Patrick O'Brien - Vice President, Investor Relations John Martin - Chairman and Chief Executive Officer John Milligan - President and Chief Operating Officer Norbert Bischofberger - Executive Vice President, Research and Development and Chief Scientific Officer Paul Carter - Executive Vice President, Commercial Operations Robin Washington - Executive Vice President and Chief Financial Officer.

Geoffrey Meacham - JPMorgan Mark Schoenebaum - ISI Group Geoff Porges - Sanford Bernstein Matthew Roden - UBS Securities Phil Nadeau - Cowen Michael Yee - RBC Capital Markets Brian Abrahams - Wells Fargo Yaron Werber - Citigroup Ying Huang - Barclays Capital Robyn Karnauskas - Deutsche Bank Ravi Mehrotra - Credit Suisse Ian Somaiya - Nomura Securities Joel Sendek - Stifel Jim Birchenough - BMO Capital Howard Liang - Leerink Matthew Harrison - Morgan Stanley Thomas Wei - Jefferies & Company Brian Skorney - Robert Baird Terence Flynn - Goldman Sachs.

Welcome to the Gilead Sciences' first quarter 2014 earnings conference call. (Operator instructions) I would now like to turn the call over to Patrick O'Brien, Vice President of Investor Relations. Please go ahead..

Thank you, Stephanie. Good afternoon, everyone. We issued a press release this afternoon providing earnings results for the first quarter, which is available on our website where you can also find detailed slides that support today's call.

For our prepared remarks and Q&A, I am joined by our Chairman and Chief Executive Officer, John Martin; our President and Chief Operating Officer, John Milligan; our Executive Vice President of Research and Development, Norbert Bischofberger; our new Executive Vice President of Commercial Operations, Paul Carter; and our Executive Vice President and Chief Financial Officer, Robin Washington.

Before we begin our formal remarks, we want to remind you that we will be making forward-looking statements, including plans and expectations, with respect to our product candidates, financial projections, all of which involve certain assumptions, risks and uncertainties that are beyond our control and could cause our actual results to differ materially from these statements.

A description of these risks can be found in our latest SEC disclosure documents and recent press releases. In addition, Gilead does not undertake any obligation to update any forward-looking statements made during this call. We will be using non-GAAP financial measures to help you understand our underlying business performance.

The GAAP to non-GAAP reconciliations are provided in our press release as well as on our website. I will now turn the call over to John Martin..

Thank you, Patrick, and thank you all for joining us today. The first quarter of 2014 was an important step towards realizing a number of milestones for the business, particularly in hepatitis C. Earlier today we reported product sales of $4.9 billion, an increase of 104% year-over-year. This increase was driven by the launch of Sovaldi.

Sovaldi's profile has the potential to transform the treatment of hepatitis C and the rapid uptake speaks to a significant unmet medical need. I couldn't be more proud of the teams at Gilead, who rapidly brought this product to market supported by a robust data package of data from many clinical studies.

Paul Carter will discuss the launch in more detail.

Moving to other advances in hepatitis C, FDA granted a PDUFA date of October 10, for the single tablet regimen of once-daily combination of ledipasvir/sofosbuvir for the treatment of chronic hepatitis C genotype 1 infection in adults, and also advised us that an advisory committee would probably not be necessary.

In addition, the European Marketing Authorisation Application for ledipasvir/sofosbuvir has been validated and has been granted accelerated assessment by the European Medicines Agency, a designation for new therapies and medicines of major public interest. If approved, this STR could be available for marketing in EU by the end of 2014.

On April 2, in a press release, topline data were disclosed from a Phase 3 study of sofosbuvir/ribavirin dosed for 12 weeks in genotype 2 hepatitis C infected patients in Japan. In this study, 98% of treatment naïve and 95% of treatment experienced patients achieved SVR12. This study will support regulatory submission in Japan by mid-year.

Earlier this month, at the 49th Annual European Association for the Study of the Liver, EASL, was held in London.

At this meeting, new data on Gilead's products and liver diseases programs were presented in 15 oral talks and over 40 posters, including results from three Phase 3 studies, ION 1, 2 and 3 on the ledipasvir/sofosbuvir fixed-dose combination.

Concurrently, the results of these three studies were also published online in the New England Journal of Medicine.

Other presentations at EASL show that both, sofosbuvir/peg/riba and sofosbuvir/ledipasvir with or without ribavirin are viable regimens for the retreatment of patients who had failed previous regimens, including sofosbuvir and containing regimens. In these studies, retreatment resulted in SVRs of 74% to 100%.

In addition, results from our Phase 2 study evaluating GS-5816, the next generation pan-genotypic NS5A inhibitor were presented. Treatment of patients with genotype 1 through 6 with GS-5816 with sofosbuvir for 72 weeks resulted in SVR12 rates of 86% to 100%.

