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Executives

John C. Martin - Chairman and Chief Executive Officer

John F. Milligan - President and Chief Operating Officer

Kevin Young - Executive Vice President of Commercial Operations

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

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

Analysts

Geoff Porges – Sanford Bernstein

Mark Schoenebaum - Deutsche Bank

Bret Holley – Oppenheimer

Thomas Wei - Piper Jaffray

Geoffrey Meacham - J.P. Morgan

Yaron Werber – Citigroup

Michael Aberman - Credit Suisse

Ian Somaiya - Thomas Weisel Partners

Philip Nadeau - Cowen & Co.

Maged Shenouda - UBS

Josh Schimmer – Leerink Swann

Joel Sendek – Lazard Capital Markets

Jason Kantor – RBC Capital Markets

Thomas Russo - Robert W. Baird & Co.

Sapna Srivastava – Morgan Stanley

Gilead Sciences, Inc. (GILD) Q2 2009 Earnings Call July 21, 2009 4:30 PM ET

Operator

Welcome to the Gilead Sciences second quarter 2009 earnings conference call. (Operator Instructions). I would now like to turn the call over to Susan Hubbard, Vice President of Investor Relations.

Susan Hubbard

Welcome to Gilead’s second quarter 2009 earnings conference call. We’re pleased you could join us today. We issued a press release this afternoon providing results for the second quarter ended June 30, 2009. This press release is available on our website at www.gilead.com. We have also posted slides that outline the topics discussed on this call.

Joining me today are Dr. John Martin, Chairman and Chief Executive Officer; Dr. John Milligan, President and Chief Operating Officer; Kevin Young, Executive Vice President of Commercial Operations; Norbert Bischofberger, Executive Vice President of Research and Development and Chief Scientific Officer; and Robin Washington, Senior Vice President and Chief Financial Officer. We will keep prepared comments brief to allow more time for Q&A.

I would first like to remind you that we will be making statements related to future events, expectations, trends, objectives, and financial results that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on certain assumptions and are subject to a number of risks and uncertainties that could cause our actual results to differ materially from those expressed in any forward-looking statement. I refer you to our Form 10-K for the year ended December 31, 2008, Form 10-Q for the first quarter of 2009, subsequent press releases, and other publicly filed SEC disclosure documents for a detailed description of the risk factors affecting our business. In addition, please note that we undertake no obligation to update or revise these forward-looking statements.

We will also be making certain references to financial measures that are on a non-GAAP basis. We provide a reconciliation between GAAP and non-GAAP numbers on our website.

I will now turn the call over to John Martin.

John C. Martin

Good afternoon and thank you for joining us today. Product revenues and non-GAAP earnings for the second quarter reached record highs of $1.57 billion and $0.69 respectively. Importantly, we have generated more than $620 million in operating cash flow. As Kevin will describe later in the call, our antiviral franchise continued its momentum and gained share across all our commercial markets reaching a record revenue of $1.41 billion. We’re very pleased that Atripla received reimbursement in France, allowing us to launch the product in May. France represents the largest market in the European Union with nearly 140,000 HIV infected patients and will be yet another contributor to the continued growth of this franchise.

The second quarter was also very busy on the organizational front as we closed the CV Therapeutics acquisition and made several management decisions to integrate the Palo Alto employees into Gilead. First we realigned the reporting structure of the combined cardiovascular organization under Norbert Bischofberger’s leadership. Luiz Belardinelli from CV Therapeutics has been named to Senior Vice President of Cardiovascular Therapies overseeing our cardiovascular R&D efforts and reporting to Norbert. Louis Lange has assumed a part-time advisory role within the organization providing us his experience, expertise, and knowledge about our cardiovascular products and programs. We believe these changes will best position us for continued growth and productivity in this therapeutic category.

In addition, we moved Medical Affairs to report to Gregg Alton who also is responsible for government affairs, public affairs, international access operations and legal affairs functions. This structure will allow us to continue to have a positive influence on heath policy and deliver scientific and medical information to benefit the health communities we serve.

In conjunction with Gregg’s role, Brett Fletcher was promoted to General Counsel. Brett most recently served as Vice President of Legal Affairs focusing primarily on legal support for corporate development, finance, research, human resources, governance, manufacturing, and clinical operations. As we enter the second half of 2009, I am confident about the strength of our organization to drive future success given the scientific and commercial progress we have achieved year to date.

I will now turn the call over to Norbert to discuss our research and development progress during the quarter.

Norbert W. Bischofberger

On the research and development front, we continued significant progress with our pipeline. As we have a great deal to cover during the prepared comments portion of this call, I would like to only speak to the most notable advancements. One of these advancements is the initiation as well as the completion of enrolment during the quarter of two important phase II studies in HIV infected patients.

The first study is evaluated our quad drug—the fixed dose regimen of Truvada, elvitegravir, and GS9350 versus Atripla—and the second is a head to head study of GS9350, our novel boosting agent versus Ritonavir. These are both 24-week primary endpoint studies which should be completed by year end.

There has been significant enthusiasm from investigators surrounding these studies, and we will target having the full data sets presented at a scientific conference early next year. The phase III study of elvitegravir head to head versus raltegravir in treatment experienced patients is now more than 60% enrolled, and we’re on target to complete enrolment in this study before the end of this year.

We continue to pursue strategies to bring forward additional and improved options for patients with HIV. This is demonstrated by our announcement just last week with Tibotec to develop a fixed dose combination of our Truvada with their NNRTI drug candidate TMC-278. If approved, this new product will become the second complete antiretroviral treatment regimen for HIV besides Atripla available in a single tablet taken once daily. We initiated co-formulation work prior to the completion of the agreement with Tibotec and have now identified and produced two formulations of the fixed dose combination. In addition, we completed animal PK studies and are now progressing these two formulations towards human bioequivalent studies.

Data from these studies along with supporting stability data will form the basis for our regulatory filing of the fixed dose combination sometime later next year. The NDA filing of TMC278 itself will be supported with data from two pivotal studies in treatment naïve patients that Tibotec currently has underway. John Milligan will speak to the terms of our agreement with Tibotec later in the call.

