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Gilead Sciences, Inc. (NASDAQ:GILD)

Q4 2012 Earnings Call

February 4, 2013 4:30 pm ET

Executives

John C. Martin – Chairman and Chief Executive Officer

Robin L. Washington – Senior Vice President and Chief Financial Officer

John F. Milligan – President and Chief Operating Officer

Norbert W. Bischofberger – Executive Vice President-Research and Development and Chief Scientific Officer

Kevin Young – Executive Vice President-Commercial Operations

Analysts

Geoffrey C. Meacham – JPMorgan Securities

Rachel McMinn – Bank of America Merrill Lynch

Matthew Roden – UBS

Mark J. Schoenebaum – ISI Group

Matthew J Andrews – Wells Fargo Advisors

Michael J. Yee – RBC Capital Markets

Robyn Karnauskas – Deutsche Bank Securities, Inc.

Geoffrey Porges – Sanford Bernstein

Ian Somaiya – Piper Jaffray

Phil M. Nadeau – Cowen & Co. LLC

Brian Skorney – Robert W. Baird

Thomas Wei – Jefferies & Company

Ravi Malhotra – Credit Suisse Securities

Terence C. Flynn – Goldman Sachs & Co.

Howard Liang – Leerink Swann

Alan Carr – Needham & Company, LLC

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Gilead Sciences' Fourth Quarter 2012 Earnings Conference Call. My name is Dericel, and I'll 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.

Patrick O’Brien

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

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

Before we begin with 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 and 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 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 are provided in our press release as well as on our website.

I will now turn the call over to John Martin.

John C. Martin

Thank you, Patrick and thank you all for joining us today. Last year Mark was marked by great productivity and an unprecedented pace of progress. Revenues increased to record levels in numerous R&D programs or advance. This is true for all therapeutic areas, HIV, liver disease, cardiovascular, respiratory and oncology. Although today I will limit my brief comments to liver disease, HIV and oncology.

As you are aware the clinical development program of sofosbuvir for the treatment of hepatitis C infection is supported by four Phase 3 studies. Results from the first study POSITRON evaluating sofosbuvir and ribavirin and interferon-intolerant or hematological genotype II and III infected patients were previously disclosed in a press release in November. This morning we issued another press release with top line data from the second and third Phase III studies, FISSION and NEUTRINO; both of these studies met their primary end points.

FISSION compared to 12 week courses of sofosbuvir and ribavirin in genotype 2 and 3 infected treatment-naïve patients to a 20 weeks standard of care regiment of pegylated interferon ribavirin. The SVR 12 rates for the sofosbuvir ribavirin arm was 67% compared to 67% in the controlled arm.

The other study, NEUTRINO evaluated a 12 week treatment course of sofosbuvir, ribavirin, and peginterferon in treatment naïve genotype 1, 4, 5, and 6 infected patients. In this study, 90% of patients achieved an SVR 12.

In both FISSION and NEUTRINO, sofosbuvir was safe and well tolerated and adverse events were consistent with the known safety profile of ribavirin and peginterferon.

The results from the fourth Phase III study, FUSION evaluating sofosbuvir and treatment experienced genotype 2 and 3 infected patients will become available later this quarter. These four Phase III studies along with a number of additional studies in special populations will support the marketing authorization applications of sofosbuvir, which are planned for submission in the second quarter of this year. Results from all Phase III studies will be presented at future scientific meetings.

We are also developing the fixed dose combination of sofosbuvir and the NS5A inhibitor ledipasvir, previously known as GS-5885. This one pill once daily FDC is being developed as all oral interferon-free regimen for genotype 1 infected patients. The first Phase 3 study evaluating the FDC with and without ribavirin was initiated last November. Earlier this year, we announced initiation of the second Phase 3 study in genotype 1 treatment experienced patients. This successful B studies would support regulatory filings in the first half of 2014.

Now turning to HIV, our vision to simplify HIV treatment with single tablet regimens is proving to be a robust strategy. With Atripla, Complera and Stribild, there are now three STRs available. Continued innovations with STRs create opportunities to improve upon current regimens. A recent example of this is TAF commonly GS-7340, which was evaluated last year in a Phase II study. This Phase 2 study show that TAF is efficacious at one-tenth the dose of VIREAD, and provides potential safety advantages. Based on these findings, a TAF containing STR was advanced into Phase 3 development last month. There are two identical Phase 3 studies, which compare elvitegravir, cobicistat, emtricitabine, and TAF co-formulated into an STR to a control Stribild.

Importantly these studies will allow for inclusion of renally impaired patients with GFR as slow as 50 mL per minute.

Turning to oncology, over the last five years we have built the beginnings of a solid franchise. Idelalisib, a PI3K double inhibitor was advanced into five Phase 3 studies in refractory CLL and IMHL. Simtuzumab, the anti-LOXL2 antibody is being evaluated in various Phase 2 studies of pancreatic and colorectal cancer and in myelofibrosis, liver fibrosis and pulmonary fibrosis.

Earlier this year, we announced the acquisition of YM BioSciences, which is expected to close this week. This acquisition brings to us CYT 378, a JAK 1/2 inhibitor, which has been studied in Phase II for the treatment of bio fibrosis. The data indicate that CYT 378 has potential advantages over existing agents and we plan on advancing the compound into Phase III studies later this year.

Overall, 2012 was a very successful year. We’ve demonstrated productivity across all parts of our organizations. 2013 will also be an exciting year with numerous upcoming milestones. We look forward to sharing our progress with you.

I’ll now turn the call over to Kevin Young.

