Gilead Sciences, Inc. (GILD) Q3 2011 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to Gilead Sciences Third Quarter 2011 Earnings Conference Call. My name is Veronica, and I will be your conference operator today. [Operator Instructions] As a reminder, this conference call is being recorded today, October 27, 2011. I would now like to turn the call over to Susan Hubbard, Vice President of Investor Relations. Please go ahead.

Thank you, Veronica. Good afternoon, everyone and welcome to Gilead's Third 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 covered on today's call. Your speakers for today will be John Martin, Chairman and Chief Executive Officer; Robin Washington, Senior Vice President and Chief Financial Officer; and Norbert Bischofberger, Executive Vice President of R&D and Chief Scientific Officer. John Martin will review the third quarter milestones, Robin will discuss our financial results and commercial performance and then Norbert will provide an update on our research and development progress and discuss our future outlook and opportunities. John Milligan, President and Chief Operating Officer, Kevin Young, Executive Vice President of Commercial operations; and Andrew Cheng, Senior Vice President of HIV therapeutics and development operations are here as well, to answer your questions later in the call. I would also like to note that we just issued a press release announcing today's completion of the U.S. NDA filing for our Quad drug. Norbert will discuss this significant milestone in further detail later in the call. 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 Litigation Reform Act of 1995. These statements are based on certain assumptions and are subject to a number of risks and uncertainties that could cause our actual results to differ materially from those expressed in any forward-looking statements. I refer you to our latest SEC disclosure documents and recent press releases for a detailed description of risk factors and other matters related to our business. In addition, please note that we undertake no obligation to update or revise these forward-looking statements. We will be making certain references to financial measures that are on a non-GAAP basis. We reconcile GAAP and non-GAAP numbers in the press release we just issued as well as on our corporate website. I will now turn the call over to John Martin to provide the highlights on the quarter.

Thank you, Susan. I'm very pleased with our progress during the third quarter. First in August, U.S. FDA approved Complera, the second single tablet regimen for the treatment of HIV, combining Truvada with Tibotec's Rilpivirine. Product was shipped to wholesalers and pharmacies within 24 hours of approval. In Europe, this product is called Eviplera, and has received a positive opinion from the CHMP. Before the end of the year, the European Commission is expected to give final approval and launches of Eviplera in various European countries will follow in 2012. At the September ICAAC conference in Chicago, Complera was the focus of a late-breaker poster, which featured results from study 111, a study designed to assess whether patients can safely switch from Atripla to Complera. The data demonstrated that all 49 patients in the study maintained biologic suppression, 12 weeks after the switch to Complera. To further define the profile for Complera, we have 2 Phase IIIb studies underway. The first is an open label comparison of Atripla to Complera, to assess the benefits of single tablet regimens, which because of ease, simplicity and convenience, may lead to higher compliance of better biologic outcomes. This 48-week study, is fully enrolled with 799 patients. The second study is designed to support switching from a protease inhibitor containing regimen to the single tablet regimen of Complera. In this study, 482 patients, fully suppressed on a protease inhibitor regimen were randomized to either continue on their existing regimen or switch to Complera. Also during the quarter, we completed the purchase of the biologics manufacturing facility of certain process development assets, located in Oceanside, California. This facility is currently designed and equipped to produce biologics for toxilogical Phase I and Phase II clinical studies. We retained many of the site's biologics manufacturing specialists and process development scientists, and will use the facility for the process development and manufacture of GS 6624 and other antibodies currently in preclinical development. This acquisition provides us with the resources and expertise to accelerate internal biologics research and development programs, and to take advantage of external opportunities in the future. I would like to highlight 2 recent announcements that are examples of our commitment to bring the best fixed dose combinations and single tablet regimens to HIV-infected patients. The first was an announcement earlier this month of a license of Boehringer Ingelheim's portfolio of non-catalytic site integrase inhibitors for HIV. This includes the lead compound BI 436, that has been evaluated in a Phase Ia dose escalation study in healthy volunteers, supporting once daily dosing. This class of non-catalytic site integrase inhibitors target HIV integrase, that bind to a novel site, distinct from the binding side of the curve class of integrase inhibitors like elvitegravir and raltegravir. Consequently, these novel agents could have activity against viruses that are resistant to the current class of integrase inhibitors. The second is a collaboration we announced yesterday with Bristol-Myers Squibb to develop a co-formulation of atazanavir with cobicistat, our boosting agent. This collaboration follows the previously announced agreement with Tibotec to co-formulate cobicistat with darunavir, and further validates the importance of cobicistat as a potential novel boosting agent. And finally, I'd like to note that this week marks the 10th anniversary of the approval of Viread. Now, Viread contain products including Truvada, Atripla and Complera, are utilized by nearly 80% of HIV-infected patients in the United States. Viread is also the most widely used treatment for hepatitis B infection in the U.S. and Europe. Every day, Viread and 1 or more of its forms, provides benefits to 2.7 million people around the world with 1.8 million patients receiving access in the developing world. I would like to acknowledge the hard and innovative work of the research scientists, both internal and external, and our clinical access and commercial teams, for their role in advancing the treatment of patients living with HIV and chronic hepatitis B. I would now like to turn the call over to Robin to cover the financials.

