吉利德科學 (GILD) 2014 Q3 法說會逐字稿

,>> Operator Ladies and gentlemen, thank you for standing by, and welcome to the Gilead Sciences third quarter 2014 earnings conference call.

My name is Kate, 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, Kate, and good afternoon, everyone.

We issued a press release this afternoon on our earnings results for the third quarter.

The press release along with the detailed slides is available on the Investor Relations section of our website.

Speaking on the call today are John Martin, Chairman and Chief Executive Officer; Paul Carter, Executive Vice President of Commercial Operations; and Robin Washington, Executive Vice President and Chief financial Officer.

Also in the room for Q&A are John Milligan, President and Chief Operating Office; and Norbert Bischofberger, Executive Vice President of Research and Development.

Before we begin our formal remarks, I want to remind you we will be making forward-looking statements including plans and expectations with respect to our product candidates and 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 statements 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 provided in our press release as well as in our website.

I will now turn the call over to John Martin.

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

The third quarter was highlighted by continued strong financial performance as well as scientific, clinical and regulatory progress that we believe will benefit the patients and communities Gilead serves over the near and longer term.

During the quarter, we generated a total of $6 billion -- revenues of $6 billion.

This performance coincided with advancing numerous clinical programs across core therapeutic areas.

I will touch on the most significant milestones that occurred in the last few months.

In the HIV therapeutic area the first [half bay] single tablet regimen of elvitegravir, cobicistat, FTC and TAF, or E/C/F/TAF, met its primary efficacy and safety end points in two Phase 3 studies in treatment naive patients.

The results show that E/C/F/TAF was non-inferior to Stribild with regard to the proportion of HIV-infected patients with viral load of less than 50 copies/mL and demonstrated statistically significant fewer renal abnormalities and also lower decreases in bone marrow density.

Additional Phase 3 studies evaluating E/C/F/TAF in multiple HIV patient populations are ongoing, including patients who switched to E/C/F/TAF from Truvada-containing regimens, patients with mild to moderate renal impairment and treatment naive HIV positive adolescence.

Submissions for regulatory approval of the E/C/F/TAF regimen will occur in both the United States and Europe by the end of the year.

In addition, TAF as a single agent is being studied for the treatment of HPV infection.

Two Phase 3 studies with 48-week primary end points should complete enrollment by the end of the year.

Moving to HCV, Harvoni, which was approved by the US FDA on October 10, is the first single tablet regimen for patients infected with genotype 1 HCV, the most prevalent genotype worldwide.

We also received approval in Canada earlier this month, a positive recommendation for approval in Europe in late September and we filed for approval in Japan also in September.

Harvoni is a major medical advance in the treatment of HCV.

It's simple.

One tablet taken once a day, it eliminates the need for both interferon and ribavirin which cause difficult side effects, and it results in high cure rates with treatment durations as few as eight weeks.

Harvoni builds on the progress of the past year during which time approximately 100,000 patients have been treated with Sovaldi in the United States and approximately 17,000 in Europe.

This represents a fraction of the estimated 185 million people in the world suffering from HCV who have the potential to benefit from sofosbuvir-based regimens.

The rapid adoption of Sovaldi continues to reflect recognition within the medical community of the substantial benefits the drug offers patients, particularly when compared to prior treatment options.

The goal of Gilead's development program is a pan genotypic single tablet regimen.

To this end enrollment of four Phase 3 studies has begun for the pan genotypic combination of GS5816 and sofosbuvir.

We anticipate being in position to share data in the second half of 2015.

In two weeks, the annual AASLD meeting will take place from November 7 to11 in Boston.

Over 90 abstracts by Gilead or by Gilead collaborators will highlight our various disease programs in Hepatitis B, Hepatitis C, and liver fibrosis; 65 abstracts deal with the use of sofosbuvir-containing regimens in various populations across various genotypes.

In particular, an oral abstract will describe the use of Harvoni in genotype 6 and Harvoni in combination with ribavirin and genotype 3 hepatitis C infected individuals.

Another presentation will describe a real world experience of Harvoni in combination with ribavirin in cirrhotic patients who have previously failed a PI PEG interferon ribavirin-containing regimen, and three other abstracts will provide safety and efficacy of Harvoni in 500 patients with compensated cirrhosis and in a combination with ribavirin in 300 pre- and post-liver transplant patients.

These existing and accumulating data continue to demonstrate that sofosbuvir-based regimens provide savings to payers, providers, patients, and our entire healthcare system over the long term, given high cure rates and subsequent reduction of costs associated with managing HCV over patients' lifetimes.

Now, let me touch briefly on Zydelig and Letairis.

Zydelig is a first-in-class oral PI3K delta inhibitor.

It was approved both in the US and Europe in combination with rituximab for the treatment of certain patients with CLL and certain patients with [NAHF].

Zydelig is the first of what we hope will be many therapies Gilead develops to improve treatment for a range of cancers.

The Letairis AMBITION study has demonstrated the potential for a new standard of care in pulmonary arterial hypertension, or PAH.

Data from this study were presented at the annual meeting of the European Respiratory Society in September with an additional analysis from AMBITION presented during a late breaker session at the [chess] meeting earlier today.

The study was conducted in collaboration with GlaxoSmithKline and Eli Lilly and was a randomized double-blind multi-center study comparing first-line combination therapy with Ambrisentan and tadalafil to monotherapy with either Ambrisentan or tadalafil alone in patients with PAH.

The study showed that the combination of these therapies reduce the risk of clinical failure by [50%] compared to the pulled Ambrisentan and tadalafil monotherapy arms.

The combination was also statistically significant versus the two individual Ambrisentan and tadalafil monotherapy arms for the primary end point.

