Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
Exhibits
EX-10.28
gildq32018ex1028.htm
EX-31.1
gildq32018ex311.htm
EX-31.2
gildq32018ex312.htm
EX-32.1
gildq32018ex321.htm
Gilead Sciences Earnings 2018-09-30
GILD 10Q Quarterly Report
Balance Sheet
Income Statement
Cash Flow
10-Q 1 q318form10-q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File No. 0-19731
GILEAD SCIENCES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
94-3047598
(State or Other Jurisdiction of
Incorporation or Organization)
(IRS Employer
Identification No.)
333 Lakeside Drive, Foster City, California
94404
(Address of principal executive offices)
(Zip Code)
650-574-3000
Registrant’s Telephone Number, Including Area Code
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý Accelerated filer ¨ Non-accelerated filer ¨
Smaller reporting company ¨ Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No ý
Number of shares outstanding of the issuer’s common stock, par value $0.001 per share, as of October 30, 2018: 1,293,619,612
We own or have rights to various trademarks, copyrights and trade names used in our business, including the following: GILEAD®, GILEAD SCIENCES®, AMBISOME®, ATRIPLA®, AXI-CELTM, BIKTARVY®, CAYSTON®, COMPLERA®, DESCOVY®, EMTRIVA®, EPCLUSA®, EVIPLERA®, GENVOYA®, GILEAD COMPASS INITIATIVE™, HARVONI®, HEPSERA®, LETAIRIS®, ODEFSEY®, RANEXA®, SOVALDI®, STRIBILD®, SYNNOTCH™, THROTTLE™, TRUVADA®, TYBOST®, VEMLIDY®, VIREAD®, VOLIBRIS®, VOSEVI®, YESCARTA® and ZYDELIG®. LEXISCAN® is a registered trademark of Astellas U.S. LLC. MACUGEN® is a registered trademark of Eyetech, Inc. SYMTUZA® is a registered trademark of Janssen Sciences Ireland UC (Janssen). TAMIFLU® is a registered trademark of Hoffmann-La Roche Inc. This report also includes other trademarks, service marks and trade names of other companies.
Accounts receivable, net of allowances of $514 and $455, respectively
3,465
3,851
Inventories
816
801
Prepaid and other current assets
2,171
1,661
Total current assets
34,918
31,823
Property, plant and equipment, net
3,791
3,295
Long-term marketable securities
2,378
11,184
Intangible assets, net
16,314
17,100
Goodwill
4,117
4,159
Other long-term assets
2,787
2,722
Total assets
$
64,305
$
70,283
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
$
580
$
814
Accrued government and other rebates
4,456
4,704
Other accrued liabilities
2,333
3,370
Current portion of long-term debt and other obligations, net
2,747
2,747
Total current liabilities
10,116
11,635
Long-term debt, net
24,570
30,795
Long-term income taxes payable
6,018
6,794
Other long-term obligations
594
558
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, par value $0.001 per share; 5 shares authorized; none outstanding
—
—
Common stock, par value $0.001 per share; 5,600 shares authorized; 1,294 and 1,308 shares issued and outstanding, respectively
1
1
Additional paid-in capital
2,118
1,264
Accumulated other comprehensive income
36
165
Retained earnings
20,706
19,012
Total Gilead stockholders’ equity
22,861
20,442
Noncontrolling interest
146
59
Total stockholders’ equity
23,007
20,501
Total liabilities and stockholders’ equity
$
64,305
$
70,283
See accompanying notes.
2
GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in millions, except per share amounts)
Three Months Ended
Nine Months Ended
September 30,
September 30,
2018
2017
2018
2017
Revenues:
Product sales
$
5,455
$
6,402
$
15,996
$
19,825
Royalty, contract and other revenues
141
110
336
333
Total revenues
5,596
6,512
16,332
20,158
Costs and expenses:
Cost of goods sold
1,086
1,032
3,283
3,115
Research and development expenses
939
789
3,068
2,584
Selling, general and administrative expenses
948
879
2,925
2,626
Total costs and expenses
2,973
2,700
9,276
8,325
Income from operations
2,623
3,812
7,056
11,833
Interest expense
(264
)
(291
)
(820
)
(821
)
Other income (expense), net
305
150
547
391
Income before provision for income taxes
2,664
3,671
6,783
11,403
Provision for income taxes
565
959
1,326
2,923
Net income
2,099
2,712
5,457
8,480
Net income (loss) attributable to noncontrolling interest
2
(6
)
5
(13
)
Net income attributable to Gilead
$
2,097
$
2,718
$
5,452
$
8,493
Net income per share attributable to Gilead common stockholders - basic
$
1.62
$
2.08
$
4.19
$
6.50
Shares used in per share calculation - basic
1,296
1,306
1,302
1,307
Net income per share attributable to Gilead common stockholders - diluted
$
1.60
$
2.06
$
4.15
$
6.44
Shares used in per share calculation - diluted
1,307
1,319
1,313
1,319
Cash dividends declared per share
$
0.57
$
0.52
$
1.71
$
1.56
See accompanying notes.
