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Gilead Sciences DEF 14A 2013
Definitive Proxy Statement
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

(Rule 14a-101)

Schedule 14A Information

Proxy Statement Pursuant to Section 14(a) of

the Securities Exchange Act of 1934

Filed by the Registrant  x    Filed by a Party other than the Registrant  ¨

Check the appropriate box:

 

¨

   Preliminary Proxy Statement

¨

   Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

x

   Definitive Proxy Statement

¨

   Definitive Additional Materials

¨

   Soliciting Material Pursuant to §240.14a-12

GILEAD SCIENCES, INC.

 

(Name of Registrant as Specified In Its Charter)

 

 

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

 

x No fee required.

 

¨ Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

  (1) Title of each class of securities to which transaction applies:

 

 

  (2) Aggregate number of securities to which transaction applies:

 

 

  (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

 

  (4) Proposed maximum aggregate value of transaction:

 

 

  (5) Total fee paid:

 

 

¨ Fee paid previously with preliminary materials.

 

 

¨ Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

  (1) Amount Previously Paid:

 

 

  (2) Form, Schedule or Registration Statement No.:

 

 

  (3) Filing Party:

 

 

  (4) Date Filed:

 

 


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LOGO

To our stockholders:

We are pleased to invite you to attend the 2013 annual meeting of stockholders of Gilead Sciences, Inc., to be held on Wednesday, May 8, 2013 at 10:00 a.m. local time at the Westin San Francisco Airport, 1 Old Bayshore Highway, Millbrae, California.

Details regarding admission to the meeting and the business to be conducted are more fully described in the Notice of Annual Meeting of Stockholders and Proxy Statement.

Your vote is very important. Whether or not you attend the annual meeting, we hope you will vote as soon as possible. There are three ways that you can cast your ballot – by telephone, by Internet or by mailing the proxy card (if you request one). Please review the instructions included in the Proxy Statement.

Thank you for your ongoing support of and continued interest in Gilead Sciences, Inc. We look forward to seeing you at the annual meeting.

Sincerely,

 

LOGO

John C. Martin

Chairman and Chief Executive Officer

March 20, 2013


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GILEAD SCIENCES, INC.

333 Lakeside Drive

Foster City, California 94404

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 8, 2013

TO THE STOCKHOLDERS OF GILEAD SCIENCES, INC.:

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Gilead Sciences, Inc., a Delaware corporation (“Gilead”), will be held on Wednesday, May 8, 2013 at 10:00 a.m. local time at the Westin San Francisco Airport, 1 Old Bayshore Highway, Millbrae, California 94030 for the following purposes:

1. To elect ten directors to serve for the next year and until their successors are elected and qualified.

2. To ratify the selection of Ernst & Young LLP by the Audit Committee of the Board of Directors as the independent registered public accounting firm of Gilead for the fiscal year ending December 31, 2013.

3. To approve a restatement of Gilead Sciences, Inc.’s 2004 Equity Incentive Plan.

4. To approve an amendment to Gilead’s Restated Certificate of Incorporation to increase the authorized number of shares of Gilead’s common stock from 2,800,000,000 to 5,600,000,000 shares.

5. To approve, on an advisory basis, the compensation of our named executive officers as presented in the Proxy Statement.

6. To vote on a stockholder proposal requesting that the Board adopt a policy that the Chairman of the Board of Directors be an independent director, if properly presented at the meeting.

7. To vote on a stockholder proposal requesting that the Board take steps to permit stockholder action by written consent, if properly presented at the meeting.

8. To transact such other business as may properly come before the meeting or any adjournment or postponement thereof.

The foregoing items of business are more fully described in the Proxy Statement accompanying this Notice.

The Board of Directors has fixed the close of business on March 13, 2013 as the record date for the determination of stockholders entitled to notice of and to vote at this Annual Meeting of Stockholders and at any adjournment or postponement thereof.

 

By Order of the Board of Directors,
LOGO
Gregg H. Alton
Secretary

Foster City, California

March 20, 2013

All stockholders are invited to attend the meeting in person. Whether or not you expect to attend the meeting, please grant a proxy to vote by telephone or the Internet or complete, date, sign and return the proxy card mailed to you (if you request one) as promptly as possible in order to ensure your representation at the meeting. Even if you have given your proxy, you may still vote in person if you attend the meeting. Please note, however, that if your shares are held of record by a broker, bank or other nominee and you wish to vote at the meeting, you must bring to the meeting a letter from the broker, bank or other nominee confirming your beneficial ownership of the shares and a proxy issued in your name from the record holder.


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Table of Contents

 

     Page No.  

INTRODUCTION

     1   

QUESTIONS AND ANSWERS

     5   

PROPOSAL 1 Election of Directors

     11   

Nominees

     12   

Directors Not Standing for Re-election

     15   

Board Composition, Leadership, Committees and Meetings

     15   

Committees of our Board of Directors

     18   

Executive Officers

     21   

PROPOSAL 2 Ratification of the Selection of Independent Registered Public Accounting Firm

     23   

Principal Accountant Fees and Services

     23   

Pre-Approval Policy and Procedures

     24   

PROPOSAL 3 Approval of a Restatement of Gilead Sciences, Inc.’s 2004 Equity Incentive Plan

     25   

PROPOSAL 4 Approval of an Amendment to Gilead’s Restated Certificate of Incorporation

     43   

PROPOSAL 5 Advisory Vote on Executive Compensation

     45   

PROPOSAL 6 Stockholder Proposal Requesting that the Board Adopt a Policy that the Chairman of the Board of Directors be an Independent Director

     47   

PROPOSAL 7 Stockholder Proposal Requesting that the Board Take Steps to Permit Stockholder Action By Written consent

     50   

EXECUTIVE COMPENSATION

     52   

Compensation Discussion and Analysis

     52   

Compensation Committee Report

     72   

Risk Assessment of Compensation Programs

     73   

Summary Compensation Table

     75   

2012 Grants of Plan-Based Awards

     76   

2012 Outstanding Equity Awards at Fiscal Year-End

     78   

2012 Option Exercises and Stock Vested

     81   

2012 Nonqualified Deferred Compensation

     81   

Employment Agreements, Severance and Change in Control Arrangements with Named Executive Officers

     83   

2012 Potential Payments Upon Involuntary Termination or Change in Control Termination

     86   

COMPENSATION OF NON-EMPLOYEE BOARD MEMBERS

     88   

General

     88   

2012 Non-Employee Board Member Compensation

     88   

2012 Director Compensation

     90   

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

     92   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     93   

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     95   

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     95   

AUDIT COMMITTEE REPORT

     96   

CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS

     97   

Indemnity Agreements

     97   

Policies and Procedures

     97   

HOUSEHOLDING OF PROXY MATERIALS

     98   

APPENDIX A: GILEAD SCIENCES, INC. 2004 EQUITY INCENTIVE PLAN

     A-1   

 

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INTRODUCTION

The Annual Meeting and this Proxy Statement provide an important opportunity for us to communicate with you about the achievements of the past year and our stewardship of Gilead. Your vote is important to us. At the Annual Meeting, in addition to the election of directors, you will have the opportunity to vote on four management and two stockholder proposals. As you consider your votes, we ask that you carefully review the information in this Proxy Statement. We summarize below key aspects of our performance, executive compensation and corporate governance to assist you as you review the more detailed information herein.

Performance Highlights

 

   

Strong financial performance. We are pleased to report that Gilead had outstanding financial performance, exceeding our objectives for 2012, with total revenues growing 16% to $9.70 billion and product sales also increasing 16% to $9.40 billion. In addition to the sales generated by our antiviral business, sales of products from our other therapeutic areas surpassed $1.26 billion in annual revenue, which represents an increase of 19%, compared to 2011.

 

   

Strong operational performance. Our 2012 operational performance met or exceeded our objectives. We continued to capitalize on opportunities to enhance our business and position us for further future growth. Achievements include:

 

   

completing the acquisition of Pharmasset, Inc. and accelerating our timeline to develop the first all-oral regimen for the treatment of hepatitis C infection, including the initiation of our first Phase 3 study of a single tablet regimen of sofosbuvir (formerly known as GS-7977) and ledipasvir (formerly known as GS-5885);

 

   

successfully launching our second single tablet regimen for the treatment of HIV, Complera®, in the United States and Canada and Eviplera® in 19 European countries;

 

   

expanding our research and development pipeline with over 50 active Phase 3 clinical studies at the end of 2012;

 

   

obtaining U.S. Food and Drug Administration approval for and launching Stribild®, our third single tablet regimen for the treatment of HIV in the United States;

 

   

submitting U.S. and E.U. marketing applications for elvitegravir, an oral integrase inhibitor for the treatment of HIV-1 infection in treatment-experienced adults, and cobicistat, a pharmacoenhancing or “boosting” agent that increases blood levels to allow once-daily dosing of certain HIV medicines; and

 

   

expanding our growing oncology/inflammation pipeline, with the announced acquisition of YM BioSciences Inc., which closed in February 2013.

 

   

Strong stockholder returns. Our strong financial and operational performance has benefitted our stockholders. We are particularly pleased to report that we have achieved total shareholder return of 80% this year, significantly outperforming our peers. In addition, our three-year TSR increased 19% on a compound annual growth basis, which also places us at the forefront of our peers.

Compensation Highlights

 

   

Pay and performance alignment. Our executive compensation programs are designed to directly link pay with performance, creating appropriate incentives for our Named Executive Officers to take actions that ultimately increase the value of Gilead and shareholder returns. Performance-based compensation, particularly long-term equity incentive awards, has historically been the largest component of our total direct compensation opportunities for our executive officers. The efforts of our executive officers to deliver against long-term business strategy contributed significantly to our operational and financial achievements in 2011 and more dramatically in 2012, which drove the significant stock price and TSR appreciation described above.

 

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Equity compensation comprises 71% of target compensation. Over the past three years, the actual compensation mix for the Named Executive Officers has been awarded in the form of approximately 14% base salary, 15% annual bonus opportunity and 71% equity awards (based on grant-date fair value). We believe this mix is appropriate because the Named Executive Officers should focus their efforts on long-term corporate results. By aligning the majority of their compensation with Gilead’s performance, the Named Executive Officers realize less value from this pay component when we do not perform well and more value from this pay component when we do perform well.

 

   

Equity compensation is performance-based: Because our equity compensation is delivered entirely in the form of performance-based shares and stock options, 100% of the value realized by an executive officer from his or her equity awards is performance-based. Both of these vehicles are performance-oriented, as our executive officers realize no pay delivery from their awards unless Gilead performs. Stock options are granted at the market price of our common stock on the date of grant and, therefore, require our common stock to appreciate in value before our executive officers realize any benefit from their awards. Performance share awards require not only stock price performance, as measured in terms of our TSR relative to an industry comparator group, but also revenue growth measured either in absolute terms (for 2012 awards) or relative to an industry comparator group (for pre-2012 awards).

 

   

Responsiveness to stockholders: Based on stockholder feedback on our compensation policies and practices, we have taken the following actions:

 

   

enhanced the disclosures about our executive compensation program in this proxy statement to better explain our Compensation Committee’s objectives and operation;

 

   

revised our compensation peer group for 2013 to remove the two largest companies based on market capitalization and revenue; and

 

   

introduced an additional cap on the maximum payout under our performance share awards.

Governance Highlights

 

   

Lead independent director. We believe that the interests of our stockholders are best served by maintaining our Board of Directors’ flexibility in determining the board leadership structure that is best suited to the needs of Gilead at any particular time. Our Board Guidelines provide that where the Chairman is also the Chief Executive Officer, the independent directors will appoint a lead independent director to coordinate their efforts and activities. The defined role of lead independent director at Gilead is closely aligned with the role of an independent Chairman, ensuring a strong independent and active Board of Directors. As set forth in the Lead Independent Charter adopted by our Board, the lead independent director has clearly delineated and comprehensive duties. These duties include:

 

   

presiding at all meetings of the Board at which the Chairman is not present, including executive sessions of the independent directors;

 

   

serving as principal liaison between the independent directors and the Chairman and between the independent directors and senior management;

 

   

approving information sent to the Board;

 

   

approving agendas for the Board;

 

   

approving meeting schedules to assure that there is sufficient time for discussion of all agenda items;

 

   

calling meetings of the independent directors when necessary and appropriate;

 

   

responding directly to stockholder and other stakeholder questions and comments that are directed to the lead independent director or to the independent directors as a group;

 

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recommending to the Board and the Board Committees the retention of advisers and consultants to report directly to the Board; and

 

   

communicating to management, as appropriate, the results of private discussions among independent directors.

 

   

Executive sessions. As required by our Board Guidelines, Gilead’s independent directors meet without the presence of executive management on a routine basis, to review and discuss, among other things, Gilead’s strategy, performance, management effectiveness and succession planning at every regularly scheduled Board meeting and as determined by the independent directors.

 

   

Substantial majority of independent directors. Currently, all of our director nominees other than our CEO (nine out of ten) are independent. In addition, all members of the key board committees—the Audit Committee, the Compensation Committee and the Nomination and Governance Committee—are “independent” in accordance with or as defined in the rules adopted by the SEC and NASDAQ and Gilead’s own Board Guidelines. This ensures that oversight of critical matters such as the integrity of our financial statements, the compensation of our executive officers, the selection and evaluation of directors and the development of corporate governance principles is entrusted to independent directors.

 

   

Corporate governance policies and practices. We maintain strong corporate governance policies and practices. Information regarding our corporate governance initiatives can be found on our website, at http://www.gilead.com in the “Investors” section under “Corporate Governance,” including in Gilead’s Board Guidelines and the charter for each Board committee. We believe our strong corporate governance policies and practices, including the substantial percentage of independent directors on our Board of Directors, as well as the robust duties of our lead independent director, empower our independent directors to effectively oversee Gilead’s management – including the performance of the Chief Executive Officer – and provide an effective and appropriately balanced board governance structure.

 

   

Responsiveness to stockholder viewpoints. Our Board has exhibited its responsiveness to the viewpoints of stockholders, taking into account the say on pay vote and votes on stockholder proposals as the Board applies its fiduciary judgment to executive compensation and corporate governance matters.

 

   

Poison pill eliminated. At the 2012 annual meeting of stockholders, a majority of the stockholders voting supported a stockholder proposal that requested our Board take steps to redeem Gilead’s rights plan or “poison pill” unless the plan is subject to a stockholder vote. In September 2012, after taking into consideration the vote of the stockholders, the Board adopted an amendment that terminated Gilead’s rights plan, effective immediately.

 

   

Stockholders’ ability to call special meeting. We permit stockholders holding a minimum of 20% of our outstanding shares of common stock to call a special meeting of stockholders.

 

   

No supermajority voting provisions. We have eliminated all supermajority voting provisions in our certificate of incorporation and bylaws in response to the viewpoints of our stockholders expressed in response to a stockholder proposal voted on at our 2010 annual meeting. At our 2011 annual meeting, our Board proposed, and our stockholders approved, amendments to our certificate of incorporation adopting simple majority voting standards.

 

   

Majority voting in uncontested election of directors. Our director nominees are elected annually by majority voting in uncontested elections.

 

   

Equal voting rights. We only have one class of stock with equal voting provisions.

 

   

Annual elections. All of our directors are elected annually.

 

   

Annual say on pay vote. We provide an annual opportunity for stockholders to advise the Board on executive compensation through an advisory say-on-pay vote, consistent with the viewpoint expressed by our stockholders in 2011 that they preferred an annual vote to a vote with lesser frequency.

 

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Summary of Proposals for Vote

 

VOTING MATTER   BOARD VOTE
RECOMMENDATION
 

SEE PAGE #

(for more
detail)

Proposal 1 – Election of Directors

  FOR each nominee   11
    Independent   Audit
Committee
  Compensation
Committee
  Nominating
and Corporate
Governance
Committee
  Scientific
Committee
       

John F. Cogan

  X   Member       Member    

Etienne F. Davignon

  X       Member      

Carla A. Hills

  X       Member      

Kevin E. Lofton

  X   Member   Member        

John W. Madigan

  X   Member   Chair        

John C. Martin

             

Nicholas G. Moore

  X   Chair   Member        

Richard J. Whitley

  X       Member   Chair    

Gayle E. Wilson

  X       Chair   Member    

Per Wold-Olsen

  X     Member     Member    
Proposal 2 – Ratification of the Selection of Independent Registered Public Accounting Firm   FOR   23
Proposal 3 – Approval of a Restatement of Gilead Sciences, Inc.’s 2004 Equity Incentive Plan   FOR   25
Proposal 4 – Approval of an Amendment to Gilead’s Restated Certificate of Incorporation   FOR   43
Proposal 5 – Advisory Vote on Executive Compensation   FOR   45
Proposal 6 – Stockholder Proposal Requesting that the Board Adopt a Policy that the Chairman of the Board of Directors be an Independent Director   AGAINST   47
Proposal 7 – Stockholder Proposal Requesting that the Board Take Steps to Permit Stockholder Action By Written Consent   AGAINST   50

Thank you for your ongoing support of Gilead Sciences, Inc. We appreciate your time and consideration and ask that with respect to your vote you support the Board’s recommendations.

 

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GILEAD SCIENCES, INC.

333 Lakeside Drive

Foster City, California 94404

PROXY STATEMENT

FOR THE ANNUAL MEETING OF STOCKHOLDERS

MAY 8, 2013

We are providing these proxy materials in connection with the solicitation by the Board of Directors (the “Board”) of Gilead Sciences, Inc., a Delaware corporation (“Gilead,” “we,” “our” or “us”), of proxies to be voted at our Annual Meeting of Stockholders to be held on Wednesday, May 8, 2013 at 10:00 a.m. local time (the “Annual Meeting”), or at any adjournment or postponement thereof, for the purposes set forth herein and in the accompanying Notice of Annual Meeting of Stockholders. The Annual Meeting will be held at the Westin San Francisco Airport, 1 Old Bayshore Highway, Millbrae, California 94030.

This proxy statement and the accompanying proxy card are being mailed, or made available electronically, to stockholders on or about March 20, 2013 to all stockholders entitled to vote at our Annual Meeting.

QUESTIONS AND ANSWERS

 

1. Why did I receive a notice regarding the availability of proxy materials on the Internet?

Pursuant to rules adopted by the Securities and Exchange Commission (the “SEC”), we have elected to provide access to our proxy materials over the Internet. Accordingly, we are sending a Notice of Internet Availability of Proxy Materials (the “Notice”) to our stockholders of record. This approach conserves natural resources and reduces our costs of printing and distributing our proxy materials, while providing stockholders with a convenient way to access our proxy materials. All stockholders will have the ability to access the proxy materials on the website referred to in the Notice or to request a printed set of the proxy materials, including a proxy card. Instructions on how to access the proxy materials over the Internet or to request a printed copy may be found in the Notice.

 

2. How may I obtain a copy of Gilead’s Annual Report on Form 10-K and other financial information?

A copy of our 2012 Annual Report, which includes our Form 10-K for the year ended December 31, 2012, is available at http://www.gilead.com/proxy or may be requested from our Investor Relations department as described elsewhere in this proxy statement. Our 2012 Annual Report is not incorporated into this proxy statement and shall not be considered proxy solicitation material.

 

3. Who is entitled to vote at the Annual Meeting?

Only holders of our common stock at the close of business on March 13, 2013 are entitled to receive the Notice of Annual Meeting and to vote their shares at the Annual Meeting. As of that date, there were 1,523,990,745 shares of common stock outstanding and entitled to vote. Each share of common stock is entitled to one vote on each matter to be voted upon at the Annual Meeting.

 

4. What items of business will be voted on at the Annual Meeting?

The items of business scheduled to be voted on at the Annual Meeting are:

 

   

to elect ten directors to serve for the next year and until their successors are elected and qualified;

 

   

to ratify the selection of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2013;

 

   

to approve a restatement of Gilead Sciences, Inc.’s 2004 Equity Incentive Plan;

 

   

to approve an amendment to Gilead’s Restated Certificate of Incorporation to increase the authorized number of shares of Gilead’s common stock from 2,800,000,000 to 5,600,000,000 shares;

 

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to approve, on an advisory basis, the compensation of our named executive officers as presented in this proxy statement.

 

   

to vote on a stockholder proposal requesting that the Board adopt a policy that the Chairman of the Board be an independent director, if properly presented at the meeting; and

 

   

to vote on a stockholder proposal requesting that the Board take steps to permit stockholder action by written consent, if properly presented at the meeting.

We will also consider any other business that properly comes before the Annual Meeting. See question 11, “Could other matters be decided at the Annual Meeting?” below.

 

5. How does the Board recommend that I vote?

Our Board recommends that you vote your shares:

 

   

“FOR” each of the nominees to the Board;

 

   

“FOR” the ratification of the selection of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2013;

 

   

“FOR” the approval of a restatement of Gilead Sciences, Inc.’s 2004 Equity Incentive Plan;

 

   

“FOR” the approval of an amendment to Gilead’s Restated Certificate of Incorporation to increase the authorized number of shares of Gilead’s common stock from 2,800,000,000 to 5,600,000,000 shares;

 

   

“FOR” the approval, on an advisory basis, of the compensation of our named executive officers as presented in this proxy statement; and

 

   

“AGAINST” the stockholder proposal requesting that the Board adopt a policy that the Chairman of the Board be an independent director; and

 

   

“AGAINST” the stockholder proposal requesting that the Board take steps to permit stockholder action by written consent.

 

6. What are the voting requirements to elect the directors and to approve each of the proposals discussed in this proxy statement?

A quorum of stockholders is necessary to hold a valid meeting. A quorum will be present if a majority of the outstanding shares is represented by votes present at the meeting in person or by proxy. Shares represented by proxies marked “abstain” and “broker non-votes” are counted in determining whether a quorum is present. A “broker non-vote” is a proxy submitted by a broker that does not indicate a vote for some of the proposals because the broker does not have discretionary voting authority on certain types of proposals and has not received instructions from its client as to how to vote on a particular proposal.

 

Proposal

  

Vote Required

Proposal 1 – Election of ten directors to serve for the next year and until their successors are elected and qualified    Majority of votes cast (number of shares voted “For” a director must exceed the number of shares voted “Against” that director)
Proposal 2 – Ratification of the selection of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2013    Majority of the shares entitled to vote and present in person or represented by proxy
Proposal 3 – Approval of a restatement of Gilead Sciences, Inc.’s 2004 Equity Incentive Plan    Majority of the shares entitled to vote and present in person or represented by proxy
Proposal 4 – Approval of an amendment to Gilead’s Restated Certificate of Incorporation    Majority of the outstanding shares of common stock

 

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Proposal

  

Vote Required

Proposal 5 – Approval, on an advisory basis, of the compensation of our named executive officers as presented in this proxy statement    Majority of the shares entitled to vote and present in person or represented by proxy
Proposal 6 – Vote on a stockholder proposal requesting that the Board adopt a policy that the Chairman of the Board be an independent director, if properly presented at the meeting    Majority of the shares entitled to vote and present in person or represented by proxy
Proposal 7 – Vote on a stockholder proposal requesting that the Board take action to permit stockholder action by written consent, if properly presented at the meeting    Majority of the shares entitled to vote and present in person or represented by proxy

If your shares are held by a broker and you do not indicate how you wish to vote, your broker is permitted to exercise its discretion to vote your shares only on certain “routine” matters. Proposal 2 is a “routine” matter. As a result, your broker is permitted to exercise discretionary voting authority to vote your shares for this proposal. Your broker may not exercise discretionary voting authority and may not vote your shares with respect to the other proposals unless you provide your broker with voting instructions.

With respect to Proposal 1, abstentions will not have an effect on the outcome of the vote. With respect to Proposals 2, 3, 4, 5, 6 and 7, abstentions will have the same effect as an “against” vote. “Broker non-votes” will have no effect on Proposals 1, 2, 3, 5, 6 or 7. Broker non-votes will have the same effect as an “against” vote with respect to Proposal 4.

 

7. How do I vote?

You may vote in person by attending the meeting or by completing and returning a proxy by mail, by telephone or electronically, using the Internet. If your shares are registered directly in your name with Gilead’s transfer agent, Computershare, you are considered a “stockholder of record.” If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the beneficial owner of shares held in “street name.” Most beneficial owners whose stock is held in the name of a bank, broker or other nominee receive instructions for granting proxies from their banks, brokers or other nominees, rather than our proxy card. You can vote your shares held through a bank, broker or other nominee by following the voting instructions sent to you by that institution.

By mail

To vote your proxy by mail, be sure to complete, sign and date the proxy card (if you request one)or voting instruction card that may be delivered to you and return it in the envelope provided. If you return your signed proxy card but do not indicate your voting preferences, the persons named on the proxy card will vote the shares represented by that proxy as recommended by our Board.

By Internet or the telephone

Stockholders may also vote their shares using the Internet or telephone. The law of the State of Delaware, under which we are incorporated, specifically permits electronically transmitted proxies so long as each such proxy contains or is submitted with information from which the inspector of election can determine that such proxy was authorized by the stockholder. The Internet and telephone voting procedures below are designed to authenticate stockholders’ identities, to allow stockholders to vote their shares and to confirm that stockholders’ instructions have been recorded properly. Stockholders voting shares via the Internet should understand that there may be costs associated with electronic access, such as usage charges from Internet access providers and telephone companies, which must be borne by the stockholder.

