Patrick O'Brien - Senior Director-Investor Relations John F. Milligan - President, Chief Executive Officer & Director Robin L. Washington - Chief Financial Officer & Executive Vice President Paul R. Carter - Executive Vice President, Commercial Operations Norbert W.

Bischofberger - Executive Vice President, Research and Development and Chief Scientific Officer.

Geoffrey Meacham - Barclays Capital, Inc. Mark J. Schoenebaum - Evercore ISI Geoffrey C. Porges - Leerink Partners LLC Michael Yee - RBC Capital Markets LLC Cory W. Kasimov - JPMorgan Securities LLC Brian Abrahams - Jefferies LLC Brian P. Skorney - Robert W. Baird & Co., Inc. (Broker) Phil Nadeau - Cowen & Co. LLC Matthew K. Harrison - Morgan Stanley & Co.

LLC Ying Huang - Bank of America Merrill Lynch Robyn Karnauskas - Citigroup Global Markets, Inc. (Broker) Alethia Young - Credit Suisse Securities (USA) LLC (Broker) M. Ian Somaiya - BMO Capital Markets (United States) Terence Flynn - Goldman Sachs & Co. James Birchenough - Wells Fargo Securities LLC Alan Carr - Needham & Co.

LLC Charles Anthony Butler - Guggenheim Securities LLC.

Ladies and gentlemen, thank you for standing by and welcome to the Gilead Sciences first quarter 2016 earnings conference call. My name is Candace, and I will be your conference operator today. At this time, all participants are in a listen-only mode. And as a reminder, this conference call is being recorded.

I would now like to turn the call over to Patrick O'Brien, Vice President of Investor Relations. Please go ahead..

John Milligan, President and Chief Executive Officer; Robin Washington, Executive Vice President and Chief Financial Officer; Paul Carter, Executive Vice President of Commercial Operations; and Norbert Bischofberger, Executive Vice President of Research and Development and Chief Scientific Officer Before we begin formal remarks, let me remind you that we will be making forward-looking statements, including plans and expectations with respect to products, product candidates, financial projections, and the use of capital, all of which involve certain assumptions, risks, and uncertainties that are beyond our control and could cause actual results to differ materially from these statements.

A description of these risks can be found in the 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. Non-GAAP financial measures will be used to help you understand the company's underlying business performance.

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

GS-4997, an ASK-1 inhibitor; and GS-9674, an FXR agonist. Nimbus also presented positive Phase 1 data for the program's lead candidate, NDI-010976, which targets ACC, a key step in lipid biosynthesis pathway. Overall, I'm enthusiastic about the future of Gilead and excited to have opportunity to help build on the company's long history of success.

Over the past few months, I've had conversations with external stakeholders and employees across all parts of our organization. It's gratifying to see the extent to which Gilead's products and commitment to access have uniquely changed the course of diseases for so many people throughout the world.

We now have the opportunity to do so again in many new areas. A few things stood out from those conversations; first, physicians and patients share the excitement that our medical and commercial teams have regarding Gilead's new treatment options for HCV and HIV, particularly the new TAF-based therapies.

Access continues to improve for people with HCV around the world. And in fact, we have treated close to 1 million patients with Sovaldi-based regimens since Sovaldi was first approved in late 2013. That's a remarkable achievement in just over two years.

With regards to HIV, as many of you are aware, TAF was added to the medicines patent pool and to our various access programs. The clinical data suggests TAF-based regimens may be the best option in both the developed and developing world.

We will build on the success we've had with the TDF-based regimens, now used by nearly 10 million people every single day, to make TAF regimens successful around the world, providing much-needed new options.

Secondly, I believe we have a rich pipeline, creating opportunities that may allow the transformation of the treatment of many diseases like NASH, HBV, inflammatory diseases, certain cancers, and cardiovascular conditions for which few, if any, options exist.

We are committed to building on our company's long history of success, and I'm confident that our innovation and our hard work will deliver on our shared goal of delivering new treatments and providing broad access to Gilead's medicines for patients in need.

Finally, we continue to look for business development opportunities that add to our core therapeutic areas and are a fit with Gilead's expertise and capabilities. We are actively assessing options and will make moves when the right opportunities present themselves.

I will now turn the call over to Robin, who will provide an overview of our financial results for the quarter. Robin will be followed by Paul, who will provide additional color on the company's performance across products and geographies..

an uncertain global macroeconomic environment; adoption of additional pricing measures to reduce HCV spending; volatility in foreign currency exchange rates; inaccuracies in HCV patient start estimates; additional competitive launches in HCV; an increase in discounts, chargebacks, and rebates due to ongoing contracts and future negotiations with commercial and government payers; and a larger than anticipated shift in payer mix to more highly discounted payer segments such as PHS, FFS, Medicaid, and the VA.

I will now turn the call over to Paul to provide more details on our commercial results for the quarter..

Thanks, Robin, and good afternoon, everyone. Our commercial performance remained strong through the first quarter. I'd like to start with HIV and Genvoya, the first of our TAF-based single-tablet regimens. We're pleased with the launch of Genvoya both in the U.S. and in the European markets where we've achieved reimbursement.

Starting with the U.S., through five months post the launch of Genvoya, cumulative prescriptions were twofold more than any HIV product from any company since Atripla, which was the first single-tablet regimen to come to market back in 2006. As expected, most of Genvoya's initial prescriptions came from switches.