In April, we presented 96-week data from both our Viread for HPV pivotal studies, and we had a poster presentation of the phase I data GS 9450, our caspase inhibitor, in healthy volunteers at the European Association for the Study of the Liver or EASL conference. GS-9450 has now progressed into a phase 2B study which is evaluating two doses of the drug versus placebo in 240 HCV infected patients with efficacy assessed by histology. We’re also continuing to evaluate GS-9450 as a potential treatment for NASH in a phase 2A study.

At the American Thoracic Society Conference in San Diego in May, there were 5 presentations on Letairis including the first presentation of data from the ARIES-3 study which is evaluating Letairis therapy in patients with pulmonary hypertension of diverse etiologies. At the American Society for Hypertension Conference in San Francisco also in May, we presented data in the late breaker session from study 311, the first darusentan phase III study in patients with resistant hypertension. We’ve also completed enrolment in study 312 which is the second pivotal study, and we will have data by year end.

The EU marketing application for regadenoson, an investigational pharmacological stress agent for radionuclide myocardial perfusion imaging, was filed and validated during the quarter and is currently under review. We also received a positive opinion for conditional approvals from the European Committee on additional products for human use, the Scientific Committee of the European Medicines Agency, on aztreonam for inhalation for cystic fibrosis, and just yesterday we were notified by the regulatory agency in Canada that the product has received a notice of compliance, with recommendation for approval in that territory as well. We anticipate both European Commission and Canadian approval for aztreonam in the second half of 2009.

Just today, important data from a landmark 5-year trial developing antiviral therapy for Africa or DART were presented during the late breaker session of the Fifth International AIDS Conference in Cape Town, South Africa. The DART trial evaluated more than 3300 patient with advanced HIV disease in Uganda and Zimbabwe. In this study, patients received anti-retroviral therapy and were randomized to clinical and laboratory monitoring or to clinical monitoring only, with 74% of the patients a Viread containing regimen.

Without treatment, the researchers estimated that more than 90% of the DART patients would have died within these five years, but after five years of receiving combination HIV therapy, 88% of participants were still alive. This is one of the best survival rates observed in an HIV treatment program for study conducted in Africa, and importantly Viread was well tolerated during the five years of this study, side effects were similar in patients who received routine laboratory monitoring and those who did not. The DART researchers concluded that laboratory monitoring including kidney monitoring tests for Viread may not be necessary in resource-limited settings when using the product as part of a first-line HIV treatment regimen.

The DART study provides important additional clinical evidence that HIV treatment utilizing Viread helps to extend life in developing countries where the AIDS epidemic has hit the hardest, and we congratulate the DART team on their success in this important research effort.

Finally, as John discussed, as we work through the integration of CV Therapeutics, it became clear that there were areas of overlap between the Colorado and the Palo Alto organizations and that the cardiovascular R&D activities would be most productively managed at one site. Consequently, we have decided to close our Colorado facility. We chose the Palo Alto site due to its proximity to our headquarters here in Foster City.

We also recently completed our first comprehensive review of our now considerable combined cardiovascular portfolio, and we’re in the process of focusing our activities on the most promising projects and programs.

With that, I would like to turn over the call to Robin.

Robin L. Washington

I’m very pleased to provide you with Gilead’s financial performance for the second quarter of 2009. Total revenues which include product sales and royalty, contract and other revenues were $1.55 billion, a 29% increase year over year. Net income was $571 million or $0.61 per share. Non-GAAP net income for the second quarter which excludes the impact of after-tax acquisition-related expenses, restructuring expenses, and stock-based compensation expenses was $649 million or $0.69 per share, representing a year-over-year increase in net income and EPS of 38% and 43% respectively. Operating cash flow was $623 million.

Product sales were $1.57 billion. Anti-viral product sales grew to $1.41 billion, up 26% year over year and 5% sequentially. Truvada sales contributed $608 million to our anti-viral product sales, up 18% year over year and 3% sequentially due primarily to sales volume growth in both the US and Europe. Atripla contributed $569 million to our anti-viral product sale. Atripla sales increased 60% year over year and 12% sequentially, resulting from the continued uptake of this product in the US and Europe, including the launch of Atripla in France this quarter. The efavirenz portion of Atripla which was purchased from BMS at its estimated market price and reflected in cost of goods sold was approximately $187 million.

Viread sales were $159 million representing a year-over-year increase of 5% and a sequential decrease of 1%. Hepsera generated sales of $67 million, a decrease of 26% year over year basis and 8% sequentially. Letairis sales were $44 million, an increase of 79% year over year and 11% sequentially, driven primarily by sales volume growth in the US. Finally, Ranexa sales were $36 million from April 15, 2009, the acquisition date of CV Therapeutics to the end of the second quarter.

Foreign currency exchange had a net unfavorable impact of $50 million on revenues when compared to the same period last year. On a sequential basis, foreign currency exchange did not have a significant impact on revenues.

Before leaving product sales, I wanted to comment on US inventory levels. US wholesales increased their inventory levels for Atripla and Truvada during the quarter. Given that retail demand was consistent with both prescription demand and revenue growth during the quarter, there is a possibility that US wholesalers may decrease their inventory level for Atripla and Truvada in the second half of 2009.

Our royalty, contract, and other revenues for the second quarter were $79 million, an increase of 29% year over year and a decrease of 5% sequentially. The year over year increase was primarily driven by increased Tamiflu sales to pandemic planning initiatives worldwide. The sequential decrease was primarily due to the recognition of $24 million of deferred revenue in the first quarter related to one of our collaborations.

Royalties received from Roche and recognized in our revenue in the second quarter were $52 million. These royalties which are paid one quarter in arrears reflect a royalty rate of approximately 15% as applied to Roche’s net sales of Tamiflu during its first quarter of 2009. Roche is scheduled to report their second quarter 2009 earnings this Thursday, July 23rd.

