吉利德科學 (GILD) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Gilead Sciences second-quarter 2005 earnings conference call.

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

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

As a reminder, this conference call is being recorded Tuesday, July 19, 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 second-quarter 2005 conference call.

We issued a press release this afternoon providing results for the second quarter ended June 30, 2005, and described in 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 second-quarter financial results and will provide 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 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 a standard Safe Harbor statement.

I would like to remind you that we will be making forward-looking statements relating to financial results, projections, and clinical and regulatory developments.

These statements are subject to the occurrence of many events outside of Gilead's control and subject to various risks that could cause our actual results to differ materially from those expressed in any forward-looking statements.

I refer to you 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 will be providing with you 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 products based on our FDA-approved prescribing information.

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

We continue to execute on our plan and strategy resulting in impressive growth in our top-line revenue, earnings and cash flow, as well as controlled increases in investments in our research and development program and sales and marketing infrastructure.

We continued the launch the Truvada in Europe and further increased our patient share for HIV and hepatitis B franchises.

Spurred by the continued strong growth of our HIV franchise, we achieved a significant milestone with record product sales in excess of $448 million, a 50% increase compared to second quarter of 2004.

Our second quarter of 2005 net income was $196 million, up 76% compared to the second quarter of 2004.

Diluted earnings per share grew by 70% and income from operations increased by 75%.

In addition, we generated over $291 million in operating cash during the quarter.

This strong operating performance is a validation of the strategies we have implemented and significant efforts by the more than 1,700 Gilead employees around the world.

Now turning to specific results for the second quarter.

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

Total revenues were up 55% compared to same quarter last year, driven primarily by higher sales from our HIV products and higher royalty revenue.

Income before taxes grew substantially from $190 -- I'm sorry -- $161.5 million to $288.2 million, approximately a 78% increase, driven by the strong revenue growth coupled with continued controlled spending increases in our operations.

As a result of the strong operating performance, operating cash flow for the quarter was $291.6 million, more than double the operating cash flow for the second quarter of 2004.

The Company reported net income of $196 million, or $0.41 per share on a fully diluted bases for the three months ended June 30, 2005.

This is an increase of 76% compared to net income in the second quarter of 2004 of $111.5 million, or $0.24 per diluted share.

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

Now turning to revenue.

Net product sales for the second quarter of 2005 were $448.5 million, a 50% increase over the same period last year.

This growth was primarily driven by higher HIV product revenue.

HIV product sales grew to $344.4 million for the second quarter of 2005, up 61% compared to $213.6 million in the second quarter of 2004.

This growth continues to be driven by higher overall prescription volumes in both the United States and Europe and increasing sales of Truvada and United States and the European Union.

Truvada sales were $123.1 million for second quarter of 2005, up 35% sequentially.

In the United States, Truvada sales were up 26% sequentially, primarily due to the use of Truvada in patients new to therapy, and secondarily from switches of patients on other regimes including Viread and Emtriva, for which U.S. sales decreased sequentially by 8% and 10%, respectively.

We are particularly pleased with the progress of Truvada in the United States according to the most recent NDC data, Truvada now has 16.4% for the new prescriptions in its class.

For our entire HIV franchise, U.S. market share growth of our HIV compounds remain strong.

According to the latest NDC weekly data, total molecule market share for Tenofovir and emtricitabines in the second quarter of 2005 increased by nearly 7% and 21%, respectively, compared to the first quarter of 2005.

Outside the United States, HIV product sales grew to $139.3 million from $90.4 million during the same period last year.

This is an increase of 54% driven by increases in sales volumes for Viread and Emtriva, as well as the launch of Truvada in certain European countries in the first and second quarters of 2005.

Truvada is now available in Germany, Ireland, Portugal, the United Kingdom, and as of today, Spain.

For the second quarter of 2005, HIV product, along with the European Union grew by 52%compared to the second quarter of 2004.

Hepsera for the treatment of chronic hepatitis B had sales of $45.8 million in the second quarter of 2005, an impressive increase of 64% compared to the $28 million recorded in the second quarter of 2004.

The second quarter of 2005, Hepsera sales in the United States and rest of world were $19.1 million and $26.7 million, respectively.

Hepsera sales volume in the European Union nearly doubled compared to the same quarter last year.

And finally, sales of AmBisome were $56.2 million for the quarter, an increase of 2% during the same period of 2004, primarily driven by a stronger European currency.

Actual sales volumes of AmBisome in Europe increased by 8% when compared to the same period last year.

This increase in volume was offset by lower pricing in most regions.

For the second quarter of 2005, Gilead recognized royalty and contract revenues of $46.8 million compared to $20.4 million for the same quarter in 2004.

This increase was primarily driven by higher royalties of $36 million received from Tamiflu sales by Roche compared to $9.7 million in the second quarter of 2004.

As a reminder, we recognize royalties from Tamiflu sales on a one-quarter lag; thus the strong royalty revenue in the second quarter of 2005 reflect the robust Tamiflu sales by Roche in first quart of 2005, driven by the significant flu season in Japan as well as delivery of government purchases from some of the early orders from pandemic readiness supplies.

Roche is schedule to release their earnings tomorrow, and will be monitoring their guidance on Tamiflu sales and evaluating any potential impact on Gilead financials.

Under our contract with Roche, Gilead has paid current year royalties using the previous year's final annual effective royalty rate for the first three quarters of each year.

The annual effective rate determined by Roche for 2004 was 10.3%, and Roche is using this figure to calculate their royalty payment for Gilead through the second through fourth quarters of 2005.

This 10.3% rate will be trued up to actual 2005 calculations, including any costs of good sold adjustment in the first quarter of 2006.