Qualitative feedback from HIV prescribers is very encouraging and indicating a clear intent to switch patients at the earliest opportunity. Stribild and Complera showed strong year-over-year prescription growth, at 18% and 5% respectively, and in quarter four 2015 Stribild was the leading product in the U.S. for patients naive to treatment.

With the launches of Genvoya and now just very recently Odefsey, we expect switches out of TDF-based single-tablet regimens into the TAF regimens to grow significantly. In fact, 82% of Genvoya's prescriptions have been switches. 49% of the switches have come from Stribild.

We are seeing an improvement in our ability to retain switch patients, meaning fewer patients who switch from Gilead TDF-containing regimens move to non-Gilead products. Of all the patients who switch to Genvoya, 91% came from a Gilead regimen and 9% came from a non-Gilead product.

In addition to switches, preliminary quarter one 2016 data indicate to us that Genvoya may soon be among the most prescribed products of patients new to treatment. Historically in quarter one, we've seen a decrease in sub-wholesaler inventories following a buildup in the prior quarter.

We observed this effect again this year, leading to a sequential decrease in HIV product sales. Finally, in the U.S., I'd like to highlight the growing use of Truvada for PrEP, which was more than 20% of Truvada demand last quarter and drove 17% year-on-year growth in prescriptions.

Turning to Europe, we're also pleased with the way that our HIV business is performing, with successful reimbursement and launches of Genvoya in several countries, including Germany and the Nordics. In other countries, Stribild and Eviplera continue to replace Atripla.

Stribild remains the most prescribed regimen for patients naive to treatment in the EU, with Eviplera in third place. Genvoya was launched in Germany during quarter one. And at the end of the quarter, preliminary data indicate that it had the leading market share for both naive and switch patients.

The product was launched and fully reimbursed in Spain just two weeks ago, and we're very excited about the opportunity to offer providers another important option to address the needs of their patients.

It's also been recognized as a preferred regimen in numerous country guidelines, including Germany, Spain, and Italy, even before reimbursement has been agreed. This is testament to the favorable clinical profile of Genvoya, a single-tablet regimen that better addresses the needs of patients who require long-term chronic therapy.

We're working hard to negotiate timely reimbursement across the rest of the European markets. Finally on HIV, we launched Descovy this month in the U.S. and the EU. We see this launch as a milestone in HIV treatment, as Descovy is the first new NRTI backbone since Truvada 10 years ago.

Given the very high use of Truvada as a preferred backbone with multiple third agents, including Tivicay, we're confident that Descovy will quickly replace Truvada and become the leading HIV regimen backbone in all our markets. Now moving to hepatitis C, we continue d to see revenue dynamics around the world which vary by country.

As Robin noted, our overall HCV product revenue decreased 6% year over year and 12% sequentially. I'll now describe the different dynamics by geographic region. Starting with the U.S.

market, we've seen an increase of new patients in the first quarter, offset by lower revenue per patient due to several factors that include an increase in our gross-to-net adjustments as well as a shortening average duration of therapy. Total market patient starts increased around 10% over Q4 to an estimated 55,000 in Q1.

This was primarily driven by the continued opening of access across payer segments to allow for the treatment of patients with lower fibrosis scores as well as an increase in treatment by the VA during the second half of the quarter, as funding made its way to the various VA sites.

The revenue associated with this increase in patient starts was partially offset by an increase in discounts associated with our contract agreements entered into during the first quarter of 2015, which provide for additional discounts if access is provided to a broader patient population.

We also saw a gradual shift to more deeply discounted payer segments such as VA, PHS, and Medicaid compared to the prior quarter. In addition, revenue was further impacted by higher than expected prior-quarter rebate claims, which come in one to two quarters in arrears and were updated in quarter one to reflect the higher claims received.

The average duration of therapy has shortened, as fewer patients require 24 weeks of treatment and a higher proportion of genotype 1 patients are treated for eight weeks, resulting in slightly lower revenues per patient. The ability to treat for eight weeks notably is a strong competitive differentiation.

In fact, our market share remained strong, with more than 90% of all patients treated in the quarter being prescribed either Harvoni or Sovaldi. Qualitative feedback suggests that prescribing HCV physicians are encouraged by the fact that real-world outcomes mimic the experience in clinical trials.

Several presentations of real-world data at EASL reinforce what has been seen in clinical practice. As we think about the rest of the year in the U.S., patient flow peaked in quarter one 2015, then declined in quarter two, and stabilized in quarter three and quarter four of 2015. In quarter one of 2016, there was an uptick in new patient starts.

Our data show that 25,000 to 30,000 patients a month are entering treated care, which exceeds the number of patients starting therapy on a monthly basis. That means there were many more people who could benefit from treatment who are already linked to care. We expect new patient starts to remain consistent through the rest of 2016.

Despite the number of patients treated to date, there are still over 3 million patients in the U.S. who have yet to be treated. About half of these patients are undiagnosed. Education and awareness efforts to increase rates of diagnosis are important. And as we well know from public health efforts in the HIV area, these efforts play out over many years.

We're encouraged to see data that screening and diagnosis rates have increased at least twofold over the last five years. Now turning to Europe, total HCV revenue in Europe was down 13% year over year and down 1% sequentially.