It is important to note that the following discussion on margin and expense related items are on a non-GAAP basis which excludes the effect of acquisition, restructuring, and stock-based compensation expenses. Product gross margin was 76.9% compared to 78.8% for the same quarter of last year and 77.6% for the first quarter of 2009. Both the year over year and sequential decreases were due primarily to the higher proportion of Atripla sales which include the efavirenz component at zero gross margin.

Operating margin was 52.4% compared to 51.1% for the same quarter last year and 55.5% sequentially. Our sequential operating margins were negatively impacted by operating results from the CV Therapeutics acquisition and lower product gross margins.

R&D expenses were $206 million, an increase of 28% on a year over year basis and an increase of 20% sequentially. Both the year over year and sequential increases were due primarily to increased clinical study activity and compensation and benefit expenses as a result of the acquisition.

SG&A expenses were $213 million, an increase of 6% year over year, due primarily to higher headcount and expenses from the acquisition. On a sequential basis, SG&A expenses increased 16% due primarily to increased promotional expenses, higher headcount, and expenses associated with the acquisition. Excluding these expenses, SG&A was essentially flat on a sequential basis.

Other income and expense reflected a net expense of $6 million for the second quarter compared to a net expense of $2 million for the same quarter last year and a net expense of $13 million for the first quarter of 2009. Our year over year and sequential other income and expense was favourably impacted by the lower hedging expenses in the second quarter of 2009 which was partially offset by lower year over year interest income due to lower investment yields.

Our effective tax rate for the second quarter was 24.7%, compared to 28.3% for the same quarter last year and 26.3% for the first quarter of 2009. The year-over-year and sequential decreases were driven primarily by the resolution of certain audits with tax authorities and increased earnings in lower tax jurisdictions.

Now I’d like to highlight some of the purchase accounting and restructuring impacts of the acquisition. $951 million of the $1.5 billion acquisition price was allocated to intangible assets related to CV Therapeutics’ marketed products—Ranexa and Lexiscan, and we capitalized the $180 million of in-process R&D and tangible assets in accordance with the guidance of the newly effected FAS141R. In addition to the organizational changes that John mentioned, we’ve developed and communicated a restructuring plan to realize headcount and facility synergies between Gilead and CV Therapeutics and to realign our cardiovascular operations.

We have identified significant opportunities in SG&A as a result of the acquisition that more than offset the incremental sales and marketing investments we intend to make to execute on the commercial Ranexa strategy that Kevin will speak to. Also as previously mentioned, we finalized the plans to close our Colorado based cardiovascular research facility by the end of this year and consolidate it with our Palo Alto facility. We believe these changes will allow us to more efficiently and effectively support the ongoing initiatives of the combined company.

In accordance with FAS-146, we account for restructuring expenses as the liabilities are incurred and recorded $18 million of after-tax restructuring expenses primarily impacting SG&A in the second quarter. We expect to incur additional restructuring expenses through 2010 as we complete this plan.

Our balance sheet continues to be strong with cash, cash equivalents, and marketable securities of $2.9 billion as of June 30, 2009. As mentioned, in the second quarter, we generated $623 million in operating cash flow. We utilized $1.25 billion in net cash to fund the acquisition including $400 million that we borrowed under our credit facility. We also utilized $305 million in cash to extinguish substantially all of the convertible senior notes we assumed in the acquisition.

We repurchased 5.3 million shares of our common stock at a cost of $238 million. As of June 30, 2009, we had approximately $530 million remaining for share repurchases under the $3 billion share repurchase program scheduled to expire at the end of 2010. We continue with our commitment to review opportunities to leverage our cash position to expand our business as well as to return value to our shareholders.

Now turning to guidance for the year, which is available on our corporate website. All guidance metrics we will discuss today include the operations acquired from CV Therapeutics. Also, our non-GAAP product gross margin and operating expenses guidance exclude the impact of acquisition, restructuring, and stock-based compensation expenses where applicable.

Based on the momentum of our antiviral franchise and the addition of Ranexa to our cardiovascular revenue stream, we are increasing net product revenue guidance for the full year 2009 from $5.9 to $6 billion to $6.1 to $6.2 billion, which reflects a 20-22% increase over 2008 net product revenues. Factors that may have an impact on our business include but are not limited to the potential for continued volatility in foreign currency exchange rates, US and international government pricing pressures, and changes in the financial health and practices of our business partners and customers. Other factors that were considered in updating our product revenue guidance include the potential for a decrease in inventory levels of Atripla and Truvada in the US following the increase in the second quarter and the impact of a competitive generic entry of Viread into the Brazilian market.

Our non-GAAP product gross margin guidance for 2009 remains unchanged and is a range of 76% to 78%. We are increasing non-GAAP R&D expenses from a range of $800 to $820 million to a range of $850 to $870 million. This guidance now also includes a portion of the anticipated R&D expense reimbursement payable to Tibotec for the development costs associated with TMC-278, as previously announced.

We are increasing non-GAAP SG&A expenses from a range of $720 to $740 million to a range of $810 to $830 million. This is an approximately 12% increase over our previous guidance and relates entirely to incremental integration and operational expenses resulting from the CV Therapeutics acquisition. As previously mentioned, we have rapidly identified synergies between our two organizations, which will allow us to remain focused on effective expense management across the Gilead organization.

Our effective tax rate guidance for the full year 2009 is expected to remain in the range of 26-27%, and finally we are increasing the full-year diluted EPS impact of acquisition, restructuring, and stock based compensation expense from $0.14 to $0.16 per share to $0.23 to $0.26. Additional details can be found on our corporate website.

At this point, I would like to turn the call over to Kevin who will discuss our commercial highlights for the quarter.

Kevin Young

I am very pleased to discuss with you today the continued progress we have made with our commercial product during the second quarter. The data I will be presenting is the most recent available to us for the analysis of market share in the US and Europe. During the second quarter, US HIV revenues performed strongly led by Atripla at $398 million, up 27% year over year, and Truvada at $286 million, up 21% year over year. In the first quarter of 2009, the number of patients being treated with antiretroviral therapy grew by 7% on a moving annual total basis to approximately 569,000 patients.