Based on these data, submission of supplemental NDA for Letairis to FDA is planned before year end.

As we continue to advance treatment options across a range of therapeutic areas, we are working to enable access of our drugs for people who need them across the world.

During the quarter we signed non-exclusive licensing agreements with seven India-based generic companies to manufacture Sovaldi and Harvoni for distribution in 91 developing countries.

In those countries, more than 100 million people are estimated to be infected with HCV which translates to 54% of the total number of people affected by HCV worldwide.

We also announced an agreement with the medicines patent pulled, MPP, under which MPP can sublicense TAF to generic companies in India and China for manufacturing and distribution in 112 developing countries.

Many initiatives are in place to expand access for patients in both the US and around the world, and represent a continuing effort that our organization is committed to and of which we are very proud.

I will now turn the call over to Paul Carter to provide a commercial update.

Thanks, John, and good afternoon, everyone.

Gilead's total net product revenue in the third quarter increased to $6 billion, representing growth of 120% over the same period last year.

US sales grew to $4.2 billion, and we had $1.4 billion of sales in Europe.

There were a number of factors underlying our sales growth during the quarter.

The primary driver was Sovaldi, and we also experienced healthy demand in our HIV business.

Beginning with Hepatitis C, we generated Sovaldi sales of $2.8 billion during the quarter, including $2.2 billion in US sales with most of the remainder coming from France and Germany.

Sovaldi is now available in 40 countries around the world.

The 20% reduction in Sovaldi revenues compared with the second quarter is related to physicians delaying the initiation of treatment in the US in anticipation of Harvoni's approval.

As we expected, the third quarter also saw a reduction of our Sovaldi inventory across the channel consistent with demand and in line with our normal contractual ranges.

Since launch, nearly 100,000 patients in the US have been treated with Sovaldi.

According to data available as of the end of the second quarter, approximately two-thirds of genotype 1, 20% of genotype 2, 10% of genotype 3, and the rest of genotypes 4, 5, and 6 combined.

Approximately 95% of US patients starting therapy in 2014 received Sovaldi.

We estimate that 80% of these patients were treatment naive and 20% were treatment experienced.

In the third quarter we saw an increase in non-retail use as a percentage of the US total sales.

At this point, only two state Medicaid programs have yet to allow access to Sovaldi.

In Europe, approximately 17,000 patients have been treated with Sovaldi.

In the UK, the National Institute for Health and Care Excellence, or NICE, issued further draft guidance recommending Sovaldi as a treatment option for certain patient subgroups.

We were very pleased to have NICE's endorsement of Sovaldi as a clinically and cost-effective treatment and look forward to working with officials in the UK to ensure maximum patient access to this drug.

We've now reached agreements on reimbursement in many countries of Western Europe.

The fact that many of these agreements are progressing faster than would typically be the case following standard timelines is a testament to the unmet medical needs that Sovaldi addresses and the value it brings.

Let me now turn to Harvoni.

As John mentioned earlier in the month, we received FDA approval for Harvoni, a simple, safe, and highly effective oral single tablet regimen for Hepatitis C. The 12-week regimen price for Harvoni is $94,500, which is in line with the regimen cost of the previous standard of care as in 12 weeks of Sovaldi plus pegylated interferon and ribavirin.

We expect over time that up to half of genotype 1 patients may benefit from just eight weeks of therapy, meaning the cost will be reduced by one-third for many patients.

We are supporting the launch through a targeted promotional effort designed to build awareness among specialist communities who are already familiar with Sovaldi, including hepatologists, gastroenterologists, and infectious-disease physicians.

Moving now to HIV.

Prescription growth continued to grow for us for all of our products in the US as nine out of 10 HIV patients new to treatment were prescribed to a Gilead medicine.

Seven out of 10 received one of Gilead's Truvada-based single- tablet regimens.

Stribild continues to be the leading HIV regimen for patients who are beginning therapy, capturing three out of 10 starts and Stribild has also become the number two regimen across all treated patients in the US behind Atripla.

Gilead's Truvada-based single-tablet regimens including Stribild, Complera, and Atripla grew 29% year over year.

The new single-tablet regimens remained on a strong growth trend with Stribild up 22% sequentially to $279 million and Complera up 19% sequentially to $183 million in the quarter.

During the quarter we saw inventory level for our HIV products finish at the upper end of the contractual range.

Moving to Europe.

Revenues for Truvada-based single-tablet regimens have grown 17% year over year.

Truvada-based single-tablet regimens continue to lead the market with Eviplera remaining the most prescribed regimen in both naive and [switch] patients, and Stribild strengthening its position as the second-most prescribed regimen for switch and the fourth most prescribed regimen for treatment naive patients.

By the end of the third quarter we had sales from Stribild in 20 countries across Europe.

This includes all EU big five markets with notably the biggest HIV market in Europe being France where Stribild was launched in late March.

We are engaged with public and private payers around the world to help them understand the significant unmet medical needs we are working to address and the positive impact we believe our product can have on healthcare systems over the long term.

In the US, our comprehensive patient assistance program continues to help make Gilead therapies accessible for patients who need financial assistance.

We're always looking at how we can partner with countries in need to enable access to our therapies.

This has been and will continue to be a top priority.

In closing, we are extremely pleased to have taken so many important steps forward with our business during the quarter.

And with that, I will now turn it over to Robin.

Thanks, Paul, and good afternoon, everyone.

We are pleased to report strong third-quarter results with total revenues of $6 billion and a non-GAAP diluted EPS of $1.84 per share which includes a cumulative catch-up of $0.21 per diluted share related to the Branded Prescription Drug fee for the final regulations in the Affordable Care Act issued during the quarter.

