吉利德科學 (GILD) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Gilead Sciences second quarter 2010 earnings conference call.

I will be your conference operator for 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, July 20, 2010.

I would now like to turn the call over to Susan Hubbard, Vice President of Investor Relations.

Please go ahead.

Thank you Stacy.

Good afternoon.

Welcome to Gilead's second quarter 2010 earnings conference call.

We issued a press release this afternoon providing results for the second quarter 2010.

This press release is available on our website at www.gilead.com, as are the slides that provide much more details around the topics discussed today on this call.

Based on outreach to you and feedback from our investors, we are introducing a new earnings call format today.

Our prepared comments on the call will be significantly briefer to allow more time for your questions.

Kicking off this new format will be John Martin, Chairman and Chief Executive Officer and John Milligan, President and Chief Operating Officer who will provide some comments on the quarter and our view about the future and opportunities for the Company.

Norbert Bischofberger, Executive Vice President of R&D and Chief Scientific Officer, Kevin Young, Executive Vice President of Commercial Operations and Robin Washington, Senior Vice President and Chief Financial Officer are here as well and will join John and John for the Q&A session.

I would first like to remind you that we will be making statements relating 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 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 to our Form 10Q for the quarter ended March 31, 2010, 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 in the press release we just issued and on our corporate website at www.gilead.com.

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

Thank you, Susan, and good afternoon.

I am very pleased with our solid performance and productivity in the second quarter of this year despite the economic headwinds we and our industry are facing.

The fundamentals of our business remain solid.

For HIV, the US business continues to perform very strongly, but the environment in the European union has been challenging.

We are confident, however, that both the US and international markets will remain sources of strong growth into the future because of the unquestionable public health benefit of HIV testing, linkage to care and treatment.

Importantly, we continue to demonstrate the public health benefit as best provided by our fixed dose products, the standard of care for the treatment of HIV, and we firmly believe that this health benefit will persuade the medical community to continue to use Gilead's combination products as generic competition becomes available.

Over the last week, two important HIV announcements were made.

First, President Obama unveiled the national HIV/AIDS strategy which acknowledges antiretroviral treatment as a proven prevention tool and strives to increase diagnosis and early treatment for people living with HIV.

The second important announcement was from the international AIDS society which altered its HIV treatment guidelines to now specifically state, and I quote, "Fixed dose combinations are recommended when possible for convenience.

tenofovir plus emtricitabine is the recommended NRTI combination in initial therapy." And importantly, the substitution of emtricitabine with lamivudine was removed.

We recognized that the success of our Company over the long term is dependent upon continued innovation.

For our HIV pipeline, our efforts are focused on providing new single tablet regimens.

I am particularly excited about the progress we have made with the TMC278 Truvada fixed dose regimen and the Quad program.

These are regimens that can extend our HIV product-related revenue stream into the 2020s.

I would like to thank Bill Lee, our head of research for leading an effort over the last six months to restructure our HCV team.

We now have five oral small molecules from four different classes in human clinical studies.

I am confident that we have both the product pipeline and the right people in place to establish Gilead as a leader within the HCV market and the future.

On today's foundation of $500,000,000 in annualized revenues, we have a growing product portfolio in the respiratory and cardiovascular areas.

Importantly, we are evaluating our existing commercial products for additional indications in patient populations such as Cayston for bronchiectasis, Letairis for idiopathic pulmonary fibrosis and Ranexa for angina in diabetic patients.

In addition to R&D efforts, our strong financial position allows us to look to the outside for opportunities and judiciously use M&A and business development efforts to enrich our pipeline.

We are considering acquisitions and partnerships in areas of unmet medical need that are a relatively modest in terms of initial investment and have clear decision points on the near term horizon.

These investments will have moderate near term impact on our R&D spend, and expenses will only increase if we determine that the compounds warrant advancement to later stage development.

An example of us executing on this strategy is our acquisition of CGI for up to $120 million during the second quarter.

While an early stage company, CGI has established itself with expertise in the area of protein carnate biology and small molecule discovery, and we will explore the use of their lead (inaudible) inhibitor for inflammatory diseases.

In our current valuations, we have been aggressively leveraging our cash to buy back shares and plan to continue this in the second half of 2010.

This is evidenced by the 44 million shares or about $1.7 billion worth of stock we bought and retired during the second quarter.

At our current price, if we were to fully execute upon the 5 billion stock repurchase planned, we would have repurchased approximately 18% of our current market cap.

Before I turn the call over to John Milligan to discuss the business more specifically, I want to close by saying that Gilead remains committed to bringing forward novel products to treat life-threatening diseases, and I am confident of this lean and focused organization's ability to continue this mission.

John?

Thanks, John.

As Susan mentioned earlier, we provided a comprehensive slide deck containing the important metrics and information that we usually provide in the scripted portion of the call.

Therefore I will only make a few brief comments on our financial, commercial and R&D progress during the second quarter so that we may take as many of your questions as time will permit during the Q&A portion of the call.

