Gilead Sciences Inc. Q1 2010 Earnings Call Transcript

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 |  About: Gilead Sciences, Inc. (GILD)
by: SA Transcripts

Gilead Sciences Inc. (NASDAQ:GILD)

Q1 2010 Earnings Call

April 20, 2010 04:30 pm ET

Executives

Susan Hubbard – VP, IR

John Martin – Chairman and CEO

Robin Washington – SVP and CFO

Kevin Young – EVP, Commercial Operations

John Milligan – President and COO

Analysts

Geoff Meacham – JPMorgan

Karim De Felipe - Citi

Joel Sendek - Lazard Capital Markets

Rachel McMinn – Bank of America

Joshua Schimmer - Leerink Swann

Geoff Porges - Sanford Bernstein

Ian Somaiya - Piper Jaffrey

Jason Kantor - RBC Capital Markets

Thomas Wei - Jefferies & Co.

Phil Nadeau - Cowen & Co.

Steve Harr - Morgan Stanley

Bret Holley - Oppenheimer

Nick [ph] - Barclays Capital

Operator

Ladies and gentlemen, thank you for standing by. We would like to welcome you to the Gilead Sciences First Quarter 2010 Earnings Conference Call. My name is Stacey and I will be your conference operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this conference call is being recorded today, April 20, 2010.

I would now like to turn the call over to Susan Hubbard, Vice President of Investor Relations. Please go ahead.

Susan Hubbard

Thank you, Stacey and good afternoon everyone. Welcome to Gilead's first quarter 2010 earnings conference call. We’re pleased you could join us today. We issued a press release this afternoon providing results for the first quarter 2010. This press release is available on our website at www.gilead.com. We’ve also posted slides that outline the topics discussed on the call today.

Joining me are John Martin, Chairman and Chief Executive Officer; John Milligan, President and Chief Operating Officer; Kevin Young, Executive Vice President of Commercial Operations; and Robin Washington, Senior Vice President and Chief Financial Officer. Norbert Bischofberger unfortunately cannot join us today, he like many is temporarily grounded in Europe due to the Icelandic volcanic eruption. We will begin with highlights from the quarter and then open up the call to address your questions.

I’d first like to remind you that we will 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 statements. I refer you to our Form 10-K for the year-ended December 31st 2009, subsequent press releases and other publicly filed SEC disclosure documents for a detailed description of risk factors and other matters related to our business.

In addition, please note that we undertake no obligation to update or revise these forward-looking statements. We will be making certain references to financial measures that are on a non-GAAP basis. We provide a reconciliation between GAAP and non-GAAP numbers in the press release we just issued and on our corporate website at www.gilead.com.

I will now turn the call over to John Martin.

John Martin

Good afternoon, everyone, and thank you for joining us today. The first quarter of this year was productive, was a productive one on many fronts. We saw a significant moment with several of our pipeline programs as well as some disappointments. John Milligan will speak about our R&D efforts in greater depth, but I wanted to highlight a couple of things.

First and foremost, I’m very pleased with the progress of our HIV pipeline of products. As you have seen, we’ve moved our Quad and cobicistat programs into Phase III development and as Johnson & Johnson announced on their call this morning, both TMC 278 Phase III studies met their primary efficacy objective after 48 weeks. In February, Cayston received approval from the U.S. FDA for the improvement of respiratory symptoms in cystic fibrosis patients with pseudomonas aeruginosa. I’d like to acknowledge the teams here at Gilead who worked tirelessly with the agency to move toward approval of this important product.

Cayston is the first new therapy for cystic fibrosis and approved in more than a decade. And just this month, the U.S. Department of Health and Human Services announced the release of more than $1.84 billion in support of programs established through the Ryan White Treatment Extension Act for people living with HIV/AIDS. This amount was in line with expectations. Specifically, $800 million was granted to State AIDS Drug Assistance Programs or ADAPs, which provide medications including antiretrovirals to patients in need.

As we described in our last earnings call, some of the Ryan White funds in the program are allocated toward a goal of administering 5 million HIV tests each year. And as you know, Gilead is active on testing as well. We continue to partner with Frontline organizations who are working to reach those undiagnosed individuals living with HIV in high incidence areas.

Our expanded efforts are focused in Los Angeles, Washington DC and New York, specifically Harlem, South Bronx and Central Brooklyn. We are working with community health clinics and networks where many at risk individuals access healthcare to expand routine HIV testing and linkage to care, as well as with other care intervention sites such as pharmacy, STD clinics and transitional housing units, including those serving formerly incarcerated individuals.

We are starting to see some momentum from the recent changes in the U.S. treatment guidelines issued in December of last year that now more strongly endorse initiating treatment for patients earlier in their diseases. For instance San Francisco recently made headlines for introducing a Department of Public Health Initiative to implement city guidelines recommending patient start therapy as soon as they are diagnosed, recognizing that earlier treatment not only results in improved survival rates, but also that transmission of the virus is greatly reduced. Sources state that there are 2,000 individuals in San Francisco alone who are aware of their status, but are not currently being treated.

We continue to make progress to remove barriers to access to all patients around the world who could benefit from a variety of our therapies. As you know, we announced in November of last year an agreement with GSK to commercialize Viread for the treatment of Hepatitis B virus in adults in five countries, including eight countries in Asia, including China where GSK will have exclusive commercialization rights and registration responsibilities for Viread for HPV.

Last month, I attended the Asian Pacific Association for the Study of the Liver conference in Beijing where there was significant enthusiasm from physicians and community about Viread’s profile. This favorable opinion will be further enforced as we continue to generate data on the favorable resistance profile and long term efficacy and safety of the drug.

In January, we announced that Per Wold-Olsen has joined Gilead’s Board of Directors. Per spent more than 30 years with Merck, most recently serving as President of the company’s human health intercontinental division. We’ve had the benefit of his expertise for the past several years through as well as a member and former chair of Gilead’s Health Policy Advisory Board, a group that he helped form to advice us on global health policy issues and access issues. His depth of experience in pharmaceutical industry and specifically his knowledge of international policy regulatory and commercial practices and challenges will be of great value to Gilead and to our Board. And finally, Gilead has had another strong quarter on their earnings front.

