NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. The financial statements include all adjustments consisting of normal recurring adjustments that the management of Gilead Sciences, Inc. (“Gilead”, “we”, “our” or “us”) believes are necessary for a fair presentation of the periods presented. These interim financial results are not necessarily indicative of results expected for the full fiscal year or for any subsequent interim period.
The accompanying Condensed Consolidated Financial Statements include the accounts of Gilead, our wholly-owned subsidiaries and certain variable interest entities for which we are the primary beneficiary. All intercompany transactions have been eliminated. For consolidated entities where we own or are exposed to less than 100% of the economics, we record net income (loss) attributable to noncontrolling interest in our Condensed Consolidated Statements of Operations equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties.
We assess whether we are the primary beneficiary of a variable interest entity (“VIE”) at the inception of the arrangement and at each reporting date. This assessment is based on our power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and our obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.
The accompanying Condensed Consolidated Financial Statements and related Notes to Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the related notes thereto for the year ended December 31, 2019, included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission.
Segment Information
We have one operating segment, which focuses on the discovery, development and commercialization of innovative medicines in areas of unmet medical need. Our Chief Executive Officer (“CEO”), as the chief operating decision-maker, manages and allocates resources to the operations of our company on an entity-wide basis. Managing and allocating resources on an entity-wide basis enables our CEO to assess the overall level of resources available and how to best deploy these resources across functions and research and development (“R&D”) projects based on unmet medical need and, as necessary, reallocate resources among our internal R&D portfolio and external opportunities to best support the long-term growth of our business. See Note 2. Revenues for additional information.
Significant Accounting Policies, Estimates and Judgments
The preparation of these Condensed Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. On an ongoing basis, we evaluate our significant accounting policies and estimates. We base our estimates on historical experience and on various market-specific and other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates are assessed each period and updated to reflect current information, such as the economic considerations related to the impact that the recent coronavirus disease (“COVID-19”) could have on our significant accounting estimates. Actual results could differ materially from these estimates under different assumptions or conditions.
Reclassification
Certain amounts for the three and nine months ended September 30, 2019 were reclassified to conform to the current period presentation. Beginning in the second quarter of 2020, acquired in-process research and development (“IPR&D”) expenses are reported separately from Research and development expenses on our Condensed Consolidated Statements of Operations. Acquired IPR&D expenses reflect IPR&D impairments as well as the initial costs of externally developed IPR&D projects, acquired directly in a transaction other than a business combination, that do not have an alternative future use, including upfront payments related to various collaborations and the initial costs of rights to IPR&D projects. Our Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019, has been conformed to separately present acquired IPR&D expenses.
Concentrations of Risk
We are subject to credit risk from our portfolio of cash equivalents and marketable securities. Under our investment policy, we limit amounts invested in such securities by credit rating, maturity, industry group, investment type and issuer, except for securities issued by the U.S. government. We are not exposed to any significant concentrations of credit risk from our investment portfolio. 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. Trade accounts receivable are recorded net of allowances for wholesaler chargebacks related to government and other programs, cash discounts for prompt payment and credit losses. Estimates of our allowance for credit losses consider a number of factors including existing contractual payment terms, individual customer circumstances, historical payment patterns of our customers, a review of the local economic environment and its potential impact on expected future customer payment patterns and government funding and reimbursement practices. The majority of our trade accounts receivable arises from product sales in the United States, Europe and Japan. Our allowance for credit losses was $47 million as of September 30, 2020 and January 1, 2020. There were no material write-offs charged against the allowance for the three and nine months ended September 30, 2020.
Recently Adopted Accounting Standards
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-13 “Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments” and has since modified the standard with several ASUs (collectively, “Topic 326”). Topic 326 requires measurement and recognition of expected credit losses for financial assets. On January 1, 2020, we adopted this standard using a modified retrospective approach. The adoption did not have a material impact on our Condensed Consolidated Financial Statements. In connection with the adoption of Topic 326, we made an accounting policy election to not measure an allowance for credit losses for accrued interest receivable.
In November 2018, the FASB issued Accounting Standards Update No. 2018-18 “Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606” (“ASU 2018-18”). ASU 2018-18 clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under Topic 606, “Revenue from Contracts with Customers” when the counterparty is a customer. In addition, the update precludes an entity from presenting consideration from a transaction in a collaborative arrangement as customer revenue if the counterparty is not a customer for that transaction. On January 1, 2020, we adopted this standard and applied it retrospectively to January 1, 2018 when we initially adopted Topic 606. The adoption did not have an impact on our Condensed Consolidated Financial Statements.
2. REVENUES
Disaggregation of Revenues
The following table disaggregates our product sales by product and geographic region and disaggregates our royalty, contract and other revenues by geographic region (in millions):
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|
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|
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|
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|
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Three Months Ended September 30, 2020
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Three Months Ended September 30, 2019
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U.S.
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Europe
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Other Locations
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Total
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U.S.
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|
Europe
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|
Other Locations
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|
Total
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Product sales:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Atripla
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|
$
|
99
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|
|
$
|
5
|
|
|
$
|
9
|
|
|
$
|
113
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|
|
$
|
132
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|
|
$
|
10
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|
|
$
|
7
|
|
|
$
|
149
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|
Biktarvy
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|
1,584
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|
|
194
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|
|
113
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|
|
1,891
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|
|
1,106
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|
|
108
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|
|
45
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|
|
1,259
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Complera/Eviplera
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|
26
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|
|
35
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|
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9
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|
|
70
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|
|
40
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|
|
45
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|
|
8
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|
|
93
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|
Descovy
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|
424
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|
|
49
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|
|
35
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|
|
508
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|
|
256
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|
|
63
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|
|
44
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|
|
363
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|
Genvoya
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|
669
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|
|
116
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|
|
61
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|
|
846
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|
|
761
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|
|
152
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|
|
65
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|
|
978
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|
Odefsey
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|
309
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|
|
116
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|
|
12
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|
|
437
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|
|
317
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|
|
111
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|
|
8
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|
|
436
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|
Stribild
|
|
27
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|
|
13
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|
|
2
|
|
|
42
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|
|
63
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|
|
18
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|
|
13
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|
|
94
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|
Truvada
|
|
492
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|
|
6
|
|
|
11
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|
|
509
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|
|
688
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|
|
14
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|
|
19
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|
|
721
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Other HIV(1)
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|
10
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|
|
1
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|
|
2
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|
|
13
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|
|
3
|
|
|
1
|
|
|
1
|
|
|
5
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Revenue share – Symtuza(2)
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|
82
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|
|
34
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|
|
2
|
|
|
118
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|
|
68
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|
|
36
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|
|
—
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|
|
104
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|
AmBisome
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|
18
|
|
|
58
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|
|
35
|
|
|
111
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|
|
9
|
|
|
57
|
|
|
33
|
|
|
99
|
|
Ledipasvir/Sofosbuvir(3)
|
|
36
|
|
|
11
|
|
|
37
|
|
|
84
|
|
|
54
|
|
|
14
|
|
|
56
|
|
|
124
|
|
Letairis
|
|
78
|
|
|
—
|
|
|
—
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|
|
78
|
|
|
121
|
|
|
—
|
|
|
—
|
|
|
121
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|
Ranexa
|
|
—
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|
|
—
|
|
|
—
|
|
|
—
|
|
|
31
|
|
|
—
|
|
|
—
|
|
|
31
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|
Sofosbuvir/Velpatasvir(4)
|
|
170
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|
|
74
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|
|
86
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|
|
330
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|
|
282
|
|
|
118
|
|
|
116
|
|
|
516
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|
Veklury
|
|
785
|
|
|
60
|
|
|
28
|
|
|
873
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|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Vemlidy
|
|
99
|
|
|
8
|
|
|
70
|
|
|
177
|
|
|
78
|
|
|
6
|
|
|
50
|
|
|
134
|
|
Viread
|
|
3
|
|
|
8
|
|
|
21
|
|
|
32
|
|
|
7
|
|
|
15
|
|
|
35
|
|
|
57
|
|
Vosevi
|
|
33
|
|
|
9
|
|
|
3
|
|
|
45
|
|
|
42
|
|
|
12
|
|
|
9
|
|
|
63
|
|
Yescarta
|
|
85
|
|
|
51
|
|
|
2
|
|
|
138
|
|
|
86
|
|
|
32
|
|
|
—
|
|
|
118
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|
Zydelig
|
|
8
|
|
|
9
|
|
|
—
|
|
|
17
|
|
|
13
|
|
|
13
|
|
|
—
|
|
|
26
|
|
Other(5)
|
|
39
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|
|
20
|
|
|
2
|
|
|
61
|
|
|
42
|
|
|
(21)
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|
|
4
|
|
|
25
|
|
Total product sales
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|
5,076
|
|
|
877
|
|
|
540
|
|
|
6,493
|
|
|
4,199
|
|
|
804
|
|
|
513
|
|
|
5,516
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Royalty, contract and other revenues
|
|
24
|
|
|
60
|
|
|
—
|
|
|
84
|
|
|
20
|
|
|
67
|
|
|
1
|
|
|
88
|
|
Total revenues
|
|
$
|
5,100
|
|
|
$
|
937
|
|
|
$
|
540
|
|
|
$
|
6,577
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|
|
$
|
4,219
|
|
|
$
|
871
|
|
|
$
|
514
|
|
|
$
|
5,604
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|
|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2020
|
|
Nine Months Ended September 30, 2019
|
|
|
U.S.
|
|
Europe
|
|
Other Locations
|
|
Total
|
|
U.S.
