吉利德科學 (GILD) 2013 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Gilead Sciences fourth quarter 2013 earnings conference call.

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

(Operator Instructions)

And as a reminder, this conference call is being recorded.

I would now like to turn the call over to Patrick O'Brien, Vice President of Investor Relations.

Please go ahead.

Thank you, Patrick, and good afternoon everyone.

We issued a press release this afternoon providing earnings results for the fourth quarter, which is available on our website where you can also find detailed slides that support today's call.

For our prepared remarks and Q&A, I am joined by our Chairman and Chief Executive Officer, John Martin; our President and Chief Operating Officer, John Milligan; our Executive Vice President of Research and Development, Norbert Bischofberger; our Executive Vice President of Commercial Operations, Kevin Young; and our Chief Financial Officer, Robin Washington.

Before we begin our formal remarks, we want to remind you that we will be making forward-looking statements, including plans and expectations with respect to our product candidate's financial projections, all of which involve certain assumptions, risks, and uncertainties that are beyond our control, and can cause our actual results to differ materially from these statements.

A description of these risks can be found in our latest SEC disclosure documents and recent press releases.

In addition, Gilead does not undertake any obligation to update any forward-looking statement made during this call.

We will also be using non-GAAP financial measures to help you understand our underlying business performance.

The GAAP to non-GAAP reconciliations are provided in our press release, as well as on our website.

I would now like to turn the call over to John Martin.

Thank you, Patrick, and thank you all for joining us today.

2013 was a very productive year on multiple fronts.

Aided by strong scientific data and excellent commercial support, our marketed products achieved record product sales of $10.8 billion, an increase of 15% year-over-year.

And Kevin will further elaborate on our commercial performance.

The research and development organization was also extremely productive, executing on a record number of clinical studies across all therapeutic areas, as well as submitting marketing authorization applications in both hepatitis C and oncology.

The special fourth-quarter highlight was the US FDA approval of Sovaldi, a once daily oral nucleotide analog for the treatment of chronic hepatitis C as a component of a combination antiviral regimen.

This was followed in January by European commission approval, and Sovaldi has been launched in the UK, Germany and France.

In December, top line data from three phase III studies on the ledipasvir sofosbuvir fixed dose combination were released.

These studies, ION-1, ION-2 and ION-3 evaluated the fixed dose tablet in genotype one infected, cirrhotic and non-cirrhotic, treatment naive and treatment experienced patients, both with and without rilpivirine for a duration of 8 to 12 or 24 weeks.

The response rates in the 8 and 12 week arms evaluating the once daily combination of ledipasvir and sofosbuvir without rilpivirine ranged from 93.6% to 97.7%.

Based on these exciting data, the NDA and the European marketing authorization sent application will be filed this quarter.

The FDA previously assigned breakthrough designation to this combination, and the European's Medicines Agency, EMEA EMA, has accepted Giliad's request for accelerated assessment, a designation that is granted to new therapies and medicines of major public health interest.

The accelerated assessment could shorten the EMA's review time of ledipasvir sofosbuvir by two months.

Turning now to HIV, we received European commission approvals for Stribild, Tybost, a pharmacokinetic enhancer that boosts blood levels of certain HIV medicines, and Vitekta, an integrase inhibitor for the treatment of HIV-1 infection in adults.

Last quarter, enrollment was completed in two phase III studies for the single tablet regimen of elvitegravir, cobisistat, emtricitabine, and TAF, abbreviated ECF TAF, in treatment-naive patients.

These studies will read out in the fourth quarter of 2014.

In addition, this tablet is being evaluated in a number of other studies, including treatment experienced patients, patients switched to ECF TAF, patients with mild to moderate renal impairment, as well as adolescents.

We currently anticipate filing this broad package for US and European approval of ECF TAF in first quarter of 2015 for naive experienced and switching indications.

In September, an NDA was submitted for idelalisib, a targeted oral inhibitor of PI3K delta for the treatment of relapsed refractory iNHL.

This application was assigned a standard review with a PDUFA date of September 11.

This was followed in December by the following of a second NDA with the FDA for CLL.

The FDA granted idelalisib a breakthrough therapy designation for relapsed CLL patients.

This designation was based on data from a pre-specified interim analysis performed by an external data monitoring committee showing a highly statistically significant effect on the primary endpoint of progression free survival.

Just yesterday, we were informed that FDA has granted this application priority review with a PDUFA date of August 6, 2014.

European MAA filings for idelalisib, and iNHL, and CLL were submitted in October.

Overall, 2013 was a very exciting year, with significant milestones achieved across the entire organization, for which I would like to thank all our employees for their dedication and hard work.

As we look ahead, 2014 will also be a busy year, with numerous upcoming milestones.

In liver disease, we expect to file our first ever regulatory submissions in Japan for sofosbuvir plus rilpivirine in genotype 2 infected patients, and ledipasvir sofosbuvir fixed dose combination in genotype 1 infected patients.

We anticipate having numerous presentations on liver disease programs at EASL in April in London, including data on the ledipasvir sofosbuvir phase III studies.

