Gilead Sciences, Inc. (GILD) Q1 2011 Earnings Report, Transcript and Summary

Robin Washington - Chief Financial Officer, Principal Accounting Officer and Senior Vice President Susan Hubbard - Vice President of Investor Relations John Martin - Chairman of the Board and Chief Executive Officer John Milligan - President and Chief Operating Officer Kevin Young - Executive Vice President of Commercial Operations Norbert Bischofberger - Chief Scientific Officer and Executive Vice President of Research & Development

Sapna Srivastava - Goldman Sachs Group Inc. Joel Sendek - Lazard Capital Markets LLC Geoffrey Porges - Sanford C. Bernstein & Co., Inc. Ravi Mehrotra - Crédit Suisse AG Ian Somaiya - Piper Jaffray Companies Thomas Wei - Jefferies & Company, Inc. Brian Abrahams - Wells Fargo Securities, LLC Joshua Schimmer - Leerink Swann LLC Thomas Russo - Robert W. Baird & Co. Incorporated Yaron Werber - Citigroup Inc Michael Yee - RBC Capital Markets, LLC Mark Schoenebaum - ISI Group Inc. Rachel McMinn - BofA Merrill Lynch Matthew Roden - UBS Investment Bank Geoffrey Meacham - JP Morgan Chase & Co

Ladies and gentlemen, thank you for standing by, and welcome to the Gilead Sciences First Quarter 2011 Earnings Conference Call. My name is Stacy, and I will be your conference operator for today. [Operator Instructions] As a reminder, this conference call is being recorded today, April 20, 2011. I would now like to turn the call over to Susan Hubbard, Vice President of Investor Relations. Please proceed.

Thank you, Stacy. Good afternoon, and welcome to Gilead's First Quarter 2011 Earnings Conference Call. We issued a press release this afternoon providing earnings results for the quarter. This press release is available on our website as are the slides that provide much more detail around the topics discussed today on this call. The speakers for today will be John Milligan, President and Chief Operating Officer; Kevin Young, Executive Vice President of Commercial Operations; and John Martin, Chairman and Chief Executive Officer. John Milligan will discuss the financial results from the first quarter 2011, followed by Kevin Young, who will discuss our commercial performance. And finally, John Martin who will provide an update on our research and development progress and discuss our view about the future and opportunities for the company. Norbert Bischofberger, Executive Vice President of R&D and Chief Scientific Officer; and Robin Washington, Senior Vice President and Chief Financial Officer, are here as well to answer your questions later in the call. 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 latest SEC disclosure documents and recent press releases for a detailed description of risk factors and other matters related to our business. In addition, please note that we undertake no obligation to update or revise these forward-looking statements. We will be making certain references to financial measures that are on a non-GAAP basis. We provide a reconciliation between GAAP and non-GAAP numbers in the press release we just issued as well as on our corporate website. I will now first turn the call over to John Milligan to discuss the quarterly results.

Thanks, Susan, and thanks all of you for joining us today. The first quarter of 2011 marked a challenging quarter for Gilead, with several unpredictable external factors simultaneously affecting our U.S. business. Kevin Young will take you through the specifics of these U.S. issues, but first, I'll briefly run through the highlights of the first quarter financials. Gilead generated $1.93 billion in total revenues for the quarter, driven by net product revenues of $1.86 billion, which were up 4% year-over-year and down 3% over the fourth quarter 2010. The year-over-year increase was a result of healthy product sales in Europe, while the quarter-over-quarter decrease was due principally to a decline in U.S. antiviral product sales. We believe that the fundamentals of our business remain strong, particularly with regard to patient demand and prescription growth in the retail sector. However, during the first quarter, there were reductions in U.S. wholesale inventories and lower sales in the non-retail sector that led our results to be less than people may have anticipated. Even with these challenges to the business, Gilead continued to maintain a healthy non-GAAP operating margin of 50.4% for the quarter, down from 52.4% in the fourth quarter of 2010 and down from 59.6% in the first quarter of 2010, driven primarily by significant decreases in Tamiflu royalties. Our non-GAAP research and development expenses, up 21% year-over-year and 2% sequentially, increased as a result of the timing of expense reimbursements related to our collaboration with Tibotec Pharmaceuticals, higher headcount and expenses associated with expanding our business including recent acquisitions. Our non-GAAP selling, general and administrative expenses were up 15% year-over-year and 10% sequentially, increased primarily as a result of the new U.S. pharmaceutical excise tax, bad debt expenses related to aging receivables in Southern European countries and higher headcount associated with our expanding business. We reported non-GAAP EPS of $0.87 per share as compared to $0.99 per share in the first quarter 2010, which benefited from a $0.19 contribution to EPS in Tamiflu-related royalties. For the first quarter of 2011, Tamiflu-related royalties contributed only $0.01 to EPS. Year-over-year revenues from Tamiflu royalties received from Roche decreased 95% to $11 million from $246 million received in the first quarter of 2010. As you may have seen, Roche released their first quarter 2011 earnings last week, reporting Tamiflu sales of CHF 252 million, which will result in approximately $37 million in royalties payable to Gilead this quarter. I would like to note that it's difficult to gain insight in the core performance of the business when conducting year-over-year comparisons as there has been and will continue to be a significant reduction in Tamiflu royalty revenues over the course of this year as worldwide pandemic planning initiatives have declined dramatically. Turning to the balance sheet and cash flow from operations. Our cash balance at the end of the quarter was $6.4 billion, due in part to the $821 million in cash flow generated from operations for the quarter and in part to $987 million in net proceeds from our recent $1 billion debt offering. Our solid cash position will allow us to continue to invest in our pipeline, pursue strategic licensing and M&A activity and return value to our shareholders through our share repurchase program. For the first quarter of 2011, we repurchased approximately $550 million or 14 million shares of Gilead's stock, leaving approximately $1.4 billion under the $5 billion 3-year repurchase program that Gilead's board authorized last May. We intend to complete this program by the end of this year. And finally, despite the challenges we faced in the first quarter with regard to U.S. antiviral sales, we are reiterating the full year 2011 guidance provided to you in January. This guidance can be found in both our earnings press release and on Slide 19 of the earnings call deck, which is available on our corporate website. Our net product sales guidance of $7.9 billion to $8.1 billion assumes two factors: first, that state ADAP purchasing will resume, and I will note that we are encouraged that the federal ADAP funding has been announced with an increase over the 2010 funding; and second, that we will see only a modest change in our U.S. payer mix. We continue to deliver on the strategic fronts we outlined in the beginning of the year, and as Kevin will discuss, the underlying fundamentals of our antiviral commercial business remains strong in both the U.S. and overseas. I'll now turn the call over to Kevin to discuss our commercial performance.

