Edgar Filing: GILEAD SCIENCES INC

Q1'13 Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File No. 0-19731

GILEAD SCIENCES, INC.

(Exact Name of Registrant as Specified in Its Charter)



Delaware	94-3047598
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)

333 Lakeside Drive, Foster City, California	94404
(Address of principal executive offices)	(Zip Code)

650-574-3000

Registrant’s Telephone Number, Including Area Code

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

Number of shares outstanding of the issuer’s common stock, par value $0.001 per share, as of April 26, 2013: 1,525,355,825

GILEAD SCIENCES, INC.

INDEX



PART I.	FINANCIAL INFORMATION		2

	Item 1.	Consolidated Financial Statements	2

		Consolidated Balance Sheets at March 31, 2013 and December 31, 2012	2

		Consolidated Statements of Income for the Three Months Ended March 31, 2013 and 2012	3

		Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2013 and 2012	4

		Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012	5

		Notes to Consolidated Financial Statements	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31

	Item 4.	Controls and Procedures	32

PART II.	OTHER INFORMATION		33

	Item 1.	Legal Proceedings	33

	Item 1A.	Risk Factors	37

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52

	Item 3.	Defaults Upon Senior Securities	52

	Item 4.	Mine Safety Disclosures	52

	Item 5.	Other Information	52

	Item 6.	Exhibits	53

SIGNATURES			62

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


PART I.	FINANCIAL INFORMATION


ITEM I.	CONSOLIDATED FINANCIAL STATEMENTS

GILEAD SCIENCES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)



	March 31, 2013		December 31, 2012
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	1,863,972	$	1,803,694
Short-term marketable securities	78,804		58,556
Accounts receivable, net	1,945,189		1,751,388
Inventories	1,799,618		1,744,982
Deferred tax assets	211,938		262,641
Prepaid taxes	411,117		348,420
Prepaid expenses	134,711		102,364
Other current assets	217,748		84,302
Total current assets	6,663,097		6,156,347
Property, plant and equipment, net	1,125,794		1,100,259
Long-term portion of prepaid royalties	179,207		175,790
Long-term deferred tax assets	139,663		131,107
Long-term marketable securities	688,254		719,836
Intangible assets, net	12,077,548		11,736,393
Goodwill	1,188,157		1,060,919
Other long-term assets	149,948		159,187
Total assets	$	22,211,668	$	21,239,838

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,356,372	$	1,327,339
Accrued government rebates	875,751		745,148
Accrued compensation and employee benefits	152,663		236,716
Income taxes payable	19,240		13,403
Other accrued liabilities	819,009		674,762
Deferred revenues	124,369		103,162
Current portion of long-term debt and other obligations, net	942,811		1,169,490
Total current liabilities	4,290,215		4,270,020
Long-term deferred revenues	32,204		20,532
Long-term debt, net	7,054,796		7,054,555
Long-term income taxes payable	110,250		115,822
Long-term deferred tax liabilities	118,403		10,190
Other long-term obligations	213,327		217,850
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, par value $0.001 per share; 5,000 shares authorized; none outstanding	—		—
Common stock, par value $0.001 per share; 2,800,000 shares authorized; 1,524,383 and 1,519,163 shares issued and outstanding ⁽¹⁾	760		760
Additional paid-in capital	5,829,126		5,649,850
Accumulated other comprehensive income (loss)	20,806		(45,615		)
Retained earnings	4,301,539		3,704,744
Total Gilead stockholders’ equity	10,152,231		9,309,739
Noncontrolling interest	240,242		241,130
Total stockholders’ equity	10,392,473		9,550,869
Total liabilities and stockholders’ equity	$	22,211,668	$	21,239,838

⁽¹⁾ The number of shares for all periods presented reflects the two-for-one stock split in the form of a stock dividend declared on December 10, 2012 which took effect on January 25, 2013.

See accompanying notes.