We also anticipate the first product approval and launch in oncology for idelalisib, and iNHL, and CLL.

In addition, we have a record number of clinical studies ongoing and planned across all therapeutic areas, as our pipeline continues to expand.

As you know, Kevin Young has announced his plans to retire and transition to a Senior Advisor role.

For the past nine years, Kevin has successfully led our global commercial organization during a time of significant change, complexities, and extraordinary growth.

Those who have had the opportunity to work with Kevin have seen first hand his passion and commitment to Gilead, and to our employees, and the value he places on doing what's right and in the best interest of patients.

His leadership and drive will be missed.

Please join me in thanking Kevin for his many contributions, and wishing him well in the next chapter of his life.

As always, we look forward to sharing our progress with you as the year progresses.

I would now like to turn the call over to Kevin Young.

Thank you, Joe.

Good afternoon, everyone.

2013 was an outstanding year for Gilead Sciences.

Total worldwide net product revenues closed in on the $11 billion mark.

Antiviral sales exceeded $9 billion.

Notably, for the first time, Complera, Stribild, and Letairis achieved sales of over $500 million.

And, our cardiopulmonary franchise topped $1 billion in 2013.

Looking to more detail around the fourth quarter results, I would first like to concentrate on the US.

Total US sales for the quarter were a record $1.94 billion, a growth of 29% over the fourth quarter of 2012.

Antiviral and cardiopulmonary franchises posted very impressive year-over-year growth of 31% and 23%, respectively.

Excluding Sovaldi sales, the antiviral franchise grew 20% year-on-year.

In HIV, underlying demand in the quarter was very healthy thanks to the growth of our newest single tablet regimens, Stribild and Complera.

Over and above this reassuring picture, revenue did exceed demand by about $130 million to $150 million due to an increase in year-end inventory levels.

I'd like to break down the inventory increase into its component parts.

First, we had a repeat of what we saw a year ago in Q4 2012, where there was a significant amount of strategic purchasing by small wholesalers and large retail chains in advance of January price increases.

Second, inventory of the big-three wholesalers finished above established ranges due to the timing of year-end.

Normalization of inventory will likely take place during Q1 2014, and thus, could have some impact on quarterly results.

As I mentioned earlier, we continue to see strong uptake of Stribild and Complera.

7 of 10 naive HIV patients start on a Gilead STR.

And as of the third quarter 2013, Stribild was the largest STR with 3 of 10 starts.

Stribild is also the number one HIV therapy in HIV patients who switch regimens.

And as you know, Stribild is now a DHHS preferred regimen, an important endorsement that strengthens its profile still further.

The performance of Complera was almost as impressive as Stribild.

Sales in the US alone exceeded $500 million for the year.

It remains the number two regimen in naive HIV patients, and the number two regimen in patients who are switched, and the number two in all HIV treated patients.

One important change to the Complera label came in December, with a broadening beyond the naive setting to include patients who are virologically-suppressed on stable PI continued regimens.

Turning to Europe.

We are very pleased with the fourth quarter year-over-year sales growth of 9%, excluding foreign exchange.

Eviplera, perhaps for the first time become the most prescribed regimen for naive HIV patients, and continues to extend its lead over Atripla as the most switched to regimen the big five EU markets.

Eviplera is now a preferred regimen in the EACS guidelines, and all five major EU national guidelines.

Furthermore, in December, European regulatory authorities extended the Eviplera label, removing a limitation of use in treatment naive patients.

We are also very excited about the early uptake of Stribild, where we have launched in 14 countries across Europe.

Performance in the UK and Germany is roughly double that of Eviplera at the same time point.

A recent change in the British HIV guidelines designated Stribild as a preferred regimen.

This coincided with (technical difficulty) and NHS England reimbursement.

We now have over 60 centers in the UK ordering Stribild, including all major London HIV clinics.

And just a month ago, Stribild was launched in Spain, the second-largest European HIV market.

We hope to have reimbursement in France by the end of the first quarter, and Italy by mid year.

Turning to hepatitis C. As John alluded to earlier, this is a transformational moment for HCV patients who have lived with this disease for many years, and have so few options for a cure.

Even though it is early days, we are extremely pleased with the US launch of Sovaldi.

Sales in December totaled $136 million.

A little over half of these are attributable to the initial open inventory supplied to the big three wholesalers, which approached nearly $70 million.

We also received a one-off order for $15 million for a clinical trial.

The balance of the revenue, approximately $50 million, was driven by patient demand.

Sovaldi prescribing has been broad-based, both across physician groups and patient genotypes.

Hepatologists, gastroenterologists, IMs, and infectious disease specialists have all begun using Sovaldi.

Our US field forces, therapeutic specialists, medical scientists, and national account managers were sized, resourced and trained to obtain broad market coverage.

And as we sensed from pre launch research, physicians who have stopped using the protease inhibitors plus pegylated interferon, reengaged in HCV treatment using Sovaldi.

Our first qualitative snapshot survey fielded at the beginning of the year, has given us a feel for the type of patient receiving Sovaldi.