At this point and based on the information received from Roche, we believe that based on Roche's historic approach to calculating royalties, the actual 2005 annual effective rate determined by Roche will be relatively close to 10.3%, thus we are not deferring the recognition of any portion of of the royalty payments we are currently receiving from Roche.

We will continue our analysis to make any future adjustments as appropriate.

As you know, on June 23 of this year, we delivered to Roche a notice of termination of the parties' 1996 development and license agreement for Tamiflu for material breach of contract.

Upon termination of the 1996 agreement, Gilead would reacquire full rights to Tamiflu.

This notice initiated a cure period during which Roche may attempt to remedy the material breaches of the agreement alleged by Gilead.

In addition, under the terms of agreement, any dispute, controversy, or claim will be subject to an arbitration procedure.

The provision also provides that all aspects of any such arbitration are to be strictly confidential, including the existence of any disputes submitted to arbitration.

Consequently, we will not be providing status updates concerning the issue between Gilead and Roche until these issues are resolved.

In the interim, it's business as usual for both Gilead and Roche.

I would like to reiterate that regardless of what transpires as a result of Gilead's notice to Roche, Gilead and Roche are both committed to ensuring that the process of resolving these issues remains between our company and will not adversely affect product manufacturing and supply.

Until such time that Gilead's notice of termination should become effective, Roche remains responsible for the manufacture and supply of Tamiflu.

Moreover, the agreement expressly provides that after any termination, Roche must continue to supply Tamiflu for up to two years and must transfer necessary manufacturing technology to Gilead.

Product gross margins for the second quarter of 2005 were 86%, consistent with the same quarter of 2004.

As you may know, late yesterday, Gilead and Royalty Pharma announced the purchase of the emtricitabine royalty interest owned by Emory University for $525 million.

Gilead and Royalty Pharma will make a one-time payment to Emory in exchange for the elimination of the emtricitabine royalties due to Emory on on a worldwide -- on worldwide net sales of the product.

Gilead and Royalty Pharma are responsible for 65 and 35%, respectively, of the $525 million cash payment to Emory.

This amounts to $341.25 million owed by Gilead, which will reduce cash, cash equivalents and marketable securities on our balance sheet in the third quarter and will be an offset by an increase to other non-current assets.

Following this transaction, Gilead will be obligated to pay Royalty Pharma royalty revenue based on all future emtricitabine net sales relative to Royalty Pharma's contribution to the buyout.

Gilead will continue to have obligations to pay certain royalties to GlaxoSmithKline fulfilling Emory's obligations under a previous agreement.

In addition in connection with other amendments of the licensing agreement between Gilead and Emory relating to the development obligations on emtricitabine for hepatitis B, Gilead will also make a one-time payment of $15 million to Emory in July of this year.

We expect to record the $15 million payment as research and development expenses in the third quarter 2005 and as a payment in lieu of fulfillment of diligence obligations for HPD.

We do not believe the Royalty buyout transaction with Emory will have a material impact on gross margins for this year.

Based on our modeling of overall emtricitabine sales, we expect this transaction to be slightly accretive in 2006 and increasingly accretive over time.

When the transaction is effective, we will amortize the purchase price on the cost of goods sold on a quarterly basis, which is where the royalty expense is currently being recorded.

Now, turning to expenses.

Research and development expenses were $59.7 million for the second quarter of 2005, an increase of 31% from $45.6 million in the same period last year.

Compared to last year, the higher spending was primarily driven by the cost of license fees incurred under our hepatitis C collaborations, as well as increased head count.

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

SG&A expenses in the second quarter of 2005 were $95.5 million, up 29% from the same quarter of 2004.

The increased spending in SG&A is principally due to increased headcount and expansion of our sales force and sales and marketing activity.

Additionally, in orderer to manage our expanding European operations, we are planning to consolidate our European functional headquarters currently divided between the United Kingdom and Paris by relocating our Paris-based groups into the London area.

We expect the relocation costs to be in the range of $10 to $13 million.

These costs include relocating employees who are transferring from Paris, potential severance costs for employees who decline relocation, as well as recruiting costs associated with hiring replacement employees in the London area.

We expect these costs to be expensed during the second half of the year.

Foreign exchange was favorable during an overall basis during the quarter due primarily to a stronger European currency relative to the U.S. dollar when compared to the same period last year.

The total net impact of foreign exchange on our pre-taxed earnings for the second quarter and first six months of 2005 was $6.4 million and $9.4 million, respectively, when compared to the same periods in 2004.

This includes the foreign exchange impact on revenues ex U.S. spending, and the results of our hedging program.

Finally, 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 $291.6 million this quarter more than doubled the operating cash flow of $122.5 million for the same period last year.

This impressive performance is primarily driven by significant growth in operating income, tax deduction benefits related to our employee stock option program, as well as strong collections of receivables in certain European countries.

Based upon the strong operating cash flow performance, the balance sheet at June 30, 2005, showed cash, cash equivalents and marketable securities of $1.79 billion.

This an increase of 22% when compared to the balance of $1.47 billion at March 31, 2005.

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

For our entire HIV franchise, which includes Viread, Emtriva, Truvada, we're raising our guidance for net product sales for the franchise $1.225 to $1.275 billion to $1.275 billion to $1.325 billion for 2005.

This guidance is a result of continued strong sales of Viread in all markets and rapid uptake in Truvada in the United States and the European Union, as well as taking into account are the historical seasonal sales pattern during the third quarter and the impact of the strengthening of U.S. dollar on ex-U.S. sales.

Turning to AmBisome.

Based on the strong second-quarter results, we are also slightly raising our previous revenue guidance of $200 to $210 million to $205 to $215 million for 2005.

For Hepsera, we reiterate our estimated net product sales of Hepsera for the full year 2005 will be in the range of $160 million to $180 million.

