吉利德科學 (GILD) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Gilead Sciences' First Quarter 2005 Earnings Conference call.

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

Later, we will conduct a question-and-answer session. [Operator Instructions].

As a reminder, this conference call is being recorded Tuesday, April 19th 2005.

Your speakers for the day are John Milligan, Executive Vice President and CFO;

John Martin, President and Chief Executive Officer, and Kevin Young, Executive Vice President of Commercial Operations.

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

Please go ahead.

Good afternoon, and welcome to Gilead's first-quarter 2005 conference call.

We issued a press release this afternoon providing results for first quarter ended March 31st 2005 and describing the Company's quarterly highlights.

The press release is also available on our website.

Also joining us on today's call are Norbert Bischofberger, Executive Vice President of Research and Development;

Mark Perry, Senior Business Advisor;

Matt Howe, Vice President of Finance; and Susan Hubbard, Senior Director of Investor Relations.

I will begin the call by reviewing the first-quarter financial results and will provide an updated financial guidance for the full-year 2005.

Then, John Martin and Kevin Young will take you through the corporate and product-related highlights for the quater.

We'll 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'll be making forward-looking statements related to financial results, projections, and clinical and regulatory developments.

These statements are subject to the occurrences of many events outside of Gilead's controls 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.

In addition, during the call today, we'll be providing you with information and data from clinical studies that have not yet been reviewed by the FDA, nor included in our prescribing information.

I want to remind you that our policies only allow our sales force to promote our products based on our FDA-approved prescribing information.

In short, the first quarter 2005 was another successful quarter for Gilead.

We had strong top and bottom line growth.

We began the launch of Truvada in Europe and continued to increase the market share of our HIV and Hepatitis B franchises.

And with strong performance of all of our products, we achieved a significant milestone with record products sales in excess of $400 million growing product and total revenues by 45 and 39%, respectively, compared with the first quarter of 2004.

When compared with the first quarter of 2004 on a non-GAAP basis, our first quarter of 2005 net income grew by 54%, diluted earnings per share grew by 50%, and income from operations increased by 54%.

In addition, we generated over $227 million in operating cash during the quarter.

This strong operating performance is a validation of the strategies we've implemented and the significant effort by the more than 1,600 Gilead employees around the world.

Now, turning to the specific results for the quarter.

Gilead had a strong financial performance during the first quarter, as sales, earnings and operating cash flow all improved significantly over the first quarter of 2004.

Total revenues were up 39% compared with the same quarter last year, driven primarily by higher sales of our HIV products and improved Hepsera performance.

Income before taxes grew substantially from $155.8 million to $231 million, approximately a 39% increase.

This improvement was fueled primarily by higher product revenue.

As a result of this strong operating performance, operating cash flow for the quarter was $227.2 million, more than double the operating cash flow for the first quarter of 2004.

The Company reported net income of $157.1 million, or 34 cents per share on a fully diluted basis, for the three months ended March 31st 2005.

This is an increase of 37% compared to net income in the first quarter of 2004 of $114.4 million, or 25 cents per diluted share.

Our effective tax rate for the first quarter was 32%, up slightly from the 31% recorded in the first quarter of 2004.

Looking forward to the rest of the year, our actual tax rate will depend on a number of factors, including actual operating performance.

At this point, we reiterate our tax guidance of 31 to 33% for the full year.

Now, turning to revenue.

Net product sales for the first quarter of 2005 were $400.2 million, a 45% increase over the same period last year.

This growth was primarily driven by higher HIV product revenues.

HIV product sales grew to $301.4 million, compared to $205.1 million in the first quarter of 2004, an increase of 47%.

This growth was driven by higher overall prescription volumes in both the US and in Europe and increasing sales of Truvada in the US.

Viread volume in the United States has declined by 3% since the fourth quarter of 2004, as patients are switching to Truvada.

We're particularly pleased with the progress of Truvada in the United States where, according to the most recent NDC data, Truvada now has 14.5% of the new prescriptions in its class.

This growth was primarily due to the use of Truvada in patients new to therapy and secondarily from switching the patients from other regimens, particularly Viread/Emtriva, and Viread and Epivir.

For our entire HIV franchise, US market share growth of our HIV compounds remained strong.

According to the latest NDC weekly data, total molecule market share for Viread/Emtriva in the first quarter of 2005 increased by nearly 7.5% and 14.5%, respectively, compared to the fourth quarter of 2004.

Total US wholesale inventory levels have remained fairly consistent with our contractual requirements based upon the data WE received from large wholesalers.

Outside the US, HIV product sales grew to 110.8 million from $78 million in the same period last year.

This is an increase of 42%, due to the increase in sales volume for Viread/Emtriva, as well as the launch of Truvada in Germany and United Kingdom.

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

For the first quarter of 2005, HIV product volume in the European Union and Australia grew by 53% compared to the first quarter of 2004.

Hepsera for the treatment of chronic hepatitis B had sales of $42.7 million in the first quarter of 2005, more than double the $18.9 million recorded in the first quarter of 2004.

For the first quarter of 2005, Hepsera sales in the United States and the rest the world were $18.3 million $24.4 million, respectively.

