吉利德科學 (GILD) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Gilead Sciences first quarter 2014 earnings conference call. My name is Stephanie and I will be your conference Operator today. At this time all participants are in a listen-only mode 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, Stephanie. Good afternoon, everyone. We issued a Press Release this afternoon providing earnings results for the first 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 Mulligan. Our Executive Vice President of Research and Development, Norbert Bischofberger, our new Executive Vice President of Commercial Operations, Paul Carter, and our Executive Vice President and 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 candidates, financial projections, all of which involve certain assumptions, risks and uncertainties that are beyond our control and could cause our actual results to differ materially from these statements. A description of these risks can be found in our latest SEC disclosure documents in recent Press Releases. In addition, Gilead does not undertake any obligation to update any forward-looking statements made during this call.

We will 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 will now turn the call over to John Martin.

Thank you, Patrick, and thank you all for joining us today. The first quarter of 2014 was an important step towards realizing a number of milestones for the business, particularly in Hepatitis C.

Earlier today, we reported product sales of $4.9 billion, an increase of 104% year-over-year. This increase was driven by the launch of Sovaldi.

Sovaldi's profile has the potential to transform the treatment of Hepatitis C and the rapid uptake speaks to a significant unmet medical need. I couldn't be more proud of the teams at Gilead, who rapidly brought this product to market, supported by a robust data package of data from many clinical studies. Paul Carter will discuss the launch in more detail.

Moving to other advances in Hepatitis C, FDA granted a PDUFA date of October 10, 2014, for the single tablet regimen of a once-daily combination of ledipasvir/sofosbuvir for the treatment of chronic Hepatitis C, genotype 1 infection in adults. And also advised us that an advisory committee would probably not be necessary.

In addition, the European marketing authorization application for ledipasvir/sofosbuvir has been validated and has been granted accelerated assessment by the European Medicines Agency. A designation for new therapies and medicines of major public interest. If approved, this SPR could be available for marketing in the EU by the end of 2014.

On April 2, 2014 in a press release, top line data were disclosed from a Phase III study of sofosuvir/ribavirin dose for 12 weeks in genotype 2 Hepatitis C infected patients in Japan. In this study 98% of treatment-naive, and 95% of treatment-experienced patients, achieved SVR12. This study will support regulatory submission in Japan by mid year.

Earlier this month, at the 49th annual meeting of the European Association for the Study of the Liver, EASL, was held in London. At this meeting new data on Gilead's products and liver disease programs were presented in 15 oral talks and over 40 posters. Including results from three Phase III studies, IN1, IN2 & IN3, on the ledipasvir/sofosbuvir fixed-dose combination. Concurrently the results of these three studies were also published online in the New England Journal of Medicine.

Other presentations at EASL showed that both sofosbuvir/riba and sofosuvir/ledipasvir with and without ribavirin, are viable regimens for the re-treatment of patients who had failed previous regimens, including sofosbuvir containing regimens. In these studies, re-treatment resulted in SVRs of 74% to 100%.

In addition, results from a Phase II study evaluating GS-5816, the Next Generation pan-genotypic NS5a inhibitor, were presented. Treatment of patients with genotype 1 through 6 with GS-5816 and sofosbuvir for 72 weeks, resulted in SVR12 rates of 86% to 100%. Initiation of Phase III studies of a fixed-dose combination of GS-5816 and sofosbuvir, are expected later this year.

Earlier this month, WHO published guidelines on screening, care, and treatment of persons with HCV infection. This quick action by the World Health Organization signals recognition of the recent advancements in the treatment of Hepatitis C.

Now, turning to HIV. The two Phase III studies comparing the single-tablet regimen of ECF TAF, Stribild, in treatment-naive patients, are fully enrolled and we expect data to become available in the fourth quarter, 2014.

In addition, this SGR is being evaluated in a number of studies, other studies, including in treatment-experienced patients, patients on stable therapy who are switched to ECF TAF, patients with mild-to-moderate renal impairment, and also in an adolescent patients. We currently anticipate filing for US and European approval of ECF TAF in the first quarter of 2015, for naive, experienced, and switch indications.

In oncology, we continue to prepare for the potential approval and launch of Idelalisib, the relapsed CLL application was assigned a priority review with a PDUFA date of August 6, 2014. And the relapse refractory INHL application, was assigned a standard review with the PDUFA date of September 11, 2014.

As I mentioned earlier, I am proud of what the team has accomplished with the launch of Sovaldi. And I also want to acknowledge the contributions on other important activities, by the more than 6,000 employees at Gilead.

I will now turn the call over to Paul Carter.

Thanks, John and good afternoon, everyone.

In the first quarter of 2014, our worldwide total net product revenue increased to $4.9 billion, representing growth of 104% over the first quarter of last year. US sales exceeded $3.6 billion, and for the very first time, European sales exceeded $1 billion in a single quarter.

