Gilead Sciences' CEO Discusses Q3 2013 Results - Earnings Call Transcript

Oct.29.13 | About: Gilead Sciences, (GILD)

Gilead Sciences, Inc. (NASDAQ:GILD)

Q3 2013 Earnings Call

October 29, 2013 4:30 p.m. ET

Executives

Patrick O'Brien – Vice President, Investor Relations

John Martin – Chairman and CEO

John Milligan - President and COO

Norbert Bischofberger – EVP, Research and Development and Chief Scientific Officer

Kevin Young – EVP, Commercial Operations

Robin Washington – SVP and CFO

Analysts

Geoff Meacham - J.P. Morgan

Mark Schoenebaum – ISI Group

Geoffrey Porges – Sanford Bernstein

Rachel McMinn - Bank of America Merrill Lynch

Yaron Werber - Citi

Brian Abrahams – Wells Fargo Securities

Matthew Roden – UBS Securities

Michael Yee - RBC Capital Markets

Phil Nadeau - Cowen & Company

Brian Skorney - Robert W. Baird

Howard Liang - Leerink Swann

Nick Abbott - BMO Capital Markets

Terence Flynn - Goldman Sachs

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Gilead Sciences Third Quarter 2013 Earnings Conference Call. My name is Erika 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, Erika, and good afternoon, everyone. We issued a press release this afternoon providing earnings results for the third quarter, which is available on our website where you can also find detailed slides that support today's call.

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

Before we begin 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, 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 would now like to turn the call over to Robin Washington.

Robin Washington

Thanks Patrick and thank you all for joining us. Earlier today, we reported solid third quarter 2013 results. Our non-GAAP EPS was $0.52 per share compared to $0.50 per share of the same period last year. Worldwide product sales exceeded $2.7 billion, up 15% over the same quarter last year and 2% sequentially, driven largely by the continued uptick of our single tablet regimen in both the U.S. and EU.

Turning to operating expenses, year-over-year non-GAAP R&D expenses were up $105 million, which is mainly attributable to the increased investments in phase 2 and 3 programs in oncology and phase 3 program in HIV. Non-GAAP SG&A spending was up about $90 million as we continued to expand our infrastructure to support the anticipated launch of Sofosbuvir.

Finally, I would like to update you on our full year 2013 financial guidance, which is summarized on Slide 10 in the earnings presentation available on our corporate website. We are increasing our non-GAAP net product revenue guidance for full year 2013 to $10.3 billion to $10.4 billion, which represents a $200 million increase from the top end of our previous guidance range.

Our operating expense and tax rate guidance are also changing as follows: R&D expense guidance will increase to $1.95 billion to $2 billion; SG&A expense guidance will decrease to $1.5 billion to $1.55 billion. Tax guidance is now 26% to 27%. All other aspects of our guidance for 2013 remain unchanged.

In closing, our year-to-date 2013 financial performance is on track and we look forward to a strong fiscal year close.

I’ll now hand the call over Kevin.

Kevin Young

Thank you, Robin. Breaking down the third quarter results, I would first like to concentrate on United States. Total U.S. sales for the quarter were an impressive $1.7 billion, a growth of 20% over the third quarter of 2012. Both antiviral and cardiopulmonary franchises posted robust year-over-year increases of 19% and 27%, respectively.

Looking in more detail at HIV, it is important to first report that there was little effect of either inventory or ADAP purchase. Inventory for our big three wholesalers increased slightly, but stayed around the mid-point of our contractual range. ADAP purchasing was solid during the third quarter but lighter in the second quarter of 2013.

It is difficult to predict the picture for the remaining quarters of federal fiscal year, but we do know now that the base and emergency funds for 2013 have been fully delivered to each state program.

The third quarter of 2013 marks two years since the launch of Complera and one year since the launch of Stribild. The adoption of both these new single tablet regimens continues to be very encouraging.

Stribild is now the number one regimen in naïve HIV patients. The number one regimen in patients who are switched and more prescriptions have been written for Stribild during its first year of launch than for any other HIV product since Atripla was introduced in 2006.

The performance of Complera is no less impressive. Complera is the number two regimen in naïve HIV patients and number two regimen in patients who are switched and the number two regimen in all HIV treated patients.

What is especially interesting is to see how the third agent landscape is rapidly changing as a result of inscription of Gilead’s new STRs. The NNRTI class has significantly reduced in share but it’s the leading third agent category.

Integrate inhibitor class has grown sharply and is now the second largest third agent category. Finally, the protease inhibitors have dropped both in share and position being the smallest of the third agents.

Turning to Europe, we were also very pleased with the third quarter year-over-year sales growth of 7% excluding foreign exchange. The continued strength of Eviplera is reassuring and the very early signs from Stribild are encouraging.

Eviplera sales rose by over 400% year-on-year driven by the fact that it was the first full quarter for all big five markets. We are particularly encouraged by the rapid uptick of Eviplera in Spain, a traditionally strong NNRTI market. In just two quarters since launch, Eviplera is the most prescribed regimen in naïve HIV patients.

Stribild is now commercially available in seven European countries but only two major markets, the U.K. and Germany. In the U.K., Stribild is the first ever prescription product to gain pricing approval to the new NHS England system and we now look forward to healthy uptick in the coming months.

Stribild performance in Germany has got off to a very fast start with prescriptions running at double the pace of Eviplera at a similar time point in launch. 70% of naïve HIV patients in Germany are already treated with Stribild.

