吉利德科學 (GILD) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Gilead Sciences third-quarter 2011 earnings conference call.

My name is Veronica, and I will be your conference operator today.

(Operator Instructions).

As a reminder, this conference call is being recorded today, October 27, 2011.

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

Please go ahead.

Thank you, Veronica.

Good afternoon, everyone, and welcome to Gilead's third-quarter 2011 earnings conference call.

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

This press release is available on our website as are the slides that provide much more detail around the topics covered on today's call.

Your speakers for today will be John Martin, Chairman and Chief Executive Officer; Robin Washington, Senior Vice President and Chief Financial Officer; and Norbert Bischofberger, Executive Vice President of R&D and Chief Scientific Officer.

John Martin will review the third-quarter milestones, Robin will discuss our financial results and commercial performance, and then Norbert will provide an update on our research and development progress and discuss our future outlook and opportunities.

John Milligan, President and Chief Operating Officer; Kevin Young, Executive Vice President of Commercial Operations; and Andrew Cheng, Senior Vice President of HIV Therapeutics and Development Operations, are here as well to answer your questions later in the call.

I would also like to note that we just issued a press release announcing today's completion of the US NDA filing for our Quad drug.

Norbert will discuss this significant milestone in further detail later in the call.

I would 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 you to our latest SEC disclosure documents and recent press releases 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 reconcile GAAP and non-GAAP numbers in the press release we just issued, as well as on our corporate website.

I will now turn the call over to John Martin to provide the highlights from the quarter.

Thank you, Susan.

I am very pleased with our progress during the third quarter.

First, in August US FDA approved Complera, the second single-tablet regimen for the treatment of HIV combining Truvada with Tibotec's rilpivirine.

Product was shipped to wholesalers and pharmacies within 24 hours of approval.

In Europe this product is called Eviplera and has received a positive opinion from the CHMP.

Before the end of the year, the European Commission is expected to give final approval, and launches of Eviplera in various European countries will follow in 2012.

At the September ICAAC conference in Chicago, Complera was the focus of a late breaker poster, which featured results from Study 111, a study designed to assess whether patients can safely switch from Atripla to Complera.

The data demonstrated that all 49 patients in the study maintained virologic suppression 12 weeks after the switch to Complera.

To further define the profile of Complera, we have two Phase IIIb studies underway.

The first is an open-label comparison of Atripla to Complera to assess the benefits of single-tablet regimens, which because of ease, simplicity and convenience may lead to higher compliance and better virologic outcomes.

This 48-week study is fully enrolled with some 799 patients.

The second study is designed to support switching from a protease inhibitor containing regimen to the single-tablet regimen of Complera.

In this study, 482 patients fully suppressed on a protease inhibitor regimen were randomized to either continue on their existing regimen or switch to Complera.

Also, during the quarter, we completed the purchase of a biologics manufacturing facility of certain process development assets located in Oceanside, California.

This facility is currently designed and equipped to produce biologics for a toxicological Phase I and Phase II clinical studies.

We retained many of the site's biologics manufacturing specialists and process development scientists and will use the facility for the process, development and manufacture of GS 6624 and other antibodies currently in preclinical development.

This acquisition provides us with the resources and expertise to accelerate internal biologics research and development programs and to take advantage of external opportunities in the future.

I would like to highlight two recent announcements that are examples of our commitment to bring the best fixed dose combinations and single-tablet regimens to HIV-infected patients.

The first was an announcement earlier this month of a license of Boehringer Ingelheim's portfolio of non-catalytic site integrase inhibitors for HIV.

This includes the lead compound, BI436, that has been evaluated in a Phase Ia dose escalation study in healthy volunteers supporting once daily dosing.

This class of non-catalytics site integrase inhibitors target HIV integrase, but bind to a novel site, distinct from the binding site of the current class of integrase inhibitors like elvitegravir and raltegravir.

Consequently these novel agents could have activity against viruses that are resistant to the current class of integrase inhibitors.

The second is a collaboration we announced yesterday with Bristol-Myers Squibb to develop a co-formulation of atazanavir with cobicistat, our boosting agent.

This collaboration follows the previously announced agreement with Tibotec to co-formulate cobicistat with darunavir and further validates the importance of cobicistat as a potential novel boosting agent.

And finally, I would like to note that this week marks the 10th anniversary of the approval of Viread.

Now Viread-containing products including Truvada, Atripla and Complera are utilized by nearly 80% of HIV-infected patients in the United States.

Viread is also the most widely used treatment for hepatitis B infection in the US and Europe.

Every day Viread in one or more of its forms provides benefits to 2.7 million people around the world with 1.8 million patients receiving access in the developing world.

I would like to acknowledge the hard and innovative work of the research scientists both internal and external and our clinical access and commercial teams for their role in advancing the treatment of patients living with HIV and chronic hepatitis B.

