吉利德科學 (GILD) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Gilead Sciences third quarter 2009 earnings conference call. I'll be your conference operator today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this conference call is being recorded today, October 20, 2009. I would now like to turn the call over to Susan Hubbard, Vice President of Investor Relations. Please go ahead.

Thank you, Melanie and good afternoon, everyone. Welcome to Gilead's third quarter 2009 earnings conference call. We're pleased you could join us today. We issued a press release this afternoon providing results for the third quarter ended September 30, 2009. This press release is available on our website at www.Gilead.com. We've also posted slides that outline the topics discussed on this call. Joining me today are John Martin, Chairman and Chief Executive Officer, John Milligan, President and Chief Operating Officer, Kevin Young, Executive Vice President of Commercial Operations, Norbert Bischofberger, Executive Vice President of Research and Development and Chief Scientific Officer and Robin Washington, Senior Vice President and Chief Financial Officer. We'll keep prepared comments brief to allow more time for Q&A.

I would first like to remind you that we will be making statements related to future events, expectations, trends, objectives, and financial results that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on certain assumptions that 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 statements. I refer you to our Form 10-K for the year ended December 31, 2008, Form 10-Qs for the first and second quarter of 2009, subsequent press releases and other publicly filed SEC disclosure documents for a detailed description of risk factors and other matters related to our business. In addition, please note that we undertake no obligation to update or revise these forward-looking statements. We will be making certain references to financial measures that are on a non-GAAP basis. We provide a reconciliation between GAAP and non-GAAP numbers on our website.

I'll now turn the call over to John Martin.

Good afternoon, everyone and thank you for joining us today. The third quarter of 2009 was financially excellent and productive on many levels. Product revenues for the quarter reached a record high of $1.65 billion. Our antiviral franchise continued its momentum in gaining share across all our commercial markets with record revenues of $1.47 billion. Importantly, we generated $861 million in operating cash flow. In July, we were very pleased to welcome Kevin Lofton to Gilead's Board of Directors. Kevin is currently the President and Chief Operating Officer of Catholic Health initiatives, a Denver based Health Care system operating the full continuum of services from hospitals to home health agencies throughout the nation. His expertise and knowledge of real world hospital administration and patient care issues will prove invaluable to our board and our management team. And I look forward to learning from his contribution and insights.

On the regulatory front, in September, the European Commission granted conditional approval of Cayston our inhaled antibiotic for the treatment of chronic pulmonary infections due to Pseudomonas aeruginosa in adult patients with cystic fibrosis. We plan to begin making the product available in Germany and the UK in the early part of 2010. Also during the third quarter we received conditional approval for Cayston in Canada. Cayston is the first new inhaled antibiotic to be licensed for the treatment of cystic fibrosis in a decade and it has the potential to improve the lives of patients suffering from this disease.

Before I turn the call over to Robin to review our financial results, I'd like to highlight two very important developments for patients with HIV/AIDS on the US policy front. First in early September, the US Department of Health and Human Services announced a proposal to add HIV screening tests to Medicare's list of covered preventative services. This proposal would mean that Medicare would cover annual voluntary screening of those at risk for HIV infection as well as women who are pregnant. A final decision regarding this proposal is expected in December.

Secondly, on September 30, the Senate Health Education Labor and Pensions or HELP committee approved draft legislation that would extend the Ryan White Treatment Act through 2013. This measure would authorize $2.35 billion in funding in fiscal 2010 with annual increases through fiscal 2013 for which $2.7 billion would be authorized. In addition to access to care and treatment, the treatment act would, for the first time, establish a national goal of administering 5 million HIV tests each year.

As you may know, just under a quarter of the patients in the United States receive antiviral therapy through state AIDS drugs assistance programs and this reauthorization would ensure continuity for those currently treated and create the opportunity to diagnose more patients, bringing them into care and onto therapy. Final adoption of this legislation is expected by the end of October.

Beyond these important policy developments here at Gilead, we have exciting progress to share in terms of our marketed products and our pipeline programs. I will turn the call over to Robin who will begin to -- begin by reviewing our financial results for the third quarter.

Thank you, John. I am very pleased to provide you with Gilead's financial performance for the third quarter of 2009. Total revenues which include product, sales and royalty, contract and other revenues were 1.8 billion, a 31% increase year-over-year. Net income was 673 million or $0.72 per share. Non-GAAP net income for the third quarter, which excludes the impact of after-tax acquisition-related expenses, restructuring expenses and stock-based compensation expenses was 730 million or $0.78 per share, representing a year-over-year increase in the net income in EPS of 39% and 42% respectively. Product sales were 1.65 billion. Antiviral product sales grew to 1.47 billion, up 19% year-over-year and 4% sequentially.

Truvada sales contributed 621 million to our antiviral product sales, up 13% year-over-year due primarily to sales volume growth in both the US and Europe. Truvada sales increased 2% sequentially. Atripla contributed 605 million to our antiviral product sales. Atripla sales increased 42% year-over-year and 6% sequentially, resulting from the continued uptake of the product in the US and Europe. The efavirenz portion of Atripla which is purchased from BMS at its estimated market price and reflected in cost of goods sold was approximately 222 million. Viread sales were 170 million representing an increase of 9% year-over-year and 7% sequentially. Hepsera generated sales of 68 million a decrease of 26% year-over-year and an increase of 1% sequentially. Letairis sales were 48 million, an increase of 52% year-over-year and 9% sequentially, driven primarily by sales volume growth in the US.