Kevin Young

Thank you, John. In the fourth quarter of 2012, we achieved record worldwide product sales up $2.5 billion, a growth of 18% over the fourth quarter of 2011. Thanks to this very strong performance. Product sales for the whole of 2012 totaled $9.4 billion, a growth of 16% over 2011.

Sales in the U.S. were especially strong in the fourth quarter, exceeding $1.5 billion for the first time, a growth of 22% over the fourth quarter of 2011. U.S. antiviral sales posted a robust 20% increase over the same quarter a year ago, but particularly notable increases of 31% was seen in our cardiopulmonary business.

Underlying U.S. demand drivers were healthy throughout the fourth quarter. However, it is important to highlight a number of purchasing events, which positively influence sales in the run-up to the year-end.

First, Antiviral product orders from the VA were above historical norms. This was particularly apparent at the regional mail-order pharmacy level. Second, inventory levels for Letairis rose by approximately four days over and above the third quarter 2012.

As a reminder, we do not administer inventory management agreements with specialty pharmacy. Third, ADHOC purchases during the fourth quarter were strong, similar to the levels seen in the second quarter of 2012. Finally, by our estimates the biggest impact on the quarter, we saw strong so-called sale of retail purchases. We believe this was in anticipation of price increases we took at the beginning of 2013.

In total for the U.S., we estimate that $80 million to $100 million of fourth quarter sales were as a result of strategic purchases beyond our control. We kind of predict whether these purchase activities will be repeated in 2013, or whether there might be others of a similar nature.

The fourth quarter of 2012 was our first full quarter of Stribild sales. I'd like to provide some color on initial uptake dynamics, which I believe are very encouraging for our HIV franchise overall, but more importantly, the continued adoption of STRs, single tablet regimens.

First and foremost, payor acceptance of Stribild has been excellent, beyond that Complera at a similar timepoint. All state Medicaid plans and all AIDS drug assistance programs now have Stribild on formulary. Moreover, most Managed Care Organizations now cover Stribild of the same level as our other HIV drugs, with little or no restrictions. Cumulative prescriptions of Stribild are running approximately 90% higher than Complera at a similar point in launch; particularly active prescribers are infectious disease physicians with large clinical workloads many of whom were involved in the Phase 3 registrational studies of Stribild.

While it’s very early, we are seeing a different patient profile for Stribild than Complera. More naive patients are receiving Stribild, few patients are switching from an NNRTI third agent to Stribild and encouragingly more patients are switching from protease inhibitor third agent to Stribild.

Please note that Gilead only details according to the naïve label in our package insert. Nevertheless, having a single tablet integrase regimen available for the first time is proving attractive to physicians who have historically preferred the protease inhibitor class.

Finally, on Stribild, as we did with Complera, we have secured an advanced look of the naïve patient breakdown for the fourth quarter, highlighted in slide 32 of our earnings presentation. Recall, that at this time in the Complera launch, STR share of naïve patients rose from 50% to 60%. We now see a similar spec change driven by Stribild, essentially several of ten naive patients now start on a single tablet regimen. This increase is associated with a decline in third agents for which Gilead does not receive economics.

Turning to Europe, whilst economic conditions remain difficult and healthcare expenditures are the continued target of government costs. We are delighted with the growth in our business. Excluding the impact of foreign exchange, European sales grew by 7% in the fourth quarter versus one year ago.

Eviplera is now in the market in 17 countries across Europe and encouragingly we have completed price negotiations in Spain and Italy, and we’ll be supplying patients in these countries during the quarter.

Eviplera uptake has been very strong in France, Germany, and the UK. We are particularly pleased with France, the largest HIV market outside the U.S. and one that is dominated by the protease inhibitor Prezista class.

Also, the fiscal quarter of launch, 42% of all Eviplera patients are switching from a protease inhibitor. So in summary, we exited 2012 with great momentum across all our therapeutic areas and across all our expanding territories.

In addition to have quick patience and meeting our company goals with today’s best-in-class drugs for HIV, HPV, pulmonary hypertension and joiner and cystic fibrosis, we have the very exciting prospect of launching a major medical innovation in 2014, Sofosbuvir for Hepatitis C. Commensurate with launch timelines of quarter one 2014 in the U.S. and quarter two 2014 in Europe, we have started a progressive ramp up of commercial activities from the start of 2013.

Subject to regulatory approval, we believe Sofosbuvir has the potential in combination with other drugs to cure significant numbers of HCV infected people. Our goal is to educate physicians in the hepatology, gastroenterology and infectious disease settings with highly trained, dedicated sales, marketing and medical affairs staff.

As has been the case in HIV, step changes in therapy change the phase of the disease. We believe the same will hold through in hepatitis C. Gilead will direct considerable resources to position itself as the commercial leader in the space.

With this in mind, we recently established our own company identity in Japan with the goal of developing, registering and supplying the many patients with advanced liver disease caused by hepatitis C.

To conclude, 2012 was a year full of new commercial milestones. In 2013, we believe that whilst there maybe some market challenges, the need for Gilead’s portfolio of specialty medicines gives us the opportunity to have another successful year.

I will now turn the call over to Robin Washington.

Robin L. Washington

Thank you Kevin, good afternoon everyone. We completed 2012 with strong financial performance. Our continued commercial execution enabled us to generate total revenues of $9.7 billion in 2012 representing a 16% increase from 2011. Net product revenues exceeded the upper end of our guidance, driven in part by $80 million to $100 million of purchasing that exceeded prescription growth as Kevin highlighted.

Our operating expenses were within our guidance range as provided for 2012. Non-GAAP R&D expenses increased to $1.5 billion, up 34%, reflecting the progression and expansion of our Phase III studies, particularly in liver disease and oncology.

