Gilead Sciences, Inc. Q1 2006 Earnings Conference Call Transcript (GILD)

Apr.19.06 | About: Gilead Sciences, (GILD)

Gilead Sciences, Inc. (NASDAQ:GILD)

Q1 2006 Earnings Conference Call

April 18th 2006, 4:30 PM.

Executives:

Dr. John Milligan, Executive Vice President and Chief Financial Officer

John Martin, Chief Executive Officer, President, Director and Member of Executive Committee

Kevin Young, Executive Vice President of Commercial Operations and Member of Executive Committee

Analysts:

Geoffrey Porges, Sanford Bernstein

Meg Malloy, Goldman Sachs

Thomas Wei, Piper Jaffray

Yaron Werber

M. Somaiya, Thomas Weisel Partners

Sapna Srivastava, Morgan Stanley

David Witzke, Banc of America Securities

George Farmer, Wachovia Securities

Shiv Kapoor, Montgomery & Company

Phil Nadeau, Cowen & Co.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Gilead Sciences First Quarter 2006 Earnings Conference Call. At this time all participants are in listen-only mode. Later we will conduct a question and answer session. At that time if you have a question, simply press “*” then the number “1” on your telephone keypad. If you would like to withdraw your question, press “*” then the number “2”. As a reminder, this conference is being recorded, Tuesday, April 18th, 2006. Your speakers for the day are John Milligan, Executive Vice President and Chief Financial Officer, John Martin, President and Chief Executive Officer, and Kevin Young, Executive Vice President of Commercial Operations. I would now like to turn the call over to Dr. Milligan. Please go ahead.

Dr. John Milligan, Executive Vice President and Chief Financial Officer

Good afternoon and welcome to Gilead's First Quarter 2006 Earnings Conference Call. We issued a press release this afternoon providing results for the quarter ended March 31, 2006, and describing the company's quarterly highlights. The press release is also available on our website. Also joining us on today's call are Norbert Bischofberger, Executive Vice President of Research and Development, Mark Perry, senior business advisor, Matthew Loar, Vice President of Finance and Susan Hubbard, Vice President of Investor Relations.

I will begin the call by reviewing the first quarter financial results and then I will provide updated financial guidance for 2006. John Martin and Kevin Young will take you through the corporate and product related highlights for the quarter. We'll keep our comments relatively brief so have time at the end of this call to answer your questions.

First, let me start with the standard Safe Harbor statement. I would 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 Act of 1995. These statements are based on certain assumptions and are subject to a number of risks and uncertainties that could cause our actual results to differ materially from those expressed in any forward-looking statements.

I refer you to our latest press release and Form 10-K 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. In addition, during the call today, we will be providing you with information and data from clinical studies that have not been reviewed by the FDA nor included in our prescribing information. I want to remind you that our sales forces are permitted to promote our products based only on our FDA approved prescribing information and we cannot guarantee that the FDA will approve the inclusion of any of the clinical information or data discussed on this call in our prescribing information.

Now, turning to the specifics for the quarter. In short, the first quarter of 2006 was another record setting quarter for Gilead as both product sales and earnings improved significantly over the first quarter of 2005. Total revenues were up 61% compared to the same quarter last year driven primarily by higher sales of our HIV products and higher royalty revenues recognized from Roche's fourth quarter Tamiflu sales.

Yield by our strong top line growth, first quarter 2006 operating income increased by 66% to $372 million when compared to the same period in 2005. Gilead reported net income of $263 million or $0.55 per share on a fully diluted basis for the three months ended March 31, 2006. We adopted FAS 123R in the first quarter of 2006 and recorded after-tax share-based employee compensation expense of $24 million. Excluding the impact of share-based employee compensation expense and accounting for rounding, our earnings per share would have been $0.59 per diluted share.

Our net income for the same period last year was $0.34 per diluted share and $0.59 per diluted share for the fourth quarter of 2005 which included a one-time tax benefit related to the foreign earnings repatriation under the American Jobs Creation Act. Our effective tax rate for the first quarter of 2006 before the impact of share-based employee compensation expense was 33%, a slight increase from the 32% effective tax rate for 2005 excluding the impact of the foreign earnings repatriation in the fourth quarter of 2005. Including the impact of share-based employee compensation expense, our effective tax rate for the first quarter of 2006 was 33.9%.

Now turning to revenue. Total revenues for the first quarter of 2006 were $693 million, an increase of 61% from total revenues of $430 million in the first quarter of 2005. Compared to fourth quarter 2005, total revenues up $609 million, total revenues increased by $84 million or 40%. This growth was primarily driven by higher HIV product sales and higher royalty revenues from Roche's fourth quarter Tamiflu sales. Revenue from Gilead's product sales increased by 40% in the first quarter of this year compared to the same period last year as both our HIV and HDV product franchises continue to grow.

Revenue from Gilead's product sales increased sequentially by 30% due primarily to higher HIV product sales. HIV product sales grew to $451 million for the first quarter of 2006, up 50% compared to $301 million in the first quarter of 2005, and up 70% sequentially from the fourth quarter of 2005. This growth continues to be driven by strong sales of Truvada and Viread. Truvada sales were $249 million for the first quarter of 2006 more than double Truvada sales for the same period last year and an increase of 30% sequentially.

In the United States, Truvada sales were $180 million in the first quarter of 2006, an increase of 20% sequentially and more than double our total Truvada product sales for the first quarter of 2005. Viread sales in the United States for the first quarter of 2006 decreased by 21% compared to the same period last year and decreased by 2% sequentially.