Thanks, John. In the third quarter, we delivered solid financial performance and continued to execute on our vision to return value to our shareholders. Product revenues were $2.1 billion, up 11% over the same quarter in 2010. Non-GAAP EPS was $1.02 per share, which represents 14% growth compared to the same quarter of 2010. Our third quarter product revenue growth was driven by the solid performance of our antiviral franchise, which in the U.S., grew 7% year-over-year and 4% sequentially, delivering revenues of $985 million. As John mentioned, in August, we launched Complera, our second complete single tablet regimen for the treatment of HIV. Complera contributed $19 million to our total U.S. antiviral product sales during the quarter. We continue to see good underlying patient demand for our antiviral products. According to Wolters Kluwer Health, our total U.S. NRTI prescription share exceeded 70% at the end of the quarter. Third quarter year-over-year U.S. prescription growth for Atripla and Truvada were 12% and 14%, respectively. Sequentially, prescription growth was 2% for both Atripla and Truvada. Third quarter non-retail purchasing was lighter than experienced in the same quarter of prior years. As we discussed on our earnings call last quarter, HRSA, an administrative arm of the Department of Health and Human Services, announced an $885 million federal fiscal year budget for the AIDS Drug Assistance Program. After an initial distribution of just over $400 million in April, the remaining tranche, including the $50 million emergency funding, was distributed to the states at the very end of September. Due to this late release of funding, individual states were more conservative in their purchases throughout third quarter. While we cannot predict the purchase patterns of individual states, on the basis of a traditional federal use it or lose it policy, we believe that the second half of the ADAP fiscal year, which ends on March 31, 2012, will be stronger than the first half. The recent reduction in ADAP waitlist, is an encouraging lead indicator. Europe contributed $677 million to our antiviral product sales, an increase of 10% year-over-year, due to demand growth and a decrease of 3% sequentially, due to the impact of unfavorable foreign currency exchange, and the seasonality of product buy-ins in the prior quarter, in advance of the summer holidays. In the third quarter, our cardiovascular franchise continued to expand. Letairis demonstrated strong year-over-year revenue growth of 31%, and sequential revenue growth of 7%. Primarily, as a result of the FDA's removal of the black box warning of liver toxicity earlier this year. Ranexa grew 36% year-over-year in the third quarter, excluding the benefit of a onetime returns reserve adjustment of approximately $8 million in the second quarter, Ranexa grew 5% sequentially. Our strong operational results generated healthy cash flows of $897 million for the quarter. And a total of $2.7 billion year-to-date. This has enabled us to continue to execute on our vision to return value to our shareholders, by continuing to invest in our future through pipeline advancements, in license and acquisition opportunities, as well as aggressive share repurchases. During the quarter, we completed our $5 billion share repurchase program announced in May, 2010 and commenced our second $5 billion program announced in January, 2011. Since January, 2010, we have repurchased and retired 164.2 million common shares or 18% of our common stock outstanding. Lastly, I would like to update our full year 2011 guidance, which is detailed in Slide 34 in the earnings call deck, and is available on our corporate website. The non-GAAP product gross margin and operating expense guidance provided to you excludes the impact of acquisition-related restructuring and stock-based compensation-related expenses, where applicable. As we look forward to the fourth quarter, we are tightening our product sales guidance for the full year 2011, to $8 billion to $8.1 billion, which is the upper end of our previous guidance range, and represents an 8% to 10% increase over our 2010 product sales. We are also tightening our non-GAAP product gross margin guidance for the full year 2011 to 75% to 76%, which is also the upper end of our previous guidance range. We are increasing our non-GAAP R&D expense guidance for the full year 2011, by approximately 10% to a range of $1.05 billion to $1.1 billion, due entirely to key business development activities in 2011 that have augmented our pipeline effort. In addition to the updates and advancements on these activities provided by John and Norbert today, we have outlined all activities in 2011 today on Slide 35 in the earnings call deck. We are also increasing our non-GAAP SG&A expense guidance for the full year 2011, to a range of $1.05 billion to $1.1 billion. This increase in SG&A expense guidance, is driven by the following: additional bad debt expenses associated with slower collections in Southern Europe, increased legal fees associated with the Department of Justice investigation and ongoing patent events, acquisition-related integration expenses and ERP implementation cost. We now expect our effective tax rate for the full year 2011 to be in the range of 24% to 25%, which is lower than previously anticipated, due to the geographical mix of our revenues. And finally, we are reintegrating our full year 2011 diluted EPS impact of acquisition-related restructuring and stock-based compensation expenses, to be in the range of $0.25 to $0.28 per share. In summary, our third quarter results reflect solid financial performance, which is reflected in our strong results of operations and our healthy operating cash flow. I'll now turn the call over to Norbert, who will take you through our upcoming pipeline milestones and advancements.