|
|
Europe
|
|
Other Locations
|
|
Total
|
Product sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Atripla
|
|
$
|
275
|
|
|
$
|
17
|
|
|
$
|
19
|
|
|
$
|
311
|
|
|
$
|
387
|
|
|
$
|
52
|
|
|
$
|
33
|
|
|
$
|
472
|
|
Biktarvy
|
|
4,346
|
|
|
528
|
|
|
314
|
|
|
5,188
|
|
|
2,868
|
|
|
229
|
|
|
71
|
|
|
3,168
|
|
Complera/Eviplera
|
|
77
|
|
|
124
|
|
|
17
|
|
|
218
|
|
|
126
|
|
|
179
|
|
|
26
|
|
|
331
|
|
Descovy
|
|
1,124
|
|
|
156
|
|
|
103
|
|
|
1,383
|
|
|
735
|
|
|
200
|
|
|
128
|
|
|
1,063
|
|
Genvoya
|
|
1,927
|
|
|
376
|
|
|
183
|
|
|
2,486
|
|
|
2,222
|
|
|
522
|
|
|
229
|
|
|
2,973
|
|
Odefsey
|
|
851
|
|
|
341
|
|
|
36
|
|
|
1,228
|
|
|
865
|
|
|
328
|
|
|
27
|
|
|
1,220
|
|
Stribild
|
|
100
|
|
|
42
|
|
|
12
|
|
|
154
|
|
|
208
|
|
|
60
|
|
|
30
|
|
|
298
|
|
Truvada
|
|
1,245
|
|
|
20
|
|
|
37
|
|
|
1,302
|
|
|
1,896
|
|
|
88
|
|
|
61
|
|
|
2,045
|
|
Other HIV(1)
|
|
24
|
|
|
4
|
|
|
21
|
|
|
49
|
|
|
23
|
|
|
3
|
|
|
11
|
|
|
37
|
|
Revenue share – Symtuza(2)
|
|
244
|
|
|
112
|
|
|
6
|
|
|
362
|
|
|
165
|
|
|
89
|
|
|
—
|
|
|
254
|
|
AmBisome
|
|
46
|
|
|
166
|
|
|
113
|
|
|
325
|
|
|
27
|
|
|
174
|
|
|
96
|
|
|
297
|
|
Ledipasvir/Sofosbuvir(3)
|
|
113
|
|
|
26
|
|
|
124
|
|
|
263
|
|
|
257
|
|
|
63
|
|
|
222
|
|
|
542
|
|
Letairis
|
|
241
|
|
|
—
|
|
|
—
|
|
|
241
|
|
|
522
|
|
|
—
|
|
|
—
|
|
|
522
|
|
Ranexa
|
|
9
|
|
|
—
|
|
|
—
|
|
|
9
|
|
|
205
|
|
|
—
|
|
|
—
|
|
|
205
|
|
Sofosbuvir/Velpatasvir(4)
|
|
646
|
|
|
253
|
|
|
330
|
|
|
1,229
|
|
|
731
|
|
|
428
|
|
|
341
|
|
|
1,500
|
|
Veklury
|
|
785
|
|
|
60
|
|
|
28
|
|
|
873
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Vemlidy
|
|
248
|
|
|
22
|
|
|
194
|
|
|
464
|
|
|
214
|
|
|
15
|
|
|
122
|
|
|
351
|
|
Viread
|
|
10
|
|
|
27
|
|
|
100
|
|
|
137
|
|
|
28
|
|
|
57
|
|
|
119
|
|
|
204
|
|
Vosevi
|
|
93
|
|
|
26
|
|
|
13
|
|
|
132
|
|
|
140
|
|
|
43
|
|
|
18
|
|
|
201
|
|
Yescarta
|
|
283
|
|
|
144
|
|
|
7
|
|
|
434
|
|
|
275
|
|
|
59
|
|
|
—
|
|
|
334
|
|
Zydelig
|
|
24
|
|
|
30
|
|
|
1
|
|
|
55
|
|
|
36
|
|
|
42
|
|
|
1
|
|
|
79
|
|
Other(5)
|
|
124
|
|
|
54
|
|
|
6
|
|
|
184
|
|
|
119
|
|
|
96
|
|
|
12
|
|
|
227
|
|
Total product sales
|
|
12,835
|
|
|
2,528
|
|
|
1,664
|
|
|
17,027
|
|
|
12,049
|
|
|
2,727
|
|
|
1,547
|
|
|
16,323
|
|
Royalty, contract and other revenues
|
|
55
|
|
|
170
|
|
|
16
|
|
|
241
|
|
|
61
|
|
|
181
|
|
|
5
|
|
|
247
|
|
Total revenues
|
|
$
|
12,890
|
|
|
$
|
2,698
|
|
|
$
|
1,680
|
|
|
$
|
17,268
|
|
|
$
|
12,110
|
|
|
$
|
2,908
|
|
|
$
|
1,552
|
|
|
$
|
16,570
|
|
|
|
|
|
|
|
________________________________
|
(1)
|
Includes Emtriva and Tybost.
|
(2)
|
Represents our revenue from cobicistat (C), emtricitabine (FTC) and tenofovir alafenamide (TAF) in Symtuza (darunavir/C/FTC/TAF), a fixed dose combination product commercialized by Janssen Sciences Ireland UC.
|
(3)
|
Amounts consist of sales of Harvoni and the authorized generic version of Harvoni sold by our separate subsidiary, Asegua Therapeutics LLC.
|
(4)
|
Amounts consist of sales of Epclusa and the authorized generic version of Epclusa sold by our separate subsidiary, Asegua Therapeutics LLC.
|
(5)
|
Includes Cayston, Hepsera, Sovaldi and Tecartus. Europe product sales included unfavorable adjustments recorded in 2019 for statutory rebates related to sales of Sovaldi made in prior years.
|
Revenues from Major Customers
The following table summarizes revenues from each of our customers who individually accounted for 10% or more of our total revenues (as a percentage of total revenues):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
AmerisourceBergen Corporation
|
|
30
|
%
|
|
21
|
%
|
|
25
|
%
|
|
21
|
%
|
Cardinal Health, Inc.
|
|
19
|
%
|
|
21
|
%
|
|
22
|
%
|
|
21
|
%
|
McKesson Corporation
|
|
22
|
%
|
|
23
|
%
|
|
22
|
%
|
|
21
|
%
|
Revenues Recognized from Performance Obligations Satisfied in Prior Periods
Revenues recognized from performance obligations satisfied in prior years related to royalties for licenses of our intellectual property were $206 million and $618 million for the three and nine months ended September 30, 2020, respectively, and $201 million and $527 million for the three and nine months ended September 30, 2019, respectively.
Variable consideration is included in the net sales price only to the extent a significant reversal in the amount of cumulative revenue recognized is not probable of occurring when the uncertainty associated with the variable consideration is subsequently resolved. Estimates are assessed each period and updated to reflect current information. Changes in estimates for variable consideration related to sales made in prior years resulted in a $13 million and $94 million increase in revenues for the three and nine months ended September 30, 2020, respectively, and a $9 million and $309 million increase in revenues for the three and nine months ended September 30, 2019, respectively.
Contract Balances
Our contract assets, which consist of unbilled amounts primarily from arrangements where the licensing of intellectual property is the only or predominant performance obligation, totaled $186 million and $144 million as of September 30, 2020 and December 31, 2019, respectively. Contract liabilities, which generally result from receipt of advance payment before our performance under the contract, were $103 million and $45 million as of September 30, 2020 and December 31, 2019. During the three and nine months ended September 30, 2020 and 2019, revenue recognized that was included in the contract liability balance as of the beginning of the respective years was not material. Revenue expected to be recognized in the future from contract liabilities as the related performance obligations are satisfied is not expected to be material in any one year.
3. FAIR VALUE MEASUREMENTS
We determine the fair value of financial and non-financial assets and liabilities using the fair value hierarchy, which establishes three levels of inputs that may be used to measure fair value, as follows:
•Level 1 inputs include quoted prices in active markets for identical assets or liabilities;
•Level 2 inputs include observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. For our marketable securities, we review trading activity and pricing as of the measurement date. When sufficient quoted pricing for identical securities is not available, we use market pricing and other observable market inputs for similar securities obtained from various third-party data providers. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data; and
•Level 3 inputs include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability. Our Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques and significant management judgment or estimation.
Our financial instruments consist primarily of cash and cash equivalents, marketable debt securities, accounts receivable, foreign currency exchange contracts, equity securities, accounts payable and short-term and long-term debt. Cash and cash equivalents, marketable debt securities, certain equity securities and foreign currency exchange contracts are reported at their respective fair values in our Condensed Consolidated Balance Sheets. Equity securities without readily determinable fair values are recorded using the measurement alternative of cost less impairment, if any, adjusted for observable price changes in orderly transactions for identical or similar investments of the same issuer. Short-term and long-term debt are reported at their amortized costs in our Condensed Consolidated Balance Sheets. The remaining financial instruments are reported in our Condensed Consolidated Balance Sheets at amounts that approximate current fair values.
The following table summarizes the types of assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury securities
|
$
|
2,238
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,238
|
|
|
$
|
2,433
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,433
|
|
Certificates of deposit
|
—
|
|
|
2,136
|
|
|
—
|
|
|
2,136
|
|
|
—
|
|
|
3,517
|
|
|
—
|
|
|
3,517
|
|
U.S. government agencies securities
|
—
|
|
|
71
|
|
|
—
|
|
|
71
|
|
|
—
|
|
|
1,081
|
|
|
—
|
|
|
1,081
|
|
Non-U.S. government securities
|
—
|
|
|
220
|
|
|
—
|
|
|
220
|
|
|
—
|
|
|
174
|
|
|
—
|
|
|
174
|
|
Corporate debt securities
|
—
|
|
|
7,525
|
|
|
—
|
|
|
7,525
|
|
|
—
|
|
|
9,204
|
|
|
—
|
|
|
9,204
|
|
Residential mortgage and asset-backed securities
|
—
|
|
|
1,209
|
|
|
—
|
|
|
1,209
|
|
|
—
|
|
|
91
|
|
|
—
|
|
|
91
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity investment in Galapagos
|
2,361
|
|
|
—
|
|
|
—
|
|
|
2,361
|
|
|
3,477
|
|
|
—
|
|
|
—
|
|
|
3,477
|
|
Money market funds
|
11,430
|
|
|
—
|
|
|
—
|
|
|
11,430
|
|
|
7,069
|
|
|
—
|
|
|
—
|
|
|
7,069
|
|
Other publicly traded equity securities
|
619
|
|
|
—
|
|
|
—
|
|
|
619
|
|
|
322
|
|
|
—
|
|
|
—
|
|
|
322
|
|
Deferred compensation plan
|
200
|
|
|
—
|
|
|
—
|
|
|
200
|
|
|
171
|
|
|
—
|
|
|
—
|
|
|
171
|
|
Foreign currency derivative contracts
|
—
|
|
|
6
|
|
|
—
|
|
|
6
|
|
|
—
|
|
|
37
|
|
|
—
|
|
|
37
|
|
Total
|
$
|
16,848
|
|
|
$
|
11,167
|
|
|
$
|
—
|
|
|
$
|
28,015
|
|
|
$
|
13,472
|
|
|
$
|
14,104
|
|
|
$
|
—
|
|
|
$
|
27,576
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan
|
$
|
200
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
200
|
|
|
$
|
171
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
171
|
|
Foreign currency derivative contracts
|
—
|
|
|
50
|
|
|
—
|
|
|
50
|
|
|
—
|
|
|
8
|
|
|
—
|
|
|
8
|
|
Total
|
$
|
200
|
|
|
$
|
50
|
|
|
$
|
—
|
|
|
$
|
250
|
|
|
$
|
171
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
179
|
|
Changes in the fair value of equity securities resulted in net unrealized losses of $964 million and $1,046 million for the three and nine months ended September 30, 2020, respectively, and net unrealized gains of $58 million and $312 million for the three and nine months ended September 30, 2019, respectively, which were included in Other income (expense), net on our Condensed Consolidated Statements of Operations.