Although there was a decrease in Viread sales quarter-over-quarter, Viread ended the first quarter with inventory levels slightly above the contractual bands we have in place with our major wholesalers as specified to our inventory management agreement. This is expected, as days of inventory will fluctuate based on declining demand for Viread as Truvada demand continues to escalate.

In Europe, Truvada sales in the first quarter of 2006 increased sequentially by 64%, while Viread sales decreased sequentially by only 4%. We are only now beginning to see the impact of the European launch of Truvada on Viread and expect as we saw in the U.S., declining sales of Viread as patients switch from a Viread containing regimen to one containing Truvada. In countries though where Truvada is either early in its launch or is not yet launched, Viread continues to be strong. For example, in Brazil, we saw large government purchases of Viread in the first quarter of this year. However, the nature of government purchases is that they are less predictable in sales in normal distribution channel and we cannot predict the size or timing of future purchases.

Hepsera for the treatment of chronic hepatitis B had sales of $53 million in the first quarter of 2006, a 23% increase compared to the first quarter of 2005 and a 3% increase for the fourth quarter of 2005. For the first quarter of 2006, U.S. sales of Hepsera were $22 million, an increase of 22% compared to the same period last year but a slight decrease of 5% compared to the fourth quarter of 2005. The reason for the slight decrease quarter-over-quarter was due to a decrease in wholesaler inventory levels within the contractual limit. Demand as defined by total prescription written was up approximately 4% sequentially from the prior quarters.

Finally, sales of AmBisome were $54 million for the first quarter of 2006, a decrease of 1% over the same period in 2005 and a 3% decrease sequentially from the prior quarter's sales level. Compared to the same period last year, revenue from Gilead's royalty and contract revenues increased by more than four-fold for the first quarter of 2005, due primarily to increased royalty revenue from Roche's Tamiflu sales and in part, due to the elimination of the cost of goods adjustment which has historically reduced the amount of Tamiflu royalties.

Now turning to gross margins. Product gross margin for the first quarter of 2006 was approximately 84% compared to the product gross margin of approximately 86% for the same quarter of 2005. The lower gross margin is due to product mix changes as patients continue to switch from Viread a higher margin product to Truvada. The inclusion of share-based employee compensation expenses from our adoption of FAS 123R during the first quarter of 2006 and a decrease to the book value of inventory for use in our access program in order to reflect its net realizable value.

Turning to expenses. Research and development expenses were $88 million for the first quarter of 2006, which included share-based employee compensation expenses of $12 million. This is an increase of 26% from $70 million for the same period last year and an increase of 29% from $69 million sequentially. Other factors which led to an increase in R&D expenses for the first quarter of 2006 were increases in head count, as of increased costs associated with clinical and product development activities including those related to our Viread for HCV program and our co-formulation of Truvada with BMS's Sustiva. In general, significant collaboration payments during the quarter can cause our R&D expenses to fluctuate.

During the first quarter of 2006, we incurred a milestone payment of $5 million to Japan Tobacco related to the dosing of the first patient in a Phase II study for our oral integrase inhibitor GS 9137. In comparison, in the first quarter of 2005, we incurred an upfront payment of $15 million to Japan Tobacco under the same agreement.

SG&A expenses in the first quarter of 2006 were $142 million, which included share-based employee compensation expense of $14 million. This is an increase of 80% from $79 million in the same quarter of 2005 and an increase of 34% from $107 million sequentially. Other factors impacting the higher SG&A expenses in the first quarter of 2006 compared to the first quarter of 2005 were increased headcount, the expansion of our sales and marketing activities and a write-off of certain capital assets related to campus renovation at our Foster City headquarters.

Finally, I would like to turn to the cash flow statement and balance sheet to highlight our cash flow performance for the quarter. The balance sheet at March 31, 2006, show cash, cash equivalent and marketable securities of $2.54 billion. This is an increase of 10% when compared to the balance of $2.31 billion at December 31, 2005. This increase is primarily due to 222 million of operating cash flow generated during the quarter partially offset by a $56 million financing cash outflow related to a pay down of our term loan.

On an ongoing basis, we actively evaluate strategic ways to use our cash in investments including opportunities to end license and acquire companies with potential products to complement our own internal effort. Our recently announced $25 million investment in Corus Pharma enabled Gilead to become the second largest shareholder in Corus, receiving preferred shares in Corus and an exclusive option to purchase remaining shares of Corus at a specified price. This was a cash investment for Gilead. Our second quarter 2006 income statement will not be impacted. The $25 million moved from cash to non-current assets on our balance sheet.

Finally, this afternoon we announced our intention to offer $1.1 billion in convertible senior notes through offerings to qualified institutional buyers pursuant to rule 144A under the Securities Act of 1933. In order for the transactions to qualify under rule 144A we are legally precluded from disclosing additional information at this time. Please refer to the press release available on our website for all the permissible information regarding the offering.

Now I would like to turn to our financial guidance for 2006. I will only be providing updates on specific guidance components that have changed since we first released 2006 guidance in January of this year. You can locate all of our guidance for 2006 on Gilead's corporate website. For entire HIV franchise, which includes Viread, Emtriva and Truvada, based on an exceptionally strong first quarter we are raising our full year 2006 guidance for net product sales for the HIV franchise from a range of $1.675 to $1.75 billion to a range of $1.825 to $1.875 billion. This does not include any revenues from future sales of the fixed dose regimen of Truvada and Sustiva, as we are not certain yet at the time lines for the FDA review and launch. We will update this guidance accordingly on future earnings conference call.

Hepsera, we are slightly increasing our guidance for 2006 net product revenue from a range of $200 to $210 million to a range of $205 to $215 million. This modest increase is a result of continued strength of the product in the U.S. despite the increased competition in the marketplace as well as growth in Europe.