Truvada maintained its position as a backbone of choice for anti-retroviral therapy in the US, with 203,000 patients on therapy or approximately 34% of all treated patients. Atripla remained the most prescribed regimen in HIV with 188,000 patients on therapy or 33% of all treated patients. Atripla together with Truvada continue to account for approximately 86% of new patients to therapy, up from 84% last quarter. Atripla remained the number one regimen capturing approximately 54% of treatment-naïve patients, up from 45% in the last quarter.

Additionally, we continue to see changes in prescriber behavior based last year’s changes in the DHHS treatment guidelines. Epzicom share continued to decline falling from 12% of naïve patients in the first quarter of 2008 to 4% in the first quarter of 2009. We were very pleased with the performance of all our HIV products in Europe, with sales of Atripla $155 million, up 24% sequentially. Since the listing of public price for Atripla on May 5th, early indicators from France are encouraging. 95% of all major HIV hospitals have already ordered Atripla, and each of the top 32 HIV treating centers in Paris have begun prescribing.

In the big five countries of Europe, approximately 24% of patients receiving Atripla converted from Truvada to Sustiva in the second quarter of 2009, while 35% was switches from other regimens and 41% of patients starting treatment were naïve patients. Truvada continued to build on its solid base throughout the EU and remained the number one brand in all big five markets. During the second quarter of 2009, Truvada contributed $288 million in revenues, up 19% from the same period in 2008. Atripla together with Truvada, or total Truvada, increased its share to approximately 75% of treatment-naïve patients, while Kivexa share continued to decline to 10% at the end of the second quarter of 2009, down from approximately 16% in the second quarter of 2008.

Total Truvada achieved new highs in the NRTI market, outperforming Kivexa with a prescription ratio of 3.2 to 1 in April 2009, up from 2.5 to 1 in April 2008. Comparable to the US, the big five countries of Europe continue to demonstrate robust growth. At the end of the first quarter of 2009, there were 277,000 patients being treated with antiretrovirals, representing a growth rate of 7% on a moving annual total basis.

Now turning to our US hepatitis franchise, as of April 2009, Viread achieved a 34% naïve patient share in the HPV market, just three percentage points behind the current market leader, Entecavir. Estimated total Viread HPV prescriptions grew by 24% from the first quarter to the second quarter of 2009. We look forward to the presentation of our 144-week data from our pivotal studies 102 and 102 being presented at the American Association for the Study of Liver Disease Conference taking place in Boston later this year.

In Europe, today we have reimbursement approval for Viread in 16 countries. The 2008 endorsements within the EASL guidelines for Viread usage in both naïve and lamivudine resistant HPV patients and our advantageous price point relative to Entecavir puts us in a strong position to become the HPV antiviral market leader. As of April 2009, Viread’s HPV share is estimated to be 13% versus 9% at the start of the year. In Germany, one of our first countries of launch, Viread has already achieved 22% market share and is very close to surpassing Entecavir. In Turkey where we established our affiliates specifically for the launch of Viread HPV, we have achieved a 19% share in just 9 months post launch.

Now turning to our cardiovascular franchise, we continue to make solid progress with Letairis for the treatment of PAH. At the end of May, we received a revised label from the FDA that now requires an annual re-enrolment in the LEAP program. This change is a step bringing our risk map requirements for Letairis and darusentan close to parity. We have also had a positive reaction to our web-based service called LabSync which is designed to minimize the burden of monthly lab monitoring. According our latest data, as we exited the second quarter, approximately one in three patients receiving an ERA was taking Letairis. Additionally, Letairis has now captured approximately 35% ERA share of all newly diagnosed PAH patients.

Finally, to update you for the first time on Ranexa, prescription demand for Ranexa has been on an upward trajectory since the label revisions that occurred in November 2008. For the most recent quarter, total prescriptions grew by 13% sequentially. During the second quarter, we saw stabilization in wholesale inventory levels after a sizeable decrease in the first quarter.

Robin provided total US sales for Ranexa were $36 million from the CV Therapeutics acquisition date to the end of the second quarter. It is important to highlight that the reported figure includes $3.6 million in booked tablets supplied to Menarini, our licensee for Ranexa in Europe as part of our supply obligations that began early this year.

Total sales for the full second quarter including sales made by CTT prior to our closing date and inclusive of booked shipments were $45.5 million. We have now shifted our Ranexa focus to operational execution including increasing the salesforce from 170 representatives to 205 representatives. This expansion will be completed by the beginning of the fourth quarter. We have designed a new call list of physicians based on angina prescribing potential as well as improved the message points used for positioning Ranexa. We will also be adding a 20-person field based medical science team and investing in CME programs, advisory boards, and speaker training programs. We have also made the decision as of the middle of August to terminate the contract with Inventive Health for the 40-person primary care selling team.

Lastly, we have made tremendous progress on the formulary status of Ranexa. As of the end of the second quarter, Ranexa was covered by approximately 70% of commercial private pay plan lives at tier 2 status.

I will now turn the call over to John Milligan for closing remarks.

John Milligan

Actually, before I begin the prepared section here, I do want to make one correction. Kevin misspoke to say that there was $45.5 million in Ranexa sales. The actual total was $41.5 million, so I hope you have got the correct number.

In summary, for the second quarter of 2009, it was a highly productive quarter for Gilead with significant milestones achieved in each of our four therapeutic categories. I also could not be more pleased with all the progress we’re making on our HIV portfolio. As Norbert discussed earlier, in addition to the advancement of our pipeline compounds, namely the quad and GS-9350, the collaboration with Tibotec for a fixed dose coformulation of TMC-278 with Truvada continues to underscore the creative and collaborative nature that we apply to advancing medicines for patients with HIV, working to provide additional and improved options for their treatment.

Subject to regulatory approval, we will assume the lead role in the manufacturing, registration, distribution, and commercialization of the product worldwide excluding the developing world and Japan. Tibotec will be responsible for the commercialization of TMC-278 as a standalone product and will hold rights to co-promote the fixed dose combination in these territories. The companies will also work towards an agreement to make the fixed combination available in the developing world.