In summary, today’s business performed exceptionally well in the third quarter. I’d now like to focus my remaining comments on our new opportunities hepatitis C and oncology.

On our quarterly costs I have kept abreast of the commercial build outs for HCV in the U.S. and Europe. I am pleased to report that for both regions we are now putting the finishing touches in place for Sofosbuvir launch. In the U.S. we have a dedicated sales team of approximately 150 HCV therapeutic specialists who are in territory and going through the final phases of training. On the approval of Sofosbuvir this team will discuss our FDA approved label with hepatologists, gastroenterologists and a proportion of infectious disease specialists. Our HIV team will play no part in the launch of Sofosbuvir and will concentrate solely on supporting our important HIV single tablet regimens. Wrapped around our HCV sales team will be a complete supporting infrastructure of medical scientists, national account managers and nurse educators. We feel confident that subject to FDA approval we have the right resources and the right people to provide strong educational support for Sofosbuvir.

Our product distribution model will essentially be similar to that of HIV yet with a bigger network of specialty pharmacists. We anticipate that Sofosbuvir purchases in December will be largely for opening and entry of our wholesaler level. And that prescribing pull through will only really start in the new year especially for the GT-1 patient requiring pegylated Interferon.

In Europe we anticipate Sofosbuvir European Commission approval in the first quarter 2014. We will then roll out our launches according to pricing and reimbursement timelines. Like the U.S. by the end of 2013 we will have finished hiring and training our field sales teams in Germany, the UK, Austria, Nordics and France. France is an especially important market to highlight because of its history of HCV infection and subsequent high diagnosis rate. We have already put in place a so-called French ATU early access program in order to provide Sofosbuvir to high need pre and post HCV liver transplant patients.

Overall we feel that our commercial launch plans are where they should be to bring Sofosbuvir responsibly to specialists and their patients upon regulatory approval.

Finally, a very brief mention of oncology. We will gear up our sales and marketing efforts for Idelalisib commensurate with projected regulatory timelines. In the U.S. we will build the stand alone sales team by mid 2014. Our approach in Europe will be slightly different where we will look to involve the Ambezon [ph] sales team. A team that already has an excellent reputation with the hospital hematologist.

In closing as I hope you sense it is a very busy yet exciting time at Gilead as we roll out the next stages of commercial growth. I will now turn the call over to Norbert.

Norbert Bischofberger

Thank you, Kevin. I am pleased with the rapid progress across all our R&D programs and the high level of productivity. A large number of development programs are mounting advance from IND through Phase 1, 2 and 3 clinical development.

First an update on oncology. In September an NDA was submitted to ACA for Idelalisib for the treatment of double-refractory INHL. This application was supported by data from Study-10109, a single arm open label Phase 2 study of 125 patients who were refractory to both rituximab and alkylating agent chemotherapy. In this study Idelalisib achieved an overall response rate of 54% with a median duration of response of 11.9 months. The most common adverse event was diarrhea, transaminase elevations and neutropenia. The final analysis of this study will be presented at an upcoming conference.

In October Study-116 of Ielealisib was stopped early following a recommendation by an independent data and safety monitoring board. Study-116 is a randomized double drawing placebo controlled study in patients with previously treated recurrent CLL who require treatment but were not fit to receive cytotoxic therapy based on clinically important cormobidities. 80% of the patients were greater than 65 years of age and 44% had the 17p deletion or TP53 mutation.

220 patients were randomized one to one to rituximab plus idelalisib versus rituximab plus placebo. After reviewing data from a predefined interim analysis and independent data and safety monitoring board recommend that stopping to study early due to overwhelming evidence of efficacy together with appropriate considerations of safety.

Data from study 116 will be submitted for presentation at an upcoming scientific conference also. The data from this interim analysis of study 116 in CLL together with the data from study 119 in iNHL is included in the European market revitalization application which was filed just yesterday.

In the U.S., we have initiated discussions with FDA regarding a regulatory filing in CLL, either as a separate NDA or as a submission to the existing NDA. An extended access program of idelalisib for patient with the current CLL requiring treatment but who are not fit for chemotherapy as planned.

In addition, full Phase 3 studies in relapsed refractory iNHL and CLL patients are currently involving. The Phase 3 program evaluating momelotinib, our JAK1/2 inhibitor myelofibrosis will be initiated into fourth quarter of 2013.

We are planning two randomized studies of momelotinib for registration. The first is an active control head-to-head study versus ruxolitinib in newly diagnosed patients requiring therapy. The second study is in patients who have failed ruxolitinib therapy because of its bone marrow suppression effects and will compare momelotinib with best available therapy. This study will start in the first quarter of 2014.

In addition to the rapid progress with idelalisib, Phase 2 studies are underway for GS-9820, a backup PI3K delta inhibitor and for GS-9973, our Syk inhibitor both along and in combination with Idelalisib in various piece of malignancies. A Phase 2 study of simtuzumab in pancreatic cancer was fully enrolled and studies in colorectal cancer and myelofibrosis are continuing to enroll. GS-5745, an entire MMP9 antibody is under evaluation on Phase 1/2 studies in pancreatic and gastric cancers. We are looking forward to sharing the emerging data of all oncology studies as they become available.