Initiation of Phase 3 studies of a fixed-dose combination of GS-5816 and sofosbuvir are expected later this year. Earlier this month, WHO published guidelines on screening, care and treatment of persons with HCV infection. This quick action by the World Health Organization signals recognition of the recent advancements in the treatment of hepatitis C.

Now, turning to HIV. The two Phase 3 studies comparing the single tablet regimen of ECF TAF in Stribild in treatment naïve patients are fully enrolled and we expect data to become available in the fourth quarter of 2014.

In addition, this STR is being evaluated in a number of other studies, including treatment experience patients, patients on stable therapy, who are switched to ECF TAF, patients with mild-to-moderate renal impairment and also in adolescent patients. We currently anticipate filing for U.S.

and European approval of ECF TAF in the first quarter of 2015 for naïve, experienced and switch indications. In oncology, we continue to prepare for the potential approval and launch of idelalisib.

The relapsed CLL application was assigned a priority review with a PDUFA date of August 6, and the relapsed refractory iNHL application was assigned a standard review with the PDUFA date of September 11.

As I mentioned earlier, I am proud of what the team has accomplished with the launch of Sovaldi, and I also want to acknowledge the contributions on other important activities by more than 6,000 employees at Gilead. I will now turn the call over to Paul Carter..

Thanks, John, and good afternoon, everyone. In the first quarter of 2014, our worldwide total net product revenue increased to $4.9 billion, representing growth of 104% over the prior quarter of last year. U.S. sales exceeded $3.6 billion and for the very first time European sales exceeded $1 billion in a single quarter.

This performance has been driven mainly by healthy demand in our core HIV business and the launch of Sovaldi, which itself had sales totaling $2.3 billion in the quarter. Off that number, $2.1 billion represent the U.S. sales and most of the remaining revenue came from Germany and France.

We had Sovaldi sales in 13 countries worldwide and that number will continue to increase as regulatory approvals and reimbursements are achieved. Beginning with the United States and HIV, underlying demand was healthy for all products.

Nine out of 10 patients new to treatment were prescribed the Gilead medicine, with Gilead's single-tablet regimen being used by seven out of 10 patients new to treatment.

Stribild continued to be the leading HIV regimen for patients that were beginning therapy, capturing three out of 10 prescription growth that Gilead's single-tablet regimens, including Stribild, Complera and Atripla is just under 20% year-over-year.

ADAP purchasing in the first quarter was strong, consistent with expectations for the last quarter and ADAP fiscal year. During our fourth quarter call, we highlighted that approximately $130 million to $150 million of our fourth quarter revenue were related to inventory build across the supply chain to yearend.

In the first quarter, as expected, we saw a drawdown at this inventory, as the big 3 wholesalers' inventory levels declined to near the bottom of established ranges. In addition, we also saw a drawdown by sub-wholesalers. This is in fact a similar dynamic to that which we've seen in first quarter over the past several years.

This collected inventory drawdown resulted in a sequential decline in HIV net product revenue. The underlying demand for Gilead HIV product is however strong and growing, especially for our newest single-tablet regimen Stribild and Complera. Moving to U.S. hepatitis C performance.

Sovaldi sales of $2.1 billion show strong patient demand and the increased inventory levels necessary to support this demand across the supply chain. Since launch, approximately 30,000 patients have begun treatment for hepatitis C with Sovaldi and these have come from all the main pair groups.

The first patient who began 12 weeks of treatment around the time of approval last December have yet to reach the timeframe, when they can achieve an SVR12, which occur the further 12 weeks after completing treatment. Nevertheless, we continue to hit positive reports from physicians about their experience with Sovaldi.

The prescribing of Sovaldi in the U.S. has been driven mainly by hepatologists and gastroenterologists, but internal medicine specialists and primary care physicians, many of them also treat HIV patients have also prescribed.

Despite the broad spectrum, we estimate that only half of the physicians visited by our therapeutic specialist have prescribed Sovaldi to date. This leaves us optimistic about the opportunity that lies ahead. In fact, with an estimated 1.7 million diagnosed patients in the U.S.

and around 400,000 under treated care, we have to take just a small fraction of those who can benefit from treatments in the future. The genotype distribution of patients that have received treatment is representative of the U.S. HCV population.

With around 70% usage in genotype 1 and the majority of this usage is being with the so called NEUTRINO regimen or a 12 week regimen in combination with pegylated interferon and ribavirin. On the payer front, access to Sovaldi has been as we expected, with its formulary status consistent with our experience in HIV reimbursement.

Most commercial, Part D and state Medicaid plans take full six months to review new drugs. Turning to Europe. We are very pleased with our strong HIV performance, which like the U.S. is underpinned by our belief in the benefit the patients of single-tablet regimen.

