吉利德科學 (GILD) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Gilead Sciences third quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS.] As a reminder, this conference call is being recorded Tuesday, October 18th, 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, sir.

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

We issued a press release this afternoon providing results for the third quarter ended September 30th, 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 third quarter financial results and will provide updated financial guidance for the full year 2005.

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

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 will be making forward-looking statements relating to financial results within the meaning of the Private Securities Act of 1995.

These statements are based on certain assumptions and are subject to a number of risks and uncertainties that could cause our actual results to differ materially from those expressed in any forward-looking statement.

I refer you to our latest press release and Form 10-K, our quarterly report on Form 10-Q for the first and second quarters of 2005, 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 sales forces are permitted to promote our products based only on our FDA-approved prescribing information, and we cannot guarantee that the FDA will approve the inclusion of any of the clinical information or data discussed on this call in our prescribing information.

Third quarter 2005 was another successful quarter for Gilead.

Driven by the continued strong growth of our HIV franchise, we achieved a significant milestone, with record product sales, in excess of $467.2 million, a 50% increase compared third quarter of 2004.

This marked eight consecutive quarters of product revenue growth.

HIV product sales surpassed the $1 billion mark for the first nine months of 2005, with successful Truvada launches in more countries.

Our third quarter of 2005 net income was $179.2 million, up 58% compared to the third quarter of 2004.

Diluted earnings per share grew by 52%, and income from operations increased by 53%.

The strong operating performance is a validation of the significant effort by the more than 1,700 Gilead employees around the world.

And the strategies that we've implemented for growing revenues and cash flows will make a controlled investment in our research and development programs and sales and marketing infrastructure.

Now turning to specific results for the third quarter.

Gilead had a strong financial performance during the third quarter, as product sales and earnings improved significantly over the third quarter of 2004.

Total revenues are up 51% compared to the same quarter last year, driven primarily by higher sales of our HIV products and higher royalty revenue from collaborations with our corporate partners.

Income before taxes grew substantially from $166.5 million for the third quarter of 2004, to $263.6 million for the third quarter of 2005, an increase of 58%, driven by strong revenue growth, coupled with continued controlled spending.

Income before taxes decreased $24.6 million compared to the second quarter of 2005, primarily due to the $15 million payment to Emory University as a part of the amendment to our existing licensing agreement for emtricitabine, the latest to the HBV indication, as well as $8.4 million in severance and relocation costs related to our moving our European headquarters from France to the United Kingdom.

The Company reported net income of $179.2 million, or $0.38 per share on a fully-diluted basis for the three months ended September 30th, 2005.

This compares to $0.25 per diluted share for the same period last year, and $0.41 per diluted share for the second quarter of 2005.

Our effective tax rate for the third quarter was 32%, unchanged from the effective tax rate for the third quarter of 2004.

Now turning to revenue.

Total revenues for the third quarter of 2005 were $493.5 million, an increase of 51% from total revenues of $326.2 million in the third quarter of 2004.

Compared to the second quarter of 2005, total revenues essentially remained flat quarter-over-quarter.

Revenues from Gilead's product sales increased sequentially by 4% in the third quarter this year, as both our HIV and HBV product franchises continue to grow.

This growth is offset by a decrease in royalty and contract income, which I'll describe in more detail later.

Net product sales for the third quarter of 2005 were $467.2 million, a 50% increase over the same period last year and 4% higher than the second quarter of 2005.

This growth was primarily driven by higher HIV and HBV product revenues, as well as continued strong sales for AmBisome.

HIV product sales grew to 363.5 million for the third quarter of 2005, up 59% compared to $228.1 million in the third quarter of 2004, and 6% sequentially from the previous quarter.

This growth continues to be driven by the strong uptake of Truvada in the United States and European countries where the product has been launched, and the strong sales of Viread in countries where Truvada has not yet been launched.

Truvada sales were $162.4 million for the third quarter of 2005, up 32% sequentially.

For the United States, Truvada sales were up 25% sequentially, primarily due to the use of Truvada in patients new to therapy, and secondary from switches of patients on other regiments, including those containing Viread or Emtriva, for which U.S. sales decreased sequentially by 15% and 2% respectively.

Truvada sales in the United States were $140.0 million for the third quarter, nearly double the $74.9 million recorded by Viread for the same period.

Worldwide Truvada sales account for almost 45% of the total HIV product revenue.

Outside the United States, HIV product sales grew to 143.8 million, from $88.6 million for the same period of last year and from $139.3 million recorded in the second quarter of 2005.

The increase was driven both by the continued successful launches of Truvada in several European countries during the first three quarters of 2005, as well as strong sales of Viread.

Truvada is now available in Germany, Ireland, Portugal, the United Kingdom, Spain, and just recently in Italy.

For the third quarter of 2005, Truvada product volume outside of the United States more than doubled sequentially compared to the second quarter of 2005.

As I mentioned, Viread sales continued to hold strong, despite the strong uptake of Truvada.

Compared to the same period of last year, international sales volume of Viread was up 45%, driven by sales in the European Union, Australia, Canada, and Latin America.

Hepsera for the treatment of chronic hepatitis B had sales of $46.9 million in the third quarter of 2005, a 58% increase compared to the third quarter of 2004, and a 2% increase sequentially from the previous quarter.

In the third quarter of 2005, U.S. and international sales of Hepsera were 21.9 million and $25 million respectively.

Hepsera sales in the European Union increased by 52%, to $22.6 million, when compared to the same quarter of 2004.

Finally, sales of AmBisome were $54.7 million for the quarter, an increase of 10% over the same period in 2004, but a 3% decrease sequentially from the prior quarter's record sales level.

Higher international sales volume of AmBisome was offset by lower pricing in some regions.

For the third quarter of 2005, Gilead recognized royalty and contract revenues of $26.2 million, compared to $15.5 million for the same quarter of 2004, and $46.8 million for the second quarter of 2005.

The increase compared to the third quarter of 2004 was primarily driven by higher royalties of $12.1 million received from Tamiflu sales by Roche, compared to royalties of $1.7 million received from Roche in the third quarter of 2004.

