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Executives

Susan Hubbard - IR

John F. Milligan, PhD - President and COO

Robin L. Washington - Sr. VP and CFO

Kevin Young - EVP, Commercial Operations

Norbert W. Bischofberger, PhD - EVP, Research and Development and Chief Scientific Officer

Analysts

Thomas Wei - Piper Jaffray & Co.

Margaret Malloy - Goldman Sachs & Co.

Michael Aberman - Credit Suisse

Mark Schoenebaum - Deutsche Bank

Philip Nadeau - Cowen & Company

Yaron Werber - Citigroup

Geoffrey Meacham - JPMorgan

Bret Holley - Oppenheimer

Geoffrey Porges - Sanford C. Bernstein & Co.

William Ho - Banc of America Securities

Sapna Srivastava - Morgan Stanley

Joel Sendek - Lazard Capital Markets

William Tanner - Leerink Swann & Co.

Maged Shenouda - UBS

Jason Kantor - RBC Capital Markets

M. Ian Somaiya - Thomas Weisel Partners

Jason Zhang - BMO Capital Markets

Thomas J. Russo - Robert W. Baird & Co

Gilead Sciences, Inc. (GILD) Q2 FY08 Earnings Call July 17, 2008 4:30 PM ET

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Gilead Sciences Second Quarter 2008 Earnings Conference Call. 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, July 17, 2008.

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

Susan Hubbard - Investor Relations

Good afternoon and welcome to Gilead's second quarter 2008 earnings conference call. We're pleased you could join us today. We issued a press release this afternoon, providing results for the second quarter ended June 30, 2008. This press release is also available on our website at www.gilead.com.

Joining me on today's call to discuss our results are John Martin, Chairman and Chief Executive Officer; John Milligan, President and Chief Operating Officer; Kevin Young, Executive Vice President of Commercial Operations; Norbert Bischofberger, Executive Vice President of Research and Development and Chief Scientific Officer and Robin Washington,Senior Vice President and Chief Financial Officer.

John Milligan will take you through the corporate highlights for the quarter, Robin Washingtonwill review the second quarter 2008 financial results and Kevin Young will summarize our commercial milestones and provide more color on the market dynamics surrounding our various franchises. We'll then allow time at the end of this call to answer your questions.

But before I turn the call over to John Milligan for the corporate update, 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 statement. I refer you to our Form 10-K for the year ended December 31, 2007, Form 10-Q for the first quarter of 2008, subsequent press releases and other publicly filed SEC disclosure documents for a detailed description of the risk factors affecting our business. In addition, please note that we undertake no obligation to update or revise these forward-looking statements.

We also 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 on our website.

I will now turn the call over to John Milligan.

John F. Milligan, PhD - President and Chief Operating Officer

Thank you, Susan. Good afternoon everyone and thank you for joining us today. We are pleased to summarize for you Gilead's accomplishments during the second quarter of 2008. I will start by reviewing our corporate milestones for the quarter and provide you a brief update on our pipeline progress.

First, I want to acknowledge John Martin's new role as Chairman of Gilead's Board of Directors in addition to this continued role as Chief Executive Officer. John has assumed the role of Chairman of the Board from Jim Denny who is remaining as a member of Gilead's Board of Directors serving as lead independent director.

As you know, Jim joined Gilead's Board in 1996, the same year that John Martin was appointed President and CEO. Since that time, Gilead has brought eight new products to market, all of which address serious unmet medical conditions. We look forward to the continued leadership of John and Jim as Gilead works to discover, develop and commercialize new products for patients in need.

Second, I'd like to welcome Robin Washington to Gilead. As you know, Robin joined Gilead in May, taking on the position of Senior Vice President and Chief Financial Officer. Robin brings to Gilead a deep financial and systems expertise. We look forward to her guidance and contributions as Gilead's business continues to expanding and grow in complexity.

Third, I'd like to briefly comment on the quarter. Gilead had another excellent quarter with record product revenues. I am very pleased with the outcome, particularly in light of the U.S. inventory stocking of our HIV products at a few ADAP accounts as we described at the end of the first quarter.

I am also pleased with our increased productivity in R&D. We now have more products moving ahead than we've ever had in the past. While this has led to an increase in R&D expenses, I feel that we are properly moving towards a more suitable level of reinvestment in the business, helping to ensure the long-term future of the company.

On the product milestone front, we've continued the Atripla rollout across Europe along with our partner Bristol-Myers Squibb. Early indications are that Atripla adoption in Europe is similar to what we observe in the U.S. Also, we were extremely pleased to receive European approval of Viread for chronic hepatitis B in late April, concurrent with EASL, the largest European conference focused on liver diseases. I believe that the treatment paradigm for chronic hepatitis B is shifting and I also believe that Viread has the best combination of activity, safety and price of any product available for HBV treatment. Kevin will provide launch updates on both products shortly.

Our partner for ambrisentan in Europe, GlaxoSmithKline, announced in April that they received European Commission approval of the product, which will be marketed under the trade name Volibris in Europe. Since then, the product has been launched in the UK, Germany and Ireland with further rollouts across the major markets of Europe expected through the reminder of this year and into next. We will receive royalties from the sale of Volibris on a one quarter lag.

During the second quarter, we continued to be active on the business development front. In late May, we announced that we acquired all the assets related to the cicletanine business of Navitas. This is a compound that we plan to evaluate as the potential treatment for pulmonary arterial hypertension based on clinical data from three small studies previously conducted in Europe. We have recently been notified that cicletanine has been granted orphan drug status for PAH in the U.S., which, as you know, provides market exclusivity for seven years following U.S. marketing approval.

Cicletanine is currently being evaluated for the potential treatment of PAH by Dr. Aaron Waxman at Massachusetts General Hospital under an investigator-held compassionate use IND. Cicletanine is available in a number of European countries as a generic product for the treatment of hypertension and has been used in over 10,000 patients.

We are currently reviewing the existing cicletanine database and we will soon discuss with the FDA the path forward for the evaluation of the drug in PAH patients in advanced clinical studies in the U.S.

In May and June, we announced that the U.S. Patent and Trademark Office completed the first and second reexamination [ph] proceedings and confirmed the patentability of a method of use patent and composition of matter patent for Viread.

Since then, I am very pleased to inform you that the two remaining patents under challenge have been confirmed as patentable by the PTO. This now complete resolves the pub health challenge and we believe we have emerged from this reexamination with an even stronger patent estate for Viread than we had entered with.

And finally on the corporate front, we are very pleased to hear last Friday that Japan's Ministry of Health, Labor and Welfare announced positive results from two large surveillance studies, which together included greater than 10,000 patients. Both studies confirm that neuro-psychiatric events occur in patients with influenza and that Tamiflu does not increase the incidence of such events, confirming no causal link between Tamiflu and abnormal behavior.

These results are consisted with the results obtained from other in-depth analysis of safety reports, previously completed clinical studies, epidemiological databases, health claims databases and new non-clinical pharmacokinetic and clinical investigations.

In light of these results, the Japanese regulatory body's safety sub-committee will reassess the appropriateness of the current restriction that is in place on the use of Tamiflu in adolescents aged 10 to 19 years of age. Roche and Gilead believe that these data fully support a lifting of the restriction in advance of the next influenza season.

Turning now to our pipeline programs. In the second quarter this year, Gilead achieved several significant research and development milestones, further advancing our pipeline programs. As you may now, we now find ourselves with a more robust pipeline of product candidates than ever before. So I am going to provide a summarized overview of the advancements during the quarter. And we are happy to go into more detail on the programs during the Q&A portion of the call.

Starting with HIV. I'd like to give you an update on our PK enhancer, GS 9350, which is being developed as a boosting agent for elvitegravir, our integrase inhibitor.

As you know, our strategy has been to develop a proprietary boosting agent, one that is devoid of HIV activity, does not require refrigeration and can be given at a relatively low dose so that coformulation with elvitegravir and also Truvada is a possibility. As we stated on our last call, a pilot formulation study demonstrated that we can coformulate GS 9350 elvitegravir and Truvada into one single cell.