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

We reiterate our previous gross margin guidance for 2005 to a range of 85% to 86%, and as I stated earlier, the emtricitabine royalty buyout transaction is not expected to have a material impact on our current year gross margin.

Also, as a result of yesterday's announcement, we are slightly raising our R&D expense guidance for 2005 to $265 to $285 million.

This range reflects the $15 million payment made to Emory during the third quarter but does not reflect any other future licensing fees or expenses associated with potential corporate development activities.

With regard to SG&A expenses, reflective of the cost of relocating our European headquarters from Paris to London and the hiring of additional therapeutic specialists in certain geographic territories, we are raising our SG&A guidance for 2005 to $365 to $385 million.

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

And finally, our tax rate guidance for the year 2005, we reiterate our previous 31% to 32% guidance for effective tax rate.

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

We will continue to promote our product lines, particularly our HIV franchise, AmBisome and Hepsera, and continue to evaluate opportunities in license or acquire companies or potential products to complement our own internal efforts.

This concludes the earnings reporting section of the conference call.

At this time, I would like to turn the call over to John Martin and Kevin Young for the corporate commercial highlights for the second quarter of 2005 and provide an update on the milestones we are striving to achieve for the remainder of the year.

Thank you, John, good afternoon, everyone, and thank you for joining us today.

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

I'll begin by discussing our recent business highlights and our pipeline programs, then Kevin Young will review our commercial efforts, and John Milligan will wrap up the call.

We are very proud of our progress in both the HIV and hepatitis franchises in the first half of 2005.

The Truvada launch in the United States has gone very smoothly, and since August of last year more patients naive to anti-retroviral therapy started treatment with a Truvada-based regimen than any other in RTI backbone.

In Europe, Truvada is off to a strong start having just been approved in late February of this year.

Our European Commercial team has launched Truvada in the markets of Germany, the United Kingdom, Portugal, Ireland, and as of today Spain, which is one of the most significant European markets.

We anticipate additional launches in Europe, including the important markets of Italy and France later this year and in to 2006.

Truvada's profile has been bolstered by clinical data presentations to the global scientific and medical community.

In April, Gilead presented 48-week data from Study 934 at the International Conference On Antiviral Research in Barcelona, Spain.

As you may recall, this study compares a regimen of the components of Truvada, Viread, and Emtriva to Combivir both with a [systeva] backbone treatment-naive HIV infected patients.

Next week, these data will be presented orally at the International AIDS Society meeting in Rio de Janeiro, Brazil.

The presentation will include efficacy, safety, and tolerability data statistically favoring the Viread/Emtriva arm over the Combivir and will also highlight the 48-week lymph fat data in both arms of the study, which show that patients who receive Combivir had less lymph fat than those who received Viread and Emtriva.

Further, in May we filed an SNDA with the U.S.

FDA to include the 48-week data from Study 934 in our Viread and Truvada product labels.

We anticipate a standard ten month review period and have begun -- and have been given a PDUFA date of March 9, 2006.

Our HIV sales force will be able to speak directly to physicians about the 48-week data once included in the package inserts, which we believe will further help the treating community understand the benefits of Viread and Truvada-based regimens.

Turning to our hepatitis franchise, in the June 30th edition of the New England Journal of Medicine, three-year data supporting the efficacy and tolerability of Hepsera in patients with "e" antigen-negative chronic hepatitis B were published.

These data further support this important product and provide with us a peer-reviewed article to share with physicians; an important tool in this increasingly competitive area.

We will continue to generate and present results from important clinical studies evaluating our products throughout the year, as Gilead believes this is the most effective way to impact physicians and the data driven, capped therapeutic categories in which we market products.

Turning to our research and development programs, Gilead made significant strides during the second quarter to augment its near and longer-term product pipeline.

In April we announced that our fixed-dose combination of Truvada and Bristol-Myers Squibb's Sustiva did not meet the FDA definition of bioequivalence and that we were continuing with the evaluation of a second formulation.

Bioequivalence and stability studies of the second formulation are currently ongoing.

Bioequivalence studies in humans are required to demonstrate that a co-formulator product results in the same levels of medication in the blood as achieved when the individual products are dosed separately.

Should the outcome the bioequivalence study be positive, we plan to file these data in a new drug application along with the necessary stability data with the U.S.

FDA by the end of 2005.

Other candidates in our HIV pipeline are proceeding in clinical development as well.

Recently we began rolling patients in a Phase I/II clinical trial evaluating GS9137, a novel oral HIV integration inhibitor.

As you recall, we enlicensed this compound from Japan Tobacco in the first quarter of this year.

Phase I/II trial is a double-blind, randomized, placebo-controlled dose-escalation study that will evaluate the tolerability, safety and antiviral activity of GS9137 in HIV-positive patients.

In addition to our efforts with GS9137, we continue to make steady progress in our internal HIV programs focused on multiple targets, including [integrace] and are looking to complement our current HIV franchise with compounds that have the potential to become a third agent that could be used in combination or co-formulated with Truvada.

In the area of hepatitis B, today we announced that we have begun enrolling patients in a Phase III clinical program evaluating Tenofovir DF for the treatment of chronic hepatitis B. We are conducting Phase III clinical trials that will evaluate Tenofovir DF among patients with either hepatitis B, "e" antigen product -- "e" antigen-positive chronic hepatitis B, or "e" antigen-negative chronic hepatitis B. The Phase III program will encompass two studies, Studies 102 and 103, which are randomized, double-blind trials that will compare the efficacy, safety, and tolerability of Tenofovir DF versus Hepsera over a 48-week period at more than 100 centers in 14 countries.

Following our research and development efforts in the area of hepatitis C are also moving rapidly toward the clinic.

One of our lead compounds developed with our partner Achillion is a small molecule inhibitor of HCV replication which works through a novel mechanism of action involving HCV protease.