The following table summarizes the classification of our equity securities in our Condensed Consolidated Balance Sheets (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
Cash and cash equivalents
|
$
|
11,430
|
|
|
$
|
7,069
|
|
Prepaid and other current assets
|
986
|
|
|
319
|
|
Other long-term assets
|
2,194
|
|
|
3,651
|
|
Total
|
$
|
14,610
|
|
|
$
|
11,039
|
|
Our available-for-sale debt securities are classified as cash equivalents, short-term marketable securities and long-term marketable securities in our Condensed Consolidated Balance Sheets. See Note 4. Available-For-Sale Debt Securities for additional information.
See Note 6. Acquisitions, Collaborations and Other Arrangements for additional information on our equity investment in Galapagos NV (“Galapagos”).
Level 2 Inputs
We estimate the fair values of Level 2 instruments by taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income-based and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate the fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities, issuer credit spreads, benchmark securities, prepayment/default projections based on historical data and other observable inputs.
Substantially all of our foreign currency derivative contracts have maturities within an 18-month time horizon and all are with counterparties that have a minimum credit rating of A- or equivalent by S&P Global Ratings, Moody’s Investors Service, Inc. or Fitch Ratings, Inc. We estimate the fair values of these contracts by taking into consideration the valuations obtained from a third-party valuation service that utilizes an income-based industry standard valuation model for which all significant inputs are observable, either directly or indirectly. These inputs include foreign currency exchange rates, London Interbank Offered Rates and swap rates. These inputs, where applicable, are observable at commonly quoted intervals.
The total estimated fair values of our aggregate short-term and long-term debt, determined using Level 2 inputs based on their quoted market values, were approximately $33.3 billion and $27.3 billion as of September 30, 2020 and December 31, 2019, respectively, and the carrying values were $29.3 billion and $24.6 billion as of September 30, 2020 and December 31, 2019, respectively.
4. AVAILABLE-FOR-SALE DEBT SECURITIES
The following table summarizes our available-for-sale debt securities (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
U.S. treasury securities
|
|
$
|
2,225
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
2,238
|
|
|
$
|
2,433
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,433
|
|
Certificates of deposit
|
|
2,136
|
|
|
—
|
|
|
—
|
|
|
2,136
|
|
|
3,517
|
|
|
—
|
|
|
—
|
|
|
3,517
|
|
U.S. government agencies securities
|
|
71
|
|
|
—
|
|
|
—
|
|
|
71
|
|
|
1,081
|
|
|
—
|
|
|
—
|
|
|
1,081
|
|
Non-U.S. government securities
|
|
220
|
|
|
—
|
|
|
—
|
|
|
220
|
|
|
174
|
|
|
—
|
|
|
—
|
|
|
174
|
|
Corporate debt securities
|
|
7,506
|
|
|
20
|
|
|
(1)
|
|
|
7,525
|
|
|
9,203
|
|
|
2
|
|
|
(1)
|
|
|
9,204
|
|
Residential mortgage and asset-backed securities
|
|
1,207
|
|
|
2
|
|
|
—
|
|
|
1,209
|
|
|
91
|
|
|
—
|
|
|
—
|
|
|
91
|
|
Total
|
|
$
|
13,365
|
|
|
$
|
35
|
|
|
$
|
(1)
|
|
|
$
|
13,399
|
|
|
$
|
16,499
|
|
|
$
|
2
|
|
|
$
|
(1)
|
|
|
$
|
16,500
|
|
The following table summarizes the classification of our available-for-sale debt securities in our Condensed Consolidated Balance Sheets (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
Cash and cash equivalents
|
|
$
|
236
|
|
|
$
|
2,291
|
|
Short-term marketable securities
|
|
11,089
|
|
|
12,721
|
|
Long-term marketable securities
|
|
2,074
|
|
|
1,488
|
|
Total
|
|
$
|
13,399
|
|
|
$
|
16,500
|
|
Accrued interest receivable excluded from both the fair value and amortized cost basis of the available-for-sale debt securities was $49 million and $37 million as of September 30, 2020 and December 31, 2019, respectively, and is recorded in Prepaid and other current assets on our Condensed Consolidated Balance Sheets. There were no write-offs of accrued interest receivable during the three and nine months ended September 30, 2020.
The following table summarizes our available-for-sale debt securities by contractual maturity (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
|
Amortized Cost
|
|
Fair Value
|
Within one year
|
|
$
|
11,292
|
|
|
$
|
11,325
|
|
After one year through five years
|
|
1,991
|
|
|
1,992
|
|
After five years
|
|
82
|
|
|
82
|
|
Total
|
|
$
|
13,365
|
|
|
$
|
13,399
|
|
The following table summarizes our available-for-sale debt securities in an unrealized loss position (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
12 Months or Greater
|
|
Total
|
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$
|
(1)
|
|
|
$
|
1,042
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1)
|
|
|
$
|
1,042
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$
|
(1)
|
|
|
$
|
1,866
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
(1)
|
|
|
$
|
1,870
|
|
We held a total of 208 positions which were in an unrealized loss position as of September 30, 2020. The unrealized losses are largely due to changes in interest rates. Aggregated gross unrealized losses on available-for-sale corporate debt securities were not material, and accordingly, no impairments were recognized for the three and nine months ended September 30, 2020.
5. DERIVATIVE FINANCIAL INSTRUMENTS
Our operations in foreign countries expose us to market risk associated with foreign currency exchange rate fluctuations between the U.S. dollar and various foreign currencies, primarily the Euro. To manage this risk, we may hedge a portion of our foreign currency exposures related to outstanding monetary assets and liabilities as well as forecasted product sales using foreign currency exchange forward or option contracts. In general, the market risk related to these contracts is offset by corresponding gains and losses on the hedged transactions. The credit risk associated with these contracts is driven by changes in interest and currency exchange rates and, as a result, varies over time. By working only with major banks and closely monitoring current market conditions, we seek to limit the risk that counterparties to these contracts may be unable to perform. We also seek to limit our risk of loss by entering into contracts that permit net settlement at maturity. Therefore, our overall risk of loss in the event of a counterparty default is limited to the amount of any unrealized gains on outstanding contracts (i.e., those contracts that have a positive fair value) at the date of default. We do not enter into derivative contracts for trading purposes.
We hedge our exposure to foreign currency exchange rate fluctuations for certain monetary assets and liabilities that are denominated in a non-functional currency. The derivative instruments we use to hedge this exposure are not designated as hedges and, as a result, changes in their fair value are recorded in Other income (expense), net on our Condensed Consolidated Statements of Operations.
We hedge our exposure to foreign currency exchange rate fluctuations for forecasted product sales that are denominated in a non-functional currency. The derivative instruments we use to hedge this exposure are designated as cash flow hedges and have maturities of 18 months or less. Upon executing a hedging contract and quarterly thereafter, we assess hedge effectiveness using regression analysis. The unrealized gains or losses in Accumulated other comprehensive income (“AOCI”) are reclassified into product sales when the respective hedged transactions affect earnings. The majority of gains and losses related to the hedged forecasted transactions reported in AOCI as of September 30, 2020 are expected to be reclassified to product sales within 12 months.
The cash flow effects of our derivative contracts for the nine months ended September 30, 2020 and 2019 were included within Net cash provided by operating activities on our Condensed Consolidated Statements of Cash Flows.
We had notional amounts on foreign currency exchange contracts outstanding of $2.8 billion and $2.9 billion as of September 30, 2020 and December 31, 2019, respectively.
While all our derivative contracts allow us the right to offset assets and liabilities, we have presented amounts on a gross basis. The following table summarizes the classification and fair values of derivative instruments in our Condensed Consolidated Balance Sheets (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
Classification
|
|
Fair Value
|
|
Classification
|
|
Fair Value
|
Derivatives designated as hedges:
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
Prepaid and other current assets
|
|
$
|
4
|
|
|
Other accrued liabilities
|
|
$
|
(45)
|
|
Foreign currency exchange contracts
|
|
Other long-term assets
|
|
2
|
|
|
Other long-term obligations
|
|
(5)
|
|
Total derivatives designated as hedges
|
|
|
|
6
|
|
|
|
|
(50)
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
Prepaid and other current assets
|
|
—
|
|
|
Other accrued liabilities
|
|
—
|
|
Total derivatives not designated as hedges
|
|
|
|
—
|
|
|
|
|
—
|
|
Total derivatives
|
|
|
|
$
|
6
|
|
|
|
|
$
|
(50)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
Classification
|
|
Fair Value
|
|
Classification
|
|
Fair Value
|
Derivatives designated as hedges:
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
Prepaid and other current assets
|
|
$
|
36
|
|
|
Other accrued liabilities
|
|
$
|
(6)
|
|
Foreign currency exchange contracts
|
|
Other long-term assets
|
|
—
|
|
|
Other long-term obligations
|
|
(2)
|
|
Total derivatives designated as hedges
|
|
|
|
36
|
|
|
|
|
(8)
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
Prepaid and other current assets
|
|
1
|
|
|
Other accrued liabilities
|
|
—
|
|
Total derivatives not designated as hedges
|
|
|
|
1
|
|
|
|
|
—
|
|
Total derivatives
|
|
|
|
$
|
37
|
|
|
|
|
$
|
(8)
|
|
The following table summarizes the effect of our foreign currency exchange contracts on our Condensed Consolidated Financial Statements (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Derivatives designated as hedges:
|
|
|
|
|
|
|
|
|
Gains (losses) recognized in AOCI
|
|
$
|
(52)
|
|
|
$
|
69
|
|
|
$
|
(28)
|
|
|
$
|
98
|
|
Gains reclassified from AOCI into product sales
|
|
$
|
12
|
|
|
$
|
31
|
|
|
$
|
57
|
|
|
$
|
96
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
|
Gains (losses) recognized in Other income (expense), net
|
|
$
|
(13)
|
|
|
$
|
40
|
|
|
$
|
(10)
|
|
|
$
|
29
|
|
From time to time, we may discontinue cash flow hedges and, as a result, record related amounts in Other income (expense), net on our Condensed Consolidated Statements of Operations. There were no discontinuances of cash flow hedges for the three and nine months ended September 30, 2020 and 2019.
As of September 30, 2020 and December 31, 2019, we only held foreign currency exchange contracts. The following table summarizes the potential effect of offsetting our foreign currency exchange contracts on our Condensed Consolidated Balance Sheets (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset
on our Condensed
Consolidated Balance Sheets
|
|
|
Description
|
|
Gross Amounts
of Recognized
Assets/Liabilities
|
|
Gross Amounts
Offset on our
Condensed
Consolidated
Balance Sheets
|
|
Amounts of Assets/Liabilities Presented
on our Condensed Consolidated
Balance Sheets
|
|
Derivative
Financial
Instruments
|
|
Cash Collateral
Received/
Pledged
|
|
Net Amount
(Legal Offset)
|
As of September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
(6)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivative liabilities
|
|
$
|
(50)
|
|
|
$
|
—
|
|
|
$
|
(50)
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
(44)
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
|
$
|
37
|
|
|
$
|
—
|
|
|
$
|
37
|
|
|
$
|
(6)
|
|
|
$
|
—
|
|
|
$
|
31
|
|
Derivative liabilities
|
|
$
|
(8)
|
|
|
$
|
—
|
|
|
$
|
(8)
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
(1)
|
|
6. ACQUISITIONS, COLLABORATIONS AND OTHER ARRANGEMENTS
We continue to pursue acquisitions, licensing and strategic collaborations and other similar arrangements including equity investments with third parties for the development and commercialization of certain products and product candidates. These arrangements may include non-refundable upfront payments, expense reimbursements or payments by us for options to acquire certain rights, contingent obligations by us for potential development and regulatory milestone payments and/or sales-based milestone payments, royalty payments, revenue or profit-sharing arrangements and cost-sharing arrangements.