Finally, Ranexa sales were 49 million for the third quarter. This represents an increase of 18% sequentially after normalizing the second quarter sales for the period prior to our acquisition of CV Therapeutics on April 15. Foreign currency exchange had a net unfavorable impact of 51 million on revenues when compared to the same period last year. On a sequential basis, foreign currency exchange had a favorable impact of 18 million. Our royalty contract and other revenues for the third quarter were 152 million, an increase of 120 million year-over-year and an increase of 74 million sequentially. Both the year-over-year and sequential increases were primarily driven by increased Tamiflu sales related to pandemic planning initiatives worldwide. Royalties received from Roche for Tamiflu sales and recognized in our revenues in the third quarter were 113 million. These royalties which are paid one quarter in arrears reflect a royalty rate of approximately 21% as applied to Roche's net sales of Tamiflu during its second quarter of 2009. Tamiflu royalties represented approximately $0.09 in earnings per share during the third quarter.

During their third quarter 2009 earnings call, Roche reported 944 million Swiss franks for Tamiflu worldwide sales in third quarter 2009. This translates into approximately 195 million in royalties payable to Gilead in our fourth quarter or approximately $0.16 per share on a fully diluted basis. It is important to note that the following discussion of all margin and expense related items are on a non-GAAP basis, which excludes the impact of acquisition, restructuring and stock-based compensation related expenses.

Product gross margin was 76.5% compared to 78.1% for the same quarter of last year and relatively flat compared to the second quarter of 2009. The year-over-year decrease was due primarily to the higher proportion of Atripla sales which includes the efavirenz component at zero gross margin. Operating margin was 53.9% compared to 53.6% for the same quarter last year and 52.4% for second quarter 2009. Our year-over-year and sequential operating margins were favorably impacted by the increase in Tamiflu royalties, as well as continued and focused cost management, partially offset by the R&D expense reimbursement related to the Tibotec TMC 278 collaboration.

During the third quarter we have also begun to realize significant operational efficiencies from the integration of CV Therapeutics. We continue to see improvements relative to 2008 in our core operating margins which excludes Tamiflu and Efavirenz. R&D expenses were 242 million, an increase of 42% on a year-over-year basis and an increase of 18% sequentially. The year-over-year increase was due primarily to the Tibotec R&D expense reimbursement, increased clinical study activity and additional hiring associated with the overall growth of our business. The sequential increase was due to the effects of the Tibotec R&D expense reimbursement, partially offset by the integration of our combined cardiovascular operations and lower clinical study expenses.

SG&A expenses were 200 million, an increase of 19% year-over-year due primarily to higher head count and investments associated with overall growth of our business, including the CV Therapeutics acquisition. On a sequential basis, SG&A expenses decreased 6%, due primarily to promotional spend seasonality in our international operations and synergies realized from the integration of CV Therapeutics partially offset by expanded sales and promotional expenses for Ranexa which Kevin will speak to.

Other income and expense reflected a net expense of 3 million for the third quarter, a decrease from a net expense of 13 million for the same quarter last year, due primarily to lower hedging expenses and more favorable foreign exchange translation gains and losses, partially offset by lower year-over-year investment yields. Sequentially, other income and expense was 2 million favorable.

Our effective tax rate for the third quarter was 24.8%, compared to 27.5% for the same quarter last year and 24.7% for the second quarter of 2009. The year-over-year decrease was driven primarily by increased earnings in the lower tax jurisdictions and the extension of the federal research tax credits in the fourth quarter of 2008. Next I wanted to provide an update on our restructuring activities. As discussed last quarter, we developed and communicated a restructuring plan to realign the cardiovascular operations of Gilead and CV Therapeutics. We have completed the integration and have incurred approximately 33 million in pretax restructuring expenses to date with 8 million incurred during the third quarter. We expect to incur additional restructuring expenses of approximately 28 million through 2010, which includes approximately 16 million in the fourth quarter of 2009. We generated 861 million in operating cash flow during the quarter. We also repurchased 6.2 million shares of our common stock at a cost of 288 million and utilized 200 million to pay down half of the 400 million credit facility that we accessed in the second quarter.

As of September 30, 2009, we had approximately 242 million remaining for share repurchases under the 3 billion share repurchase program scheduled to expire at the end of 2010. We ended the quarter with a strong balance sheet position. Our cash and marketable securities portfolio of 3.3 billion allows us the continued flexibility to pursue opportunities to expand our business and return value to our shareholders as appropriate.

Now turning to guidance for the year, which is available on our corporate website. Based on strong financial performance for the first nine months of 2009, we expect net product revenues for the full year 2009 to be approximately 6.35 billion, which is higher than our previous guidance of 6.1 to 6.2 billion and which reflects a 25% increase over 2008 net product revenues. Factors that may have an impact on our business include, but are not limited to the potential for continued volatility in foreign exchange rates, US and international government pricing pressures and changes in the financial health and/or practices of our business partners and customers. Please note that the non-GAAP product gross margin and operating expense guidance provided to you excludes the impact of acquisition, restructuring and stock-based compensation related expenses where applicable. Our non-GAAP product gross margin guidance for 2009 remains unchanged and ranges from 76 to 78%.

For expenses, we are decreasing non-GAAP R&D expense guidance from a range of 850 to 870 million to a range of 810 to 830 million. This guidance includes the 2009 R&D expense reimbursement payable to Tibotec for the development costs associated with TMC 278. Non-GAAP SG&A expense guidance remains unchanged and ranges from 810 to 830 million. Our effective tax rate guidance for the full year 2009 is expected to remain in the range of 26 to 27%.

And finally, we are maintaining the full year diluted EPS impact of acquisition restructuring and stock-based compensation related expenses at a range of $0.23 to $0.26 per share. Additional details can be found on our corporate website.

At this point I would like to turn the call over to Kevin who will discuss our commercial highlights for the quarter.