While overall Gilead patient starts increased 5% sequentially to around 31,000 in the quarter, average revenue per patient declined due to a shift in geographic mix and shorter average treatment duration. We also saw a negative foreign exchange movement, which affected HCV revenues by about 8% year on year and 3% sequentially.

The mix of sales in the EU is such that more patients are now being treated in countries which have lower net prices per patient. European countries continue to vary significantly in terms of patient access, with many still limiting treatment to patients with high fibrosis scores.

We anticipate that as sicker patients are treated, these restrictions will start to loosen, as healthier patients can be cared for within existing budgets. Again, as in the U.S., we treat just a small fraction of patients diagnosed. We are encouraged by ongoing efforts and commitments by governments to increase diagnosis and treatment across Europe.

Now moving to Japan, revenue was over $1 billion during the quarter. We're pleased with the successful launches of Sovaldi and Harvoni, where a strong patient flow and high market shares continued through quarter one. More than 30,000 patients were treated with Gilead products during the quarter, representing a market share greater than 90%.

Other markets where we recently launched our HCV products include Australia, where nearly 5,000 patients started treatment in Q1. This reflects a strong commitment by the Australian government to address their HCV burden and the usual warehousing of patients prior to the launch of sofosbuvir-based regimens.

In closing, our underlying HCV business is strong and sustainable. We've treated around 700,000 patients in the U.S., Europe, and Japan. And despite strong competition, Gilead has maintained high market shares in all regions.

The Gilead commercial organization is focused on executing our numerous HIV and HCV product launches across multiple geographies during the remainder of the year. In addition to our three TAF-based HIV products, we're preparing to launch our pan-genotypic HCV product as early as next quarter in the U.S.

Thank you, and now let's open the call for questions.

Operator?.

Thank you. Our first question comes from the line of Geoff Meacham of Barclays. Your line is now open..

Hey, guys. Thanks for taking the question. It seems like lower revenue per patient was one of the bigger contributors to the sequential trends, so a couple questions.

What's the initial outlook for higher volumes coming from commercial patients just with respect to broader access for F0 and F1? And then was the volume contribution this quarter pretty meaningful from the VA system? I just want to get a sense for the sequential trends there too. Thanks..

Hi, Geoff. So several things happened in the quarter in relation to volume and revenue per patient, so maybe I'll try and deal with all of them. So the first thing, as you said, we had, and we expected this and hoped for it, that several of the large commercial payers opened up access to patients regardless of their fibrosis scores during quarter one.

The consequence of that was that they triggered discounts that had been previously negotiated in order to incentivize that opening up of restrictions. So that was the first thing. And then the VA, as you know, treated very few patients in quarter four last year because of lack of funding.

That funding was agreed for a two-year period and focused on HCV medicines, and was clarified late December. Then the VA went through a process of evaluating the clinical evaluation of product available from not just us, but obviously new entrants to the market. And that process took through till mid to late January.

And we had to negotiate with the VA, and we did give the VA some extra discounts, which resulted in them putting our products on their formulary and also opening up, again, access to all patients within the VA. So there were no restrictions on patients. And again, we see this as a large positive.

And as that funding got distributed around the VA centers, we started to see a very large uptick in VA treatment from about the middle of the quarter, and we anticipate that that will continue through the year.

The second area that happened, of course, is we had the entrance of Merck into the market, and so we judiciously exercised our contractual right to preserve access. And in a few cases, we did increase a little bit of discount to some payers to ensure that Harvoni in particular remained on formularies and with full access.

The third thing I think we've seen, as I indicated in the comments, was a slight and gradual shift of payer mix away from the commercial and Medicare Part D payers towards the more government payers, and that was probably about a 10% shift from quarter four to quarter one.

And then the final piece, as we indicated, is we did have a catch-up, a true-up of some rebate claims that came in respect to quarter three and quarter four that were a little bit higher than we estimated last quarter and which we put right during quarter one. So that really is the dynamic between volumes and revenue per patient..

Great. Thanks a lot, Paul..

Thank you. And our next question comes from Mark Schoenebaum of Evercore ISI. Your line is now open..

Hey, guys. By the way, John, I really enjoyed your opening comments. Everyone is very focused on what you're going to do with your cash, BD, M&A. So I have actually one simple question probably for John.

Would you be willing to go hostile? And if not, why not? How do you feel about that? Because clearly what we're hearing is that the small companies won't engage right now because they don't like the valuations, but the large companies are very interested. Thank you..

Hi, Mark. It's John. Mergers and acquisitions are always a process, and so the ability to go hostile is limited by how much data or how much cooperation you need.

And so in each situation, you'd have to think about what do I need to know about the pipeline or about things that are not public about a company in order to be comfortable making a public offer for the company. But that being said, we've never declared ourselves unwilling to go hostile.

I do prefer a friendly process, but it would just depend on the situation itself..

Thank you very much..

Thank you. And our next question comes from Geoffrey Porges of Leerink Partners. Your line is now open..

Thanks very much and, John, welcome to leading your first call completely. I guess to follow up on that question, you've invested it looks like about $19 billion or $20 billion over the last year reducing your share count. The share count has come down by about 10%, but your EPS is pretty much flat, maybe up low single digits versus last year.

Are you convinced that that's the best use of your capital? You've got $21 billion in cash and about the same amount of debt.

