10-K 1 a2018form10-k.htm FORM 10-K Document


 
 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 (Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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. 000-19731
 
 
GILEAD SCIENCES, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
94-3047598
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
333 Lakeside Drive, Foster City, California
94404
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: 650-574-3000
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
Title of each class 
Name of each exchange on which registered 
Common Stock, $0.001 par value per share
The Nasdaq Global Select Market
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes x    No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes ¨    No x
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 and post such files).    Yes  ý    No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨
Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting 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
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based upon the closing price of its Common Stock on the Nasdaq Global Select Market on June 29, 2018 was $79,506,595,778.*
The number of shares outstanding of the registrant’s Common Stock on February 15, 2019 was 1,275,510,558.
DOCUMENTS INCORPORATED BY REFERENCE
Specified portions of the registrant’s proxy statement, which will be filed with the Commission pursuant to Regulation 14A in connection with the registrant’s 2019 Annual Meeting of Stockholders, to be held on May 8, 2019, are incorporated by reference into Part III of this Report.
*    Based on a closing price of $70.84 per share on June 29, 2018. Excludes 173,576,690 shares of the registrant’s Common Stock held by executive officers, directors and any stockholders whose ownership exceeds 5% of registrant’s common stock outstanding at June 29, 2018. Exclusion of such shares should not be construed to indicate that any such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant or that such person is controlled by or under common control with the registrant.
 





GILEAD SCIENCES, INC.
2018 Form 10-K Annual Report
Table of Contents

PART I
 
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
 
 
PART II
 
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
 
 
PART III
 
Item 10
Item 11
Item 12
Item 13
Item 14
 
 
PART IV
 
Item 15
Item 16
 
 


We own or have rights to various trademarks, copyrights and trade names used in our business, including the following: GILEAD®, GILEAD SCIENCES®, AMBISOME®, ATRIPLA®, BIKTARVY®, CAYSTON®, COMPLERA®, DESCOVY®, EMTRIVA®, EPCLUSA®, EVIPLERA®, GENVOYA®, HARVONI®, HEPSERA®, LETAIRIS®, ODEFSEY®, RANEXA®, SOVALDI®, STRIBILD®, TRUVADA®, TRUVADAFORPREP®, TYBOST®, VEMLIDY®, VIREAD®, 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. TAMIFLU® is a registered trademark of Hoffmann-La Roche Inc. This report also includes other trademarks, service marks and trade names of other companies.






This Annual Report on Form 10-K, including the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933, as amended (the Securities Act), and the Securities Exchange Act of 1934, as amended (the Exchange Act). Words such as “expect,” “anticipate,” “target,” “goal,” “project,” “hope,” “intend,” “plan,” “believe,” “seek,” “estimate,” “continue,” “may,” “could,” “should,” “might,” "forecast," variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements other than statements of historical fact are forward-looking statements, including statements regarding overall trends, operating cost and revenue trends, liquidity and capital needs and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends and similar expressions.
We have based these forward-looking statements on our current expectations about future events. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Our actual results may differ materially from those suggested by these forward-looking statements for various reasons, including those identified in Part I, Item 1A of this Annual Report on Form 10-K under the heading “Risk Factors.” Given these risks and uncertainties, you are cautioned not to place undue reliance on forward-looking statements. The forward-looking statements included in this report are made only as of the date hereof. Except as required under federal securities laws and the rules and regulations of the Securities and Exchange Commission (SEC), we do not undertake, and specifically decline, any obligation to update any of these statements or to publicly announce the results of any revisions to any forward-looking statements after the distribution of this report, whether as a result of new information, future events, changes in assumptions or otherwise.

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PART I
ITEM  1.
BUSINESS
Overview
Gilead Sciences, Inc. (Gilead, we, our or us), incorporated in Delaware on June 22, 1987, is a research-based biopharmaceutical company that discovers, develops and commercializes innovative medicines in areas of unmet medical need. With each new discovery and investigational drug candidate, we strive to transform and simplify care for people with life-threatening illnesses around the world. We have operations in more than 35 countries worldwide, with headquarters in Foster City, California. Gilead’s primary areas of focus include HIV/AIDS, liver diseases, hematology/oncology and inflammation/respiratory diseases. We seek to add to our existing portfolio of products through our internal discovery and clinical development programs, product acquisition, in-licensing and strategic collaborations.
2018 Highlights
2018 was marked by operational excellence and transition as we positioned ourselves for the future growth of our business. We continued to develop and deliver innovative medicines to help people with life-threatening illnesses around the world. Highlights of our 2018 performance include:
HIV: We achieved record sales of our HIV products in 2018, with HIV product revenues increasing by 19% in the United States and 12% worldwide compared to 2017. This growth was driven by the successful launch of Biktarvy® and the continued strong uptake of our single tablet regimens containing tenofovir alafenamide (TAF) for the treatment of HIV infection as well as Truvada® for a pre-exposure prophylaxis (PrEP) indication for HIV prevention. Biktarvy, a once-daily single tablet regimen containing bictegravir, emtricitabine and TAF for the treatment of HIV infection in adults, was approved by the U.S. Food and Drug Administration (FDA) in February and by the European Commission in June.
Liver Diseases: Our revenues from our chronic hepatitis C virus (HCV) products became more predictable in 2018. Because we wanted to introduce a lower-priced alternative to our HCV products without significant disruption to the healthcare system and our business, we authorized the launch of generic versions of Epclusa® and Harvoni® in the United States starting in January 2019 through our separate subsidiary, Asegua Therapeutics LLC (Asegua). We also continued to advance our clinical trials for the treatment of chronic hepatitis B virus (HBV) and nonalcoholic steatohepatitis (NASH), including completing enrollment of Phase 3 clinical trials of NASH.
Cell Therapy and Immuno-Oncology: We advanced our pipeline of cancer therapies and positioned ourselves as a leader in cell therapy. Yescarta® was approved by the European Commission in August for the treatment of relapsed or refractory diffuse large B-cell lymphoma (DLBCL) and primary mediastinal large B-cell lymphoma (PMBCL) after two or more lines of systemic therapy. We certified additional centers in the United States and Europe to provide treatment for Yescarta. In order to advance and accelerate research and development efforts in cell therapy and immuno-oncology, during the year, we entered into key strategic collaborations with the National Cancer Institute, Pfizer, Inc. (Pfizer), Sangamo Therapeutics, Inc. (Sangamo), Gadeta B.V. (Gadeta), HiFiBiO Therapeutics (HiFiBiO), Tango Therapeutics (Tango) and Agenus Inc. (Agenus).
Inflammation: We continued to advance our pipeline of novel investigational agents for inflammatory diseases, including announcing positive data on filgotinib in ongoing Phase 2 and 3 clinical trials. We also entered into a strategic collaboration with Verily Life Sciences LLC, an Alphabet company (Verily), using Verily’s Immunoscape platform to identify and better understand the immunological basis of inflammatory diseases.
During the year, we continued to invest in and advance our research and development pipeline across our therapeutic areas. At the end of 2018, our research and development pipeline included 119 active clinical studies, of which 41 were Phase 3 clinical trials. Additionally, we completed 26 collaborations, partnerships and strategic investments in 2018, which reflects our commitment to enabling our access to new technologies and drug candidates with the potential to evolve care for people with life-threatening illnesses. Our investments in research and development reflect our commitment to expanding our pipeline across a range of diseases to address areas of significant unmet medical need and positioning ourselves for the long-term growth of our business.
Our Principal Products
Our innovative medicines represent advancements by offering enhanced modes of delivery, more convenient treatment regimens, improved resistance profiles, reduced side effects and greater efficacy. Our focus on innovation has allowed us to deliver more than 24 marketed products across our primary areas of focus: HIV/AIDS, liver diseases, hematology/oncology and inflammation/respiratory diseases.

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Our principal products and the approved indications in the United States are as follows:
HIV/AIDS
Biktarvy is an oral formulation dosed once a day for the treatment of HIV-1 infection in certain patients. Biktarvy is a single tablet regimen of a fixed-dose combination of our antiretroviral medications, bictegravir, emtricitabine and TAF.
Descovy® is an oral formulation indicated in combination with other antiretroviral agents for the treatment of HIV-1 infection in certain patients. Descovy is a fixed-dose combination of our antiretroviral medications, emtricitabine and TAF.
Odefsey® is an oral formulation dosed once a day for the treatment of HIV-1 infection in certain patients. Odefsey is a single tablet regimen of a fixed-dose combination of our antiretroviral medications, emtricitabine and TAF, and rilpivirine marketed by Janssen Sciences Ireland UC, one of the Janssen Pharmaceutical Companies of Johnson & Johnson (Janssen).
Genvoya® is an oral formulation dosed once a day for the treatment of HIV-1 infection in certain patients. Genvoya is a single tablet regimen of a fixed-dose combination of our antiretroviral medicines, elvitegravir, cobicistat, emtricitabine and TAF.
Stribild® is an oral formulation dosed once a day for the treatment of HIV-1 infection in certain patients. Stribild is a single tablet regimen of a fixed-dose combination of our antiretroviral medications, elvitegravir, cobicistat, tenofovir disoproxil fumarate (TDF) and emtricitabine.
Complera®/Eviplera® is an oral formulation dosed once a day for the treatment of HIV-1 infection in certain patients. The product, marketed in the United States as Complera and in Europe as Eviplera, is a single tablet regimen of a fixed-dose combination of our antiretroviral medications, TDF and emtricitabine, and Janssen’s rilpivirine hydrochloride.
Atripla® is an oral formulation indicated as a complete regimen for the treatment of HIV-1 infection in certain patients. Atripla is a fixed-dose combination of our antiretroviral medications, TDF and emtricitabine, and Bristol-Myers Squibb Company’s (BMS’s) efavirenz.
Truvada® is an oral formulation indicated in combination with other antiretroviral agents for the treatment of HIV-1 infection in certain patients. It is a fixed-dose combination of our antiretroviral medications, TDF and emtricitabine. FDA also approved Truvada for a PrEP indication, in combination with safer sex practices, to reduce the risk of sexually acquired HIV-1 infection in certain at-risk patients.
Liver Diseases
Vosevi® is an oral formulation of a once-daily, single tablet regimen of sofosbuvir, velpatasvir and voxilaprevir for the re-treatment of chronic HCV infection in adults: (i) with genotype 1, 2, 3, 4, 5 or 6 previously treated with an NS5A inhibitor-containing regimen or (ii) with genotype 1a or 3 previously treated with a sofosbuvir-containing regimen without an NS5A inhibitor.
Vemlidy® is an oral formulation of TAF dosed once a day for the treatment of chronic HBV infection in adults with compensated liver disease.
Epclusa® is an oral formulation of a once-daily single tablet regimen of sofosbuvir and velpatasvir for the treatment of chronic HCV infection in adults with genotype 1, 2, 3, 4, 5 or 6: (i) without cirrhosis or with compensated cirrhosis or (ii) with decompensated cirrhosis for use in combination with ribavirin.
Harvoni® is an oral formulation of a once-daily, single tablet regimen of ledipasvir and sofosbuvir for the treatment of chronic HCV infection in: (i) adults with genotype 1, 4, 5 or 6 without cirrhosis or with compensated cirrhosis, (ii) adults with genotype 1 infection with decompensated cirrhosis, in combination with ribavirin, (ii) adults with genotype 1 or 4 who are liver transplant recipients without cirrhosis or with compensated cirrhosis, in combination with ribavirin, or (iv) certain pediatric patients with genotype 1, 4, 5 or 6 without cirrhosis or with compensated cirrhosis.
Viread® is an oral formulation of TDF dosed once a day for the treatment of chronic HBV infection in adults and certain pediatric patients.
Hematology/Oncology
Yescarta (axicabtagene ciloleucel) is a CAR T cell therapy for the treatment of adult patients with relapsed or refractory large B-cell lymphoma after two or more lines of systemic therapy, including DLBCL not otherwise specified, PMBCL, high-grade B-cell lymphoma and DLBCL arising from TFL.
Zydelig® (idelalisib) is an oral formulation of a kinase inhibitor for the treatment of patients with: (i) relapsed chronic lymphocytic leukemia (CLL), in combination with rituximab, for whom rituximab alone would be considered appropriate therapy due to other co-morbidities, (ii) relapsed follicular B-cell non-Hodgkin lymphoma (FL) in patients who have received at least two prior systemic therapies or (iii) relapsed small lymphocytic lymphoma who have received at least two prior systemic therapies.

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Other
Letairis® (ambrisentan) is an oral formulation of an endothelin receptor antagonist for the treatment of pulmonary arterial hypertension (PAH) (WHO Group I) (i) to improve exercise capacity and delay clinical worsening or (ii) in combination with tadalafil to reduce the risks of disease progression and hospitalization for worsening PAH, and to improve exercise ability.
Ranexa® (ranolazine) is an oral formulation of an extended-release tablet of an antianginal for the treatment of chronic angina.
AmBisome® (amphotericin B liposome for injection) is a proprietary liposomal formulation of amphotericin B, an antifungal agent, for the treatment of serious invasive fungal infections caused by various fungal species in adults.
For information about our product revenues, including the amount of revenue contributed by each of the products listed above for each of the last three fiscal years, see Note 2, Revenues, of the Notes to Consolidated Financial Statements included in Item 8 of our Annual Report on Form 10-K.
Commercialization and Distribution
We have U.S. and international commercial sales operations, with marketing subsidiaries in more than 35 countries. Our products are marketed through our commercial teams and/or in conjunction with third-party distributors and corporate partners. Our commercial teams promote our products through direct field contact with physicians, hospitals, clinics and other healthcare providers. We generally grant our third-party distributors the exclusive right to promote our product in a territory for a specified period of time. Most of our agreements with these distributors provide for collaborative efforts between the distributor and Gilead in obtaining and maintaining regulatory approval for the product in the specified territory.
We sell and distribute most of our products in the United States exclusively through the wholesale channel. Our product sales to three large wholesalers, McKesson Corporation, AmerisourceBergen Corporation and Cardinal Health, Inc., each accounted for more than 10% of total revenues for each of the years ended December 31, 2018, 2017 and 2016. On a combined basis, in 2018, these wholesalers accounted for approximately 85% of our product sales in the United States and approximately 62% of our total worldwide revenues. We sell and distribute our products in Europe and countries outside the United States where the product is approved, either through our commercial teams, third-party distributors or corporate partners.
Competition
We operate in a highly competitive environment. We face significant competition from global pharmaceutical and biotechnology companies, specialized pharmaceutical firms and generic drug manufacturers. Our products compete with other commercially available products based primarily on efficacy, safety, tolerability, acceptance by doctors, ease of patient compliance, ease of use, price, insurance and other reimbursement coverage, distribution and marketing. As our products mature, private insurers and government payers often reduce the amount they will reimburse patients, which increases pressure on us to reduce prices. Further, as new branded or generic products are introduced into major markets, our ability to maintain pricing and market share may be affected. For a description of our competitors, see Item 1A - Risk Factors “We face significant competition.”
Research and Development
Our research and development (R&D) philosophy and strategy are to develop best-in-class drugs that improve safety or efficacy for unmet medical needs. We intend to continue committing significant resources to internal R&D opportunities and external business development activity.
Our product development efforts cover a wide range of medical conditions, including HIV/AIDS, liver diseases, hematology/oncology, and inflammation/respiratory diseases. We have research scientists engaged in the discovery and development of new molecules and technologies that we hope will lead to the approval of new medicines that will advance the current standard of care and address unmet medical needs.
The development of our product candidates is subject to various risks and uncertainties. These risks and uncertainties include our ability to enroll patients in clinical trials, the possibility of unfavorable results of our clinical trials, the need to modify or delay our clinical trials or to perform additional trials and the risk of failing to obtain regulatory approvals. As a result, our product candidates may never be successfully commercialized. Drug development is inherently risky and many product candidates fail during the drug development process.

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Below is a summary of our key product candidates and their corresponding current stages of development.
Product Candidates for the Treatment of HIV/AIDS
Product Candidates
 
Description
Product in Phase 3
 
 
Descovy
 
Descovy is being evaluated for a PrEP indication.
Product in Phase 2
 
 
GS-9131
 
GS-9131, a nucleoside reverse transcriptase inhibitor, is being evaluated for the treatment of HIV infection.
Products in Phase 1
 
 
GS-6207
 
GS-6207, a capsid inhibitor, is being evaluated for the treatment of HIV infection.
Vesatolimod
 
Vesatolimod (formerly GS-9620), a TLR-7 agonist, is being evaluated as a potential cure for HIV infection.
GS-9722
 
GS-9722, a broadly neutralizing antibody, is being evaluated as a potential cure for HIV infection.
Product Candidates for the Treatment of Liver Diseases
Product Candidates
 
Description
Product in Phase 3
 
 
Selonsertib
 
Selonsertib, an ASK-1 inhibitor, is being evaluated in the STELLAR-3 trial for the treatment of NASH and bridging fibrosis.
Products in Phase 2
 
 
GS-9688
 
GS-9688, a TLR-8 agonist, is being evaluated for the treatment of HBV infection.
Cilofexor
 
Cilofexor (formerly GS-9674), a FXR agonist, is being evaluated for the treatment of NASH, primary biliary cirrhosis and primary sclerosing cholangitis.
Firsocostat
 
Firsocostat (formerly GS-0976), an ACC inhibitor, is being evaluated for the treatment of NASH.
Product Candidates for the Treatment of Hematology/Oncology
Product Candidates
 
Description
Products in Phase 3
 
 
Axicabtagene ciloleucel
 
Axicabtagene ciloleucel is being evaluated for the treatment of second line diffuse large B-cell lymphoma (DLBCL).
Products in Phase 2
 
 
Axicabtagene ciloleucel
 
Axicabtagene ciloleucel is being evaluated for the treatment of indolent non-Hodgkin lymphoma. Axicabtagene ciloleucel is also being evaluated for the treatment of DLBCL in combination with anti-PD-L1 mAB and first line DLBCL.
Tirabrutinib
 
Tirabrutinib, a BTK inhibitor, is being evaluated for the treatment of B-cell malignancies.
KTE-X19
 
KTE-X19, a CAR T cell therapy, is being evaluated for the treatment of mantle cell lymphoma and adult and pediatric acute lymphoblastic leukemia.
Products in Phase 1
 
 
KITE-718
 
KITE-718, a MAGE A3/A6, is being evaluated for the treatment of solid tumors.

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Product Candidates for the Treatment of Inflammation/Respiratory Diseases
Product Candidates
 
Description
Product in Phase 3
 
 
Filgotinib
 
Filgotinib, a JAK1 inhibitor, is being evaluated for the treatment of rheumatoid arthritis, Crohn’s disease and ulcerative colitis.
Products in Phase 2
 
 
Filgotinib
 
Filgotinib is being evaluated for the treatment of various inflammatory diseases.
GS-9876
 
GS-9876, a Syk inhibitor, is being evaluated for the treatment of Sjogren’s syndrome and lupus.
Products in Phase 1
 
 
GS-4875
 
GS-4875, a TPL2 inhibitor, is being evaluated for the treatment of inflammatory bowel disease.
Other Product Candidates
Product Candidate
 
Description
Product in Phase 2
 
 
Remdesivir
 
Remdesivir, a Nuc inhibitor, is being evaluated for the treatment of Ebola virus infection.
In addition to our internal discovery and clinical development programs, we seek to add to our portfolio of products through product acquisition, in-licensing and strategic collaborations. We completed 26 collaborations, partnerships and strategic investments in 2018, compared to 6 in 2017, which reflects our commitment to enabling our access to new technologies and drug candidates with the potential to evolve care for people with life-threatening illnesses.
Patents and Proprietary Rights
U.S. and European Patent Expiration
We have a number of U.S. and foreign patents, patent applications and rights to patents related to our compounds, products and technology, but we cannot be certain that issued patents will be enforceable or provide adequate protection or that pending patent applications will result in issued patents.
The following table shows the estimated expiration dates (including patent term extensions, supplementary protection certificates and/or pediatric exclusivity where granted) in the United States and the European Union for the primary (typically compound) patents for our Phase 3 product candidates. For our product candidates that are fixed-dose combinations of single tablet regimens, the estimated patent expiration date provided corresponds to the latest expiring compound patent for one of the active ingredients in the single tablet regimen.
Phase 3 Product Candidates
 
Patent Expiration
Product Candidate for the Treatment of HIV/AIDS
 
U.S.
 
E.U.
 