Thank you, Robin. I am pleased to share with you the solid commercial performance for the third quarter and especially our HIV results. During the third quarter, total US antiviral product sales were a very healthy $805 million led by Atripla at 408 million, up 18% year-over-year and Truvada, up 293 million, up 12% year-over-year. Prescription demand during the quarter for both Atripla and Truvada were particularly robust. As highlighted in our second quarter earnings call, we did see a rise in inventory levels as a result of wholesale levels anticipating a July price increase. In the third quarter, we saw this situation reversed with the second quarter buy in largely taken out and inventory returning to levels in line with the first quarter.

In the third quarter, non-retail purchases, primarily those linked to state AIDS drug assistance programs were consistent with the buying pattern of the previous financial year, albeit stronger than the third quarter of 2008. As a reminder, patient data for the US lags our financial results by one quarter. In the second quarter of 2009, the number of patients treated with antiretroviral therapy grew by 6% on a moving annual total basis to approximately 571,000 patients. Atripla, the most prescribed regimen in HIV had 180,000 patients on therapy or nearly a third of all treated patients and captured approximately 50% of treatment naive patients. Truvada continued to grow to a total of 211,000 patients on therapy or 37% of all treated patients, maintaining its position as the back bone of choice for antiretroviral therapy in the US.

Total Truvada or Atripla together with Truvada continued to account for approximately 85% of patients new to therapy and the products now are the components of all of the top six prescribed regimens in HIV. It is also encouraging to see that the growth of the newer third agents in the naive setting is coming in tandem with Truvada. Approximately 61% of raltegravir patients and 92% of darunavir patients are coprescribed Truvada. Our HIV products in Europe continue to perform well led by Truvada which contributed $293 million of revenue in the third quarter, up 14% from the same period in 2008. In our first full quarter with Atripla launched in France, Atripla revenues were 182 million, up 18% sequentially. The uptake dynamics for Atripla within the French market are encouraging and while it is still early, we have seen similar characteristics to that of the US, even though protease inhibitors are a more popular third agent class in France. We anticipate launching Atripla in three additional international markets where Gilead has a commercial presence, with Belgium in the coming weeks and Australia and Switzerland to follow in the first half of 2010.

In the early Atripla launch countries, namely Germany, Spain and the UK, we now have the number one and number two brands in Truvada and Atripla. The big five countries of Europe continue to show robust growth with approximately 281,000 patients treated with antiretroviral at the end of the second quarter 2009 representing a growth rate of 7% on a moving annual total basis. Approximately 25% of the patients receiving Atripla converted from Truvada plus Sustiva in the third quarter 2009 whilst 31% were switches from other regimens and 44% of patients were naive.

Total Truvada increased its share to approximately 74% of treatment naive patients, up from approximately 68% in the third quarter of 2008, while Kivexa's share remained at 11% in the third quarter of 2009, down from approximately 16% in the third quarter of 2008. Total Truvada achieved new highs in the NRTI market, outperforming Kivexa with a prescription ratio of 3.4 to 1 in July 2009 up from 2.6 to 1 in July 2008.

Now turning to our US hepatitis franchise. Estimated total HBV prescriptions grew by 21% quarter on quarter, more than offsetting the decline in Viread HIV total prescriptions and generating a 5% quarter on quarter increase in Viread prescription volume across both indications. The latest September monthly data point for total HBV prescriptions have Viread at a estimated market share of approximately 30% and Hepsera up 22%. As most of the recent data point in July 2009, Viread had achieved a 40% naive patient share in the HBV market, marking the second consecutive month that Viread was at a naive patient share at or above that of entecavir We are very pleased with our recent addition to our US label of 96 week data from our pivotal with our studies of 102 and 103 as well as 48 week resistance data from study 106.

In Europe, Viread for HBV is reimbursed in 16 countries with international launches anticipated in Belgium, Poland and Australia in the fourth quarter of 2009. Supported by guideline endorsements for use in both naive and limited experience patients and a positive recommendation from the UK National Institute for health and clinical excellence, Viread has surpassed entecavir in Germany and Spain our first countries of launch.

As of July 2009 Viread' HBV market share in Europe was estimated to be 16% versus 9% at the start of the year. In Turkey, where we established our affiliate specifically for the launch of Viread HBV, we have achieved a 21% market share one year post launch and are making gains on entecavir which holds a 29% market share.

Now turning to our cardiovascular franchise. We continue to make progress with Letairis for the treatment of pulmonary arterial hypertension, supported by our updated label, removing the six-month reenrollment requirement in the LEAP program as well as our recent introduction of LabSync which is designed to reduce the burden of monthly lab monitoring. During the quarter, bosentan received the treatment indication for WHO Functional Class II patients. Along with that approval, the FDA added a considerations for use section to the label which states that physicians should consider whether benefits offset the risk of liver injury in this class of patients.

As a reminder, Letairis was immediately approved for WHO functional Class II and does not carry this safety warning. Thus we continue to believe we have the best in class ERA for PAH with a distinctive profile from the sulphonamide structure ERAs, namely bosentan and sitaxentan. According to our latest data as we exited the third quarter, approximately one in three patients receiving an ERA were taking Letairis.

And finally, turning to Ranexa, total US sales for Ranexa during the third quarter were $49 million. This figure included $3.9 million in bulk tablets supplied to Menarini, our licensee for Ranexa in Europe. During the quarter, we did see a modest increase in Ranexa inventories to where days on hand for Ranexa now model that of our HIV franchise. Additionally, we had a one-time Ranexa benefit as we began transitioning certain of our US wholesalers to Gilead inventory management agreements. We have made a great deal of progress on the operational plan for Ranexa that I laid out on our last earnings call. We have completed the hiring and initial training of our new 200 person sales force and as of Monday, this team began field promotion with a new visual aid, a new sample policy and a new copay program. We have revamped the previous Ranexa call universe based on angina prescribing potential, mixing both cardiologists and internal medicine specialists, 30% of whom are entirely new targets. In conjunction with this work, we canceled the primary care pilot program instigated a year ago by CV Therapeutics.. The rebuilding of a field based medical science team is nearly complete and they will be supported in their work by an extensive continuing education program focused on the treatment of chronic angina.