Eviplera is the most prescribed regimen for treatment naïve HIV patient and also continue to expand its lead over Atripla as the regimen most commonly switch to in the big 5 European market. By the end of the first quarter, we have launched Stribild in 19 countries across Europe.

This includes recently in France, which represents the biggest single HIV market in the EU. It is also just this month been launched in Italy, so is now available to patients in all of the European Union big five market.

I would like to highlight that in early launched countries like Germany, the performance of Stribild has been approximately double out of Eviplera at the same time point. Regional reimbursement in Spain and Italy is expected to continue to roll out during the rest of the year. Moving to Hepatitis C.

The European sales for Sovaldi totaled a $164 million in the quarter. While Sovaldi has regulatory approval in the European Union, full pricing and reimbursement, is a country-by-country process with some countries completing that process more quickly than others.

Today we have reimbursement in Germany, Austria, Sweden, Finland and to some extent France. As mentioned in the prior earnings call, we have filed health economic dossiers with all the major reimbursement agencies and we are following the normal process that leads to price and reimbursement approvals.

In France, after completing or completion of the temporary authorization for use or ATU program, but prior to completion of full reimbursement stages, we continue to provide Sovaldi to patients who have pre and post-liver transplant and also patients with advanced liver disease who have failed other HCV treatments or are interferon intolerant.

This is in line with the ATU scope and will widen when full reimbursement is agreed. In the U.K., the National Health Service in England has recently issued a statement confirming that they have approved the filing to Sovaldi for approximately 500 patients.

Notably, this is funding pre-NICE approval and recognizes the urgent need for Sovaldi for sicker patients. The European Association for the Study of the Liver or EASL, just last week published their clinical practice guidelines on the management of HCV infections.

Sovaldi is recommended in combination with other agents across all genotypes as well as in several difficult-to-treat groups. These EASL guidelines come soon after newly issued guidelines in Germany and France, which also both recommend Sovaldi. Outside of North America and Europe, we continue to expand our geographic footprint.

I would like to highlight that we are making good progress building out our Gilead organization in Japan in the anticipation of sofosbuvir approvals during 2015. In closing, I'd like to provide an update on our commercial readiness for oncology. As John mentioned, we have filed for regulatory approval in both the U.S.

and EU for idelalisib for using iNHL and CLL. We have completed hiring the U.S. therapeutics specialist team and have fully trained in end-markets. So we are ready and excited to launch idelalisib. A similar process is being followed in Europe consistent with anticipated regulatory and reimbursement timelines.

I'd now like to hand the call over to Robin..

Thank you, Paul, and good afternoon everyone. Non-GAAP diluted earnings per share for our first quarter 2014 were $1.48. Total revenues for the first quarter were $5 billion, up 97% year-over-year.

As Paul mentioned, similar to prior year's strong wholesaler and sub-wholesaler purchases in anticipation of January 1 price increases for HIV and cardiopulmonary products results in an inventory drawdown in the first quarter of 2014.

Non-GAAP product gross margins were 87.4%, up from 74.5% largely driven by Sovaldi sales and an favorable HIV product mix. Sovaldi's impact to gross margin is a combination of Sovaldi revenues as a percent of total net product revenue and the geographic mix of these revenues, which were 92% U.S. sales in the first quarter.

Product gross margin for our HIV franchise was favorably impacted, primarily by lower Atripla revenues. Turning to expenses year-over-year. Non-GAAP R&D expenses were up $98 million reflecting the progression of clinical study activity, primarily in oncology and HIV.

Non-GAAP SG&A spending was up $167 million to support the ongoing lunches of Sovaldi in the U.S. and in cautionary as well as the anticipated launch of idelalisib. Cash flow from operations was $1.5 billion.

During the quarter, we raised $4 billion in debt financing for general corporate purposes, including repayment of debt, working capital and share repurchases. We also repaid $840 million in debt from previous finances and purchased $450 million in shares.

Finally, we are reiterating full year 2014 guidance, which excludes Sovaldi product sales and is outlined on Slide 45. The metrics we provided in February for the impact of Sovaldi product sales still applies to our full year results and includes the following estimates.

Non-GAAP product gross margin will increase by approximately 0.75% to 1% for every $1 billion of Sovaldi sales and non-GAAP effective tax rate will decrease approximately 0.75% to 1% for every $1 billion of Sovaldi sales. In closing, we look forward to updating you on our continued progress in the coming months.

We would now like to open the call for questions..

(Operator Instructions) Your first question comes from the line of Geoffrey Meacham with JPMorgan..

So there's been a lot of payer noise, obviously a lot lately. So I just wanted to get you guys perspective on how you think you could change kind of the conversation from cost benefit to sort of the value of a payer, and this would be for public and private payers.

Are there any sort of pharmacoeconomic studies that you guys are doing coming out or just help us a little bit with how to deal with a lot of the headlines that we've been seeing almost everyday from commercial payers and government payers?.