Now turning to HIV. In October, Tybost which is also known as cobicistat received European Commission approval and elvitegravir received a positive CHMP opinion and we expect the European Commission accrual by the end of this year. In the U.S., a complete response letter was issued by FDA on cobicistat and elvitegravir in April and the resubmission is planned for the first half of 2014.

The two Phase 3 studies evaluating TAF, Gilead’s novel prodrug of tenofovir are expected to be fully enrolled this month. These studies are identically designed evaluating Stribild to a single tablet regimen of elvitegravir, COBI, FTC and TAF abbreviated as ECF TAF in over 800 patients in each study in treating naïve HIV infected patients. The primary endpoint in this study is at 48 weeks and we would expect that data available in the fourth quarter of 2014.

ECF TAF will also be evaluated in two additional Phase 3 studies. We’ll study 117 in patients who are failing on their current regimen and who has not previously been treated with an integrase inhibitor and in study 119 in fully suppressed patients who are taking a multitablet b.i.d. regimen and who have previously failed at PI or NNRTI regimen. Both of these studies are currently ongoing. Along with E/C/F/TAF, we plan to also submit a marketing authorization application for F TAF, which will be supported by a single bioequivalence study. The two phase 3 studies evaluating TAF has a single agent for the treatment of chronic hepatitis [indiscernible] negative patients are currently ongoing.

And finally, as all of you are aware, we had a successful FDA advisory committee last week. The panel [ph] voted unanimously in favor of approval of sofosbuvir with ribavirin for the treatment of genotype 2 and 3 hepatitis C infected patients and approval of [indiscernible] course of sofosbuvir pegylated interferon with ribavirin for the treatment of genotype 1 and 4 hepatitis C infected patients.

In addition, the majority of panel members were in favor of broadening the indication to improve genotype 1 treatment experienced patient in the label. [indiscernible] the use of sofosbuvir plus ribavirin in the pre-transplant setting quotations with ACC. At the advisory committee meeting, new data were presented from the VALENCE study which indicated that treatment-naïve and treatment experience genotype 3 hepatitis C infected patient was so faster by providing with 24 weeks with SVR rate of 84%.

We are naturally excited about bringing sofosbuvir to the market and we feel like panel members commented that this is a historic moment, for which every employee at Gilead is proud of. We look forward to working with FDA to complete the review of the sofosbuvir NDA and ultimately launch the product.

Meanwhile the clinical development program of the sofosbuvir [indiscernible] dose combination is also proceeding rapidly. Three phase 3 studies IN-1, IN-2 and IN-3 explore the utility of the fixed dose combination both treatment, naïve treatment experience genotype 1 hepatitis C infected patients, with and without ribavirin, therefore treatment durations of eight, 12 and 24 weeks, we anticipate having data from these studies that we have about towards the end of this year and into early next year as we are on track for NDA, MAA filings in the second quarter of 2014.

The development of sofosbuvir in combination with ribavirin for genotype 2 infected patients in Japan is progressing. The single-arm phase 3 study with 12 weeks treatment duration was fully enrolled in September and we are on track to submit the marketing application in Japan towards the middle of 2014. This is a significant opportunity as genotype 2 infected patients in Japan constitute over 25% of the total and sofosbuvir and ribavirin will be the first on oral interferon free option for these patients.

In addition, the phase 3 program after fixed dose combination of sofosbuvir/ledipasvir with and without ribavirin genotype 1 hepatitis C infected patients was initiated in September 2013 that we anticipate this study to be fully enrolled by the end of this year. This two-arm study in three [indiscernible] genotype 1 infected both treatment, naïve treatment experienced patients, randomized to a 12-week course of the fixed dose combination with and without ribavirin.

Finally, the potentially pan-genotypic interferon and ribavirin free regimen, the combination of sofosbuvir [indiscernible] GS-5816 is advancing to phase 2 development, two studies in treatment naïve and treatment experienced patients in various genotypes are fully enrolled, and depending on the emerging data, we should be in a position to initiate phase 3 studies in the second half of 2014.

More information on our programs will be presented at the annual AASLD meeting which will commence this week in Washington DC. Over 50 abstracts were submitted on Gilead's various liver disease programs and importantly, new data will be presented on the safety and efficacy of sofosbuvir,

Ribavirin in HIV core affected patient and in the post liver transplant setting.

In summary, very rapid progress has been made across all our therapeutic areas in all other programs. Our pipeline provides us with numerous opportunities with continued growth, both short-term and longer-term. We want to take this opportunity to thank all of our employees for their continued hard work and dedication.

So with that, we will now open the call for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Geoff Meacham with J.P. Morgan. Please proceed.

Geoff Meacham - J.P. Morgan

Hi, guys. Thanks for taking the question. Just on Hep C, looking at your market research, you guys have obviously done a lot of work ahead of the sofosbuvir launch. So, I want to know on the epidemiology side, what would you say are the biggest gaining factors that convert patients from diagnosed to the treated bucket? And then just a related question, when you think about the filing of sofosbuvir plus ledipasvir, what’s the current thinking on which of the ION studies will go into that filing I know time is over yet? Thanks, guys.

Kevin Young

Hi, Geoff. It’s Kevin. Thanks for the question. The one bucket that we are still working up and I think we are getting closed, but we are still sort of road testing is what we term as patients under treated cares. So those are patients who are diagnosed, are under the management so to say a hepatologist, astroenterologist or an infectious disease specialist. That bucket tends to move around a bit a lot more than what do a typical bucket of patients in HIV because patients are treated and obviously are cured. Some patients are treated and not cured and stay with these specialists and some are treated and drift if you like backing to that 1.7 of diagnosed but leave the specialist.