Finally, we have set in motion a new and expanded Ranexa Speaker Program that will highlight the benefits of Ranexa according to our new label. I am encouraged by the firsthand feedback I have received during field visits and advisory boards and I look forward to keeping you updated on Ranexa progress as our activities gain traction in 2010.

I will now turn the call over to Norbert to discuss our R&D efforts.

Thank you, Kevin. On the research and development front, we're now in the final stages of completing an annual review of our R&D portfolio, a process in which we assess the progress as well as the evolving medical and commercial opportunity to our various product candidates and programs across our four therapeutic areas, namely HIV, liver diseases, respiratory diseases and cardiovascular metabolic diseases. I am pleased that we have a number of very exciting opportunities available to us in that between now and the end of 2010 we expect numerous and important data sets to emerge from these efforts.

First on the cardiovascular metabolic front. The results of the DAR 311 study were published online and will soon appear in an upcoming publication of The Lancet showing that darusentan was effective at reducing trough setting and mean 24 hour systolic and diastolic blood pressure after 14 weeks of treatment in patients with resistant hypertension. DAR 311 is one of two ongoing phase three clinical trials evaluating the safety, efficacy and tolerability of darusentan as an add-on treatment for resistant hypertension.

The second study, DAR 312 is expected to be completed with data available by the end of 2009. DAR 312 is an international phase three double blind placebo and active controlled group trial in which 849 patients were randomized to receive darusentan titrate to the optimal dose of 50, 100 or 300-milligram once daily or inactive comparative placebo. The coprimary efficacy end points of the trial are the changes from base line to week 14 in trough setting systolic and diastolic blood pressure. Importantly, we will also learn more about the safety of darusentan, particularly with regard to edema in cardiovascular safety events.

There are also a number of additional indications and opportunities for Ranexa and follow on late sodium channel inhibitors. Based on desired product profiles, we will pursue some of these opportunities with Ranexa itself and some of them with new chemical entities emerging from our research efforts. We're also moving GS 9667, a partial AdenosineA1 agonist into a phase 1 B study. This compound has previously shown in a single ascending dose study to lower plasma free fatty acids. The phase Ib study will assess the effect on GS 9667 plasma triglycerides, glycemic control and insulin sensitivity. In addition we are exploring the utility of Letairis for the treatment of non-whole group one pulmonary hypertension patients. We're currently screening patients in a phase III study exploring the utility of Letairis for the treatment pulmonary hypertension secondary to IPF. The safety and efficacy of Letairis will be determined in this placebo controlled study, with six minute walk distance as the primary efficacy end point.

On the respiratory front, as John Martin mentioned, we're very pleased that Cayston has received conditional approval both in the EU and Canada. We continue to work with the FDA to determine the path for approvability for the product in the United States. Our head to head study of Cayston versus Tobi, which would support full approval in EU and Canada and potentially support in the United States will be fully enrolled by the end of this year with data toward that study toward the middle of next year. With regard to GS 9411, our epithelial sodium channel blocker or ENaC inhibitor, we've successfully completed two phase one studies designed to assess the safety a single ascending dose of the compound. We are now initiating a multiple dose study in healthy volunteers which would be completed by the end of the year. We will also initiate a single ascending dose study in patients with cystic fibrosis shortly. As an ENaC inhibitor, this compound is designed to stimulate and increase airway hydration and, therefore, could have applications beyond use in patients with cystic fibrosis. Based on positive data, safety data in the phase one studies, we're preparing to initiate a proof of concept study in patients with COPD. In addition, the phase III study of Letairis for the treatment of IPF is continuing to enroll patients.

With regards to our efforts in hepatitis C, as you know, the current standard of care for the treatment of patients with chronic hepatitis C is the combination of peginterferon and ribavarin. But there are many patients that either do not respond to or can't tolerate this regimen. Therefore, the focus of the industry's effort in this area is to develop direct antivirals to increase cure rates, to improve the safety and tolerability and to reduce treatment duration. Initially, these new compounds are being developed as an add on to peg/riva therapy. But as a shift in the treatment paradigm will require combination antiviral therapy with much more limited or no use of peg/riva. While our focus to date has been to develop GS9190, our polymerase inhibitor, on top of the standard of care in a phase IIb program, our research efforts have been focused on the identification of other small molecules that we could develop in combination with GS 9190.

And the iidentification of such a lead compound would prompt a shift in our development strategy for GS9190. We now have that candidate in GS9256 and HCV protease inhibitor. Because of this progress, we have decided that rather than pursue the untested path with regulatory authorities of advancing 9190 into an accelerated phase III program, we will now focus our resources on development of GS9190 in combination with our new protease inhibitor. And in parallel, ee will continue our GS9190 phase II study, looking at 12 and 24 week SVR data which we will have next year to see if GS 9190 has the profile that would allow it to be further developed on the back of peg/riva.

I'm certain that you have many questions about our new protease inhibitor, but we have not yet presented data on this compound and for competitive reasons will not go into any further detail about it or the data we have generated to date, other than we feel that we have sufficient comfort with the emergent antiviral activity and safety profile of GS 9256 to advance it further in combination with GS 9190.