Acquisitions
Forty Seven, Inc. (“Forty Seven”)
On April 7, 2020, we acquired all of the then issued and outstanding common stock of Forty Seven, a clinical-stage immuno-oncology company focused on developing therapies targeting cancer immune evasion pathways and specific cell targeting approaches, for a price of $95.50 per share in cash, for total consideration of $4.7 billion, net of acquired cash. As a result, Forty Seven became our wholly-owned subsidiary. Forty Seven’s lead program, magrolimab, is an investigational monoclonal antibody in clinical development for the treatment of myelodysplastic syndrome, acute myeloid leukemia, non-Hodgkin lymphoma and solid tumors.
We accounted for the transaction as an asset acquisition since the lead asset, magrolimab, represented substantially all the fair value of the gross assets acquired. At the acquisition date, we recorded a $4.5 billion charge representing an acquired IPR&D asset with no alternative future use in Acquired in-process research and development expenses on our Condensed Consolidated Statements of Operations. In connection with this acquisition, we recorded $202 million of assets acquired primarily consisting of deferred tax assets. Liabilities assumed were not material. During the three months ended June 30, 2020, we also recorded share-based compensation expense of $144 million related to the cash settlement of unvested Forty Seven employee stock awards attributable to post-acquisition services, which was primarily recorded in Research and development expenses on our Condensed Consolidated Statements of Operations.
Immunomedics, Inc. (“Immunomedics”)
On September 13, 2020, we entered into an agreement and plan of merger (“Agreement and Plan of Merger”) to acquire Immunomedics, a company focused on the development of antibody-drug conjugate (“ADC”) technology. Immunomedics researches and develops biopharmaceutical products, particularly antibody-based products for patients with solid tumors and blood cancers, and manufactures and markets Trodelvy. Trodelvy, a Trop-2-directed ADC, developed by Immunomedics is the first ADC that the U.S. Food and Drug Administration (“FDA”) approved for the treatment of adult patients with metastatic triple-negative breast cancer.
On September 24, 2020, under the terms of the Agreement and Plan of Merger, we commenced a tender offer (“Offer”) to acquire all of the outstanding shares of common stock of Immunomedics for approximately $21 billion (at a price of $88.00 per share), net in cash, without interest and subject to any withholding of taxes.
In an event subsequent to September 30, 2020, on October 23, 2020, we completed the Offer for all outstanding shares of common stock of Immunomedics and accepted all shares validly tendered and not withdrawn as of the expiration time of the Offer. Following the Offer, we also acquired all remaining shares not tendered at Offer pursuant to the merger contemplated by the Agreement and Plan of Merger. As a result, the acquisition was completed and Immunomedics became a wholly owned subsidiary of Gilead. The financial results of Immunomedics will be included in our consolidated financial results for the year ending December 31, 2020 from the date of completion of the acquisition. We financed the acquisition with the majority of the proceeds from the September 2020 senior unsecured notes offering, an additional $1.0 billion borrowing under a new senior unsecured term loan facility and the balance with cash on hand. See Note 9. Debt and Credit Facilities for additional information.
Our acquisition of Immunomedics will be accounted for as a business combination using the acquisition method of accounting in the fourth quarter of 2020. Given the recent timing of the transaction close, we are in the process of estimating fair values of the assets acquired and liabilities assumed in the business combination. As a result, we are currently unable to provide preliminary allocation of purchase consideration based on the acquisition date fair values of the assets acquired and liabilities assumed as well as other related information, but we will disclose such information in our Annual Report on Form 10-K for the year ending December 31, 2020.
Collaborations and Other Arrangements
Arcus Biosciences, Inc. (“Arcus”)
On May 29, 2020, we acquired 2.2 million shares of the common stock of Arcus, a publicly traded oncology-focused biopharmaceutical company, for approximately $61 million in a secondary equity offering.
Separately, on May 27, 2020, we entered into a transaction with Arcus, which included entry into an option, license and collaboration agreement (the “Collaboration Agreement”) and a common stock purchase agreement and an investor rights agreement (together, the “Stock Purchase Agreements”).
Upon closing of the Collaboration Agreement and Stock Purchase Agreements, on July 13, 2020, we made an upfront payment of $175 million and acquired approximately 6 million additional shares of Arcus’ common stock for $200 million in accordance with the terms of the Collaboration Agreement and the Stock Purchase Agreements. Of the total $391 million initial cash payments made under the agreements and direct transactional costs, we recorded $135 million as an equity investment, which was calculated based on Arcus’ closing stock price of $22.67 on the closing date of the transaction. As a result, combined with our existing share holdings, we own 8.2 million shares of Arcus, representing approximately 13% of the issued and outstanding voting stock of Arcus immediately following the closing of the transaction. We recorded our equity investments in Arcus in Other long-term assets on our Condensed Consolidated Balance Sheets as the investments are subject to contractual lock-up provisions for a period up to 2 years from the closing date of the agreements, subject to certain conditions. We account for our equity investment in Arcus at fair value with changes in fair value recognized in Other income (expense), net for each reporting period. The remaining $256 million was attributed to the acquired license and option rights of $175 million representing IPR&D assets with no alternative future use, $65 million of an issuance premium for the equity purchase and $16 million of direct transactional costs. These amounts were expensed as Acquired in-process research and development expenses during the three months ended September 30, 2020 on our Condensed Consolidated Statements of Operations.
Gilead has the right to opt-in to all current and future investigational product candidates that emerge from Arcus’ research portfolio for the ten years following the closing of the transaction. Upon our exercise of an option for a program, unless Arcus opts out according to the terms of the Collaboration Agreement, the companies will co-develop and share global development costs and co-commercialize and share profits in the U.S. We will obtain exclusive rights to commercialize any optioned programs outside of the U.S., subject to any rights of Arcus’ existing partners, for which we will pay to Arcus tiered royalties ranging from the high teens to the low twenties on net sales.
Under the Collaboration Agreement, subject to certain limited exceptions, we are required to provide $100 million to Arcus on the second anniversary of the agreement and may pay an additional $100 million at our option on each of the fourth, sixth, and eighth anniversaries of the agreement, unless terminated early, as ongoing research and development support to extend our collaboration term to up to 10-years. Accordingly, during the three months ended September 30, 2020, we recorded a $100 million charge representing the contractually committed payment in Acquired in-process research and development expenses on our Condensed Consolidated Statements of Operations.
Under the Collaboration Agreement, we will potentially provide up to $1.2 billion in opt-in and milestone payments with respect to current clinical product candidates, if and when such payments are triggered under the Collaboration Agreement.
Under the Stock Purchase Agreements, we have the right to purchase additional shares of Arcus from Arcus over the next five years, up to a maximum of 35% of the outstanding voting stock. We are subject to a three-year standstill restricting our ability to acquire voting stock of Arcus exceeding more than 35% of the then issued and outstanding voting stock of Arcus, subject to certain exceptions. Additionally, we agreed not to dispose of any equity securities of Arcus prior to the second anniversary of the closing of the Stock Purchase Agreements without the prior consent of Arcus, subject to certain exceptions.
Pionyr Immunotherapeutics, Inc. (“Pionyr”)
On June 19, 2020, we entered into a transaction with Pionyr, a privately held company pursuing novel biology in the field of immuno-oncology, which included entry into two separate merger agreements, one contemplating the initial acquisition of 49.9% equity interest in Pionyr, and the other providing us the exclusive option, subject to certain terms and conditions, to acquire the remaining outstanding capital stock of Pionyr (together, the “Pionyr Merger and Option Agreements”) and a research and development service agreement.
On July 13, 2020, we closed the transaction with Pionyr and paid $269 million in cash and accrued an additional $6 million payable, subject to certain customary adjustments, to Pionyr’s shareholders in accordance with the terms of the Pionyr Merger and Option Agreements. We account for our investment in Pionyr using the equity method of accounting because our equity interest provides us with the ability to exercise significance influence over Pionyr. Our investment in Pionyr, consisting of the transaction price noted above and transaction costs, exceeded our pro-rata portion of Pionyr's net assets at transaction closing. We determined that the resulting basis difference primarily relates to Pionyr’s IPR&D which has no alternative future use and that Pionyr is not a business as defined in ASC 805, “Business Combinations.” As a result, we immediately recorded a charge for this basis difference of $215 million in Acquired in-process research and development expenses on our Condensed Consolidated Statements of Operations during the three months ended September 30, 2020.
The estimated fair value of our exclusive option to acquire the remaining outstanding capital stock of Pionyr is approximately $70 million based on a probability weighted option pricing model and recorded in Other long-term assets on our Condensed Consolidated Balance Sheet. From the first anniversary of the closing date, we may choose to exercise our exclusive option to purchase the remaining equity interest from Pionyr’s current shareholders for a $315 million option exercise fee and up to $1.2 billion in potential future milestone payments upon achievement of certain development and regulatory milestones, in each case subject to certain negotiated adjustments. Such option to purchase will expire following the earliest occurrence of specified events, including the delivery of data following completion of certain Phase 1b trials by Pionyr.
Under the research and development service agreement, we made an initial cash funding of $80 million and recorded a charge in Acquired in-process research and development expenses on our Condensed Consolidated Statements of Operations during the three months ended September 30, 2020. We will provide additional payments of up to $115 million to Pionyr upon achievement of certain development milestones.
Tizona Therapeutics, Inc. (“Tizona”)
On July 17, 2020, we entered into a transaction with Tizona, a privately held company developing cancer immunotherapies, which included entry into two separate merger agreements, one contemplating the initial acquisition of a 49.9% equity interest in Tizona, and the other providing us the exclusive option, subject to certain terms and conditions, to acquire the remaining outstanding capital stock of Tizona (together, the “Tizona Merger and Option Agreements”) and a development agreement.
On August 25, 2020, we closed the transaction with Tizona and paid $302 million in cash to Tizona’s shareholders in accordance with the terms of the Tizona Merger and Option Agreements. We account for our investment in Tizona using the equity method of accounting because our equity interest provides us with the ability to exercise significance influence over Tizona. Our investment in Tizona, consisting of the transaction price noted above and transaction costs, exceeded our pro-rata portion of Tizona’s net assets at transaction closing. We determined that the resulting basis difference primarily relates to Tizona’s IPR&D with no alternative future use and that Tizona is not a business as defined in ASC 805, “Business Combinations.” As a result, during the three months ended September 30, 2020, we immediately recorded this basis difference of $272 million in Acquired in-process research and development expenses on our Condensed Consolidated Statements of Operations.