As a reminder, we recognize royalties from Tamiflu sales on a one-quarter lag.

Thus, the strong royalty revenue in the third quarter of 2005 reflect stronger Tamiflu sales by Roche in the second quarter of 2005, as compared to Tamiflu sales in the same quarter of 2004.

The higher Tamiflu sales during the second quarter of 2005 were mostly driven by pandemic planning purchases, as Roche fulfilled several large government orders.

Sequentially, royalty and contract revenues decreased by 44%.

This decrease was primarily the result of the higher royalty payment received from Roche in the second quarter 2005.

During the second quarter of 2005, Gilead received a royalty payment from Roche of $36.2 million from Tamiflu sales by Roche in the first quarter, the majority of which were from seasonal flu sales, particularly in Japan.

Roche is scheduled to release their earnings tomorrow, and we will be monitoring their guidance on Tamiflu sales and evaluating any potential impact on Gilead's future financial performance.

I'd like to take a few moments to discuss Tamiflu, the status of the dispute with Roche, and the growing public attention being paid to avian flu and the global pandemic planning.

As you know, Gilead scientists invented Tamiflu.

In 1996, we outlicensed rights for the worldwide commercialization of the drug to Hoffmann-La Roche.

Gilead and Roche co-developed the drug, with Gilead conducting three of the four clinical trials that led to the product's first approval for the treatment of influenza in the United States in 1999.

On June 23rd of this year, we delivered to Roche a notice of termination of our 1996 development and license agreement for Tamiflu for material breach of contract.

The specific claims of breach are detailed in the notice of termination letter filed with the SEC as an 8-K, and I refer you to that document for the details.

Following the notice, Gilead and Roche were unable to resolve the outstanding dispute within the 90-day cure period.

As a result, the parties have now submitted the matter for confidential binding arbitration under the terms of the 1996 agreement.

Until the matter is resolved, ongoing discussions between Roche and Gilead and the status of the arbitration are confidential.

There are a wide variety of outcomes that could result from the arbitration process, none of which we can speculate on or comment on.

Since delivery of the notice of termination, we've been committed to ensuring that our dispute will not in any way interfere with discussions between Roche and any parties interested in pandemic purchasing, and will not adversely effect product manufacturing and supply.

We cannot comment on Roche's recent public statements regarding the array of alternatives available to them for increasing manufacturing capacity, but we do want to reiterate that, as the inventor of the compound and the Company that developed the manufacturing method that was transferred to Roche, we are well versed in the technology and with all aspects of the manufacturing process.

We are confident that should it become necessary, Gilead and our third-party manufacturers will be capable of manufacturing Tamiflu in significant quantities.

We apologize that this is all we can say at this point.

Now turning to gross margins.

Product gross margins for the third quarter of 2005 are approximately 86%, compared to product gross margins of approximately 87% for the same quarter of 2004.

The slightly lower gross margin is primarily due to product mix change as switches continue to occur from Viread, a higher market product, to Truvada.

Now turning to expenses.

Research and development expenses were $78.8 million for the third quarter of 2005, an increase of 60% from $49.2 million in the same period last year, and an increase of 32% sequentially.

The higher spending was primarily driven by the $15 million payment made to Emory University in connection with the amendment of our license agreement with Emory related to development of emtricitabine for hepatitis B, as well as higher expenses related to increased headcount, purchases of clinical and product development materials, and increased costs and fees incurred by Gilead under our hepatitis C collaboration.

SG&A expenses in the third quarter of 2005 were $99.2 million, up 37% from the same quarter of 2004, and a 4% increase sequentially.

The increase in spending and SG&A is principally due to $8.4 million of severance and relocation expenses that we recorded to date related to the relocation of our European commercial, medical, and administrative headquarters from France to the United Kingdom.

In relation to our European headquarter relocation, we continue to expect that total costs for severance, relocation, and hiring to be within the range of 10 to $13 million, which we previously disclosed.

These costs include relocating employees who are transferring from France to the United Kingdom, severance costs for employees who have declined relocation, as well as recruiting costs associated with hiring replacement employees in the London area.

The impact of foreign exchange was favorable on 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-tax earnings for the third quarter and first nine months of 2005 was 5.3 and $14.7 million respectively, when compared to the same period in 2004.

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

Finally, I'd like to turn to the cash flow statement and balance sheet to highlight our cash flow performance for the quarter.

The balance sheet at September 30th, 2005, shows cash, cash equivalents, and marketable securities of $1.7 billion.

This is a decrease of 7% when compared to the balance of approximately $1.8 billion at June 30th, 2005.

This decrease is primarily related to the Emory royalty buyout payment we made of $341.3 million, partially offset by operating cash of $179.2 million generated from net income during the quarter.

We will continue to evaluate strategic ways to use our cash and investments, including opportunities to inlicense, acquire companies or potential products to complement our own internal efforts, as well as methods to offset future dilution from the employee stock option exercises, including potential stock buy-back programs.

Now I'd like to turn to our financial guidance for 2005.

For our entire HIV franchise, which includes Viread, Emtriva, and Truvada, we're raising our guidance for net product sales for the franchise from a range of 1.275 to $1.325 billion to a range of 1.365 to $1.385 billion for the entire year of 2005.

This guidance is the result of continued strong sales of Viread in all markets and rapid uptake of Truvada in the United States and the European Union.

Turning to AmBisome.

Based on strong year-to-date results, we are also slightly raising our previous revenue guidance of 205 to $215 million to a range of 210 to $220 million for 2005.

For Hepsera, we're tightening our estimated net product sales of Hepsera for the full year 2005 from a range of 160 to $180 million to a range of 170 to $180 million.

We reiterate our previous gross margin guidance for 2005 to a range of 85% to 86%.

We're also tightening our R&D expense guidance for 2005, from 265 to 285 million to a range of 270 to $280 million.

With regard to SG&A expenses, we are tightening our guidance for 2005, from 365 to $385 million to a range of 370 to $380 million.