We are pleased with the continued progress of launching Hepsera, which is now marketed in 20 countries, including US and Australia and all major countries of the European Union.

Finally, sales of AmBisome were $54.2 million for the quarter, an increase of 5% over the same period in 2004.

Actual sales volume of AmBisome in Europe increased by 7% when compared to the same period last year.

This increase of volume along with higher sales volumes in Latin America, Africa, and Asia, were partially offset by lower pricing in some regions.

For the first quarter of 2005, Gilead recognized net royalty and contract revenues of $30.2 million, compared to $32.5 million for the same quarter in 2004.

This decrease was primarily driven by lower royalties of $11.9 million earned from Tamiflu sales by Roche compared to $27.4 million for the end of first quarter of 2004.

This reduction in Tamiflu royalties was partially offset by a $7-million milestone payment received from Eyetech upon the first commercial sales of Macugen in the United States in the first quarter of 2005.

As a reminder, we'll be recognizing royalties from Macugen sales on a one-quarter lag, as we do with Tamiflu and Hepsera.

As you may know, Roche announced its first-quarter 2005 results this morning, and reported net product sales of Tamiflu of 424 Swiss francs or $353.5 million during the quarter based on current exchange rate.

The bulk of these sales were from Japan, and only 21% of sales were a result of orders placed by various countries for the purpose of pandemic planning.

We will report royalty payments for those sales in the second quarter, as we recognize royalty on a one-quarter lag.

In addition, Roche provided revenue guidance for Tamiflu pandemic planning sales for the second quarter of 2005 of 50 million to 100 million Swiss francs, or $42 million to $83 million, and second-half 2005 guidance of 250 million to 300 million Swiss francs, or $208 million to $250 million.

At this time, we cannot provide guidance on the royalty rate, (ph) associated with this sale.

Under our contract with Roche, the royalty rates increases with escalating sales tiers, but maybe adversely impacted by the potential cost of goods adjustment.

Product gross margins were 86% compared to 87% in the first quarter of 2004.

The gross margin percentage change was primarily driven by the growing impact of Truvada and the magnificent sales in 2005, which has a slightly lower gross margin because of the royalty obligation association with the Emtriva component.

Now turning to expenses.

Research and development expenses were $70.4 million for the first quarter of 2005, an increase of 20% from $58.5 million in the same period last year.

Compared with last year, the higher spending was primarily driven by the $15 million upfront license fee we incurred under our HIV integrase inhibitor licensing agreement with Japan Tobacco, as well as the other research and contract service fees paid to Achillion and Genelabs as part of our hepatitis C collaborations, and the increases in headcount.

These increases were offset by a lower level of clinical trial activity and related costs.

SG&A expenses in the first quarter of 2005 were $80.1 million, up 13% from the same quarter of 2004.

The increased spending in SG&A is principally due to increased headcount, and expansion of our sales and marketing activities, partially offset by lower expenses due to timing of certain international conferences.

Foreign exchange was slightly favorable on an overall basis during the quarter, due primarily to a stronger Euro relative to the US dollar when compared to the same period last year.

The total net impact of foreign exchange on our pre-tax earnings for the first quarter 2005 was $3 million, when compared to the same period in 2004.

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.

As discussed, operating cash flow of $227.2 million this quarter more than doubled when compared with operating cash flow of $98.2 million for the same period last year.

This strong performance is primarily driven by significant growth in operating income, as well as collections and receivables in southern Europe.

Based upon the strong operating cash flow performance, the balance sheet at March 31, 2005 shows cash, cash equivalents, and marketable securities of $1.47 billion.

This is an increase of 17% compared to the balance of $1.25 billion at December 31, 2004.

Now, I would like to turn to our financial guidance for 2005.

For entire HIV franchise, which includes Viread, Emtriva and Truvada we are raising our guidance for net product sales for the franchise from 1.2 to $1.25 billion, to 1.225 to $1.275 billion for 2005.

This increase in guidance is a result of continued strong sales of Viread in US and the European Union as well as the rapid uptick of Truvada in United States than previously expected.

For AmBisome, based on the strong first quarter results, we are raising our previous guidance of 195 to $205 million, to the 200 to $210 million range for 2005.

In addition, we reiterate that our estimated net product sales of Hepsera for the full year 2005 is in the range of 150 to $180 million.

This guidance range does factor our current estimated impact of the additional competition that have entered the market.

We reiterate our gross margin range of 85 to 86%.

Now turning to expenses.

When we issued the press release announcing that Japan Tobacco licensing transaction in March, we updated our R&D expenses for 2005 to reflect the $15 million upfront licensing fee to JT at the time of signing.

We now reiterate that range to 250 to $270 million.

This range did not reflect any additional licensing fees or expenses associated with potential corporate development activities.

For SG&A expenses, our guidance for 2005 remains at $350 million to $370 million.

Our capital expenditures guidance for 2005 remains at $55 million to $65 million range.

And finally, our tax rate guidance for the year 2005, we reiterate our previous 31% to 33% guidance for effective tax rate.

In summary, as Gilead looks ahead, we'll continue to make investments we believe necessary to build a strong and independent global business.