Turning to expenses guidance. The remaining guidance on expenses and tax rate will now include the impact of stock-based compensation expensing resulting from adoption of FAS 123R. We are altering our R&D expense guidance for 2006 from $295 to $320 million to $345 to $370 million to reflect the impact of stock-based compensation expensing. We have not included any additional R&D expenses for potential new collaborations or product licensing activity, and we'll update our guidance as appropriate during the year.

We are raising our SG&A guidance from a range of $430 to $455 million to a range of $500 to $530 million. This increase in guidance reflects the impact of share-based employee compensation expensing, as well as an $8 million write-off of certain capital assets related to campus renovation, which is recorded in the first quarter of this year. And finally, we're raising our tax rate guidance from a range of 32% to 34% to a range of 33% to 35%, mostly due to the impact of stock-based compensation expense.

In summary, as Gilead looks ahead, we'll continue to make the investments we believe necessary to promote our product lines, further develop our pipeline and continue to evaluate opportunities to build a strong and independent global business. This concludes the earnings reporting section of this conference call. At this point, I would like to turn the call over to John Martin and Kevin Young who review our corporate and commercial highlights for the first quarter of 2006 and provide an update on the milestones we'll be striving to achieve through the remainder of 2006.

John Martin, Chief Executive Officer, President, Director and Member of Executive Committee

Thank you, John. Good afternoon, everyone. Thank you for joining us today. We're pleased to summarize for you Gilead's accomplishments during the first quarter of 2006. I will begin by providing an update on our business and pipeline programs and Kevin Young will review our commercial efforts.

To begin, I would like to provide an update on the pandemic planning efforts for Tamiflu and the recent announcement by our partner Roche to expand manufacturing capacity to 400 million treatment for Tamiflu annually by the end of 2006. To accomplish this, Roche has added 15 external production partners to assist with the manufacture of Tamiflu in nine countries around the world and has expanded its own facility. These external contractors will provide both intermediate and finished materials in accordance with Roche's quality standards.

Gilead will receive royalties on worldwide net sales of Tamiflu produced by Roche and its partners. In addition, Gilead and Roche have worked together to grant sublicenses to companies for their complete production of oseltamivir in countries where Tamiflu is not patent protected, including sublicenses to Hetero and Shanghai Pharmaceuticals.

Moving to our product and research pipeline, we remain on track to file an NDA for the Truvada Sustiva single tablet regimen during the second quarter of this year. If approved, the fixed dose combination will be the first ever-complete once daily single tablet regimen available to HIV infected patients.

For GS 9137, our lead integrase inhibitor for HIV, we presented positive Phase I/II data for GS 9137 at the Conference on Retroviruses and Opportunistic Infections in early February. As a short-term monotherapy, GS 9137 achieved antiviral activity at all doses with approximate mean reductions of two logs at doses of 400-milligrams and 800-milligrams both twice daily. And at 50-milligrams dose once daily when boosted with 100-milligrams of ritonavir.

At the end of March, we initiated Phase II program to evaluate three once daily doses of GS 9137 boosted with 100 milligrams of ritonavir versus a boost of protease inhibitor of the investigators' choice. We will keep you updated on our progress with GS 9137.

Also, as we mentioned on our conference call in January, we began evaluating another integrase inhibitor, GS 9160 in a Phase I study earlier this year. Based on results from the study, GS 9160 did not demonstrate an adequate half-life to enable once daily dosing. So, we've opted to discontinue development of that compound. And in order to focus on another back up compound GS 9224, which has demonstrated a longer half-life in animal models than GS 9160. We anticipate moving this back-up compound into the clinic before the end of this year.

The enrollment in our two pivotal Phase III studies of Viread for chronic hepatitis B is progressing well and we anticipate completing enrollment in these studies during the second half of this year. As safer and better therapies for chronic hepatitis B continue to enter the market, we believe that the market for HBV treatment will continue to expand. Based on data seen from previous studies with Viread in co-infected patients, we believe that Viread has the potential to be an important treatment to help patients living with this chronic disease.

For the treatment of hepatitis B, Gilead and Achillion have successfully completed the Phase I evaluation of a liquid formulation of GS 9132 and are now evaluating a tablet formulation of the drug in a Phase I study. We anticipate completing this study and initiating Phase I/II borrow dynamic study by the end of this quarter. I am pleased with the research and development accomplishments we have achieved this quarter, which underscore our ongoing commitment to advance our product pipeline.

To wrap up, I would like to expand on John Milligan's mention of our recent investment in Corus Pharma. We are excited about the opportunity presented by Corus's Late-Stage Product Candidate Aztreonam Lysinate for treatment of Cystic Fibrosis related lung infection. This product was granted orphan drug status by the U.S. Food and Drug Administration in March of 2002 and represents a potential treatment for a significant disease with significant unmet medical needs.

Cystic Fibrosis and its related infection affect more than 30,000 people in the United States and there is no known cure for the illness. Aztreonam Lysinate is an inhaled antibiotic with activity against gram-negative bacteria, including Pseudomonas, which is the major cause of lung infections in patients with Cystic Fibrosis. Corus anticipates completing enrollment in two Phase III trials for Aztreonam Lysinate later this year with the data anticipated to be available during the fourth quarter. If positive, an NDA could be submitted during the first half of 2007.

We are pleased to help support the continued development of Corus's important Late-Stage Product Candidate for the treatment of Cystic Fibrosis. Our investment in Corus fits well with our corporate strategy to develop and commercialize important new treatment options that address life-threatening diseases. I will now turn the call over to Kevin Young to review our commercial product efforts. Kevin.