We're also lowering and tightening our capital expenditures guidance for 2005 from a range of 55 to $65 million to a range of 45 to $50 million.

And, finally, our tax rate guidance for 2005.

We reiterate our previous 31 to 33% guidance for our effective tax rate.

However, we are evaluating a potential repatriation of foreign earnings under the Homeland Investment Act, which could result in a net one-time benefit to our effective tax rate in the fourth quarter of 2005.

In summary, as Gilead looks ahead, we will continue to make the investments we believe necessary to promote our product lines, particularly our HIV franchise -- AmBisome and Hepsera -- and continue to evaluate opportunities to build a strong and independent global business.

This concludes the earnings reporting section 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 and commercial highlights for the third quarter of 2005 and provide an update on the milestones we've been striving to achieve during the remainder of the year.

Thank you, John.

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

We're pleased to summarize for you Gilead's accomplishments during the third quarter of 2005.

I'll begin by providing a brief corporate update and discussing our pipeline programs.

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

On the corporate front, we were very pleased to announce in July that John Cogan has joined our Board of Directors.

Dr. Cogan is currently a senior fellow at the Hoover Institution and at the Stanford Institute For Economic Policy Research.

As the scope of our business grows increasingly complex, we look forward to benefiting from his expertise in healthcare economic policy.

On a global front, during the third quarter we were able to make significant progress in our efforts to bring medication to HIV patients in developing world countries through our Gilead Access Program.

We announced in August that we had reduced the no-profit price of Viread and Truvada by 31 and 12% respectively.

Our ability to continue to reduce prices of these medicines is a result of increased economies of scale, the manufacture of active pharmaceutical ingredient for both Viread and Truvada at a contract manufacturer in the Bahamas, and continued improvements in the manufacturing process.

In an effort to deliver our HIV medication to those most in need, we also made progress on the registration front, submitting several filings to developing world countries over the course of the quarter, bringing our total number of submissions to more than 35.

And just last week, we finalized our non-exclusive licensing and distribution agreement with Aspen Pharmacare for Viread and Truvada in the developing world.

Aspen will manufacture finished product for countries included in Gilead's Access Program and will distribute the products in every country in Africa.

Finally, I'm pleased to announce that Gilead's European team has moved into its new corporate headquarters in the United Kingdom.

This office is located in Stockley Park, a high-technology business park only 10 minutes from Heathrow Airport and about 35 minutes from Central London.

This move builds an important foundation for the further development of the Gilead organization in Europe.

Turning to research and development.

As you know, we continue our efforts in developing a fixed dose combination of Truvada and Sustiva.

Despite the challenges we face, this remains an important area of focus for both Gilead and Bristol-Myers.

In August we announced that we had turned our efforts to develop -- to the development of a bi-layer pill, where Truvada and Sustiva are physically separated in two layers combined in one pill.

We're evaluating three bi-layer pills in parallel, ranging in size from 1,400 to 1,600 milligrams.

Based on pre-clinical data, we believe that this approach has a greater probability of achieving bioequivalence than our prior two attempts.

Should these efforts prove successful, we will be on track to file an NDA for the triple combination during the first half of 2006.

Moving to another development program in HIV, we are very pleased with the progress to date with GS 9137, our novel integrase inhibitor for which we initiated Phase I/II study in late June.

As you may recall, we inlicensed this compound March of this year from Japan Tobacco, and were able to file an IND in June, with a strong pre-clinical toxicology package.

Also, prior to our inlicense, Japan Tobacco had completed a Phase I study in healthy human volunteers in Japan.

The Phase I/II study that we are conducting is a short dose-ranging monotherapy study in HIV infected individuals.

We're evaluating GS 9137's potential to be a once or twice-a-day drug, and assessing the potency and short-term safety of this compound.

We hope to present data from this study in early 2006.

Integrase inhibitors represent a promising new field in the -- of HIV research.

Given our experience developing novel compounds in HIV, and due to the unmet medical need for some late-stage patients, if the Phase I/II results are positive, we believe that GS 9137 could follow a rapid development path, with Phase II studies beginning in 2006.

Turning to our hepatitis development programs.

In July, we initiated two Phase III clinical trials -- Study 102 and Study 103 -- comparing the efficacy and safety of tenofovir versus Hepsera in patients chronically infected with hepatitis B. We believe that the 300-milligram dose of tenofovir, the same dose marketed as Viread for HIV has the potential to be an important treatment for hepatitis B. There have been several scientific presentations highlighting significant hepatitis B viral load decreases in HIV, HBV co-infected patients treated with tenofovir.

We look to confirm those results in our Phase III studies.

We are making steady progress to enroll patients in the two trials and believe it will take approximately 12 months to complete enrollment of nearly 600 patients.

Once enrollment is complete, the studies will run for 48 weeks.

Based on these estimated timelines, the earliest we would be able to file a supplementary NDA would be in 2008.

In hepatitis C, we took our most advanced candidate, GS 9132, into the clinic in a Phase I study in August.

We're evaluating the pharmacokinetics, tolerability, and safety of single escalating doses of GS 9132 in approximately 20 healthy volunteers.

As you may recall, GS 9132 is the compound we are developing in partnership with the Achillion Pharmaceuticals.

It is a small molecule inhibitor of hepatitis C virus replication which works through a novel mechanism involving HCV protease.

Achillion will lead the development of GS 9132 through the proof of concept study, at which time, Gilead will assume responsible for the further development of the compound.

We look forward to presenting data on this compound at a scientific conference in 2006.

As we -- as we stated previously, we believe that the treatment paradigm for HCV will evolve similar to that of HIV and are, therefore, committed to bringing forward several compounds in hepatitis C. We continue to make progress in our other early-stage efforts, which include the Genelab's nucleoside program and our internal protease and polymerase programs.

I am proud of the recent R&D accomplishments we have made by advancing three compounds into clinical trials in the areas of HIV, hepatitis B, and hepatitis C. We are committed to building through -- both through internal research and inlicensing and acquisitions efforts, a pipeline of products that will help fuel the growth of the Company in the years ahead.

