Annual Reports

 
Quarterly Reports

  • 10-Q (Nov 7, 2017)
  • 10-Q (Aug 7, 2017)
  • 10-Q (May 10, 2017)
  • 10-Q (Nov 7, 2016)
  • 10-Q (Aug 5, 2016)
  • 10-Q (May 6, 2016)

 
8-K

 
Other

Gilead Sciences 10-Q 2017

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.1
Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
 
 
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2017
or 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________ to ________
Commission File No. 0-19731
 
 
GILEAD SCIENCES, INC.

(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
94-3047598
(State or Other Jurisdiction of
Incorporation or Organization)
(IRS Employer
Identification No.)
 
 
333 Lakeside Drive, Foster City, California
94404
(Address of principal executive offices)
(Zip Code)
650-574-3000
Registrant’s Telephone Number, Including Area Code
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ý    No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý Accelerated filer ¨ Non-accelerated filer ¨     (Do not check if a smaller reporting company)
Smaller reporting company ¨ Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No ý
Number of shares outstanding of the issuer’s common stock, par value $0.001 per share, as of April 28, 2017: 1,306,728,398
 




GILEAD SCIENCES, INC.
INDEX

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


We own or have rights to various trademarks, copyrights and trade names used in our business, including the following: GILEAD®, GILEAD SCIENCES®, AMBISOME®, CAYSTON®, COMPLERA®, DESCOVY®, EMTRIVA®, EPCLUSA®, EVIPLERA®, GENVOYA®, HARVONI®, HEPSERA®, LETAIRIS®, ODEFSEY®, RANEXA®, SOVALDI®, STRIBILD®, TRUVADA®, TYBOST®, VEMLIDY®, VIREAD®, VITEKTA®, VOLIBRIS® and ZYDELIG®. ATRIPLA® is a registered trademark of Bristol-Myers Squibb & Gilead Sciences, LLC. LEXISCAN® is a registered trademark of Astellas U.S. LLC. MACUGEN® is a registered trademark of Eyetech, Inc. SUSTIVA® is a registered trademark of Bristol-Myers Squibb Pharma Company. TAMIFLU® is a registered trademark of Hoffmann-La Roche Inc. This report also includes other trademarks, service marks and trade names of other companies.





PART I.
FINANCIAL INFORMATION
Item 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in millions, except per share amounts)
 
March 31, 2017
 
December 31, 2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
10,285

 
$
8,229

Short-term marketable securities
3,830

 
3,666

Accounts receivable, net of allowances of $557 at March 31, 2017 and $763 at December 31, 2016
4,034

 
4,514

Inventories
1,474

 
1,587

Prepaid and other current assets
1,801

 
1,592

Total current assets
21,424

 
19,588

Property, plant and equipment, net
2,922

 
2,865

Long-term deferred tax assets
1,208

 
1,259

Long-term marketable securities
19,902

 
20,485

Intangible assets, net
8,761

 
8,971

Goodwill
1,172

 
1,172

Other long-term assets
2,312

 
2,637

Total assets
$
57,701

 
$
56,977

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
944

 
$
1,206

Accrued government and other rebates
4,712

 
5,021

Other accrued liabilities
2,626

 
2,991

Total current liabilities
8,282

 
9,218

Long-term debt, net
26,321

 
26,346

Long-term income taxes payable
1,848

 
1,753

Other long-term obligations
333

 
297

Commitments and contingencies (Note 9)


 


Stockholders’ equity:
 

 
 

Preferred stock, par value $0.001 per share; 5 shares authorized; none outstanding

 

Common stock, par value $0.001 per share; shares authorized of 5,600 at March 31, 2017 and December 31, 2016; shares issued and outstanding of 1,307 at March 31, 2017 and 1,310 at December 31, 2016
1

 
1

Additional paid-in capital
616

 
454

Accumulated other comprehensive income
260

 
278

Retained earnings
19,564

 
18,154

Total Gilead stockholders’ equity
20,441

 
18,887

Noncontrolling interest
476

 
476

Total stockholders’ equity
20,917

 
19,363

Total liabilities and stockholders’ equity
$
57,701

 
$
56,977





See accompanying notes.