Gilead posted solid second quarter 2010 results with non-GAAP net income of $761 million, or $0.85 cents per share, representing a year-over-year increase in net income and EPS of 17% and 22% respectively.

Sales growth was strong across our therapeutic areas with total revenues of just over $1.9 billion, up 17% year-over-year.

Antiviral product sales were $1.6 billion, up 13% year-over-year.

The US contributed $887 million to our antiviral product sales increasing 14% year-over-year resulting from the continued strong growth of patient and market share in the United States and was flat sequentially due to lower purchasing from non-retail outlets, particularly ADAPs as we have seen historically the second quarter of each calendar year.

Europe contributed $601 million for antiviral product sales, increasing 9% year-over-year and decreasing 4% sequentially.

The sequential decrease in Europe is driven primarily by the strengthening of the US dollar relative to European currencies and cost containment measures in light of budget deficits in many of the countries in Europe.

In addition to the solid contribution from our antiviral franchise, we have significant growth from our cardiovascular franchise.

Ranexa prescriptions in particular have grown by 54% since the first quarter of 2009, the quarter prior to our acquisition of CVT.

Ranexa's recent performance further demonstrates the increasing capabilities of our commercial organization's ability to quickly absorb a new product, tailoring promotional efforts around awareness, expanding the field force and prescriber targets and improving reimbursement and access.

Our newest product Cayston achieved $10.5 million in its first full quarter of sales in both the United States and some countries of Europe.

We continue to receive positive responses from the CF community as to the importance of having an additional treatment option in an area where the last antibiotic approved was more than a decade ago.

We recently presented data from our head to head study of Cayston versus TOBI, showing statistical superiority over TOBI at the European cystic fibrosis meeting in Valencia, Spain.

These data and the positive response from patients demonstrates that there's a clear need for a novel antibiotic to address the growing incidence of TOBI resistance or intolerance.

The final piece of the financial highlight that I will speak to is our 2010 guidance, which is detailed in slide 37 in the earnings call deck.

Given the impact of foreign currency fluctuations, we are reducing our product sales guidance to $7.3 billion to $7.4 billion.

We are also revising our effective tax rate guidance to 26.5% to 27.5% due to higher than expected US revenue growth and lower than expected revenues in Europe.

Turning to R&D.

We have also made significant progress in research and development with many key achievements in a variety of our clinical research programs.

As John mentioned, our ATD programs continue to make significant strides.

We have recently held meetings with our HCV scientific advisors, both in the US and internationally, which confirmed that our strategy of moving toward an all antiviral combination therapy is the appropriate long-term goal in the treatment of this disease.

At this point, we have five small molecules in clinical development with two more about to enter the IND stage, which would give us six classes of small molecules that in principal can all be explored in various combinations.

We look forward to sharing more details on several of these programs and our progress to date at the conference taking place in Boston in late October, including data from the phase 2A study evaluating a combination of GS9190 and GS9256, with or without Ribavirin dosed for 28 days in HCV positive genome type one patients.

To further the understanding of potential applications of Cayston, we initiated a phase 3B study just a few months ago in CV patients with Brookhold area infection.

This is a pathogen that is benign in healthy individuals, but devastating to patients with CF, increasing mortality and requiring them to live very isolated lives so as not to infect other patients.

Underscoring this need, we expect to fully enroll 95 patients into the study by the end of this month.

In addition, we are following the promising results from the phase 2 study of Cayston and bronchiectasis, and we are preparing to launch a larger phase 3 study by the end of this year that would support this indication.

With the setback of two of our competitors' compounds under investigation for the treatment of idiopathic pulmonary fibrosis, we have had even more interest in our study of Ambrisentan in the treatment of this very serious disease.

Our phase 3 study is designed to enroll approximately 660 patients, and is now more than 50% enrolled.

It is an event driven study with time to progression or death as the primary end point.

We also continue to advance our HIV pipeline in the second quarter with the initiation of the phase 3 studies for both the Quad fixed dose regimen and Cobicistat, our novel pharmaco enhancer.

We have already completed screening in study 102, the study comparing the Quad and Atripla, and we expect to complete the enrollment of approximately 700 patient before the end of this month.

This would translate into initiating and completing enrollment in a study in about two and a half months.

This speaks to the excitement about this program for both the investigators and study participants.

We also now have the 48 week data from the phase 2 Quad versus Atripla study and hope to present in an upcoming HIV conference before the end of this year.

As you may know, the International AIDS conference is taking place this week in Vienna, Austria with the data on two pivotal TMC278 studies will be presented by Dr.

Cal Cohen during the late breaker session on Thursday.

As the data are embargoed until the presentation, we are restricting our comments to only the results that are included in the abstract and to what is already in the public domain.

The abstract cites the TMC278 was not inferior to, and better tolerated that efavirenz, leading to fewer than discontinuation due to adverse events.

There were fewer grade two to four adverse events, and the difference was statistically significant with regard to some psychiatric and neurological events and rash.

There were more virological failures in the TMC278 arms compared to efavirenz, and the data are currently pending analysis to identify the predictors of response.