Thank you, John. Gilead generated total antiviral franchise revenues of $1.6 billion for the first quarter, up 2% over first quarter 2010 and down 4% sequentially. This sequential decline was primarily driven by U.S. performance, which decreased 7% sequentially. While demand in the U.S. increased at the prescriber level during the first quarter, there were reductions in certain state ADAP purchases and in inventory at the wholesale level. Let me immediately address the mismatch between U.S. demand and revenues. First and foremost, it is important to point out that we continue to see what you see, namely, strong and very healthy growth in underlying demand for our HIV products. The first quarter, Wolters Kluwer Health total prescription growth for both Atripla and Truvada were robust at 5% and 4%, respectively. These are some of the largest quarterly gains that we have seen in the past year. We are pleased with this high level of operational execution and the reassuring evidence that treatment guidelines supporting earlier ARV initiation and the preferred status of Gilead products are being pulled through into provider behavior. With that backdrop, the question then becomes, why did these healthy prescriber dynamics not translate into equally positive Q1 revenue numbers? There were two primary reasons for this disconnect. First, the financial strains faced by two large states' AIDS Drug Assistance Programs, namely, Florida and Texas, led to a significant decrease in ADAP purchasing as they approach the end of their budgetary cycle. The well-known state budget crisis in Florida relate not only to an increase in ADAP wait lists, but also to a temporary rolling off of some previously covered patients into industry-supported patient assistance programs until April, the beginning of the ADAP fiscal year for federal funding. Florida did not place their typical orders for Atripla and Truvada in the second half of Q1. The Texas ADAP program handled Q1 quite differently from Florida. Texas did not roll patients off drug nor did they start to wait list. They instead utilized existing inventory and stopped ordering until Congress provided more clarity on the federal budget for 2011. The recent announcements of a new ADAP drug budget for fiscal year 2011 has been positively welcomed by providers and advocacy groups. A total of $885 million has been granted. This is $50 million or 6% above the previous year's initial budget and in excess of most people's expectations. Whilst ADAP programs will not know their final 2011 allocations for another month or so, HRSA, the administrators of ADAP, did release initial funds on April the 1st to ensure that states could continue to support their patients. The very latest intelligence we have gathered at the state level indicates that there is Q2 purchasing by ADAP programs, including Florida within the last week. The second reason for the revenue versus demand disconnect was a change in inventory levels at both the large and independent regional wholesalers. In both cases, we believe the reduction in quarterly purchases was in part a reaction to the lack of ADAP pull-through. In Q1, we saw a reduction of approximately 2.5 days across our 3 major wholesalers. Collectively, these organizations handle approximately 90% of Gilead antiviral product volume. And whilst we have inventory management agreements in place, they went from the higher end of that contractual range to the lower end. The same situation occurred at the smaller wholesaler level, where we believe they reduced their stock levels below that of the end of Q4 2010. The difference here is that Gilead does not operate IMAs with these entities. I hope this information provides a helpful upfront commentary for you, and I welcome your questions later in the call. Now turning to our international performance. Europe contributed $651 million to our antiviral product sales in quarter 1, an increase of 4% year-over-year and flat sequentially. We were pleased to see this steady performance after all the economic turbulence of 2010. Whilst the 2010 austerity-mandated price reductions in Spain, Germany, Greece and Turkey are still affecting our year-on-year financial performance, we do not see any other major government interventions in Q1 2011. Moreover, there were several positive movements for our market-leading HIV products. First, a part from the 2010 introduction in Spain by a national company, we have not seen generic 3TC launched across Europe. Second, Atripla new starts continue to grow at a healthy clip. Atripla is now prescribed in 26% of patients naive to antiretrovirals. This is despite the fact that we do not have a naive indication in Europe. And third, the most significant milestone that occurred in the quarter was the change in the European AIDS consortium guidelines. These now state, and I quote, "Generic HIV drugs are becoming available and can be used as long as they replace the same drug, but do not break up recommended fixed dose combinations." We believe this endorsement will result in continued growth of our fixed dose combinations in single-tablet regimens, today, in the form of Truvada and Atripla and in the future, in the form of Truvada TMC278 and Quad. Finally, I'd like to make some closing remarks on the Letairis, for which we have seen a recent increase in ERA market share. Q1 data from our proprietary survey showed a growth from 35% share in Q4 2010 to 38% share in Q1 2011. Moreover, shares specifically in PAH centers grew from 38% to 42%. Letairis achieved revenues of $62 million in Q1 2011, a 12% increase versus Q1 2010. However, this was down 3% sequentially due to a drawdown in inventory at the specialty pharmacy level, where we do not operate IMAs. Importantly, in early March, we announced the FDA's approval of a change to the prescribing information for Letairis, where the language concerning the potential risk of liver injury was removed from the black box warning. In conjunction with this label update, monthly liver function tests are no longer required before Letairis prescription is fulfilled and distributed to the patient. LFT should be ordered and reviewed as clinically indicated. This change was due in part to post-marketing data reflecting more than 7,800 patient years of experience, which we collected through the Letairis Education and Access Program, and which were consistent with the clinical trial data used to support our NDA. The new label now reflects a major medical difference between Letairis and the older marketed ERA, bosentan, which still requires monthly monitoring. We believe this fundamental distinction will build upon the momentum we had already begun to see in Q1. In addition to the higher scientific bar now established by Letairis, there are clear benefits for PAH patients and their care givers. Not having the workload of mandated monthly liver enzyme testing has been universally well received. The Letairis medical affairs team have completed an intense month of educational activities, and whilst early, we are already seeing a noticeable pickup in patient enrollment. In closing, whilst we have the unusual effect of shortfalls in non-retail sales for our HIV drugs in Q1, it was a good quarter for continuing commercial gains and milestones, especially U.S. prescription growth. I remain confident about our prospects for the rest of 2011, both across our franchises and across our regions. I'll now turn the call over to John Martin.