Kevin Young, Executive Vice President of Commercial Operations and Member of Executive Committee

Thank you, John. Good afternoon, everyone. To begin, I would like to highlight the first quarter performance of our HIV franchise in the United States. Truvada continues to make steady share gains and is the number one branded NRTI on the market today. As John Martin mentioned, Gilead and Bristol-Myers are preparing for the NDA filing and anticipated approval of the Truvada and Sustiva once daily single tablet regimen.

We believe this product will further solidify Truvada's leadership as a backbone of HIV therapy and tenofovir as the leading molecule for the treatment of HIV. If approved, Gilead and Bristol-Myers are ready for an immediate U.S. launch of this important product. Truvada continues to be the first choice among physicians and patients in first line regimens.

Based on data received from a third-party market research firm, on a one-quarter lag, as of the end of the fourth quarter last year, Truvada was prescribed in approximately 62% of new patient starts. On each patient pool, which represents a strong portion of our Truvada business has continued to grow. At the same time, 60% of patients initiating therapy with Truvada are the result of switches from other products. Combivir still represents the largest pool of patients we are targeting. And we believe that the recent addition of the 48-week study 934 data in our U.S. product label provides our sales force with a valuable tool for promotional purposes.

Notably, as of the end of the fourth quarter last year, based on data received from third-party market research, we believe that approximately 1-in-5 Combivir patients have switched to Truvada since its launch in August of 2004. In addition, Truvada has recently become the number one prescribed NRTI backbone with the top three leading third agents, Sustiva, Reyataz and Kaletra. And the regimen of Truvada plus Kaletra surpassed Combivir plus Kaletra for the first time during the fourth quarter last year.

As I mentioned earlier, we continue to see steady prescription gains in both Truvada and our entire HIV franchise. As of the week ended March the 31st, according to Wolters Kluwer Health, formerly NDCHealth, Truvada held 25.3% and 23.8% of new and total prescriptions in the NRTI markets respectively. And our entire HIV franchise including Viread, Truvada and Emtriva held 40% and 39.6% of new and total prescriptions of the NRTI market respectively.

As you know, there are several factors that impact our U.S. HIV franchise business. I would like to share a few of those drivers with you so you have a better understanding of how to gauge our HIV franchise growth from quarter to quarter. As we have mentioned in the past, the retail segments for which most of you receive weekly and monthly prescription data represents only a portion of our U.S. market.

The non-retail sector, which includes government institutions, correctional facilities, and large health maintenance organization currently contributes approximately 25% to 30% of our HIV business. This segment of our market tends to be less consistent in terms of buying powers and often results in quarter-over-quarter fluctuations that do not necessarily mirror the growth pattern that you will see in the retail prescription data. For example, in the third quarter 2005, we saw a 46% increase in the non-retail units over the second quarter 2005. And in the fourth quarter 2005, the growth was only 4%.

At the time we announced earnings for any given quarter, our data provider has not yet released all three months of non-retail data for the quarter. And therefore, we can only provide you with an estimates of what it may be based on the two months -- the first two months of the quarter. For the first quarter of this year, we estimate that the non-retail segment grew by approximately 12% based on a three month rolling average of the non-retail sector.

Another factor impacting the retail prescription data is the growing mail order segment, which according to third-party data is approximately 19% of Gilead's HIV retail business. This is up approximately 36% since the launch of Truvada. Current retail prescription data do not fully capture the actual number of bottles being prescribed to a patient. For mail order, our third-party data provide estimates that one prescription actually represents approximately 1.4 bottles. And when averaged across the entire retail business, the total bottles exceed prescriptions by approximately 7%.

HIV becomes more of a chronically managed disease and patients remain on their treatment regimens longer. Many patients are opting to receive their prescriptions via mail order, which simplifies one aspect of managing their disease. Based on what I shared with you regarding the available retail prescription data, and the factors that impact it, hopefully you can understand that it is challenging to extrapolate patient numbers under our HIV sales growth from that prescription data alone. We will provide you with, as much detail as we can each quarter as to the rate of growth of our HIV franchise is experiencing in both retail and non-retail segments of the market.

The truest measure of market share for any product is the molecule share. So, I am proud to say that during the first quarter of this year, tenofovir is now within one market share point of overtaking 3TC as the most prescribed molecule in HIV. A position 3TC has held for nearly a decade. Moreover, FTC, the molecule in Emtriva and Truvada is now prescribed more than AZT. These advances are a testament to the profile of Gilead's products and the important data generated by our clinical teams.

Finally, I would like to point out that the NRTI market is continuing to grow and at a higher rate than we've seen in the past several years. According to third party market research, the total number of patients receiving antiretroviral therapy increased by 8% over the last twelve months, the largest jump in recent years. Approximately 99% of all ARV treated patients are receiving one NRTI and 96% are receiving two NRTI's as part of their HAART regimen.

This trend is consistent with emerging clinical data that link earlier treatment with improved clinical outcomes, as well as patient acceptability of convenience, well-tolerated therapies. The role of Truvada as a first line backbone of therapy has had a significant impact on the trend towards earlier treatments.

Turning to our HIV franchise performance in Europe. Truvada was on the market in all of our five major countries of Europe during the first quarter, having launched in two of the largest European markets of Italy and France during the fourth quarter of last year. We have seen strong initial uptake of Truvada in France, Italy and Spain and continued growth in the U.K. and Germany. This can be attributed to the Study 934 data in the part label and the hard work of our European sales forces.