This performance has been driven mainly by healthy demand in our core HIV business and the launch of Sovaldi, which itself had sales totaling $2.3 billion in the quarter. Of that number, $2.1 billion represents US sales. And most of the remaining revenue came from Germany and France. We had Sovaldi sales in 13 countries worldwide, and that number will continue to increase as regulatory approvals and reimbursements are achieved.

Beginning with the United States in HIV. Underlying demand was healthy for all products. Nine out of 10 patients new to treatment were prescribed a Gilead medicine with Gilead's single tablet regimen being used by 7 out of 10 patients new to treatment.

Stribild continues to be the leading HIV regimen for patients who are beginning therapy, capturing 3 out of 10 starts. Prescription growth of Gilead's single-tablet regimens including Stribild, Complera and Atripla, is just under 20% year-over-year. ADAP purchasing in the first quarter was strong, consistent with expectations for the last quarter of an ADAP fiscal year.

During our fourth quarter call, we highlighted that approximately $130 million to $150 million of our fourth quarter revenues were related to inventory build across the supply chain to year-end. In the first quarter, as expected, we saw a drawdown of this inventory. At the big three wholesalers, inventory levels declined to near the bottom of established ranges. In addition we also saw a drawdown by sub-wholesalers. This is in fact a similar dynamic to that which we've seen in first quarter of the past several years.

This collective inventory drawdown, resulted in a sequential decline in HIV net product revenue. The underlying demand for a Gilead HIV product is however strong and growing especially for our newer single-tablet regimens, Stribild and Complera.

Moving to US Hepatitis C performance. Sovaldi sales of $2.1 billion shows strong patient demand and the increased inventory levels necessary to support this demand across the supply chain.

Since launch approximately 30,000 patients have begun treatment for Hepatitis C with Sovaldi, and these have come from all the main payer groups. The first patients who began 12 weeks of treatment around the time of approval last December, have yet to reach the time point when they can achieve an SVR12, which occurs a further 12 weeks after completing treatment. Nevertheless, we continue to hear positive reports from physicians about their experience with Sovaldi.

The prescribing of Sovaldi in the US is being driven mainly by hepatologists and gastroenterologists, but internal medicine specialists and primary care physicians, many of whom also treat HIV patients, have also prescribed. Despite this broad spectrum, we estimate that only half of the physicians visited by our therapeutic specialists, have prescribed Sovaldi to date. This leaves us optimistic about the opportunity that lies ahead.

In fact with an estimated 1.7 million diagnosed patients in the US and around 400,000 under treated care, we have to date reached just a small fraction of those who can benefit from treatment in the future.

The genotype distribution of patients that have received treatment is representative of the US HCV populations, with around 70% usage in genotype 1. And the majority of this usage has been with the so-called NEUTRINO regimen, or a 12 week regimen in combination with pegylated interferon and ribavirin.

On the payer front, access to Sovaldi has been as we expected, with its formulary status consistent with our experience in HIV reimbursement. Most commercial Part D and State Medicaid plans, take a full six months to review new drugs.

Turning to Europe, we are very pleased with our strong HIV performance, which like the US, is underpinned by our belief in the benefit to patients of single tablet regimens. Eviplera is the most prescribed regimen for treatment-naive HIV patients and also continues to extend its lead over Atripla, as the regimen most commonly switched to in the big five European Union Market.

By the end of the first quarter we have launched Stribild in 19 countries across Europe. This includes recently in France, which represents the biggest single HIV market in the EU. It has also, just this month, been launched in Italy, so is now available to patients in all of the European Union big five Markets.

I would like to highlight that in early launch countries like Germany, the performance of Stribild has been approximately double that of Eviplera at the same time point. Regional reimbursement in Spain and Italy is expected to continue to rollout during the rest of the year.

Moving to Hepatitis C. European sales for Sovaldi totaled $164 million in the quarter. While Sovaldi has regulatory approval in the European Union, full pricing and reimbursement is a country by country process, with some countries completing that process more quickly than others. Today, we have reimbursement in Germany, Austria, Sweden, Finland, and to some extent France.

As mentioned in the prior earnings call, we have filed health economic dossiers with all the major reimbursement agencies. And we are following the normal process that leads to price and reimbursement approvals.

In France after completing or completion of the temporary authorization to use, or ATU program, but prior to completion of full reimbursement status, we continue to provide Sovaldi to patients who are pre and post liver transplant. And also patients with advanced liver disease who failed other HCV treatments or are interferon intolerant. This is in line with the ATU scope and will widen when full reimbursement is agreed.

In the UK, the National Health Service in England, has recently issued a statement confirming that they have approved the funding for Sovaldi for approximately 500 patients. Notably, this is funding pre NICE approval and recognizes the urgent need for Sovaldi for sicker patients.