3
GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(in millions)
Three Months Ended
Nine Months Ended
September 30,
September 30,
2018
2017
2018
2017
Net income
$
2,099
$
2,712
$
5,457
$
8,480
Other comprehensive income (loss):
Net foreign currency translation gain (loss), net of tax
1
(4
)
(17
)
(51
)
Available-for-sale securities:
Net unrealized gain, net of tax impact of $0, $1, $0 and $4, respectively
31
185
25
311
Reclassifications to net income, net of tax impact of $0, $0, $0 and $(8), respectively
—
(1
)
4
(7
)
Net change
31
184
29
304
Cash flow hedges:
Net unrealized gain (loss), net of tax impact of $0, $(2), $1 and $(11), respectively
(6
)
(76
)
51
(278
)
Reclassifications to net income, net of tax impact of $0, $1, $0 and $0, respectively
8
25
101
(4
)
Net change
2
(51
)
152
(282
)
Other comprehensive income (loss)
34
129
164
(29
)
Comprehensive income
2,133
2,841
5,621
8,451
Comprehensive income (loss) attributable to noncontrolling interest
2
(6
)
5
(13
)
Comprehensive income attributable to Gilead
$
2,131
$
2,847
$
5,616
$
8,464
See accompanying notes.
4
GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in millions)
Nine Months Ended
September 30,
2018
2017
Operating Activities:
Net income
$
5,457
$
8,480
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense
169
155
Amortization expense
902
734
Stock-based compensation expense
670
304
Deferred income taxes
10
127
Other
14
227
Changes in operating assets and liabilities:
Accounts receivable, net
367
473
Inventories
(191
)
(79
)
Prepaid expenses and other
749
311
Accounts payable
(217
)
(515
)
Income taxes payable
(1,551
)
(48
)
Accrued liabilities
(324
)
(1,024
)
Net cash provided by operating activities
6,055
9,145
Investing Activities:
Purchases of marketable securities
(5,786
)
(18,813
)
Proceeds from sales of marketable securities
1,201
8,966
Proceeds from maturities of marketable securities
17,021
4,164
Capital expenditures
(676
)
(370
)
Other
(140
)
—
Net cash provided by (used in) investing activities
11,620
(6,053
)
Financing Activities:
Proceeds from issuances of common stock
239
183
Proceeds from debt financing, net of issuance costs
—
2,991
Repurchases of common stock
(1,938
)
(848
)
Repayments of debt and other obligations
(6,250
)
(90
)
Payments of dividends
(2,235
)
(2,049
)
Other
(464
)
(141
)
Net cash provided by (used in) financing activities
(10,648
)
46
Effect of exchange rate changes on cash and cash equivalents
(46
)
141
Net change in cash and cash equivalents
6,981
3,279
Cash and cash equivalents at beginning of period
7,588
8,229
Cash and cash equivalents at end of period
$
14,569
$
11,508
See accompanying notes.
5
GILEAD SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. The financial statements include all adjustments, consisting of normal recurring adjustments that the management of Gilead Sciences, Inc. (Gilead, we, our or us) believes are necessary for a fair presentation of the periods presented. These interim financial results are not necessarily indicative of results expected for the full fiscal year or for any subsequent interim period.
The accompanying Condensed Consolidated Financial Statements include the accounts of Gilead, our wholly-owned subsidiaries and certain variable interest entities for which we are the primary beneficiary. All intercompany transactions have been eliminated. For consolidated entities where we own or are exposed to less than 100% of the economics, we record net income (loss) attributable to noncontrolling interest in our Condensed Consolidated Statements of Income equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties.
We assess whether we are the primary beneficiary of a variable interest entity (VIE) at the inception of the arrangement and at each reporting date. This assessment is based on our power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and our obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. As of September 30, 2018, we did not have any material VIEs.
The accompanying Condensed Consolidated Financial Statements and related Notes to Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the related notes thereto for the year ended December 31, 2017, included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (SEC).
