Here’s the entire text of the Q&A from Gilead Sciences’ (ticker: GILD) Q3 2005 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.
Today's question-and-answer session will be conducted electronically. Anyone wishing to ask a question may signal us by firmly pressing the * key followed by the digit 1 on his or her touchtone telephone. We will call on you in the order that you signal us. If you find that your question has been asked, you may remove yourself from the roster by pressing the * key followed by 2. As a reminder, we will be taking a maximum of two questions per person at one time. We'll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Jeffrey Porgis with Sanford Bernstein.
[Q]: Thanks for taking the question. Congratulations on a good quarter, guys. I just wanted you to give a little bit more color on the HIV market. You mentioned some growth numbers, but I'd be curious about what the underlying growth is in the patient number on HIV treatment in the US and non-US and how many new to treatment patients you think you'll see this year, then perhaps a little bit of sense of whether you think that's likely to continue in the future. Thanks.
[A]: Hi, Jeff. It's Kevin Young speaking. I'll try and fill as many of your questions as possible. I think that we expect that there will be some increase in new patients coming through. Basically, you know, those 40,000 patients newly diagnosed. So we expect that to be a little bit higher on an annual basis. If I just deal with essentially what I call the utilization of Truvada, on a launch-to-date basis about 60% of Truvada has been composed of switch business, and about 40% is been composed of new patients. And that picture will gradually change as Truvada gets older. The components of new patients will get bigger and bigger. In terms of the buckets in which we have essentially scooped our patients from, of patients as I’ve commented earlier, we’ve now estimate that 60% of new patients who are put on antiretroviral therapy go onto Truvada. And again, we're optimistic defects of proportion of new patients will increase. And then if you then look at just the switch business where we have essentially captured the patients from, we believe that we have penetrated about half the patients of Viread plus Emtriva, and about a quarter of the Viread plus 3TC patients. And then finally we believe we penetrated just a little 10% of the Combivir patients. And again, those calculations come from independent market research and are based on from launch to where we are today. So essentially 12 months.
[Q]: Thanks very much.
Thank you, sir. Our next question comes from the line of Meg Malloy with Goldman Sachs.
[Q]: Thanks very much. That definitely answered the first question. I was wondering if you have, I know it's early days in Europe, but if you have a similar sense in terms of the major market countries in terms of percent of patients that you've cannibalized versus new starts, and I'm wondering also if there's a different sense about the need for Combivir switched in Europe.
[A]: Actually Meg, it's a good question. I was just running budget reducing in Europe last week. It is early days. But what we can see from sort of UK/Germany, it's actually a pretty similar picture. So I think there's remarkable consistency. I think some of the European markets potentially because of their grouping of patients in sort of the hospitals have the ability to switch on mass more patients. So that could be an upside for us, you know, on the Combivir switch. But I think it's a little bit early days now.
[Q]: Thank you.
Thank you, ma’am. Our next question comes from the line of Craig Parker with Lehman Brothers.
[Q]: :I'm going to use both my questions. First, Kevin, is the status of the 24-week data from the 934 study being incorporated into promotional material?
[A]: I think actually what we want to do just to sort of a correction there, Craig, is that we want to get the 48-week into the Truvada labeling in the US. And the only guidance we've given on that is basically in the first half of 2006.
[Q]: Maybe you can help me understand that. Why wouldn't you want to try to get some of the 24-week data into the promotion material?
[A]: Craig, can I answer the question? Craig, 934 actually was a requirement to get full approval for Viread and that was a 48-week end point. The primary end point was 48 weeks. So, we submitted the study report in May, and it has a 10-month due per date. Essentially the US time line for approval of the 48 weeks is incorporating the USPI is March of '06 and I want to add in the European union we have the 48-week data, which has got the CHMP a positive opinion on that. And we will get it incorporated in the next three months or so when we get European Commission approval.
[Q]: Okay. Second question is on the GS-9137 data, maybe you could describe the patients involved in that study that were prepared to evaluate that data when it comes out.
[A]: Okay, Craig, this was a dose-ranging study that looks at various doses of 9137 in HIV-infected individuals dosed for 10 days. It was eight to two randomized active to placebo. And we will make the decision on how many doses we're going to and whether we go up or down in those based on emerging data. We are looking at, you know, b.i.d. and q.d. dosing in depth. I don't have any news to tell you now because these are all ongoing blinded studies.
[Q]: In treatment experienced patients?