I’ll now turn the call over to Robin to review our financial results.

Robin Washington

Thank you. As John mention, the first quarter of 2010 was another very successful quarter for Gilead. Total revenues, which includes product sales and royalty, contracts and other revenues were a record $2.1 billion, a 36% increase year-over-year. Our net income for the first quarter was $855 million or $0.92 per share. Our non-GAAP net income for the first quarter was $915 million or $0.99 per share, representing a year-over-year increase in net income and EPS of 48% and 50% respectively.

As a reminder, our non-GAAP income and net income per share exclude the impact of acquisition-related expenses, restructuring expenses and stock-based compensation expenses net of tax. Product sales for the quarter were $1.8 billion. Antiviral product sales grew to $1.6 billion, up 19% year-over-year and remained relatively flat on a sequentially basis with all of our key antiviral products, mainly Atripla, Truvada and Viread.

Compared to the prior quarter, the continued underlying growth in demand in the U.S. and Europe was generally offset by the impact of U.S. Healthcare Reform Legislation of 29 million and unfavorable changes in foreign currency exchange rates during the quarter.

Please note that we are quantifying the first quarter impact of the U.S. Healthcare Reform Legislation only for comparison against our current 2010 guidance. But we will not be during so going forward. We estimate that the full impact of 2010 will be approximately $200 million for U.S. Healthcare Reform. Additional details about the impact can be found in the earnings slides available on our website.

Atripla contributed $693 million to our Antiviral product sales, increasing 36% year-over-year resulting from the continued up-tick of the product in the U.S. and Europe. Efavirenz portion of Atripla, which is purchased from BMS at an estimated market price and reflected in cost of goods sold was approximately $256 million or 37% of total Atripla sales.

Truvada sales contributed $658 million to our antiviral product sales, up 11% year-over-year due primarily to sales volume growth in both the U.S. and Europe.

Viread sales were $181 million, representing an increase of 13% year–over-year, driven primarily by sales volume growth in the majority of our market. Our cardiovascular franchise product sales also experienced healthy growth and will be covered in more depth during Kevin’s section of the call.

Finally, sales of other products, which include AmBisome, Hepsera, Emtriva and for the first time Cayston were a $150 million representing an increase of 2% year-over-year and a decrease of 6% sequentially. Foreign currency exchange had a net favorable impact of $2 million on revenues when compared to the same period last year.

On a sequential basis foreign currency exchange had an unfavorable impact of 23 million. Our royalty, contract and other revenues for the first quarter were 298 million, an increase of 215 million year-over-year and an increase of 70 million sequentially. Both the year-over-year and sequential increases were primarily driven by increased Tamiflu sales related to the pandemic planning initiatives worldwide.

Tamiflu royalties for the first quarter were 246 million. These royalties, which are paid one quarter in arrears, reflect a royalty rate of approximately 22% as applied to Roche’s net sales of Tamiflu during the fourth quarter of 2009. As you may have seen, Roche reported their first quarter of 2010 earnings last week, 517 million Swiss francs in Tamiflu sales.

We therefore expect that the Tamiflu royalty revenue that we will report in the second quarter of 2010 will be approximately $78 million or approximately $0.06 per share on a fully diluted basis. The following discussion of our margin and expense related items are on a non-GAAP basis and exclude the impact of acquisition restructuring and stock-based compensation related expenses as applicable.

Product gross margin were 76.7% for the first quarter compared to 77.6% for the same quarter of last year and 75% for the fourth quarter of 2009. The year-over-year decrease was due primarily to the higher proportion of Atripla sales, which include the efavirenz component at zero gross margin. The sequential increase was due primarily to the resetting of tiered royalty expenses for the New Year and product mix.

Operating margin was 59.6% for the first quarter compared to 55.5% for the same quarter last year and 56.4% for fourth quarter 2009. Our year-over-year and sequential operating margins were favorably impacted by the increased in Tamilflu royalties. Our core operating margin which excludes Tamilflu and efavirenz also continues to improve relative to 2009 on a year-over-year and sequential basis, reflecting our continued focus on effective expense management and profitable growth.

R&D expenses were $196 million for the quarter, an increase of 14% on a year-over-year basis and a decrease of 7% sequentially. The year-over-year increase reflects the general increased R&D spending and the sequential decrease is due primarily to the timing of clinical studies. SG&A expenses were 229 million for the quarter, an increase of 25% on a year-over-year basis and an increase of 3% sequentially.

The year-over-year increase reflects the general growth of our business and promotional and infrastructure expenses associated with our expanded cardiovascular franchise. The sequential increase is due primarily to the timing of annual grants to certain non-profit organizations, which typically occur in the first quarter of the year. Other income and expense was 11 million favorable on a year-over-year basis and 5 million favorable on a sequential basis due primarily to a favorable expense impact from our foreign currency hedging program.

Higher interest income associated with our cash balances in the first quarter also contributed to the sequential favorability. Our effective tax rate for the first quarter of 2010 was 26.5% compared to our fourth quarter 2009 effective tax rate of 24.6% and first quarter 2009 effective tax rate of 26.3%.

The year-over-year and sequential increase was driven by the expiration of the Federal Research Tax credit as of December 31, 2009. The sequential increase was also significantly impacted by the Q4’2009 resolution of certain tax audits with tax authorities and the revaluation of certain tax assets related to the integration of CV Therapeutics as we discussed during last quarter’s earnings call.

Next I want to provide an update on our restructuring activities related to the realignment of our cardiovascular operation. We incurred 15 million in pre tax restructuring expenses during the first quarter consisting primarily of lease termination costs and expect to incur additional restructuring expenses of approximately 3 million for the remainder of 2010.