For example, in France, our most recent launch in Europe, Truvada surpassed Glaxo's Kivexa known as Epzicom in the U.S. in market share after only two months on the market. Kivexa have been launched in France six months before Truvada. We look forward to continuing the momentum that Truvada has gained and we'll continue to target both naive and switch patients who might benefit from a Truvada based regimen.

Our Viread business remains strong in Europe and continues to be the second most prescribed NRTI behind Combivir. While we anticipate some of Viread's sales will be converted to Truvada, as we move through the first full year of launches, similar to the U.S. market, we expect Viread to maintain a strong presence in later lines of therapy.

Turning to Hepsera. We achieved first quarter 2006 revenues of more than $22 million in the United States and continues to be the leading antiviral agent for the treatment of chronic hepatitis B, with nearly 54% of total prescriptions. During the past year, Hepsera and Bristol-Myers’s Entecavir helped to increase the total prescription volume of oral anti-HBV medications by 35%, a market historically undeserved.

Hepsera has maintained its antiviral leadership in hepatitis B in spite of new competition from Entecavir. During the first quarter of 2006, more Hepsera was prescribed than in any previous quarter. To date, the majority of Entecavir conversions have come from Lamivudine. In Europe, Hepsera achieved record first quarter 2006 revenues of more than $30 million and continues to grow across the major countries.

Earlier this year, the National Institute for Health and Clinical Excellence, commonly referred to as NICE, endorsed the use of Hepsera for the treatment of chronic hepatitis B in adults in England and Wales. The official guidelines recommend the use of Hepsera among patients who are not candidates for, cannot tolerate, have not responded to or have suffered a relapse from the treatment with interferon alpha or interferon alpha-2a. The guidelines also note Hepsera as a cost effective treatment option. Also next week in Vienna, Austria, data from Gilead sponsored studies involving Hepsera will be presented at the European Association for the Study of Liver Disease, an important hepatitis meeting for the European treatment community.

Finally, AmBisome recorded another solid quarter sales of nearly $54 million. Our antifungal franchise remains a strong position in Europe because of AmBisome's brand reputation as a proven treatment for confirmed invasive fungal infections. We continue to support this product with a specialized European marketing and sales organization.

In summary, I am pleased with our performance during the first quarter. It reflects the strong emphasis that the commercial operations team at Gilead has placed on operational excellence over the last 12 months. I will now turn the call back over to the operator so that we can take your questions. Operator?

Question-and-Answer Session

Operator

Operator Instructions. And your first question comes from Geoffrey Porges of Sanford Bernstein. Please proceed sir.

Q - Geoffrey Porges

Thanks very much for taking the question and congratulations on another terrific quarter. My question first of all concerns the Viread number. Could you give us a sense of how much of the revenue came in rest of world markets as opposed to Europe? And particularly, how much the one-time purchases or the government purchases in Latin America contributed to the result? And secondly, on the SG&A, even when I back out the compensation expense and the facility charges, it still looks like you've got about a 20% jump from the prior quarter. And for the first time we've seen the SG&A ratio go up. It looks like it is about 18.1% of revenue. I am just wondering if you would give us a little bit more detail on what's driving that? But particularly, what the outlook is for over time, where that number is likely to be as a percentage of sales? Is it going to stay at about this level or should we anticipate further operating leverage there? Thanks.

A - John Milligan

Thanks, Geoff. It's John Milligan. I guess will start with the question about the ex-U.S. Viread revenues. The total Viread was just over 115 million and about 15% of that specifically came from Brazil. So, it was a significant number of orders that came in through the Brazilian government. We're kind of calculating this up here. It looks like the total ex-U.S. sales were about -- I am sorry ex-ROW sales about 30 million. Is that correct? It's about $30 million. So, slightly over half of that was due to Brazil. The second question was about SG&A and leverage. We are seeing some increases in SG&A. I think that's to be expected for a number of reasons. Number one, we are seeing the full year effect of all the hirings and all the investments we made last year. And as you see, the continued drive of kind of performance that we're seeing with our HIV franchise today, we're clearly going to have to invest in people and in programs in order to keep driving sales. And I think that's why that investment is the results in the success you're seeing today. In addition, there is a number of costs that we're starting to incur related to the ramp up for the launch of the triple combination product. Where that stabilizing, clearly give you the full year guidance. We don't break things out by quarter but I don't know that I can answer that without getting into things that I shouldn't get into here.

Q - Geoffrey Porges

Okay thanks. That’s very helpful. Appreciate it.

Operator

And your next question comes from Meg Malloy of Goldman Sachs. Please proceed.

Q - Meg Malloy

Thanks very much. Just a quick follow up. Could you give us more color John on the Viread inventory? And then I know it is early days particularly in countries like France and Italy, but can you give us a little bit more color in terms of pricing and reimbursement and how that campaign is going?

A - John Milligan

Sure. I will take the question related to the inventory and then Kevin can talk more specifically to Europe. So, with regard to Viread, if you look at the end of Q4 of 2005, we were on the lower end of inventory. So, we were below the midway point in terms of the bands that we have for our inventory management agreement. And as you look at this quarter, we have now just barely exceeded the upper end of what would be the contractual obligation. It is somewhat of a guessing game as prices -- I am sorry, as prescriptions decrease, as patients switch to Truvada, we have to make some educated guesses as to how much inventory to be allowed to go in there and we and the wholesalers overshot just slightly during the course of the quarter.

Q - Meg Malloy

Thanks. If you don't mind John, could you remind us what was the band, the two to four weeks?

A - John Milligan

Right now most, yes, actually it is three to four weeks are most of the inventory actually going to start, different ranges for different wholesalers. I think it is fair to say most wholesalers are at the lower end are holding three weeks or greater. But it could be as high as four weeks.