The genotype distribution is very much in line with the US HCV population, with approximately 70% usage in genotype 1. By far the most popular treatment regimen for the genotype 1 patient is, as you would expect, the NEUTRINO approach of Sovaldi in combination with pegylated interferon and ribavirin for 12 weeks.

We also see that some GT1 patients have been given a combination of Sovaldi plus Simeprevir.

On the payer front, it typically takes between three and six months for a full formulary listing.

However, almost without exception, prescriptions are being approved by commercial plans.

The typical tiering of an innovative new specialist drug is being applied to Sovaldi, namely tier 3 with a prior authorization.

We expect the same type of timelines for coverage across the various Federal payer segments, and encouragingly, we have already seen some uptake by state Medicaid plans, as well as DoD TriCare.

Our US patient assistance program for Sovaldi, Support Path, has been very active since launch.

This program helps patients navigate benefits coverage, as well as provide assistance where allowed, with co-pays on foundation grants.

We anticipate that 30% to 50% of commercial patients will utilize our co-pay systems program.

Outside the US, we were very pleased with the European Commission approval of Sovaldi on Friday, January the 17.

Bottles of Sovaldi began shipping immediately on Monday morning.

And we have so far fulfilled orders in the UK, Germany, France, Austria, Sweden and Finland.

Full pricing will not be completed in some countries for up to 1 year.

Health economic dossiers have now been filed with all major reimbursement agencies, and we are very hopeful that Sovaldi will be given high ratings to support rapid public coverage.

On an interim basis, we are exploring special national mechanisms that allow purchase and prescribing in defined (technical difficulty) populations.

As a reminder, we began selling in France in October under an approved temporary authorization for use or ATU program, in patients pre-and post-liver transplant, and patients with advanced liver disease who have failed other HCV treatments.

Sales under this program for 2013 were $3 million.

Finally, I'd like to briefly mention our oncology activities.

We have begun to build out our sales and marketing organizations for idelalisib in line with projected regulatory timelines.

In the US, we have hired all of our regional managers, and will have the therapeutic specialist team in place and trained by the middle of the year.

All individuals have strong backgrounds in oncology and hematology, a very similar process will be followed in Europe, with particular emphasis on Germany, France and the UK.

In closing, I have never seen Gilead so strong and so ready to face the challenges and capture the opportunities of a new year.

I will now turn the call over to Robin.

Thanks, Kevin, and good afternoon everyone.

Earlier today, we were pleased to report strong fourth-quarter and full-year 2013 results that were in line with our revised guidance.

Our strong commercial execution across all therapeutic areas resulted in fourth quarter total revenues of over $3 billion, up 21% year-over-year, and 12% sequentially.

As previously mentioned, strong wholesaler and sub wholesaler purchases in anticipation of January 1 price increases may result in an inventory draw down by wholesalers and sub wholesalers in the first quarter of 2014, similar to the first quarter of 2013.

Fourth-quarter non-GAAP diluted EPS was $0.55 per share, compared to $0.50 per share the same period last year.

Turning to the balance sheet, during 2013, we achieved our target net debt to EBITDA of 1.5 X, and resumed repurchases under our share repurchase program, which were $582 million for the full year.

Focused efforts on collections and increased government funding to hospitals in Southern Europe, allowed us to reduce our European DSO to levels not seen in over 10 years.

Finally, I would like to cover our full-year 2014 non-GAAP financial guidance, summarized on slide 45 in the earnings presentation available on our Corporate website.

We expect product sales from our core business, excluding Sovaldi, to be in the range of $11.3 billion to $11.5 billion, an increase of 6% to 8% over 2013.

This range assumes anticipated price decreases in certain European territories, and the impact of generic efavirenz, now available in Canada and Europe.

Our non-GAAP product gross margin is expected to be in the range of 75% to 77%.

We expect our non-GAAP R&D expenses to be in the range of $2.2 billion to $2.3 billion, as we continue to invest in our product pipeline.

We expect our non-GAAP SG&A expenses to be in the range of $2.1 billion to $2.2 billion, which assumes the continued build out and expansion of our commercial infrastructure in Europe and Asia to support Sovaldi, and increased marketing and sales efforts related to the launch of our first oncology product, idelalisib in the US and Europe.

For the full-year, our non-GAAP effective tax rate is expected to be in the range of 28% to 29%.

As Congress has not extended the Federal R&D tax credit for 2014, we have excluded the credit from our guidance.

Please note that last year's affect the tax rate included an R&D tax credit for 2013, and the retroactive impact for 2012 in the first quarter.

We are anticipating the full-year diluted EPS impact of acquisition related restructuring and stock-based compensation expenses to be in the range of $0.63 to $0.66 per share.

This range includes the full-year effect of the amortization of in-process R&D related to Sovaldi.

At this point, full-year sales of Sovaldi are difficult to estimate, and are not included in that product sales guidance.

With that said, we are conscious of the potential magnitude of Sovaldi's impact on certain areas of our guidance, and wanted to provide you with the following metrics.

In 2014 only, we estimate that our non-GAAP product gross margin will increase by approximately 0.75% to 1% for every $1 billion of Sovaldi sales.