 

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Stockholders of record may go to http://www.proxyvote.com to vote their shares. You will be required to provide the control number printed on your Notice. The votes represented by such proxy will be generated on the computer screen and the voter will be prompted to submit or revise them as desired. Stockholders of record using a touch-tone telephone may vote their shares by calling (800) 690-6903 and following the recorded instructions.

A number of brokers and banks are participating in a program that offers the ability to grant proxies to vote shares over the telephone and Internet. Street name holders may vote on the Internet by accessing http://www.proxyvote.com. You will be required to provide the control number printed on your Notice. Street name holders using a touch-tone telephone may vote their shares by calling (800) 454-8683 and following the recorded instructions.

Internet and telephone voting for stockholders of record and street name holders will be available 24 hours a day, and will close at 11:59 p.m., Eastern Daylight Time on May 7, 2013. Submitting your proxy via the Internet or by telephone will not affect your right to vote in person should you decide to attend the Annual Meeting.

In person at the Annual Meeting

Stockholders of record may vote in person at the Annual Meeting or vote by proxy using a proxy card that they may request. Whether or not a stockholder plans to attend the meeting, the stockholder should vote by proxy to ensure his or her vote is counted. A stockholder may still attend the meeting and vote in person if he or she has already voted by proxy. To vote in person, a stockholder may come to the Annual Meeting and we will provide the stockholder with a ballot when he or she arrives. To vote using the proxy card, simply complete, sign and date the proxy card and return it promptly in the envelope provided to you. If a stockholder returns a signed proxy card to us before the Annual Meeting, we will vote the stockholder’s shares as he or she directs.

If you are a beneficial owner of shares, you must obtain a legal proxy from your bank, broker or other nominee and present it to the inspector of election with your ballot to be able to vote at the Annual Meeting.

Your vote is important. You can save us the expense of a second mailing by voting promptly.

 

8. What can I do if I change my mind after I vote my shares?

Any stockholder giving a proxy pursuant to this solicitation has the power to revoke it at any time before the shares are voted.

If you are a stockholder of record, you can revoke your proxy before it is exercised by:

 

   

filing a written notice to our Corporate Secretary at our principal executive office, 333 Lakeside Drive, Foster City, California 94404;

 

   

timely delivery of a valid, later-dated proxy or a later-dated vote by telephone or on the Internet; or

 

   

voting by ballot at the Annual Meeting.

If you are a beneficial owner of shares, you may revoke your proxy or submit new voting instructions by contacting your bank, broker or other holder of record. You may also vote in person at the Annual Meeting as described in the answer to the preceding question.

Attendance at the meeting will not, by itself, revoke a proxy. All shares that have been properly voted and not revoked will be voted at the Annual Meeting.

 

9. What is the deadline for voting my shares by proxy, via the Internet or by telephone?

Votes by proxy must be received before the polls close at the Annual Meeting. Votes submitted via the Internet or by telephone must be received by 11:59 p.m., Eastern Daylight Time on May 7, 2013.

 

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10. Could other matters be decided at the Annual Meeting?

On the date this proxy statement went to press, we did not know of any matters to be raised at the Annual Meeting other than those referred to in this proxy statement. If other matters are properly presented at the Annual Meeting for consideration and you execute and deliver a proxy, then John C. Martin and John F. Milligan, the persons named on your proxy card, will have the discretion to vote on those matters for you.

 

11. Is my vote confidential?

Yes. Proxy cards, ballots and voting tabulations that identify stockholders by name are kept confidential. There are exceptions for contested proxy solicitations or when necessary to meet legal requirements. Veaco Group, the independent proxy tabulator that we have engaged, will count the votes and act as the inspector of election for the meeting.

 

12. Where can I find the voting results of the Annual Meeting?

We will announce preliminary voting results at the Annual Meeting and publish final results in a Current Report on Form 8-K within four business days after the Annual Meeting.

 

13. Who will pay for the cost of this proxy solicitation?

We will pay the cost of soliciting proxies, including preparation, assembly, printing and mailing of the Notice and this proxy statement and any additional information furnished to stockholders. Copies of solicitation materials will be furnished to banks, brokerage houses, fiduciaries and custodians holding in their names, shares of our common stock beneficially owned by others, to forward to such beneficial owners. We may reimburse persons representing beneficial owners of common stock for their out-of-pocket expenses for forwarding solicitation materials to such beneficial owners. We have hired Innisfree M&A Incorporated to act as our proxy solicitor in conjunction with the Annual Meeting. We will pay Innisfree M&A Incorporated a fee of $15,000, plus reasonable out-of-pocket expenses, for these services. Our solicitation of proxies by mail may be supplemented by telephone, facsimile, electronic mail or personal solicitation by directors, officers or other of our employees. No additional compensation will be paid to directors, officers or other employees for such solicitation services performed by them.

 

14. When are the stockholder proposals for Gilead’s 2014 Annual Meeting due?

You may submit proposals for consideration at future stockholder meetings. For a stockholder proposal to be considered for inclusion in our proxy statement for the annual meeting next year, the Corporate Secretary must receive the written proposal at our principal executive offices no later than November 20, 2013. Such proposals also must comply with SEC regulations under Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), regarding the inclusion of stockholder proposals in company proxy materials. Proposals should be addressed to:

Corporate Secretary

Gilead Sciences, Inc.

333 Lakeside Drive

Foster City, California 94404

Fax: (650) 578-9264

Stockholders wishing to submit proposals or director nominations that are not to be included in such proxy statement must give timely written notice to the Corporate Secretary in accordance with our Bylaws, which require that written notice be received by the Corporate Secretary:

 

   

not earlier than the close of business on January 8, 2014; and

 

   

not later than the close of business on February 7, 2014.

 

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The chairperson of our annual meeting has the sole authority to determine whether any nomination or other business has been properly brought before the meeting in accordance with our Bylaws and to declare that any such nomination or other business not properly brought before our annual meeting shall not be transacted.

 

15. Where can I get information related to future stockholder meetings of Gilead?

To request a copy of the proxy statement, annual report and form of proxy related to all of our future stockholder meetings where you are a stockholder on the relevant record date, you may log on to

http://www.proxyvote.com or contact Investor Relations at:

Gilead Sciences, Inc.

Attention: Investor Relations

333 Lakeside Drive

Foster City, CA 94404

(800) 445-3235

Email: investor_relations@gilead.com

 

16. I want to attend the Annual Meeting and vote in person. From whom can I obtain directions to the Annual Meeting?

You may contact Investor Relations at (800) 445-3235 or investor_relations@gilead.com to obtain directions to the Annual Meeting.

 

17. If I have additional questions, whom can I contact?

If you have any questions about the Annual Meeting or how to vote or revoke your proxy, you should contact our proxy solicitor:

Innisfree M&A Incorporated

501 Madison Avenue, 20th floor

New York, New York 10022

Stockholders may call toll free: (877) 750-9501

Banks and Brokers may call collect: (212) 750-5833

 

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PROPOSAL 1

ELECTION OF DIRECTORS

There are ten nominees for the ten Board positions presently authorized. Proxies cannot be voted for a greater number of persons than the number of nominees standing for election. Directors are elected by a majority of the votes cast (number of shares voted “For” a director must exceed the number of shares voted “Against” that director) with respect to the election of each director at the Annual Meeting. Each director who is elected will hold office until the next annual meeting of stockholders and until his or her successor is elected and qualified, or until such director’s earlier death, resignation or removal. Each nominee listed below is currently a director of Gilead. Each nominee was previously elected by the stockholders at the 2012 annual meeting of stockholders.

Shares represented by executed proxies will be voted for or against the election of the ten nominees named below. In the event that any nominee should be unavailable for election as a result of an unexpected occurrence, such shares will be voted for the election of such substitute nominee as our Board may propose. Each person nominated for election has agreed to serve if elected and our Board and management have no reason to believe that any nominee will be unable to serve.

Our Nominating and Corporate Governance Committee recommended each of the nominees listed below to our Board for nomination. Each member of our Nominating and Corporate Governance Committee meets the definition of “independent director” as defined in Rule 5605 of The NASDAQ Stock Market (“NASDAQ”) Marketplace Rules, as determined affirmatively by our Board.

Majority Vote Standard for Election of Directors

Our Bylaws require directors to be elected by the majority of the votes cast with respect to such director in uncontested elections (number of shares voted “for” a director must exceed the number of shares voted “against” that director). In a contested election (a situation in which the number of nominees for director exceeds the number of directors to be elected), the standard for election of directors will be a plurality of the shares represented in person or by proxy at any such meeting, in which a quorum is present, and entitled to vote on the election of directors. Under our Board Guidelines, any director who fails to receive at least a majority of the votes cast in an uncontested election must tender his or her resignation to our Board. Our Nominating and Corporate Governance Committee would then evaluate the tendered resignation and make a recommendation to our Board whether to accept or reject the resignation or whether other action should be taken. Our Board will act on our Nominating and Corporate Governance Committee’s recommendation and publicly disclose its decision and the rationale for such decision within 90 days from the date the election results are certified. The director who tenders his or her resignation will not participate in our Board’s decision. If a nominee who was not already serving as a director does not receive at least a majority of the votes cast for such director at the annual meeting that nominee will not become a director.

Our Board has adopted certain corporate governance principles, which we refer to as our Board Guidelines, to promote the functioning of the Board and its committees, to promote the interests of stockholders and to set forth a common set of expectations as to how the Board, its various committees and individual directors should perform their functions. On January 30, 2013, our Board amended the Lead Independent Director Charter, which is available on our website at http://www.gilead.com in the Investors section under “Corporate Governance.”

 

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THE BOARD RECOMMENDS A VOTE “FOR” EACH NAMED NOMINEE.

Nominees

Our Nominating and Corporate Governance Committee has evaluated and recommended, and the full Board has considered and nominated for election at the Annual Meeting, each of the ten directors described below. The names of the nominees, in alphabetical order and certain information about them as of March 20, 2013, as well as the specific experience, qualifications, attributes or skills of the director nominees that led our Nominating and Corporate Governance Committee to conclude that the nominee should serve as a director of Gilead, are set forth below:

John F. Cogan, age 65, joined our Board in July 2005. Dr. Cogan is currently the Leonard and Shirley Ely Senior Fellow at the Hoover Institution and a Professor in the Public Policy Program at Stanford University, where he has had a continuing appointment since 1980. Dr. Cogan’s current research is focused on U.S. budget and fiscal policy, social security and healthcare. Dr. Cogan has held a number of positions in the U.S. government, including Assistant Secretary for Policy in the U.S. Department of Labor and Associate Director and Deputy Director in the U.S. Office of Management and Budget. Dr. Cogan is a trustee of the Charles Schwab Family of Funds and a director of Venture Lending and Leasing Funds II, IV and VI, Inc.

Relevant Experience, Qualifications and Skills: Significant experience in economic healthcare policy, including serving as the Leonard and Shirley Ely Senior Fellow at the Hoover Institution, Stanford University, where his research is focused on U.S. budget and fiscal policy, social security and healthcare. Significant policy-making and government experience, including previously serving as Assistant Secretary for Policy in the U.S. Department of Labor and Associate Director and Deputy Director in the U.S. Office of Management and Budget.

Etienne F. Davignon, age 80, joined our Board in September 1990. He is currently Minister of State and serves as Chairman of Recticel, CMB, SN Air Holding and Genfina and as a director of Sofina. Previously, he served as Chairman of Société Générale de Belgique, a diversified financial and industrial company. Mr. Davignon has served as the European Community’s Commissioner for Industry and International Markets and as the European Community’s Vice President for Research, Industry and Energy Policies.

Relevant Experience, Qualifications and Skills: Significant leadership and business experience, including serving as Chairman of Recticel, CMB, SN Air Holding and Genfina and previously serving as Chairman of Société Générale de Belgique. International background and significant policy-making and government experience, including serving as the Minister of State and previously serving as the European Community’s Commissioner for Industry and International Markets and as the European Community’s Vice President for Research, Industry and Energy Policies. Breadth of knowledge about Gilead’s business as a result of service on Gilead’s Board since 1990.

Carla A. Hills, age 79, joined our Board in January 2007. Since 1993, she has served as the Chair and Chief Executive Officer of Hills & Company, a firm providing advice to U.S. businesses on investment, trade and risk assessment issues outside the United States. Mrs. Hills served as U.S. Trade Representative from 1989 to 1993, and was principal advisor on international trade to President George H. W. Bush. Under President Gerald R. Ford, she served as Secretary of Housing and Urban Development. Mrs. Hills is a director of TCW Group, Inc. and serves on the international advisory boards of J.P. Morgan Chase and Rolls Royce. She is Chair of the Council on Foreign Relations and of the National Committee on U.S.-China Relations. Mrs. Hills is Co-Chair of the Inter-American Dialogue and of the International Advisory Board of the Center for Strategic and International Studies. She is also a member of the Executive Committee of the Peterson Institute for International Economics and of the Trilateral Commission, and a member of the board of the International Crisis Group.

Relevant Experience, Qualifications and Skills: Significant international trade policy and business experience, including serving as the Chair and Chief Executive Officer of Hills & Company, International Consultants, a firm providing counsel to U.S. businesses on investment, trade and risk assessment issues abroad.

 

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Significant policy-making experience and government service, including previously serving as U.S. Trade Representative and the principal advisor on international trade to President George H. W. Bush.

Kevin E. Lofton, age 58, joined our Board in July 2009. He is currently the President and Chief Executive Officer of Catholic Health Initiatives. Headquartered in Denver, the healthcare system operates the full continuum of services from hospitals to home health agencies throughout the nation. He previously served as Chief Executive Officer of two university hospitals, the University of Alabama at Birmingham Hospital and Howard University Hospital in Washington, D.C. In 2007, Mr. Lofton served as Chairman of the Board of the American Hospital Association, the nation’s largest hospital trade association. Mr. Lofton also serves on the Board of Directors of the Morehouse School of Medicine, Atlanta, and Conifer Health Solutions LLC, a privately held revenue cycle management company in Dallas.

Relevant Experience, Qualifications and Skills: Significant leadership experience, including serving as the President and Chief Executive Officer of Catholic Health Initiatives, a healthcare system operating the full continuum of services from hospitals to home health agencies across the United States. Expertise and knowledge in hospital administration and patient care. Demonstrated commitment to ensuring that patients have access to medical services.

John W. Madigan, age 75, joined our Board in December 2005. He is the retired Chairman and Chief Executive Officer of Tribune Company, a media company, operating businesses in broadcasting, publishing and on the Internet. He is also a director and former Chairman of the Robert R. McCormick Foundation and a director of Boise Cascade Holdings, L.L.C. Mr. Madigan is a former member of the Defense Business Board of the Department of Defense, an advisor to Madison Dearborn Partners and a director and former Chairman of The Chicago Council on Global Affairs. He also serves as a trustee of Northwestern University, Rush University Medical Center and the Paley Center for Media in New York. Mr. Madigan is a member and former Chairman of The Commercial Club of Chicago and a director of New Schools for Chicago.

Relevant Experience, Qualifications and Skills: Significant leadership experience and broad knowledge of business, including previously serving as the Chairman and Chief Executive Officer of Tribune Company, a media industry leader with operations in major markets throughout the United States. Significant financial expertise including experience as an investment banker with Salomon Brothers and Paine, Webber, Jackson & Curtis.

John C. Martin, age 61, was appointed as Chairman of Gilead’s Board in May 2008 and has served as Gilead’s Chief Executive Officer and a member of Gilead’s Board of Directors since April 1996. Prior to joining Gilead, Dr. Martin held several leadership positions at Bristol-Myers Squibb Company and Syntex Corporation. He is a member of the Board of Directors of the California Healthcare Institute. He also serves on the University of Southern California Board of Trustees. Dr. Martin previously served as President of the International Society for Antiviral Research, Chairman of the Board of Directors of BayBio and Chairman of the Board of Directors of the California Healthcare Institute. He served on the National Institute of Allergy and Infectious Diseases Council, the Board of Directors of the Biotechnology Industry Organization, the Board of Trustees of the University of Chicago, the Board of Trustees of Golden Gate University and the External Scientific Advisory Board of the University of California School of Global Health. Additionally, Dr. Martin served on the Centers for Disease Control/Health Resources and Services Administrations Advisory Committee on HIV and STD Prevention and Treatment and was a member of the Presidential Advisory Council on HIV/AIDS. Dr. Martin previously served as a director of Gen-Prob Incorporated. Dr. Martin holds a Ph.D. in organic chemistry from the University of Chicago and an MBA in marketing from Golden Gate University. He has received the Isbell Award from the American Chemical Society and the Gertrude B. Elion Award for Scientific Excellence from the International Society for Antiviral Research. In 2008, Dr. Martin was inducted into the National Academy of Engineering of the National Academies.

Relevant Experience, Qualifications and Skills: Significant leadership and business experience, including serving as Gilead’s Chief Executive Officer and Chairman since May 2008 and previously serving as President

 

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and Chief Executive Officer from 1996 through May 2008. Significant scientific experience, as he holds a Ph.D. in organic chemistry and previously served as a member of the Presidential Advisory Council on HIV/AIDS from 2006 to 2009. Breadth of knowledge about Gilead’s business as a result of employment at Gilead since 1990 in numerous leadership positions.

Nicholas G. Moore, age 71, joined our Board in March 2004. Mr. Moore is the retired global Chairman of PricewaterhouseCoopers LLP, a professional services firm formed in July 1998 by the merger of Coopers & Lybrand and Price Waterhouse. Prior to the merger, Mr. Moore was elected Chairman and Chief Executive Officer of Coopers & Lybrand (U.S.) in 1994 and Coopers & Lybrand International in 1997. Mr. Moore is the lead independent director of NetApp, Inc. and a director of Bechtel Group, Inc., Wells Fargo, Inc. and E2 Open. He has also served as Chairman of the Board of Trustees of St. Mary’s College of California. Mr. Moore is an inactive member of the American Institute of Certified Public Accountants (“CPAs”), the California Bar Association and the California and New York Society of Certified Public Accountants.

Relevant Experience, Qualifications and Skills: Significant leadership and business experience across a range of industries, including previously serving as Chairman of PricewaterhouseCoopers and serving as the lead independent director of NetApp, Inc. and a director of Bechtel Group, Inc., Wells Fargo & Company and E2 Open. Significant financial expertise as he is an inactive member of the American Institute of CPAs and the California and New York Society of CPAs.

Richard J. Whitley, age 67, joined our Board in July 2008. He also serves as the Distinguished Professor, Loeb Scholar Chair in Pediatrics; Director, Division of Pediatric Infectious Diseases; Vice-Chair, Department of Pediatrics; Senior Scientist, Department of Gene Therapy; Senior Scientist, Cancer Research and Training Center; Associate Director for Clinical Studies, Center for AIDS Research; and Co-Director, Center for Emerging Infections and Emergency Preparedness (CEIEP) for the University of Alabama at Birmingham. Dr. Whitley has held responsibility for the National Institute of Allergy and Infectious Diseases Collaborative Antiviral Study Group, is a former President of the International Society of Antiviral Research, chairs the Board of Scientific Councilors for the National Center for Infectious Diseases of the U.S. Centers for Disease Control and Prevention and is President of the Board of the Infectious Disease Society of America.

Relevant Experience, Qualifications and Skills: Significant medical expertise, including serving as the Distinguished Professor, Loeb Scholar Chair in Pediatrics at the University of Alabama at Birmingham. Significant health policy experience, including chairing the Board of Scientific Councilors for the National Center for Infectious Diseases of the U.S. Centers for Disease Control and Prevention, serving as the President of the Board of the Infectious Disease Society of America, previously holding responsibility for the National Institute of Allergy and Infectious Diseases Collaborative Antiviral Study Group and serving as a former President of the International Society of Antiviral Research. Extensive experience in the field of antiviral medicine. Breadth of knowledge about Gilead’s business as a result of service on Gilead’s Scientific Advisory Board from 2003 to 2008.

Gayle E. Wilson, age 70, joined our Board in October 2001. Mrs. Wilson served as California’s First Lady from 1991 to 1999. Mrs. Wilson is a member of the board of directors of the Ralph M. Parsons Foundation, a non-profit organization that provides grants for higher education, social impact, civic, cultural issues and health issues. She is also the Chair Emeritus of the Advisory Board of the California State Summer School for Math and Science, a member of the board of trustees of the California Institute of Technology and the Sanford Burnham Institute for Medical Research.

Relevant Experience, Qualifications and Skills: Significant experience in education, public policy and science and technology, including previously serving as California’s First Lady from 1991 to 1999, currently serving as a member of the board of trustees of the California Institute of Technology, Chair Emeritus of the Advisory Board of the California State Summer School for Math and Science and as a member of the board of the Sanford Burnham Institute for Medical Research. Breadth of knowledge about Gilead’s business as a result of service on Gilead’s Board since 2001.

 

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Per Wold-Olsen, age 65, joined our Board in January 2010, after serving as the Chair of our Health Policy Advisory Board since 2007. From 2005 to 2006, he served as President of the Human Health Intercontinental Division of Merck & Co., Inc., a global pharmaceutical company. From 1997 until 2005, he served as President of Human Health Europe, Middle East/Africa and Worldwide Human Health Marketing for Merck. Mr. Wold-Olsen is currently Chairman of the Board of GN Store Nord A/S. He also serves as a director of Exiqon A/S and Novo A/S. Mr. Wold-Olsen is a member of the Board of Governors of BioMalta and of the Board of the Medicines for Malaria Venture (MMV), a non-profit initiative dedicated to the discovery, development and delivery of new medicines for the treatment of malaria. Mr. Wold-Olsen previously served as a director of PharmaNet Development Group, Inc. and H. Lundbeck A/S.

Relevant Experience, Qualifications and Skills: Significant leadership and international business experience at Merck & Co., Inc., including previously serving as President of the Human Health Intercontinental Division. Breadth of knowledge about Gilead’s business as a result of service as Chair of Gilead’s Health Policy Advisory Board from 2007 to 2009.

Directors Not Standing for Re-election

In January 2013, we announced that Mr. James Denny and Dr. Gordon Moore will not stand for re-election as directors of Gilead.

James M. Denny, age 80, joined our Board in 1996 and has served as the lead independent director of our Board since May 2008. He served as Chairman of our Board from 2001 to May 2008. Previously, he served as the Chief Financial Officer and subsequently Vice Chairman of Sears, Roebuck & Co., then a retailing and financial services conglomerate, with oversight responsibility for many of the company’s operations and staff functions. He previously served as Executive Vice President and Chief Financial and Planning Officer of G.D. Searle & Co., Chairman of Pearle Health Services, Inc., Senior Advisor at William Blair Capital Partners, Treasurer at the Firestone Tire & Rubber Co., and associate counsel at Dewey Ballantine Bushby, Palmer & Wood in New York and Paris. Mr. Denny is currently Chairman of a privately-held healthcare technology company. He is a past Chairman of Northwestern Memorial Hospital and the Northwestern Memorial Foundation and has held directorships at Astra AB, ChoicePoint, Inc., GATX Corporation, The Principal Financial Group, The Allstate Corporation and General Instruments, Inc.

Gordon E. Moore, age 84, joined our Board in January 1996, and served as a member of our Business Advisory Board from July 1991 until January 1996. Dr. Moore retired from Intel Corporation, the world’s largest semiconductor chip maker, where he was a co-founder and previously served as Chairman, President and Chief Executive Officer. Dr. Moore is a former Chairman and now Life Trustee of the California Institute of Technology, a member of the National Academy of Engineering and a Fellow of the Royal Society of Engineering (UK). Among his awards, he received the National Medal of Technology and the Presidential Medal of Freedom.

Board Composition, Leadership, Committees and Meetings

Independence of the Board of Directors

The NASDAQ listing standards require that a majority of the members of a listed company’s board of directors must qualify as “independent” as affirmatively determined by our Board. In addition, our Board Guidelines requires that a substantial majority of our Board shall consistent of “independent” directors as defined by the Board Guidelines. Our Board Guidelines are available on our website at http:/www.gilead.com in the Investors section under “Corporate Governance.”

After review of all relevant transactions and relationships between each director, and his or her family members, and us, our senior management and independent registered public accounting firm, our Board has determined that nine of our ten nominees for director are “independent” directors as defined in Rule 5605 of the

 

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NASDAQ Marketplace Rules. Dr. Martin, our Chairman and Chief Executive Officer is not an independent director within the meaning of the NASDAQ Marketplace Rules. In addition, our Board affirmatively determined that Mr. Denny and Dr. Moore qualified as “independent” directors.

Board Leadership Structure and Oversight of Risk

Dr. Martin, our Chief Executive Officer, has served as Chairman of the Board since May 2008. Our Board Guidelines provide that the independent directors will designate a lead independent director when the positions of Chairman and Chief Executive Officer are held by the same person. Mr. Denny has served as the lead independent director since May 2008 and will serve until as lead independent director until retirement from the Board in May 2013. We expect to appoint a successor lead independent director at Gilead’s Board meeting in May 2013.