Descovy for PrEP
 
2022*
 
2021*
 
Product Candidate for the Treatment of Liver Diseases
 
 
 
 
 
Selonsertib for the treatment of NASH
 
2033
 
2033
 
Product Candidates for the Treatment of Hematology/Oncology
 
 
 
 
 
Axicabtagene ciloleucel for the treatment of second line diffuse large B-cell lymphoma
 
2027
 
**
 
Product Candidate for the Treatment of Inflammation/Respiratory Diseases
 
 
 
 
 
Filgotinib for the treatment of rheumatoid arthritis, Crohn’s disease and ulcerative colitis
 
2030
 
2030
 
_______________________
 
 
 
 
 
 
*An application for patent term extension was filed in the United States that if granted would extend the U.S. expiration date to 2025. Applications for supplementary protection certificates were filed in the European Union that if granted would extend the E.U. expiration date to 2026.
** The composition of matter patent has expired in the European Union. In the European Union and the United States, patent applications are pending relating to Kite’s proprietary manufacturing processes.

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The following table shows the actual or estimated expiration dates (including patent term extensions, supplementary protection certificates and/or pediatric exclusivity where granted) in the United States and the European Union for the primary (typically compound) patents for our principal products. For our products that are fixed-dose combinations or single tablet regimens, the estimated patent expiration dates provided correspond to the latest expiring compound patent for one of the active ingredients in the single tablet regimen.
Products
 
Patent Expiration
 
 
U.S.
 
E.U.
 
Letairis
 
2018
(1) 
2020
 
Ranexa
 
2019
(2) 
2023
 
Atripla
 
2021
(3) 
2017
 
Truvada
 
2021
(3) 
2017
(4) 
Descovy
 
2022
(7) 
2021
(7) 
Vemlidy
 
2022
(7) 
2021
(7) 
Complera/Eviplera
 
2025
 
2022
(6) 
Zydelig
 
2025
(6) 
2025
(6) 
Odefsey
 
2025
 
2022
(6) 
Yescarta
 
2027
(6) 
-
(5) 
Stribild
 
2029
 
2027
(6) 
Genvoya
 
2029
 
2027
(6) 
Harvoni
 
2030
 
2030
(6) 
Epclusa
 
2032
 
2032
 
Biktarvy
 
2033
 
2033
 
Vosevi
 
2034
 
2033
 
_______________________
 
 
 
 
 
These estimated expiration dates do not include any potential additional exclusivity (e.g., patent term extensions, supplementary protection certificates or pediatric exclusivity) that has not yet been granted.
______________________________________________________
Notes:
(1)
In 2017, Gilead and Watson Laboratories, Inc. reached an agreement to settle a patent litigation matter related to Letairis.
(2)
In 2013, Gilead and Lupin Limited (Lupin) reached an agreement to settle a patent litigation matter related to Ranexa.
(3)
In 2014, Gilead and Teva Pharmaceuticals reached an agreement to settle the patent litigation concerning patents that protect emtricitabine in our Truvada and Atripla products.
(4)
Supplementary protection certificates (SPCs) have been granted in several European countries. The validity of these SPCs has been challenged by several generic manufacturers, many of whom launched their competing product in 2017. The validity of these SPCs is being considered in national courts and by the Court of Justice for the European Union.
(5)
The composition of matter patent has expired in the European Union. In the European Union and the United States, patent applications are pending relating to Kite’s proprietary manufacturing processes.
(6)
Applications for patent term extensions are pending in the United States and/or SPCs are pending in one or more countries in the European Union for these products.
(7)
An application for patent term extension was filed in the United States that, if granted, would extend the U.S. expiration date to 2025. Applications for SPCs were filed in the European Union that, if granted, would extend the E.U. expiration date to 2026.
Patent Protection and Certain Challenges
Patents and other proprietary rights are very important to our business. If we have a properly drafted and enforceable patent, it can be more difficult for our competitors to use our technology to create competitive products and more difficult for our competitors to obtain a patent that prevents us from using technology we create. As part of our business strategy, we actively seek patent protection both in the United States and internationally and file additional patent applications, when appropriate, to cover improvements in our compounds, products and technology.
Patents covering certain of the active pharmaceutical ingredients (API) of most of our HIV products as well as Yescarta, Letairis and Ranexa are held by third parties. We acquired exclusive rights to these patents in the agreements we have with these parties. We do not own patents covering ranolazine, the active ingredient of Ranexa. Instead, when it was discovered that only a sustained-release formulation of ranolazine would achieve therapeutic plasma levels, we obtained patents on those formulations and the characteristic plasma levels they achieve.
We may obtain patents for certain products many years before marketing approval is obtained. Because patents have a limited life that may begin to run prior to the commercial sale of the related product, the commercial value of the patent may be limited. However, we may be able to apply for patent term extensions or supplementary protection certificates in some countries. For

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example, extensions for the patents or supplementary protection certificates on many of our products have been granted in the United States and in a number of European countries, compensating in part for delays in obtaining marketing approval. Similar patent term extensions may be available for other products we are developing, but we cannot be certain we will obtain them in some countries.
It is also important that we do not infringe the valid patents of third parties. If we infringe the valid patents of third parties, our reputations may be harmed and we may be required to pay significant monetary damages, we may be prevented from commercializing products or we may be required to obtain licenses from these third parties. We may not be able to obtain alternative technologies or any required license on reasonable terms or at all. If we fail to obtain these licenses or alternative technologies, we may be unable to develop or commercialize some or all of our products. For example, we are aware of patents and patent applications owned by other parties that such parties may claim to cover the use of sofosbuvir, axicabtagene ciloleucel and bictegravir.
Because patent applications are confidential for a period of time until a patent is issued, we may not know if our competitors have filed patent applications for technology covered by our pending applications or if we were the first to invent or first to file an application directed toward the technology that is the subject of our patent applications. Competitors may have filed patent applications or received patents and may obtain additional patents and proprietary rights that block or compete with our products. In addition, if competitors file patent applications covering our technology, we may have to participate in interference/derivation proceedings or litigation to determine the right to a patent. Litigation and interference/derivation proceedings are unpredictable and expensive, such that, even if we are ultimately successful, our results of operations may be adversely affected by such events.
Patents relating to pharmaceutical, biopharmaceutical and biotechnology products, compounds and processes such as those that cover our existing compounds, products and processes and those that we will likely file in the future, do not always provide complete or adequate protection. Future litigation or other proceedings regarding the enforcement or validity of our existing patents or any future patents could result in the invalidation of our patents or substantially reduce their protection. From time to time, certain individuals or entities may challenge our patents.
Our pending patent applications and the patent applications filed by our collaborative partners may not result in the issuance of any patents or may result in patents that do not provide adequate protection. As a result, we may not be able to prevent third parties from developing compounds or products that are closely related to those which we have developed or are developing. In addition, certain countries do not provide effective enforcement of our patents, and third-party manufacturers may be able to sell generic versions of our products in those countries.
For a description of our significant pending legal proceedings, see Note 13, Commitments and Contingencies - Legal Proceedings of the Notes to Consolidated Financial Statements included in Item 8 of our Annual Report on Form 10-K.
Trade Secrets
We also rely on unpatented trade secrets and improvements, unpatented internal know-how and technological innovation. For example, a great deal of our liposomal manufacturing expertise, which is a key component of our liposomal technology, is not covered by patents but is instead protected as a trade secret. We protect these rights mainly through confidentiality agreements with our corporate partners, employees, consultants and vendors. These agreements provide that all confidential information developed or made known to an individual during the course of their relationship with us will be kept confidential and will not be used or disclosed to third parties except in specified circumstances. In the case of employees, the agreements provide that all inventions made by an individual while employed by us will be our exclusive property. We cannot be certain that these parties will comply with these confidentiality agreements, that we have adequate remedies for any breach or that our trade secrets will not otherwise become known or be independently discovered by our competitors. Under some of our R&D agreements, inventions become jointly owned by us and our corporate partner and in other cases become the exclusive property of one party. In certain circumstances, it can be difficult to determine who owns a particular invention and disputes could arise regarding those inventions. If our trade secrets or confidential information become known or independently discovered by competitors, or if we enter into disputes over ownership of inventions, our business and results of operations could be adversely affected.
Manufacturing and Raw Materials
Our products are manufactured either at our own facilities or by third-party contract manufacturers. We depend on third parties to perform manufacturing activities for the majority of our API and drug products. For most of our products, including our HIV and HCV products, we use multiple third-party contract manufacturers so that we have primary and back-up suppliers and manufacturing sites. For Letairis, we are the exclusive manufacturer of the ambrisentan API, but we have another qualified supplier to make this API. For Yescarta, we have established clinical and commercial manufacturing facilities for the cell processing activities. For our future products, we continue to develop additional manufacturing capabilities and establish additional third-party suppliers to manufacture sufficient quantities of our product candidates to undertake clinical trials and to manufacture sufficient quantities of any product that is approved for commercial sale.

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Our Manufacturing Facilities
We own or lease manufacturing facilities in Foster City, San Dimas, La Verne, Oceanside and El Segundo, California; Dublin and Cork, Ireland; and Edmonton, Alberta, Canada, where we manufacture and distribute certain products and API for clinical and/or commercial uses.
Foster City, California: We conduct process chemistry research and development activities, manufacture API for our clinical trials and oversee our third-party contract manufacturers.
San Dimas and La Verne, California: We manufacture AmBisome (in San Dimas), package and label the majority of our commercial products and distribute our products to the Americas and Pacific Rim.
Oceanside, California: We utilize the facility for clinical manufacture and process development of our biologics candidates.
El Segundo, California: We utilize the facility for clinical and commercial manufacture and processing of Yescarta.
Cork and Dublin, Ireland: We utilize the Cork facility for commercial manufacture, packaging and labeling of our antiviral products. We also perform quality control testing, labeling, packaging and final release of many of our products for distribution to the European Union and other international markets. The Dublin facility is also responsible for distribution activities of our products.
Edmonton, Alberta, Canada: We conduct process chemistry research and scale-up activities of our clinical development candidates, manufacture API for both investigational and commercial products and conduct chemical development activities to improve existing commercial manufacturing processes.
Third-Party Manufacturers
We believe the technology we use to manufacture our products is proprietary. For products manufactured by our third-party contract manufacturers, we have disclosed all necessary aspects of this technology to enable them to manufacture the products for us. We have agreements with these third-party manufacturers that are intended to restrict them from using or revealing this technology, but we cannot be certain that these third-party manufacturers will comply with these restrictions. In addition, these third-party manufacturers could develop their own technology related to the work they perform for us that we may need to manufacture our products. We could be required to enter into additional agreements with these third-party manufacturers if we want to use that technology ourselves or allow another manufacturer to use that technology. The third-party manufacturer could refuse to allow us to use their technology or could demand terms to use their technology that are not acceptable to us.
For more information about our third-party manufacturers, see Item 1A - Risk Factors “Manufacturing problems, including at our third-party manufacturers and corporate partners, could cause inventory shortages and delay product shipments and regulatory approvals, which may adversely affect our results of operations.”
Regulation of Manufacturing Process
The manufacturing process for pharmaceutical products is highly regulated and regulators may shut down manufacturing facilities that they believe do not comply with regulations. We, our third-party manufacturers and our corporate partners are subject to current Good Manufacturing Practices, which are extensive regulations governing manufacturing processes, stability testing, record keeping and quality standards as defined by FDA and the European Medicines Agency (EMA). Similar regulations are in effect in other jurisdictions. Our manufacturing operations are subject to routine inspections by regulatory agencies.
For Yescarta, we are required by FDA to comply with the Risk Evaluation and Mitigation Strategy program, which includes educating and certifying medical personnel regarding the therapy procedures and the potential side effect profile of our therapy, such as the potential adverse side effects related to cytokine release syndrome and neurologic toxicities. Additionally, we are required to maintain a complex chain of identity and custody with respect to patient material as such material moves to the manufacturing facilities, through the manufacturing process, and back to the patient.
Access to Raw Materials
We need access to certain raw materials to conduct our clinical trials and manufacture our products. These raw materials are generally available from multiple sources, purchased worldwide and normally available in quantities adequate to meet the needs of our business. We attempt to manage the risks associated with our supply chain by inventory management, relationship management and evaluation of alternative sources when feasible. For more information, see Item 1A - Risk Factors “We may not be able to obtain materials or supplies necessary to conduct clinical trials or to manufacture and sell our products, which would limit our ability to generate revenues.”
Seasonality of Operations and Backlog
Our worldwide product sales do not reflect any significant degree of seasonality in end-user demand. In the United States, fluctuations in wholesaler inventory levels have impacted our product sales. We have observed that strong wholesaler and sub-

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wholesaler purchases of our products in the fourth quarter have resulted in inventory draw-down by wholesalers and sub-wholesalers in the subsequent first quarter. Several other factors, including government budgets, annual grant cycles for federal and state funds and other buying patterns, have impacted the product sales recorded in a particular quarter. For more information, see Item 1A - Risk Factors “Our inability to accurately predict demand for our products, uptake of new products or fluctuations in customer inventories makes it difficult for us to accurately forecast sales and may cause our forecasted revenues and earnings to fluctuate, which could adversely affect our financial results and our stock price.”
For the most part, we operate in markets characterized by short lead times and the absence of significant backlogs. We do not believe that backlog information is material to our business as a whole.
Government Regulation
Our operations and activities are subject to extensive regulation by numerous government authorities in the United States, the European Union and other countries, including laws and regulations governing the testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion of our products. As a result of these regulations, product development and product approval processes are very expensive and time consuming. The regulatory requirements applicable to drug development and approval are subject to change. Any legal and regulatory changes may impact our operations in the future.
A country’s regulatory agency, such as FDA in the United States and EMA/European Commission for the European Union, must approve a drug before it can be sold in the respective country or countries. The general process for drug approval in the United States is summarized below. Many other countries, including countries in the European Union, have similar regulatory structures.
Preclinical Testing
Before we can test a drug candidate in humans, we must study the drug in laboratory experiments and in animals to generate data to support the drug candidate’s potential benefits and safety. We submit this data to FDA in an investigational new drug (IND) application seeking its approval to test the compound in humans.
Clinical Trials
If FDA accepts the IND, the drug candidate can then be studied in human clinical trials to determine if the drug candidate is safe and effective. These clinical trials involve three separate phases that often overlap, can take many years and are very expensive. These three phases, which are subject to considerable regulation, are as follows:
Phase 1. The drug candidate is given to a small number of healthy human control subjects or patients suffering from the indicated disease, to test for safety, dose tolerance, pharmacokinetics, metabolism, distribution and excretion.
Phase 2. The drug candidate is given to a limited patient population to determine the effect of the drug candidate in treating the disease, the best dose of the drug candidate, and the possible side effects and safety risks of the drug candidate. It is not uncommon for a drug candidate that appears promising in Phase 1 clinical trials to fail in the more rigorous and extensive Phase 2 clinical trials.
Phase 3. If a drug candidate appears to be effective and safe in Phase 2 clinical trials, Phase 3 clinical trials are commenced to confirm those results. Phase 3 clinical trials are conducted over a longer term, involve a significantly larger population, are conducted at numerous sites in different geographic regions and are carefully designed to provide reliable and conclusive data regarding the safety and benefits of a drug candidate. It is not uncommon for a drug candidate that appears promising in Phase 2 clinical trials to fail in the more rigorous and extensive Phase 3 clinical trials.
FDA Approval Process
When we believe that the data from our clinical trials show an acceptable benefit-risk profile, we submit the appropriate filing, usually in the form of a New Drug Application (NDA) or supplemental NDA, with FDA seeking approval to sell the drug candidate for a particular use. FDA may hold a public hearing where an independent advisory committee of expert advisors asks additional questions and makes recommendations regarding the drug candidate. This committee makes a recommendation to FDA that is not binding but is generally followed by FDA. If FDA agrees that the compound has met the required level of safety and efficacy for a particular use, it will allow us to sell the drug candidate in the United States for that use. It is not unusual, however, for FDA to reject an application because it believes that the drug candidate is not safe enough or efficacious enough or because it does not believe that the data submitted is reliable or conclusive.
At any point in this process, the development of a drug candidate can be stopped for a number of reasons including safety concerns and lack of treatment benefit. We cannot be certain that any clinical trials that we are currently conducting or any that we conduct in the future will be completed successfully or within any specified time period. We may choose, or FDA may require us, to delay or suspend our clinical trials at any time if it appears that the patients are being exposed to an unacceptable health risk or if the drug candidate does not appear to have sufficient treatment benefit.

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FDA may also require Phase 4 non-registrational studies to explore scientific questions to further characterize safety and efficacy during commercial use of our drug. FDA may also require us to provide additional data or information, improve our manufacturing processes, procedures or facilities or may require extensive surveillance to monitor the safety or benefits of our product candidates if it determines that our filing does not contain adequate evidence of the safety and benefits of the drug. In addition, even if FDA approves a drug, it could limit the uses of the drug. FDA can withdraw approvals if it does not believe that we are complying with regulatory standards or if problems are uncovered or occur after approval.
In addition to obtaining FDA approval for each drug, we obtain FDA approval of the manufacturing facilities for any drug we sell, including those of companies who manufacture our drugs for us. All of these facilities are subject to periodic inspections by FDA. FDA must also approve foreign establishments that manufacture products to be sold in the United States and these facilities are subject to periodic regulatory inspection. Our manufacturing facilities located in California also must be licensed by the State of California in compliance with local regulatory requirements. Our manufacturing facilities in Canada and Ireland also must obtain local licenses and permits in compliance with local regulatory requirements.
Drugs that treat serious or life-threatening diseases and conditions that are not adequately addressed by existing drugs, and for which the development program is designed to address the unmet medical need, may be designated as fast track candidates by FDA and may be eligible for priority review. Drugs for the treatment of HIV infection that are designated for use under the U.S. President’s Emergency Plan for AIDS Relief may also qualify for an expedited review.
European Union Approval Process
Drugs are also subject to extensive regulation outside of the United States. In the European Union, there is a centralized approval procedure that authorizes marketing of a product in all countries of the European Union. If this centralized approval procedure is not used, approval in one country of the European Union can be used to obtain approval in another country of the European Union under one of two simplified application processes: the mutual recognition procedure or the decentralized procedure, both of which rely on the principle of mutual recognition. After receiving regulatory approval through any of the European registration procedures, separate pricing and reimbursement approvals are also required in most countries. The European Union also has requirements for approval of manufacturing facilities for all products that are approved for sale by the European regulatory authorities.
Pricing and Reimbursement
Successful commercialization of our products depends, in part, on the availability of governmental and third-party payer reimbursement for the cost of such products and related treatments in the markets where we sell our products. Government health authorities, private health insurers and other organizations generally provide reimbursement. In the United States, the European Union and other significant or potentially significant markets for our products and product candidates, government authorities and third-party payers are increasingly attempting to limit or regulate the price of medical products and services. A significant portion of our sales of the majority of our products are subject to substantial discounts from the list prices. As a result, the price increases we implement from time to time on certain products may have a limited effect on our product sales in certain markets. In addition, standard reimbursement structures may not adequately reimburse for innovative therapies.
As our products mature, private insurers and government payers often reduce the amount they will reimburse patients, which increases pressure on us to reduce prices. Further, as new branded or generic products are introduced into major markets, our ability to maintain pricing and market share may be affected.
For more information, see Item 1A - Risk Factors “Our existing products are subject to reimbursement from government agencies and other third parties. Pharmaceutical pricing and reimbursement pressures may reduce profitability.” and “Our inability to accurately predict demand for our products, uptake of new products or fluctuations in customer inventories make it difficult for us to accurately forecast sales and may cause our forecasted revenues and earnings to fluctuate, which could adversely affect our financial results and our stock price.”
Patient Assistance Programs
Recently, there has been enhanced scrutiny of company-sponsored patient assistance programs, including insurance premium and co-pay assistance programs and donations to third-party charities that provide such assistance. There has also been enhanced scrutiny by governments on reimbursement support offerings, clinical education programs and promotional speaker programs. If we, or our agents, vendors or donation recipients, are deemed to have failed to comply with laws, regulations or government guidance in any of these areas, we could be subject to criminal and civil sanctions. Any similar violations by our competitors could also negatively impact our industry reputation and increase scrutiny over our business and our products.