GILEAD SCIENCES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

(in thousands, except per share amounts)



	Three Months Ended
	March 31,
	2013			2012
Revenues:
Product sales	$	2,393,568		$	2,208,342
Royalty revenues	134,407			71,105
Contract and other revenues	3,660			3,002
Total revenues	2,531,635			2,282,449
Costs and expenses:
Cost of goods sold	634,448			580,931
Research and development	497,632			458,211
Selling, general and administrative	374,296			443,121
Total costs and expenses	1,506,376			1,482,263
Income from operations	1,025,259			800,186
Interest expense	(81,787		)	(97,270		)
Other income (expense), net	(3,324		)	(34,085		)
Income before provision for income taxes	940,148			668,831
Provision for income taxes	222,438			231,300
Net income	717,710			437,531
Net loss attributable to noncontrolling interest	4,476			4,425
Net income attributable to Gilead	$	722,186		$	441,956
Net income per share attributable to Gilead common stockholders—basic ⁽¹⁾	$	0.47		$	0.29
Shares used in per share calculation—basic ⁽¹⁾	1,521,372			1,512,572
Net income per share attributable to Gilead common stockholders—diluted ⁽¹⁾	$	0.43		$	0.28
Shares used in per share calculation—diluted ⁽¹⁾	1,665,060			1,554,776

⁽¹⁾ Net income per share and the number of shares used in the per share calculations for all periods presented reflect the two-for-one stock split in the form of a stock dividend declared on December 10, 2012 which took effect on January 25, 2013.

See accompanying notes.

GILEAD SCIENCES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(in thousands)



	Three Months Ended
	March 31,
	2013			2012
Net income	$	717,710		$	437,531
Other comprehensive income (loss):
Net foreign currency translation gain (loss), net of tax	(8,956		)	4,897
Available-for-sale securities:
Net unrealized gain (loss), net of tax impact of $(1,016) and $266	1,785			(463		)
Reclassifications to net income, net of tax impact of $(9) and $(519)	(17		)	30,600
Net change	1,768			30,137
Cash flow hedges:
Net unrealized gain (loss), net of tax impact of $(1,849) and $1,802	74,060			(48,816		)
Reclassification to net income, net of tax impact of $(11) and $(400)	(451		)	(10,827		)
Net change	73,609			(59,643		)
Other comprehensive income (loss)	66,421			(24,609		)
Comprehensive income	784,131			412,922
Comprehensive loss attributable to noncontrolling interest	4,476			4,425
Comprehensive income attributable to Gilead	$	788,607		$	417,347

See accompanying notes.

GILEAD SCIENCES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)



	Three Months Ended
	March 31,
	2013			2012
Operating Activities:
Net income	$	717,710		$	437,531
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	23,973			19,710
Amortization expense	50,353			46,457
Stock-based compensation expense	61,767			48,731
Excess tax benefits from stock-based compensation	(40,746		)	(23,304		)
Tax benefits from employee stock plans	38,905			18,153
Deferred income taxes	39,301			51,385
Other	8,262			13,767
Changes in operating assets and liabilities:
Accounts receivable, net	(231,781		)	(196,531		)
Inventories	(57,109		)	(26,833		)
Prepaid expenses and other assets	(187,304		)	(75,176		)
Accounts payable	30,792			107,652
Income taxes payable	12,056			(99,151		)
Accrued liabilities	173,042			110,402
Deferred revenues	32,880			20,176
Net cash provided by operating activities	672,101			452,969

Investing Activities:
Purchases of marketable securities	(62,604		)	—
Proceeds from sales of marketable securities	65,985			56,719
Proceeds from maturities of marketable securities	6,862			—
Purchases of other investments	—			(25,000		)
Acquisitions, net of cash acquired	(378,645		)	(10,751,636		)
Capital expenditures	(38,854		)	(23,199		)
Net cash used in investing activities	(407,256		)	(10,743,116		)