The Phase I study to evaluate the safety, tolerability and metabolic profile of several doses of GS 9350 in healthy volunteers is nearing completion. Initial data show that 9350 does increase the blood levels of midazolam, a standard test compound used to assess boosting. We are preparing to evaluate the compound as a booster for elvitegravir and Atazanvir in additional Phase I studies in healthy volunteers. As the results are piloted [ph] from the study of elvitegravir, we could then proceed with a Phase I study assessing our coformulated single tablet of elvitegravir GS 9250 [ph] in Truvada which could get underway prior to the end of this year.

I am also pleased to provide an update on our elvitegravir program. First, we've completed the protocols for the Phase III registrational program for elvitegravir, which will consist of two pivotal non-inferiority studies evaluation elvitegravir versus Merck's raltegravir in treatment experienced patients.

The first study, Study 144, has begun screening patients in the U.S. and we anticipate dosing the first patient any day now. The second study, Study 145, is targeted to begin enrolling patients in the EU, Canada and Australia later this quarter.

The studies each will enroll 700 patients with a primary endpoint of the proportion of the patients that achieve and maintain HIV RNA of less than 50 copies per milliliter at week 48.

And finally on the HIV front, I am also pleased to say that we have completed enrollment in the two pivotal trials of the Viread pediatric program. Data from these two studies could support a U.S. supplemental NDA filing before the end of 2009.

On the HCV front, which, as you know, is our largest pre clinical research effort here at Gilead, we are continuing to screen patients in the continuation of the Phase Ib study for GS 9190, our novel HCV polymerase inhibitor. This study is continuing in order to establish a safety and efficacy of the 40 milligram dose in a sufficient number of patients to allow us to go forward into Phase II study.

We expect dosing in the Phase Ib study to be completed by the end of this month, which could allow us to begin the Phase II study in HCV infected patients before the end of this year.

With regards to GS 9450, our caspase inhibitor in licensed last year, the compound is currently being evaluated as a hepatoprotectant in an ongoing Phase Ia study in HCV infected individuals. We've increased the number of study sites to accelerate enrollment and we anticipate data from this trial by the end of the year. Based on our belief that this molecule may also have utility in other diseases such as fatty liver disease, we'll soon be initiating a Phase II study in patients with NASH, or non-alcoholic steatohepatitis.

The primary endpoint in this study will be safety and tolerability of multiple oral doses of GS 9450. Secondary endpoints include pharmacokinetics and activity as defined by changes in baseline of certain liver enzymes and metabolic markers.

By way of background, NASH is a growing area of unmet medical need, affecting 2% to 5% of Americans. It resembles alcoholic liver disease, but occurs in people who drink little or no alcohol. NASH is becoming more common, possibly because of the greater number of Americans with obesity. In the past 10 years for instance, the rate of obesity has doubled in adults and tripled in children. The major feature of NASH is fattening of liver along with inflammation and fibrosis. NASH can be severe and can lead to sclerosis. There are currently no approved therapies to directly treat NASH.

Other HCV research efforts are focused on compounds targeted at both viral and cellular enzymes. Our research effort has led to the discovery of some very interesting lead compounds and we look forward to sharing more information on our A2 pipeline as these compounds progress into the clinic.

On the respiratory front, aztreonam lysine for inhalation is Gilead's unique drug formulation specifically designed to achieve high lung antibiotic concentrations with a short duration of administration. We have a PDUFA date of September 16th of this year. In order make the product available to CS patients in need prior to its commercial availability, we opened up an expanded access program and now have approximately 200 patients enrolled in the program across 29 sites. Kevin will discuss our launch plans later in the call.

Our EU marketing application filed on March 7th is under review as is our application in Canada which received a priority review. In June, we announced positive interim 12 month Phase III results of AIR-CF3, an ongoing study evaluating the safety of the aztreonam lysine for inhalation in CF patients with pseudomonas infection. These data were presented last month at the 31st Annual European Cystic Fibrosis Conference in Prague.

To further establish and extend the therapeutic profile of aztreonam lysine in CF, we have recently initiated two new studies. The first, called the mild study is evaluating aztreonam lysine in CF patients with baseline function greater than 75% of predicted. The second is the EU-based head-to-head study of aztreonam versus inhaled tobramycin in CF patients with moderate to severe lung function. We'll also be evaluating aztreonam lysine in a Phase II study in patients with non-CF bronchiectasis, which is projected to begin prior to the end of this year.

Bronchiectasis is a lung disease that usually results from a current severe lung infection such as pneumonia and tuberculosis or other conditions that injure the walls of the airways in the lungs. We estimate that there are more than 100,000 people diagnosed with non-CF bronchiectasis in the United States.

We are also preparing to evaluate Letairis in patients with idiopathic pulmonary fibrosis and are targeting the initiation of this Phase III study before the end of the year. This will be a placebo-controlled study looking at the delay of disease progression or death in patients with IPF.

IPF is a debilitating disease characterized by progressive scarring of the lung. This scarring gradually interferes with a person's ability to breathe. Current treatments are intended to improve symptoms and slow disease progression. According to the Coalition for Pulmonary Fibrosis, an estimated 128,000 people in the United States have IPF and prevalence is on the rise with an estimated 48,000 new cases developing each year. We'll target enrolling approximately 600 patients at over 190 investigational sites worldwide. And we'll provide additional details closer to the study's initiation.

Regarding our cardiovascular franchise, the Phase III studies for darusentan in resistant hypertension saw significant progress in terms of the enrollment in both the DAR 311 and DAR 312 studies, which are 83% and 39% enrolled respectively. We believe we're on track to complete enrollment and receive data from these studies in 2009.

I am very pleased with the progress Gilead made in the second quarter and we look forward to informing you on further corporate milestones and the continued advancement of our pipeline candidates throughout the remainder of the year. I would like acknowledge the dedication and hard work of over 3200 Gilead employees who individually and collectively strive to achieve our aggressive goal of delivering therapies that address life care [ph] and diseases worldwide.

Next, Robin Washington will review our financial performance for the quarter. Robin?

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

Thank you, John. The second quarter of 2008 was another very successful quarter for Gilead.

Total revenues, which include product sales and royalty, contract and other revenues, for the second quarter of 2008 were $1.3 billion. Second quarter product sales were $1.2 billion, a 34% increase on a year-over-year basis and our third consecutive quarter of surpassing $1 billion in product sales.

Total product sales for the second quarter of 2008 were driven primarily by the strong growth of Atripla sales, due primarily to the continued uptake in the U.S. and the recent launches in Europe as well as continued growth of Truvada in the U.S. and Europe.

Our second quarter 2008 net income was $443 million or $0.46 per share on a fully diluted basis.

Non-GAAP operating expenses excluding the impact of stock-based compensation and IPR&D expenses were $362 million, a 31% increase on a year-over-year basis. This reflects our continued commitment to investing in our pipeline across all therapeutic areas and our geographic expansion while maintaining focus on overall expense management.

Non-GAAP net income per share for the second quarter of 2008 was $0.49 per share on a fully diluted basis, an 8% increase over the second quarter 2007 non-GAAP diluted net income per share of $0.46, which excluded the impact of after tax stock-based compensation expense.

During the second quarter of 2008, we generated $426 million in operating cash flow and we purchased 150 million of our common stock.

Now turning to the specific results of the second quarter. Total revenues for the second quarter of 2008 were $1.3 billion, an increase of 22% from total revenues of $1billion in the second quarter of 2007. This performance was driven by the year-over-year increase of $312 million in our product sales, partially offset by an $82 million decrease in our royalty, contract and other revenues.