Significant Accounting Policies, Estimates and Judgments
The preparation of these Condensed Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. On an ongoing basis, we evaluate our significant accounting policies and estimates. We base our estimates on historical experience and on various market-specific and other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates are assessed each period and updated to reflect current information. Actual results may differ significantly from these estimates.
Concentrations of Risk
We are subject to credit risk from our portfolio of cash equivalents and marketable securities. Under our investment policy, we limit amounts invested in such securities by credit rating, maturity, industry group, investment type and issuer, except for securities issued by the U.S. government. We are not exposed to any significant concentrations of credit risk from these financial instruments. The goals of our investment policy, in order of priority, are as follows: safety and preservation of principal and diversification of risk; liquidity of investments sufficient to meet cash flow requirements; and a competitive after-tax rate of return.
We are also subject to credit risk from our accounts receivable related to our product sales. The majority of our trade accounts receivable arises from product sales in the United States and Europe. To date, we have not experienced significant losses with respect to the collection of our accounts receivable. We believe that our allowance for doubtful accounts was adequate as of September 30, 2018.
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 “Revenue from Contracts with Customers” (Topic 606). Topic 606 supersedes the revenue recognition requirements in Topic 605 “Revenue Recognition” (Topic 605) and requires entities to recognize revenue in an amount that reflects the consideration to which the entity expects to be entitled when promised goods or services are transferred to a customer. Entities adopting Topic 606 had the option of using either a full retrospective or a modified retrospective approach.
On January 1, 2018, we adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. As such, results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting under Topic 605.
6
As discussed further in Note 2, Revenues, our product sales are recognized when control of the product transfers, generally upon shipment or delivery to the customer. Certain product sales that were deferred under the sell-through or cash basis methods of accounting because fees were not fixed or determinable prior to the adoption of Topic 606 are now recognized upon transfer of control. Royalty revenue is recognized in the period in which the corresponding sales by our corporate partners occur. Prior to the adoption of Topic 606, royalty revenue was generally recognized in the quarter following the quarter in which the corresponding sales by our corporate partners occurred.
The cumulative effect of the changes made to our Condensed Consolidated Balance Sheets as of January 1, 2018 for the adoption of Topic 606 was as follows (in millions):
December 31, 2017
Adjustments Due to Topic 606
January 1, 2018
Prepaid and other current assets
$
1,661
$
96
$
1,757
Other long-term assets
$
2,722
$
10
$
2,732
Other accrued liabilities
$
3,370
$
(115
)
$
3,255
Other long-term obligations
$
558
$
31
$
589
Retained earnings
$
19,012
$
190
$
19,202
For the three and nine months ended September 30, 2018, the impact to our Condensed Consolidated Financial Statements as a result of applying Topic 606 in place of Topic 605 was not material.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01 “Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities” (ASU 2016-01). ASU 2016-01 changes accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. Additionally, ASU 2016-01 clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. On January 1, 2018, we adopted this standard using a modified retrospective approach. The standard requires that equity investments with readily determinable fair values be measured at fair value with any changes in fair value recognized in earnings. As a result of the adoption, we reclassified $293 million of unrealized net gain from accumulated other comprehensive income (AOCI) to retained earnings on January 1, 2018, which primarily consisted of $278 million unrealized gain from our equity investment in Galapagos NV.
In August 2017, the FASB issued Accounting Standards Update No. 2017-12 “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities” (ASU 2017-12). The amendments in ASU 2017-12 more closely align the results of hedge accounting with risk management activities. ASU 2017-12 also amends the presentation and disclosure requirements and eases documentation and effectiveness assessment requirements. Pursuant to the provisions of ASU 2017-12, we are no longer required to separately measure and recognize hedge ineffectiveness for highly effective hedges. On January 1, 2018, we early adopted this standard on a prospective basis. Upon adoption of ASU 2017-12, we no longer recognize hedge ineffectiveness in our Condensed Consolidated Statements of Income, but we instead recognize the entire change in the fair value of the hedge contract in AOCI. The adoption did not have a material impact on our Condensed Consolidated Financial Statements. The primary impact of adoption was required disclosure changes. See Note 5, Derivative Financial Instruments, for additional information.
In March 2018, the FASB issued Accounting Standards Update No. 2018-05 “Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118” (ASU 2018-05). ASU 2018-05 amends Topic 740 by incorporating the SEC Staff Accounting Bulletin No. 118 (SAB 118) issued on December 22, 2017. SAB 118 provides guidance on accounting for the effects of the Tax Cuts and Jobs Act (Tax Reform) and allows a company to record provisional amounts during a measurement period not to extend beyond one year from the enactment date. See Note 14, Income Taxes, for additional information.