Financing Activities:
Proceeds from debt financing, net of issuance costs	—			2,144,733
Proceeds from convertible note hedges	100,771			—
Proceeds from issuances of common stock	86,049			132,530
Repurchases of common stock	(82,239		)	(20,770		)
Repayments of debt financing	(347,896		)	(350,000		)
Repayments of other long-term obligations	(20		)	(612		)
Excess tax benefits from stock-based compensation	40,746			23,304
Contributions from (distributions to) noncontrolling interest	3,588			(73,595		)
Net cash provided by (used in) financing activities	(199,001		)	1,855,590
Effect of exchange rate changes on cash	(5,566		)	2,722
Net change in cash and cash equivalents	60,278			(8,431,835		)
Cash and cash equivalents at beginning of period	1,803,694			9,883,777
Cash and cash equivalents at end of period	$	1,863,972		$	1,451,942

See accompanying notes.

GILEAD SCIENCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. The financial statements include all adjustments (consisting only of normal recurring adjustments) that the management of Gilead Sciences, Inc. (Gilead, we or us) believes are necessary for a fair presentation of the periods presented. These interim financial results are not necessarily indicative of results expected for the full fiscal year or for any subsequent interim period.

The accompanying Consolidated Financial Statements include the accounts of Gilead, our wholly-owned subsidiaries and our joint ventures with Bristol-Myers Squibb Company (BMS), for which we are the primary beneficiary. We record a noncontrolling interest in our Consolidated Financial Statements to reflect BMS’s interest in the joint ventures. All intercompany transactions have been eliminated. The Consolidated Financial Statements include the results of companies acquired by us from the date of each acquisition for the applicable reporting periods.

The accompanying Consolidated Financial Statements and related financial information should be read in conjunction with the audited Consolidated Financial Statements and the related notes thereto for the year ended December 31, 2012, included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (SEC).

On January 25, 2013, we completed a two-for-one stock split in the form of a stock dividend to stockholders of record as of January 7, 2013, as declared on December 10, 2012. Accordingly, all share and per share amounts for all periods presented in these Consolidated Financial Statements and notes have been adjusted retroactively to reflect this stock split.

Significant Accounting Policies, Estimates and Judgments

The preparation of these Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. On an ongoing basis, management evaluates its significant accounting policies or estimates. We base our estimates on historical experience and on various market specific and other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ significantly from these estimates.

Net Income Per Share Attributable to Gilead Common Stockholders

Basic net income per share attributable to Gilead common stockholders is calculated based on the weighted-average number of shares of our common stock outstanding during the period. Diluted net income per share attributable to Gilead common stockholders is calculated based on the weighted-average number of shares of our common stock outstanding and other dilutive securities outstanding during the period. The potential dilutive shares of our common stock resulting from the assumed exercise of outstanding stock options, performance shares and the assumed exercise of warrants relating to the convertible senior notes due in May 2013 (May 2013 Notes), May 2014 (May 2014 Notes) and May 2016 (May 2016 Notes) (collectively, the Convertible Notes) are determined under the treasury stock method.

Because the principal amount of the Convertible Notes will be settled in cash, only the conversion spread relating to the Convertible Notes is included in our calculation of diluted net income per share attributable to Gilead common stockholders. Our common stock resulting from the assumed settlement of the conversion spread of the Convertible Notes has a dilutive effect when the average market price of our common stock during the period exceeds the conversion price of $19.05 for the May 2013 Notes, $22.54 for the May 2014 Notes and $22.71 for the May 2016 Notes.

During the three months ended March 31, 2013 and 2012, the average market price of our common stock exceeded the conversion prices of the Convertible Notes and the dilutive effects are included in the accompanying table. During the three months ended March 31, 2013, a portion of the Convertible Notes were converted and as a result, we have only considered their impact for the period they were outstanding.

Warrants relating to the Convertible Notes have a dilutive effect when the average market price of our common stock during the period exceeds the warrants’ exercise price of $26.95 for the May 2013 Notes, $28.38 for the May 2014 Notes and $30.05 for the May 2016 Notes. During the three months ended March 31, 2013, the average market price of our common stock exceeded the warrants' exercise prices relating to the Convertible Notes and the dilutive effect is included in the accompanying table. During the three months ended March 31, 2012, the average market price of our common stock did not exceed the

warrants’ exercise prices relating to any of the Convertible Notes; therefore, these warrants did not have a dilutive effect on our net income per share for that period.