Our caspase inhibitor, GS 9450, continues to make progress as a hepatoprotectant, both in HCV and Nash. Positive results generated early this year from a phase two B study in patients with HCV supported the compounds advancement into a phase 2 B trial which is a randomized placebo controlled multi center study to investigate the safety, tolerability and efficacy of two dose regimens of GS9450 or placebo in adults with chronic HCV infection. We're enrolling patients in this study and are currently more than a quarter enrolled. The study has a 24 week efficacy end point as assessed by liver histology. In addition, we have recently completed dosing in a phase 2 A study of GS9450 for Nash with data analysis ongoing. This was a randomized placebo controlled multi center study designed to investigate, safety, tolerability, pharmacokinetics and activity of multiple dose regimens of GS9450 for four weeks. We're targeting presenting data from both these phase 2 A studies at the major medical meeting in the spring of next year.

And finally, on HIV, at the ICAAC conference in San Francisco in mid-September, we had several posters on GS 9350, our novel boasting agent, including one describing the chemical structure and properties of the compound as well as a poster describing its ability to boost atazanivir one of the most widely prescribed protease inhibitors to levels bioequivalent to those seen when boosted with Retonavir. These are important data as they supported the phase two study design of GS 9350 versus ritonavir in combination in atazanavir and Truvada in HIV infected patients. Importantly, we have recently successfully completed the required chronic animal toxicology for GS 9350 which supports the continued development of this compound.

The quad and 9350 phase two programs remain on track and we expect data from both these studies early next year. Should they provide the results we anticipate, our goal will be to initiate three full phase three studies before the mid-point of next year. The Elvitegravir phase three study head to head versus raltegravir in treatment experienced HIV patients is soon to complete enrollment which would put us on track for the results of that study by early 2011.

Our efforts to produce the most optimized fixed dose formulation of Truvada with Tibotec's NNRTI drug candidate TMC 278 has yielded a two lead single tablet formulations and bioequivalence studies with both formulations are currently underway. The clinical data sets that would support the filing of the fixed dose in addition to bioequivalency data are the phase three results from the TMC 278 head to head program versus efavirenz in treatment naive patients. Tibotec has indicated that they will have data from these two studies before the mid-point of next year, which would allow them to file for the single agent of TMC 278 for use in treatment naive patients in the second half of 2010. As we stated when we announced the collaboration in July, pending agreement with FDA, we would submit marketing applications for the fixed dose of Truvada and TMC 278 either simultaneously or shortly thereafter in both the United States and the European union.

In summary, we have a number of exciting opportunities both for label extensions of our commercial product and for new chemical entities in development or arising from our research efforts. I will now turn over the call to John Milligan.

Thank you, Norbert. Over the last two quarters, we acquired CV therapeutics, successfully integrated the organization into Gilead and began consolidated our cardiovascular operations in California. Despite all these potential distractions, we were able to continue to increase sales and move our development candidates along. While doing so we were even able to reduce our overall expenses. As I review the financial, commercial and R&D milestones we achieved during the third quarter, I'm very proud of the productivity, focus and efficiency of this lean organization. I thank all of our employees for their dedication and effort to make this such a successful quarter for Gilead.

In addition, we're pleased to update you with the progress we have made in our largest area of research, HCV with the movement of GS 9256 our protease inhibitor into clinical studies in combination with GS 9190. We also have a number of important clinical milestones in the coming months, in particular, data from the phase three DAR 312 study of darusentan in resistant hypertension before the end of the year.

In addition, we will have the phase two results from both the quad and GS 9350 studies in HIV in early 2010. There are several important medical meetings between now and the end of the year, including the AASLD conference in Boston starting at the end of this month where we will present three year data from both of our pivotal studies of Viread for the treatment of HBV. And we will continue to focus our commercial efforts on the growth of market of products especially the antiviral franchise and, as Kevin described the implementation of the revamped commercial effort behind Ranexa for angina in the United States. We thank all of our shareholders for their continued support and look forward to keeping you updated on our progress. I will now turn the call over for the question and answer session.

Thank you. (Operator Instructions). We'll pause for just a moment to compile the Q&A roster. And our first question comes from the line of Geoff Meacham with JPMorgan. Go ahead.

Hey, guys, congrats on the quarter and thanks for taking the question. The question for you, I'm trying to reconcile product sales guidance with Kevin's comments on inventory and if I look at the guidance, it implies I think an incremental 35 million or so in 4Q sales and yet, Kevin, you noted on the call that 3 Q inventory levels were below normal -- or were at normal, so I'm just curious if you can give us some comments on both of those things.

So let me just go back to the inventory, Geoff, thanks for the question. As we said in Q2 earnings, there was a build up that was about four days of Truvada and Atripla because of wholesalers anticipating a July price increase, which we did, indeed, implement. That basically came out in the third quarter, so we're back to essentially business as usual with our HIV inventory levels. So, we think that will be, you know, maintained going into the fourth quarter and throughout the year. So unless there's some unanticipated events take place and, you know, we never know what's going to happen there in terms of the practices of our major wholesalers, our assumption going forward is that we would be operating at current levels of inventory through the fourth quarter.

Geoff, this is Robin. I'll also add just to be clear the new guidance is 6 billion, 350, so it actually increased 150 million.

Next question, operator.

Our next question comes from the line of Mark Schoenebaum with Deutsche Bank. Go ahead.

Hi, everyone, thanks for taking my question. I really appreciate it. John, I'm fascinated by the R&D guidance. Can you give us a little more color as to how you were able to lower guidance? Was it efficiencies or was it reprioritization and maybe not doing some things you thought we were going to do? And I know you're not going to give forward guidance beyond '09, but in a big picture way we think about the Company, the R&D as a percent of revenues that you're seeing right now, is that a reasonable way to think about the Company over the next few years? Thanks a lot.

Thanks for the question, Mark. I'll try to remember all three parts to this. So on the first part of this -- on the first part, we were able to achieve a lower projected R&D spending based on really two things, one, we were able to drive greater synergies of the CV therapeutics acquisition than we had predicted, largely predicted by less hiring that would have occurred in our Colorado operations, offset by bringing some of the CVT people into our organization. So we were able to make the two organizations much more efficient much more quickly than we anticipated. The second part of that was are there other programs that we're not doing? The answer is there are.