I would now like to turn the call over to Robin to cover the financials.

Thanks, John.

In the third quarter, we delivered solid financial performance and continued to execute on our vision to return value to our shareholders.

Product revenues were $2.1 billion, up 11% over the same quarter in 2010.

Non-GAAP EPS was $1.02 per share, which represents 14% growth compared to the same quarter of 2010.

Our third-quarter product revenue growth was driven by the solid performance of our antiviral franchise, which in the US grew 7% year over year and 4% sequentially, delivering revenues of $985 million.

As John mentioned, in August we launched Complera, our second complete single-tablet regimen for the treatment of HIV.

Complera contributed $19 million to our total US antiviral product sales during the quarter.

We continue to see good underlying patient demand for our antiviral products.

According to Wolters Kluwer Health, our total US and RTI prescription share exceeded 70% at the end of the quarter.

Third-quarter year-over-year US prescription growth for Atripla and Truvada were 12% and 14% respectively.

Sequentially prescription growth was 2% for both Atripla and Truvada.

Third-quarter nonretail purchasing was lighter than experienced in the same quarter of prior years.

As we discussed on our earnings call last quarter, HRSA, an administrative arm of the Department of Health and Human Services, announced an $885 million federal fiscal year budget for the AIDS drug assistance program.

After an initial distribution of just over $400 million in April, the remaining tranche, including the $50 million in emergency funding, was distributed to the state at the very end of September.

Due to this late release of funding, individual states were more conservative in their purchases throughout the third quarter.

While we cannot predict the purchase patterns of individual states, on the basis of a traditional federal use it or lose it policy, we believe that the second half of the ADAP fiscal year, which ends on March 31, 2012, will be stronger than the first half.

The recent reduction in ADAP wait list is an encouraging lead indicator.

Europe contributed $677 million to our antiviral product sales, an increase of 10% year over year due to demand growth and a decrease of 3% sequentially due to the impact of unfavorable foreign currency exchange and the seasonality of product buy-ins in the prior quarter in advance of the summer holidays.

In the third quarter, our cardiovascular franchise continue to expand.

Letairis demonstrated strong year-over-year revenue growth of 31% and sequential revenue growth of 7%, primarily as a result of the FDA's removal of the black box warning of liver toxicity earlier this year.

Ranexa grew 36% year over year in the third quarter.

Excluding the benefit of a one-time returns reserve adjustment of approximately $8 million in the second quarter, Ranexa grew 5% sequentially.

Our strong operational results generated healthy cash flows of $897 million for the quarter and a total of $2.7 billion year-to-date.

This has enabled us to continue to execute on our vision to return value to our shareholders by continuing to invest in our future through pipeline advancement, in license and acquisition opportunities, as well as aggressive share repurchases.

During the quarter, we completed our 5 billion share repurchase program announced in May 2010 and commenced our second 5 billion program announced in January 2011.

Since January 2010 we have repurchased and retired 164.2 million common shares or 18% of our common stock outstanding.

Lastly, I would like to update our full-year 2011 guidance, which is detailed in slide 34 in the earnings call back and is available on our corporate website.

The non-GAAP product gross margin and the operating expense guidance provided to you excludes the impact of acquisition-related, restructuring and stock-based compensation-related expenses were applicable.

As we look forward to the fourth quarter, we are tightening our product sales guidance for the full-year 2011 to $8 billion to $8.1 billion, which is the upper end of our previous guidance range and represents an 8% to 10% increase over 2010 product sales.

We are also tightening our non-GAAP product gross margin guidance for the full-year 2011 to 75% to 76%, which is also the upper end of our previous guidance range.

We are increasing our non-GAAP R&D expense guidance for the full-year 2011 by approximately 10% to a range of $1.05 billion to $1.1 billion, due entirely to key business development activities in 2011 that have augmented our pipeline efforts.

In addition to the updates and advancements on these activities provided by John and Norbert today, we have outlined all activities in 2011 to date on slide 35 in the earnings call deck.

We are also increasing our non-GAAP SG&A expense guidance for the full-year 2011 to a range of $1.05 billion to $1.1 billion.

This increase in SG&A expense guidance is driven by the following.

Additional bad debt expenses associated with slower collections in Southern Europe, increased legal fees associated with the Department of Justice investigation and ongoing patent events, acquisition-related integration expenses and ERP implementation costs.

We now expect our effective tax rate for the full-year 2011 to be in the range of 24% to 25%, which is lower than previously anticipated due to the geographical mix of our revenues.

And finally, we are reiterating our full-year 2011 diluted EPS impact of acquisition-related restructuring and stock-based compensation expenses to be in the range of $0.25 to $0.28 per share.

In summary, our third-quarter results reflect solid financial performance, which is reflected in our strong results of operations and our healthy operating cash flow.

I will now turn the call over to Norbert who will take you through our upcoming pipeline milestones and advancements.

Thank you, Robin.