Thank you, Robin. We made significant progress in advancing several important clinical programs across our therapeutic areas in the third quarter. In the press release this afternoon, we announced the U.S. NDA filing of the Quad. I'm very proud of our development teams, who were able to very rapidly, in a period of only 5.5 months, enroll a total of 1,400 patients in the 2 pivotal Phase III studies at 150 sites in North America, Europe, Australia, Mexico and Thailand. In addition, our team has accomplished submission of the NDA in record time, only 6 weeks after last patient last visit and 5 weeks after unblinding of the second Phase III study. This is very impressive, considering that the average industry timelines are 6 to 9 months. And I want to reiterate the industry timelines are 6 to 9 months, not weeks. We provided top line results in August and September from the 2 pivotal Phase III studies, comparing the Quad with 2 current standard of care regimens, Atripla in Study 102 and that is integrated ritonavir, with Truvada in study 103. In both cases, the Quad proved to be non-inferior to the standard of care regimen. In Study 102, 88% of patients on the Quad arm, achieved a viral load of less than 50 copies/mL compared to 84% in the Atripla arm. And in Study 103, 90% of the patients on the Quad arm compared to 87% in the atazanavir ritonavir plus Truvada arm, achieved viral load, less than 50 copies/mL at week 48. The 90% response rate on the Quad arm in Study 103, is to our knowledge, the highest response rate seen in any large-blinded, randomized study in HIV patients. With the data from Studies 102 and 103, we now have strong evidence, supporting the safety and efficacy of the Quad. In addition, the safety tolerability and anti-HIV activity of elvitegravir, one of the components of the Quad, is supported by Study 145. The results, of which were presented at the International AIDS Society Conference this past July. Study 145 compared elvitegravir to raltegravir, in treatment experienced HIV infected patients, and the results indicated that once daily elvitegravir, was non-inferior to twice-daily raltegravir. We will be requesting a priority review from FDA, that if granted, could allow for an FDA approval of the first integrated inhibitor containing single tablet regimen before midyear 2012. For cobicistat and elvitegravir, data from the final study comparing cobicistat to ritonavir, each in combination with atazanavir and Truvada will be available for the end of this year. The elvitegravir and cobicistat NDA filings will follow the Quad filing in the second quarter of 2012. From our earlier stage HIV pipeline, we have now completed the dose-ranging study of GS 7340, our novel prodrug of tenofovir, evaluating doses of 8, 25 and 40 milligrams and have selected a 25-milligram dose for Phase II, providing systemic tenofovir exposures, approximately 10 fold lower than those provided by Viread, with greater anti-viral activity. We're doing formulation works now to produce GS 7340 containing single tablet regimens, for evaluation in Phase II. This includes an integrate-based single tablet regimen of GS 7340 emtricitabine, cobicistat and elvitegravir and a protease inhibitor-based single tablet regimen of GS 7340 emtricitabine, cobicistat and Tibotec's darunavir. With this work well underway, we're now targeting to enroll patients in the first study in early 2012. As we have previously indicated with the data from several studies supporting the use of Truvada as pre-exposure prophylaxis for HIV transmission, known as prep, we intend to file for inclusion of the prevention data in our U.S. Truvada label. We're in ongoing discussions with the FDA and could be in a position to file the NDA before the end of this year. Review of the submission could include an FDA advisory committee meeting, in the first half of next year. As you may know, in July of this year, we filed an MDA for the pediatric formulations. Both in oral powder and reduced strength tablets of Viread, for the treatment of HIV in children ages 2 to 12. We were notified by FDA in September that they granted Viread pediatric exclusivity, extending its patent protection by 6 months to January 2018. We expect action on our filing by early next year, and will be prepared to make the drug available in the U.S. shortly after registration. Turning to our efforts in liver disease. On November 4, the American Association for the Study of Liver Diseases conference, kicks off here in San Francisco. We will present important 5-year data from our pivotal studies of Viread in hepatitis B. In those studies, Viread treatment, not only prevented progression of liver fibrosis, but actually, reversed cirrhosis in a high percentage of patients. In addition, no patient developed resistance to Viread after 5 years of treatment. As we have previously discussed, 2011 has been a very busy year on the hepatitis C front as well. To date, we have enrolled more than 1,600 patients, across 8 Phase II clinical studies, 3 of which, evaluate all oral interferon 3 regimens and 5 evaluate interferon's daily regimens. We look forward to sharing some of these results with you next year. In our growing oncology effort, GS 1101, the lead compound from our Calistoga acquisition, will be entering Phase III studies in patients with chronic lymphocytic leukemia, early next year. A Phase II, single-arm study is currently ongoing, evaluating the efficacy of GS 1101 in patients with indolent non-Hodgkin's lymphoma, were refractory to rituximab and cytotoxics. We're also planning for Phase III studies in patients with iNHL, which would commence, which we would expect to commence in the first half of next year. In addition, we're making progress with the development of GS 6624, the monoclonal antibody added to our pipeline through the acquisition of Arresto. GS 6624 targets LOXL2, which is a crucial enzyme responsible for the establishing the maintenance of the pathological extracellular matrix in both in fibrotic diseases and solid tumors. We have initiated a Phase II study of 2 different doses of GS 6624 in myelofibrosis, and we will initiate 2 Phase II studies of GS 6624 in both pancreatic and colorectal cancer, before year end. The pancreatic and colorectal cancer studies are both double randomized, double-blind placebo-controlled studies, comparing 2 doses of GS 6624 versus the standard of care in second line metastatic disease. In our cardiovascular program, we see significant opportunities to expand the utility of Ranexa. Ranexa appears unique among anti angina agents, and that it reduces ischema and angina. And in addition, there's evidence that it also lowers Hb1c, the biomarker for type 2 diabetes. There's significant overlap between coronary artery disease and type 2 diabetes. About 30% to 40% of coronary artery disease patients also have type 2 diabetes. Hence, these patients could potentially derive a dual benefit from Ranexa. In order to further define this potential benefit, we're planning to initiate 3 Phase III studies, enrolling approximately 400 patients each to determine the effect of Ranexa alone, or in combination with other anti-diabetic therapies, in lowering Hb1c and plasma glucose after 24 weeks of treatment. Another opportunity for Ranexa is its use in conjunction with percutaneous coronary intervention or PCI, to prevent subsequent major adverse outcomes. A sub group analysis of MERLIN, in a 7,000 patient study of Ranexa in acute coronary syndrome, indicated reduction in major adverse cardiovascular events in patients with a history of angina undergoing PCI. We will be initiating a Phase III study, further defining this potential benefit. In this study, 2,600 patients with a history of angina undergoing PCI with incomplete revascularization, will be randomized to Ranexa or placebo, with the end point of major adverse cardiovascular events. In closing, the investments we're making today, both in our internal R&D efforts and through selected business development opportunities, will drive the success of our business in the future. And we look to closing out this year, we will have approximately 60 Phase II and III studies underway, an all-time high for Gilead and the result of a commitment and productivity of the talented employees across our organization. We're confident in our ability to deliver innovative products to the patients we serve. We will now open the call to your questions. Operator?