[A ]: These are both treatment experienced and treatment naïve, we don't make a distinction. And as you may remember in the March study we actually did not see a difference in terms of response between naïve and experienced patients because it's a novel target.
[Q]: Okay. Thanks very much, guys.
Thank you, sir. Our next question comes from the line of Thomas Ray with Piper Jaffray.
[Q]: Thank you very much. I had a question. I am little bit confused about the US HIV numbers particularly when you look at them on a sequential basis. If we take the Viread and Truvada sales and strip out the potion of Truvada that is in Emtriva, you end up with all Viread growth from second quarter to third quarter that would look like $156 million to $159 million despite having taken a price increase at the beginning of the third quarter and it being at least partially effective during the quarter. Can you help us understand what some of the factors are there. did you see a sequential decline in overall prescriptions for NRTIS, or was there something on the image 45 that might explain that? Thanks.
[A]: I'm not sure I fully get your question and we could probably get more details and get back to you. Just one thing to clarify, you got to watch the effects when you're looking at the NRTI market, the effect of the denominator changing because you've got products that move from essentially single products into combined products that alters the dynamic. So one thing to watch is sometimes market share does not alter but volume does go down, that is the case, for example, with Combivir, Combivir's share has not altered that much, but if you look at the volume decrease, it's quite significant that’s because essentially the market is shrinking because single products are going into double or triple products. So that might have some influence on, the picture you're seeing. But in terms of more detail, I think we probably need to get back to you on that.
[A]: Yes, just looking at the volume data now, so clearly Viread volumes did decrease quarter over quarter but that was more than offset by the Truvada gain quarter over quarter in terms of volume. So, those two things certainly led to the number. It was a tricky question. I'd have to write it down to get if t right. The other thing that you mentioned was the price increases. And one thing to be clear is the way the price increases were implemented is they come in slowly. Which is, there is some inventory that is out there that previously established prices that flows its way through naturally. And also the price increases that the government payers, Medicaid, things like that only go up due to cost of living. So it's only implemented partially throughout even after a period of time. But that first quarter, the effect is much smaller than you might anticipate based on a simple model.
[A]: And just one final comment again about the dynamics of this market. If you look at just the total Tenofovir molecule what comes from essentially Viread and Truvada, since the launch of Truvada total Tenofovir has increased by 30% in terms of NRX. Contrast that with total abacavir, and that's only gone up 5%. I think that illustrates that in terms of capturing more patients on to the Tenofovir molecule whether it be Viread or more importantly now Truvada, we're getting naive patients and we getting switch patients going onto Truvada whether they switch from Viread based or whether it be from other products.
[Q]: Can I just ask a followup on that last point? If you look at that Tenofovir share or volume on a sequential basis, you said it's up 30% since the Truvada launch. Can you tell us what it was from 2Q to 3Q?
[A]: I can't off the top of my head, Thomas.
[A]: The total can’t Q2 to Q3
[A]: We'd be happy to follow up. But we don't have that readily available.
[Q]: Alright. Thanks very much.
Thank you sir. Our next question comes there the line of Aaron Weber with Citigroup..
[Q]: Hi, good afternoon. Very nice quarter. Wanted to ask a quick question, yourt guidance for the year is gross margins between 85% and 86%. You've been pretty much annualizing, I mean, the last nine months an 86%. What would perhaps take the gross margin down to 85%? I mean, there shouldn't be any sort of stocking that you would run through at this point. Am I correct to assume that?
[A]: Yes, there's no stocking, let's be clear about that. But as Truvada has an Emtriva component to it, and that Emtriva component has a smaller margin than does Viread and so. And even with the royalty buyout, that is not affected because we amortized that cost of that royalty buyout through the cogs line. So what you're seeing is the product mix makes more Emtriva sold, it drags down the margins a little bit. So that's the largest factor that's affecting it. The other thing, of course, that happens over time is worldwide pricing changes. There's a gross dynamic there, a price decrease in some areas versus price increases in other areas that can affect gross margin, as well.
[Q]: Okay. It seems to me up to now this could have been a possibility in this quarter, as well and we haven't seen that. In terms of having any impact on gross margin.
[A]: Yeah, clearly with the guidance we've given, we don't expect any change throughout the remainder this year and we're not yet thinking about gross margins for next year. Our guidance just ends at the end of the year.