Q - Meg Malloy

Thanks a lot.

A - Kevin Young

Hi Meg, it’s Kevin just to answer your questions about Europe. As you know, we obviously have a staggered rollout of the Truvada launches, Germany, U.K., been on the market a year now, Spain nine months, Italy six months, and France for three months. Actually one or two of those launches particularly in France and Italy came a little bit earlier than we had planned because of the success we had with pricing and reimbursement negotiations and pretty much consistently across Europe we've had 1 plus 1 pricing of Emtriva plus Viread for Truvada. So, we've been very successful in those. And as I said in the call, France, which is our last of the major five out of the blocks, which is the biggest HIV market in Europe, has come out very strong. And already after two months past Kivexa Epzicom, which did have a six-month headstart on us. So, I think that bodes well for the year.

Q - Meg Malloy

Thanks, Kevin.

Operator

And your next question comes from Thomas Wei of Piper Jaffray. Please proceed.

Q - Thomas Wei

Thanks very much. Just wanted to ask on the R&D and the SG&A numbers, could you translate what your guidance would be on a non-GAAP basis excluding the share based compensation expenses?

A - John Milligan

For the full year, if I am recalling this correctly, the R&D number is $50 million of total share based compensation expenses based on our current estimates, based on our current methodologies. And for SG&A and for the full year it would be $60 million of compensation expense. So if you subtract that out, that would get you to the non-GAAP -- I guess we'll call it the non-GAAP number.

Q - Thomas Wei

Thanks. And just a question on the comment that you made about Combivir switches. If you have 20% of Combivir patients that have switched since Truvada was launched and back in the day you have given us a metric that maybe somewhere in the high single digit percentage of patients have switched. Are you seeing an acceleration in that trend as we go into 2006?

A - Kevin Young

I think we've seen nice movement. Back in the third quarter '05, we were by 11%. Fourth quarter '05 is the 1-in-5 essentially just below 20% of conversions. So, in kind of round figures, we began the launch of Truvada with 141,000 Combivir patients. According to our data sources, it is about 108,000 Combivir patients now.

Q - Thomas Wei

All right. Thanks.

A - John Milligan

Thank you.

Operator

And your next question comes from Yaron Werber. Please proceed.

Q - Yaron Werber

Hi thanks for taking my question and nice quarter. I'm just asking can you just give us a sense during the heyday what market share did Glaxo have over total HIV market across all their products, or the NRTI market?

A - John Milligan

Yaron, it’s John Milligan. That's a good question. For the market has changed pretty dramatically, I can tell you what I recall from those days, whatever the heyday actually means. We'll call it during the peak. 3TC was used in between 75% and 80% of patients. It was about 77%, I think, if I recall correctly, of patients had -- were using 3TC at one time. And then AZT was used in about 40% of patients. It may have been a little bit higher, but if you look at AZT plus D4T, so, that's really the market segment that we're competing with the Viread; that was over 80% of patients. So, those are the sorts of metrics we are using, we are thinking about how to build a molecule to compete with it and take apart the franchises the way we have. But in terms of the total NRTI market, I just frankly don't know that metric.

Q - Yaron Werber

Okay. Fair enough and just again looking at your guidance, John, for the year, if you just extrapolate the current total HIV run rate, I mean the guidance is looking at between 1% and 4% growth in the current run rate. So, now in my head, it sounds like you're giving fairly conservative guidance here. Are you expecting tremendous amount of lumpiness in the quarter because of the mail order business or should we still expect that on a quarter on quarter basis total revenues would be increasing?

A - John Milligan

It is a good question. If you look at the guidance we've given, we've had first and foremost a tremendous quarter. We're up 65 million quarter over quarter in terms of our HIV franchise growth. But there are sort of three buckets that lead us to be more conservative rather than more aggressive. And number one is sales in Brazil, which is always unpredictable, both in terms of when and how they occur and whether or not there will ever be future renegotiations. And as people have been following the story know, dealing with the Brazilian government is quite challenging. The second thing that we have been looking at of course is the inventories have increased both of Truvada and with Viread. So, if you look at Truvada, we started off fairly low in the contractual bands and we crossed over the half way point. So, it has increased. We don't yet know how that will play out over the course of the year. But there has been inventory increase still within a contractual obligations that the IMA's put the wholesalers under. And then of course, Viread has increased in terms of inventory. So, we do see some inventory creeping up. And then also during the course of the quarter we did see some significant purchases from other pharmaceutical firms using Truvada in particular for clinical studies. So, those are three events, which may not be reproducible as we go forward. And so we will -- clearly, we're very excited about the growth rate. We're excited about the data we have. We do think that there will be continued market share gains in the United States and particularly in Europe and new markets. But we do have these three factors, which lead us to be more conservative than now.

A - Kevin Young

And just going back to your question on GSK's share, I don't know whether you call it a heyday, but at the launch of Truvada, the total GSK product share TRX was 54%. It’s now coming out of March down at 46%.

Q - Yaron Werber

Okay. That's very useful. And John, can you just quantify for us that you mentioned other pharmaceutical players have been purchasing Truvada for clinical studies. Is there anyway you can give us a monetary amount of how much that was?

A - John Milligan

I am afraid I can't disclose that.

Q - Yaron Werber

Okay. Great. Thank you.

Operator

Your next question comes from M. Somaiya of Thomas Weisel Partners. Please proceed.