So, one of the reasons that we want to double check that number and wait a little while until we have a few more quarters is just to get back as collect as we can. We do think there is a good number of patients that are currently under care that we can access fairly quickly with the sales force that we put in place at the launch of sofosbuvir. Some of those are treatment-experienced and they are probably in most obvious bucket of patients and it was nice to see the remarks of the FDA advisory panel around the possibility of getting a label for the treatment experienced.

And some of them are treatment naïve. So we do think, first and foremost, our focus will be with the specialist treated for the patients that they currently have in their practices that I know they would be recalling to go on sofosbuvir.

John Martin

Geoff, going through the other question, all three studies will go in the NDA. We feel they are all important. As you may remember, ION-1 is treatment-naïve, ION-2 is treatment-experienced and ION-3 explores an eight week course of therapy, both with and without ribavirin.

We are fairly convinced that we will be able to repeat the Phase 2 results, which would mean that even the eight weeks duration will give you high response rates and that will be important information drives into legal. The rate limiting study by the way in my view is the 24-week arms of ION-1, as that will become available sometime early in 2014 as that determines the past to the NDA.

Geoff Meacham - J.P. Morgan

Okay. Thank you.

Operator

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

Mark Schoenebaum – ISI Group

Thanks a lot guys. First I would just like to say congratulations to Kevin for a phenomenal launch of the next generation HIV drugs, some of those slides are really amazing, so good job. I know everyone has [indiscernible] but pretty cool stuff. I was just wondering on the slide you have that shows the 1.7 million patients in the U.S. that are diagnosed with hep-C, if you could let us know perhaps, how many of those you estimate are incarcerated and how many are in the VA and when you give guidance next year will the sales guidance include hep-C when you give that in January? Thank you.

Kevin Young

Hey Mark, well first of all that was very decent of you to thank everybody here for our uptake of single tablet in HIV. I am lucky to work with some great people so they are doing a fine job and we got some nice data behind those products. In terms of the number of patients or people should I say, because I think it is more people with HCV. It is quoted that about 4% of the VA population, that is about 225,000 people, veterans, have hepatitis-C and I would say Mark that is probably a higher priority for us, the VA population than corrections. We have very good relationships with the VA and we feel that their model of accessing patients at the launch of Sofosbuvir as a single agent, it is probably easier and more straight forward than it is in the correctional setting.

In the correctional setting I honestly don’t know off the top of my head the total number of people that go through the correctional setting but the CDC have quoted that 35% of the prison population, up to 35%, has hepatitis-C. We will be addressing the correctional setting, as you know we do have a team for HIV today that address that population. But I have to say I do think it will be the Interferon-free regimen that will do better in the correctional setting. I don’t think Interferon has ever done particularly well in the correctional setting because of the obvious side effects. So I think it is going to be Sofosbuvir lidisobir [ph] that will be an effective regimen for corrections.

Robin Washington

Hi Mark, this is Robin, to answer your second question, it is hard at this point in time to give guidance about our guidance. We are hard at work on preparing for a successful launch so – I see that we are undecided yet relative to what granularity we give around guidance by product particularly in product launches at this point.

Mark Schoenebaum – ISI Group

Okay thanks.

Operator

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

Geoffrey Porges – Sanford Bernstein

Hi, Kevin just to followup on the ACV question, could you talk us to -- clearly when everyone’s signaled there’s potentially a huge demand for particularly the ribavirin sofosbuvir based regimens and also single tablet regimes later, what are you hearing from payers both in the U.S. and outside the U.S. about how they are going to triage patients and what if any restrictions might be imposed, is it going to be enough to just show up to a physician in France and say I have got HCV, treat me, or to a physician in the U.S. and say I would like treatment, or is there going to be some triaging of patients depending upon fibrosis or anything else. That would be helpful for us to understand and thanks.

Kevin Young

Thanks for the question Geoff. That is a really broad question, let me try and go through a sequence here. Let me deal with the U.S. first. We have had a lot of discussion with U.S. payers. They certainly have HCV on their radar but I am encouraged from our conversations that they will reimburse well for Sofosbuvir and of course the broader the label the better. Again I was encouraged with the tone of the advisory committee that we could come out after our further discussions with a good broad label and that would help us with U.S. players. There will always be a prior authorization that a patient has to go through and the physician in the office have to go through before starting an HCV treatment. But generally is a check that the drug is being used on label. So we think that will be fairly straightforward and most of the hepatologist and gastroenterologist who currently prescribe an HCV are used to that step. So I think we are encouraged that we will have a very good coverage in United States.

In Europe, of course, it’s a country by country pricing and reimbursements process. Depends on the country, the earlier markets, typically the U.K. and Germany, the later markets of the southern European markets.

We do think that in certain categories and I really highlight the liver transplant area that we may get some exceptional coverage between the European Commission approval and the normal timelines of pricing and reimbursement, and that’s true just because of the absolute unmet need. We also hope that the pricing -- the normal pricing and reimbursement process will go a little bit quicker for a drug as innovative as Sofosbuvir.

Basically early next year we will be submitting our dossiers to bodies like NICE, AMNOG, the transparency committee in France, so we are all geared up and we think we have some good data that really shows exceptional cost benefit for Sofosbuvir. So, a long answer but I hope that gives you some sort of color.