The European Association for the Study of the Liver, or EASL, just last week published their clinical practice guidelines on the Management of HCV infections. Sovaldi is recommended in combination with other agents across all genotypes, as well as in several difficult to treat groups. These EASL guidelines come soon after newly issued guidelines in Germany and France, which also both recommend Sovaldi.

Outside of North America and Europe, we continue to expand our geographic footprints. I would like to highlight that we are making good progress building out our Gilead organization in Japan in the anticipation of sofosbuvir approvals during 2015.

In closing I'd like to provide an update on our commercial readiness for oncology. As John mentioned, we have filed for regulatory approval in both the US and the EU for Idelalisib for use INHL and CLL. We have completed hiring the US therapeutic specialist team and they are fully trained and in market. So we are ready and excited to launch Idelalisib. A similar process is being followed in Europe consistent with anticipated regulatory and reimbursement timeliness.

I'd now like to hand the call over to Robin.

Thanks, Paul and good afternoon, everyone. Non-GAAP diluted earnings per share for our first quarter 2014 were $1.48. Total revenues for the first quarter were $5 billion, up 97% year-over-year.

As Paul mentioned, similar to prior years, strong wholesaler and sub-wholesaler purchases, in anticipation of January 1, 2014, price increases for HIV and cardiopulmonary products, resulted in inventory drawdowns in the first quarter of 2014.

Non-GAAP product gross margins were 87.4% up from 74.5%, largely driven by Sovaldi sales and favorable HIV product mix. Sovaldi's impact to gross margin is a combination of Sovaldi revenues, as a percent of total net product revenue, and the geographic mix of these revenues, which were 92% US sales in the first quarter. Product gross margin for our HIV franchise was favorably impacted, primarily by lower Atripla revenues.

Turning to expenses year-over-year. Non-GAAP R&D expenses were up $98 million, reflecting the progression of clinical study activity, primarily in oncology and HIV. Non-GAAP SG&A spending was up $167 million, to support the ongoing launches of Sovaldi in the US and [inconsequently] as well as the anticipated launch of Idelalisib.

Cash flow from operations was $1.5 billion. During the quarter we raised $4 billion in debt financing for general corporate purposes, including repayment of debt, working capital and share repurchases. We also repaid $840 million in debt from previous financing and purchased $450 million in shares.

Finally, we are reiterating full year 2014 guidance, which excludes Sovaldi product sales, and is outlined on Slide 45. The metrics we provided in February for the impact of Sovaldi product sales still applies to our full year results and include the following estimates.

Non-GAAP product gross margin will increase by approximately 0.75% to 1% from every billion of Sovaldi sales. And non-GAAP effective tax rates will decrease approximately 0.75% to 1% for every billion of Sovaldi sales. In closing, we look forward to updating you on our continued progress in the coming months.

We would now like to open the call for questions. Operator?

(Operator Instructions)

Your first question comes from the line of Geoffrey Meacham with JP Morgan.

Hey guys, thanks for taking the question and a big congrats on the quarter and on Sovaldi.

Thanks, Geoff.

So there's been a lot of payer noise, obviously a lot lately. So I just wanted to get you guys perspective on how you think you could change kind of the conversation from cost benefit to sort of the value of a cure? And this would be for public and private payers, are there any sort of pharma-economic studies that you guys are doing coming out?

Or just help us a little bit with how to deal with a lot of the headlines that we've been seeing almost every day from commercial payers and government.

Geoff, it's John Milligan. Thanks for the question. So there's a number of things that I think is important we talk about.

First and foremost the value of a cure, I tend to think it's underestimated in terms of the overall advantage that the healthcare system receives from it. And I do know that as we've talked to doctors, and certainly the tone coming out of EASL, has been one of greater understanding of the value that this provides to patients and healthcare systems, is that in fact HCV patients cost a lot of money.

They all cause mortality, the overall health care costs for an HCV patient is very high. And we're seeing more and more papers now being written on this as there is the possibility of curing a larger number of patients. And so we do think that's an important part of the dynamic of talking about this.

And also talking about the priorities that healthcare systems will likely make as they do choose to treat certain patients now and defer certain patients til later. And these will be difficult conversations, but important ones for doctors, at the payer community, and public health officials to undertake as they understand the benefit that they get. And try to outline the time frame from which they wish to tackle this very difficult problem of trying to eradicate HCV from as much of the population as we can.

And so we will be talking quite heavily about these things. There are publications out there, not by Gilead but by respected people in the field, who understand this very well and who can start these conversations in a more of an academic, collegial way.

Great, that's helpful, thanks.

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

Hey guys, thanks a lot. Let me echo Geoff. Congratulations on the best launch of any drug of all-time, that I'm aware of at least.

I was just wondering if you guys could talk a little bit about -- I mean there has been this conversation out there about perhaps restricting over time the access for the drug to patients that are perhaps the most at need. People have talked about certain levels of fibrosis. I'd love to get your perspective on that if you think that is medically -- what your view on that is? If you think that that's medically appropriate?