Non-GAAP SG&A expenses increased to $1.2 billion, up 12% year-over-year driven by higher pharmaceutical excise tax and ongoing cost to support the growth of our expanding business.

During 2012, we generated operating cash flows of $3.2 billion, which includes $533 million in cash collections from Southern Europe for the payment of past due accounts receivables. We repaid a total of $1.6 billion in debt resulting in a non-GAAP debt-to-EBITDA ratio of $1.8 billion as of December 31, and remained on track to reach our targeted non-GAAP debt-to-EBITDA ratio of $1.5 billion by mid-2013.

With recent business development activity and the upcoming maturity of the May 2013 convertible notes, we will be suspending our repurchase activity until this targeted math.

The last financial highlight that I would like to share is our full year 2013 financial guidance, which is detailed on a slide 41 in the earnings presentation available on our corporate website. Please note that this guidance is inclusive of the YM BioSciences acquisition.

For the full year 2013, we are projecting product sales of $10 billion to $10.2 billion reflecting a 6% to 9% increase over 2012 product sales. This range is since the continued growth of Complera and Stribild in the U.S. and Europe, as well as the continued growth of our cardiovascular franchise. We also assume the continuation of a challenging economic environment in Europe and the potential for continued volatility in foreign currency exchange rates.

Our non-GAAP product gross margin for 2013 is expected to be in the range of 74% to 76%. We expect our full-year non-GAAP R&D expenses to be in the range of $1.8 billion to $1.9 billion if we continue to invest in our product pipeline. We expect non-GAAP

SG&A expenses to be in the range of $1.55 billion to $1.65 billion which includes increased sales and marketing expenses in preparation for the launch of sofosbuvir in 2014.

Our non-GAAP effective tax rate for the full-year 2013 is expected to be in the range of 26% to 28%. This includes the benefit of the Federal R&D tax credit extension which was passed by Congress in January and is retroactive to 2012. As a result, our income tax provision for 2013 will include a discrete tax benefit which will reduce our effective tax rate for the first quarter and to a lesser extent full-year.

As detailed on Slide 42, we are anticipating a full-year 2013 diluted EPS impact of acquisition related restructuring and stock-based compensation expenses to be in the range of $0.21to $0.24 per share.

In closing, we're pleased with our performance across the organization during 2012 and as John indicated, we believe we have laid the groundwork for future success. We want to thank our employees for their continued dedication and hard work.

I will now turn the call over for Q&A.

Question-and-Answer Session

Operator

Today's question-and-answer session will be conducted electronically. (Operator Instructions) And your first question comes from the line of Geoffrey Meacham with JPMorgan. Please proceed.

Geoffrey C. Meacham – JPMorgan Securities

Hey guys, good afternoon. Congrats on the quarter and thanks for taking the question. A couple related clinical question, can you help us with how you’re thinking about the genetype remarket based on the data so far, there’s 5816, 7977 the combo you’re looking for, and what are the gating factors there to start the Phase 2? And then finally on study 104 in HIV, is 48 weeks enough, do you think to see an impact on bone and other points of differentiation with respect to our straddles? Thanks.

Norbert W. Bischofberger

Hi, Geoff, it’s Norbert. So regarding genotype 3, I would say immediately, we’re doing two things, we could think of longer treatment durations to get a response rate up, and that’s ongoing in fusion, and we can also think about or we are initiating a study to look at the NEUTRINO regimens or pegylated interferon, ribavirin and sofosbuvir for genotype 3, that will be a very attractive opportune, I think and I’m assuming the response rate with that regimen would mimic what we have seen in NEUTRINO genotype 1, 4, 5, 6, more intermediate term we were actually looking in ELECTRON in two cohorts with our fixed dose combination of sofosbuvir and 5885, for genotype 2 and 3, I have to tell you my expectation is that that regimen should not be excellent, because simply the antiretroviral activity of 5885 against certain polymerase in genotype 3a is suboptimal.

And then lastly, as you pointed out we’re certainly looking at 5816, I think that compound in combination with sofosbuvir has that opportunity to make this whole issue disappear, and we are looking at that hopefully we can initiate the Phase 2 study sometime in the middle of this year; studies in genotype 2 and 3 are currently ongoing and as soon as those are finished, and as we have some inkling about the dose will initiate Phase 2.

And then you asked about study 104, you correctly – so the 48 week is the primary regulatory end point, at which we would analyze the study and submit it for marketing authorization application. But as you know, we always carry these studies out to longer duration in a blinded fashion, and this study currently is planned to go for 96 weeks. But we are confident that we are going to see difference in BMD at week 48, I want to remind you, we have seen those same difference with a much smaller same emphasize into Phase 2 study at week 24. So I’m convinced we’re going to see the same thing in the Phase 3 study.

John C. Martin

Yeah, and Jeff I’d just like to chip in and say that the GT-3 market size in the U.S. is 7% of the population. It’s different in Europe. It’s different in the rest of world, but it’s only 7%. So market here is very much GT-1 and GT-2. And I’d also like to point out that there was 11% of patients from FISSION, who had to discontinue and that’s in a clinical trial setting so clearly current standard of peg ribavirin is difficult to take even of a 24 week period. So we can do better. We want to do better for the GT-3 patient both the current standard is certainly less not optimal.

Geoffrey C. Meacham – JPMorgan Securities

Okay, thanks.

Operator

And your next question comes from the line of Rachel McMinn with Bank of America. Please proceed.

