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Gilead Sciences Inc. (NASDAQ:GILD)

Q3 2010 Earnings Call

October 19, 2010 05:30 pm ET

Executives

Susan Hubbard - VP of IR

John Milligan - President and COO

John Martin - Chairman and CEO

Kevin Young - EVP, Commercial Operations

Norbert Bischofberger - EVP, Research and Development and CSO

Robin Washington - SVP and CFO

Analysts

Geoff Meacham - JPMorgan

Mark Schoenebaum - ISI

Rachel McMinn - Banc of America Merrill Lynch

Yaron Werber - Citigroup

Josh Schimmer - Leerink Swann

Ian Somaiya - Piper Jaffrey

Geoffrey Porges - Sanford Bernstein

Thomas Wei - Jefferies & Company

Jason Kantor - RBC Capital Markets

Tom Russo - Robert W. Baird

Phil Nadeau - Cowen & Co.

Joel Sendek - Lazard Capital Markets

Robyn Karnauskas - Deutsche Bank

Jim Birchenough - Barclays Capital

Jason Zhang - BMO Capital Markets

Maged Shenouda - Stifel Nicolaus

Geoff Meacham - JPMorgan

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Gilead Sciences third 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, October 19, 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 third quarter 2010 earnings conference call. We issued a press release this afternoon providing earnings results for the quarter. This press release is available on our website at www.gilead.com as are the slides that provide much more detail around the topics discussed today on this call. Similar to the format we introduced on our last earnings call, our prepared comments will be brief to allow more time for your questions.

Our speakers today will be John Milligan, President and Chief Operating Officer and John Martin, Chairman and Chief Executive Officer who will provide some comments on this quarter and our view about future and opportunities for the company. Norbert Bischofberger, Executive Vice President of R&D and Chief Scientific Officer, Robin Washington, Senior Vice President and Chief Financial Officer and Kevin Young, Executive Vice President of Commercial Operations are here as well for the Q&A session.

I would first like to remind you that we will be making statements relating 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 latest SEC disclosure documents and recent press releases 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 number 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 Milligan.

John Milligan

Thanks Susan. Gilead posted strong third quarter 2010 results with non-GAAP net income of almost $760 million or $0.90 per share representing a year-over-year increase in net income and EPS of 4% and 15% respectively.

Sales growth was strong with total revenues of just over $1.94 billion, up 8% year-over-year. Antiviral product sales were record $1.65 billion, up 12% year-over-year.

The US contributed $923 million for antiviral product sales increasing 15% year-over-year, resulting from the continued strong growth in patients and market share in the US and up 4% sequentially despite the added impact of rebates to ADAP and PHS as mandated by healthcare reforms.

There are now over 600,000 HIV inspected patients in the US taking antiretroviral therapy and we believe we are started to see the impact of DHHS guidelines endorsing earlier treatment.

Europe contributed $614 million to our antiviral product sales increasing 5% year-over-year and 2% sequentially. Although we saw demand growth for our products across Europe including clinical trial purchases totaling $10 million, this is partially offset by the fourth quarter impact of mandated price reductions and fluctuations in foreign exchange rates as we described on our second quarter call.

The products in our cardiovascular franchise namely Letairis and Ranexa delivered strong year-over-year growth of 26% and 23% respectively but were relatively flat sequentially. Both products saw demand growth that was paired back by small adjustments in wholesale inventories as well as changes in average selling price due to selective discounts in to managed care.

Our newest product Cayston achieved nearly $15 million in its second full quarter sales in both the US and some countries of Europe. In June we presented data from our head-to-head study of Cayston versus TOBI showing statistical superiority over TOBI at day 28 and we were presenting a six month data from the study at the North American Cystic Fibrosis Conference taking place in Baltimore later this week. We continue to receive positive responses from the CF community as the importance of having an additional treatment option and a null antibiotic to address the growing incidence of TOBI resistance and intolerance.

We continue to be vigilant on expense management resulting in a very healthy non-GAAP operating margin nearly 55% and we generated $740 million in operating cash flow for the quarter. And we have also been aggressive in our $5 billion share repurchase program having a repurchase retired $1.55 billion worth of stock or more than 45 million shares during the third quarter alone.

Our total share repurchase activity over the course of this year has reduced our total shares outstanding by approximately 10%. Given our current valuation, we view the share repurchase as the preferred vehicle for returning value to shareholders. We will continue to be opportunistic and leverage our cash balance over the coming year to complete our authorized program. In addition to advancing our pipeline programs and considering strategic options through partnerships, licensing and M&A.

The last financial highlight that I will speak to is our 2010 guidance which is detailed in slide 38 in the earnings call deck. The only adjustment we are making to our full year guidance to R&D. We are lowering our R&D guidance for the full year to a range of $830 million to $840 million from a range of $850 million to $870 million. This reduction in R&D spend is driven by the timing of clinical trial expenditures. All other guidance parameters remain unchanged.

As previously disclosed, on September 24, Gilead received a warning letter from the Food and Drug Administration related to an inspection of our San Dimas, California facility. We have responded to the warning letter within the mandated 15 day period. As a reminder, back in January and February of this year the FDA inspected our facility and issued a 43 letter citing a series of observations due to concerns about our manufacturing and quality related procedures. Subsequently we learned that we are likely to receive a warning letter based on the inadequacy of our response to the 483s. We disclosed this in our Form 10-Q for the second quarter of 2010. We have been and we'll continue to work diligently to address the FDA's concerns. Gilead continues to manufacture AmBisome, Cayston and Macugen and package and distribute products from the San Dimas facility.