Product sales were a record $1.2 billion for the second quarter of 2008, making five consecutive years of quarterly product sales growth. Product sales from the second quarter increased sequentially by 7% as our antiviral product sales continued to grow. Our antiviral franchise is comprised of our portfolio of HIV and hepatitis B products. $45 million of our product sales increase in the second quarter of 2008 was due to a favorable foreign currency exchange impact when compared to the same period last year and a $17 million increase when compared to the first quarter of 2008. Royalty, contract and other revenues decreased year-over-year by 57% and decreased sequentially by 48%, due primarily to the decrease in Tamiflu royalties.

Now turning to more specifics on product sales. Antiviral product sales grew to $1.1 billion for the second quarter of 2008 from $837 million in the second quarter of 2007, up 34% year-over-year and up 7% sequentially. Atripla contributed $355 million to our second quarter antiviral product sales, resulting from the continued uptake for this... of this product in the U.S. and recent launches in Europe. Atripla sales accounted for 32% of our total antiviral product sales in the second quarter of 2008.

The efavirenz portion of Atripla, which is distributed back to BMS and reflected in the cost of goods sold line, was approximately $130 million or 37% of Atripla sales in the second quarter of 2008.

As noted during our first quarter 2008 earnings call, we observed large non-retail purchases in the first quarter of 2008 by a small number of state ADAP accounts, which we believe were driven by the grant cycle for federal ADAP funds rather than being completely demand driven. These higher purchases in the first quarter tempered our second quarter sales in the U.S. for both Atripla and Truvada as those inventories were drawn down.

In the U.S., Atripla sales were $312 million for the second quarter of 2008, up 48% year-over-year, due primarily to the continued uptake of Atripla. Sequentially, Atripla sales in U.S. were up 2%, due primarily to the continued uptake of Atripla, partially offset by the ADAP purchasing in the first quarter which was previously discussed.

In Europe, Atripla sales for the second quarter of 2008 were $38 million, more than double the Atripla sales in the first quarter of 2008, due to the additional launches in Europe. Truvada sales were $516 million for the second quarter of 2008, up 34% year-over-year and up 8% sequentially. Truvada sales accounted for 46% of our total antiviral product sales in the second quarter of 2008.

In the U.S., Truvada sales were $236 million for the second quarter of 2008, up 27% on a year-over-year basis, due primarily to sales volume growth. Truvada sales growth demonstrates Truvada's continued uptake as the NRTI backbone of choice when used in combination with protease inhibitors.

Sequentially, Truvada sales in the U.S. were down 1%, again, due primarily to the ADAP purchasing in the first quarter. In Europe, Truvada sales for the second quarter of 2008 were $241 million, a year-over-year increase of 39% and a sequential increase of 10%, driven primarily by sales volume growth and a favorable foreign currency exchange impact.

As we previously discussed in our first quarter earnings call, the supply management system and plan appears to be operating effectively and managing orders of Truvada and Viread and ensuring adequate and appropriate supply of those products commensurate with the market demand in France. We continue to monitor parallel trade activity in France and in certain other markets to ensure continued effectiveness of our supply management system.

In Latin America, Truvada sales for the second quarter of 2008 increased by $6 million on a year-over-year basis and increased by $13 million sequentially, due primarily to higher sales volume in Mexico.

Viread sales were $151 million for the second quarter of 2008, a year-over-year decrease of 3% and a sequential decrease of 1%. The decreases from both comparative periods were due primarily to lower sales volumes in the U.S. and Europe, partially offset by a favorable foreign currency exchange impact.

Hepsera for the treatment of chronic hepatitis C, generated sales of $90 million in the second quarter of 2008, up 20% on a year-over-year basis and up 9% sequentially, driven by a favorable foreign currency exchange impact and sales volume growth.

Sales of AmBisome for severe fungal infections were $70 million for the second quarter of 2008, a year-over-year increase of 8%, primarily driven by a favorable foreign currency exchange impact. AmBisome sales decreased by 2% sequentially, due primarily to decreased sales volume, offset by a favorable foreign currency exchange impact.

Finally, Letairis sales were $25 million for the second quarter of 2008, an increase of 21% on a sequential basis.

Our royalty contract and other revenues decreased by 57% year-over-year and decreased by 48% sequentially, due primarily to the decrease in royalty revenue recognized from Tamiflu sales made by Roche.

The year-over-year decrease in Tamiflu sales was due primarily to the decrease sales related to pandemic planning initiatives worldwide. The sequential decrease in Tamiflu sales was due primarily to the seasonality of the incidence of influenza and resulting Tamiflu sales as well as the annual reset to the lowest royalty tier at the beginning of Roche's fiscal year.

Royalties received from Roche and recognizing our revenues in the second quarter of 2008 were $38 million. These royalties, which are paid one quarter in arrears, reflect a royalty rate of approximately 15% as applies to Roche's net sales of Tamiflu during the first quarter of 2008. As you may be aware, Roche is scheduled to report second quarter 2008 earnings on July 24, 2008.

Turning to gross... product gross margin. Non-GAAP product gross margin for the second quarter of 2008, which excludes stock-based compensation expense, was approximately 78.4% compared to non-GAAP product gross margin of approximately 80.1% for the same quarter last year and 79.1% for the first quarter of 2008. The decreases from both comparative periods were due primarily to the higher proportion of Atripla sales which includes the efavirenz portion at a zero gross margin.

Turning to expenses. In the second quarter of 2008, we recorded IPR&D expense of $11 million as a result of our recent acquisition of the cicletanine assets from Navitas which we announced in May and which John Milligan described earlier. The impact of this IPR&D expense as well as the impact of stock-based compensation expense are excluded from our non-GAAP operating expenses for the second quarter of 2008.

Non-GAAP R&D expenses for the second quarter of 2008 were $161 million, a year-over-year increase of 35% and an increase of 16% sequentially, primarily as result of increased clinical study and related expenses as well as higher headcount, driven by the growth in our business.

Non-GAAP SG&A expenses for the second quarter of 2008 were $201 million, an increase of 27% year-over-year and an increase of 13% on a sequential basis, due primarily to increased marketing and promotional expenses, including those related to the launch of Atripla in certain European countries, higher headcount driven by the growth in our business as well as costs associated with certain termination-related disputes in our international operation.

The stronger euro also contributed to higher expenses in U.S. dollar terms for our euro-denominated operations. Foreign currency exchange had a net favorable impact of $45 million and $21 million on our second quarter 2008 revenues and pre-tax earnings respectively when compared to the same period last year. When compared to the first quarter of 2008, the foreign currency exchange impact on our second quarter of 2008 revenue and our pre-tax earnings was a favorable $17 million and $12 million respectively.

Our effective tax rate for the second quarter of 2008 was 28.4%. Our effective tax rate for the full year of 2007 was 28.9%. The lower effective tax rate in the second quarter of 2008 compared to the full year 2007 was driven primarily by increased earnings in favorable tax jurisdictions.

Next, I would like to turn to our net cash position and our operating cash flow performance for the quarter.

Our balance sheet at June 30, 2008 shows cash, cash equivalents and marketable securities of $2.9 billion, an increase of $186 million when compared to the balance of $2.7 billion at December 31, 2007.

As of June 30, 2008, we reclassified our 1.3 billion convertible senior notes into current liabilities due to the exerciseability of their conversion feature beginning on July 1st. The convertible senior notes become convertible for a particular calendar quarter when Gilead's common stock trades at a certain sustained level for a specified period of time during the preceding quarter. While Gilead's stock price has recently met these conditions, we do not believe the conversion of these notes will happen until their respective expiration dates of 2011 and 2013. With that said, we cannot predict our stock price and whether our notes will continue to be convertible and when, or if, holders will convert the notes.

In the second quarter of 2008, we generated $426 million in operating cash flow. We repurchased 2.8 million shares of our common stock at a total cost of $150 million this quarter under our 3 billion share repurchase program. In addition, we received 240,000 additional shares of our common stock upon the completion of the accelerated share repurchase program that we entered into in March 2008. As of June 30, 2008, we had approximately 2 billion under the 3 billion share repurchase program, which will expire at the end of 2010. To date, we have spent $998 million to repurchase approximately 20.2 million shares of our common stock under this program.