Excluding this one-time adjustment, EPS for the quarter would have been $2.05 per share.

Worldwide product sales growth of 120% year-over-year was driven by strength across Gilead's product portfolio, including continued uptake of Sovaldi coupled with the growth of our HIV single-tablet regimen, Stribild and Complera, Eviplera across geographies.

Sequentially, product sales, excluding Sovaldi, increased by 8% with steady growth in our HIV franchise.

Sovaldi product sales were robust at $2.8 billion for the third quarter but decreased compared with the second quarter which likely resulted from physicians holding off initiation of treatment in anticipation of Harvoni.

In Europe, Sovaldi product sales increased 31% sequentially as more patients initiated therapy during the quarter.

Non-GAAP operating expenses were up $609 million year-over-year.

Non-GAAP R&D expenses were up $98 million year-over-year, reflecting increases in headcount and infrastructure costs related to the growth of our R&D portfolio and progression of oncology and liver diseases clinical studies.

Non-GAAP SG&A expenses were up $511 million year-over-year driven by the Branded Prescription Drug fee.

As mentioned earlier, the IRS issued final regulations which required manufacturers to recognize an additional year of expense which resulted in a non-tax deductible cumulative catch-up of $337 million within the quarter.

Non-GAAP SG&A expenses also increased due to product launch expenses for liver diseases and oncology, patient support programs, head-count growth and investments in our infrastructure and geographic expansion.

Our cash flow from operations was $4 billion for the quarter.

We continue to focus on shareholder return and accelerated our level of share repurchases to 19.1 million shares at an average price of $89.10 per share, utilizing $1.7 billion in cash during the third quarter.

This completed the January 2011 share repurchase plan where we repurchased a total of 92.9 million shares at an average repurchase price of $53.83 per share for a total spend of $5 billion.

This month, we began utilizing the May 2014 $5 billion share repurchase plan and expect cash allocated in the fourth quarter to share repurchases to be similar to the third quarter.

During the quarter, we also paid $4.1 billion in cash to settle the warrants related to the May 2014 convertible debt which reduced diluted shares by 10 million for the current quarter.

Turning briefly to taxes.

As many of you are aware, the Irish finance minister announced the proposed 2015 budget for Ireland which included a number of changes to their residency roles.

We are still evaluating the proposed changes and the related impact to Gilead, if any.

The proposed changes include a six-year grandfather period through 2020.

If we determine that the final rules will impact Gilead, we believe that our worldwide revenue base and operations in Ireland will provide us with options for structuring alternatives in the future.

Finally, we are updating full-year 2014 guidance which includes HCV product sales and is outlined on slide 44.

The changes are as follows: Net product revenue guidance is now $22 billion to $23 billion; gross margin guidance is now 86% to 88%; tax rate guidance is now 17.5% to 19.5%.

We are raising SG&A expense guidance to $2.7 billion to $2.8 billion.

This increase is fully attributable to the impact of the IRS regulations related to the change in accounting of the branded prescription drug fee which represents approximately 20% to 21% of SG&A expense in 2014.

All other components of our 2014 guidance remain unchanged.

Overall, we are very pleased with our third-quarter performance as well as our outlook for the remainder of the year.

We look forward to updating you on our continued progress.

At this point, we would like to open the call for questions.

Operator?

(Operator Instructions)

Our first question comes from the line of Geoff Porges with Bernstein.

Thanks very much for taking the question and congratulations on all of the progress and the results.

Could I just ask a related question on HCV?

Could you give us a sense of how Harvoni is going?

You have more visibility than we do in terms of comparing it to the Sovaldi launch.

Do you get the sense that it's tapping into that warehouse group of patients?

And just related to that, could you give us some color pull on what proportion of patients that are being treated are F3/F4 in the US and whether you expect that to become more or less de facto reimbursement standard as we get into 2015 for HCV reimbursement?

Thanks.

Yes, Geoff, so I think it's two questions there actually, but I can give you a little bit of feedback on Harvoni launch.

As you pointed out, we only have one kind of data point like you do, but I can tell you a little bit more what we're hearing.

So, first of all the data point of prescriptions last week was for prescriptions that are actually filled.

We are hearing that many more prescriptions are being written during these first two or three weeks of launch.

We have to be careful I think comparing apples to apples though with the Sovaldi launch and if you remember Sovaldi was approved at the beginning of December and there was a reticent I think at that point for many physicians to write prescriptions starting patients off on an interferon regimen just prior to the Christmas and holiday period.

So there is a slight apples to apples comparison I think we need to take into account.

However, we are seeing a few things.

We're seeing a broader group of physicians writing scripts, I think, than with Sovaldi.

Several physicians we know have written scripts that never wrote one for Sovaldi before, and I think this reflects the simplicity of the Harvoni regimen.

We're also seeing rate of adoption, I think, a little bit faster this time, so some physicians who took many months to write their first prescription of Sovaldi seem to appreciate, again, the simplicity of the Harvoni regimen and are writing scripts earlier.

With regard to payers, we're feeling reasonably confident with their reaction.

I think they're very pleased to see that in GT1 patients up to half we estimate of those patients will be eligible for eight weeks of therapy in due course because they're rather treatment naive, non-cirrhotic, and with a low baseline viral load.

And I think also when they compare the cost of the treatment of Sovaldi plus olysio,, which we saw ramping up during the course of the year and in fact I think in the second quarter or possibly in the third quarter even, maybe 50% of patients are on that very expensive regimen costing around $150,000 that there is a sense of relief now that a large number of patients will be able to access the eight-week regimen at a substantially reduced cost, so that's very positive, I believe.

It's very early really to characterize access through the state paired systems and really too early to say that.