We generated 671 million in operating cash flow during the quarter. Our balance sheet position remains strong with current cash and marketable securities of 4.6 billion. Our board authorized a one year one billion share repurchase program on January 29 of this year. During the later half of the quarter, we repurchased 3.4 million shares of our common stocks at a cost of a 162 million.

Our current share repurchase program will allow us to offset dilution from our equity compensation and make opportunistic share repurchases to return capital to our shareholders during the year.

Now I would like to turn to our financial guidance for the full year 2010. You can locate all of our guidance for 2010 and additional details on Gilead’s corporate website. Our product sales guidance for the full year 2010 is now a range of $7.4 billion to $7.5 billion, down from our previous guidance of $7.6 billion to $7.7 billion.

The 200 million decrease is due to the impact of the U.S. healthcare reform legislation, which was excluded from our previous guidance because of the uncertainty of its passage. The impact for Gilead is driven by our HIV business where nearly half of our payers are impacted by the legislation. We anticipate the impact to be approximately $0.15 per share on a fully diluted basis.

Other factors that may have an impact on our business include, but are not limited to international government pricing pressures and the potential for continued volatility in foreign currency exchange rates. During the first quarter, we have seen increased evidence of additional international government measures to reduce pharmaceutical expenditures including increased rebates, cancellations and claw back of price increases, and increased headwind associated with FX volatility that we continue to monitor.

Please note that the non-GAAP product gross margin and operating expense guidance provided to you excludes the impact of acquisition restructuring and stock-based compensation-related expenses where applicable.

Our non-GAAP product gross margin for 2010 remains unchanged and ranges from 75% to 77%. Non-GAAP R&D expense guidance for 2010 remains unchanged and ranges from $850 million to $870 million. Non-GAAP SG&A expense guidance for 2010 remains unchanged and ranges from $900 million to $920 million. As always, Gilead remains committed to conscientious expense management to sustain the continued profitable growth of our company.

Our effective tax rate guidance for the full year 2010 is expected to remain in the range of 25% to 26%. Finally, we are maintaining the full year 2010 diluted EPS impact of acquisition, restructuring and stock-based compensation related expenses to be in the range of $0.27 to $0.30 per share.

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

Kevin Young

Thank you, Robin. It’s a pleasure to discuss with you today our first quarter 2010 commercial performance. During the quarter, total US antiviral product sales were $887 million. Our US HIV sales were led by Atripla, which contributed $456 million, up 23% year-over-year followed by Truvada with $327 million, up 16% year-over-year. Prescription growth in the first quarter 2010 for both Atripla and Truvada remained robust and were consistent with the trends we saw coming out of 2009.

Inventory levels in the first quarter of 2010 across our three major US wholesalers which comprised approximately 90% of our US antiviral product sales remind as expected relatively flat compared to the fourth quarter of 2009. As a reminder, during the fourth quarter of 2009, we entered into revised inventory management agreements with these wholesalers.

Under these new agreements, we established an upper and lower limits of inventory days on hand and removed the buying option around price increases. Non-retail sales predominantly made up by State AIDS Drug Assistance Programs were weaker in the first quarter of 2010 compared to the fourth quarter of 2009. Florida, Texas and Puerto Rico ADAPs all made lower purchases following strong ordering in the second half of 2009.

As John mentioned earlier, we were very pleased to see the recent release of HHS funds to state ADAPs and we believe similar to last year that supplemental grants would be released in the second quarter of 2010. As a reminder, patient data for the US lags our financial results by one quarter.

In the fourth quarter of 2009, the number of patients treated with antiretroviral therapy grew by 4% on a moving annual total basis to approximately 581,000 patients. Atripla, the most prescribed regimen in HIV had 191,000 patients on therapy or one-third of all treated patients. Growth in Truvada continued to be strong with 222,000 patients on therapy, or 38% of all treated patients, clearly maintaining its position as the backbone of choice for antiretroviral therapy in the US.

Total Truvada, only Atripla together with Truvada accounted for approximately 85% of patients new to therapy and Truvada was a component of the top five prescribed regimens in HIV. As newer drugs replaced the use of traditional antiretrovirals, it is encouraging to see that the growth of these agents is coming in combination with Truvada. In the fourth quarter of 2009, approximately 77% of raltegravir patients and 84% of darunavir patients were co-prescribed with Truvada.

Now turning to our performance in Europe, the first area I’d like to address is pricing as we are seeing some changes since the end of 2009. On a country-by-country basis, adjustments happen periodically depending on the product’s life cycle as well as the country specific pricing methodology. Direct government interventions mandating industry wide price reductions also occur on occasion.

Since December 2009, we have had price reductions in Turkey, France and Greece. Moreover Germany has pending legislation that potentially imposes an additional 10% pharmaceutical product rebates. This could impact us later in the year.

For the first quarter of 2010, our HIV products delivered good performances led by Truvada which contributed 298 million, up 7% from the same period in 2009, and Atripla which contributed 218 million up almost 75% from the same period in 2009.

We now have the number one and number two HIV brands in Truvada and Atripla in four of the big five markets and Atripla is closing the gap on Kivexa in France. At the end of the fourth quarter the big five countries of Europe had approximately 294,000 patients treated with antiretrovirals representing a growth rate of 7% on a moving annual total basis.

Approximately 49% of patients that received Atripla were treatment naive while 32% were switches from other regimens and 19% of the patients converted from Truvada to Sustiva in the first quarter of 2010.

Total Truvada increased its share to approximately 79% of treatment naive patients up from approximately 73% in the first quarter of 2009, while Kivexa’s share dropped to 7% in the first quarter of 2010, down from 13% in the first quarter of 2009.

Our recent launches of Atripla in Belgium and Australia are being well received and the uptake dynamics look very strong. This leaves Switzerland as the last remaining large HIV developed market without Atripla. We hope to have our Swiss reimbursement finalized by mid year.

Now turning to our US Hepatitis franchise, on our once quarterly call we discussed significant modifications to our HPV promotional efforts and the resizing of our field force. We have completed our expansion and are now targeting our efforts within the large US Asia communities and new HPV prescribers. We believe these additional resources could provide a much needed catalyst to driving growth in the diagnosis and treatment of HPV.