We continue to actively evaluate strategic ways to use our cash and investments, including continuing our efforts to pursue opportunities to in license or acquire products to complement our own internal efforts. We are also committed to returning cash to our shareholders as is evidenced by our ongoing share repurchase program.

Now I would like to turn to our financial guidance for the full year 2008. You can locate all of our guidance for 2008 on Gilead's corporate website.

We are very pleased with the sequential quarter-over-quarter growth in our product revenues, particularly our antiviral franchise. As a result, we are increasing our net product revenue guidance from our initial range of $4.7 billion to $4.8 billion to a range of $4.9 billion to $5 billion. Of note, this guidance now includes anticipated revenues from Viread for HBV sales, both in the U.S. and the EU, but does not include any potential revenues from the U.S. launch of aztreonam lysine for cystic fibrosis, for which we anticipate approval in September of this year. This guidance also assumes that the impact of foreign currency exchange fluctuations will remain consistent.

Changes from this assumption could affect both our revenues and expenses for the remainder of the year. As a reminder, the expense guidance we are reiterating today will be non-GAAP, which excludes the impact of stock-based compensation expense. We are reiterating our initial 2008 non-GAAP gross margin guidance range of 77% to 79%.

For non-GAAP R&D expenses, we are increasing our 2008 expense guidance of $610 million to $630 million to a range of $650 million to $670 million. This increase in guidance is a reflection of the increased expenses for the continued ramp and advancement of our multiple clinical pipeline program and for more rapid hiring of research staff at our various R&D sites than previously forecasted.

For non-GAAP SG&A expenses, we are increasing our 2008 guidance of $710 million to $730 million to a range to $720 million to $740 million. This increase primarily reflects the impact of costs associated with certain termination-related disputes at our international operations that were incurred in the second quarter of this year as previously mentioned.

Our full year tax rate guidance of 28% to 29% remains unchanged. And finally, regarding after tax stock-based compensation expense, we are reiterating the 2008 fully diluted EPS impact to be in the range of $0.12 to $0.14 per share.

In conclusion, our solid operating performance continues to be a validation of the significant efforts made by the more than 3200 Gilead employees. We remain committed to driving performance for our shareholders by working to improve the lives of patients around the world.

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

Kevin Young - Executive Vice President, Commercial Operations

Thank you, Robin, and good afternoon everyone. In completing the first half of 2008, we have a lot to be satisfied with regarding our commercial progress, namely the strength of our core HIV business, Viread HBV launches currently underway in Europe and the anticipated approval in the U.S. later this year, the solid start to our cardiovascular franchise and the prospect of launching the first new inhaled antibiotic for cystic fibrosis in more than a decade.

Before turning to our commercial performance for the quarter, I would like to remind you that for the analysis of market share data in the U.S. and Europe, we rely on the most up-to-date third party data available to us in each market. So if the dates of these data points can fluctuate, we will identify the referenced time periods as appropriate.

I would like to begin by discussing the performance of our antiviral franchise, which is comprised of our HIV and HPV marketed products. Our U.S. HIV franchise performance remains the best in the industry in Q1 of 2008. And the gap between Gilead and our closest competitors continues to widen.

In the first quarter of 2008, the number of patients being treated with antiretroviral therapy grew by 8% over the first quarter of 2007 to approximately 539,000 patients.

During the first quarter, we achieved all-time highs for the total number of patients receiving Truvada as well as Truvada patient share as it continued to be the backbone of choice for antiretroviral therapy in the U.S. with an impressive 175,000 patients on therapy or over 30% of all treated patients.

Importantly, this recent performance underscores that we continue to have two HIV growth products: namely Truvada and Atripla. This is particularly important as more third agents enter the market, most of which were paired with Truvada in their pivotal clinical studies.

Atripla remained the most prescribed regimen in HIV with 27% of patients receiving Atripla across all lines of therapy. Atripla together with Truvada continued to account for approximately eight out of ten treatment naïve patients.

In patients switching to Atripla from other therapies, 60% were from non-Gilead based regimens. Patients previously on Combivir continue to dominate switch patients, comprising approximately 40% of those that switched to Atripla with Epzicom comprising approximately 10%.

Patients receiving the tenofovir molecule in one of its three forms, namely Atripla, Truvada or Viread during the first quarter represented approximately 364,000 patients or 68% of all treated patients.

In June, we added three year efficacy and safety data from Study 934 to the labels of Atripla and Truvada. With the inclusion of these data together with the recent ACTG 5142, 96-week data demonstrating the benefits of an efavirenz-based regimen over a Kaletra regimen, Gilead and BMS will be able to reinforce the preferred role of Atripla in treatment-naïve patients.

On the testing front, positive steps to remove written informed consent and pre-test counseling continue to be made with laws previously passed by Virginia and Maryland becoming effective this month. In total, 10 states now have active legislation in place that remove or reduce HIV screening barriers.

Most recently, in late June, the New York City Health Department announced plans over the next three years to conduct HIV screening in every adult in the Bronx. As a reminder, the Bronx has the highest death rate from AIDS of the five New York boroughs. This campaign has been called the most aggressive testing effort ever undertaken in the U.S. and is designed to help identify HIV infected patients and move them into treatment earlier while their disease is still manageable.

Efforts such as these will add to the number of patients receiving antiretroviral therapy and surely will save lives.

Also in June, Gilead agreed to maintain the current prices of our HIV products that are sold through certain government channels through 2010. These channels, which are predominately comprised of state ADAPs and the public health clinics, represented approximately 35% of our U.S. HIV business in 2007.

The decision to maintain our current pricing was primarily driven by Gilead's global commitment to help provide access to our HIV medicines commensurate with patients' ability to pay. We anticipate this decision will have a minimal impact on our future business due to the supplement through rebates that are already required through these channels.

Now turning to our HIV performance in Europe. The market opportunity in the Big Five countries in Europe continued to show robust growth and it is estimated that at the end of first quarter 2008, 259,000 patients were being treated with antiretrovirals within these five markets. This represents a 7% year-over-year growth rate and is comparable to the rate of growth achieved in the U.S. We continue to make excellent progress with our HIV products and are very pleased with the initial launch of Atripla.

As a reminder, we and our partner Bristol-Myers Squibb received European approval for Atripla in late December 2007. Atripla is now available in 13 countries throughout the EU, including four of the Big Five countries. We are still in reimbursement discussions with France and at this point, do not believe that those negotiations will be completed before the end of this year.

Of the patients receiving Atripla in the second quarter, representing the launches in the UK and Germany, approximately 50% converted from Truvada plus Sustiva while 29% were switches from other regiments. Combivir continued regiments comprised 35% of switch and Kivexa plus Sustiva comprised 19% of switch patients. Truvada has continued to build on the solid base throughout Europe and remained the number one brand in all Big Five markets. Patients new to therapy continue to be the primary source of bills initiating on therapy with Truvada during the second quarter of 2008, comprising 64% of all new patients while 36% had switch from other products. The Tenofovir molecule has now become the leading molecule in all of the big five countries having recently achieved that status in Italy. Of all patients for initiative therapy during the second quarter approximately 68% were initiating therapy on the Tenofovir molecule.

By contrast, the number of patients initiating therapy on Kivexa has declined 8 percentage points to 16% since the fourth quarter of 2007. In the NRTI market total Truvada continued to out perform Kivexa with a total Truvada versus Kivexa market share ratio of 2.5 to 1, up from 2.3 to 1 in January. This will continue to be an important metric for us as we monitor the impact of the Atripla launch and any prescribing response to future DAD ACTG 50202 or associated data presentations or publications.

As we noted on our first quarter earnings, the British HIV Association circulated revised UK HIV treatment guidelines for consultation in reaction to the initial data releases from DAD and ACTG 5202 studies. While the preliminary draft guidelines circulated in April listed only Truvada as the preferred backbone of choice for frontline therapy, the recently revised pre-press guidelines recommend Truvada or Kivexa as appropriate backbones. They state, however, that Kivexa should be used only in patients who are HLA-B5701 negative and used with caution in patients with baseline viral loads over 100,000 copies per milliliter and in those where there is a significant risk of cardiovascular disease. Additionally, in reaction to the DAD publication in the April 26th issue of the guidance rates [ph].