And then on the commercial side -- this is the same question by the way. Do you have any statistics on the market that might help us understand what percentage of patients are F3 and F4, so that we can run those scenarios through our models? And thanks again.

Yes, hi, Mark. I'm going to try and answer the first question. So with regards to the price and volume and the overall cost, there are four points to make.

The first one is that regimen cost of Sovaldi [paid light by] 12 weeks is not dissimilar from standard of care, either [Simepramir] or Telaprevir [peg-riba] for a respective period of time. Number two, Sovaldi provides shorter treatment duration, higher cure rates, and is better tolerated, so there's the value.

But the value goes beyond just treating Hepatitis C, there is value, as John Milligan mentioned, there is more disease in HCV that is non-hepatic. So if you look at the extra hepatic mortality, non-HCV related, it is much higher in the HCV infected population than the control group.

Thirdly, curing somebody for Hepatitis C has benefits that go beyond the liver. It's recognized now that Hepatitis C is a chronic inflammatory condition that over time leads to more diabetes, more heart disease, more CNS disease even. And you could certainly reasonably argue curing somebody of their Hepatitis C infection has collateral benefits that go beyond the liver.

And we've actually shown that in our own Phase III studies. It's a result that's somewhat underappreciated. We have looked at PRO, patient reported outcomes, and we have shown in a blinded fashion that the people in those studies that achieved an SVR, they had much better outcomes than those that didn't.

And the better outcomes were they felt better, they had less bodily pain, and even better mental health status. And we're working, as John Milligan said, in putting all of this together into a bigger pharma-economic argument.

But to summarize a short answer to your question, I do not believe it's justified medically to prioritize and restrict the cure of Hepatitis C. It may be necessary economically and that's what all is going to address.

Yes, hi. Mark, so it's actually, this launch is absolutely unprecedented as we've already sort of agreed, I think. The data coming in and the kind of patients that are being treated is not absolutely clear yet. I mean we've got a sense of the genotypes, but we don't have a good sense of the severity of fibrosis scores.

We have, call it sort of qualified qualitative anecdotal comments coming in. But I don't think I'm in a position really to say the proportion of F3 and F4s. I would get it's about maybe 30% or 40%, but that's just a personal guess.

Thank you.

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

Thank you very much and similar congratulations, really remarkable.

So I suppose I better change the direction just a little bit, Robin. Given the cash flow that you reported in the quarter and the new debt you've taken on, you are in a position to be pretty aggressive about either share buybacks or anything else that you would like to do. And yet the share buyback in the quarter was relatively modest.

Could you give us some sense of your thinking about how that might play out, what you'd like to be doing with your cash, how you view the stock here for the balance of the year? Because I think that certainly some of your people are starting to ask.

Yes, absolutely, Geoff. Thanks for the question. I mean our plan has always been to accelerate our repurchases post the launch of Sovaldi. So you could definitely expect to see larger share repurchases during the remainder of 2014.

I think clearly, given our increased cash flows and recent debt raise, we have the liquidity to be able to do that. And as you mentioned, just given our current stock price, it's something that we would be able to take further advantage of and reduce the number of shares outstanding.

Robin, do you have a sort of goal in terms of percentage of cash flow or amount of cash that you'd like to deploy?

Not at this point, Geoff. We haven't kind of recalibrated to that. We haven't provided guidance.

As again I said definitely will be north or higher. But we will -- we haven't necessarily rethought our capital strategy where I can give you a percentage of free cash flow at this point in time.

Okay, thanks very much. Look forward to hearing that later.

Your next question comes from Matthew Roden with UBS Securities.

Thanks very much for taking the question and congrats on a wow number.

So I also want to change directions, Norbert, maybe a pipeline question for you. When I look across your pipeline programs seen in your slides, it's really striking how many indications may be addressable with Simtuzumab.

So I was just wondering if you can review why you think that that's a drug? What the cadence of read outs will be across the indications? And then lastly, if there are any of these Phase II read outs could possibly form the basis of an early filing in any of the indications? Thanks.

Matt, thanks for the question. So Simtuzumab was always -- the preclinical data strongly supported both fibrosis and solid tumors. And LOXL2, as you know, is involved and necessary in both and expressed to high levels in both.

So we decided, to enter solid tumors we chose pancreatic and colorectal cancer. And we chose to go into fibrosis and we chose IPF and liver. And I have to say, all of these studies were done so that if we see a spectacular effect that we could potentially file with the Phase II data.

For instance the liver study, as I have stressed many times, it's powered on HVPG, hepatic venus pressure gradient, that's an approval end point according to FDA and NASH under accelerated approval guidelines. And the IPF study is similarly powered that we could file it with the Phase II data, if the data is good.

So you know, we feel very comfortable with the program. I know it looks like a lot when you look at the slide, but it certainly a risk worth taking. This Simtuzumab, if it works, could be a really big drug, a successful drug for us.