Turning now to the key milestones during the quarter. At the International AIDS Conference in July, Dr. Cal Cohen presented 48 week results from the two pivotal TMC278 studies during the Late Breaker Session. The data demonstrated TMC278 was non-inferior to and better tolerated that efavirenz leading to fewer discontinuations due to adverse events. There are fewer grade two to four adverse events and the difference is statistically significant with regard to some psychiatric and neurological events and rash. There were more virological failures in the TMC278 arms compared to efavirenz, and further analysis of the data presented at ICAAC in September suggested that suboptimal inherent and or viral load were the primary predictors of virological failures with TMC278.

Due to the blinded placebo control design of the study, patients in this trial had to take multiple pills, multiple times a day, which may have lead to suboptimal inherent resulting in virological failure. As is recognized by the major treatment guidelines, single tablet fixed dose regimens lead to better compliant, therefore Gilead plans to conduct a head-to-head, open legal study of the fixed dose combination of Truvada and TMC278 versus ATRIPLA, as well as the study in which we will switch patients from our protease inhibitor containing regimen to our single tablet regimen of Truvada and TMC278.

We'll provide more details as we get closer to initiation of these studies. We have gotten through the regulatory process, Tibotec filed for the single agent TMC278 in the US in July and followed with the filing of the European Union on September 3.

We also filed our EU marketing application for the single-tablet regimen of TMC278 and Truvada on September 3rd. We expect the standard review which would allow for approval in the fourth quarter of next year. Gilead plans to file for the single-table regimen here in the US in November which would be expected to lead to an approval timeframe in the second quarter of 2011.

We are very pleased with the progress of this program. The introduction of this product will gave patients and physicians an important new choice for one pill, once-daily regimen. I will now turn the call over to John Martin to discuss our pipeline and other upcoming milestones.

John Martin

Thank you, John. I am pleased with our performance and productivity in the third quarter of this year. Ultimately our success for long term is dependant upon continued innovation and pipeline advancement where we have made significant strides this year. Management recently completed a thorough review of our R&D portfolio and we are enthusiastic about the number and quality of programs underway across our therapeutic areas.

For our HIV pipeline, the Quad and cobicistat programs continue to progress rapidly. As you know last month at the ICAAC Conference in Boston, 48-week data from the two Phase II studies were presented confirming the positive results seen at 24 weeks. Enrollment was completed in the pivotal Phase III Quad studies 102 and 103 in only four and a half months after study initiation.

Study 102 is a head-to-head study of the Quad versus ATRIPLA and study 103 is a head-to-head study of the Quad versus boosted atazanavir plus Truvada, both comparative arms being guideline recommended first line regimens. Each Phase III study enrolled over 700 patients putting this development program on track for availability of 48-week data in the third and fourth quarters of next year. The speed in which the studies were enrolled speaks to the excitement surrounding this integrase-based single-tablet regimens.

The third Phase III study, Study 114 evaluating cobicistat versus ritonavir is also making rapid progress and screening is now completed and the study will be fully enrolled before year end. This study along with the other studies which use cobicistat will support the filings for cobicistat as a standalone agent.

Turning to the ongoing research valuing the potential for tenofovir and Truvada to be used as a prevention in HIV, a topical gel tenofovir for use as a vaginal microbicide to prevent HIV infection in women has been under evaluation via South African based group called CAPRISA. This trial was jointly funded by the governments of South Africa and the United States. At the IAS Conference in July, the first data from this study were presented.

Results demonstrated that the use of tenofovir gel led to an overall 39% reduction in risk of contracting HIV among participants and women who used the gel most consistently experienced a 54% risk reduction. This presentation received a standing ovation at the conference as this is the first study to provide evidence of effectiveness of a topical microbicide for the prevention of HIV infection.

A number of oral prevention studies are also ongoing. Data are expected shortly from the iPrEx study which is a placebo-controlled double-blind trail conducted in North and South America and Southeast Asia of the daily use of Truvada in nearly 2,500 men who have sex with men. This study is sponsored by the National Institutes of Health. If the results are positive, Gilead will work with the appropriate regulatory agencies to determine whether the data would warrant inclusion in the prescribing information.

And finally for our ongoing HCV research. During the past quarter, we revealed that our HCV pipeline has grown to seven candidate compounds with six different mechanisms of action. Five of these are currently inhuman clinical studies and two are nearing Phase I initiation.

At AASLD in Boston next week, clinical data on four of these programs will be presented. One presentation is a late breaker of data from the three arm Phase IIa study evaluating GS 9190 of polymerase inhibitor in combination with GS 9256 of protease inhibitor. When used as dual antiviral therapy alone or as a three drug regiment in combination with ribavirin or as a four drug regimen including ribavirin and peginterferon.

As reported in the published abstract, a substantial portion of patients receiving the four drug regimen achieved rapid and complete moral suppression after 14 days of therapy, supporting further clinical valuation. Therefore, I am pleased to report that patient screen began just last week for a Phase IIb study utilizing this regimen to determine if the duration of therapy can be shortened from 24 weeks to 16 weeks. Shortening of therapy is an intermediate step in the treatment of chronic Hepatitis C as we expect that an all oral antiviral regimen from three or more classes will ultimately become the standard of care.