We made significant progress in advancing several important clinical programs across our therapeutic areas in the third quarter.

In a press release this afternoon, we announced the US NDA filing of the Quad.

I'm very proud of our development teams who were able to very rapidly in a period of only five and a half months enroll a total of 1400 patients in the two pivotal Phase III studies at 150 sites in North America, Europe, Australia, Mexico and Thailand.

In addition, our team has accomplished submission of the NDA in record time, only six weeks after last patient, last visit and five weeks after un-blinding of the second Phase III study.

This is very impressive considering that the average industry timelines are six to nine months, and I want to reiterate the industry timelines are six to nine months, not weeks.

We provided topline results in August and September from the two pivotal Phase III studies comparing the Quad with two current standard of care regimens, Atripla in Study 102 and Adenosine ritonavir with Truvada in Study 103.

In both cases the Quad proved to be non-inferior to the standard of care regimen.

In Study 102 88% of patients on the Quad arm achieved a viral load of less than 50 copies per milligram compared to 84% in the Atripla arm.

And in Study 103, 90% of the patients on the Quad arm compared to 87% in the Adenosine ritonavir plus Truvada arm achieved viral load less than 50 copies per milligram at week 48.

The 90% response rate on the Quad arm in Study 103 is to our knowledge the highest response rate seen in any large, blinded, randomized study in HIV patients.

With the data from Studies 102 and 103, we now have strong evidence supporting the safety and efficacy of the Quad.

In addition, the safety, tolerability and anti-HIV activity of elvitegravir, one of the components of the Quad, is supported by Study 145, the results of which were presented at the International AIDS Society Conference this past July.

Study 145 compared elvitegravir to raltegravir in treatment-experienced HIV infected patients, and the results indicated that once daily elvitegravir was not inferior to twice daily raltegravir.

We will be requesting a priority review from FDA that if granted could allow for a FDA approval of the first integrase inhibitor containing single-tablet regimen before mid-year 2012.

For cobicistat and elvitegravir, data from the final study comparing cobicistat to ritonavir, each in combination with Adenosine and Truvada, will be available for the end of this year.

The elvitegravir and cobicistat NDA filings will follow the Quad filing in the second quarter of 2012.

From our earlier stage HIV pipeline, we have now completed the dose ranging study of GS 7340, our novel prodrug of tenofovir, evaluating doses of 8, 25, and 40 mg, and have selected the 25 mg dose for Phase II providing systemic tenofovir exposures approximately tenfold lower than those provided by Viread with greater antiviral activity.

We are doing formulation work now to produce GS 7340 containing single-tablet regimens for evaluation in Phase II.

This includes an integrase-based single-tablet regimen of GS 7340, emtricitabine, cobicistat and elvitegravir, and a protease inhibitor-based single-tablet regimen of GS 7340, emtricitabine, cobicistat and Tibotec's darunavir.

With this work well underway, we are now targeting to enroll patients in the first study in early 2012.

As we have previously indicated with the data from several studies supporting the use of Truvada as pre-exposure prophylaxis for HIV transmission known as PrEP will intend to file for inclusion of the prevention data in our US Truvada label.

We are in ongoing discussions with the FDA and could be in a position to file the NDA before the end of this year.

Review of the submission could include an FDA advisory committee meeting in the first half of next year.

As you may know, in July of this year, we filed an NDA for the pediatric formulations both in oral powder and reduced strength tablets of Viread for the treatment of HIV in children ages two to 12.

We were notified by FDA in September that they granted Viread pediatric exclusivity, extending its patent protection by six months to January 2018.

We expect action on our filing by early next year and will be prepared to make the drug available in the US shortly after registration.

Turning to our efforts in liver disease, on November 4 the American Association for the Study of Liver Diseases Conference kicks off here in San Francisco.

We will present important five-year data from our pivotal studies of Viread in hepatitis B.

In those studies, Viread treatment not only prevented progression of liver fibrosis, but actually reversed cirrhosis in a high percentage of patients.

In addition, no patient developed resistance to Viread after five years of treatment.

As we have previously discussed, 2011 has been a very busy year on the hepatitis C front as well.

To date we have enrolled more than 1600 patients across eight Phase II clinical studies, three of which evaluate all oral interferon free regimens and five evaluate interferon's bearing regimens.

We look forward to sharing some of these results with you next year.

In our growing oncology effort, GS 1101, the lead compound from our Calistoga acquisition, we will be entering Phase III studies in patients with chronic lymphocytic leukemia early next year.

A Phase II single arm study is currently ongoing, evaluating the efficacy of GS 1101 in patients with indolent non-Hodgkin's lymphoma who are refractory to rituximab and cytotoxics.

We are also planning for Phase III studies in patients with NHL, which would commence -- which we would expect to commence in the first half of next year.

In addition, we are making progress with the development of GS 6624, the monoclonal antibody added to our pipeline through the acquisition of Arresto.