Rachel McMinn – Bank of America Merrill Lynch

Yeah, it’s kind of a high class problem, but Norbert, I’m just curious what you do with your short duration studies with loans done ELECTRON showed at six or eight weeks the treatment duration is positive with really strong STRs. Are these going to have an impact on potential pricing decision, so can you expand into multi-center Phase 3 to really try and get more data, or is it just something that kind of sits on the sideline and you just kind of price it as a shorter treatment regimen? Thanks.

Norbert W. Bischofberger

Yeah, hi, Rachael, so it is a high class problem, you are right, but it’s certainly not going to sit on the sidelines. So what we are currently thinking and this of course needs to be discussed with regulatory authorities to do a non-inferiority study, so we will do another Phase 3 type study, non-inferiority of 12 versus eight potentially versus six weeks, depending on the outcome of the Phase 2 studies, and we would like to get that into the label. We feel it’s very important to have that information available for promotional purposes and maybe Kevin could comment on that thing.

So that’s our thinking Rachael. Again, this has not been discussed with regulatory authorities yet, we still yet that to do that.

Kevin Young

Yeah, Rachael, our preference always at Gilead is to have these things in the label, not only who enable our field forces, sales representatives, our medical scientists, but it’s obviously a key for the payor. And we would definitely want it for that subject to – that been an appropriate profile for 7977 plus 5885.

Rachel McMinn – Bank of America Merrill Lynch

And just squeezing it on from a timeline perspective with that delay your, combination, there is regimen filing or you think you can get all those stuff done in time?

John Martin

Yeah, Rachel, we think, we can get all of those done in time, the rate limiting step right now seems to be IM1, so the study that started first, as you know we stoped enrollment that the first 200 patients and the other 600 would be enrolled following an interim analysis on the second quarter. So that would be the rate limiting study. And another thing I’d like to add Rachel is that the sample size for non-inferiority studies is fairly reasonable, you don't need the larger number of patients, the further, away you are from 50% the easier just to show non-inferiority.

Rachel McMinn – Bank of America Merrill Lynch

Thank you so much.

Operator

And your next question comes from the line of Matt Roden with UBS. Please proceed.

Matthew Roden – UBS

Great, thank for taking my question. First, Norbert, can you give us the actual SVR-12 for the NEUTRINO genotype 1 non-cirrhotic patients? And then secondly, by the time you file for FDA approval, can you talk about whether or not to what extent you have data on decompensated cirrhotics and transplant patients, and if so whether or not you could get claims for those populations based on the data? And lastly, how many patients you think that description as of today? Thanks a lot.

Norbert W. Bischofberger

Yeah, hi, Matt, I don't have the – so what we put in the press release, the response rate in NEUTRINO was 90% and 80% in cirrhotics. So non-cirrhotics you can kind of calculate what that would be if the overall population of cirrhotics is 17%, I don't have the number right here, but it’s obviously something north of 90%. U.S., the second question you had about how many transplant and decompensated would be in the label, so needless to say, we are going to put in the filing whatever we have at that time, we've had at the moment if I’ve not mistaken about 25 to 30 patients enrolled in our pre-transplant study with a post-transplant study that has about a similar amount. And then Rich has started a decompensated study dose that have a portal hypertension, and I don’t have the number here.

And whether this is enough to actually get in the label, of course has to be determined by FDA, I don’t know – it also what they think about, 25 patients. It’s also, of course depends on what the results are if we see something spectacular then FDA would be more mineable, I think to put the lower number of patients in the label. But I think we have a very good broad package that includes decompensated pre-transplant, post-transplant and HIV coinfection that we will be in the initial label.

Kevin Young

Yeah, Matt, I don’t have the transplant numbers at my finger tip. So I can get back to you in terms of the proportion of patients who are being transplanted specifically for HCV. So we can get up to you.

Matthew Roden – UBS

Kevin, strategically how important is it to get the sort of special populations in the label to start of with, from the most affected?

Kevin Young

It’s always nice to have high need population, and clearly a transplant patients, because they all reinfect with HCV is a very, very high need population. But I think, what we’re seeing from our day to today and having labels for GT-I, GT-II or GT-III, it’s clearly the core parts of our approval. So I think it’s nice to have, but I don’t see it is very, very big and sort of a big swing factor in our launch at all.

Matthew Roden – UBS

Thank you very much and congrats on all the progress.

Kevin Young

Thank you.

Norbert W. Bischofberger

I just like to remind everybody, please keep with you one question, please.

Operator

And your next question comes from the line of Mark Schoenebaum with ISI Group. Please proceed.

Mark J. Schoenebaum – ISI Group

Hey, thanks it's Mark Schoenebaum. Hey Pat, I have got eight questions, if I may. No, I was actually wondering hey Kevin, I know you are talking at JPMorgan at some point, you might be willing to give out a number, I think we all plan pretty helpful, and modeling, I just want to ask if you’ve got the number ready, and that is the number of the diagnosed hepatitis C patients treated by specialists in the U.S. and Europe, and if you want to answer that, maybe I can ask Rob then – Robin, where is the IP for 7977 domicile, is there any opportunity to take your tax rate down once you start selling that drug, that is could be cash flows, be taxed at a lower rate for that drug than the corporate average rate now. Thank you.

Kevin Young

Hey Mark, it's Kevin. Yeah, if you don't mind Mark we probably do mind, I'm going to hold those numbers for a little while longer, we are obviously in a highly competitive market here, but I think once we get through regulatory filing, and getting to the middle of the year, and we really start to take up the commercial activities then I think we will be able to share some quite interesting information we're starting together on the whole dynamics of HCV, not just in U.S. we’re doing some really good work in Europe as well. So we will start to share that with you as we get into the middle of the year.