We'll continue to broaden our product line, particularly our HIV franchise, AmBisome and Hepsera, and continue to elevate opportunities to in-license or acquire companies or potential products to complement our own internal effort.

This concludes the earnings reporting section of this conference call.

At this point, I'd like to turn the call over to John Martin and Kevin Young, who will review our corporate commercial highlights for the first quarter of 2005.

Thank you, John.

Good afternoon, and thank you joining us.

We are pleased to summarize for you today Gilead's many accomplishments during the first quarter of 2005.

I'll begin by discussing our recent business highlights in our pipeline programs.

Then, Kevin Young will review our commercial efforts, and John Milligan will wrap up the call.

In February, Truvada, our fixed-dose combination of Viread and Emtriva received marketing authorization in all 25-member states of the European Union.

This follows the August 2004 approval of the product in the United States.

Within days of the approval, we were able to launch Truvada in Germany, and in the United Kingdom, and we will roll out Truvada in various European countries throughout the remainder of 2005 and into 2006.

Kevin will elaborate on the European launch of Truvada later in this call.

Also, in February, we released positive 48-week data from Study 934, which compares a regimen of the components of Truvada, Viread and Emtriva to Combivir, both in combination Sustiva in treatment-naive HIV infected patients.

These data were presented in greater detail last week in a late-breaker presentation at the International Conference on Antiviral Research in Barcelona, Spain.

The presentation highlighted the favorable response in the Viread and Emtriva arm compared to the Combivir arm.

No development of K 65 are in either arm, some are renal safety profiles in both arms, and a higher discontinuation rate in the Combivir arm due to adverse event with anemia being a major cause for discontinuation.

We believe that generating comparative clinical data is critical to demonstrate the beneficial profile Truvada over competitive products in support of both the US and European launches.

In addition to the 934 data I just mentioned, another important set of data was presented as a late -breaker at the conference on Retroviruses and Opportunistic Infections in Boston in February.

The RAVE study, or Randomized Abacavir Viread Evaluation, was designed as a randomized open-label, 48-week comparative trial for Abacavir Viread as a replacement for a thymidine analog, specifically AZT or d4T, as part of a highly active antiretroviral therapy in HIV infected patients with little atrophy and controlled HIV RNA.

Data from the study demonstrated that patients with lipoatrophy or loss of fat in the limbs and facial area, who switch from AZT or d4T to Viread or Abacavir, maintain virologic suppression and showed improvements in limb far and lipid parameters.

Turning to our corporate development activities during the quarter, we continued our product in-licensing efforts by signing a licensing agreement for a novel HIV integrase inhibitor with Japan Tobacco.

Gilead has worldwide rights to this compound except in Japan.

As you may recall, Japan Tobacco is our commercial partner for a Viread, Emtriva and Truvada, in Japan, and they recently announced the launch of both Emtriva and Truvada in Japan.

We are excited about integrase inhibitor class of compounds, and believe that may play an important role in HIV therapy in the future.

Recent early clinical studies by other sponsors show that integrase inhibitors can cause a significant decrease of viral load over a 10-day period.

Integrase appears to be a promising target, and drugs targeting this enzyme may have different resistive profiles than other class of HIV drugs.

The novel compound we in-license, JTK-303, which is now called to GS 9137, has been studied in a Phase I trial in healthy individuals in Japan.

Based on results from this trial, we know that the compound is orally bioavailable.

We do not know yet know the potential dosing schedules of GS 9137, which we plan to study in a Phase I, II study in HIV infected individuals.

We recently filed an IND with the FDA for GS 9137, and expect to dose the first patient around midyear.

Turning to our collaboration with BMS and the triple combination pill, the development plan of the co-formulation of Viread, Emtriva, and Sustiva in a single tablet of once-daily combination product is on track.

Data from bioequivalence and initial stability studies with the lead formulation are on target to be available midyear 2005.

Pending a positive outcome from the bioequivalence study, we would plan to file a new drug application for the product during the second half of this year.

To mitigate the risk associated with combination drug development, we are also developing a backup formulation.

If the first co-formulation does not meet the requirements for bioavailability, pursuing the back of formulation would delay the program by three to four months.

Our research and development efforts in the area of hepatitis C are progressing as planned.

As we mentioned previously, we have three programs in HCV focused on the protease and polymerase targets, and are working with conjunction with Achillion and Genelabs as well as pursuing our own internal research efforts.

We have selected preclinical development candidates from all three programs, and anticipate moving one of the candidates into the clinic during the second half of this year.

Finally, our internal HIV research and development programs targeted at both existing and novel targets are ongoing and continue to make products.

In closing, I'd like to highlight the expansion of Gilead's global Access Program to include additional countries in the Caribbean and Latin America during the first quarter.

The Gilead Access Program is now designed to make Truvada and Viread available to physicians and treatment programs in 95 countries, representing an estimated 70% of the global epidemic at no profit prices.

Gilead is entering into a long-term agreement with the manufacturing plant in the Bahamas to expand the capacity for producing tenofovir, which may be used to supply Viread and Truvada to all territories including resource poor countries.