We believe that our current Board leadership structure provides effective oversight of management and strong leadership of the independent directors. The defined role of lead independent director at Gilead is closely aligned with the role of an independent Chairman. As set forth in the Lead Independent Director Charter adopted by our Board, the lead independent director has clearly delineated and comprehensive duties. These duties include:

 

   

presiding at all meetings of the Board at which the Chairman is not present, including executive sessions of the independent directors;

 

   

serving as principal liaison between the independent directors and the Chairman and between the independent directors and senior management;

 

   

approving information sent to the Board;

 

   

approving agendas for the Board;

 

   

approving meeting schedules to assure that there is sufficient time for discussion of all agenda items;

 

   

calling meetings of the independent directors when necessary and appropriate;

 

   

responding directly to stockholder and other stakeholder questions and comments that are directed to the lead independent director or to the independent directors as a group;

 

   

recommending to the Board and the Board Committees the retention of advisers and consultants to report directly to the Board; and

 

   

communicating to management, as appropriate, the results of private discussions among independent directors.

In addition, as required by our Board Guidelines, Gilead’s independent directors meet without the presence of executive management on a routine basis, to review, among other things, Gilead’s strategy, performance, management effectiveness and succession planning. As lead independent director, Mr. Denny regularly attends meetings of the Audit Committee, Nominating and Corporate Governance Committee and Compensation Committee in a non-voting capacity. In addition, Mr. Denny conducts an annual self-assessment of the Board and committees of the Board to evaluate their effectiveness.

We believe there is a benefit to having Dr. Martin serve as both Chairman and Chief Executive Officer. Dr. Martin’s long tenure and knowledge of Gilead and our industry provide him unique insight into our business. In addition, in light of Dr. Martin’s experience navigating Gilead through periods of growth, including resulting from large acquisitions, our Board concluded that Gilead can more effectively execute its strategy and business plans to maximize stockholder value if Dr. Martin holds the positions of Chairman and Chief Executive Officer. Further, as the individual with primary responsibility and accountability for managing our day-to-day operations, he can provide unified leadership of Gilead and ensure that key business and strategic issues, risks and opportunities are brought to our Board’s attention in a way that prioritizes and makes best use of the Board’s time.

 

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Our Audit Committee reviews risks associated with our financial and accounting systems, accounting policies and investment strategies, in addition to regulatory compliance and other matters that have significant elements of risk associated with them. In addition, our Audit Committee regularly meets in executive session and in private sessions with Gilead’s independent registered public accounting firm, internal audit and the Chief Financial Officer to discuss, among other things, risks to Gilead’s business. As discussed in more detail under “Executive Compensation – Risk Assessment of Compensation Programs” beginning on page 73, our Compensation Committee evaluates Gilead’s compensation policies and practices for its employees to help ensure that these policies and practices do not incentivize employees to take risks that are reasonably likely to have a material adverse effect on Gilead. Our Nominating and Corporate Governance Committee reviews our management of risks in areas such as regulatory, clinical trials, manufacturing, product promotion and human resources and meets periodically with senior employees of Gilead responsible for managing risk in these areas. Each of the committees periodically reports to the Board of Directors on its risk oversight activities. We do not believe our Board’s leadership structure adversely affects the Board’s ability to evaluate and manage risk.

On January 30, 2013, our Board amended the Lead Independent Director Charter, which is available on our website at http://www.gilead.com in the Investors section under “Corporate Governance.”

Executive Sessions

As required under applicable NASDAQ listing standards, our independent directors meet in regularly scheduled executive sessions at which only they are present. Mr. Denny, our lead independent director, presides over these executive sessions. Additionally, executive sessions may be convened by the lead independent director at his discretion and will be convened if requested by any other independent director.

Meetings of our Board of Directors and Board Committees; Attendance at Annual Meetings

Our Board has an Audit Committee, a Compensation Committee, a Nominating and Corporate Governance Committee and a Scientific Committee. All directors attended at least 75% of the aggregate of all meetings of our Board and of the committees on which they served during the year ended December 31, 2012. Current committee membership and the number of meetings of our full Board and committees held in 2012 are shown in the table below:

 

    Board   Audit
Committee
  Compensation
Committee
  Nominating
and Corporate
Governance
Committee
  Scientific
Committee

John F. Cogan

  Member   Member       Member

Etienne F. Davignon

  Member       Member  

James M. Denny

  Lead Independent Director   *   *   *   *

Carla A. Hills

  Member       Member  

Kevin E. Lofton

  Member   Member   Member    

John W. Madigan

  Member   Member   Chair    

John C. Martin

  Chair        

Gordon E. Moore

  Member     Member    

Nicholas G. Moore

  Member   Chair   Member    

Richard J. Whitley

  Member       Member   Chair

Gayle E. Wilson

  Member       Chair   Member

Per Wold-Olsen

  Member     Member     Member

Number of 2012 Meetings

  6   9   8   4   2

 

* Ex-officio, non-voting participant

Our Board expects our directors to attend our annual meetings of our stockholders. Eleven of the then-current twelve Board members attended our 2012 annual meeting of stockholders.

 

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Committees of our Board of Directors

Our Board Guidelines require that all members of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee and at least one member of the Scientific Committee must be “independent” directors as defined by the Board Guidelines.

Audit Committee

Our Board has determined that all members of our Audit Committee are “independent directors” as defined in Rule 5605 of the NASDAQ Marketplace Rules and satisfy heightened independence standards under Rule 10A-3 under the Exchange Act. Our Board has determined that Mr. Nicholas Moore and Mr. Madigan are “audit committee financial experts,” as defined in applicable SEC rules.

Our Audit Committee oversees, on behalf of our Board, our corporate accounting, financial reporting process and systems of internal accounting and financial controls. For this purpose, our Audit Committee performs several functions. Among other things, our Audit Committee:

 

   

evaluates the performance, independence and qualifications of the independent registered public accounting firm;

 

   

determines the engagement of the independent registered public accounting firm;

 

   

determines whether to retain or terminate the existing independent registered public accounting firm or to appoint and engage a new independent registered public accounting firm;

 

   

reviews and approves the retention and compensation of the independent registered public accounting firm to perform any proposed audit and proposed permissible non-audit services;

 

   

reviews and approves, in advance, all related person transactions;

 

   

monitors the rotation of partners of the independent registered public accounting firm on our engagement team as required by SEC rules;

 

   

reviews with the independent registered public accounting firm the scope, adequacy and effectiveness of, and compliance with, our accounting and financial controls and systems of internal controls;

 

   

reviews the financial statements to be included in our Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q; and

 

   

discusses with management and the independent registered public accounting firm the results of the annual audit and the results of their review of our quarterly financial statements.

Our Audit Committee is also responsible for establishing and maintaining procedures for receiving, reviewing and responding to complaints regarding accounting, internal accounting controls or auditing matters under the Complaint Procedure and Non-Retaliation Policy, which procedures are summarized on our website at http://www.gilead.com in the Investors section under “Corporate Governance.”

The Audit Committee Charter is available on our website at http://www.gilead.com in the Investors section under “Corporate Governance.”

Compensation Committee

Our Board has determined that all members of our Compensation Committee are independent directors as defined in Rule 5605 of the NASDAQ Marketplace Rules. The members of our Compensation Committee are “outside directors” as determined under Section 162(m) of the Internal Revenue Code and “non-employee directors’ as determined under Rule 16b-3 under the Exchange Act.

 

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Our Compensation Committee has overall responsibility for approving and evaluating our executive officer compensation plans, policies and programs. These duties include:

 

   

setting the compensation philosophy for executive officers, including the compensation objectives, target pay levels and the peer group for executive compensation and performance benchmarking;

 

   

evaluating the performance of Dr. Martin, our Chief Executive Officer, and reviewing and approving his compensation, subject to ratification by the independent directors of the Board, each year;

 

   

reviewing and approving the compensation arrangements for our other executive officers;

 

   

overseeing the administration of our compensation plans, including our 2004 Equity Incentive Plan, Employee Stock Purchase Plan, corporate bonus plan, deferred compensation program and our Internal Revenue Code Section 162(m) Executive Bonus Plan;

 

   

establishing the stock ownership guidelines applicable to executive officers; and

 

   

reviewing and discussing the “Compensation Discussion and Analysis” beginning on page 52.

Our Compensation Committee operates pursuant to a charter that outlines its specific authority, duties and responsibilities. On November 5, 2012, our Board amended the charter, which is available on our website at http://www.gilead.com in the Investors section under “Corporate Governance.”

Our Compensation Committee has the authority to engage the services of its own outside advisors to assist it in determining the compensation of our executive officers. Our Compensation Committee has retained Frederic W. Cook & Co. (“FWC”) as its independent compensation consultant. FWC’s role in the compensation process for 2012 included advice and recommendations on the following matters:

 

   

the executive compensation philosophy, program structure and selection of peer companies;

 

   

the compensation arrangement for Dr. Martin;

 

   

the compensation analyses and recommendations developed by management for the other executive officers; and

 

   

the compensation arrangements for our non-employee Board members.

FWC provides consulting services solely to our Compensation Committee and does not receive professional fees from us for any other services.

Nominating and Corporate Governance Committee

Our Board has determined that all members of the Nominating and Corporate Governance Committee are independent directors as defined in Rule 5605 of the NASDAQ Marketplace Rules.

Our Nominating and Corporate Governance Committee performs several functions. Among other things, our Nominating and Corporate Governance Committee:

 

   

identifies, evaluates and recommends directors for consideration by our full Board;

 

   

establishes criteria for Board and committee membership;

 

   

reviews and recommends changes to our corporate governance policies and procedures;

 

   

oversees Gilead’s management of non-financial or non-compensation policies-related risks; and

 

   

reviews Gilead’s political expenditure policies and expenditures, including payments to trade associations.

 

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In identifying potential director nominees, the Nominating and Corporate Governance Committee considers Board candidates through a variety of methods and sources. These include suggestions from current Board members, senior management, stockholders, professional search firms and other sources. Our Nominating and Corporate Governance Committee reviews all candidates in the same manner regardless of the source of the recommendation.

In evaluating candidates for membership on the Board, our Nominating and Corporate Governance Committee considers the candidate’s relevant experience, the number and nature of other board memberships held and possible conflicts of interest. In addition, our Nominating and Corporate Governance Committee will consider whether the candidate assists in achieving a mix of members that represents a diversity of backgrounds and experience, including with respect to age, gender, international background, race and specialized experience. Each year, our Nominating and Corporate Governance Committee reviews its Board membership criteria and assesses the composition of the Board against the criteria.

Our Nominating and Corporate Governance Committee will also consider all factors it considers appropriate to meeting the needs of the Board at that particular time. According to the Board membership criteria established by our Nominating and Corporate Governance Committee, candidates nominated for election or reelection to the Board should possess the following qualifications:

 

   

highest standards of personal and professional integrity;

 

   

ability and judgment to serve the long-term interest of our stockholders;

 

   

experience and expertise relevant to our business and which will contribute to the overall effectiveness and diversity of the Board;

 

   

broad business and social perspective;

 

   

ability to communicate openly with other directors, to meaningfully and civilly participate in the Board’s decision making process;

 

   

commitment to serve on the Board for an extended period of time to ensure continuity and to develop knowledge about Gilead’s business, and willingness to devote appropriate time and effort to fulfilling the duties and responsibilities of a Board member;

 

   

independence from any particular constituency; and

 

   

ability and willingness to objectively appraise the performance of management.

It is the policy of our Nominating and Corporate Governance Committee to consider properly submitted stockholder recommendations of new director candidates. The Nominating and Corporate Governance Committee’s evaluation process for director nominees does not vary based on whether a candidate is recommended by a stockholder. Any stockholder recommendation must include the candidate’s name and qualifications for Board membership, the candidate’s age, business address, residence address, principal occupation or employment, the number of shares beneficially owned by the candidate and all other information that would be required to solicit a proxy under federal securities law. In addition, the recommendation must include the stockholder’s name, address and the number of shares beneficially owned. The recommendation should be sent to the Corporate Secretary, Gilead Sciences, Inc., 333 Lakeside Drive, Foster City, California 94404. The recommendation must be delivered to the Corporate Secretary prior to the applicable deadline described under “Stockholder Proposals” above.

The Nominating and Corporate Governance Committee Charter is available on our website at http://www.gilead.com in the Investors section under “Corporate Governance.” On November 5, 2012, our Board amended the charter.

 

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Scientific Committee

Our Scientific Committee was formed in January 2004 to advise our Board regarding our research strategies, the scientific merit of technology or products involved in licensing and acquisition opportunities and emerging science and technology issues. The charter of our Scientific Committee is available on our website at http://www.gilead.com in the Investors section under “Corporate Governance.”

Stockholder Communications with our Board of Directors

Stockholders may communicate with our Board by sending a letter to the Corporate Secretary, Gilead Sciences, Inc., 333 Lakeside Drive, Foster City, California 94404. Our Corporate Secretary reviews all communications from stockholders, but may, in his sole discretion, disregard any communication that he believes is not:

 

   

related to our business;

 

   

within the scope of our responsibility;

 

   

credible; or

 

   

material or potentially material.

If deemed an appropriate communication, the Corporate Secretary will submit a stockholder communication to our lead independent director.

Code of Ethics

Our written Code of Ethics applies to all of our directors and employees, including our executive officers. The Code of Ethics is available on our website at http://www.gilead.com in the Investors section under “Corporate Governance.” Changes to or waivers of the Code of Ethics will be disclosed on the same website. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding any amendment to, or waiver of, any provision of the Code of Ethics by disclosing such information on the same website.

Executive Officers

The names of our executive officers who are not also directors of Gilead and certain information about each of them as of March 20, 2013 are set forth below.

Gregg H. Alton, age 47, is our Executive Vice President, Corporate and Medical Affairs. Mr. Alton joined us in 1999, and served as General Counsel from 2000 to 2009, when he was appointed to his current position. In his current role, Mr. Alton is responsible for legal affairs, corporate compliance and quality, government affairs, medical affairs, public affairs and emerging market activities. Prior to joining Gilead, Mr. Alton was an attorney at the law firm of Cooley Godward, LLP, where he specialized in mergers and acquisitions, corporate partnerships and corporate finance transactions for healthcare and information technology companies. Mr. Alton is a member of the boards of BayBio, a San Francisco Bay Area life sciences industry organization, and the Boys and Girls Clubs of Oakland. He is also a member of the advisory board of UCSF Global Health Sciences and a member of the Dean’s Advisory Council at Stanford Law School. Mr. Alton received a bachelor’s degree in legal studies from the University of California at Berkeley, and holds a JD from Stanford University.

Norbert W. Bischofberger, age 57, is our Executive Vice President, Research and Development and Chief Scientific Officer. Dr. Bischofberger joined us in 1990 and has served as Executive Vice President, Research and Development since 2000 and Chief Scientific Officer since 2007. Prior to joining us, Dr. Bischofberger was a Senior Scientist in Genentech, Inc.’s DNA Synthesis group from 1986 to 1990. He received his B.S. in Chemistry at the University of Innsbruck in Austria and his Ph.D. in Organic Chemistry at the Eidgenossische Technische Hochschule (ETH) in Zurich, Switzerland and performed postdoctoral work at Harvard University.

 

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John F. Milligan, age 52, is our President and Chief Operating Officer Dr. Milligan joined Gilead in 1990 as a Research Scientist, and in 1996, he became Director of Project Management and Project Team Leader for Gilead’s collaboration with Hoffmann-La Roche Ltd on Tamiflu®. In 2002, Dr. Milligan was appointed Chief Financial Officer. He was promoted to Chief Operating Officer in 2007 and President in 2008. Dr. Milligan is a member of the board of Biotechnology Industry Organization (BIO), the largest biotechnology industry organization, and a trustee of Ohio Wesleyan University. Dr. Milligan received his B.A. in chemistry from Ohio Wesleyan University and his Ph.D. in biochemistry from the University of Illinois and was an American Cancer Society postdoctoral fellow at the University of California at San Francisco.

Robin L. Washington, age 50, is our Senior Vice President and Chief Financial Officer. Ms. Washington joined us in May 2008. Prior to joining Gilead, Ms. Washington served as Chief Financial Officer of Hyperion Solutions, an enterprise software company that was acquired by Oracle Corporation in March 2007. Ms. Washington also spent nearly 10 years at PeopleSoft, a provider of enterprise application software, most recently in the role of Senior Vice President and Corporate Controller. She previously was a Director of Finance for Tandem Computers, an Accounting Analyst for the Federal Reserve Bank of Chicago and a Senior Auditor for Deloitte & Touche. Ms. Washington holds a bachelor’s degree in business administration from the University of Michigan and an MBA from Pepperdine University. She currently serves on the board of directors of the Children’s Discovery Museum of San Jose and previously served as a member of the board of directors of MIPS Technologies, Inc.

Kevin Young CBE, age 55, is our Executive Vice President, Commercial Operations. Mr. Young joined us in 2004. Mr. Young is a 29-year veteran of the biopharmaceutical industry, with a career that spans a variety of therapeutic categories including cardiology, oncology, rheumatology, hepatitis and HIV/AIDS. He previously held positions at Amgen, Inc. and AstraZeneca Pharmaceuticals (formerly ICI Pharmaceuticals). During his 12 years at Amgen, Mr. Young held a number of positions in Europe and the United States, most recently as Head of the U.S. Inflammation Business Unit leading the re-launch of Enbrel® following the acquisition of Immunex Corporation. In 2011, Mr. Young was appointed Commander of The British Empire, one of Great Britain’s highest civilian honors, in recognition of his service to the healthcare and pharmaceutical industries. Mr. Young has undergraduate and graduate degrees in Sports Science and Exercise from Liverpool John Moores University and Nottingham University in England and has completed the Executive Program at the University of Michigan.

 

 

 

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PROPOSAL 2

RATIFICATION OF THE SELECTION OF INDEPENDENT

REGISTERED PUBLIC ACCOUNTING FIRM

Our Audit Committee has selected Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2013 and has further directed that we submit the selection of our independent registered public accounting firm for ratification by the stockholders at the Annual Meeting. Our Audit Committee has determined that the rendering of non-audit services by Ernst & Young LLP during the fiscal year ended December 31, 2012 was compatible with maintaining their independence. Ernst & Young LLP has audited our financial statements since our inception in 1987. Representatives of Ernst & Young LLP are expected to be present at the Annual Meeting, will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions.

Stockholder ratification of the selection of Ernst & Young LLP as our independent registered public accounting firm is not required by our Bylaws or otherwise. However, our Board is submitting the selection of Ernst & Young LLP to the stockholders for ratification as a matter of good corporate practice. If the stockholders fail to ratify the selection, our Audit Committee will reconsider whether or not to retain Ernst & Young LLP. Even if the selection is ratified, our Audit Committee in its discretion may direct the appointment of a different independent registered public accounting firm at any time during the year if they determine that such a change would be in the best interests of our stockholders and us.

Principal Accountant Fees and Services

The aggregate fees billed by Ernst & Young LLP for the years ended December 31, 2012 and 2011 for the professional services described below are as follows:

 

     2012      2011  

Audit Fees(1)

   $ 4,902,000       $ 5,706,000   

Audit-Related Fees(2)

     20,000         162,000   

Tax Fees(3)

     1,588,000         1,677,000   

All Other Fees(4)

     2,000         12,000   
  

 

 

    

 

 

 

Total

   $ 6,512,000       $ 7,557,000   
  

 

 

    

 

 

 

 

(1) 

Represents fees incurred for the integrated audit of our consolidated financial statements and of our internal control over financial reporting and review of the interim condensed consolidated financial statements, as well as fees incurred for audit services that are normally provided by Ernst & Young LLP in connection with other statutory or regulatory filings or engagements. During 2012, these fees also included accounting consultation services related to our acquisitions of Pharmasset, Inc., an office building located in Foster City, California and YM BioSciences Inc. During 2011, these fees also included accounting consultation services related to our acquisitions of Arresto Biosciences, Inc., Calistoga Pharmaceuticals, Inc. and Pharmasset, Inc. and the issuance of various tranches of our senior unsecured notes.

(2) 

Represents fees incurred for assurance and related services that are traditionally performed by Ernst & Young LLP, are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under “Audit Fees.” During both 2012 and 2011, audit-related fees consisted of fees incurred in connection with specified procedures performed by Ernst & Young LLP in relation to user-defined reports.

(3) 

Represents fees primarily incurred in connection with domestic and international tax compliance and tax consultation services.

(4) 

During both 2012 and 2011, fees for other professional services were related to accessing Ernst & Young LLP’s online research database. For 2011, fees for other professional services were also related to statutory reporting services for our United Kingdom subsidiary.

 

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All of the services described above were pre-approved by our Audit Committee.

Pre-Approval Policy and Procedures

Our Audit Committee has adopted a policy and procedures for the pre-approval of audit and permissible non-audit services rendered by our independent registered public accounting firm, Ernst & Young LLP. Under this policy, our Audit Committee must pre-approve all services to be provided by the independent registered public accounting firm, and the policy prohibits the engagement of the independent registered public accounting firm for certain specified services. The policy permits the engagement of the independent registered public accounting firm for services that are approved by our Audit Committee in defined categories such as audit services, audit-related services and tax services. The policy also permits engagement of the independent registered public accounting firm for other services approved by our Audit Committee if there is a persuasive business reason for using the independent registered public accounting firm over other providers. The policy provides that as a general rule of thumb, the fees for these other services should be below 25% of total audit fees. Pre-approval may be given as part of our Audit Committee’s approval of the scope of the engagement of the independent registered public accounting firm or on an individual explicit case-by-case basis before the independent registered public accounting firm is engaged to provide each service. The pre-approval of services may be delegated by our Audit Committee to a member of the Audit Committee. Our Audit Committee receives quarterly reports on the scope of services provided to date and planned to be provided by the independent registered public accounting firm in the future.

THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” PROPOSAL 2.

 

 

 

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PROPOSAL 3

APPROVAL OF A RESTATEMENT OF GILEAD SCIENCES, INC.’S 2004 EQUITY INCENTIVE PLAN

Stockholders are being asked to approve the January 2013 restatement of our 2004 Equity Incentive Plan (the “2004 Plan”) that will:

 

   

expand and re-confirm the list of:

 

   

financial and non-financial performance criteria that may be utilized in the formulation of the specific performance goals to which the vesting of performance-based awards under the 2004 Plan may be tied; and

 

   

permissible adjustments that may be made to those criteria in assessing performance goal attainment.

This would enable us to make awards that continue to qualify as performance-based compensation not subject to the one million dollar ($1,000,000) limitation on income tax deductibility per executive officer imposed under Section 162(m) of the Internal Revenue Code (the “Code”).

 

   

impose limitations on the aggregate grant-date value for which awards denominated in shares of common stock, whether in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units and phantom shares, may be made under the 2004 Plan per calendar year to each continuing non-employee Board member or each newly elected or appointed no-employee Board member;

 

   

extend the term of the 2004 Plan until May 7, 2023;

 

   

impose a limitation on the maximum number of shares of common stock that may be issued under the 2004 Plan pursuant to tax-favored incentive stock options granted after December 31, 2012; and

 

   

effect other revisions to allow the 2004 Plan to continue to comply with the requirements of applicable laws and regulations, including (without limitation) the imposition of additional restrictions on the repricing of stock options and stock appreciation rights.

The new January 2013 restatement of the 2004 Plan (the “January 2013 Restatement”) will not result in any increase in the number of shares of common stock reserved for issuance over the term of the plan. However, all awards currently outstanding under the 2004 Plan will continue to be governed by the existing terms and provisions of the applicable agreements evidencing those awards, and nothing in the new restatement will affect or modify the existing terms and conditions of those awards.

All share numbers that appear in this proposal reflect the two-for-one stock split of the Gilead’s common stock that was completed on January 25, 2013.

 

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The table below summarizes, as of February 28, 2013, the remaining share reserve under each of our equity incentive plans, the number of shares subject to outstanding awards under each such plan, the weighted average exercise price of those awards and the weighted average remaining contractual term:

 

    

Shares Available for

Future Grant

   Outstanding Awards

Plan

  

Number of
Shares

   Number of
Shares
  Weighted Average
Exercise Price(1)
  Weighted Average
Remaining
Contractual Term(2)

2004 Plan

   77,270,126(3)        84,387,190 (4)     $ 19.3989         5.00 years  

1991 Stock Option Plan

   We no longer grant equity
awards under this plan
       8,349,356       $ 7.5440         0.89 years  

CV Therapeutics, Inc. 2004 Equity Incentive Plan

   We no longer grant equity
awards under this plan
       313,816       $ 25.3478         2.70 years  

Corus Pharma, Inc. 2001 Stock Plan

   We no longer grant equity
awards under this plan
       7,362       $ 6.2753         1.65 years  

Myogen, Inc. 2003 Equity Incentive Plan

   We no longer grant equity
awards under this plan
       149,244       $ 10.2249         2.98 years  

Arresto Biosciences, Inc. 2007 Equity Incentive Plan

   We no longer grant equity
awards under this plan
       17,596         0.715         6.66 years  

Total

   77,270,126(3)        93,224,564       $ 18.0189 (5)       4.51years (6)
  

 

    

 

 

     

 

 

     

 

 

 

 

(1) 

Represents the weighted average exercise price of the options outstanding on February 28, 2013 under each listed equity incentive plan.