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Health Care Fraud and Abuse Laws; Anti-Bribery Laws
We are subject to various federal and state laws pertaining to health care “fraud and abuse,” including anti-kickback laws and false claim laws. Anti-kickback laws make it illegal for a prescription drug manufacturer to solicit, offer, receive or pay any remuneration in exchange for, or to induce, the referral of business, including the purchase or prescription of a particular drug. Due to the breadth of the statutory provisions and the increasing attention being given to them by law enforcement authorities, it is possible that certain of our practices may be challenged under anti-kickback or similar laws. False claims laws generally prohibit anyone from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment by federal and certain state payers (including Medicare and Medicaid), or knowingly making, using or causing to be made or used, a false record or statement material to a false or fraudulent claim. Our sales, marketing, patient support and medical activities may be subject to scrutiny under these laws.
In addition, the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws generally prohibit companies and their intermediaries from making improper payments for the purpose of obtaining or retaining business. Our policies mandate compliance with these anti-bribery laws. We operate in parts of the world that have experienced governmental corruption to some degree. In certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices or may require us to interact with doctors and hospitals, some of which may be state controlled, in a manner that is different than local custom.
Despite our training and compliance program, our internal control policies and procedures may not protect us from reckless or criminal acts committed by our employees or agents. Violations of fraud and abuse laws or anti-bribery laws may be punishable by criminal and/or civil sanctions, including fines and civil monetary penalties, as well as the possibility of exclusion from federal health care programs (including Medicare and Medicaid). Violations can also lead to the imposition of a Corporate Integrity Agreement or similar government oversight program.
U.S. Healthcare Reform
The U.S. federal and state governments continue to propose and pass legislation designed to regulate the healthcare industry, including legislation that seeks to indirectly or directly regulate pharmaceutical drug pricing.
For more information, see Item 1A - Risk Factors “Our results of operations may be adversely affected by current and potential future healthcare legislative and regulatory actions” and “Laws and regulations applicable to the health care industry could impose new obligations on us, require us to change our business practices and restrict our operations in the future.”
Employees
As of January 31, 2019, we had approximately 11,000 employees. We believe we have good relations with our employees.
Environment
We are subject to a number of laws and regulations that require compliance with federal, state, and local regulations for the protection of the environment. The regulatory landscape continues to evolve, and we anticipate additional regulations in the near future. Laws and regulations are implemented and under consideration to mitigate the effects of climate change mainly caused by greenhouse gas emissions. Our business is not energy intensive. Therefore, we do not anticipate being subject to a cap and trade system or other mitigation measure that would materially impact our capital expenditures, operations or competitive position.
Other Information
We are subject to the information requirements of the Exchange Act. Therefore, we file periodic reports, proxy and information statements and other information with the SEC. The SEC maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
The mailing address of our headquarters is 333 Lakeside Drive, Foster City, California 94404, and our telephone number at that location is 650-574-3000. Our website is www.gilead.com. Through a link on the “Investors” page of our website (under “SEC Filings” section), we make available the following filings free of charge as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: our Annual Reports on Form 10-K; Quarterly Reports on Form 10-Q; Current Reports on Form 8-K; and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act.
Transactions with Iran
We did not engage in any transactions within Iran during 2018 that would require disclosure in this Annual Report on Form 10-K.

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Item 1A.
RISK FACTORS
In evaluating our business, you should carefully consider the following risks in addition to the other information in this Annual Report on Form 10-K. A manifestation of any of the following risks could materially and adversely affect our business, results of operations and financial condition. We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. It is not possible to predict or identify all such factors and, therefore, you should not consider the following risks to be a complete statement of all the potential risks or uncertainties that we face.
A substantial portion of our revenues is derived from sales of products to treat HIV and HCV. If we are unable to increase HIV sales or if HCV sales decrease more than anticipated, then our results of operations may be adversely affected.
We receive a substantial portion of our revenue from sales of our products for the treatment of HIV infection. During the year ended December 31, 2018, sales of our HIV products accounted for approximately 67% of our total product sales, and we expect our HIV products to account for a higher percentage of our total product sales in 2019 than in 2018. Most of our HIV products contain tenofovir alafenamide (TAF), tenofovir disoproxil fumarate (TDF) and/or emtricitabine, which belong to the nucleoside class of antiviral therapeutics. If the treatment paradigm for HIV changes, causing nucleoside-based therapeutics to fall out of favor, or if we are unable to maintain or increase our HIV product sales, our results of operations would likely suffer and we would likely need to scale back our operations, including our future drug development and spending on research and development (R&D) efforts.
During the year ended December 31, 2018, sales of our products for the treatment of chronic hepatitis C virus (HCV) infection accounted for approximately 17% of our total product sales. Our HCV revenues have declined, and we expect a further decline in product sales in 2019, compared to 2018, in major markets. The drivers of our HCV product revenues are patient starts, net pricing, market share and treatment duration. With treatment duration stabilizing and pricing largely stabilizing, we expect to continue to compete for market share across market segments and geographies. We anticipate patient starts to continue to steadily decline and be more predictable. Any unexpected and adverse changes to these drivers, including any larger than anticipated shifts, may adversely impact our HCV product revenues.
In addition, future sales of our HIV and HCV products depend, in part, on the extent of reimbursement of our products by private and public payers. We may continue to experience global pricing pressure that could result in larger discounts or rebates on our products or delayed reimbursement, which negatively impacts our product sales and results of operations. Also, private and public payers can choose to exclude our products from their formulary coverage lists or limit the types of patients for whom coverage will be provided, which would negatively impact the demand for, and revenues of, our products. Any change in the formulary coverage, reimbursement levels or discounts or rebates offered on our products to payers may impact our anticipated revenues. If we are unable to achieve our forecasted HIV and HCV sales, our stock price could be adversely impacted.
We may be unable to sustain or increase sales of our HIV or HCV products for any number of reasons including, but not limited to, the reasons discussed above and the following:
As our products are used over a longer period of time in many patients and in combination with other products, and additional studies are conducted, new issues with respect to safety, resistance and interactions with other drugs may arise, which could cause us to provide additional warnings or contraindications on our labels, narrow our approved indications or halt sales of a product, each of which could reduce our revenues.
As our products mature, private insurers and government payers often reduce the amount they will reimburse patients for these products, which increases pressure on us to reduce prices.
If physicians do not see the benefit of our HIV or HCV products, the sales of our HIV or HCV products will be limited.
As new branded or generic products are introduced into major markets, our ability to maintain pricing and market share may be affected.
If we fail to commercialize new products or expand the indications for existing products, our prospects for future revenues and our results of operations may be adversely affected.
If we do not introduce new products or increase sales of our existing products, we will not be able to increase or maintain our total revenues nor continue to expand our R&D efforts, and our results of operations may be adversely affected. Drug development is inherently risky and many product candidates fail during the drug development process. We may decide to terminate product development after expending significant resources and effort. For example, we recently announced that our KITE-585, an anti- B-cell maturation antigen (anti-BCMA) being evaluated for the treatment of multiple myeloma, will not be moving forward. We also recently announced that STELLAR-4, a Phase 3 study evaluating the safety and efficacy of selonsertib in patients with compensated cirrhosis due to nonalcoholic steatohepatitis (NASH), did not meet the pre-specified week 48 primary endpoint. In addition, if we are unable to obtain regulatory approval for product candidates, our future revenue growth and results of operations may be adversely impacted.

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Further, any future marketing applications we file may not be approved by the regulatory authorities on a timely basis, or at all. Even if marketing approval is granted, there may be significant limitations on their use.
Our inability to accurately predict demand for our products, uptake of new products or fluctuations in customer inventories makes it difficult for us to accurately forecast sales and may cause our forecasted revenues and earnings to fluctuate, which could adversely affect our financial results and stock price.
We may be unable to accurately predict demand for our products, including the uptake of new products, as demand depends on a number of factors. For example, the non-retail sector in the United States, which includes government institutions, including state AIDS Drug Assistance Programs (ADAPs), the U.S. Department of Veterans Affairs, correctional facilities and large health maintenance organizations, tends to be even less consistent in terms of buying patterns and often causes quarter-over-quarter fluctuations that do not necessarily mirror patient demand for our products. Federal and state budget pressures, as well as the annual grant cycles for federal and state funds, may cause purchasing patterns to not reflect patient demand of our products. For example, in the first quarters of 2018 and certain prior years, we observed large non-retail purchases of our HIV products by a number of state ADAPs that exceeded patient demand. We believe such purchases were driven by the grant cycle for federal ADAP funds. We expect to continue to experience fluctuations in the purchasing patterns of our non-retail customers which may result in fluctuations in our product sales, revenues and earnings in the future. In light of the budget crises faced by many European countries, we have observed variations in purchasing patterns induced by cost containment measures in Europe. We believe these measures have caused some government agencies and other purchasers to reduce inventory of our products in the distribution channels, which has decreased our revenues and caused fluctuations in our product sales and earnings. We may continue to see this trend in the future.
We sell and distribute most of our products in the United States exclusively through the wholesale channel. During the year ended December 31, 2018, approximately 85% of our product sales in the United States were to three wholesalers, AmerisourceBergen Corp., Cardinal Health, Inc. and McKesson Corp. The U.S. wholesalers with whom we have entered into inventory management agreements make estimates to determine end user demand and may not be completely effective in matching their inventory levels to actual end user demand. As a result, changes in inventory levels held by those wholesalers can cause our operating results to fluctuate unexpectedly if our sales to these wholesalers do not match end user demand. In addition, inventory is held at retail pharmacies and other non-wholesaler locations with whom we have no inventory management agreements and no control over buying patterns. Adverse changes in economic conditions, increased competition or other factors may cause retail pharmacies to reduce their inventories of our products, which would reduce their orders from wholesalers and, consequently, the wholesalers’ orders from us, even if end user demand has not changed. For example, during the fourth quarter of 2017, strong wholesaler and sub-wholesaler purchases of our products resulted in inventory draw-down by wholesalers and sub-wholesalers in the first quarter of 2018. As inventory in the distribution channel fluctuates from quarter to quarter, we may continue to see fluctuations in our earnings and a mismatch between prescription demand for our products and our revenues.
In addition, we estimate the rebates we will be required to pay in connection with sales during a particular quarter based on claims data from prior quarters. In the United States, actual rebate claims are typically made by payers one to three quarters in arrears. Actual claims may vary significantly from our estimates which can cause an adjustment to our product revenues. To the extent our actual or anticipated product revenues exceed or fall short of investors’ expectations, our stock price could be adversely impacted.
Yescarta, a chimeric antigen receptor (CAR) T cell therapy, represents a novel approach to cancer treatment that creates significant challenges for us, which may impact our ability to increase sales of Yescarta.
Yescarta, a CAR T cell therapy, involves (i) harvesting T cells from the patient’s blood, (ii) engineering T cells to express cancer-specific receptors, (iii) increasing the number of engineered T cells and (iv) infusing the functional cancer-specific T cells back into the patient. Advancing this novel and personalized therapy creates significant challenges, including:
educating and certifying medical personnel regarding the procedures and the potential side effect profile of our therapy, such as the potential adverse side effects related to cytokine release syndrome and neurologic toxicities, in compliance with the Risk Evaluation and Mitigation Strategy (REMS) program required by FDA for Yescarta;
using medicines to manage adverse side effects of our therapy, such as tocilizumab and corticosteroids, which may not be available in sufficient quantities, may not adequately control the side effects and/or may have a detrimental impact on the efficacy of the treatment;
developing a robust and reliable process, while limiting contamination risks, for engineering a patient’s T cells ex vivo and infusing the engineered T cells back into the patient; and
conditioning patients with chemotherapy in advance of administering our therapy, which may increase the risk of adverse side effects.

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The use of engineered T cells as a potential cancer treatment is a recent development and may not be broadly accepted by physicians, patients, hospitals, cancer treatment centers, payers and others in the medical community. We may not be able to establish or demonstrate to the medical community or commercial or governmental payers the safety and efficacy of Yescarta and the potential advantages compared to existing and future therapeutics. If we fail to overcome these significant challenges, our sales of Yescarta, results of operations and stock price could be adversely affected.
We face significant competition.
We face significant competition from global pharmaceutical and biotechnology companies, specialized pharmaceutical firms and generic drug manufacturers. Our products compete with other available products based primarily on efficacy, safety, tolerability, acceptance by doctors, ease of patient compliance, ease of use, price, insurance and other reimbursement coverage, distribution and marketing.
Our TAF-containing HIV products compete primarily with products from ViiV Healthcare Company (ViiV). We also face competition from generic HIV products. Generic versions of efavirenz, a component of Atripla, are available in the United States, Canada and Europe. We have observed some pricing pressure related to the efavirenz component of our Atripla sales. TDF, one of the active pharmaceutical ingredients in Truvada, Atripla, Complera/Eviplera and Stribild, faces generic competition in the European Union, the United States and certain other countries. In addition, because emtricitabine, the other active pharmaceutical ingredient of Truvada, faces generic competition in the European Union, Truvada also faces generic competition in the European Union and certain other countries outside of the United States.
Our HCV products compete primarily with products marketed by AbbVie and Merck.
Our HBV products face competition from existing therapies for treating patients with HBV as well as generic versions of TDF. Our HBV products also compete with products marketed by Bristol-Myers Squibb Company and Novartis Pharmaceuticals Corporation (Novartis).
Yescarta competes with a CAR T cell therapy marketed by Novartis and is expected to compete with products from other companies developing advanced T cell therapies.
Letairis competes with products marketed by Actelion Pharmaceuticals US, Inc., United Therapeutics Corporation and Pfizer Inc. Because the U.S. patent for ambrisentan, the active pharmaceutical ingredient in Letairis, expired in July 2018, Letairis is expected to face competition from manufacturers of generic versions of Letairis in the United States.
Ranexa competes predominantly with generic compounds from three distinct classes of drugs for the treatment of chronic angina in the United States, including generic and/or branded beta-blockers, calcium channel blockers and long-acting nitrates. Ranexa is expected to face competition from manufacturers of generic versions of Ranexa in the United States starting in the first quarter of 2019.
In addition, a number of companies are pursuing the development of technologies which are competitive with our existing products or research programs. These competing companies include specialized pharmaceutical firms and large pharmaceutical companies acting either independently or together with other pharmaceutical companies. Furthermore, academic institutions, government agencies and other public and private organizations conducting research may seek patent protection and may establish collaborative arrangements for competitive products or programs. If any of these competitors gain market share as a result of new technologies, commercialization strategies or otherwise, it could adversely affect our results of operations and stock price.
Our results of operations may be adversely affected by current and potential future healthcare legislative and regulatory actions.
Legislative and regulatory actions affecting government prescription drug procurement and reimbursement programs occur relatively frequently. In the United States, the Affordable Care Act (the ACA) was enacted in 2010 to expand healthcare coverage. Since then, numerous efforts have been made to repeal, amend or administratively limit the ACA in whole or in part. For example, the Tax Cuts and Jobs Act, signed into law by President Trump in 2017, repealed the individual health insurance mandate, which is considered a key component of the ACA. In December 2018, a Texas federal district court struck down the ACA on the ground that the individual health insurance mandate is unconstitutional, although this ruling has been stayed pending appeal. The ongoing challenges to the ACA have resulted in uncertainty regarding its future viability and destabilization of the health insurance market. The resulting impact on our business is uncertain and could be material.
Efforts to control prescription drug prices could also have a material adverse effect on our business. For example, in 2018, President Trump and the Secretary of the U.S. Department of Health and Human Services (HHS) released the "American Patients First Blueprint" and have begun implementing certain portions. The initiative includes proposals to increase generic drug and biosimilar competition, enable the Medicare program to negotiate drug prices more directly and improve transparency regarding drug prices and ways to lower consumers' out-of-pocket costs. The Trump administration also proposed to establish an “international pricing index” that would be used as a benchmark to determine the costs of drugs under Medicare Part B. In addition, many states

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have proposed or enacted legislation that seeks to indirectly or directly regulate pharmaceutical drug pricing, such as by requiring biopharmaceutical manufacturers to publicly report proprietary pricing information or to place a maximum price ceiling on pharmaceutical products purchased by state agencies. For example, in 2017, California’s governor signed a prescription drug price transparency state bill into law, requiring prescription drug manufacturers to provide advance notice and explanation for price increases of certain drugs that exceed a specified threshold. Similar bills have been introduced at the federal level. Such initiatives and legislation may cause added pricing pressures on our products.
Changes to the Medicaid program at the federal or state level could also have a material adverse effect on our business. Proposals that could impact coverage and reimbursement of our products, including giving states more flexibility to manage drugs covered under the Medicaid program and permitting the re-importation of prescription medications from Canada or other countries, could have a material adverse effect by limiting our products’ use and coverage. Furthermore, state Medicaid programs could request additional supplemental rebates on our products as a result of an increase in the federal base Medicaid rebate. To the extent that private insurers or managed care programs follow Medicaid coverage and payment developments, they could use the enactment of these increased rebates to exert pricing pressure on our products, and the adverse effects may be magnified by their adoption of lower payment schedules.
Other proposed regulatory actions affecting manufacturers could have a material adverse effect on our business. For example, in December 2018, HHS proposed a rule that would modify the Medicare Part D protected class policy to provide Part D Plan Sponsors broader authority to impose step therapy, prior authorization and other utilization management controls on products in the Part D protected classes, including our HIV products. In January 2019, HHS also proposed a rule that would remove regulatory protection under the Discount Safe Harbor to the Federal Anti-Kickback Statute for manufacturer rebates paid to Part D Plan Sponsors, Medicaid managed care organizations and pharmacy benefit managers under contract with them, and would create new safe harbors for arrangements with these entities. It is difficult to predict the impact, if any, of any such proposed legislative and regulatory actions or resulting state actions on the use and reimbursement of our products in the United States, but our results of operations may be adversely affected.
Our existing products are subject to reimbursement from government agencies and other third parties. Pharmaceutical pricing and reimbursement pressures may reduce profitability.
Successful commercialization of our products depends, in part, on the availability of governmental and third-party payer reimbursement for the cost of such products and related treatments in the markets where we sell our products. Government health authorities, private health insurers and other organizations generally provide reimbursement. In the United States, the European Union and other significant or potentially significant markets for our products and product candidates, government authorities and third-party payers are increasingly attempting to limit or regulate the price of medical products and services. A substantial portion of sales of the majority of our products is subject to significant discounts from list price. In addition, standard reimbursement structures may not adequately reimburse for innovative therapies.
For example, effective October 2018, the Centers for Medicare and Medicaid Services (CMS) established inpatient reimbursement for patients receiving Yescarta. The reimbursement includes payment for a severity adjusted diagnosis related group (DRG) 016, a new technology add-on payment (NTAP) for Yescarta that at most will cover one half the cost of Yescarta and may cover less than that, and, in some cases, an outlier payment. Taken together, the total payment may not be sufficient to reimburse hospitals for their cost of care for patients receiving Yescarta. This payment methodology is likely to be in effect until at least September 2020. Limited payments such as this could impact the willingness of some hospitals to offer the therapy and of doctors to recommend the therapy and could lessen the attractiveness of our therapy to patients, which could have an adverse effect on sales of Yescarta and on our results of operations. CMS has also proposed a National Coverage Decision on CAR T cells and would impose certain coverage limitations on that therapy. These coverage limitations would apply to the entire Medicare program and includes, among other things, a requirement for patients to be enrolled in a clinical trial or registry in order for the hospital and physician to be paid for CAR T cell therapy. Further, commercial payers may follow Medicare coverage policies and could impose similar limitations. Additionally, in the European Union, there are barriers to reimbursement in individual countries that could limit the uptake of Yescarta.
Laws and regulations applicable to the health care industry could impose new obligations on us, require us to change our business practices and restrict our operations in the future.
The health care industry is subject to various federal, state and international laws and regulations pertaining to drug reimbursement, rebates, price reporting, health care fraud and abuse, and data privacy and security. In the United States, these laws include anti-kickback and false claims laws, laws and regulations relating to the Medicare and Medicaid programs and other federal and state programs, the Medicaid Rebate Statute, individual state laws relating to pricing and sales and marketing practices, the Health Insurance Portability and Accountability Act (HIPAA) and other federal and state laws relating to the privacy and security of health information.