We anticipate that a Phase I, single dose dose-escalation study to evaluate the pharmacokinetics, the tolerability and safety of the compound in healthy volunteers will begin in the second half of this year.

As you may recall in November of last year, Gilead entered into a collaboration with Achillion which provided us with an additional HCV research program that is highly complementary to our own internal research.

This exclusive agreement with Achillion grants Gilead the world-wide rights for the research, development, and commercialization of Achillion small molecule inhibitors of HCV replication.

We look forward to providing you with further updates on this program and our other HCV research programs later this year.

I would also like to highlight the developments we have made to expedite access to our HIV medications in resource-limited parts of world.

In April, we signed a letter of intent to enter into a non-exclusive licensing and distribution agreement with Aspen Pharmacare of South Africa for Viread and Truvada.

We will provide active pharmaceutical ingredient for our products to Aspen, and Aspen will manufacture the finished product according to U.S. standards for GNP for all of the 95 countries included in Gilead's access program, and we will distribute Truvada and Viread in every country in Africa.

This collaboration is important step in helping provide safe and effective HIV therapy that reaches as many people as possible, which continues to be an important goal for Gilead.

In closing, as part -- as a global organization with more than 1,700 employee around the world, we are constantly evaluating the best ways to operate our business effectively and efficiently.

As John mentioned earlier in the call, after a careful analysis of our needs and opportunities in the European Union and surrounding regions, we plan to relocate our European headquarters to the United Kingdom.

This will enable Gilead to optimize our current European structure with better collaboration between the teams running our European business.

All of our affiliate offices in Europe, including our Paris office, will remain at their current locations.

We look forward to sharing with you our continued product development and commercial successes around the world.

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 highlighting the developments in our HIV franchise, which achieved record second-quarter revenues of more than $344 million.

In the U.S. market, we continue to see steady growth of our overall HIV franchise comprised of Truvada, Viread, and Emtriva.

As of week ended July 8, 2005, Truvada has captured 16.4% of new prescriptions and 15.5% of the total prescriptions in the NRTI class.

Based on independent market research, we believe that approximately 85,000 patients are being treated with Truvada in the United States as part of their HIV treatment regimen.

As we mentioned last quarter, we believe there are far more patients new to HIV therapy than previously estimated.

Based on the latest data, in the United States there are now annually approximately 40,000 naive patients starting antiretroviral therapy, and the number of total patients receiving antiretroviral therapy has increased to 430,000.

Increases in patient numbers we are now seeing are not entirely surprising and are, we believe, the result of two primary factors: first, the introduction of safer, more tolerable, and easy-to-take care therapies like Truvada; and second, improvements in survey methodologies and patient pool projections.

Truvada currently captures over 50% of new patient starts, and this represents 25% of Truvada-treated patients.

We believe that approximately 50% of the patients on Viread and Emtriva-based regimens and about 25% of patients taking Viread and Epiver, have switched to Truvada, respectively, since its launch.

Switching stable patients is a challenge in any therapeutic category and HIV is no different.

Practice switches from Combivir to Truvada have grown slowly over the quarter, and we believe that about 7% of Combivir patients have been converted to Truvada.

This is not a surprising result, since our U.S. sales force currently cannot promote the 48-week 934 study data.

We continue to believe that patient switches are a significant opportunity for Truvada, and our promotional efforts will be governed by enhancements in the product label, specifically, the inclusion of the data from Study 934, which is expected to occur in March of next year.

As John mentioned, one year, 934 study results will be presented on July 27th in Brazil.

At the same conference, additional posted data from the RAVE study, a randomized, open-label, 48-week comparative trial of abacavir or Viread as replacement for a thymidine analog, specifically, AZT or d4T as part of a highly active antiretroviral therapy in HIV infected patients with lipoatrophy and controlled HIV RNA will be presented.

Also, Gilead's COMET study, which is a multi-centered, single-arm study evaluating switching from twice-daily Combivir to once-daily Truvada in in virologically suppressed HIV patients taking Sustiva is fully enrolled in 400 at patients.

We are very pleased to announce that the preliminary data from the study has been accepted for presentation this September at the Interscience Conference On Anti-microbial Agents and Chemotherapy which will be held in New Orleans.

Finally, in the non-retail setting, Truvada continues to perform well.

In May, we recorded an all-time high for Truvada monthly sales in correction facilities.

Also this month, Truvada and Emtriva were added to the formulary of the largest correctional system in the country, the Texas Department of Criminal Justice, making both products available for the first time in approximately 2,500 HIV-posted patients within the system.

With the EU approval of Truvada in February, the second quarter included a full quarter of Truvada sales in Germany and the United Kingdom, and a partial quarter of sales in Portugal and Ireland.

As John mentioned, we just launched Truvada this week in Spain, a significant event, because this represents the second-largest HIV market in the European Union.

In the countries where we have launched Truvada, we have received tremendous feedback and believe that already approximately 3,500 patients are being treated with Truvada.

The presentation of the 48-week 934 data, as well the inclusion of the 24-week data from this study and the label, have had an important impact on the launch of Truvada in Europe and will continue to help us market Truvada as the NRTI backbone of choice.

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

In the U.S. market, as of July the 8th, Viread captured 17.5% and 18.4% of new and total prescriptions in the NRTI class, respectively.

We believe that approximately 100,000 patients in the United States are taking Viread as part of their HIV treatment regimen.

The tenofovir molecule which is part of both Viread and Truvada is being used in approximately 44% of antiretroviral-treated HIV patients in the United States.

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 6% during the second quarter of 2005, compared to the first quarter of 2005.

We believe that approximately 90,000 patients treated for HIV in the European Union are taking Viread as part of their treatment regimen.