We had anticipated potentially going into a larger phase three study of GS 9190, pending the results from our GS 9256 studies, the phase one studies that Norbert's team had been conducting and with the decision now to consolidate those two programs together to look at dual antiviral activity of a protease inhibitor, we've now delayed the potential phase three study pending the SVR 12 and SVR 24 week data from 9190. So those are costs that would have occurred this year that have been delayed depending on the outcome of that 9190 study. So those are the two things that we have been able to do to keep our costs in line. The last thing is where are we relative to where we should be? I do think we're investing very wisely in the different programs that we have ongoing and, again, I don't get fixated by a certain percentage of revenue or a certain percentage of an organization. I do think we're investing in the right thing and I think I agree with Norbert's assessment. We have a lot of exciting things in our pipeline and will continue to make wise choices as we invest in different opportunities for the future.

Okay. Appreciate that. Thanks, John.

Our next question comes from the line of Michael Aberman with Credit Suisse.

Hey, guys. Can you hear me okay?

Sure can, Michael.

I guess can I get a clarification on the quarter again on the ADAP buying and what we've seen this quarter and whether, based on annual patterns of ADAP sales, whether you can expect some increased ADAP sales in fourth quarter based on what we've seen so far this year and whether that's a consideration in this guidance?

Hi, Michael, it's Kevin. There's always three components we look at in our HIV performance. Obviously there is the best measure, which is the prescription date. Demand data, the demand data and that was very robust. Depending on what you use, it was between 5 and 6% for the quarter. There was inventory levels and I just described the situation we had on that and thirdly there is the nonretail and a big component of that, the ADAP wholesaler purchases, so that's primarily Florida, Texas and Puerto Rico.

In terms of the shape of 2009, we're seeing a very similar type of shape where we have the larger Q1 the lower Q2 and then business is returned in Q3, but I have to say that the sales in Q3 -- in other words, the second quarter of that financial year was actually very robust for this quarter compared to 2008. Typically when we look at the ordering patterns of ADAP, in that first two quarters, it's a little bit less than the second two quarters, in other words, Q4 and Q1. So, we're expecting pretty good performance even though we had a very good quarter for Q3. We're expecting a good -- a good Q4 and Q1. So, we're expecting kind of the same pattern as 2008 and expectation that just like underlying demand, the rest of the year is going to play out in a healthy way.

Okay.

Our next question comes from the line of Rachel McMinn with Banc of America. Go ahead.

Yeah. Just to further expand on some of the HPV commentary. I guess I'm confused what it is you're waiting for. At this point you should have your 12 week safety data for 9190 and I understand you would want to see rates for 9190 if you're going to develop it alone, but once you have the 12 week safety data, isn't that sufficient to start combination data with your protease or do you need additional protease data before you can start those trials?

Rachel, it's Norbert. Thanks for the question. So what we -- what we're doing is we are really refocusing from developing 9190 on top of peg/riva. The same strategy going down the road and we're refocusing our effort to look at combinations, more molecule antivirals. So we have the protease inhibitor, 9256 and what we're currently doing is a drug interaction study between the two. You're entirely correct, we have enough safety data, both preclinical talks information and clinical data on the 9190 by itself so that we could go afterwards into combination therapy.

Okay.

Does that answer your question?

Well, just to wrap that up, then, so you don't actually need to wait for SVR data from 9190 before you proceed into combination studies?

No, no. And, those -- it's almost -- you think of it as a parallel development opportunity, so we could look at 9190 in combination with peg/riva for which the SVR data would be relevant, but for the combination 9190 with our protease inhibitor, we don't really need any of those data to move ahead. That's correct.

Okay. Thanks very much.

Our next question comes from the line of Heron Huber with Citi.

It's actually Karim Defilipe. I have a question on potential guideline changes. Is that something -- I'm just wondering if there is any update, if we could hear of guideline changes to treat HIV patients based on the accord study, is that something we could hear about in Croy or around that time frame? Is there any update in that sense?

Hi, it's Kevin. I think our guess is as good as yours. I think we get a sense around our HIV world that there is probably a better chance of those guidelines changing. What they will look like in terms of the actual wording, we don't know and we don't know the actual timing on that, either. Obviously there are somewhere in the region of about 100,000 patients in the US, about 80,000 patients in the European big five markets that would, come under new guidelines if they were taken up to a 500 CD4 level, so obviously that's an opportunity for our HIV franchise. I think that together with, as John Martin mentioned, the Ryan White extension for another four years, I think those two coming together at some point would be a real sense of confidence and boost to the HIV community to be treating more patients. So we have a sense of anticipation that there may be eventually a guideline change.

Thank you very much.

Our next question comes from the line of Jeff Borgess with Bernstein. Go ahead.

Question on the cash for the two Johns. You've got 3.3 billion in cash now and 89 million in the quarter and you've cut your R&D spend, so your cash is going to double essentially over the next year. Should we think that you're just going to continue to do the relatively small on acquisitions, but more importantly, have contemplated any accelerated share repurchase or another one or even considering a dividend? How are you going to use this cash that's just going to accumulate?

Hi, Geoff, this is Robin Washington. Again, as we've always said, we always are looking at potential opportunities to end license or acquire as well as continue to find other ways to strategically get that cash to our shareholders and one has been share buy backs. We've been consistent and it's showing that we are buying on a regular basis to cover over and above dilution, but also we've been strategic relative to accelerated share repurchases. So it's something that we review all the time. We do feel that relative to the cash we're generating, we have a capability to do both now and going forward and we'll continue to evaluate alternatives as we go. I will point out on the 860 million, that is a rate that is somewhat higher relative to our kind of run rate of 6 or 700 million just due to the fact that we have a significant amount of accruals and higher net income.