While there is considerable competition in the space, we believe that we have an expanding multi-class antiviral HCV pipeline along with a talented research and development group in place to deliver on our ambition.

In summary, over the course of 2010, many of Gilead's core pipeline programs have advanced on schedule and in some cases have exceeded our own aggressive timelines. We delivered strong commercial and financial performance in the third quarter and we look forward to keeping you posted on our progress as we conclude this year and embark on 2011.

I will now turn the call over to the operator for Q&A portion of the call. Operator?

Question-and-Answer Session

Operator

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

Geoff Meacham - JPMorgan

You know the question for you on slide 17, the CD4 count, so do you guys have a sense in this data, what the segmentation is of patients for accounts greater than the 500 and then a follow up to this is, maybe a bigger picture question. As for the guideline changes in the CDC recommendations a few years ago, what would you guys say today is a tipping point for converting the patients in care to those on ART.

Kevin Young

Yeah we do have that underlying, Geoff. We thought it was a lot cleaner to put the two together, though there was a small movement of the patients above 500, the majority of that growth that you are seeing up to 42% is coming from the 350 to 500. We felt it was important to give you that slide on this quarter as I have referred to this slide on the second quarter. In terms of the tipping point, I actually think we are in the tipping point.

If we look at the Synovate data for the second quarter to go over 600,000 patients on antiretroviral therapy was a big landmark for us, 219,000 patients on ATRIPLA, 226,000 on Truvada, so we have two products now well above 200,000 patients.

Other markers of earlier treatments include, we are seeing increases in the actual number of starting patient on antiretroviral and we are seeing a shortening of the average time between diagnosis and starting antiretroviral treatment. So, it does seem as though all of the key drivers are now operating and coming in parallel in all in the same direction. So, what we sensed was happening early this year is, is really starting to come through in the numbers, and I am quite presently surprised that we are seeing this as early as we are. But I think it shows the commitment to the HIV community to really adopt these guidelines. So, I think we are into the tipping point.

Operator

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

Mark Schoenebaum - ISI

Hey guys, I was wondering a follow-up on Jeff's question, could you talk about -- I didn't hear you say that, maybe I just didn't hear it but the new treatment guidelines are having any material impact in Europe yet? Are they having impact in Europe, if not, why not and then the follow-up well it's actually a second question so you don't have to answer it, but I was wondering if you could comment on this issue and does FTC equal 3TC?

Kevin Young

Well, let me do one at a time here Mark. I was commenting, that's the first question on the US, not quite as strong an indicator around guidelines. The EACS guidelines changed in November, not quite as strongly as DHHS and not as strongly as IAS. So, we haven't seen a stronger situation as we have in the US and that's not unusual because Europe is normally a little bit slower following the US. I do want to highlight one particular guideline change that's happened fairly recently and that's France. France is a very important market as you know, it's our number one market outside the US, very progressive from the point of view of HIV, and the French guidelines so called (inaudible) guidelines have moved of the start of antiretroviral treatment to 500. So that's a very, very key changing guideline. So again, I would hope to see that starting to come through.

In terms of your question very quickly on FTC versus 3TC, here in the US we have still not seen the launch of any generic 3TC and we are preferred in guidelines here. So I think we have a very, very strong position. So as would be seen from the growth in ATRIPLA and the growth in Truvada I think our single-tablet regimens on fixed-dose combinations have a very, very strong position.

Mark Schoenebaum - ISI

But do your customers view them as the same and then I'll stop.

Kevin Young

Our advisory boards off late, our HIV specialists are recognizing the difference between FTC and 3TC and we have medical education slide sets and discussions that are used by our medical scientists which clearly differentiates the products faced on resistance profile, based on the pharmacokinetics.

John Martin

I would like to just add something, I mean I want to emphatically say that FTC is not equal to 3TC and as Kevin said that's recognized by the people who are in the know. It has a longer pharmacokinetic half-life. It is more of a QD drug than 3TC. It is more potent on monotherapy and there is some clinical data emerging that would indicate that there's less resistance development when you are on an FTC containing regimen compared to a 3TC and then lastly as Kevin very correctly pointed out FTC is the only compound that in a preferred regimen coformulated either with Viread and Truvada or with Viread and efavirenz and ATRIPLA.

Operator

Your next question comes from the line of Rachel McMinn with Banc of America Merrill Lynch.

Rachel McMinn - Banc of America Merrill Lynch

Two quick questions, one is just on the non-retail purchasing during the quarter, if there's any comment there and then just when we look towards 2011, just to comment here about $50 million worth of pharmaceutical excise tax expected in 2011, I am just wondering when you look at that, think about your STD pipeline, is it fair to assume just directionally an operating margin decline next year, thanks?

Kevin Young

Hi, Rachel its Kevin Young. The first question, non-retail US was really, really solid. I was very pleased to see the results. We had excellent touches from Texas. As you remember Texas was a little bit cooler in Q2 because they are always waiting for the start of their new budgets, both common and supplemental. But we had very good purchase from Texas, very good purchase from Florida. That was unaltered and has had no impact of the weightless in Florida, so it was absolutely rock solid and as you know, typically Q3, Q4 and Q1 are the stronger of the quarters from the point of view of the financial year.