Geoffrey Porges – Sanford Bernstein

Okay. Thanks very much.

Operator

Your next question comes from the line of Rachel McMinn with Bank of America Merrill Lynch. Please proceed.

Rachel McMinn - Bank of America Merrill Lynch

Hi. Yeah. I guess also had a question for Kevin but one for Norbert as well. I just, for genotype 2 and 3 patients in the U.S., maybe you can just give us a little bit more sense, a lot of genotype 1 patients will wait for the fixed oral dosage pill but genotype 3 there was -- 2 and 3 there is a lot of visibility perhaps that maybe, they would be less inclined to wait, but I just wanted to get your thoughts on how to think about that population for 2014?

And then, Norbert, on 5816, do you actually have some on treatment or SVR results now and I just wanted to take your temperature on that program. Thanks.

Kevin Young

Hi, Rachel. It’s Kevin. We do think that the 2s and 3s will be taken up pretty quickly. If you look at the table on slide 28, you have got about 20% of the U.S. population is, of HCV population in genotype 2 and 3. So we think that’s the most obvious patient category because you haven’t got Interferon.

I think in terms of how a treating position will move through those 2 and 3 patients. Of course, it will be the ones with advanced liver disease or perhaps that even failed previously on an Interferon-based therapy. But, it is, I think, the obvious group of patients to be getting on and treating right from launch.

Norbert Bischofberger

Yeah. So Rachel with regards to clinical data we do have some emerging data, so that the toughest test for 5816 in genotype 3 that is simply based on neurology data. We do have some emerging data in the treatment naïve genotype 3 population that looks promising but what we have to wait for and that’s the rate in the established genotype 3 treatment experience we will get those data sometime in the February, March timeframe of next year. So only then would we really make the decision to go into a more advanced Phase 3 program, if we take the genotype 3 treatment experienced population.

Rachel McMinn - Bank of America Merrill Lynch

Thanks.

Operator

Your next question comes from the line of Yaron Werber with Citi. Please proceed.

Yaron Werber - Citi

Yeah. Hi and I got to tell you also really congratulations and if you look where you were two years ago and where you are now. I mean, it’s absolutely incredible, so congrats on a really terrific job, really everything, hep C, HIV and oncology. So, I have two questions and both of them are obviously you would imagine hep C? First one just, one of things, you guys asked for is sofosbuvir label that is very broad. That covers the treatment of hepatitis C with other oral – other drugs broadly. And I just wanted to get your sense as to – it looks like FDA was very supportive overall but then really necessarily comment that they sort of made some remarks. What’s your thoughts on the ability to get that label?

And then secondly, when – in 5816, you’re actually going an eight-week arm now for genotype 3. So it sounds like you guys have a lot of confidence in genotype 3. So I am just trying to get a sense what do you know on ledipasvir and sofosbuvir. It sounds like you already know something about 5816 but what do you know about ledipasvir, sofosbuvir?

Norbert Bischofberger

The first question you asked about the change that we get that broad label that was described in the Anti-Viral Advisory Committee Meeting at the beginning and I am not sure whether you listened to the day before to the tenofovir [ph] deliberations, Jeff Murry made a comment along the lines they said, they don’t want to do that right now. They have been surprised in the past about different regimen having different response rates. They would like to get some more experience to figure out which specific combination works and which ones should you rather stay away from. So they indicated they will not table at this point to give us a broad indication to just see with other agents. [indiscernible] dossier that we have not either really in-depth conversation with the FDA about this. That will happen now as the advisory committee meeting is over.

And the other question was – what we do know about 5816 is that it works in genotype 3 treatment naïve patients. As I said, we need a genotype 3 treatment experienced and then as you very astutely observe, the alternative – study to look at eight weeks of therapy. And again, it would be the same thought process that we initiate the phase 3 program, we might actually do the phase 3 program 8-weeks treatment in genotype – in all genotypes treatment naïve and maybe 12 weeks of treatment in treatment experienced. But again it all depends on how the phase 2 data emerge. At least we will be in a position next year to make an informed and intelligent decision as to what the phase 3 program is going to look like based on these two data.

Operator

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

Brian Abrahams – Wells Fargo Securities

So it sounds like 12-weeks for genotypes 1 and 2 and 24 weeks for genotypes 3, were the durations that the panelists in the FDA are leaning towards based on all the data? Now that there is a little bit more concrete, I am just wondering, how does that shape your pricing strategy in terms of balancing the three genotypes next year and also anticipating the overall combo coming on in 2015?

Kevin Young

Hey Brian, it’s Kevin. Thanks again for the nice words. We are very close now, Brian, only six weeks to PDUFA date. So not lock away, and so we set our price at launch. So I can’t go into really great detail today. The one comment I would make is that there is only 9% of the U.S. population – HCV population that are GT3. So whilst those patients look like they are going to be given a label for 12-24 weeks and you can say well, it’s not going to have profound effects on your pricing strategy. There is not only small number of patients there.

So I wouldn’t say that the advisory committee has had a major influence on our continued thinking and finalization of our pricing. So I hope that’s helpful.

Operator

Your next question comes from the line of Matt Roden with UBS.