2



GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in millions, except per share amounts)
 
 
Three Months Ended
 
 
March 31,
 
 
2017
 
2016
Revenues:
 
 
 
 
Product sales
 
$
6,377

 
$
7,681

Royalty, contract and other revenues
 
128

 
113

Total revenues
 
6,505

 
7,794

Costs and expenses:
 
 
 
 
Cost of goods sold
 
957

 
1,193

Research and development expenses
 
931

 
1,265

Selling, general and administrative expenses
 
850

 
685

Total costs and expenses
 
2,738

 
3,143

Income from operations
 
3,767

 
4,651

Interest expense
 
(261
)
 
(230
)
Other income (expense), net
 
111

 
81

Income before provision for income taxes
 
3,617

 
4,502

Provision for income taxes
 
918

 
935

Net income
 
2,699

 
3,567

Net income (loss) attributable to noncontrolling interest
 
(3
)
 
1

Net income attributable to Gilead
 
$
2,702

 
$
3,566

Net income per share attributable to Gilead common stockholders - basic
 
$
2.07

 
$
2.58

Shares used in per share calculation - basic
 
1,308

 
1,383

Net income per share attributable to Gilead common stockholders - diluted
 
$
2.05

 
$
2.53

Shares used in per share calculation - diluted
 
1,320

 
1,412

Cash dividends declared per share
 
$
0.52

 
$
0.43























See accompanying notes.

3



GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(in millions)
 
 
Three Months Ended
 
 
March 31,
 
 
2017
 
2016
Net income
 
$
2,699

 
$
3,567

Other comprehensive income (loss):
 
 
 
 
Net foreign currency translation gains (losses), net of tax
 
(76
)
 
2

Available-for-sale securities:
 
 
 
 
Net unrealized gains (losses), net of tax impact of $2 and $30, respectively
 
184

 
(24
)
Reclassifications to net income, net of tax impact of $0 and $0, respectively
 
3

 

Net change
 
187

 
(24
)
Cash flow hedges:
 
 
 
 
Net unrealized losses, net of tax impact of $(7) and $(10), respectively
 
(87
)
 
(150
)
Reclassifications to net income, net of tax impact of $(1) and $(6), respectively
 
(42
)
 
(80
)
Net change
 
(129
)
 
(230
)
Other comprehensive loss
 
(18
)
 
(252
)
Comprehensive income
 
2,681

 
3,315

Comprehensive income (loss) attributable to noncontrolling interest
 
(3
)
 
1

Comprehensive income attributable to Gilead
 
$
2,684

 
$
3,314
































See accompanying notes.

4



GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in millions)
 
 
Three Months Ended
 
 
March 31,
 
 
2017
 
2016
Operating Activities:
 
 
 
 
Net income
 
$
2,699

 
$
3,567

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation expense
 
49

 
42

Amortization expense
 
245

 
241

Stock-based compensation expense
 
89

 
88

Deferred income taxes
 
58

 
15

In-process research and development impairment
 

 
114

Other
 
39

 
68

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable, net
 
537

 
(191
)
Inventories
 
(5
)
 
(14
)
Prepaid expenses and other
 
177

 
(126
)
Accounts payable
 
(262
)
 
(239
)
Income taxes payable
 
(24
)
 
205

Accrued liabilities
 
(677
)
 
360

Net cash provided by operating activities
 
2,925

 
4,130

 
 
 
 
 
Investing Activities:
 
 
 
 
Purchases of marketable securities
 
(3,482
)
 
(4,977
)
Proceeds from sales of marketable securities
 
3,173

 
2,959

Proceeds from maturities of marketable securities
 
734

 
443

Other investments
 

 
(357
)
Capital expenditures
 
(118
)
 
(177
)
Net cash provided by (used in) investing activities
 
307

 
(2,109
)
 
 
 
 
 
Financing Activities:
 
 
 
 
Proceeds from convertible note hedges
 

 
95

Proceeds from issuances of common stock
 
96

 
92

Repurchases of common stock
 
(565
)
 
(8,000
)
Repayments of debt and other obligations
 
(30
)
 
(126
)
Payments of dividends
 
(687
)
 
(587
)
Other
 
(58
)
 
(87
)
Net cash used in financing activities
 
(1,244
)
 
(8,613
)
Effect of exchange rate changes on cash and cash equivalents
 
68

 
56

Net change in cash and cash equivalents
 
2,056

 
(6,536
)
Cash and cash equivalents at beginning of period
 
8,229

 
12,851

Cash and cash equivalents at end of period
 
$
10,285

 
$
6,315





See accompanying notes.