Turning to Hepsera for chronic hepatitis B. Hepsera achieved second-quarter 2005 revenues of $45.8 million.

In the United States, product sales were $19.1 million and product sales were $26.7 million in the marketed territories outside the United States.

In the United States to-date, the launch of Bristol-Myers Squibbs' Entecovir had some effect on Hepsera market share.

This is not unexpected.

Encouragingly, Hepsera prescription volume remains at pre-Entecovir launch levels.

Hepsera continues to be supported by its long-term efficacy, proven safety, and superior resistance profile.

With the support of an expanded marketing, sales, and medical affairs organization, we believe Hepsera is in a position to continue to be the number one antiviral prescribed for HIV -- HBV in the United States.

In the European Union, much of the growth in Hepsera is occurring in France and Germany.

During the second quarter of 2005, unit volume of Hepsera increased by 95% in the European Union compared with same period in 2004.

Overall, we continue to believe that introduction of alternative HBV therapies from Bristol Myers Squibb and Roche will result in increased awareness of chronic hepatitis B. Ultimately, we believe this will help drive increased diagnosis and initiation of HBV treatment and provide continued opportunities to increase the number of patients on Hepsera therapy.

Finally, Hepsera received regulatory approval in China on March 23, 2005.

Gilead's commercial partner in Asia, GlaxoSmithKline, has conducted a number of launch meetings for the product in the major cities of [inaudible], Shanghai, and Beijing through June.

GSK plans to have Hepsera commercially available in China in the third quarter of this year.

We don't yet know GSK's pricing strategy for Hepsera in China, but it is important to point out that it will be significantly less than in other commercial markets.

To conclude my discussion of our commercial products, AmBisome achieved record second-quarter 2005 product revenues of $56.2 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 8% during the second quarter of 2005 compared to the same period last year.

During the quarter, we saw increased volume across many European markets reinforcing that even in the face of heavy competition, AmBisome is the gold standard for serious fungal infections.

We are very pleased with the continued growth of all of our franchises during the quarter.

This completes my discussion of our commercial products.

I will now 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, and product development accomplishments Gilead achieved in the second quarter.

We look forward to continuing strong product revenue performance during the remainder of 2005, driven by our growing [inaudible] franchise as well as Hepsera and AmBisome sales.

We remain focused on adopting [inaudible] in our pipeline, and our marketing and sales programs are continuing to deliver earnings for our shareholders.

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

Operator?

[OPERATOR INSTRUCTIONS] .

And your first question comes from the line of [Jeff Porgis from Bernstein].

Hi, thanks for taking the question.

Perhaps you could give us some more detail on the Royalty buyout terms, and in particular, is it just a straight 65% that is now no longer due or does that phase in over time?

And perhaps you could also give us the -- kind of period over which that is going to be amortized?

Yeah, that's a good question.

So the royalty buyout begins immediately.

So 65% of what we would have owned will now not be owed.

The other 35% we'll continue to pay, but to Royalty Pharma.

And then in addition to that, we will pay a small, undisclosed percentage to GlaxoSmithKline.

So that will begin immediately.

Those -- that payment, the 65%, or $341.25 million, will be amortized over the life of the patent.

Thanks.

And your next question comes from the line of Mike King with Rodman and Renshaw.

Good afternoon and congratulations on a nice quarter.

I wanted to just to see if I could get a breakdown of the U.S. sales of Truvada.

Yes, Mike.

So Truvada sales for the U.S. for the second quarter, U.S. was $111.7 million.

Rest of the world was $11.4 million.

Thank you.

And then questions on the Truvada -- I am sorry the -- yes, Truvada versus Hepsera and HBV study, the Phase III.

Could you talk about the size, primary end point, and what your commercial options are depending on the outcome of that study?

Mike, just to be clear, it's the Viread versus Hepsera trial.

I will let Norbert answer the question of the primary end point and then we'll come back to commercial after that.

So MIke, these are two Phase III studies; one is 300 patients, the other one is about 240.

They are 2-to-1 randomized to Viread versus adefovir, and the primary end point is a mixed end point of HBV DNA below 400 and the usual is the logical end points, two-point increase -- decrease in [inaudible--heavily accented speaker] but no worsening of fibrosis.

Is it a non-inferiority study, Norbert?

Yes.

And can you talk about the power to detect, you know, a difference outside the band?

I'll have to get back to you on that.

I don't have it right here with me.

Okay.

But nothing--

In terms of the commercial part of your question, Mike, I think it is important to recognize that, obviously, we are doing what we need to do; we hope for the regulatory approval of Viread and HBV, but we recognize there will be a lot of market dynamics by the time we come to market involving a couple of new entrants.

So we will be taking that -- taking that into account as we look at -- you know sort of potential Phase III B, Phase IV studies and the ultimate commercialization of Viread.

Okay.

And then just to be clear, Gilead owns all the rights for HPV for Tenofovir?

Yes, we own rights for all indications, Mike.

All right, thank you.

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

Thanks very much.

I was going to ask if you could just repeat -- I am sorry to ask you to repeat -- but the Truvada new and total prescription share.

And then, secondly, could you address what's driving the Viread growth in Europe and maybe a little bit more clarity on increased accounts receivables.

And then finally, related to Viread, is the rate of switch in the U.S. for patients on Viread consistent with your expectations?

Thanks.

Hi, Meg.

I will try to take a couple parts of your question.

In terms of the shares, if you take Truvada, our very latest data point for NRX is 16.4% and for Viread it is 17.5% market share.

I'll also have the TRX, if you require that, but basically, particularly with Truvada, we concentrate on NRX.

Your next question, I was trying to think of the question.

I was -- I was asking about Viread growth in Europe --

Oh, yeah.

-- and then if you can provide some clarity on increased accounts receivable.

Thank you.