Q – M. Somaiya

Thanks guys, just two questions. Again, congratulations on a great quarter. First question just on the rate of Combivir switches. Given that the 934 data is finally included in the products label Truvada, specifically, what is an achievable goal in your minds as we move through the rest of this year? And right time as you said you're at 20%. What do you think a number could be as we move through the end of '06?

A - Kevin Young

It’s very difficult to pinpoint or to give a number on that. Just to remind everybody, we really only had two weeks of 934 promotion in this quarter. We actually got the inclusion of 934 in our U.S. label in the second week in March, so basically the U.S. sales force just got motoring on that. Obviously, we think it can go higher. We're very pleased with the 62% that we now get of new patient stops. And we're going to be working very, very hard to take that higher. And obviously, we hope later in the year, we'll have both Truvada and the triple therapy, which is driving overall Truvada higher.

Q – M. Somaiya

Okay. And just a follow-up question to Yaron's. The studies that you mentioned that the pharmaceutical companies are conducting with Truvada, can you just comment on -- is it a direct comparison to Truvada or is it just being used as a background or backbone therapy? Anything you can share in terms of the type of drugs that the -- that are being evaluated with Truvada against Truvada?

A - Kevin Young

Typically, in these situations what we see is that because Truvada is now the leading backbone, it is often used in the backbone setting.

Q – M. Somaiya

Okay. So, there are no head to head studies.

A - John Martin

I think it’s fair to say there are -- we do know that there are head to head studies out there and some of these sales are in studies where people are looking potentially to replace Truvada. That's obviously something Glaxo has been focused on.

Q – M. Somaiya

Okay, thank you.

Operator

And your next question comes from Sapna Srivastava of Morgan Stanley. Please proceed.

Q - Sapna Srivastava

Thanks, congrats on strong quarter. And just following again on your HIV guidance. Just some better color on the Truvada growth we have seen this quarter compared to fourth quarter where we saw much lesser growth. Can you help us quantify for us like as to how much was a non-retail segment in Truvada, which could account for this kind of lumpiness maybe?

A - Kevin Young

John can certainly comment more. But as we said, typically, the non-retail is 25% to 30% of our overall HIV business, so that's typical ratio. And we have seen that fairly steady over the last twelve months.

Q - Sapna Srivastava

And so, what do you think really contributed to strong growth we've seen this quarter over the last quarter?

A - Kevin Young

Well, I think there is some great underlying indicators in the overall market. As I said, the patients on antiretroviral therapy has increased by 8%. The approximate number of patients is now 455,000 patients in the U.S. on antiretroviral therapy. Truvada obviously, is now over 60% capture of new patients and as I said, also in a very strong position because we are the leading backbone with every one of the leading third agents Sustiva, Reyataz and Kaletra. And the other thing to add is that we are widening the gap between Truvada and Epzicom. And that's now the ratio of 3.2 to 1. So, I think, if you take all of those indicators together, I think that's showing you a very strong underlying trend in the market.

Q - Sapna Srivastava

So, I mean you felt that all of these trends significantly accelerated over fourth quarter in this quarter?

A - Kevin Young

I think the comments I've made are the trends are over a longer period of time; I think they're all…

Q - Sapna Srivastava

Right, because what I am just trying to understand is like a $9 million growth in U.S. sales third quarter over fourth quarter than we are seeing much significant higher in first quarter with all the underlying metrics stayed pretty much the same. And just trying to understand really where the growth has come from.

A - Kevin Young

I think we also added into our scripts was the kind of lumpiness that we see and have to manage in our non-retail business. So, I think that was part of the explanation of the quarter-on-quarter numbers.

Q - Sapna Srivastava

Okay.

A - John Martin

Yeah, I think it is fair to say that as we saw very anemic growth fourth quarter over third in the non-retail segment. And then it came back much more strong, as we estimated for the first quarter where looked to be 12% based on what we've seen, the data we have in hand for the first two months and extrapolating. So, that really helped contributed. The other factors are, as we've said, there are specific orders to pharmaceutical firms and then our inventory did increase. And those factors all combined to the strong quarter that you saw.

Q - Sapna Srivastava

So, what do you view for the non-retail segment going forward? I mean which is more predictive.

A - John Martin

So, what’s more predictive? It is hard to know because we have seen some wild monthly swings. And it’s not something that we can predict nor is it something we control. So again, the wholesalers sell directly into these non-retail segments. So, examples are when something like the Texas correction system or Florida ADAP makes a large purchase that can have a very significant effect one quarter over another. And we don't know, nor do we have access to data, which would allow us to know, when these things are going to happen.

Q - Sapna Srivastava

Just last question. The increase in head count is that mostly in sales and how much is that?

A- Kevin Young

We don't typically disclose the size of our sales teams but we have the size of our sales organizations particularly we did towards the end of year in Europe.

Q - Sapna Srivastava

Thank you.

Operator

And your next question comes from David Witzke of Banc of America Securities. Please proceed.

Q - David Witzke

Yeah, thanks good afternoon. Regarding the integrase inhibitor 9317, what does the fastest path to market look like, an update there? And what's the likelihood the FDA could view the Phase II study as one of two pivotal trials?

A- Kevin Young

David, I am going to try to answer that question. So we have initiated a Phase II study. It’s officially a 48-week study with a 24 week -- it is a 48-week study with 24-week primary end point. Based on the emerging data from that study, we will make a decision on those selections for Phase III and then move into a Phase III study in experienced patients. Now with regard to what FDA, how FDA could view the Phase II study, I would say absolutely they could view it as part of a registration package. And I am saying that simply because recently TIPO take actually find with one Phase II and one Phase III study for their protease inhibitor. And so if we look at that as a proxy, it would certainly be conceivable that we could find with a Phase III and Phase II study. The Phase III study would also have 24-week end point. So, you can kind of figure out by yourself when -- assume six months enroll and 24 week end point, that would kind of be the time to get the data and then at six months from that point on to find the NDA.