Robin Washington

If you noticed on slide 35, we kind of highlight that we expect to the excise tax in 2011 to not be greater than $50 million and it could be less, we are still working and trying to understand the calculation as is the rest of the industry. Clearly to the extent the impact SG&A will have some impact on our overall operating margin, but I think overall it is yet to be determined and we won't be providing 2011 guidance until January.

Operator

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

Yaron Werber - Citigroup

If you don't mind I just have a quick question on Robin kind of as a follow-up and then I just have a follow-up to the follow-up. In this quarter, how much would the top line impact it because of healthcare reform, I remember in Q1 it was around $29 million and it was slightly more than that in Q2. So can you give us a sense for this quarter and then there was just a question for Kevin. Help us understand a little bit, it sounds like this quarter there was again growth resuming both in the US and OUS and after the previous two quarters where it was much more sluggish. Is it all because of the guidelines because if you look at the slide on guideline changes, you actually saw an uptick in patients starting at the 500 level even in Q1. So I am just trying to get a little bit of understanding, what's different about this quarter? Thank you.

Robin Washington

Yes we did provide the initial impact of healthcare reform in Q1 but we also highlighted that we would not break it out just because it's difficult to view going forward, but we stand-by the guidance that we provided of about $200 billion for the full year. We are seeing on track relative to that guidance. I will say that in Q3 as well as in Q4 we did see a higher ramp up healthcare reform cost driven primarily by the fact that the discounts in the PHF and ADAP sector of our payer population increased in Q3 so the second half isn't highlighted before we see a higher ramp than we'd expect to see that flat in Q4.

Yaron Werber - Citigroup

Can be flat versus Q3, Q4 will be flattish versus Q3.

Robin Washington

Well, it will be based on sales but yes, relative to the ramp it would be flat.

Kevin Young

Just as much as we look at doom and gloom when we have a kind of a flat quarter with Synovate, we probably shouldn't go the other way and give a trumpets out when there is a very good quarter. I think we all should look at Synovate as the trend, as the direction. It certainly is nice to see that, we go over 600,000 patients now on antiretroviral therapy. I think what we're seeing is the coming together of all of the key parameters in HIV. We have got diagnostics and screening going on. We have got earlier treatment. We have got HIV still in the news and still is a major healthcare challenge. So, whether it's the US and more testing going on a bit $25 million emergency fund that went out there to help ADAP's or whether its guideline changes in France or diagnostic initiatives in the UK. I still think this tremendous momentum behind this market and the need to diagnose and the need to treat is compelling.

Operator

Your next question comes from line of Josh Schimmer with Leerink Swann. Please proceed.

Josh Schimmer - Leerink Swann

Couple of quick questions, one is a clarification really which is the healthcare reform projections, the 2011. If the 2010 impact was primarily backend loaded, how do you wind up with the same magnitude on a percentage basis in 2011, I would have thought that it would have actually gone up as a percent in 2011. And then a quick question on the prep studies, that's not your general formulation, do you see that as a viable commercial opportunity and if so, what kind of parameters can you put around that? Thanks very much.

Robin Washington

So, Josh relative to healthcare reform, I think we talked about it being four to five or five to six for 2011 in the next five to six for 2011 and the next five to six being the same percentage points fall in probably an anymore to the top end. Okay, and again because it's half and loaded it starts to get built into our run rate.

John Milligan

And Josh, with regard to the prevention studies going both as gel and with Viread and Truvada. We do believe that we will have an important conversation with regulatory bodies and to try to determine how the information should be included in the prescribing information around the world. But there is an obligation to provide that information to physicians so they can provide better guidance to their patient. But with regard to a commercial opportunity, we do not see this as a significant commercial opportunity at this point.

Operator

Your next question comes from the line of Ian Somaiya with Piper Jaffrey. Please proceed.

Ian Somaiya - Piper Jaffrey

Just a question for Norbert. Do you think you have all the necessary pieces that relate to FC program to in essence to catch up or to provide a meaningful combination regimen and starting where do you see sort of the [position of piece of the asset]?

Norbert Bischofberger

Ian, I am not sure whether I understood everything that you said, your phone connection wasn't quite ideal.

Susan Hubbard

Yeah, so Ian, this is Susan. I'll just clarify, and you were asking whether or not we believe that we've got all the assets we need, should we provide in the HCV space. Is that correct?

Ian Somaiya - Piper Jaffrey

That's correct. That's right.

John Milligan

Yes, so Ian, I will not state begin with our strategies. As you know, in the way the field has evolved in HIV that really, every drug all 32 of them that are approved right now has been developed as a standalone agent, either an addition to an existing regimen or a substitution for another agent in the regimen. We think HCV, and by the way it has taken 30 years or so for that to happen. I think HCV will be much accelerated, we have learned a lot from HIV and I think that's why we are working not on single agent but we are working on a combination for our antiretroviral combination that actually leads to cure of FC.