Importantly in January Viread achieved a major milestone of becoming the most prescribed product in HPV surpassing Entecavir in total prescription volume and market share. We are exceptionally proud to attain this leading position in 18 months. Total HPV prescriptions to Viread grew by 12% in the first quarter compared to the fourth quarter of 2009.

In reviewing the naïve patient share, on the most recent data point in January 2010, Viread had achieved a 43% naive patent share in the HPV market whilst Entecavir's naïve patient share continued to decline to 34% versus a peak of 49% in April 2008.

In Europe, I am also pleased to report that as of January Viread overtook Entecavir in market share in the big five yield markets, and was second only to Lamivudine for the market lead in HPV. Viread has continued to build on its lead over Entecavir in Germany, Spain and the UK, our first countries of launch.

As of January 2010, Viread’s HPV marker share in Europe was an estimated 22% versus 10% in January 2009. Last week, we had a 144 weak data from our 102 and103 studies added to our label in Europe and we anticipate having these data added to our US label before the end of the year.

Turning now to our cardiovascular franchise and firstly Letairis. Total US sales for Letairis during the first quarter of 2010 were 55 million, up 40% over the same period in 2009. According to our latest data, as we exited the fist quarter, approximately 35% of the patients receiving an ERA were taking Letairis.

In keeping with our Gilead philosophy of studying the long term effects of our drugs, we recently submitted the two years safety and efficacy data from our ARIES-E study to the FDA. These data show remarkable durability in six minute walk distance both the five and 10 milligram doses of Letairis.

Now to Ranexa. I am pleased to say that our 2010 Ranexa commercial plan of action is well underway. In the first quarter 2010 alone, we completed over 600 speaker and educational events. We now has some 250 field based sales and medical affair staff supporting Ranexa and have made fundamental changes to key activities such as product promotion, medical education, patient starter kits and copay cards and physician web based information.

At the recent American College of Cardiology meeting, we were pleased to see the gains in Ranexa brand recognition from the level at our closing of the CVT acquisition one year ago. Total US sales for Ranexa during the first quarter 2010 were 51 million up 11% from the fourth quarter of 2009.

Additionally, one of our goals when we acquired Ranexa was to bring the percentage of managed care covered lives at a non-restricted Tier 2 co-pay status to 75% and I am very pleased to say we have now achieved that goal.

Finally, I would like to briefly mention the launch of Cayston for Cystic Fibrosis. On US approval on February 22, we were well positioned the following week to make Cayston commercial available through four specialty pharmacists. The U.S. launch has got off to a healthy start with over half of CF centers starting a patient on Cayston.

Additionally, Cayston is now also available in Canada, the UK, Germany and Austria. In closing, we are very pleased with the solid commercial performance in the first quarter.

I will now turn the call over to John Milligan to discuss our R&D efforts and up and coming milestones.

John Milligan

Thanks, Kevin. For the second time and in Norbert’s absence, I will keep my comments brief and related to the most important R&D updates for the quarter. First on the respiratory front, we have recently completed the first 28 days of dosing of all patients in our head-to-head study of Cayston versus TOBI, which was designed to provide important comparative data to differentiate Cayston from TOBI and support full approval in the EU and Canada.

I would like to take a minute to share with the other top line results. This Phase III study is an open label, multi center, randomized parallel group study, designed to compare the safety and efficacy of Cayston versus TOBI in 274 adults and pediatric cystic fibrosis patients whose pulmonary disease is stable and who had a positive sputum culture for pseudomonas infection at study entry.

The design consisted to two treatment arms, either Cayston or TOBI administered for three cycles of 28 days of treatment followed by 28 days of a drug free period for total study duration of 24 weeks. The primary efficacy evaluation was relative change in forced expiratory volume in one second or FEV 1 at day 28 compared to baseline.

The result demonstrated that patients on the Cayston treatment arm had an increase in FEV 1 at day 28 of 8.4% compared to 0.5% for those in the TOBI arm which is highly statistically significant result. Safety results were similar across both arms of the study and consistent with previous clinical trials.

We have submitted these data to the European Cystic Fibrosis society conference taking place in the Valencia, Spain June 16 to 19 and will also be submitting it to regulatory authorities in the near future for inclusion in Cayston’s label. We look forward to presenting the data on the full study later in the year at a scientific conference.

We have also recently initiated a small phase 3B study of the use of Cayston in treating cystic fibrosis patients who have brachioradial [ph] infection an area of high unmet medical need where there are no currently approved inhaled antibiotics to treat this very serious infection in CF patients.

With regards to GS 9411, our epithelial sodium channel blocker or ENaC inhibitor, we have now completed both the single and multiple dose Phase I studies in healthy volunteers. In both studies, we saw increases in serum potassium in patients dosed with GS 9411, which is now supporting advancing this particular compound further. We remain interested in ENaC as a target for increasing airway hydration and will continue our drug discovery efforts on alternative ENaC blockers to this end.

We are also going to refocus the development program of GS 9310, 9311, our combination of fosamycin and tobramycin therapy for inhalation that we have evaluated in the 28 day Phase II study in cystic fibrosis patients using a liquid formulation. The data were encouraging and we are now working to reformulate the combination therapy in a dry powder form which could greatly improved the ease of administration.

The low dose required for antibiotic activity makes this a possibility and the dry powder formulation in combination with a simpler device would potentially extend the applicability of lung to lung diseases outside of CF such as COPD.

The Phase III study of Letairis for the treatment of IPF is approximately 40% enrolled with 15 active sites and we’re targeting to complete enrollment of 600 patients in this study by the end of this year. It is an event-driven study with time to regression or death as the primary end point.