So are you going to revisit that, or is that more or less the path that you believe generates the best returns here?.

Geoff, I think that was directed at me, but I'm going to let Robin answer the first part of the question..

Hi, Geoff. It's Robin. I think as we said all along, we look at how we leverage our cash as not only being share repurchases and dividends, but also we consistently look at investing in our core pipeline as well as M&A where appropriate.

And similar to the amounts that you called out relative to cash, it's actually about a 17% reduction in share count, as I mentioned on the call. We have done a lot of M&A as well. And I think we'll continue to do that, as John said, when the right opportunities present themselves.

So I think we've always been fairly clear that we're balancing doing all of those things, and we have purposely focused on share repurchases because in the absence of M&A it allows us to be flexible and more opportunistic.

But when the right M&A opportunities present themselves, it allows us to reduce our share repurchases in order to make those necessary acquisitions and leverage our cash and debt and borrowing if we need to..

For us it's fairly simple. We have the flexibility to do both things; that is, return shareholder value through stock repurchases and dividends and of course continue to be opportunistic in M&A. How we're deploying it is a reflection of the things we're interested in.

I think, for example, the Nimbus acquisition, while relatively small, could bring a very, very unique product to us and something that we had focused on during the quarter. We're continuing to look for opportunities like that, and we will continue to aggressively look for opportunities to deploy our cash in investing in things other than Gilead..

Okay, thanks. I'll get back in the queue..

Thank you. And our next question comes from Michael Yee of RBC Capital Markets. Your line is now open..

Hi, good afternoon. I wanted to revisit some questions that you were talking about related to price and volume. You did mention on the positive that net new patient starts were up about 10%, which is great. But then the total revenues in the U.S. declined by 11%. So someone could do the math and imply that price was down 10% to 20%.

Can you comment on that or maybe just describe where you think the price/volume equation was in the quarter and how we should think about net price changing quarter over quarter and how that should change over the year? Thanks..

Mike, I think we are in a much more stable place than we were one year ago at this time. I think I described it just now. We've made some contractual moves which have opened up access. We're very happy about that. We're happy that some of the government payers are beginning to treat a few people.

We're very happy about the VA in particular ramping up its treatment levels. I said that we've had to compete in the VA, and we did that, but we're enjoying very high market shares wherever physicians have the choice of prescribing.

And that's always been our aim, to make sure that physicians and patients can choose what drug they think is appropriate. And wherever that's the case, Gilead seems to do pretty well. So I would say looking forward, we're in a fairly stable place now.

Clearly, over time as competition increases, prices are likely to incrementally move in one direction, I would think. But I think we're stable..

So on one side we're getting lots of access, but on the other side my math is not totally off, just to be fair..

Correct..

Okay, got it. Thank you, guys..

Thank you. And our next question comes from the line of Cory Kasimov with JPMorgan. Your line is now open..

Hey. Good afternoon, guys. Thanks for taking the question. Going back to the strategic theme, you've talked in the past about wanting to be a leader in oncology.

But given the issues you've had with Zydelig and the leadership changes you've also had, are you as committed to that space as you once were? And if so, what's your thought on the potential opportunities you see out there between solid tumors and Heme/Onc [Hematology/Oncology]? Thanks..

Cory, it's John. That's of course a big question. So if you think about where we are in our oncology portfolio, we have been focused heavily on a number of activities around these kinase inhibitors and how that actually behind Zydelig a number of opportunities are moving in the clinic, including our SYK inhibitor, our BTK inhibitor.

I should probably let Norbert go on about this, but I would say we have numerous opportunities that we're continuing to pursue. You had mentioned we want to be a leader in oncology. We think of oncology as one leg of a future company that could be important to us along with our investments in NASH and inflammatory diseases.

We do see some good opportunities out there and we see some good opportunities internally. So the Zydelig setback hasn't changed our appetite for trying to do more transformative things in oncology.

It was never going to be a franchise product like Viread or sofosbuvir but was a good beginning for us, and I really haven't changed my thought process around it as a result of the setback because of the toxicities we've seen.

Norbert, do you want to add anything to that?.

No. As John said, Zydelig has not only not decreased our appetite, it has increased our appetite to do more in oncology. And we're now at a point where a number of programs are coming to fruition. For instance, momelotinib we're intending to file early next year. The Phase 3 studies are fully enrolled. We should get results at the end of this year.

The anti-MMP9 antibody is in Phase 3 for colorectal cancer. We're at the end of dose-ranging with combinations of PI3K, SYK, and SYK/BTK, and that will move into front-line treatment. So we have a number of interesting things ongoing internally. And of course, like John said, we're continuously looking externally at finding suitable opportunities.

And if the right opportunity comes along, then we will take advantage of it..

Great, thank you..

Thank you. And our next question comes from Brian Abrahams of Jefferies. Your line is now open..

Hi, thanks for taking my questions. I was wondering if you could talk a little bit about hep C diagnostic initiatives and maybe some of the pull-throughs that you're seeing or might expect to see on patient identification.

And I'm particularly curious if you have a sense among the growing number of new patient starts, who may have been identified last year and are now getting access with fewer restrictions versus patients who are getting identified this year and coming onto treater care concurrently? Thanks..

Should I comment on that, John, maybe? So it's actually very hard to tell when people have been diagnosed and who's been treated when. Anecdotally, I can tell you, and I was out visiting some doctors in California just last week. Patients are – there are plenty of patients there. There are many people who are linked to care now.

