10-Q 1 q218form10-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 June 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 ¨    (Do not check if a smaller reporting company)
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 July 30, 2018: 1,296,340,593
 





GILEAD SCIENCES, INC.
INDEX

PART I.
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
PART II.
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 1A.
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 5.
 
 
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 


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.







PART I.
FINANCIAL INFORMATION
Item 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in millions, except per share amounts)
 
June 30, 2018
 
December 31, 2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
13,234

 
$
7,588

Short-term marketable securities
12,683

 
17,922

Accounts receivable, net of allowances of $591 at June 30, 2018 and $455 at December 31, 2017
3,541

 
3,851

Inventories
859

 
801

Prepaid and other current assets
2,411

 
1,661

Total current assets
32,728

 
31,823

Property, plant and equipment, net
3,659

 
3,295

Long-term marketable securities
5,739

 
11,184

Intangible assets, net
16,496

 
17,100

Goodwill
4,124

 
4,159

Other long-term assets
2,609

 
2,722

Total assets
$
65,355

 
$
70,283

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
623

 
$
814

Accrued government and other rebates
4,684

 
4,704

Other accrued liabilities
2,607

 
3,370

Current portion of long-term debt and other obligations, net
2,998

 
2,747

Total current liabilities
10,912

 
11,635

Long-term debt, net
26,062

 
30,795

Long-term income taxes payable
6,001

 
6,794

Other long-term obligations
646

 
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; shares authorized of 5,600 at June 30, 2018 and December 31, 2017; shares issued and outstanding of 1,296 at June 30, 2018 and 1,308 at December 31, 2017
1

 
1

Additional paid-in capital
1,844

 
1,264

Accumulated other comprehensive income
2

 
165

Retained earnings
19,825

 
19,012

Total Gilead stockholders’ equity
21,672

 
20,442

Noncontrolling interest
62

 
59

Total stockholders’ equity
21,734

 
20,501

Total liabilities and stockholders’ equity
$
65,355

 
$
70,283




See accompanying notes.

2



GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in millions, except per share amounts)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
 
Product sales
 
$
5,540

 
$
7,046

 
$
10,541

 
$
13,423

Royalty, contract and other revenues
 
108

 
95

 
195

 
223

Total revenues
 
5,648

 
7,141

 
10,736

 
13,646

Costs and expenses:
 
 
 
 
 
 
 
 
Cost of goods sold
 
1,196

 
1,126

 
2,197

 
2,083

Research and development expenses
 
1,192

 
864

 
2,129

 
1,795

Selling, general and administrative expenses
 
980

 
897

 
1,977

 
1,747

Total costs and expenses
 
3,368

 
2,887

 
6,303

 
5,625

Income from operations
 
2,280

 
4,254

 
4,433

 
8,021

Interest expense
 
(266
)
 
(269
)
 
(556
)
 
(530
)
Other income (expense), net
 
72

 
130

 
242

 
241

Income before provision for income taxes
 
2,086

 
4,115

 
4,119

 
7,732

Provision for income taxes
 
267

 
1,046

 
761

 
1,964

Net income
 
1,819

 
3,069

 
3,358

 
5,768

Net income (loss) attributable to noncontrolling interest
 
2

 
(4
)
 
3

 
(7
)
Net income attributable to Gilead
 
$
1,817

 
$
3,073

 
$
3,355

 
$
5,775

Net income per share attributable to Gilead common stockholders - basic
 
$
1.40

 
$
2.35

 
$
2.58

 
$
4.42

Shares used in per share calculation - basic
 
1,298

 
1,307

 
1,302

 
1,307

Net income per share attributable to Gilead common stockholders - diluted
 
$
1.39

 
$
2.33

 
$
2.55

 
$
4.38

Shares used in per share calculation - diluted
 
1,308

 
1,317

 
1,314

 
1,319

Cash dividends declared per share
 
$
0.57

 
$
0.52

 
$
1.14

 
$
1.04























See accompanying notes.