Thank you, Kevin. I'd like to highlight the significant progress we made in R&D during the quarter. In March, at the European Association for the Study of Liver Conference in Berlin, Gilead showcased 23 posters and 1 oral presentation related to our liver disease product portfolio. Data presented relevant to hepatitis B included efficacy of GS 9620, a TLR-7 agonist, in the woodchuck model and also predictors of "s" antigen loss in Viread-treated patients. These 2 presentations represent progress towards identifying a finite therapy resulting in a cure of hepatitis B infection. Of particular note for hepatitis C virus, the first clinical data on GS 5885, an NS5A inhibitor, were also disclosed at the conference. 3 days of dosing with GS 5885 resulted in a 3 log drop in HCV RNA. Data emerging for the HCV protease inhibitor, GS 9451, has led to its selection over GS 9256 for future studies based on once-daily dosing, its safety profile and lower manufacturing costs. Because of this progress on multiple fronts, an all-oral 4-drug regimen study will be initiated in this current quarter. This study will compare 2 doses of GS 5885 in combination with GS 9451, GS 9190 and ribavirin for 24 weeks in genotype 1 infected patients. To our knowledge, this will be the first study initiated to evaluate 4 oral drugs to cure HCV infection. Now turning to Cayston. Burkholderia cepacia is a serious pathogen that affects approximately 3% of patients with cystic fibrosis, resulting in a poor survival prognosis. We have recently completed a 100-patient study comparing Cayston to placebo, which failed to show benefit in this population. The Phase III program to evaluate Cayston for the treatment of bronchiectasis is expected to initiate during this quarter. This program consists of 2 identical Phase III studies of 172 patients comparing Cayston to placebo, with the end point of improvement in patient-reported outcomes. Now turning to the HIV pipeline portfolio. In January following the FDA's "refuse to file" notification for Truvada/TMC278 single-tablet regimen, the NDA was resubmitted within 2 weeks to include the requested CMC information. On April 6, the FDA accepted this filing and granted a priority review with a PDUFA date of August 10. Additionally, at the CROI conference in February, data were presented from a 14-day Phase Ib viral dynamic study of GS 7340, a novel prodrug of tenofovir. In this study, doses of 50 and 150 milligrams of GS 7340 were shown to be more potent than Viread at 300 milligrams. Thus, a second Phase Ib viral dynamic study has been initiated to evaluate the potency of 8, 25 and 40 milligram doses of GS 7340. This second Phase Ib study will allow for the selection of doses to take into Phase II. As the ultimate dose of GS 7340 will be significantly lower than 300 milligram Viread, GS 7340 should have a better safety margin, making it more amenable for use in special populations like the elderly and renally impaired patients. Also, this lower dose should allow for the creation of a smaller fixed dose combination, for which Viread at 300 milligrams is too large to co-formulate into a single tablet. A GS 7340 emtricitabine tablet has been developed and will enter into a human bioavailability study this quarter. Relating to the development of the Quad, we released impressive top line data from our Phase III pivotal study of elvitegravir versus raltegravir, which demonstrated that elvitegravir was non-inferior to raltegravir in treatment-experienced HIV patients, with the lower bound of the 95% confidence interval at minus 6%. The safety and tolerability of elvitegravir given once daily was comparable to BID raltegravir. For the development of the Quad, elvitegravir and cobicistat, 4 Phase III studies are necessary to support -- in support of regulatory submissions for all 3 agents. We have reached agreement with the FDA to accelerate the filing of the Quad to the first quarter of 2012, ahead of the cobicistat and elvitegravir filings. Both pivotal studies for the Quad will reach their 48-week end point in the third quarter of this year, with the data from the Quad versus Atripla study preceding that of the Quad versus boosted atazanavir. Results from the final study cobicistat versus ritonavir will be available in the fourth quarter of this year. And therefore, elvitegravir and cobicistat NDA filings are expected to be during the second quarter of 2012. Top line data from these 3 Phase III studies will be shared with you later this year as they become available. And finally, I'd like to comment on 2 recently completed acquisitions. Arresto and Calistoga provide exciting opportunities in fibrosis, myelofibrosis, solid tumors and hematological malignancies. In addition, the collaboration with Yale University announced last month on the application of genomics in cancer to identify driver mutations and promising targets has broadened our capabilities in cancer research. Building on this momentum, Norbert will be recruiting additional scientists to further strengthen oncology research at Gilead. The progress over the last quarter demonstrates our commitment to advancing science for unmet medical needs. We are in excellent financial health, have a solid pipeline and motivated employees to carry out this mission. We will now open the call to your questions. Operator?