And with the fibrosis restrictions being dropped now, most physicians can treat – certainly in the commercial area and Medicare area, can treat whoever they want.

One thing is clear though that there are still prior authorizations in place and there's still a fair amount of office paperwork and bureaucracy that have to be put in place for each patient.

Then there are the patients themselves, many of whom just simply aren't quite mentally ready or psychologically ready to commit to that disciplined eight-week or 12-week treatment. And with these products, of course, insurance companies aren't keen to do it twice.

They want to try and get it right the first time, the doctors want to get it right the first time, and the patients want to get it right the first time. So we're seeing that some of the delays in patients starting has to do with the patient just being ready to commit to a disciplined eight or 12 weeks of patients.

On the diagnosis side, again anecdotally, we just know that there are a lot of activities going on. A lot of people are telling us what's going on around the countryside, and we do see diagnosis rates increasing significantly.

So I think there are plenty of patients being diagnosed and there are plenty of patients coming into treatment and there's a waiting list of patients at most offices. By the way, our estimate on diagnosis is about 200,000 new diagnoses happened in the U.S. last year..

Brian, I might want to add that we have a number of demonstration projects ongoing in the United States to look for places, institutions, populations and figure out what the diagnosis positivity would be. And it's surprising, we've identified some places like ER rooms that have seropositivity rates of greater than 10%.

We hope that those demonstration projects will then lead to a broader recognition of the value of diagnosis and identification of hepatitis C in infected individuals..

Thanks very much..

Thank you, and our next question comes from the line of Brian Skorney of Robert Baird. Your line is now open..

Hey, good afternoon, guys. Thanks for taking my questions. I guess two quick ones.

I know we talked a little bit about this at EASL, John, but just first on the timeline in terms of when you think you can get sofosbuvir [sof]-based regimens approved in China, how you think about pricing that there to capture share of patients who are looking at a branded drug versus potentially penetrating further in.

And then just on the U.S., have you guys heard anything in terms of a warehouse build in genotype 3 ahead of a sof/vel [velpatasvir] launch? Should we be expecting a small bolus of patients upon that approval?.

So, Brian, I'll start with the China question. So in terms of timing for China, there is a fairly fixed process. And according to the recent processes, we could possibly have sofosbuvir on the market in 2017.

As you may have seen, there are new – the Chinese government is working hard to try to accelerate review and approval of HCV drugs because currently none are on the market of the direct-acting antivirals, and that could help us accelerate the timelines into China, and we are working on that.

Particularly of interest to us would be accelerating the timeline for sof/velpatasvir because there are so many different genotypes in China. Genotyping is not common in China, and this could provide a very good option for the people of China.

So there's hope, but we can't guarantee of course that we can accelerate that approval beyond its current timeline, which is 2019. The Chinese market is fairly large. Between 10 million and 20 million people are thought to have HCV.

I don't want to get into public discussions of pricing, but I do think there's a price/volume relationship that would work for us and for the Chinese health system that could be very, very good for us both. And so that's what we're working towards is access in China. Your second question was on warehousing for genotype 3 patients.

Currently a lot of genotype 3 patients are being treated with sof in combination with daclatasvir. And so there seems to be fairly decent access for that. So I'm looking at Paul. I don't think there's any real warehousing going on, but maybe you're more aware of it than I am..

About 7% or 8% of the U.S. HCV epidemiology is genotype 3. We don't have any data on it, but certainly we get – I'm getting the impression from my team anecdotally there is a little bit of warehousing, but not least because sofosbuvir/daclatasvir is a very expensive regimen.

And the hope is that the cost of the genotype 3 treatment will come down somewhat after sof/vel comes onto the market, which is the PDUFA date is June 28, so people are thinking about that. So we're optimistic..

Great. Thanks, guys..

Thank you, and our next question comes from Phil Nadeau of Cowen & Company. Your line is now open..

Good afternoon, a few questions on Japan. I know you said that there was some change in pricing because of the April 1 price declines during the quarter.

What other dynamics were going on in Japan during this quarter? Where do you think you are in treating the bolus in Japan? How much longer could that go? And then separately, I believe that there are price discounts that come in with a certain volume being reached.

Are we right to assume that those could be hit in July? And what kind of dynamics do you expect to see in the Japanese market going forward?.

So we're very, very pleased with the execution of our launches in Japan. In terms of patient flow, the genotype 2 patients, which represent about 20% of the Japanese epidemiology in HCV, are beginning to stabilize now. So those are the patients being treated with Sovaldi. Those numbers – we launched on May 25 last year.

We initially had a bolus and then those numbers came down through quarter four. And quarter one is at a lower level than quarter four, but we're seeing a stable flow of patients now in genotype 2, and we would anticipate that to be stable through the rest of the year. Genotype 1 is treated by Harvoni.

We treated an enormous number of patients initially. We're not quite sure if the curve in Japan is identical to the curves we've seen in the U.S. or other major markets, and that's because there was a DAA [Direct Antiviral Agent] in the market before Harvoni, which did treat quite a few people.

So there might not have been quite such a large amount of warehousing. In any case, we're seeing the Harvoni patient numbers coming down gradually. It's not quite as steep as some of the markets. And that's yet to stabilize, but I'm pretty sure – I know it will stabilize sometime in the next quarter or two. So that's how we're seeing it.