Mark J. Schoenebaum – ISI Group

Okay I understand thank you. Maybe the tax question. . .

Robin L. Washington

Yes, so Mark IP for 7977 is domiciled in Ireland; so as we commercialize that, there an opportunity for our tax rate to decline over time.

Mark J. Schoenebaum – ISI Group

Thank you.

Operator

And your next question comes from the line of Matt Andrew with Wells Fargo. Please proceed.

Matthew J Andrews – Wells Fargo Advisors

Hey, good afternoon this is Matthew Andrews calling in for Brian Abrahams. Thanks for taking the question. Just on your 2013 guidance, Robin can you talk about your expectations for peak year expenses as it relates to R&D considering the large number of Phase 3s you are currently having ongoing? Thanks.

Robin L. Washington

Sure Matt right, I can’t necessarily talk about peak year, I can talk about 2013, and I mean, I do think if you look at on an absolute basis, and as a percentage of net product revenue do, and we’ve guided to towards being higher (inaudible) that's given by the progression of our Phase 3 studies in HCV oncology. I don't necessarily – I see that trend probably continuing somewhat beyond that, but we'll try to add at the appropriate time.

Matthew J Andrews – Wells Fargo Advisors

Okay, thank you.

Operator

And your next question comes from the line of Michael Yee with RBC Capital Markets. Please proceed.

Michael J. Yee – RBC Capital Markets

Hey thanks for the question on Lone Star, can you clarify when you think you might actually get data on that steady? Have you completed screening et cetera, and just to clarify, if you were to run a non-inferiority study of ‘12 versus 08 and what not? When do you not be able to do that until, you had the data. So can you may be just walk through the timeline for Lone Star and when you get that data running a potential on a period how that all gets done by mid '14. Thanks.

Norbert W. Bischofberger

Yeah Michael, so the data from Lone Star and by the way also from ELECTRON, the six week arm is an ELECTRON, we should be able to get those early second quarter, and only then can we make a decision to do a larger study to look at to compared to '12 to '08 to may be six weeks. But keep in mind the ION-I has a 24-week treatment arm in it, that’s going to be the late-limiting step. So we compare 12 to 8 to 6, we’ll get that done before the 24-week treatment arm in ION-I will finish, so it all works out for NDA filing.

Michael J. Yee – RBC Capital Markets

Okay, thank you.

John C. Martin

Thank you.

Operator

And your next question comes from the line of Marshall Urist with Morgan Stanley. Please proceed.

Marshall Urist – Morgan Stanley

Hey guys, thanks for taking the question. So just two for Robin on spending, just I know you’re not going to talk about peak here. But should we thinking, as I think about how about the business and new products that this is a good level of R&D, have you guys are kind of sort of comfortable spending at over the next three years, as we think about the model, and then maybe just also on gross margin, it looks like to think about that sort of flattish year-on-year. So Robin, just talk through how we can think about the mixed benefits of some of the new products rolling through, and when we might see some more of that benefit? Thanks.

Robin L. Washington

Sure, Marshall. So I mean as it relates to R&D spending, I cannot mention for 2013 on an absolute percentage of revenue, it would be higher. 2014, still I think similar level particularly given our focus on oncology as we continue to build up that franchise with the successful launch as a percentage of revenue obviously that would go down, right more towards traditional levels, right but those absolute spend, I’d see probably remain at the 2013 levels for a while.

John C. Martin

And Marshall, let me add some different look, clinical perspective clearly in the second quarter of this year will hit the peak of clinical studies, we have the pen of how you count eight Phase 3 studies Stribild in hepatitis C and all of those should finish this year, they are fairly short duration treatment, so next year we should see fewer clinical studies lot more.

Robin L. Washington

And Marshall, it relates to gross margin as we have a larger component of our net product revenue coming from Stribild and Complera, we would expect to see a more favorable impact of gross margin and we think clearly in 2014, with the launch of 7977 and expects that even greater going forward.

Marshall Urist – Morgan Stanley

Great, thanks a lot.

Robin L. Washington

Okay.

Operator

And your next question comes from the line of Yaron Werber with Citigroup. Please proceed.

Yaron B. Werber – Citigroup

Great, thanks. So Norbert, I just have a couple of questions sort of it’s one question in two parts, if you don’t mind. ION-I, just give us a little bit of sense, it sounds like come April or so, you can do the interim analysis in 200 patients, how fast can you get the other 600 in, if they have been prescreened? And then you really didn’t say much about 9669, where is that product going?

Norbert W. Bischofberger

So Yaron, how fast could we re-open the enrollment, one challenge we had with these studies that involve all oral regimens is that, we have to slowdown to side, because enrollment is too fast. In this case its even somewhat better or more accelerate, because all the (inaudible) divide, all the patients are ready, they are prescreened, so which was that to say go and then we would enroll that study very, very quickly. So I am sorry, what was the second question?

Yaron B. Werber – Citigroup

Second one was about 9669.

Norbert W. Bischofberger

9669, where is that going? So our plan right now is to follow. So we are going have to first answer the question, what is the limit of 7977, 5885. Is 12 weeks without ribavirin limit, is it eight weeks, is it six weeks with ribavirin. Once we have found the point where the response kind of wares off, then we would do the mixed experiment, and see whether if we had a third drug or we will place ribavirin will 9669 whether we get a better response rate.

So in other words, if you can think about six weeks may not be enough with 7977 by the (inaudible). So add to that 9669 again, we would have once-daily potentially single tablet regimen for six weeks. That’s kind of what we’re looking at right now. Of course then we have to ask the question, is three drugs for six weeks versus two drugs for eight weeks or 12-weeks. That still a debate we’re having internally, but meanwhile in Phase 2 we’re answering these questions.