This plan is approved by the FDA to manufacture tenofovir and meet the same high-quality standards, as our other manufacturing facilities.

I will now turn the call over to Kevin Young to review our commercial product efforts.

Kevin?

Thank you, John.

Good afternoon everyone.

I will begin by discussing the developments in our HIV franchise, which achieved first quarter revenues of just over $300 million.

With the EU approval of Truvada in February, the first quarter included approximately one month of Truvada revenues in Germany and the United Kingdom.

We are very pleased with a favorable label we received in Europe, which unlike the US, includes the 24-Week Data for Study 934.

In Germany and the UK, the markets where we have lost Truvada, we have received a positive response from the treating community on the new brand, and believe there are approximately 1500 patients are already been treated with Truvada in these two countries.

We anticipate the next launches will occur in Portugal and at the end of 2005, in France and Spain, as pricing is obtained.

The presentations of the 48 Week 934 an array of data sets have had an important impact of the launch of Truvada in Europe, and will continue to help support positions understanding of the products.

Turning to the US markets, as of the week ended April 1, 2005, Truvada has captured 14.5% of the new prescriptions, and 12.2% of the total prescriptions in the NRTI class.

According to the retail and non-retail prescription data from NDC, we believe that approximately 48,000 patients are being treated with Truvada in the United States as part of their HIV treatment regimen through the end of February.

According to our market research, we believe Truvada brand awareness is close to 100% within the HIV treatment community.

Truvada sales have continued to increase primarily due to low side effects, positive clinical data, and once daily dosing.

Many physicians have patients requesting Truvada by name.

We believe that the awareness of Truvada is in part attributable to our targeted direct to the patient campaign, which we initiated late last year and are continuing in 2005.

Practice switches from Combivir to Truvada have been low as anticipated during the early stages of the launch, and the uptake of Truvada is primarily due to its penetration into preferred, first-line regimens.

There are still approximately 90,000 patients on the Combivir continued regimen, which creates a significant growth opportunity for Truvada.

With the continued presentations of clinical data, that highlight thymidine analog associated adverse events and long-term toxicities, we anticipate that switches from Combivir, which contains the thymidine analog AZT, will accelerate overtime.

In addition, Viread and Emtriva are used as the backbone in most of the arms of Abbot Study 418, evaluating Kaletra as a once daily regimen.

We believe that these data will be added to the Kaletra label during the second quarter of this year, which will provide us with further ability to promote Truvada as the NRTI backbone of choice, when used with a third agent from either an NNRTI, or PI class.

Turning to Viread, overall sales have continued to remain strong since the launch of Truvada.

In the US market, Viread captured 17.7% and 19.4% of new and total prescription of the NRTI class, respectively.

We believe that approximately 104,000 patients in the United States are taking Viread as part of their HIV treatment regimen.

Viread volume in the United States has declined by 3% since the fourth quarter 2004 as patients are switching to Truvada.

In the European Union, we continue to observe solid growth of Viread sales and use of the product has been evolving steadily towards earlier lines of therapy.

On a volume basis, unit sales of Viread in the European Union increased by 37% during the first quarter of 2005, compared to the first quarter of 2004.

We believe that approximately 78,000 patients treated for HIV in the European Union are taking Viread as part of their treatment regimen.

We continue to generate important clinical data to support our HIV franchise.

As John mentioned, data from Gilead study 934 and Chelsea and Westminster's RAVE study were presented recently.

The detailed 48 -- Week Data from Study 934 have been accepted as an oral presentation at the International AIDS Society meeting in Rio-de Janeiro, Brazil.

The presentation will occur on July 27th, 2005.

We've also extended this study to 96 weeks.

There are several additional phase for switched studies on going both domestically and internationally, including our own COMET study.

A 400 patient, multicenter, single-arm study, evaluating switching from twice daily Combivir to once daily Truvada in biologically suppressed HIV patients taking Sustiva.

We anticipate data from one more of these days could be released towards the end of this year and into next year.

Turning to Hepsera for chronic hepatitis B. Hepsera achieved first quarter 2005 revenues of $42.7 million.

In the United States, product sales were 18.3 million, and product sales were 24.4 million in the marketed territories outside the United States.

In the United States, approximately 11,000 patients are now receiving Hepsera therapy, or approximately 56% of patients being treated with antivirals for chronic hepatitis B. Similarly, in the European Union, approximately 13,000 patients are receiving Hepsera.

We continue to see much of the growth in Europe occur in France, Germany, Italy and Greece, where chronic hepatitis B prevalence is higher.

Last week, at the European Association for the study of the Liver meeting in Paris, data from eight studies were presented which demonstrated the utility of Hepsera, in a broad range of HBV-infected patients.

Data presented included the safety and efficacy of Hepsera through four years from Study 438, which evaluated Hepsera in patients with hepatitis e-antigen-negative disease.

In this study, 77% achieved undetectable levels of serum HBV DNA which is designed -- defined as less than 1000 copies per milliliter at a 192 weeks compared with 63% by 48 weeks.