On the cardiovascular metabolic fund, we have recently completed single and multiple ascending dose studies of GS 9667, a partial A1 adenosine agonist in healthy volunteers and based on what the safety and activity of the drug in lowering plasma free fatty acids, we are now progressing towards II Phase Ib proof-of-concept studies, which we expect to begin this quarter. The trails will assess the effect of GS 9667 on plasma glucose and insulin sensitivity, as well as its effects on plasma triglycerides and will help determine the compound’s potential use in patients with type 2 diabetes or with hypertriglyceridemia.

With regard to our Phase IV studies of Letairis in PAH, the first study ATHENA-1 is evaluating whether the additional Letairis to sildenafil is safe and effective in patients with PAH who have not demonstrated an optimal response for sildenafil therapy alone.

This study is now more than half enrolled and we expect to complete enrollment of the study by the mid point of this year. This will put us on track to have 24 week primary end point data from the study early next year. We are collaborating with our partner GlaxoSmithKline to conduct an international event driven study called the AMBITION study, which is anticipated to begin in the third quarter of this year. AMBITION will evaluate first line combination use with Letairis and tadalafil, a PDE5 inhibitor versus monotherapy with each arm enrolling approximately 300 patients with PAH.

With regard to our efforts in liver disease, as you may have seen, we announced last night our decision to terminate the Phase IIb study of GS 9450 for HCV. This decision follows reports of laboratory abnormalities indicating hepatotoxicity in a number of clinical study participants.

As always, we consider patient safety as our top priority and therefore we made the decision to halt the study immediately. This is an obvious disappointment on the heels of the two presentations on the compound at the recent European Association for the Study of the Liver Conference just last week in Vienna, Austria. We will be conducting a thorough review of all available data to assess future clinical development as a compound in NASH or other potential applications.

On the positive side, we also presented data at the EASL conference on GS 9256, our novel HCV NS3 protease inhibitor. The phase Ia study was a dose ranging placebo controlled three day monotherapy study of GS 9256 in genotype 1 HCV infected patients. After day four, we saw dose dependent decline of median HCV RNA across the arms of up to 2.9 logs. GS 9256 was well tolerated across the arms.

We reviewed the 9256 proof of concept data earlier this year and decided to expedite the initiation of a combination study with GS 9190, our polymerase inhibitor. This Phase IIa study is evaluated in a combination of GS 9190 and GS 9256 with or without ribavirin in HCV positive genotype 1 patients for 28 days.

The enrollment is this study, which has been conducted in four European countries has been brisk today. We anticipate completion of the study by mid year. And in parallel we’re continuing our GS 9190 Phase II study in 250 HCV infected patients, looking at 12 and 24 week SCR [ph] data which we will have later this year to see if GS 9190 has a profile that would allow it to be further developed in combination with pegylated interferon and ribavirin.

I’m pleased with the progress we’re making in HCV, where we now have a total of five HCV small molecule candidates, including the one that I’ve described above, where we have filed an IND and are in clinical development. Norbert and I look forward to updating you on our progress as we garner additional data on these programs.

Finally on HIV, 2010 has gotten off to a very exciting start for HIV programs and in each program we have achieved some important milestones to allow us to advance these products towards commercialization. As you know, in February, we issued a press release to present it at the conference on retroviruses and opportunistic infections here in San Francisco, the full data sets from the Phase II clinical studies of the Quad and of GS 9350, both of which met their primary objectives of comparability to Atripla and ritonavir respectively. And just last week, we announced that we’ve begun dosing of the first of the three Phase III studies in treatment-naïve HIV infected patients, all of which we intend to have up and running before the end of this quarter.

Positive data from these studies, coupled with those of the head-to-head Elvitegravir versus Raltegravir in treatment experienced patients would allow us to file marketing applications in the U.S. and EU for three new products, the Quad, cobicistat and elvitegravir based on four cross referenced Phase III studies.

As John Martin mentioned, Johnson and Johnson announced on their earnings call this morning that the primary efficacy objective in both Phase III studies of Tibotec TMC278, evaluated primarily in combination with Truvada was met after 48 weeks. We expect to present the data in full at an upcoming HIV conference and we are on track to submit TMC278 for regulatory review in the third quarter of this year.

We are working to identify the appropriate formulation of the fixed dose regimen of TMC278 and Truvada that meets bioequivalence. As you know, our bioequivalence study is required to demonstrate that a co-formulated product results in the same level of medications of blood as achieved when the individual products are dosed simultaneously as separate pills. We will keep you posted as to our progress, but at this point we remain on track to file for the new fixed dose regimen before the end of the year.

In summary, I’m very pleased with the continuity of our organization’s productivity and strong financial performance for the first quarter of this year. The health of our business is evidenced by our consistent financial performance and strong balance sheet. We continuously evaluate the best way to return value to shareholders with one example being the implementation of our one year $1 billion share repurchase program initiated this past quarter.

We will continue to invest in our business for the future, leveraging our scientific expertise to look for opportunities to enhance the Gilead pipeline. We will remain opportunistic and thoughtful with regard to the augmenting of our business to in licensing collaborations and acquisitions. I’m very proud of the efforts of the collective Gilead team, a team of only 4,000 individuals who diligently work to breakdown barriers and expand access to patients who could benefit from treatment with our therapies on a worldwide basis.

I’ll now turn the call over to the operator for the question-and-answer session. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Geoff Meacham - JPMorgan.

Geoff Meacham - JPMorgan

A couple of questions here on the funding for the quarter, so was there any primary reason why ADAP purchases were lower and then what’s the risk that these funds contract throughout this year? And then I guess a follow-up is what’s the magnitude, Kevin, maybe of the supplemental fund that you’ve think are going to be released for this quarter?

Kevin Young

First of all, in terms of ADAP, if you look at the full year of 2009 it was very consistent, the non-retail growth versus basically all retail prescribing. I think the difference that we saw in the 2009 financial year, as a reminder that ends at the end of the first quarter of this year was basically that the phasing and I think what we saw in 2009 fiscal year was it was much slower than in previous years. In other words, it was stronger in Q3 and Q4 and a little bit less in Q1.