Matthew Roden – UBS Securities

And Kevin, these data points on hep C are great. I guess I just wanted to ask a little bit more – if you could speak a little bit more about the methodology here. Is it fair to say that you wouldn’t have put these numbers out if there wasn’t a fairly high level conviction in these estimates. And then just drilling down on that a little bit more, do you have a sense of what the proportion is among the diagnosed, who have evidence of advanced liver disease? It seems to me that those would be the more urgent need to treat patients that might be tackled more in the near term than long term? Thanks.

John Martin

Yeah, just to give a little bit background of how we are trying to develop this math. We’re going down the road of the patient database like we’ve done with Synovate. Synovate became Ipsos. Ipsos is the people that we are working with once again. It takes a long time to develop robust samples.

I have to tell you that whilst we are getting more confident with hepatitis C, the sampling is far lower both in terms of the physician universe as well as the number of charts that we get through for HIV. We have 10 years of developing that database and we’re really on sort of year one of getting this off the ground at Gilead.

So, I think we’re getting more confidence. As I said earlier, one of the reasons that we’re still not sharing fully that bucket that sits with the specialist, so the patients that are diagnosed that sit with specialist treaters is that we just want one or two more quarters to make sure that it is reproducible, but I think we are getting more comfortable.

In terms of treatment-experienced, I think there is something in the range of about 80 to 100,000 patients that are treatment experienced today and they sit between that 1.7 -- they sit within the 1.7 diagnosed, but somewhat lower number that the sort of lower end of the spectrum, about 80,000 and probably in and around the specialist office. So that’s our directional sense today.

Matthew Roden – UBS Securities

Thanks very much.

Operator

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

Michael Yee - RBC Capital Markets

Hey, thanks. Congrats as well. Question on Slide 31, I thought that was quite interesting with your break out of the distribution channels. Do you have any sense of the size, relative size of the buckets there, particularly VA and prisons and how price sensitive those buckets maybe, do you have to get contracts there, how does that really work in the relative size amongst those four? Thanks.

Kevin Young

Hi, Michael. It’s Kevin, great question. By far the majority of sofosbuvir will go through the first two blocks there, specialty pharmacy. Specialty pharmacy play an important role and have done since the launch of the PIs in supporting the hepatologists and gastroenterologists. So the majority will go through specialty pharmacy and through other retail change like the large retailers, Walgreens, CVS. So by far, they are bigger, much smaller level will be VA and prisons.

Typically with some like the VA, we do go through a contracting process for supply. We feel that we’ve got a very strong value proposition with sofosbuvir. And we would be looking to have a very constructive conversation once we bring it for listing on their National Formulary. So we think, we can maintain close to our retail pricing that will be in the first two buckets.

The one obvious thing that’s different with sofosbuvir than HIV is obviously that we don’t have the large ADAP buckets that has lower pricing that we have in the HIV world. So our expectation is that very little, if any, will move through the ADAP channel for hepatitis C.

Michael Yee - RBC Capital Markets

But do you think VA’s like 5% or 10 % or bigger than that?

Kevin Young

I think it’s in that ballpark, the one you quoted at 5% to 10%. It’s quite small.

Michael Yee - RBC Capital Markets

Okay. Okay. Perfect. Thank you.

Operator

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

Robyn Karnauskas - Deutsche Bank

Hi, guys. Thanks for taking my question. I guess, first, just a follow-up, so for Ion [ph] 3 eight weeks will you have that data, do you have it in-house and will you have that data before you launch, do you know how to price the drug, and how are you thinking about releasing it? Would you release it with the full Ion [ph] data set, and then just to clarify 5816, you talked about how you might think about developing it for genotype 3s and maybe shortening duration of therapy for these other patients, but how do you view it for genotype 1s, is it more of a life cycle management with better safety without riva, how are you thinking about it.

Norbert Bischofberger

Well so Robyn you asked about availability of data from Ion [ph] 3, we don’t have those data now but as soon as we have the SVR 12 so the regulatory end point we intend to do our price release on that which would give you top line results. That data will go into the NDA filing unless it’s completely negative which I would find hard to believe because we have done the Phase 2 study as you know. The second question of how we view 5816, it really I think everything else its hoped the profile holds up with continued clinical development and in Phase 3 the fixed dose combination of Sofosbuvir and 5816 would really replace the fixed dose combinations of Sofosbuvir and ledipasvir. It would be the pan-genotypic, interferon-free ribavirin-free single pill for everybody where you don’t have to worry about which genotype and what history and what resistance mutation we have. That is how we are looking at the 5815 Sofosbuvir fixed dose combination.

By the way that is also the reason why we are testing it specifically in the fairly large Phase 3 study in genotype 3 with experienced patients. We have absolutely no concerns that it works in genotype 1, that is a given but the question we have with genotype 3 treatment experience. If it passes that test then I think we have a [indiscernible] Interferon ribavirin free maybe eight weeks but certainly 12 weeks treatment duration regimen for everybody.

Robyn Karnauskas - Deutsche Bank

Great thanks, and just to clarify the question on Ion was really more about eight weeks, you have eight weeks in-house and will you have the eight week data before you launch the product.

Norbert Bischofberger

So Robyn the way we do this operation, we don’t look internally look at data after they become available. Once everybody has the last patient last visit which is obviously the twelve week duration [indiscernible] time when we actually would clean up the data base [indiscernible] and the [indiscernible] and that has not happened yet.