5



GILEAD SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. The financial statements include all adjustments, consisting of normal recurring adjustments that the management of Gilead Sciences, Inc. (Gilead, we 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 or loss attributable to noncontrolling interest in our Condensed Consolidated Statements of Income equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties.
We assess whether we are the primary beneficiary of a variable interest entity (VIE) at the inception of the arrangement and at each reporting date. This assessment is based on our power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and our obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. As of March 31, 2017, the only material VIE was our joint venture with Bristol-Myers Squibb Company (BMS) which is described in Note 7, Collaborative Arrangements.
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, 2016, included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission.
Significant Accounting Policies, Estimates and Judgments
The preparation of these Condensed Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. On an ongoing basis, we evaluate our significant accounting policies and estimates. We base our estimates on historical experience and on various market specific and other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates are assessed each period and updated to reflect current information. Actual results may differ significantly from these estimates.
Concentrations of Risk
We are subject to credit risk from our portfolio of cash, cash equivalents and marketable securities. Under our investment policy, we limit amounts invested in such securities by credit rating, maturity, industry group, investment type and issuer, except for securities issued by the U.S. government. We are not exposed to any significant concentrations of credit risk from these financial instruments. The goals of our investment policy, in order of priority, are as follows: safety and preservation of principal and diversification of risk, liquidity of investments sufficient to meet cash flow requirements and a competitive after-tax rate of return.
We are also subject to credit risk from our accounts receivable related to our product sales. The majority of our trade accounts receivable arises from product sales in the United States, Europe and Japan. To date, we have not experienced significant losses with respect to the collection of our accounts receivable. We believe that our allowance for doubtful accounts was adequate at March 31, 2017.
Recently Adopted Accounting Pronouncements
In November 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2015-17 (ASU 2015-17) “Balance Sheet Classification of Deferred Taxes.”  We adopted this standard on a retrospective basis in the first quarter of 2017. ASU 2015-17 requires that deferred tax assets and liabilities be classified as noncurrent on the balance sheet. As a result, our Condensed Consolidated Balance Sheets as of December 31, 2016 was retrospectively adjusted, resulting in a reduction in Total current assets of $857 million and an increase in Long-term deferred tax assets of $857 million. The resulting reclassification of our deferred tax liabilities was not material.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09 (ASU 2016-09) “Improvements to Employee Share-Based Payment Accounting.” We adopted this standard in the first quarter of 2017. One aspect of the standard requires that