We look forward to the presentation of the full study results this Thursday.

I'm also pleased to confirm that we are on track to complete our regulatory filings for the fixed dose in both the US and Europe either shortly after or at the time of the J&J filing.

The introduction of this product will give patients, and physicians an important new choice for a one pill, once daily regimen.

As John mentioned, the revised IS guidelines now endorse our fixed dose combinations and removal lamivudine as a substitution for emtricitabine.

Specifically, they recommend Tenofovir with emtricitabine as the backbone of choice, noting that it is available as a fixed dose combination backbone as Truvada and also available within a complete regimen, including efavirenz as Atripla.

They also recommend Truvada with either of two protease inhibitors added to Atovir or darunavir and with the integrase inhibitor, Raltegravir.

These guidelines also now endorse the initiation of earlier treatment at a CD4 cell count at 500 or below and state that therapy should be considered for patients with CD4s above 500.

And the final and important piece is that Epticom has been downgraded from a preferred to an alternative treatment.

In totality, as Gilead's products, namely Atripla and Truvada, are the cornerstones of first line therapy capturing the majority of new starts.

We see this as an important opportunity, along with the drive to screen more individuals, to continue to grow the number of patients on a Gilead based regimen.

In summary, I am proud of Gilead's progress and strong financial performance in the second quarter this year on the backdrop of challenging economic conditions.

Further, Norbert and his team have demonstrated a real increase in RND productivity with five new molecules now in the clinic for HCV.

In the coming quarters, you will see evidence of our increased productivity in our other franchises as well.

I continue to be impressed with the passion and dedication of Gilead's employees who are deeply committed to helping patients facing very challenging diseases.

To our current shareholders, we, the management team at Gilead, are individually and collectively committed to returning value to shareholders and firmly believe that Gilead can deliver much more than what is reflected in our current valuation.

We will continue to work hard to deliver on our short and medium-term commercial objectives to bring forward new products and to augment our pipeline for the long-term benefit of patients and shareholders alike.

I will now turn the call over to the operator for the question-and-answer session.

Operator?

Thank you.

(Operator Instructions) We will pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Josh Schimmer with Leerink Swann.

Please proceed.

Great.

Thanks for taking my questions.

I guess I'll just ask about the all-oral HCV combo regimen trials that you're considering.

How fast do you think those can move forward in development?

Maybe you can give us a little bit of a sense of the development strategy and timelines there.

And you've got a number of targets to choose from.

How do you decide which to combine with each other?

Thanks.

Yes Josh, thanks for the question.

This is Norbert.

So we are actually doing one study now where we are looking at the combination of our NS5B with the protease inhibitor plus/minus Ribavirin to simply ask the question how much viral load reduction can you see with two antivirals and added Ribavirin .

The conclusion from that study is as expected, that these compounds are not enough, so we will add more compounds to the mix.

Now, how are you going to go about that?

I think part of it, is of course, guided by very simple drug interactions.

Part of it is guided by in vitro synergy and additivity experiments, but in the end it has to do with clinical research.

We just have to now short viral dynamic studies to figure out are three compounds enough, four compounds enough or five compounds enough.

And once we feel we get the required potency, then we would move that into a larger phase 2 study to look at HVRs.

I -- in principle, I think the path is pretty clear, although it is a bit challenging because in six classes, there are quite the number of combinations that you can evaluate.

But of course, we are not going to evaluate all of

Yes, Norbert, I'd like to add to that too.

One of the reasons we have so many products going into clinic, we want to make sure that, inevitably, there will be issues of tolerability.

We wanted to make sure we have enough molecules that we can have a complete regimen.

And any guess when you'd be in a position to move into a larger SBR design trial, how long might that take?

That is a more difficult thing to say, but Josh, I would think if we -- so if we file these two additional INDs, which we have all intent to, then we will have six classes of molecules early next year or sometime in the first quarter of next year, and I would say by the end of next year, we should be in the position to choose a certain combination and move them forward.

Great.

Thanks very much.

Your next question comes from the line of Geoff Meacham with JPMorgan.

Please proceed.

Hey, guys.

Thanks for taking the question.

I have a question for you on slide 5, just on the cash flow.

And I think part of the logic here for the valuation is really discomfort with the current pipeline and diversification away from HIV.

And so a three part question here.

What's your appetite for doing phase 3 deals that move the dial, what their particular areas look attractive to you and then, what is the appetite for doing a tender offer to do even a more aggressive share buyback?

Geoff, it's John Milligan.

Thanks for the question.

So with regard to the kinds of deals we are doing, we are looking for earlier stage compounds for the most part, and I think there's a lot of value there because it allows us to help guide the development of the programs so that we can have good input by the time it gets to phase 3, because that's really, I think, where the value we can bring to a compound is designed in good phase 3 studies rather than inheriting something.

I'm not going to rule it out, but it's clear that our emphasis is on earlier deals today, things like CGI.

That would be something more important to us at this point in time.

In terms of other therapeutic areas, Norbert and his team is doing quite a bit of work with the business development group over the last year, and I think they have really done a good job sort of outlying different kinds of areas that we'd be interested in getting into.