[Operator Instructions] Your first question comes from the line of Brian Abrahams with Wells Fargo.

Thanks very much for taking my question. I have a sort of 30,000-foot view question regarding ADAPs. The wait list continuing to grow, federal funding up, I guess, relatively incrementally. You're already providing drug at a significant discount. Can you maybe talk about some of the strategies that you might consider to help ease this issue? And are you guys expecting significant supplemental funding throughout the year just given the budget deficit?

Brian, it's Kevin. Brian, maybe I should just frame a little bit more in terms of Q1 and put a bit more color around my script just to sort of bridge into your question. So we saw what you saw in terms of very healthy underlying prescriptions. We've also seen the increase in the wait list. What was a surprise for us in the second half of the first quarter was that both Florida and Texas didn't place orders through their normal large wholesaler supplies that they have done in previous Q1s. So basically, for different reasons, they essentially shook down their ordering. Now when we take the bigger picture question that you pose, we were actually pretty pleased to see the new federal funding. It took some time, of course, in keeping with the overall settlement of the U.S. budget. I think some people were really quite worried that ADAP would only get the core funding of $835 million. I think to come out with the extra $50 million was actually a very positive result. Obviously, a key component of our business is ADAP. It now makes up 23% of our business in the fourth quarter. We think it's the right thing for patients to support the programs. We did put in the supplementary discounts. They are now set until 2013, so we think we've done everything in terms of our discounts and in terms of our PAP to support the programs. It's important also to say that whilst clearly, Florida have had a real challenge around their program particularly because of the difficulties with their state budgets, there are several of the large ADAP programs that don't have waiting lists: California, New York, New Jersey, Illinois. So they are managing their programs well, and they're integral to the support of HIV. And the final thing I would say is, of course, with increasing testing, with increasing earlier treatment, which are all good things from the point of view of HIV care, comes more stress on federal and state payers. So we've always discussed that the need to treat patients does increase the political demand to support the area. So one doesn't come without the other.

Thanks very much.

Your next question comes from the line of Matt Roden with UBS

Great. Thanks for taking the questions. We've seen this kind of lumpiness in 1Q non-retail performance in the past. So Kevin, I was wondering if you can maybe put in context for us the relative contribution to the 1Q sequential step down between the 2 factors that you mentioned? And then secondly, with respect to the increase in federal funding, are you thinking of that along the lines that it would maintain the status quo in the ADAP wait list? Or is this the sort of thing that could actually reduce the ADAP wait list over time?

Yes, good questions both, Matt. Again, I just want to set up my answers by just reiterating that ADAPs order through our wholesalers: 1 of Florida and 1 of Texas order through one of the large wholesalers in our inventory management agreement wholesalers and 1 order through one of the smaller wholesalers. And we do think that when ADAP is affected, of course, that has an influence on these wholesalers from the point of view of their inventory levels. Specifically, on your 2 questions, if you look at the phasing, there is a changing pattern. If you go back 4 years to the relative splits of our ADAP purchases, so you go back to the fiscal year 2007, Q1 made up 32% of the purchases. That then moved for 2008 to 29%. It moved to 27% for the previous fiscal year, and then for 2010 fiscal year, it was 25%. Now there's a number of reasons for that. If you remember, 4 years ago, the budgets were given out fairly late, and so people were trying to catch up with using all of that budget. We've had a situation where budgets have been given out earlier, but of course, they've had their challenges around just the total funding. So it's basically gone from a 32% phasing of a quarter, down now to 25%. In terms of the allocation, HRSA have given out -- and they actually based it on the previous call budget of $835 million -- they gave out approximately 1/2 of that on April the 1st. So just to make sure that ADAPs would not run out of their federal funds. But now in terms of parsing out the full $885 million, we think that's going to be the next month or so. We think it will be done all at once because it is late anyway, so why have extra supplementals. So we think when they finally get their individual state allocations, it will all be based off the full $885 million. Thereafter, whether any emergency funds, any top off funds come later in the year, just remain to be seen, Matt.

Thanks a lot.

Your next question comes from the line of Geoff Meacham with JP Morgan. Geoffrey Meacham - JP Morgan Chase & Co: Thanks for taking the question. 2-part question. Wondering, Kevin, if you can give detail on the ADAP purchases with respect to budgets and other states like, say, New York, Illinois, California, some of the bigger HIV contributors. And then the second part is, you went over the guideline impact for the past couple of quarters, and I know the sales read-through isn't there. But when you look at the patients on a Gilead regimen this quarter versus the past 2, it is, in fact, down. And I'm curious if the market's growing, how I should interpret that.