6



excess tax benefits and deficiencies that arise upon vesting or exercise of share-based awards be recognized in the income statement, on a prospective basis. Under previous guidance, the tax effects were recorded in additional paid-in capital. As a result, we recognized $20 million of excess tax benefits in Provision for income taxes on our Condensed Consolidated Statements of Income for the three months ended March 31, 2017. The resulting impact to the shares used in the calculation of diluted earnings per share for the three months ended March 31, 2017 was not material. Additionally, as allowed by the standard, we elected to continue to estimate potential forfeitures.
Another aspect of ASU 2016-09 amends the presentation of certain share-based payment items on the statement of cash flows, which we adopted on a retrospective basis. As a result, our Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2016 was adjusted to (a) reclassify $89 million of excess tax benefits from stock-based compensation from Net cash used in financing activities to Net cash provided by operating activities and (b) reclassify $128 million of employee taxes paid to tax authorities when we withheld shares to meet the minimum statutory withholding requirement from changes in Accrued liabilities within Net cash provided by operating activities to Other within Net cash used in financing activities.
Recently Issued Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09) “Revenue from Contracts with Customers.” The standard’s core principle is that a reporting entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard will become effective for us beginning in the first quarter of 2018. Early adoption is permitted in 2017. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt this new guidance. The FASB issued supplemental adoption guidance and clarification to ASU 2014-09 in March 2016, April 2016, May 2016 and December 2016 within ASU 2016-08 “Revenue from Contracts with Customers: Principal vs. Agent Considerations,” ASU 2016-10 “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing,” ASU 2016-12 “Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients” and ASU 2016-20 “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” respectively. We expect to adopt these standards using the modified retrospective approach. The cumulative effect of adopting these standards will be recorded to retained earnings on January 1, 2018. We have completed our initial assessment of the effect of adoption. Based on this assessment, we expect changes in our revenue recognition policy relating to royalty revenues and certain other revenues that are currently recognized on a cash basis or sell through method. Upon adoption of these standards, these revenues will be recognized in the periods in which the sales occur, subject to the constraint on variable consideration. We currently do not expect that adopting these standards will have a material impact on our Condensed Consolidated Financial Statements.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01(ASU 2016-01) “Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 changes accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. In addition, it clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The guidance will become effective for us beginning in the first quarter of 2018 and must be adopted using a modified retrospective approach, with certain exceptions. Early adoption is permitted for certain provisions. We are evaluating the impact of the adoption of this standard on our Condensed Consolidated Financial Statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02) “Leases.” ASU 2016-02 amends a number of aspects of lease accounting, including requiring lessees to recognize almost all leases with a term greater than one year as a right-of-use asset and corresponding liability, measured at the present value of the lease payments. The guidance will become effective for us beginning in the first quarter of 2019 and is required to be adopted using a modified retrospective approach. Early adoption is permitted. We are evaluating the impact of the adoption of this standard, and we anticipate recognition of additional assets and corresponding liabilities related to leases on our Condensed Consolidated Balance Sheets.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13 (ASU 2016-13) “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires measurement and recognition of expected credit losses for financial assets. This guidance will become effective for us beginning in the first quarter of 2020 and must be adopted using a modified retrospective approach, with certain exceptions. Early adoption is permitted beginning in the first quarter of 2019. We are evaluating the impact of the adoption of this standard on our Condensed Consolidated Financial Statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-01 (ASU 2017-01) “Clarifying the Definition of a Business.” ASU 2017-01 clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. This guidance will become effective for us beginning in the first quarter of 2018 and is required to be adopted on a prospective basis. Early adoption is permitted. We are evaluating the impact of the adoption of this standard on our Condensed Consolidated Financial Statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04 (ASU 2017-04) “Simplifying the Test for Goodwill Impairment.” ASU 2017-04 simplifies the goodwill impairment test. Under the new guidance, goodwill impairment will be measured by the amount by which the carrying value of a reporting unit exceeds its fair value, without exceeding the carrying

7



amount of goodwill allocated to that reporting unit. This guidance will be effective for us beginning in the first quarter of 2020 and is required to be adopted on a prospective basis. Early adoption is permitted. We currently do not expect that adopting this standard will have a material impact on our Condensed Consolidated Financial Statements.
In February 2017, the FASB issued Accounting Standards Update No. 2017-05 (ASU 2017-05) “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets.” ASU 2017-05 clarifies the scope of the derecognition of nonfinancial assets, defines in substance financial assets, adds guidance for partial sales of nonfinancial assets and clarifies the recognition of gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. This guidance will become effective for us beginning in the first quarter of 2018 and may be adopted using either a full retrospective or a modified retrospective approach. Early adoption is permitted. We are required to adopt the amendments in this standard at the same time that we adopt the amendments in ASU 2014-09. We are evaluating the impact of the adoption of this standard on our Condensed Consolidated Financial Statements.
2.
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 which include quoted prices in active markets for identical assets or liabilities;
Level 2 inputs which 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 which include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability. Our Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques and significant management judgment or estimation.
Our financial instruments consist primarily of cash and cash equivalents, marketable securities, accounts receivable, foreign currency exchange contracts, equity securities, accounts payable and short-term and long-term debt. Cash and cash equivalents, marketable securities, foreign currency exchange contracts and equity securities are reported at their respective fair values on our Condensed Consolidated Balance Sheets. Short-term and long-term debt are reported at their amortized costs on our Condensed Consolidated Balance Sheets. The remaining financial instruments are reported on our Condensed Consolidated Balance Sheets at amounts that approximate current fair values. There were no transfers between Level 1, Level 2 and Level 3 in the periods presented.