CGI, for example, brings us into the area of kinases, and kinases can be useful in lots of different therapeutic areas.

There is kinase inhibitors on the market for cancer.

Obviously, they are being explored for different inflammatory disease.

And I'm sure with over 500 known kinases and the increased understanding of the human biology of the kinases, there will be other diseases behind that.

And so what I think you'll see is focusing on these areas that are similar to the ones I've described where we have a good opportunity to really further medical -- the medical -- I would say -- let me try that again.

Where we would have the ability to tackle an unmet medical need with a new molecule and where we would have a proprietary position that would make the sales and marketing relatively straightforward.

So without being more specific, I think that gives you an idea of where we are going.

And then the last question with regard to tender offers, it's one of those clear things that we can't at this point in time and won't speculate about such actions in the future.

And then just a follow-up to the -- to your question about -- or to the answer about phase 2 programs.

So does the hiring of Dr.

McHutchison speak to anything with respect to a therapeutic area?

Because I know you have had, obviously Hep C products in the portfolio for a while, and would that be something that you would look externally, or would you put more resources behind the current pipeline?

Geoff, hi, it's Norbert.

Geoff, I would say the answer to that is both.

We are constantly looking externally as to what's available and of course, with John having joined us, we have more insights and knowledge as to what is really available and what is, what would fit our pipeline, But we also want to put a lot more emphasis on our own programs as well and as you may know, we recently made the decision to close our Durham facility, which allows us to concentrate on everything here in Foster City and bring both the clinical development and the research efforts into close proximity.

I think that will greatly accelerate the programs.

Just what Josh was asking earlier about the complexity of the development, we felt like we needed everyone together on one site and needed to expand the team, and it's just our recognition that we want to move this through as quickly as possible and come up with an all-oral regimen.

Robin, I believe you wanted to elaborate on --

Yes, I was going to follow on to John's comment.

Geoff, as you know, we have done accelerated share repurchases.

We also have access to the capital market and clearly, capital structure is one thing we continue to look at.

As John mentioned, we can't give specifics, but we will have updates for you pretty quickly here in the second half of the year.

Okay.

Thanks.

Your next question comes from the line of Yaron Werber with Citigroup.

Please proceed.

Yes, hi, guys.

Thanks for taking my question.

Can you help us understand a little bit discrepancy between -- the IMS data, as we all know, does not follow ADAPs and it does not follow non-retail.

When we look at your synovate data, which you have kindly been providing to us for years now, it does look like the US market has only increased 2% year-over-year, which is essentially down from about 4% to 5% back about four quarters ago.

Encouragingly, the European market is growing nicely at 7%.

But help us understand, that's more of a retail business too, the synovate data.

Help us understand maybe a little bit ,what are you seeing there and maybe a second question is, what happened with ADAP purchasing this quarter and what happened in non-retail?

And are you seeing economic sensitivities there, or is it that the ADAP business ultimately will come back sequentially just a quarter later.

Thank you.

Hi Yoran, it's Kevin.

First thing I want to say is> I was really pleased with the results from my US organization in the second quarter.

These were really solid results and they were very hard earned, and I actually think that some of the best results that I have seen my organization deliver.

Let me elaborate on that.

If you look at the TRX, the growth in Q2 of 2010 was as good as the growth that we actually had in Q2 2009, whether that be quarter-on-quarter or that be year-over-year, and that really is the acid test of the dynamics of our HIV business.

Our prescription's growing, and they were rock solid and they were right where we wanted them to be.

You're quite right, the variable is always in our HIV business, the non-retail.

Non-retail in Q2 has always been traditionally the weakest quarter of the four quarters for the financial year of ADAP, and that's because we have these direct purchases, particularly from Florida, from Texas and from Puerto Rico.

So as we expected, Q2 was a weaker quarter.

When we do our historical calculations, typically, Q2 is about 21% of the division of the four quarters and traditionally, Q3, Q4 and Q1 on a calendar basis are the stronger quarters for non-retail.

So it's what we expected, it's where we expected it to land and of course, we have no control over the purchase from those same central ADAP depos.

Let me talk a little bit about ADAP, which of course are the largest part of that non-retail.

We have seen it tick up in waiting lists.

Actually, over the last week, we have seen a drop actually in the ADAP wait lists.

North Carolina actually took off over 600 patients as they had some release of state budgets into their ADAP fund, so that was nice to see.

So just as much as wait lists can go up, they can very quickly go down.

So it's something that we -- it's something that we watch very carefully.

There generally isn't a correlation between uptick in wait list and actually purchase, which might surprise you.

The federal dollars are still there in a very healthy way.

They were an increase on 2009 and the ADAPs still want to spend their money, so we still did see purchase from Florida and from Texas in the second quarter.

And the final thing I would say is that in some ways, if there weren't any wait lists for the ADAP programs, there wouldn't be the back pressure that tries to get the extra budget.

And as you have seen, about a week ago, there was an extra $25 million released by the federal government to assist some of the ADAP programs, and it is our information that those dollars will be released towards the end of August, after the ADAP programs have applied.