Stock options to purchase approximately 1.3 million and 21.8 million weighted-average shares of our common stock were outstanding during the three months ended March 31, 2013 and 2012, respectively, but were not included in the computation of diluted net income per share attributable to Gilead common stockholders because their effect was antidilutive.

The following table is a reconciliation of the numerator and denominator used in the calculation of basic and diluted net income per share attributable to Gilead common stockholders (in thousands):



	Three Months Ended
	March 31,
	2013		2012
Numerator:
Net income attributable to Gilead	$	722,186	$	441,956
Denominator:
Weighted-average shares of common stock outstanding used in the calculation of basic net income per share attributable to Gilead common stockholders	1,521,372		1,512,572
Effect of dilutive securities:
Stock options and equivalents	36,812		29,746
Conversion spread related to the May 2013 Notes	10,703		6,846
Conversion spread related to the May 2014 Notes	25,554		3,010
Conversion spread related to the May 2016 Notes	25,140		2,602
Warrants related to the Convertible Notes	45,479		—
Weighted-average shares of common stock outstanding used in the calculation of diluted net income per share attributable to Gilead common stockholders	1,665,060		1,554,776

Concentrations of Risk

We are subject to credit risk from our portfolio of cash equivalents and marketable securities. Under our investment policy, we limit amounts invested in such securities by credit rating, maturity, industry group, investment type and issuer, except for securities issued by the U.S. government. We are not exposed to any significant concentrations of credit risk from these financial instruments. The goals of our investment policy, in order of priority, are as follows: safety and preservation of principal and diversification of risk; liquidity of investments sufficient to meet cash flow requirements; and a competitive after-tax rate of return.

We are also subject to credit risk from our accounts receivable related to our product sales. The majority of our trade accounts receivable arises from product sales in the United States and Europe.

As of March 31, 2013, our accounts receivable in Southern Europe, specifically Greece, Italy, Portugal and Spain, totaled approximately $849.6 million, of which $348.5 million were greater than 120 days past due and $114.1 million were greater than 365 days past due. To date, we have not experienced significant losses with respect to the collection of our accounts receivable. We believe that our allowance for doubtful accounts was adequate at March 31, 2013.

Recent Accounting Pronouncements

In January 2013, the Financial Accounting Standards Board (FASB) issued an update to clarify the scope of disclosures for offsetting assets and liabilities. The update was effective for us beginning in the first quarter of 2013 and was applied retrospectively for all comparative periods presented. The adoption of this guidance did not have a material impact on our Consolidated Financial Statements.

In February 2013, the FASB issued a new standard to improve the reporting of reclassification adjustments out of accumulated other comprehensive income (OCI). The update requires disclosure of amounts reclassified out of accumulated OCI by component. In addition, if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period, an entity is required to present significant amounts reclassified out of accumulated OCI by the respective line items of net income. The updated standard was effective for us beginning in the first quarter of 2013. The adoption of this guidance did not have a material impact on our Consolidated Financial Statements.

In February 2013, the FASB also issued an update to the existing standard for liabilities. The update provides guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements. For obligations for which the total amount is fixed at the reporting date, an entity will be required to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. Such entities will also be required to disclose the nature, amount and other significant information about the obligations. This guidance will become effective for us beginning in the first quarter of 2014. We are evaluating the financial statement impact of this guidance. Currently, we do not expect that adopting this update will have a material impact on our Consolidated Financial Statements.


2.	FAIR VALUE MEASUREMENTS

We determine the fair value of financial and non-financial assets and liabilities using the fair value hierarchy, which establishes three levels of inputs that may be used to measure fair value, as follows:


•	Level 1 inputs which include quoted prices in active markets for identical assets or liabilities;

•

Level 2 inputs which include observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. For our marketable securities, we review trading activity and pricing as of the measurement date. When sufficient quoted pricing for identical securities is not available, we use market pricing and other observable market inputs for similar securities obtained from various third-party data providers. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data; and

•

Level 3 inputs which include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques and significant management judgment or estimation.