GS 6624 targets LOXL2, which is a crucial enzyme responsible for establishing the maintenance of the pathological extracellular matrix involved in fibrotic disease and in solid tumors.

We have initiated a Phase II study of two different doses of GS 6624 in myelofibrosis, and we will initiate two Phase II studies of GS 6624 in both pancreatic and colorectal cancer before year-end.

The pancreatic and colorectal cancer studies are both double-randomized, double-blind, placebo-controlled studies comparing two doses of GS 6624 versus the standard of care in second-line metastatic disease.

In our cardiovascular program, we see significant opportunities to expand the utility of Ranexa.

Ranexa appears unique among anti-angina agents in that it reduces ischemia and angina, and in addition, there is evidence that it also lowers HbA1c, a biomarker for type 2 diabetes.

There is significant overlap between coronary artery disease and type 2 diabetes.

About 30% to 40% of coronary artery disease patients also have type 2 diabetes.

Hence, these patients could potentially derive a dual benefit from Ranexa.

In order to further define this potential benefit, we are planning to initiate three Phase III studies, enrolling approximately 400 patients each to determine the effect of Ranexa alone or in combination with other antidiabetic therapies in lowering HbA1c and plasma glucose after 24 weeks of treatment.

Another opportunity for Ranexa is its use in conjunction with percutaneous coronary intervention, or PCI, to prevent subsequent major adverse outcomes.

A sub-group analysis of MERLIN, a 7000-patient study of Ranexa in acute coronary syndrome, indicated reduction in major adverse cardiovascular events in patients with a history of angina undergoing PCI.

We will be initiating a Phase III study further defining this potential benefit.

In this study 2600 patients with a history of angina undergoing PCI with incomplete revascularization will be randomized to Ranexa or placebo with the endpoint of major adverse cardiovascular events.

In closing, the investments we are making today, both in our internal R&D efforts and through selected business development opportunities, will drive the success of our business in the future.

And we look to closing out this year, we will have approximately 60 Phase II and III studies underway, an all-time high for Gilead and the result of a commitment and productivity of the talented employees across our organization.

We are confident in our ability to deliver innovative products to the patients we serve.

We will now open the call to your questions.

Operator?

(Operator Instructions).

Mark Schoenebaum, ISI Group.

This is [Wes] here sitting in for Mark.

I actually have a question about healthcare reform.

There has been some talk about the super committee not being able to get to this minimum amount of savings and as a result sequestration occurring.

So if there is sequestration and across-the-board reduction in budgets, will this impact Ryan White funding and, as a result, ADAP revenues for Gilead?

It is a good question.

Our understanding is Ryan White for 2012 -- I'm sorry, for 2011 and into the first part of 2012 has already been distributed.

So could the impact go beyond that?

I don't really know the impact beyond that.

But the funds that are out for what will be the Q4 of this year and Q1 of next year and our fiscal year have already been distributed.

So certainly it would not have a short-term impact.

And just to add to that, basically the Ryan White re-authorization was done a year ago, and it was a three-year term.

So that takes us through to 2013.

And at that point there is the potential transition to Medicaid within the healthcare act as it was written.

So that would be our expectation.

I think what happens in this super committee is completely locked down right now and remains to be seen.

But, as John said, certainly for 2011 and we would also expect for 2012 that the Ryan White Treatment Act would be fully funding the ADAP programs.

Geoff Meacham, JPMorgan.

A couple on Complera versus Atripla.

So for Complera, how much of the quarter would you say is stocking versus demand?

And then for Atripla, do the sequential trends say anything about the promotion of Complera over Atripla, or is that also demand fluctuation?

I had a funny feeling in my bones that you were going to ask me these questions.

Am I that predictable?

No, just very shrewd.

So let me take the Atripla first because I think it runs into Complera.

So, as you have seen, Atripla was down by 2% quarter over quarter.

Truvada had a nice quarter, plus 7%, but Atripla was down by 2%.

The first thing to say is the underlying prescription growth quarter on quarter was 2%, as Robin said, for both products, and that 2% was pretty solid when it comes to that we have very good quarterly growth in prescriptions for Q1 and Q2.

So it is nothing to do with the growth in prescriptions, which is up.

That is a direct measure of patient growth.

Secondly, Atripla was not an inventory story.

Inventories remained at the bottom of the ranges.

So after that pulldown in Q1 of this year, as we predicted, the major wholesalers are operating as low as they can according to their contracts.

So Atripla comes back to the non-retail area that we have often talked about before.

The ADAP budgets in their entirety went out extremely late in the quarter, in fact, the very last week.

So what we did see during the quarter was I think what you would best define as very prudent purchasing by the direct purchase states.

It does seem as though they are improving their inventory management.

It does seem that they are wanting to be cautious so they don't run out and really avoid a Florida-like situation.