Yes, let me try to answer both of those, Geoff. Thank you. Basically, when it comes to Florida and Texas, Florida, their patients in the program is about 12,000 patients. Texas is about 9,000. So that's the third biggest and the fourth biggest of the ADAP programs in the United States. So obviously, with that cutoff that we have for 2 different reasons, that is quite a large effect within the quarter. If you look at California and New York, California have 25,000. They're the biggest program. New York have 15,000. If you come down to New Jersey, they only have 5,000. Now we haven't seen big problems or big issues around these other ADAP programs. They don't have a wait list. I think the other thing to also bear in mind is when it comes to California, New York and New Jersey, that they aren't central purchase. They operate through retail pharmacies and a rebate program. So they typically aren't operating inventories and then some of the swings that come with inventories. The second part of the question again, sorry, Geoff? Geoffrey Meacham - JP Morgan Chase & Co: So the guideline impact that you talked about with respect to CD4 counts and things like that, so the impact from sales you've discussed here. But I wanted to reconcile the patients coming out in Gilead regimen this quarter versus the past 2. It looks directionally down.

Right. So again, we always say this and I apologize if it sounds a little bit like a stuck record. Synovate has it's ebbs and flows. We don't go crazy on a great quarter. We don't go desperate on a poor quarter. The number of patients treated on antiretrovirals was quite a large increase, and that's now gone up to 619,000, but it was a little bit lower in terms of growth for Gilead products. I just think that's the swings and roundabouts of ADAP. Obviously, it was the fourth quarter, so it's 1 quarter in arrears. The starts CD4 counts for that fourth quarter were a little bit lower, but as you can see from the annualized numbers, there's still a nice improvement. And then finally, Geoff, the ultimate acid test is always prescriptions, and we look Wolters Kluwer Health. I think you normally look at IMS. But it was a pretty good quarter, and we were pleased with that. So you always go back to does the underlying prescribing look healthy, and it certainly did for the first quarter. Geoffrey Meacham - JP Morgan Chase & Co: Got it. Thank you very much.

Your next question comes from the line of Tom Russo with Robert W. Baird. Thomas Russo - Robert W. Baird & Co. Incorporated: A question on expenses, actually. For SG&A and R&D, there were some explanations, the bad debt in Southern Europe hitting SG&A and then in R&D, the timing of charges related to Tibotec. Would you be able to quantify both of those? And then also, tell us maybe how we should expect those to look going forward over the rest of the year?

Sure, Tom. So related to the Tibotec, remember that was, overall, $100 million collaboration over the past three years. So in 2011, the last tranche of about approximately EUR 23 million to EUR 25 million is euro-based, and I think we booked about $23 million this quarter related to that. And so that was one of the key drivers overall for R&D expense on a sequential basis that drove it up, right. The other thing that you have to remember too is one of the things that we're looking at relative to as we think about guidance is the impact of acquisitions, right. Those aren't things that we necessarily factored in. But given where we look today, we have been able to fill up the ones that we've acquired as of today relative to our guidance. So we feel good about it, but definitely see it trending towards the high side. Thomas Russo - Robert W. Baird & Co. Incorporated: SG&A?

And relative to SG&A on bad debt expense, right now, [indiscernible] in the number is probably about an incremental $6 million to $8 million of expenses associated with in Southern Europe. The other big major change in SG&A was the excise tax. If you remember, we explained that we expected that new tax to yield about a $30 million to $50 million impact for the full year to SG&A. So that's planned, and that's one of the key drivers of our overall growth. So we now are projecting that range to be towards the high end as well. So 1/4 of that $50 million is reflected in our Q1 SG&A expenses. Thomas Russo - Robert W. Baird & Co. Incorporated: Okay. Thanks.

Your next question comes from the line of Ravi Mehrotra with Crédit Suisse. Ravi Mehrotra - Crédit Suisse AG: Thank you. A question for Kevin, and just to mix up a little bit, I thought I'd ask something on Letairis. You mentioned about your 1-month education program for your reps and then having gone out with that message. Can you give us a little bit more color on what that message is? And concomitantly, can you just remind us what percentage of patients per year on bosentan have elevated LFTs?

So yes, what I referred to is a very committed educational program through our medical affairs team. So we've done a lot of speaker programs. We've done a lot of explaining and updating to our key opinion leaders and to, broadly, to the PAH audience. We had a great response. That's largely being based upon, of course, the label explaining why the change came from the FDA, built on the analysis that we submitted and explaining now what this means to the day-to-day management of the PAH patients. And it's very logical. It's very kind of straightforward around everything that has changed for the label. Now I think, typically, the type of LFT elevations can be up to about 15%, so we have been told by opinion leaders for bosentan. Right now, we get about 30% of our starts for Letairis from bosentan switches. The sense that we're getting from the point of view of the reaction and the increase in enrollments that we've seen over the past 5 weeks since the label changes, it's coming across-the-board. It's coming from new patients, it's coming from bosentan switches and it's also coming from the patients who require the addition of an ERA when they're on some other form of therapy. So it's a combination therapy. So it seems to be a nice across-the-board patient spectrum as well as across-the-board from the point of the geographic response that we've had from the PAH centers. Ravi Mehrotra - Crédit Suisse AG: Thank you. That's very good. Just a very quick follow-up. Is the message that do you don't have to do monitoring at all, or just moving into a greater interval than 1 month?