Operator

And your next question comes from the line of Robyn Karnauskas with Deutsche Bank. Please proceed.

Robyn Karnauskas – Deutsche Bank Securities, Inc.

Hi, guys. Just one question on HIV, so cobicistat, maybe you can talk a little bit about, is it included in your guidance and how do we think about that product given it could launch this year?

Kevin Young

Hi, Robyn, it’s Kevin. Yes, it’s included in our guidance. It’s probably going to be a very small product. We’ll be hopefully launching simultaneous to elvitegravir. I think as John Milligan has said in the past, in the main driver of cobicistat as a boosting agent will come from the combination products that will be launched in due time by our partners with Reyataz and with Prezista.

So I think our expectations are for fairly modestly sized products and our concentration for the sales representatives will be first and foremost way to Stribild followed by Complera.

Operator

And your next question comes from the line of Jeff Porges with Sanford Bernstein. Please proceed.

Geoffrey Porges – Sanford Bernstein

Thank you, that was remarkably good. So, Rob, I just would like to focus in on what you've been saying about margin, so we understand first on the gross margin front, is the mix shift towards the first [Eviplera] should we assume that that product will contribute gross margins that are at least this good or better than the profitability of the core HIV business ex is the stable component.

And then also on the operating margins, you’ve had a very negative trend over the last two years and you’ve seem to be guiding that operating margins will be negative again in 2013. Should we expect that they could get back to the level of 2010 in the future at some point if things go well with the HIV franchise, or is that something that we should forget about? Thanks.

Robin L. Washington

Thanks, Geoff, for your question, I mean the quick answer is yes, and yes to both. I mean clearly, we would expect gross margins with (inaudible) equal to or better, I mean it would be dependent on final pricing by directionally if we think about our plans, yes, we would expect them to be at the higher end relative to our current margin for HIV.

And as it relates to operating margin, as we discussed the last two years of the acquisition and the investment period for us without the following revenues. So with the launch of 7977 in 2014, we would definitely expect to return to operating margin conditional for Gilead and hopefully improved.

Geoffrey Porges – Sanford Bernstein

Terrific. Thank you very much.

Operator

And your next question comes from the line of Ian Somaiya with Piper Jaffray. Please proceed.

Ian Somaiya – Piper Jaffray

Thanks, just a question on the pipeline. First on TAF’s, how should we think about your decision to start Phase 3 studies with TAF, part of the release of a second Phase 2 data? And just on Simtuzumab, there seems to be more discussion today on it’s evaluation in multiple Phase 2 studies. You mentioned pancreatic cancer, colorectal, I was hoping to get your thoughts on IPF, what if anything you have seen from the early clinical works since you’re running a 500 patient Phase 2 study in that setting?

John C. Martin

Yeah, so Ian with regards to TAF, I assume you’re thinking about the second Phase 3 study that was also – which will come out I think in the second quarter if I am not mistaken. We’re still debating that internally whether we should do the second fixed dose combination actually with the protease inhibitor or whether it should be something else and that should lead to – we will announce the decisions on that Monday, as soon as we are there.

And then you asked about IPF, that study was a very small study. I think it was some like 25 patients that weren’t dosed for long enough. So I think even if Simtuzumab has had a fairly dramatic effect in IPF. I don’t think we would have seen it. So what we’re doing right now in the Phase 2 study, it cannot be a Phase 2 that leads to a Phase 3, which is an event driven study that is doing a number of interim analysis for utility. So in other words if we see a trend early on we would of course continue, we don’t see much at a certain point, we will discontinue the study. So it’s a risk based – risk managed approach to a large Phase 3 study which starts out a Phase 2.

Ian Somaiya – Piper Jaffray

Can you give some sense of the timelines of when the interim analysis will be conducted?

John C. Martin

I feel reluctant to do that, because the enrollment rate is an unknown, I mean if this was Hepatitis C, I would feel no fear to give you a date, but in IPS, it’s a little bit slower, and I don't know how the community is going to react to an injectable, it's something that we should have to see on enrollment goes, I don't know.

Ian Somaiya – Piper Jaffray

Okay. Thanks, Norbert.

Operator

Thank you. Your next question comes from the line of Phil Nadeau with Cowen & Co. Please proceed.

Phil M. Nadeau – Cowen & Co. LLC

Good afternoon. Thanks for taking my question. My question is actually on the side effect profile of sofosbuvir. The press releases that you’ve issued so far have been pretty parsed in the details around the side effect profile. So I wondering if you could give us a bit more information on how Phase 3 side effect profile is different from Phase 2, and in particular you have a lot more experience now in cirrhotics than you had in Phase 2. So how does that side effect profile with cirrhotics differ from patients who have fully functioning livers? Thank you.

Norbert W. Bischofberger

Yeah, Phil, so I would say it was parsed what we put in the press release, but we did like a statement that that – if you look at just adverse events and laboratory abnormalities differ always greater in the control arm even in POSITRON, which utilized in placebo control, there were more laboratory abnormalities in the placebo arm compared to the 7977 arm.

So to this date, I have to say, we have not seen anything that we could point to, that’s a signal in either adverse event for laboratory abnormalities that is due to sofosbuvir. I don’t know the exact size of the database, but it’s something like a thousand patients treated beyond 12 weeks, maybe about 2,000 total, so that’s the state of our safety. They are based and lastly, the safety profile in cirrhotic doesn’t seem to be sufficiently different from non-cirrhotics. so to this point, this is very well tolerated and well behaved drug, we are very happy with it.