John Milligan

Hey Robyn, its John Milligan. I think the confusion here is what do you mean by the product. I assume you mean will we have the eight weeks data in house before we launch Sofosbuvir and the answer is we will not so we will be extrapolating. We are going to be extrapolating from the Phase 2 data as a way to gauge what the pricing will be as we launch Sofosbuvir assuming that we will have a similar outcome from Phase 2.

Robyn Karnauskas - Deutsche Bank

Got it, great, that is very clear. Thank you so much.

Operator

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

Phil Nadeau - Cowen & Company

Thanks for taking my question. One, Norbert, for you, we are obviously going to see ION 1, 2 and 3 over the next several months. Our sense of expectations for those data are that they are going to marginally replicate what we saw on Phase 2, so in treatment naïve patients SVR rates of at least 90 %, possibly approaching 100% and in treatment experienced patients SVR rates at probably 80% or higher, do those expectations jive with you yourself are expecting or is there anything about the treatment designs, the trial designs here, the patient populations that we should keep in mind as we await these data sets that kind of modulate what SVR rates we should anticipate.

Norbert Bischofberger

So Phil you are exactly right that is our internal expectation that we would replicate the Phase 2 data. There is no reason to believe why we wouldn’t. It is larger patient numbers. You know you always lose a few more if you have more [indiscernible] and maybe a few more lost to followup but I am very convinced with a 90% or higher response rate. And you know what I said before about the eight week study in Lonestar, even though the numbers were not large, about 25, what they absolutely do is they validate and give you a lot of confidence in the 12 week results. That is why we are very confident that we saw 95% or 100% response rates with eight weeks of treatment in Phase 2. That’s why I’m confident towards the 95% to 100% response rate in Phase 3 with 12 weeks treatment duration.

Phil Nadeau - Cowen & Company

Okay. And then, just one last question on treatment duration, I believe, I still think there's going to be a study out of, I think it's the NIH that's looking at a six-week regimen where the data were intriguing. Can you talk about the data and how you put that in context, when you look towards moving, even beyond the next generation of regimens? Is this something that you will begin to push the duration down to six weeks?

Norbert Bischofberger

So Brian, this is our thinking. So as you know, we have continuously reduced treatment duration, we were actually surprised ourselves. It went from 24 weeks to 12 weeks, to eight weeks. And there's a presentation at the ASO that talks about six-weeks and what that presentation would indicate that six weeks with two drugs is not enough.

So we're now asking the next question, if you add a third drug to a six-week sofosbuvir/ledipasvir, will the response rate again go up to 90% to 100%. That's kind of the experiment that you will hear about that data at ASO. And if that is indeed the case then we have to a make a decision internally, if that's something we want to pursue because you always have to challenge another drug. It's always more complicated.

There is always more drug interactions. There may be more safety issues, and what you gain is maybe two weeks of treatment duration. Maybe Kevin, wants to comment on it too.

Kevin Young

Yes. Just to chip in with a commercial angle here. I think if you move from three months to two months, that's clearly a step change and an advantage. I think going from eight weeks to six weeks doesn't really give you that much more and two months. If it turns out that way, is a very nice set, sort of regimen to deliver to a patient. I don't think carving off an extra two weeks is that big a differentiator when it comes to the commercial profile of the products?

Norbert Bischofberger

Brian, having that said, that's something we are still debating internally. So we haven't really come to a final conclusion yet.

Phil Nadeau - Cowen & Company

Okay. Thanks for taking my questions.

Operator

Your next question comes from the line of Brian Skorney with Robert W. Baird. Please proceed.

Brian Skorney - Robert W. Baird

Hi. Good afternoon guys. Thanks a lot for taking my questions. Really two quick ones, first just in terms of the ION-2 dataset, my understanding is open label. I’m just wondering are you guys blinded to the data as it is coming in because theoretically you probably have at least the SVRs for the 12 weeks at this point. And also would you release the 12-week data when it was in hand or would you wait for the full 12 and 24 weeks?

Norbert Bischofberger

Yes. So Brian, we actually internally do not locate the emerging data. We wait for the whole study to be done because you have to be really careful with Phase 3 and what we will never do is by looking at the data you could always be accused or viewed as influencing the ongoing conduct of the study. And if you were to make available SVR4 data from the 12 week ARM that would undoubtedly influence the 24 weeks ARM in the studies and you don’t want to do that. So we internally will wait for the whole study to be done. The last patient after last visit and then we look at the data.

Brian Skorney - Robert W. Baird

Got you. And just really quick on oncology, I noticed you have GS-9820 a next gen delta PI3 kinase inhibitor, I was just wondering, if you could kind of highlight the differentiation between idelalisib and 9820 in terms of what you think this might a better version of that? I know some of the competition, are developing a PI3K delta inhibitors, talk about potentially circumventing the DLTs in particular are levered off. Do you think that's the target?

Norbert Bischofberger

Yes. Brian, really good question. That’s exactly it. We’re looking at 9820 or something that has the same efficacy characteristic as idelalisib without the liver toxicity because liver toxicity we belief is compound specific. It does not mechanism or anything else related and so by making different analogs, we have convinced we can come up with PI3K delta inhibitor that don’t have DLTs elevation and only clinical data we haven’t dose enough patients yet with indicators that we have to this day not seen [indiscernible] elevations with 9820.

Operator

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

Howard Liang - Leerink Swann

Regarding the liver transplant opportunity, do you see Sofosbuvir use in pre-transplant HCV patient outside HCV, and in post transplantation? And a related, Kevin mentioned there might be exceptional coverage in the EU for liver transplant prior to reimbursement, can you explain how that works?