I do think it's worth pointing out that Sovaldi will continue to co-exist with Harvoni, so I think in the months going forward we should look at the overall Gilead position in Hepatitis C as Harvoni plus the Sovaldi prescription, so we're going to continue to see because Sovaldi remains the best on label option for genotype 2 through 6 and for various other patient subgroups.

So, pretty early days, but, I think, good signs.

We also just had a satellite symposium hosted last week by several Hepatitis C thought leaders and we had 1900 health care providers join the symposium, so I think it's a very high level of interest and so we're quietly confident in the success of this launch.

I think the second question was about fibrosis scores?

Yes.

We've seen a surprisingly large number of patients actually treated with low fibrosis scores.

I think our estimate so far in the year-to-date is that 0 through 2 is about 60% of the patients treated, so the balance would be F3's and F4's, Geoff.

I hope that answers the question.

Great.

Thank you very much for that color.

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

Hi, thanks for taking my question and congratulations on all of the progress, as well.

Just following up on Geoff's question.

I was wondering if you could talk more specifically about this potential backlog of prescriptions for Harvoni.

Do you have any sense for patient throughput on the drug relative to prescriptions written?

How quickly you might expect to see these patients get insurance authorization to start treatment?

I'm trying to understand both the initial insurance hurdles as well as how best to reconcile the prescriptions we're going to see in the launch relative to actual patient demand.

Thanks.

Yes, it's a really hard question to answer.

We really don't know.

I think the apples-to-apples comparison with Sovaldi, again, we need to take into consideration that I think insurance companies were somewhat unprepared for the volume of patients when Sovaldi was initially launched, and certainly in the first few weeks a lot of prescriptions, I think went through very quickly.

This time, insurance companies are more organized and prepared around the Harvoni launch, so there may be slightly more -- there may be more constraints initially.

But, as I said, Harvoni is an incredible step forward, the single tablet once a day, interferon-free, ribavirin-free regimen, many patients are able to be prescribed it for just eight weeks.

So, I would hope that the economic benefits of even the eight-week potential might expedite proceedings, but it's a bit difficult to tell.

There are some swings around abouts on this.

Thanks very much.

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

Hey, thanks very much for taking my question.

I appreciate it.

I noticed in your slide deck this quarter that you didn't provide us the waterfall plot that you often provide for the hepatitis C market starting with infected patients, then going to diagnosed patients, then going to patients under the active care of a treating specialist.

I was wondering if you could update us on those numbers, if possible, especially now that we're all trying to model the Harvoni launch?

And then just related you said that the two state Medicaids have allowed access only to Sovaldi.

What's your expectation for how that's going to roll out -- how the state Medicaid situation will rollout in 2015?

Thanks so much.

Mark, it's John Milligan.

I'll start with the waterfall question.

We're taking a look at the plot and recognize that the data we have on the patients under care are at least a quarter old, if not older, and so we no longer felt that we had an accurate picture of where those patients are coming from.

So we don't know exactly how many patients are under care anymore, and how many of the patients that went through care would have been characterized as part of that bucket prior to this.

So we felt it was misleading to put a number out there that you would then rely on for understanding how the dynamic is going.

We are trying to figure out where those patients are going to come from, and we will take some time of course to understand how many patients came directly into care from nowhere, which was common in this field, patients who typically had [metric] care suddenly seeking care and how many of those patients are still in that bucket.

So this very dynamic process may not lend itself to a typical waterfall that we've used in the past for HIV, and we're trying to figure out a better way to convey what those numbers might look like as those patients come into care, and as those patients are driven into care by increased knowledge of the product.

And of course many of you have seen awareness ads on TV already from various companies, which will of course help drive awareness and patients into care, as well.

So it's a very dynamic process and we'll try to do the best we can.

But I don't have a good handle on what that number is today.

Paul, second one was about Medicaid?

Yes, I think we should anticipate -- certainly for modeling I would anticipate the same sort of timelines for Harvoni through the state Medicaid systems, although I would emphasize again that the eight-week regimen, you would hope the economic benefits of the shorter treatment might expedite that process somewhat.

Thanks a lot.

Our next question comes from the line of Matthew Roden with UBS.

Great.

Thanks for taking the question.

So, there's been a lot of debate about the importance of short duration therapy, and I notice for your GS5816 program in Phase 3 that you're really only looking at 12 weeks treatment duration.

So I realize the Phase 2 data are mixed on eight weeks there.

But should we just think about this combination for genotype 2 and 3, and then related, can you update us where you are with your NextGen PI, and what the plans are and timeliness for additional combos to get to shorter durations?

Thanks.

Yes, Matt.

Hi, it's Norbert.

Matt, with regards to 5816, the way we're thinking about this is it would be one pill simple regimen 12 weeks for everybody.

Now, you can make the argument in the US it's probably genotype 2 and 3, but for instance you look at the UK, they have 30% genotype 3's and in other parts of the world it's the most prominent genotypes are not genotype 1, so we are looking at this really as a global solution, so to speak, for all genotypes for Hepatitis C.

With regards to shorter treatment durations, we're still pursuing shorter treatment duration.

You may remember we have presented data, actually the NIID presented data, on six weeks treatment naive non-cirrhotic 100% response rates with ledipasvir, sofosbuvir of 9451.

We are now looking at what happens in eight weeks, in six weeks in treatment-experienced cirrhotics.

There's a presentation by Eric Lovitz at ASLD that looks at eight weeks in treatment-experienced cirrhotics, and you will see why the response rates are still reasonably high, almost 90%, they are not as high as we would like them to be, and we're looking at four weeks right now in treatment-naive non-cirrhotic.