8



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):
 
March 31, 2017
 
December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
$

 
$
12,583

 
$

 
$
12,583

 
$

 
$
12,603

 
$

 
$
12,603

U.S. treasury securities
5,164

 

 

 
5,164

 
5,529

 

 

 
5,529

Money market funds
7,795

 

 

 
7,795

 
5,464

 

 

 
5,464

Residential mortgage and asset-backed securities

 
3,522

 

 
3,522

 

 
3,602

 

 
3,602

U.S. government agencies securities

 
1,002

 

 
1,002

 

 
975

 

 
975

Certificates of deposit

 
985

 

 
985

 

 
943

 

 
943

Non-U.S. government securities

 
721

 

 
721

 

 
720

 

 
720

Municipal debt securities

 
22

 

 
22

 

 
27

 

 
27

Equity securities
593

 

 
 
 
593

 
428

 

 

 
428

Foreign currency derivative contracts

 
167

 

 
167

 

 
336

 

 
336

Deferred compensation plan
96

 

 

 
96

 
84

 

 

 
84

Total
$
13,648

 
$
19,002

 
$

 
$
32,650

 
$
11,505

 
$
19,206

 
$

 
$
30,711

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Deferred compensation plan
$
96

 
$

 
$

 
$
96

 
$
84

 
$

 
$

 
$
84

Foreign currency derivative contracts

 
17

 

 
17

 

 
37

 

 
37

Contingent consideration

 

 
25

 
25

 

 

 
25

 
25

Total
$
96

 
$
17

 
$
25

 
$
138

 
$
84

 
$
37

 
$
25

 
$
146

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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- and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities, issuer credit spreads, benchmark securities, prepayment/default projections based on historical data and other observable inputs.
Substantially all of our foreign currency derivative contracts have maturities within an 18-month time horizon and all are with counterparties that have a minimum credit rating of A- or equivalent by Standard & Poor’s Ratings Services, Moody’s Investors Service, Inc. or Fitch, Inc. We estimate the fair values of these contracts by taking into consideration valuations obtained from a third-party valuation service that utilizes an income-based industry standard valuation model for which all significant inputs are observable, either directly or indirectly. These inputs include foreign currency exchange rates, London Interbank Offered Rates (LIBOR) and swap rates. These inputs, where applicable, are at commonly quoted intervals.
The total estimated fair values of our short-term and long-term debt, determined using Level 2 inputs based on their quoted market values, were approximately $26.9 billion and $27.0 billion at March 31, 2017 and December 31, 2016, respectively, and the carrying values were $26.3 billion at March 31, 2017 and December 31, 2016.
Level 3 Inputs
As of March 31, 2017 and December 31, 2016, the only assets or liabilities that were measured using Level 3 inputs on a recurring basis were our contingent consideration liabilities, which were immaterial.
Our policy is to recognize transfers into or out of Level 3 classification as of the actual date of the event or change in circumstances that caused the transfer.

9



3.
AVAILABLE-FOR-SALE SECURITIES
Estimated fair values of available-for-sale securities are generally based on prices obtained from commercial pricing services. The following table summarizes our available-for-sale securities (in millions):
 
 
March 31, 2017
 
December 31, 2016
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value 
Corporate debt securities
 
$
12,619

 
$
10

 
$
(46
)
 
$
12,583

 
$
12,657

 
$
7

 
$
(61
)
 
$
12,603

U.S. treasury securities
 
5,190

 
1

 
(27
)
 
5,164

 
5,558

 
1

 
(30
)
 
5,529

Money market funds
 
7,795

 