Geoff, its John Milligan. So, yes, there is a number of things, I think it's important that we talk about. First and foremost, the value of a cure I tend to think it's under estimated in terms of the overall advantage to the healthcare system receives from it.

And I do know, as we have talked to doctors and certainly the tone coming out of EASL has been one of greater understanding of the value that it provides to patients and healthcare systems. And then, in fact, HCV patients cost a lot of money. The all cost mortality, the overall healthcare cost for an HCV patient is very high.

And we are seeing more and more papers now being written on this, as there is a possibility of curing a larger number of patients.

And so we do think that's an important part of the dynamic of talking about this, and also talking about the priorities that healthcare systems will likely make as they do choose to treat certain patients now and for certain patients to later.

And these will be difficult conversations, but important ones for doctors and the payer community and public health officials to undertake, as they understand the benefit that they get and try to outline the timeframe from which they wish to tackle this very difficult problem of trying to eradicate HCV from as much of the population as we can.

And so we will be talking quite heavily about these things. There are publications out there not by Gilead, but by respected people in the field, who understand this very well and whoever can start these conversations and more of an academic collegiate way..

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

I was just wondering if you guys could talk a little bit about -- I mean there has been this conversation out there, but perhaps restricting over time the access for the drug, the patients that are perhaps the most at need, people talk about certain levels of fibrosis.

I'd love to get your perspective on that, if you think that that is medically and what your view on that is if you think if that's medically appropriate? And then on the commercial side, just the same question by the way.

Do you have any statistics on the market that might help us understand what percentage of patients are F3 and F4, so that we can sort of run those scenarios through our models?.

I am going to try to answer the first question. So with regards to the price and volume and the overall cost, there are four points to make. The first one is that regimen cost of Sovaldi/peg/riba for 12 weeks is not dissimilar from standard of care, either simeprevir or [ph] faldaprevir or peg/riba for the respective period of time.

Number two, Sovaldi provide shorter treatment durations, higher cure rates and is better tolerated. So there is the value. But the value goes beyond just treating hepatitis C, there is value, as John Milligan mentioned, there is more disease in HCV that is non-hepatic.

So if you look at the extra Hepatic mortality, non-HCV related is much higher in the HCV infected population than the control group. Thirdly, curing somebody for hepatitis C has benefits that go beyond the liver.

It's recognized now that hepatitis C is a chronic inflammatory condition that over time leads to more diabetes, more heart disease, more CNS disease and you could certainly reasonably argue curing somebody of their hepatitis C infection has collateral benefits that go beyond the liver. And we've actually shown that in our own Phase 3 studies.

It's a result that's somewhat underappreciated. We have looked at PRO, patient reported outcomes, and we have shown in a blind fashion that the people in the studies that achieve an SVR, they had much better outcomes than those that didn't.

And the better outcomes were they felt better, they had less bodily pain and they had even better mental health status.

And we're working as John Milligan said, in putting all of this together into a bigger pharmacoeconomic argument, but to summarize a short answer to your question, I do not believe its medically to prioritize and restrict the cure of hepatitis C. It maybe necessary economically and that's what is going to address..

Mark, it's actually, this launch is absolutely unprecedented as we've already sort of agreed I think. The data coming in and the kind of patients sort of being treated is not absolutely clear yet. I mean, we got a sense of the genotype, but we don't have a good sense about the severity of fibrosis scores.

We have, call it, a sort of qualitative anecdotal comments coming in, but I don't think I'm in a position really to say that proportion of F3 and F4s. I would get it's about maybe 30% or 40%, but that's just a personal guess..

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

So I suppose I better change the direction just a little bit Robin. Given the cash flow that you reported in the quarter and the new debt you've taken on in a position to be pretty aggressive about either share buybacks or anything else that you would like to do, and yes, the share buyback in the quarter was relatively modest.

Could you give us some sense of your thinking about how that might play out? What you'd like to be doing with your cash? How you view the stock here for the balance of the year, because I think that's something that people are starting to ask?.

Absolutely, Geoff. Thanks for the question. I mean our plan has always been to accelerate our repurchases, post the launch of Sovaldi. So you could definitely expect to see larger share repurchases, cash flows and recent debt raise. We have the liquidity to be able to do that.

And as you mentioned just given our current stock prices something that we would be able to take further advantage of and reduce the number of shares outstanding..

Robin, do you have sort of goal in terms of percentage of cash flow or amount of cash that you'd like to deploy?.

Not at this point, Geoff. We haven't kind of recalibrated to that. We haven't provided guidance. Again, I'd say, definitely it will be north or higher. But we haven't necessarily rethought our capital strategy, where I can give you a percentage of free cash flow at this point in time..