Our financial instruments consist principally of cash and cash equivalents, marketable securities, accounts receivable, foreign currency exchange forward and option contracts, accounts payable and short-term and long-term debt. Cash and cash equivalents, marketable securities and foreign currency exchange contracts that hedge accounts receivable and forecasted sales are reported at their respective fair values on our Consolidated Balance Sheets. Short-term and long-term debt are reported at their amortized cost on our Consolidated Balance Sheets. The remaining financial instruments are reported on our Consolidated Balances Sheets at amounts that approximate current fair values.

The fair values of our Convertible Notes and senior unsecured notes were determined using Level 2 inputs based on their quoted market values. The following table summarizes the carrying values and fair values of the Convertible Notes and senior unsecured notes (in thousands):



		March 31, 2013				December 31, 2012
Type of Borrowing	Description	Carrying Value		Fair Value		Carrying Value		Fair Value
Convertible Senior	May 2013 Notes	$	342,759	$	825,330	$	419,433	$	815,297
Convertible Senior	May 2014 Notes	1,211,072		2,696,870		1,210,213		2,040,363
Convertible Senior	May 2016 Notes	1,156,632		2,704,726		1,157,692		2,110,938
Senior Unsecured	April 2021 Notes	993,138		1,133,650		992,923		1,146,990
Senior Unsecured	December 2014 Notes	749,473		771,398		749,394		772,650
Senior Unsecured	December 2016 Notes	699,152		749,784		699,095		748,902
Senior Unsecured	December 2021 Notes	1,247,501		1,405,125		1,247,428		1,420,725
Senior Unsecured	December 2041 Notes	997,828		1,208,000		997,810		1,252,090

The following table summarizes, for assets or liabilities recorded at fair value, the respective fair value and the classification by level of input within the fair value hierarchy defined above (in thousands):



	March 31, 2013								December 31, 2012
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Debt securities:
U.S. treasury securities	$	95,855	$	—	$	—	$	95,855	$	81,903	$	—	$	—	$	81,903
Money market funds	1,633,153		—		—		1,633,153		1,416,355		—		—		1,416,355
U.S. government agencies securities	—		218,038		—		218,038		—		248,952		—		248,952
Municipal debt securities	—		12,115		—		12,115		—		12,088		—		12,088
Corporate debt securities	—		355,063		—		355,063		—		352,718		—		352,718
Residential mortgage and asset-backed securities	—		85,987		—		85,987		—		82,732		—		82,732
Total debt securities	1,729,008		671,203		—		2,400,211		1,498,258		696,490		—		2,194,748
Derivatives	—		43,182		—		43,182		—		14,823		—		14,823
	$	1,729,008	$	714,385	$	—	$	2,443,393	$	1,498,258	$	711,313	$	—	$	2,209,571

Liabilities:
Contingent consideration	$	—	$	—	$	211,084	$	211,084	$	—	$	—	$	205,060	$	205,060
Derivatives	—		18,671		—		18,671		—		65,248		—		65,248
	$	—	$	18,671	$	211,084	$	229,755	$	—	$	65,248	$	205,060	$	270,308

Level 2 Inputs

We estimate the fair values of our government related debt, corporate debt, residential mortgage and asset-backed securities by taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income- and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities; prepayment/default projections based on historical data; and other observable inputs.

Substantially all of our foreign currency derivatives contracts have maturities primarily over an 18 month time horizon and all are with counterparties that have a minimum credit rating of A- or equivalent by Standard & Poor's, Moody's Investors Service, Inc. or Fitch, Inc. We estimate the fair values of these contracts by taking into consideration valuations obtained from a third-party valuation service that utilizes an income-based industry standard valuation model for which all significant inputs are observable, either directly or indirectly. These inputs include foreign currency rates, London Interbank Offered Rates (LIBOR) and swap rates. These inputs, where applicable, are at commonly quoted intervals.