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Violations of these laws or any related regulations may be punishable by criminal and/or civil sanctions, including, in some instances, substantial fines, civil monetary penalties, exclusion from participation in federal and state health care programs, including Medicare, Medicaid, Veterans Administration health programs, and federal employee health benefit programs, actions against executives overseeing our business and burdensome remediation measures. In addition, these laws and regulations are broad in scope and they are subject to change and evolving interpretations, which could require us to incur substantial costs associated with compliance or to alter one or more of our sales or marketing practices. Violations of these laws, or allegations of such violations, could also result in negative publicity or other consequences that could harm our reputation, disrupt our business or adversely affect our results of operations. If any or all of these events occur, our business and stock price could be materially and adversely affected.
Recently, there has been enhanced scrutiny of company-sponsored patient assistance programs, including insurance premium and co-pay assistance programs and donations to third-party charities that provide such assistance. There has also been enhanced scrutiny by governments on reimbursement support offerings, clinical education programs and promotional speaker programs. If we, or our agents, vendors or donation recipients, are deemed to have failed to comply with laws, regulations or government guidance in any of these areas, we could be subject to criminal or civil sanctions. Any similar violations by our competitors could also negatively impact our industry reputation and increase scrutiny over our business and our products.
For a description of our government investigations and related litigation, see Note 13, Commitments and Contingencies of the Notes to Consolidated Financial Statements included in Item 8 of our Annual Report on Form 10-K.
We have engaged in, and may in the future engage in, business acquisitions, licensing arrangements, strategic collaborations or disposal of our assets, which could cause us to incur significant expenses and could adversely affect our financial condition and results of operations.
We have engaged in, and may in the future engage in, business acquisitions, licensing arrangements, strategic collaborations or disposal of our assets, as part of our business strategy. We may not identify suitable transactions in the future and, if we do, we may not complete such transactions in a timely manner, on a cost-effective basis, or at all, and may not realize the expected benefits. If we are successful in making an acquisition, the products and technologies that are acquired may not be successful or may require significantly greater resources and investments than originally anticipated. We may not be able to integrate acquisitions successfully into our existing business and could incur or assume significant debt and unknown or contingent liabilities. We also conduct annual impairment testing of our goodwill and other indefinite lived intangible assets in the fourth quarter, or earlier if impairment indicators exist, as required under U.S. generally accepted accounting principles. If we fail to overcome these risks, it could cause us to incur significant expenses and negatively affect profitability, which could have an adverse effect on our results of operations. We could also experience negative effects on our reported results of operations from acquisition or disposition-related charges, amortization of expenses related to intangibles and charges for impairment of long-term assets.
Approximately 25% of our product sales occur outside the United States, and currency fluctuations and hedging expenses may cause our earnings to fluctuate, which could adversely affect our stock price.
Because a significant percentage of our product sales are denominated in foreign currencies, primarily the Euro, we face exposure to adverse movements in foreign currency exchange rates. When the U.S. dollar strengthens against these foreign currencies, the relative value of sales made in the respective foreign currency decreases. Conversely, when the U.S. dollar weakens against these currencies, the relative value of such sales increases. Overall, we are a net receiver of foreign currencies and, therefore, benefit from a weaker U.S. dollar and are adversely affected by a stronger U.S. dollar.
We use foreign currency exchange forward and option contracts to hedge a percentage of our forecasted international sales, primarily those denominated in the Euro. We also hedge certain monetary assets and liabilities denominated in foreign currencies, which reduces but does not eliminate our exposure to currency fluctuations between the date a transaction is recorded and the date cash is collected or paid. Foreign currency exchange, net of hedges, had a favorable impact on our product sales of $94 million for the year ended December 31, 2018, compared to the same period in 2017.
We cannot predict future fluctuations in the foreign currency exchange rates of the U.S. dollar. If the U.S. dollar appreciates significantly against certain currencies and our hedging program does not sufficiently offset the effects of such appreciation, our results of operations will be adversely affected and our stock price may decline.
Additionally, the expenses that we recognize in relation to our hedging activities can also cause our earnings to fluctuate. The level of hedging expenses that we recognize in a particular period is impacted by the changes in interest rate spreads between the foreign currencies that we hedge and the U.S. dollar.

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If significant safety issues arise for our marketed products or our product candidates, our reputation may be harmed and our future sales may be reduced, which would adversely affect our results of operations.
The data supporting the marketing approvals for our products and forming the basis for the safety warnings in our product labels were obtained in controlled clinical trials of limited duration and, in some cases, from post-approval use. As our products are used over longer periods of time by many patients with underlying health problems, taking numerous other medicines, we expect to continue to find new issues such as safety, resistance or drug interaction issues, which may require us to provide additional warnings or contraindications on our labels or narrow our approved indications, each of which could reduce the market acceptance of these products.
Regulatory authorities have been moving towards more active and transparent pharmacovigilance and are making greater amounts of stand-alone safety information and clinical trial data directly available to the public through websites and other means, such as periodic safety update report summaries, risk management plan summaries and various adverse event data. Safety information, without the appropriate context and expertise, may be misinterpreted and lead to misperception or legal action which may potentially cause our product sales or stock price to decline.
Further, if serious safety, resistance or drug interaction issues arise with our marketed products, sales of these products could be limited or halted by us or by regulatory authorities and our results of operations would be adversely affected.
Our operations depend on compliance with complex FDA and comparable international regulations. Failure to obtain broad approvals on a timely basis or to maintain compliance could delay or halt commercialization of our products.
The products we develop must be approved for marketing and sale by regulatory authorities and, once approved, are subject to extensive regulation by FDA, the European Medicines Agency (EMA) and comparable regulatory agencies in other countries. We are continuing clinical trials for many of our products for currently approved and additional uses. We anticipate that we will file for marketing approval in additional countries and for additional indications and products over the next several years. These products may fail to receive such marketing approvals on a timely basis, or at all.
Further, how we manufacture and sell our products is subject to extensive regulation and review. Discovery of previously unknown problems with our marketed products or problems with our manufacturing, safety reporting or promotional activities may result in restrictions on our products, including withdrawal of the products from the market. If we fail to comply with applicable regulatory requirements, including those related to promotion and manufacturing, we could be subject to penalties including fines, suspensions of regulatory approvals, product recalls, seizure of products and criminal prosecution.
For example, under FDA rules, we are often required to conduct post-approval clinical studies to assess a known serious risk, signals of serious risk or to identify an unexpected serious risk and implement a REMS for our products, which could include a medication guide, patient package insert, a communication plan to healthcare providers or other elements as FDA deems are necessary to assure safe use of the drug, which could include imposing certain restrictions on the distribution or use of a product. Failure to comply with these or other requirements imposed by FDA could result in significant civil monetary penalties and our operating results may be adversely affected.
We face risks in our clinical trials, including the potential for unfavorable results, delays in anticipated timelines and disruption, which would adversely affect our prospects for future revenue growth and our results of operations.
We are required to demonstrate the safety and efficacy of products that we develop for each intended use through extensive preclinical studies and clinical trials. The results from preclinical and early clinical studies do not always accurately predict results in later, large-scale clinical trials. Even successfully completed large-scale clinical trials may not result in marketable products. For example, we recently announced that our KITE-585, an anti-BCMA being evaluated for the treatment of multiple myeloma, will not be moving forward. We also recently announced that STELLAR-4, a Phase 3 study evaluating the safety and efficacy of selonsertib in patients with compensated cirrhosis due to NASH, did not meet the pre-specified week 48 primary endpoint. If any of our product candidates fails to achieve its primary endpoint in clinical trials, if safety issues arise or if the results from our clinical trials are otherwise inadequate to support regulatory approval of our product candidates, commercialization of that product candidate could be delayed or halted. In addition, we may also face challenges in clinical trial protocol design.
If the clinical trials for any of the product candidates in our pipeline are delayed or terminated, our prospects for future revenue growth and our results of operations would be adversely impacted. For example, we face numerous risks and uncertainties with our product candidates, including Descovy for pre-exposure prophylaxis (PrEP); selonsertib for the treatment of NASH; axicabtagene ciloleucel for the treatment of second line diffuse large B-cell lymphoma; and filgotinib for the treatment of rheumatoid arthritis, Crohn’s disease and ulcerative colitis, each currently in Phase 3 clinical trials, that could prevent completion of development of these product candidates. These risks include our ability to enroll patients in clinical trials, the possibility of unfavorable results of our clinical trials, the need to modify or delay our clinical trials or to perform additional trials and the risk of failing to obtain FDA and other regulatory body approvals. As a result, our product candidates may never be successfully commercialized. For example, FDA has requested that we conduct a safety study of filgotinib in men with ulcerative colitis (MANTA study), and

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enrollment in this MANTA study will likely be the rate limiting factor to filing an NDA for filgotinib in the United States. Further, we may make a strategic decision to discontinue development of our product candidates if, for example, we believe commercialization will be difficult relative to other opportunities in our pipeline. If these programs and others in our pipeline cannot be completed on a timely basis or at all, then our prospects for future revenue growth and our results of operations may be adversely impacted. In addition, clinical trials involving our commercial products could raise new safety issues for our existing products, which could in turn adversely affect our results of operations and harm our business.
In addition, we extensively outsource our clinical trial activities and usually perform only a small portion of the start-up activities in-house. We rely on independent third-party contract research organizations (CROs) to perform most of our clinical studies, including document preparation, site identification, screening and preparation, pre-study visits, training, program management, patient enrollment, ongoing monitoring, site management and bioanalytical analysis. Many important aspects of the services performed for us by the CROs are out of our direct control. If there is any dispute or disruption in our relationship with our CROs, our clinical trials may be delayed. Moreover, in our regulatory submissions, we rely on the quality and validity of the clinical work performed by third-party CROs. If any of our CROs’ processes, methodologies or results were determined to be invalid or inadequate, our own clinical data and results and related regulatory approvals could be adversely affected.
We depend on relationships with third parties for sales and marketing performance, technology, development, logistics and commercialization of products. Failure to maintain these relationships, poor performance by these companies or disputes with these third parties could negatively impact our business.
We rely on a number of collaborative relationships with third parties for our sales and marketing performance in certain territories. For example, we have collaboration arrangements with Janssen Sciences Ireland UC for Odefsey, Complera/Eviplera and Symtuza. In some countries, we rely on international distributors for sales of certain of our products. Some of these relationships also involve the clinical development of these products by our partners. Reliance on collaborative relationships poses a number of risks, including the risk that:
we are unable to control the resources our corporate partners devote to our programs or products;
disputes may arise with respect to the ownership of rights to technology developed with our corporate partners;
disagreements with our corporate partners could cause delays in, or termination of, the research, development or commercialization of product candidates or result in litigation or arbitration;
contracts with our corporate partners may fail to provide significant protection or may fail to be effectively enforced if one of these partners fails to perform;
our corporate partners have considerable discretion in electing whether to pursue the development of any additional products and may pursue alternative technologies or products either on their own or in collaboration with our competitors;
our corporate partners with marketing rights may choose to pursue competing technologies or to devote fewer resources to the marketing of our products than they do to products of their own development; and
our distributors and our corporate partners may be unable to pay us.
Given these risks, there is a great deal of uncertainty regarding the success of our current and future collaborative efforts. If these efforts fail, our product development or commercialization of new products could be delayed or revenues from products could decline.
In addition, we rely on third party sites to collect patient white blood cells, known as apheresis centers, shippers, couriers, and hospitals for the logistical collection of patient’s white blood cells and ultimate delivery of Yescarta to patients. Any disruption or difficulties incurred by any of these vendors could result in product loss and regulatory action and harm our Yescarta business and our reputation. To ensure that any apheresis center is prepared to ship cells to our manufacturing facilities, we plan to conduct quality certifications of each apheresis center. However, apheresis centers may choose not to participate in the certification process or we may be unable to complete certification in a timely manner or at all, which could delay or restrain our manufacturing and commercialization efforts. As a result, our sales of Yescarta may be limited which could harm our results of operations.
Our success depends to a significant degree on our ability to defend our patents and other intellectual property rights both domestically and internationally. We may not be able to obtain effective patents to protect our technologies from use by competitors.
Patents and other proprietary rights are very important to our business. Our success depends to a significant degree on our ability to:
obtain patents and licenses to patent rights;
preserve trade secrets and internal know-how;
defend against infringement of our patents and efforts to invalidate them; and

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operate without infringing on the intellectual property of others.
If we have a properly drafted and enforceable patent, it can be more difficult for our competitors to use our technology to create competitive products and more difficult for our competitors to obtain a patent that prevents us from using technology we create. As part of our business strategy, we actively seek patent protection both in the United States and internationally and file additional patent applications, when appropriate, to cover improvements in our compounds, products and technology.
Patent applications are confidential for a period of time before a patent is issued. As a result, we may not know if our competitors filed patent applications for technology covered by our pending applications or if we were the first to invent or first to file an application directed toward the technology that is the subject of our patent applications. In addition, if competitors file patent applications covering our technology, we may have to participate in litigation, post-grant proceedings before the U.S. Patent and Trademark Office or other proceedings to determine the right to a patent or validity of any patent granted. Litigation, post-grant proceedings before the U.S. Patent and Trademark Office or other proceedings are unpredictable and expensive, and could divert management attention from other operations, such that, even if we are ultimately successful, our results of operations may be adversely affected by such events.
Generic manufacturers have sought, and may continue to seek, FDA approval to market generic versions of our products through an abbreviated new drug application (ANDA), the application process typically used by manufacturers seeking approval of a generic drug. For a description of our ANDA litigation, see Note 13, Commitments and Contingencies of the Notes to Consolidated Financial Statements included in Item 8 of our Annual Report on Form 10-K. The entry of generic versions of our products may lead to market share and price erosion and have a negative impact on our business and results of operations.
Our success depends in large part on our ability to operate without infringing upon the patents or other proprietary rights of third parties.
If we infringe the valid patents of third parties, we may be required to pay significant monetary damages or we may be prevented from commercializing products or may be required to obtain licenses from these third parties. We may not be able to obtain alternative technologies or any required license on commercially reasonable terms or at all. If we fail to obtain these licenses or alternative technologies, we may be unable to develop or commercialize some or all of our products. For example, we are aware of patents and patent applications owned by third parties that such parties may claim cover the use of sofosbuvir, axicabtagene ciloleucel and bictegravir. See also a description of our litigation regarding sofosbuvir, axicabtagene ciloleucel and bictegravir in Note 13, Commitments and Contingencies of the Notes to Consolidated Financial Statements included in Item 8 of our Annual Report on Form 10-K. We are also aware of U.S. Patent Nos. 9,044,509, 9,579,333 and 9,937,191 assigned to the U.S. Department of Health and Human Services that purport to claim a process of protecting a primate host from infection by an immunodeficiency retrovirus by administering a combination of emtricitabine and tenofovir or TDF prior to exposure of the host to the immunodeficiency retrovirus. We have been in contact with the U.S. Department of Health and Human Services about the scope and relevance of the patents and have explained that we do not believe that these patents are valid because the patent office was not given the most relevant prior art and because physicians and patients were using the claimed methods years before the Centers for Disease Control and Prevention filed the applications for the patents.
Furthermore, we also rely on unpatented trade secrets and improvements, unpatented internal know-how and technological innovation. For example, a great deal of our liposomal manufacturing expertise, which is a key component of our liposomal technology, is not covered by patents but is instead protected as a trade secret. We protect these rights mainly through confidentiality agreements with our corporate partners, employees, consultants and vendors. We cannot be certain that these parties will comply with these confidentiality agreements, that we have adequate remedies for any breach or that our trade secrets, internal know-how or technological innovation will not otherwise become known or be independently discovered by our competitors. Under some of our R&D agreements, inventions become jointly owned by us and our corporate partner and in other cases become the exclusive property of one party. In certain circumstances, it can be difficult to determine who owns a particular invention and disputes could arise regarding those inventions. If our trade secrets, internal know-how, technological innovation or confidential information become known or independently discovered by competitors or if we enter into disputes over ownership of inventions, our business and results of operations could be adversely affected.
Manufacturing problems, including at our third-party manufacturers and corporate partners, could cause inventory shortages and delay product shipments and regulatory approvals, which may adversely affect our results of operations.
In order to generate revenue from our products, we must be able to produce sufficient quantities of our products to satisfy demand. Many of our products are the result of complex manufacturing processes. The manufacturing process for pharmaceutical products is also highly regulated and regulators may shut down manufacturing facilities that they believe do not comply with regulations.
Our products are either manufactured at our own facilities or by third-party manufacturers or corporate partners. We depend on third parties to perform manufacturing activities effectively and on a timely basis for the majority of our solid dose products.

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We, our third-party manufacturers and our corporate partners are subject to Good Manufacturing Practices (GMP), which are extensive regulations governing manufacturing processes, stability testing, record keeping and quality standards as defined by FDA and EMA. Similar regulations are in effect in other jurisdictions.
Our third-party manufacturers and corporate partners are independent entities subject to their own unique operational and financial risks that are out of our control. If we or any of these third-party manufacturers or corporate partners fail to perform as required, this could impair our ability to deliver our products on a timely basis or receive royalties or could cause delays in our clinical trials and applications for regulatory approval. Further, we may have to write-off the costs of manufacturing any batch that fails to pass quality inspection or meet regulatory approval. In addition, we, our third-party manufacturers and our corporate partners may only be able to produce some of our products at one or a limited number of facilities and, therefore, have limited manufacturing capacity for certain products, and we may not be able to locate additional or replacement facilities on a reasonable basis or at all. Our sales of such products could also be adversely impacted by our reliance on such limited number of facilities. To the extent these risks materialize and affect their performance obligations to us, our financial results may be adversely affected.
Our manufacturing operations are subject to routine inspections by regulatory agencies. If we are unable to remedy any deficiencies cited by FDA in these inspections, our currently marketed products and the timing of regulatory approval of products in development could be adversely affected. Further, there is risk that regulatory agencies in other countries where marketing applications are pending will undertake similar additional reviews or apply a heightened standard of review, which could delay the regulatory approvals for products in those countries. If approval of any of our product candidates were delayed or if production of our marketed products was interrupted, our anticipated revenues and our stock price would be adversely affected.
We may not be able to obtain materials or supplies necessary to conduct clinical trials or to manufacture and sell our products, which would limit our ability to generate revenues.
We need access to certain supplies and products to conduct our clinical trials and to manufacture our products. If we are unable to purchase sufficient quantities of these materials or find suitable alternate materials in a timely manner, our development efforts for our product candidates may be delayed or our ability to manufacture our products would be limited, which would limit our ability to generate revenues.
Suppliers of key components and materials must be named in the new drug application or marketing authorization application filed with the regulatory authority for any product candidate for which we are seeking marketing approval, and significant delays can occur if the qualification of a new supplier is required. Even after a manufacturer is qualified by the regulatory authority, the manufacturer must continue to expend time, money and effort in the area of production and quality control to ensure full compliance with GMP. Manufacturers are subject to regular, periodic inspections by the regulatory authorities following initial approval. If, as a result of these inspections, a regulatory authority determines that the equipment, facilities, laboratories or processes do not comply with applicable regulations and conditions of product approval, the regulatory authority may suspend the manufacturing operations. If the manufacturing operations of any of the single suppliers for our products are suspended, we may be unable to generate sufficient quantities of commercial or clinical supplies of product to meet market demand, which would in turn decrease our revenues and harm our business. In addition, if delivery of material from our suppliers were interrupted for any reason, we may be unable to ship certain of our products for commercial supply or to supply our products in development for clinical trials. In addition, some of our products and the materials that we utilize in our operations are made at only one facility, which we may not be able to replace in a timely manner and on commercially reasonable terms, or at all. Problems with any of the single suppliers we depend on, including in the event of a disaster, such as an earthquake, equipment failure or other difficulty, may negatively impact our development and commercialization efforts.
A significant portion of the raw materials and intermediates used to manufacture our antiviral products are supplied by third-party manufacturers and corporate partners outside of the United States. As a result, any political or economic factors in a specific country or region, including any changes in or interpretations of trade regulations, compliance requirements or tax legislation, that would limit or prevent third parties outside of the United States from supplying these materials would adversely affect our ability to manufacture and supply our antiviral products to meet market needs and have a material and adverse effect on our operating results.
If we were to encounter any of these difficulties, our ability to provide our products and product candidates to patients would be jeopardized.
Imports from countries where our products are available at lower prices and unapproved generic or counterfeit versions of our products could have a negative impact on our reputation and business.
Prices for our products are based on local market economics and competition and sometimes differ from country to country. Our sales in countries with relatively higher prices may be reduced if products can be imported into those or other countries from lower price markets. If our HIV, HBV and HCV products, which we have agreed to make available at substantially reduced prices to certain low- and middle-income countries participating in our Gilead Access Program, are re-exported from these low- and

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middle-income countries into the United States, Europe or other higher price markets, our revenues would be adversely affected. In addition, we have entered into voluntary licensing agreements with generic drug companies in India, South Africa and China, as well as a licensing agreement with the Medicines Patent Pool, a United Nations-backed public health organization, which allows generic drug companies to manufacture generic versions of HIV and HBV products incorporating our licensed compounds, TAF, cobicistat, elvitegravir and bictegravir, for distribution in certain low- and middle-income countries. We have also entered into agreements with generic manufacturers in India, Egypt and Pakistan allowing them to produce and/or distribute generic versions of our HCV products in certain low- and middle-income countries. If generic versions of our HIV, HBV and HCV products produced and/or distributed under these agreements are then re-exported to the United States, Europe or other markets outside of these low- and middle-income countries, our revenues would be adversely affected. In addition, purchases of our products in countries where our selling prices are relatively low for resale in countries in which our selling prices are relatively high may adversely impact our revenues and gross margin and may cause our sales to fluctuate from quarter to quarter. Additionally, use of these diverted products could occur in countries where they have not been approved and patients could source the product outside the legitimate supply chain. Therefore, the products may be handled, shipped and stored inappropriately, which may affect the efficacy of the product and could harm patients, our brands or the commercial or scientific reputation of our products.
In the European Union, we are required to permit products purchased in one EU member state to be sold in another EU member state. Purchases of our products in countries where our selling prices are relatively low for resale in countries in which our selling prices are relatively high can affect the inventory level held by our wholesalers and can cause the relative sales levels in the various countries to fluctuate from quarter to quarter and not reflect the actual consumer demand in any given quarter. These quarterly fluctuations may impact our earnings, which could adversely affect our stock price and harm our business.
We are also aware of the existence of various “Buyers Clubs” around the world that promote the personal importation of generic versions of our HCV and HIV products that have not been approved for use in the countries into which they are imported. As a result, patients may be at risk of taking unapproved medications which may not be what they purport to be, may not have the potency they claim to have or may contain harmful substances. To the extent patients take unapproved generic versions of one or more of our medications and are injured by these generic products, our brands or the commercial or scientific reputation of our HCV and HIV products could be harmed.
Further, third parties may illegally distribute and sell counterfeit versions of our products, which do not meet the rigorous quality standards of our manufacturing and supply chain. For example, in 2017 and 2018, there were reports that a product labeled as Epclusa was available in multiple countries, which we determined was not authentic product based on sample analysis and the lot number. We have cooperated and continue to cooperate with regulatory authorities to investigate this matter. We actively take actions to discourage counterfeits of our products around the world, including working with local regulatory and legal authorities to enforce laws against counterfeit drugs, raising public awareness of the dangers of counterfeit drugs and promoting public policies to hinder the sale and availability of counterfeit drugs. Counterfeit drugs pose a serious risk to patient health and safety and may raise the risk of product recalls. Our reputation and business could suffer as a result of counterfeit drugs sold under our brand name.
Expensive litigation and government investigations have increased our expenses which may continue to reduce our earnings.
We are involved in a number of litigation, investigation and other dispute-related matters that require us to expend substantial internal and financial resources. We expect these matters will continue to require a high level of internal and financial resources for the foreseeable future. These matters have reduced and will continue to reduce our earnings and require significant management attention. For a description of our litigation, investigation and other dispute-related matters, see Note 13, Commitments and Contingencies of the Notes to Consolidated Financial Statements included in Item 8 of our Annual Report on Form 10-K. The outcome of such legal proceedings or any other legal proceedings that may be brought against us, the investigations or any other investigations that may be initiated and any other dispute-related matters, are inherently uncertain, and adverse developments or outcomes can result in significant expenses, monetary damages, penalties or injunctive relief against us that could significantly reduce our earnings and cash flows and harm our business.
We may face significant liability resulting from our products and such liability could materially reduce our earnings.
The testing, manufacturing, marketing and use of our commercial products, as well as product candidates in development, involve substantial risk of product liability claims. These claims may be made directly by consumers, healthcare providers, pharmaceutical companies or others. We have limited insurance for product liabilities that may arise. If we do not maintain adequate coverage or if claims exceed our coverage, our financial condition will be adversely affected. In addition, negative publicity associated with any claims, regardless of their merit, may decrease the future demand for our products and impair our financial condition. For a description of our products liability matters, see Note 13, Commitments and Contingencies of the Notes to Consolidated Financial Statements included in Item 8 of our Annual Report on Form 10-K.