[Operator Instructions] Your first question comes from the line of Mark Schoenebaum from ISI Group.

This is Wes here sitting in for Mark. I actually have a question about health care reform. There has been some talk about the super committee not being able to get to this minimum amount of savings. And as a result, sequestration occurring. So if there is sequestration and across-the-board reduction in budgets, will this impact Ryan White funding. And as a result, eat up revenues for Gilead?

It's a good question. Our understanding is Ryan White for 2012 -- I'm sorry for the 2011 and into the first part of 2012 has already been distributed. So could the impact go beyond that, I don't really know the impact beyond that. But from funds that are out for what will be the Q4 of this year and Q1 of next year and our fiscal year have already been distributed. So certainly, it wouldn't have a short-term impact.

And just to add to that, basically, the Ryan White reauthorization was done a year ago. And it's a 3-year term, so that takes us through to 2013. And at that point, there is the potential transition to Medicaid, within the healthcare act as it was written. So that would be our expectation. I think what happens in the super committee, is complete lockdown right now, and remains to be seen. But as John said, certainly for 2011 and we'd also expect for 2012, that the Ryan White treatment act would be fully funding the ADAP programs.

Your next question comes from the line of Geoff Meacham from JPMorgan. Geoffrey C Meacham - JP Morgan Chase & Co, Research Division: A couple one on Complera versus Atripla. So for Complera, how much of the quarter would you say is stocking versus demand? And then for Atripla, does the sequential trends say anything about the promotion of Complera over Atripla or is that also sort of demand fluctuation?

Geoff, it's Kevin. I had a funny feeling in my bones, you're going to ask me these questions. So let me take the Atripla first, because I mean I think it runs into Complera. So as you see, Atripla was down by 2% quarter-over-quarter. Truvada had a nice quarter plus 7%, but Atripla was down by 2%. First thing to say is, that underlying prescription growth quarter-over-quarter was 2%, as Robin said for both products. And that 2% was pretty solid when it comes to it, that we have very good quarterly growth in prescriptions for Q1 and Q2. So it's nothing to do with the growth in prescriptions, which is up, that's a direct measure of patient growth. Secondly, Atripla was not an inventory story. Inventories remained at the bottom of the ranges, so after that pull-down in Q1 of this year, as we predicted, the major wholesalers are operating as low as they can according to their contracts. So Atripla comes back to the non-retail area that we've often talked about before. The ADAP budgets in their entirety went out extremely late in the quarter, in fact, in the very last week. So what we did see during the quarter was, I think what you'd best defined as very prudent purchasing by the direct purchase states. It does seem Geoff as though they're kind of improving their inventory management. It does seem that they're wanting to be cautious, so they don't run out. And really, avoid a Florida-like situation. But the early pull down in the waitlist is encouraging. It's important to say that since that peak at the beginning of September, the waitlist sort of come down 27%. So I think that's a good early sign. So really, the Atripla was mostly about non-retail ordering. Transitioning to Complera, the 19 million that we sold in Q3 was, mostly pipeline sales. From what we can ascertain, it wasn't really at the cost of Atripla. Of course, the sales represents are now detailing Complera as number one product, Atripla is number 2. But from what we could make out and the data is very early, this was not based on some major switch off of Complera. The launch is going as we planned from what we can see around the prescriptions. It just seems to be tracking the equivalent of a Prezista-like uptake. And that's not unsurprising to us, when we think about our label and we think about the profile. In terms of the patients, Complera seems to be going down the lines, anecdotally, anyway, of the patients that we are profiling, which is the women of childbearing potential, and individuals that could have high susceptibility to CNS R&D want to avoid CNS side effects. So that's really the story on Complera. And I would characterize it as so far so good. Geoffrey C Meacham - JP Morgan Chase & Co, Research Division: Just as a follow-up, I mean so if you didn't see a lot of switching, when you switched gears to the Quad, and knowing the profile of the Quad like you guys do and the tolerability issues with proteases, what would be your market expectation for switching to the Quad, looking to say second half of next year?