So in short, it was a very good and solid quarter for our HIV business.

Your next question comes from the line of Mark Schoenebaum with ISI Group, please proceed.

Hey, thanks for taking my question.

Thanks for allowing -- thanks for changing the call format so we can ask so many questions.

My question is around capital structure.

I was intrigued by Robin's comment that -- I think you said something to the effect that will have an update for you pretty quickly here in the second half of the year around capital structure.

Could you just clarify, perhaps Robin, what you meant by that or if you misheard you?

And then on slide -- related on slide 5, I was -- I liked slide 5 and was just wondering, there was no mention of a dividend over the next three years on slide 5.

Could you just give your company's current thinking on your philosophy here on dividend.

Thanks.

So, Mark, this is Robin.

As we have highlighted on slide 5, I think our focus in terms of returning shareholder value to investors right now is going to be via share repurchase plans.

It doesn't mean that we would never consider a dividend, but our current thinking is to use the vehicle of share repurchases.

What I meant was again, it's very clear, as John highlighted, that at our current valuation, there is an opportunity with the five billion share repurchase program to continue to be aggressive and potentially even accelerate our repurchase of stocks.

So we can't provide details at this point, but we do expect to be able to update you in the near future.

How much cash do you have on shore in the US that you could theoretically use to do something like that?

Well currently, we have been using a fair amount of our on shore cash to facilitate the share repurchase buyback that we have done quarter to date, which has been about -- or year to date, which has been about $1.9 billion, so we have about 26% of that for $200,000 is currently on shore.

But again, as I mentioned, there are various vehicles and options available for us that we can consider that allow us to continue to be aggressive with our share buybacks.

Okay.

Thanks a lot, Robin.

Your next question comes from the line of Rachel McMinn with Bank of America Merrill Lynch.

Please proceed.

Yes, thanks very much.

Two very unrelated questions.

Just on the tax rate comment, I guess I'm struggling a little bit here.

I think the US HIV sales percentage wise really didn't change much in the first half, so I'm a little bit confused as to why the tax rate is increasing so much in terms of your guidance.

And then in terms of the Hep C comment, can you give us a sense of whether -- what you're seeing with your combination of your triple wire adding interferon here?

Is that related to viral breakthrough or just lack of overall potency?

Thanks.

Rachel, I'll answer the first part relative to our tax rates.

As we tried to articulate in the slide, it's really a mix between higher US and lower revenues in our low tax jurisdictions.

That's primarily Europe, so given the weakness in the Euro and pricing and again, we are projecting our effective tax rate for the full year as a result of our guidance change.

We had to take our tax rate up, so when you think about an increase or decrease in US profits, it usually results in about a quarter of a percentage change in our tax rate.

While when you look at decreases relative to ex-US profits, it's about a 50% or 50 basis point change relative to our tax rate.

So that change or dynamic in the geographic mix causes our tax rate to go up.

The reason why you're seeing it higher in Q2 is because we have to do a catch up from Q1 and bring that in line with what we project going forward.

I'll also mention that one of our assumptions in our tax rate for the year is that we -- we haven't assumed that we can renew the R&D tax credit, so if we are able to do that, that actually reduce our rates about another half a point.

And Rachel, hi, it's Norbert.

I'll answer the second question with regards to addition of another arm in the study that includes interferon.

The study started out as a viral dynamic study to simply answer the question with a 91/90 and 92/50/16 combination with or without Ribavirin if you get RVR response.

And we included the third arm which includes the interferon (inaudible) and the two antivirals.

Number one is a control to see how much viral potency can you get with four drugs and secondly, because of the observation that three drugs by themselves were not enough.

The details of these -- the study will be submitted, we intend to be submitting to ASLD, and so you should see it there.

Okay.

Thanks.

Your next question comes from the line of Tom Russo with Robert W.

Baird.

Please proceed.

Good afternoon.

Just had a question of guidance.

Can you comment on what expectations for European price cuts going forward are captured?

Whether you still see the impact of health care reform in the US as about $200 million or whether that's been refined.

And then lastly, what might be the biggest risk to guidance looking forward from today?

Thanks.

Hi Tom, it's Kevin.

I'll certainly check the European pricing.

You've seen slide 36 where we tried to highlight as clearly as we can what is taking place during the first two quarters of this year.

That includes both what we call normal European -- the normal European pricing and then the result of some of the actions around the decks and the intervention of governments, unexpected, and in keeping with the economic environment.

These are what we can see right now, very difficult to make any forward predictions.

Obviously, there are two of the major markets here, Spain and Germany.

I think most of the other companies have noted this.

In terms of the other three major markets, Italy did announce cuts, but they were directed towards their generic industry.

They have quite high prices for their branded generics.

And we have not heard any news about price decreases in France of and above the normal processes you go through with the pricing committee.

And for the UK, that is subject to what they call the PPRS, the pharmaceutical price regulatory scheme, that was renegotiated on a five-year term back in February of 2009.