The estimated fair value of our exclusive option to acquire Tizona is approximately $41 million based on a probability weighted option pricing model and recorded in Other long-term assets on our Condensed Consolidated Balance Sheet. From the first anniversary of the closing date, we may choose to exercise our exclusive option to purchase the remaining equity interest from Tizona’s current shareholders for up to $1.3 billion, including an option fee and potential future milestone payments upon achievement of certain development and regulatory milestones, in each case subject to certain negotiated adjustments. Such option to purchase will expire following the earliest occurrence of specified events, including the delivery of data following completion of certain Phase 1b trials by Tizona.
Under the development agreement, we committed to provide funding to Tizona of $115 million, which was recorded in Acquired in-process research and development expenses on our Condensed Consolidated Statements of Operations during the three months ended September 30, 2020.
Tango Therapeutics, Inc. (“Tango”)
On August 17, 2020, we entered into a transaction with Tango, a privately held company pursuing innovative targeted immune evasion therapies for patients with cancer through its proprietary, CRISPR-enabled functional genomics target discovery platform, which included entry into an amended and restated research collaboration and license agreement and a stock purchase agreement (together, the “Collaboration and Stock Purchase Agreements”).
Upon entering into this transaction, we made an upfront payment of $125 million and a $20 million equity investment in Tango, representing approximately 7% of the issued and outstanding voting stock of Tango immediately following the transaction, in accordance with the terms of the Collaboration and Stock Purchase Agreements. During the three months ended September 30, 2020, we recorded the $125 million upfront expense in Acquired in-process research and development expenses on our Condensed Consolidated Statements of Operations. Our equity investment in Tango is recorded at cost less impairment, if any, adjusted for observable price changes in orderly transactions for identical or similar investments of Tango.
Under the Collaboration and Stock Purchase Agreements, Gilead has the right to option up to 15 programs over the seven-year collaboration for up to $410 million per program in opt-in, extension and milestone payments. The parties will equally split profits and losses, as well as development costs in the U.S., for the products that Tango opts to co-develop and co-promote. We will provide Tango milestone payments and royalties on sales outside of the U.S. For products that Tango does not opt to co-develop and co-promote, we will pay Tango up to low double digit tiered royalties on net sales.
Jounce Therapeutics, Inc. (“Jounce”)
On September 1, 2020, we entered into a transaction with Jounce, a publicly traded company developing novel cancer immunotherapies, which included entry into license, registration rights and stock purchase agreements (together, “License and Stock Purchase Agreement”). In an event subsequent to September 30, 2020, in October 2020, we closed this transaction and made a total payment of $120 million in accordance with the terms of the License and Stock Purchase Agreement and recorded $56 million as an equity investment, representing approximately 14% of the issued and outstanding voting stock of Jounce immediately following the transaction, which was calculated based on Jounce’s closing stock price of $10.06 on the closing date of the transaction. In addition, we will provide up to $685 million in future potential clinical, regulatory and commercial milestone payments upon achievement of certain milestones, and pay Jounce royalties ranging from high single digit to mid-teens based upon worldwide sales, subject to certain adjustments.
Galapagos
In August 2019, we closed an option, license and collaboration agreement (the “Collaboration Agreement”) and a subscription agreement (the “Subscription Agreement”), each with Galapagos, pursuant to which the parties entered into a global collaboration that covers Galapagos’ current and future product portfolio (other than filgotinib). Upon closing, we paid $5.1 billion for the license and option rights and 6.8 million new ordinary shares of Galapagos at a subscription price of €140.59 per share. As a result, combined with our then existing share holdings, we owned 13.6 million ordinary shares of Galapagos, representing approximately 22% of the issued and outstanding voting securities of Galapagos at the closing of the Collaboration Agreement and Subscription Agreement. The parties also amended certain terms relating to the development and commercialization of filgotinib pursuant to the license and collaboration agreement previously entered into between Gilead and Galapagos in 2015.
We have elected the fair value option to account for our equity investment in Galapagos whereby the investment is marked to market through earnings in each reporting period based on the market price of Galapagos shares. We believe the fair value option best reflects the underlying economics of the investment. The $1.1 billion equity investment, which included an issuance discount of $63 million calculated based on Galapagos’ closing stock price on the date of closing of the Subscription Agreement and the subscription price of €140.59 per share, and our existing equity investment in Galapagos was recorded in Other long-term assets on our Condensed Consolidated Balance Sheets as our equity investment in Galapagos is subject to contractual lock-up provisions for a period up to 5 years from the closing date of the Subscription Agreement. The remaining $3.9 billion of the payment was recorded in Acquired in-process research and development expenses on our Condensed Consolidated Statements of Operations.
During the three months ended September 30, 2020, as the initial contractual lock-up provision for certain Galapagos shares will expire in August 2021, the corresponding equity investment balance of $505 million was reclassified to Prepaid and other current assets from Other long-term assets on our Condensed Consolidated Balance Sheets. During the three months ended September 30, 2020, we recorded a pre-tax unrealized loss of $923 million related to our investment in Galapagos in Other income (expense), net on our Condensed Consolidated Statement of Operations due to a decline in Galapagos’ stock price. See Note 3. Fair Value Measurements for additional information.
Gadeta B.V. (“Gadeta”)
In July 2018, we entered into a collaboration arrangement with Gadeta and made a purchase of equity in Gadeta from Gadeta’s shareholders. We determined that Gadeta was a VIE, and we were its primary beneficiary because we had the power to direct the activities of Gadeta that most significantly impact its economic performance. Upon the initial consolidation of Gadeta, we recorded $82 million to Noncontrolling interest, primarily reflecting acquired intangible assets related to IPR&D on our Condensed Consolidated Balance Sheets.
During the three months ended September 30, 2020, we effectively terminated the agreement with Gadeta. Upon the effective termination, we ceased to have a controlling interest and deconsolidated this VIE by removing the related net assets and noncontrolling interest of $82 million from our Condensed Consolidated Balance Sheets. The net loss from the deconsolidation was not material.
Other Arrangements
During the three and nine months ended September 30, 2020 and 2019, we entered into several collaborative, equity investments and licensing arrangements as well as other similar arrangements that we do not consider to be individually material. We recorded upfront collaboration expenses related to these arrangements of $7 million and $129 million for the three and nine months ended September 30, 2020, respectively, and $40 million and $331 million for the three and nine months ended September 30, 2019, respectively, within Acquired in-process research and development expenses on our Condensed Consolidated Statements of Operations. Cash payments made related to our equity investments for the three and nine months ended September 30, 2020 were $36 million and $61 million, respectively, and totaled $15 million and $119 million for the three and nine months ended September 30, 2019, respectively, which were primarily recorded within Prepaid and other current assets and Other long-term assets on our Condensed Consolidated Balance Sheets.
Under the financial terms of these arrangements, we may be required to make payments upon achievement of developmental, regulatory and commercial milestones, which could be significant. Future milestone payments, if any, will be reflected in our Condensed Consolidated Statements of Operations when the corresponding events become probable. In addition, we may be required to pay significant royalties on future sales if products related to these arrangements are commercialized. The payment of these amounts, however, is contingent upon the occurrence of various future events, which have a high degree of uncertainty of occurrence.
7. OTHER FINANCIAL INFORMATION
Inventories
The following table summarizes our Inventories (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
Raw materials
|
|
$
|
1,061
|
|
|
$
|
1,348
|
|
Work in process
|
|
182
|
|
|
170
|
|
Finished goods
|
|
710
|
|
|
549
|
|
Total
|
|
$
|
1,953
|
|
|
$
|
2,067
|
|
|
|
|
|
|
Reported as:
|
|
|
|
|
Inventories
|
|
$
|
1,008
|
|
|
$
|
922
|
|
Other long-term assets (1)
|
|
945
|
|
|
1,145
|
|
Total
|
|
$
|
1,953
|
|
|
$
|
2,067
|
|
|
|
|
|
|
|
________________________________
|
(1)
|
Amounts primarily consist of raw materials.
|
Other Accrued Liabilities
The following table summarizes the components of Other accrued liabilities (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
Compensation and employee benefits
|
|
$
|
648
|
|
|
$
|
599
|
|
Income taxes payable
|
|
943
|
|
|
287
|
|
Other accrued expenses
|
|
2,550
|
|
|
2,188
|
|
Total
|
|
$
|
4,141
|
|
|
$
|
3,074
|
|
8. INTANGIBLE ASSETS
The following table summarizes our intangible assets, net (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Foreign Currency Translation Adjustment
|
|
Net Carrying Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Foreign Currency Translation Adjustment
|
|
Net Carrying Amount
|
Finite-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible asset - sofosbuvir
|
|
$
|
10,720
|
|
|
$
|
(4,777)
|
|
|
$
|
—
|
|
|
$
|
5,943
|
|
|
$
|
10,720
|
|
|
$
|
(4,253)
|
|
|
$
|
—
|
|
|
$
|
6,467
|
|
Intangible asset - axicabtagene ciloleucel
|
|
6,200
|
|
|
(1,019)
|
|
|
—
|
|
|
5,181
|
|
|
6,200
|
|
|
(761)
|
|
|
—
|
|
|
5,439
|
|
Other
|
|
1,203
|
|
|
(516)
|
|
|
(2)
|
|
|
685
|
|
|
1,098
|
|
|
(454)
|
|
|
(6)
|
|
|
638
|
|
Total finite-lived assets
|
|
18,123
|
|
|
(6,312)
|
|
|
(2)
|
|
|
11,809
|
|
|
18,018
|
|
|
(5,468)
|
|
|
(6)
|
|
|
12,544
|
|
Indefinite-lived assets - IPR&D
|
|
1,130
|
|
|
—
|
|
|
—
|
|
|
1,130
|
|
|
1,247
|
|
|
—
|
|
|
(5)
|
|
|
1,242
|
|
Total intangible assets
|
|
$
|
19,253
|
|
|
$
|
(6,312)
|
|
|
$
|
(2)
|
|
|
$
|
12,939
|
|
|
$
|
19,265
|
|
|
$
|
(5,468)
|
|
|
$
|
(11)
|
|
|
$
|
13,786
|
|
Aggregate amortization expense related to finite-lived intangible assets was $281 million and $844 million for the three and nine months ended September 30, 2020, respectively, $281 million and $868 million for the three and nine months ended September 30, 2019, respectively, and was primarily included in Cost of goods sold on our Condensed Consolidated Statements of Operations.