We also are generating about, I'd say about 52% of that cash is related to off shore cash that gets generated which gives us a little less flexibility relative to immediate usage. I'd say overall we continue to analyze and look at our strategy and will continue on an ongoing basis as we work with our management team and our board on other alternative uses.

Our next question comes from the line of Joshua Schimmer with Leerink Swann. Go ahead.

Thanks for taking the question. I was curious about the ADAP price freeze that I believe is set to expire in 2010. What do you expect will happen when that goes up, is there any catch up, is there any opportunity for future price increases? Thanks.

Our commitment to the ADAPs program goes right to the end of 2010 and I think, Joshua, we'll obviously have to consider what want to do for the federal part of our market, so I think it will be a -- you know, a measured decision and what -- what we try to do in the best interests of providing our drugs for people who are underserved. So I think that will come down to kind of a corporate decision.

Josh, one thing to remember is that those price increases would still be tied to CPI at the time which has been lower negative in recent quarters. So I don't expect that to really add on significant amounts to the business.

Okay. Fair. Thanks.

Our next question comes from the line of Steve Harr with Morgan Stanley. Go ahead.

Good afternoon. Can you guys give us an update on what is a rate limiting step for filing TMC 278 as a single pill and what it is that you have outstanding from your two formulations or tablets that you're looking at right now?

Steve, it's Norbert. Essentially we need three pieces, so first of all the application for 278 itself has to be filed and as I said in my -- previously the data should be available sometime early next year and then the filing should go in middle of next year. The second piece is we need a completed by equivalent study and as I said that by equivalent study is ongoing and the third piece is really just stability data on the coformulated tablet and all of that will be in place, you know, by the middle of next year. So the only thing -- if we get all these three pieces, then we just have to have a conversation with FDA and see whether they allow us a simultaneous filing particularly with regards to work at the review division.

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

Hi, thanks for taking my question. I'm still a little confused on the HCV program. So protease inhibitor, that is or is not currently in patients? And when you think about a combination approach, are you going directly to -- can these be coformulated as a fixed dose combination and when do you think you'll actually be in kind of a proper phase two combination study with the two drugs?

So Jason, thanks for the question. So just to make it clear, the HCV protease inhibitor is in clinical development. We obviously have completed the initial stages and we're happy with the PK, with the emergent safety and efficacy data and now we're at the point of doing a drug interaction study with an inhibitor and then move into a combination therapy. In terms of what we're thinking about, really two or three possibilities. You could think about completely very much shortening the peg/riva treatment durations or do something like an induction maintenance approach where we use peg/riva for four weeks with the two antivirals and then peel off the peg/riva and continue with the antivirals.

If they are potent enough, you can think about using them by itself. For instance, in that population where peg/riva is contraindicate and the third is in combination with peg/riva to increase SVR rates and again, it all depends on the emerging combination antiviral data. The timing -- you also asked me about the timing, that's still -- I don't want to mention that now, but it depends on the number of things, but it should be sometime first half of next year.

So you're going to be pursuing two investigational drugs ultimately into a phase three program with two drugs neither of which is approved?

If the two -- if the profile of the two drugs both the potency and the safety is acceptable, then, yes, that is our intent.

Okay. Thank you.

Our next question comes from the line of Davis Bu with Goldman Sachs. Go ahead.

Thank you for taking the call -- the question. I guess the question I had was if you could add anymore color on the impact on the economy on sales. I know that you've talked about some of the ADAP purchasing habits, for instance, but maybe is there any pressure on the ADAPs themselves? Are you seeing more demand for your own safety net programs and, you know -- what's going on internationally?

Hi, Dave. I'll just comment on our so-called patient assistance programs, safety net as you referred to. We have not seen any creep up in our HIV products over the last five quarters in terms of, you know, demand from patients who have been unable to get drug buy of the insurance or federal means, so we have not seen an increase in Atripla or Truvada. The only increase in our patient assistance programs that we have seen recently is actually Viread and that is for the hepatitis B patients. There are some very small ADAP waiting lists out there in about six states currently, but they are in states where there is a very low prevalence of HIV. For example, Montana, Idaho, so these are very small states in terms of the big picture of HIV.

And, Davis, I just wanted to mention, you asked about the ADA P program and the economy in general. Clearly we don't think that the economy is having much, if any, impact on our business as Kevin mentioned. With regard to the AIDS drug assistance programs, actually there's been good progress in Congress, particularly the senate with the Ryan White treatment extension act. The senate passed that bill last night. It's now going to the house and is expected to be voted on perhaps tomorrow by the house and so that's an important extension of the funding which would occur for an additional four years or through 2013 with a -- providing an across the board 5% increase in funding.

So we think this is a very positive movement for that -- for that treatment act and importantly in this act there is also provision for increased testing where at the federal level there will be a mandate to test 5 million people per year. So in addition to what states and localities are doing, so we think that will be an important way to test and then link people to care within the provisions for the new Ryan White treatment extension act.

Okay, thank you.

Our next question comes from the line of Phil Nadeau with Cowen and Company.

Good afternoon, thanks for taking my question. There's some discussion this afternoon about a dear doctor level that was sent out in the GS 9350 phase two trial, can you confirm whether that was true, disclose what was in the letter and discuss if there was any impact to the time lines for either 9350 or the impact to the time lines for either 9350 or the quad pill.