Our label is that tests should be done as clinically indicated. Ravi Mehrotra - Crédit Suisse AG: Fair enough. Thank you.

And your next question comes from the line of Mark Schoenebaum with ISI Group.

Thanks for taking the question, and Kevin, thanks a lot for all the clarity. I thought that was very helpful. But I want to follow up on somebody else's question. I still am trying to quantify the inventory change versus the ADAP buying. So if my calculation is vaguely right, that it's 2.5 days of inventory for the U.S. HIV franchises is worth something on the order of $25 million, and the miss from consensus was on the order of $85 million. So the ADAP component might have been around $60 million and the inventory component around $20 million, $25 million or so. Am I in the right ballpark?

So Mark, it's Robin. I'll answer the first part of your question around...

Okay. Sorry if I was confusing.

No, no problem...

I can't do math.

No, no, I understand your point. You're right. What Kevin talked about is the range change relative to the IMA agreement. But if you recall, today and last quarter, he talked about Q4 inventory being at the higher end. So when you think about the inventory change he mentioned today about -- using about $10 million as an average of a day, you're going from the high end to the low end. So the real change on a sequential basis is about 4 days.

I see, so 4 days. I see. Okay. At $10 million a day. Okay. Got it.

Okay.

Yes, and Mark, just let me add something. Nothing has changed with our IMAs. Typical IMA agreements for the industry are a range of 5 to 7 days. Whilst I won't share with you the specifics for Gilead, I can certainly tell you that our ranges are lower than 5 to 7 days. So I believe that we have in place some industry-leading IMA agreements. They don't include any provision for buy-in, so these organizations cannot buy-in. So nothing has changed. They haven't gone outside their bandings. They haven't lowered their total inventory. So nothing has changed since we introduced some new IMAs about 12 months ago, and they're going to run through until 2012. In terms again of the ADAPs, it's very difficult to actually quantify that because of their kind of inventory if they're a central purchasing. We never quite know about it. We don't have any type of IMA equivalent with them. They are state entities. We never know quite what their inventory holdings are. Suffice it to say, clearly, Florida is #3 and Texas is #4, are pretty big entities.

But thinking about ADAP as a $40-ish million impact in the quarter doesn't seem crazy.

I think you're in the right ballpark.

Okay. I really appreciate the color, guys. Thank you very much.

And your next question comes from the line Geoff Porges with Sanford Bernstein Geoffrey Porges - Sanford C. Bernstein & Co., Inc.: Thanks a lot for taking the question. Just tackling some of these issues slightly different way. Kevin, could you talk, first of all, about Europe, the patient trend and the pricing trend in Europe across your HIV portfolio? And then could you give us a comment about what your realized pricing trend was in the U.S. for the HIV products too?

Yes, I'll take the first part of it, Geoff. It was a very steady quarter for Europe. And actually, whilst that doesn't sound great, actually, I think that was good because you know very well about all of the heavy waves that everybody has faced in Europe. In terms of actual pure kind of dollar to dollar, it looked fairly flat. Actually, underlying demand growth was just a little bit better than that, and that's because we had a strong fourth quarter for 2010. That's very typical of Europe. They tend to buy-in at the end of the year to see them through the Christmas and New Year periods. So there was a little uptake -- uptick -- in the fourth quarter as is the standard for the pharmaceutical industry. There was also an additional buy-in in the U.K. where you might know that the U.K. increased their sales tax, so called VAT, value-added tax, and that applied to pharmaceuticals. So some of their hospitals that had budgets in fourth quarter did buy ahead of Q1. So it was a positive quarter for us in terms of underlying demand, and I think really quite nice. In terms of pricing, there were no flash dramatic headlines in terms of government interventions. Of course, behind that, we still have some day-to-day pricing trends where countries reference and countries negotiate with us. But what we said in terms of the austerity type of reductions are in the range of 2% to 3% for 2011, still at this point in time, looks to have held well. In terms of the U.S., obviously, we have locked our prices around ADAP. I think in terms of prices across-the-board, it depends on your splits. We've included those splits in our slides. You'll see just a small change of ADAP going from 22% to 23%, so that's a small change. But we just have to watch and wait to see if there are any kind of future mix changes. And the other part of this is that we did take the 7.9% increase on April 1 for Truvada, which runs through to Atripla. So the comment from John around that guidance is that we believe we've made the right provisions within our guidance on our mix, but it's something that we continue to watch carefully. Geoffrey Porges - Sanford C. Bernstein & Co., Inc.: Thanks very much.

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

Thanks for taking my question as well, and thanks for all the clarity. This is really, really useful. It's a question for both Kevin and Robin, just so we understand a little bit kind of from your vantage point, do you feel that you have a good sense of where pricing is going in Europe this year? And what other new price increases are expected this year, so we can just -- so we can model or put those in our model correctly?

Well, I'll jump in, and Robin can add to it, Yaron. You said new price increases...

I'm sorry. The price decreases in Europe.

Okay. All right...

If you can take the price increases, go for it.