I think Geoff, it really depends on the label you get. Please don't forget that we don't have switching directly in our label for Complera. And we probably won't get that either for Quad. And that's why we do the follow-on phase in our Phase IV studies. And I think a big advantage that we have for Quad, is that very strong positioning in first line. Because the 2 studies will give us the opportunity to talk about both the NNRTI patients, as well as the protease patients, being applicable as first-line therapy to Quad. So first and foremost, I think that would be our positioning for the product.

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

This is actually Andrew phoning for Matt. I've had a question on treatment guidelines, and how you guys are positioning both Complera, and eventually, the Quad. Given that you're no longer detailing the Atripla, is it your goal to get Complera on kind of equal waiting in treatment guidelines to Atripla?

Andrew, it's Kevin. Good question. So we still do talk about Atripla. It's the second detail after Complera for our U.S. sales team, and we'll do the same as we roll out the countries in Europe. As you probably saw recently, because the DHHS guidelines did come out just over a week ago, Complera was not put into a preferred therapy. And quite frankly, we didn't expect it to be. It wasn't one of our expectations and we certainly didn't include it in our internal forecasts for Complera. We didn't think that the ECHO and THRIVE studies would get to that finish line in a quick fashion. And that's exactly why we set up to do the head to head with Atripla using single tablet versus single tablet. We do feel at this stage, that with the 102 and 103 studies, and particularly, the response rates that we've got, that 90% -- I'm sorry 88% and 84%, we're in a very strong position, likely stronger to ascertain a preferred position in a quicker time period after the introduction of the quad. So we think Quads can get into that position fairly quickly.

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

Just a little bit more granularity maybe on the ADAP purchasing trends. You mentioned purchasing and waitlist are down. But has pricing stabilized at the side of ADAP, and particularly, Florida? And then, maybe you can give us some color on, what have you learned this year about ADAP transparency? And do you think you'll be able to better guide The Street next year?

Robyn, it's Kevin. In terms of pricing, we've made no changes to our pricing to ADAP. As you know, Robyn, we've had our prices basically locked. We haven't put any price increases into ADAP. So those prices have been fixed for some time now. So we made that commitment, we have a very good relationship with the ADAP programs. And any of the price increases that we've taken this year on Truvada and thus, Atripla, have not been passed on to ADAP. In terms of transparency, we obviously respect the management of the direct purchase ADAP states. We have very healthy conversations with them, but their management -- their stock levels of course, is their own private business. We do get the sense that they're just being careful. They did want to wait until they got their own allocation, the total dollars were known, but none of the states who knew exactly what they were getting, until that final week of the quarter. And I think they've got used to running at a lower level of inventory. They just want to manage tighter. The $50 million that they were given as part of the emergency, was linked to expectations have taken down the waitlists. And that's what they started to do. We don't think at Gilead, that those waitlist will go to 0. We think that they will come down nicely, but we don't think they will go to 0. Because in some ways, having a waitlist is a form of management for the ADAP. And indeed, it helps them with their arguments, come the next ADAP year in appealing for their budgets. So relationships are very good. I just think they're being just a little bit more cautious than they have been in previous years. And I think they'll probably remain cautious until they get into Q1, and it's coming towards the end of their financial year. And on a use it or lose it basis, they know they will have to spend once they've carefully managed their year.

That's very helpful. On pricing, I was just really asking about the concession. California's been very vocal about you guys making concessions on Atripla. So I was really just asking more about additional concessions, and whether you think that's stabilized or there will be more pressure next year?

Well, again I think we've always done the right thing to do. We have given and do give a supplementary discount to ADAPs. We made changes to our Patient Assistance Program. We have very good entry criteria for federal poverty level, often better than the states themselves for our PAP. So as a package, I think we've been very constructive and been professional, and worked extremely well with the ADAP. So we were the first company to step forward with the price freeze that we put in place over a year ago, and we've always tried to be a leader for ADAP. So I think they've appreciated that.