(2) 

Represents the weighted average remaining contractual term of all options outstanding on February 28, 2013 under each listed equity incentive plan.

(3) 

Reflects two-for-one stock split effective January 25, 2013.

(4) 

Includes 3,109,680 shares of our common stock subject to performance share awards that will vest and become issuable upon the attainment of designated performance objectives, without any cash consideration or other payment required of the recipient.

(5) 

Represents the weighted average exercise price of all options outstanding on February 28, 2013 under all of our listed equity incentive plans.

(6) 

Represents the weighted average remaining contractual term of all options outstanding on such date under all of our listed equity incentive plans.

General

We believe that a comprehensive equity compensation program serves as a necessary and powerful tool to attract, retain and incentivize individuals essential to our financial success and accordingly benefits all of our stockholders by allowing us to retain individuals who are expected to make significant contributions to the creation of stockholder value. We have structured the January 2013 Restatement to enable us to achieve the following objectives:

1. The opportunity for stockholders to review our equity incentive plan periodically. We believe it is a sound governance practice to provide our stockholders with the opportunity to evaluate and vote on our equity compensation plan periodically. The purpose of the January 2013 Restatement is to allow our shareholders to provide the requisite approval to allow us to continue to structure one or more future awards under the plan so that they qualify as performance-based compensation not subject to the one million dollar ($1,000,000) limitation on income tax deductibility per executive officer imposed under Section 162(m) of the Code. The January 2013 Restatement will also allow our stockholders to decide whether the term of the 2004 Plan should be extended for an additional period of years through May 7, 2023.

However, we are not at this time seeking stockholder approval of any share increase to the 2004 Plan. We believe the existing share reserve under the 2004 Plan should provide us with sufficient shares to fund future

 

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equity awards under the plan over the next couple of years, subject however to any extraordinary events such as acquisitions

2. Our continued ability to provide equity-based incentive compensation opportunities to substantially all of our U.S. employees and non-employee Board members. Our average net dilution resulting from our equity-based incentive compensation awards made over the 2012, 2011 and 2010 fiscal years was 1.3% per year, which excludes options for 65,428 shares assumed in our acquisition of Arresto Biosciences, Inc. in 2011.

3. The ability to maintain a market-competitive stock-based incentive program by having various types of equity compensation awards available under the 2004 Plan, including: stock options, restricted stock, restricted stock units, performance shares, performance units, phantom shares and stock appreciation rights.(1) The various types of awards available under the 2004 Plan provide us with the flexibility to reward employee performance with equity compensation and respond to market-competitive changes in equity compensation practices. Based on where we are in our life cycle, management and the Compensation Committee of our Board believe that a combination of stock options, performance shares and restricted stock units best align employee compensation with company performance. For our executive officers, we expect to continue to grant a combination of stock options with an exercise price set at the full fair market value of our common stock on the date of grant, performance shares and performance-based restricted stock units. For our broad-based employee population and our non-employee Board members, we expect to continue to grant a combination of stock options and time-based restricted stock units as the primary forms of equity compensation. The additional $1,000,000 limitation that the January 2013 Restatement imposes on the aggregate grant-date value of the awards which may be made under the 2004 Plan to any one continuing or newly-elected or appointed non-employee Board member in a single calendar year is intended to provide a more focused limit on non-employee Board member grants that reflect the typical grant-date value of the annual awards that have been made per non-employee Board member over the last several years.

4. The furtherance of compensation and governance best practices. We have incorporated a number of provisions in the 2004 Plan to protect stockholders and reflect corporate governance best practices. First, the 2004 Plan prohibits the repricing of stock options and stock appreciation rights without stockholder approval and does not contain an evergreen feature that would automatically replenish the number of authorized shares available under the plan. Second, there is a special limitation on the maximum number of shares of restricted stock, restricted stock units, performance shares, performance units (to the extent settled in stock) and phantom shares that may be issued under the 2004 Plan. That limit was increased with stockholder approval at the 2009 annual meeting to 25,000,000 shares (now 50,000,000 shares as a result of the January 25, 2013 stock split). Stock options and stock appreciation rights are not subject to this special limit, because money consideration equal to the aggregate exercise price will be paid for the shares issued upon the exercise of the options, and with respect to the stock appreciation rights, the share reserve will be reduced by the gross number of shares as to which such rights are exercised and not by the net number of shares issued in settlement of those rights. Finally, our stockholder-approved 2004 Plan is the only existing plan under which new equity awards may be granted to our employees, other than our Employee Stock Purchase Plan.

5. The performance criteria under the plan allow us to continue to award equity incentives with meaningful performance milestones that will qualify as performance-based compensation under Section 162(m) of the Code. The January 2013 Restatement, if approved by the stockholders, will allow us to continue to structure one or more future awards under 2004 Plan so that they qualify as performance-based compensation not subject to the $1,000,000 per-person limitation on the income tax deductibility of

 

(1)  The 2004 Plan also provides us with the ability to grant dividend equivalent rights with respect to certain types of awards made under the plan. We have never declared or paid a cash dividend and do not intend to grant any dividend equivalent rights in the foreseeable future. However, should we do so, we would treat the number of shares as to which such dividend equivalent rights are granted as subject to the 50,000,000 share limit applicable to full-value share awards. In addition, the 2004 Plan does not allow us to award dividend equivalent rights with respect to shares subject to stock options or stock appreciation rights granted under the plan.

 

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compensation paid to certain of our executive officers that would otherwise be imposed under Section 162(m) of the Code. Accordingly, awards of performance shares, performance units, restricted stock units and phantom shares that will not otherwise vest unless one or more specific goals tied to the stockholder-approved performance criteria under the 2004 Plan are attained should be fully deductible for federal income tax purposes upon settlement. The stock options and any stock appreciation rights we may grant under the 2004 Plan are also designed to qualify as performance-based compensation that is not subject to the Section 162(m) limitation. However, the Plan Administrator has complete discretion to determine whether or not awards under the 2004 Plan will be structured so as to comply with the applicable requirements for performance-based compensation under 162(m) and may make non-compliant awards as and when the circumstances and other relevant factors warrant.

Background on Equity Compensation

Equity compensation has historically been a key element of our compensation program. We believe this practice was a significant contributing factor to our corporate achievements and financial performance in 2012 and stockholder returns over the years. The ability to make equity awards, such as stock options, stock appreciation rights, performance shares, restricted stock and restricted stock units, also enables us to attract and retain the highest caliber of employees. Moreover, such equity awards have allowed us to link incentive rewards to company performance, encourage employee stock ownership and align the interests of employees and Board members with those of our stockholders.

The use of equity compensation is not unique to us. Stock-based awards, such as stock options and restricted stock units (and increasingly other forms of equity compensation), are a common form of compensation within our industry and are typically granted broadly throughout an organization. Without the ability to make equity compensation awards, we would be at a disadvantage against our competitors for recruiting and retaining key talent in that we would be unable to offer the market-competitive total compensation arrangements necessary to attract, retain and motivate individuals critical to our future success. Without the ability to make equity awards, we could be forced to increase cash compensation, thereby reducing resources available for research and development or commercialization of our products.

We understand that stock-based compensation is a valuable and limited resource and that stockholders expect us to utilize this tool in an efficient manner. As a consequence, we have actively managed our stock plans over the past few years to meet stockholder expectations. Over the last three years, our average net annual dilution rate was 1.3% (excluding certain options we assumed in the acquisitions described above). To manage our stock plans, individual annual grants are linked directly to an employee’s performance. Management and our Compensation Committee also carefully monitor and manage the total number of shares of our common stock available for issuance under the 2004 Plan, which is currently at a level that approximates the 50th percentile of our peer group.

We strongly believe that our equity compensation program and emphasis on employee stock ownership have been integral to our success to date, and that the equity program will continue to play a key role in our ability to achieve consistently superior performance in the years ahead. Our equity program is critical to our ability to recruit top-notch talent and to reward individual employee performance that results in increased stockholder value. Therefore, we consider approval of the January 2013 Restatement to be vital to our continued success. Please see information under “Compensation Discussion and Analysis—Equity Compensation Program Overview” on page 54 below for more information concerning our policies and philosophy with regard to equity compensation for executive officers.

The January 2013 Restatement of the 2004 Plan is attached hereto as Appendix A. The affirmative vote of the holders of a majority of the shares present in person or represented by proxy and entitled to vote at the Annual Meeting will be required to approve the January 2013 Restatement. Abstentions will be counted toward the tabulation of votes cast and will have the same effect as negative votes. Broker non-votes are counted toward a quorum, but are not counted for any purpose in determining whether this proposal has been approved.

 

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Should such stockholder approval not be obtained, then the proposed extension of the term of the 2004 Plan to May 7, 2023 will not be implemented, and the expiration date for the 2004 Plan will remain May 25, 2014. However, the new $1,000,000 limitation on the aggregate grant-date value of the awards which may be made per non-employee Board member in a calendar year will be effected in order to impose a more focused limitation on non-employee Board member grants. The other remaining provisions and features of the 2004 Plan as last approved by the stockholders at the 2009 annual meeting will continue in full force and effect, and awards may continue to be made pursuant to those provisions until May 25, 2014 or until the available share reserve under such plan has been issued. However, any such new awards under the 2004 Plan, other than stock options and stock appreciation rights, will not qualify as performance-based compensation under Code Section 162(m), and the income tax deductibility of those awards will accordingly be subject to the one million dollar limitation per covered executive officer. As a result, we will have to use other alternatives outside of the 2004 Plan to provide such qualifying performance-based compensation, to the extent we decide to make awards intended to satisfy the Code Section 162(m) requirements.

Key Provisions

The 2004 Plan is designed to reflect prevailing corporate governance and executive compensation best practices. The following is a summary of the key provisions of the 2004 Plan (assuming stockholder approval of the January 2013 Restatement), but such summary does not purport to be a complete description of all the provisions of the 2004 Plan and is qualified in its entirety by reference to the provisions of the January 2013 Restatement itself.

 

Plan Termination Date:    May 7, 2023   
Eligible Participants:    Executive officers and other employees, non-employee Board members and consultants in our employ or service or the employ or service of our subsidiaries or other related entities   
Shares Authorized over Term of Plan:    243,188,366(1)   
Shares Available for Future Awards as of February 28, 2013:    77,270,126(2)   
Shares Authorized as a Percent of Common Stock Outstanding on February 28, 2013(3):    16%   
Award Types:   

(1) Incentive stock options

 

(2) Non-statutory stock options

 

(3) Stock appreciation rights

 

(4) Restricted stock

 

(5) Restricted stock units

 

(6) Performance shares

 

(7) Performance units

 

(8) Phantom shares

 

(9) Dividend equivalent rights(4)

  
Grant Limits Per Person Per Calendar Year:    Maximum number of shares subject to stock options and granted during the calendar year:      5,000,000 (5) 
   Maximum number of shares subject to restricted stock, restricted stock units, performance shares, performance units, phantom shares and stock appreciation rights granted during the calendar year:      2,000,000 (6) 
   Maximum value of awards denominated in U.S. dollars granted during the calendar year:    $ 10,000,000 (7) 

 

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Additional Grant Limit Per Non-Employee Board Member Per Calendar Year:    Maximum aggregate grant-date value of awards, whether made in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units or phantom shares, which may be per non-employee Board member during the calendar year:    $ 1,000,000   
Limit on Maximum Number of Shares Subject to Restricted Stock, Restricted Stock Unit, Performance Share, Performance Unit (to the extent settled in shares) and Phantom Share Awards:    Maximum number of shares subject to restricted stock, restricted stock units, performance shares, performance units, and phantom shares that may granted under the Plan:      50,000,000 (8) 
Not Permitted:    Repricing of stock options or stock appreciation rights, unless approved by stockholders   

 

(1) 

Includes (a) 90,400,000 shares authorized for issuance under the 2004 Plan plus (b) 62,388,366 shares that have as of February 28, 2013 been transferred in the aggregate to the 2004 Plan from the previously-authorized but unissued reserve under the Gilead Sciences, Inc. 1991 Stock Option Plan and the Gilead Sciences, Inc. 1995 Non-Employee Directors’ Stock Option Plan, including shares that were available for future award under such plans on May 25, 2004, the date the stockholders first approved the 2004 Plan, and shares subject to awards outstanding under those plans on that date that have subsequently terminated or expired without the issuance of vested shares thereunder plus (c) an additional 90,400,000 shares to reflect the two-for-one split of the common stock effected on January 25, 2013.

(2) 

Includes the 20,000,000 share increase (now 40,000,000 shares as a result of the January 25, 2013 split) to the 2004 Plan approved by the stockholders at the 2009 annual meeting.

(3) 

As of February 28, 2013, 1,522,709,320 shares of our common stock (post-January 25, 2013 stock split) were outstanding.

(4) 

We have never declared or paid a cash dividend to stockholders in our history and do not intend to grant any dividend equivalent rights in the foreseeable future. In addition, dividend equivalent rights cannot be awarded with respect to shares subject to stock options or stock appreciation rights granted under the 2004 Plan.

(5) 

Under the 2004 Plan, an employee may be granted options to purchase up to an additional 1,000,000 shares of common stock (now 2,000,000 as a result of the January 25, 2013 stock split) in the calendar year in which his or her hire or promotion date occurs.

(6) 

The increase in this limit from 400,000 shares to 1,000,000 shares (now 2,000,000 shares as a result of the January 25, 2013 stock split) was approved by the stockholders at the 2009 annual meeting. Under the 2004 Plan, an employee may be granted restricted stock, restricted stock units, performance shares, performance units, stock appreciation rights or phantom shares for up to an additional 200,000 shares (now 400,000 as a result of the January 25, 2013 stock split) in excess of the 2,000,000-share limit in the calendar year in which his or her hire or promotion date occurs.

(7) 

The increase in this limit from $7,000,000 to $10,000,000 was approved by the stockholders at the 2009 annual meeting.

(8) 

The increase in this limit from 10,000,000 shares to 25,000,000 shares (now 50,000,000 shares as a result of the January 25, 2013 stock split) was approved by the stockholders at the 2009 annual meeting.

Eligibility

Executive officers and other employees, non-employee members of our Board and consultants in our employ or service or in the employ or service of our parent or subsidiaries (whether now existing or subsequently established) or other related entities are eligible to receive awards under the 2004 Plan. As of February 28, 2013, approximately 4,600 employees (including six executive officers) and eleven non-employee Board members were eligible to participate in the 2004 Plan.

 

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Share Reserve

As of February 28, 2013, 84,387,190 shares of common stock were subject to outstanding awards under the 2004 Plan, 81,531,050 shares had been issued under the 2004 Plan pursuant to exercised options and other stock-settled awards, such as performance shares, restricted stock units and phantom share distributions, and an additional 77,270,126 shares of common stock remained available for future award.

The maximum number of shares of common stock that may be issued from the available share reserve pursuant to tax-favored incentive stock options that are granted under the 2004 Plan after December 31, 2012 will be limited to 129,325,853 shares.

As indicated in the chart above, there are limitations on the maximum number of shares for which any one participant may be granted stock options or other stock awards under the Plan per calendar year. No participant may receive stock options for more than 5,000,000 shares of common stock in any one calendar year (or for more than 7,000,000 shares in the calendar year of hire or promotion). No participant may be awarded restricted stock, restricted stock units, performance shares, performance units (to the extent settled in shares of common stock), stock appreciation rights or phantom shares covering more than 2,000,000 shares in the aggregate in any one calendar year (or for more than 2,400,000 shares in the calendar year of hire or promotion). In addition to the limitations on the maximum number of shares for which awards may be made to any participant under the Plan per calendar year, there is also a limit on the maximum dollar value of cash-denominated awards that a participant may be granted under the Plan per calendar year. No participant may be awarded cash-denominated awards of more than $10,000,000 U.S. dollars in the aggregate in any single calendar year. Our executive compensation program does not currently include the grant of cash-denominated awards.

Stockholder approval of this proposal will also constitute re-approval of each of the foregoing limitations for purposes of Section 162(m) of the Code. The approved limitations will assure that any deductions to which we would otherwise be entitled upon the exercise of stock options or stock appreciation rights granted under the 2004 Plan will not be subject to the $1,000,000 limitation on the income tax deductibility of compensation paid per covered executive officer imposed under Section 162(m). In addition, shares issued pursuant to restricted stock, restricted stock units, performance shares, performance units or phantom shares awarded under the 2004 Plan may also qualify as performance-based compensation that is not subject to the Section 162(m) limitation, if the award covering those shares is approved by our Compensation Committee and the vesting of such award is tied to the attainment of performance milestones based on one or more of the performance criteria discussed below.

There is an additional limitation on the maximum grant-date value of awards which may be made in the aggregate to any one non-employee Board member under the 2004 Plan per calendar year. A non-employee Board member may not receive awards under the 2004 Plan, whether in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units or phantom shares, with an aggregate grant date value in excess of $1,000,000 in any calendar year. That limitation applies to both continuing non-employee Board members and newly-appointed or elected non-employee Board members.

The shares of common stock issuable under the 2004 Plan may be drawn from shares of our authorized or unissued shares or from shares reacquired by us, including shares repurchased on the open market. Shares subject to any outstanding options or other awards under the 2004 Plan that are forfeited, canceled or expire are deemed not to have been issued for purposes of determining the maximum number of shares which may be issued in the aggregate under the 2004 Plan. Unvested shares that are forfeited or repurchased by us at the lower of their original purchase price or their fair market value at the time of repurchase will become available for future grant.

We do not have any net counting provisions in effect under the 2004 Plan. The share counting provisions are as follows:

 

   

Should the exercise price of an option under the 2004 Plan be paid with shares of common stock, the authorized reserve under the 2004 Plan will be reduced by the gross number of shares for which that option is exercised, and not by the net number of shares issued under the exercised stock option.

 

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Upon the exercise of a stock appreciation right granted under the 2004 Plan, the share reserve will be reduced by the gross number of shares as to which that stock appreciation right is exercised, and not by the net number of shares issued in settlement of the exercised stock appreciation right.

 

   

Should shares of common stock otherwise issuable under the 2004 Plan be withheld in satisfaction of the applicable withholding taxes incurred in connection with the exercise, vesting or settlement of an award under the 2004 Plan, then the number of shares of common stock available for issuance under the 2004 Plan will be reduced by the gross number of shares issuable under such award, calculated prior to such share withholding.

Valuation

The fair market value per share of our common stock on any relevant date under the 2004 Plan will be deemed to be equal to the closing sale price per share of our common stock on that date on the primary market on which our common stock is at the time traded. On February 28, 2013, the fair market value was $42.72 per share, based on the closing sale price of our common stock on that date on the NASDAQ Global Select Market. If the date in question is not a date on which our common stock is traded, then the immediately preceding trading date will be used.

Administration

Our Compensation Committee serves as the primary administrator of the 2004 Plan and has the exclusive authority to administer the 2004 Plan with respect to our executive officers and the non-employee members of our Board. However, our Board may administer the 2004 Plan with respect to eligible individuals other than executive officers and non-employee Board members and may also authorize one or more Board committees or one or more of our officers to make awards under the 2004 Plan to those eligible individuals. The term Plan Administrator, as used in this summary, means our Compensation Committee, our Board, any other committee of our Board and any officer or officers granted administrative authority under the 2004 Plan, to the extent each such entity or person is acting within the scope of such person’s or entity’s administrative jurisdiction under the 2004 Plan.

The Plan Administrator has the discretion to select the eligible individuals to whom awards are to be granted under the 2004 Plan and the terms and conditions of each award, including the number of shares of common stock underlying the award or the dollar amount of any cash award made under the plan, the vesting schedule in effect for the award (including any applicable performance goals), the issuance schedule for the shares to be issued in settlement of the award, the maximum term of the award and the provisions for satisfying the applicable withholding taxes upon the exercise, vesting or settlement of the award.

Awards

The 2004 Plan provides for the following types of awards: incentive stock options, non-statutory stock options, stock appreciation rights, dividend equivalent rights, restricted stock, restricted stock units, performance units, performance shares, phantom shares and dividend equivalent rights. However, dividend equivalent rights may not be awarded with respect to shares of our common stock subject to outstanding stock options or stock appreciations rights granted under the 2004 Plan. Awards under the 2004 Plan will vest upon the completion of a designated service period and/or the attainment of pre-established performance goals.

To assure that the compensation attributable to one or more awards under the 2004 Plan will qualify as performance-based compensation that will not be subject to the $1,000,000 limitation imposed by Section 162(m) of the Code on the income tax deductibility of the compensation paid per covered executive officer, our Compensation Committee will have the discretionary authority to structure one or more awards so that the shares of common stock subject to those particular awards will not vest unless certain pre-established performance goals are achieved. Such goals may be based on one or more of the following criteria: (i) revenue target or revenue growth; (ii) achievement of specified milestones in the discovery, development or regulatory

 

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approval of one or more of our products; (iii) achievement of specified milestones in the commercialization of one or more of our products; (iv) achievement of specified milestones in the manufacturing of one or more of our products; (v) cost reduction or other expense control targets; (vi) personal management objectives; (vii) stock price (including, but not limited to, growth measures); (viii) total stockholder return; (ix) earnings per share; (x) operating efficiency; (xi) operating margin; (xii) gross margin; (xiii) return measures (including, but not limited to, return on assets, capital, equity, or sales); (xiv) net sales growth; (xv) productivity ratios; (xvi) operating income; (xvii) net operating profit; (xviii) net earnings or net income (before or after taxes); (xix) cash flow (including, but not limited to, operating cash flow, free cash flow, and cash flow return on capital); (xx) earnings or operating income before interest, taxes, depreciation, amortization and/or stock-based compensation expense; (xxi) economic value added; (xxii) market share; (xxiii) customer satisfaction; (xxiv) working capital targets; (xxv) budget objectives, (xxvi) mergers, acquisitions or divestitures and (xxvii) with respect to awards not intended to be performance-based compensation under Section 162(m), other measures of performance selected by the Plan Administrator.

Each performance objective may be based upon the attainment of specified levels of our performance measured under one or more of the criteria described above, either in absolute terms or in relation to the performance of other entities, and may also be based on the performance of any of our business units or divisions or any parent or subsidiary company. In addition, one or more of such performance criteria may be measured in terms of percentage achievement of the budgeted amounts established for those criteria. Each applicable performance objective may include a minimum threshold level of performance below which no award will be earned, levels of performance at which specified portions of the award will be earned and a maximum level of performance at which the award will be fully earned.

Each applicable performance criteria may be structured at the time of the award to provide for appropriate adjustment for one or more of the following items: (i) asset impairments or write-downs; (ii) litigation and governmental investigation expenses and judgments, verdicts or claim settlements; (iii) the effect of changes in tax law, accounting principles or other laws, regulations or provisions affecting reported results; (iv) the effect of exchange rates for non-U.S. dollar denominated net sales or goals based on operating profit, earnings or income; (v) accruals for reorganization and restructuring programs; (vi) any extraordinary nonrecurring items, as determined under generally accepted accounting principles or as described in management’s discussion and analysis of financial condition and results of operations appearing in our annual report to stockholders for the applicable year, (vii) costs and expenses incurred in connection with mergers and acquisitions, (viii) items of income, gain, loss or expense attributable to the operations of any business acquired by us or any parent or subsidiary or of any joint venture established by us or any parent or subsidiary; (ix) items of income, gain, loss or expense attributable to one or more business operations divested by us or any parent or subsidiary or the gain or loss realized upon the sale of any such divested business or the assets thereof; or (x) the effect of any change in the outstanding shares of our common stock effected by reason of a stock split, stock dividend, stock repurchase, reorganization, recapitalization, merger, consolidation, spin-off, combination or exchange of shares or other similar corporate change or any distributions to our stockholders other than regular cash dividends.

Stockholder approval of the January 2013 Restatement will also constitute approval of the foregoing performance criteria and adjustments for purposes of establishing the specific vesting targets for one or more awards under the 2004 Plan that are intended to qualify as performance-based compensation under Code Section 162(m). However, not all awards made under the 2004 Plan will be structured to qualify as such performance-based compensation, and the Plan Administrator will have complete discretion to determine whether or not the award is to be structured so as to qualify as performance-based compensation.

The principal features of the various types of awards authorized under the 2004 Plan may be summarized as follows:

 

   

Stock Options. The exercise price of stock options granted under the 2004 Plan may not be less than the fair market value of our common stock on the grant date, and no stock option may have a term in excess of ten years. The granted option will generally become exercisable in one or more installments

 

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over a specified period of service measured from the grant date. Payment of the exercise price may be made in cash or in shares of our common stock, including a net issuance using shares otherwise purchasable under the option to pay the exercise price. The option may also be exercised through a broker-dealer sale and remittance procedure pursuant to which the optionee affects a same-day exercise of the option and sale of the purchased shares in order to cover the exercise price for the purchased shares and the applicable withholding taxes.

 

   

Stock Appreciation Rights. A stock appreciation right granted under the 2004 Plan will allow the holder to exercise that right as to a specific number of shares of common stock and receive in exchange an appreciation distribution from us in an amount equal to the excess of (i) the fair market value of the shares of common stock as to which the stock appreciation right is exercised over (ii) the aggregate base price in effect for those shares. The base price per share may not be less than the fair market value per share of the common stock on the date the stock appreciation right is granted, and the right may not have a term in excess of ten years. The distribution may be made in cash or in shares of our common stock.