And that will make a difference in the treatment of life-threatening diseases worldwide.

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, where we have continued to experience growth in all our commercial markets.

Since the U.S. launch of Truvada, we've increased the combined new prescription market share of all of our HIV products to 37.8%, from 26.9%.

As of the week ended October the 7th, 2005, Truvada alone captured 20.2% of the new prescriptions and 18.7% of the total prescriptions in the NRTI class.

At the same point in time, Viread continued to hold 16.2% of new prescriptions and 17.6% of total prescriptions in the class.

The third quarter also marked a changing of the guard, so to speak, for our HIV's franchise.

In August, one year after its launch, Truvada surpassed Glaxo's Combivir in new prescription market share.

Notably, in September, Truvada surpassed both Viread and Combivir in total prescription market share.

Further, Truvada has achieved a 3 to 1 edge in both market share and prescription volume over GSK's Epzicom, the combination of abacavir and 3TC, which was approved on the same day of Truvada.

The HIV market in the U.S. has experienced demographic shifts, and we are recognizing significant potential for market expansion through education and awareness.

In the United States, approximately 40,000 new patients started antiretroviral therapy last year, and the number of total patients receiving antiretroviral therapy is now approximately 430,000.

The introduction of safer, more tolerable, and easier-to-take therapies -- like Truvada -- improvements in diagnostic tests for HIV; and a trend among some physicians to start their patients on therapy earlier have all contributed to this increase in treated patients.

As these trends continue to play out in the market over time, we believe that we are well positioned with Truvada to capture a large proportion of the greater than 500,000 patients who are infected, but are not currently on therapy in the United States.

As for the total pool of patients on antiretroviral therapy today, independent market research estimates that more than 95,000 patients are receiving Truvada therapy as we enter the third quarter.

And, importantly, Truvada is currently capturing nearly 60% of new patient starts, up from 50% in the previous quarter, as well as switches from other therapy.

One of the factors contributing to the increasing overall Truvada use is the continued rollout of important scientific data.

The 48-week results of Study 934, our head-to-head study of Truvada versus Combivir in naive patients, were presented for the second time this summer at the International AIDS Conference.

We have expanded this study to 144 weeks and will continue to present the data in important and appropriate forums during the next several years.

We expect the 48-week data to be added to the Viread and Truvada labels during the second half of next year, which will provide additional support to our U.S. sales force.

In addition, Viread and Emtriva, the components of Truvada, were used as the backbone in both arms of Abbott's Study 418, evaluating Kaletra as a once-daily therapy.

These data were added to the Kaletra label earlier this year, and have provided us with the ability to promote Truvada as the NRTI backbone of choice when used with a third agent from either the NNRTI or PI class.

Finally, as many of you know, interim data from Gilead's COMET study, which is a single-arm study evaluating switching from twice daily Combivir to once daily Truvada in virologically suppressed HIV patients were to be presented at the Interscience Conference On Antimicrobial Agents and Chemotherapy in September in New Orleans.

Due to the catastrophic event of Hurricane Katrina, the conference was rescheduled to occur in December in Washington, D.C.

Many of the patients in the COMET study will have passed the 24-week end point by December, and data from those patients will be included in the presentation.

And prior to that, interim data from COMET will also be presented at the European AIDS Conference in Dublin, in Ireland, in November.

Turning to our performance in the European Union.

Truvada has now launched in four of the five major European countries, including the United Kingdom, Germany, Spain, and, most recently, Italy.

We anticipate that the product will launch in France early next year, a significant milestone, as France represents the largest HIV market in Europe, with more than 50,000 patients on antiretroviral therapy.

With the launch in France, all of the big-five European markets will have launched Truvada in less than one year from EMEA approval.

We are very pleased that we have been successful, not only at achieving a concentrated rollout among the major European countries, but that we have worked efficiently with European pricing authorities to achieve a consistent one-plus-one pricing pattern.

Looking at Truvada's performance to date in Europe, in Germany, despite the fact that Truvada launched three months after Glaxo's Kivexa -- which is known as Epzicom in the U.S. -- Truvada is outselling Kivexa 3 prescriptions to 1.

In the U.K., even though Truvada launched four months after Kivexa, Truvada began outselling Kivexa three months after launch.

And in Spain, after only two months on the market, Truvada is now in formulary in more than 25% of HIV-treating hospitals.

Turning to Viread in the European Union.

Overall sales have remained strong since the launch of Truvada.

We continue to see Viread growth, largely as a result of its convenient once-daily dosing and its established position in second and third lines of therapy.

According to third-party market research, Viread has now passed Combivir in NRTI market share, with Viread at 19.7% and Combivir at 17.1%.

This continued growth is, in part, attributable to our European sales force's ability to promote the 24-week Study 934 data, currently included in the Truvada European label.

Overall, approximately 100,000 patients are receiving Viread, Emtriva, or Truvada as individual agents as part of their HIV regimen in the European Union.

The use of our HIV portfolio has grown mainly because of expanded use of Viread and naive patients starting on Truvada therapy, balanced by conversions from Viread and Emtriva to Truvada.

We believe that Truvada represents a significant opportunity to further penetrate earlier lines of treatment and secure its position as the once-daily NRTI backbone of choice.

Turning to Hepsera for chronic hepatitis B. In the United States, Hepsera prescription volume grew 33% on an annual basis at the end of the third quarter 2005.

In spite of increasing competition, Hepsera prescription volume has increased 6% since the launch of Entecavir by Bristol-Myers Squibb.

As the antiviral market leader for the treatment of chronic hepatitis B, Hepsera has benefited from the growth of the market since the entrance of a new competitor.

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

We will present exciting five-year data from the Hepsera Study 438 at the American Association For the Study of the Liver Diseases annual meeting, San Francisco, in November.

As detailed in the publicly available abstracts, data from the study in "e" antigen negative patients, a difficult-to-treat form of hepatitis B, indicate that the treatment with Hepsera up to five years reverse signs of liver damage.

In total, there will be seven Hepsera presentations at the meeting.