Well, in terms of growth of Viread in Europe, of course, we have only got it out for the second quarter in two of the five major markets; that was Germany and the UK.

We've now this week having the launch in a third major market which is -- sorry, that's Truvada --

I am following you.

-- in Spain.

Right.

So basically the markets that haven't got Truvada, of course, are fully committed to promotion of Viread as first product detail.

You alluded to earlier treatment use.

Is that what you are finding particularly in Europe?

Is that what is driving it?

Well, again, I think it's -- it is part of typically, you know, it is the gold standard within -- within first line triple therapy.

So, you know, Viread, as you know, is -- is incredibly powerful brand, and, continues to be used as the standard of care.

Okay, fine.

And then could you provide some clarity on the increased accounts receivable?

Well, Meg, accounts receivable actually decreased quarter-over-quarter, or even despite the growing sales.

I am sorry.

Yes, so we were down just under $14 million in accounts receivable and that rate is a favorable payment pattern to the U.S. but importantly, we have some big collections in Europe for some of the Southern European countries and in particular, Greece, where payment tends to be slow, and it was a rather large lump-sum payment that came out of Greece that helped us out.

Okay, but there was no change in terms of your policies, is that fair?

No policy changes other than just due diligence and getting it collected.

Thanks.

And then just finally on Viread, is the switch rate from Viread to Truvada in the U.S. consistent with what you are expecting?

Yes, as I said, Meg, basically about 50% of the Viread plus Emtriva patients have switched and about 25% of the Viread plus Epivir patients have switched.

And we will continue to scoop patients out those buckets, but that's very much the pattern that we expected.

So I think the kind of slowing that you're seeing is what we expect and, in fact ,if you just compare that to what happened with the entry of Combivir to epivir, it's a very, very similar type of profile.

Great.

Thanks very much.

Thank you.

And your next question comes from the line of Steven Harr with Morgan Stanley.

Hi.

It's actually [Jason Chang] calling on behalf of Steve.

Just a quick question.

If you guys could explain a little bit about the strategic -- strategic rationale for including Royalty Pharma given the strong balance sheets and cash flows that the company has and ,secondly, what the positive impact of that deal might be?

Hey, that's a good question.

So royalty buyouts are not our specialty, and it was a new area for us.

And looking historically, when companies have competed with these royalty buyout groups, the companies always lose.

And so we felt that we needed a partner in this that had sort of expertise and history of success, and Royalty Pharma tends to be the winner in these royalty buyouts.

And so we felt that it was better to take a high percentage, if not all -- although not all of it -- but ensure victory.

And I think the success of this partnership has borne out that we chose the right partner and that they really were instrumental in helping us understand the dynamics of this kind of thing.

With regard to the impact, as we said in the call today, this is roughly neutral for this year, but as is the nature of these things and based on modeling, we expect it to be slightly accretive next year and then increasingly accretive according to our projections for growth of the product.

Obviously, the better we perform, the more accretive it becomes over time.

Great, thank you.

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

Thanks very much.

I had a housekeeping question.

Can you disclose what the royalty that was paid on Emtriva during the second quarter?

And then just on some of these metrics that you've provided on the use of Truvada, the new patients and the switching from the various buckets, can you give us a sense at all as to how that changed over the recent quarters, say, from the fourth to the first to the second quarter?

Hey, Thomas, we don't disclose individual royalty payments, and so those remain confidential.

So we won't be able to disclose that to you, unfortunately.

And then, Kevin, I will turn over the second --

Thomas, I don't have the specifics for you, but obviously, the most obvious bucket of switch was the [inaudible] Emtriva [inaudible]; it's the direct components of Truvada so obviously, the rate was very quick in the first quarter when we launched -- the first quarter of this year was greater.

So this is slowing up as we go through the quarter and then through the year.

So it's, again, an obvious pattern of events.

And I am sorry, when you look at in terms of capture of new patients, how has that percentage changed over time?

Did you say that it was -- you think that you are at about 50% capture of new front-line patients right now?

That's correct, yeah.

We believe that we capture over half the naive patients to therapy who are coming on to antiretroviral therapy.

Has that been relatively stable over the past few quarters?

I can't answer that question directly for you, Thomas.

I can get back to you with an answer, but I can't give you an answer directly.

All right, thank you.

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

Thanks for taking my questions.

Congratulation on another great quarter.

The first [inaudible] with Royalty Pharma, I was just wondering if you have an option at any given point of price to buy out Royalty Pharma's stake in the Emtriva royalty agreement.

And then I just have a follow-up.

No, there is no pre-existing agreement that will allow us to buy it out, no.

The second question was a follow-up to Kevin's comment that 7% of Combivir patients had moved on to Truvada, I believe.

What's an achievable target in your mind once you are able to market [ inaudible--microphone inaccessible] .

Ian, that's not the type of information we tend to kind of just put out there, so, yes, we do have some internal goals but we don't typically from a competitive point of view share those.

Thank you very much.

Thank you.

Your next question comes from the line of Eun Yang with Wells Fargo.

Thanks.

On the front of the royalty interest and Emtriva buyout, I am just wondering with that whether your strategy for potential acquisition or licensing on new product changed?

No.

This was not a change in strategy.

It shouldn't be interpreted as that.

This was a unique opportunity to take advantage of an area we really knew well, yet what we believe is a good return on investment, clean-up, a relationship with Emory that is now much more simple for us to work out.

So it just felt like it was the right thing to do from a cash flow perspective, but it certainly doesn't alter our strategy going forward and, frankly, we don't feel at all impaired in terms of going after other products, either through licensing or other mechanisms.

You also mentioned that the purchase price for Gilead's portion which is about $342 million, that's going to be amortized over the patent life of the product.