Health Canada issued a Dear Doctor Letter, stating it is recommended that physicians discuss the potential benefits and risks of abacavir with their patients. The titles of accepted late breaker abstracts for the International AIDS Conference taking place in Mexico, August the 3rd through the 8th have now been posted on the ISA website.

Of note, the data from the ACTG 5202 study will be presented for the first time; we believe this is an opportunity for increased discussion about the importance and impact of these data.

Turning to our Hepatitis franchise, on April the 25th the European Commission granted marketing authorization for the Viread for the treatment of chronic hepatitis B in all 27 member states for the European Union, the timing of this approval came the same morning as we were preparing for five Viread presentations at the European association for the study of the liver conference.

Since EASL, we have launched Viread for HPV in nine countries including four of the Big Five with Italy anticipated before year end. While it is too early to provide concrete information on our Viread launch, we recently held a scientific meeting with over 350 HPV physicians and we're very pleased with the feedback we received on the clinical, safety and cost benefit profile of Viread.

In regards to our commercial readiness to support a successful launch of Viread for HPV in the U.S. later this year, we are far along in our pre-launch preparations. Our sales team is trained and ready to launch the product immediately following its anticipated approval. As you know, the PDUFA date for Viread for HPV in the U.S is August 11th. Since we believe Viread has the atttributes to impact the HPV markets in a similar way it has impacted the HIV market, Gilead is supporting many screening initiatives within the U.S. Asian American communities where the HPV infected patient population is largely unaware of their status.

Until the FDA grants approval for the use of Viread in HPV, our sole promotional priority remains Hepsera. During the second quarter of 2008, Hepsera continued to be the leading antiviral agent for the treatment of chronic hepatitis B. As of the end of May 2008, Hepsera remained the market leader with a total prescription market share of approximately 43%. In the Gilead territories outside of the U.S., Hepsera's market share has remained relatively stable at 36% despite strong competition.

Now turning to our cardiovascular franchise and Letairis for the treatment of pulmonary apteral hypertension or PAH. During the second quarter, Gilead recorded $25 million in Letairis sales. We now have approximately 4000 physicians enrolled in our Letairis education and access program, otherwise known as LEAP. Additionally, during the quarter, we expanded the Letairis prescribing base by over 30% to 1200 physicians. We are confident with continued use, the efficacy and safety profile of Letairis will distinguish it from other ERA treatment options.

Consistently, last quarter, and in an effort to share additional details on the PAH market, we conducted our proprietary PAH survey again this quarter. The survey involved over 130 prescribing physicians that are responsible for more than 10,000 PAH patients and included approximately 80% of the same physicians as last quarter.

According to our survey data, Letairis has achieved a 22% share of ERA treated PAH patients, up from 17% the previous quarter. Importantly, in the PAH centers, which accounted for over 60% of all Letairis patients, that share was approximately 26%. Letairis captured approximately 28% of newly diagnosed patients treated with an ERA. Letairis is used into 52% of patients as monotherapy versus 48% as combination therapy.

In terms of the source of patients taking Letairis as monotherapy, over 80% are from either patients new to therapy or switches from placenta [ph].

On the reimbursement front, access barriers have been minimal and manageable since the launch of Letairis with comparable coverage to placenta [ph] on most formularies. Letairis is covered on virtually all of the top managed care and state Medicare plans.

We remain encouraged by the physician's feedback we have been receiving. And as that experience grows, physicians are gaining additional comfort in expanding the number of patients for whom they prescribe Letairis. We believe we are well positioned to continue to build upon our first year of Letairis use and our commitment to this space has never been stronger.

And to further define the peripheral of the product, we are now conducting the first of several planned Phase IV programs. The ATHENA-1 Phase IV program is evaluating Letairis in patients who are poor responders to sildenafil monotherapy. We have begun enrolling patients in the 80-patient study. In addition, there are 14 Letairis investigator sponsored like studies underway or in the planning stages.

Turning briefly to aztreonam lysine for the treatment of cystic fibrosis. A significant amount of planning has already been put into our launch preparations as we anticipate our September the 16 PDUFA date with the FDA. Supplying both a drug and the device will present certain new challenges to the commercial organization. But the focused nature of CF will offset some of those challenges.

As we speak, a newly formed Gilead respiratory sales force is being trained, many of whom bring with them a deep depth of CF sales and marketing experience. The team will be focusing their selling efforts on the 115 major CF centers of excellence in the U.S.

And finally, AmBisome turned in another solid quarter, continuing to occupy a strong position as the agent of choice for serious fungal infections.

In closing, I am very pleased to say that across franchises and geographies, the commercial operations organization has made significant progress in the second quarter and we are carrying forward strong momentum into the second half of 2008.

I will now turn the call over to the operator to begin the question and answer portion of the call. Operator?

Question And Answer

Operator

Thank you. Today's question and answer session will be conducted electronically. [Operator Instructions]. And our first question comes from the line of Thomas Wei with Piper Jaffray. Go ahead.

Thomas Wei - Piper Jaffray & Co.

Hi, thanks very much. I wanted to ask about the market share trends in the HIV franchise. It's very tough to see that there has been any movement in the back of your share in the U.S. so far. When do you think is the right time to see those market start shifting? What is the catalyst that's going to get that going?

Kevin Young - Executive Vice President, Commercial Operations

Hi Thomas, it's Kevin. I'll talk about... focus on the U.S., although I think it's also important that we also talk about Europe because I think we've seen a different pattern over in Europe, especially in the UK. But focusing on the U.S., I think it is a little early to see an impact. Honestly, we haven't the full publication, or we won't do until World AIDS of 5202. And it seems that in the U.S. 5202 has more interest than DAD, DAD being a European cohort study. So I think there is more interest in the ACTG 5202. So I think we're going to see a reaction to that post Mexico. And I think that's going to start to sort of raise the discussion and debate again about the use of abacavir. So I think it's going to take that as a pivotal point in this debate.

Operator

Our next question comes from the line of Meg Malloy with Goldman Sachs. Go ahead.

Margaret Malloy - Goldman Sachs & Co.

Thanks very much. I am wondering if you have any better handle on what the actual purchasing levels were for the ADAP programs in Q1.

John F. Milligan, PhD - President and Chief Operating Officer

Meg, it's John. We don't know the actual number. I can tell you that the two largest systems that we saw purchasing in the ADAP system were Florida and Taxes. Florida started to order really only very late in the quarter and Texas only at the very, very end of the quarter. So we were almost completed devoid of sales into two systems during the course of the quarter. We don't know what the demand is there and we certainly don't know how much was on hand. It was, I would say, a little bit more than we had even forecasted. So it was significant.

Kevin Young - Executive Vice President, Commercial Operations

But just to add to that, Meg, I think we feel now that Q3 is back on track and essentially that buying, which is difficult, as John said, to calculate, has bled off and we are back to sort of a normal purchase to demand.

Margaret Malloy - Goldman Sachs & Co.

Can I follow up with a question on what the inventory levels are currently and how that compares to where you would normally be?

John F. Milligan, PhD - President and Chief Operating Officer

The inventory levels are flat quarter-over-quarter, so there is no changes in the overall wholesale inventory. But we are going to ask again if everybody could just ask one question only.

Margaret Malloy - Goldman Sachs & Co.

Thanks a lot, sorry.

Operator

Our next question comes from the line of Michael Aberman with Credit Suisse. Go ahead.

Michael Aberman - Credit Suisse

Hey guys, thanks for taking the question. Can you update us. You mentioned the starting of the integrase inhibitor. Can you just go through what's your expectations in terms of timing of enrollment on that trail and also maybe a little more clarity even in the integrates inhibitor field around the single cell that you described and what needs to get done to move that into pivotal trails?