In the European union, much of the growth in Hepsera is occurring in France, Spain, Italy, and countries of the Mediterranean region, most notably Turkey.

During the third quarter of 2005 total unit volume of Hepsera increased by 55% compared to the same period in 2004.

Finally, Hepsera was launched in China on August the 25th by our commercial partner in Asia, GlaxoSmithKline.

To conclude my description of our commercial products, AmBisome 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 11% during the third quarter of 2005 compared to the same period last year.

AmBisome remains the gold standard for serious fungal infections, and continues to maintain nearly 24% market share in the intravenous antifungal market.

As you will recall, late last year we completed the AmBiLoad trial, which evaluated higher loading doses of AmBisome versus the standard three milligrams per kilogram dose.

Data from this study will be presented at the American Society of Hematology in early December in Atlanta.

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

Finally, I would like to conclude by highlighting how proud I am of the employees at Gilead for their swift response to help address the urgent needs of physicians and patients in the wake of Hurricane Katrina.

We were able to communicate to the relevant state government and public health officials about our efforts to ensure ongoing access to Truvada, Viread, Emtriva, and Hepsera.

One of these efforts included dispensing replacement products at no cost to the State AIDS Drug Assistance Programs in the Gulf states and to out-of-state displaced individuals.

Helping to address unmet medical needs is central to our mission at Gilead, and at a time like this, I am pleased that we were able to contribute to the relief efforts.

Now -- now I will return the call back to John Milligan.

Thank you, Kevin.

Thanks to everyone for joining us on the call today.

We're proud of the financial, commercial, and product development accomplishments Gilead achieved in the third quarter.

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

We remain focused on investing wisely in our pipeline and our marketing and sales program 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?

[OPERATOR INSTRUCTIONS.] Our first question comes from the line of Geoffrey Porges with Sanford Bernstein.

Thanks for taking the question.

Congratulations on a good quarter, guys.

Thanks, Geoff.

I just wanted to see if you would give a little bit more color on the HIV market.

You mentioned some growth numbers.

But I'd be curious about what the underlying growth is in the patient number in -- on HIV treatment in the U.S. and o-U.S.

And, then, how many new-to-treatment patients you think you'll see this year?

And, then, perhaps, a little bit of sense of whether you think that's likely to continue in the future?

Thanks.

Hi, Jeff.

It's Kevin Young speaking.

I'll try and cover as many of the questions as possible.

I think that we expect that there will be some increase in new patients coming through, basically, those 40,000 patients newly diagnosed.

So we expect that to be a little bit higher on an annual basis.

If I just deal with, essentially what I would call the utilization of Truvada, on a launch-to-date basis about 60% of Truvada has been composed of switch business, and about 40% is being composed of new patients.

And that picture will gradually change as Truvada gets older.

The components of new patients will get bigger and bigger.

In terms of the buckets in which we have, essentially, scooped our patients from, of naive patients, as I commented earlier, we now estimate that 60% of new patients who are put on antiretroviral therapy go onto Truvada.

And, again, we're optimistic that that proportion of new patients will increase.

And if you then look at just the switch business, where we have, essentially, captured the patients from, we believe that we have penetrated about half the patients of Viread plus Emtriva and about a quarter of the Viread plus 3TC patients.

And, then, finally, we believe we penetrated just under 10% of the Combivir patients.

And, again, those calculations come from independent market research and are based on from launch to where we are today, so, essentially, 12 months.

Thanks, very much.

Thank you, sir.

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

Thanks, very much.

That definitely answered the first question.

I was wondering if you have -- I know it's early days in Europe -- but if you have a similar sense, in terms of the major market countries, in terms of percent of patients that you've cannibalized versus new starts?

And I'm wondering, also, if there's a different sense about the need for Combivir switch in Europe?

Actually, Meg, it's a good question because I was just running budget reviews in Europe last week.

It is early days.

But what we can see from, sort of, U.K., Germany, it's actually a pretty similar picture.

So I think there's remarkable consistency.

I think some of the European markets, potentially, because of their grouping of patients in, sort of, the hospitals have the ability to switch en masse more patients.

So that could be an upside for us on the Combivir switch.

But I think it's a little bit early days now.

Okay.

Thank you.

Thank you, ma'am.

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

Hi, I'm going to use both my questions.

First, Kevin, is the status of the 24-week data from the 934 study being incorporated into promotional material?

I think, actually, what we're -- what we want to do, just to sort of a correction there, Craig, is that we want to get the 48-week into the Truvada labeling in the U.S.

And the only guidance we've given on that is basically in the first half of 2006.

Okay.

Well, maybe you can help me understand that.

Why wouldn't you want to incorporate -- try to get some of the 24-week data into the promotional material?

Craig, can I, maybe, answer the question?

Craig, 934 actually was a requirement to get full approval for Viread.

And that was a 48-week end point.

The primary end point was 48 weeks.

So we submitted the study report in May, and it has a 10-month PDUFA date.

So, essentially, the U.S. timeline for approval of the 48-week -- incorporating in the U.S.

PI is March of '06.

And I want to add, in the European Union, we have the 48-week data, which has got a CHMP positive opinion on that.

And we will get it incorporated in the next three months or so, when we get European Commission approval.

Okay.

Second question is on the GS 9137 data.

Norbert, maybe you could just describe the patients enrolled in that study so that we're prepared to evaluate that data when it comes out.

Okay.

Craig, this was a dose-ranging study that looks at various doses of 9137 in HIV-infected individuals dosed for 10 days.

It was 8 to 2 randomized, active to placebo.

And we will make the decision on how many doses we're going to and whether we go up or down in those, based on emerging data.

We are looking at BID and QD dosing.

And I don't have anything else to -- any news to tell you now because these are all ongoing blinded studies.

In treatment experienced patients?

These are both treatment experienced and treatment naive.

We don't make a distinction.

As you may remember, in the Merck study, they actually did not see a difference in terms of response between naive and experienced patients because it's a novel target.

Okay.

Thanks, very much, guys.

Thank you, sir.