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If we fail to attract and retain highly qualified personnel, we may be unable to successfully develop new product candidates, conduct our clinical trials and commercialize our product candidates.
Our future success will depend in large part on our continued ability to attract and retain highly qualified scientific, technical and management personnel, as well as personnel with expertise in clinical testing, governmental regulation and commercialization. We face competition for personnel from other companies, universities, public and private research institutions, government entities and other organizations. Competition for qualified personnel in the biopharmaceutical field is intense, and there is a limited pool of qualified potential employees to recruit. We may not be able to attract and retain quality personnel on acceptable terms. Additionally, changes to U.S. immigration and work authorization laws and regulations could make it more difficult for employees to work in or transfer to jurisdictions in which we have operations and could impair our ability to attract and retain qualified personnel. If we are unsuccessful in our recruitment and retention efforts, our business may be harmed.
At the end of 2018, John F. Milligan stepped down as our President and Chief Executive Officer following 28 years of service. We announced that Daniel P. O'Day will serve as our Chief Executive Officer, effective March 1, 2019. If we do not successfully manage the transition to a new Chief Executive Officer in 2019, our business may be negatively impacted.
Business disruptions from natural or man-made disasters may harm our future revenues.
Our worldwide operations, third party manufacturers or corporate partners could be subject to business interruptions stemming from natural or man-made disasters, including those related to climate change, for which we or they may be uninsured or inadequately insured. Our corporate headquarters in Foster City and our Santa Monica location, which together house a majority of our R&D activities, and our San Dimas, La Verne, Oceanside and El Segundo manufacturing facilities are located in California, a seismically active region. As we may not carry adequate earthquake insurance and significant recovery time could be required to resume operations, our financial condition and operating results could be materially adversely affected in the event of a major earthquake.
We are dependent on information technology systems, infrastructure and data, which may be subject to cyberattacks and security breaches.
We are dependent upon information technology systems, infrastructure and data, including our Kite Konnect platform, which is critical to ensure chain of identity and chain of custody of Yescarta. The multitude and complexity of our computer systems make them inherently vulnerable to service interruption or destruction, malicious intrusion and random attack. Likewise, data privacy or security breaches by employees or others pose a risk that sensitive data, including our intellectual property or trade secrets or the personal information of our employees, patients, customers or other business partners may be exposed to unauthorized persons or to the public. Cyberattacks are increasing in their frequency, sophistication and intensity. Cyberattacks could include the deployment of harmful malware, denial-of-service, social engineering and other means to affect service reliability and threaten data confidentiality, integrity and availability. Our business and technology partners face similar risks and any security breach of their systems could adversely affect our security posture. While we have invested, and continue to invest, in the protection of our data and information technology infrastructure, there can be no assurance that our efforts, or the efforts of our partners and vendors, will prevent service interruptions or identify breaches in our systems. Such interruptions or breaches could adversely affect our business and operations and/or cause the loss of critical or sensitive information, which could result in financial, legal, business or reputational harm to us. In addition, our insurance may not be sufficient in type or amount to cover the financial, legal, business or reputational losses that may result from an interruption or breach of our systems.
Regulators globally are also imposing new data security requirements, including greater monetary fines for privacy violations. For example, the General Data Protection Regulation (GDPR) that became effective in Europe in 2018 established new regulations regarding the handling of personal data, and non-compliance with the GDPR may result in monetary penalties of up to four percent of worldwide revenue. In addition, we may be subject to additional data privacy and security laws, such as the California Consumer Privacy Act of 2018. The GDPR and other changes in laws or regulations associated with the enhanced protection of certain types of sensitive data, including healthcare data or other personal information, could greatly increase our cost of providing our products and services or even prevent us from offering certain services in jurisdictions in which we operate.
Changes in our effective income tax rate could reduce our earnings.
We are subject to income taxes in the United States and various foreign jurisdictions including Ireland. Due to economic and political conditions, various countries are actively considering and have made changes to existing tax laws. We cannot predict the form or timing of potential legislative and regulatory changes that could have a material adverse impact on our results of operations. For example, the United States enacted significant tax reform, and certain provisions of the new law are complex and will continue to significantly affect us.
In addition, significant judgment is required in determining our worldwide provision for income taxes. Various factors may have favorable or unfavorable effects on our income tax rate including, but not limited to, changes in forecasted demand for our HCV products, our portion of the non-tax deductible annual branded prescription drug fee, the accounting for stock options and

24



other share-based awards, mergers and acquisitions, the ability to manufacture product in our Cork, Ireland facility, the amortization of certain acquisition related intangibles for which we receive no tax benefit, future levels of R&D spending, changes in the mix of earnings in the various tax jurisdictions in which we operate, changes in overall levels of pre-tax earnings, resolution of federal, state and foreign income tax audits, and potential changes to our legal entity structure. The impact on our income tax provision resulting from the above mentioned factors may be significant and could have a negative impact on our consolidated results of operations.
Our income tax returns are subject to audit by federal, state and foreign tax authorities. We are currently under examination by the Internal Revenue Service for the tax years from 2013 to 2015 and by various state and foreign jurisdictions. There are differing interpretations of tax laws and regulations and, as a result, significant disputes may arise with these tax authorities involving issues of the timing and amount of deductions and allocations of income among various tax jurisdictions. Resolution of one or more of these exposures in any reporting period could have a material impact on the results of operations for that period.
See Note 18, Income Taxes of the Notes to Consolidated Financial Statements included in Item 8 of our Annual Report on Form 10-K for additional details.
There can be no assurance that we will pay dividends or continue to repurchase stock.
Our Board of Directors authorized a dividend program under which we intend to pay quarterly dividends of $0.63 per share, subject to quarterly declarations by our Board of Directors. Our Board of Directors also approved the repurchase of up to $12.0 billion of our common stock, of which $5.1 billion is available for repurchase as of December 31, 2018. Any future declarations, amount and timing of any dividends and/or the amount and timing of such stock repurchases are subject to capital availability and determinations by our Board of Directors that cash dividends and/or stock repurchases are in the best interest of our stockholders and are in compliance with all respective laws and our agreements applicable to the declaration and payment of cash dividends and the repurchase of stock. Our ability to pay dividends and/or repurchase stock will depend upon, among other factors, our cash balances and potential future capital requirements for strategic transactions, including acquisitions, debt service requirements, results of operations, financial condition and other factors beyond our control that our Board of Directors may deem relevant. A reduction in or elimination of our dividend payments, our dividend program and/or stock repurchases could have a negative effect on our stock price.
ITEM  1B.
UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM  2.
PROPERTIES
Our corporate headquarters is located in Foster City, California, where we house our administrative, manufacturing and R&D activities. We also have R&D facilities in Emeryville, Oceanside, Santa Monica, California; Gaithersburg, Maryland; Seattle, Washington; Edmonton, Alberta, Canada; and Amsterdam, Netherlands and manufacturing facilities in El Segundo, La Verne, Oceanside, San Dimas, California; Alberta, Canada; and Dublin and Cork, Ireland. Our global operations include offices in Europe, North America, Asia, South America, Africa, Australia and the Middle East.
We believe that our existing properties, including both owned and leased sites, are in good condition and suitable for the conduct of our business. We believe our capital resources are sufficient to purchase, lease or construct any additional facilities required to meet our expected long-term growth needs.
ITEM  3.
LEGAL PROCEEDINGS
For a description of our significant pending legal proceedings, please see Note 13, Commitments and Contingencies - Legal Proceedings of the Notes to Consolidated Financial Statements included in Item 8 of our Annual Report on Form 10-K, which is incorporated herein by reference.
ITEM  4.
MINE SAFETY DISCLOSURES
Not applicable.

25



PART II
ITEM  5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the Nasdaq Global Select Market under the symbol “GILD.”
As of February 15, 2019, we had 1,275,510,558 shares of common stock outstanding held by approximately 375 stockholders of record, which include shares held by a broker, bank or other nominee.
Performance Graph (1)  
The following graph compares our cumulative total stockholder return for the past five years to two indices: the Standard & Poor’s 500 Stock Index (S&P 500 Index) and the Nasdaq Biotechnology Index (NBI Index). The stockholder return shown on the graph below is not necessarily indicative of future performance, and we do not make or endorse any predictions as to future stockholder returns.


Comparison of Cumulative Total Return on Investment for the Past Five Years (2)
gildperformancegraph.jpg


______________________________________________________ 
Notes:
(1) 
This section is not “soliciting material,” is not deemed “filed” with the SEC and is not to be incorporated by reference in any of our filings under the Securities Act or the Exchange Act whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
(2) 
Shows the cumulative return on investment assuming an investment of $100 in our common stock, the NBI Index and the S&P 500 Index on December 31, 2013, and assuming that all dividends were reinvested.

26



Equity Compensation Plan Information
The following table provides certain information with respect to our equity compensation plans in effect as of December 31, 2018:
Plan Category
 
Number of Common Shares to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a)
(in thousands)
 
Weighted-average Exercise Price of Outstanding Options, Warrants and Rights (b) (1)
(in dollars)
 
Number of Common Shares Remaining Available for Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a) (c)
(in thousands)
Equity Compensation plans approved by security holders :
 
 
 
 
 
 
2004 Equity Incentive Plan
 
23,524

 
$
53.80

 
91,441

Employee Stock Purchase Plan (2)
 
 
 
 
 
10,491

Total equity compensation plans approved by security holders
 
23,524

 
$
53.80

 
101,932

Equity Compensation plans not approved by security holders
 

 

 

Total
 
23,524

 
$
53.80

 
101,932

_________________________________________
 
 
 
 
 
 
Notes:
(1) 
Does not take into account 16 million restricted stock and stock unit awards, performance share units and phantom shares granted under our 2004 Equity Incentive Plan.
(2) 
Under our Employee Stock Purchase Plan, participants are permitted to purchase our common stock at a discount on certain dates through payroll deductions within a pre-determined purchase period. Accordingly, these numbers are not determinable.
Issuer Purchases of Equity Securities
In the first quarter of 2016, our Board of Directors authorized a $12.0 billion share repurchase program (2016 Program) under which repurchases may be made in the open market or in privately negotiated transactions. We started repurchases under the 2016 Program in April 2016.
During 2018, we repurchased and retired 40 million shares of our common stock for $2.9 billion through open market transactions under the 2016 Program.
The table below summarizes our stock repurchase activity for the three months ended December 31, 2018:
 
 
Total Number
of Shares
Purchased
(in thousands)
 
Average
Price Paid
per Share
(in dollars)
 
Total Number of
Shares Purchased
as Part of a Publicly
Announced Program
(in thousands)
 
Maximum Fair
Value of Shares
that May Yet Be
Purchased Under
the Program
(in millions)
October 1 - October 31, 2018
 
804

 
$
73.96

 
751

 
$
6,053

November 1 - November 30, 2018
 
5,922

 
$
69.16

 
5,696

 
$
5,660

December 1 - December 31, 2018
 
7,642

 
$
67.39

 
7,608

 
$
5,147

Total
 
14,368

(1) 
$
68.49

 
14,055

(1) 
 
_________________________________________
 
 
 
 
 
 
 
 
Notes:
(1) 
The difference between the total number of shares purchased and the total number of shares purchased as part of a publicly announced program is due to shares of common stock withheld by us from employee restricted stock unit awards in order to satisfy applicable tax withholding obligations.




27



ITEM  6.
SELECTED FINANCIAL DATA
GILEAD SCIENCES, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
(in millions, except per share data)
 
Year Ended December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
CONSOLIDATED STATEMENT OF INCOME DATA(1):
 
 
 
 
 
 
 
 
 
Total revenues (2)
$
22,127

 
$
26,107

 
$
30,390

 
$
32,639

 
$
24,890

Total costs and expenses
$
13,927

 
$
11,983

 
$
12,757

 
$
10,446

 
$
9,625

Income from operations
$
8,200

 
$
14,124

 
$
17,633

 
$
22,193

 
$
15,265

Provision for income taxes(3)
$
2,339

 
$
8,885

 
$
3,609

 
$
3,553

 
$
2,797

Net income(2)(3)
$
5,460

 
$
4,644

 
$
13,488

 
$
18,106

 
$
12,059

Net income attributable to Gilead(2)(3)
$
5,455

 
$
4,628

 
$
13,501

 
$
18,108

 
$
12,101

Net income per share attributable to Gilead
 common stockholders - basic(2)(3)
$
4.20

 
$
3.54

 
$
10.08

 
$
12.37

 
$
7.95

Shares used in per share calculation - basic
1,298

 
1,307

 
1,339

 
1,464

 
1,522

Net income per share attributable to Gilead
 common stockholders - diluted(2)(3)
$
4.17

 
$
3.51

 
$
9.94

 
$
11.91

 
$
7.35

Shares used in per share calculation - diluted
1,308

 
1,319

 
1,358

 
1,521

 
1,647

Cash dividends declared per share
$
2.28

 
$
2.08

 
$
1.84

 
$
1.29

 
$

 
December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
CONSOLIDATED BALANCE SHEET DATA(1):
 
 
 
 
 
 
 
 
 
Cash, cash equivalents and marketable debt securities(4)
$
31,512

 
$
36,694

 
$
32,380

 
$
26,208

 
$
11,726

Working capital(4)(5)
$
25,231

 
$
20,188

 
$
10,370

 
$
14,044

 
$
11,453

Total assets(4)(6)
$
63,675

 
$
70,283

 
$
56,977

 
$
51,716

 
$
34,601

Other long-term obligations(5)
$
1,040

 
$
558

 
$
297

 
$
395

 
$
594

Long-term debt, including current portion(4)(6)
$
27,322

 
$
33,542

 
$
26,346

 
$
22,055

 
$
12,341

Retained earnings(2)(3)
$
19,024

 
$
19,012

 
$
18,154

 
$
18,001

 
$
12,732

Total stockholders’ equity(2)(3)
$
21,534

 
$
20,501

 
$
19,363

 
$
19,113

 
$
15,819

 
____________________
 
Notes:
 
(1)
See Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of this Annual Report on Form 10-K for a description of our results of operations for 2018.
 
 
(2)
In 2018, we adopted Accounting Standards Update No. 2014-09 (Topic 606) “Revenue from Contracts with Customers” using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. As such, results for 2018 are presented under Topic 606, while the information for prior periods has not been adjusted and continues to be reported in accordance with our historical accounting under Topic 605 “Revenue Recognition”. The impact as a result of applying Topic 606 in place of Topic 605 was not material for the year ended December 31, 2018. See Note 1, Organization and Summary of Significant Accounting Policies, and Note 2, Revenues, of the Notes to Consolidated Financial Statements included in Item 8 of our Annual Report on Form 10-K for further information.
 
 
(3)
In December 2017, we recorded an estimated $5.5 billion net charge related to the enactment of the Tax Cuts and Jobs Act. See Note 18, Income Taxes of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional details.
 
 
(4)
In 2018, we repaid $1.8 billion principal amount of our senior unsecured notes at maturity and repaid $4.5 billion of term loans borrowed in connection with our acquisition of Kite Pharma, Inc. (Kite).
 
 
 
In 2017, in connection with the acquisition of Kite, we issued $3.0 billion aggregate principal amount of senior unsecured notes in a registered offering and drew on a $6.0 billion aggregate principal amount term loan facility credit agreement, of which $1.5 billion was repaid in December 2017.
 
 
In 2016, we issued $5.0 billion principal amount of senior unsecured notes in a registered offering. We also repaid $285 million of principal balance of convertible senior notes due in May 2016 and $700 million of principal balance of senior unsecured notes due in December 2016.
 
 
In 2015, we issued $10.0 billion principal amount of senior unsecured notes in a registered offering. We also repaid $213 million of principal balance of convertible senior notes due in May 2016.
 
 
In 2014, we issued $8.0 billion principal amount of senior unsecured notes in registered offerings. We also repaid $912 million of principal balance of convertible senior notes due in May 2014, $750 million of principal balance of senior unsecured notes due in December 2014 and $600 million under our five-year revolving credit facility agreement.
 
(5)
In 2017, we retrospectively adopted Accounting Standards Update No. 2015-17 “Balance Sheet Classification of Deferred Taxes,” which requires deferred tax assets and liabilities be classified as noncurrent on the balance sheet. As a result, we reclassified deferred tax assets from Total current assets to Other long-term assets and our deferred tax liabilities from Other accrued liabilities to Other long-term obligations for each of the years presented.
 
 
(6)
In 2016, we retrospectively adopted Accounting Standards Update No. 2015-03 “Simplifying the Presentation of Debt Issuance Costs,” which requires presentation of debt issuance costs as a direct deduction from the carrying amount of a recognized debt liability on the balance sheet. As a result, we reclassified unamortized debt issuance costs from assets to Long-term debt, including current portion for each of the years presented.
 