Level 3 Inputs

For the three months ended March 31, 2013, we held no assets measured using Level 3 inputs. For the three months ended March 31, 2012, assets measured at fair value using Level 3 inputs were comprised of auction rate securities and Greek bonds within our available-for-sale investment portfolio. Our policy is to recognize transfers into or out of Level 3 classification as of the actual date of the event or change in circumstances that caused the transfer.

Auction Rate Securities

As of March 31, 2013, we did not hold any auction rate securities. During the third quarter of 2012, we sold our remaining portfolio of auction rate securities and as a result of the sale, we received total proceeds of $37.3 million which resulted in a $3.8 million loss that was recognized in other income (expense), net on our Consolidated Statement of Income.

The underlying assets of our auction rate securities consisted of student loans. Although auction rate securities would typically be measured using Level 2 inputs, the failure of auctions and the lack of market activity and liquidity experienced since the beginning of 2008 required that these securities be measured using Level 3 inputs. The fair value of our auction rate securities was determined using a discounted cash flow model that considered projected cash flows for the issuing trusts, underlying collateral and expected yields. Projected cash flows were estimated based on the underlying loan principal, bonds outstanding and payout formulas. The weighted-average life over which the cash flows were projected considered the collateral composition of the securities and related historical and projected prepayments.

Greek Government Bonds

As of March 31, 2013, we did not hold any Greek government bonds. During the first quarter of 2012, the Greek government restructured its sovereign debt which impacted all holders of Greek bonds. As a result, we recorded a $40.1 million loss related to the debt restructuring as part of other income (expense), net on our Consolidated Statement of Income and exchanged the Greek government-issued bonds for new securities, which we liquidated during the first quarter of 2012. We estimated the fair value of the Greek zero-coupon bonds using Level 3 inputs due to the then current lack of market activity and liquidity. The discount rates used in our fair value model for these bonds were based on credit default swap rates.

Contingent Consideration Liabilities

In connection with certain acquisitions, we may be required to pay future consideration that is contingent upon the achievement of specified development, regulatory approval or sales-based milestone events. We estimate the fair value of the contingent consideration liabilities on the acquisition date and each reporting period thereafter using a probability-weighted income approach, which reflects the probability and timing of future payments. This fair value measurement is based on significant Level 3 inputs such as the anticipated timelines and probability of achieving development, regulatory approval or sales-based milestone events and projected revenues. The resulting probability-weighted cash flows are discounted using credit-risk adjusted interest rates.

Each reporting period thereafter, we revalue these obligations by performing a review of the assumptions listed above and record increases or decreases in the fair value of these contingent consideration obligations in research and development (R&D) expenses within our Consolidated Statements of Income until such time that the related product candidate receives marketing approval. In the absence of any significant changes in key assumptions, the quarterly determination of fair values of these contingent consideration obligations would primarily reflect the passage of time.

Significant judgment is employed in determining Level 3 inputs and fair value measurements as of the acquisition date and for each subsequent period. Updates to assumptions could have a significant impact on our results of operations in any given period and actual results may differ from estimates. For example, significant increases in the probability of achieving a milestone or projected revenues would result in a significantly higher fair value measurement while significant decreases in the estimated probability of achieving a milestone or projected revenues would result in a significantly lower fair value measurement. Significant increases in the discount rate or in the anticipated timelines would result in a significantly lower fair value measurement while significant decreases in the discount rate or anticipated timelines would result in a significantly higher fair value measurement.

The potential contingent consideration payments required upon achievement of development or regulatory approval-based milestones related to our CGI Pharmaceuticals, Inc. and Calistoga Pharmaceuticals, Inc. acquisitions range from no payment if none of the milestones are achieved to an estimated maximum of $254.0 million (undiscounted), of which we had accrued $163.9 million as of March 31, 2013 and $159.3 million as of December 31, 2012. The remainder of the contingent consideration liabilities accrual as of March 31, 2013 and December 31, 2012 relates to potential future payments resulting from the acquisition of Arresto Biosciences, Inc. for royalty obligations on future sales once specified sales-based milestones are achieved.