And our non-GAAP effective tax rate will decrease by approximately 0.75% to 1% for every $1 billion in Sovaldi sales.

In closing, we are pleased with our 2013 accomplishments across the organization.

Based on the groundwork we have laid, we believe 2014 will be another outstanding year for Gilead, and look forward to sharing updates on our progress and future successes with you.

We would now like to open the call for questions.

Operator?

(Operator Instructions)

Geoff Meacham with JPMorgan.

Congrats on a really strong quarter.

So, Kevin, I want to get your early market experience with Sovaldi in the US, beyond your earlier comments.

Just with respect to treatment experience versus naive, and then genotype 3 use.

And if you have heard of any secondary warehousing occurring in the US, then maybe the sum total of this, if you can contrast that with what you've seen in France, just given your longer experience there too.

Thanks.

Geoff, good afternoon.

So in terms of the US, I referred to some market research that we did in January.

Going back to the launch, we did expect that people might hold off in the genotype 1, because of the Christmas period.

In this research, just seeing now that the use of Sovaldi is very much reflecting the spectrum of patients that you have in the US, about 70% In genotype 1. We have seen some use in genotype 2 and 3. 3 was about 12% in this very small survey, genotype 2 was about 17%.

Again, I must stress, this is very low numbers.

It was a survey done in people who were beginning to use Sovaldi.

So, it's very representative, and I think that's very reassuring that we're seeing that.

Our sense is that physicians are calling in their advanced patients, because of course they need to be treated.

So our sense is that they're clearing patients that they may have had waiting, and that may well continue during the first quarter.

In terms of France, our prescribing right now is according to the definition of the temporary authorization for use, the ATU.

Because what happened in January, is that the French government have said that the ATU are [prometism], which now still applied until there is full reimbursements of the product in France.

So, we've had extremely good response.

As soon as we switched to the use of our public Sovaldi, we had an immediate order from the public hospitals around Paris.

19 of our top centers of our top 20 centers in France have prescribed Sovaldi.

But the majority of the patients treated have been the F3s and F4s, and that's not surprising.

Because patients with advanced disease with no alternative, are as per the ATU guidance.

So, that's probably not surprising.

And I'll just throw and as well, Geoff, that in Germany, kind of like the US, our sense is that it's prescribing according to the distribution of genotypes.

Sorry, Geoff, John Milligan just reminded me of a part.

We're not aware at all of any form of secondary warehousing of patients.

Right now, I think physicians, whether it be the US or Europe, are totally energized about the availability of Sovaldi.

So, no sense whatsoever that they may be holding back patients for all oral.

Mark Schoenebaum with ISI Group.

John, I was just wondering how you're preparing for the 2029 Sovaldi patent cliff?

Just kidding.

Congratulations.

Can I just extend that last question?

I know you're not giving full Sovaldi guidance this year.

Obviously, I respect that and get why because of all the unknowns.

But I was interested in your response of Geoff's question that you haven't seen any secondary warehousing.

Is it your current expectation that we're not likely to see a decline in US demand for Sovaldi any time before the combination pill G1 launch, presumably in the 4Q?

If you're willing.

And then, just a clarification on the tax rate.

That's $1 billion of sales, no matter where they occur geographically, correct, that would have the impact on tax rate and gross margin?

Thank you.

It's Kevin.

Mark, it really is still incredibly early days.

We've only just got through our first full month, and what we call the first brave month of launch, clearing the holiday period.

So, I think it's still difficult to say what's going to happen in the transition period between Sovaldi and Sovaldi ledipasvir.

Of course, we don't know what ultimately the timelines are going to be for launch around new single tablets.

So, I just don't think we know, and I think we need to get through the first quarter into the second quarter and of course know what might be the timelines for launch before we can have any feel for that lot.

So I really don't have any other color.

I would just reemphasize that the energy is extremely high, and that's not just in the major liver disease centers.

We're getting good response from the gastroenterologists who have been prescribing from internal medicine physicians.

And we're seeing a little prescribing from the infectious disease physician.

And, Mark, this is Robin.

For the second part of your question, which I believe was if the guidance we provided around the impact on our tax rate applied to global Sovaldi sales.

The answer is, it does.

And please remember that as we've guided, that only relates to 2014.

Michael Yee with RBC Capital Markets.

Congratulations on a good quarter.

My question is on your end user customers.

What percent do you think you're seeing are private pay, versus Medicaid, versus other buckets?

And the follow-on to that is, when does the VA come on and prisons?

What kind of customers are you seeing now and going through the first half the of the year, et cetera?

Michael, Kevin.

To answer the question, by far, the vast majority is the private pay right now.

We are actually having some initial formulary listing from state Medicaids like New Jersey, New York, which is quite encouraging.

We shouldn't forget that all Medicaids have often some form of interim coverage, just like the private plans.

And so we're going to be exploring all of those across the country.

We've had a couple of ADAPs cover and list Sovaldi, that's not with any additional discounts, that's purely at the Medicare pricing.

But I have to say that the majority of patients right now are coming from the private managed care sector.