Your next question comes from Matthew Roden with UBS Securities..

So I also want to change directions, Norbert, maybe a pipeline question for you.

When I look across your pipeline programs here in your slides, it really striking how many indications maybe addressable with Simtuzumab? So I was just wondering if you can review why you think that that's a drug, what the cadence of readouts will be across the indications? And then lastly, is there any of these Phase 2 readouts could possibly from the basis of an early filing in any of the indications?.

Simtuzumab was always the preclinical data strongly supported both fibrosis and solid tumors, and lots of [indiscernible] involved than necessary in both and expressed to high levels and both. So we decided to enter solid tumors. We chose pancreatic and colorectal cancer. And we chose to go into fibrosis and we chose IPF in Liver.

And I have to say, all of these studies were done so that when if we see a spectacular effect, that we could potentially file with the Phase 2 data.

For instance, the liver study, as I stressed many times, it's powered on HPVT, hepatic venous pressure gradient, that's an approval endpoint according to FDA and NASH, under accelerated approval guidelines. And the IPF study is similarly powered that we could file with the Phase 2 data, if the data is good.

So you know, we feel very comfortable with the program. I know it looks like a lot when you look at the slide, but it's certainly a risk worth taking, this Simtuzumab if it works, it could be a really big drug, a successful drug for us..

Your next question comes from Phil Nadeau with Cowen..

I did want to circle back on to the payers, just for a bit.

Could you give us more of a sense of how the negotiations are going, so how many of your target accounts are currently under contract and how does the progress compare to kind of where you thought you would be at this point in time in the launch?.

Well, we can't tell you too much is the honest truth, because we're in negotiation, but everything is pretty much in line with our expectation and our experience with HIV and other drug. So we're in negotiations. We're making good progress. And that's really all I can say at this point..

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

My question is as it relates to sustainability. First part of question is in Europe, I think some of the feedback was that based on the way the budgets are obviously run that one way to control it under a line item annualized budget is to limit it to more of the sicker patients.

I guess the first question, do you expect that to happen and should that be your expectation for our revenue models? But the second part of that is that's also creates a longer tale.

Do you expect that that could at some point happen in the United States, does that create a longer tale? How should we think sustainability and as it relates to what you're going to see in Europe?.

Michael, this is Paul here. I think you've got it in one there. Its how to going to be big in short-term or it's going to be longer-term and less each year and I think the European markets, market-by-market have their own economic circumstances.

A lot of the Southern European countries that you're fully aware have really tight squeezes on their healthcare budgets. And they will have to probably prioritize patients at this point or significantly increase the amount of money going into Hepatitis C. So I think we're very confident in our clinical position and the science and our pipeline.

So to us, we're very, very comfortable about it. But I think you're right, it's going to be spread out in Europe, typically some of the Southern European countries over a longer time period..

Michael, I would like to add something also in this pharma-economic debate and that is that there was a paper published in 2012 in hepatology that looked at the cost of caring for a Hepatitis C infected person and what is apparent from that paper that the cost of not treating is fairly substantial, and actually that paper claims it ranged from $7,000 for a cirrhotic early disease patient to $42,000 per year for somebody with end-stage lever disease.

Those are the annual cost of just doctor visits, tests and other care. So that clearly has to be entered into this debate also, although I'm not sure how much of that is applicable to Europe, the cost might be different there. This was a really large U.S. study..

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

Coming out of the full data presentations and publications for IM1, IM2 and IM3, what your sense as to how physicians might be thinking about optimizing duration of therapy for the overall across different patient groups.

For instance, how much eight week usage might expect among treatment naïve genotype 1? How much longer than 12 week usage amongst the treatment experienced cirrhotic? And I'm curious how this as well as some of the current reimbursement buzz we're hearing about factors into your pricing decision for the fixed=-dose combo?.

Brian, let me answer the first questions, then Paul will talk about the price issue. So we have proposed in our regulatory filing that eight week treatment duration should be for everybody who is treatment naïve and non-cirrhotic.

People who are treatment experienced and/or cirrhotic will 12 weeks of treatment and this is really based that thought process. This follows a thought process where we asked ourselves if we take everybody 12 weeks, how many of the patients would be over treated, would get more than they need.

And there were way too many, was north of 90% depending on which population you looked at. And if you were in London, you may remember, [indiscernible] who did one of our IM presentations. He actually mentioned this at the podium.

And given the fact that you can't justify not medically, but certainly not economically over treating patients that for one-third of the duration, they need only 8 weeks, but they get a 12. That I think is a reasonable proposal.

And our of course it has too to be agreed upon with regulatory authorizes, but that was our proposal in the filings that we have made..

And I guess, I'll take the second part, this is John Milligan, again.