Our next question comes from the line of Thomas Wei Piper Jaffray.

Thanks, very much.

I had a question.

I'm a little bit confused about the U.S.

HIV numbers, particularly when you look at them on a sequential basis.

So if we take the Viread and Truvada sales and strip out the portion of Truvada that is Emtriva, you'd end up with all Viread growth from second quarter to third quarter, that would look like 156 million to 159 million, despite having taken a price increase at the beginning of the third quarter and it being at least partially effected during the quarter.

Can you help us understand what some of the factors are there?

Did you see a sequential decline in overall prescriptions for NRTIs, or was there something on the inventory side that might explain that?

Thanks.

Thomas, I'm not sure -- I'm not sure I fully get your question.

And we could probably get more details and get back to you.

Just one thing to clarify.

You've got to watch the effect when you're looking at the NRTI market, the effect of the denominator changing.

Because you've got products that move from, essentially, single products into combined products, that alters the dynamic.

So one thing to watch is sometimes market share does not alter but volume does go down.

That's the case, for example, with Combivir.

Combivir's share has not altered that much.

But if you look at the volume decrease, it's quite significant.

And that's because, essentially, the market's shrinking because single products are going into double or triple products.

So that might have some influence on the picture you're seeing.

But in terms of more detail, I think we probably need to get back to you on that.

Yes, Thomas, just looking at the volume data now.

So, clearly, Viread volume did decrease quarter-over-quarter, but that was more than offset by the Truvada gain quarter-over-quarter in terms of volume.

So those two things certainly led to the number.

It was a tricky question.

I'd have to write it down to get it right.

The other thing that you mentioned was the price increases.

And one thing to be clear is the way the price increases are implemented, hey come in slowly, which is, there is some inventory that's out there at the previously established prices that flows its way through naturally.

And, also, the price increases that the government payors, Medicaid, ADAP, things like that, only go up due to cost of living.

So it's only implemented partially throughout the -- even after a period of time.

But that first quarter, the effect is much smaller than you might anticipate based on a simple model.

And just one final comment, Thomas, again, about the dynamics of this market.

If you look at just the total tenofovir molecules, what comes from, essentially, Viread and Truvada, since the launch of Truvada, total tenofovir has increased since by 30% in terms of NRx.

Contrast that with total abacavir, and that's only gone up 5%.

So I think that illustrates that, in terms of capturing more patients onto the tenofovir molecule, whether it be Viread -- or more informally now Truvada -- we're getting naive patients and we're getting switch patients going onto Truvada, whether it be switch from Viread based, or whether it be it from other products.

Actually, could I just ask a follow-up on that last point?

If you look at the tenofovir share or volume on a sequential basis, you said it's up 30% since the Truvada launch.

Can you tell us what it was from 2Q to 3Q?

I can't off the top of my head, Thomas.

The total tenofovir Q2 to Q3?

Thomas, we'd be happy to follow up with you.

We don't have that readily available.

All right.

Thanks, very much.

Thank you, sir.

Our next question comes the line of Yaron Werber with Citigroup.

Yes, hi.

Good afternoon.

Very nice quarter.

Wanted to ask a quick question.

The guidance for the year is to post gross margins between 85 and 86%.

You've been pretty much annualizing, I mean, the last nine months an 86%.

What would, perhaps, take the gross margin down to 85%?

I mean, there shouldn't be any sort of stocking that you would run through at this point.

Am I correct to assume that?

Yes, there's no stocking, let's be clear about that.

But as Truvada has an Emtriva component to it, and that Emtriva component has a smaller margin than does Viread.

So -- and even with the royalty buyout, that is not affected because we amortized that cost of that royalty buyout through the COGS line.

And so what you're seeing is the product mix makes more Emtriva sold, it drags down the margins a little bit.

So that's the largest factor that's affecting it.

The other thing, of course, happens over time is worldwide pricing changes.

There's a gross dynamic there, a price decreases in some areas versus price increases in other areas that can affect gross margins, as well.

It just seems to me that up to now, this could have been a possibility in this quarter, as well.

And we haven't seen that.

In terms of having an impact on gross margin.

Yes, we don't -- clearly, with the guidance we've given, we don't expect any change throughout the remainder this year, and we're not yet thinking about gross margins for next year.

Our guidance just ends at the end of the year.

I just want to quickly follow up on one question, if I may?

If the integrase inhibitor is successful and you're moving that into Phase II, I just want to make sure there will be nothing in the contract with Bristol with Sustiva to stipulate that you would not be able to run a combination study, Truvada with an integrase inhibitor head to head versus Sustiva and Truvada

No, of course not.

And let me just be clear, the contract with Bristol-Myers gives us freedom to operate in a lot of different areas with other protease inhibitors and other new molecules.

Basically, anything that comes into our portfolio is fair game.

That -- which is the right thing to do under this kind of agreement.

Great.

Thank you.

Thank you, sir.

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

Thanks for taking my question.

Actually had to of them.

First, just to follow up on the HIV franchise.

You said the price increases are not fully reflected yet.

I was just kind of curious when the -- when do you expect the full price increases to be reflected in the U.S.?

Then I just had a follow-up question.

[Indiscernible] quickly, it basically amounts to about a one-quarter lag, which it takes us about that long to flow things through there -- more or less a one-quarter lag.

And, then, again, those price increases, the full extent of which is not felt in the public sector, except that we do increase slowly as the consumer price index goes up.

So it's tied to that directly.

And so there's always a slight increase in markets.

But over time, there's -- essentially, we'll never catch up to the full price increases over time.

Does that properly manage any inventory fluctuations?

It's not related to inventory.

It's just the dynamics of how things flow through and the mechanics of how price increases are manifested in different payor groups.

Okay.

And just to follow up on Tamiflu, can you just review for us the size of the government orders that you've received to date and just update us on the manufacturing capacity and any steps taken there to ramp up capacity?

Well, to be clear, we don't take any orders on Tamiflu.

These are all Roche orders.

Right.