So, overall I think it was very consistent with the retail prescribing and retail growth, but it was just really a little bit different because the budgets of the, the base budgets and the supplementals were issued earlier as you might remember in 2009. Now when it comes to the fiscal year 2010, as John Martin said that, the base budgets have gone out, there are small increase on 2009, which is good and now what everybody is waiting for are the supplementals.

I think based on the base budgets, our expectation would be something similar, hopefully a little bit more, but something similar to 2009. And then the question of course remains is where those supplemental budgets go because they do vary year-to-year on what ADAP program, what states receive the supplemental. Last year it was 20 states that received a total of about $40 million. It remains to be seen what states will receive those funds so that’s how it summarized the situation.

Operator

Your next question comes Yaron Werber - Citi.

Karim De Felipe - Citi

Hi, this is actually Karim De Felipe calling in for Yaron. I have a question on the price decreases in Europe and the potential one in Germany, could you give us a little bit more positive sense how that affected the quarter and how could that affect 2010 in general and how likely do you see the Germany price decrease to happen? Thank you.

John Martin

Yeah, we don’t typically split the effects on our revenues by country, but let me give you a little more color on what’s been happening over there. As I said, it’s the kind of a mix between the natural impacts that countries bring about and that’s depending on time the drug has been in the market, how they reference over counties, but we’ve also seen the additional layering in certain countries of national decreases not only on Gilead drugs, but across the industry. Examples of that would be in December we had an increase in the rebates in Turkey on pharmaceuticals from 12% to 23%, so a considerable increase. In Greece, we have seen an increase in frequency now going forward for the references that they do for other countries, usually once per year, now they are going to move to a three times per year references. And as I said, there is this, potential in Germany for an additional 10% rebate. I think our view here is that there is a fairly high likelihood of that taking place and our estimate would be probably from the third quarter of this year. And just for information we have seen this type of change before in Germany. The rebate did go up from 6% to 16% so a 10% change in 2004 and then came down subsequently in 2005, so these are not new to winning our business in Europe.

Operator

Your next question comes from Joel Sendek - Lazard Capital Markets.

Joel Sendek - Lazard Capital Markets

I am just trying to reconcile the healthcare reform legislation impact in the first quarter to the full year and I am wondering what -- why it is less on a relative basis, just 29 million versus 200 million for the year, can you help us with that?

Robin Washington

Sure, Joel. Basically for the majority of the government payers such as ADAP and PHS, the impact on healthcare reform is delayed until Q3 2010 due to the pricing mechanism, so there’s about a two quarter lag between the Medicaid pricing employed by those government run entities. So, we have a more backend loaded ramp of healthcare reform based on those two components.

Joel Sendek - Lazard Capital Markets

Okay, great thank you. And that’s you said before it’s mostly just HIV drugs, is that how we should model it for the healthcare reform effect?

Robin Washington

Healthcare reform impact all of our business, but clearly on the HIV side that’s where we see the largest impact happening.

Operator

Your next question comes from Rachel McMinn - Banc of America.

Rachel McMinn – Bank of America

I am wondering if you can comment at all about the KTC [ph] profile or the CNS profile for TMC278 and just as a follow up if you can give us a little bit more color on what the status of the co formulated triple combo (inaudible) that would be great.

Robin Washington

Yeah, Rachel, we can’t say anything about the study results that have come out of TMC278. Johnson & Johnson is very clear that they are not going to resolve -- they’re not going to release, excuse me, any result until the scientific conference and in fact we had to push pretty hard just to get the top line notes. So, we are pleased with that. So, sorry that I can’t give you more, but well stay tuned and there will be more that I can say later on in the year. Second with regard to the co formulated status, we are continuing to work on multiple formulation. We, from we are today believe that if one of them is successful, we can still have a filling before the end of the year. But beyond that until we have one, I can tell you any more, so we’ll have to wait until such time that we can make that announcement.

Operator

Your next question comes from Joshua Schimmer - Leerink Swann.

Joshua Schimmer - Leerink Swann

Thanks to taking my question. I guess first of all how should be thinking about the 2011 impact of healthcare reform if it’s going to be back loaded in 2010 do you have any number we can put around it. Relative to the fairly significant discounts you are already reporting, why is there such a meaningful incremental impact, what’s kind of driving that additional discount at vendors under the new plan?

Robin Washington

Sure, So, on the first component, which is the Medicaid rebate, there was the 8% increase in the rebate that we experienced just like all other pharmaceutical companies. So that’s really to driver for the incremental discounts for us, right, and that impacts even some of our more heavily discounted areas including ADAP, PHS as well as Medicaid.

So we were impacted by that just like everyone else was. To your other question, what happens in 2011, we can’t quantify it, but in addition, our business growth will be a bigger overall impact relative to what we saw in 2010, but added to that would be the industry, the excise tax, which we haven’t calculated yet. We’re still trying to understand how it ultimately will be calculated, but that will be one component of it.

The other piece you need to think about is the Medicare Part D doughnut hole discount, which could also have some impact, although less so for us in that we have a lot of non -- dual eligible. So they would be cover under Medicaid, but we could see some incremental impact there as well.

Operator

Your next question comes from Geoff Porges - Sanford Bernstein.

Geoff Porges - Sanford Bernstein

Just to the two Johns. You’ve had a couple of pipeline disappointments here today and yesterday and yet you are throwing off all of this cash and I think question all of us are asking is what you’re going to do and I’m wondering if you talk a little bit more about, are you happy sort of less then 50% of your cash flow being returned to shareholders?

Are you are saving up to something? Is there something in mind? I think, I certainly am a little surprised to see you getting into diabetes and triglyceridemia given some of expectation in the company we’ve seen particularly in the cardiovascular. So maybe you could talk a little bit about strategy and a little bit about use of cash flow would be very helpful?

John Milligan

Geoff, it’s John Milligan. It’s a little bit of a mixed question, but let me see what I can do to sort this out. We continue to maintain a very strong positive cash flow that’s going to continue of course for sometime, that’s really clear. So we are continuing to look for ways to return shareholder value.