[Operator Instructions]

Your next question comes from the line of Ian Somaiya from Piper Jaffray.

Just a quick one on gross margins. If you could just help us understand what's driving the improvement in gross margins, and what impact, I guess, greater Complera and Quad contribution will have in the future.

Ian, it's Robin. I mean overall, it's product mix, relative to where we're selling some of the products, primarily Access Program versus our commercial program, that's a slight improvement. Overall, Complera still is very small to date, but ultimately, given the fact that we will get a component of the Rilpivirine component of the sale, we'd expect gross margins to over time improve as more and more of that product becomes part of our net product revenue.

There is a second part of the question.

Sorry, Ian. What was the second part of the question?

Just as we have Complera, be a larger portion of the revenue mix. And similarly, with Quad, how should we think about gross margins in the future? And are we looking at a time point, where we can go to pre-Atripla days or approach, pre-Atripla days?

Well, I mean, I think again, as I said, and we'd expect to see some improvement as we get our component of it, will it be pre-Atripla, no. As we bring more on the Quad on longer time, we'd expect margin expansion, and that would be all Gilead product.

Your next question comes from the line of Brian Abrahams from Wells Fargo Securities.

I was wondering if you could talk -- another question on the Quad switching. If you could talk a little bit about the timelines for the switching studies in terms of how quickly into the launch of Quad do you think you'll have meaningful data from these studies? Are there any metabolic issues with switching that need to be parsed out, similarly, to Atripla to Complera switching? And when might we see the data from the rollover component of studies 102 and 103? How important would that be to drive switching at the initial launch?

So Brian, so the rollover studies from 102 and 103, as you know, I want to remind you, those are both blinded studies out to week 96. And you could simply say add 48 weeks to when we released the last data, that's when internally, we'll have the data available and I would assume we'll submit it to an upcoming conference. So it would be sometime in the fall, mid-year to the fall of next year that we will have those data available. And the other question you had out there, any metabolic issues we're switching, the answer is no. As you may remember, there was a hypothetical issue with switching from -- to Complera from efavirenz because of the inductive effect of efavirenz. And I'm sorry, Brian. What was your first question?

Just wondering on the time frame, how quickly into the U.S. launch of Quad, you do think you'll be able to have some meaningful, or commercially meaningful data from these switching studies?

Brian, its Andrew. And so I think both of the switch studies from NNRTI, as well as PIs, are slated to initiate activities in Q4 of this year. So in terms of when we'll have data available, I think that's always dependent on enrollment timelines. So I think it's a little bit hard to predict accurately at this time.

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

First of all, congratulations on the court filing; and secondly, I just wanted to get some color on the expense trajectory. How should we think of R&D spend going forward? It clearly seems to picking up as a percentage of revenues, and I just wanted clarity as to how we should think about forward years?

Sapna, it's Robin. Well, we only give annual guidance, but I will say, as Norbert described, we have a very robust R&D pipeline. And given the M&A collaboration and activity that occurred this year, as we continue to ramp up and integrate those companies, we expect that trend to continue. Norbert mentioned over 60 Phase II and III trials that are ongoing. So that's an overall, all-time high for Gilead. So we definitely don't anticipate R&D expenses to decline at this point.

Your next question comes from the line of Geoff Porges from Bernstein.

Your next question comes from the line of Ravi Mehrotra from Crédit Suisse. Ravi Mehrotra - Crédit Suisse AG, Research Division: Probably a question for Kevin. And related to, again, Complera. I'm really looking for further levels of granularity to the answer you gave to Geoff's question. I appreciate it's really early days in the launch. But can you tell us ballpark, what percentage of patients are moving on to Complera are naive versus treatment experienced? And going forward, do you think you can use the 50 patient report of study to gain physician confidence? Or do you think the hurdle rate really will be unwound[ph], when we see the dates from those 2 larger studies next year?

Ravi, it is very early. Don't have a lot of sort of percentages between switch and new starts. We think it's a blend of those 2. We don't think the switch particularly came from Atripla, so you'd have to presume that, that therefore it came from, the PI regimens. From a medical information point of view, upon request, we're able to share the information on the 50 patients switched study. But we're not able to put that into mainline promotion. So really, we do need the single tablet versus single tablets. And of course, that should be submitted and incorporated into our label. But certainly, I think the opinion leaders would've got a great deal of confidence from reading the abstract that you're okay to switch virally suppressed patients from Atripla to Complera. Ravi Mehrotra - Crédit Suisse AG, Research Division: Okay fair enough, I do appreciate it is early. Perhaps, a quick cheeky second one. Of the 19 million, and you say it's mostly fill, again, can you give us any granularity, is that 95% or 50% of the 19?

It's not just normal for us Ravi to break those out. So I'll just leave it to the majority of this was pipeline fill.