And they've given guidance -- first of all, they've been very clear that they're not giving external guidance on their manufacturing capacity, nor are we able to give any guidance on their capacity.

They have certainly been strongly stating in the press that they've increased their capacity over time.

They have been working to qualify plants and new facilities, much like they had in the announcement they had today on their new capsuling facility.

I believe the guidance for the remainder of the year -- and, again, this will be on tomorrow's call, but the guidance for the remainder of 2005 -- if I've got this right -- is a low of -- this is in -- I'm going to give it to you in dollars, about 250 to 295, in dollars for the second half of '05.

We've converted that from their Swiss franc guidance, which is 300, 350.

So we used a conversion factor to get to those numbers.

And just to be clear, that's for pandemic sales only.

They've not given any seasonal guidance.

Right.

So that's just what they're -- they've given guidance on.

And we look forward to tomorrow's call and updated guidance, if any.

Okay.

Thank you.

Thank you, sir.

Our next question comes from the line of Sapna Srivastava with Morgan Stanley.

Hello, thanks.

I have two questions.

One is -- Could you give us a little bit more color on ex-U.S.

Truvada sales, as to why do you see the uptake being slightly slower than you probably would have expected.

And the second question is in the co-formulation of Sustiva and Truvada, as to why you're not considering co-packaging of the two drugs?

Hi, Sapna, it's Kevin speaking.

I don't think I said, or I hope I didn't give the impression that the European uptake was any slower than the U.S.

We've been absolutely delighted.

And I think there's a remarkable amount of consistency, albeit that we've only got very early data from Europe.

But we see -- we see a very, very similar picture.

And that's, perhaps, hardly surprising because of the consistency around treating HIV worldwide, the use of guidelines.

If you look at the DHS guidelines, with Truvada being in a first-line position, that's very, very similar and paralleled by the BHIVA guidelines, that's the British guidelines on HIV which, again, are representative of very much the European thinking.

So our expectation is we will see a very, very similar type of uptake.

We saw the same thing with Viread, Viread paralleled uptake in the U.S., in Europe.

And our expectation is it -- it's going to do the same for Truvada.

We are every bit as confident about Truvada in Europe as we are here.

And with regards to co-packaging, maybe I can answer that.

We have very carefully thought about co-packaging the two products.

It certainly sounded fairly straightforward to do.

But we have decided not to make that our first priority because, simply, the -- our commercial groups felt that this concept of one pill once daily would be the big selling point for patients and a big advantage.

Okay.

But it's certainly still an option that we haven't completely dismissed.

Thank you.

Thank you, ma'am.

Our next question comes from the line of Eric Ende with Merrill Lynch.

Thanks.

When you gave your guidance, you gave guidance of 1.365 to 1.385.

You also talked about a price increase that's going to start showing up in the fourth quarter.

I guess what I'm curious about is sequential growth is based on your guidance as a minus 2% to a positive 3%.

I'm just trying to understand that guidance.

Is it just conservativism, or is there something that you see in the fourth quarter?

Yes, Eric, your numbers are exactly right in terms of the sequential growth.

I'd say the best way to think about this is we're facing -- we're facing a really strong product launch going on in Europe.

We're facing considerable pressure in the United States because we've had such a strong launch now, we've gotten a lot of the easy patients.

And I would say that this is a number that we're very confident in for the remainder of the year.

But we have missed some opportunities that we thought we might have to get some data out there.

And so, for example, the ICAAC meeting, where we had planned on having a number of events, we missed because of Katrina.

And so a lot of our marketing is now delayed.

So I think that's probably a little bit of our nervousness, I'll put, for the fourth quarter.

So I don't see any bad events, we just missed opportunities.

Now the good news is, I see great opportunities going forward.

In November, there's a meeting at EACS, which is in Ireland.

We have ICAAC in December.

We have, in the first quarter of next year, we have the retrovirus conference.

And then we have the expanded label occurring in March.

So, really, for the next five months, we have four key events.

We'll be able to get out data on 934.

We'll be able to get out data on COMET, showing how effective this product is in switches.

We'll have a label update in the U.S., probably also, now, a label update in Europe.

So this will all help us going forward.

But some of the tools were taken out of our hand in September, unfortunately, because of the hurricane.

Okay.

And, then, just a question on tenofovir in HBV.

Can you -- what is the relative pricing of tenofovir versus Hepsera at the current time?

Well, it's lower.

It's about $100 a month lower, if I'm recalling it correctly, in the United States, per bottle.

So that -- so it's a significant decrease in price.

So it's an overall benefit to the healthcare system to have Viread in the mix versus Hepsera.

And, obviously, Eric, it would be considerably cheaper than Entecavir, because, as you know, Entecavir priced a very large premium compared Hepsera.

So what we're seeing is the opportunity to bring a product that's as good or better, we believe, than Entecavir to market.

It certainly has higher viral load decreases.

There's published data out there showing significantly stronger viral activity in patients with Viread.

So 5-log-plus decreases versus 3.5-log decreases on Hepsera.

So better viral control.

Huge safety database of patients who've already been treated with the product, which is a big advantage.

And, clearly, a pricing advantage.

So, to offset any erosion from Hepsera, we clearly have to build the market to a bigger stature than it is today.

Sure.

Thanks a lot.

Thank you, sir.

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

Hi, thanks for taking my call.

Could you be clear in terms of inventory changes for Viread -- or really, any of your products in the U.S.?

Is any of the decrease in the U.S. due to inventory draw down?

And, also, you mentioned, I think it's great that you were providing the HIV drugs at no cost to people affected by the hurricanes.

Could you quantify what, if any, sales impact there was in the quarter as a result of that program?

Thank you.

I'll have a crack, Jason, and John can come in.

Basically, there's been no change in -- no fluctuations in terms of inventory.

So our inventory management agreements that we have with the three major wholesalers are working very well.

So I'm pleased to say that there's nothing in the results that are reflective of any inventory situation.

It's very difficult to actually put a number on just affected patients.

We think we've helped -- we helped -- we think we've helped circa about 1,000 patients with our Access Program for a short period of time.