I thought the $1 billion share buyback was a good start for this year as you continue to evaluate other investments in the company, including pipeline investments. This business is one in which you have to be opportunistic because there are chances to go out and bring in new products to company that can help you out.

Ranexa was a good example of that and with that came drugs that’s good for potentially for diabetes and hypertriglyceridemia and I think it makes sense for us to continue to evaluate that with the option potentially licensing it out to somebody else once we have proof-of-concept. They didn’t make sense to license it today and it may make sense to do so tomorrow. On the other hand it maybe something that we could get excited about in the future, but Jeff you’re absolutely right. It’s a very competitive area for a lots of different drugs, but I thought it was worthwhile to continue to pursue that along those fronts, but we will continue. As I said in my prepared remarks we will continue to look for opportunities to bring products into the company, and we’ll continue to evaluate them. You just have to do this in a very methodical, thoughtful way in order to figure out what the right things are.

A lot of people out there have a lot of opinions about what we should do, but I think we have to stay the course that we’re going down, which is to really try to evaluate the things that are best for Gilead.

Operator

Your next question comes from Ian Somaiya - Piper Jaffrey.

Ian Somaiya - Piper Jaffrey

Just a follow-up on the healthcare reform, in 2011, maybe you could, I know you spoken to this on a call data basis, maybe if you can give us some numbers around the dollar impact or exposure to patients, who are non-dual eligibles within Medicare. And as we move into 2011, what the impact could be from the Medicaid front and is it possibly going to be 2%, 3% of total revenues or you know some semblance of that.

Robin Washington

So to answer your first question relative to Medicare Part D, a large component of our patient are dual eligible so we don’t expect a significant impact, but the discount percentage is pretty steep, it’s about 50%, so the impact it would have on our business, which we anticipate to be about maybe 1% to 2% of our payer mix would be a significant discount of our dollar wise [ph] not huge. The second half of your question can you…

John Milligan

Well, that’s the tough one for us, Ian, because you are asking us to give you a dollar amount for next year when we haven’t given sales guidance for next year, so unfortunately we can’t give than kind of forward-looking guidance today.

Ian Somaiya - Piper Jaffrey

But even on a percentage of a sales basis, if you could speak it what the Medicaid exposure is? Not on a total revenue?

Robin Washington

If you look on a percentage of sales just let’s take our guidance relative to 2010 and you can project from there, I mean if you look at it relative to our antiretroviral business, it’s about 4.4% for the U.S business.

Ian Somaiya - Piper Jaffrey

That’s something we should expect to stay fairly stable or…?

Robin Washington

Again as mentioned, you’ll have the addition of the excise tax, which could also be offset of revenue and Medicare Part D, so it could get a bit higher.

Ian Somaiya - Piper Jaffrey

Okay, thanks that’s helpful...

Robin Washington

It’s the general growth of our business.

Operator

Your next question comes from Jason Kantor - RBC Capital Markets.

Jason Kantor - RBC Capital Markets

I’ve still obviously have questions around this healthcare reform, I don’t think you guys quite come to the answer everyone wants, but why don’t I change subjects and just ask you, to your five HCV candidates. Could you tell us what those are and what the charges are, and where they are in development?

John Martin

I’m sorry, so you’ve switched from healthcare reform to the five HCV candidates, you weren’t all that clear.

Jason Kantor - RBC Capital Markets

Yes, well I don’t want to keep beating the dead hose on the other ones, so I though I’d move on to something that you could be specific on?

John Martin

Yes, I think you’ve variances. So the other answers were not going to specific either, because we are obviously we’re not talking about the other three candidates. So we have the two that are in clinical development 9190 and 9256 and then we have three other candidates that are currently in clinical development and we’ll bring the data out on those as we start to see if they have antiviral activity in the Phase I studies that they’re currently in.

Jason Kantor - RBC Capital Markets

Well, then maybe I can get some better clarity on the healthcare reform issue, you don’t want to give guidance for 2011, you’ve given some guidance for the full-year 2010, that’s backend loaded. Could you give us some sense of where you’re going to end the year? What the Q4 impact might be? So we can all sort of think about how to model this thing going into 2011?

Robin Washington

No, we can give you the full-year impact, we talked about it being more backend loaded to the last couple of quarters as we continue to grow. It’s still hard from our standpoint, Jason, because it’s really when the organization impacts a change. I mean, the legislation got passed on March 23. So we’re working through it like everyone else.

Operator

Your next question comes from Thomas Wei - Jefferies & Co.

Thomas Wei - Jefferies & Co.

I wanted to go back to an earlier question on healthcare reform, and I thought that historically you had said that your freezing of price increases at the government level and the very slow pace of your realized price increases over time would have muted the impact of changes in government rebates under healthcare reform. What am I missing about that?

Kevin Young

We have a freeze-in right now for our federal payers, that’s quite right, the largest proportion of which is ADAP and we’ve committed to that to the end of 2010. Thereafter we will be thinking back through very carefully during the rest of the year. I think in the early parts of healthcare reform discussion, our observation from a distance, we wondered like a lot of companies whether additional rebates would be applied to the payers where we have discounts already in place that are greater than the current 15% now moving to the 23% that have been mandated and it’s quite clear from the legislation that irrespective of the discount that you have in place to these federal players, an additional 8% has to be added and I think that’s the clarity that’s now come in the legislation.

Thomas Wei - Jefferies & Co.

So effectively you’re being penalized for having given the government a higher discount historically?

Kevin Young

That’s correct. Yes.

John Martin

That is the same for every company, Thomas.

Operator

Your next question comes from Phil Nadeau - Cowen & Co.

Phil Nadeau - Cowen & Co.

I did want to ask you on market growth, you said a figure of 4% market growth in the U.S., which is down 200 or 300 basis points over where it was not too long ago. So wanted to get your interpretation of that figure, I know on the last quarterly call you said you can’t judge too much by one quarter’s decrease, but now we have got two quarters of slower market growth at a time after the HIV guidelines have been changed for we thought maybe the market will be going in the other direction?