With regards to the protease inhibitor that has just entered Phase 2, so we're doing dose ranging in combination studies again looking at shorter treatment durations.

So, I don't have any specific data to tell you about, hopefully at EASL, we will be able to say something about the four-week treatment duration and the six weeks in cirrhotic patients.

Thanks very much.

Our next question comes from the line of Michael Yee with RBC Capital Markets.

Hi, thanks.

My question is in regards to some reimbursement criteria for different payers suggesting the need for high-risk hepatitis C disease in order to get treated.

Anecdotally, or do you think going forward, do you think that that is going to be any impact or do you think that's basically going to be similar to what we saw in Q2, where I think a lot of that criteria was trying to be implemented.

And similarly to OUS, how do you see that being played out, cirrhotic versus non-cirrhotic, so in other words high risk versus low risk?

Hi, Michael.

It's John Milligan.

So, your first question is segmented into high-risk HCV patients for treatment only.

I think that's the way you phrased it, and I would say it's very difficult to characterize across all the very different payer groups who respond differently to the people who of course are paying the premiums, and so there's a wide range of behaviors that we're seeing out there.

There are certainly some groups who are trying to segment it more for the high-risk patients, but of course some groups are more open ended as to what kind of patient can come on board.

So you could be high risk by a number of criteria including physician judgment based on co-morbidities; you can get therapy based on other criteria.

Interesting, if you look at for example Medicare patients.

There is quite a range of patients able to be treated under Medicare and CMS has sort of dictated currently that all patients should be allowed therapy.

I think what you'll see over time is rather than a restriction, more of a loosening of the guidelines over time much like we saw with the HIV.

I shouldn't say guidelines but a loosening of the criteria for reimbursing, which is typically what happens over time.

As more patients get treated who are on the worse end of the spectrum, there will be more capacity and more money that will be freed up to treat people who are earlier on in their disease.

We also think the eight-week option, the cheaper option, is going to be very favorably looked at by the payers, as well.

We think also the treating earlier is your best chance to save the most money for the healthcare system over time.

And so we would encourage people to think about it that way as well.

So you will see some restrictions currently, and, I think, for example, in the Medicaid which have fixed budgets, there will be greater restrictions than anywhere else, but I can't give you one answer.

I just think it's an evolving field which will eventually allow most patients to be treated, but I do think there will be a triage system set up over the coming years to get to the right number of patients.

Maybe I'll add--

And that's for OUS?

How is that different than OUS?

For example, (multiple speakers) slide with the pie charts, you don't have that for OUS.

Thanks, Michael.

I'm going to turn it over to Paul Carter about the answer for the ex US piece of this.

So we're making very good progress, in terms of reimbursement agreements with most of the major European countries.

What we have in Europe is somewhat like the state Medicaid systems, fairly inflexible budgets for healthcare generally, and specifically in the Hepatitis C area.

Having said that, I think that there's very clear recognition of the unmet medical need, and particularly in some countries a very large number of patients that really need to be treated as soon as possible.

We would expect those governments to prioritize the patients just because of the inflexible nature of the budget and therefore, I think at this stage the sicker patients clearly will be the first ones to be treated.

Having said that, ironically John pointed out the best way to save money per patient is to treat early, and in fact treat the less sick, or less cirrhotic patients on the eight-week type of therapy that will be available shortly in Europe.

Thank you.

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

Thanks for taking my question.

I had a followup on the ex US launch.

We recently saw on the web it looks like you've reached an agreement with Italy and Italy expects to I think treat more patients than any other big five nations.

Is that correct?

Is Italy now on line and what are your expectations for the launch there?

And similarly in Egypt where there's a huge patient population, what are your expectations for revenue out of Europe and -- out of Egypt and how could that ramp?

So, I'll take the Italy question.

First of all, Italy does have the highest prevalence of any of the major EU countries, for sure, and they do recognize the healthcare issue staring them in the face now.

So, we have been in close negotiations with the Italian government.

We have signed an agreement with them and that agreement is now working through the Italian system.

We expect the first patients in Italy, hopefully, to get treated next month as part of this agreement.

So Italy is moving forward and we're very pleased about that.

Do you want to talk about Egypt, John?

Yes, with regard to Egypt, obviously we have announced we have a program to have a specific program for Egyptian citizens to get access to Sovaldi for genotype 4. There are some pretty high expectations within the Egyptian government about the number of patients who can be treated.

We have yet to actually see those orders materialize.

We're working with them on what the proper forecast and supply could look like.

So at this time I can't give you anything to say we will be very, very small for 2014, and as we get into 2015 and approach talking about the year guidance then, perhaps if that's a significant component we would call it out at that point in time.

But given this is a public health initiative, obviously the revenue number is small per patient, but with a large number of patients could be an important part of our ex US European revenue line.

Just generally on places like Egypt and Italy and other places with high prevalence, do they set up an annual budget beforehand, and do they tell you what that is, or is there more demand-based ordering from those countries?

So specifically to Italy and Egypt there is a specific amount of money they are setting aside to try to treat the disease.

To my knowledge, those numbers aren't public, but they have put aside special public funds because of the important health need for each of those countries, yes.

And if I can just add that certainly speaking for Italy the budget will be a significant step up from previous Hepatitis C budgets, with the ambition of treating a lot of patients over the next few years and with a recognition that they can't possibly treat all patients in the first year or two.

This will be spread out over many years.

Great.

Thanks for taking my questions.

Our next question comes from the line of Yaron Werber with Citi.

Great.

Thanks for taking my question.

I have, if you don't mind, a question on inventory and then a question on 5816.

Inventory-wise for Sovaldi, it looks like about 30% of sales sort of are outside the genotype 1. That's going to be obviously the strong suit kind of going forward for Sovaldi.