News travels fast. It was not a dear doctor level, it was a letter to investigators. What this relates to is the solubility of 9350, which is very pH dependent. As the pH rises, the solubility goes down. When we reviewed these months ago, we made a decision that we would do a drug interaction study of looking at the effect of administering GS 9350 together with, for instance, proton pump inhibitors to make sure that first of all there is not an interaction and second and even more importantly that whatever little interaction there might be, that it doesn't lead to different boosting profiles of 9350. Meanwhile, in order to be super conservative, we have written a letter to investigators and asked them to separate the administration of 9350 from antacid or pump inhibitors or whatever other things that would change -- increase the pH of the stomach. Having that said, I am very confident that this is not an issue and, also, I wanted to tell you that the DSMB recently met, actually a few weeks ago, reviewed safety and efficacy data and they came to the conclusion that the study is on track and should continue.

Okay. Just so I'm clear, there was no actual interaction between PPIs and 9350. You've done this kind of proactively?

No, so the only -- Phil, the only thing that this relates to, this is a reaction to in vitro dissolution data. Other than that, we don't have any other information.

Okay.

But we are -- but we are doing -- we're currently doing a study to look at the effect of GS 9350 boosted with or without proton pump inhibitors to make sure we understand what the increased pH of the stomach, what the effect of that is on our quad.

Okay. Great. Thank you.

Our next question comes from the line of Tom Russo with Baird.

Good afternoon. I don't think anybody has asked about Tamiflu yet. Roche and Glaxo have said that they expect swine flu revenues to maintain. I know you don't control those, but see a benefit. Do you have any thoughts you would share on the sustainability let's say over the midterm?

Tom, I think we have to leave that all to Roche because they have the greatest visibility on what's going to happen with Tamiflu, especially in the consumer market outside of the pandemic planning. I am pleased with the effort that Roche has been putting forth and the new team that is working on Tamiflu, so I hope that you're right and this is sustainable, but it's not something that we have as much visibility as we would typically have with our other products, so I can't comment further.

Thanks.

Our next question comes from the line of Jim Birchenough with Barclays Capital. Go ahead.

Hi, guys, just a bit more follow-up on the HCV program. I just want to understand the decision to deprioritize development with peg/riva. That's not driven by any negative data in that combination. I'm trying to understand why wouldn't you do -- take both paths, do combination with the existing standard of care as well as with other direct antivirals? I'm wondering why you're going to forcefully in one direction and then I'm also a little confused on what is a registration program look like for two investigational drugs to try and get a combo approved.

Jim, thanks for the questions. I just want to make clear we didn't deprioritize the 9190 peg/riva program. We simply decided instead of super accelerating it and going into a phase three study right now without any SVR data -- and by the way, there is -- not only is there no precedent for this from the regulatory point of view, but the FDA has repeatedly stated that they want SVR data to -- from the phase two study to initiate phase three, so instead of spending the money there, we would focus on looking at 9190 in combination with 9256. So you are absolutely correct. We are actually doing both. We're simply -- 9190 with peg/riva is on its merry way, we're waiting for the SVR data and then make a decision based on that whether we're going to put it into a phase three program, but in parallel, in addition, we're looking at 9190 and 9256. So, Jim, just one other comment on the development of two experimental agents.

Of course, at one point along the way, you have to show the contribution of each individual agent and prove that the two together are better than either one alone and that, you know, it still needs to be a discussion with regulatory agencies, but we're thinking, given the nature of HCV that it's a viral disease, there's a lot of precedent from HIV that that could be potentially something you could do in phase two rather than in phase three. So that's kind of our thinking, but again, it has to evolve and we have not had a conversation with regulatory authorities about this.

Jim, there is plenty of precedent for this in HIV. In fact, the Quad has two experimental agents in it. So it is something that the antiviral division is used to dealing with.

Great. Thanks, guys.

Our next question comes from the line of Brett Holly with Oppenheimer. Go ahead.

Yes, thanks for taking the question. I'm wondering what might be the earliest time line for having combo data and how you might communicate it to us, I'm wondering when we might see the first data for 9256?

Brett, I don't want to give you a specific answer, so we're currently doing the drug interaction study between the two agents and based on the results of that, we would then move into a combination study. The reason why I'm a little bit evasive on this is because there is some conflicting information from various geographies including EMEA guidance documents recently about the need for combination talk studies and depending on what regulatory authorities ultimately decide is needed to go into a combination study will in part determine our timing. There was a guidance document recently by EMEA, and they said they needed three months of combination tox data and that would of course mean that that the initiation of that study would be delayed.

I was just wondering --

As we have more clarity on this and as things move along, we'll keep you informed.

Ladies and gentlemen, we have time for one more question. Our last question comes from the line of John Sonnier with William Blair. Go ahead.

Thanks for taking the question. This is actually for Kevin. You mentioned screening initiatives and guideline changes for earlier starts. Another source of growth for you has been a back of your switches and it felt like this year there was maybe less consensus around the cardiovascular risks than the year prior. Can you comment on that and whether or not you've seen a change in the rate of switching?

Currently, out there in the US, John, in the -- in Q2, there was about 63,000 Epzicom patients, so there's still quite a number. We still from a promotional point of view are raising cardiovascular risk and the patients that the physician is tackling in terms of HIV therapy. So it's still there as part of our interaction with the physician and it's certainly part of our medical education programs. You know, also, I think, you know, I think -- I still think there's going to be studies that emerge and databases that emerge, you know, going forward so we'll have to see what happens later this year. The EACS Meeting or going into CROI, et cetera, so I think people still continue to look at their databases from the point of view of cardiovascular risk, but it's something that is still part of our discussions and with such a low level of (Inaudible) use in the naive patient, I think you can see that -- whether it be Atripla or Truvada, you know, the choice is very much with the Gilead products.

Thanks.

Miss Hubbard at this point we have run out of time for additional questions.

Thank you, Melanie and thanks, everyone for joining us today. We appreciate your continued interest in the Gilead and we certainly recognize that we couldn't get to everybody's questions on today's call, so we'll all be back in our offices shortly and happy to address any further questions. Thanks.

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may disconnect. Have a wonderful day.