3



GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(in millions)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2018
 
2017
 
2018
 
2017
Net income
 
$
1,819

 
$
3,069

 
$
3,358

 
$
5,768

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Net foreign currency translation gain (loss), net of tax
 
(25
)
 
29

 
(18
)
 
(47
)
Available-for-sale securities:
 
 
 
 
 
 
 
 
Net unrealized gain (loss), net of tax impact of $0, $1, $0 and $3, respectively
 
30

 
(58
)
 
(6
)
 
126

Reclassifications to net income, net of tax impact of $0, $(8), $0 and $(8), respectively
 
4

 
(9
)
 
4

 
(6
)
Net change
 
34

 
(67
)
 
(2
)
 
120

Cash flow hedges:
 
 
 
 
 
 
 
 
Net unrealized gain (loss), net of tax impact of $1, $(2), $1 and $(9), respectively
 
118

 
(115
)
 
57

 
(202
)
Reclassifications to net income, net of tax impact of $0, $0, $0 and $(1), respectively
 
45

 
13

 
93

 
(29
)
Net change
 
163

 
(102
)
 
150

 
(231
)
Other comprehensive income (loss)
 
172

 
(140
)
 
130

 
(158
)
Comprehensive income
 
1,991

 
2,929

 
3,488

 
5,610

Comprehensive income (loss) attributable to noncontrolling interest
 
2

 
(4
)
 
3

 
(7
)
Comprehensive income attributable to Gilead
 
$
1,989

 
$
2,933

 
$
3,485

 
$
5,617




























See accompanying notes.

4



GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in millions)
 
 
Six Months Ended
 
 
June 30,
 
 
2018
 
2017
Operating Activities:
 
 
 
 
Net income
 
$
3,358

 
$
5,768

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation expense
 
112

 
103

Amortization expense
 
601

 
489

Stock-based compensation expense
 
472

 
191

Deferred income taxes
 
(2
)
 
138

Other
 
149

 
189

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable, net
 
277

 
118

Inventories
 
(34
)
 
(14
)
Prepaid expenses and other
 
622

 
145

Accounts payable
 
(193
)
 
(399
)
Income taxes payable
 
(1,838
)
 
72

Accrued liabilities
 
319

 
(349
)
Net cash provided by operating activities
 
3,843

 
6,451

 
 
 
 
 
Investing Activities:
 
 
 
 
Purchases of marketable securities
 
(2,009
)
 
(13,269
)
Proceeds from sales of marketable securities
 
676

 
7,629

Proceeds from maturities of marketable securities
 
11,539

 
1,942

Capital expenditures
 
(509
)
 
(241
)
Other
 
(102
)
 

Net cash provided by (used in) investing activities
 
9,595

 
(3,939
)
 
 
 
 
 
Financing Activities:
 
 
 
 
Proceeds from issuances of common stock
 
159

 
119

Repurchases of common stock
 
(1,489
)
 
(695
)
Repayments of debt and other obligations
 
(4,500
)
 
(60
)
Payments of dividends
 
(1,493
)
 
(1,367
)
Other
 
(424
)
 
(121
)
Net cash used in financing activities
 
(7,747
)
 
(2,124
)
Effect of exchange rate changes on cash and cash equivalents
 
(45
)
 
95

Net change in cash and cash equivalents
 
5,646

 
483

Cash and cash equivalents at beginning of period
 
7,588

 
8,229

Cash and cash equivalents at end of period
 
$
13,234

 
$
8,712








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 June 30, 2018, we do 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 at June 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 at 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 six months ended June 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, 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 is required to be adopted using a modified retrospective approach. Early adoption is permitted.
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 adopt these standards using the modified retrospective approach with the cumulative effect of adoption recognized to retained earnings on January 1, 2019. We plan to elect the practical expedients upon transition

7



that will retain the lease classification and initial direct costs for any leases that existed prior to the adoption of these new standards. We will not reassess whether any contracts entered into prior to the adoption are leases.
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 utilization rates, 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 utilization rates 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 utilization rates and our expectations regarding future utilization rates.
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.
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

8



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.
Revenue Recognized from Performance Obligations Satisfied in Prior Periods
During the three and six months ended June 30, 2018, revenue recognized from performance obligations satisfied in prior years was $222 million and $232 million, respectively, consisting primarily of royalties for licenses of our intellectual property of $131 million and $228 million, respectively, and revised estimates for variable consideration related to sales made in prior years of $91 million and $4 million, respectively.
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 $126 million and $132 million at June 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 six months ended June 30, 2018 and 2017. The information for the three and six months ended June 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 June 30, 2018
 
Three Months Ended June 30, 2017
(In millions)
 
U.S.
 
Europe
 
Other International
 
Total
 
U.S.
 