And you know if you look at the distribution of patients infected, patients diagnosed and patients on treatment, it turns out that only 5% of those that are infected are actually on treatment and that's a large part the reflection of the treatment modality that we have now. And in order to substantially change that and really be able to access the large number of Hepatitis C infected patients that are out there, you need to get rid of (inaudible) and that's our goal. And so we think if we have maybe its three drugs, maybe its four drugs, we will find that out sometime during the next year. And also which three drugs or which four drugs and we will do a combination study with those three or four, show that it leads in certain geno types to a cure of the FC infection and that's the modality we will get approved by regulatory authorities, and I think that will leap frog the field and it will greatly change how people view the disease, it will greatly lead to increased diagnosis and those that our diagnose to increase treatment, that's our philosophy and we think we have all the assets in place right now internally, both in terms of programs and people to execute on that.

Operator

Your next question comes from the line of Geoffrey Porges with Sanford Bernstein, please proceed.

Geoffrey Porges - Sanford Bernstein

Just a question on the cash performance, impressive share repurchase activity since May, and clearly you could go through this authorization much faster than you originally anticipated. I think it was three years. So Robin, just thinking I had to where you might another five months from now is your expectation first that if the stock stays in its current range that you would deploy the cash at the same pace or a different pace and secondly would you be willing to lever up further to get more cash to continue with that program at that pace. And then lastly, you've talked in the past about dividend discussions, I'm wondering if you had any follow-up to that. Thanks.

Robin Washington

Sure Geoff. So to address the first part, you know if you think about the rest of the year we plan to probably use in the range in a space of evaluation of about 3 billion in those share repurchase program. And then as John mentioned and outlined in the script, we'd anticipate utilizing the rest of that authorization in 2011. Okay, so relative to cash on hand and ability to lever up we would, we talked about getting the rating before you recall the reason why we did to the initial convert offering back in July was because we did have a rating. So that is also something that we are planning on looking at in 2011 and relative to dividends as we have mentioned, we pretty much view share buybacks given our valuation is the appropriate vehicle for returning value to our shareholders.

But it's a topic that we continue to evaluate as our business matures. We do recognize that our shareholders, while there are a lot of different opinions out there, but they expect us to have a sound capital management strategy and they also want longer term visibility around our cash usage and our returned value. So, we will continue to ensure that our method of returning value is complementary to our strategy and our future growth profile.

Operator

Your next question comes from the line of Thomas Wei with Jefferies & Company.

Thomas Wei - Jefferies & Company

Thanks just kind of following up on the last question. If we think about that Gilead profitability structure right now, do you think that you can achieve your long-term goals in terms of the pipeline, whatever you need to do to fill patent cliff with the current type of structure on operating margins, should we assume that you are going to try to keep the operating margins in the center range 50 to 55%?

John Milligan

As we model out for the future I think it's fair to say for example this year that we are spending less in R&Ds than we had planned to spend and that was a result of course two things, darusentan not going forward as we had thought and also the issues that we encountered and the safety of GS 9450. So as I look at this year we are not spending as much in R&D as I would have liked. As I look at the year we are going to come in around between 10% and 11% depending on how the year plays out in a couple of different areas.

So that's a little bit lower than we would want. What I would like to see is a longer term return to our higher level of R&D spend. I am not saying it's significantly higher but we need to spend a little bit more and looking at Norbert's pipeline for the future he's going to clearly need some more money to put into some of those larger more important Phase III clinical studies especially as the HCV portfolio matures and I would expect that to happen. So 55% is about as good as you can do anywhere these days. So that's a tough one to maintain and I would like to put a little bit more money particularly in R&D long term.

John Martin

Well Thomas an additional comment I would like to point out, we maybe not spending a lot of money on R&D as a percent of revenues, but in the total into the absolute amount $840 million as the huge amount of money. And you can do a lot of interesting things with it and we will continue to spend money very frugally and judiciously.

Operator

Your next question comes from line Jason Kantor with RBC Capital Markets. Please proceed.

Jason Kantor - RBC Capital Markets

Wondering if you could comment on how if any, there was an impact from the patient assistance programs and the co-patient assistance program which I believe were expanded this quarter.

Kevin Young

Yes, we in conjunction with our price at which we agreed with ADAP, we did make some other changes one of which was to take a power co-pay card basically from zero, it previously started at $50, its now zero to $200. Just as a reminder, that can only apply to private patients account, apply to any of the federal payers. It has been well received. There were very, very small areas of the country where we probably had a situation where a physician favored a competitive product because of our co-pay card patch being betted by a co-pay card of another company. So, that is being helpful but I have to say that's probably been in very small spots. I think the thing that's really driving this is the extra funding that came from federal, the extra funding when counting this emergency $25 million fund and just a desire by the physicians to be adopting the guidelines we are having discussions from medical scientists and our field force around the guideline changes but the reception to that has been very, very positive. We haven't been pushing uphill. The physicians themselves I think wanted that endorsement to be starting patients earlier. So I think that's where the real momentum comes from.

Jason Kantor - RBC Capital Markets

Could you speak to how the co-pay assistance program might work through the P&L overtime and is that going to be a growing thing, something that we're going to see more patients take advantage of?