Recently Issued Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued Accounting Standards Update No. 2016-02 “Leases” (Topic 842). Topic 842 amends a number of aspects of lease accounting, including requiring lessees to recognize leases with a term greater than one year as a right-of-use asset and corresponding liability, measured at the present value of the lease payments. In July 2018, the FASB issued supplemental adoption guidance and clarification to Topic 842 within ASU 2018-10 “Codification Improvements to Topic 842, Leases” and ASU 2018-11 “Leases (Topic 842): Targeted Improvements.” The guidance will become effective for us beginning in the first quarter of 2019 and early adoption is permitted. We plan to adopt these standards on the effective date by recording a cumulative effect adjustment to the opening balance of retained earnings on January 1, 2019.
As we continue to evaluate the impact of the adoption of these standards, we anticipate recognition of additional assets and corresponding liabilities related to leases on our Condensed Consolidated Balance Sheets with no material impact to our Condensed Consolidated Statements of Income. We plan to elect the practical expedients upon transition that will retain the lease classification
7
and initial direct costs for any leases that existed prior to the adoption of these standards. We will not reassess whether any contracts entered into prior to the adoption are leases. We are in the process of implementing a new lease accounting system and updating our controls and procedures for maintaining and accounting for our lease portfolio under the new guidance.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13 “Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments” (ASU 2016-13). ASU 2016-13 requires measurement and recognition of expected credit losses for financial assets. This guidance will become effective for us beginning in the first quarter of 2020 and must be adopted using a modified retrospective approach, with certain exceptions. Early adoption is permitted beginning in the first quarter of 2019. We are evaluating the impact of the adoption of this standard on our Condensed Consolidated Financial Statements.
2.
REVENUES
On January 1, 2018, we adopted Topic 606 using the modified retrospective method. As a result, we have changed our accounting policies for revenue recognition as detailed below.
Product Sales
We recognize revenue from product sales when control of the product transfers, generally upon shipment or delivery, to the customer. Upon recognition of revenue from product sales, provisions are made for various forms of variable consideration, which include government and other rebates such as Medicaid reimbursements, customer incentives such as cash discounts for prompt payment, distributor fees and expected returns of expired products, as appropriate. Our payment terms to customers generally range from 30 to 90 days.
Royalty, Contract and Other Revenues
Royalty revenue is recognized in the period in which the obligation is satisfied and the corresponding sales by our corporate partners occur.
Policy Elections and Practical Expedients Taken
•
We account for shipping and handling activities that are performed after a customer has obtained control of a good as fulfillment costs rather than as separate performance obligations; and
•
If we expect, at contract inception, that the period between the transfer of control and corresponding payment from the customer will be one year or less, we do not adjust the amount of consideration for the effects of a significant financing component.
Variable Consideration
Rebates and Chargebacks
We estimate reductions to our revenues for amounts paid to payers and healthcare providers in the United States, including Medicaid rebates, AIDS Drug Assistance Program rebates and chargebacks, Veterans Administration and Public Health Service chargebacks and other rebates, as well as foreign government rebates. Rebates and chargebacks are based on contractual arrangements or statutory requirements which may vary by product, payer and individual payer plans. Our estimates are based on products sold, historical payer mix, and as available, pertinent third-party industry information, estimated patient population, known market events or trends, and for our U.S. product sales, channel inventory data obtained from our major U.S. wholesalers in accordance with our inventory management agreements. We also take into consideration, as available, new information regarding changes in programs’ regulations and guidelines that would impact the amount of the actual rebates and/or our expectations regarding future payer mix for these programs. Government and other chargebacks that are payable to our direct customers are classified as reductions of Accounts receivable on our Condensed Consolidated Balance Sheets. Government and other rebates that are invoiced directly to us are recorded in Accrued government and other rebates on our Condensed Consolidated Balance Sheets.
Cash Discounts
We estimate cash discounts based on contractual terms, historical customer payment patterns and our expectations regarding future customer payment patterns.
Distributor Fees
Under our inventory management agreements with our significant U.S. wholesalers, we pay the wholesalers a fee primarily for compliance with certain contractually determined covenants such as the maintenance of agreed upon inventory levels. These distributor fees are based on a contractually determined fixed percentage of sales.