With regard to the terms of this agreement, we will make future payments to Tibotec of up to approximately $100 million for their development costs for TMC-278. In addition, once the product is launched, we will book all revenues associated with the product, retaining all of the Truvada-related revenue as well as a significant percentage of the TMC-278 related revenue which recognized Gilead’s investment in the clinical development of TMC-278 and the combination product.

Putting together collaborations such as these is a complicated and time-consuming process. I would like to commend the teams from both companies for their thoughtfulness and dedication, working together as they did to make this important product a reality for patients.

We’re disappointed with Brazil’s decision to reject our patent application for Viread and are seeking to appeal their decision as we believe Viread represents an important innovation. Intellectual property and patents are the assets of research-based companies reflecting the tremendous investment made, risk taken, and value created. We believe that patent protection is necessary to ensure continued investment and innovation and that it is not an impediment to treatment access when used responsibly by companies such as ours.

With our new expanded cardiovascular franchise, we will closely charter our progress with Ranexa for chronic angina as well as Letairis for PAH. We look forward to the data from the second pivotal study, study 312, of Darusentan in resistant hypertension before the end of this year so we can assess the potential of the compound in patients with dangerously high blood pressure.

I’d like to close by thanking all our employees for their focus and dedication during a very busy and difficult time as well as our shareholders for your support. We continue to strive to run an effective and efficient organization, as exemplified by the integration of CV Therapeutics into Gilead in a very cost-effective manner.

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

Question and Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Geoff Porges – Sanford Bernstein.

Geoff Porges – Sanford Bernstein

I have a question on a J&J agreement. Could you clarify the outlook for both parties to develop other combinations? Can J&J do other triple combinations with, for example, tenofovir in them post 2017? Conversely, can Gilead develop other combinations with NNRTIs, and then any chance of a protease inhibitor combination being developed by you guys as well?

John Milligan

The answer is that these are non-exclusive deals, so Tibotec specifically, a part of J&J, has the right to co-formulate TMC-278 with other products, and we will continue to have the right to co-formulate other products with Truvada including other NNRTIs as you talked about. There are some limitations to what Tibotec can do with regard to other co-formulations, including our product. I’m not liberty to say the details of that. We have thoughtfully executed this contract to allow them flexibility, but also to retain the value that we’ve created with our Truvada franchise. That’s the most of what I can say, and yet there certainly are other opportunities for us to co-formulate with protease inhibitors including one that we might develop on our own.

Operator

Your next question comes from the line of Mark Schoenebaum - Deutsche Bank.

Mark Schoenebaum - Deutsche Bank

I didn’t understand what you guys said about inventories. You said inventories built in the quarter a little bit and that they may come down into the end of the year. Is there any way you can help quantify what impact that had on sequential Q2 sales growth?

Robin L. Washington

We wouldn’t necessarily quantify it, but to your point, they did go up for Atripla and Truvada by several days, which means absolute inventory levels went up. It makes sense for that to happen. Our speculation is that the price increases that we announced on July 1st caused some speculative buying in Q2, so that would be pretty consistent with trends we’ve seen in the past relative to inventory increases.

Mark Schoenebaum - Deutsche Bank

That’s wholesaler inventories, right?

Robin L. Washington

Yes. That would be wholesaler inventories.

Mark Schoenebaum - Deutsche Bank

Are they normal now, the levels?

Kevin Young

No. Mark, as Robin said, they did go up by several days. We’ve seen this historically in the past often where the large wholesalers are speculating. I do want to emphasize that the quarter was very strong from an underlying demand point of view. I think this was a great quarter for patient demand, and should not just be seen as some form of inventory build-up.

Operator

Your next question comes from the line of Bret Holley – Oppenheimer.

Bret Holley – Oppenheimer

I’m just wondering about the positioning of the quad pill versus TMC-278 combo. I’m wondering if the J&J deal makes it perhaps more likely that you will assess the quad pill in phase III versus a PI containing regimen?

John Milligan

As we’ve announced previously, we do intend to take the quad pill into two studies, one of which will be versus Atripla, the other of which will be versus a boosted protease inhibitor. We haven’t determined if it will be Atazanavir or Darunavir, but it’ll be one of those two products going forward, so yes, we do think there is a significant opportunity to take share away from protease containing regimens based on obviously positive clinical data coming out of this, and also based on the fact that only about half the physicians currently tend to prescribe a PI or an NNRTI, so there is an opportunity for us to do that. There is the possibility that we could position this slightly differently, but at the end of the day, we want to provide better options for patients. TMC-278 and the collaboration with Tibotec allowed us to do that sooner rather than later, so the time value of that plus the economics of that became very attractive to us as well, so I think we have two chances for success across a broad range of patients going forward, and basically we’re providing another set of great options, so I think it really made a lot of sense for us.

Kevin Young

Bret, just to add, in terms of promotional sequence, obviously all being well, when we get to the 278 fixed dose combination that would replace Atripla in the promotional lineup and then when the quad comes along, the quad would be the lead agent that we would promote, and the 278 fixed dose combination would be behind that.

Operator

Your next question comes from the line of Thomas Wei - Piper Jaffray.

Thomas Wei - Piper Jaffray

I had a question on the second quarter US HIV franchise. I understand your comments about end-user demand based on IMS data and Wolters Kluwer and the Synovate data, but if you actually look at the reported second quarter number and calculate total tenofovir and total Truvada sales growth on a sequential basis, it doesn’t look very strong, especially since you’re telling us that there was an inventory increase at the wholesaler level. Can you help us understand how we should think about this quarter, and whether or not there were any other factors like non-retails that we might need to account for in our analysis of the sequential growth rates?