But you mentioned that you're within the IMA, so the contractual -- usually I think you have been two to three weeks.

So I'm trying to get a sense where do you think inventory will go and how much is it going to get compensated by Harvoni next quarter?

And then in terms of 5816, is there any discussion internally about also doing an eight-week regimen before you actually file for approval?

Thank you.

Yaron, it's Robin.

I'll take the question.

As we outlined on the call, Sovaldi inventory stayed overall for the quarter within the ranges, but it did go down commensurate with the decline in demand that we saw in anticipation of Harvoni.

This quarter, Q4, we would expect the Harvoni inventory to ramp up and Sovaldi continue to ramp down.

I can't say exactly how that's all going to play out.

Overall, when we bring on a new product we do have a few quarters to ramp up inventory overall, so that is something we'll have to see how it plays out over the rest of the quarter.

Yaron, we don't have any plans for the filing, for the first NDA filing of 5816 to include shorter than 12-week treatment duration arms, but we are, as I said, exploring shorter treatment duration arms with adding a third agent, and in this particular case the protease inhibitor 9857, those studies also currently ongoing.

We would like or we attempt for the shorter treatment duration to be applicable to all patients, not limited to a certain non-cirrhotic treatment-naive low viral load segment, but it should work for everybody.

That's what we're attempting do.

Robin, I don't know if I can maybe ask it a different way.

In Q4, are you expecting sales in Hep C in the US to be higher in Q2?

That's sort of what I'm trying to get to.

I understand your question.

I can't necessarily project that.

We have given overall guidance for the full period.

As we talked about, we did expect to see some warehousing and we would expect to see that ramp up, but there are a lot of uncertainties.

You still got to go through the reimbursement process, there's a potential for a competitive launch, et cetera, Yaron, so I can't necessarily say this early whether it's going to go up or down, but we do feel comfortable with our guidance.

Okay, great.

Figured I'll try, thank you.

Sure.

(Operator Instructions)

Our next question comes from the line of Ian Somaiya with Nomura Securities.

Thank you.

Just one question on the sustainability of pricing in Hep C. As you and your competitors all strive to shorten the treatment duration, I was wondering if we should assume pricing is maintained of the current eight-week mark or should we assume the savings are passed on to whoever?

Until we see the product profiles, I think if the shorter week durations, I think it's absolutely impossible to answer that question.

I think that what we do have though with Harvoni is a really, really strong clinical profile and high efficacy, low side effects, one pill once a day, no interferon, no ribavirin, a great profile.

So that's -- . Norbert wants to say something.

Ian, the other thing I'd like to add as far as I know, nobody has yet shown any shortening of treatment duration with the exception of Gilead.

The other thing I would like to point out, the regulatory hurdle to get anything approved is very, very high.

You may actually want to look at the Harvoni label, how the eight week, the IM3 study was labeled.

We had overall 96% response rate with the eight-week treatment arm versus 98% in the 12-week treatment arm, and yet what showed up in the label was it should be used for 12 weeks with a footnote saying that it can be considered for certain patients with an eight-week treatment duration.

I'm just telling you this is how regulatory authorities think about this.

They do not trade a two-week treatment duration if you have to pay a 2% penalty in relapse rates.

But really the question was more your effort as you're working on potential three-drug combo and that could support shorter treatment duration, does the price naturally come down, or should we assume it kind of stays where it is?

I think -- so, this is John Milligan.

You have to think about the overall patient populations that we're looking at right now and it will depend heavily on how we were able to drive the different treatment durations.

There are patients now who are considered for 24 weeks, and so as we drive those patients down to the lesser durations we will have to take a look at the totality of the data to figure out which patient population is appropriate for three-drug combinations, at which duration, and at which price, and so we may have to make some choices in there as to what we intend to do.

So, we have -- the nice thing is that multiple drug combinations we have is we have flexibility across the regimen to do the best thing that we can for the Company and for the patients simultaneously.

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

Hi.

Thanks for taking the question.

First for Robin.

I know you've toyed with dividend and thinking about capital allocation.

What are the next things that have to happen to make a decision on whether that was a choice you would make or not?

And then regarding patient flow, I know initially you'd said that with Sovaldi launch that you're seeing doctors prescribe much quicker than you thought day one.

What are you seeing with Harvoni that might surprise you, or what are your thoughts around patient flow?

Thanks.

Hi, Robyn, just to answer the first part.

We continue to keep our consistent capital structure focus in place and that's focusing on the reimbursed investment of our pipeline M&A and returning excess value, and we think right now given our current valuation, share repurchases is the most optimal way for us to return value to shareholders.

We continue to look at our future cash flows.

To your point, how do we think about it going forward.

This is something that we're discussing with management and the Board as to whether there are other vehicles that we might want to consider, and I think most importantly we're kind of looking at our return relative to free cash flow going forward.

So there are various vehicles that we might choose to optimize in the future, but right now share repurchases is our area of focus.

Robyn, I couldn't actually hear very clearly the second part of the question.

Would you mind repeating it?

Sure.

You were mentioning when Sovaldi launched that you saw doctors prescribe immediately all at once.

So that is more about patient flows for Harvoni.

What are you thinking about?

Do you still expect even patient flows, anything that's surprising you as far as how many patients are coming in for treatment, how many doctors are prescribing?

Well, again, it's very, very early days on Harvoni specifically.

We're not seeing anything really unexpected.

We knew there was quite a lot of patients warehoused.

We saw new prescriptions let's say to Sovaldi reduce between quarter two and quarter three by about 20%, and you can assume that those are warehouse patients.

Other than that, I think we're assuming that there's still plenty of patients under care, there's plenty of diagnosed patients and it will take years to work through those.