8
Product Returns
We do not provide our customers with a general right of product return, but typically permit returns if the product is damaged or defective when received by the customer, or in the case of product sold in the United States and certain countries outside the United States, if the product has expired. We will accept returns for product that will expire within six months or that have expired up to one year after their expiration dates. Our estimates for expected returns of expired products are based primarily on an ongoing analysis of our historical return patterns, historical industry information reporting the return rates for similar products and contractual agreements intended to limit the amount of inventory maintained by our wholesalers.
Revenues Recognized from Performance Obligations Satisfied in Prior Periods
During the three and nine months ended September 30, 2018, revenues recognized from performance obligations satisfied in prior years related to royalties for licenses of our intellectual property were $167 million and $395 million, respectively. Changes in estimates for variable consideration related to sales made in prior years were not material during the three and nine months ended September 30, 2018.
Contract Assets
Our contract assets, which consist of unbilled amounts primarily from arrangements where the licensing of intellectual property is the only or predominant performance obligation, totaled $117 million and $132 million as of September 30, 2018 and January 1, 2018, respectively.
Disaggregation of Revenues
The following table disaggregates our product sales by product and geographic region and disaggregates our royalty, contract and other revenues by geographic region for the three and nine months ended September 30, 2018 and 2017. The information for the three and nine months ended September 30, 2017 has not been adjusted in accordance with our modified retrospective adoption of Topic 606 and continues to be reported in accordance with our historical accounting under Topic 605.
Three Months Ended September 30, 2018
Three Months Ended September 30, 2017
(In millions)
U.S.
Europe
Other International
Total
U.S.
Europe
Other International
Total
Product sales:
Atripla
$
221
$
29
$
8
$
258
$
324
$
79
$
36
$
439
Biktarvy
375
11
—
386
—
—
—
—
Complera/Eviplera
61
67
11
139
91
133
13
237
Descovy
310
81
15
406
241
65
10
316
Genvoya
921
203
52
1,176
810
146
32
988
Odefsey
323
95
5
423
255
37
4
296
Stribild
111
20
15
146
181
40
8
229
Truvada
665
62
30
757
604
154
53
811
Other HIV(1)
10
2
2
14
13
2
—
15
Revenue share - Symtuza(2)
8
14
—
22
—
—
—
—
AmBisome
9
59
34
102
9
51
32
92
Epclusa
225
136
116
477
543
263
76
882
Harvoni
185
38
88
311
718
110
145
973
Letairis
241
—
—
241
213
—
—
213
Ranexa
178
—
—
178
164
—
—
164
Vemlidy
66
2
19
87
34
2
1
37
Viread
17
10
43
70
137
55
82
274
Vosevi
78
21
4
103
117
5
1
123
Yescarta
75
—
—
75
—
—
—
—
Zydelig
15
4
1
20
18
22
—
40
Other(3)
37
19
8
64
70
33
170
273
Total product sales
4,131
873
451
5,455
4,542
1,197
663
6,402
Royalty, contract and other revenues
20
102
19
141
21
74
15
110
Total revenues
$
4,151
$
975
$
470
$
5,596
$
4,563
$
1,271
$
678
$
6,512
9
Nine Months Ended September 30, 2018
Nine Months Ended September 30, 2017
(In millions)
U.S.
Europe
Other International
Total
U.S.
Europe
Other International
Total
Product Sales:
Atripla
$
723
$
119
$
79
$
921
$
974
$
259
$
133
$
1,366
Biktarvy
593
13
—
606
—
—
—
—
Complera/Eviplera
210
279
39
528
315
385
44
744
Descovy
895
234
41
1,170
682
149
22
853
Genvoya
2,678
596
144
3,418
2,189
358
67
2,614
Odefsey
905
230
15
1,150
688
87
6
781
Stribild
388
83
36
507
632
161
38
831
Truvada
1,821
245
108
2,174
1,635
527
175
2,337
Other HIV(1)
30
6
10
46
34
5
2
41
Revenue share - Symtuza(2)
8
34
—
42
—
—
—
—
AmBisome
40
170
102
312
26
153
97
276
Epclusa
733
502
278
1,513
2,142
649
154
2,945
Harvoni
649
116
225
990
2,628
583
515
3,726
Letairis
689
—
—
689
654
—
—
654
Ranexa
581
—
—
581
517
—
—
517
Vemlidy
172
8
41
221
66
3
1
70
Viread
40
72
137
249
395
202
237
834
Vosevi
250
57
12
319
117
5
1
123
Yescarta
183
—
—
183
—
—
—
—
Zydelig
46
44
2
92
52
57
1
110
Other(3)
93
75
117
285
228
279
496
1,003
Total product sales
11,727
2,883
1,386
15,996
13,974
3,862
1,989
19,825
Royalty, contract and other revenues
54
233
49
336
62
226
45
333
Total revenues
$
11,781
$
3,116
$
1,435
$
16,332
$
14,036
$
4,088
$
2,034
$
20,158
____________________
(1) Includes Emtriva and Tybost
(2) Represents Gilead’s revenue from cobicistat (C), emtricitabine (FTC) and tenofovir alafenamide (TAF) in Symtuza (darunavir/C/FTC/TAF), a fixed dose combination product commercialized by Janssen
(3) Includes Cayston, Hepsera and Sovaldi
3.