When we stepped in, these were basically people who were just displaced and needed coverage because they were in another state.

We, again, consider that as very small and relatively inconsequential to our performance.

And, quite honestly, it was more about the values and the right thing to do for humanity than, essentially, worrying about our refuse.

We feel it was the right thing to do as a corporation.

I won't argue with that.

I was just trying to see if you -- if there was a number you could put behind it.

The inventory agreements that you have, you say you haven't changed inventory.

Is this the inventory hasn't changed on a dollar basis or on a weeks of sales basis, because as Viread comes down, one would expect, if you kept just -- if you estimated a certain number of weeks of inventory, clearly that number would -- you'd have to draw down on the inventory.

Could you clarify that?

John?

Sure.

We'll be more precise, you're right, when we say it hasn't changed.

What we mean is that the inventory management agreements are effectively keeping the inventory within the prescribed ranges that we look at.

And so there's a forecast both backward looking and forward looking that brings things into a prescribed range.

So we watched it gently cushion the fall of Viread as Viread sales have decreased.

But then on the reverse side, they're building inventory as it relates to Truvada, as we've seen the rapid increases in the number of prescriptions.

So one is going down and one is going up.

And it seems to us, and as evidenced by the price increases, the smooth transition this quarter, that they worked very effectively, because we brought things in just exactly as we had forecasted.

Thanks.

Thank you, sir.

Our next question comes from the line of Mark Augustine with Credit Suisse First Boston.

Thanks.

Two things, quickly, on the repatriation.

Just remind us what the steps are in terms of forming and then submitting a plan.

Remind us if that allows you to undertake various transactions in calendar 2006 accordingly.

So the Homeland Investment Act would allow repatriation of foreign earnings at an advantaged tax rate.

And we do have some offshore earnings that we've built up over time.

So we would be -- we can effectively repatriate those at a favorable tax rate.

For some companies, this is a net negative.

For Gilead it would be positive to our effective tax rate because we have sufficient reserves for those repatriated earnings.

So it's a positive event for us.

If we choose to do this, we'll be careful, because we have not yet elected to do anything in this.

But the thing to say is then we have some period of time in order to which to deploy the money repatriated and specifically earmark it for certain events, including R&D and things of that nature.

We do have some specific ideas as to how we would use it or potentially use it.

But we can't communicate those until we officially make the election and talk about this publicly.

Well, what kind of amounts of money might be considered eligible?

Can you undertake transactions -- ?

I can't disclose that at this time.

The other question related to comments made in the prepared remarks about future of hepatitis C therapy and the Company's belief that a combination therapy could be the future there.

I think people would love to hear more on that perspective of the Company that's so deeply involved in a number of infectious diseases.

Certainly, HIV therapy has supported combination therapy.

I suppose there's been use of combination therapy in bacterials and not really so much so in hepatitis B and to a limited extent antifungals, I guess mainly due to concerns about antagonism.

But help us understand better where this view comes from.

And I want to make it distinguished in hepatitis C, a view of it being a combination therapy future as opposed to a sequential therapy future.

Thanks.

Well, Mark, we absolutely agree with you that we think -- a lot of us at Gilead believe that the future of hepatitis C treatment will go the same way as HIV treatment, which is combination therapy with small molecules that can be taken orally.

And that's exactly why we are pursuing the lines of research and development that we're pursuing.

We're working with a collaboration with Genelabs on nucleoside polymerase inhibitors against hepatitis C. And we have a collaboration with Achillion on polymerase -- on protease inhibitors of hepatitis C, and internal research program programs, as well.

So I hope that answers your question.

Mark, your other -- I think you also alluded to hepatitis B in there.

The hepatitis B part, you're right, has not been proven in terms of combination therapy.

They're not really good examples.

And, certainly, no large, controlled studies which have shown combination therapy to provide benefit.

There is, certainly, a theoretical consideration that longer term benefit would include less resistance, which is really the important thing to consider in this.

So for example, in our trials, we will take some patients who have failed other therapies and try Truvada to see if combination therapy can work.

But it's not -- it's not proven.

And we're kind of taking a step-wise fashion into that.

You had also mentioned sequential therapy.

And sequential therapy, generally, brings out lots of resistance.

So there's a general feeling that, certainly in the HIV it did.

And so there's a feel that sequential therapy, based on that model would be more likely to generate resistance than not.

And it will take multiple mechanisms to get us where we need.

Thank you, all those comments are really helpful.

I appreciate it.

Thank you.

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

Hi, yes.

I just had a question on the triple combination formulations.

You now have three bi-layer formulations.

I'm wondering have you gone back to the drawing board and have formulations beyond that?

And the second question is surrounding the commercial viability of pills larger than 1,600 milligrams and whether those would actually be viable?

Yes, so, we are -- so we -- as we pointed out in our conference call in the -- previously by Kevin that we're working on three -- in parallel -- on three bi-layer combination formulations.

And if any of those proves to be bioequivalent we would file the NDA in the first half of '06.

Beyond that, of course, as we always do, we work on backup programs.

And we have formulation six, seven, and eight currently in development that are partly bi-layer, partly tri-layer combinations.

And then regarding the pill size, yes we do believe that the 1,600-milligram pill size is absolutely viable.

And if you look at some of those multivitamins that are available on -- commercially, they are about the same size tablet.

We also have done a very limited market research with the 1,600-milligram pill and have not found any issues that patients had with regards to swallowability.

I'm just wondering beyond 1,600 milligrams.

Does there become a problem in case you have to actually go larger than -- ?

Yes, we actually -- our goal is not to go beyond 1,600 milligrams because, simply, the tablet becomes somewhat large.

And then I think we would have to go to two separate tablets rather than one.

Okay.

But we -- our internal goal is to keep it at 1,600.

Or below.

Or below, of course, yes.

Thanks, very much.

Thank you, sir.

Dr. Milligan, it does appear that is all the time we do have for questions today.

Thank you, Operator.

And thank you, all, for joining us today.

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

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

This does conclude your presentation, and you may now disconnect.

Have a wonderful day.