Great, thank you.

Our next question comes from the line of Ying Huang with BofA.

Hello.

Thanks for taking my questions, as well.

First of all, I know you guys are still very much in the process of securing reimbursement and pricing in Europe, but when shall we expect a significant pick up in European revenues beyond just France and Germany?

And then, secondly, Sovaldi has been in the market for three full quarters now.

Do you think you have reached -- have you reached the steady gross to net adjustment and what is it right now in 3Q.

And then lastly I guess, Norbert, you mentioned that the regulators such as the FDA will not sacrifice even 2% SVR for shorter duration.

So it sounds like we could assume that maybe a four-week duration is not critical commercially?

Thank you.

Wow, there's three questions in there.

Let me just quickly deal with the first one though, which is we have made good progress with reimbursement in Europe.

Several of those countries, notably Spain, Italy, Netherlands, Belgium, we've signed agreements with, but those patients haven't really started yet.

We're expecting those over the next month or two or three.

France, we're still working with the pricing committee there, we're close we believe to having an agreement and, as I mentioned earlier about the NICE in the UK where we have their endorsement but we still don't have full access from NHS in England, but that we hope is close.

So we can anticipate over the next month the European sales of Sovaldi beginning to ramp up.

Having said that, the European sales of Sovaldi to date I think are pretty impressive given the limited access that we've had so far.

I'll hand it over to Robin for the next part.

Hi, Ying.

In regards to your second question about steady state for gross to net.

As we've been saying, we had four non-retail customers and payers come on board, state Medicaid, NDA as of Q2 and Q3.

I'm a little hesitant to give a steady state because it's just as we start to get there with Sovaldi and we've now launched Harvoni.

So I think it's going to take us a couple more quarters to get to the right mix between Sovaldi and Harvoni and what that gross to net will be particularly since we may have more patients on different periods of treatment over time.

So I'd say Q2 or Q3 of next year we'll have a better idea of what steady state is as we get through the second product launch and get Harvoni on the dockets relative to reimbursement.

And in your last question, my comment had to do with that hurdle bar is really high for short treatment durations and as I said, regulatory authorities do not consider price when they think about this and with Harvoni, a drug that is so safe and well tolerated with no identifiable side effects, there is not much of a willingness to save four weeks of treatment duration if you have to increase the -- or decrease the response rates by a few percentages.

And again I would urge you to look at our IM3 study and how it is labeled.

I agree with this, by the way, from a scientific point of view.

Of course the payers may have a slightly different opinion on this shortened treatment duration.

Norbert, I think one of the questions was, is it commercially competitive?

And these things, if somebody else has a shorter duration than you do with all of the activities, then that becomes a competitive advantage, and so that's why we're continuing to innovate across our portfolio to try to drive things to the simplest, safest, shortest duration and that's why you'll continue to see Norbert and his group try to innovate with other three-drug combinations in the future.

Alright.

Thank you for that answer.

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

Thanks very much.

A question on what you're seeing treatment duration in the real world with Harvoni, probably for Paul.

As Norbert mentioned earlier, the label recommends 12 weeks actually for all treatment-naive non-cirrhotic patients, but recommends eight weeks for those with the full viral load -- say the low viral load can be considered for eight weeks.

Some physicians we talked to say they intend to give 12 weeks to everyone with treatment- naive with non-cirrhotic -- with no cirrhosis in absence of payer requiring it for further duration.

I guess my question is how widespread is this approach amount physicians and how are payers handling this?

Are they mandating eight weeks for those able to get eight weeks?

Yes.

So, Howard, the latter question, I don't know how widespread it is, but the few folks I've talked to told me the same thing.

These are obviously the well known academic thought leaders.

They said why do you want to treat for eight weeks if there's a slight chance you might add more relapse or so?

Just treat for 12 weeks.

There's no medical or adverse event price to be paid.

But those same people then said in the next sentence that they are probably not the ones making this decision anyway, but it's probably the payers.

It's far too early for us to know what kind of patients have been treated.

I think it's constructive to look, though, into the third quarter where we did see very high usage of interferon-free Sovaldi plus olysio at this very high premium price of around $150,000.

I think that will end with the arrival of Harvoni.

But it will be interesting to see how long it takes to kind of get to a steady state when the usage of the eight-week regimen reflects the epidemiology of GT1 patients across the US, and indeed Europe in due course.

And, Howard, I would just add, we are going to make sure our sales reps are on label with the eight weeks is the right duration for patients who are below 6 million international units baseline.

There is no evidence that more is better in any of these patients and that's the data that we'll emphasize as we go out and educate about the value of eight weeks.

And so I think at the end of the day it's very clear cut that eight weeks is a better thing for patients and over prescribing is not a good thing in this world.

(Operator Instructions)

Our next question comes from the line of Ravi Mehotra with Credit Suisse.

Thanks for taking my question.

A little bit of a left field question on Ambrisentan given that John flagged the AMBITION study results in his opening remarks.

How do you see those results changing your marketing message in the PH market, given the changing message for your competitors which themselves have moved to more healthy message?

I guess I'm asking wherever you see PH franchise as a legacy line or an opportunity for growth which gives you an opportunity to talk about 4997?

Thank you.

Ravi, it's John Milligan.

When you look at the time line for the AMBITION data to be put into label, we'll file this before the end of year.

But that means it won't be until the latter part of next year that we will be allowed to talk about this with physicians, so we're anxious to be able to do so.

It is clear that it has had an impact with the top KOLs with regard to how they think about what the best thing is to do.

I can't tell you its changed prescribing habits.

I don't know that, but I do know that its becoming clear in their mind that this is the new standard of care.