 

   

Restricted Stock. The Plan Administrator may make awards of unvested shares of our common stock. The Plan Administrator will determine the vesting schedule of those shares at the time of the award (including any performance-vesting requirements), the amount of consideration to be paid, if any, for the restricted stock and the form in which such consideration may be paid.

 

   

Restricted Stock Units. A restricted stock unit award under the 2004 Plan will entitle the holder to receive one share of our common stock for each awarded unit upon the completion of a designated service period and/or the attainment of specified performance objectives as determined by the Plan Administrator. The shares of common stock underlying the restricted stock units may be issued immediately upon vesting or may be deferred to a later date, as described below.

 

   

Performance Shares. A performance share award will be denominated in shares of our common stock. At the time of the award, the Plan Administrator will determine the performance goal or goals to be attained in order for the underlying shares to vest, any additional period of service required of the grantee after the performance goals are attained, the amount of consideration to be paid, if any, for the performance shares and the form in which such consideration may be paid. The performance shares which vest under the terms of the award may be settled in shares of our common stock or in cash. Settlement may occur at the time of vesting or may be deferred to a later date, as described below.

 

   

Performance Units. A performance unit award will be denominated in terms of a fixed dollar amount. At the time of the award, the Plan Administrator will determine the performance goal or goals to be attained in order for the performance units to vest and any additional period of service required of the grantee after those performance goals are attained. The performance units which vest under the terms of the award will be paid in cash or, at the discretion of the Plan Administrator, may be settled in shares of our common stock with a fair market value equal to such cash amount. Settlement may occur at the time of vesting or may be deferred to a later date, as described below.

 

   

Phantom Shares. Phantom shares are denominated in terms of our common stock, but do not provide any actual stockholder rights to the individual. At the time of the award, the Plan Administrator will determine the performance criteria to be attained and/or the service period, if any, to be completed in order for the phantom shares to vest. Any phantom shares which vest under the terms of the award may be settled in shares of our common stock or in cash. Settlement may occur at the time of vesting or may be deferred to a later date, as described below.

Grants to Non-Employee Board Members

We also use the 2004 Plan to help administer our compensation program for the non-employee members of our Board. There is no automatic grant program in effect for our non-employee Board members under the 2004 Plan, and all grants to our non-employee Board members are discretionary. However, the January 2013 Restatement will impose the following limitation on the grants that may be made per non-employee Board

 

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member, commencing with the 2013 calendar year, and that limitation will be in effect, whether or not the stockholders approve the January 2013 Restatement:

A non-employee Board member may not be granted awards under the 2004 Plan, whether in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units or phantom shares, with an aggregate grant date value in excess of $1,000,000 in any calendar year. Such limitation will apply to both continuing non-employee Board members and newly-elected or appointed non-employee Board members.

Under our Deferred Compensation Plan, non-employee Board members are allowed to defer receipt of all or a portion of their annual cash retainers in the form of phantom shares granted under the 2004 Plan.

Equity Awards Since January 1, 2008

Option Transactions

The following table sets forth, as to our Named Executive Officers who are identified in the Summary Compensation Table which appears on page 75 below and the other individuals and groups indicated, the number of shares of our common stock subject to option grants made under the 2004 Plan from January 1, 2008 through February 28, 2013, together with the weighted average exercise price per share for such option grants. No stock appreciation rights were granted during such period.

 

Name & Position

   Number of Shares
Underlying Options
Granted
     Weighted Average
Exercise Price Per
Share
 

Named Executive Officers

     

John C. Martin

     4,030,750       $ 23.9857   

Chairman and Chief Executive Officer

     

Robin L. Washington

     910,290       $ 25.3529   

Senior Vice President and Chief Financial Officer

     

John F. Milligan

     1,796,120       $ 23.9825   

President and Chief Operating Officer

     

Norbert W. Bischofberger

     1,147,560       $ 24.3905   

Executive Vice President, Research and Development and Chief Scientific Officer

     

Kevin Young

     1,173,270       $ 23.9032   

Executive Vice President, Commercial Operations

     

Non-Employee Board Members

     

John F. Cogan

     129,892       $ 23.7151   

Etienne F. Davignon

     36,604       $ 22.8656   

James M. Denny

     144,892       $ 24.0153   

Carla A. Hills

     122,392       $ 23.5374   

Kevin E. Lofton

     71,532       $ 22.2597   

John W. Madigan

     129,892       $ 23.7151   

Gordon E. Moore

     129,892       $ 23.7151   

Nicholas G. Moore

     142,392       $ 23.9697   

Richard J. Whitley

     137,392       $ 24.0372   

Gayle E. Wilson

     137,392       $ 23.8734   

Per Wold-Olsen

     63,232       $ 21.8232   

All current executive officers as a group (6 persons)

     10,564,060       $ 24.2131   

All current non-employee Board members as a group (11 persons)

     1,245,504       $ 23.6101   

All employees, including current officers who are not executive officers, as a group

     39,397,406       $ 24.2131   

 

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Stock Awards

The following table shows, as to our Named Executive Officers who are identified in the Summary Compensation Table which appears on page 75 below and the other individuals and groups indicated, the number of shares of common stock subject to restricted stock, restricted stock units, performance shares and phantom shares awarded under the 2004 Plan between January 1, 2008 and February 28, 2013. No other type of stock award was made during such period.

 

Name & Position

   Number of Shares
Subject to Restricted
Stock Awards
     Number of Shares
Subject to Restricted
Stock Units
     Number of Shares
Subject to
Performance Share
Awards
 

Named Executive Officers

        

John C. Martin

                     1,292,870   

Chairman and Chief Executive Officer

        

Robin L. Washington

             30,000         275,020   

Senior Vice President and Chief Financial Officer

        

John F. Milligan

                     559,530   

President and Chief Operating Officer

        

Norbert W. Bischofberger

                     385,050   

Executive Vice President, Research and Development and Chief Scientific Officer

        

Kevin Young

                     383,820   

Executive Vice President, Commercial Operations

        

Non-Employee Board Members

        

John F. Cogan

             27,568           

Etienne F. Davignon

     42,782         13,116           

James M. Denny

             27,568           

Carla A. Hills

             27,568           

Kevin E. Lofton

             25,474           

John W. Madigan

             27,568           

Gordon E. Moore

             27,568           

Nicholas G. Moore

             27,568           

Richard J. Whitley

             27,568           

Gayle E. Wilson

             27,568           

Per Wold-Olsen

             22,536           

All current executive officers as a group (6 persons)

             30,000         3,239,718   

All current non-employee Board members as a group (11 persons)

     42,782         281,670           

All employees, including current officers who are not executive officers, as a group

             28,364,106         2,086,680   

New Plan Benefits

As of February 28, 2013 no awards had been made, and no shares had been issued, under the 2004 Plan on the basis of the amendments to the 2004 Plan that included in the January 2013 Restatement.

General Provisions

Limitations on Vesting

Except with respect to a maximum of 5% of the total number of shares of common stock authorized for issuance under the 2004 Plan, no awards of restricted stock or restricted stock units which vest solely on the basis

 

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of continued service with us or any parent or subsidiary company will provide for vesting at a rate more rapid than annual pro rata vesting over a three-year period, and any awards of restricted stock, restricted stock units, performance shares or performance units which provide for vesting upon the attainment of performance goals will provide for a performance period of at least 12 months; provided, however, that such limitations will not apply in the event of a change in control transaction or to any award recipient whose service terminates by reason of death, disability or an involuntary termination other than for cause or to any award made after June 30, 2013 to a non-employee Board member.

Transferability

Generally, awards under the 2004 Plan may not, prior to settlement, be transferred assigned, pledged or disposed of in any manner other than by will or the laws of inheritance following the grantee’s death. However, a grantee may assign awards to a revocable living trust established by the grantee (or by the grantee and his or her spouse) of which he or she is a trustee or co-trustee with his or her spouse. In addition, a grantee may designate a beneficiary to receive the vested portion of his or her awards in the event of their death, and the Plan Administrator also has the authority to allow the transfer of awards other than incentive stock options by gift or pursuant to a domestic relations order to members of the grantee’s immediate family or former spouse.

Termination of Employment

Upon termination of employment, the grantee will have a limited period in which to exercise outstanding stock options or stock appreciation rights as to any shares which are vested at that time. The applicable post-employment exercise period will be determined by the Plan Administrator, need not be uniform for all awards made under the 2004 Plan, and may reflect distinctions based on the reasons for termination of employment. Other outstanding awards held by a grantee at the time of his or her termination of employment (other than by reason of death, total and permanent disability or for some awards, retirement) will be forfeited to the extent they are not vested at that time. If the grantee previously paid any cash consideration for the forfeited shares, then we will pay to such individual the lower of the cash amount paid for those shares or their then fair market value.

Deferral of Settlement

The Plan Administrator may provide selected grantees with the opportunity to defer receipt of the shares of common stock or other consideration due upon the settlement of their awards following the satisfaction of the applicable vesting requirements. The Plan Administrator will have the discretionary authority, subject to the applicable requirements of Section 409A of the Code, to establish the election process, the amounts eligible for deferral, the procedures for crediting interest or other investment return on the deferred amounts, the timing and form of payment of those deferred amounts and such other terms, conditions, rules and procedures as the Plan Administrator deems advisable for the administration of the deferral program.

Change in Control

Stock options and stock appreciation rights outstanding under the 2004 Plan at the time a change in control is effected will be subject to one or more of the following methods of disposition: (i) the options and stock appreciation rights may be assumed by the surviving corporation or replaced with economically equivalent cash or equity awards, (ii) the options and stock appreciation rights may vest in full immediately prior to the change in control and then terminate immediately after the consummation of the change in control, to the extent not previously exercised, or (iii) the options and stock appreciation rights may be continued in full force and effect following such change in control.

Any other awards outstanding under the 2004 Plan at the time a change in control is effected will automatically vest in full on an accelerated basis, and the shares of common stock subject to those awards will be issued as fully vested shares, immediately prior to the change in control, except to the extent (i) those awards are assumed by the successor corporation or otherwise continued in effect or (ii) such awards are replaced with economically equivalent cash or equity awards.

 

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Awards under the 2004 Plan will vest in full in the event the grantee’s service with us or the successor entity is terminated (actually or constructively) within a designated period following a change in control in which those awards are assumed, replaced with an economically-equivalent substitute award or otherwise continued in effect. In addition, the Plan Administrator will have the discretion to structure one or more awards under the 2004 Plan so that the shares subject to those awards will vest immediately prior to the effective date of a change in control, whether or not those awards are assumed, replaced with an economically-equivalent substitute award or otherwise continued in effect.

Awards subject to performance-vesting requirements may be structured so that upon the occurrence of a change in control prior to the completion of the applicable performance measurement period, the performance goal or goals established for those Awards will be deemed to have been met at a level pre-specified in the award agreement.

A change in control will be deemed to occur in the event (i) we are acquired by merger or asset sale, (ii) any person or group of related persons becomes directly or indirectly the beneficial owner of securities possessing more than 50% of the total combined voting power of our outstanding securities or (iii) certain changes occur in the composition of our Board.

Prohibition against Repricing

Without the consent of our stockholders, no award granted under the 2004 Plan may be repriced, replaced, regranted through cancellation or modified (other than in the event of certain changes in our capital structure as described below), if the effect would be to reduce the exercise or purchase price in effect for the shares underlying that award. Accordingly, the Plan Administrator may not implement any of the following repricing programs under the 2004 Plan without obtaining stockholder approval: (i) the cancellation of outstanding options or stock appreciation rights in return for new options or stock appreciation rights with a lower exercise price per share, (ii) the cancellation of outstanding options or stock appreciation rights with exercise prices per share in excess of the then current fair market value per share of our common stock for consideration payable in cash, equity securities or in the form of any other award under the 2004 Plan, except in connection with a change in control transaction, or (iii) the direct reduction of the exercise price in effect for outstanding options or stock appreciation rights.

Adjustments

In the event any change is made to our outstanding common stock as a result of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares, spin-off transaction or other change affecting our outstanding common stock as a class without our receipt of consideration, or should the value of the outstanding shares of our common stock be substantially reduced as a result of a spin-off transaction or an extraordinary dividend or distribution, or should there occur any merger, consolidation or other reorganization, then equitable and proportional adjustments will be made to the maximum number and class(es) of securities issuable under the 2004 Plan, the maximum number and class(es) of securities issuable under the 2004 Plan pursuant to incentive stock options granted under such plan after December 31, 2012, the maximum number and class(es) of securities as to which awards of restricted stock, restricted stock units, performance shares, performance units (to the extent settled in shares of our common stock) and phantom shares may be made and the maximum number and class(es) of securities for which the various types of awards under the 2004 Plan may be made to any person during any calendar year. Outstanding awards under the 2004 Plan will also be equitably and proportionally adjusted as to the number and class(es) of securities and exercise price (or other cash consideration) payable per share under each such award; provided, however, that the aggregate exercise price (or other cash consideration) will remain the same. The adjustments will be made in such a manner as the Plan Administrator deems appropriate and such adjustments will be final, binding and conclusive.

Withholding

The Plan Administrator may provide holders of awards under the 2004 Plan with the right to use shares of

 

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our common stock in satisfaction of all or part of the federal and state income and employment withholding taxes to which they may become subject in connection with the exercise, vesting or settlement of those awards. Either of the following alternatives may be utilized to satisfy the applicable withholding taxes:

 

   

Stock withholding: The election to have us withhold, from the shares otherwise issuable upon the exercise, vesting or settlement of that award, a portion of those shares with an aggregate fair market value equal to the percentage of the withholding taxes (not to exceed 100%) designated by the holder. The shares so withheld will reduce the number of shares of common stock authorized for issuance under the 2004 Plan.

 

   

Stock delivery: The election to deliver to us, at the time of the exercise, vesting or settlement of such award, shares of our common stock at the time held by such individual with an aggregate fair market value equal to the percentage of the withholding taxes (not to exceed 100%) designated by such individual. The shares of common stock so delivered will not be added to the number of shares of common stock authorized for issuance under the 2004 Plan.

In addition, the Plan Administrator may structure an award under the 2004 Plan so that a portion of the shares of common stock otherwise issuable under those awards will automatically be withheld by us in satisfaction of the withholding taxes which become applicable in connection with the exercise, vesting or settlement of that award.

Amendments and Termination

The Board may amend, suspend or terminate the 2004 Plan at any time; provided, however, no amendments to the 2004 Plan will be made without the approval of our stockholders, if such approval is required by applicable law or regulation or the listing standards of the exchange on which our common stock is at the time primarily traded, or if such amendment would change any provisions of Section 4(b)(vi) or Section 13(a) of the 2004 Plan. Unless earlier terminated by our Board, the 2004 Plan will terminate on May 7, 2023 or, if the new restatement is not approved at the Annual Meeting, on May 25, 2014.

Federal Income Tax Consequences

The following is a summary of the Federal income taxation treatment applicable to us and the participants who receive awards under the 2004 Plan.

Option Grants

Options granted under the 2004 Plan may be either incentive stock options, which satisfy the requirements of Section 422 of the Code, or non-statutory stock options, which are not intended to meet such requirements. The Federal income tax treatment for the two types of options differs as follows:

Incentive Stock Options

No taxable income is recognized by the optionee at the time of the option grant, and no taxable income is recognized for ordinary income tax purposes at the time the option is exercised, although taxable income may arise at that time for alternative minimum tax purposes. The optionee will recognize taxable income in the year in which the purchased shares are sold or otherwise made the subject of certain other dispositions. For Federal tax purposes, dispositions are divided into two categories: (i) qualifying and (ii) disqualifying. A qualifying disposition occurs if the sale or other disposition is made more than two years after the date the option for the shares involved in such sale or disposition is granted and more than one (1) year after the date the option is exercised for those shares. If the sale or disposition occurs before those two periods are satisfied, then a disqualifying disposition will result.

Upon a qualifying disposition, the optionee will recognize long-term capital gain in an amount equal to the excess of (i) the amount realized upon the sale or other disposition of the purchased shares over (ii) the exercise

 

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price paid for the shares. If there is a disqualifying disposition of the shares, then the excess of (i) the fair market value of those shares on the exercise date or (if less) the amount realized upon such sale or disposition over (ii) the exercise price paid for the shares will be taxable as ordinary income to the optionee. Any additional gain or loss recognized upon the disposition will be a capital gain or loss.

If the optionee makes a disqualifying disposition of the purchased shares, then we will be entitled to an income tax deduction, for the taxable year in which such disposition occurs, equal to the amount of ordinary income recognized by the optionee as a result of the disposition. We will not be entitled to any income tax deduction if the optionee makes a qualifying disposition of the shares.

Non-Statutory Options

No taxable income is recognized by an optionee upon the grant of a non-statutory option. The optionee in general will recognize ordinary income, in the year in which the option is exercised, equal to the excess of the fair market value of the purchased shares on the exercise date over the exercise price paid for the shares, and the optionee will be required to satisfy the tax withholding requirements applicable to such income. We will be entitled to an income tax deduction equal to the amount of ordinary income recognized by the optionee with respect to the exercised non-statutory option. The deduction in general will be allowed for our taxable year in which such ordinary income is recognized by the optionee.

Stock Appreciation Rights

No taxable income is recognized upon receipt of a stock appreciation right. The holder will recognize ordinary income in the year in which the stock appreciation right is exercised, in an amount equal to the excess of the fair market value of the underlying shares of common stock on the exercise date over the base price in effect for the exercised right, and the holder will be required to satisfy the tax withholding requirements applicable to such income. We will be entitled to an income tax deduction equal to the amount of ordinary income recognized by the holder in connection with the exercise of the stock appreciation right. The deduction will be allowed for the taxable year in which such ordinary income is recognized.

Restricted Stock Awards

The recipient of unvested shares of common stock issued under the 2004 Plan will not recognize any taxable income at the time those shares are issued but will have to report as ordinary income, as and when those shares subsequently vest, an amount equal to the excess of (i) the fair market value of the shares on the vesting date over (ii) the cash consideration (if any) paid for the shares. The recipient may, however, elect under Section 83(b) of the Code to include as ordinary income in the year the unvested shares are issued an amount equal to the excess of (i) the fair market value of those shares on the issue date over (ii) the cash consideration (if any) paid for such shares. If the Section 83(b) election is made, the recipient will not recognize any additional income as and when the shares subsequently vest. Subject to the deductibility limitations of Section 162(m) described below, we will be entitled to an income tax deduction equal to the amount of ordinary income recognized by the recipient with respect to the unvested shares. The deduction in general will be allowed for our taxable year in which such ordinary income is recognized by the recipient.

Restricted Stock Units

No taxable income is recognized upon receipt of restricted stock units. The holder will recognize ordinary income in the year in which the shares subject to the units are actually issued to the holder. The amount of that income will be equal to the fair market value of the shares on the date of issuance, and the holder will be required to satisfy the tax withholding requirements applicable to such income. Subject to the deductibility limitations of Section 162(m) described below, we will be entitled to an income tax deduction equal to the amount of ordinary income recognized by the holder at the time the shares are issued. The deduction will be allowed for the taxable year in which such ordinary income is recognized.

 

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Performance Shares/Performance Units/Phantom Shares

No taxable income is recognized upon receipt of such award. The holder will recognize ordinary income in the year in which the shares subject to the award are actually issued or in the year in which the award is settled in cash. The amount of that income will be equal to the fair market value of the shares on the date of issuance or the amount of the cash paid in settlement of the award, and the holder will be required to satisfy the tax withholding requirements applicable to the income. We will be entitled to an income tax deduction equal to the amount of ordinary income recognized by the holder at the time the shares are issued or the cash amount is paid. The deduction will be allowed for the taxable year in which such ordinary income is recognized.

Deductibility of Executive Compensation

We anticipate that any compensation deemed paid by us in connection with the exercise of non-statutory stock options or stock appreciation rights or the disqualifying disposition of incentive stock option shares will qualify as performance-based compensation for purposes of Section 162(m) and will not have to be taken into account for purposes of the $1,000,000 limitation per covered individual on the deductibility of the compensation paid to certain of our executive officers. Accordingly, the compensation deemed paid with respect to options and stock appreciation rights granted under the 2004 Plan will remain deductible by us without limitation under Section 162(m). However, any compensation deemed paid by us in connection with any other awards made under 2004 Plan will be subject to the $1,000,000 limitation, unless the vesting of those awards is tied to performance goals based on one or more of the performance criteria described above. The Compensation Committee has full discretion to determine whether or not awards made under the Plan will be structured so as to qualify as performance-based compensation under Code Section 162(m) and will make its decision based on all the relevant factors, including potential tax deductibility, in existence at the time of the award.

Accounting Treatment

The accounting principles applicable to awards made under the 2004 Plan may be summarized in general terms as follows:

Stock-Settled Awards

Pursuant to Accounting Standards Codification, Topic 718, of the Financial Accounting Standards Board, we are required to expense all share-based payments, including grants of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares and all other stock-based awards under the 2004 Plan. Accordingly, stock options and stock appreciation rights which are granted to employees and non-employee Board members and payable in shares of our common stock must be valued at fair value as of the grant date under an appropriate valuation formula, and that value will then be charged as a direct compensation expense against our reported earnings over the designated vesting period of the award. Stock appreciation rights that are to be settled in cash will be subject to variable mark-to-market accounting until the actual settlement date. For shares issuable upon the vesting of service-based restricted stock units awarded under the 2004 Plan, we will be required to amortize over the vesting period a compensation cost equal to the fair market value of the underlying shares on the date of the award. If any other shares are unvested and tied to service-vesting requirements at the time of their direct issuance, then the fair market value of those shares at that time (less any cash consideration paid for those shares) will be charged to our reported earnings ratably over the service-vesting period. Such accounting treatment will be applicable for awards tied solely service-vesting requirements. The issuance of a fully-vested stock bonus will result in an immediate charge to the Corporation’s earnings equal to the fair market value of the bonus shares on the issuance date.

For performance shares and performance units payable in shares of our common stock, the accounting cost is generally equal to the fair market value per share of the common stock on the award date multiplied by the number of shares of common stock that would be issued under that award at target level attainment, assuming such level of attainment is the probable outcome for the award at the time. The applicable cost is then amortized over the requisite service period, subject to subsequent adjustment in the event a different level of performance

 

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goal attainment is later determined to be the probable outcome. Any such adjustment to the accounting cost of the award would be effected on a cumulative prospective basis by revising the number of shares of our common stock likely to become issuable under the award, but the original grant-date fair value per share would continue to be used for purposes of determining the overall compensation expense associated with the award. However, for certain performance share awards, including those tied to total shareholder return, a more complex valuation formula must be utilized under Accounting Standards Codification Topic 718 to determine the grant-date value of those awards and the resulting accounting cost to be amortized over the applicable service period.

Cash-Settled Awards

Awards that are to be settled at a fixed cash amount established at the time the award is made will result in a fixed compensation expense equal to that cash amount and amortized ratably over the vesting period. If the cash amount payable under the award is not fixed at the time the award is made, then the award will be subject to mark-to-fair-value accounting treatment until the award is actually settled. Accordingly, at the end of the accounting period prior to settlement, the fair value of the award will be measured, and additional compensation expense will result to the extent that value exceeds the fair value taken into account for prior periods in which the award is outstanding.

THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” PROPOSAL 3.

 

 

 

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PROPOSAL 4

APPROVAL OF AN AMENDMENT TO GILEAD’S RESTATED CERTIFICATE OF INCORPORATION

Our Board has adopted, subject to stockholder approval, an amendment to our restated certificate of incorporation. This amendment would increase the authorized number of shares of our common stock from 2,800,000,000 shares to 5,600,000,000 shares. On January 25, 2013, we effected a two-for-one stock split in the form of a stock dividend for stockholders of record on January 7, 2013, that greatly reduced the number of our authorized but unissued shares. Specifically, we propose to amend the second and third sentences of Article V.A. to be read in their entirety as follows:

“The total number of shares which the corporation is authorized to issue is five billion six hundred and five million (5,605,000,000) shares. Five billion six hundred million (5,600,000,000) shares shall be Common Stock, each having a par value of one-tenth of one cent ($.001).”

As of February 28, 2013, there were 1,522,709,320 shares of common stock outstanding and held by our stockholders. In addition to these shares, as of February 28, 2013, there were 174,754,666 shares of common stock reserved for issuance under our equity incentive plans, 7,121,666 shares of common stock reserved for issuance under our Employee Stock Purchase Plan and 112,803,064 shares of common stock reserved for issuance under senior convertible notes and warrants issued by us. This meant as of February 28, 2013, we had only 982,611,284 shares of common stock available for other corporate purposes.

The additional shares of common stock would have rights identical to our currently outstanding common stock. Adoption of the proposed amendment to our restated certificate of incorporation and any issuance of shares of our common stock would not affect the rights of our stockholders except for effects incidental to increasing the number of shares of common stock outstanding. Incidental effects of the increase in the outstanding number of shares of common stock may include dilution of the earnings per share and voting rights of current holders of common stock. If this proposal is approved by our stockholders, the amendment to our restated certificate of incorporation will become effective upon filing of a certificate of amendment of our restated certificate of incorporation with the Secretary of State of the State of Delaware.