But the early pulldown in the wait lists is encouraging.

It is important to say that since their peak at the beginning of September, the wait list have come down 27%.

So I think that is a good early sign.

So really the Atripla was mostly about nonretail ordering.

Transitioning to Complera, the $19 million that we sold in Q3 was mostly pipeline fill.

From what we can ascertain, it was not really at the cost of Atripla.

Of course, the sales representatives are now detailing Complera as the number one product; Atripla is number two.

But from what we could make out -- and the date is very early -- this was not made based on some major switch off of Complera.

The launch is going as we planned from what we can see around the prescriptions.

It seems to be tracking the equivalent of a Prezista-like uptake, and that is not unsurprising to us when we think about our label and we think about the profile.

In terms of the patients, Complera seems to be going down the lines anecdotally anyway of the patients that we are profiling, which is the women of childbearing potential and individuals that could have high susceptibility to CNS R&D want to avoid CNS side effects.

So that is really the story on Complera, and I would characterize it as so far so good.

Okay.

Just as a follow-up, I mean, so if you did not see a lot of switching when you switch gears to the Quad and knowing the profile of the Quad like you guys do and the tolerability issues with proteases, what would be your market expectation for switching to the Quad looking to, say, second half of next year?

I think it really depends on the label you get.

Please don't forget that we don't have switching directly in our label for Complera, and we probably will not get that either for Quad.

And that is why we do the follow-on Phase IV studies.

You know, I think the big advantage that we have for Quad is that very strong positioning in first line.

Because the two studies will give us the opportunity to talk about both the NNRTI patients, as well as the protease patients, being applicable as first-line therapy to Quad.

So, first and foremost, I think that will be our positioning for the product.

Matt Roden, UBS.

This is actually [Andrew] filling in for Matt.

Let me add my congratulations on the quarter.

I have a question on treatment guidelines and how you guys are positioning both Complera and eventually the Quad.

Given that you are no longer detailing Atripla, is it your goal to get Complera on equal weighting and treatment guidelines to Atripla?

Good question.

So we still do talk about Atripla.

It is the second detail after Complera for our US sales team and will be the same as we roll out the countries in Europe.

As you probably saw recently, because the DHHS guidelines did come out just over a week ago, Complera was not put into a preferred therapy.

And, quite frankly, we did not expect it to be.

It was not one of our expectations, and we certainly did not include it in our internal forecasts for Complera.

We did not think that the ECHO and THRIVE Studies would get to that finish line in a quick fashion, and that is exactly why we set up to do the head-to-head with Atripla using single-tablet versus single-tablet.

We do feel at this stage that with the 102 and 103 Studies and particularly the response rates that we have got, that 90% -- I'm sorry 88% and 84%, we are in a very strong position, likely stronger to ascertain a preferred position in a quicker time period after the introduction of the Quad.

So we think Quad can get into that position fairly quickly.

Robyn Karnauskas, Deutsche Bank.

Just a little bit more granularity maybe on the ADAP purchasing trends.

You mentioned purchasing and wait lists are down, but has pricing stabilized at the site of ADAP, particularly Florida?

And then maybe you can give us some color on what have you learned this year about ADAP transparency, and do you think you will be able to better guide the Street next year?

In terms of pricing, we have made no changes to our pricing to ADAP.

As you know, we have had our prices basically locked.

We have not put any price increases into ADAP, so those prices have been fixed for some time now.

So we made that commitment.

We have a very good relationship with the ADAP programs, and any of the price increases that we have taken this year on Truvada and thus Atripla have not been passed on to ADAP.

In terms of transparency, we obviously respect the management of the direct purchase ADAP states.

We have very healthy conversations with them, but their management of their stock levels, of course, is their own private business.

We do get the sense that they are just being careful.

They did want to wait until they got their own allocation.

The total dollars were known, but none of the states knew exactly what they were getting until that final week of the quarter.

And I think they have got used to running at a lower level of inventory.

They just want to manage tighter.

The $50 million that they were given as part of the emergency was linked to expectations of taking down the wait lists, and that is what they have started to do.

We don't think at Gilead that those wait lists will go to zero.

We think that they will come down nicely, but we don't think they will go to zero.

Because in some ways having a wait list is a form of management for ADAPs, and indeed, it helps them with their arguments come the next ADAP year in appealing for their budgets.

So relationships are very good.

I just think they are being just a little bit more cautious than they have been in previous years.

And I think they will probably remain cautious until they get into Q1, and it is coming towards the end of their financial year, and on a use it or lose it basis, they know they will have to spend once they have carefully managed their year.

That is very helpful.

And pricing, I was just really asking about the concessions.

California has been very vocal about you guys making concessions on Atripla.

So I was really just asking more about additional concessions and whether you think that has stabilized or there will be more pressure next year?

Well, again, we think we have always done the right thing.

We have given and do give a supplementary discount to ADAPs.