It's going to be Emtriva -- I am assuming it is going to be Emtriva -- so my question is, when is the patent expiration for Emtriva in the U.S.?

2018.

2018.

The last question is even if we assume that HIV product sales to be flat for the remainder of the year, the full-year HIV franchise sales would have come out above the high end of your guidance.

So I am just wondering what your assumptions are behind your guidance?

There's a couple of thing to say about that.

First of all, we have -- there is a little bit of seasonality with relation to our products.

AmBisome and [inaudible] products as well, and it seems to be a little bit more pronounced in Europe than in the United States.

Also, we are keep our eye on a declining currency environment as the euro is declining in value relative to dollar.

And while we hedge on a forward basis, we are certainly not fully hedged, and that's something we are keep our eye on.

So in looking at those different back patterns and some of the uncertainties about the launches in Europe, we felt that this guidance was the most appropriate way to give -- the most appropriate guidance for Wall Street as we monitor the events in these countries and through the currency changes.

Okay.

Thanks.

Could you give us a breakdown between royalty and contracts revenues for second quarter?

Royalty for the second quarter was $44.1 million; contract revenue was $2.7 million.

Okay.

Thanks very much.

And your next question comes from the line of Sharon Seiler with Punk, Ziegel and Company.

Thanks.

My questions were answered.

Your next question comes from the line of Philip Nadeau with SG Cowen.

Good afternoon and congratulations on the strong quarter.

Just two questions.

The first is going forward, do you plan on reporting cash EPS or GAAP EPS?

GAAP EPS, obviously, including the amortized payments.

And second, could you give us some detail on when investors might see the results from the ongoing triple combination study?

Thank you.

We're going to report on the GAAP EPS-basis on a go-forward, based on these transactions, so I wouldn't expect us to report cash EPS.

We are not -- for the second part of this, we are not exactly certain when those results will be available or exactly how they will communicate it.

It will depend on the kind of result that we get going forward.

Okay.

Thank you.

And your next question comes from the line of Craig Parker with Lehman Brothers.

Hi, two questions. [Inaudible -- very low audio].

Craig, we can't hear you at all, Craig.

Craig?

Can you hear me now.

We can hear you now.

Okay, great.

Sorry about that.

I know you can't say much about Tamiflu, but can you comment on whether there are any specific manufacturing levels that Roche has committed to for the two years?

First question.

Second question, I know you commented from the first fixed-dose study with Sustiva that you didn't see much variability patient to patient, so you were able to ascertain after, I think, relatively few number of patients, five or six or seven, whether it looked like it was going to be bioequivalent.

Do you think that will be true for this current study and if so, what's the timing of knowing that data on the first five or seven patients?

On the first question, we can't comment on Roche's commitment to any level.

Certainly, it is a changing capacity right now and so I would be unable to speak to that from a knowledge point of view.

Okay.

Secondly, with regard to the study, you are correct, we were able to ascertain fairly quickly in the last study that things didn't go well because there were fairly similar range between the patients, and range clearly was going to fall outside of the 90% competence intervals as as well as the point estimate that you need to reach.

So whether or not we will be able to say it sooner or later will depend quite a bit on whether the second formulation has the clustering and whether it is within the range.

If it was bad, we would be able to say it sooner; if it is better or close or right on the mark, we probably wouldn't be able to stay until the very end when we do the whole statistical analysis on all patients as to whether it is bioequivalent or not.

I quite frankly don't exactly know the exact timing of that.

All right.

Thank you.

And your next question comes from the line of Jason Kantor with RBC Capital Markets.

Thanks.

Most of my questions have been answered, but going back to the triple combination pill, if the bioequivalent studies don't pan out, do you have any immediate plans to move to a sort of a co-packaging strategy or is that something that you are not look at?

And then just sort of more broadly, strategic thinking here, at this point, what is the profile of a company or product that you would be looking to bring in?

Are you looking at totally new franchises or are you going to maintain sort of the anti-viral folks to the company?

Maybe I will answer the first question.

As we pointed out a number of times, there is always a risk in these co-formulation projects, particularly in this one with regards to the properties of [efaverence].

And we are as we always do, we have back-up plans, and we are currently looking at not a co-packaged product, but a bilayer product.

So basically a product that would have, you know, the efaverence being one layer and Truvada being the other layer.

And that will be the next -- the next approach is that we would be looking at if this second formulation doesn't pan out.

And I will let -- John, are you --

If I can ask another question about that.

What is the disadvantage of doing that at that?

If that's simple and likely to work, why wouldn't you go straight to that?

You know, it is always a trade-off between stability, manufacturing complexity, size of the pill.

And those trade-offs you just have to make, and we, you know, made our best judgment -- our best guess we pursued first, and the second guess comes second.

Okay.

Thank you.

So Jason, your next question was on the profile of company or product.

That's a hard one to say.

We have certainly been public that we would be interested in putting in a new therapeutic category.

We haven't chosen -- and in fact don't have a definitive answer for you in what that would be.

We are as always interested in continuing our anti-infective franchise, so I would expect there is still -- basically there's a range of transactions possible that could include staying in anti-infectives, augmenting our antivirals or advancing into a new therapeutic category.

And it really depends on opportunity and need at the time that the transaction takes place.

Thanks.

And your next question comes from the line of [David Answood] with Friedman, Billings, Ramsey.

Hi.

Can you hear me?

Yes.

We hear you fine.

All right.

Just a couple of quick questions.

Do you think Truvada's use will benefit from AZT going generic?

And then my second question is in hep C, how is the Achillion compound chosen to move into Phase I?

Thanks.

Hi, David.

Maybe I can take first one is which is AZT.

We've done a lot of work here kind of modeling what might be events.

So I won't go into details, but I think we've got -- I think we have followed this through very, very carefully.

The one thing to say is that an HIV product going generic is a lot different from your classical pharma situation of a product going generic.