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

Yes, so Michael, we are initiating the two Phase III studies. Both are 700 patient studies carried out, one primarily in the U.S., one primarily in Europe. But we are also utilizing sites in South America and possibly Asia as well; we haven't quite decided. The enrolment is always somewhat difficult to predict and I don't want to do that here really but you can get a look at our old studies and see how long it has taken us to enroll those. With regards to the integrase sale as John said in his part of the talk so what we... where we want to go with the integrase is first of all the existing studies will give us a proof of in treatment experienced patients. In order to go into treatment naïve patients we believe we need a booster that it can't be [indiscernible] like in other words it can't be an of HIV protease inhibitor. And so we developed our own booster, we're currently doing metabolic profiling studies and the only thing that we would need to do is we need then to show that the booster also boost the elvitegravir.

We have already co-formulated the four components into a single pill so we would need to do a bioally [ph] a PK study or bioequivalent study to see that the levels of both elvitegravir, Viread, Tenofovir and [indiscernible] have been, are equivalent or under same ball park that this would be without just beyond the individual components and then we will do a study and treatment naïve patients, and that would give us approval of the single pill elvitegravir containing complete regimen for many patients.

Michael Aberman - Credit Suisse

Great, thanks.

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

Okay.

Operator

Our next question comes form the line of Mark Schoenebaum with Deutsche Bank, go ahead.

Mark Schoenebaum - Deutsche Bank

Hi, guys, thanks for taking my question, maybe I can just drill in the R&D line this a... maybe you can just help us understand I mean this is a fairly substantial increase in your R&D guidance, $40 million to $60 million from your other guidance on a base of 600, so you know these percentage is clearly internally of the company and please correct me if I'm wrong, it appears like something has changed. Can you help us understand what really maybe John has changed from when you gave the annual guidance?

John F. Milligan, PhD - President and Chief Operating Officer

Yes, Mark, it's a good question, so two main drivers to this, number one we have been hiring at a faster pace than we have ever been able to hire before. We had pretty ambitious plans to fulfill a number of areas including new clinical researchers, also a quite of number of chemists associated particularly with process development. We have talked about this in the past because its so important to be able to scale up early to make these clinical studies go more effectively, so you can get to talk to college and into the clinic as soon as possible.

And we're working out some fairly complex molecules specially in our HCV portfolio right now. So we have hired and I have to say I think it must be because of the economy, we're hiring at a much better rate and seeing much better candidates that we have typically, so that's a good news for us. It doesn't mean that we're going to spend more money because we brought those people in more quickly than anticipated and we'll also bear the full year burden of that. So on the hiring front that's always good news for us. Secondarily, we're recruiting quite well in a number of areas including the 311 and 312 studies which are going much, much faster than they were last year. And so the modifications we put into the protocols have really had a dramatic positive effect in that. And of course the more patients you enroll the more money you spend and then you spend it sooner so that has had that effect.

But I have to say the other thing as I was trying to communicate in the early part of my prepared words were that we have more programs going faster than we ever had before, so across all our R&D efforts things are rolling very fast, protocols are getting through very quickly so that we can move on to new studies. And so it's all really humming right now and so that, that's the good news. The other thing that I've said in the past is we've been spending about 12% of revenues in our R&D line, which I think is not a sustainable level and we have sought to increase that without compromising the quality of the programs that are working on it and I think that we've done that here through the productivity gains and R&D this year.

Mark Schoenebaum - Deutsche Bank

What do you think your peak target is?

John F. Milligan, PhD - President and Chief Operating Officer

We'll you know we are far below the industry average of about 17%, but I don't think we want to be that high, but we do want to increase what we are spending, I don't know the perfect number in this area.

Mark Schoenebaum - Deutsche Bank

Okay thanks, let me slip back in.

Operator

Our next question comes from the line of Phil Nadeau with Cowen, go ahead.

Philip Nadeau - Cowen & Company

Good afternoon, thanks for taking my question, my question is on the press release that state paid apps. Could you maybe give us a bit more of an idea of how much of any future price increases, between now and 2010 you will actually be able to realize, so if you announce a price increase of Truvada of 8%, taking into account all the discounts and the ADAC price raise, what would that actually result in the increase in price to Gilead?

Kevin Young - Executive Vice President, Commercial Operations

Hi Phil, it's Kevin. The first thing to just to reiterate is that this is a price hold that we think is the right thing to do for patients on its effects essentially about 35% of our HIV business on the price per use is on Truvada, Viread and Emtriva.

Now, this does not have a big impact on our U.S HIV sales going forward because as you probably know with the pivotal players you are only able to take on a quarterly basis a rate that's commensurate with CPI-U.

So, those increases obviously, are pegged to consumer price increase whatever that might be and that is the maximum amount that you can take. It won't affect our ability to take price increases in our normal retail markets, essentially we have a 65% of our U.S Gilead HIV business.

We don't make statements regarding our forward pricing, but certainly we have our normal flexibility in that piece of our HIV business.

Philip Nadeau - Cowen & Company

So would it fair if we see a price increase in the future or just if you announce an 8% price increase we simply take about two-thirds of that in and assume that's actually what Gilead will be able to realize throughout the U.S?

Kevin Young - Executive Vice President, Commercial Operations

I think that's a reasonable ball park, Phil.

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

And that's in fact what we've seen in the past. But again just a one question if we can please.

Operator

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

Go ahead

Yaron Werber - Citigroup

Hey how are you? So I have a question on Truvada in Europe, we saw pretty good strength in outside the U.S. Can you give us a sense is that sustainable or do you think there is some kind of an anomaly there?

John F. Milligan, PhD - President and Chief Operating Officer

I think Yaron as Atripla rolls out across here we'll see some flattening like we did in U.S here, but then I think again my expectation is it will mirror the U.S type of profile and start to come through again as you switch across the Truvada plus Sustiva patients to Atripla.

But then the Atripla finds it's own place together with the protease inhibitor I mean there are some markets in Europe, France is one of them that have quite large shares of protease inhibitor.

So Truvada will definitely have a very solid position in markets like that. So my expectation is that we will see the conversion, right now there has been of our initial markets Germany and U.K. about 50% of Atripla came from Truvada plus Sustiva. But as that converts over the coming quarters, I think we'll certainly see Truvada come back and have its very strong place alongside Atripla.

Yaron Werber - Citigroup

But there is no inventory stocking in order to make that going on there?

John F. Milligan, PhD - President and Chief Operating Officer

No.

Yaron Werber - Citigroup

Great, thank you.

Operator

Our next question comes from the line of Geoffrey Meacham with JP Morgan. Go ahead.

Geoffrey Meacham - JPMorgan

Hi, guys, question for on the PH market. A lot of companies in the space have reported flattish sales over the past few quarters. I am just wondering if you're seeing any decreases in patients into the PH paradigm and then if growth is a share gain, what are your strategies to capture more interact [ph] share from bosentan?

Kevin Young - Executive Vice President, Commercial Operations

Hi Geoff, Kevin. I still think there is a steady but discernible increase in the size of this market, I think that's because companies are very active on sales Like Chilean, United and to smaller extent Pfizer.

So I still think it's a very active market, people are investing a book for promotion on the educational aspects. So I think we all seeing a flow of patients. Primarily there are referring to the major centers and they come from the more general cardiologist or pulmonologist and quite a lot from the rheumatologist because of the skeloderma [ph] patients.

So, I think it's kind of what we expected which is it's going to keep increasing books at a steady rate, so we don't sense any flattening out there. Certainly in terms of market share we're very, very committed as I said in my scripts to this market, with the acquisition cicletanine, which signaled our longer term portfolio. I think that's been very well received. We have both our general PAH sales representatives as well as our center of excellence therapeutic specialists focused on our promotion. We have the Phase IV program together with the investigator led studies. And we recently have hired two more pulmonologists into Gilead. So our expectation is that our investment in both people and dollars and just level of activity is going to be continued in a very significant fashion.