Europe
 
Other International
 
Total
Product sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Atripla
 
$
274

 
$
39

 
$
36

 
$
349

 
$
334

 
$
86

 
$
55

 
$
475

Biktarvy
 
183

 
2

 

 
185

 

 

 

 

Complera/Eviplera
 
82

 
103

 
14

 
199

 
112

 
127

 
15

 
254

Descovy
 
311

 
78

 
14

 
403

 
232

 
47

 
7

 
286

Genvoya
 
904

 
207

 
49

 
1,160

 
710

 
125

 
22

 
857

Odefsey
 
303

 
77

 
5

 
385

 
230

 
27

 
1

 
258

Stribild
 
144

 
34

 
9

 
187

 
225

 
54

 
14

 
293

Truvada
 
649

 
86

 
30

 
765

 
567

 
184

 
61

 
812

Other HIV(1)
 
11

 
3

 
5

 
19

 
7

 
2

 
2

 
11

Revenue share - Symtuza(2)
 

 
13

 

 
13

 

 

 

 

AmBisome
 
14

 
55

 
34

 
103

 
8

 
50

 
34

 
92

Epclusa
 
239

 
168

 
93

 
500

 
864

 
248

 
59

 
1,171

Harvoni
 
230

 
22

 
79

 
331

 
984

 
230

 
168

 
1,382

Letairis
 
244

 

 

 
244

 
230

 

 

 
230

Ranexa
 
208

 

 

 
208

 
200

 

 

 
200

Vemlidy
 
59

 
3

 
14

 
76

 
21

 
1

 

 
22

Viread
 
16

 
32

 
34

 
82

 
141

 
76

 
83

 
300

Vosevi
 
86

 
20

 
3

 
109

 

 

 

 

Yescarta
 
68

 

 

 
68

 

 

 

 

Zydelig
 
17

 
22

 

 
39

 
19

 
16

 

 
35

Other(3)
 
27

 
41

 
47

 
115

 
98

 
126

 
144

 
368

Total product sales
 
4,069

 
1,005

 
466

 
5,540

 
4,982

 
1,399

 
665

 
7,046

Royalty, contract and other revenues
 
14

 
79

 
15

 
108

 
22

 
59

 
14

 
95

Total revenues
 
$
4,083

 
$
1,084

 
$
481

 
$
5,648

 
$
5,004

 
$
1,458

 
$
679

 
$
7,141

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

9



 
 
Six Months Ended June 30, 2018
 
Six Months Ended June 30, 2017
(In millions)
 
U.S.
 
Europe
 
Other International
 
Total
 
U.S.
 
Europe
 
Other International
 
Total
Product Sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Atripla
 
$
502

 
$
90

 
$
71

 
$
663

 
$
650

 
$
180

 
$
97

 
$
927

Biktarvy
 
218

 
2

 

 
220

 

 

 

 

Complera/Eviplera
 
149

 
212

 
28

 
389

 
224

 
252

 
31

 
507

Descovy
 
585

 
153

 
26

 
764

 
441

 
84

 
12

 
537

Genvoya
 
1,757

 
393

 
92

 
2,242

 
1,379

 
212

 
35

 
1,626

Odefsey
 
582

 
135

 
10

 
727

 
433

 
50

 
2

 
485

Stribild
 
277

 
63

 
21

 
361

 
451

 
121

 
30

 
602

Truvada
 
1,156

 
183

 
78

 
1,417

 
1,031

 
373

 
122

 
1,526

Other HIV(1)
 
20

 
4

 
8

 
32

 
21

 
3

 
2

 
26

Revenue share - Symtuza(2)
 

 
20

 

 
20

 

 

 

 

AmBisome
 
31

 
111

 
68

 
210

 
17

 
102

 
65

 
184

Epclusa
 
508

 
366

 
162

 
1,036

 
1,599

 
386

 
78

 
2,063

Harvoni
 
464

 
78

 
137

 
679

 
1,910

 
473

 
370

 
2,753

Letairis
 
448

 

 

 
448

 
441

 

 

 
441

Ranexa
 
403

 

 

 
403

 
353

 

 

 
353

Vemlidy
 
106

 
6

 
22

 
134

 
32

 
1

 

 
33

Viread
 
23

 
62

 
94

 
179

 
258

 
147

 
155

 
560

Vosevi
 
172

 
36

 
8

 
216

 

 

 

 

Yescarta
 
108

 

 

 
108

 

 

 

 

Zydelig
 
31

 
40

 
1

 
72

 
34

 
35

 
1

 
70

Other(3)
 