Hepsera also provided sustained improvement in liver function up to 192 weeks, as measured by blood levels of the liver enzyme ALT. 91% of patients normalize ALT levels by 192 weeks compared to 73% by 48 weeks.

Next week, there will be three Hepsera -- sorry-- next month there'll be three Hepsera presentations of the Digestive Week meeting in Chicago, which will provide additional data on the long-term efficacy, safety, and tolerability usability of Hepsera.

We anticipate that the introduction of new competition in the United States from Bristol-Myers Squibb and also in the European Union from Roche will result in increased awareness of chronic hepatitis B due to education and swinging programs conducted by these new entrants to the HPV market.

Ultimately, we believe this will help drive increased diagnosis and treatment of HPV and with the profile of Hepsera and the long-term safety data available, will provide continued opportunities to increase the number of patients on Hepsera therapy.

Now, I'd like to provide a development update on tenofovir DF for hepatitis B. The US IND to evaluate tenofovir for chronic hepatitis B was submitted recently and we received a safe to proceed notification from the FDA.

We plan to begin Phase III trials of tenofovir for chronic HPV to compare tenofovir to Hepsera and hepatitis B e-antigen positive and negative patients around mid-year.

These studies will be conducted in North America, Eastern and Western Europe, Australia and New Zealand.

Finally, AmBisome achieved first quarter 2005 product revenues of $54.2 million, and continues to perform well in our key market segments, namely fever of unknown origin, and confirmed invasive fungal infections.

On a volume basis, unit sales of AmBisome in Europe where Gilead markets directly or through distributors, increased by 7% during the first quarter of 2005 compared with first quarter of 2004.

We continue to see strong performance in certain middle Mediterranean countries and conversely increased pressure from competition in other European markets.

The AmBiLoad study was conducted and -- was concluded and an analysis of the data is underway.

We anticipate that the results will be available for presentation at an appropriate scientific conference this fall or winter.

We're very pleased with the continued growth of all our franchise during -- all our franchises during this quarter.

This completes my discussion of our commercial products.

I will now talk -- turn the call back over to John Milligan.

Thank you, Kevin.

And thanks to everyone for joining us on the call today.

We are proud of the financial, commercial accomplishments Gilead recognized in the first quarter.

We look forward to continued strong product revenue performance in the remainder of 2005, driven by our growing HIV franchise, as well as Hepsera and AmBisome sales.

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

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

Operator?

Thank you very much, sir. [Operator Instructions] And our first question comes from the line of Mr. Eric Ende of Merrill Lynch.

Please proceed, sir.

Thanks for taking my question.

On Tamiflu, I believe, Roche reported fourth sales of 75 million.

If you are kind of back into the royalty rate, you are talking about north of 14%.

Is that correct?

Or am I doing the wrong math?

Well, Eric, the actual royalty rate -- this is John Milligan, by the way.

The actual royalty rate is lower than that.

It's somewhere north of 10%.

Remember in the fourth quarter there is also true-up payment.

So that's kind of takes into account.

How much was the true-up payment, then?

I don't have the specific breakout here.

I don't have the specifics between the two in front of me, Eric.

So it sounds like we should be thinking 10 or 11% for...

That's a more realistic.

Well, again, there is a lot of things to take into account.

I understand.

So let me just remind everybody -- that's a very good question.

So as Roche shows more account within the course of the year, the tiers will increase and so we'll start from what would have been in the 14% rate and then proceed upward, and we haven't disclosed those upward tiers, either the percentages or where they break.

But I think it's fair to say we will get into those tiers.

And then the second thing to say is that the cost of goods adjustment, and it's gonna depend quite heavily on the price that Roche sells into these pandemic groups, and what economy of scale they have going forward.

We don't have the answer to those questions just yet, and so that may again cause quite a bit of a cost of goods adjustment.

So we are going to be spending a lot of time working this quarter with Roche, try to get that information so that we can then have a better estimate on going-forward basis.

That's helpful.

Thank you.

And Eric, just quickly, we just got -- the true-up payment was $3.8 million for the quarter.

Thank you.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Mr. Mike King.

Please proceed -- of Banc of America Securities.

Thanks for taking the question.

Congratulations.

I may have missed it, but did we get a breakdown of US versus ex-US Truvada sales?

We did breakout Truvada sales for Europe, suffice it to say, that it was one month only.

It was very, very, small.

Okay.

And inventory for Truvada for the quarter?

Well, inventory was slightly below based upon the current implication, which is a not (inaudible).

Yes.

Mike, it's Kevin Young speaking.

The wholesalers are, obviously, still playing kind of cat show with the levels that they're stocking, because it's a growth product and that's very, ver,y typical of product that's sort of only eight months into launch.

Right.

I'm sorry, but John Milligan answer to my question was sort of fading in and out, could you just mind repeating what you said, John?

Yes.

We are getting there in fact, so we are slightly below where we would have this inventory based on a contractual so were below sort of what we would have estimated.

Okay.

Great.

Thank you.

Thank you very much, sir.

Ladies and gentlemen, your next question comes to the line of Ms. Meg Malloy of Goldman Sachs.

Please proceed.

Thanks very much.

I was wondering if you could provide any more detail in terms of the penetration of Truvada?