We made changes to our patient assistance program.

We have very good entry criteria for federal poverty level, often better than the states themselves for our PAP.

So, as a package, I think we have been very constructive and being professional and have worked extremely well with the ADAPs.

We were the first company to step forward with the price freeze that we put in place over a year ago, and we have always tried to be a leader for ADAP.

So I think they have appreciated that.

Thank you.

This is Susan.

Just if I could remind you, we have a long list of people that would like to ask questions.

If I could ask you again to keep your questions to one, that would be great.

We would be happy to take your follow-up afterwards.

Ian Somaiya, Piper Jaffray.

Just a quick one on gross margins.

If you could just help us understand what is driving the improvement in gross margins, and what impact, I guess, greater Complera and Quad contribution will have in the future?

I mean overall it is product mix relative to where we are selling some of the products, primarily access programs versus our commercial program.

That is a slight improvement.

Overall Complera is still very small to date, but ultimately given the fact that we will get a component of the rilpivirine component of the sale, we would expect gross margins to over time to improve as more and more of that product becomes part of our net product revenue.

There was a second part of the question.

I'm sorry.

What was the second part of the question?

Just as we have Complera be a larger portion of the revenue mix and similarly with Quad, how should we think about gross margins in the future?

Are we looking at a time when we can go to pre-Atripla days or approach pre-Atripla days?

Well, I mean I think, again, as I said, we would expect to see some improvement as we get a component of it.

Will it be pre-Atripla?

No.

As we bring on the Quad on longer-term, we would expect margin expansions, and that would be all Gilead product.

Brian Abrahams, Wells Fargo Securities.

I was wondering if you could talk another question on the Quad switching.

If you could talk a little bit about the timelines for the switching studies in terms of how quickly into the launch of Quad do you think you will have meaningful data from these studies?

Are there any metabolic issues with switching that need to be parsed out similarly to Atripla to Complera switching?

And when might we see the data from the rollover component of Studies 102 and 103?

How important would that be to drive switching at the initial launch?

So the rollover studies from 102 and 103, as you know, I want to remind you those are both blinded studies out to week 96, and you could simply say, you know, add 48 weeks to when we released the last data, that is when internally we will have the data available, and I would assume we will submit it to an upcoming conference.

So it will be sometime in the fall midyear to the fall of next year that we would have those data available.

And the other question, are there any metabolic issues with switching?

The answer is no.

As you may remember, there was a hypothetical issue with switching to Complera from Efavirenz because of the inductive effect of Efavirenz.

And I am sorry.

What was your first question?

I'm just wondering on the timeframe how quickly into the US launch of Quad do you think you'll be able to have some meaningful or commercially meaningful data from these switching studies?

So I think both of the Swiss studies from NNRTI's, as well as PI's, are isolated to initiate activities in Q4 of this year.

So, in terms of when we will have data available, I think that is always dependent on enrollment timelines.

So I think it is a little bit hard to predict accurately at this time.

Sapna Srivastava, Goldman Sachs.

First of all, congratulations on the court filing.

Secondly, I just wanted to get some color on the expense strategy.

How should we think of R&D spend going forward?

It clearly seems to be picking up as a percentage of revenues, and I just wanted to gain clarity as to how we should think about forward years?

It is Robin.

We only give annual guidance, but I will say, as Norbert described, we have a very robust R&D pipeline.

And given the M&A and collaboration and activity that occurred this year as we continue to ramp up and integrate those companies, we expect that trend to continue.

Norbert mentioned over 60 Phase II and III trials that are ongoing, so that is an overall all-time high for Gilead.

So we definitely don't anticipate R&D expenses to decline at this point.

Geoff Porges, Sanford Bernstein.

Ravi Mehrotra, Credit Suisse.

Probably a question for Kevin, and it relates to, again, Complera.

I'm really looking for further levels of granularity to the answer you gave to Geoff's question.

I appreciate it is really early days in the launch, but can you tell us ballpark what percentage of patients moving on to Complera are naive versus treatment experienced?

And going forward do you think you can use the 50-patient reported study to gain physician confidence, or do you think the hurdle rates really will be unwound when we see the data from the two large studies next year?

It is very early.

We don't have a lot of percentages between switch and new starts.

We think it is a blend of those two.

We don't think the switch particularly came from Atripla.

So you would have to presume that, therefore, it came from the PI regimens.

From a medical information point of view, upon request we are able to share the information on the 50-patient switch study.

But we are not able to put that into mainline promotion.

So really we do need the single-tablet versus single-tablet and, of course, that to be submitted and incorporated into our label.

But I certainly think the opinion leaders would have gotten a great deal of confidence from reading the abstract that you are okay to switch virally suppressed patients from Atripla to Complera.

Okay.

Fair enough.

I do appreciate it is early.

Perhaps a quick cheeky second one.