FAIR VALUE MEASUREMENTS
We determine the fair value of financial and non-financial assets and liabilities using the fair value hierarchy, which establishes three levels of inputs that may be used to measure fair value, as follows:
•
Level 1 inputs include quoted prices in active markets for identical assets or liabilities;
•
Level 2 inputs include observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. For our marketable securities, we review trading activity and pricing as of the measurement date. When sufficient quoted pricing for identical securities is not available, we use market pricing and other observable market inputs for similar securities obtained from various third-party data providers. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data; and
•
Level 3 inputs include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability. Our Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques and significant management judgment or estimation.
10
Our financial instruments consist primarily of cash and cash equivalents, marketable securities, accounts receivable, foreign currency exchange contracts, equity securities, accounts payable and short-term and long-term debt. Cash and cash equivalents, marketable debt and equity securities, and foreign currency exchange contracts are reported at their respective fair values on our Condensed Consolidated Balance Sheets. Short-term and long-term debt are reported at their amortized costs on our Condensed Consolidated Balance Sheets. The remaining financial instruments are reported in our Condensed Consolidated Balance Sheets at amounts that approximate current fair values. There were no transfers between Level 1, Level 2 and Level 3 in the periods presented.
The following table summarizes the types of assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy (in millions):
September 30, 2018
December 31, 2017
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Assets:
Available-for-sale debt securities:
U.S. treasury securities
$
3,075
$
—
$
—
$
3,075
$
4,061
$
—
$
—
$
4,061
Certificates of deposit
—
4,392
—
4,392
—
5,131
—
5,131
U.S. government agencies securities
—
932
—
932
—
926
—
926
Non-U.S. government securities
—
260
—
260
—
664
—
664
Corporate debt securities
—
12,757
—
12,757
—
14,747
—
14,747
Residential mortgage and asset-backed securities
—
2,037
—
2,037
—
4,058
—
4,058
Marketable equity securities:
Money market funds
5,138
—
—
5,138
4,714
—
—
4,714
Equity securities
825
—
—
825
635
—
—
635
Deferred compensation plan
139
—
—
139
116
—
—
116
Foreign currency derivative contracts
—
42
—
42
—
13
—
13
Total
$
9,177
$
20,420
$
—
$
29,597
$
9,526
$
25,539
$
—
$
35,065
Liabilities:
Deferred compensation plan
$
139
$
—
$
—
$
139
$
116
$
—
$
—
$
116
Foreign currency derivative contracts
—
6
—
6
—
93
—
93
Total
$
139
$
6
$
—
$
145
$
116
$
93
$
—
$
209
For the three and nine months ended September 30, 2018, changes in the fair value of marketable equity securities resulted in unrealized gains of $168 million and $149 million, respectively, which were included in Other income (expense), net, on our Condensed Consolidated Statements of Income.
Our available-for-sale debt securities are classified as cash equivalents, short-term marketable securities and long-term marketable securities. See Note 4, Available-for-Sale Debt Securities, for additional information.
The following table summarizes the classification of our marketable equity securities in our Condensed Consolidated Balance Sheets (in millions):
September 30, 2018
December 31, 2017
Cash and cash equivalents
$
5,138
$
4,714
Prepaid and other current assets
829
637
Other long-term assets
135
114
Total
$
6,102
$
5,465
Level 2 Inputs
We estimate the fair values of Level 2 instruments by taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income-based and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include
11
reported trades of and broker/dealer quotes on the same or similar securities, issuer credit spreads, benchmark securities, prepayment/default projections based on historical data and other observable inputs.