So just thinking about, your question was what do we take into account where putting the price of Sovaldi and Sovaldi was I think price appropriately based on the benefit that it provides today, but we were aware that a significant percentage of patients, particularly those with low risk factors, a new to therapy could benefit from eight weeks in the future with the combination of ledipasvir/sofosbuvir.

So we did think about this very heavily as we weighed into our debate on what the final price of Sovaldi would be and of course it will weigh into our picking on the next generation of pricing as well as we mature to no ribavirin, no interferon simple regimens for shorter duration still and so we will provide additional benefit to those medications that we have taken always into account as we think through pricing strategies..

Our next question comes from Yaron Werber with Citigroup..

Two questions. One give us a little bit of sense, if you look at the IMS data, which we know on the reports, I mean you've sort of beat at the top end of that handedly, so was there any stalking? And then two, give us a little bit of a sense, what's going on in the VA and in the prison systems.

So how much usage are you seeing in those verticals? And if you don't mind, what's your strategy, how to deal with pricing in those verticals, especially if it gets more competitive?.

I think there is three questions. So Robin, do you want to start..

Yaron, we're only 17 weeks in, in our market at this point and our IMA agreement are not totally inter-passed as we've previously communicated in case of Sovaldi nine months or so to fully get through that process. So while we know that inventory was build this quarter, it is difficult for us to fully quantify it at this point in time in the launch.

But I would say, as we continue to get more clarity around demand et cetera going forward, we'll be better able to provide that in the future, but I would say there is inventory, but unfortunately we're not able to quantify it at this point..

Maybe I'll just add a couple of comments on VA. So Sovaldi was added to the VA National Formulary during the first week of April. And ultimately be a potentially the largest federal purchaser of healthcare for Hepatitis C in the U.S. We haven't seen a huge amount of orders come in yet, but this is really because it's very, very early days for them.

In the prison system, Federal Bureau of Prisons is updating basically the treatment guidelines and we understand those are going to be released imminently and we do anticipate that Sovaldi will be included in those guidelines..

Your next question comes from the line of Ying Huang with Barclays Capital..

Firstly, can you give us a little bit idea in terms of the payer mix you saw in first quarter? How many patients taking Sovaldi are insured by commercial insurers and then how many coming from Medicare, how many coming from Medicaid? And then also would you mind giving us also the so called growth net adjustment for the first quarter sales of Sovaldi?.

So again, its very early days and our data to some extent is reflecting that. We think about 90% of our business so far in the first quarter has come from both the private and the Medicare sector. And I think that that's probably split roughly half and half. Medicaid is about 70% and the rest is the small balance left over..

Relative to growth to net, again similar to Paul's response, it's still very early in the launch and as he previously described we're still in the midst of contracting process.

So I would say our growth to net percentage now is not necessarily predicted of what it would be going forward, but it is lower, lower than HIV and kind of lower than we project the whole year to be?.

Yes, the mix will change at a time..

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

So on this whole concept of prioritizing patients by fibrosis, how would that be implemented? Would it be implemented by the doctor potentially or could it be forced by the payer, and in conjunction with that how do payers and doctors view eight weeks versus 12 weeks.

And is eight week an advantage, if you're in that situation where you have prioritization by fibrosis score..

So there is a healthy, I'm not sure it's healthy, I see tension between payers and clinicians I think at this point. And it's clear that some payers are trying to restrict or prioritize patients with say higher fibrosis scores or sicker patients.

And I think clinicians are some times taking a different view of that and it's very hard for us to see how that's worked out from here, but we do hope that the clinician and the science prevails, but over time we're pretty confident that would be the case as payers starts to get used to and to predict better the volumes of patients that require treatment..

The other equation is an interesting one that maybe I could summarize it by something that a well-respected thought leader told me. He said, he would prefer 12 weeks of treatment over eight, simply because it is something that's really safe, well-tolerated, why not go for the safe path and give them 12 weeks, it's not that much more.

But then he went on to say that he is ultimately not the one that will make that decision, but that decision will probably be made for him by the payers. And how that's exactly worked operationally, I'm unsure, but that's probably what we're thinking..

Your next question comes from Ravi Mehrotra with Credit Suisse..

Obviously you are now in very different league from a sales perspective, the market cap perspective, and actually a future-pipeline needs perspective in the long-term. Cognizant to that, you got a lowest R&D budgets, yet the highest operating margin.

So philosophically how do you think about R&D and B&D in the long-term to fill out your long-term pipeline?.

Our R&D as a percentage of sales has been down fairly dramatically this quarter as you know, which means you can't grow that up to a level that might be more appropriate for a company with the sales levers we're seeing in a very short period of time. It takes a long time to hire the people and to put thoughtful programs into place.

So with regard to R&D, our philosophy is simple, would be to continue to grow, but to grow a reasonable sustainable pace as we add more pogroms and as things mature from research into development. We're seeing quite a number of those happening this year and that I think is quite exciting for us.