That's probably a better frame. Well, actually, on that point in a serious way, of course, there is going to be an event later this year in the U.S., of course, which will be the launch of, we hope, Truvada 278. We won't control the pricing of TMC278, but of course, that's a new price for us with a new product. That will apply in Europe probably just at the back end of the year with Germany, we think, and the U.K. Coming back to primarily Atripla and Truvada in Europe, we haven't seen any other kind of seismic type of interventions. We've got the full year effect of Spain from June and Germany from August. The one that we do continue to watch is Portugal. You see that in the economic headlines, and they have their own budget issues. And that's the one that we continue to watch very carefully. I must say that our value story around Atripla, being significantly cheaper than particularly the protease inhibitors, continues to resonate. So I think we've got to face up to some of the pressures that the whole industry is seeing. But when you look at our single-tablet regimen, actually, that's a very good argument for us. So there are some positives there.

So should we not expect new price decreases then in Spain and Germany in June and August? Isn't that an annual price decrease?

No. Of course, any country, Yaron, can jump in at any point as a public payer. But our expectation was that, that was essentially a one-off. It might -- it could happen in any country in the future. But the way it was set up and the way it was agreed with the industry that, that was not to become an annual decrease. It was basically an intervention that took place in the middle of last year. Another example of that, another sort of parallel is the U.K. where they have something called PPRS. It's a negotiation with the industry. Now that is an agreement that typically runs for anywhere between 3 and 5 years. So a government comes in, they are looking for some form of change, it's negotiated and typically, it stays in place for a number of years.

Okay. Great. Thanks so much, Kevin.

Your next question comes from the line of Michael Yee with RBC Capital Markets.

Great. Thanks. Just to be clear going through in the inventory and ADAP issue. Just to be clear, can you reiterate what you said about as the new funds were released, Florida and Texas, how have they resumed? And I assume that they will resume normal purchasing as the funds get released. And then with that, would you expect that the inventory levels would then resume back and reverse and so you get some buy up back in Q2? Thanks.

Yes, thank you, Michael. It's difficult to know exactly how the wholesalers are going to react in terms of what amount of product that they will kind of replace within their operating band. Again, we have IMAs in place, contractual IMAs with the big 3 wholesalers. That's about 90% of our antiviral business, but we don't have IMAs in place with the smaller wholesalers. And so they can change their inventory levels according to their particular operating as well as financial requirements. It's also important to say that one of the Florida go through one of the majors, one of Florida-Texas go through one of the small wholesalers. So if they're seeing smaller -- if the wholesalers are seeing lower uptake, then I think it does, obviously, alter their perspectives on their holding inventories. Strictly when it comes to Florida and Texas, obviously, we get a little bit of a delayed news on the purchasing because this is all based on charge-backs through the wholesalers. It's all done through those financial checks and balances. We do know for sure that Florida have placed an order. We haven't heard that that's the case yet with Texas. I do think this is not going to be a complete bolus overnight ordering by these central purchase states. I think it's going to take a little while. And whilst they are feeling a lot better about the federal funds from a totality point of view, they obviously want to know what their allocation is. And then they do their numbers on the federal allocation together with their expectation of state allocation, because it's always a mix. So I think we'll start to see their confidence come back as we move through the quarter.

Well, my follow-up then is on the IMAs. Why have the bands? What happens when you fall through it? What is the recourse?

There are penalties, which I can't disclose. But there are penalties for falling below or going outside the banding.

Okay. Thanks.

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

Thanks. I wanted to switch gears a little bit, just hepatitis C. John, you mentioned that you're going to be starting this new Quad study. And I guess my question is that I had heard from other companies that the FDA wants to see a reasonable amount of safety data from one of the experimental -- or the lead experimental compounds before starting combination. So I guess how much confidence do you have in 9451 safety? Can you go into a little bit more detail there? And I guess what kind of margin did it have over 9256 in case that one does run into problems with longer term dosing? Thanks.

Rachel, it's Norbert. I would like to first thank you for the question, and thanks for giving Kevin a break. I'd also like to mention, John Martin had to leave earlier. He had a flight scheduled that he had to catch. So he left about 5 minutes ago. So I'll take your question. So Rachel, we are very encouraged by our own portfolio what we have, and I was also even more encouraged when I saw some of the presentation at EASL. I'm sure you have seen them, particular the one on BMS where they took PI and then NS5A and treated null responders. And they saw 4 out of 11 SVRs. So we are doing a similar experiment, with the exception we're not only adding NS5A and PI but 2 other drugs like ribavirin and GS 9190, and both of those we know add something to the antiviral activity. So now the question that you asked about 9451, our protease inhibitor, as you might know, it has gone into a larger 150-patient Phase II study end of last year. And we are now at a point where we are looking in a real-time and safety data particularly laboratory, and we feel very comfortable that this is the right compound to take forward and we have enough patient experience now that we can make that judgment. With regards to FDA, we haven't had any signs that they would have a problem with that. I'm sure they -- I'm convinced they don't, and we can initiate this study in a few months. And we're -- as I said, I'm hopeful that we will see some very significant SVR rates. Did I answer all of your questions?

Yes, yes. And just as a quick follow-up to your nucleoside, when will we get some hint of how active the compound is?

The nucleoside is, right now, going through dose escalation and at this point, I do not have any information on either efficacy or exposure. Those will come in a few months, at least, internally.

Great. Thanks so much.

Your next question comes from the line of Sapna Srivastava with Goldman Sachs.

Thanks for taking my questions. Most of them had been asked, so just a quick clarification. You mentioned that your guidance was contingent on 2 factors, ADAP funding and modest change in payer mix. Could you elaborate a little bit on the second point? [Technical Difficulty] Just when you spoke about maintaining your guidance, you spoke about 2 factors: ADAP funding -- depending on ADAP funding if it resumes; and secondly, modest change in the payer mix. And I just wanted to get a little bit more clarification on the second factor that you mentioned, what kind of changes in the payer mix?