[Q]: Just want to quickly followup on one question if I may. If the integrate inhibitor is successful and you're move that into phase II, I am sure there will be nothing n the contract with Bristol with Sustiva to stipulate that the you would not be able to run the combination study Truvada with the integrated inhibitor head to head versus Sustiva and Truvada.
[A]: Of course not. Let me see clear the contract with Bristol Myers gives us freedom to operate in a lot of different areas with, you know, other protease and inhibitors and other new molecules. Basically anything that comes into our portfolio is fair game. That which is the right thing to do under this kind of agreement.
[Q]: Great. Thank you.
Thank you, sir. Our next question comes from the line of Ian Somaiya with Thomas Live consultant.
[Q]: Thanks for taking my question right. First just to follow up on the HIV franchise. You said the price increases are not fully reflected yet. I was just kind of curious when do you expect the full price increases to be reflected in the US and I just have a followup question.
[A]: So quickly, It basically amounts to about a one quarter lag, which, you know, it takes us about that long to flow things through there. More or less a one-quarter lag. Then again, those price increases, the full extent of which is not felt in the public sector except that we do increase slowly as the consumer price index goes up. So it's tied to that directly. So there's always a slight increase in those markets. But you know over time that we'll never catch up to the full price increases over time.
[Q]: Does that properly manage any inventory fluctuations?
[A]: Its not related inventory, it's just the dynamic of how things flow through and the mechanics of how price prices are manifested in different pair groups.
[Q]: Okay, to follow up on Tamiflu, can you just review for us the size of the government orders that you've received to date and just update us on the manufacturing capacity and any steps taken there to ramp up capacity.
[A]: Well, to be clear, we don't take any orders on Tamiflu, these are all Roche orders. And they've given guidance, first of all. They've been very clear that they're not giving external guidance on their manufacturing capacity, nor we were able to give any guidance on our capacity. They have certainly been strongly stating to the press that they have increased their capacity over time. They have been working to qualify plants and new facilities much like they had in the announcement they had today on their new capsuling facility. I believe the guidance for the remainder of the year and if again, this will be on tomorrow's call, but the guidance for the remainder of 2005, I've got this right I'm going to give it to you in dollars, about 250 to 295, in dollars for the second half of '05. We've converted that from the switch frank guidance, which is 300, 350. We used a conversion factor to get those numbers.
[Q]: And just to be clear, that's for pandemic sales only. They've not given any seasonal guidance.
[A]: Right. So that what they have given guidance on. So we look forward to tomorrow's call and updated guidance if any.
[Q]: Okay. Thank you.
Thank you, sir. Our next question comes from the line of Sabana Srivatsava with Morgan Stanley.
[Q]: Hello, thanks. I have two questions. One is could you give us a little bit more color on us ex-US Truvada sales as to why do you see the update being slower than probably what we expected. And the second question is in the co-formulation of Sustiva and Truvada, as to why you are not considering co packaging of the two drugs.
[A]: Hi Sabana it’s Kevin speaking I don’t think I said here, I hope I didn't give the impression that the European uptake was any slower than the US. We've been absolutely delighted. I think there is a remarkable amount of consistency albeit that we've got only very early data from Europe, but we see a very, very similar picture. And that's perhaps highly surprising because of the consistency around treating HIV worldwide, the use of guidelines. If you look at the VHS guidelines with Truvada being in the first-line position, that's very, very similar and paralleled by the Beaver guidelines, that's the British guidelines on HIV which, again, are representative of very much the European thinking. So our expectation is we will see a very, very similar type of uptake. We saw the same thing with Viread. Viread paralleled uptake in the US, in Europe, and our expectation is it's going to do the same for Truvada. We are every bit as confident about Truvada in Europe as we are here.
[A]: And in regards to co-package, I can answer that. We have very carefully thought about co-packaging the two products. It certainly sounded fairly straightforward to do. But we have decided not to make that our first priority because simply the outer commercial groups felt that this concept of one pill once daily would be the big selling point for patients and a big advantage.
[A]: But it's certainly still an option that we haven't completely dismissed.
[Q]: Thank you.
Thank you, ma'am. Our next question comes from the line of Eric Enday with Merrill Lynch.
[Q]: Thanks. When you gave your guidance, you gave guidance of 1365 to 1385. You also talked about the price increase that is going to start that will show up in the fourth quarter. I guess what I'm curious about is sequential growth is based on your guidance is a -2% to a positive 3%. I'm just trying to understand that guidance. Is it just conservativism, or is it something that you see in the fourth quarter?