And what we hope is there will be further discussions and potentially guideline changes that would allow people to have access to this very important combination.

And the data were very crystal clear because we had a -- we were better than either the individual treatment arms, not just placebos, so this was an important difference that hasn't been seen in pulmonary arterial hypertension before and we think this will be an important part of armamentarian for doctors.

I think your last part of the question is does this do it for our franchise?

Clearly we're very interested in PH.

We're continuing to look through our own portfolio to see if other products that we have could be also be useful in the field of PAH, and so we'll see how things progress, but there are some options for us to do things organically that could be quite interesting.

Thank you.

Our next question comes from the line of Brian Skorney with Robert W. Baird.

Hi.

Thanks for taking the question.

Diving down a little more into the Harvoni label.

Could you kind of walk us through in your conversations with the FDA how they segregated the label?

I hear the point that they have a very high hurdle at this point.

But looking at how they evaluate it, is there a point estimate in their mind that they think is necessary at this point or is it just based on looking at subgroups that there's a specific delta at which point they're uncomfortable with a set specific duration one over the other?

So, Brian, obviously this was a long process and it was a collaborative process.

We did analysis, the FDA did analysis, that the one thing you might notice in the label, the ribavirin arms aren't even in there and that was a decision that was made early because consistently across all three Phase 3 studies the addition of ribavirin didn't make any difference to non-ribavirin arms.

And then it just proceeded.

Then you look at relapsers, whether the relapse rate in the eight-week arms compared to the 12-week arms they were 5% to 1% even though the numbers are fairly small.

And things evolved from there.

Sometimes there was a statistically significant difference when arms were pooled, sometimes there wasn't but we ended up in this mutually acceptable situation that we are conservative.

We err on the longer treatment duration arm if there is a chance that you jeopardize response rates.

That's kind of what the summary of it is, and the similar thing is, by the way, the case in Europe.

Great.

And just real quick, any idea on the mix between CLL and NHL for Zydelig?

In prescriptions?

Yes, in terms of do you have any idea in terms of the patients you're seeing are they primarily refractory NHL patients or CLL patients?

It's too early to tell you that, Brian, I don't know.

Okay, thanks.

Very early days.

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

Great, thanks for taking the question.

Two parts.

You mentioned something on HIV being near the high end of the range.

Are you expecting some inventory to come out of the channel in the next quarter.

And then just separately on patient share.

I think in HCV you said that 80% of the patients you've treated are naive.

I'm just wondering if you can walk through that, versus I think you've talked about 45% potential using the eight-week duration with Harvoni.

So maybe you could just help us think about what percentage of those naives were cirrhotic?

Thanks.

Okay, do you want to go ahead?

I was going to mention the inventory.

I think one of the features of the HIV inventory build slightly this quarter was because the quarter ended on a Tuesday, which is a day typically where we get our sort of three main orders in the week whereas the previous quarter ended on a day, I can't remember which day it was, but it was like the lowest, so we did have a slight build.

I think specifically for quarter four we should anticipate neither a build nor a flattening out of inventory probably.

The second question was on the naive patient?

Eighty percent of those patients.

So, I guess the best way to think about this is and the way we've been talking about this is of the patients we look across who are treatment naive and non-cirrhotic, that comes to about 45% of patients, so in looking at that 80% of patients, slightly more than half who come on board should be eligible for that eight weeks of therapy based on just the math that we have seen across large data sets.

We're not 100% certain if those patients are representative, so those that we're describing in this pie chart on slide 24 are representative of the overall data set we looked at and we looked at larger sets of patients out there, so I don't know that we could compare this apples-to-apples but over time we would expect it to be about 45% of patients.

We don't know if there will be a bias early on towards longer duration and more cirrhotic patients or not, but it seems to us it should even out over time at 45%.

Our next question comes from the line of Thomas Wei with Jefferies.

Thanks.

Just a question on how you think about long-term HIV sales now that you have the TAF data in hand.

When we look beyond 2017 and in the 2020s, do you think your HIV sales will be lower than, similar to, higher relative to the pre-[variad]) patent expiration year?

Well, we started off with great data on TAF and we anticipate more data coming through the next months, so that's a very good place for us to begin the process now of thinking through our HIV portfolio.

The big bucket of patients, of course, is the patients that are already on treatment and will switch.

What we've seen historically is when you have a conversion situation, which is really the way that we're thinking about this from tenofovir-based single tablet regimens to TAF-based single tablet regimens, we intend to ensure that that happens.

It won't happen by itself but that's our clear intention.

And, Mr. O'Brien, we have time for one more question from the line of Jason Kolbert with Maxim.

Hi.

Thank you so much.

Given the success of Sovaldi and given what's happening in the dynamic to the combination product with Harvoni, how does that influence the decision to launch Sovaldi particularly in a country like Japan where you haven't really launched yet.

So can you just help us understand?

And, also, where is the Japanese infrastructure at this state?

Okay, so we can talk about the launch.

So, as you know, we find Sovaldi for genotype 2 only, which is about the quarter of the Japanese population and that's in combination with ribavirin.

We got very high response rate, and we find Harvoni for the remainder, mostly genotype 1B patients.

Again, we have fairly high response rate.

So in Japan it's very bifurcated, Sovaldi with ribavirin is for genotype 2, Harvoni is for genotype 1B.

Yes, and the second part is about our infrastructure build out in Japan, which we're very, very happy about.

We've got over 200 Gilead employees now in Japan and getting ready for launches as and when we get approval, which we hope will be in the first half of next year for both products.

That's awesome.

Thank you so much.

Congratulations.

Thanks.

Thank you, Kate, 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.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude the program and you may all disconnect.

Everyone, have a good day.