Who knows what the government will do going forward, but that's typically a five-year term.

So we have really noted here what our best intelligence tells us.

Right, and so I'll chime in on health care reform.

To the question, we are on track relative to the $200 million that we guided to.

We did provide a $29 million in Q1 and as we discussed, while we won't provide additional details, I can tell you that Q2 was slightly higher as you would expect, and we still see more back end loading relative to that $200 million in the second half of the year as the ADAP and PHS pricing increases start to get impacted.

So we are very comfortable with that $200 million.

I think the Kevin outlined the overall dynamics of the business, so we feel very comfortable with our guidance now that we have adjusted for the FX volatility.

And Tom, this is Susan.

I'll just chime in.

We have got a pretty detailed slide as you have seen on slide 34 in the slide deck that outlines what we think for 2011.

Should provide you a little bit more color on what we are thinking about the excise tax, et cetera.

Thanks.

Your next question comes from the line of Ian Somaiya with Piper Jaffray.

Please proceed.

Thanks.

Just a question of the caspase inhibitor.

I see that as part of the slide deck, I was just curious if you can now speak the side effects that are seen with the -- in the phase 2 studies.

What if anything are the plans moving forward with the side effect specific for that drug or is it for the entire class?

Hi Ian, it's Norbert.

Ian, we are currently debating whether there are opportunities still for the caspase inhibitor.

Like one example is where you could have a disease that doesn't require chronic dosing and that would have some tolerance for hepatic toxicity.

We are in the middle of that evaluation and haven't come to a final conclusion yet, but we hope to be able to do so end of August.

Does that include Nash or HCV or are those two indications (inaudible)?

Again we haven't -- I'm just telling you some of my thinking.

I think it would exclude Nash and HCV because both of those would require long term chronic dosing, but something like acute alcoholic hepatitis would be something that potentially could be considered.

Again, that's something we have to discuss with experts.

This is my own personal opinion, so that's where it stands.

Okay, thank you.

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

Please proceed.

Hi.

Thanks for taking my question.

On the TMC278 data that's being presented, we got a lot of details in the abstract.

Are we to expect more information when they present and if so, what kind of information -- new information might we be seeing?

And then also, I'd love to get your thoughts on what you're hearing from physicians regarding the differentiation, the importance of viral breakthrough versus the safety benefits and how you see this drug ultimately being commercially positioned.

Jason, maybe I'll give you first an answer about the emerging data and then maybe Kevin can comment on the commercial positioning.

So we are actually very encouraged by the phase 3 data because as John Milligan mentioned, it's another once daily complete regimen option for the patients.

The response rates are better than -- the response rates are the same efavirenz, and they are up there in low 80s, the highest that have been reported in recent phase 3 studies and including our own 934 study and the Stark Merck study with Raltegravir.

It's clearly better tolerated, but it has more virological failure.

But I want to make three comments on those virological failures.

First of all, J&J Tipotek, in collaboration with us were looking at base line predictors of those virological failures and two obvious things to look at would be base line viral load and body weight.

If we could find some easy baseline predictors, that would minimize the whole issue of virological failures.

Secondly, you have to keep in mind that the consequence of being intolerant to the regimen and virologically failing the regimen is really the same.

You, Jason worded it as tolerability versus virological failure, but these are really two of the same things and the consequences that the patient goes off the regiment onto another one.

Now thankfully, we have other good regimens that the patients can go to, particularly integrates, protease and CCR5 inhibitors.

And then the final thing I want to point your attention to, if you look at the publication that came out in June of this year in AIDS where they presented the 278 48 week and 96 week data, you may notice that the failure rate, that 48 weeks on 278 and on the efavirenz was very much similar to what was reported in the phase 3 studies Echo and Thrive.

However, at week 96, the failure rates between 278 and the efavirenz were the same.

If this is fairly easy to illustrate (inaudible) to interpret, you simply say that efavirenz is less well tolerated.

Consequently, patients may be less compliant, and that leads to more virological failures.

So you this is again an example where virological failures and tolerability are really very much linked, and this is actually something we are seeing in our own phase 3 studies.

We have actually done a number of studies that include efavirenz as a third agent, and what we have seen is that the failure rates at week 48 are pretty much in the 5% range what is reported in Echo and Thrive, but at week 96, the failure rate goes up to 9%.

So again, if we are seeing this in these phase 3 studies, then you would basically come to the conclusion that the virological failure rates between 278 and efavirenz, the study carried out to 96 weeks would be no different.

And then you're left with the benefit of 278.

So I personally think the emerging profile together with the expected much better pregnancy category is a selling point for 278, and it would be welcome new option for patients.

So Kevin, you want to --

Yes, just after that Jason, that obviously this is when we really fire the gun on our prelaunch activities, just as you say.

We needed the full data set to be presented.

I've got a team out in Vienna.

We will be doing debriefs with advisory boards, and this is exactly when we need to understand and hear the reaction to the data.

I think we have always said that we see this fixed dose combination as more a drug for the naive setting, a patient new to therapy.