[A]: Eric, your numbers are exactly right in terms of the sequential growth. I'd say the best way to think about this is we're facing a really strong product launch going on in Europe. We're facing considerable pressure in the United States because we've had such a strong launch now. We've gotten a lot of the easy patients. And I would say that this is a number that we're very confident in for the remainder of the year. But we have missed some opportunities that we thought we might have to get some data out there. And so, for example, _____ the meeting where we had planned on having a number of events, we missed because of Katrina. And so a lot of our marketing is now delayed so I think that's probably a little bit of our nervousness, up what after the fourth quarter. So I don't see any bad events, we just missed opportunities. Now the good news is I see great opportunities going forward. In November, there's a meeting at EACS, which is in Ireland. We have ICAC in December. We have in the first quarter of next year we're, we have the retrovirus conference. And then we have the expanded label occurring in March. So really for the next five months, we have four key events. We'll be able to get data on 934. We'll be able to get data on comet, showing how effective this product is in switches. We'll have a label update in the US. Probably also now a label update in Europe. So this will all help us going forward. But some of the tools we ‘re taken out of our hand in September, unfortunately, because of the hurricane.
[Q]: Okay. Just a question on Tenofovir in HPV. What is the relative pricing of to Tenofovir versus Hepsera at the current time?
[A]: Well, it's lower. It's about $100 a month lower, if I'm recalling it correctly, in the United States per bottle. So its a significant decrease in price. So it's an overall benefit to the health care system to have Viread take in the mix versus Hepsera.
[A]; Obviously, it would be considerably cheaper than Entacavir, because as you know Entacavir is priced at a very large premium compared to Hepsera. So we're seeing the opportunity to bring a product that's as good or better we believe than Entacavir to the market. It certainly has higher viral load decreases and there is published data out there showing significantly stronger viral activity in patients with Viread. So 5 log plus decreases versus, you know, 3.5 log decreases on Hepsera. So better viral control. Huge safety database of patients who have been treated with the product, which is the big advantage. And clearly a pricing advantage. So to offset any erosion from Hepsera, we clearly have to build the market to a bigger stature than it is today.
[Q]: Sure. Thanks a lot.
Thank you, sir. Our next question comes from the line of Jason Canter with RBC Capital markets.
[Q]: Hi thanks and taking my positive view the clear in terms of inventory changes for Viread really enable the products in the US. Any of the decrease in the US due to or any of the products in the US. Is any of the decrease in US due to inventory you mentioned I think it's great that you were providing the HIV drugs at no cost to people affected by the hurricane. Could you quantify what if any sales impact there was in the quarter as a result of that program. Thank you.
[A]: Jason and John can come in. Basically there's been no change, no fluctuation in terms of inventory. So our inventory management agreements that we have with the three major wholesalers are working very well. So I'm pleased to say that there's nothing in the results that are reflective of any inventory situation. It's very difficult to actually put a number on just affected patients. We think we've helped about 1,000 patients with our access program for a short period of time. When we stepped in, these were basically people who were just displaced and needed coverage because they were in another state. We again, you know, consider it's very small and relatively inconsequential to our performance. You know, quite honestly, it was more about the values and the right thing to do for humanity than essentially worrying about our revenue. We feel it was the right thing to do as a corporation.
[Q]: I won't argue with that. Just I am trying to see f there was a number you could put behind it. The inventory agreements that you have is a, you haven't changed inventory. The inventory hasn't changed on a dollar basis or on a week of sales basis. Because as Viread comes down one word expect that just if you estimated a certain number of weeks of inventory, clearly that number would, you'd have to draw down on the inventory. Could you clarify that.
[A]: Sure. We'll be more precise. You're right, when we say it hasn't changed what we mean is that the inventory management agreements are effectively keeping the inventory within the prescribed ranges that we look at. So there's a forecast both backward looking and forward looking that brings things into a prescribed range. So we watched it gently cushion the fall of Viread as Viread sales have decreased. But then on the reverse side, they are building inventory as it relates to Truvada as we've seen the rapid increases in number of prescription. So one is going down and one is going up. And it seems to us, and as evidenced by the price increases, the smooth transition this quarter, that they worked very effectively because we brought things in just exactly as we had forecasted.
Thank you, sir. Our next question comes from the line of mark Augustine with _____.
[Q]: Two things quickly on the repatriation. Just remind us what the steps are in terms of forming and then submitting a plan. Remind us if that allows you to undertake various transactions in calendar 2006 accordingly.