Kevin Young

Its a relatively small amount in my expenses, so its captured an expenses, so it's a very, very small amount of money and for the goodwill and doing the right thing for HIV, its quite appropriate. I should also say Jason that we have seen an increase in our PAP that's our Patients Assistance Program, not the co-pay card and that goes hand-in-hand with some of the growth that we have seeing in the ADAP waiting lists. Again we feel responsible as a HIV company to do the right thing and typically the PAP is a transitional place for HIV patients until they come off a wait list and so whether it be Florida or another states, we make sure our people know about our PAP, the come on to our PAP and then when the waitlist hopefully, eventually come down or are cleared, that allows for very quick transition to a commercial paying patient.

Operator

Your next question comes from the line of Tom Russo with Robert W. Baird. Please proceed.

Tom Russo - Robert W. Baird

Just a quick another macro question on hep C. As a leader in Hepatitis B where it's also very under-diagnosed and under-penetrated, what in your view is the key difference about hep C, is it the ability to get a cure that would move that needle and then as a follow-up with your six mechanisms of action what currently do you think are the most likely that could be combined to achieve in our overall three drug cure.

Norbert Bischofberger

So Tom, the first question here exactly why the big difference between hep C and hep B is that hep C gave the treatment, the end goal of treatment is cure, whereas in hep B that's more what you would like to achieve but in most cases it's a question of viral replication. We are by the way with our TLR7 agonist, actually pursuing a hepatitis B cure as well, and that is greatly expand again the diagnosis and the treatment of patients that are infected with hep B.

With regards to which mechanisms are most likely to work, Tom, I don't think there is a particular role that we have, you simply need three potent agents that are not antagonistic, they don't have unfavorable drug interactions that you can combine and that have added a synergistic activity so that you suppress virus replication and you have to suppress it for a certain period of time that could be between 12 and 24 weeks, and afterwards HCV will be cured. That's our ongoing assumption.

Operator

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

Phil Nadeau - Cowen & Co.

In about six or eight months it sounds like ATRIPLA and BTRIPLA will be competing in the marketplace. So now that you had more time to digest the Phase III data from TMC278, could you give us your updated thoughts on how you are going to position ATRIPLA versus BTRIPLA, and can you remind us how much flexibility you have in your experiments with J&J in Bristol to change strategy, change the horse that you are backing, forming a data from the ATRIPLA versus BTRIPLA head-to-head study?

Kevin Young

Hi Phil, it's Kevin. May be I will try and sort of reverse my answer to your question. First of all, we've got complete flexibility when it comes to our partnership with Bristol-Myers. That partnership today where ATRIPLA continues to be incredibly professional, but in the first quarter of next year we will essentially separate from DMX in terms of that joint promotion.

Both companies can continue to promote ATRIPLA, and that's their own discussion but we will be no longer coordinating our efforts with Bristol-Myers Squibb. Coming back to Truvada 278, yes we've done a lot of work and certainly we wrapped that up since the two recent presentations of 278. The first thing I want to say is that I think some people have considered that 278 Truvada is some form of either niche products or is somehow second line to ATRIPLA. We don't see it that way. We see this is a really strong first line drug for treatment naïve patients, certainly in terms of the tolerability process side-effect profile. It seemed to perform better than ATRIPLA in both ECHO and THRIVE and certainly for the 49% of treatment naïve patients who stopped on ATRIPLA I think we've got an alternative. The other part of the treatment naïve pie is obviously Truvada. The majority of, Truvada is with the protease inhibitors or in some cases with an integration inhibitor with Isentress and that's also an opportunity for us in that naïve setting. So we think the profile of Truvada 278 is very strong and will be leading out with that for treatment naïve patients.

The final thing I would say is I do think we have a good opportunity with the switch patient, certainly talking to the physicians and having advice reports while there is some patients who much prefer the single-tablet regimen of ATRIPLA, in some cases they do struggle sometimes with tolerability.

They didn't have a second single table available as an alternative, will provide a good opportunity for a physician to switch a patient. So the final thing I would say is, it's really a very strong position to have two single tablets and we can certainly get to a place having those two percentage of the physician that we could never get with just ATRIPLA alone.

John Martin

I would like to add in this was said before by John Milligan in the conference call earlier that we believe that the Phase III data on 278 do not fully reflect the value of 278 fixed dose combination because as mentioned due to the blinded nature of the study, these people had to take three pills, everybody at two different times of the day, one with food, the other one without food at bed time.

And so it may have led to less compliance than you would get if you simply have one pill once daily. And that's the reason why we are repeating or doing this study open label one pill versus one pill, 278, those combinations versus ATRIPLA to really show that that would lead to higher compliance rates and less virological failures on 278.

And if we can show that then 278 would be truly a wining combination for a good substitute for ATRIPLA.

Phil Nadeau - Cowen & Co.

And if I could follow up on Tim's comments on the protease inhibitor part of the market, part of the conversation with HIV physicians, it sounds like they use PIs in the first line in many cases in patients where they don't think they're going to take their pills to give them a higher barrier to resistance. If there's a question with 278s to resistance, what happens if you miss pills? How likely is it that you're going to be able to penetrate that part of the market, kind of what's going to be your marketing message to convince somebody to go on 278 plus Truvada instead of a PI plus Truvada?

John Martin

Well I think you're right. There are some physicians who for that reason use protease inhibitors. There are physicians who choose protease because they just don't like efavirenz. And I think that's, there are physicians, there are patients that an alternative would be very welcome.