The obvious benefits of there in terms of avoidance, so potential CNS side effects on the efavirenz and obviously, women of child bearing age.

Those groups of patients very often go to the protease inhibitors in combination with Truvada right now, and you can certainly see them going onto a 278 fixed dose combination.

So what I like about this is we will have two single tablet regimens available to physicians, to patients.

And as we have seen from the IS guidelines, really highlighting the benefit of fixed dose combination.

That's a great position to be in.

The fine-tuning of those positioning of Atripla and 278, we are now going to start to put together.

If I could follow up with Norbert, is it generally accepted that virologic failure and failure due to intolerance are equivalent?

Because that's not necessarily the feedback you get when you talk to all the physicians out there.

Jason, when you look at the breakdown of virological failure, there are two categories.

There is the category of never suppressed and there's the category of rebounder.

I think what would -- I don't -- I haven't done a poll and asked people how many accept this notion, but I think it's common sense that you would say the -- particularly the rebounder are due to compliance, at least that's what we are finding with -- in our studies.

Thank you.

Thank you.

Your next question comes from the line of Geoff Porges with Sanford and Bernstein.

Please proceed.

Thanks very much, and appreciate the chance to ask the questions.

Could I follow-up with Kevin a little bit on the outlook for the TNC based combination and Atripla?

Kevin, first of all, just how important is the M184B mutation emerging in the 48 week TMC study?

And are physicians currently willing to continue patients on Truvada, even in the presence of that mutation?

And then just a related question.

Is -- are you going to shift your commercial emphasis entirely over to the TMC based combination, or are you going to continue to support commercially Atripla?

And then lastly, as you look ahead a few years to Atripla, what sort of discussions are you having with payors, particularly in Europe about what their expectations are for the price of the combination (inaudible) available generically?

Thanks.

So Geoff, thanks for all the questions.

I'll let Norbert take the first part, and then I'll take the two and three.

Now Geoff, quickly you asked a question about 184 mutation.

As you may know, it's a very labile mutation, and when you stop the selective pressure, it reverts back to Y type.

I can talk for our own studies with efavirenz and Truvada.

We have done two phase 3 studies that included that as one of the arms.

What we did see is the emergence of the K103M, that's the same mutation we saw as the J&J Tipotek observed in the current phase 3 studies.

And on the new side it was the M180VOI, and we have actually been successful in sequencing those patients with a Truvada containing regimen.

So the answer is, I would say the consequence -- clinical consequence of the M140VI mutation is not clear.

Or at best, it doesn't preclude the use of Emtricitabine in Truvada in those patients.

Thanks.

And Geoff, the BNC parts of your question.

We continue to have a very professional relationship with Bristol-Myers Squibb.

It's going very well this year, we are -- both companies incredibly committed to Atripla.

In the early part of next year, thanks to the contract that we have between the companies, we are able to move away from our association with Bristol-Myers Squibb.

In terms of our promotional emphasis of Atripla and 278, that will be the choice of Gilead and again, as we see the reaction to the data come out of Vienna, we will be making some internal decisions and obviously, right now they have competitive implications, so that's something in detail that we will be working out simultaneous to the regulatory pathway.

So we have the flexibility here at Gilead to put the emphasis that we decide to choose on Atripla versus 278.

In terms of European payors, I actually think there's a very good news story here, and that's the value story around our fixed dose combination.

We are significantly lower in terms of price in our European markets for Atripla than the combination of Truvada plus proteases and Truvada plus Isentress .

And when you have cost controls and pressures coming in in the likes of a country like Spain through their regions, it's a very good and strong position.

It's one that we are presenting that to actually treat more patients where Atripla is actually a saving opposite some of the other regimens that are used by physicians.

So that's something that we are starting to ensure that we communicate.

So we have actually got a benefit there that plays to some of the needs right now in terms of the euros spent on HIV

Okay.

Thanks very much.

Your next question comes from the line of Thomas Wei with Jefferies & Company.

Please proceed.

Thanks.

I had a question on TMC278 as well, and it seems as though in -- when we get to the ultimate competitive market, it's really going to be a question of TMC278 versus these integrase regimens.

And I did want to get your sense.

It seems like your drugs, what you're going to have to offer will be one pill once a day with maybe some outstanding questions on efficacy, virologic breakthrough versus some of your competitors who may not have the same issues on efficacy, but would be forced to provide their pills as maybe a two pill, once a day regimen.

Can you help us understand how we should think about the tradeoff there between factors like virological failure versus needing to take two pills once a day?

Hey Thomas, this is Kevin.

Well, I don't think the story is quite as simple as that.

I draw your attention to an abstract that is being presented at the IAS conference that's looking at BID route tergravir versus QD route tegravir.

And I think there's some interesting results there, so I don't think it's quite as simplistic as that the integrades class has got incredible efficacy and tolerability, and it's all about that versus a single tablet regimen.

So I think we are going to see more studies and we are going to see that play out over time.

So I wouldn't necessarily jump to that being the direct comparison.

I think you've seen, when the IAS guidelines come out so strongly in terms of commending the use of a fixed dose combination.