Substantially all of our foreign currency derivative contracts have maturities within an 18-month time horizon and all are with counterparties that have a minimum credit rating of A- or equivalent by S&P Global Ratings, Moody’s Investors Service, Inc. or Fitch Ratings, Inc. We estimate the fair values of these contracts by taking into consideration valuations obtained from a third-party valuation service that utilizes an income-based industry standard valuation model for which all significant inputs are observable, either directly or indirectly. These inputs include foreign currency exchange rates, London Interbank Offered Rates (LIBOR) and swap rates. These inputs, where applicable, are observable at commonly quoted intervals.
The total estimated fair values of our short-term and long-term debt, determined using Level 2 inputs based on their quoted market values, were approximately $27.5 billion and $35.5 billion as of September 30, 2018 and December 31, 2017, respectively, and the carrying values were $27.3 billion and $33.5 billion as of September 30, 2018 and December 31, 2017, respectively.
4.
AVAILABLE-FOR-SALE DEBT SECURITIES
The following table summarizes our available-for-sale debt securities (in millions):
September 30, 2018
December 31, 2017
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Estimated Fair Value
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Estimated Fair Value
U.S. treasury securities
$
3,090
$
—
$
(15
)
$
3,075
$
4,090
$
—
$
(29
)
$
4,061
Certificates of deposit
4,392
—
—
4,392
5,131
—
—
5,131
U.S. government agencies securities
938
—
(6
)
932
934
—
(8
)
926
Non-U.S. government securities
262
—
(2
)
260
668
—
(4
)
664
Corporate debt securities
12,792
2
(37
)
12,757
14,790
3
(46
)
14,747
Residential mortgage and asset-backed securities
2,049
—
(12
)
2,037
4,072
1
(15
)
4,058
Total
$
23,523
$
2
$
(72
)
$
23,453
$
29,685
$
4
$
(102
)
$
29,587
The following table summarizes the classification of our available-for-sale debt securities in our Condensed Consolidated Balance Sheets (in millions):
September 30, 2018
December 31, 2017
Cash and cash equivalents
$
7,178
$
481
Short-term marketable securities
13,897
17,922
Long-term marketable securities
2,378
11,184
Total
$
23,453
$
29,587
The following table summarizes our available-for-sale debt securities by contractual maturity (in millions):
September 30, 2018
Amortized Cost
Fair Value
Within one year
$
21,130
$
21,075
After one year through five years
2,313
2,299
After five years through ten years
58
57
After ten years
22
22
Total
$
23,523
$
23,453
12
The following table summarizes our available-for-sale debt securities that were in a continuous unrealized loss position, but were not deemed to be other-than-temporarily impaired (in millions):
Less Than 12 Months
12 Months or Greater
Total
Gross Unrealized Losses
Estimated Fair Value
Gross Unrealized Losses
Estimated Fair Value
Gross Unrealized Losses
Estimated Fair Value
September 30, 2018
U.S. treasury securities
$
(1
)
$
1,339
$
(14
)
$
1,613
$
(15
)
$
2,952
U.S. government agencies securities
—
285
(6
)
612
(6
)
897
Non-U.S. government securities
—
—
(2
)
234
(2
)
234
Corporate debt securities
(6
)
2,636
(31
)
3,602
(37
)
6,238
Residential mortgage and asset-backed securities
(1
)
409
(11
)
1,300
(12
)
1,709
Total
$
(8
)
$
4,669
$
(64
)
$
7,361
$
(72
)
$
12,030
December 31, 2017
U.S. treasury securities
$
(2
)
$
821
$
(27
)
$
3,240
$
(29
)
$
4,061
U.S. government agencies securities
(1
)
206
(7
)
700
(8
)
906
Non-U.S. government securities
(1
)
203
(3
)
461
(4
)
664
Corporate debt securities
(14
)
7,674
(32
)
3,561
(46
)
11,235
Residential mortgage and asset-backed securities
(4
)
2,245
(11
)
1,206
(15
)
3,451
Total
$
(22
)
$
11,149
$
(80
)
$
9,168
$
(102
)
$
20,317
We held a total of 1,523 and 2,957 positions, which were in an unrealized loss position, as of September 30, 2018 and December 31, 2017, respectively.
Based on our review of these securities, we believe we had no other-than-temporary impairments as of September 30, 2018 and December 31, 2017, because we do not intend to sell these securities nor do we believe that we will be required to sell these securities before the recovery of their amortized cost basis. Gross realized gains and gross realized losses were not material for the three and nine months ended September 30, 2018 and 2017.
5.