In terms of BD, it's somewhat of a similar issue, we're looking for to licensing programs, but we can only grow so fast based on a number of people we have, the complexity of the business and also just the capability of bringing in and bringing programs in and then doing a very good job on them. So I think we've got a very full pipeline right now.

I think it's going to be a thoughtful way forward as we grow the company, and I think we have most of what we need to continue to grow this company for years to come. So that would be very, what I call very targeted kinds of transactions that can help further us along..

And if may add something, John, we're going to continue to be disciplined about all of this just because we have more money available, it doesn't mean we're going to spend it. The science has to be right and the medical need has to be right, that's when we're going to do it and not in any other -- under any other scenario..

Your next question comes from Ian Somaiya with Nomura Securities..

On the fast launch, had a question regarding, again, on the pricing front, and actually just wanted to revisit maybe some prior comments that you have made in terms of how we should think about pricing for the combination, specifically that most of the value that was being derived from Sovaldi and that's the way we should think about from a pricing perspective that most of the contribution from price would be from Sovaldi and there would some incremental value or cost associated with the second drug.

So I wanted to gets your thoughts on that whether that still holds? And related question is the conversations that we have with payers are not really focused on Sovaldi on its own, they're focused on the combination and the price point they all seem to have in the mind, whether we think about the U.S.

payers or European is the off-label usage of Alicio and Sovaldi and the $150,000 of our price point, but if you could just sort of comment on those things that would be really appreciated?.

Ian its John Milligan. It's always difficult to talk about pricing. And let's not forget, we don't have approvals for those products. But as you know as you think about it there were natural limits on what I think is appropriate for a next generation products.

And for example, with 5885, we're essentially replacing pegylated interferon and ribavirin, which over a 12-week duration is much less expensive for example than Sovaldi. So first of all it is the driver, the value in that combination. And then I tend to think about it in that sort of way. And so I think you're right.

People are concerned about the combinations of things like Alicio and Sovaldi. And that's really not how we're thinking about next generation products..

Your next question comes from the line of Joel Sendek with Stifel..

I had a question about just the duration of therapy that you're seeing so far. You mentioned about the use with interferon in Roche's report that the sale of the peg didn't really got that much.

So I'm wondering if can you just help us with the average duration for example, how many patients or what percentage are on the 24 week Sovaldi ribavirin regimen as opposed to the 12 week combination then what we would expect for the trend in that duration over the next couple of months?.

The data we have is only for the U.S. We think about 70% of patient's are genotype 1 and also 70% -- we think about 65% to 70% are on so called NEUTRINO regimen at 12 weeks of sofosbuvir plus peg/riba. So I think that that's 12 week piece, the 24 week piece we're not at all sure on..

The combination of patients who are on genotype 2 taking 12 weeks and genotype 3 who are taking 24 weeks, but anyway you doing the math with the shorter duration and a high percentage of patients now taking non-interferon-based regimens is not surprising that the interferon sales are declining..

We think there is about, the U.S. so far around about 7% to 30,000 have been genotype 3..

Your next question comes from Jim Birchenough with BMO Capital..

Just a question, as you think about potential competitors coming in later in the year and into next year.

Is there anything you can do with payers right now to try and preempt what could be price competition and aggressive discounting just to preserve some level of pricing in this market?.

Well, Jim, it's not generally prudent to talk about strategies in public, so that others know what you're doing. So I'm going to decline making any comments on that.

Although I do note that it looks to us based on today's filing of the AbbVie regimen with the five drug regimen that they're putting out there, that we should have a considerable leads to market from where they are, since they are over two months behind us in terms of their filing, so that could be an advantage for us..

Your next question comes from the line of Howard Liang with Leerink..

Can you talk about what next in HCV? There's some chatter out of EASL that your dataset in cirrhotic patients now is as big as AbbVie, do you have a plan to do a cirrhotic study? And then also what's the next the regimen you take to Phase 3 in HCV?.

I'm not sure I understood all your question.

You were asking about the comparability of AbbVie's cirrhotic population results with ours?.

You've got a big enough -- do you need another study dedicated to cirrhotic patients?.

Well, I think we have answered the question. AbbVie chose to do a separate cirrhotic study. We have included our cirrhotic patients, and by the results were in that population, AbbVie had 88% and then our subpopulation of treatment experienced cirrhotic patient was 86%, so a similar number.

The only thing to remember is AbbVie didn't have experienced patient, really as experienced patients in their study, we did. So comparing the two studies is a difficult thing to do, you'll have to do a head-to-head study. And I think you asked about what's next about, the thing would be 5816.

So what we have now filed ledipasvir/sofosbuvir for genotype 1 and we're repeating this now with a pan-genotypic NS5A inhibitor in as GS-5816, which would be the one pill, once daily for everybody for all genotypes.