One thing I want to say is that there's to be another comment regarding effect in viral load. Basically 75% of new starting patients have a viral load of less than 100,000 copies. So the majority of patients who are treated in the naïve setting, have a viral load below 100,000. So again, I don't think that's an obstacle to prescribing of Truvada 278.

John Milligan

I would like to mention I think Kevin may have said this before, I am not sure. We are doing this study where we are actually switching in a Phase III design in a controlled way. People are not suppressed on the PI contain regimen to 278 fixed doze combination. I think those data are very useful and maybe even necessary to convince a large part of the division that is a viable strategy.

Operator

Your next question comes from the line of Joel Sendek with Lazard Capital Markets. Please proceed.

Joel Sendek - Lazard Capital Markets

I had a question about your cardiovascular franchise. So, you mentioned that in explanation for why there is flat sales effectively for Letairis and Ranexa, inventory and ASP changes. I am wondering what the sequential demand growth was if you can give us some fuel for that and just help us going forward. Thanks.

Kevin Young

Basically I'll the next one first, it depends what data source you use. But what is close to about 5% sequential increase in prescriptions and IMS with 6%, so its 5% to 6%. That is lower than it was in the second quarter where it was one of our highest growth levels of 13 or 13 for what is clearing and 10 for IMS. So it was lower than Q2 growth but nevertheless there was growth there. In terms of Letairis, we don't base our demand on prescriptions. It shipments out and shipments out Q3 on Q2 are about 6% up. It is, as John said, it is in his text. We had a slight lowering of inventories with regard to Renexa, that's with the major wholesalers with regards to Letairis that's where the specialty pharmacists and we do do some contracting on a very selective basis with Renexa, that's been all about access and with Letairis, that's more reactive to some loose we see from competition.

Operator

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

Robyn Karnauskas - Deutsche Bank

First question is so according to your metric, what percent of agents really struggle with tolerability on ATRIPLA according to your databases and then second question is for Norbert. Given any thought to I know your HCV pipelines early, have you given any thought to your need to partnering your drug a little earlier drugs that are going to come to market in hep-C space.

Kevin Young

I don't have a percentage off the top of my head, but I can answer that more qualitative. You know what we typically hear from physicians when we have our round tables is they particularly get concerned about HIV patients who have high technical jobs. So maybe in kind of the financial world or just dealing with complex information and so those are the people who sometimes because of some CNX effects don't do as well. So if people are operating machinery, people are driving as part of their profession, that's when physicians tend to be just cautious about using an (inaudible) spaced regimen.

Norbert Bischofberger

Robin, and to answer your question about partnering Hepatitis C, absolutely we are looking at that constantly almost we're in a number of discussions with various organizations to look whether partnering makes sense, but I have to say it makes sense to us if we believe that it greatly accelerates the timelines for us to come up with the oral antiviral regimen and in that case of course we would completely enter into a partnership and support that.

Operator

Your next question comes from the line of Jim Birchenough with Barclays Capital. Please proceed.

Jim Birchenough - Barclays Capital

Hello guys, just want to follow-up on just the focus on your HCV development program. What do you view as the major de-risking event in trying to get to a three or four drug combo? Is it efficacy, is it safety, have you done the pharmacodynamic modeling where you feel pretty confident if you can put three drugs together, you are fine and so its safety. Just trying to understand how you are thinking about that and when we'll hit that's sort of time point where you can take a step function in terms of your confidence that you are going to be the ones that that develop a triple combo.

Kevin Young

Yes Jim, we actually have a late breaker presentation at AASLD that you may have seen the abstract and basically this was an experiment to ask a question with our three, two drugs through our antivirals in combination with ribavirin may actually be enough to give you a good RVR or suppression of virus and the answer to that was no. So, we are looking at viral modeling, viral kinetics and we just need, either it's going to be three drugs or four drugs and we will be in a position to test that concept hopefully by the end of next year and then we can really find out whether the concept works and whether three or four drugs are enough. But I think in the end it has to do with, there has to be an absence of course of antagonism ideally we are on synergy between the drugs in terms of activity, you want to have a potency which means each drug by itself should lower viral load by a few logs, all of them together should be as I said additive or synergistic and when you say it shouldn't have significant drug interactions, but if you have all that I think you have a chance of being able to cure each HCV infection with an all oral antiviral regimen with a limited treatment duration of between whatever it is 12 to 24 weeks.

Jim Birchenough - Barclays Capital

And if I can just follow-up on this, I guess what I am trying to figure out is if you are quite certain that you've got the three or four drugs to combine then I understand not being aggressive in pursuing partnership or acquisition but it just seems like it's a pretty high technical hurdle and why not increase your odds by being more aggressive on the M&A or end licensing front. It just seems like you are making a bet on what you've got internally with limited information and why not be more aggressive.

Norbert Bischofberger

I completely agree with you and all I can tell you is we are aggressive. I'm not at liberty to talk about the details of all the discussions we are having with various organizations, but you know we are looking at the de-risking event could be, the only thing we are not certain about our compounds is the safety because we simply don't have enough experience like with our protease inhibitors yet to be able to see how safety they are. So, it does make sense to look at other opportunities of compounds that are further along in terms of human safety experience and think about should we collaborate with those organizations or acquire them. And we are actually doing that, we are in discussions.

Operator

Your next question comes from line of Jason Zhang with BMO Capital Markets. Please proceed.