We treated about 30,000 patients during the quarter. So that number, it will be there or thereabouts I think for the rest of the year..

And what about the volume discounts, are those going to come later in the year, and what kind of dynamics?.

I'm sorry. We're not anticipating any further price movements in this year in Japan..

Great, thanks for taking my question..

Thank you. And our next question comes from Matthew Harrison of Morgan Stanley. Your line is now open..

Sorry, can you hear me?.

Yes, now we can..

Okay, great. Thanks, I guess one follow-up on Phil's question on Japan.

Can you just be clear with us? The pricing that you talked about in March, was that the full extent of the 30% price cut or would there be more in April, just so we can understand how much was reflected in this quarter? And then on the rebates that you talked about, the true-up that happened, would you expect that to swing again through the rest of this year, or do you think that that is now at a level that expresses what your forward-looking expectations are for the level of rebates? Thanks..

I'll do the first part and Robin will talk about the second part. So the pricing in Japan, the official price reduction was just under 32% and officially from April 1.

We actually reduced our prices into wholesalers early in March, and the reason for that was because the price cut was announced much earlier, and therefore we wanted to just smooth out the inventory situation, so that's why we reduced our price into wholesalers a little bit earlier.

And by the end of the quarter, inventory levels were up to I would say reasonable levels relative to demand. And actually a little bit, inventory levels were a little bit down from where we ended quarter four because overall demand was slightly down because of Harvoni.

Robin?.

Sure. And going back to answer the second part of your question relative to the rebate accruals that both Paul and I mentioned, we regularly have to adjust our accruals to reflect the trends and timing of rebates.

And I would say still the trends and the dynamics and the complexity around reimbursement in these markets still make them somewhat difficult to predict. So I wouldn't say they were all one-time in nature.

There may be a small component that you could say when we were trying to look at the level of inventory that maybe was one-time in nature, but these dynamics I think we may see continue into the future. The honest answer is we don't necessarily know..

Thank you, and our next question comes from the line of Ying Huang with Bank of America Merrill Lynch. Your line is now open..

Hi, thanks for taking my questions. First of all, I want to probe a little bit about the rebates. Can you clarify whether it's actually access-based or volume-based? Because we can see from the scripts apparently the volume is not really picking up after those big insurers opened up the access regardless of F [fibrosis] scores.

So I wonder what happens there. And then secondly, I think, Paul, you mentioned that the payer mix is getting a little bit worse this quarter. But can you talk about your thoughts on payer mix going forward? Is it going to be continuing shift to the public payers or I guess the lower price environment or not? Thank you..

Hi, Ying. So the first question was about patient volumes coming in and relative to the opening up of the fibrosis scores. So I'm not sure whether you look at this data or not, but we get new-to-brand data, which is really the leading indicator of new starts in the quarter.

So we've seen, and this is just retail scripts by the way, so that doesn't include the VA, it doesn't include scripts that go through ESI [Express Scripts] and various other groups, so it's partly representative.

And what we've seen amongst those scripts is new starts in the quarter have gone up, and that's gone up exactly in line with our expectations with the fibrosis scores being released.

Total scripts have remained relatively flat, and part of that is because in quarter four of course the patient numbers, throughout really 2015 quarter on quarter, the new starts were coming down. And therefore the refills associated with those new starts falling into quarter one were somewhat down.

So the aggregate of that makes the numbers of total prescriptions in the quarter look relatively flat and slightly disengaged from the fibrosis piece. So I think that hopefully covers that. And then of course, the VA, as I said, isn't included in that group and that was a large number of patients coming into the system..

And then the payer mix?.

The payer mix, I think directionally, this is not a dramatic move. I think directionally we anticipate that Medicaid will start. There's a lot of pressure on Medicaid to treat patients. And we anticipate that the public payer sector will start proportionately getting a little bit bigger in our mix.

Just as an example, around 77% of our payer mix at the end of quarter four or during quarter four was really commercial and Medicare Part D. That number has dropped down now to about 64% as a proportion. So we're seeing a shift, and I would imagine that that will continue gradually..

And then would you guys ever talk about the relative magnitude compared to the 46% you flagged last year?.

No, we're not going to give guidance on our guidance. We gave the gross-to-net number once. We've built that into our guidance for the rest of the year, so we're not planning on breaking that out it all..

Thank you, Paul..

Thank you, and our next question comes from Robyn Karnauskas of Citi. Your line is now open..

Hi, guys. Thanks for taking the questions. So just thinking about the moving parts over the course of the year and the color you gave on fibrosis scores, so with so many people getting rejected early on based on fibrosis score, how might they flow into the system during the year? Because there are a lot of patients.

Do you see them coming on evenly, or could they come in a bolus and we could see some choppiness in the quarter? And then the second question I had was how comfortable are you that some of the pricing negotiations have been done and we won't see further pricing negotiations coming with the new nuke-based regimens coming next year? Do you think there's going to be another round of surprises in 2017 for discounting, or do you think we've reached a little bit lower of a steady state? Thanks..

I think it's hard to tell on the flow of patients first of all. What we do know is there are plenty of patients out there. As I said, our data, we've got three different sources of data which shows that 25,000 to 30,000 patients are coming into treatment. Obviously, a lot less than that are actually being treated.