Brian Abrahams with Wells Fargo.

Congrats on all the progress.

I was wondering if you could talk a little bit about what you're seeing into the first quarter?

Obviously, the prescription data is clearly showing an uptick.

You've talked about early January being the real launch, where you're going to detail more aggressively engage with payers.

So, wondering what kind of follow through you're seeing, and also what the impact of the recent AASLD guidelines might be on treatment patterns and treatment practice and uptake patterns?

Thanks.

Brian, it's so hard, Brian, just -- it's so early.

It is obvious that the major liver centers are treating the sicker patients.

That's only intuitive, but it's common sense that you'd want to be trying to cure patients who are really, really advanced and the hepatologists knew about this drug.

The hepatology centers take the sicker patients.

So they have patients lined up.

We even know of some centers that were even checking on the insurance qualifications of those patients so they could very quickly receive drug.

I think it's important though to say, that we've got a lot of people to talk to about Sovaldi, particularly in the GI community.

That really weren't that familiar with the protease inhibitors, and weren't warehousing patients.

And we're introducing, I think, a very novel therapy and they're very interested in this.

And, as I mentioned, I think we're getting people to reengage and think about treating HCV, whereas in past years, they were certainly asking for the patient to wait.

The AASLD guidelines are very, very positive.

I couldn't tell you that I've seen an actual specific impact.

But as an umbrella endorsement of Sovaldi, and indeed to stop using the prior therapies, is very strong.

I'd also like to mention, Brian, that we have seen after only 10 days after approval, a very similar change in Germany, and we do know that the opinion leaders in the UK are considering some form of consensus guidelines with the introduction of Sovaldi.

So, very positive.

Geoff Porges with Sanford Bernstein.

Congratulations, again, to Kevin and all he's accomplished.

Unfortunately, my question is about the SG&A guidance, which is a significant step up I think from certainly what we were expecting, but also a big step up from 2013.

I was just wondering if you would talk a little bit more about that guidance, specifically does it fully account for the expense for the launch of idelalisib through fixed dose combination, and whatever else you might incur?

Is there any contingency in the SG&A that would go up if you sell more Sovaldi over the year?

And equally looking ahead, is this the big step up in SG&A given the [light stays] pipeline or should we anticipate similar increases in the next couple of years?

Thanks.

Geoff, it's Robin.

So I'm going to go in a little different order.

Relative to the contingency, I think we really stepped back and looked at SG&A to be all-encompassing.

So irrespective of the size of sales, I think we got that all included, relative to the guidance that we've given you.

In terms of the overall component, it does include all the sales and marketing expenses for Sovaldi launch in the US, Europe, and Canada and Australia.

And keep in mind, this isn't only for the ramp that continues in some of those countries, but it's the full-year effect of the ramp that we had in 2013.

It does also include the build out, as Kevin talked about in his script, for a launch of idelalisib in both the US and the [EU].

And it also includes the ramp for new markets, most specifically Japan.

But there's also a small amount of money in there for some other emerging markets that we are considering in 2014.

So, that's the biggest component, over 50% of the increase.

If you think about just our traditional SG&A, external legal is increasing significantly, as we have to continue to defend our patents.

The excise tax, and again, the excise tax is retroactive.

So, it does not include Sovaldi sales, because it's based on 2013 revenues, but there is a significant step up in that.

And you saw on our slide that we're guiding to about $150 million to $170 million for that, as well.

And I think, just given the overall growth of the Company, and we've increased employees 1,000 fold this past year, so there are some just overall increases relative to our infrastructure in SG&A that we had to consider, given our growth.

Yes, I've just talked about from Robin, Geoff, that as a reminder that Japan, we're going to launch as Gilead.

So we're going to be staffing a full specialist field force, and that will take place in the second half of the year, ready for first half 2015 launch.

So that is a new component for us at Gilead.

Rachel McMinn with Bank of America Merrill Lynch.

Just to follow-up on the HCV co-pay and taxes.

I guess I'm a little bit confused if 30% to 50% of your Sovaldi patients are going to be utilizing the co-pay assistance program, how does that not impact SG&A?

Or how are you thinking about that?

And then, Robin, I was intrigued by your comment about the tax improvement only applying to 2014.

So, can you give us a better sense of what are the dynamics in 2015 and beyond that would make that number higher or lower as we think about our outer year models?

Thanks.

Rachel, relative to the co-pay, as I said, it's to the extent that the co-pay program or the support launch, as Kevin described, it is inclusive on both co-pays and SG&A guidance.

So it's sales, its marketing, and it's any type of programs that we would put in place.

There are also specific foundation grants that we've given to help with patients getting access to Sovaldi.

You saw an increase in Q4, and some of that continues into 2014.

So, relative to the tax rate, I've said all along that commercialization of Sovaldi worldwide would lower our tax rate, and that's based on where the patient population of Sovaldi is, more ex-US sales will overall allow us to continue to reduce that rate.

And we also did some supply chain restructuring that allowed us to take advantage of that tax rate reduction even sooner.