The other thing -- this is Susan, and I might want to just add to what Kevin said, that is that we do get Synovate data but that Synovate data is on a quarter lag. So clearly, it's too soon for us to have patient data, other than what we hear from our reps and from the physicians, clearly, that we speak to. [Operator Instructions]

Your next question comes from the line of Tom Russo from Robert W. Baird. Thomas J. Russo - Robert W. Baird & Co. Incorporated, Research Division: I think my question's actually pretty easy, it has to do with the change in guidance for 2011. Robin, can you comment how much of the $100 million increase in R&D and $50 million in SG&A showed up in the third quarter? And also, what in the revenue mix geographically, is different than what's originally expected?

So relative to your first question, I think I probably look at it more second half overall, about 75% of the $100 million was driven by second half spending increases. I mean, even if you look on R&D just relative to the 2 announcement this week, BI and GlobeImmune, that will be a pretty significant increase to Q4, relative to the -- or a significant component of the guidance increase in Q4. On the SG&A side, about 70% of the some $50 million is related to the second half. Bad debt, there was a significant increase in bad debt that we did take in Q3. But given, some of the continued degradation that we see in DSOs, we could expect that to potentially happen in Q4 as well. And relative to the legal expenses, those are pretty evenly split, overall. And then your second question was product revenue, which was? Thomas J. Russo - Robert W. Baird & Co. Incorporated, Research Division: The geographic split.

Yes, I mean, I would think the one thing that Kevin talked a little bit is about the ADAP shortfall. So those were slightly less than what we expected, driven by the funding timing. So that's kind of the key driver. But overall, we feel good, relative to our overall higher end, upper end of our guidance.

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

Relative to GSK's franchise, and it looks like you might have lost a little bit of share in Europe, can you comment on share trends there and if that's accurate or not?

Josh, it's Kevin. Obviously, please bear in mind that things did change quarter-to-quarter. And we're only coming out to the summer months in Europe, which do tend to be a little bit quieter. The stronger months, stronger quarters are always typically Q2 and Q4 in Europe. You are correct in spotting that our naive share for Atripla did just come down slightly. We have got one contract issue within the U.K., where the contract was offered purely on price. And there has been a small amount of share taken in the naive patient setting, Atripla versus Kivexa. We believe this situation can be addressed and we are addressing it. So it's just one isolated situation.

Your next question comes from the line of Thomas Wei from Jefferies. Thomas Wei - Jefferies & Company, Inc., Research Division: I had a question actually, on business development strategy. So with the very notable exception of Calistoga, it seems as though what you've been doing is a lot of these, in-licensing deals or acquisitions, very early-stage assets, in virology and cancer. Is that kind of the direction that we should see for business development going forward? Or do you still have an appetite for a larger, maybe even later stage product in those areas?

Tom, this is John Milligan. I don't think you can take any sort of short-term trend like what we've been announcing in the last few days and extrapolate it. Because we look at a wide variety of different opportunities, both early-stage and late stage. And have been doing so for years. And we really did want to bolster some of the early parts of the HIV pipeline, especially, in conjunction with 7240. And certainly, the deals to expand the use of cobicistat and 7240, have been a great opportunity for us. So quite a bit of emphasis on that HIV portion of the pipeline over the last few months. But as you know, in this field, things change every quarter. So we'll always take a look across the spectrum, across our portfolio. And from that, we'll make determinations as to what to do.

Your next question comes from the line of Yaron Werber from Citi.

This is Gloria for Yaron. And we just wanted to ask a question, how are you going to position Quad versus Complera when the Quad does launch? And is there any type of support that you're obligated to have for Complera?

Yes, we have a contractual arrangement, which runs for several years with Tibotec. We can certainly, more than adequately service that when the Quad is introduced. So when the Quad is introduced, it will become our first line detail for our HIV team. And Complera will then move to number 2, and we will then drop the promotional of Atripla. We do think the Quad data are subject to approval and subject to a label, will give us every opportunity to very much go, after the full array of naïve patients. And therefore, naturally be what we believe to be a very strong first line therapy. So we put tremendous emphasis on the Quad. We believe this is the future of HIV, and we believe it's the best treatment going forward, after approval for HIV patients. But we will still have a Complera detail as part of that.

Your next question comes from the line of Rachel McMinn from BOA Merrill Lynch.

Two quick questions, and then, maybe just another one. On this Priority Review for Quad, if you can just give us a sense of your -- I guess your views there? When in 2012 might we see oral data from your HCV studies or all-oral HCV studies? And that I wanted to ask on just the different angle on switching for Quad? Whether you think the switch rates, relative to stavudine or Combivir to Viread, whether the switch rates from like any Atripla or other regimens, would be faster or slower for Quad and why?

Rachel, this is Susan. Again, that's 3 questions, I think we'll answer one and Andrew, why don't you answer.

Sure. Rachel, it's Andrew. So your question regards to prior reviews for the Quad. I think it's very clear that it would be the first single tablet regimen in integrase, and I think that's a very important distinction. As currently, the single tablet regimens are only the non-nucleoside class. I think that in itself, makes a very compelling case.