And anecdotally as I said, I think it's because there's bureaucracy still in the physicians' offices, which give a kind of – I guess that's a gating in the sense of the number of patients that can be treated. And also there's from the patient side people actually ready to be treated.

I think they want to be teed up, if you like, for treatment, but they might not want to actually start tomorrow morning. So I think we should expect patient flow to be fairly stable through this year.

And then on the negotiation side, I think with real-world data, payers are tending now to really take a lot more time and put a lot more thought into evaluating the clinical profiles of the products. And until we see the clinical profiles of the new products, it's very hard to predict how competitive they are.

If they're competitive, I think we have to anticipate prices will come down and we'll negotiate because we certainly don't want to lose any access to patients for our products, and we'll defend our market share vigorously. So it's hard to predict.

I think directionally, competition equals lower prices, but we're going to be focusing on looking at differentiating our products. We've got great products out there now and our pipeline looks really exciting. So I think we're in good shape for a long and sustainable and healthy HCV business in the U.S..

Thanks..

Thank you, and our next question comes from Alethia Young of Credit Suisse. Your line is now open.

Hey, guys. Thanks for taking my question. Just one, if we go back to the beginning of this year and think about the $30 billion to $31 billion you put out there, has the mix between hep C and HIV changed? It seems like HIV is doing a little bit better on the nuances and hep C has more pricing pressure.

And then just also, can you confirm maybe if we're seeing any competition in the big five from new competitors like Merck coming to the market?.

Maybe I'll see if I can take the first part of your question. This is Robin. We gave guidance for the full year. I would say yes, this quarter we had a slightly uptick relative to our HIV expectations and slightly down relative to HCV. But I think we've still got three quarters to play things out.

And as Paul said, we continue to be optimistic relative to patient starts and a more stable, predictable environment going forward. But it's still very early to tell..

And in Europe, I've got to say the payers are treating the products generally with less consideration to the clinical differences than we're seeing in the U.S. And there are some payers who are treating the products a bit more like commodities, and we're working hard to make sure that we educate them as best as possible.

And I think the real-world data, much of which originates from Europe, is really supporting us in that. But we have seen some instances, for example, tenders in the Nordics, which have a very binary outcome. And there are certain times that we've decided that those tenders' prices don't warrant the value of our products.

So our market shares have been a little bit less in Europe. And specifically to answer your question, I think all three players are out there in Europe trying to get business. But at the end of the day, we hope that people will recognize that the Gilead products are highly effective, very simple, very tolerable.

And the real-world data, which is now there are vast amounts of it, really does support us when physicians make their choices. And as I said earlier, where physicians have the freedom of prescription, we tended to have very, very strong market shares, in the 90%-plus..

Thank you, and our next question comes from Ian Somaiya of BMO Capital. Your line is now open..

Thanks. Maybe just changing the topic a little bit, a question for Norbert.

I was hoping you could just speak to the three oral candidates you have for NASH now, just how you're planning to develop them, how they might come into play, potential combination strategies? And as you think about the larger BD question that keeps getting asked, do you have enough data on your internal programs to make decisions in terms of what additional products that might benefit your internal efforts in NASH and also in hep B?.

So, Ian, actually it's four products that we have currently in early clinical studies if you include the Nimbus compound. That deal, by the way, has not closed yet, but it should close in the next week. So we have the ASK inhibitor, the ACC1/ACC2 inhibitor, simtuzumab, and then the FXR agonist.

And we could by the end of this year be in four Phase 2 studies really in NASH to look at the effect of any one of these agents by themselves. And then we would also at the same time look at our star combination studies to see – we always have SYK. We believe in the three points of PET disease pathogenesis.

There's fibrosis, inflammation, and metabolic, and yet we don't have agents that address all of them. And you're absolutely – our hypothesis is that ultimately it's a complex biological disease and probably more than one agent would be needed. And we're looking forward, maybe sometime next year we will then go to Phase 3.

With regards to BD, we're of course looking. At the moment there is nothing out there that I would say we have to get. As I said, we have four components. We're going to look at those individually and then as the results come in make decisions what else we would need..

And then what about hep B, just similar question? With the assets you do have, I know that you provided very little information or shared very little information with us.

But just as you think about your internal portfolio, do you feel like you have the assets you need to move forward with them and obviously capture the market?.

I would say we have, as you know, GS-4774. GS-4779, that's the GlobeImmune vaccine. We've presented data at the last AASLD so they're showing that at least in virally-suppressed patients it did not lead to a reduction in its antigen. We are currently doing a study in treatment-naive patients.

We then have GS-9620, the TLR-7 agonist in Phase 2 as well – or Phase 2a. And then we have two other internal programs that we haven't disclosed yet. They are pre-IND, but we have identified with two different mechanisms molecules that we want to develop or evaluate in human clinical studies.

But having that said, it's early as a general statement in hepatitis B cure that we are really having a very open mind and looking outside what else is there potentially that would fit our portfolio..

Thank you, and our next question comes from Terence Flynn of Goldman Sachs. Your line is now open..

Hi, thanks for taking the questions. I was just wondering. You mentioned this 25,000 to 30,000 per month number of patients coming into treatment, and then you gave us the new diagnosis last year in the U.S. And so that equates to about 17,000 per month.