Q - David Witzke

That's helpful. And any update on discussions with Merck in Europe on the Truvada Sustiva fixed dose combination? Or do you think it is not until U.S. approval with Bristol before I guess there is enough pressure to get Europe done?

A - John Martin

That's a good question. I think there is tremendous pressure that we're all feeling Gilead, Bristol-Myers and Merck to put together this rest of world deal and we have made a commitment to put these things together both for Europe and the developing world. It is probably the most complicated series of agreements we've ever worked on. And it just -- and with three parties, as you can imagine, it is very hard to get agreements on all the stuff, all the little bits and pieces that are so important for this agreement. The U.S. approval -- filing and approval will of course put additional pressure on us to get this done. But rest assured we're working very hard on it right now.

Q - David Witzke

Are you optimistic on an agreement this year? Or how should we think of time line?

A - John Martin

Well, I don't want to give specific time lines. I will let you know that we're devoting considerable resources to getting it done.

Q - David Witzke

Thank you.

Operator

And your next question comes from George Farmer of Wachovia Securities. Please proceed.

Q - George Farmer

Hi, thanks for taking my question. I was wondering if you guys could comment, without going into too many specifics on the details of your offering, about how you see the world right now in terms of what's available for Gilead to purchase or to partner with? And just kind of comment on the use of cash at for a share buyback rather than some other strategic option?

A - John Martin

Let me just first and foremost we're not going to make any comments with regard to the offering. With regard to our strategic ambition, I think it’s fair to say that we are spending quite a bit of time with our team looking at both public and private companies. Obviously, Corus being an example of a private one where we see a number of very interesting assets out there. Some with products that could be on the market sooner, Corus is an example of that. Others which might be more research oriented. And I do think that we have both the capability and ambition to broaden the therapeutic areas that we're in and to bring products out over a period of time, so that we would basically manage our portfolio products to have multiple product launches over multiple years and ensure the long-term, meaning ten years, sustainability of the company.

Q - George Farmer

And should we use this Corus deal as a signal about the therapeutic areas you guys are most interested in right now? Or should we see other infectious disease fields or will you be looking at other disease indications?

A - John Martin

We do like, obviously, the infectious disease angle is closer to home for us. So, it is something we like. Also, the respiratory area is something that is quite interesting to us. I think the expertise that Corus brings, especially with regard to specific devices used for bringing new products into the lung, could allow us over time, if we were ultimately able to acquire Corus to build a franchise around not only anti-infectives but respiratory products. So, that's pretty interesting to us. But secondly, I would say we are looking at areas outside of infectious diseases and continue to be very interested in moving into other areas.

Q - George Farmer

Okay. Thanks.

Operator

Your next question comes from Shiv Kapoor of Montgomery & Company. Please proceed.

Q - Shiv Kapoor

Thanks for taking my question. I have a question on your integrase inhibitor strategy. Why do you have two molecules so close together in the clinic? And a follow-up question to that.

A- Kevin Young

Well first of all, I wouldn't say the two integrase compounds are that close to each other, they're probably a year and a half to two years apart. And we end licensed the integrase inhibitor from Japan Tobacco first in our Phase I, Phase II study we realized that the best way to use it is boosting it with tenofovir and that currently in Phase II. But as a back up strategy, we are working internally on an integrase inhibitor that should be dosed once daily without requiring boosting. So, that is our long-term goal. Now, where we end up and how exactly the two compounds will be positioned, I would say is in large part a matter of what the emerging data is going to show. So, what the safety and efficacy is going to be both in the experienced and naive patients. But we think there is certainly a room for both compounds to be very useful compounds for the treatment of HIV infection.

Q - Shiv Kapoor

So, a follow up question on that. Apart from the half-life and the resulting dosing difference, are there any key functional differences between the first generation compound GS 9137 and the second-generation inhibitors?

A- Kevin Young

Yes, there are differences in the resistance profiles and there is differences in the metabolism. And we don't have clinical resistance data yet. But in vitro, there is clearly a difference in terms of resistance development. And so maybe one role for these two integrase inhibitors would be that one could be used to treat patients that become resistant to the first drug, although, that has to be confirmed in clinical studies.

Q - Shiv Kapoor

All right, thanks a lot.

Operator

And your next question comes from Phil Nadeau of Cowen & Co. Please proceed.

Q - Phil Nadeau

Good afternoon. Congratulations on a great quarter. Just two quick questions. First is, are there any other major territories that you're going to launch Truvada in over the next quarter or two? And then second, when might we see viral load reduction data for your HBV protease inhibitor?

A - Kevin Young

I will take the first question. In addition to the five major markets we have launched in Ireland, Portugal in the fourth quarter we mopped up sort of the Nordic countries and Austria and into this year, further into this year, we'll have to launch in Baylands as well. So that will really complete the sort of substantial trounce of European markets.

Q - Phil Nadeau

Okay.

A- Kevin Young

And regarding the HBV protease inhibitors, it is our plan right now to start the viral dynamic study with the Achillion HBV protease inhibitor towards the middle of this year. And depending on how many dose levels we go to and what the PK is and what the tablet formulation, it may be longer or it may be shorter until clinical viral load data are available.

Q - Phil Nadeau

Okay. Great. Thank you.

Operator

This concludes the question and answer portion. I would like to turn it back to Dr. Milligan for closing comments.

Dr. John Milligan, Executive Vice President and Chief Financial Officer

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

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