I mean what you said it was hopeful.

I think going into launch there were about 48,000 patients on Viread and/or Emtriva or different combinations.

So could you give any more color in terms of the Viread cannibalization versus market growth?

And I guess it looks like just north of 10,000 patients or so that may have switched from Combivir, do you have any more detail on number of Combivir switchers?

Hi Meg, this is Kevin speaking.

What we said in the call and the announcement was that we have -- we think about 48,000 patients in the US on Truvada.

As we expected, the uptake has been very consistent with what our market research told us, going into launch, which is, we have had a very nice uptake in terms of naive patients.

And then the majority of the rest of patients are coming from Viread plus Emtriva and Viread plus 3TC.

We're getting some penetration of the D4T segments to the market, and we're getting a small penetration right now from Combivir.

Your estimates of 10,000 patients switching from Combivir is a little on the high side.

We would see it now anywhere between 3 and 4,000 patients, and that's exactly what we thought it would be, because - in all honesty, the data is still emerging in the US.

My sales organization is obviously not promoting our 934 data right now, because we haven't got a peer-reviewed publication.

So it's very, very early days for the Combivir business switch.

Okay.

Thanks.

That's helpful.

And if I may, just have a follow-up on the royalty rates for Tamiflu, it's a little bit confusing in terms of both the escalation and the true up on cost of goods, and my understanding is that it can actually dip below the 10% level that was referenced.

Could you provide any more detail on that, John?

Yes.

That's correct.

Meg, I mean, we've had -- it can be up to 50% decrease over what the overall rate -- the lowest we have ever received at 7%.

So again, it depends upon the tiers, and it depends on the exact magnitude of the cost of goods adjustment.

So it's confusing and frustrating because there's many variables to calculate there.

So the most conservative would be, you know, start from, maybe, 7% type range.

Is that fair?

7% is as low as it can go, that would be the most conservative (inaudible).

And just so you know John, you are kind of breaking up a little bit.

Maybe you get a little closer...

We're working with that.

We're getting an extra factor (ph) to solve.

So we're trying to solve that problem.

Okay.

Thanks.

Thank you very much, ma'am.

Ladies and gentlemen, your next question comes from the line of Sapna Srivastava of Morgan Stanley.

Please proceed.

Thank you for taking my question.

Congratulations on a good quarter.

Could you just give us a little bit of update on when you can get the 48-week data on the label and the timeline for it, both for US and Europe?

And secondly, if you are having any trouble with the co-formulation with Sustiva that you are going for a back-up formulation, if you could put some more color on that?

Yes.

This is Norbert Bischofberger.

With regard to when the data will come into label, the last patient who cross the 48-week time point in this study in December, we're currently cleaning up the data, analyzing it, writing up the study we report and that report will be submitted to FDA as soon as it's available in the next three months or so.

And then we expect for that review to get a standard 10-month producer (ph) date.

So, we could expect the data to actually be in the label 10 -- sometime in the first quarter of next year.

With regard to Europe, I want to remind you that we do have the 24-week data in the label...

Right.

....in the European prescribing information, and the submission to the European level of the 48 weeks data was going parallel to submission with the FDA.

In Europe, that process is somewhat faster, and I would expect that the data would be in the label sometime, maybe, later this year.

So is it reasonable to expect that you could probably get a publication which you can promote before you get the data on the label?

We will, of course, in parallel with submission of this study report also submit a publication to a journal.

But, of course, it's very hard to predict what the timing of that publication will be.

Right,

Because the journal may or may not accept the publication.

And so, the other question you asked is about the back-up formulation on the triple combination project.

You know, if you look at the three components, Viread, Emtriva, and efavirenz, the most difficult component of these three is the efavirenz component because it's a highly lipophilic and low water soluble compound.

And the absorption and bioavailability of that component depends very much on the formulation and the particle size, etcetera.

And so, we thought if there is a real risk that the first lead formulation may not turn out to be by bioavailable, bioequivalent, and so, we just worked in parallel on the back-up formulation that optimizes more to particle size and to formulation of the efavirenz component.

As we said, as John Milligan said, if we have to resort to the backup formulations, the program would be delayed by three to four months.

So, instead of having the stability date in mid 2004 -- of mid 2005, you probably have it somewhere towards the latter half of second half in 05?

Yes.

That's right, the second half of -- to later part of '05.

Okay.

Thank you so much.

Thank you very much, ma'am.

And just as a quick reminder, ladies and gentlemen, [Operator Instructions] -- let me go a little quicker.

Our next participant in our Q&A is Thomas Wei from Piper Jaffray.

Please proceed sir.

Thank you very much.

I had a question on the SG&A.

You had mentioned that there was increased headcount, can you just remind us were these additions were in and how the sales force size has changed in the US and Europe?

And then maybe on the integrase inhibitor, wherever you can share with us there on structural similarity to the Merck or Shionogi series and whether or not there has been any signal seen on liver renal talks.

Thanks.

Yes.

Thomas, this is Kevin.

I'll just very quickly talk about the sales and marketing area.

You know, we have generally increased both the sales and marketing organizations in your US and Europe.