Of the $19 million -- and you said it is mostly fill -- again, can you give us any kind of granularity?

Is that 95% or 50% of the $19 million?

It is just not normal for us really to break those out.

So I will just leave it that the majority was pipeline filled.

This is Susan and I might just want to add to what Kevin said is that we do get Synovate data, but that Synovate data is on a quarter lag.

So clearly it is too soon for us to have patient data other than what we hear from our reps and from the physicians clearly that we speak to.

Again, I just want to remind you guys if you would please stick it to one question.

Tom Russo, Robert W.

Baird.

I think my question is actually pretty easy.

It has to do with the change in guidance for 2011.

Robin, can you comment how much of the $100 million increase in R&D and $50 million in SG&A showed up in the third quarter?

And also what in the revenue mix geographically is different than was originally expected?

So relative to your first question, I would probably look at it more second-half overall.

About 75% of the $100 million was driven by second-half spending increases.

I mean, even if you look on R&D just relative to the two announcements this week, BI and GlobeImmune, that was -- that will be a pretty significant increase to Q4 relative to the -- or a significant component of the guidance increase in Q4.

On the SG&A side, about 70% of the $50 million is related to second half.

Bad debt, there was a significant increase in bad debt that we did take in Q3, but given some of the continued degradation that we see in DSOs, we could expect that to potentially happen in Q4 as well.

Relative to the legal expenses, those are pretty evenly split overall.

And then your second question was product revenue.

The geographic split as -- (multiple speakers)

Yes, I mean I would think the one thing that Kevin talked a little bit is about the ADAP shortfalls.

So those were slightly less than what we expected driven by the funding timing.

So that is kind of a key driver.

But overall we feel good relative to our overall higher end and upper end of our guidance.

Josh Schimmer, Leerink Swann.

Relative to GSK's franchise, it looks like you might have lost a little bit of share in Europe.

Can you comment on share trends there and if that is accurate or not?

Obviously please bear in mind that things do change quarter to quarter, and we are only coming out of the summer months in Europe, which do tend to be a little bit quieter.

The stronger quarters are always typically Q2 and Q4 in Europe.

You are correct in spotting that our naive share for Atripla did just come down slightly.

We have got one contract issue within the UK where a contract was offered purely on price, and there has been a small amount of share taken in the naive patient setting, Atripla versus Kivexa.

We believe this situation can be addressed, and we are addressing it.

So it is just one isolated situation.

Thomas Wei, Jefferies.

I had a question actually on business development strategy.

So with the very notable exception of Calistoga, it seems as though what you have been doing as a lot of these in-licensing deals or acquisitions very early stage assets in virology and cancer.

Is that the direction that we should see for business development going forward, or do you still have an appetite for a larger maybe even later stage product in those areas?

I don't think you can take any sort of short-term trend like what we have been announcing in the last few days and extrapolate it.

Because we look at a wide variety of different opportunities both early stage and late stage and have been doing so for years.

We did really want to bolster some of the early parts of the HIV pipeline, especially in conjunction with 7340.

And certainly the deals to expand the cobicistat in 7340 have been a great opportunity for us, so quite a bit of emphasis on that HIV portion of the pipeline over the last few months.

But, as you know in this field, things change every quarter, so we will always take a look across the spectrum, across our portfolio, and from that we will make determinations as to what to do.

Yaron Werber, Citi.

This is [Gloria] for Yaron.

We just wanted to ask the question, how are you going to position the Quad versus Complera when the Quad does launch, and is there any type of support that you are obligated to have for Complera?

Yes, we have a contractual arrangement which runs for several years with Tibotec, and we can certainly more than adequately service that when the Quad is introduced.

So when the Quad is introduced, it will become our first-line detail for our HIV team, and Complera will then move to number two, and we will then drop the promotion of Atripla.

We do think the Quad data subject to approval and subject to a label will give us every opportunity to very much go after the full array of naive patients.

And that will naturally be what we believe to be a very strong first-line therapy.

So we will put tremendous emphasis on the Quad.

We believe this is the future of HIV, and we believe it is the best treatment going forward after approval for HIV patients.

But we will still have a Complera detail as part of that.

Rachel McMinn, BofA Merrill Lynch.

Two quick questions and then maybe just another one.

Just priority review for Quad, if you could just give us a sense of your views there, and when in 2012 might we see oral data from your HCV studies or all-oral HCV studies?

And then I wanted to ask on just a different angle on switching for Quad whether you think the switch rates relative to [Scabuden] or Combivir to Viread whether the switch rates from like an Atripla or other regimens would be faster or slower for Quad and why?

This is Susan again.

That's three questions.

I think we will answer one of them.

Andrew, do you want --

Sure.

So your question with regards to priority for the Quad, I think it is very clear that Quad will be the first single-tablet regimen in integrase class, and I think that is a very important distinction as currently the single-tablet regimens are only in the non-nucleoside class.