That is very powerful, it's very powerful with physicians and it's very, very powerful with payors.

So that type of endorsement, is incredibly important.

Right now in the US, we have a -- we see that in some ways, the mindset of HIV physicians is what we call Atripla unless.

In other words, Atripla is the go-to of first line therapy and in very small situations, they will look at other starting therapies.

So I think the value around a single tablet regimen is so strong in this market and will continue to be so.

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

Please proceed.

Good afternoon, and thanks for taking my question.

My question is on the change in guidance.

You mentioned that the factor leading to the change of guidance was the foreign currency fluctuations.

Can you give us some idea of what euro/dollar exchange rate is assumed in the current guidance?

And in the past, you've said that 10% change in FX would impact revenue by about $100 million per year.

Could you give us an updated figure?

Sure.

So that stays about the same.

If you think of it on a year-to-date basis, it's going to about $60 million, kind of given where we are and the impact we have experienced overall.

And I'm focused on revenue primarily as opposed to net earnings, which as you know, it also impacts to a lesser extent.

But to a sequential basis, we had a decline in general.

There was a decline in the euro of about 10%.

As you know, we hedge other currencies as well, but that kind of pegs over all the volatility that we saw, and it's pretty indicative of the overall market basket of currencies that we hedge.

As you mentioned with our strategy, we hedged 50% to 60% of the revenue and 60% to 70% of pretax, right?

And a 10% change gets us to about a $100 million impact,based on how we hedge.

We were -- again, in terms of sequentially, we were able to mitigate a portion of that so that we ended up having a sequential impact on FX of about 3%.

On a year-to-date basis, the euro's declined about 16%.

So again, if you do that math with that plus or minus 10%, it kind of gives you the indication of what happened relative to our guidance.

Okay.

I guess the reason why I'm wondering is when I look at the euro quote on my screen in front of me it's about $1.29 and looking back at April 21, it was about $1.33.

So I understand there's been a dip in the interim, but versus where we were on the Q1 call, the euro hasn't changed all that much.

So what is kind of the base rate assumed in your guidance, and are we in fact somewhat above it where the euro is trading now?

No.

You should probably go back and look at beginning of January.

The rates were significantly higher than where it's trading today from a euro perspective.

Okay.

Fair enough.

Thanks.

Okay.

Your next question comes from the line of Joel Sendek with Lazard Capital Markets.

Hi, thanks a lot I have a question about the HIV sales in the second quarter.

So in particular slide 15, if you look at the far right-hand column there, 440,000 patients, that's down from the similar slide last quarter and I'm just wondering why that is, and I'm trying to make sense of your comments that you had a really strong quarter because on the basis of the guideline changes, at the end of last year for earlier treatment, I would have thought that number would have been up.

So can you just help me understand what's going on?

Yes, sure, Joel.

My comment earlier was based on TRX.

Synovate is a really good database.

But as we said time and time again in the past, it is a survey, it's basically 200 physicians, it's 4,000 patient records.

Put that into perspective.

We've got over 500,000 patients on antiretrovirals therapy.

So it is a survey, it is very helpful.

And by the way, I want to come back to a very, very important data point that I haven't brought out in my answers to date.

But we certainly use it for forecasting purposes, but it certainly isn't the only survey or only piece of data or information that we use in our own forecasting models around market size.

What I was referring to earlier is if you look at TRX, the TRX in the quarter for both Atripla and Truvada quarter-on-quarter grew in the mid 3%.

For us, we use Walters Kluwer Health.

Atripla grew by 3.5% and Truvada grew by 3.8%.

If you compare that with Q2 2009, the numbers were 3.3 and 3.6.

And if you compare it with year-over- year, this quarter previous year and 2009 Q2 previous year, again, the growths were the same.

And then the other thing we look at is basically the moving annual total, just as we do for Synovate.

If you look at that for prescriptions, for Q2 on a moving annual total basis 2010, Walters Kluwer Health, the growth was 8.5% for total ARV prescribing, 8.5%.

A very, very healthy growth.

For IMS, it was just under 8%.

So again, if you look at the real -- where the rubber hits the road, which is prescriptions, clearly, there's very healthy growth there.

I would like to come back and just comment on what I said earlier about earlier prescribing.

You've been looking for a data point where we can see the impact of DHHS -- HSS, and we actually saw a very nice jump in the starting point, CD4 starting point for naive patients.

If you look at quarter two, three and four of 2009, about 32% to 33% of HIV patients were started at 350 and above.

We saw that jump to 39% in Q1 of this year, so quite a step change in the starting point of antiretroviral therapy.

So that's the first strong indicator we have seen that what we hear on a day-to-day basis from our field based teams, the physicians are being very proactive in talking to patients about starting therapy in line with the new guidelines is now coming through in the data.

So we are pretty pleased to see that step change.

So clearly, it's coming through in the data.

Thank you.

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

Okay.

Well thank you very much, operator, and thank you certainly all for joining us today and to engaging in this new format or our earnings call.

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This does conclude your presentation.

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