Your next question comes from Phil Nadeau with Cowen.

Good afternoon. Thanks for taking my question. I did want to circle back on to the payers just for a bit.

Could you give us more of a sense of how the negotiations are going? So how many of your target accounts are currently under contract and how does the progress compare to kind of where you thought you'd be at this point in time in the launch?

Phil, hi it's Paul here. Well we can't tell you too much is the honest truth because we're in negotiation. But everything is pretty much in line with our expectation and our experience with HIV and other drugs.

So we're in negotiations and we're making good progress. And that's really all I can say at this point.

Your next question comes from Michael Yee with RBC Capital Markets.

Hey, thanks. Congratulations. My question is as it relates to sustainability.

First part of the question is in Europe, I think some of the feedback was that based on the way the budgets are obviously run that one way to control it under a line item annualized budget is to limit it to more of the sicker patients. I guess the first question is do you expect that to happen and should that be our expectation for our revenue models?

But the second part of that is that also creates a longer tail. Do you expect that that could at some point happen in the United States and does that create a longer tail? How should we think about sustainability and as it relates to what you're going to see in Europe?

Michael, this is Paul here. I think you've got it in one there. It's either going to be big in short-term or it's going to be longer term and less each year. And I think the European Markets, market by market, have their own economic circumstances.

A lot of the southern European countries, as you're fully aware, have really tight squeezes on their healthcare budgets. And they will have to probably prioritize patients at this point or significantly increase the amount of money going into Hepatitis C.

So I think we are very confident in our clinical position and the science and our pipeline. So to us, we're very, very comfortable about it, but I think you're right. It's going to be spread out in Europe, particularly some of the Southern European countries, over a longer time period.

Michael, I would like to add something also in this pharma economic debate. And that is that there was a paper published in 2012 in Hepatology, that looked at the cost of caring for a Hepatitis C infected person.

And what is apparent from that paper that the cost of not treating is fairly substantial. And actually that paper claims it ranged from $7,000 for a non-cirrhotic, early disease patient to $42,000 per year for somebody with end stage liver disease. Those are the annual costs of just doctor visits, tests and other care.

So that clearly has to be entered into this debate, although also although I'm not sure how much of that is applicable to Europe, the costs might be different there. This was a large US study.

Your next question comes from the line of Brian Abrahams with Wells Fargo.

Thanks for taking my question and my congrats as well on the great launch. Coming out of the full data presentations and publications for IN1, IN2 & IN3, what's your sense as to how physicians might be thinking about optimizing duration of therapy for the oral-oral across different patient groups?

For instance how much eight week usage might you expect among treatment-naive genotype 1's? How much longer than 12 week usage, amongst the treatment-experienced cirrhotics? And I'm curious how this, as well as some of those current reimbursement buzz we're hearing about, factors into your pricing decision for the fixed-dose combo? Thanks.

So Brian let me answer the first question and then Paul can talk about the pricing issues. So we have proposed in our regulatory filing that eight weeks treatment duration should be for everybody who is treatment-naive and non-cirrhotic. People who are treatment-experienced and/or cirrhotic will get 12 weeks of treatment.

And this is really based on that thought process, it follows a thought process. We asked ourselves if we gave everybody 12 weeks, how many of the patients would be over treated -- would get more than they need? And there were way too many. It was north of 90% depending on which population you looked at.

And if you were in London you may remember Nate [Archald] who did one of our IM presentations. He actually mentioned this at the podium. And given the facts that you can't justify, not medically but certain not economically, over treating patients that for one-third of the duration, they need only eight weeks but they get 12, that I think gives a reasonable proposal.

And of course it has to be agreed upon with regulatory authorities but that was our proposal in the filings that we have made.

And I guess I'll take the second part, it's John Milligan again. So just thinking about your question was, what do we take into account when we're putting together the price of Sovaldi? And Sovaldi was, I think, priced appropriately based on the benefit that it provides today. But we were aware that a significant percentage of patients, particularly those with low risk factors and new to therapy, could benefit from eight weeks of therapy in the future with a combination of ledipasvir/sofosbuvir.

So we did think about this very heavily as we weighed into our debate on what the final price of Sovaldi would be. And of course it will weigh into our thinking on the Next Generation of pricing as well as we mature to no ribavirin, no interferon, simple regimens for a shorter duration still. And so we will provide additional benefit through those medications. And we have taken all of this into account as we think through our pricing strategies.

Your next question comes from Yaron Werber with Citigroup.

Great, thanks for taking my questions and also congrats. Two questions. One, give us a little bit of a sense, if you look at the IMS data, which we know under reports, I mean you sort of beat at the top end of that handily. So was there any stocking?

And then two, give us a little bit of a sense, what's going on in the VA and in the [privi] systems, sort of how much usage are you seeing in those verticals? And if you don't mind, what's your strategy how to deal with pricing in those verticals especially as it gets more competitive? Thank you.