I think that in itself makes a compelling case.

Just one other comment about the switching from the Quad, as Andrew before said, we will not have any -- we have not initiated any studies yet.

We will not -- we don't expect to have that in the label when we get approval, and that will be sometime in 2013 before we can file that to the label update.

And so I think it is too early to speculate on the pace of switching and how it compares to [D40] in the old days.

Michael Yee, RBC Capital Markets.

The Truvada numbers are really strong, and I think that you guys quoted them as up 7% sequentially as well, but yet scripts were only up 2%.

Did ADAP not have a negative effect there?

Maybe you could help us connect the dots why that was strong, and Atripla was a little bit lighter.

There's ebbs and flows here.

We kind of saw the reverse situation in Q2 where we had the strong Atripla up 10% in revenues and Truvada only up 4%, and yet prescriptions were both about 4% increase.

So I think these are the sort of ups and downs, modulations, undulations that you get quarter on quarter because of the element that we have of the nonretail purchase.

Non-retail is largely ADAP, but we do have the [CMOPs], the [VADAD] ordering, and we do have public clinics as well.

So it is just the variability I think you get between the purchase element of our revenues versus underlying prescriptions.

I will tell you that everything we think about every time we forecast our HIV portfolio we always do it based on prescriptions.

Bret Holley, Oppenheimer.

I'm wondering about Atripla in the EU and thoughts on how you might grow naive patients here relative to other alternative Truvada-containing regimens near-term?

Will you just now really start to think forward to Complera and Quad in Europe?

Very, very important distinction between where we are in the US versus where we are in Europe is that we actually don't have a label for first line, and that is very, very important.

Our sales representatives in Europe do not promote Atripla in the naive setting, whereas that can be done here in the US.

So inevitably that is a drag on our performance Europe versus the US.

The other thing, of course, is that we have got a mix of countries, some of which are very NNRTI-oriented like a UK and Spain, and they are like the US, and markets like Italy and France that are very strongly PI, and some of those have actually gone to the integrase like France.

So there are those very distinct differences.

We will have a staggered rollout of Complera in Europe.

We will not get -- for example, we will not get France and Italy until the second half of 2012.

So inevitably there will be a mix of some countries that will have Atripla still first line for a while and then move to Complera, markets like the UK, France -- UK, Germany, Austria we hope at the end of this year or early next year will have Complera as the first detail.

And the good thing I should add about Complera is it will have a first-line naive label.

Maged Shenouda, Stifel Nicolaus.

So, given the worldwide austerity issues, what is your current thinking about the pricing of Atripla with the eventual introduction of generic Atripla and how your Atripla margins could possibly change with that introduction?

Well, just to give you an update, we did not see any national haircuts in terms of prices in Q3.

We continue to watch the situation in Europe very carefully.

We have probably got more sensitivity around Turkey and Portugal for the remainder of the year.

I think if you asked anybody in the industry that is probably where they think there may be some price actions.

We have been very successful with our single-tablet regimens in Europe.

If you take a proxy of where we are with generic 3TC, for example, in Spain, whilst we have done some selective contracting and some selective price modulation on Atripla, the position and the strength of support for single-tablet regimens now supported by publications in the likes of Spain do give us that premium pricing.

So I don't think that we necessarily have to tumble to Efavirenz pricing at such point that becomes available in the European countries.

Jim Birchenough, BMO Capital Markets.

Just on the US HIV market dynamics, when I look at patients on antiretroviral treatment, it looks like it went down sequentially from the data reported in the second quarter, and it looks pretty flat in Europe.

So the question is, is this just inaccuracy inherently in the data in the US, and does this really mean that you really have exhausted the early treatment initiative, and if not, what is going to really drive that to re-accelerate in terms of patients getting on antiretroviral therapy?

I will take just very quickly on Europe.

Europe is still progressing in terms of antiretroviral growth.

I think austerity is a backdrop, but still HIV is very much in the focus, and we are seeing legislation, and we are seeing pronouncements coming out from governments.

For example, the UK did one recently saying that their level of care for HIV was inadequate and they should be doing more work there.

So I still think there is potential to continue screening and feeding patients into care and onto Gilead products.

The main difference that you see in the US numbers is a change in the Synovate database.

They brought in a change in Q2, so please, please recognize that.

We were able to send you information that backs up all of these number changes.

We have got retrospective numbers, and you can get that from Patrick O'Brian.

Basically what they did is rather than do a bottom-up extrapolation on total market size, they are now using CDC numbers.

So basically you will see that patients in care, patients on antiretrovirals, and then patients on Gilead products drop down by circa 6%, and that is purely a change that has been made by Synovate.

It is the same for all companies that buy the information.

It is just a standard change by this independent provider.

Okay, operator.

Well, thank you, everybody, very much for joining us today.

This is Susan.

We appreciate your support and happy to take your follow-on questions after we conclude the call.