Kevin Young

You went straight to it. It’s the non-retail. It’s the same shape of year that we had in 2008, but it’s not as deep in terms of the way that Q2 stepped off Q1. As you know, in Q1 of 2008, we really did have a very large quarter, and therefore Q2 relative to that was much smaller. What we saw in 2009 was a larger Q1 relative to the fourth quarter, but not as pronounced because as you know the ADAP programs were buying earlier. It was a sort of smoother year, but even then we did have a step-down, as we expected, in Q2. So that really will square away your calculations.

Operator

Your next question comes from the line of Geoffrey Meacham - J.P. Morgan.

Geoffrey Meacham - J.P. Morgan

I have a question for Norbert. I’m wondering if you can walk us through the details of the clinical path forward for the Tibotec, the 278 combo, and as a followup, do you guys have to conduct any studies, either preclinical or early clinical before you can start a phase III program?

Norbert W. Bischofberger

It’s actually fairly simple. TMC-278 of course has to be developed according to the normal guidelines for two phase III studies in treatment naïve patients, and that’s all being done by Tibotec, so those studies are ongoing. They are full enrolled. What Gilead has to do to get the combination product approved is simply CMC related and bioequivalent study, so we have to provide information about the formulation, about stability of the formulation, and we have to show that the fixed dose combination is bioequivalent to the components when taken separately. This is very similar to the development of Truvada where we only had a bioequivalent study and CMC information and also Atripla was filed and approved entirely on bioequivalents and CMC. I hope that answers your question.

Geoffrey Meacham - J.P. Morgan

It does. So I’m trying to reconcile maybe the market impact of that data versus what’s the impetus for switching for a patient or an Atripla script over a combo with TMC-278, just looking out a couple of years.

Norbert W. Bischofberger

I think the utilization of the TMC-278 fixed dose combination versus Atripla versus others will be entirely determined by the phase III data that is going to emerge. Atripla is a very good drug, but it’s not perfect. So if we could diminish the CNS side of it—the rash and have a better pregnancy category—that would automatically be an incentive for people to use the TMC-278 fixed dose combination over Atripla. Of course, those things all have to be shown or proven in phase III studies.

John Milligan

We do know that there are some underlying shortcomings in that. There are significant long-term CNS side effects, and you’re seeing that in other studies that are looking at Sustiva, so it’s the weakest link in there. One thing that Norbert didn’t say with regard to the phase III studies that Tibotec is conducting is the study design itself. In one side, both arms have Truvada, and it’s Sustiva versus TMC-278, so that’s really just a study of Truvada—the perfect study for us. The second study was a similar design of Sustiva versus TMC-278, and doctors were allowed to choose whichever backbone they wanted, but of course, as consistent with the market, over 80% of those patients are on Truvada, so essentially we have both phase III studies conducted by Tibotec based on that enrolment criteria, and that’s what’s going to allow us to make the bioequivalent study—the next study—necessary for approval rather than having to conduct additional studies.

Operator

Your next question comes from the line of Yaron Werber – Citigroup.

Yaron Werber – Citigroup

Ranexa actually looked very good this quarter. You mentioned inventories were stable. What was the destocking last quarter, so people understand what’s a normalized run rate, and is the $3.6 million sales Menarini, is that a normalized run rate from now on also because that also looked pretty good?

Kevin Young

Yes. There was really quite a large dropoff from Q4 to Q1. That was probably in the area of about something like 10 days. That’s the best of our estimate, so it really was quite a considerable draw-down by the wholesalers. As I said, of the reported $36.1 million for us in Q2, $3.6 million of that were the booked tablets that went to Menarini. In the quarter, it was actually $2.6 million that went in terms of booked tablets. So we’ll have to see how that develops. A lot of it will depend of course on the Menarini. They are now making big efforts with Ranexa particularly in Germany where they have a very sizeable field force and it’s a large potential market, so a lot of it will depend upon how successful they are over there.

Operator

Your next question comes from the line of Michael Aberman - Credit Suisse.

Michael Aberman - Credit Suisse

I don’t mean to go back to the inventory levels and what not, but looking at Viread for example, you’re getting increased penetration in the HPV setting; yet, you have it down sales quarter over quarter. Can you help us understand what’s going on there? Are you giving away free drugs in the HPV setting?

Kevin Young

Yes, certainly. Again, it’s a mix issue with Viread. Please appreciate that 75% of Viread is still HIV. When we began selling Viread for HPV, only about 4% of total Viread sales were coming from the HPV setting. That’s where we started at. Now it’s up to about 25%, but you’ve got a very large slumping effect from HIV. As I said earlier, because of non-retail came down across the board for our HIV products, that affected Viread, and therefore that affects HIV in the mix of total Viread prescriptions, so the mismatch that you’re seeing between the growth the HPV and our actual product sales is very much this issue of HIV.

Michael Aberman - Credit Suisse

You specifically mentioned that there could be a decline in inventory that has an impact on second half. How about the non-retail? Do you expect it to go back to normal where we can have a positive impact on second half?

Kevin Young

Again, shape is always difficult during the year, but the one thing we do now, because this is being given out, we do know the budgets for financial year 2009, and they’re about the same. They’re slightly higher, but for all intents and purposes, they are the same for 2008, so that’s the best we know. I think there will be a shape because the financial year always goes through to the end of March, so people tend to use their budgets during the first quarter of the year, but exactly how it plays out is always difficult to peg.

John Milligan

One other thing that may be didn’t come through with this is that we talked about inventory levels, we’re specifically talking about Truvada and Atripla. With regard to Viread the inventory levels did come down quarter over quarter, and as you may recall, we did implement a price increase on April 1 for Viread, and so inventory had probably grown a little bit in anticipation of that price increase and then did come down to the lower levels during the course of this quarter as well, which affected the overall Viread sales level.

Operator

Your next question comes from the line of Ian Somaiya - Thomas Weisel Partners.

Ian Somaiya - Thomas Weisel Partners

I’m trying to get a better understanding of the strategy for triple combination HIV pills. Is it one of picking the best drug in a given class, or is it going to be a classic let’s try to get any and all combination pills we can, so at least Truvada remains the backbone and you might be able to get some level of profitability on the third drug? Any comments would be useful.