56

 
56

 
109

 
221

 
158

 
246

 
326

 
730

Total product sales
 
7,596

 
2,010

 
935

 
10,541

 
9,432

 
2,665

 
1,326

 
13,423

Royalty, contract and other revenues
 
34

 
131

 
30

 
195

 
41

 
152

 
30

 
223

Total revenues
 
$
7,630

 
$
2,141

 
$
965

 
$
10,736

 
$
9,473

 
$
2,817

 
$
1,356

 
$
13,646

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
____________________
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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

10




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.
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):
 
June 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:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
$

 
$
12,092

 
$

 
$
12,092

 
$

 
$
14,747

 
$

 
$
14,747

U.S. treasury securities
3,391

 

 

 
3,391

 
4,061

 

 

 
4,061

Residential mortgage and asset-backed securities

 
2,657

 

 
2,657

 

 
4,058

 

 
4,058

U.S. government agencies securities

 
872

 

 
872

 

 
926

 

 
926

Certificates of deposit

 
3,145

 

 
3,145

 

 
5,131

 

 
5,131

Non-U.S. government securities

 
404

 

 
404

 

 
664

 

 
664

Marketable equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
7,060

 

 

 
7,060

 
4,714

 

 

 
4,714

Equity securities
663

 

 

 
663

 
635

 

 

 
635

Deferred compensation plan
131

 

 

 
131

 
116

 

 

 
116

Foreign currency derivative contracts

 
53

 

 
53

 

 
13

 

 
13

Total
$
11,245

 
$
19,223

 
$

 
$
30,468

 
$
9,526

 
$
25,539

 
$

 
$
35,065

Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Deferred compensation plan
$
131

 
$

 
$

 
$
131

 
$
116

 
$

 
$

 
$
116

Foreign currency derivative contracts

 
11

 

 
11

 

 
93

 

 
93

Total
$
131

 
$
11

 
$

 
$
142

 
$
116

 
$
93

 
$

 
$
209

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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):
 
June 30, 2018
 
December 31, 2017
Cash and cash equivalents
$
7,060

 
$
4,714

Prepaid and other current assets
666

 
637

Other long-term assets
128

 
114

Total
$
7,854

 
$
5,465


11



For the three and six months ended June 30, 2018, changes in the estimated fair values of marketable equity securities resulted in unrealized losses of $64 million and $19 million, respectively, which were included in Other income (expense), net, on our Condensed Consolidated Statements of Income.
Cash and cash equivalents in the table above excludes cash of $2.0 billion and $2.4 billion, respectively, and cash equivalents of $4.1 billion and $481 million as of June 30, 2018 and December 31, 2017, respectively.
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 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 $29.3 billion and $35.5 billion at June 30, 2018 and December 31, 2017, respectively, and the carrying values were $29.1 billion and $33.5 billion at June 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):
 
 
June 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 
Corporate debt securities
 
$
12,144

 
$
3

 
$
(55
)
 
$
12,092

 
$
14,790

 
$
3

 
$
(46
)
 
$
14,747

U.S. treasury securities
 
3,412

 

 
(21
)
 
3,391

 
4,090

 

 
(29
)
 
4,061

Residential mortgage and asset-backed securities
 
2,674

 

 
(17
)
 
2,657

 
4,072

 
1

 
(15
)
 
4,058

U.S. government agencies securities
 
880

 

 
(8
)
 
872

 
934

 

 
(8
)
 
926

Certificates of deposit
 
3,145

 

 

 
3,145

 
5,131

 

 

 
5,131

Non-U.S. government securities
 
407

 

 
(3
)
 
404

 
668

 

 
(4
)
 
664

Total
 
$
22,662

 
$
3

 
$
(104
)
 
$
22,561

 
$
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):
 
 
June 30, 2018
 
December 31, 2017
Cash and cash equivalents
 
$
4,139

 
$
481

Short-term marketable securities
 
12,683

 
17,922

Long-term marketable securities
 
5,739

 
11,184

Total
 
$
22,561

 
$
29,587


12



The following table summarizes our available-for-sale debt securities by contractual maturity (in millions):
 
 
June 30, 2018
 
 
Amortized Cost
 
Fair Value
Within one year
 
$
16,861

 
$
16,822

After one year through five years
 
5,710

 
5,649

After five years through ten years
 
67

 
66

After ten years
 
24

 
24

Total
 
$
22,662

 
$
22,561

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
June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
 
$
(15
)
 
$
3,774

 
$
(40
)
 
$
3,449

 
$
(55
)
 
$
7,223

U.S. treasury securities
 
(1
)
 
239

 
(20
)
 
2,482

 
(21
)
 