Kevin Young

Yes, it’s 12% on an MAT basis, I think we should always remember that this is a survey as we’ve said in the past based on 200 physicians and we have a much larger base that we are coming off. There are now 581,000 antiretroviral treated patients and obviously that’s a much larger base than we’ve had historically. If you look at the growth in Europe that’s 7% on 294,000 patients.

So obviously, a different base. I think and what we’re going to be watching carefully going forward is the impact of all of the communications that we’re having on the new DHS guidelines. I was talking to my team earlier today and it’s quite that right across the U.S. in HIV clinics private, public or indeed even VA, that physicians are having the discussions about starting therapy earlier, so we’ll just have to see how that works out.

Phil Nadeau - Cowen & Co.

Do you have any sense that these guidelines are bringing new people back beyond just preliminary discussions with them between physicians and patients? Is there any data that you have that maybe is more concrete?

Kevin Young

Guidelines, always actually follow, to a large extent clinical practice. Over 30% of HIV stocks are already within the new guidelines. Of those 350 actually 10% are already above 500, so there are physicians out there who’ve already and have been for some time applying the new guidelines.

Talking to my team this morning, what physicians are not doing and we didn’t expect them to do is they’re not recalling patients especially to change onto drug. What they are doing is they are having more proactive discussions with patients; and I think historically they may have presented the pros and cons and let the patient come to an opinion. We certainly sense that there is a much more persuasive and compelling set of arguments given by the physician to the patient with a greater sense of urgency but it’s the physician’s opinion that the patient should now stop therapy and that’s what we are hearing.

Operator

Your next question comes from Steve Harr - Morgan Stanley.

Steve Harr - Morgan Stanley

I want to follow up the question from Jeff if you wouldn’t mind John, could you talk a little bit about what you think is the right level of debt for the company current balance sheet? What type of cash levels you want to carry going forward so that you can be opportunistic? Then as you evaluate different prospects for the company, what are the stages of development that you are going to look at right now? Do you have any focuses as well as the disease areas that the company is focused upon?

John Martin

I’m going to let Robin answer the question with regard to cash levels and capital use, because that’s a more appropriate discussion for the CFO, but I will follow up with the last part of that question, what are the diseases areas we are looking in. So clearly continued to look under the disease areas, where we’ve been have the greatest scientific expertise including Hepatitis C, additional things in HIV and other areas, including PAH and specialty cardiovascular disease is where we continue to look. But we’re also looking at a wider, we’ve cast the net wider, Steve so we are looking at other areas where we can potentially bring in other products.

The problem, of course, is that we start to have a public discussion it makes the whole ability to do those sorts of things nearly impossible. So this is very frustrating for you and very frustrating for us conversation about what we’re going to do next in this area. So, it’s a difficult one to answer, but we are going to use the expertise we have scientifically to try to bring in products that will help us sell into the various franchises we’ve build and into the geography that we’ve now built out, which I think is going effectively very, very well.

Robin Washington

We are fairly conservatively leveraged as a company we have the converts [ph]. We clearly know that given our size and our balance sheet, it could be levered a bit more, it’s something that we evaluate, but again it’s in the context of our overall corporate strategy and company’s strategy around our cap structure, as well as John just talked about our potential M&A opportunities. So, it somewhat goes hand in hand as we work through our overall company strategy we consider our necessary cash balances and leverage to support it.

Operator

Your next question comes from Bret Holley - Oppenheimer.

Bret Holley - Oppenheimer

I’m wondering, possibly you’re struggling a little bit to identify a combo with TMC278. So, I think in the past you said you wanted to file the single agent with the combo and now you’re talking about filing it before the end of the year, am I reading too much into that?

John Martin

We have gotten guidance back from the FDA that they would like us to wait until the TMC278 application has been accepted. So, there is a validation period that it goes through so, initially we are hopefully could file with TMC278 and now there will be a delay in terms of the timing of filing based on the FDA response. We’ve talked about that publicly previously, so this isn’t new, but it does put us closer to the second half -- the end of the year rather than earlier because of that delay.

Bret Holley - Oppenheimer

Okay, so it’s not something fundamental?

John Martin

No, this is not something new. And of course while there has been some guidance from -- rough guidance from J&J on when they’re going to file, they don’t have a specific date either. So, we can’t be anymore specific than they are.

Operator

Your next question comes from Jim Birchenough - Barclays Capital.

Nick - Barclays Capital

This is Nick [ph] for Jim. I’m interested in the tobramycin data and really if I look at the package insert for TOBI we’d expect to see somewhere a 10 plus percent increase in FEV1 and you saw 0.5. So, I guess that is, if we assume that means it was a TOBI resistant population, so what does it tell us the TOBI population in Europe where these carefully selected patients had a lot of prior exposed to TOBI or it is just a high degree of resistance?

John Martin

Now I can give you some generalities, I don’t have the specifics in front of me, but this study was designed to enroll patients who have had previous experience on tobramycin. Not necessarily TOBI, remember in Europe, there is a lot of home brewed tobramycin that’s used by different pharmacies and sold into the patient population. So it was designed to select patients who have had consistent tobramycin use and it has been the observation in those longer term studies that tobramycin effect goes down cycle-after-cycle.

So this is somewhat consistent with what we would have expected, although probably more on the low end than I would predicted, whereas you should recall in the 06 studies, the Cayston activity seems to be fairly consistent cycle-after-cycle and the 06 was our rollover studies from our pivotal studies where we continued to give Cayston month-on month-off for many cycles and so we’re more optimistic than we were even that we’ll have a more consistent effect and that this could be a very nice replacement, especially for patients who are TOBI resistant in Europe.

Operator

Ms. Hubbard, at this point, we have run out of time for additional questions.

Susan Hubbard

Okay. Thank you, Stacy, and thank you all for joining us today. We appreciate your continued interest in Gilead and we look forward to providing you updates on our future progress. We'll be signing off the call now, but certainly available in our offices shortly to do any follow-up calls. Thanks all for your time.

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