 

 
7,795

 
5,464

 

 

 
5,464

Residential mortgage and asset-backed securities
 
3,534

 
1

 
(13
)
 
3,522

 
3,613

 
2

 
(13
)
 
3,602

U.S. government agencies securities
 
1,008

 

 
(6
)
 
1,002

 
981

 

 
(6
)
 
975

Certificates of deposit
 
985

 

 

 
985

 
943

 

 

 
943

Non-U.S. government securities
 
726

 

 
(5
)
 
721

 
725

 

 
(5
)
 
720

Municipal debt securities
 
22

 

 

 
22

 
27

 

 

 
27

Equity securities
 
357

 
236

 

 
593

 
357

 
71

 

 
428

Total
 
$
32,236

 
$
248

 
$
(97
)
 
$
32,387

 
$
30,325

 
$
81

 
$
(115
)
 
$
30,291

The following table summarizes the classification of our available-for-sale securities on our Condensed Consolidated Balance Sheets (in millions):
 
 
March 31, 2017
 
December 31, 2016
Cash and cash equivalents
 
$
8,062

 
$
5,712

Short-term marketable securities
 
3,830

 
3,666

Prepaid and other current assets
 
593

 

Long-term marketable securities
 
19,902

 
20,485

Other long-term assets
 

 
428

Total
 
$
32,387

 
$
30,291

Cash and cash equivalents in the table above excludes cash of $2.2 billion and $2.5 billion as of March 31, 2017 and December 31, 2016, respectively.
The following table summarizes our available-for-sale securities by contractual maturity (in millions):
 
 
March 31, 2017
 
 
Amortized Cost
 
Fair Value
Within one year
 
$
11,893

 
$
11,892

After one year through five years
 
19,303

 
19,225

After five years through ten years
 
577

 
571

After ten years
 
106

 
106

Total
 
$
31,879

 
$
31,794


10



The following table summarizes our available-for-sale securities that were in a continuous unrealized loss position but were not deemed to be other-than-temporarily impaired (in millions):
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
 
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
 
$
(46
)
 
$
7,630

 
$

 
$
77

 
$
(46
)
 
$
7,707

U.S. treasury securities
 
(27
)
 
4,542

 

 

 
(27
)
 
4,542

Residential mortgage and asset-backed securities
 
(13
)
 
2,761

 

 
25

 
(13
)
 
2,786

U.S. government agencies securities
 
(6
)
 
978

 

 

 
(6
)
 
978

Non-U.S. government securities
 
(5
)
 
712

 

 
5

 
(5
)
 
717

Municipal debt securities
 

 
11

 

 

 

 
11

Total
 
$
(97
)
 
$
16,634

 
$

 
$
107

 
$
(97
)
 
$
16,741

 
 
 

 
 

 
 

 
 

 
 

 
 

December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
 
$
(60
)
 
$
8,685

 
$
(1
)
 
$
155

 
$
(61
)
 
$
8,840

U.S. treasury securities
 
(30
)
 
5,081

 

 

 
(30
)
 
5,081

Residential mortgage and asset-backed securities
 
(13
)
 
2,180

 

 
42

 
(13
)
 
2,222

U.S. government agencies securities
 
(6
)
 
897

 

 

 
(6
)
 
897

Non-U.S. government securities
 
(5
)
 
714

 

 
5

 
(5
)
 
719

Certificates of deposit
 

 
15

 

 

 

 
15

Municipal debt securities
 

 
11

 

 

 

 
11

Total
 
$
(114
)
 
$
17,583

 
$
(1
)
 
$
202

 
$
(115
)
 