We're finishing up some studies, one the result was disclosed at EASL by Emerson, that show it works against all genotype sofosbuvir GS-5816 combination. We still have with data are coming in right now on the same regimen cirrhotic and we're also looking at shorter treatment durations.

When all of that is in we'll make a decision to go in Phase III some time in the second half of this year..

Your next question comes from the line of Matthew Harrison with Morgan Stanley..

I wanted to ask a little bit back on the payer side and we've heard some commentary out of some of the payers that have already reported about sort of patient volumes and UNH was one of them and they had suggested that based on patient volumes, we're actually peeking for them in the first quarter.

So I guess I was wondering, a, if you agree with that? And then, b, sort of as it related to that, what kind of information do you need where you feel like you'll be in a position to give us Sovaldi guidance..

So Matthew, its John Milligan. In terms of the patient numbers, I mean you see the prescription rates as much as we do. We don't necessarily know where those patients come from, so I can't speak to the United Health population whether that is an accurate portray all or not, I assume they know more than we do about those patients and their system.

But as Paul had talked about we have less than 50% of physicians who can prescribe Sovaldi, who have prescribed Sovaldi. And so we also look at the fraction of patients who've been treated relative to the total patients and it's relatively small.

In a typical year about 60,000 patients are treated, near about 30,000 last quarter, and so that put us certainly in a faster pace than the last few years, but certainly far below some of the peak years and well over 140,000 patients were treated.

So for one believes there are many, many patients out there who will continue to seek some Sovaldi therapy or who might be looking forward to the combination therapy, as we get later into the year. So I think there is plenty of opportunity out there for us..

Your next question comes from Thomas Wei with Jefferies & Company..

I wanted to ask a little bit about some of the discussion at EASL on the EU countries banding together potentially buying antivirals beyond pandemic vaccines and your take on.

How likely is something like that to happen and how the mechanics of that might work? Any insights that you have to share would be very helpful?.

I think this is a wonderful idea and if it could work, it will be great, because we could have one price and access at the same time across Europe. But as we've often said, you can't change a thousand years of history, and if Europe ever managed to get back together on this, I would be absolutely amazed. So that's really my point of view on it..

Your next question comes from Brian Skorney with Robert Baird..

Let me congratulate you and maybe then one up by saying I think this was actually the biggest single quarter for a pharmaceutical product in U.S. history. It's probably tied I think a couple of quarters in '06 with Lipitor. But anyway, I just wanted to know kind of got going off of John's comments about the number of patients that are out there.

Do you have any sense that there is a warehousing going on ahead of all approval? I mean it just seems with six months to go before interferon is totally out of the equation that it'd be a little bit of -- there won't be much rationale for starting non-symptomatic naïve patients.

So do you anticipate a depth in new prescriptions in the coming months and anticipation of that? And do you have any kind of guidance on what sort of acceleration we might anticipate post the launch of ledipasvir/sofosbuvir?.

It's very hard to determine, if there is warehousing, except by talking to physicians, and we've talked to some of the top KOLs, and it's clear that they are thinking they would like to hold back some of their less sick patients to put them on all oral therapies later on the year.

But as I mentioned there is a whole host of the middle-tier physicians, people who don't attend, so who are just now becoming Sovaldi prescribers, who seem to be having a very good experience.

And we don't get any sense that they are all that aware of the next generation coming out or that they wish to slowdown their own practices in order to wait for business later on the year.

So I kind of doubt that those physicians would have significant amounts of warehousing, and in fact could likely accelerate their use of Sovaldi as they get into the second part of this year..

Mr. O'Brien, we have time for one more question. Your final question comes from Terence Flynn with Goldman Sachs..

Just two quick ones from me. John, I was just wondering on the prescriber mix, you mentioned you reached out about 50% or 50% of the targeted audience prescribed.

Can you tell us what historically they represent in terms of volumes for those 50%? And then the second question was just, any early feedback on the DTC campaign and what metrics are you guys using there to evaluate the effectiveness of that program?.

These are getting into the middle-decile of the doctors represent that mix, where they'll exclude the lower tiers, because we tend not to hit those decile one and two doctors frequently. But it's a real middle mix of these doctors who are geographically difficult to get to in some cases and some times could be difficult to see.

So that is a really good piece of business for us as well. And the second question was the DTC --.

DTC campaign. We really don't have any idea if the unbranded campaign of awareness have had an impact other than a few anecdotes of patients calling their physicians.

I think give the stronger than expected early demands, those campaigns, of course, are being rolled back very substantially and you'll see less and less of that in the coming weeks and months..

Thank you, Stephanie, and thank you all for joining us today. We appreciate your continued interest in Gilead and the team here looks forward to providing you with updates and future progress. Thanks..

Thank you. This concludes today's conference. You may now disconnect..