Rachel, just one other comment about the switching from the Quad. As Andrew before said, we won't have any, we haven't initiated any studies yet. We won't -- we don't expect to have that in the label when we get approval, and that will be sometime in 2013, before we can file that to the label update. And so I think it's too early to speculate on the pace of switching, and how it compares to D40 in the old days.

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

The Truvada numbers were really strong. And I think that you guys quoted them as up 7% sequentially as well. But yet scripts, were only up 2%. Did ADAP not have a negative effect there? Maybe you could help us connect the dots why that was strong and Atripla was a little bit lighter?

Michael there is ebbs and flows here. We kind of saw the reverse situation in Q2 where we have the strong Atripla up 10% in revenues and Truvada only up 4%. And yet, prescriptions were both about 4% increase. So I think these are the sort of ups and downs modulations, undulations that you get quarter-on-quarter, because of the element that we have with the non-retail purchase. Non-retail is largely ADAP, but we do have the CMOPs, the VA, DAD ordering, and we do have public clinics as well. So it's just the variability I think you get between the purchase elements of our revenues versus underlying prescriptions. I won't tell you that everything that we think about every time we forecast our HIV portfolio, we do it -- we always do it based on prescriptions.

Your next question comes from the line of Bret Holley from Oppenheimer. Bret Holley - Oppenheimer & Co. Inc., Research Division: I'm wondering about Atripla in the EU, and thoughts on how you might grow naive patients here relative to other alternative Truvada-containing regimens near term? Or were you just now really, I guess, starting to think forward to Complera and Quad in Europe?

Bret, it's Kevin. Very, very important distinction between where we are in the U.S. versus where we are in Europe, is that we actually don't have a label for first line. And that's very, very important. Our sales representatives in Europe do not promote Atripla in the naive setting, whereas that can be done here in the U.S. So inevitably, that's a drag on our performance, Europe versus the U.S. The other thing of course, is that we've got a mix of countries, some of which are very NNRTI-orientated, like the U.K. and Spain, and they're like the U.S. And markets like Italy and France, that are very strongly PI. And some of those have actually gone to the integrase like France. So there are those very distinct differences. We will have a staggered rollout of Complera in Europe. We won't get, for example, we won't get France and Italy until the second half of 2012. So inevitably there'll be a mix of some countries will have Atripla, still the first-line for a while, and then move to Complera. Markets like the U.K., France -- U.K., Germany, Austria, we hope at the end of this year or early next year, will have Complera as the first detail. And the good thing I should add about Complera is, it will have a first-line naive label.

Your next question comes from the line of Maged Shenouda from Stifel Nicolaus. Maged S. Shenouda - Stifel, Nicolaus & Co., Inc., Research Division: Given the worldwide austerity issues, what's your current thinking about the pricing of Atripla, with the eventual introduction of generic Sustiva, and how your Atripla margins could possibly change with that introduction?

It's Kevin. Just to give you an update, we didn't see any national haircuts in terms of prices in Q3. We continue to watch the situation in Europe very carefully. We've probably got more sensitivity around Turkey and Portugal for the remainder of the year. And I think if you ask anybody in the industry, that's probably where they think there may be some sort of price actions. We've been very successful with our single-tablet regimens in Europe. And if you take a proxy of where we are with generic 3TC, for example in Spain, whilst we have done some selective contracting and some selective price modulation on Atripla, the position and the strength of support to single tablet regimens, now supported by publications and the likes of Spain, do give us that premium pricing. So I don't think that we necessarily have to sort of tumble to Efavirenz pricing at such point that, that becomes available in the European countries.

Your final question comes from the line of Jim Birchenough from BMO Capital.

Just on the U.S. HIV market dynamics, when I look at patients on anti-retroviral treatment, it looks like it went down sequentially from the data reported in the second quarter, and it looks pretty flat in Europe. And so the question is, is this just inaccuracy inherently in the data in the U.S.? And does this really mean that you've really exhausted the early treatment initiative, and if not, what's going to really drive that to reaccelerate in terms of patients getting on anti-retroviral therapy?

Jim, it's Kevin. I'll take, just very quickly on Europe. Europe is still progressing in terms of anti-retroviral growth. I think austerity is a backdrop, but still, HIV is very much in the focus. And we're seeing legislation and we're seeing pronouncements coming out from governments, for example, the U.K. did one recently, saying that their level of care for HIV is inadequate, and they should be doing more work there. So I still think there is potential to continue screening and feeding patients into care and onto Gilead products. The main difference that you see in the U.S. numbers, is a change in the Synovate data base. They brought in a change in Q2, so please recognize that. We're able to send you information that backs up all of these number change. We've got retrospective numbers and you can get that from Patrick O’Brien. Basically, what they did is rather than do a bottom up extrapolation on total market size, they're now using CDC numbers. So basically, you'll see that patients in care, patients on anti-retrovirals, and then patients on Gilead products, dropped down by 6%. And that's purely a change that has been made by Synovate, it's the same for all companies that buy the information. It's just a standard change by this independent provider.

Operator, well, thank you, everybody, very much for joining us today. This is Susan, we appreciate your support and happy to take your follow-on questions after we conclude the call.