John Milligan

A couple of things to say. You always want to work with the best drug in a category. That’s always very clear, and it would be I think advantageous for us to do additional products. There are debates over which is the best drug in a category of course, so there is possibility for us to do additional combination collaborations. I don’t think we can do too many more of them because of the complexity of the business that we’re running, and also because there are other options that we are tying to develop internally for the long-term as well, but there is I think the possibility that we could do one protease inhibitor collaboration and there are some good choices out there to do that, especially if 9350 plays out the way we hope because that could allow other proteases to be much more successful than they are today, so there is some really interesting science and clinical data that we’ll have to sort through to make these choices going forward.

Operator

Your next question comes from the line of Philip Nadeau - Cowen & Co.

Philip Nadeau - Cowen & Co.

My question is actually on the quad combo pill. I know you briefly gave us an update in your prepared remarks, but could you talk a little bit more about the milestones that you expect for that pill over the say 6 to 9 months? For example, will you give us some data by the end of the year in advance of the medical meeting and what’s latest timeframe when the phase III could begin?

Norbert W. Bischofberger

The two phase II studies are fully enrolled. We anticipate having the 24-week endpoint will be reached before the end of this year, so we will have the data available. We anticipate if everything goes well to submit those to some meeting early next year. With those data in hand, we will then approach FDA and get final agreement on the development plan. Overall, I don’t think it’s going to be any controversial because it’s fairly straightforward. It’s simply we’re proposing to do two phase II studies in treatment naïve patients. We actually proposed that to the FDA already. They didn’t have any issues or comments with it, and so to make a long story short, we would hope to initiate those phase III studies in the first half of 2010, so sometime in the second quarter of next year.

Philip Nadeau - Cowen & Co.

You said you’re going to have the 24-week endpoint data by year end, but it sounds like you’re not going to release that. You’re just going to wait till the medical meeting?

Norbert W. Bischofberger

The devil of course is in the detail, but I think to a medical conference or a scientific conference early in 2010 we would be in a position to submit the data.

Robin L. Washington

Operator, before the next call, I did want to make a clarification on the guidance. We did receive a question regarding whether our guidance for R&D expenses from $800-$820 million to a range of $850-$870 million, we were asked if it did include any part of the reimbursement payable to Tibotec, and it does. A substantial portion of that increase is related to Tibotec. So I wanted to provide that clarification.

John Milligan

The way to think about the substantial portion is that this reimbursement will be billed to Gilead and will go over a couple of years, so there’ll be some portion for this year and some portion for next year, and this is the maximum amount that Tibotec would be allowed to bill us out of the contract for this year. We don’t know if they will bill all that, and we’ll update you in the future if they bill us for less.

Operator

Your next question comes from the line of Maged Shenouda - UBS

Maged Shenouda - UBS

Can you discuss the European ordering patterns for the HIV franchise in the quarter? Were there any unusual orders?

Kevin Young

Not really. We saw a strong underlying demand. There was a little bit of extra ordering in Spain. This is a funny time period for particularly the major continental European markets—Italy, Spain, France—a lot of holidays take place, so judging that right is always a fine art, but largely the quarter was as we expected. Obviously we’re doing extremely well with Atripla in the US, in Spain. We now have Italy growing, and of course we had about two months worth of sales in France, so it was very much driven by the pickup in Atripla.

Operator

Your next question comes from the line of Josh Schimmer – Leerink Swann.

Josh Schimmer – Leerink Swann

If you did decide to roll the phase II quad studies into phase II/III trials, will we still see the interim data?

Norbert W. Bischofberger

You are asking me if we would run it into a phase III study, under that scenario we would not be able to release the data, so we’re debating that currently internally, but I think since the rate limiting step for approval of the quad will be to second phase III study with the protease inhibitor. That’s why I think it wouldn’t buy us much if we would convert this phase II study into a phase III study, so our current thinking right now is to start two new phase III studies, one against Atripla and one against the protease inhibitor.

Operator

The next question comes from the line of Joel Sendek with Lazard Capital Markets.

Joel Sendek – Lazard Capital Markets

With this interest for the frontline label, and their testing it, potentially it’s once a day, do you view that as more of a threat now than it used to be and what are you doing to defend against that?

John Milligan

The Prezista plan has been known for some time that they were going to go for once a day. We don’t know if it will be successful or not successful. For our money, the value of having this in a fixed dose combination really takes away much of that competitive threat unless they can find some other way to co-formulate it with something else and put it in first-line because the co-formulated products are so much advantageous to patients, and they tend to have better outcomes. One of the problems you get into with non-fixed dose combinations is patients make choices to take partial regimen and that’s where you get the higher levels of resistance and the higher levels of failure in the real world areas, and so I think the value of fixed dose combinations is well known to physicians and will be the preferred route because of the longer term benefits.

Norbert W. Bischofberger

Joel just to kind of reassure today in terms of the two-third agents that are really sort of growing right now. With Prezista, our penetration of Gilead products is 88%. This is in the naïve setting, and with Isentris, it’s 84% of patients, so largely that’s Truvada. Some of it is sometimes Viread, but largely Truvada, so you can see that over eight times out of 10, Prezista or Isentris is partnered with Gilead.

Operator

The next question comes from the line of Jason Kantor with RBC Capital Markets.

Jason Kantor – RBC Capital Markets

With regard to your tax rate, you said that there was some resolution of audits but also geographic mix, so I’m wondering where you’re getting those benefits geographically and if that might persist into future quarters, and then on France with the launch there, how much is the uptake was due to filling the channel there, inventory build in France?

Robin Washington

I’ll take the first half Jason, and then Kevin will cover France. The majority of the tax rate reduction was generated by a completion of our tax audit and our ability to get rid of reserve. Overall, we continue to see continued upgrade and improvement in international growth, primarily Europe, and because we have the tax structure, higher international European revenues drive our overall rate down, so that’s something that we see continue to the extent that we continue to generate more profit overseas.