DERIVATIVE FINANCIAL INSTRUMENTS
Our operations in foreign countries expose us to market risk associated with foreign currency exchange rate fluctuations between the U.S. dollar and various foreign currencies, primarily the Euro. In order to manage this risk, we may hedge a portion of our foreign currency exposures related to outstanding monetary assets and liabilities as well as forecasted product sales using foreign currency exchange forward or option contracts. In general, the market risk related to these contracts is offset by corresponding gains and losses on the hedged transactions. The credit risk associated with these contracts is driven by changes in interest and currency exchange rates and, as a result, varies over time. By working only with major banks and closely monitoring current market conditions, we seek to limit the risk that counterparties to these contracts may be unable to perform. We also seek to limit our risk of loss by entering into contracts that permit net settlement at maturity. Therefore, our overall risk of loss in the event of a counterparty default is limited to the amount of any unrecognized gains on outstanding contracts (i.e., those contracts that have a positive fair value) at the date of default. We do not enter into derivative contracts for trading purposes.
We hedge our exposure to foreign currency exchange rate fluctuations for certain monetary assets and liabilities of our entities that are denominated in a non-functional currency. The derivative instruments we use to hedge this exposure are not designated as hedges and, as a result, changes in their fair value are recorded in Other income (expense), net, on our Condensed Consolidated Statements of Income.
We hedge our exposure to foreign currency exchange rate fluctuations for forecasted product sales that are denominated in a non-functional currency. The derivative instruments we use to hedge this exposure are designated as cash flow hedges and have maturities of 18 months or less. Upon executing a hedging contract and quarterly thereafter, we assess hedge effectiveness using regression analysis. Prior to January 2018, we excluded time value from our effectiveness testing and recognized changes in the time value of the hedge in Other income (expense), net, on our Condensed Consolidated Statements of Income. Starting in January 2018, we include time value in our effectiveness testing and the entire change in the value of hedge contracts is recorded as unrealized gains or losses in AOCI within Stockholders’ equity on our Condensed Consolidated Balance Sheets. The unrealized gains or losses in AOCI are reclassified into product sales when the respective hedged transactions affect earnings. As of September 30, 2018, the amount of unrealized gains and losses related to the hedged forecasted transactions reported in AOCI that is expected to be reclassified into product sales within the next 12 months was not material.
13
The cash flow effects of our derivative contracts for the nine months ended September 30, 2018 and 2017 are included within Net cash provided by operating activities on our Condensed Consolidated Statements of Cash Flows.
We had notional amounts on foreign currency exchange contracts outstanding of $2.5 billion and $2.8 billion as of September 30, 2018 and December 31, 2017, respectively.
While all of our derivative contracts allow us the right to offset assets and liabilities, we have presented amounts on a gross basis. The following table summarizes the classification and fair values of derivative instruments in our Condensed Consolidated Balance Sheets (in millions):
September 30, 2018
Asset Derivatives
Liability Derivatives
Classification
Fair Value
Classification
Fair Value
Derivatives designated as hedges:
Foreign currency exchange contracts
Other current assets
$
40
Other accrued liabilities
$
(5
)
Foreign currency exchange contracts
Other long-term assets
2
Other long-term obligations
(1
)
Total derivatives designated as hedges
42
(6
)
Derivatives not designated as hedges:
Foreign currency exchange contracts
Other current assets
—
Other accrued liabilities
—
Total derivatives not designated as hedges
—
—
Total derivatives
$
42
$
(6
)
December 31, 2017
Asset Derivatives
Liability Derivatives
Classification
Fair Value
Classification
Fair Value
Derivatives designated as hedges:
Foreign currency exchange contracts
Other current assets
$
2
Other accrued liabilities
$
(89
)
Foreign currency exchange contracts
Other long-term assets
1
Other long-term obligations
(3
)
Total derivatives designated as hedges
3
(92
)
Derivatives not designated as hedges:
Foreign currency exchange contracts
Other current assets
10
Other accrued liabilities
(1
)
Total derivatives not designated as hedges
10
(1
)
Total derivatives
$
13
$
(93
)
The following table summarizes the effect of our foreign currency exchange contracts on our Condensed Consolidated Financial Statements (in millions):
Three Months Ended
Nine Months Ended
September 30,
September 30,
2018
2017
2018
2017
Derivatives designated as hedges:
Gains (losses) recognized in AOCI
$
(6
)
$
(78
)
$
52
$
(289
)
Gains (losses) reclassified from AOCI into product sales
$
(8
)
$
(26
)
$
(101
)
$
4
Gains recognized in Other income (expense), net
$
—
$
10
$
—
$
32
Derivatives not designated as hedges:
Gains (losses) recognized in Other income (expense), net