We do not give out specifics on sizing.

But rest assured, that I believe we now have a size and shape of sales organization in both the US and Europe.

It's highly competitive in both HIV, hepatitis B, and in the case of Europe, in the hematological setting for AmBisome.

But we have, I think, carefully and gradually, increased the size of our sales organization.

And I think we're now at the type of number that gives the firepower to really get deep penetration of our target customers.

John?

For the rest of SG&A, I guess, it's fair to say that we have is, you know, we are into sales and marketing areas re-division last year, so there is a number new folks in headquarters and a variety of areas including strategic marketing and planning, as well as general marketing.

And then the -- clearly additional headcount is the complexity of the business has growth.

I don't have once specific component that I can point to other then just general growth of the organization since last year at this time.

Well, Thomas, a comment about the integrase, which we analyze, since to, needless to say, we're very excited about this opportunity.

We have not disclosed the structure of it, but what I can tell you is that it's distinct from other integrase inhibitors.

It's very potent, and this came to us not only with Phase I PK data in humans, but it also came to us with an extensive pre-clinical toxicology package, which included completed chronic toxicology studies in two species, and we're not seeing anything what Merck saw in terms of liver toxicity and there is also no evidence of any nephrotoxicity either.

Thank you very much, sir.

And ladies and gentlemen, your next question comes from a line of Kris Jenner of T Rowe Price.

Please proceed.

Hi.

Two questions for Kevin.

Kevin, could you just remind us what kind of price you've obtained in Europe relative to the US?

And then I have a second question for Truvada.

Hi, Kris.

Basically, our expectations and of course, typically in European markets it's a negotiation process as you all know.

You know, we expect to have one plus one, pricing, which is the pricing that we have in the United States, and we certainly are positive about that.

We think socially the right thing to do and we think it's highly acceptable to governments and to physicians in terms of uptake of the product.

So is that, that's been the experience thus far in Germany, in the UK, is that the prices on par with the US?

That's correct, Kris.

Okay.

And second question is Truvada and the non-audited channels, how are you seeing the product going through non audited channels thus far?

I realize, it's still early in this life but any deviations from what you saw historically with Viread?

Actually, we've been really pleased with how they -- the sort of like the non retail uptick has been.

We have really put a lot of work and expanded our efforts in both corrections and what we call community.

And we have seen excellent formula approval in correction facilities, for example, across the US.

So, we haven't seen sort of barriers classically, some of these institutions put up quite a lot of resistance to combination products because across they're highly controlled and they can use the individual products.

We've seen actually very, very good form uptake.

In fact, we saw in one particular area, one particular place, we were the first combination ever taken on that formula.

So it seems that we're doing quite nicely there.

So, Kevin, just quantitatively, any approximate split between audited and non-audited channels thus far in Truvada?

No, it's difficult for us to even judge that Kris.

But I think, you can generally say that certainly that the non-retail is fairly similar to the retail in terms of uptake.

Okay.

Thank you.

Thank you, Kris.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Ian Somaiya of Thomas Weisel Partners.

Please proceed.

Thank you and congratulations on a great quarter.

I had two questions, the first on Viread.

You reported approximately an 18% decline in volume -- US volume, and I was just wondering just based on your market research, are we close to seeing a sort of stabilization of transition of patients from Viread to Truvada?

And what would the base level be and then I just have one follow-up question to that.

Hi, it's Kevin, Ian.

I would say approximately and very approximately, the absolute base of Viread is probably somewhere about the 50% starting point.

I say that because sort of there are 50% of Viread patients on third line therapy, or even deeper in terms of their HIV care.

Now, the erosion has been steady so far -- again, it very much matches the type of penetration that we've seen in the Viread plus Emtriva and Viread plus 3TC patient pools.

So, we expect that to continue, but we do expect that Viread has a very healthy life of its own because of its applicability to care of the more severely all patients.

Okay.

And just the one follow-up question for Norbert on the integrase inhibitor, which segment of the HIV, I guess the class, which you expect the integrase inhibitor to replace?

And just separately, has there been any feasibility worked-on on a potential co-formulation with your existing drugs?

Well, maybe, I'll start with the second question first.

We have not done any work on co-formulation, the reason is, in our Phase I and II study we first have to find out what the likely schedule of dosing is, it maybe a BID, it maybe a QD drug.

Of course, if it's a QD drug, we would immediately start co-formulation work with Viread and Emtriva.

With regards to what is going to replace, I do really think that entirely depends on long-term tolerability and safety.

If this turns out to be a compound that is very safe that where resistance development comes up very slowly, this could potentially have the -- be the frontline agent in combination with two nucleosides for treatment of HIV infection.

And then, of course, it would absolutely also have a place in salvage therapy, because you would expect that all patients that have resistance to current classes of agents would be susceptible to the integrase inhibitor.

Okay.

Thank you very much.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Ms. Sharon Seiler of Punk, Ziegel & Company.

Please proceed.

Good afternoon.

I have another co-formulation question and that pertains to, do you have any discussions with Abbott about the possibility of co-formulating Viread and Emtriva with Kaletra?