Sapna, it's Kevin here. It's just a matter of seeing how these things play out. I hope you've seen that we've updated you in our slide for fourth quarter on the splits of the various parts of our public and our private. There was not a lot of change Q4 over Q3. That was just a 1% increase in ADAP. That actually came out of the Medicaid section. There wasn't a change in the private plus the Medicare Part D portion. So there wasn't a lot of variability, but where you have changes in state economies, we just want to watch this from the point of view of these splits going forward. So I think it's prudent for us to point out that whilst we try to forecast these things and place these into our guidance, it's something that is always somewhat of a -- has some movement.

And Sapna, this is Robin. I think the other component that I'll mention is if you recall, when we talked about healthcare, we talked about that new component that Kevin was alluding to around Managed Medicaid. And because it's based on charge-backs and things that happen in arrears, we saw in Q1 and we'll still continue to see through probably the next 2 quarters charge-backs and rebates associated with that. We had talked about it being in the range of 2% to 4%, which is included in our guidance and as part of the overall 5% to 6% of healthcare reform impact in 2011. But I think what Kevin was alluding to is that -- to Kevin's point, we can't predict. We've made some assumptions around it. But if conditions worsen significantly or if something changes, it may be greater than we've projected.

Thank you. That's helpful.

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

Thanks. My questions have been answered.

Your next question comes from the line of Thomas Wei with Jefferies & Company. Thomas Wei - Jefferies & Company, Inc.: Thanks. I just wanted to ask about the state allocation to ADAP funding. Is it -- am I thinking about this correctly that the states pitch in about 1/3 of the overall funding for ADAP? And can you just remind us, have those budget decisions at the state level already been determined, in particular in Florida and Texas?

Thomas, it's Kevin. Thanks for the question. Honestly, Thomas, it's a real smorgasbord of different contributions across the states. Interestingly, some like Florida has a relatively small state contribution when you look at something like New York, and they're kind of, we believe, about 50-50. So it does -- there's quite a spread of contributions from federal and contributions from state. The other aspect of this is some of the states have different financial years. So the timings of which they get to know their own state numbers, again, varies from state-to-state. So for them to actually predict when ultimately they get that kind of total-total, it's quite difficult for them. And I think that's actually a good backdrop to what happened in Texas. Our understanding in Texas is that they have got states dollars remaining. They held back on their purchase and done some inventory in the first quarter because they just wanted to see what the federal was going to play out like. And I guess once they get their federal, they'll be looking to see ultimately what will be coming in the next financial year for the state. So there's always a yin-yang here and all of these timings, I think, are unique to each state.

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

Thanks. I have a question about the Calistoga acquisition. The general question that, first of all, with regard to -- what's the rationale for diversifying into cancer after you exited the business a number of years back? And then specifically, are you concerned or you can -- can you discuss at all the liver enzyme elevation issue with CAL-101 that we've seen?

Joel, so what's the rationale for diversifying into cancer. We made the CGI acquisition, afterwards the Arresto acquisition and now with Calistoga. We have a really nice portfolio of agents and research that is applicable both in cancer and inflammation. And what the rationale was, Joel, we felt that now is the time where cancer chemotherapy and how we think about cancer is completely going to change. As you know, it went from cytotoxics in the '70s and '80s to more targeted therapies like antibodies, anti-EGFR antibodies, to really very much targeted therapies that had to do with cancer genomics like the Plexxikon, the BRAF mutation and V600E that makes melanoma so virulent. And so that's the reason why we think now, with this new collaboration, we have all the ingredients in place to be a major player in oncology and inflammation in the future. With regards to Calistoga, yes, we absolutely very much looked into these LFT elevations. We talked to both liver toxicity experts, we talked to oncologists. And the overwhelming response that we got was that these liver elevations, given the benefit that the compound has in terms of progression-free survival, that the benefits largely outweigh the risks. And that's why we're comfortable with moving ahead. Also, needless to say, we are looking both into potential predictors for liver toxicity. If you could identify the patient that actually get it up front, we're looking at genomics in that respect. And we're also looking at potential clinical management of liver toxicity as well.

Thanks.

And our final question comes from the line of Ian Somaiya with Piper Jaffray.

Thanks for squeezing me in there. Just a question for you, Norbert. I was curious about the Quad study and just this -- just specifically related to the potential dropout that you might be seeing in the trials. If you could just remind us what the trial is designed to sort of take on and what was expected on the control, and what's expected in the treatment arm and how the trial is tracking and how that might implicate the eventual outcome?

Ian, are you talking about the Quad study?

I am.

[indiscernible] Quad. Yes, so Ian, just to back up. You may be referring to we -- and I in the past have said that we had concerns about the elvitegravir versus raltegravir non-inferiority study, because we saw larger drop numbers or dropouts than we anticipated. But needless to say, nevertheless, we've got a very tight confidence interval with a 6% margin, which I think is just absolutely wonderful. Now with regards to Atripla Quad, we are seeing very few discontinuations, and that study was completely inline with what we have seen in other Phase III studies. So I have no concerns about that.

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

Great, Stacy. Thank you very much, and thank you, all, for joining us today. We appreciate your continued support and interest in Gilead. We look forward to providing you with updates on our future progress. We'll be available back in our offices to take your follow-up calls. And again, thanks for your time.

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