Our Board is of the opinion that the proposed increase is in the best interests of Gilead and its stockholders as the availability of additional authorized shares will provide us with flexibility to meet business and financing needs as they arise. Our Board believes that Gilead should have sufficient authorized but unissued shares for issuance in future stock splits in the form of stock dividends, raising capital, establishing strategic relationships, acquisitions of other companies, businesses or products, equity incentives and compensation for employees and directors, and other transactions that our Board deems are in our best interest. The additional authorized shares of common stock would enable us to act quickly in response to appropriate opportunities that may arise for these types of transactions, in most cases without the necessity of obtaining further stockholder approval. We have no current plans, arrangements or understandings regarding the additional shares that would be authorized pursuant to this proposal.

We could also use the additional shares of common stock to oppose a hostile takeover attempt or delay or prevent changes in control or management of the company. For example, without further stockholder approval, our Board could sell shares of common stock in a private transaction to purchasers who would oppose a takeover or favor our current Board. The ability of our Board to sell shares of common stock in this manner without further stockholder approval would be subject to applicable listing rules of the NASDAQ Global Select Market, which generally require stockholder approval for a transaction that results in a 20% or more increase in the number of shares outstanding. Although this proposal to increase the authorized common stock has been prompted by business and financial considerations discussed above and not by the threat of any known or threatened hostile takeover attempt, stockholders should be aware that approval of this proposal could facilitate future efforts by us to deter or prevent changes in control of us, including transactions that our Board determines

 

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are not in the best interests of us or our stockholders, even though the stockholders would have received a premium for their shares over then-current market prices. At the present time, our Board has no intention to use these additional shares for anti-takeover purposes.

The affirmative vote of the holders of a majority of the outstanding shares of our common stock will be required to approve this amendment to our restated certificate of incorporation. As a result, abstentions and broker non-votes will have the same effect as negative votes.

THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” PROPOSAL 4.

 

 

 

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PROPOSAL 5

ADVISORY VOTE ON EXECUTIVE COMPENSATION

General

Based upon a vote of stockholders at the 2011 Annual Meeting, following the Board’s recommendation for an annual advisory vote to approve the compensation of our named executive officers, Gilead is providing stockholders with an advisory vote on executive compensation. Although the vote is non-binding, our Board and Compensation Committee value the opinions of the stockholders and will consider the outcome of the vote when making future compensation decisions affecting our executive officers.

2012 Financial Highlights

In 2012, our total shareholder return (“TSR”) was 80%. We also had outstanding financial performance, exceeding our objectives for 2012, with total revenues growing 16% to $9.70 billion and product sales also increasing 16% to $9.40 billion. In addition to the sales generated by our antiviral business, sales of products from our other therapeutic areas surpassed $1.26 billion in annual revenue, which represents an increase of 19%, compared to 2011.

One-Year TSR at the Highest Percentile of our Compensation Peer Group. Three-Year TSR at the 90th Percentile of our Compensation Peer Group

The continued focus of our executive officers to deliver against long-term business strategy contributed significantly to our operational and financial achievements in 2011 and more dramatically in 2012, which drove our significant stock price appreciation. As noted above, our one-year TSR was 80%, which is at the highest percentile of our compensation peer group. In addition, our three-year TSR increased 19% on a compound annual growth basis, which is above the 90th percentile of our compensation peer group. For specific 2012 corporate achievements, please see the business highlights under “Compensation Discussion and Analysis” beginning on page 52.

Pay for Performance Philosophy

The core objective of our executive officer compensation program is to align pay and performance. Performance-based compensation, particularly long-term equity incentive awards, has historically been the largest component of our total direct compensation opportunities for our executive officers. Over the past three years, the actual compensation mix for the Named Executive Officers has been awarded in the form of approximately 14% base salary, 15% annual bonus opportunity and 71% equity awards (based on grant-date fair value). We believe this mix is appropriate because the Named Executive Officers should focus their efforts on long-term corporate results. By aligning the majority of their compensation with Gilead’s performance, the Named Executive Officers realize less value from this pay component when we do not perform well and more value from this pay component when we do perform well.

Receptive to Stockholder Feedback

In advance of our 2012 annual meeting of stockholders, we contacted our top 100 stockholders to seek feedback about our 2011 compensation policies and practices. Most of the stockholders we met with did not have specific concerns with respect to our executive compensation program or any related policies or practices. Following our 2012 annual meeting, our Compensation Committee carefully reviewed the results of the stockholder advisory vote and asked that management review our policies and practices to identify opportunities for improving pay-for-performance alignment and the clarity of disclosure. Based on this review, we took the following actions:

 

   

enhanced the disclosures about our executive compensation program in this proxy statement to better explain our Compensation Committee’s objectives and operation;

 

   

revised our compensation peer group for 2013 to remove the two largest companies based on market capitalization and revenue;

 

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introduced an additional cap on the maximum payout under our performance share awards; and

 

   

terminated our rights plan or “poison pill,” which termination was approved by the Board and effective in September 2012.

Our Compensation Committee closely evaluates our company performance and compensation programs and will continue to take action to ensure that our compensation programs are aligned with our long-term performance and stockholder interests. Stockholders may express their views directly to our Compensation Committee as described in our “Stockholder Communications with Our Board of Directors” policy available on our website at http://www.gilead.com in the Investors section under “Corporate Governance.”

Resolution

Our stockholders are being asked to approve by advisory vote the following resolution relating to the compensation of the named executive officers in this proxy statement:

“RESOLVED, that Gilead’s stockholders hereby approve the compensation paid to Gilead’s executive officers named in the Summary Compensation Table of this proxy statement, as that compensation is disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, the various compensation tables and the accompanying narrative discussion included in this proxy statement.”

The vote on this resolution is not intended to address any specific element of compensation; rather the vote relates to the compensation of our named executive officers, as described in this proxy statement in accordance with the compensation disclosure rules of the Securities and Exchange Commission.

THE BOARD RECOMMENDS A VOTE “FOR” PROPOSAL 5.

 

 

 

 

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PROPOSAL 6

STOCKHOLDER PROPOSAL REQUESTING THAT THE BOARD ADOPT A POLICY THAT THE CHAIRMAN OF THE BOARD OF DIRECTORS BE AN INDEPENDENT DIRECTOR

James McRitchie has submitted a stockholder proposal for consideration at the Annual Meeting. Mr. McRitchie’s address is 9295 Yorkship Court, Elk Grove, CA 95758. We have been notified that Mr. McRitchie has continuously held at least 200 shares of our common stock since October 29, 2011. The stockholder proposal is required to be voted on at our Annual Meeting only if properly presented. As explained below, our Board unanimously recommends that you vote “AGAINST” the stockholder proposal. The affirmative vote of the holders of a majority of the stock present in person or represented by proxy and entitled to vote at the Annual Meeting will be required to approve the stockholder proposal. The resolution being submitted by Mr. McRitchie to the stockholders for approval is as follows:

RESOLVED: Shareholders request that our board of directors adopt a policy that, whenever possible, the chairman of our board of directors shall be an independent director. An independent director is a director who has not previously served as an executive officer of our Company. This policy should be implemented so as not to violate any contractual obligations in effect when this resolution is adopted. The policy should also specify how to select a new independent chairman if a current chairman ceases to be independent between annual shareholder meetings. To foster flexibility, this proposal gives the option of being phased in and implemented when our next CEO is chosen.

When our CEO is our board chairman, this arrangement can hinder our board’s ability to monitor our CEO’s performance. Many companies already have an independent Chairman. An independent Chairman is the prevailing practice in the United Kingdom and many international markets. This proposal topic won 50%-plus support at three major U.S. companies in 2012 including 55%-support at Sempra Energy.

This proposal should also be evaluated in the context of our Company’s overall corporate governance as reported in 2012:

GMI/The Corporate Library, an independent investment research firm, has continuously rated our company “D” since 2010 with “High Governance Risk.” Also “High Concern” for the qualification of our directors and “High Concern” in Executive Pay — a whopping $43 million for our CEO John Martin. GMI said annual bonuses for our highest paid executives were 25%-based based on subjective issues. This can undermine the effectiveness of incentive pay. Furthermore, long-term incentive pay consisted of performance shares and market-priced stock options that simply vested over time. Mr. Martin also had a potential entitlement of $36 million for a change in control. Our poison pill finally expired in September 2012.

Gayle Wilson, John Martin, James Denny, our lead director at age 79, Gordon Moore and Etienne Davignon, also age 79 — each had from 11 to 22 years long-tenure. Long-tenured directors can form relationships that may compromise their independence and hinder their ability to provide effective oversight. Carla Anderson Hills, on our nomination committee at age 78, was negatively flagged by GMI due to the significant losses of shareholder value at Time Warner, Lucent Technologies and American International Group during her tenure as a director. John Cogan, on our audit committee, was negatively flagged by GMI due to his involvement with the Monaco Coach Corporation bankruptcy. Six of the 12 seats on our most important board committees were controlled by directors who were age 70 to 79 — succession planning concerns thanks to Gayle Wilson who chaired our nomination committee.

Please encourage our board to respond positively to this proposal to strengthen our corporate governance and protect shareholder value:

Independent Board Chairman — Proposal 6

 

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Our Board Recommends a Vote AGAINST This Proposal

Our Board believes that stockholder interests are best served when the Board has the flexibility to determine the best person to serve as Chairman, whether that person is an independent director, the Chief Executive Officer or another person, and recommends a vote AGAINST this proposal. Flexibility to set Gilead’s Chairman and board leadership structure as the Board deems appropriate based on the circumstances at the time permits the Board to choose a leadership structure that can be tailored to the strengths of Gilead’s officers and directors and best addresses Gilead’s evolving and highly complex business. Departing from Gilead’s current policy of permitting a non-independent director to serve as Chairman where the Board determines that such an arrangement is in Gilead’s best interests would hamper the Board’s ability to select the director it believes is best suited to serve as Chairman based on the circumstances at the time.

Our Board of Directors believes that it is currently in the best interest of Gilead and its stockholders for Dr. Martin to serve as both Chief Executive Officer and Chairman. Our Board believes the robust role of the lead independent director and Gilead’s other strong corporate governance policies and practices, provides an appropriate balance in Gilead’s leadership and effective oversight of management. Moreover, our Board’s approach to this issue is consistent with that of most large, publicly-traded companies in the United States: only 23 percent of companies in the S&P 500 have an independent chairman, according to the Spencer Stuart 2012 Board Index.

Dr. Martin’s long tenure and knowledge of Gilead and our industry provide him unique insight into our business. In addition, in light of Dr. Martin’s experience navigating Gilead through periods of growth, including resulting from large acquisitions, our Board concluded that Gilead can more effectively execute its strategy and business plans to maximize stockholder value if Dr. Martin holds the positions of Chairman and Chief Executive Officer. Further, as the individual with primary responsibility and accountability for managing our day-to-day operations, he can provide unified leadership of Gilead and ensure that key business and strategic issues, risks and opportunities are brought to our Board’s attention in a way that prioritizes and makes best use of the Board’s time.

Dr. Martin’s selection as our Chairman is counterbalanced by the following features of Gilead’s corporate governance structure:

 

   

Lead independent director. Our Board Guidelines provide that where the Chairman is also the Chief Executive Officer, the independent directors will appoint a lead independent director to coordinate their efforts and activities. The defined role of lead independent director at Gilead is closely aligned with the role of an independent Chairman, ensuring a strong independent and active Board of Directors. As set forth in the Lead Independent Charter adopted by our Board, the lead independent director has clearly delineated and comprehensive duties. These duties include:

 

   

presiding at all meetings of the Board at which the Chairman is not present, including executive sessions of the independent directors;

 

   

serving as principal liaison between the independent directors and the Chairman and between the independent directors and senior management;

 

   

approving information sent to the Board;

 

   

approving agendas for the Board;

 

   

approving meeting schedules to assure that there is sufficient time for discussion of all agenda items;

 

   

calling meetings of the independent directors when necessary and appropriate;

 

   

responding directly to stockholder and other stakeholder questions and comments that are directed to the lead independent director or to the independent directors as a group;

 

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recommending to the Board and the Board Committees the retention of advisers and consultants to report directly to the Board; and

 

   

communicating to management, as appropriate, the results of private discussions among independent directors.

In addition, as required by our Board Guidelines, Gilead’s independent directors meet without the presence of executive management on a routine basis, to review, among other things, Gilead’s strategy, performance, management effectiveness and succession planning.

 

   

Substantial majority of our directors are independent. Currently, nine out of the ten director nominees are independent.

 

   

Fully-independent Board committees. All members of the key board committees—the Audit Committee, the Compensation Committee and the Nomination and Governance Committee—are “independent” in accordance with or as defined in the rules adopted by the SEC and NASDAQ, which ensures that oversight of critical matters such as the integrity of Gilead’s financial statements, the compensation of our executive officers, the selection and evaluation of directors and the development of corporate governance principles is entrusted to independent directors.

 

   

Established corporate governance guidelines. Gilead maintains strong corporate governance policies and practices. Information regarding Gilead’s corporate governance initiatives can be found on our website, including Gilead’s Board Guidelines and the charter for each committee of our Board of Directors. These guidelines and charters can be found on our website at http://www.gilead.com in the “Investors” section under “Corporate Governance.”

We believe our strong corporate governance policies and practices, including the substantial percentage of independent directors on our Board of Directors, as well as the robust duties of our lead independent director, empower our independent directors to effectively oversee Gilead’s management – including the performance of the Chief Executive Officer – and provide an effective and appropriately balanced board governance structure. We believe that the interests of our stockholders will be best served by maintaining our Board of Directors’ flexibility in determining the board leadership structure that is best suited to the needs of Gilead at any particular time.

THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “AGAINST” PROPOSAL 6.

 

 

 

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PROPOSAL 7

STOCKHOLDER PROPOSAL REQUESTING THAT THE BOARD TAKE STEPS TO PERMIT STOCKHOLDER ACTION BY WRITTEN CONSENT

John Chevedden has submitted a stockholder proposal for consideration at the Annual Meeting. Mr. Chevedden’s address is 2215 Nelson Avenue, No. 205, Redondo Beach, CA 90278. We have been notified that Mr. Chevedden has continuously held at least 150 shares of our common stock since October 1, 2011. The stockholder proposal is required to be voted on at our Annual Meeting only if properly presented. As explained below, our Board unanimously recommends that you vote “AGAINST” the stockholder proposal. The affirmative vote of the holders of a majority of the stock present in person or represented by proxy and entitled to vote at the Annual Meeting will be required to approve the stockholder proposal. The resolution being submitted by Mr. Chevedden to the stockholders for approval is as follows:

Stockholder Supporting Statement

Proposal 7 – Right to Act by Written Consent

Resolved, Shareholders request that our board of directors undertake such steps as may be necessary to permit written consent by shareholders entitled to cast the minimum number of votes that would be necessary to authorize the action at a meeting at which all shareholders entitled to vote thereon were present and voting. This written consent includes all issues that shareholders may propose. This written consent is to be consistent with applicable law and consistent with giving shareholders the fullest power to act by written consent consistent with applicable law.

The shareholders of Wet Seal (WTSLA) successfully used written consent to replace certain underperforming directors in October 2012. This proposal topic received our 52% support in 2012. This proposal topic also won majority shareholder support at 13 major companies in a single year. This included 67%-support at both Allstate and Sprint. Hundreds of major companies enable shareholder action by written consent.

Please encourage our board to respond positively to this proposal to protect shareholder value: Right to Act by Written Consent—Proposal 7.

Our Board Recommends a Vote AGAINST This Proposal

Our Board believes that adoption of this proposal would significantly disenfranchise a large proportion of our stockholders and is not necessary given other accountability mechanisms that the Board has adopted. The Board therefore recommends a vote AGAINST this proposal as it is not in the best interests of Gilead or its stockholders.

The Board carefully considered the advisory vote to implement written consent in 2012 and concluded that stockholders are best served by holding meetings whereby all stockholders are provided with notice of the meeting, may discuss the proposed actions and vote their shares. Stockholder meetings provide stockholders with a much more meaningful way to participate in proposed actions and facilitate a more rigorous and careful consideration of proposed actions by both the Board and the stockholders.

Unlike meetings of stockholders, action by written consent would result in certain stockholders being denied the ability to be informed about, vote on or otherwise have a say on proposed stockholder actions. Action by written consent would enable a bare majority of our stockholders to take action on a proposal without the benefit of hearing the views, questions and arguments of other stockholders. Smaller stockholders, in particular, may be disenfranchised in a consent solicitation. In addition, action by written consent eliminates the need for notice to be given to stockholders about a proposed action, and therefore, certain stockholders may not be informed about the proposed action until after the action has already been taken. This would deny these stockholders the ability

 

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to determine whether to exercise their rights, such as by expressing their views as to the merits of the proposal, encouraging the Board to reconsider the matter and voting on the proposed action. The Board, therefore, believes that this proposal could adversely affect the conduct of stockholder business by resulting in certain stockholders taking action that otherwise would not have been taken if all of our stockholders were informed about and afforded the opportunity to discuss, debate and vote on the matter.

Adoption of this proposal is unnecessary because the Board has already taken a number of significant steps to ensure accountability to stockholders. For example:

 

   

At the 2012 annual meeting of stockholders, the stockholders voted to request that our Board take steps to redeem Gilead’s rights plan or “poison pill” unless the plan is subject to a stockholder vote. In September 2012, after taking into consideration the vote of the stockholders, the Board adopted an amendment that terminated Gilead’s rights plan, effective immediately.

 

   

We permit stockholders holding a minimum of 20% of our outstanding shares of common stock to call a special meeting of stockholders. There is no limitation on the timing or agenda of a special meeting called by stockholders. In addition, stockholders may propose any proper matter for a vote at our annual meeting.

 

   

We have eliminated all supermajority voting provisions in our certificate of incorporation and bylaws.

 

   

Our director nominees are elected annually by majority voting in uncontested elections.

 

   

A substantial majority of our directors (nine out of the ten director nominees) are independent.

 

   

We only have one class of stock with equal voting provisions.

THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “AGAINST” PROPOSAL 7.

 

 

 

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EXECUTIVE COMPENSATION

COMPENSATION DISCUSSION AND ANALYSIS

This Compensation Discussion and Analysis provides an overview of the material components of our executive compensation arrangements for:

 

   

John C. Martin, our Chief Executive Officer and the Chairman of our Board of Directors (our “Chief Executive Officer”);

 

   

John F. Milligan, our President and Chief Operating Officer;

 

   

Norbert W. Bischofberger, our Executive Vice President, Research and Development and Chief Scientific Officer;

 

   

Kevin Young, our Executive Vice President, Commercial Operations; and

 

   

Robin L. Washington, our Senior Vice President and Chief Financial Officer.

We refer to these executive officers collectively in this Compensation Discussion and Analysis and the related compensation tables as the “Named Executive Officers.”

We also provide a summary of our business operations and financial achievements for 2012, an overview of our executive compensation program, a description of the overall objectives of the program and an analysis of each component of compensation that we provide. In addition, we explain how and why the Compensation Committee of our Board of Directors ( “Compensation Committee”) arrived at the specific compensation policies and decisions involving the Named Executive Officers during 2012.

Executive Summary

2012 Performance Highlights

In 2012 our total shareholder return (“TSR”) was 80%. We also had outstanding financial performance, exceeding our objectives for 2012, with total revenues growing 16% to $9.70 billion and product sales also increasing 16% to $9.40 billion. In addition to the sales generated by our antiviral business, sales of products from our other therapeutic areas surpassed $1.26 billion in annual revenue, which represents an increase of 19%, compared to 2011.

 

LOGO

The continued focus of our executive officers to deliver against long-term business strategy contributed significantly to our operational and financial achievements in 2011 and more dramatically in 2012, which drove our significant stock price appreciation. As noted above, our one-year TSR was 80%, which is at the highest percentile of our compensation peer group (discussed below under—Use of Market Data). In addition, our three-year TSR increased 19% on a compound annual growth basis, which is above the 90th percentile of our compensation peer group.

 

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LOGO

 

(1) 

Our 2011 stock price reflects the closing market price of our common stock on December 30, 2011; our 2012 stock price reflects the closing market price of our common stock on December 31, 2012. Per share amounts have been adjusted retroactively to reflect the two-for-one stock split effective on January 25, 2013.

Our long-term focus on identifying and developing best-in-class drugs to address unmet medical needs continues to deliver strong financial performance in the near-term while at the same time creating sustainable long-term value. In addition to our strong operating, financial and TSR performance in 2012, we continued to capitalize on opportunities to enhance our business and position us for further growth, including:

 

   

completing the acquisition of Pharmasset, Inc. (“Pharmasset”) and accelerating our timeline to develop the first all-oral regimen for the treatment of hepatitis C virus (“HCV”), including the initiation of our first Phase 3 study of a single tablet regimen of sofosbuvir (formerly known as GS-7977) and ledipasvir (formerly known as GS-5885);

 

   

successfully launching our second single tablet regimen for the treatment of HIV, Complera®, in the United States and Canada and Eviplera® in 19 European countries;

 

   

expanding our research and development (“R&D”) pipeline with over 50 active Phase 3 clinical studies at the end of 2012;

 

   

obtaining U.S. Food and Drug Administration (“FDA”) approval for and launching Stribild®, our third single tablet regimen for the treatment of HIV in the United States;

 

   

submitting U.S. and E.U. marketing applications for elvitegravir, an oral integrase inhibitor for the treatment of HIV-1 infection in treatment-experienced adults, and cobicistat, a pharmacoenhancing or “boosting” agent that increases blood levels to allow once-daily dosing of certain HIV medicines;

 

   

expanding our growing oncology and inflammation pipeline, with the announced acquisition of YM BioSciences Inc. (“YM BioSciences”), which closed in February 2013; and

 

   

obtaining FDA approval for once-daily oral Truvada®, for use in combination with safer sex practices, for pre-exposure prophylaxis to reduce the risk of HIV-1 infection among uninfected adults, in the United States.

2012 Executive Compensation Highlights

Consistent with our business results, our Compensation Committee took the following actions with respect to the 2012 compensation of the Named Executive Officers.

 

   

Base Salary. We increased the base salary of our Chief Executive Officer by 4.9% and the base salaries of the other Named Executive Officers by amounts ranging from 5.5% to 12.9%. Our Compensation Committee made these

 

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increases to reward the strong individual performance of each of the Named Executive Officers to ensure an appropriate balance in their compensation mix between cash and equity.

 

   

Annual Bonus. The annual bonuses for 2012 were earned at roughly 150% of the target for our Named Executive Officers. This reflected our successful performance against the corporate financial and operational performance objectives established under our annual bonus plan, as well as the individual performance of each Named Executive Officer (other than our Chief Executive Officer, whose bonus was based solely on our corporate performance).

 

   

Equity Awards. We granted the Named Executive Officers equity awards with both performance vesting and time vesting conditions. Both of these vehicles are aligned with the long-term interests of our stockholders. The value realized from stock options is tied to the absolute appreciation in the market value of our common stock, and the value realized from the performance share awards is dependent on our TSR and revenue performance. In determining the size of these equity awards, our Compensation Committee considered the practices of the companies in our peer group and that we motivate long-term value creation and satisfy our employment retention objectives.

2012 Stockholder Vote on Executive Compensation

We have a long-standing practice of engaging in dialogue with our major stockholders about various corporate governance topics of interest to them. The insights we have gained from these discussions over the years have been helpful to our Compensation Committee as it considers and approves the compensation policies and practices affecting our executive officers, including the Named Executive Officers.

In advance of our 2012 annual meeting of stockholders, we contacted our top 100 stockholders to seek feedback about our 2011 compensation policies and practices. Most of the stockholders we met with did not have specific concerns with respect to our executive compensation program or any related policies or practices. At the annual meeting, our stockholders approved the compensation of the Named Executive Officers with approximately 76% of the votes cast in favor of our executive compensation program.

Following our 2012 annual meeting, our Compensation Committee carefully reviewed the results of the stockholder advisory vote. Our Compensation Committee did not change our executive compensation program, based on its strong belief that our policies and practices are effective in ensuring that we pay for performance over the long-term, which is directly aligned with delivering sustained corporate growth. However, our Compensation Committee asked that management review our policies and practices to identify opportunities for improving pay-for-performance alignment and the clarity of disclosure. Based on this review, we took the following actions:

 

   

enhanced the disclosures about our executive compensation program in this proxy statement to better explain our Compensation Committee’s objectives and operation;

 

   

revised our compensation peer group for 2013 to remove the two largest companies based on market capitalization and revenue;

 

   

introduced an additional cap on the maximum payout under our performance share awards; and

 

   

terminated our rights plan or “poison pill,” which termination was approved by the Board and effective in September 2012.

Our Compensation Committee continues to carefully consider feedback from our stockholders regarding our executive compensation program. Stockholders may express their views directly to our Compensation Committee as described in our “Stockholder Communications with Our Board of Directors” policy available on our website at http://www.gilead.com in the Investors section under “Corporate Governance.”