$
17,785

We held a total of 2,375 and 2,709 positions as of March 31, 2017 and December 31, 2016, respectively, related to our debt securities that were in an unrealized loss position.
Based on our review of our available-for-sale securities, we believe we had no other-than-temporary impairments on these securities as of March 31, 2017 and December 31, 2016, because we do not intend to sell these securities nor do we believe that we will be required to sell these securities before the recovery of their amortized cost basis. Gross realized gains and gross realized losses were immaterial for the three months ended March 31, 2017 and 2016.
4.
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, the most significant of which are the Euro and Yen. In order to manage this risk, we may hedge a portion of our foreign currency exposures related to outstanding monetary assets and liabilities as well as forecasted product sales using foreign currency exchange forward or option contracts. In general, the market risk related to these contracts is offset by corresponding gains and losses on the hedged transactions. The credit risk associated with these contracts is driven by changes in interest and currency exchange rates and, as a result, varies over time. By working only with major banks and closely monitoring current market conditions, we seek to limit the risk that counterparties to these contracts may be unable to perform. We also seek to limit our risk of loss by entering into contracts that permit net settlement at maturity. Therefore, our overall risk of loss in the event of a counterparty default is limited to the amount of any unrecognized gains on outstanding contracts (i.e., those contracts that have a positive fair value) at the date of default. We do not enter into derivative contracts for trading purposes.
We hedge our exposure to foreign currency exchange rate fluctuations for certain monetary assets and liabilities of our entities that are denominated in a non-functional currency. The derivative instruments we use to hedge this exposure are not designated as hedges and, as a result, changes in their fair value are recorded in Other income (expense), net, on our Condensed Consolidated Statements of Income.
We hedge our exposure to foreign currency exchange rate fluctuations for forecasted product sales that are denominated in a non-functional currency. The derivative instruments we use to hedge this exposure are designated as cash flow hedges and have maturity dates of 18 months or less. Upon executing a hedging contract and quarterly thereafter, we assess prospective hedge effectiveness using regression analysis which calculates the change in cash flow as a result of the hedge instrument. On a quarterly basis, we assess retrospective hedge effectiveness using a dollar offset approach. We exclude time value from our effectiveness testing and recognize changes in the time value of the hedge in Other income (expense), net, on our Condensed Consolidated

11



Statements of Income. The effective component of our hedge is recorded as an unrealized gain or loss on the hedging instrument in Accumulated other comprehensive income (AOCI) within Stockholders’ equity on our Condensed Consolidated Balance Sheets and the gains or losses are reclassified into product sales when the hedged transactions affect earnings. The majority of gains and losses related to the hedged forecasted transactions reported in AOCI at March 31, 2017 are expected to be reclassified to product sales within 12 months.
The cash flow effects of our derivative contracts for the three months ended March 31, 2017 and 2016 are included within Net cash provided by operating activities on our Condensed Consolidated Statements of Cash Flows.
We had notional amounts on foreign currency exchange contracts outstanding of $5.1 billion and $6.2 billion at March 31, 2017 and December 31, 2016, respectively.
While all of our derivative contracts allow us the right to offset assets and liabilities, we have presented amounts on a gross basis. Under the International Swap Dealers Association, Inc. master agreements with the respective counterparties of the foreign currency exchange contracts, subject to applicable requirements, we are allowed to net settle transactions of the same currency with a single net amount payable by one party to the other. The following table summarizes the classification and fair values of derivative instruments on our Condensed Consolidated Balance Sheets (in millions):
 
 
March 31, 2017
 
 
Asset Derivatives
 
Liability Derivatives
 
 
Classification
 
Fair Value 
 
Classification
 
Fair Value
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
Other current assets
 
$
107

 
Other accrued liabilities
 
$
(7
)
Foreign currency exchange contracts
 
Other long-term assets
 
1

 
Other long-term obligations
 
(3
)
Total derivatives designated as hedges
 
 
 
108

 
 
 
(10
)
Derivatives not designated as hedges:
 
 
 
 

 
 
 
 

Foreign currency exchange contracts
 
Other current assets
 
59

 
Other accrued liabilities
 
(7
)
Total derivatives not designated as hedges
 
 
 
59

 
 
 
(7
)
Total derivatives
 
 
 
$
167

 
 
 
$
(17
)
 
 
December 31, 2016
 
 
Asset Derivatives
 
Liability Derivatives
 
 
Classification
 
Fair Value
 
Classification
 
Fair Value
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
Other current assets
 