We don't give long-term tax rate guidance, but I'd expect to see the tax rate overall continue to decline as the level of Sovaldi revenue continues to increase.

Thank you.

Matt Roden with UBS.

Congrats to Kevin on a great contribution.

And, Kevin, while we have you for one last call, I thought I'd try to squeeze one last out of you, as well.

So first of all, in terms of demand in the fourth quarter, can you tell me if I'm doing the math right that if you had $136 million on the quarter, $15 million was a one timer, $70 million was inventories.

Does that mean that demand is roughly $50 million, is that the right way to think about it?

And then related, I get a lot of questions on the sustainability of the Hep C market.

I was just wondering if you could talk about, to the extent that you can, how you model Hep C over the longer term?

You've said you see this as a relatively long-lived opportunity, and that's a point of view that we have seen shared by other management teams as well.

I just wanted to get your sense for the key swing factors in your model that are most impactful to sustained demand, whether it's diagnosis and linkage to care, capacity to treat, need to treat, geographic expansion, et cetera?

And then lastly, and related, how you see advocate market wide pricing over the long-term in the market?

Thanks.

Okay.

Let me try and take all of those questions.

Yes, your maths is about right.

Bear in mind, that the $70 million that we put out there, we felt, was appropriate for the December period and the type of usage.

I think it's important to point out that as we go into January, February, and first quarter, that actual purchase will be for demand but will be for ticking up inventory levels.

Major wholesalers start to adjust their inventory levels according to demand.

So, we'll see as we go into second, first, second quarter, that the actual purchase will be reflective of both dynamics.

But your $15 million number, we think is about right.

In terms of sustained ability, we've said I think on a number of occasions at Gilead, that we see this as a long-term opportunity for the Company and for our products in hepatitis C. Yes, people are clearly waiting for Sovaldi.

There will be, undoubtedly, physicians and hospitals excited about having an all oral.

But we're going to be doing a lot as we come out of 2014 into 2015 around patient education, particularly for the patients who are currently diagnosed but are really not doing anything about their disease.

And I think you're going to see as we move through 2014, some very innovative advertising from Gilead that will start to raise awareness that there are good alternatives now for hepatitis C, and you should be seeking a conversation with your physician.

And then, you mentioned the geographic rollout.

We think there are great opportunities in Europe, undoubtedly, that's led by France.

But, we're seeing initial excitement and quite significant early uptake in Germany, and then we'll have some of the European markets come on later.

We do think this drug is really appropriate for the elderly treatment experience, and treatment intolerant in Japanese patients.

And then, we've got a great team here.

We've got a lot of experience in other countries like Latin America, Brazil, where actually we're putting some of our own people in there for the first time, and we think that's going to be helpful for the more difficult and challenging pricing and reimbursement descriptions you have in these countries.

So I think on all of those levels, we have a longer life cycle for our hepatitis C products than perhaps people are giving credit for.

Thanks very much.

Yaron Werber with Citi.

So I just have, Robin, I have a quick question for you, and then question for Kevin.

And so, Robin, for you, you mentioned or I think Kevin mentioned that prior authorizations are one of the tier 3 requirements, but this is essentially a first-line product, recommended to be first-line product.

So I'm just confused a little bit about the requirement for prior authorizations.

What can they possibly require?

And then secondly, just for Kevin, help us think, how do we think about that $56,000 US, I'm sorry, euro price under APU?

Historically, that's been a good benchmark about how to think about the European pricing.

Is that how we should think about it now that it's approved?

Thank you.

Yaron, I probably should take the first question as well.

Right now, because managed care are using an interim coverage, you get this tier 3 plus a prior authorization.

When they go for full form of listing, it could well move to tier 2, but there will always be a prior authorization.

Every hepatitis C drug has a PA, and I think we absolutely believe that whether it's Sovaldi or Sovaldi ledipasvir, or any other product for that matter, a PA will always be there.

And it's really just a checkpoint that the drug is being used according to the label.

It is no further restriction than that.

So, it's just the right type of patient, the right genotype according to the label is being prescribed by the physician.

Let me transition to European pricing.

So, you mentioned the French ATU price.

So you are correct, that's EUR56,000, or by today's FX about $76,000.

And I had said before, that that's really a very individual price-point.

Because it's a very restricted use in patients that really have no alternatives, whether they are HCV or HCV with a liver transplant.

I would like to talk a little bit about the rest of the pricing for Europe.

We have now listed our price in the UK.

Our price in the UK is almost GBP35,000, so that's about $57,000.

And I think as a benchmark for the majority of Europe, that would be a good price-point for you going forward.

So, I'll say that again, about GBP35,000, this is a 12 week course of treatment, or about $57,000.

And I also mentioned the German pricing, the German pricing is almost EUR49,000, or $66,000.

So, Germany, typically is a little bit higher.

And my final comment on European pricing is just to say that these are significant differences to the telaprevir pricing.

And the uplift that we've taken for Sovaldi we believe is very justified according our cost effectiveness data, and the premium is very comparable to the premium that we took on Sovaldi versus the original price of telaprevir in the United States.

Brian Skorney with RW Baird.