The following table summarizes the estimated future amortization expense associated with our finite-lived intangible assets as of September 30, 2020 (in millions):
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Amount
|
2020 (remaining three months)
|
|
$
|
284
|
|
2021
|
|
1,137
|
|
2022
|
|
1,137
|
|
2023
|
|
1,137
|
|
2024
|
|
1,137
|
|
Thereafter
|
|
6,977
|
|
Total
|
|
$
|
11,809
|
|
9. DEBT AND CREDIT FACILITIES
Senior Unsecured Notes
The following table summarizes our borrowings under our senior unsecured notes (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount
|
Issue Date
|
|
Maturity Date
|
|
Interest Rate
|
|
September 30, 2020
|
|
December 31, 2019
|
November 2014
|
|
February 2020
|
|
2.35%
|
|
$
|
—
|
|
|
$
|
500
|
|
September 2015
|
|
September 2020
|
|
2.55%
|
|
—
|
|
|
1,999
|
|
March 2011
|
|
April 2021
|
|
4.50%
|
|
999
|
|
|
998
|
|
September 2020
|
|
September 2021
|
|
3-month LIBOR + 0.15%
|
|
499
|
|
|
—
|
|
December 2011
|
|
December 2021
|
|
4.40%
|
|
1,249
|
|
|
1,248
|
|
September 2016
|
|
March 2022
|
|
1.95%
|
|
499
|
|
|
499
|
|
September 2015
|
|
September 2022
|
|
3.25%
|
|
998
|
|
|
998
|
|
September 2016
|
|
September 2023
|
|
2.50%
|
|
747
|
|
|
747
|
|
September 2020
|
|
September 2023
|
|
3-month LIBOR + 0.52%
|
|
496
|
|
|
—
|
|
September 2020
|
|
September 2023
|
|
0.75%
|
|
1,992
|
|
|
—
|
|
March 2014
|
|
April 2024
|
|
3.70%
|
|
1,746
|
|
|
1,745
|
|
November 2014
|
|
February 2025
|
|
3.50%
|
|
1,746
|
|
|
1,746
|
|
September 2015
|
|
March 2026
|
|
3.65%
|
|
2,736
|
|
|
2,734
|
|
September 2016
|
|
March 2027
|
|
2.95%
|
|
1,246
|
|
|
1,245
|
|
September 2020
|
|
October 2027
|
|
1.20%
|
|
745
|
|
|
—
|
|
September 2020
|
|
October 2030
|
|
1.65%
|
|
992
|
|
|
—
|
|
September 2015
|
|
September 2035
|
|
4.60%
|
|
991
|
|
|
991
|
|
September 2016
|
|
September 2036
|
|
4.00%
|
|
741
|
|
|
741
|
|
September 2020
|
|
October 2040
|
|
2.60%
|
|
986
|
|
|
—
|
|
December 2011
|
|
December 2041
|
|
5.65%
|
|
996
|
|
|
995
|
|
March 2014
|
|
April 2044
|
|
4.80%
|
|
1,735
|
|
|
1,734
|
|
November 2014
|
|
February 2045
|
|
4.50%
|
|
1,732
|
|
|
1,731
|
|
September 2015
|
|
March 2046
|
|
4.75%
|
|
2,218
|
|
|
2,217
|
|
September 2016
|
|
March 2047
|
|
4.15%
|
|
1,726
|
|
|
1,725
|
|
September 2020
|
|
October 2050
|
|
2.80%
|
|
1,475
|
|
|
—
|
|
Total debt, net
|
|
29,290
|
|
|
24,593
|
|
Less: current portion
|
|
1,498
|
|
|
2,499
|
|
Total long-term debt, net
|
|
$
|
27,792
|
|
|
$
|
22,094
|
|
Senior Unsecured Notes Offering
In September 2020, we issued $7.25 billion aggregate principal amount of senior unsecured notes consisting of (i) $500 million principal amount of floating rate notes due September 2021 and $500 million principal amount of floating rate notes due September 2023 (together, the “Floating Rate Notes”); and (ii) $2.0 billion principal amount of 0.75% senior notes due September 2023, $750 million principal amount of 1.20% senior notes due October 2027, $1.0 billion principal amount of 1.65% senior notes due October 2030, $1.0 billion principal amount of 2.60% senior notes due October 2040 and $1.5 billion principal amount of 2.80% senior notes due October 2050 (together, the “Fixed Rate Notes” and, together the Floating Rate Notes, the “2020 Senior Notes”), the terms of which are summarized in the table above.
The Fixed Rate Notes may be redeemed at our option at a redemption price equal to the greater of (i) 100% of the principal amount of the Fixed Rate Notes to be redeemed and (ii) the sum, as determined by an independent investment banker, of the present values of the remaining scheduled payments of principal and interest on the Fixed Rate Notes to be redeemed (exclusive of interest accrued to the date of redemption) discounted to the redemption date on a semiannual basis at the treasury rate, plus 10 basis points in the case of the 2023 fixed rate notes, 12.5 basis points in the case of the 2027 fixed rates notes, 15 basis points in the case of the 2030 fixed rate notes, 20 basis points in the case of the 2040 fixed notes and 25 basis points in the case of the 2050 fixed rate notes, plus any accrued and unpaid interest on the Fixed Rate Notes to be redeemed to, but excluding, the date of redemption. The Fixed Rate Notes also have a call feature, exercisable at our option, to redeem the notes at par in whole, or in part, on dates ranging from two months to two years prior to maturity. In each case, accrued and unpaid interest is also required to be redeemed to the date of redemption. The September 2023 floating rate notes also have a call feature, exercisable at our option, to redeem the notes at par, in whole, or in part, approximately two years prior to maturity.
In the event of the occurrence of a change in control and a downgrade in the rating of the 2020 Senior Notes below investment grade by Moody’s Investors Service, Inc. and S&P Global Ratings, the holders may require us to purchase all or a portion of their notes at a price equal to 101% of the aggregate principal amount of the notes repurchased, plus accrued and unpaid interest to the date of repurchase.
We are required to comply with certain covenants under our note indentures governing our senior unsecured notes. As of September 30, 2020, we were in compliance with all covenants.
Senior Unsecured Notes Repayments
In February 2020, we repaid $500 million of our senior unsecured notes upon maturity. In September 2020, we repaid $2.0 billion of our senior unsecured notes upon maturity.
Term Loan Facility
In September 2020, we entered into a commitment letter with a group of institutional lenders to provide for a three-year senior unsecured term loan facility (the “Term Loan Facility”) in an aggregate principal amount of $1.0 billion. As of September 30, 2020, there were no borrowings outstanding. In an event subsequent to September 30, 2020, on October 23, 2020, we entered into a term loan credit agreement under the Term Loan Facility and borrowed an aggregate principal amount of $1.0 billion.
The Term Loan Facility contains customary representations, warranties, affirmative and negative covenants and events of default. The Term Loan Facility bears interest at 3-month LIBOR plus the Applicable Percentage as defined in the Term Loan Facility credit agreement. We may terminate or reduce the amount borrowed under the Term Loan Facility in whole or in part at any time without premium or penalty.
Revolving Credit Facilities
In June 2020, we terminated our $2.5 billion revolving credit facility maturing in May 2021 (the “2016 Revolving Credit Facility”) and entered into a new $2.5 billion revolving credit facility maturing in June 2025 (the “2020 Revolving Credit Facility”), which has terms substantially similar to the 2016 Revolving Credit Facility. The 2020 Revolving Credit Facility can be used for working capital requirements and for general corporate purposes, including, without limitation, acquisitions. As of September 30, 2020 and December 31, 2019, there were no amounts outstanding under these revolving credit facilities.
The 2020 Revolving Credit Facility contains customary representations, warranties, affirmative and negative covenants and events of default. At September 30, 2020, we were in compliance with all covenants. Loans under the 2020 Revolving Credit Facility bear interest at either (i) the Eurodollar Rate plus the Applicable Percentage, or (ii) the Base Rate plus the Applicable Percentage, each as defined in the 2020 Revolving Credit Facility agreement. We may terminate or reduce the commitments, and may prepay any loans under the new credit facility in whole or in part at any time without premium or penalty.
10. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
We are a party to various legal actions. The most significant of these are described below. 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 material loss is reasonably possible and the loss or range of loss can be estimated, we disclose the possible loss. Unless otherwise noted, it is not possible to determine the outcome of these matters or the outcome (including in excess of any accrual) is not expected to be material, and we cannot reasonably estimate the maximum potential exposure or the range of possible loss.
We did not have any material accruals for the matters described below in our Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019.
Litigation Related to Sofosbuvir
In 2012, we acquired Pharmasset, Inc. Through the acquisition, we acquired sofosbuvir, a nucleotide analog that acts to inhibit the replication of the hepatitis C virus (“HCV”). In 2013, we received approval from FDA for sofosbuvir, now known commercially as Sovaldi. Sofosbuvir is also included in all of our marketed HCV products. We have received a number of litigation claims regarding sofosbuvir. While we have carefully considered these claims both prior to and following the acquisition and believe they are without merit, we cannot predict the ultimate outcome of such claims or range of loss.
We are aware of patents and patent applications owned by third parties that have been or may in the future be alleged by such parties to cover the use of our HCV products. If third parties obtain valid and enforceable patents, and successfully prove infringement of those patents by our HCV products, we could be required to pay significant monetary damages. We cannot predict the ultimate outcome of intellectual property claims related to our HCV products. We have spent, and will continue to spend, significant resources defending against these claims.
Litigation with Idenix Pharmaceuticals, Inc. (“Idenix”), Universita Degli Studi di Cagliari (“UDSG”), Centre National de la Recherche Scientifique and L’Université Montpellier II
In 2013, Idenix, UDSG, Centre National de la Recherche Scientifique and L’Université Montpellier II sued us in the U.S. District Court for the District of Delaware alleging that the commercialization of sofosbuvir infringes U.S. Patent No. 7,608,600 (the “’600 patent”). We prevailed at all phases of litigation concerning the ’600 patent, and in 2018, the U.S. Supreme Court denied Idenix’s petition for certiorari. Also in 2013, Idenix and UDSG sued us in the U.S. District Court for the District of Massachusetts alleging that the commercialization of sofosbuvir infringes U.S. Patent Nos. 6,914,054 (the “’054 patent”) and 7,608,597 (the “’597 patent”). In 2014, the court transferred the Massachusetts litigation to the U.S. District Court for the District of Delaware.
Prior to trial in 2016, Idenix committed to give us a covenant not to sue with respect to any claims arising out of the ’054 patent related to sofosbuvir and withdrew that patent from the trial. A jury trial was held in 2016 on the ’597 patent, and the jury found that we willfully infringed the asserted claims of the ’597 patent and awarded Idenix $2.54 billion in past damages. In 2018, the judge invalidated Idenix’s ’597 patent and vacated the jury’s award of $2.54 billion in past damages. Idenix appealed this decision to the U.S. Court of Appeals for the Federal Circuit (“CAFC”), and in October 2019, the CAFC issued an opinion affirming the trial court’s decision that the ’597 patent is invalid. In April 2020, the CAFC denied Idenix’s petition for rehearing en banc. Idenix has sought review by the U.S. Supreme Court.