Phil M. Nadeau – Cowen & Co. LLC

Great, thank you.

Operator

And your next question comes from the line of Brian Skorney with R.W. Baird. Please proceed.

Brian Skorney – Robert W. Baird

Hey, good afternoon, guys. Thanks for fitting me, and I’ve got a lot of questions, but I guess given the one, maybe I will ask Robin a question about just what are your thoughts on or regarding cost of capital and what you are internally thinking of the cost of equity versus the cost of debt? And why in particular the goal is to get 1.5 times non-GAAP EBITDA on the debt as opposed to interest rates being where they are, maybe staying even a little higher than that?

Robin L. Washington

Okay. So Brian, part and parcel, if you recall probably about eight or 10 months before we did the acquisition, we had just recently been rated. So when we took out the amount of the debt that we did with the transaction, we actually proactively reviewed it with the rating agency and just given our maturity about capital structure where it was in terms of being rated and it’s something that is important to us.

We chose to be, which I don’t discrete as a fairly conservative relative to debt-to-EBITDA ratio. I mean, going forward I think there is different ways to look at that, but I think relative to the commitment that we made when we did the transaction there, our goal is to ensure that we meet that as we guided to when we initially close the deal.

Brian Skorney – Robert W. Baird

I guess if I could just kind of ask a follow up to that. I mean what would be implication beyond cost of that to take it downward?

Robin L. Washington

I don’t think it would be significant Brian. It would really depend on what we do by taking that downgrade, right. So I think relative to other companies of our size with our balance sheet, we could take on more debt, but you are right, the cost of capital is doing a given current interest rates would probably not be that significant.

Brian Skorney – Robert W. Baird

Gotcha. Thanks.

Operator

And your next question comes from the line of Thomas Wei with Jefferies & Company. Please proceed.

Thomas Wei – Jefferies & Company

Hi, thanks. I wanted to ask a question about the hep C data. So when we're all doing these calculations of the STR rates in cirrhotics versus non-cirrhotics, those numbers in the delta has varied quite a bit from study-to-study, so if I'm doing all these math right, it looks like there is the 12% delta in NEUTRINO, 20% in POSITRON, 25% in FISSION. And I guess I'm wondering why should we take away from our guard, is the 12% delta in NEUTRINO smaller – this potentially misleading, because there is PEG+RBV in the backbone, or is there something about genotypes when you look at the more detailed data that makes cirrhotics for certain genotypes particularly harder to treat?

Norbert W. Bischofberger

Hi, Thomas, this is Norbert. You are kind of reading my mind, because both John (inaudible) and I looked at this over the weekend then we went back and forth over the numbers. So I can tell you, I don't have an answer for you other than to tell you that the numbers are small, so you have to be careful what percentage is. I'm not sure whether some of these percentages will still be the same when the numbers are much larger.

The next study by the way FUSION will shed some light on this. It has more cirrhotics actually 35%, and so I hope we’re going to learn something more there. But you know what these known from a larger number of interferon ribavirin studies that was recently if April and December 2012 in hepatology first author Marcelo, and he actually showed that over a large number of patients 7,000 patients in all genotype cirrhotics are about 15% to 10% lower in their response rates than non-cirrhotics and somehow I feel like what we are seeing here looks like the same thing.

Operator

And your next question comes from the line of Ravi Malhotra. Please proceed with Credit Suisse.

Ravi Malhotra – Credit Suisse Securities

Question for Kevin on patient population size for HC. I'm going to ask Mark's question in a slight different way in a much broader context. For your initial stage I approval of 7977 in early 2014; what population proportion do you think you can address with that label versus when you get to stage 2 as it where, when you get a fixed dose ION-I, II sort of added to it, and link to that what society of sales folks initially versus stage 2. Thank you.

Kevin Young

Hey Ravi, it’s Kevin. I’ll reverse the order of your questions, can’t right now peg you the specific number for our HCV field force again as I said with Mark's question; we are in a very, very competitive world. I did say today that we would have a dedicated HCV field force, I think it’s important for us not only to do well in hepatitis C, but continue our success in HIV, so we will separate the field forces so we'll continue to have a dedicated HIV set sales force, and we will have a dedicated HCV field force. Actually we will also have a dedicated HBV field force. So I hope that's somewhat helpful.

In terms of our genotypes and the way we are viewing our launch, it’s certainly not going to be some sort of low key entry into the market because we’ve got 7977 plus 5885, a year down the road. If you look at today’s results, I think in all genotypes we are a step improvement certainly significant improvement in the GT-1 and GT-2 patients and that’s the majority of patients in the U.S. So we will be high-gear and we will have a significant high-energy launch behind all three genotypes subject to getting everything that we would like into a label from the FDA. So we are going to somehow low key genotype 1 launch and if you like to heighten GT-2 launch, we’ll be putting a common emphasis on all three genotypes.

Ravi Malhotra – Credit Suisse Securities

Thank you.

Operator

And your next question comes from the line of Terence Flynn with Goldman Sachs. Please proceed.

Terence C. Flynn – Goldman Sachs & Co.

Hi, thanks for taking the question. I noticed you had very low discontinuation rate in FISSION and NEUTRINO, but was wondering if there are any patients that receive less than 12 weeks of therapy and if you could give us any details on the outcome in those patients regarding QR rates. Thanks.

John C. Martin

Yeah, hi Terence. We actually don’t have any data, I don’t have any of the discontinuation rates. They’re very small and I don’t have any information on what the response rates in those people were that received less than 12 weeks of the regime and I have to go back to our data set and look. Sorry.