Congrats on a great launch, so far.

I know we've talked a little bit about the potential competition we're going to see in Hep C, and we've seen the full AbbVie phase III results right now.

And I just wonder if we can get some top-level thoughts on how you see competition emerging between you guys?

Do you think that -- would you favor a position where AbbVie can have some reasonable market share without getting into a price competition?

Or do you think, given the benefits of sofosbuvir in your regimens that it's a moot point at any price.

Do you think the regimens were so much better that it will stand on its own?

Brian, it's Kevin.

I'll answer, and then maybe Norbert has one or two on the scientific front.

I think what you are referring to is, my apologies, somewhat artificial.

I don't think Gilead thinks that way.

I don't think really any pharmaceutical company, in terms of somehow being super clever about segmentation, and one company gets one part and one company gets another.

We present the profile of Sovaldi.

We, obviously present, according to the label, and all of the data within the label.

And I think ultimately, the physician and the payer make the choice.

We believe that the Sovaldi data and the Sovaldi ledipasvir data is very, very strong.

And our profile will give it a preeminent position, not only in the minds of the physician, but in the minds of the payer.

So, I think the market ultimately makes decisions, and ultimately prescribes and uptakes the product according to the scientific profile.

And we've certainly, as you heard from John Martin, without rilpivirine for our combination, have a very, very strong profile in genotype 1.

Yes, Brian, just to add to that, if you do comparisons with in the study are -- you will come to the conclusion that rilpivirine really doesn't make any difference anywhere in any of our arms, in any of our subpopulations.

And so our recommendation, and of course this has to be reviewed by and agreed by regulators, will be that anybody with treatment naive and (inaudible), will get eight weeks of the Viktrelis combination, without (inaudible), and everybody else will get 12 weeks.

It's a very simple algorithm and there's nothing else required, no response (inaudible) therapy et cetera.

Robyn Karnauskas with Deutsche Bank.

Robin?

Next question, operator.

Patrick, the next question please?

Ian Somaiya with Nomura Securities.

Just one for Robin.

As it relates to your gross margin guidance, and if we think about this maybe a little bit a couple years down the road, just let me know if this is an appropriate way to think about (inaudible) margins.

As Gestiva goes generic in 2017, should these corporate gross margins go back to a level prior to the AAA launch, right around in the mid-80%s, and then we layer on top of that a roughly 100 basis point improvement in margins for every $1 billion dollars in HCV sales.

Is that a good way to think about it?

Go ahead.

And just a slightly different question, maybe for Norbert.

Is there any more clinical work do you think that needs to be done to differentiate your hepatitis C combination versus, not versus AbbVie, where we think the comparisons are obvious, but versus some of the newer competitors, maybe Merck, as an example?

So, Ian, to answer the first part of your question, you are speaking about it directionally the right way.

But recall that our range with BMS, it says once efavirenz goes generic, that there is a step down royalty that we'll need to pay to BMS.

So it won't happen immediately upon going generic.

Also keep in mind, if you think about our core business, excluding Sovaldi, as we continue to have more usage of Stribild and Complera Eviplera, that will also have overall product gross margin impact.

Hence, you saw even in our guidance for 2014, you saw some of that shift start to occur.

On top of that, is the incremental product gross margin impact related to Sovaldi that we'd expect to see as that product becomes a larger component of our revenue stream.

Ian, yes, thanks for asking an R&D question.

I thought I was going to escape this call without having been asked one single question.

So, thank you very much.

Ian, as you know, we have now succeeded with our ledipasvir sofosbuvir fixed dose combination to actually incredibly shorten treatment duration to 8 weeks and 12 weeks in cirrhotics treatment experience with response rates that go up to 95% or higher.

But we're not stopping there.

This is of course for genotype 1.

We have another fixed dose combination in development, 5816 combined with sofosbuvir.

You will see some of those early data at EASL, and we're still waiting for the treatment experience cirrhotic genotype 3 cohort to make a decision, or to feel comfortable going into phase III.

And then finally, as you know, we have efforts under way to shorten the treatment duration even further to six weeks by adding a third drug.

So all of those things are ongoing, and I think we will be competitive with our -- you can't read in too much more than having one single pill once daily.

Very safe, very well tolerated tablet given for eight weeks and achieving response rates of 95%.

Phil Nadeau with Cowen and Company.

Kevin, let me add my congratulations to you on your career at Gilead, and maybe if I could direct one last question to you.

It's on payers more broadly than just to what you're seeing today.

There's been a lot of news in the press recently about payers restricting access, either ultimately pressuring on price through formulary price [limit] or exclusion, or maybe putting up some sort of barriers before patients can have therapy like cirrhosis status, or something like that.

Can you discuss your discussions with payers?

Do think at some point they'll push back on Sovaldi sales if sales get too big, and do think you would have a general appreciation of how big Sovaldi sales could be this year, next year, in order to prepare?

Thank you for your comments, Phil.

So I think there's great awareness.

I think we always knew that, when we did our research.

Even a year ago with payers, hepatitis C was very high on their radar as it is with oncology products and RA products, and some others.