This is Paul here. I think there's three questions. Shall I -- Robin do you want talk about stock first?

I'll take the inventory and turn it over to Paul. Yaron, we're only 17 weeks into launch at this point in our IMA agreement are not totally in stock. As we've previously communicated, it takes us about nine months or so to fully get through that process.

So while we know that inventory was built this quarter, it is difficult for us to fully quantify it at this point of time in the launch. But I would say as we continue to get more clarity around demand, et cetera going forward, we'd be better able to provide that in the future. But I would say there's inventory, but unfortunately we're not able to quantify it at this point.

Okay. Maybe I'll just add a couple of comments on the VA. So Sovaldi was added to the VA National Firmary during the first week of April. And as you noted the VA is potentially the largest federal purchaser of healthcare for Hepatitis C in the US. We haven't seen a huge amount of orders from them yet, but this is really because it's very, very early days with them.

In the prison systems, the Federal Bureau of Prisons is updating its HCV treatment guidelines and we understand those are going to be released imminently. And we do anticipate that Sovaldi will be included in those guidelines.

Your next question comes from the line of Ying Huang with Barclays Capital.

Thank you very much for taking my questions as well. Firstly, can you give us a little bit idea in terms of the payer mix you saw in the first quarter? How many patients, or percent of patients, are taking Sovaldi are insured by commercial insurance? And then how many are coming from Medicare, how many are coming from Medicaid?

And then also, would you mind giving us also the so-called gross to net adjustment for the first quarter of sales for Sovaldi?

Yes, Ying it's Paul here. I'll take the first question and the hand over to Robin.

So again it's very early days and our data to some extent is reflecting that. We think about 90% of our business so far in the first quarter has come from both the private and the Medicare sector. And I think that, that probably split roughly half and half. Medicaid is about 7% and the rest, the small balance left over.

Robin?

Yes, Ying. So relative to gross to net, again similar to Paul's response, still very early in the launch. And as he previously described we're still in the midst of the contracting process.

So I would say our gross to net percentage now is not necessarily predictive of what it would be going forward, but it is lower. It's lower than HIV, and kind of lower than we project the full year to be.

Yes, the mix will change over time.

Thank you very much.

Your next question comes from the line of Robyn Karnauskas with Deutsche Bank.

Hi guys, thanks for taking my questions. So on this whole concept of prioritizing patients by fibrosis, how would that be implemented? Would it be implemented by the doctor potentially or could it be forced by the payer?

And in conjunction with that, how do payers and doctors view eight weeks versus 12 weeks? And is eight weeks an advantage if you're in that situation where you have prioritization by fibrosis score? Thanks.

Paul here. I'll tell you the first bit and maybe hand over to Norbert.

So there is a healthy, I'm not sure it's healthy, I'd say tension between payers and clinicians I think at this point. And it's clear that some payers are trying to restrict or prioritize patients with say higher fibrosis scores or sicker patients. And I think clinicians are sometimes taking a different view of that.

And it's very hard for us to see how that's worked out from here. But we do hope that the clinician and the client prevails over time. We're pretty confident that will be the case as payers start to get used to and predict better the volume of patients that require treatment.

And perhaps I can hand it over to Norbert.

The other question is an interesting one and maybe I could summarize it by something that a well respected thought leader told me. He said he would prefer 12 weeks of treatment over eight simply because it is something that's really safe, well tolerated. Why not go for the safe path and give them 12 weeks, it's not that much more.

But then he went on to say that he is ultimately not the one that will make that decision, but that decision will probably be made for him by the payers. And how that exactly works operationally I'm unsure, but that's probably where we're heading.

Your next question comes from Ravi Mehrotra from Credit Suisse.

(inaudible) -- for taking my question and let me add my congratulations. Obviously you're now in a very different league from a sales perspective and market cap perspective. Actually a future pipeline needs perspective in the long term. Con commitments there you've got one of the lowest R&D budgets, yet the highest operating margin.

So philosophically, how do you think about R&D and BD in the long term, til you fill out your long term pipeline.

Ravi, it's John Milligan. So it's a very good question. Our R&D as a percentage of sales went down fairly dramatically this quarter as you know, which means you can't grow that up to a level that might be more appropriate for a Company with the sales levers we're seeing, in a very short period of time. It takes a long time to hire the people and to put thoughtful programs into place.

So with regard to R&D, our philosophy simple would be to continue to grow, but to grow at a reasonable sustainable pace as we add more programs and as things mature from research into development. We're seeing quite a number of those happening this year in a way that I think is quite exciting for us.

In terms of BD, it's somewhat of a similar issue. We're looking to license and programs, but we can only grow so fast based on the number of people we have, the complexity of the business. And also just the capability of bringing in -- and bringing programs in and then doing a very good job on them.