Litigation with the University of Minnesota
The University of Minnesota (the “University”) has obtained U.S. Patent No. 8,815,830 (the “’830 patent”), which purports to broadly cover nucleosides with antiviral and anticancer activity. In 2016, the University filed a lawsuit against us in the U.S. District Court for the District of Minnesota, alleging that the commercialization of sofosbuvir-containing products infringes the ’830 patent. We believe the ’830 patent is invalid and will not be infringed by the continued commercialization of sofosbuvir. In 2017, the court granted our motion to transfer the case to California. We have also filed petitions for inter partes review with the U.S. Patent and Trademark Office Patent Trial and Appeal Board (“PTAB”) alleging that all asserted claims are invalid for anticipation and obviousness, and the PTAB instituted one of these petitions. In 2018, the U.S. District Court for the Northern District of California stayed the litigation until after the PTAB concludes the inter partes review that it has initiated, which we expect will occur by 2021.
Litigation Related to Axicabtagene Ciloleucel
We own patents and patent applications that protect our axicabtagene ciloleucel chimeric DNA segments. Third parties may have, or may obtain rights to, patents that could allegedly be used to prevent or attempt to prevent us from commercializing axicabtagene ciloleucel or to require us to obtain a license in order to commercialize axicabtagene ciloleucel.
In October 2017, Juno Therapeutics, Inc. and Sloan Kettering Cancer Center (collectively, “Juno”) filed a lawsuit against us in the U.S. District Court for the Central District of California, alleging that the commercialization of axicabtagene ciloleucel, sold commercially as Yescarta, infringes on U.S. Patent No. 7,446,190 (the “’190 patent”). A jury trial was held on the ’190 patent, and in December 2019, the jury found that the asserted claims of the ’190 patent were valid, and that we willfully infringed the asserted claims of the ’190 patent. The jury also awarded Juno damages in amounts of $585 million in an up-front payment and a 27.6% running royalty from October 2017 through the date of the jury’s verdict. The parties filed post-trial motions in the first quarter of 2020, and the trial judge entered a judgment in April 2020. The trial judge affirmed the jury’s verdict, enhanced the past damages by 50% and maintained the royalties on future Yescarta sales at 27.6%.
In assessing whether we should accrue a liability for this litigation in our consolidated financial statements, we considered various factors, including the legal and factual circumstances of the case, the jury’s verdict, the district court’s pre- and post-trial orders, the current status of the proceedings, applicable law, the views of legal counsel and the likelihood that the judgment will be upheld on appeal. As a result of this review, we have determined, in accordance with applicable accounting standards, that it is not probable that we will incur a material loss as a result of this litigation.
If the judgment is reversed on appeal, the loss is expected to be zero. If the judgment is upheld in its entirety on appeal, we estimate a loss through the third quarter of 2020 to be approximately $1.3 billion, which consists of (i) approximately $811 million, which represents damages on Yescarta revenues through December 12, 2019, and prejudgment interest thereon, (ii) approximately $389 million, which represents a 50% enhancement of past damages and (iii) approximately $128 million for royalties and prejudgment interest on Yescarta revenues from December 13, 2019 to September 30, 2020. Although we cannot predict with certainty the ultimate outcome of this litigation on appeal, we believe the jury’s verdict and the judgment to be in error. In April 2020, we filed an appeal seeking to reverse the judgment or obtain a new trial due to errors made by the trial judge.
Litigation Related to Bictegravir
In 2018, ViiV Healthcare Company (“ViiV”) filed a lawsuit against us in the U.S. District Court of Delaware, alleging that the commercialization of bictegravir, sold commercially in combination with tenofovir alafenamide and emtricitabine as Biktarvy, infringes ViiV’s U.S. Patent No. 8,129,385 (the “’385 patent”) covering ViiV’s dolutegravir. Bictegravir is structurally different from dolutegravir, and we believe that bictegravir does not infringe the sole asserted claim of the ’385 patent. The court has set a trial date of March 2021 for this lawsuit.
In 2018, ViiV also filed a lawsuit against us in the Federal Court of Canada, alleging that our activities relating to our bictegravir compound have infringed ViiV’s Canadian Patent No. 2,606,282 (the “’282 patent”), which was issued to Shionogi & Co. Ltd. and ViiV. The ’282 patent is the compound patent covering ViiV’s dolutegravir. We believe that bictegravir does not infringe the claims of the ’282 patent. In January 2020, the court held a summary trial to assess ViiV’s infringement allegations. In April 2020, the court determined that bictegravir does not infringe the claims of the ’282 patent and dismissed the case. ViiV has appealed this decision.
In November and December 2019, ViiV filed lawsuits in France, Germany, Ireland and the UK asserting the relevant national designations of European Patent No. 3 045 206 (“EP ’206”); in Australia asserting Australian Patent No. 2006239177; in Japan asserting Japanese Patent No. 4295353; and in Korea asserting Korean Patent Nos. 1848819 and 1363875. These patents all relate to molecules which ViiV claims would act as integrase inhibitors. We believe that bictegravir does not infringe the claims of any of ViiV’s patents. In 2019, we filed an opposition in the European Patent Office (“EPO”) requesting revocation of EP ’206. The EPO hearing is scheduled for 2021. In all jurisdictions, to the extent that the claims of ViiV’s patents are interpreted to cover bictegravir, we believe that those claims are invalid. We cannot predict the ultimate outcome of intellectual property claims related to bictegravir.
Litigation Relating to Pre-Exposure Prophylaxis
In August 2019, we filed petitions requesting inter partes review of U.S. Patent Nos. 9,044,509, 9,579,333, 9,937,191 and 10,335,423 (collectively, “HHS Patents”) by PTAB. The HHS Patents are assigned to the U.S. Department of Health and Human Services (“HHS”) and 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, a process commonly known as pre-exposure prophylaxis (“PrEP”). In November 2019, the U.S. Department of Justice filed a lawsuit against us in the U.S. District Court of Delaware, alleging that the sale of Truvada and Descovy for use as PrEP infringes the HHS Patents. In February 2020, PTAB declined to institute our petitions for inter partes review of the HHS Patents. In April 2020, we filed a breach of contract lawsuit against the U.S. federal government in the Court of Federal Claims, alleging violations of four material transfer agreements (“MTAs”) related to the research underlying the HHS Patents and a clinical trial agreement (“CTA”) by the U.S. Centers for Disease Control and Prevention related to PrEP research. Although we cannot predict with certainty the ultimate outcome of these litigation matters, we believe that the U.S. federal government breached the MTAs and CTA, that Truvada and Descovy do not infringe the HHS Patents and that the HHS Patents are invalid over prior art descriptions of Truvada’s use for PrEP and post-exposure prophylaxis as well because physicians and patients were using the claimed methods years before HHS filed the applications for the patents. A trial date for the lawsuit in the District Court of Delaware has been set for May 2023.
Litigation with Generic Manufacturers
As part of the approval process for some of our products, FDA granted us a New Chemical Entity (“NCE”) exclusivity period during which other manufacturers’ applications for approval of generic versions of our product will not be approved. Generic manufacturers may challenge the patents protecting products that have been granted NCE exclusivity one year prior to the end of the NCE exclusivity period. Generic manufacturers have sought and may continue to seek FDA approval for a similar or identical drug through an abbreviated new drug application (“ANDA”), the application form typically used by manufacturers seeking approval of a generic drug. The sale of generic versions of our products earlier than their patent expiration would have a significant negative effect on our revenues and results of operations. To seek approval for a generic version of a product having NCE status, a generic company may submit its ANDA to FDA four years after the branded product’s approval.
Starting in December 2019, we received letters from Lupin Ltd., Apotex Inc., Shilpa Medicare Ltd., Sunshine Lake Pharma Co. Ltd., Laurus Labs, Natco Pharma Ltd., Macleods Pharma Ltd., Hetero Labs Ltd. and Cipla Ltd. (collectively, “generic manufacturers”) indicating that they have submitted ANDAs to FDA requesting permission to market and manufacture generic versions of certain of our tenofovir alafenamide (“TAF”)-containing products. Between them, these generic manufacturers seek to market generic versions of Odefsey, Descovy and Vemlidy. Some generic manufacturers have challenged the validity of four patents listed on the Orange Book and associated with TAF, while others have challenged the validity of two of our Orange Book-listed patents associated with TAF. We filed lawsuits against the generic manufacturers, and we intend to enforce and defend our intellectual property.
European Patent Claims
In 2015, several parties filed oppositions in the EPO requesting revocation of one of our granted European patents covering sofosbuvir that expires in 2028. In 2016, the EPO upheld the validity of certain claims of our sofosbuvir patent. We have appealed this decision, seeking to restore all of the original claims, and several of the original opposing parties have also appealed, requesting full revocation. The appeal hearing is scheduled for July 2021.
In 2017, several parties filed oppositions in the EPO requesting revocation of our granted European patent relating to sofosbuvir that expires in 2024. The EPO conducted an oral hearing for this opposition in 2018 and upheld the claims. Two of the original opposing parties have appealed, requesting full revocation.
In 2016, several parties filed oppositions in the EPO requesting revocation of our granted European patent covering TAF that expires in 2026. In 2017, the EPO upheld the validity of the claims of our TAF patent. Three parties have appealed this decision. The appeal hearing is scheduled for March 2021.
In 2017, several parties filed oppositions in the EPO requesting revocation of our granted European patent relating to TAF hemifumarate that expires in 2032. In 2019, the EPO upheld the validity of the claims of our TAF hemifumarate patent. Three parties have appealed this decision.
In 2016, three parties filed oppositions in the EPO requesting revocation of our granted European patent covering cobicistat that expires in 2027. In 2017, the EPO upheld the validity of the claims of our cobicistat patent. Two parties have appealed this decision.
The appeal process may take several years for all EPO opposition proceedings. While we are confident in the strength of our patents, we cannot predict the ultimate outcome of these oppositions. If we are unsuccessful in defending these oppositions, some or all of our patent claims may be narrowed or revoked and the patent protection for sofosbuvir, TAF, TAF hemifumarate and cobicistat in the European Union could be substantially shortened or eliminated entirely. If our patents are revoked, and no other European patents are granted covering these compounds, our exclusivity may be based entirely on regulatory exclusivity granted by the European Medicines Agency. If we lose patent protection for any of these compounds, our revenues and results of operations could be negatively impacted for the years including and succeeding the year in which such exclusivity is lost.