Executive Compensation Program Overview

The design of our executive compensation program is influenced by six fundamental principles:

 

   

Pay-for-Performance. Include a substantial portion of performance-based compensation to ensure that the compensation earned by our executive officers is directly and demonstrably linked to Gilead’s

 

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performance, as measured by relative TSR compared to selected performance peers and a range of corporate performance objectives.

 

   

Market Competitiveness. Offer market competitive compensation opportunities that attract and retain executive officers capable of meeting Gilead’s business objectives.

 

   

Balance the Short-and Long-Term Perspective. Ensure that our executive officers are focused on strategic financial and operational objectives and the achievement of both short-and long-term performance objectives essential to Gilead’s growth and success.

 

   

Stockholder Alignment. Align the interests of our executive officers and stockholders in sustaining long-term value creation through the use of equity incentives and executive stock ownership guidelines.

 

   

Cost-Effectiveness. Balance the need for competitive compensation against our objective of providing reasonable and responsible pay arrangements.

 

   

Egalitarian Approach. Maintain an egalitarian culture with respect to compensation so that all employees are generally eligible to participate in the same programs as our executive officers.

The base salary and annual bonus opportunities of our executive officers’ primarily relate to our objective of providing competitive compensation that will attract, retain and motivate talented executives. The goals under our annual bonus plan are designed to reward the achievement of short-term corporate and individual objectives. They are also designed to drive longer-term corporate performance and growth through the objectives relating to research and development achievements, as well as strategic priorities that have an inherent long-term focus.

The equity award component of our executive officers’ compensation packages comprises both options to purchase shares of our common stock and performance share awards. Both of these vehicles are performance-oriented, as our executive officers realize no pay delivery from their awards unless Gilead performs. Stock options are granted at the market price of our common stock on the date of grant and, therefore, require our common stock to appreciate in value before our executive officers realize any benefit from their awards. Performance share awards require not only stock price performance, as measured in terms of our TSR relative to an industry comparator group, but also revenue growth measured either in absolute terms (for 2012 awards) or relative to an industry comparator group (for pre-2012 awards).

Performance-based compensation, particularly long-term equity incentive awards, has historically been the largest component of our total direct compensation opportunities for our executive officers. Over the past three years, the actual compensation mix for the Named Executive Officers has been awarded in the form of approximately 14% base salary, 15% annual bonus opportunity and 71% equity awards (based on grant-date fair value).

We believe this mix is appropriate because the Named Executive Officers should focus their efforts on long-term corporate results. By aligning the majority of their compensation with Gilead’s performance, the Named Executive Officers realize less value from this pay component when we do not perform well and more value from this pay component when we do perform well.

Competitive Positioning

We target the total compensation of our employees, including our executive officers, at competitive levels to enable us to attract and retain the qualified talent necessary to operate and grow our business. To determine appropriate pay levels, we review industry peer data; however, we also review internal equitability to ensure appropriate differentiation between our executive officers. At the time compensation decisions were approved in January 2012, the total direct compensation opportunities of the Named Executive Officers ranged between the 50th and 76th percentiles of our compensation peer group.

 

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Ongoing Compensation Policies and Practices

We endeavor to maintain good governance standards pertaining to the oversight of our executive compensation policies and practices. As in prior years, the following policies and practices were in effect during 2012:

 

   

Our Compensation Committee is composed solely of independent directors who maintain an awareness of our stockholders’ views on executive compensation.

 

   

Our Compensation Committee’s independent advisor, Frederic W. Cook & Co., Inc. (“FWC”), is retained directly by the committee and performs no other services for us.

 

   

Our Compensation Committee annually reviews and approves our compensation strategy, including an annual assessment to determine if our compensation programs have potential risks that are reasonably likely to have a material adverse effect on Gilead.

 

   

We maintain stock ownership guidelines that require each executive officer to maintain a stock ownership level equal to a specified multiple of his or her base salary. The ownership levels range from 5 times base salary for our Chief Executive Officer, 3 times base salary for our President and Chief Operating Officer and two times base salary for other executive officers. Individuals newly hired or promoted receive a certain number of years to achieve this ownership level. As of December 31, 2012, all of the Named Executive Officers were in compliance with their respective stock ownership guidelines.

 

   

We maintain a compensation recovery or “claw back” policy under which our Board of Directors has the authority to recoup any bonus, other cash or equity compensation that was based upon the achievement of financial results that are subsequently restated from any executive officer or other covered individual whose misconduct contributed to an obligation to file the financial restatement.

 

   

We maintain an insider trading policy applicable to all employees, including our Named Executive Officers, which prohibits hedging transactions in our common stock as well as pledging of Gilead securities.

 

   

Our Compensation Committee approves regular long-term equity awards to our executive officers at its January meeting each year. The date of this meeting is set approximately one year in advance. For administrative efficiency, our Board of Directors has delegated authority to our Chief Executive Officer to approve equity awards for employees below the level of Vice President. Awards must be made in accordance with established guidelines for each grade level and are subject to an annual equity pool approved by our Board of Directors.

Compensation-Determination Process

Role of Our Compensation Committee

Our Compensation Committee is responsible for overseeing the development and administration of our executive compensation program. Among its duties, our Compensation Committee is responsible for approving all of the compensation decisions for our executive officers, and formulating and approving the compensation of our Chief Executive Officer. Our Chief Executive Officer’s compensation is subject to ratification by the independent members of our Board of Directors. Our Compensation Committee is also responsible for the:

 

   

reviewing and approving Gilead’s performance objectives relevant to compensation;

 

   

evaluating each executive officer’s contribution to this performance in light of the relevant objectives; and

 

   

evaluating the competitiveness of each executive officer’s total compensation.

Our Compensation Committee is supported in its work by our Human Resources Department and an external executive compensation consultant, as described below.

 

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Role of Chief Executive Officer

Our Chief Executive Officer, with input from Dr. Milligan with respect to his direct reports, makes compensation recommendations to our Compensation Committee for the other Named Executive Officers. In formulating his recommendations, our Chief Executive Officer obtains internal base salary data and external compensation data from our Human Resources Department, which has engaged Compensia Inc., a national compensation consulting firm (“Compensia”), to provide comparable market data, including tally sheets, financial performance reports, market compensation reviews and other analyses to aid our Chief Executive Officer in developing his recommendations. During 2012, Compensia served solely as a consultant to management in the compensation decision-making process. Our Compensation Committee places considerable weight on our Chief Executive Officer’s compensation recommendations because of his direct knowledge of each Named Executive Officer’s performance and contributions to Gilead’s performance.

Role of Compensation Consultant

Our Compensation Committee has retained FWC, a national compensation consulting firm, as its compensation consultant. FWC reports directly to our Compensation Committee, and may be replaced by the committee at any time. George Paulin, Chairman and CEO of FWC, attends meetings of our Compensation Committee, as requested. FWC provides various executive compensation services to our Compensation Committee, including advising the Committee on the principal aspects of our Chief Executive Officer’s compensation and evolving industry practices, and providing market information and analyses regarding the competitiveness of our program design for both executives and non-employee directors. During 2012, FWC served solely as a consultant to our Compensation Committee and did not provide any services to management.

Based on the six factors for assessing independence and identifying potential conflicts of interest that are set forth in Exchange Act Rule 10C-1(b)(4) and such other factors as were deemed relevant under the circumstances, our Compensation Committee determined that its relationship with FWC and the work of FWC on behalf of the committee did not raise any conflict of interest.

Use of Market Data

The compensation peer group we used in 2012 to assess the competitiveness of our executive compensation program consisted of 12 biopharmaceutical and pharmaceutical companies headquartered in the United States that were most similar to us in terms of business strategy, labor market competition, market capitalization, revenue and number of employees. These companies, which were identified based on these objective selection criteria, were as follows:

 

Abbott Laboratories, Inc.

   Cephalon, Inc.

Allergan, Inc.

   Eli Lilly and Company

Amgen, Inc.

   Forest Laboratories, Inc.

Biogen-Idec, Inc.

   Johnson & Johnson

Bristol-Myers Squibb Company

   Merck & Co., Inc.

Celgene Corporation

   Pfizer, Inc.

At the time the 2012 compensation peer group was approved in July 2011, the peer companies had the following profile:

 

       
     Gilead Sciences, Inc.         Peer Group

Last Four Quarters Revenue

  $ 7.79 billion   Range:    $3.0 billion – $67.5 billion
    Median:    $17.4 billion

Market Capitalization

  $ 31.3 billion   Range:    $6.1 billion – $178.3 billion
    Median:    $46.0 billion

Worldwide Headcount

  4,000   Range:    4,182 – 114,000
    Median:    22,200

 

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Our compensation peer group includes companies we believe are most similar to us in terms of business complexity and product life-cycle. We also include companies that fall within specified revenue and market capitalization ranges. These ranges are broad enough to ensure we can maintain a sufficient number of peer companies. This is especially important as the industry experiences a number of mergers and acquisitions each year, thereby reducing the number of relevant peer company choices. Accordingly, our Compensation Committee faces numerous challenges when constructing a peer group using standard pre-defined principles, such as revenue, market capitalization and GICS code classification. Therefore, we believe our approach reflects how stockholders and other constituents view our relevant peers, given these size constraints. Despite the difficulty of developing a compensation peer group that meets our selection criteria, in mid-2012, we removed the two largest peer companies (based on market capitalization and revenue), Johnson & Johnson and Pfizer, Inc., from our 2013 compensation peer group to avoid any potential distortions in the compensation data. This decision was based on feedback we received from proxy advisory firms and our Compensation Committee’s desire to better align with stockholder interests, despite management’s strong belief that these companies are relevant peers with regards to labor-market competition, our product life-cycle and business complexity. Meanwhile, we added three smaller companies Baxter International Inc., Mylan Inc. and Vertex Pharmaceuticals Incorporated that result in positioning us at the 48th percentile in terms of revenue and the 57th percentile in terms of market capitalization.

We review the companies in our compensation peer group annually and make adjustments as necessary to ensure the comparator companies properly reflect the market in which we compete for executive talent. To further validate the competitiveness of our executive compensation program, we also review the executive pay practices of similarly situated companies as reported in industry surveys and reports.

Use of Tally Sheets

Our Compensation Committee annually reviews tally sheets, which it uses along with peer group analyses and financial performance comparisons, in its evaluation of the total compensation provided to each Named Executive Officer. These tally sheets affix dollar amounts to each compensation component, including current cash compensation (base salary and bonus), outstanding vested and unvested equity awards, employee benefits, perquisites and other personal benefits and potential severance payments and benefits.

Compensation-Related Risk

We have reviewed the various policies and practices that govern our executive compensation program to determine whether they encourage excessive risk-taking that could create a potential risk to Gilead. Based on this review, our Compensation Committee concluded it was not reasonably likely that any of the policies and practices with respect to the compensation of our executive officers would have a material adverse effect on Gilead. For further information on our risk assessment process with respect to all our employee compensation programs, see “Risk Assessment of Compensation Programs” beginning on page 73 below.

 

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Executive Compensation Components

The principal components of our executive compensation program for 2012 and the principal objectives each component is designed to meet were as follows:

 

Compensation Component   Principal Objectives
Base Salary  

Market and internal competitiveness

Cost-effectiveness

Annual Bonus  

Pay-for-performance

Market and internal competitiveness

Balance short-term and long-term perspective

Equity Compensation  

Pay-for-performance

Stockholder alignment

Market and internal competitiveness

Balance short-term and long-term perspective

Welfare Benefits and Perquisites  

Market competitiveness

Cost-effectiveness

Egalitarian approach

Post-Employment Compensation  

Market competitiveness

Balance short-term and long-term perspective

Base Salary

Base salary is the primary fixed-compensation component in our executive compensation program and supports our compensation objective of providing competitive compensation that will attract and retain talented executive officers. Our Compensation Committee believes that base salary should reflect the responsibilities of the position, the individual’s performance for the preceding year and his or her experience and pay level relative to similar positions within Gilead and the external competitive market. Each year, we develop a “merit budget,” which is our overall budget for base salary increases throughout Gilead. Executive officer base salary increases are effective on February 1 of each year, the same as for the rest of our employees.

In January 2012, our Chief Executive Officer presented his recommendations for base salary increases for the Named Executive Officers (other than himself) to our Compensation Committee for consideration and approval, as follows:

 

Named Executive Officer

   2011 Base Salary      2012 Base Salary      Percentage Base Salary Increase

Dr. Milligan

   $ 905,000       $ 955,000       5.5%

Dr. Bischofberger

   $ 760,000       $ 820,000       7.9%

Mr. Young

   $ 715,000       $ 760,000       6.3%

Ms. Washington

   $ 620,000       $ 700,000       12.9%

Based on our Chief Executive Officer’s performance evaluation for these four individuals and their contributions to Gilead’s strong overall performance, our Compensation Committee approved these recommendations. In approving the recommendations, our Compensation Committee considered the corporate and individual achievements of the Named Executive Officers during 2011, and the expectations for their roles moving forward as well as their competitive market positioning. Specifically in the case of our Chief Financial Officer, our Compensation Committee considered that the base salary for her position continued to be below the market-median position and, based on this and her performance in her expanded role during 2011, determined that a significant increase was necessary and appropriate. This increase brought the base salary of our Chief Financial Officer to the 50th percentile for the comparable position at the companies in our compensation peer group.

 

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Our Compensation Committee reviews and approves our Chief Executive Officer’s base salary, subject to ratification by the independent members of our Board of Directors. For 2012, our Compensation Committee approved an approximate 5% increase to his base salary from $1,430,000 to $1,500,000. Subsequently, the independent members of our Board of Directors ratified this increase. This increase reflected the positive view held by both our Compensation Committee and the independent members of our Board of Directors of our Chief Executive Officer’s overall performance, Gilead’s long-term performance relative to our compensation peer group and his leadership and direction in our achievement of key business initiatives and financial objectives.

Annual Bonuses

Our annual bonus plan is designed to reward the achievement of key short-term corporate and individual performance objectives that ultimately drive long-term corporate achievement through the objectives relating to research and development achievements, and strategic priorities, which have an inherent long-term focus. The plan is designed so that any earned bonuses, paid to the Named Executive Officers should qualify for the “performance-based compensation” exception to the $1 million deduction limit imposed under Section 162(m) of the Internal Revenue Code. Accordingly, no bonuses were payable to our executive officers for 2012 unless our non-GAAP operating income for the year was at least $3.15 billion, regardless of the achievement of other corporate financial and operational performance objectives established for the year. For 2012, our non-GAAP operating income, which was determined using our GAAP operating income excluding the impact of acquisition-related, restructuring and stock-based compensation expenses, was $4.58 billion.

Target Bonus Opportunities

The 2012 target bonus opportunities for the Named Executive Officers were established as a percentage of their base salaries and were set at or below the 50th percentile for comparable positions at the companies in our compensation peer group. The actual amount a Named Executive Officer could earn ranged from 0% to 150% of his or her target bonus opportunity, based on actual achievement of the relevant performance objectives. The 2012 target bonus opportunities for the Named Executive Officers were as follows:

 

Named Executive Officer

   2012 Bonus Opportunity
(as a  percentage of base salary)
(Target)

Dr. Martin

   150%

Dr. Milligan

   100%

Dr. Bischofberger

   80%

Mr. Young

   80%

Ms. Washington

   70%

Except with respect to our Chief Executive Officer, annual bonus determinations for the Named Executive Officers were weighted 75% on achievement of the corporate financial and operational performance objectives established under our annual operating plan for 2012 and 25% on each executive officer’s achievement of his or her individual performance objectives. The target bonus opportunity for our Chief Executive Officer was based entirely on our achievement of the corporate financial and operational performance objectives as established under our annual operating plan for 2012.

Corporate Performance Objectives

Our Compensation Committee approved corporate financial and operational performance objectives for 2012 in the following categories:

 

   

build pipeline for the future;

 

   

launch and support products;

 

   

achieve financial results; and

 

   

achieve operational priorities.

 

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Our Compensation Committee varies the weighting of each category depending on the importance for a particular year. Within each category, our Compensation Committee considers our performance against the objectives established for that category, the degree of difficulty in achieving the objectives and relevant events and circumstances that affected our performance. Based on these assessments, our Compensation Committee has the discretion to assign a corporate performance factor between 0 and 1.5 for each category, as referenced in the table below, and thereby establish an overall corporate performance factor for the year. It is important to note four additional features of our annual bonus plan:

 

   

Although our Compensation Committee evaluates our performance based on the achievement of specific objectives established for each category, the achievement of an objective does not require that the committee assign any particular performance factor for that category or award any particular bonus amount based on the level at which the objective or objectives within that category are actually achieved. The final overall corporate performance factor established by our Compensation Committee is based on its assessment of our overall performance for the year. The specific performance objectives within the various categories serve only as the framework for making that overall assessment.

 

   

If our Compensation Committee determines that the overall corporate performance factor for the year was less than 50%, then no bonus is payable for the year.

 

   

Our Compensation Committee has the discretion to add or subtract an additional 10% to recognize unplanned achievements or misses, provided that the total amount payable may not exceed the maximum bonus opportunity for the year.

 

   

Our Compensation Committee has broad discretion in determining the size of annual bonus awards for our Named Executive Officers and considers a number of factors in setting the actual bonus amounts, including whether an executive officer has caused us to incur unnecessary or excessive risk.

Corporate Performance Achievement

Our Compensation Committee considers our performance in each of the categories listed below and believes that the achievement in each of the categories is reflective of the leadership, and therefore the performance, of our Chief Executive Officer. In assessing Dr. Martin’s and the overall corporate performance, our Compensation Committee considered that under Dr. Martin’s leadership in 2012, we achieved the following:

 

   

Build Pipeline for the Future achievement: We presented or published data from studies across all of our therapeutic areas, and we initiated several Phase 3 and 4 programs. Also, significant progress was made with our preclinical and/or clinical evaluation of multiple product candidates. In the HCV area, we completed the four Phase 3 clinical studies of sofosbuvir. We anticipate file for regulatory approval for sofosbuvir in both the United States and European Union in the second quarter of 2013. We also significantly progressed development across all our programs in liver diseases. For example, we initiated Phase 2 clinical studies of simtuzumab, a monoclonal antibody formerly referred to as GS-6624, being evaluated for the treatment of liver fibrosis, nonalcoholic steatohepatitis and primary sclerosing cholangitis. In the HIV area, we submitted new drug applications for elvitegravir, our oral integrase inhibitor, and cobicistat, a pharmacoenhancing or “boosting” agent that that increases blood levels to allow once-daily dosing of certain HIV medicine, as single agents; completed Phase 2 study of with tenofovir alafenamide (“TAF”), formerly referred to as GS-7340; and initiated two Phase 2 trials of a single tablet regimen of TAF, elvitegravir, cobicistat and emtricitabine and a single tablet regimen of TAF, darunavir, cobicistat and emtricitabine. In the respiratory area, we initiated Phase 2 studies of GS-5806, an orally available small molecule antiviral fusion inhibitor, being evaluated in a Phase 2 trial for the treatment of respiratory syncytial virus. We also advanced development of simtuzumab which is also being evaluated in a Phase 1 trial for the treatment of idiopathic pulmonary fibrosis. In the cardiovascular area, we initiated multiple Phase 3 clinical studies evaluating the use of ranolazine, our late sodium current inhibitor for the treatment of type 2 diabetes as well as for the treatment of incomplete revascularization post-percutaneous coronary intervention. In the oncology and inflammation area, we initiated three Phase 3 studies with idelalisib, formerly GS-1101, for the

 

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treatment of chronic lymphocytic lymphoma and completed enrollment of a Phase 2 study in non-Hodgkin’s lymphoma. We also advanced simtuzumab in a Phase 2 trial for the treatment of myelofibrosis, colorectal cancer and pancreatic cancer.

 

   

Launch and Support Products achievement: In the HIV area, we continued the launch of Complera/Eviplera, our second single tablet regimen, which in total produced $342.2 million in annual sales for 2012 compared to $38.7 million in 2011. We also obtained approval of Stribild, our third single tablet regimen and our first integrase containing single tablet regimen for the treatment of HIV, in the United States and Canada. Stribild was launched within 48 hours of receiving FDA marketing approval. Stribild was launched in the U.S. in August 2012 and contributed to $57.5 million of sales in 2012. In the developing world, we increased our antiretroviral therapy reach to 3.1 million patients with HIV/AIDS in low- and middle-income countries. This represents one-third of people receiving HIV treatment in these countries. In July 2012, Truvada was approved as the first agent for HIV prevention in infected adults, in combination with safer sex practices, as part of a strategy called pre-exposure prophylaxis. In order to ensure we maintain a robust and high quality supply chain for our products, we added five new manufacturing sites and expanded a packaging site during 2012.

 

   

Financial achievement: For 2012, we exceeded the upper end of our product sales guidance of $9.10 billion to $9.20 billion. In 2012, our product sales were $9.40 billion which represented a 16% increase over 2011. We continued to see strong growth in demand for our products during 2012 both in the United States and Europe and expanded our market share in key franchises, despite the continued impact of healthcare reform legislation in the United States, pricing pressures within certain European countries and foreign currency exchange fluctuations. Our non-GAAP research and development and selling, general and administrative expenses for 2012 were $2.72 billion in the aggregate, within our guidance range of $2.68 and $2.83 billion. In addition, over the course of 2012, we repurchased approximately 23.1 million shares of our common stock through our Board-authorized share repurchase program.

 

   

Operational achievement: We completed the acquisition of Pharmasset and successfully integrated the organization. As a result of our completion of four Phase 3 studies of sofosbuvir, we significantly accelerated our anticipated regulatory filing timelines for sofosbuvir by more than one year. We also entered into an agreement to acquire YM BioSciences to support our continuing efforts in oncology. YM BioSciences’s lead drug candidate, momelotinib or GS-0387, formerly known as CYT387, is an orally administered, once-daily, selective inhibitor of the Janus kinase (JAK) family, specifically JAK1 and JAK2. In addition, we expanded our global reach and established operations in South Korea and other Asian countries in order to increase market share for our existing as well as future products. Additionally, we focused on internal employee engagement and various operational improvement initiatives.

Based on these assessments, our Compensation Committee set the overall company performance factor for 2012 at 150%, as reflected below. The relative weighting for each performance category and our Compensation Committee’s assessment of our performance for each category were as follows:

 

Corporate Performance Category

   2012
Weighting
(A)
    2012
Performance
Factor
(B)
    Contribution to
Overall Corporate
Performance Factor
(A x B)
 

Build Pipeline For the Future

     30     147     0.441   

Launch and Support Products

     30     142     0.426   

Financial Results

     30     145     0.435   

Operational

     10     143     0.143   

Target Bonus Amount

     100       1.445   

Unplanned Activities

     10       0.055   

Overall Corporate Performance Factor

         150 % 

 

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Individual Performance Objectives

Our Compensation Committee also considered the individual contributions of the Named Executive Officers (other than our Chief Executive Officer whose target bonus opportunity was based entirely on our achievement of the corporate financial and operational performance objectives) to the achievement of the research, development, commercial and operational objectives that supported our corporate objectives. Based on his evaluation of our performance, our Chief Executive Officer informed our Compensation Committee that each of the other Named Executive Officers had exceeded his or her individual objectives. The personal achievements considered by our Chief Executive Officer and our Compensation Committee were as follows:

 

Named Executive Officer

  

Principal Individual 2012

Performance Objectives

  

Select 2012 Achievements

Dr. Milligan

  

•   Achieve net product revenue and total expense goals

•   Execute on corporate development goals related to acquisitions and in-licensing transactions and managing key alliance relationships

•   Achieve manufacturing goals, including ensuring supply and demand requirements are met with appropriate inventory levels, order obligations are achieved and ensure successful launch supplies

  

•   Exceeded financial and commercial goals, including those summarized under the “Corporate Performance Achievement” above

•   Executed on corporate development goals, including:

–   Entry into an agreement to acquire YM BioSciences

–   Successful integration of the acquisition of Pharmasset

•   Launched Stribild into the U.S. within 48 hours of regulatory approval

Dr. Bischofberger

  

•   Define and deliver on key research strategies in the HIV/AIDS, liver diseases, respiratory, cardiovascular and oncology therapeutics area

•   Lead key development initiatives, including our Phase 1 to 3 clinical studies across all therapeutic areas

  

•   Completed four Phase 3 studies of sofosbuvir and significantly advanced our timeline to develop the first all-oral HCV regimen, including the initiation of our first Phase-3 study of a single tablet regimen of sofosbuvir and ledipasvir for the treatment of HCV

•   Exceeded requests for development goals

•   Received regulatory approval for Stribild, our third single tablet regimen for the treatment of HIV

Mr. Young

  

•   Achieve worldwide net product revenue and market share goals

•   Determine and begin build out of optimal Asia business unit structures

•   Comply with and administer all U.S. Healthcare Reform requirements

  

•   Exceeded net product revenue goal

•   Expanded HIV market share through successful launch of Complera in U.S. and Canada and the launch of Eviplera in Europe

•   Successful launch of Viread® in South Korea

•   Achieved all country pricing and reimbursement goals

 

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Named Executive Officer

  

Principal Individual 2012

Performance Objectives

  

Select 2012 Achievements

Ms. Washington

  

•   Execute financial plan/budgets to achieve targeted results

•   Develop a multi-year information technology roadmap to support key priorities and functional strategies

•   Continued refinement of long-term tax and capital structure

  

•   Exceeded the 2012 financial performance targets as summarized under the “Corporate Performance Achievement—Financial achievement” above

•   Successfully financed and integrated the Pharmasset acquisition, the most significant acquisition in the last 10 years

•   Completed multi-year technology roadmap and implemented enterprise-wide IT governance model

•   Improved Days Sales Outstanding (DSO) which yielded outstanding collections in parts of Southern Europe

Annual Bonus Decisions

Based on Gilead’s overall corporate performance, which was the sole factor in determining the award for our Chief Executive Officer, our Compensation Committee awarded Dr. Martin a bonus in the amount of $3,375,000 for 2012, representing 225% of his base salary and 150% of his target bonus opportunity of $2,250,000.