Geoffrey Meacham - JPMorgan

Okay, thanks.

Operator

Our next question comes from the line of Bret Holley with Oppenheimer Funds. Please go ahead.

Bret Holley - Oppenheimer

Yes, hi. Just thanks for taking the question. I was wondering if there is any evolution in your thinking on darusentan commercial plans now that we are a little bit closer to the data. Would you consider partnership? Would you go alone? Has that thinking changed at all?

Kevin Young - Executive Vice President, Commercial Operations

Hi Bret, Kevin. Little bit early for us to really make a comment on that. We are doing a lot of analytical work in the background as you can imagine. Just still a little bit early I think for us to start sharing our thoughts on that. I think we have to take into account what specialist and what part of the primary care market is involved in resistant hypertension? We've also got to take into account aspects such as the adoption over products that has a risk map... some sort of risk map associated with it. So we are considering another number of aspects not just the number of physicians and target audience.

Bret Holley - Oppenheimer

Okay, thanks.

John F. Milligan, PhD - President and Chief Operating Officer

And Bret, it's important that we understand what the data looked like so the outcome of the clinical trial will really be telling as well.

Bret Holley - Oppenheimer

Fair enough.

Operator

Our next question comes from the line of Geoff Porges with Sanford Bernstein. Go ahead.

Geoffrey Porges - Sanford C. Bernstein & Co.

Thanks very much for taking the question. A question for Robin perhaps and also for John. A number of moving parts in your margin, but looks as though your operating margin is sort of down substantially both sequentially and year-over-year. And you commented about R&D John, but could you give us a sense, is this the sort of operating margin level overall that you think is sustainable or do you think that you could see some more recovery going forward? I mean where do you think it goes from here?

John F. Milligan, PhD - President and Chief Operating Officer

We did have... Geoff, it's John Milligan. We had a number of one-time items that did depress our margin a little bit. We're including the reserves that we took for some disputes on our terminations in Europe. We did have some milestones paid out, which have been one timer. We also first have the Atripla which is sales are increasing which are not only growth but operating margin as well. So I think those are one time events that drove things down a little bit. I also think that there are a lot of terms where Atripla which will continue to put some pressure on that margin. We are trying very hard to keep our expenses in line and please as well we sought R&D but I did one to plan. I was thinking about this the sales or marketing high that also one of this quarter, added up and for those results we would not have taken those that guidance up. There were almost all attributable to those reserves. So we are trying to hold the line as best we can in this area as well and keep that operating margin as high as possible.

Kevin Young - Executive Vice President, Commercial Operations

I would just add in terms of sales and marketing with the launch of Viread HPV, that's out of our current Hepsera field force. And we can also believe we can be very efficient with our aztreonam lysine launch and utilize certain components of our existing PAH team.

Geoffrey Porges - Sanford C. Bernstein & Co.

Thanks very much.

Operator

Our next question comes from the line of William Ho with Banc of America Securities. Go ahead.

William Ho - Banc of America Securities

Hey guys, thanks for taking my question. Just a quick question about the Viread in HPV launch, about your assumption. How quickly do you think that will ramp? And do you think it will be significant or... do you know if any proportion of your current Viread sales are actually off label sales in HPV so that you may not have such a strong launch in that...

Kevin Young - Executive Vice President, Commercial Operations

William, I think it's very difficult actually. I am sure you find it difficult to actually make calculations on how much Viread today is being used in HPV. Obviously, that is off label. That constrains our analysis. Also, there is no form of coding in terms of the prescription to give you any lead on that. Our sense is that it's really quite low at the moment. They may be certain opinion leaders, certain specialists who have been very enthusiastic about Viread for some time. But I think generally, it is very low, both here in the U.S. and in Europe.

In terms of the ramp, I think it will be steady. I think it will be mainly from new patients. Our expectation is that maybe some Hepsera patients will switch across, but I think if a patient is stabilized and doing well, as we found out in the HIV market, there will be a slower sort of stream of patients than the new patients. So certainly, in terms of our promotion in our first European markets, we've been very much concentrating on newly diagnosed HBV patients.

William Ho - Banc of America Securities

Great, thank you.

Operator

Our next question comes from the line of Sapna Srivastava with Morgan Stanley. Go ahead.

Sapna Srivastava - Morgan Stanley

Hi, thanks for taking my question. Not mentioned in today's call, but you recently put out on the trial that you are planning an HBV with Pharmasset. Could you just give a little bit of color on that please, what led you to that?

Unidentified Company Representative

The clevudine study, Norbert, the study with...

Sapna Srivastava - Morgan Stanley

HBV, clevudine and Tenofovir.

Susan Hubbard - Investor Relations

And Sapna, just to be clear, that was their press release.

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

This is a study that is being carried out by the pick up and carried off by the ANRA [ph], so Gilead is only involved to the extent that we provide Tenofovir for the conduct of this study. Other than that, it's a French government sponsored study. The press release was done by Pharmasset.

Sapna Srivastava - Morgan Stanley

Okay. So if I can have one quick question just on your PK booster too, is it specifically for the integrase inhibitors or is it possible that you could use it even for the PIs.

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

No... sure, from the early metabolic profiling studies that we have done, we are seeing that... we're seeing a very similar effect of ritonavir. So of course you could in principal use it the same way as ritonavir is currently being used. Ritonavir, as you know, is available at 100 milligram capsule filled... gel filled capsule, and it is mostly or entirely used as a booster for other protease inhibitors. And that's what could be done with our booster as well. But we have not made the definitive decision yet as to whether to develop it and how to develop this as a standalone booster.

John F. Milligan, PhD - President and Chief Operating Officer

But Sapna, we are going to do a study with atazanovir to show the principal... if there were some principal.

Sapna Srivastava - Morgan Stanley

Okay, thank you.

Operator

Our next question comes from the line of Joel Sendek with Lazard. Go ahead.

Joel Sendek - Lazard Capital Markets

Thanks. I have a darusentan question. So you said that 311 was 83% enrolled. and if I remember correctly, it's a 14-week study. So is it possible that we might see that data by the end of the year or very early next year?

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

It's certainly possible. So we... we are going to close the enrollment certainly this year and 14 weeks later, in principle, we would have primary... the last patient primary end point last visit. But keep in mind, since this is a pivotal study, there has to be a lot of data query and data clean up. That typically takes a few months. So it will stretch into first, second quarter of next year until we have the data in hand. And then we would probably submit them to a major conference.

Joel Sendek - Lazard Capital Markets

Okay, thank you.

Operator

Our next question comes from the line of Bill Tanner with Leerink Swann. Go ahead.

William Tanner - Leerink Swann & Co.

Thanks. Kevin, a question for you on 5202. I guess we understand that when you see that data, it's going to be fairly evident that it's not related to patients trying to manage the tolerance for abacavir such as the hypersensitivity, but it's really going to be a real effect in terms of the failure. And I guess it's been suggested to us that it might actually really begin to narrow the use of Epzicom only to patients that Truvada has contraindicated in such as renal failure or low bone mineral density. So just if that could be the case, I mean what's sort of the upside in terms of the market share, or I guess conversely, what would be the percentage of patients that Truvada would be contraindicated in?

Kevin Young - Executive Vice President, Commercial Operations

Just to give kind of broadly the numbers, Bill, I mean in U.S. on all abacavir, there is just over 100,000 patients today. In terms of Epzicom, it is just over 50,000, about 58,000. So that's the type of scale, if you like. And I think in terms of rate of switch, it's difficult to kind of see that at the moment until we've actually seen I think just how powerful this data is. Certainly, if the UK is anything to go by, and that's been a reaction to DAD, I must stress as opposed to 5202. We're certainly seeing early signs of patients being taken off Kivexa... Epzicom. So I think there is anywhere between potential of circa 50,000 patients anywhere up to in terms of the total molecule, 100,000 patients here in the U.S.