Government Investigations and Related Litigation
In 2011, we received a subpoena from the U.S. Attorney’s Office for the Northern District of California requesting documents related to the manufacture, quality and distribution practices of Complera, Atripla, Truvada, Viread, Emtriva, Hepsera and Letairis. We cooperated with the government’s inquiry. In 2014, the U.S. Department of Justice informed us that it had declined to intervene in a False Claims Act lawsuit filed by two former employees. In 2019, the District Court granted the Department of Justice’s motion to dismiss plaintiffs’ federal claims. In April 2020, plaintiffs refiled their California False Claims Act and California retaliation claims in the Superior Court of California, County of San Mateo. In July 2020, the California Attorney General declined to intervene in the case, and the state court complaint was unsealed. In September 2020, we filed a demurrer requesting that the Superior Court dismiss plaintiffs’ claims, and we expect the court to rule on our demurrer before the end of the year. Although we cannot predict the ultimate outcome of this lawsuit, we believe the action is without merit and we intend to vigorously defend against it.
In 2016, we received a subpoena from the U.S. Attorney’s Office for the District of Massachusetts requesting documents related to our support of 501(c)(3) organizations that provide financial assistance to patients and documents concerning our provision of financial assistance to patients for our HCV products. In 2020, the matter was resolved through settlement.
In 2017, we received a subpoena from the U.S. Attorney’s Office for the District of Massachusetts requesting documents related to our copay coupon program and Medicaid price reporting methodology. We cooperated with this inquiry, and in July 2020, the government notified us that it was closed.
In 2017, we received a voluntary request for information from the U.S. Attorney’s Office for the Eastern District of Pennsylvania requesting information related to our reimbursement support offerings, clinical education programs and interactions with specialty pharmacies for Sovaldi and Harvoni. In 2018, we received another voluntary request for information related to our speaker programs and advisory boards for our HCV and hepatitis B virus (“HBV”) products. We cooperated with these voluntary requests. In October 2019, the government informed us that, following an investigation, it declined to intervene in two False Claims Act lawsuits against us relating to HCV reimbursement support and clinical education programs and hepatitis B speaker programs and advisory boards, respectively. Notwithstanding the government’s declination, two plaintiffs have continued to pursue the lawsuit relating to HBV speaker programs and advisory boards and served us with the Second Amended Complaint in November 2019. Although we cannot predict the ultimate outcome of this lawsuit, we believe the action is without merit and we intend to vigorously defend against it.
In 2017, we received a subpoena from the California Department of Insurance and the Alameda County District Attorney’s Office requesting documents related to our marketing activities, reimbursement support offerings, clinical education programs and interactions with specialty pharmacies for Harvoni and Sovaldi. In August 2020, we were informed that the government had closed this matter.
In 2017, we also received a subpoena from the U.S. Attorney’s Office for the Southern District of New York requesting documents related to our promotional speaker programs for HIV. We are cooperating with this inquiry.
In April 2020, Health Choice Advocates, LLC (“Health Choice Advocates”) filed a qui tam lawsuit against us under seal in New Jersey state court alleging violations of the New Jersey False Claims Act through our clinical education programs for Sovaldi and Harvoni and our HCV and HIV patient access programs. In July 2020, the New Jersey Attorney General’s Office declined to intervene in the lawsuit and the complaint was unsealed. In May 2020, Health Choice Advocates filed a qui tam lawsuit under seal against us in Texas state court making similar allegations. In October 2020, the Texas Attorney General’s Office declined to intervene in the lawsuit and the complaint was unsealed. Health Choice Advocates previously filed a lawsuit making similar allegations in federal court in the Eastern District of Texas in June 2017 and the court entered an order dismissing that matter without prejudice in July 2018. Although we cannot predict the ultimate outcome of this lawsuit, we believe the action is without merit.
Product Liability
We have been named as a defendant in two class action lawsuits and various product liability lawsuits related to Viread, Truvada, Atripla, Complera and Stribild. Plaintiffs allege that Viread, Truvada, Atripla, Complera and/or Stribild caused them to experience kidney, bone and/or tooth injuries. The lawsuits, which are pending in state or federal court in California, Delaware, Florida, New Jersey and Missouri, involve more than 19,000 plaintiffs. Plaintiffs in these cases seek damages and other relief on various grounds for alleged personal injury and economic loss. We intend to vigorously defend ourselves in these actions. While we believe these cases are without merit, we cannot predict the ultimate outcome. If plaintiffs are successful in their claims, we could be required to pay significant monetary damages.
Antitrust and Consumer Protection
We (along with Japan Tobacco Inc. (“Japan Tobacco”), Bristol-Myers Squibb Company and Johnson & Johnson, Inc.) have been named as defendants in class action lawsuits filed in 2019 and 2020 related to various drugs used to treat HIV, including drugs used in combination antiretroviral therapy. Japan Tobacco was dismissed from the lawsuit after a favorable court ruling on the defendants’ motion to dismiss. Plaintiffs allege that we (and the other remaining defendants) engaged in various conduct to restrain competition in violation of federal and state antitrust laws and state consumer protection laws. The lawsuits, which have been or may be consolidated, are all pending in the U.S. District Court for the Northern District of California. The lawsuits seek to bring claims on behalf of two nationwide classes - one of direct purchasers consisting largely of wholesales, and another of end-payor purchasers, including health insurers and individual patients. Plaintiffs seek damages, permanent injunctive relief and other relief.
In September 2020, we along with generic manufacturers Cipla Ltd. and Cipla USA Inc. (“Cipla”) were named as defendants in a class action lawsuit filed by Jacksonville Police Officers and Fire Fighters Health Insurance Trust (“Jacksonville Trust”) on behalf of end-payor purchasers. Jacksonville Trust claims that the 2014 settlement agreement between us and Cipla, which settled a patent dispute relating to patents covering our Emtriva, Truvada, and Atripla products and permitted generic entry prior to patent expiry, violates certain federal and state antitrust and consumer protection laws.
While we believe these cases are without merit, we cannot predict the ultimate outcome. If plaintiffs are successful in their claims, we could be required to pay significant monetary damages or could be subject to permanent injunctive relief awarded in favor of plaintiffs.
Other Matters
We are a party to various legal actions that arose in the ordinary course of our business. We do not believe that these other legal actions will have a material adverse impact on our consolidated business, financial position or results of operations.
11. STOCKHOLDERS’ EQUITY
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.
In the first quarter of 2020, our Board of Directors authorized a new $5.0 billion stock repurchase program (“2020 Program”), which will commence upon the completion of the 2016 Program. Purchases under the 2020 Program may be made in the open market or in privately negotiated transactions.
During the three and nine months ended September 30, 2020, we repurchased and retired 3 million and 22 million shares of our common stock for $201 million and $1.6 billion, respectively, through open market transactions under the 2016 Program. During the three and nine months ended September 30, 2019, we repurchased and retired 3 million and 25 million shares of our common stock for $223 million and $1.6 billion, respectively, through open market transactions under the 2016 Program. As of September 30, 2020, the remaining authorized repurchase amount under both programs was $6.8 billion.
Accumulated Other Comprehensive Income
The following table summarizes the changes in AOCI by component, net of tax (in millions):
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation, Net of Tax
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|
Unrealized Gains and Losses on Available-for-Sale Debt Securities, Net of Tax
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|
Unrealized Gains and Losses on Cash Flow Hedges, Net of Tax
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Total
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Balance at December 31, 2019
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|
$
|
53
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|
|
$
|
1
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|
|
$
|
31
|
|
|
$
|
85
|
|
Net unrealized gain (loss)
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|
(12)
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|
|
42
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|
|
(25)
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|
|
5
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|
Reclassifications to net income
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|
—
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|
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(17)
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|
|
(50)
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|
|
(67)
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Net current period other comprehensive income (loss)
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|
(12)
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|
|
25
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|
|
(75)
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|
|
(62)
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|
Balance at September 30, 2020
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|
$
|
41
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|
|
$
|
26
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|
|
$
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(44)
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|
|
$
|
23
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|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation, Net of Tax
|
|
Unrealized Gains and Losses on Available-for-Sale Debt Securities, Net of Tax
|
|
Unrealized Gains and Losses on Cash Flow Hedges, Net of Tax
|
|
Total
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Balance at December 31, 2018
|
|
$
|
47
|
|
|
$
|
(52)
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|
|
$
|
85
|
|
|
$
|
80
|
|
Net unrealized gain (loss)
|
|
(19)
|
|
|
53
|
|
|
99
|
|
|
133
|
|
Reclassifications to net income
|
|
—
|
|
|
—
|
|
|
(96)
|
|
|
(96)
|
|
Net current period other comprehensive income (loss)
|
|
(19)
|
|
|
53
|
|
|
3
|
|
|
37
|
|
Balance at September 30, 2019
|
|
$
|
28
|
|
|
$
|
1
|
|
|
$
|
88
|
|
|
$
|
117
|
|
The amounts reclassified to net income for gains and losses on cash flow hedges are recorded as part of Product sales on our Condensed Consolidated Statements of Operations. See Note 5. Derivative Financial Instruments for additional information. The amounts reclassified to net income for gains and losses on available-for-sale debt securities are recorded as part of Other income (expense), net on our Condensed Consolidated Statements of Operations. Gross realized gains and losses on available-for-sale debt securities were not material for the nine months ended September 30, 2020 and 2019. The income tax impact allocated to each component of other comprehensive income (loss) was not material for the periods presented.
12. NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO GILEAD COMMON STOCKHOLDERS
Basic net income (loss) per share attributable to Gilead common stockholders is calculated based on the weighted average number of shares of our common stock outstanding during the period. Diluted net income (loss) per share attributable to Gilead common stockholders is calculated based on the weighted average number of shares of our common stock and other dilutive securities outstanding during the period. The potentially dilutive shares of our common stock resulting from the assumed exercise of outstanding stock options and equivalents were determined under the treasury stock method.
Potential shares of common stock excluded from the computation of diluted net income (loss) per share attributable to Gilead common stockholders because their effect would have been antidilutive were 13 million and 38 million for the three and nine months ended September 30, 2020, respectively, and 40 million and 14 million, for the three and nine months ended September 30, 2019, respectively.
The following table summarizes the calculation of basic and diluted net income (loss) per share attributable to Gilead common stockholders (in millions, except per share amounts):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Net income (loss) attributable to Gilead
|
|
$
|
360
|
|
|
$
|
(1,165)
|
|
|
$
|
(1,428)
|
|
|
$
|
2,690
|
|
Shares used in per share calculation - basic
|
|
1,255
|
|
|
1,267
|
|
|
1,257
|
|
|
1,271
|
|
Dilutive effect of stock options and equivalents
|
|
6
|
|
|
—
|
|
|
—
|
|
|
7
|
|
Shares used in per share calculation - diluted
|
|
1,261
|
|
|
1,267
|
|
|
1,257
|
|
|
1,278
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to Gilead common stockholders - basic
|
|
$
|
0.29
|
|
|
$
|
(0.92)
|
|
|
$
|
(1.14)
|
|
|
$
|
2.12
|
|
Net income (loss) per share attributable to Gilead common stockholders - diluted
|
|
$
|
0.29
|
|
|
$
|
(0.92)
|
|
|
$
|
(1.14)
|
|
|
$
|
2.10
|
|
13. INCOME TAXES
The following table summarizes our income tax expense (benefit) (in millions, except percentages):