So is it safe to assume that of the new patients coming onto treatment, half are newly diagnosed and half are coming from the currently diagnosed pool? Am I thinking about that the right way? And then the second question was just, can you tell us the percentage of patients that are getting eight weeks of therapy this quarter? Thank you..

Hi, Terence. I think broadly speaking, your math is correct on that. It's hard to tell exactly where the patients are coming from, but I think mathematically that sounds about right.

Sorry, what was the second question?.

Eight weeks..

On the eight weeks..

Oh, yes, sorry, eight weeks. We've drifted slowly but surely upwards on the eight weeks. I think we're about 43% now. I've got to emphasize the data we have is called intent-to-treat rather than actual prescriptions. So the intent to treat in the U.S. is about 43%.

The epidemiology, as we've previously said, would probably suggest that about half our genotype 1 patients would fall into the criteria that would trigger off eight-week treatment..

Thank you, and our next question comes from Jim Birchenough of Wells Fargo. Your line is now open..

Hi, guys, a bit of a maintenance question and then a more meaningful question. On the maintenance side, you refer to a bit of a shift from 24 weeks to eight weeks.

Could you break down the eight-week, 12-week, and 24-week treatment numbers in HCV and where you see that heading? And the more meaningful question is NASH is obviously an important part of your future growth strategy. FXR is in that category.

How confident are you that you can separate out the metabolic effects of FXR agonism versus the beneficial effect? What's the basis for that cohort, and when will we see that data? Thanks..

We're not going to break down the weeks of therapy. I just said what we think the eight-week amount is, but the rest you'll have to just model yourself. And I'll hand over to Norbert for the second question..

So, Jim, as you know, steroid FXR agonists do many, many things, not only in the liver, but in other target organs. So our philosophy is that we have an FXR agonist that purely acts at the level of the GI. So it does not get orally absorbed to any meaningful degree.

And then what it does at the level of the GI, it releases FGF19, and we believe that FGF19 does everything that it needs to do in order to impact on NASH. That's our hypothesis and we're testing that, and we should have data available in the third or fourth quarter of this year. So that's a fairly easy experiment to do.

You simply look at bio-availability which is below, but the FGF19 – increase the FGF19 levels with some of the consequent metabolic effects. That way we also think we can prevent colitis, we can prevent the cholesterol effects, we can prevent alkaline phosphatase elevations, et cetera.

So if that all is true, it should be a much safer and cleaner FXR agonist..

And, Norbert, when is the form for that data release? And I guess what are the next steps for that program? How far behind are you from things that are in Phase 3 right now as an FXR agonist?.

We could probably have some of the preliminary data at the AASLD, and we would then move into Phase 3 soon after that. So we're not that far behind other companies..

Okay, thanks for taking my question..

Thank you, and our next question comes the line of Alan Carr of Needham & Company. Your line is now open..

Hi, thanks for taking my question. I wondered if you can talk a little bit more about the new diagnoses in 2015 that you mentioned. You said there were around 200,000. Do you have any other details around that, where they were found or I guess the trend over the course of the year? Is it increasing? Thanks..

I don't have a lot of details at my fingertips actually, Alan.

I would say, just to build on what Norbert was saying earlier, the interactions we're having with many people working on diagnosis projects around the country are that there's a lot of – a surprisingly high level of positive diagnosis in some of the urban centers and in ER rooms in particular in those urban centers, where diagnosis rates have been double at least what even the local investigators had anticipated.

Why that is, I'm not sure, but this has been consistent throughout the country. So I would say that diagnosis rate, the 200,000, would grow rather than shrink, certainly for the next few years.

And there are great efforts of course now to encourage diagnosis because people know that at the end of it, they're going to be treated and have a high probability of being cured..

Great, thanks very much..

Thank you, and we have time for one final question. That question comes from the line of Tony Butler of Guggenheim. Your line is now open..

Thanks very much.

Norbert, very quickly if you could, recognizing that Nimbus closes next week, have there not been other ACC inhibitors which have actually failed? And if that's true, what might be unique about the Nimbus program? I understand it may attack a different part of the molecule, which would be interesting for you to elaborate on if that is indeed the case.

Thanks..

So, Tony, you are exactly right. There have been previous ACC programs at Merck and Pfizer. They have not been successful, and the reason had to do with the specificity. This compound is really unique, it's a low nanomolar inhibitor of both ACC1 and ACC2.

And it inhibits not only the pathway that goes to de novo lipogenesis, so based on low Coenzyme A production, but it also inhibits at the level of the mitochondrion. It stimulates, I might say, lipid acid beta oxidation. So it does really two things.

It inhibits the formation of lipids, palmitate mostly, and at the same time it stimulates the beta oxidation of lipids. And so there are actually some anecdotal reports from the Pfizer compound that inhibition of ACC1 and ACC2 results in a decrease in liver fat. That's by the way something we will do as one of the next experiments.

We would look by MRI on the reduction of – we've already shown at the EASL presentation that it inhibits lipogenesis. Now we have to show also that it inhibits lipid fat content of the liver. It's a very straightforward and easy experiment to do.

And I think once we have shown that, we have pretty high confidence that there would be a meaningful clinical benefit of the combo..

Great, thank you..

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

Ladies and gentlemen, thank you for participating in today's conference. That does conclude the program, and you may all disconnect. Have a great day, everyone..