And the second question I had was with respect to the hepatitis B trials of tenofovir, can you give us some more detail on the size and the length of those trials, and I'm assuming that these would be superiority trials, but please let us know?

Okay.

Regarding the first question, we have had very limited discussions with Abbott and the reason is simply that Kaletra QD is not approved, it's a BID drug, and as such, we think it doesn't make any sense to co-formulate it with our Emtriva and Truvada.

Secondly, if the Phase III studies -- the two Phase III studies in hepatitis B with Viread, we have not disclosed the details yet, but they are along the same lines as we had for adefovir, so there is side-by-side comparison of one-to-one randomization to either adefovir or Viread, in one study in "E" antigen-positive, the other one in "E" antigen-negative patients.

The endpoints are the usual 48 weeks histology combined with HBV/DNA responses.

Thank you.

Thank you very much, ma'am.

Ladies and gentlemen, your next question comes from the line of Eun Yang of Wells Fargo.

Please proceed.

Thanks.

Just a follow-up question on tenofovir, and I'm just wondering how you would position tenofovir for hepatitis B in relation to Hepsera and other competitive drugs, if it's getting to some markets?

Hi, this is Kevin.

I'll also let Norb to answer, but I honestly think it's too early.

We have to see the data.

You know, we just really have to see how well Viread performs clinically.

Clearly, we have a very, very good drug in Hepsera.

As you have heard, we have now got four-year data.

And we just have to see what that 48 week endpoint looks like, and then I think the clinically data will lead the decision.

Yes, basically, the hypothesis we are testing here is, can we improve on the efficacy and safety of Hepsera, and that answer will come from the Phase III study.

Okay.

And then in light of the entacavir coming onto the market, is there any change in your marketing strategy for Hepsera?

No.

I think we've got a very good product in Hepsera.

We obviously have prepared very thoroughly for the launch of this new product.

If you look at the three key parameters in terms of safety, of your treatment in terms of efficacy and in terms of resistance, I think in terms of hitting all of those in a complete package, you have an ideal product in terms of Hepsera.

So, we have always used that platform and we will continue to use that platform.

And we think that it resonates very well with the physicians.

We've also seen a quite large price point taken there and I think it remains to be seen how that is accepted by particularly managed care as the product comes to market.

So we feel that we're ready for this competition and my team has got their heads down and are all very well trained for this entrance.

Okay.

Just one last question.

Could you give us a word down between royalty and contract revenue of 1Q?

Hang on one second.

Yes?

Well, it's a very long list.

We can do at offline if you like.

No, no it's pretty complicated here.

I'm looking at the different contracts and other.

Okay.

And just I would like to ask one more question.

Kevin mentioned that there are over 9000 patients accounted on Combivir, does that refer to the number of patients only in the US and if it is then, do we know how many patients outside the US are accounted on Combivir?

Thanks.

I don't have that number of the top of my head, but yes, the 90,000 is US patients treated with Combivir.

Okay.

Thanks very much.

Thank you very much ma'am.

Ladies and gentlemen your next question comes from the line of Mr. Joel Sendek of Lazard.

Please proceed.

Thanks a lot.

I have a question on SG&A.

It's a follow-up from earlier question.

If you look at the SG&A expense at a percentage of sales over the last four/five quarters, it decreased every quarter despite the fact that you're in the middle of the product launches from about 30% to 20%.

And, I'm wondering, can you hit lower than this?

Are we a meter at this quarter?

What are the issues as we look at your guidance, which really didn't change that much as far as SG&A as a percentage of product sales?

Thanks.

So in discovering need I guess, I mean as a percentage, I mean this a -- because we don't spend a lot of money on advertising and other outside, in fact most of our success is really headcount related.

And so we do expect our headcount to grow as you would naturally expect in a company like ours.

But as though sales increased dramatically, it seems likely that we won't be able to grow headcount as fast as we grow revenues.

And just to add to that, Joel we're working in very, very focused markets here and that's the efficiency of HIV and hepatitis B. So yes, we're going to spend appropriately, but there are boundaries and limitations when you're operating in these markets and as John says, we don't have the big shotgun approach of spend that you would get in a larger market.

We have rent to direct patients to HIV coming into this year and we just are going to make sure that we use our expenses in a very focused fashion.

If I calculate your guidance using the midpoint of the range that come to about 22% of the sales.

Given the fact you're at 20% this quarter, almost it seems a bit conservative.

Any comment on that?

I don't really want to comment on whether we're conservative or not conservative about something, lets think that that's the just the numbers that the why they are.

Okay.

That's fair.

Thank you.

Can I follow-up on Eun Yang question, on quick consumer break down?

Royalty was about $70 million (ph) in the contract upon -- that royalty contract with $13.1 million.

Thank you very much.

Sorry about the interruption sir.

That's going to conclude our Q&A session for today.

I would like to turn the call back over to our speakers for any closing remarks they may have.

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

We certainly appreciate your continued interest in Gilead and we look for to provide you with the updates on our future progress.

Thank you very much, ladies and gentlemen for your participation in today's conference call.

This concludes the presentation and you may now disconnect.

Have a good day.