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

Bill, this is Norbert. Just a quick comment on what you said about the notion that the absence of an HLA-B5701 test and the fact that HSR have been... might have influenced the results, keep in mind that this was a virological failure analysis that was... that treated missing data, that censored missing data. So it was a capital... minor analysis and basically only existing data were considered.

So if this had been a missing equals failure analysis, then I would see the logic of saying, be it... HSR could have influenced the results. But since this is a pure virological failure analysis, I do not see the logic of making this argument. But I hope that in two weeks, we will have complete clarity on this and we can lay this issue to rest.

William Tanner - Leerink Swann & Co.

All right, thank you.

Operator

Our next question comes from the line of Maged Shenouda with UBS.

Go ahead.

Maged Shenouda - UBS

Yes,hi. I have a question about VD activities. Other companies in this space have said that they are going to be more aggressive due to depressed values in the small and mid cap space. Just wanted to get your take on that now that you've fully integrated Myogen of course and Raylo.

Unidentified Company Representative

So you're talking about other biotech companies, I assume...

Maged Shenouda - UBS

No, no, you. Your take on it. So specifically, what's your take on M&A right now?

Unidentified Company Representative

What's our take on M&A right now. I think we have a pretty full pipeline right now. So anything that we would do in this area would not be one based on the current value, but perceived need that we would have out there. And from an R&D perspective, I don't think we need a lot because we've got so many things working. So that's not to say that we're not active and that we don't get the calls on all the different activities that are going on. But I think we have the luxury of being very selective on anything that we would do in the future.

Maged Shenouda - UBS

Thank you.

Operator

Our next question comes from the line of Jason Kantor with RBC Capital Markets. Go ahead.

Jason Kantor - RBC Capital Markets

Great, thanks for taking my question. Just wanted to get some clarity on the numbers you gave for Letairis and you see 28% of new patient share. What other drugs are you throwing in that share mix and what kind of share do they have and are you seeing any switching from one class to another in the market?

Kevin Young - Executive Vice President, Commercial Operations

Hi Jason.Basically, my numbers were 22% of all ERA treated patients. That goes up to 26% when you just look at all ERA treated patients in the PH centers. And the PH centers we think make up about 60% of the market. And if you're talking about naïve patients or patients new to therapy with just an ERA, that percentage goes up to 28%. So we're nearing about a 30% of level for our market share of all specifically ERA treated patients.

Jason Kantor - RBC Capital Markets

So theother 72% is on other ERA, is that... are starting on ERAs?

Kevin Young - Executive Vice President, Commercial Operations

Correct, correct. And in terms of where patients are coming from, I gave out the figure for the Letairis monotherapy. And that's over 80% are either completely new to therapy or have come off both symptoms [ph]. And that's a roughly equal split between those two. So you've got just over 40% of a monotherapy patient either is a new patient or is a Bocentam [ph] switch.

Jason Kantor - RBC Capital Markets

It just seems that if your percentage of new patients is so similar to your percentage of total patients, they must... patients must not be staying on therapies for very long. What's the average you think on therapy?

Kevin Young - Executive Vice President, Commercial Operations

I just think, Jason, please bear in mind, these are relatively small numbers. So I think these percentages are directional. What I like is that the lead indicator, which is naïve patients, is heading in the right direction. I think after a year of launch of approaching nearly a third of patients I think is a very solid performance.

Jason Kantor - RBC Capital Markets

Thank you.

Operator

Our next question comes from the line of Ian Somaiya with Thomas Weisel Partners. Go ahead.

M. Ian Somaiya - Thomas Weisel Partners

Yes, just a question on darusentan. I was hoping Norbert could just help us handicap the Phase III results. Just share with us what the net differences are in the Phase III trial design relative to the Phase II and if there are any other variables that we should be aware of when thinking about potential for positive outcome for that trial.

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

So the design and also the background of the patients that are enrolled in the 311 studies very similar to the phase II study in darusentan, and that's what makes us confident that at least on the efficacy side, we will see a similar statistic... test highly clinically meaningful and statistical significant result on the 312 study remember we have in addition to a placebo group we also have a control on Gwonfozine [ph] and that's an experiment that has never been done and I really don't know what the outcome of that is, but my feeling is that Gwonfozine will show very little if any efficacy and that we will be... that darusentan will be at the very least equivalent to Gwonfozine. But my own prediction will be it's going to be better.

M. Ian Somaiya - Thomas Weisel Partners

Okay, thank you.

Operator

Our next question comes from the line of Jason Zhang with the BMO Capital Markets, go ahead.

Jason Zhang - BMO Capital Markets

Thanks, I have a question on Letairis. You just mentioned that you are almost got one third of the market share, yet your revenue in a quarter is $20 million to $25 million minimum about a range. You mean if you double your market share you are only going to get $50 million. I am just wondering from an investment point of view how much more investment you think you are going put into this area and when do you think you are going to break even for this product and if the current set or the future ship sales what you have expected when you acquire margin?

Kevin Young - Executive Vice President, Commercial Operations

Hi Jason. I think we are satisfied where we are today after a year on the market of Letairis. We've made a company commitment to the cardiovascular space and I think we are going to continue to invest in this product. So where we are today, we feel that at the right level of investment, I see that continuing for the foreseeable future. I think clinicians are getting very comfortable with Letairis, particularly in terms of the LFT.

And I just want to point out that the experience recently that came out of the so-called early study of Blocenton [ph], over 13% level of LFTs clearly shows the difference between ourselves and our competitors. So I think our expectation is that we are going to continue to take market share and this is going to be the right choice. It is playing out as the best-in-class product. And when we hopefully start to work on Seclatenin [ph] and potentially build out our cardiovascular franchise, we know, we will have a large and profitable franchise.

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

Jason, I would like to add, we are actively looking at other areas and other applications of ERAs. And we will communicate that as we make the decision to pursue them. But something that John Milligan mentioned today is we have made the decision to go into Phase III evaluating Ambrisentan for IPF and that potential is a very big area. So we are looking, we are committed to PIH but we are looking outside that area as well for applications of DERAs [ph].

Jason Zhang - BMO Capital Markets

Can I just have a follow-up. I know that long-term this might become very attractive drug and franchise but in the near term is there anything that you could do to see to accelerate the drug sales a little bit?

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

Jason, we really are trying to keep it to one question but we'll address your thought.

Kevin Young - Executive Vice President, Commercial Operations

No I think you can, we expected this to be a very progressive launch and it's turning out to exactly that way. These are very seriously ill patients and we have a very focused audience, who are very selective with the way they approach the patients and I think we are certainly winning brand loyalty and really building the presence of Gilead with these opinion leaders and with this audience. So I think it's on the track we expected.

Jason Zhang - BMO Capital Markets

Thanks.

Operator

Our next question comes from the line of Tom Russo with Baird. Go ahead.

Thomas J. Russo - Robert W. Baird & Co

Thanks for taking the question, I actually had a little different question on Norbert it's actually on IPF which you just mentioned again. Just wondering if the one large study could in theory support a filling or would you then do a second study if the first is successful? And secondly is this independently in and up itself a interest therapeutic area for the company? Thanks.

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

So first of all the S1 study could support the indication the endpoint is here progression free survival or death as John mentioned. And you know by the way we would never do two consecutive studies if we decide to do IPF, if it needs two studies, we will do them concurrently because one big thing we are trying to save here is time, which is money. And secondly yes, absolutely I think it's a great opportunity for us it belongs to our pulmonary franchise, we have expertise in Seattle, we have physicians with a note of pulmonary area etcetera and so I think its something we... that fits very nicely into our franchise.

Thomas J. Russo - Robert W. Baird & Co

Okay thank you very much.

Operator

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

Susan Hubbard - Investor Relations

Thank you, operator. And we'd like to thank you all very much for joining us today. We appreciate your continued interest in Gilead and look forward to providing you with updates on our future progress.

Operator

Ladies and gentlemen, that does conclude today's presentation. You may now disconnect. Have a wonderful day.

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Source: Gilead Sciences, Inc. Q2 2008 Earnings Call Transcript
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