Kevin Young

I think if your question for U.S. is, do you have expectation of extensive uptick for liver transplant patient with HCV who is on the wait list then, we think there are probably in the US between 5000 and 6000 patients on the wait list for a transplant. We think yes – we think those patients are very obese patients to be treated, you need to clear they are HCV pre the transplant. So it will be subject to approval in our label, it will be on obese patient group for us. We know the specialists hepatologists who support the transplant program, we know a lot of the transplant surgeons as well. So we would direct some very specialists educational efforts to this group of patients.

Mentioning these scenes that are available in Europe, I did mention a good example in my script. And that’s called the French ETU translated that really means temporary authorization for use. It’s something that is granted by the French regulatory authorities. I think it’s a very noble thing where they will cover and allow the prescribing of pharmaceutical pre-European approval where there is profound unmet need. And so we have started to supply Sofosbuvir under that designation in France that was about – it started about a week ago, and that’s called pre and post liver transplant setting. So that’s a good example.

It varies from country to country but there are schemes not quite expensive as the French ETU but there are special categories that allow for getting the drug out there, typically after the European Commission approval, but before pricing and reimbursement where normally for pharmaceutical there would be no uptick at all.

Norbert Bischofberger

Howard, I would like to add, as you saw at the advisory committee meeting that the FDA is currently thinking of limiting the indication to the actual population studied which was HCC patients that fit the Milan criteria but you might also look at the ASLD abstract, we have a very exciting presentation on post liver transplant where we actually saw very respectable SVR rates, the fact [ph] that I have learned. So whatever label we end up with we will soon after approval file a SNDA and you get those additional data in the Milan [ph] broadened indication.

HCC patients that are on the transplant list that fit the criteria about one in five of the transplant. So it’s not insignificant but it could be larger.

Operator

Your next question comes from the line of Nick Abbott with BMO Capital Markets.

Nick Abbott - BMO Capital Markets

I would like to follow up on that theme of pricing in genotype question [ph]. First, can you tell me what the breakdown of genotype is with HCC? And secondly, knowing that fibrosis in HCC is higher for genotype 3 than genotypes in your data genotype 3 prevalence in EU Big 5 – for the Big 5 20% to 40%. Do you have pharmacoeconomic dossiers for EU detail, HCC risk per genotype, which presumably presumably helps adjust higher price for genotype 3 in the longer duration? Thanks.

John Martin

So, Nick, you are right. We got some interesting country effects in Europe, where a lot more a genotype 3. Good example is the U.K., where some of the populations that were, immigrant populations either first generation or second generation and a large population in and around London have genotype 3.

We’ve done pharmacoeconomic analysis on all our patient populations, both in naïve setting and the advanced erotic settings. So there will be all part of the dossiers that we will be supplying to the pricing and reimbursement bodies, particularly naïve and AMNOG/IQWiG in Germany.

So we feel that we’ve just like Norbert’s done in treating a broad array of HCV populations. We felt it necessary to do the same from the pharmacoeconomic point of view, so again, hopefully supporting a good broad array of patients.

Again, I would just say, Nick, we are quite close to the launch of the product. Here, I am hopefully, first quarter in Europe, so I just hold back on any further comments on pricing.

Operator

Okay. Mr. O'Brien, we have time for one more question. Your question comes from the line of Terence Flynn with Goldman Sachs. Please proceed.

Terence Flynn - Goldman Sachs

Hi. Thanks for taking me in here. Just two for me. I was just wondering in terms of the diagnosis rate, peak diagnosis rate that we might think about in the U.S. I was wondering France and Japan maybe are suitable proxies as we look at some of the data you guys have?

And then, Robin, I was wondering on capital allocation, if you can give us any update in terms of what you guys are thinking, now you brought leverage ratio down and we are approaching end of the year? Thanks a lot.

Kevin Young

Hi, Terence. This is Kevin. Great question. I don’t think that the U.S. will get to the level of France or the really high level of Japan. I certainly think it would take quite some years to get there. I think what really triggered the situation, first and foremost in Japan and then, fairly similarly in France was of course there was a lot of publicity, there was a lot of, I would say, it goes as far as saying sort of scandal around the infection of individuals through blood transfusion.

So I think it became very political and it force government to go on the front foot in terms of proactive measures in terms of screening of patients. So that’s why you see very, very high levels in Japan and above 50% actually in France.

So they were so politicized. They were so high profile. The population it was on -- in newspapers, on television and I think that drove that very high diagnosis rate. We feel that -- we feel it certainly can go higher in the U.S. I am not sure whether it will ever get to the level certainly Japan.

Robin Washington

And Terence to your second question, I mean, overall, our capital framework remains the same. We are focused on ensuring that we have the financial flexibility to invest in the business may come necessary M&A decisions and return value to shareholders. As you can see, we did start our share repurchases back this quarter and expect that to continue to accelerate in Q4 and beyond in 2014.

John Martin

Well, thank you, [Erica], and thank you all for joining us today. We appreciate your continued interest in Gilead and the team. We look forward to providing you with updates on future progress and earnings. We will look forward to calling some of you back after the call and thanks again.

Operator

Thank you for your participation on today’s conference. This concludes the presentation. Everyone may now disconnect and have a great day.

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