28



ITEM  7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand our results of operations and financial condition. MD&A is provided as a supplement to, and should be read in conjunction with, our audited Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements and other disclosures included in this Annual Report on Form 10-K (including the disclosures under Part I, Item 1A, Risk Factors). Our Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles and are presented in U.S. dollars.
Management Overview
Gilead Sciences, Inc. (Gilead, we, our or us), incorporated in Delaware on June 22, 1987, is a research-based biopharmaceutical company that discovers, develops and commercializes innovative medicines in areas of unmet medical need. With each new discovery and investigational drug candidate, we strive to transform and simplify care for people with life-threatening illnesses around the world. We have operations in more than 35 countries worldwide, with headquarters in Foster City, California. Gilead’s primary areas of focus include HIV/AIDS, liver diseases, hematology/oncology and inflammation/respiratory diseases. We seek to add to our existing portfolio of products through our internal discovery and clinical development programs, product acquisition, in-licensing and strategic collaborations.
Our portfolio of marketed products includes AmBisome®, Atripla®, Biktarvy®, Cayston®, Complera®/Eviplera®, Descovy®, Emtriva®, Epclusa®, Genvoya®, Harvoni®, Hepsera®, Letairis®, Odefsey®, Ranexa®, Sovaldi®, Stribild®, Truvada®, Tybost®, Vemlidy®, Viread®, Vosevi®, Yescarta® and Zydelig®. We also sell and distribute certain products through our corporate partners under collaborative agreements.
2018 Business Highlights
2018 was marked by operational excellence and transition as we positioned ourselves for the future growth of our business. We continued to develop and deliver innovative medicines to help people with life-threatening illnesses around the world. Highlights of our 2018 performance include:
HIV: We achieved record sales of our HIV products in 2018, with HIV product revenues increasing by 19% in the United States and 12% worldwide compared to 2017. This growth was driven by the successful launch of Biktarvy and the continued strong uptake of our single tablet regimens containing tenofovir alafenamide (TAF) for the treatment of HIV infection as well as Truvada for a pre-exposure prophylaxis (PrEP) indication for HIV prevention. Biktarvy, a once-daily single tablet regimen containing bictegravir, emtricitabine (FTC) and TAF for the treatment of HIV infection in adults, was approved by the U.S. Food and Drug Administration (FDA) in February and by the European Commission in June.
Liver Diseases: Our revenues from our chronic hepatitis C virus (HCV) products became more predictable in 2018. Because we wanted to introduce a lower-priced alternative to our HCV products without significant disruption to the healthcare system and our business, we authorized the launch of generic versions of Epclusa and Harvoni in the United States starting in January 2019 through our separate subsidiary, Asegua Therapeutics LLC (Asegua). We also continued to advance our clinical trials for the treatment of chronic hepatitis B virus (HBV) and nonalcoholic steatohepatitis (NASH), including completing enrollment of Phase 3 clinical trials of NASH.
Cell Therapy and Immuno-Oncology: We advanced our pipeline of cancer therapies and positioned ourselves as a leader in cell therapy. Yescarta was approved by the European Commission in August for the treatment of relapsed or refractory diffuse large B-cell lymphoma (DLBCL) and primary mediastinal large B-cell lymphoma (PMBCL) after two or more lines of systemic therapy. We certified additional centers in the United States and Europe to provide treatment for Yescarta. In order to advance and accelerate research and development efforts in cell therapy and immuno-oncology, during the year, we entered into key strategic collaborations with the National Cancer Institute, Pfizer, Inc. (Pfizer), Sangamo Therapeutics, Inc. (Sangamo), Gadeta B.V. (Gadeta), HiFiBiO Therapeutics (HiFiBiO), Tango Therapeutics (Tango) and Agenus Inc. (Agenus).
Inflammation: We continued to advance our pipeline of novel investigational agents for inflammatory diseases, including announcing positive data on filgotinib in ongoing Phase 2 and 3 clinical trials. We also entered into a strategic collaboration with Verily Life Sciences LLC, an Alphabet company (Verily), using Verily’s Immunoscape platform to identify and better understand the immunological basis of inflammatory diseases.
During the year, we continued to invest in and advance our research and development pipeline across our therapeutic areas. At the end of 2018, our research and development pipeline included 119 active clinical studies, of which 41 were Phase 3 clinical trials. Additionally, we completed 26 collaborations, partnerships and strategic investments in 2018, which reflects our commitment to enabling our access to new technologies and drug candidates with the potential to evolve care for people with life-threatening illnesses. Our investments in research and development reflect our commitment to expanding our pipeline across a range of diseases to address areas of significant unmet medical need and positioning ourselves for the long-term growth of our business.

29



Recent key announcements include:
HIV and Liver Diseases Programs
FDA and European Commission granted marketing authorization for Biktarvy for the treatment of HIV-1 infection.
FDA approved Truvada - in combination with safer sex practices - to reduce the risk of sexually acquired HIV-1 in at-risk adolescents.
China National Drug Administration (CDA, succeeded by China National Medical Products Administration (NMPA)) approved Genvoya in China for the treatment of HIV-1 infection.
NMPA approved Descovy in China for the treatment of HIV-1 infection in adults and adolescents.
We entered into an agreement with Japan Tobacco Inc. (Japan Tobacco) to expand our rights to develop and commercialize elvitegravir to include Japan and to acquire from Japan Tobacco the rights to market and distribute certain products in our HIV portfolio in Japan effective January 1, 2019.
We entered into a research collaboration and license agreement with Hookipa Biotech AG (Hookipa) that grants us exclusive rights to Hookipa’s TheraT® and Vaxwave® arenavirus vector-based immunization technologies for chronic HBV infection and HIV infection.
We announced plans to launch authorized generic versions of Epclusa and Harvoni in the United States through our separate subsidiary, Asegua.
NMPA approved Harvoni in China for the treatment of chronic HCV infection with genotype 1-6 in adults and adolescents aged 12 to 18 years.
CDA approved Epclusa in China for the treatment of adults with genotype 1-6 chronic HCV infection. The CDA also approved Epclusa in combination with ribavirin for adults with chronic HCV infection and decompensated cirrhosis.
NMPA approved Vemlidy in China for the treatment of chronic HBV infection in adults and adolescents.
We entered into a strategic collaboration with Precision BioSciences (Precision) to develop therapies targeting the in vivo elimination of chronic HBV infection with Precision’s proprietary genome editing platform, ARCUS.
We announced that STELLAR-4, a Phase 3, randomized, double-blind, placebo-controlled study evaluating the safety and efficacy of selonsertib, an investigational, once-daily, oral inhibitor of apoptosis signal-regulating kinase 1 (ASK1), in patients with compensated cirrhosis (F4) due to NASH, did not meet the pre-specified week 48 primary endpoint of a ≥ 1-stage histologic improvement in fibrosis without worsening of NASH.
Oncology and Cell Therapy Programs
We entered into an immuno-oncology partnership with Agenus focused on the development and commercialization of up to five novel immuno-oncology therapies.
We entered into a global strategic collaboration with Tango to discover, develop and commercialize a pipeline of targeted immuno-oncology treatments for patients with cancer.
European Commission granted marketing authorization for Yescarta as a treatment for adult patients with relapsed or refractory DLBCL and PMBCL after two or more lines of systemic therapy.
We announced new worldwide facilities to advance manufacturing of cell therapies for people with cancer.
We entered into a research collaboration with Gadeta to advance gamma delta T cell receptor technology for solid tumors. This collaboration adds an additional new platform to our current capabilities in research and cell manufacturing.
We entered into a research collaboration and license agreement with HiFiBiO to develop technology supporting the discovery of neoantigen-reactive T cell receptors for the potential treatment of various cancers, including solid tumors.
We entered into a license agreement with Trianni, Inc. (Trianni) that grants us the use of the Trianni transgenic human monoclonal antibody discovery platform to support our drug discovery efforts.
We announced a new cooperative research and development agreement with the National Cancer Institute to develop adoptive cell therapies targeting patient-specific tumor neoantigens.
We entered into a worldwide collaboration with Sangamo using Sangamo’s zinc finger nuclease technology platform for the development of next-generation ex vivo cell therapies in oncology.
We entered into a clinical trial collaboration with Pfizer to evaluate the safety and efficacy of the investigational combination of Yescarta and Pfizer’s utomilumab, a fully humanized 4-1BB agonist monoclonal antibody, in patients with refractory large B-cell lymphoma.
Inflammation Programs
We entered into a strategic collaboration with Scholar Rock Holding Corporation to discover and develop highly specific inhibitors of transforming growth factor beta activation for the treatment of fibrotic diseases.

30



We entered into a scientific collaboration with Verily, using Verily’s Immunoscape platform to identify and better understand the immunological basis of three common and serious inflammatory diseases: rheumatoid arthritis, inflammatory bowel disease and lupus-related diseases.
Transition
Following 28 years of service, John F. Milligan, Ph.D., stepped down from his role as President and Chief Executive Officer (CEO) effective December 31, 2018. Our Board announced the selection of Daniel O’Day to be our new Chairman and CEO effective March 1, 2019. Mr. O’Day brings more than 30 years of executive management, creative leadership and operational excellence. Most recently, Mr. O’Day served as the CEO of Roche Pharmaceuticals, the pharma division of Roche Group. We had other leadership transitions throughout the year resulting from planned successions and normal industry turnover.
2018 Financial Highlights
Total revenues decreased to $22.1 billion and total product sales decreased to $21.7 billion in 2018, compared to $26.1 billion and $25.7 billion in 2017, respectively, primarily due to lower sales of our HCV products, partially offset by higher sales of our HIV products. In the United States, product sales were $16.2 billion in 2018, compared to $18.1 billion in 2017. In Europe, product sales were $3.7 billion in 2018, compared to $5.0 billion in 2017. Product sales in other international locations were $1.8 billion in 2018, compared to $2.6 billion in 2017.
Cost of goods sold increased to $4.9 billion in 2018, compared to $4.4 billion in 2017, primarily due to reserves for excess raw material inventory, and higher amortization related to intangible assets acquired in connection with our acquisition of Kite Pharma, Inc. (Kite). In 2018, inventory reserves of $440 million were recorded for excess raw materials primarily due to a sustained decrease in demand for Harvoni as a result of a shift in the market from Harvoni to Epclusa.
Research and development (R&D) expenses increased to $5.0 billion in 2018, compared to $3.7 billion in 2017, primarily due to an $820 million impairment charge related to in-process R&D (IPR&D) for the KITE-585 program (an anti-BCMA being evaluated for the treatment of multiple myeloma), an increase in up-front collaboration expenses to further enhance our pipeline, a full year of investments to support the growth of our business following the acquisition of Kite and higher stock-based compensation expenses associated with the acquisition of Kite.
Selling, general and administrative (SG&A) expenses increased to $4.1 billion for 2018, compared to $3.9 billion in 2017, primarily due to a full year of investments to support the growth of our business following the acquisition of Kite, partially offset by lower acquisition-related costs associated with the acquisition of Kite and lower branded prescription drug (BPD) fees.
Net income attributable to Gilead was $5.5 billion or $4.17 per diluted share in 2018, compared to $4.6 billion or $3.51 per diluted share in 2017. The increase was primarily due to a $5.5 billion charge to income tax expense related to the enactment of the Tax Cuts and Jobs Act (Tax Reform) recorded in 2017 and higher HIV product sales in 2018, partially offset by lower HCV product sales and higher operating expenses associated with advancement of our pipeline and investments to support the growth of our business following the acquisition of Kite in 2018.
As of December 31, 2018, we had $31.5 billion of cash, cash equivalents and marketable debt securities compared to $36.7 billion as of December 31, 2017. During 2018, we generated $8.4 billion in operating cash flow, repaid $6.3 billion of principal amount of debt, paid cash dividends of $3.0 billion and repurchased a total of 40 million shares for $2.9 billion through open market transactions.
Outlook 2019
In 2019, we expect to continue to maintain our strong focus on operational excellence and financial discipline. From an R&D perspective, we expect to continue to invest in new and ongoing clinical studies that support both our existing products and product candidates. We expect data read-outs in 2019 including selonsertib or STELLAR-3 for the treatment of NASH, filgotinib for the treatment of rheumatoid arthritis, and Descovy for PrEP indication. In order to further augment our product pipeline, we continue to pursue opportunities for collaborations, partnerships and strategic investments that fit into our long term strategic plan.
From a commercial perspective, we expect to continue to promote Biktarvy and other HIV regimens containing TAF. In addition, we believe Truvada for PrEP will continue to be an integral part of our growth in HIV in the United States as communities continue to embrace the public health benefits of prevention. In HCV, we expect a decline in product sales as a result of lower patient starts across all markets and competitive factors, although at a lower rate than in 2018. We believe the launch of authorized generic versions of Epclusa and Harvoni in the United States through our separate subsidiary, Asegua, will increase access to the medications for patients at lower prices. In cell therapy, we expect to continue to promote Yescarta in the United States and support its launch in Europe.
We will continue to help promote patient access to our products around the world, including through our Gilead Access Program, under which more than 11 million people receive our HIV medicines in low- and middle-income countries.

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Our progress on all of these initiatives is subject to a number of uncertainties, including, but not limited to, the possibility of unfavorable results from new and ongoing clinical trials (for example, we recently announced that STELLAR-4, a Phase 3 study evaluating the safety and efficacy of selonsertib in patients with compensated cirrhosis due to NASH, did not meet the pre-specified week 48 primary endpoint); the continuation of an uncertain global macroeconomic environment; additional pricing pressures from payers and competitors; slower than anticipated growth in our HIV products; an increase in discounts, chargebacks and rebates due to ongoing contracts and future negotiations with commercial and government payers; market share and price erosion caused by the introduction of generic versions of products containing tenofovir disoproxil fumarate (TDF) outside the United States and Viread, Letairis and Ranexa in the United States; inaccuracies in our HCV patient start estimates; potential amendments to the Affordable Care Act or other government action that could have the effect of lowering prices; a larger-than-anticipated shift in payer mix to more highly discounted payer segment; and volatility in foreign currency exchange rates.
2018 Results of Operations
Total Revenues
The following table summarizes the period-over-period changes in our product sales and royalty, contract and other revenues:
(In millions, except percentages)
 
2018
 
Change
 
2017
 
Change
 
2016
Revenues:
 
 
 
 
 
 
 
 
 
 
Product sales
 
$
21,677

 
(16
)%
 
$
25,662

 
(14
)%
 
$
29,953

Royalty, contract and other revenues
 
450

 
1
 %
 
445

 
2
 %
 
437

Total revenues
 
$
22,127

 
(15
)%
 
$
26,107

 
(14
)%
 
$
30,390

On January 1, 2018, we adopted Accounting Standards Update No. 2014-09 “Revenue from Contracts with Customers” (Topic 606) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. As such, results for 2018 are presented under Topic 606, while the information for prior periods has not been adjusted and continues to be reported in accordance with our historical accounting under Topic 605 “Revenue Recognition” (Topic 605). The impact as a result of applying Topic 606 in place of Topic 605 was not material for the year ended December 31, 2018. See Note 1, Organization and Summary of Significant Accounting Policies, and Note 2, Revenues, of the Notes to Consolidated Financial Statements included in Item 8 of our Annual Report on Form 10-K for further information.
Product Sales
2018 Compared to 2017
Total product sales decreased by 16% to $21.7 billion in 2018, compared to $25.7 billion in 2017, primarily due to lower sales of our HCV products, partially offset by increased sales of our HIV products.
HIV product sales increased by 12% to $14.6 billion in 2018, compared to $13.0 billion in 2017, primarily due to the launch of Biktarvy in 2018 and the continued uptake of Descovy, Genvoya and Odefsey.
HCV product sales decreased by 60% to $3.7 billion in 2018, compared to $9.1 billion in 2017, primarily due to lower average net selling price and lower sales volume across all major markets as a result of increased competition and lower patient starts.
Yescarta generated $264 million in sales in 2018, compared to $7 million in sales in 2017.
Other product sales, which include products from our HBV, cardiovascular, oncology and other categories inclusive of Vemlidy, Viread, Letairis, Ranexa, Zydelig and AmBisome, decreased by 12% to $3.1 billion in 2018, compared to $3.5 billion in 2017. Sales of Viread, which is primarily used for the treatment of chronic HBV infection, decreased due to the availability of generic versions of the product. Letairis is expected to face generic competition in the United States because the U.S. patent for ambrisentan, the active pharmaceutical ingredient in Letairis, expired in July 2018. Ranexa is also expected to face generic competition in the United States. We expect a decline in our Letairis and Ranexa sales in the United States after the generic entries.
Of our total product sales, 25% were generated outside the United States in 2018. We faced exposure to movements in foreign currency exchange rates, primarily in the Euro. We used foreign currency exchange contracts to hedge a percentage of our foreign currency exposure. Foreign currency exchange, net of hedges, had a favorable impact on our product sales of $94 million in 2018, compared to 2017.
We record product sales net of estimated mandatory and supplemental discounts to government payers, in addition to discounts to private payers, including rebates, chargebacks, cash discounts for prompt payment, distributor fees and other related costs. These deductions are generally referred to as gross-to-net deductions, which totaled $16.5 billion, or 43% of gross product sales in 2018, compared to $17.2 billion, or 40% of gross products sales in 2017. Of the $16.5 billion in 2018, $14.8 billion or 39% of

32



gross product sales was related to government and other rebates and chargebacks, and $1.7 billion was related to cash discounts for prompt payment, distributor fees and other related costs.
Product sales in the United States decreased by 11% to $16.2 billion in 2018, compared to $18.1 billion in 2017. The decrease was primarily due to lower sales of our HCV products, partially offset by higher sales of our HIV products. The decrease in sales of our HCV products was primarily due to lower average net selling price and lower sales volume as a result of increased competition. The increase in the sales of our HIV products was primarily due to the launch of Biktarvy in 2018, the continued uptake of Descovy, Genvoya and Odefsey, the increased usage of Truvada for PrEP and higher average net selling price, partially offset by the decreases in sales volume of Atripla, Complera and Stribild.
Product sales in Europe decreased by 26% to $3.7 billion in 2018, compared to $5.0 billion in 2017. The decrease was primarily due to lower sales of our HCV products and the availability of generic versions of Truvada, Atripla and Viread. The decrease in sales of our HCV products was primarily due to lower sales volume and average net selling price as a result of increased competition. The decrease was partially offset by our launch of Biktarvy in 2018 and the continued uptake of Descovy, Genvoya and Odefsey. Foreign currency exchange, net of hedges, had a favorable impact on our product sales in Europe of $68 million in 2018, compared to 2017.
Product sales in other international locations decreased by 30% to $1.8 billion in 2018, compared to $2.6 billion in 2017, primarily due to lower sales of our HCV products in Japan. Sales of our HCV products in Japan decreased to $167 million for 2018, compared to $692 million in 2017, primarily due to lower market share as a result of increased competition.
2017 Compared to 2016
Total product sales decreased by 14% to $25.7 billion in 2017, compared to $30.0 billion in 2016, primarily due to lower sales of our HCV products, partially offset by increased sales of our HIV products.
HIV product sales increased by 11% to $13.0 billion in 2017, compared to $11.7 billion in 2016, primarily driven by the continued uptake of Descovy, Genvoya and Odefsey, partially offset by decreases in sales of Truvada, Atripla, Complera and Stribild.
HCV product sales decreased by 38% to $9.1 billion in 2017, compared to $14.8 billion in 2016, primarily due to declines across all major markets as a result of increased competition and lower total market patient starts.
Other product sales, which include products from our HBV, cardiovascular, oncology and other categories inclusive of Vemlidy, Viread, Letairis, Ranexa, Zydelig and AmBisome, increased by 2% to $3.5 billion in 2017, compared to $3.4 billion in 2016.
Of our total product sales, 29% were generated outside the United States in 2017. We faced exposure to movements in foreign currency exchange rates, primarily in the Euro. We used foreign currency exchange contracts to hedge a percentage of our foreign currency exposure. Foreign currency exchange, net of hedges, had an unfavorable impact on our product sales of $117 million in 2017, compared to 2016.
Our gross-to-net deductions totaled $17.2 billion, or 40% of gross product sales in 2017, compared to $20.3 billion, or 40% of gross products sales in 2016. Of the $17.2 billion in 2017$15.5 billion or 36% of gross product sales was related to government and other rebates and chargebacks, and $1.7 billion was related to cash discounts for prompt payment, distributor fees and other related costs.
Product sales in the United States decreased by 6% to $18.1 billion in 2017, compared to $19.3 billion in 2016. The declines in sales of our HCV products was partially offset by the increase in sales of our HIV products. The declines in sales of our HCV products was primarily due to lower Harvoni and Sovaldi sales volume as a result of increased competition and lower total market patient starts. Additionally, increases in Epclusa and Vosevi sales volume were partially offset by lower average net selling price for Epclusa as pricing of all regimens has gravitated towards the 8-week regimen price. The increase in the sales of our HIV products was primarily due to the continued uptake of Descovy, Genvoya and Odefsey and higher average net selling prices, partially offset by decreases of Truvada, Atripla, Complera and Stribild and the prior year favorable impact of a revision to our rebate reserves of $332 million, primarily related to Truvada, Atripla, Complera and Stribild.
Product sales in Europe decreased by 18% to $5.0 billion in 2017, compared to $6.1 billion in 2016, primarily due to lower Harvoni and Sovaldi sales volume, partially offset by higher Epclusa sales volume. Foreign currency exchange, net of hedges, had an unfavorable impact on our product sales in Europe of $89 million in 2017 compared to 2016.
Product sales in other international locations decreased by 45% to $2.6 billion in 2017, compared to $4.6 billion in 2016, primarily due to lower sales in Japan. Sales of our HCV products in Japan decreased to $692 million in 2017, compared to $2.5 billion in 2016, primarily due to lower sales volume as a result of lower total market patient starts and increased competition.