In the case of each other Named Executive Officer, the assigned individual performance factor reflects the extent to which his or her personal contributions were deemed to benefit Gilead’s overall performance. Each Named Executive Officer’s individual performance factor closely aligns with the overall assessment of our performance in the categories for which he or she was responsible. Based on this approach, our Compensation Committee approved the following bonus payments to these Named Executive Officers:

 

Named Executive Officer

  Target
Bonus
Opportunity
(% of base
salary)
    Target
Bonus
Opportunity
($)
    Company
Performance
Factor
(%)
    Company
Performance
Factor
Weighting
(%)
    Individual
Performance
Factor (%)
    Individual
Performance
Factor
Weighting
(%)
    Total
Bonus
Payment
($)
    Total
Bonus
Payment
(% of
target)
 

Dr. Martin

    150   $ 2,250,000        150     100                 $ 3,375,000        150

Dr. Milligan

    100   $ 955,000        150     75     145     25   $ 1,420,563        149

Dr. Bischofberger

    80   $ 656,000        150     75     145     25   $ 975,800        149

Mr. Young

    80   $ 608,000        150     75     145     25   $ 904,400        149

Ms. Washington

    70   $ 490,000        150     75     145     25   $ 728,875        149

Equity Compensation

The long-term incentive compensation component of our executive compensation program is entirely performance-based and in 2012 consisted of (i) performance share awards that may be earned only upon the achievement of multiple pre-established performance objectives and (ii) time-vested options to purchase shares of our common stock. This award mix serves two purposes:

 

   

the performance share awards made in 2012 will reward our executive officers for our overall financial performance measured in terms of (i) our TSR relative to that of three specified subsets of the Standard & Poor Healthcare Index: Biotechnology, Pharmaceuticals and Health Care Equipment (collectively, the “S&P Healthcare Sub-Index”) and (ii) our absolute revenue growth; and

 

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the stock options provide our executive officers with a substantial stake in enhancing the absolute long-term appreciation of our common stock.

2012 Equity Awards

To enhance the relationship between Gilead’s performance and TSR, in January 2012 our Compensation Committee granted our executive officers long-term incentive compensation in the form of options to purchase shares of our common stock and performance share awards to earn shares of our common stock. These awards were equally weighted based on approximate grant date fair values. To make this allocation, our Compensation Committee used a three-for-one option to performance share equivalency ratio to approximate the relative value of each type of award.

2012 Performance Share Awards

Relative TSR Portion. The performance share awards granted by our Compensation Committee in 2012 were divided into two equal tranches. The performance-based vesting requirement for the first tranche is tied to the percentile level of our TSR for the three-year performance period from January 1, 2012 through December 31, 2014 relative to the TSR realized for that same period by the companies comprising the S&P Healthcare Sub-Index.

Our Compensation Committee selected the S&P Healthcare Sub-Index for comparison purposes because it enables the Committee to assess our financial performance against an objective peer group which consists of approximately 31 companies.

For purposes of comparing the TSR measure against the S&P Healthcare Sub-Index, TSR is measured with a beginning point tied to the 60-trading day average immediately preceding the January 1, 2012 commencement date of the performance period and an ending point tied to the last 60-trading day average within the three-year performance period. Our Compensation Committee believes that this calculation more accurately reflects our overall TSR performance and indicates what stockholders experience with their investment in our common stock, rather than how the common stock performed at a single point in time.

 

LOGO

To receive the shares of our common stock earned pursuant to a performance share award, an executive officer must remain employed with us through the date following the completion of the performance period on which our Compensation Committee certifies the TSR level attained.

Absolute Revenue Portion. The performance-based vesting requirement for the second tranche of each performance award is divided into three equal subtranches, each with its own one-year performance period and applicable service period of one or more specified years. The performance-based vesting requirement for the first

 

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subtranche was our achievement of the target level of net product revenue for 2012 that was established by our Compensation Committee in January 2012 at the time the award was made. The revenue targets were set at $8.26 billion for threshold payout at the 20% level, $8.60 billion for target level payout at 100% and $8.94 billion for maximum level payout at 200%. Payout is proportionately adjusted for performance between threshold and target and between target and maximum. In addition, to receive the shares of our common stock earned for this one-year performance period, an executive officer must remain employed with us through completion of the three-year service period from January 1, 2012 through December 31, 2014.

The performance-based vesting requirement for the second subtranche will be our achievement of the target level of consolidated net product revenue for 2013 as established by our Compensation Committee within 90 days after the start of that performance period. Meanwhile the time-based vesting requirement for this subtranche is tied to the executive officer’s continued employment with us through completion of the two-year service period from January 1, 2013 through December 31, 2014.

The performance-based vesting requirement for the final subtranche will be our achievement of the target level of consolidated net product revenue for 2014 as established by our Compensation Committee within 90 days after the start of that performance period, while the time-based vesting requirement for this subtranche is tied to the executive officer’s continued employment with us through completion of the one-year service period from January 1, 2014 through December 31, 2014.

The actual number of shares of our common stock into which each tranche or subtranche of a performance share award may convert will be calculated by multiplying the target number of performance shares allocated to that tranche or subtranche by a performance percentage ranging from 0% to 200%. The performance percentage will be based on the actual level at which the applicable performance requirement is attained, as certified by our Compensation Committee.

In January 2013, our Compensation Committee calculated the level of our 2012 revenue for purposes of determining the level at which the performance goal for the 2012 year subtranche of the revenue tranche of the performance share award was attained. Our net product revenue level for such year was $9.40 billion, which represents a potential payout level of 200% of the target number of shares allocated to such subtranche. Accordingly, each Named Executive Officer’s target number of shares subject to this subtranche and the actual number of shares accrued in connection with this subtranche by reason of the attained level of our 2012 revenue target, were as follows; such shares will become payable to each such individual provided he or she satisfies the time-based vesting requirement applicable to that subtranche:

 

Named Executive Officer

   Target Number of Shares Subject
to First Subtranche of the
Revenue Tranche of the
Performance Share Award (1)
     Number of Shares Earned Under
First Subtranche of

the Revenue Tranche of the
Performance Share Award
 

Dr. Martin

     39,000         78,000   

Dr. Milligan

     17,082         34,164   

Dr. Bischofberger

     13,332         26,664   

Mr. Young

     10,666         21,332   

Ms. Washington

     10,000         20,000   

 

(1) 

All share amounts have been adjusted retroactively to reflect the two-for-one stock split effective on January 25, 2013.

Our Compensation Committee selected TSR and revenue growth as our performance measures because they relate to the key behaviors that it wants to reinforce, and they are differentiated from the measures used in the annual bonus plan to focus on long-term initiatives to avoid redundancy. These two measures are commonly used among our industry peers.

 

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Should the service of an executive officer with Gilead terminate prior to the completion of one or more applicable service periods, the performance shares allocated to those periods will be forfeited, whether or not the performance objectives are eventually met. However, if an executive officer’s employment terminates during an applicable service period by reason of retirement on or after the date his or her combined age and years of service total 70 years or more or by reason of death or disability, then a portion of the performance shares allocated to that service period will convert into actual vested shares of our common stock based on the level at which the performance objective in effect for that service period is actually attained and the number of calendar months of continuous service he or she completed during that service period.

2012 Stock Options

Our Compensation Committee considers options to purchase shares of our common stock to be the foundation of our performance-based incentive compensation program. Stock options give recipients the right to purchase at a specified price (the market price on the date of grant) a specified number of shares of our common stock over a specified period of time (generally, 10 years). A Named Executive Officer can exercise this right for the remainder of the term as the options vest over four years.

Our Compensation Committee believes that options provide an appropriate incentive for our executive officers because they will realize value only if the market price of our common stock increases, which benefits all stockholders, and the executive officer remains employed with us through the date that his or her options vest.

The options to purchase shares of our common stock vest over a four-year service period, which is consistent with the practices of our industry peer group. One quarter of the shares of our common stock subject to these options vest one year from the grant date and the remaining shares vest quarterly thereafter (assuming the continued service of the executive officer over the next three years) until fully vested.

2012 Equity Award Decisions

In January 2012, our Chief Executive Officer recommended to our Compensation Committee that equity awards in the amounts set forth below be granted to the Named Executive Officers (other than himself). After evaluating each Named Executive Officer’s performance during the prior year, his or her expected future contributions, our performance compared to the competitive market and our Chief Executive Officer’s recommendation, our Compensation Committee approved each of these recommendations.

In addition, our Compensation Committee approved the grant of an option to purchase 662,000 shares of our common stock and a performance share award covering 234,000 shares of our common stock to our Chief Executive Officer. Our Compensation Committee’s recommendation, which was ratified by the independent members of our Board of Directors, was based on the following considerations:

 

   

a competitive assessment of the grant date fair value of the equity awards granted to the chief executive officers at the companies in our compensation peer group;

 

   

our financial and operational performance in 2011; and

 

   

our consistent financial performance relative to our compensation peer group over the past several years.

 

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The 2012 stock option and performance share awards for the Named Executive Officers were as follows:

 

Named Executive Officer

   Stock
Option
(Number
of
Shares) (1)
     Performance
Share
Award
(Number of
Shares)
Threshold (2)
     Performance
Share
Award
(Number of
Shares)

Target
     Performance
Share
Award
(Number of
Shares)
Maximum
 

Dr. Martin

     662,000         46,800         234,000         468,000   

Dr. Milligan

     302,500         20,500         102,500         205,000   

Dr. Bischofberger

     232,500         16,000         80,000         160,000   

Mr. Young

     188,000         12,800         64,000         128,000   

Ms. Washington

     180,000         12,000         60,000         120,000   

 

(1) 

The options to purchase shares of our common stock each had an exercise price per share of $24.30, representing the closing market price of our common stock on January 26, 2012. All share and per share amounts have been adjusted retroactively to reflect the two-for-one stock split effective January 25, 2013.

(2) 

Assumes threshold for all shares issuable under the 2012 performance share award will be at 20%, similar to the TSR tranche and subtranche 1 of the Revenue tranche. The threshold for subtranches 2 and 3 of the Revenue tranche, for which there is at present no reportable grant-date fair value, is subject to change as it is not yet determined.

2011 Performance Share Awards

In January 2011, our Compensation Committee granted performance share awards to the Named Executive Officers that were tied to performance goals measured over the three-year performance period from January 1, 2011 through December 31, 2013. The number of shares of our common stock that may be earned under those awards range from 0% to 200% of the target number of shares subject to each award and will be determined on the basis of our actual performance over the performance period measured in terms of our TSR relative to the companies in both the NYSE Arca Biotech Index and the NYSE Arca Pharmaceutical Index (collectively, the “Peer Group Indices”) and our revenue growth relative to the Peer Group Indices. These awards were outstanding during all of 2012.

2010 Performance Share Awards

In January 2010, our Compensation Committee granted performance share awards to the Named Executive Officers subject to conditions that were substantially similar to the performance measures (relative TSR and revenue growth) described above for the 2011 performance share awards, but those performance objectives were to be measured over a three-year performance period that began on January 1, 2010 and ended on December 31, 2012. In March 2013, our Compensation Committee approved payment of the 2010 performance share awards at 50% of their target award level. This determination was based on our achieving TSR at the 9th percentile of the Peer Group Indices and revenue growth at the 54th percentile of the Peer Group Indices, based on our performance during the three-year performance period from 2010 through 2012. The payout of 50% of the target level award is based only on our revenue achievement as our TSR achievement below the 20th percentile results in 0% payout for the TSR portion of the grant. Each Named Executive Officer’s target number of shares subject to his or her 2010 performance share award and the actual number of shares of our common stock earned in connection with this award were as follows:

 

Named Executive Officer

   Target Number of Shares Subject
to Performance Share Award (1)
     Number of Shares Earned Under
Performance Share Award
 

Dr. Martin

     212,000         106,000   

Dr. Milligan

     98,000         49,000   

Dr. Bischofberger

     48,000         24,000   

Mr. Young

     58,000         29,000   

Ms. Washington

     36,000         18,000   

 

(1) 

All share amounts have been adjusted retroactively to reflect the two-for-one stock split effective on January 25, 2013.

 

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Health and Welfare Benefits and Perquisites

We do not provide defined benefit retirement plans, post-retirement health coverage or any other retiree benefits for our executive officers or employees, as we believe that the equity awards they receive and the compensation deferral program in which they are eligible to participate provide them with a substantial vehicle to accumulate retirement income.

The health and welfare benefits we offer our executive officers are substantially the same as those offered to all our employees. We provide medical and other benefits to our executive officers that are generally available to other full-time employees, including participation in our employee stock purchase plan, group term life insurance program and a Section 401(k) savings plan. Under the Section 401(k) plan, we make matching contributions on behalf of each participant equal to 50% of his or her contributions to the plan, up to an annual maximum matching contribution of $7,500. All of our executive officers participated in the Section 401(k) plan during 2012 and received matching contributions. Currently, perquisites and other personal benefits are not a significant component of our executive compensation program. We generally do not provide perquisites or other personal benefits to our executive officers. For further information on the perquisites and other personal benefits provided to our Named Executive Officers, see the “Summary Compensation Table” on page 75 below.

Nonqualified Deferred Compensation

We maintain a Deferred Compensation Plan that allows our executive officers and other senior level employees to accumulate income for retirement in a tax efficient way. Eligible employees can enroll in the Deferred Compensation Plan and defer a portion of their base salaries each year and part or all of their annual bonuses and commissions. Each participant may direct the investment of his or her deferred compensation account balance among a number of investment choices that mirror substantially all of the investment funds available under the Section 401(k) plan. For further information on the deferred compensation arrangements of our Named Executive Officers, see the “2012 Nonqualified Deferred Compensation Table” on page 81 below.

Our executive officers may defer receipt of the shares of our common stock in which they vest under their performance share awards for up to 10 years. Among other requirements, any such election to defer receipt of such shares must be made at least six months prior to the end of the applicable performance period.

Post-Employment Compensation

We do not have employment agreements with any of our executive officers, and their employment with us is “at-will.” Instead, we maintain the Gilead Sciences, Inc. Severance Plan (the “Severance Plan”) that offers severance benefits to all of our employees, including our executive officers, upon certain involuntary terminations of employment.

Upon an involuntary termination of employment without cause not involving a change in control of Gilead, the Severance Plan provides a participant with certain cash payments, outplacement services and a lump-sum payment to fund continued coverage under our group health plans for a specified period. None of the outstanding stock awards held by our executive officers are subject to accelerated vesting or otherwise enhanced in the event of a termination of employment under such circumstances.

If the employment of an executive officer is involuntarily terminated without cause, or the executive officer resigns for good reason, in either case in connection with a change in control of Gilead, he or she will receive certain enhanced cash payments, outplacement services and a lump-sum payment to fund continued coverage under our group health plans for a longer specified period. In addition, all outstanding stock awards held by the executive officer will fully vest as of his or her termination date.

In January 2010, we amended the Severance Plan to limit the participants who may qualify for a tax “gross-up” payment to cover any excise tax they may incur as a result of any payments and benefits they receive under the Severance Plan that may constitute a “parachute payment” under the Internal Revenue Code. Accordingly,

 

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such protection is provided to only those individuals who were eligible for such protection at the time the policy was amended, for as long as their benefits are not materially modified.

We maintain the Severance Plan to enhance employee objectivity, morale and productivity and encourage retention in the event of an actual or threatened change in control of Gilead. The Severance Plan also enables us to provide a standard set of payments and benefits to new and current executive officers and employees, thereby eliminating the negotiation of “one-off” arrangements. In addition, the Severance Plan better aligns the interests of our executive officers with those of our stockholders by enabling our executive officers to consider corporate transactions that are in the best interests of our stockholders and other stakeholders without undue concern over whether a transaction may jeopardize their employment. We have intentionally structured the payments and benefits under the Severance Plan in the event of a change in control of Gilead to be subject to a “double trigger,” which means that an executive officer will receive payments and benefits only if he or she loses his or her employment in connection with the change in control. This arrangement is wholly consistent with the purpose of the plan, which is to provide our executive officers and other employees with a guaranteed level of financial protection only upon a loss of employment.

For further information about the Severance Plan, including an estimate of the potential payments and benefits that would be received by our Named Executive Officers upon termination of employment under certain defined circumstances, see “Executive Compensation – Employment Agreements, Severance and Change in Control Arrangements with Named Executive Officers” on page 83 below.

Tax and Accounting Considerations

Deductibility of Compensation

Section 162(m) of the Internal Revenue Code disallows an income tax deduction to publicly traded companies for compensation paid to or realized by the Chief Executive Officer and certain other executive officers (other than the Chief Financial Officer) to the extent that compensation exceeds $1 million per individual in any taxable year and does not otherwise qualify for an exception to this limitation, such as the exception for “performance-based compensation.” Our current annual bonus plan for executive officers and equity compensation plan have been structured with the intent to qualify the compensation paid or realized under these plans as “performance-based compensation.” As a consequence, we believe that all compensation paid to or realized by our executive officers for 2012, except for base salary in the amount of $494,214 paid to our Chief Executive Officer, should not be subject to the deduction limit of Section 162(m).

Our Compensation Committee will continue to evaluate ways to achieve compliance with Section 162(m) that are in the best interests of Gilead and our stockholders. However, in establishing the cash and equity incentive compensation plans for our executive officers, our Compensation Committee believes that the potential deductibility of the compensation payable under these plans should be only one of a number of relevant factors taken into consideration, and not the sole or primary factor. Our Compensation Committee believes that cash and equity incentive compensation must be maintained at the requisite level to attract and retain talented executives, even if all or part of that compensation may not be deductible by reason of Section 162(m).

Accounting for Stock-Based Compensation

We follow Financial Accounting Standards Board Accounting Standards Codification Topic 718 (“FASB ASC Topic 718”) for our stock-based compensation awards. FASB ASC Topic 718 requires companies to measure the compensation expense for all share-based payment awards made to employees and directors, including stock options, based on the grant-date “fair value” of these awards. This calculation is performed for accounting purposes and reported in the compensation tables below, even though our executive officers may never realize any economic value from their awards. FASB ASC Topic 718 also requires companies to recognize the compensation cost of their stock-based compensation awards in their income statements over the period that an executive officer is required to render service in exchange for the option or other award. For performance share awards, the FASB ASC Topic 718 grant-date fair value reported in the compensation tables below is based on the probable outcome of the applicable performance goals.

 

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2013 Executive Compensation

In January 2013, our Compensation Committee approved the 2013 base salaries and 2013 target bonus opportunities, and awarded stock options and performance shares to the Named Executive Officers in the respective amounts set forth in the table below. These compensation decisions were made on the basis of the executive compensation philosophy and principles discussed earlier in this Compensation Discussion and Analysis, including assessing the competitiveness of our executive compensation program in relation to our 2013 compensation peer group, which includes the following 12 biopharmaceutical and pharmaceutical companies:

 

Abbott Laboratories, Inc.

   Celgene Corporation

Allergan, Inc.

   Eli Lilly and Company

Amgen, Inc.

   Forest Laboratories, Inc.

Baxter International Inc.

   Merck & Co., Inc.

Biogen-Idec, Inc.

   Mylan Inc.

Bristol-Myers Squibb Company

   Vertex Pharmaceuticals Incorporated

The compensation decisions also reflected our Compensation Committee’s assessment of corporate and individual performance during 2012. In the case of the 2013 equity awards, our Compensation Committee approved an approximately equal allocation of the grant date fair value of such awards between stock option and performance shares, based on the three-for-one equivalency ratio noted above, for each Named Executive Officer; and an approximately equal allocation of the grant date fair value of the performance share award between performance shares tied to our revenue growth and performance shares tied to our TSR relative to the S&P Healthcare Sub-Index.

 

Named Executive Officer

   Base Salary      2013 Target Bonus
Opportunity (as a
Percentage of Base
Salary)
    Number of Shares
of Common Stock
Subject to Stock
Options Granted (1)
     Number of
Shares of
Common Stock
Subject to
Performance
Shares (2)
 

Dr. Martin

   $ 1,575,000         150     392,750         120,310   

Dr. Milligan

   $ 1,015,000         100     149,620         45,830   

Dr. Bischofberger

   $ 890,000         80     134,660         41,250   

Mr. Young

   $ 815,000         80     108,470         33,230   

Ms. Washington

   $ 750,00         70     89,490         27,410   

 

(1) 

The stock options were granted on February 1, 2013, with an exercise price of $40.56 per share.

(2)

Fifty percent of the awarded performance shares on a grant date value basis will convert into actual shares of our common stock based on our TSR over a three-year period in relation to the TSR realized for that period by a specified subset of companies in the S&P Healthcare Index. The remaining 50% of the awarded performance shares on a grant date value basis will convert into actual shares of our common stock based on our performance against an annual revenue target established by our Compensation Committee at the beginning of each year over a specified three-year period (the 2013, 2014 and 2015 years) coincident with the performance period for the TSR performance shares. We believe that this design for the revenue goals provides a strong link between performance and payment because it eliminates the need to project revenue performance beyond one year. The actual number of shares of our common stock into which the performance shares may convert will be calculated by multiplying the number of performance shares by a performance percentage ranging from 0% to 200% based on the level at which the performance goal applicable to that share is in fact attained. However, in no event shall the number of shares of our common stock that be earned pursuant to the TSR tranche of the performance share award exceed 100% of the number of shares of our common stock allocated to that award if our absolute TSR for the performance period is a negative number. The shares earned as a result of the attained performance goals will be issued in the year following the end of the three-year performance period.

 

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Table of Contents

COMPENSATION COMMITTEE REPORT(1)

Our Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K and contained within this Proxy Statement with management and, based on such review and discussions, our Compensation Committee recommended to our Board that the Compensation Discussion and Analysis be included in this Proxy Statement.

Compensation Committee

John W. Madigan, Chairman

Kevin E. Lofton

Gordon E. Moore

Nicholas G. Moore

Per Wold-Olsen

 

(1)

The material in this report is not “soliciting material,” is not deemed “filed” with the SEC, and is not to be incorporated by reference into any of our filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

 

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Table of Contents

RISK ASSESSMENT OF COMPENSATION PROGRAMS

Our Compensation Committee, with input from our Human Resources Department, undertook a review of the compensation programs for our Named Executive Officers and for our other employees to determine whether any of those programs encourage excessive risk-taking that would create a material risk to our economic viability. Based on that review, our Compensation Committee concluded it was not reasonably likely that any of our compensation policies and practices in place during 2012, whether individually or in aggregate, would have a material adverse effect upon us. In reaching this conclusion, our Compensation Committee took into account the following factors, including factors specifically analyzed in terms of the compensation program for our Named Executive Officers:

 

   

Our overall compensation structure is applied uniformly throughout the organization, with the only major exception relating to the form in which the equity component is granted. For individuals below the level of Vice President, the equity component is in the form of restricted stock unit awards tied solely to service-based vesting requirements, while for employees at the level of Vice President or above, the equity component is primarily in the form of stock options and performance share awards. Other than for sales employees, we do not have compensation arrangements that are unique to any of our business units or that otherwise depart significantly from the general uniformity of our overall compensation structure. Our sales employees are included in incentive plans that are subject to multiple levels of review during both the design stage and the incentive calculation and payment process. Only Senior Directors and below are eligible to participate in those incentive plans, and the applicable bonus targets range between approximately 20% and 53% of base salary. Payments are based on prescriptions written during the previous quarter to ensure results are assessed and confirmed. Performance objectives and potential payouts are reviewed on a quarterly basis and are subject to a cutback feature. This cutback may reduce payments if there is a large transaction that was not expected at the time the goals were set or should any other unusual or extraordinary event occur after the goals were set.

 

   

For our broad-based director-and-above employee population, a significant component of compensation is in the form of equity awards tied to the value of our common stock. As our stock price appreciates and shareholder value is thereby created, the amount of compensation earned via these awards increase. Accordingly, our overall compensation program is structured to encourage long-term growth and appreciation in the value of our business and stock price. For our entry-level employees, the predominant component of compensation is base salary. Although stock options have the potential to encourage risk-taking, we structure these awards so that they vest over a period of several years. This vesting period encourages our executive officers and other employees to focus on sustaining our long-term performance. Because options are granted annually, our executive officers and employees always have unvested options outstanding that could decrease significantly in value if our business is not managed in a way that increases our stock price over the long-term.