So I think we've got a very full pipeline right now. I think it's going to be a thoughtful way forward as we grow the Company. And I think we have most of what we need to continue to grow this Company for years to come. So it'll be very, what I call very targeted kinds of transactions, that could help further us along.

And if I may add something, John, we're going to continue to be disciplined about all of this. Just because we have more money available doesn't mean we're going to spend it. The science has to be right and the medical need has to be right. That's when we're going to do it and not in any other -- under any other scenario.

Your next question comes from Ian Somaiya with Nomura Securities.

(inaudible) -- on the fast launch. Had a question regarding again on the pricing front on Hep C.

Just wanted to revisit maybe some prior comments that you have made in terms of how we should think about pricing for the combination. Specifically that most of the value felt was being derived from Sovaldi. And that's the way we should think about from a pricing perspective that most of the contribution from price would be from Sovaldi and there would be some incremental value or costs associated with the second drug. So wanted to get your thoughts on that, whether that still holds?

And a related question is the conversations that we have with payers are not really focused on Sovaldi on its own, they're focused on the combination. And the price point they all seem to have in mind whether we think about the US payers or European, is the off label usage Olysio of Sovaldi and the $150,000 price point.

So if you could just sort of comment on those things that would be really appreciated.

Ian, it's John Milligan. It's always difficult to talk about pricing and let's not forget we don't have approval for those products. But as you think about it, there are natural limits on what I think is appropriate for Next Generation products.

And for example, with 5885 we're essentially replacing pegylated interferon ribavirin, which over a 12 week duration is a much less expensive for example, than Sovaldi. So it's clear Sovaldi is the driver of the value in that combination.

And I tend to think about it in that sort of way, and so I think you're right. People are concerned about the combinations of things like Olysio and Sovaldi. And that's really not how we're thinking about Next Generation products.

Okay thank you.

Your next question comes from the line of Joel Sendek with Stifel Nicolaus.

Hi thanks. I had a question about just the duration of therapy that you're seeing so far. You mentioned about the use with interferon, but I noticed in Roche's report, that the sale of the Pegasys really didn't go up that much.

So I'm wondering if you can just help us with the average duration. For example, how many patients or what percentage are on the 24 week Sovaldi ribavirin regimen as opposed to the 12 week combinations. And what we would expect for the trend in that duration over the next couple months?

It's Paul here. I mean the data we have is [spend] for the US. We think about 70% of patients are genotype 1 and of those 70% we think about 65% to 70% are on the so-called NEUTRINO regimen, 12 weeks sofosbuvir plus peg/riba. So I think that that's the 12 week piece, the 24 week piece we're not at all sure on.

Yes, it's a combination of patients who are on genotype 2 taking 12 weeks and genotype 3 are taking 24 weeks. But any way you do the math with the shorter duration and a high percentage of patients now taking non-interferon-based regimens, it's not surprising that the interferon sales are declining.

Genotype 3 we think is about in the US so far around about 7% of the 30,000 who have been genotype 3

Your next question comes from Jim Birchenough with BMO Capital.

Hi guys, let me add my congratulations. Just a question as you think about potential competitors coming in later in the year and into next year. Is there anything you could do with payers right now to try and preempt what could be a price competition and aggressive discounting just to preserve some level of pricing in this market?

Well Jim, it's not generally prudent to talk about strategies in public so that others know what you're doing, so I'm going to decline making any comments on that.

Although I do note that it looks to us based on today's filing of the AVI regimen with the five drug regimen that they're putting out there, that we should have a considerable lead to market from where they are, since they're over two months behind us in terms of their filing. So that could be an advantage for us.

Your next question comes from the line of Howard Liang with Leerink.

Thanks very much and congrats. Just can you talk about just what's next in HCV. There's some chatter out of EASL that your data set in cirrhotic patients is not as big as AVI. Do you have a plan to do a cirrhotic study?

And then also what's the next regimen you take to Phase III in HCV?

I'm not sure that I understood all your question. You were asking about the comparability of AVI's cirrhotic population results with ours?

No, just whether is that a big enough -- do you need another study for cirrhotic patients?

No, I think we've answered the question. AVI chose to do a separate cirrhotic study. We have included our cirrhotic patients and [were not able to] -- and by the way the results were in that population. AVI had 88% and then our sub population of treatment-experienced cirrhotic patients was 86%, so a similar number.

The only thing to remember is AVI didn't have experienced patients in their study, we did. So comparing the two studies is a difficult thing to do. You'd have to do a head to head study.

And I think you asked about what's next on our 5816. So what we have now filed, ledipasvir/sofosbuvir for genotype 1. And we're repeating this now with a pan-genotypic NS5A inhibitor in GS-5816, which would be the one pill, once-daily for everybody, for all genotypes.

We're just finishing up some studies. One result was disclosed at EASL by Emerson, that showed it works against all genotypes, sofosbuvir GS-5816 combination. We still have to -- with data are coming in right now on the same regimen in cirrhotics. And we're also looking at shorter treatment durations.