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The following table summarizes the period-over-period changes in our product sales:
(In millions, except percentages)
 
2018
 
Change
 
2017
 
Change
 
2016
Atripla
 
$
1,206

 
(33
)%
 
$
1,806

 
(31
)%
 
$
2,605

Biktarvy
 
1,184

 
*

 

 
*

 

Complera/Eviplera
 
653

 
(32
)%
 
966

 
(34
)%
 
1,457

Descovy
 
1,581

 
30
 %
 
1,218

 
*

 
298

Genvoya
 
4,624

 
26
 %
 
3,674

 
*

 
1,484

Odefsey
 
1,598

 
44
 %
 
1,106

 
*

 
329

Stribild
 
644

 
(39
)%
 
1,053

 
(45
)%
 
1,914

Truvada
 
2,997

 
(4
)%
 
3,134

 
(12
)%
 
3,566

Other HIV(1)
 
61

 
5
 %
 
58

 
23
 %
 
47

Revenue share - Symtuza(2)
 
79

 
*

 

 
*

 

Total HIV
 
14,627

 
12
 %
 
13,015

 
11
 %
 
11,700

AmBisome
 
420

 
15
 %
 
366

 
3
 %
 
356

Epclusa
 
1,966

 
(44
)%
 
3,510

 
100
 %
 
1,752

Harvoni
 
1,222

 
(72
)%
 
4,370

 
(52
)%
 
9,081

Letairis
 
943

 
6
 %
 
887

 
8
 %
 
819

Ranexa
 
758

 
6
 %
 
717

 
6
 %
 
677

Vemlidy
 
321

 
*

 
122

 
*

 
3

Viread
 
307

 
(71
)%
 
1,046

 
(12
)%
 
1,186

Vosevi
 
396

 
35
 %
 
293

 
*

 

Yescarta
 
264

 
*

 
7

 
*

 

Zydelig
 
133

 
(11
)%
 
149

 
(11
)%
 
168

Other(3)
 
320

 
(73
)%
 
1,180

 
(72
)%
 
4,211

Total product sales
 
$
21,677

 
(16
)%
 
$
25,662

 
(14
)%
 
$
29,953

_______________________
 
 
 
 
 
 
 
 
 
 
Notes:
* Percentage not meaningful
(1) Includes Emtriva and Tybost
(2) Represents our revenue from cobicistat (C), FTC and TAF in Symtuza® (darunavir/C/FTC/TAF), a fixed dose combination product commercialized by Janssen
(3) Includes Cayston, Hepsera and Sovaldi
The following is additional discussion of our results on certain products:
Descovy (FTC/TAF)-based products - Biktarvy, Descovy, Genvoya and Odefsey
Product sales of our Descovy (FTC/TAF)-based products were $9.0 billion, $6.0 billion and $2.1 billion, and were 41%, 23% and 7% of our total product sales in 2018, 2017 and 2016, respectively.
In 2018, sales of our Descovy (FTC/TAF)-based products were $7.2 billion in the United States and $1.5 billion in Europe, compared to $5.0 billion in the United States and $892 million in Europe in 2017 and $1.8 billion in the United States and $256 million in Europe in 2016.
The increase in 2018 compared to 2017 in all major markets was primarily driven by higher sales volume reflecting our launch of Biktarvy in 2018 and the continued uptake of Genvoya, Odefsey and Descovy.
The increase in 2017 compared to 2016 in all major markets was primarily driven by higher sales volume as patients shifted away from Truvada (FTC/TDF)-based regimens.
Truvada (FTC/TDF)-based products - Atripla, Complera/Eviplera, Stribild and Truvada
Product sales of our Truvada (FTC/TDF)-based products were $5.5 billion, $7.0 billion and $9.5 billion, and were 25%, 27% and 32% of our total product sales in 2018, 2017 and 2016, respectively.
In 2018, sales of our Truvada (FTC/TDF)-based products were $4.4 billion in the United States and $815 million in Europe, compared to $4.8 billion in the United States and $1.7 billion in Europe in 2017 and $6.6 billion in the United States and $2.3 billion in Europe in 2016.

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In the United States, the decrease in 2018 compared to 2017 was primarily due to lower sales volume as a result of patients switching to newer regimens containing TAF, partially offset by the increased usage of Truvada for PrEP and higher average net selling price of certain of our Truvada (FTC/TDF)-based products. In Europe, the decrease in 2018 compared to 2017 was primarily due to lower sales volume as a result of the availability of generic versions of Truvada and Atripla and patients switching to newer regimens containing TAF.
In the United States, the decrease in 2017 compared to 2016 was primarily due to lower sales volume as a result of patients switching to newer regimens containing TAF, partially offset by the increased usage of Truvada for PrEP. In Europe, the decreases in 2017 compared to 2016 was primarily due to lower sales volume as a result of the availability of generic versions of Truvada in several countries and patients switching to newer regimens containing TAF.
HCV products - Epclusa, Harvoni, Sovaldi and Vosevi
HCV product sales were $3.7 billion, $9.1 billion and $14.8 billion, and were 17%, 36% and 50% of our total product sales in 2018, 2017 and 2016, respectively.
In 2018, sales of our HCV products were $2.0 billion in the United States, $896 million in Europe and $767 million in other international locations. In 2017, sales of our HCV products were $5.9 billion in the United States, $1.9 billion in Europe and $1.4 billion in other international locations. In 2016, sales of our HCV products were $8.4 billion in the United States, $2.8 billion in Europe and $3.6 billion in other international locations.
The decrease in 2018 compared to 2017 in all major markets was primarily due to lower sales volume and lower average net selling price as a result of increased competition and lower total market patient starts. Harvoni and Sovaldi product sales also decreased as a result of a shift in the market from Harvoni and Sovaldi to Epclusa.
The decrease in 2017 compared to 2016 in all major markets was primarily due to lower sales volume and lower average net selling price as a result of increased competition and lower total market patient starts. Harvoni and Sovaldi product sales also decreased as a result of a shift in the market from Harvoni and Sovaldi to Epclusa. Epclusa product sales increased in 2017 compared to 2016 primarily due to a full year of sales. Epclusa was approved by FDA and European Commission in June and July 2016, respectively.
Cost of Goods Sold and Product Gross Margin
The following table summarizes the period-over-period changes in our product sales, cost of goods sold and product gross margin:
(In millions, except percentages)
 
2018
 
Change
 
2017
 
Change
 
2016
Total product sales
 
$
21,677

 
(16
)%
 
$
25,662

 
(14
)%
 
$
29,953

Cost of goods sold
 
$
4,853

 
11
 %
 
$
4,371

 
3
 %
 
$
4,261

Product gross margin
 
78
%
 
 
 
83
%
 
 
 
86
%
Our cost of goods sold for 2018 increased by $482 million or 11%, compared to 2017, primarily due to higher inventory reserves. In 2018, we recorded inventory reserves of $572 million, of which $440 million was related to excess raw materials primarily due to a sustained decrease in demand for Harvoni as a result of a shift in the market from Harvoni to Epclusa. Inventory reserves recorded for the years ended December 31, 2017 and 2016 were not material. Cost of goods sold also increased due to a full year of amortization expense related to intangible assets acquired in connection with our acquisition of Kite in October 2017. The increases were partially offset by lower costs of efavirenz, a component of Atripla, as a result of the termination of a collaboration arrangement with Bristol-Myers Squibb Company on December 31, 2017.
The decrease in our product gross margin in 2018 compared to 2017 was primarily due to the factors impacting cost of goods sold noted above and changes in product mix.
The decrease in our product gross margin in 2017 compared to 2016 was primarily due to changes in product mix, as our HCV product sales decreased as a percentage of total product sales.
Research and Development Expenses
The following table summarizes the period-over-period changes in R&D expenses:
(In millions, except percentages)
 
2018
 
Change
 
2017
 
Change
 
2016
R&D expenses
 
$
5,018

 
34
%
 
$
3,734

 
(27
)%
 
$
5,098

R&D expenses consist primarily of clinical studies performed by contract research organizations, materials and supplies, licenses and fees, up-front and milestone payments under collaboration agreements, personnel costs, including salaries, benefits and stock-based compensation and overhead allocations consisting of various support and facilities-related costs.

35



We do not track total R&D expenses by product candidate, therapeutic area or development phase. However, we manage our R&D expenses by identifying the R&D activities we anticipate will be performed during a given period and then prioritizing efforts based on scientific data, probability of successful development, market potential, available human and capital resources and other considerations. We continually review our R&D pipeline and the status of development and, as necessary, reallocate resources among the R&D portfolio that we believe will best support the future growth of our business.
The following table provides a breakout of R&D expenses by major cost type (in millions):
 
 
2018
 
2017
 
2016
Clinical studies and outside services
 
$
1,665

 
$
1,881

 
$
2,446

Personnel, infrastructure and other expenses
 
1,876

 
1,399

 
1,271

IPR&D impairment charges
 
820

 

 
432

Up-front collaboration expenses
 
278

 

 
373

Acquired IPR&D
 

 
222

 
400

Stock-based compensation expenses
 
379

 
232

 
176

Total
 
$
5,018

 
$
3,734

 
$
5,098

In 2018, R&D expenses increased by $1.3 billion or 34%, compared to 2017, primarily due to an $820 million impairment charge related to the IPR&D for the KITE-585 program due to its discontinuance, an increase in up-front collaboration expenses and higher personnel and facilities-related costs to support the growth of our business following the acquisition of Kite, partially offset by higher acquired IPR&D expense in 2017 as a result of our purchase of Cell Design Labs, Inc.
In 2017, R&D expenses decreased by $1.4 billion or 27%, compared to 2016, primarily due to the 2016 impacts of business development activities resulting in up-front collaboration expense related to our license and collaboration agreement with Galapagos NV and acquired IPR&D expense related to our purchase of Nimbus Apollo, Inc., IPR&D impairment charges and ongoing milestone payments, partially offset by acquired IPR&D expense related to our purchase of Cell Design Labs, Inc. in 2017.
Selling, General and Administrative Expenses
The following table summarizes the period-over-period changes in SG&A expenses:
(In millions, except percentages)
 
2018
 
Change
 
2017
 
Change
 
2016
SG&A expenses
 
$
4,056

 
5
%
 
$
3,878

 
14
%
 
$
3,398

SG&A expenses relate to sales and marketing, finance, human resources, legal and other administrative activities. Expenses consist primarily of personnel costs, facilities and overhead costs, outside marketing, advertising and legal expenses and other general and administrative costs. SG&A expenses also include the BPD fee. In the United States, we, along with other pharmaceutical manufacturers of branded drug products, are required to pay a portion of the BPD fee, which is estimated based on select government sales during the prior year as a percentage of total industry government sales and is trued-up upon receipt of invoices from the Internal Revenue Service.
In 2018, SG&A expenses increased by $178 million or 5%, compared to 2017, primarily due to a full year of expense to support the growth of our business following the acquisition of Kite, partially offset by lower acquisition-related costs associated with the acquisition of Kite and lower BPD fees.
In 2017, SG&A expenses increased by $480 million or 14%, compared to 2016, primarily due to costs associated with our acquisition of Kite, which primarily consist of stock-based compensation and transaction costs, as well as higher BPD fee expenses resulting from a favorable adjustment of $191 million in the first quarter of 2016.
BPD fee expenses were $229 million, $385 million and $270 million in 2018, 2017 and 2016, respectively. BPD fee expenses are not tax-deductible.
Other Income (Expense), Net
Other income (expense), net, was $676 million, $523 million and $428 million in 2018, 2017 and 2016, respectively. The increase in 2018 compared to 2017 was primarily due to unrealized gains from changes in the fair value of our marketable equity securities. Starting in January 2018, we recorded unrealized gains (losses) from changes in the fair value of our marketable equity securities in Other income (expense), net, on our Consolidated Statements of Income as a result of the adoption of Accounting Standards Update No. 2016-01 “Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities”. See Note 1, Organization and Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements included in Item 8 of our Annual Report on Form 10-K for further information.

36



The increase in other income (expense), net, in 2017 compared to 2016 was primarily due to our cash, cash equivalents and marketable securities earning a higher yield and higher cash balances.
Provision for Income Taxes
Provision for income taxes was $2.3 billion in 2018 compared to $8.9 billion in 2017. The 2018 effective tax rate decreased to 30.0% from the 2017 effective tax rate of 65.7%, primarily due to a $5.5 billion net tax charge in 2017 and a reduction to the U.S. corporate tax rate in 2018 as a result of the enactment of Tax Reform in December 2017. In addition, the 2018 effective tax rate was further decreased due to a $202 million tax benefit recorded in 2018 related to settlement of tax examinations, offset by a $588 million deferred tax charge in 2018 resulting from a transfer of acquired intangible assets between wholly owned subsidiaries, changes to the geographic mix of earnings and the tax on Global Intangible Low-Taxed Income (enacted as part of Tax Reform). We are continuing to evaluate certain changes to our legal entity structure in response to guidelines and requirements in various international tax jurisdictions where we conduct business. These changes may take multiple reporting periods to implement and may result in certain material, but non-recurring, adjustments to our deferred tax assets and/or liabilities, which will cause an offsetting increase or decrease to our tax provision. Estimates of these adjustments cannot be reasonably determined at this time and are dependent on the changes actually implemented.
Our provision for income taxes was $8.9 billion in 2017 compared to $3.6 billion in 2016. The 2017 effective tax rate increased to 65.7% from the 2016 effective tax rate of 21.1%, primarily due to the enactment of Tax Reform in December 2017. Changes to the geographic mix of earnings also contributed to the increase in the 2017 effective tax rate.
See Note 18, Income Taxes of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional details on Tax Reform.
Liquidity and Capital Resources
The following table summarizes our cash, cash equivalents, and marketable debt securities and working capital (in millions):
 
 
 
December 31,
 
 
 
2018
 
2017
Cash, cash equivalents and marketable debt securities
 
$
31,512

 
$
36,694

Working capital
 
$
25,231

 
$
20,188

Cash, Cash Equivalents and Marketable debt Securities
Cash, cash equivalents and marketable debt securities decreased by $5.2 billion, or 14%, compared to December 31, 2017. During 2018, we generated $8.4 billion in operating cash flow, repaid $1.8 billion principal amount of senior unsecured notes at maturity, repaid $4.5 billion of term loans borrowed in connection with our acquisition of Kite, paid cash dividends of $3.0 billion and utilized $2.9 billion on stock repurchases.
Working Capital
Working capital increased by $5.0 billion, or 25%, compared to December 31, 2017, primarily driven by an increase in cash and cash equivalents resulting from a shift in the average remaining term to maturity of our marketable debt securities portfolio to reduce interest rate risk.
Cash Flows
The following table summarizes our cash flow activities (in millions):
 
 
2018
 
2017
 
2016
Cash provided by (used in):
 
 

 
 

 
 

Operating activities
 
$
8,400

 
$
11,898

 
$
17,047

Investing activities
 
$
14,355

 
$
(16,069
)
 
$
(11,985
)
Financing activities
 
$
(12,318
)
 
$
3,393

 
$
(9,725
)
Cash Provided by Operating Activities
Cash provided by operating activities represents the cash receipts and disbursements related to all of our activities other than investing and financing activities. Operating cash flow is derived by adjusting our net income for non-cash items and changes in operating assets and liabilities. Cash provided by operating activities decreased by $3.5 billion to $8.4 billion in 2018 compared to 2017, primarily due to lower cash receipts as a result of lower product sales and higher tax payments. The tax payments made

37



in 2018 included a $500 million payment related to the first annual installment of the Tax Reform transition tax, a $771 million deemed early payment of the Tax Reform transition tax and a $514 million settlement of a tax examination.
Cash provided by operating activities decreased by $5.1 billion to $11.9 billion in 2017 compared to 2016, primarily due to lower cash receipts as a result of lower product sales and higher tax payments.
Cash Provided by (Used in) Investing Activities
Cash provided by (used in) investing activities primarily consists of purchases, sales and maturities of our marketable debt securities, capital expenditures, acquisitions (net of cash acquired) and other investments. 
Cash provided by investing activities was $14.4 billion in 2018 compared to cash used in investing activities of $16.1 billion in 2017. The change in cash provided by (used in) investing activities was primarily due to higher proceeds from maturities of our marketable debt securities and lower purchases of marketable debt securities, partially offset by lower proceeds from sales of our marketable debt securities. In addition, $10.4 billion cash was used to acquire Kite in 2017, whereas no cash was used for acquisitions in 2018.
Cash used in investing activities increased by $4.1 billion to $16.1 billion in 2017 compared to 2016, primarily due to our acquisition of Kite, partially offset by higher proceeds from maturities and sales of marketable debt securities and lower purchases of marketable debt securities.
Cash Provided by (Used in) Financing Activities
Cash used in financing activities was $12.3 billion in 2018, compared to cash provided by financing activities of $3.4 billion in 2017. The change in cash provided by (used in) financing activities was primarily due to higher repayment of debt and repurchases of our common stock in 2018. In addition, we had $9.0 billion net proceeds from debt issuances to partially fund our acquisition of Kite in 2017, whereas no debt was issued in 2018.
Cash provided by financing activities was $3.4 billion in 2017, compared to cash used in financing activities of $9.7 billion in 2016, primarily due to lower repurchases of our common stock and higher proceeds from the issuances of debt.
Debt and Credit Facilities
Long-Term Obligations
The summary of our borrowings under various financing arrangements is included in Note 12, Debt and Credit Facilities of the Notes to Consolidated Financial Statements included in Item 8 of our Annual Report on Form 10-K.
Senior Unsecured Notes
In 2018, we repaid at maturity $1.0 billion principal amount of senior unsecured notes that were issued in September 2015 and $750 million of principal amount of senior unsecured notes that were issued in September 2017.
In 2017, in connection with our acquisition of Kite, we issued $3.0 billion aggregate principal amount of senior unsecured notes consisting of $750 million principal amount of floating rate notes due September 2018, $750 million principal amount of floating rate notes due March 2019, and $500 million principal amount of floating rate notes due September 2019 (collectively, the Floating Rate Notes) and $1.0 billion principal amount of 1.85% senior notes due September 2019 (the Fixed Rate Notes, and collectively with the Floating Rate Notes, the 2017 Notes). The Floating Rate Notes bear interest rates equal to three month London Interbank Offered Rates (LIBOR), plus 0.17% with respect to the Floating Rate Notes due September 2018, 0.22% with respect to the Floating Rate Notes due March 2019 and 0.25% with respect to the Floating Rate Notes due September 2019. The Fixed Rate Notes pay interest semiannually and the Floating Rate Notes pay interest quarterly.  
We are required to comply with certain covenants under our notes indentures and as of December 31, 2018, we were not in violation of any covenants.
Term Loan Facilities
In September 2017, we entered into a $6.0 billion aggregate principal amount term loan facility credit agreement consisting of a $1.0 billion principal amount 364-day senior unsecured term loan facility, a $2.5 billion principal amount three-year senior unsecured term loan facility and a $2.5 billion principal amount five-year senior unsecured term loan facility (collectively, the Term Loan Facilities). In October 2017, we drew $6.0 billion aggregate principal amount on the Term Loan Facilities and used the proceeds to finance our acquisition of Kite, of which $1.5 billion was repaid in 2017 and the remaining $4.5 billion was repaid in 2018. The term loan facility credit agreement was terminated in 2018.

38



Credit Facilities
In 2016, we entered into a $2.5 billion five-year revolving credit facility maturing in May 2021 (the Five-Year Revolving Credit Agreement). The revolving credit facility can be used for working capital requirements and for general corporate purposes, including, without limitation, acquisitions. We are required to comply with certain covenants under the Five-Year Revolving Credit Agreement and as of December 31, 2018, we were not in violation of any covenants, and no amounts were outstanding under the Five-Year Revolving Credit Agreement.
Capital Return Program
The details of our Stock Repurchase Programs and Dividends are included in Note 14, Stockholders’ Equity of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information.
Stock Repurchase Programs
In the first quarter of 2016, our Board of Directors authorized a $12.0 billion stock repurchase program (2016 Program), under which repurchases may be made in the open market or in privately negotiated transactions. We started repurchases under the 2016 Program in April 2016.
Repurchases under the 2016 Program were 40 million and 13 million shares of our common stock for $2.9 billion and $954 million in 2018 and 2017, respectively. As of December 31, 2018, the remaining authorized repurchase amount under the 2016 Program was $5.1 billion.
Dividends
We declared and paid quarterly cash dividends for an aggregate amount of $3.0 billion or $2.28 per common share and $2.7 billion or $2.08 per common share in 2018 and 2017, respectively.
On February 4, 2019, we announced that our Board of Directors declared a quarterly cash dividend increase of 11% from $0.57 to $0.63 per share of our common stock, with a payment date of March 28, 2019 to all stockholders of record as of the close of business on March 15, 2019. Future dividends are subject to declaration by the Board of Directors.
Capital Resources
We believe our existing capital resources, supplemented by cash flows generated from our operations, will be adequate to satisfy our capital needs for the foreseeable future. Our future capital requirements will depend on many factors, including but not limited to the following:
the commercial performance of our current and future products;
the progress and scope of our R&D efforts, including preclinical studies and clinical trials;
the cost, timing and outcome of regulatory reviews;
the expansion of our sales and marketing capabilities;
the possibility of acquiring additional manufacturing capabilities or office facilities;
the possibility of acquiring other companies or new products;
debt service requirements;
the establishment of additional collaborative relationships with other companies; and
costs associated with the defense, settlement and adverse results of government investigations and litigation
We may in the future require additional funding, which could be in the form of proceeds from equity or debt financings. If such funding is required, we cannot guarantee that it will be available to us on favorable terms, if at all.
Critical Accounting Policies, Estimates and Judgments
The discussion and analysis of our financial condition and results of operations is based on our Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these 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 and base our estimates on historical experience and on various other 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. Actual results may differ significantly from these estimates.

