Analyst Conference Summary

conference date: October 27, 2011 @ 2:00 PM Pacific Time
for quarter ending: September 30, 2011 (third quarter, Q3)

Forward-looking statements

Overview: Slight sequential decrease, otherwise another good quarter with strong y/y EPS gain.

Basic data (GAAP) :

Revenues were $2.12 billion, down 1% sequentially from $2.14 billion, but up 9% from $1.94 billion in the year-earlier quarter.

Net income was $741.1 million, down 1% sequentially from $746.2 million, but up 5% from $704.9 million year-earlier.

Earnings per share (EPS) were $0.95, up 2% sequentially from $0.93 and up 14% from $0.83 year-earlier.

Guidance:

Updated. 2011 product sales $8.0 to $8.1 billion. Non-GAAP product gross margin 75% to 76%. Non-GAAP R&D expense increased to $1.05 to $1.1 billion. Non-GAAP SG&A expense also increased to $1.05 to $1.1 billion. Effective tax rate 24 to 25%. GAAP (vs. non-GAAP) diluted EPS impact of $0.25 to $0.28 for acquisitions, stock based compensation, etc.

Conference Highlights:

A New Drug Application (NDA) was just submitted to the FDA for the Quad HIV regimen. Complera for HIV was approved by the FDA in August and generated revenue in the quarter. It is the tenth anniversay of the approval of Viread, which is used (including in combination in Atripla, Truvada and Complera) by 80% of U.S. patients in treatment.

Non-GAAP numbers: EPS $1.02, up 14% y/y. Net income $795.2 million, up 5% from $759.7 million year-earlier.

Product sales of $2.07 billion were up 11% from $1.87 billion year-earlier. Antiviral product sales were $1.79 billion, up 9% y/y. Gilead's prescription share in the U.S. for HIV exceeded 70%. European antiviral revenues were $677 million.

Royalty, contract and other collaboration revenues were $55.8 million, down 23% from $72.1 million year-earlier, due to Tamiflu royalties of only $3.7 million, down from $34.5 million year-earlier.

Cash and securities balance $5.48 billion. Long-term liabilities $4.2 billion. Operating cash flow was $897 million. Completed the $5 billion, May 2010 share repurchase program in the quarter and commenced the January 2011 $5 billion allotment.

Gilead bought a biologics facility in Oceanside, California.

Several clinical programs advanced, with 60 Phase II or III clinical trials expected underway by the end of 2011. Quad for HIV data was good (highest response rate ever for a large, blinded trial) and NDA was submitted very quickly, about 6 weeks after data came in. FDA approval, if we get priority review, is possible by mid year 2012.

Truvada as a preventative data will be filed for inclusion on U.S. label, possibly before the end of 2011.

Viread for pediatric use for HIV was granted pediatric exclusivity in September, extending its patent protection by six months to January 2018.

This year over 1600 patients have been enrolled in eight Phase II studies for Hepatitis C. Data should begin to become available in 2012.

Cancer therapy pipeline will also be advanced in 2012.

Ranexa will have three new Phase III studies to extend its indications.

See also Gilead Pipeline.

Cost of goods sold was $532.0 million, leaving gross profit of $1.589 billion. Research and development expense was $290.1 million; selling, general and administrative expense was $295.9 million. Leaving $1.004 billion income from operations. Interest expense net $29.7 million. Income tax provision $237.5 million. Loss to noncontrolling interest $3.6 million.

Q&A:

Health care reform, budget restrictions on Ryan-White funds? We believe those funds for ADAP have already been distributed for the first half of 2012, and the reauthorization goes to 2013. We have no insight into what will happen in the budget supercommittee.

Complera demand vs. initial stocking? $19 million was mostly pipeline fill, and did not appear to be from switching from Atripla. Prescriptions are tracking up now for appropriate patient subpopulations. But it is not listed as a preferred therapy.

Atripla down 2% sequentially? Not prescription based, as those were up 2%. Atripla slide is from non-retail area due to lateness in ADAP fund releases in the quarter. But wait lists have come down since September. Pricing to ADAP has been fixed for some time. We do not think wait lists will go to zero.

What could Quad switching look like? It depends on the label, but switching is not explicit in labels.

Complera and Quad should help margins as all components are Gilead product.

There are no metabolic issues with switching from Atripla to Quad.

Guidance change, increased expenses? The increase is mainly in Q3 and Q4. We had some bad debt in Q3 and expect some in Q4 as well.

Share trends in Europe? Naive share for Atripla came down slightly in the quarter. We had one contract issue in the U.K., based exclusively on price.

Are you mainly looking at early stage therapy acquisiitons? You should not take what happened lately as a trend. We consider a broad range of options.

When Quad is introduced it will become the first line detail of our sales team, with Complera second detail and Atripla no longer being promoted. We believe Quad is the future of HIV treatment. But it is too early to speculate on the pace of switching.

Reminder that in Europe Atripla does not have a label for naive treatment, which is a drag on sales.

Generic susteva effects on Atripla pricing? We have been very sucessful with our single tablet regimens in Europe. Publications support single tablet regimens which support our pricing.

Sinovate patient number data drop from Q2 to Q3 was due to their announced change in methods of data gathering. They now are relying on CDC data rather than their own bottoms up data.

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