Jason Zhang - BMO Capital Markets

Norbert, questions for you. You mentioned two HIV trials. The one is BTRIPLA versus ATRIPLA, open-label trial, and another one is switching from PI to BTRIPLA. Could you give us a little more detail in terms of number of patients, when we'll be seeing data?

Norbert Bischofberger

These are two large Phase-III studies, and we receive data and we are in the stage of protocol development, we still have to go through FDA approval, IRB approval, et cetera and then enrollment. I would say just back of the envelop calculation it's probably going to be somewhere, sometime in the year 2012 before we have data on any of those studies. The design is really simple, the one is the randomized one-to-one ATRIPLA versus 278 fixed-dose combination and the other one is a controlled people suppressed on a PI regimen, if they randomized to even continue on that regimen or switch to 278 fixed-dose combination. The end point is that in both studies a 48 week proportion less than 50 with missing inputs failure.

Jason Zhang - BMO Capital Markets

Then quickly off the Phase II B HCV study, you said you are studding Phase II B and try to look at either 24 weeks or 16 weeks. I assume that is compared to the standard of care as a control, but just going, looking into the future if you do indeed move this into a regulatory trial, what do you think will be the control to be if the protease inhibitor is already on the market. Do you have any dialogues with the FDA about that?

Norbert Bischofberger

We have had conversations with various regulatory authorities, but the way this is going to evolve in our mind is the following, so you will show, let's say you take a triple combination or a antiviral agent, combination, you show the contribution of each individual agent to the antiviral response in a short maybe 14 or 28 day viral dynamic study, then you to the typical Phase III study where you use as control, the standard of care that exists at that point. Once it is approved that maybe that together with big rival will be the standard of care but you will then simply compare that standard of care to the three or four all oral antiviral regimen and show that you can get similar SVR rates and that will lead to approval of the regimen whether that's three drugs or four drugs, and of course there's the realization by regulatory authorities by precisions and most importantly by patients that if you get rid of peginterferon/ribavirin you will have a greatly better tolerated more convenient regimen that I think the world would embrace.

The other thing I would like to mention quickly about the two, Phase III studies and I have got to say this in HIV we all recognize that you can get value of the study when it's still on going. When the world knows that you are actually doing study, that means there is conviction on part of the company that this switch strategy and the randomized versus ATRIPLA has value and I think that could change the behavior of prescribers and physicians while the study is still on going.

John Martin

Yes, Jason I just like to add that obviously with the Quad, one of our studies was totally done in the US and for our second Quad study, 60% of the sites was in the US. But if you look at ECHO and THRIVE, the studies for 278, only 30% of sites were in the US. So I think the Phase III that Norbert talks about are going to be very helpful for US physician to gain more experience in Truvada 278.

Operator

Your next question comes from line of Maged Shenouda with Stifel Nicolaus.

Maged Shenouda - Stifel Nicolaus

Can you discuss the profile of GS7340 and what hole in the market that will potential fill?

John Martin

So 7340 is a pro drug that actually delivers more anti-viral active components into the compartment in the body where it's really needed which means into lymphocytes mostly. What that means, as you can take a lower dose and actually our clinical study would indicate that 1/6 to 1/10 the Viread dose and you will get actually higher efficacy with less exposure.

So we are actually looking at this compound to be used in subpopulation where people have been concerned with Viread and that's in particular that the one in renal impairment or elderly people that have renal function and the other population would be also that pre-existing or a suspicion of bone disease Osteoporosis and Osteomalacia. So that's where we will initially go into precision of the compound.

John Milligan

As you know that probably the hottest topic in HIV is the whole issue of aging and several of its here and an advisory board went around the table and asked the percentage of the physicians populations over the age of 50 and most of them had 40% to 50% of their patients over the age of 50. So, in terms of long-term therapy as well as the age of the HIV patients we want to be progressive and look at potential advantages for long-term care of these patients and potential alternative to tenofovir.

Operator

And your next question comes from the line Geoff Meacham with JPMorgan. Please proceed.

Geoff Meacham - JPMorgan

There has been some noise on Veriad and XMRV, I am wondering if you had feedback on that chronic fatigue or prostate cancer, I know its been in the press off late and I know there is some publications, but wasn't sure if there is anything specific Gilead plans to capitalize on any further data in these two end patients?

John Martin

Actually we are actively monitoring the situation. We actually have a meeting scheduled internally in two weeks from now to talk about this, what we should do. If anything needless to say so first of all we have done in-vitro studies in house with XMRV and it turned out that tenofovir and tricitabine are active and of course Truvada would be a very good inhibitor of XMRV.

The challenge that we have and I think the whole field is to have some certainty about XMRV as the causative agent of CFS. There have been in the past various reports about viruses being involved in chronic fatigue or hypermyalgia and they all turned out to be not true on further follow up. There was a recent science paper, I think it was in science where they actually disclosed that it may have to do with contamination in this particular study where they have found mouse mitochondrial DNA sequences in these human samples which would indicate that there is some mouse tissue contaminate, that is a contamination issue and not really an XMRV issue, but we have looked in this and we are debating what we should do with anything.

Operator

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

Susan Hubbard

Great thank you Stacy and thank you all so much for joining us today. We appreciate your continued interest in Gilead and we look forward to providing this updates on our future progress.

Operator

We thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect and have a great day.

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