lot of patients in the hospital over to AmBisome because you have no other choices.

Yes, not much drive to that.

You know, this is a strong horse and it's a very dependable product and (multiple speakers)

Familiarity important?

Familiarity was the question.

Yes, it's -- absolutely.

It's a brand that's been relied on now, you know, for well over 10 years.

And we're still very committed to it.

I think it's important to say, particularly in Europe we have an organization that feels very strongly and is very allegiant to AmBisome.

Third question is more of riddle; why would BMS move slowly given the rate of Efavirenz resistance?

If they mess around for another two years, is this deal even worth doing?

I am curious to your thoughts there.

Well I want to make it clear I'm not blaming Bristol-Myers for moving slowly.

In some ways, we are trying -- we have more risk.

And I think of the two parties, we probably being more cautious into this deal.

But the truth is these drugs are already available, so Truvada/Efavirenz is out there.

You know, I think while it helps us both in terms of incremental sales, I just don't think it's -- you know, I don't think this is revolutionary.

I think it's a really nice thing for patients but they actually have their products today.

And remember the 934 data are just out.

So this is a new -- it wasn't certain how competitive this would be with Combivir and it's turning out to be very competitive with Combivir.

So there's a lots of excitement, but this is just early days.

Yes, let me add to that too.

We are not moving slowly, we are working closely with BMS to develop the product that John described already, that we have the 1.4 gram pill and are moving forward on the critical path.

OK.

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

Please proceed.

Thank you.

Most of the questions have been answered by now.

But about -- on Tamiflu, what do you think the royalty rate is going to turn out to be this year?

Is Roche able to scale up production for this current season?

And how much could they scale it up for next season?

And also what portion of Tamiflu is typically taken for prevention versus treatment of influenza?

Thanks.

I will see if I can remember all the multiple parts to that.

I would say -- we won't the know royalty rates for this year until the end of the year.

So, the most conservative way to think about it is 7%, which is the way we have been paid for -- not last year but the year before.

Last year we got to a higher rate largely because the royalty moved into a higher tier based on sales.

We don't know if we'll hit that higher tier this year or not.

So, one way to think about is just a conservative 7%.

There's a lot of news about flu this year, so it's certainly opportunity.

You talked about the amount of Tamiflu, Roche has announced that they have put -- have available 4 million doses for the United States.

That's the extent to what we know about how much they have prepared for us and where it is.

And how they are going to distribute it, we don't really know.

The DHHS guidelines, which just came out, do recommend the use of Tamiflu for the treatment of influenza, but not for prophylaxis.

And we actually think, more anecdotally than through data, we think that there's been very little use prophylatically, and that most of it has been used for treatment.

OK.

That's all, folks.

Thank you.

Dr. Milligan, 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 future progress.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes your presentation.

You may now disconnect.

Good day.

END