[A]: So the homeland investment act would allow repatriation of foreign earnings in an advantaged tax rate. And we do have some offshore earnings we've built up over time. So we would be, we can effectively repatriate those at a favorable tax rate. For some companies, this is a net negative. For Gilead it would be positive to our effective tax rate because they have sufficient reserves for those, the case rate of earnings. So it's a positive event for us. If we choose to do this we'll be careful because we have not yet elected to do anything in this. But the thing to say is that we have some time in order, which to deploy the money repatriated and specifically market concerned of that including R&D and things of that nature. We do have some specific ideas as to how we would use it or potentially use it. But we can't communicate those until we officially make the election and talk about this publicly.
[Q]: What kind of amounts of money might be considered, can you undertake transactions?
[A]: I can't disclose that at this time.
[Q]: Okay. The other question related to you comments made in the prepared remarks about the future of hepatitis C therapy and the company's belief that a combination therapy could be the future there. I think people would love to hear more on the perspective of the company that's so deeply involved in the number of infectious diseases. Certainly HIV therapy with supported combination therapy. I suppose there's been some use of combination therapy in bacterials and not really so much so in hepatitis B and to a limited extent antifungals. I guess that is mainly due to concerns about antagonism, but help us understand better where this view comes from, and I want to make a distinguish in Hepatitis C being a combination therapy future as opposed to a sequential therapy future. Thanks.
[A]; Well, Mark, we absolutely agree with you that we think, we said a lot of us at Gilead believe that the future of Hepatitis C treatment will go the same way as HIV treatment. Which is combination therapy with small molecules that can be taken orally and that's exactly why we are pursuing the lines of research and development that we're pursuing. We're working with a collaboration with Gene labs on nucleotide ploymerase inhibitors against hepatitis C. And we have a collaboration with Akileon on protease inhibitors of Hepatitis C. And internal research program as well. I hope that answers your question.
[A]; Mark, I think you also alluded to hepatitis B in there. You know, the hepatitis B part, you're right, has not been proven in terms of combination therapy. They're not really good examples and certainly no large, controlled studies, which have shown combination therapy to provide benefit. There is certainly a theoretical consideration that longer-term benefit would include less resistance, which is really the important thing to consider in this. So for example, in our trials, we will take some patients who have failed other therapies and try Truvada to see if combination therapy can work. But it's not proven. And we're kind of taking a stepwise fashion into that. You'd also mentioned sequential therapy and sequential therapy generally bring out lots of resistance. So there's a general feeling, certainly in HIV it did. And so there's a feeling that sequential therapy based on that model would more likely generate resistance than not. And it will take multiple mechanisms to get us where we need to.
[Q]; Thank you, all those comments were really helpful. Appreciate it.
Thank you. Our next question comes from the line of Bret Holly with CIBC world markets.
[Q]; Hi, yeah. I just had a question on the triple combination formulations. You now have three bi-layer formulations. I'm wondering if you’ve gone back to the drawing board and have formulations beyond that? And the second question is surrounding the commercial viability of pills larger than 1,600 milligrams and whether those would actually be viable.
[A]: As we pointed out in our conference call previously by Kevin that we're working in parallel on three bi-layer combination formulations. And if any of those proves to be bio-equivalent we would file the NDA in the first half of '06. Beyond that of course as we always do, we work on backup programs, and we have formulation six, seven, and eight currently in development at our partly bi-layer partly tri-layer combinations. And then regarding the pill size, yes we do believe that the 1,600-milligram pill size is absolutely viable. And if you look at some of those multivitamins that are available on commercially, they are about the same size tablet. We also have done a very limited market research with the 1,600-milligram pill and have not found any issues that patients had with regard to swallow ability.
[Q]: I'm wondering beyond 1,600 milligrams. Does there become a problem, in case you have to actually go larger than this?
[A]; Yes, our goal is not to go beyond 1,600 milligrams because simply the tablet becomes somewhat large. And then I think we would have to go to two separate tablets rather than one.
[A]: Our goal is to keep it at 1,600 or below.
Thank you sir, Dr. Milligan, it does appear that is all the time we do have for questions today.
[Dr. Milligan Executive Vice President and CFO]:
Thank you, operator. Thank you all for joining us. We appreciate your continued interest in Gilead and look forward to providing updates on our future progress.
[Operator]: Ladies and gentlemen, thank you for your participation in today's conference. This does conclude your presentation. And you may now disconnect. Have a wonderful day.
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