The following table provides a rollforward of our contingent consideration liabilities, which are recorded as part of other long-term obligations in our Consolidated Balance Sheets (in thousands):



Balance at December 31, 2012	$	205,060
Additions from new acquisitions	—
Net changes in valuation	6,024
Balance at March 31, 2013	$	211,084


3.	AVAILABLE-FOR-SALE SECURITIES

The following table is a summary of available-for-sale debt securities recorded in cash and cash equivalents or marketable securities in our Consolidated Balance Sheets (in thousands):



	March 31, 2013									December 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value

Debt securities:
U.S. treasury securities	$	95,661	$	194	$	—		$	95,855	$	81,752	$	151	$	—		$	81,903
Money market funds	1,633,153		—		—			1,633,153		1,416,356		—		—			1,416,356
U.S. government agencies securities	217,680		358		—			218,038		248,595		386		(29		)	248,952
Municipal debt securities	12,049		66		—			12,115		12,062		33		(7		)	12,088
Corporate debt securities	353,468		1,630		(35		)	355,063		351,309		1,492		(84		)	352,717
Residential mortgage and asset-backed securities	86,034		96		(143		)	85,987		82,717		156		(141		)	82,732
Total	$	2,398,045	$	2,344	$	(178	)	$	2,400,211	$	2,192,791	$	2,218	$	(261	)	$	2,194,748

Estimated fair values of available-for-sale securities are generally based on prices obtained from commercial pricing services. The following table summarizes the classification of the available-for-sale debt securities on our Consolidated Balance Sheets (in thousands):



	March 31, 2013		December 31, 2012
Cash and cash equivalents	$	1,633,153	$	1,416,356
Short-term marketable securities	78,804		58,556
Long-term marketable securities	688,254		719,836
Total	$	2,400,211	$	2,194,748

Cash and cash equivalents in the table above exclude cash of $230.8 million and $387.3 million as of March 31, 2013 and December 31, 2012, respectively.

The following table summarizes our portfolio of available-for-sale debt securities by contractual maturity (in thousands):



	March 31, 2013
	Amortized Cost		Fair Value
Less than one year	$	1,711,889	$	1,711,957
Greater than one year but less than five years	661,969		664,058
Greater than five years but less than ten years	9,437		9,460
Greater than ten years	14,750		14,736
Total	$	2,398,045	$	2,400,211

The following table summarizes the gross realized gains and losses related to sales of marketable securities (in thousands):



	Three Months Ended
	March 31,
	2013			2012
Gross realized gains on sales	$	182		$	10,015
Gross realized losses on sales	$	(156	)	$	(40,096	)

The cost of securities sold was determined based on the specific identification method.

The following table summarizes our available-for-sale debt securities that were in a continuous unrealized loss position, but were not deemed to be other-than-temporarily impaired (in thousands):



	Less Than 12 Months					12 Months or Greater				Total
	Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value
March 31, 2013
Debt securities:
U.S. government agencies securities	$	—		$	—	$	—	$	—	$	—		$	—
Municipal debt securities	—			—		—		—		—			—
Corporate debt securities	(35		)	47,567		—		—		(35		)	47,567
Residential mortgage and asset-backed securities	(143		)	47,748		—		—		(143		)	47,748
Total	$	(178	)	$	95,315	$	—	$	—	$	(178	)	$	95,315

December 31, 2012
Debt securities:
U.S. government agencies securities	$	(29	)	$	26,306	$	—	$	—	$	(29	)	$	26,306
Municipal debt securities	(7		)	3,993		—		—		(7		)	3,993
Corporate debt securities	(84		)	72,722		—		—		(84		)	72,722
Residential mortgage and asset-backed securities	(141		)	36,415		—		—		(141		)	36,415
Total	$	(261	)	$	139,436	$	—	$	—	$	(261	)	$	139,436

As of March 31, 2013 and December 31, 2012, we held a total of 37 and 47 securities, respectively, that were in an unrealized loss position. Based on our review of these securities, we believe we had no other-than-temporary impairments on these securities as of March 31, 2013 and December 31, 2012 because we do not intend to sell these securities and it is not more likely than not that we will be required to sell these securities before the recovery of their amortized cost basis.