39



We believe the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of our Consolidated Financial Statements.
Revenue Recognition
Adoption of ASC Topic 606, “Revenue from Contracts with Customers”
On January 1, 2018, we adopted Topic 606 using the modified retrospective method whereby 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. Under Topic 606, an entity recognizes revenue when it transfers control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We recorded the cumulative effect of applying the new revenue standard as a net increase of $190 million to the opening balance of retained earnings. The impact as a result of applying Topic 606 in place of Topic 605 was not material for the year ended December 31, 2018.
Product Sales
We recognize revenue from product sales when control of the product transfers, generally upon shipment or delivery, to the customer, or in certain cases, upon the corresponding sales by our customer to a third party. We record product sales net of estimated mandatory and supplemental discounts to government and private payers, in addition to discounts to private payers, and other related charges. These are generally accounted for as variable consideration estimated in the same period the related sales occur. Government and other rebates and chargebacks represent the majority of our variable consideration and require complex and significant judgment by management. Estimates are assessed each period and updated to reflect current information.
Government and Other Rebates and Chargebacks
Government and other rebates and chargebacks include 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, by payer and individual payer plans.
For qualified programs that can purchase our products through wholesalers or other distributors at a lower contractual price, the wholesalers or distributors charge back to us the difference between their acquisition cost and the lower contractual price.
Our allowances for government and other rebates and chargebacks are estimated based on products sold, historical payer mix, pertinent third-party industry information, estimated patient population, known market events or trends, channel inventory data and/or other market data. We also consider 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. We believe the methodology that we use to estimate our government and other rebates and chargebacks is reasonable and appropriate given the current facts and circumstances. However, actual results may differ significantly from our estimates. Historically, our actual government rebates and chargebacks claimed for prior periods have varied by less than 5% from our estimates.
Government and other chargebacks that are payable to our direct customers are classified as reductions of Accounts receivable on our Consolidated Balance Sheets and totaled $492 million and $340 million at December 31, 2018 and 2017, respectively. Government and other rebates that are invoiced directly to us are recorded in Accrued government and other rebates on our Consolidated Balance Sheets and totaled $3.9 billion and $4.7 billion at December 31, 2018 and 2017, respectively. The following table summarizes the consolidated activities and ending balances in our government and other rebates and chargebacks accounts (in millions):
Accrued government and other rebates and chargebacks:
 
Balance at Beginning of Year
 
Decrease/(Increase) to Product Sales
 
Payments
 
Balance at End of Year
Year ended December 31, 2018:
 
 
 
 
 
 
 
 
Activity related to 2018 sales
 
$

 
$
14,784

 
$
(10,953
)
 
$
3,831

Activity related to sales prior to 2018
 
5,044

 
41

 
(4,496
)
 
589

Total
 
$
5,044

 
$
14,825

 
$
(15,449
)
 
$
4,420

Year ended December 31, 2017:
 
 

 
 

 
 

 
 

Activity related to 2017 sales
 
$

 
$
15,809

 
$
(11,170
)
 
$
4,639

Activity related to sales prior to 2017
 
5,657

 
(264
)
 
(4,988
)
 
405

Total
 
$
5,657

 
$
15,545

 
$
(16,158
)
 
$
5,044



40



Legal Contingencies
We are a party to various legal actions. The most significant of these are described in Note 13, Commitments and Contingencies - Legal Proceedings of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. It is not possible to determine the outcome of these matters. We recognize accruals for such actions to the extent that we conclude that a loss is both probable and reasonably estimable. We accrue for the best estimate of a loss within a range; however, if no estimate in the range is better than any other, then we accrue the minimum amount in the range. If we determine that a loss is reasonably possible and the loss or range of loss can be estimated, we disclose the possible loss.
Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of the inherent uncertainty and unpredictability related to these matters, accruals are based on what we believe to be the best information available at the time of our assessment, including the legal facts and circumstances of the case, status of the proceedings, applicable law and the views of legal counsel. Upon the final resolution of such matters, it is possible that there may be a loss in excess of the amount recorded, and such amounts could have a material adverse effect on our results of operations, cash flows or financial position. We periodically reassess these matters when additional information becomes available and adjust our estimates and assumptions when facts and circumstances indicate the need for any changes.
We did not recognize any accruals in our Consolidated Balance Sheets for such matters as of December 31, 2018 and 2017 as we did not believe losses were probable.
Valuation of Intangible Assets
The identifiable intangible assets are measured at their respective fair values as of the acquisition date and may be subject to revision within the measurement period, which may be up to one year from the acquisition date. The models used in valuing these intangible assets require the use of significant estimates and assumptions including but not limited to:
estimates of revenues and operating profits related to the products or product candidates;
the probability of success for unapproved product candidates considering their stages of development;
the time and resources needed to complete the development and approval of product candidates;
the life of the potential commercialized products and associated risks, including the inherent difficulties and uncertainties in developing a product candidate such as obtaining FDA and other regulatory approvals; and
risks related to the viability of and potential alternative treatments in any future target markets.
We believe the fair values used to record intangible assets acquired in connection with a business combination using information known and knowable and are based upon reasonable estimates and assumptions given the facts and circumstances as of the related valuation dates.
Intangible assets related to IPR&D projects are considered to be indefinite-lived until the completion or abandonment of the associated R&D efforts. If and when development is complete, which generally occurs if and when regulatory approval to market a product is obtained, the associated assets would be deemed finite-lived and would then be amortized based on their respective estimated useful lives at that point in time. During the period the assets are considered indefinite-lived, they are not amortized but are tested for impairment on an annual basis as well as between annual tests if we become aware of any events or changes that would indicate that it is more likely than not that the fair values of the IPR&D projects are below their respective carrying amounts. The fair value of our indefinite-lived intangible assets is dependent on assumptions such as the expected timing or probability of achieving the specified milestones, changes in projected revenues or changes in discount rates. Significant judgment is employed in determining these assumptions and changes to our assumptions could have a significant impact on our results of operations in any given period.
Intangible assets with finite useful lives are amortized over their estimated useful lives primarily on a straight-line basis. Intangible assets with finite useful lives are reviewed for impairment when facts or circumstances suggest that the carrying value of these assets may not be recoverable.
On October 3, 2017, in connection with our Kite acquisition, we acquired intangible assets primarily related to IPR&D for axicabtagene ciloleucel, KITE-585 (an anti-BCMA, being evaluated for the treatment of multiple myeloma) and KTE-X19 (being evaluated for the treatment of adult and pediatric acute lymphoblastic leukemia), which had an estimated aggregate fair value of $9.0 billion. On October 18, 2017, FDA approved axicabtagene ciloleucel, now known commercially as Yescarta, making it the first CAR T cell therapy for the treatment of adult patients with relapsed or refractory large B-cell lymphoma after two or more lines of systemic therapy, which includes diffuse large B-cell lymphoma, transformed follicular lymphoma and primary mediastinal B-cell lymphoma. Upon approval, we reclassified $6.2 billion of the purchased IPR&D as a finite-lived intangible asset. We are amortizing this asset over an estimated useful life of 18 years using the straight-line method.
During the fourth quarter of 2018, we concluded that the efficacy profile of the KITE-585 program did not justify further efforts based on the totality of the clinical data gathered and made a decision to discontinue the KITE-585 program. As a result,

41



the estimated fair value of the IPR&D relating to the KITE-585 program was written down to zero and we recorded an impairment charge of $820 million within Research and development expenses on our Consolidated Statements of Income included in Item 8 of this Annual Report on Form 10-K.
Provision for Income Taxes
We estimate our income tax provision, including deferred tax assets and liabilities, based on significant management judgment. We evaluate the realization of all or a portion of our deferred tax assets on a quarterly basis. We record a valuation allowance to reduce our deferred tax assets to the amounts that are more likely than not to be realized. We consider future taxable income, ongoing tax planning strategies and our historical financial performance in assessing the need for a valuation allowance. If we expect to realize deferred tax assets for which we have previously recorded a valuation allowance, we will reduce the valuation allowance in the period in which such determination is first made. The valuation allowance was $331 million and $162 million at December 31, 2018 and 2017, respectively. The increase of our valuation allowance in 2018 was primarily related to certain Kite tax attributes and certain foreign jurisdictions, which do not have sufficient history of profit to realize the benefit of the losses on a more-likely-than-not basis.
We are subject to income taxes in the United States and various foreign jurisdictions including Ireland. Due to economic and political conditions, various countries are actively considering and have made changes to existing tax laws (for example, the United States enacted significant tax reform, and certain provisions of the new law will continue to significantly affect us). We cannot predict the form or timing of potential legislative changes that could have a material adverse impact on our results of operations. In addition, significant judgment is required in determining our worldwide provision for income taxes.
We record liabilities related to uncertain tax positions in accordance with the guidance that clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. An adverse resolution of one or more of these uncertain tax positions in any period could have a material impact on the results of operations for that period.
Of the total unrecognized tax benefits, $1.3 billion and $1.8 billion at December 31, 2018 and 2017, if recognized, would reduce our effective tax rate in the period of recognition. As of December 31, 2018, we believe that it is reasonably possible that our unrecognized tax benefits will decrease by approximately $100 million in the next 12 months due to potential settlements with taxing authorities.
We file federal, state and foreign income tax returns in the United States and in many foreign jurisdictions. For federal income tax purposes, the statute of limitations is open for 2013 and onwards and 2010 and onwards for California income tax purposes. For certain acquired entities, the statute of limitations is open for all years from inception due to our utilization of their net operating losses and credits carried over from prior years.
Our income tax returns are subject to audit by federal, state and foreign tax authorities. We are currently under examination by the IRS for the tax years from 2013 to 2015 and by various state and foreign jurisdictions. There are differing interpretations of tax laws and regulations, and as a result, significant disputes may arise with these tax authorities involving issues of the timing and amount of deductions and allocations of income among various tax jurisdictions. We periodically evaluate our exposures associated with our tax filing positions.
See Note 18, Income Taxes of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.

42



Contractual Obligations
Our contractual obligations consist of debt obligations, operating leases, capital commitments, purchase obligations for active pharmaceutical ingredients and inventory-related items and clinical trials contracts. The following table summarizes our significant enforceable and legally binding obligations, future commitments and obligations related to all contracts that we are likely to continue regardless of the fact that certain of these obligations may be cancelable as of December 31, 2018 (in millions):
 
 
Payments due by Period
Contractual Obligations
 
Total
 
Less than one
year
 
1-3 years
 
3-5 years
 
More than 5
years
Debt (1)
 
$
41,876

 
$
3,753

 
$
6,582

 
$
3,801

 
$
27,740

Operating lease obligations
 
574

 
89

 
144

 
112

 
229

Capital commitments (2)
 
336

 
336

 

 

 

Purchase obligations (3)
 
1,629

 
1,280

 
214

 
72

 
63

Clinical trials (5)
 
1,678

 
930

 
505

 
207

 
36

Transition Tax Payable (6)
 
4,639

 

 
621

 
1,359

 
2,659

Total (4)(7)
 
$
50,732

 
$
6,388

 
$
8,066

 
$
5,551

 
$
30,727

_______________________
 
 
 
 
 
 
 
 
 
 
Notes:
(1) 
Debt consists of senior unsecured notes and includes principal and interest payments. Interest payments for our fixed rate senior unsecured notes are incurred and calculated based on terms of the related notes. Interest payments for our variable rate debt are calculated based on the interest rates on the last reset date in 2018 for each debt instrument. See Note 12, Debt and Credit Facilities of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information.
(2) 
Amounts include capital project commitments primarily relating to construction of new buildings.
(3) 
Amounts include purchase commitments primarily relating to active pharmaceutical ingredients with minimum purchase requirements and certain inventory-related items. These amounts also include a $365 million accrued payment to Japan Tobacco, Inc. as a result of a collaboration arrangement. See Note 11, Collaborative Arrangements of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information.
(4) 
In addition to the above, we have committed to make potential future milestone payments to third parties as part of licensing, collaboration and development arrangements. Payments under these agreements generally become due and payable only upon achievement of certain developmental, regulatory and/or commercial milestones. Because the achievement of these milestones is neither probable nor reasonably estimable, such contingencies have not been recorded on our Consolidated Balance Sheets and have not been included in the table above.
(5) 
At December 31, 2018, we had several clinical studies in various clinical trial phases. Our most significant clinical trial expenditures are to contract research organizations (CROs). Although all of our material contracts with CROs are cancelable, we historically have not canceled such contracts. These amounts reflect commitments based on existing contracts and do not reflect any future modifications to, or terminations of, existing contracts or anticipated or potential new contracts.
(6) 
In connection with Tax Reform, as of December 31, 2017, we recorded a federal income tax payable for transition tax on the mandatory deemed repatriation of foreign earnings that will be payable over an eight-year period. The amounts included in the table above represent the remaining federal income tax payable after applying the first year’s installment payment and early payments of future installments. See Note 18, Income Taxes of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional details on Tax Reform.
(7) 
As of December 31, 2018, our long-term income taxes payable includes unrecognized tax benefits, interest and penalties totaling $1.3 billion. Due to the high degree of uncertainty on the timing of future cash settlement and other events that could extinguish these unrecognized tax benefits, we are unable to estimate the period of cash settlement and therefore we have excluded these unrecognized tax benefits from the table above.
Recent Accounting Pronouncements
The information required by this item is included in Note 1, Organization and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks that may result from changes in foreign currency exchange rates, interest rates, credit risks and market price. To reduce certain of these risks, we enter into various types of foreign currency or interest rate derivative hedging transactions, follow investment guidelines and monitor outstanding receivables as part of our risk management program.
Foreign Currency Exchange Risk
Our operations include manufacturing and sales activities in the United States, Canada and Ireland as well as sales activities in countries outside the United States, including Europe and Asia Pacific. As a result, our financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which we distribute our products. Our operating results are exposed to changes in foreign currency exchange rates between the U.S. dollar and various foreign currencies, the most significant of which is the Euro. When the U.S. dollar strengthens against

43



these currencies, the relative value of sales made in the respective foreign currency decreases. Conversely, when the U.S. dollar weakens against these currencies, the relative amounts of such sales increase. Overall, we are a net receiver of foreign currencies and, therefore, benefit from a weaker U.S. dollar and are adversely affected by a stronger U.S. dollar relative to those foreign currencies in which we transact significant amounts of business.
Approximately 25% of our product sales were denominated in foreign currencies during 2018. To partially mitigate the impact of changes in currency exchange rates on net cash flows from our foreign currency denominated sales, we may enter into foreign currency exchange forward and option contracts. We also hedge certain monetary assets and liabilities denominated in foreign currencies, which reduces but does not eliminate our exposure to currency fluctuations between the date a transaction is recorded and the date that cash is collected or paid. In general, the market risks of these contracts are offset by corresponding gains and losses on the transactions being hedged.
As of December 31, 2018 and 2017, we had open foreign currency forward contracts with notional amounts of $2.2 billion and $2.8 billion, respectively. A hypothetical 10% adverse movement in foreign currency exchange rates compared with the U.S. dollar relative to exchange rates at December 31, 2018 would have resulted in a reduction in fair value of these contracts of approximately $218 million on this date and, if realized, would negatively affect earnings over the remaining life of the contracts. The same hypothetical movement in foreign currency exchange rates compared with the U.S. dollar relative to exchange rates at December 31, 2017, would have resulted in a reduction in fair value of these contracts of approximately $285 million on this date and, if realized, would negatively affect earnings over the remaining life of the contracts. The analysis does not consider the impact that hypothetical changes in foreign currency exchange rates would have on anticipated transactions that these foreign currency sensitive instruments were designed to offset.
Interest Rate Risk
Our portfolio of available-for-sale marketable debt securities and our fixed and variable rate liabilities create an exposure to interest rate risk. With respect to our investment portfolio, we adhere to an investment policy that requires us to limit amounts invested in securities based on credit rating, maturity, industry group and investment type and issuer, except for securities issued by the U.S. government. 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
competitive after-tax rate of return.
The following table summarizes the expected maturities and average interest rates of our interest-generating assets and interest-bearing liabilities at December 31, 2018 (in millions, except percentages):  
 
 
Expected Maturity
 
 
 
 
 
 
 
 
 Total Fair Value
 
 
2019
 
 
2020
 
 
2021
 
 
2022
 
 
2023
 
 
Thereafter
 
 
Total
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale debt securities
$
22,741

 
$
1,001

 
$
311

 
$
16

 
$
30

 
$
65

 
$
24,164

 
$
24,164

Average interest rate
 
2.61
%
 
 
3.10
%
 
 
2.97
%
 
 
2.89
%
 
 
2.54
%
 
 
3.47
%
 
 
 

 
 
 

Liabilities
 
 

 
 
 

 
 
 

 
 
 

 
 
 

 
 
 

 
 
 

 
 
 

Long-term debt, including current portion(1):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate
$
1,500

 
$
2,500

 
$
2,250

 
$
1,500

 
$
750

 
$
17,750

 
$
26,250

 
$
25,886

Average interest rate
 
1.92
%
 
 
2.51
%
 
 
4.44
%
 
 
2.82
%
 
 
2.50
%
 
 
4.16
%
 
 
 

 
 
 
Variable rate
$
1,250

 
$

 
$

 
$

 
$

 
$

 
$
1,250

 
$
1,250

Average interest rate(2)
 
3.02
%
 
 
%
 
 
%
 
 
%
 
 
%
 
 
%
 
 
 

 
 
 

_______________________
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Notes:
(1) 
Amounts represent principal balances. In addition to these fixed and variable rate long-term debt, we have a $2.5 billion five-year revolving credit facility. There were no amounts outstanding under the five-year revolving credit facility as of December 31, 2018. See Note 12, Debt and Credit Facilities of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information.
(2) 
Average interest rates for our variable rate debt were based on the interest rates on the last reset date in 2018 for each debt instrument and are dependent upon several factors subject to change, including but not limited to LIBOR, the principal amount of debt outstanding and credit ratings on each reset date.
Credit Risk
We are subject to credit risk from our portfolio of cash equivalents and marketable debt 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

44



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.
As of December 31, 2018, our accounts receivable, net, in Southern Europe, specifically Greece, Italy, Portugal and Spain, totaled approximately $161 million, of which $31 million were greater than 120 days past due, including $27 million greater than 365 days past due. As of December 31, 2017, our accounts receivable, net, in Southern Europe, specifically Greece, Italy, Portugal and Spain, totaled approximately $326 million, of which $131 million were greater than 120 days past due, including $52 million greater than 365 days past due. To date, we have not experienced significant losses with respect to the collection of our accounts receivable.
Market Price Risk
We hold shares of common stock of certain publicly traded biotechnology companies in connection with license and collaboration agreements. These equity securities are measured at fair value with any changes in fair value recognized in earnings starting on January 1, 2018 as a result of our adoption of Accounting Standards Update No. 2016-01 “Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities”. See Note 1, Organization and Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements included in Item 8 of our Annual Report on Form 10-K for further information.
The fair value of these equity securities was approximately $881 million and $635 million as of December 31, 2018 and 2017, respectively. Changes in fair value of these equity securities are primarily due to the volatility of the stock market and changes in general economic conditions, among other factors. A hypothetical 20% increase or decrease in the stock prices of these equity securities would increase or decrease their fair value at December 31, 2018 and 2017 by approximately $176 million and $127 million, respectively.

45



ITEM  8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

GILEAD SCIENCES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Years ended December 31, 2018, 2017 and 2016

CONTENTS


46




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Gilead Sciences, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Gilead Sciences, Inc. (the Company) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedule listed in the index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 25, 2019 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.


/s/ Ernst & Young LLP

We have served as the Company’s auditor since 1988.

San Jose, California
February 25, 2019


47




GILEAD SCIENCES, INC.
Consolidated Balance Sheets
(in millions, except per share amounts)
 
December 31,
 
2018
 
2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
17,940

 
$
7,588

Short-term marketable securities
12,149

 
17,922

Accounts receivable, net of allowances of $583 and $455, respectively
3,327

 
3,851

Inventories
814

 
801

Prepaid and other current assets
1,606

 
1,661

Total current assets
35,836

 
31,823

Property, plant and equipment, net
4,006

 
3,295

Long-term marketable securities
1,423

 
11,184