When all of that is in we will make a decision to go to Phase III some time in the second half of this year.

Your next question comes from the line of Matthew Harrison with Morgan Stanley.

Great, good afternoon. Thanks for taking the question.

I wanted to ask a little bit back on the payer side. We've heard some commentary out of some of the payers that have already reported about sort of patient volumes, And UNH was one of them and they had suggested they thought patient volumes were actually peeking for them in the first quarter.

So I guess I was wondering if, A, you agree with that? And then B, sort of as a related to that, what kind of information do you need where you feel like you'll be in a position to give us Sovaldi guidance? Thanks.

Yes, so Matthew it's John Milligan. In terms of the patient numbers, I mean you see the prescription rates as much as we do. We don't necessarily know where those patients come from so I can't speak to the United Health population whether that is an accurate portray all or not. I assume they know more than we do about those patients in their system.

But as Paul had talked about, we have less than 50% of physicians who can prescribe Sovaldi, who have prescribed Sovaldi. And so we also look at the fraction of patients who have been treated relative to the total patients and it's relatively small. In a typical year about 60,000 patients are treated, there were about 30,000 last quarter. And so that put us certainly at a faster pace than the last few years but certainly far below some of the peak years when well over a 100,000, 140,000 patients were treated.

So I for one believe that there are many, many patients out there who will continue to seek Sovaldi therapy. Or who might be looking forward to the combination therapy as we get later into the year.

So I think there's plenty of opportunity out there for us.

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

Thanks. I wanted to ask a little bit about some of the discussion at EASL on the EU countries banding together, potentially buying anti-virals beyond pandemic vaccines. And your take on how likely is something like that to happen and how the mechanics of that might work.

Any insights that you have to share would be very helpful. Thanks.

Thomas, it's Paul here. I think this is a wonderful idea. And if it could work it would be great because you could have one price and access at the same time across Europe.

But as we've often said, you can't change a thousand years of history and if Europe ever managed to get its act together on this I would be absolutely amazed. So that's really my point of view on it.

Your next question comes from Brian Skorney with Robert Baird.

Let me congratulate you and maybe even one up by [Shawn Bunn] by saying I think this was actually the biggest single quarter for a pharmaceutical product in US history, it's probably tied I think in a couple quarters in 2006 with Lipitor.

But anyway, I just wanted to know kind of got going off of John's comments about the number of patients that are out there. Do you have any sense that there's a warehousing going on ahead of all oral approval? I mean it just seems with six months to go before interferon is totally out of the equation that there would be a little bit of -- there wouldn't be much rationale for starting non-symptomatic naive patients.

So do you anticipate a dip in new prescriptions in the coming months in anticipation of that? And do you have any kind of guidance on what sort of acceleration we might anticipate post the launch of ledipasvir/sofosbuvir?

John it's very hard to determine if there's warehousing, except by talking to physicians. And we've talked to some of the top KOLs and it's clear that they are thinking they would like to hold back some of their less sick patients to put them on all oral therapies later on in the year.

But as I mentioned there's a whole host of the middle tier physicians, people who don't attend EASL, who are just now becoming Sovaldi prescribers who seem to be having a very good experience. And we don't get any sense that they are all that aware of the Next Generation coming out or that they wish to slowdown their own practices in order to wait for business later on in the year. So I kind of doubt that those physicians would have significant amounts of warehousing, but in fact could likely accelerate their use of Sovaldi as they get into the second part of this year.

Mr. O'Brien, we have time for one more question. Your final question comes from Terence Flynn with Goldman Sachs.

Hi, thanks for fitting me in. Just two quick ones for me.

John I was just wondering on the prescriber mix you mentioned you had reached out to about 50% of the targeted audience that prescribed. Can you tell us what historically they represent in terms of volumes for those 50%?

And then the second question was just any early feedback on the DTC campaign? And what metrics are you guys using there to evaluate the effectiveness of that program? Thanks.

Yes, these are getting into the middle tier -- middle deciles, excuse me, of the doctors represent that mix. We will exclude the lower tiers because we tend not to hit those decile 1 and decile 2 doctors very frequently. But it's a real middle mix of these doctors who are geographically difficult to get to in some cases and sometimes can be difficult to see. So but that is a really good piece of business for us as well.

And the second question was the DTC campaign. We really don't have any idea if the unbranded campaign of awareness has had an impact other than a few anecdotes of patients calling their physicians. I think given the -- I think stronger than expected early demand, those campaigns of course are being rolled back very substantially and you'll see less and less of that in the coming weeks and months.

Alright, thank you, Stephanie and thank you all for joining us today. We appreciate your continued interest in Gilead. And the team here looks forward to providing you with updates on future progress. Thanks.

Thank you. This concludes today's conference. You may now disconnect.