$
225

 
Other accrued liabilities
 
$
(1
)
Foreign currency exchange contracts
 
Other long-term assets
 
20

 
Other long-term obligations
 

Total derivatives designated as hedges
 
 
 
245

 
 
 
(1
)
Derivatives not designated as hedges:
 
 
 
 

 
 
 
 

Foreign currency exchange contracts
 
Other current assets
 
81

 
Other accrued liabilities
 
(34
)
Foreign currency exchange contracts
 
Other long-term assets
 
10

 
Other long-term obligations
 
(2
)
Total derivatives not designated as hedges
 
 
 
91

 
 
 
(36
)
Total derivatives
 
 
 
$
336

 
 
 
$
(37
)

12



The following table summarizes the effect of our foreign currency exchange contracts on our Condensed Consolidated Financial Statements (in millions):
 
 
Three Months Ended
 
 
March 31,
 
 
2017
 
2016
Derivatives designated as hedges:
 
 
 
 
Losses recognized in AOCI (effective portion)
 
$
(94
)
 
$
(160
)
Gains reclassified from AOCI into product sales (effective portion)
 
$
43

 
$
86

Gains recognized in Other income (expense), net (ineffective portion and amounts excluded from effectiveness testing)
 
$
13

 
$
14

Derivatives not designated as hedges:
 
 
 
 
Losses recognized in Other income (expense), net
 
$
(135
)
 
$
(151
)
From time to time, we may discontinue cash flow hedges and, as a result, record related amounts in Other income (expense), net, on our Condensed Consolidated Statements of Income. There were no material amounts recorded in Other income (expense), net, for the three months ended March 31, 2017 and 2016 as a result of the discontinuance of cash flow hedges.
As of March 31, 2017 and December 31, 2016, we held one type of financial instrument, derivative contracts related to foreign currency exchange contracts. The following table summarizes the potential effect of offsetting derivatives by type of financial instrument on our Condensed Consolidated Balance Sheets (in millions):
 
 
 
 
 
 
 
 
Gross Amounts Not Offset
on our Condensed
Consolidated Balance Sheets
 
 
Description
 
Gross Amounts
 of Recognized
Assets/Liabilities
 
Gross Amounts
 Offset on our
Condensed
Consolidated
Balance Sheets
 
Amounts of Assets/Liabilities Presented
 on our Condensed Consolidated
Balance Sheets
 
Derivative
Financial
Instruments
 
Cash Collateral
Received/
Pledged
 
Net Amount
 (Legal Offset)
As of March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
 
$
167

 
$

 
$
167

 
$
(17
)
 
$

 
$
150

Derivative liabilities
 
(17
)
 

 
(17
)
 
17

 

 

As of December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
 
$
336

 
$

 
$
336

 
$
(37
)
 
$

 
$
299

Derivative liabilities
 
(37
)
 

 
(37
)
 
37

 

 

5.
OTHER FINANCIAL INFORMATION
Inventories
Inventories are summarized as follows (in millions):
 
 
March 31, 2017
 
December 31, 2016
Raw materials
 
$
1,470

 
$
1,610

Work in process
 
836

 
626

Finished goods
 
859

 
928

Total
 
$
3,165

 
$
3,164

 
 
 
 
 
Reported as:
 
 
 
 
Inventories
 
$
1,474

 
$
1,587

Other long-term assets
 
1,691

 
1,577

Total
 
$
3,165

 
$
3,164

Amounts reported as other long-term assets primarily consisted of raw materials as of March 31, 2017 and December 31, 2016.
The joint ventures formed by Gilead Sciences, LLC and BMS, which are included on our Condensed Consolidated Financial Statements and described in Note 7, Collaborative Arrangements, held efavirenz active pharmaceutical ingredient in inventory.

13



This efavirenz inventory was purchased from BMS at BMS’s estimated net selling price of efavirenz and totaled $1.1 billion as of March 31, 2017 and December 31, 2016.
Other accrued liabilities
The components of Other accrued liabilities are summarized as follows (in millions):
 
 
March 31, 2017
 
December 31, 2016
Branded prescription drug fee
 
$
548

 
$
481

Deferred revenues
 
245

 
202