2,721

Residential mortgage and asset-backed securities
 
(5
)
 
1,176

 
(12
)
 
1,167

 
(17
)
 
2,343

U.S. government agencies securities
 

 
46

 
(8
)
 
687

 
(8
)
 
733

Certificates of deposit
 

 
71

 

 

 

 
71

Non-U.S. government securities
 

 
64

 
(3
)
 
323

 
(3
)
 
387

Total
 
$
(21
)
 
$
5,370

 
$
(83
)
 
$
8,108

 
$
(104
)
 
$
13,478

 
 
 

 
 

 
 

 
 

 
 

 
 

December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
 
$
(14
)
 
$
7,674

 
$
(32
)
 
$
3,561

 
$
(46
)
 
$
11,235

U.S. treasury securities
 
(2
)
 
821

 
(27
)
 
3,240

 
(29
)
 
4,061

Residential mortgage and asset-backed securities
 
(4
)
 
2,245

 
(11
)
 
1,206

 
(15
)
 
3,451

U.S. government agencies securities
 
(1
)
 
206

 
(7
)
 
700

 
(8
)
 
906

Non-U.S. government securities
 
(1
)
 
203

 
(3
)
 
461

 
(4
)
 
664

Total
 
$
(22
)
 
$
11,149

 
$
(80
)
 
$
9,168

 
$
(102
)
 
$
20,317

We held a total of 1,866 and 2,957 positions as of June 30, 2018 and December 31, 2017, respectively, which were in an unrealized loss position.
Based on our review of these securities, we believe we had no other-than-temporary impairments as of June 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 six months ended June 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.

13



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. The majority of gains and losses related to the hedged forecasted transactions reported in AOCI at June 30, 2018 are expected to be reclassified to product sales within 12 months.
The cash flow effects of our derivative contracts for the six months ended June 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 at June 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):
 
 
June 30, 2018
 
 
Asset Derivatives
 
Liability Derivatives
 
 
Classification
 
Fair Value
 
Classification
 
Fair Value
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
Other current assets
 
$
44

 
Other accrued liabilities
 
$
(11
)
Foreign currency exchange contracts
 
Other long-term assets
 
9

 
Other long-term obligations
 

Total derivatives designated as hedges
 
 
 
53

 
 
 
(11
)
Derivatives not designated as hedges:
 
 
 
 

 
 
 
 

Foreign currency exchange contracts
 
Other current assets
 

 
Other accrued liabilities
 

Total derivatives not designated as hedges
 
 
 

 
 
 

Total derivatives
 
 
 
$
53

 
 
 
$
(11
)
 
 
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
)

14



The following table summarizes the effect of our foreign currency exchange contracts on our Condensed Consolidated Financial Statements (in millions):
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2018
 
2017
 
2018
 
2017
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
Gains (losses) recognized in AOCI
 
$
119

 
$
(117
)
 
$
58

 
$
(211
)
Gains (losses) reclassified from AOCI into product sales
 
$
(45
)
 
$
(13
)
 
$
(93
)
 
$
30

Gains recognized in Other income (expense), net
 
$

 
$
9

 
$

 
$
22

Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
Gains (losses) recognized in Other income (expense), net
 
$
10

 
$
25

 
$
(4
)
 
$
(110
)
From time to time, we may discontinue cash flow hedges and, as a result, record related amounts in Other income (expense), net, on our Condensed Consolidated Statements of Income. There were no material amounts recorded in Other income (expense), net, on our Condensed Consolidated Statements of Income for the three and six months ended June 30, 2018 and 2017 as a result of the discontinuance of cash flow hedges.
As of June 30, 2018 and December 31, 2017, we held one type of financial instrument, which was derivative contracts related to foreign currency exchange contracts. The following table summarizes the potential effect of offsetting derivatives by type of financial instrument on our Condensed Consolidated Balance Sheets (in millions):
 
 
 
 
 
 
 
 
Gross Amounts Not Offset
on our Condensed
Consolidated Balance Sheets
 
 
Description
 
Gross Amounts
 of Recognized
Assets/Liabilities
 
Gross Amounts
 Offset on our
Condensed
Consolidated
Balance Sheets
 
Amounts of Assets/Liabilities Presented
 on our Condensed Consolidated
Balance Sheets
 
Derivative
Financial
Instruments
 
Cash Collateral
Received/
Pledged
 
Net Amount
 (Legal Offset)
As of June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
 
$
53

 
$

 
$
53

 
$
(9
)