I think if you present value to them, and we shouldn't forget we are presenting a cure, it's very compelling.

And we're curing somebody in 12 weeks, as Norbert said, in 8 weeks in the future.

And I think that is a very compelling proposition.

Already, into the launch of Sovaldi, we have had some plans come to us who are traditionally are quite difficult to get listings.

In fact, we've had one of them place orders outside their formulary.

So, I come back to the -- I always come back to the area, which is it's the profile of the product.

The need in the patient is very clear, and we've got a well-tolerated, highly effective cure that physicians and patients want.

The payer will always look at this, and we'll have discussions with the payer.

But I think this is transformational medicine.

And the payer will have a role, but I think the adoption of HCV products is here for a long time to come.

Great, thank you.

John Sonnier with William Blair.

Kevin, my congratulations, as well, for all the success over the years.

You spoke a bit to the broad market access approach of your HCV commercial organization.

And as the launch gained steam, I suspect that becomes increasingly relevant.

But I'm curious, in the early stages, to get your perspective on what attitudes are towards screening among the different specialties.

And as screening starts, I think we'll get a better picture of true prevalence.

And I guess the parallel question is, how confident are you that the current US epidemiology is actually correct?

Thank you.

Hello, John.

I don't think managed care and the payer are thinking too much about the movement in US guidelines on the baby boomers.

And to be honest with you, John, right now our concentration of efforts at Gilead is very much presenting the products.

But as we get into 2014, and I did refer earlier to some new educational campaigns that we want to have by the middle of the year, we're certainly going to be addressing the diagnosed population, that 1.7 million.

That's the first area I think that could be mobilized, and then move into the larger 4 million population.

We have seen some state activities.

There's been a law changing in New York that an HCV test must be offered to a baby boomer when they present in a clinical setting.

We are aware that that's being discussed also in Florida, and we're soon to be using our government affairs organization to continue that around the country.

I think it's always the case around screening, that you need the products to treat the disease once it's been identified.

And now we have that with Sovaldi, and it will become even stronger with our combination, and that encourages people.

So I think we're going to see more and more of that.

I think ourselves and competitors will be raising the awareness more and more.

So, I do think there is a great deal of potential in this market.

Josh Schimmer with Piper Jaffray.

It's actually a bit of an extension off of Phil's question, since we seem to be in uncharted territory for the launch we're seeing with Sovaldi.

Are there any theoretical caps or limits regarding the speed or extended uptake of a new multi-billion dollar drug franchise in the US, or a point at which various payer systems strain under the pressures of the added costs?

And if so, where might those limits or caps be?

Wow, that is an incredible question, Josh.

I think you're right.

We just don't quite know yet.

I think those caps and possibly bumpers might be more prevalent in Europe.

It does take European governments more time to expand budgets.

So it may well be more prevalent there.

We have seen increases, even as a result of the protease inhibitors, in some markets like Spain and Italy.

But, I think because it's national health funding across Europe, that might be more of -- brought into more question.

I think we just don't know.

And this drug is really very special, and very transformative.

So, this is not extending life by a few months, this is probably one of the greatest breakthroughs to cure people and get rid of a very serious virus.

So, I think time will tell, Josh.

Mr. O'Brien, we have time for one final question.

And it comes from the line of Terence Flynn with Goldman Sachs.

Just two quick ones for me.

The first is, I noticed that you had some new data in your slides on the number of patients in the US and Europe under care.

I was wondering, specifically in the US number, if that includes or excludes the patients in the VA, so about the 200,000?

And then on the capital allocation side, Robin, maybe you could just provide us with your perspective on share repurchases in 2014.

And then, anything beyond that.

Thank you.

Terence, this is Kevin.

Yes, it does include the VA population.

So again, I just wanted to say, Terence, that these are estimates.

We're using the company Ipsos, that's the company that we've used for a long time HIV.

But the sampling is much smaller than we currently have in HIV.

In HIV, it took us about 10 years to get the type of sophistication from the Ipsos data.

It's going to take us a few years to get more accuracy with hepatitis C.

So I would just put a caveat and perhaps a health warning around this data, but it's the best we've got.

I think it's representative of where the US today, and you'll see that we've also included that number for the European big five markets, as well.

Terence, this is Robin.

Relative to capital allocation, in the earnings deck on slide 61, we outlined our share repurchase by quarter for 2013.

In Q4, we resumed that to our goal of offsetting dilution, and you can expect that to continue in 2014.

Relative to long-term capital structure, I'd say that we remained fairly consistent.

In fact, in our pipeline, we are looking at various assets that may make sense, and then returning cash to shareholders.

Right now via share repurchases, but as we've said, we may consider other vehicles over time.

But, other than that, I'd say it's business as usual as to how we're thinking about utilization of cash with Sovaldi.

This concludes the question and answer portion of our call.

I would now like to turn the call back over to Mr. O'Brien for closing remarks.

Thank you, Patrick, and thank you all for joining us today.

We appreciate your interest in Gilead, and the team here looks forward to providing updates on future progress.

Thanks again.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.