Operator, next question…

Operator

Yes. Your next question is coming from Howard Liang with Leerink. Please proceed.

Howard Liang – Leerink Swann

For sofosbuvir, ribavirin combination what do you think and what were your proposed regulators on how long the duration should be for genotype 3 patients in the label? It seems like 12 weeks will be too short as you mentioned earlier and the patients keep going after 12 weeks. So if longer dosing is of consideration, how big is your safety database for 24 weeks and 16 weeks for sofosbuvir?

John F. Milligan

Yeah, hi Howard. So it all really depends on what we see in the mix study FUSION, as you know that was a blind study that compared 12 weeks to 16 weeks of therapy in genotype 2, 3. Actually we have genotype 3 population 63%, so we should get a very good field from that, whether extending the duration of treatment will have any benefit. And based on those results we then have to make up our own mind and also talk to FDA about what they would think the ultimate recommendation will be.

But Howard I would not say just something because you know it comes up to this genotype 3. The response rates that we're seeing actually are very, very good. They’re comparable to what you get with interferon ribavirin. In the FISSION study it was 56%, versus 63%, 63% of interferon, 56% was the ribavirin. It’s a little bit lower numerically, but that confidence whenever crosses zero so it’s not significantly worse.

And secondly, in order as we have shown in the POSITRON study, these are patients that actually don't have any other options. And we cure 61% of them in genotype 3, so it’s a good, well tolerated regimen, which just need – we know we can do better and that’s what we’re going to do next as I said was extending the treatment duration, we’re having an interferon-containing regimen or adding, replacing ribavirin or adding another drug line 5885 or 5816.

Howard Liang – Leerink Swann LLC

Is the size of the Phase III database an issue for longer dose?

John F. Milligan

Phase III database, Howard, I have to look it up. Honestly I don’t want to give you a number that I don’t know. I do know we have about a 1,000 patients exposed for 12 weeks or longer. How many more we have longer, I am not sure. FUSION has about 100 patients for 16 weeks?

Howard Liang – Leerink Swann LLC

Thank you very much.

John F. Milligan

But the 200 patients probably that have been exposed for longer than 12 weeks.

Howard Liang – Leerink Swann LLC

And your next question comes from the line of Joel Sendek with Stifel Nicolaus. Please proceed.

Joel D. Sendek – Stifel, Nicolaus & Co., Inc.

Hi, thanks a lot. I have a question about the Stribild source of business. I was confused by something you said. But first of all, if I look at that slide, it’s slide 32, 32% of Stribild comes from Naïve patients relative to 30% for Complera. I would have expected a greater percentage coming from Naïve. I think you mentioned something about 70% number, could you repeat that again? Thanks.

Kevin Young

Hey, Joel, it’s Kevin. Basically to seem and if you look at the slide 33, which is kind of Eviplera is a contrast that do seem that as we go into the market with these single tablets, some thing about a third of the patient seem to be coming from Naïve, which is our label and that’s what we promote on. But physicians do make switches within HIV and looking to kind of a upgrade or when they have the resistance or they want to improve the side effect profile for patients, we’ll make a switch. That’s not what we’re promoting, but that seems to happen.

We’ll just have to see how we progress with Stribild. I think what is the most encouraging part of slide 32 is saying that physicians have seen the struggles in alternative to that protease inhibitor. And if you just look at the Naïve market shares, you can see how there is a drop off in Prezista, drop off in Reyataz, with the entry of Complera and with Stribild.

But I think Stribild is seen for those doctors who have not been great fans of efavirenz as seen as a – both starting as an alternative drug where they have not been particular advocates of Atripla, R&D, Complera as NNITI food agents try to getting Stribild.

Joel D. Sendek – Stifel, Nicolaus & Co., Inc.

Okay, thank you.

Operator

And we have time for one more question. That comes from the line of Alan Carr with Needham & Company. Please proceed.

Alan Carr – Needham & Company, LLC

Thanks for filling me in. One, can you give us an update on that early stage HCV compound the inventory, you mentioned G-5816. But wondering if you – I believe you have a couple other classes in there as well renew. And then also can you give us your thoughts on expectations for austerity measures in Europe in 2013?

John F. Milligan

Alan, in terms of pipeline for hepatitis C, as you know we started off this whole effort with the belief that we needed multiple drugs and we actually will see through as of three years ago if you had asked me, I would have said me, three, four, five drugs, probably and that’s the reason why we pursue broadly a large class. We have two PIs now in Phase II; 9256, 9451 with another PI in pre-clinical we have two NS5As, we also have a cycle of filling inhibitor in pre-clinical and we are working on another nuc and we have another NS5B non-nucleoside.

So either if there are any broad agent, staple of agents and the way it looks right now, we may not meet that menu, it may actually turn out at two or enough, but if we need three, we will have three. Alton, do you want to answer the other question?

Gregg H. Alton

No.

Norbert W. Bischofberger

Robin?

Robin L. Washington

Alan, I will take that from Norbert. Alan, I mean I would say, kind of consistent with prior year as we modeled out, 2013 we bought about 2% to 3% or so in European price impact relative to our revenue. Other additional pricing pressure that we could see come out of Southern Europe, one of the things that we are seeing in addition just pricing, there are other classes being taken such as reductions in inventory, delayed treatment, attractive pricing and reimbursement negotiation, but we also see kind of a kind for one of directly price related reducing, we all have to do with the kind of environment in Europe.

Alan Carr – Needham & Company, LLC

Thanks, that’s helpful.

Patrick O’Brien

Thank you, Dericel. Thank you all for joining us today. We appreciate your continued interest in Gilead and we look forward to providing you with updates on our future progress.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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