Kevin Young

And in terms of France, this was not a very large bolus going into the wholesale. Obviously we did supply the wholesalers in France, but this was not a big load. Please appreciate that the component products are available. Also France is biased towards the protease inhibitors and therefore the use of Truvada. I think what gives us a lot of confidence in these couple of months is that the uptake on the driven therapeutic committees was virtually total in terms of the 180 plus HIV centers in France, and all of the large centers in Paris as I said particularly the large assistance public hospitals which are very large are prescribing, so I think the first quarter obviously truncated was about demand as opposed to a big wholesaler load.

Operator

The next question comes from the line of Tom Russo with Baird.

Tom Russo – Baird

I wanted to ask a question somewhat related to inventories. What is your best read looking at the second quarter of underlying market growth in the US? Does it still feel like 7 to 9% which has been pretty consistent the last few years or does it feel like something else, and then with regard to guidance, how would it have been revised just based on the core business as opposed to CV Therapeutics and other moving parts?

Kevin Young

In terms of the market, defined as the antiviral market, the annual growth has remained pretty solid. It was 7% and actually likewise in Europe, so those numbers are very consistent. We still see a high need out there for increased testing and linkage to care. We are still seeing very high incidence of HIV in the large cities and the instance growing into the southeast of the US. Certainly there remains very high profile, and we have the appropriate government policy, people, as well as community-based, field-based people who are continuing to discuss the need for increased testing and linkage to care, i.e, putting into the healthcare system.

Tom Russo – Baird

I was asking was about Q2. I think the market research that you’ve shown usually has a quarter lag, and I just wanted to really figure out if there is anything that looks or feels any different even anecdotally in the second quarter.

Kevin Young

No. Obviously, we are always a quarter behind here in the US, Tom, and so we don’t know the accurate figure for Q2, but there is nothing that we have seen during this quarter that would say that there has been some fall off in that type growth.

Robin Washington

For the second half of your question, we do provide overall net product revenue guidance, so Ranexa was factored into that guidance, but we won’t provide a breakout by therapeutic area or product.

Operator

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

Geoff Porges – Sanford Bernstein

John and Robin, you’ve got a lot of moving parts here—Atripla, the next triple Truvada, the quad, patent expiry for Sustiva—how should we think about margins going forward? You had a bit of a trend down here. You think that you can sustain margins, particularly operating margins at the current level or around the current level as you go through all of these transitions?

Robin Washington

Given relative to our overall guidance, we do factor in margin as you know, but the more we sell of Atripla, it does create an overall drag on our margins, but we focus operationally on our core margin exclusive of Atripla or the Sustiva component of Atripla as well as Tamiflu, so it’s something that we watch and monitor very closely. Clearly, if you look at second half 2009, we’re impacted by the fact that we are integrating two companies, so we’ve got infrastructure in place for two companies that will continue to work through. The CPT impact on our overall EPS, if you look at it operationally, was about a penny, so feel pretty comfortable that we can maintain our operating margins overall going forward.

Geoff Porges – Sanford Bernstein

Robin, would you agree with that longer term?

John Milligan

Geoff, we continue to try and run a very efficient business. As Robin just pointed out, the small EPS impact already that CVT is having on Gilead shows that we can run a very efficient organization and that we are focused on it. If you think about the R&D guidance that Robin provided today, the vast majority of that increase in R&D guidance relates to the payment to Tibotec, and so we are able to rationalize efficiently. We are able to run this business and with a focus on those operational margins, and we are going to continue to do so for the future. I can’t give you guidance for 2010 or beyond, but I know that you know as we discussed it during the course of the year, we are heavily focused on keeping this business running very efficiently, and that won’t change for us.

Operator

The next question comes from the line of Geoff Meacham with J.P. Morgan.

Geoff Meacham – J.P. Morgan

Where are you guys in the preparations for launch in the EU, and can you highlight maybe the key differences from a regulatory view between what the EMEA and Canadian regulatory authorities think compared to the US?

Kevin Young

I’ll take the first part of that. Yes, we are just getting the European markets ready. I would say two things. It’s probably a fairly modest potential in Europe as I think you may know there are lot of compounded products used in Europe. I think the market that is most attractive to us both in terms of prevalence of the disease as well as actually the ability to have a good price and usage is Germany, so that’s going to be one of our first markets, so I think Germany is probably top of our list to have a successful introduction. We also I think will eventually need that head to head data of the study that we are running versus TOBI to really make it an attractive market in Europe.

Norbert W. Bischofberger

Jeff, the two regulatory approvals or almost approvals that we have in European Union and in Canada are both conditional approvals, and what that means is we have to fulfill certain conditions which essentially is the completion of ongoing studies. That’s not the case in the US, and we are still in discussions with US FDA about the approval of aztreonam, and we hope to make some progress, but if they don’t agree to our dispute resolution, we do have the study in place, and it is enrolled and that will get us approval in the United States as well.

Operator

The next question comes from the line of Sapna Srivastava with Morgan Stanley.

Sapna Srivastava – Morgan Stanley

If you were to exclude CVTX from your revenue guidance update, could you help us understand where it would have come out to be?

Robin Washington

As I mentioned earlier, we don’t breakout our guidance by product or therapeutic area, so it is inclusive of overall net product revenues, and we have factored in Ranexa into that guidance.

Sapna Srivastava – Morgan Stanley

How should we think about non-retail balancing out the inventory aspect of it? Are they mostly comparable or does one outweigh the other? The increase of inventory levels largely boosting the Atripla antiviral revenues, and the non-retail coming down slightly. If I just had to figure out exactly where the midpoint would be, should I think of them kind of cancelling each other when I think of the run rate going forward in the future quarters?

Kevin Young

There was a certain degree of cancelling. As I said earlier, Sapna, the drop-off in Q2 was not as substantial as it was in 2008. That’s probably as much color as I can provide you. It’s difficult to give you real accuracy on those two tradeoffs.

Operator

At this point we have run out of time for additional questions.

Susan Hubbard

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

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Source: Gilead Sciences, Inc. Q2 2009 Earnings Call Transcript
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