We don't see a massive effect going forward to the uptick of Truvada from the change from branded to generic AZT.

Obviously, we'll watch it very closely, but we have since checked this with, you know, many of our customers and looked at it from many different angles, but we will be watching it closely.

And maybe I will answer the other question.

One reason why we are very excited about this Achillion compound, the Achillion collaboration, is that this compound works really by a novel mechanism.

We have not disclosed that yet publicly.

That will be disclosed by the Achillion scientists at a future scientific conference, but it involves NS3 HCV processing and as such, what is exciting about this compound is that this compound, number one, does not work -- is not an active site inhibitor like all the other HCV protease inhibitors of [inaudible] the other companies.

As such, it is not cross resistant to those compounds and potentially it could be used in combination with those, not instead of them.

That's great.

Thanks, and congratulations.

Thank you.

And your next question comes from the line of Bret Holley with CIBC World Markets.

Yes, I have got two questions.

On the HBV Phase III for Veriad versus Hepsera, was there consideration given to running a comparative arm with [inaudible] or entecovir in that trial and why was the choice made just to run it versus Hepsera?

Yes.

So we absolutely gave it consideration to run either lamividine or entecovir.

The reason why lamividine was not picked was because there were concerns both from investigators and regulatory authorities that would use lamividine as a control because of the rapid resistance development.

And entecovir, at that point when we designed the Phase III studies, was not approved yet and it is still not approved in some territories where we are carrying out the Phase III studies, mainly in Europe.

Okay.

And so we felt adefovir, at that point, was the appropriate control; it's the standard of care, and we believe it is the best treatment for chronic hepatitis B.

And the second question involves switching from Viread and Emtriva to Truvada, and with 50% of the patients switched, and I guess it's slowing a bit, what really is the rationale for that other 50% of patients remaining on the single pills?

I think, Brett, we have talked about this before.

Again, there is a lot of human behavior in all of this and if patients aren't asking for a change, if the doctor is busy, if the -- you know, the measurements or their blood levels are, you know, on the measurements they're doing fine, then often there is an incentive for the doctor to transfer the patient.

So these are the common issues that you see in any market from the point of view of making change.

And believe me, we are reminding the physician and we have a direct to the patient campaign, so there is an awful lot of effort going in on our part.

But I think, in some respects, these are natural dynamics of switching any market.

One last question.

On Combivir, what is the -- what is the rate -- or do you have an estimate of the rate of treatment failures annually on Combivir?

And you said that 7% of patients now have switched from Combivir; is that correct?

Yes.

I don't -- I don't actually have a figure.

From my perspective, from the commercial perspective on Combivir, of failure, so I can look towards --

The only thing we can maybe point to is our Study 934, which was a direct comparison of Combivir to Viread and emtricitabine.

If you look at intent to treat at 48-week, the proportion below 400 was 73%.

That means -- and I think there were about 19% were treatment failure, most of them because of adverse events.

So that gives you some idea of what the number will be.

Okay.

Many of the patients in clinical practice are maintained on Combivir with [inaudible] loads so that's why the clinical trial experience doesn't give you an accurate projection.

Okay.

Thanks.

Thank you.

And you now have a question coming from the line of Andrew McDonald with Think Equity.

Thank you, guys, and congratulations on the great quarter.

Thanks.

My question is really related to your pipeline and maybe I'll start with the integrase inhibitor.

Something I thought about is how you will position this compound were it to make it to market, where do you see it fitting in, is it a second-line type of a product that you would combine with Truvada?

I really would like to get a little bit of insight there.

Well, maybe, let me take a crack at this.

I think certainly the -- an integrase inhibitor would absolutely be a second line treatment for patients that feel their current regimen, for the simple reason that all patients would be still sensitive, they would not have developed resistance yet to that class.

And secondly, in that kind of a scenario, you would use Viread with it, because Viread has a great resistance profile.

And as you know, Viread was originally developed in that patient population.

With regards to broader use, that entirely depends on the safety, tolerability, and convenience, but if you could come up with an integrase inhibitor that is safe, well tolerated, potentially once daily, I think that would obtain -- quickly capture broad acceptance in the HIV market.

And I think I pointed out at the last conference call that we have extensive, pre-clinical toxicology data on this integrase inhibitor, up to six months, and the data looked very promising.

That's one thing that we are very excited about this integrase inhibitor.

And then related to the Achillion PI, the other component of future therapy, at least in the short run, likely still be an interferon.

I am kind of wondering if you had -- if you've made some, I guess, thoughts as to maybe acquiring an interferon or do you want to try to move to an all oral therapy in lieu of that?

Yes.

I think that's a good question.

We are certainly contemplating different ways to develop these programs, including co-development of these products with interferon.

We do think certainly for a subset of patients, if not a majority of patients, it will ultimately evolve to complete oral therapy for a lot of the reasons involving avoiding the toxicity to the interferons.

But I do think there will be a transition in there.

So we certainly have thought about potential ways to do clinical studies.

I can't really comment on whether or not we'd acquire an interferon or any other product.

But we do have a belief that the HCV treatment paradigm will evolve like HIV has evolved, which is combinations, small molecules.

And that is one reason why we pursued two corporate collaborations, one with GeneLabs on the nuclear side area and one with Achillion on the protease inhibitors, and that gives us a foot in the door with two classes, potentially.

And then do you think the treatment duration in HCV, once these agents are developed, is going to be substantially shortened to maybe even three months to one month with these --

That's a really difficult -- I can't answer that question.

I guess it all depends on the clinical data.

Okay.

Thank you.

And Dr. Milligan, there appears to be no more questions at this time.

Great.

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 up updates on our future progress.

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

This concludes the presentation and you may now disconnect.

Have a great day.