4.	DERIVATIVE FINANCIAL INSTRUMENTS

We operate in foreign countries, which exposes us to market risk associated with foreign currency exchange rate fluctuations between the U.S. dollar and various foreign currencies, the most significant of which is the Euro. In order to manage this risk, we may hedge a portion of our foreign currency exposures related to outstanding monetary assets and liabilities as well as forecasted product sales using foreign currency exchange forward or option contracts. In general, the market risk related to these contracts is offset by corresponding gains and losses on the hedged transactions. The credit risk associated with these contracts is driven by changes in interest and currency exchange rates and, as a result, varies over time. By working only with major banks and closely monitoring current market conditions, we limit the risk that counterparties to these contracts may be unable to perform. We also limit our risk of loss by entering into contracts that permit net settlement at maturity. Therefore, our overall risk of loss in the event of a counterparty default is limited to the amount of any unrecognized gains on outstanding contracts (i.e., those contracts that have a positive fair value) at the date of default. We do not enter into derivative contracts for trading purposes, nor do we hedge our net investment in any of our foreign subsidiaries.

We hedge our exposure to foreign currency exchange rate fluctuations for certain monetary assets and liabilities of our foreign subsidiaries that are denominated in a non-functional currency. The derivative instruments we use to hedge this exposure are not designated as hedges, and as a result, changes in their fair value are recorded in other income (expense), net on our Consolidated Statements of Income.

We hedge our exposure to foreign currency exchange rate fluctuations for forecasted product sales that are denominated in a non-functional currency. The derivative instruments we use to hedge this exposure are designated as cash flow hedges and have maturity dates of 18 months or less. Upon executing a hedging contract and quarterly thereafter, we assess prospective hedge effectiveness using a regression analysis which calculates the change in cash flow as a result of the hedge instrument. On a monthly basis, we assess retrospective hedge effectiveness using a dollar offset approach. We exclude time value from our effectiveness testing and recognize changes in the time value of the hedge in other income (expense), net. The effective component of our hedge is recorded as an unrealized gain or loss on the hedging instrument in accumulated OCI within stockholders' equity. When the hedged forecasted transaction occurs, the hedge is de-designated and the unrealized gains or losses are reclassified into product sales. The majority of gains and losses related to the hedged forecasted transactions reported in accumulated OCI at March 31, 2013 will be reclassified to product sales within 12 months. The cash flow effects of our derivatives contracts for the three months ended March 31, 2013 and 2012 are included within net cash provided by operating activities in the Consolidated Statements of Cash Flows.

We had notional amounts on foreign currency exchange contracts outstanding of $3.47 billion and $3.39 billion at March 31, 2013 and December 31, 2012, respectively.

While all of our derivative contracts allow us the right to offset assets or liabilities, we have presented amounts on a gross basis. Under the International Swap Dealers Association, Inc. master agreements with the respective counterparties of the foreign currency exchange contracts, subject to applicable requirements, we are allowed to net settle transactions of the same currency with a single net amount payable by one party to the other. The following table summarizes the location and fair values of derivative instruments on our Consolidated Balance Sheets (in thousands):



	March 31, 2013
	Asset Derivatives			Liability Derivatives
	Classification	Fair Value		Classification	Fair Value
Derivatives designated as hedges:
Foreign currency exchange contracts	Other current assets	$	33,048	Other accrued liabilities	$	17,915
Foreign currency exchange contracts	Other long-term assets	9,697		Other long-term obligations	106
Total derivatives designated as hedges		42,745			18,021
Derivatives not designated as hedges:
Foreign currency exchange contracts	Other current assets	437		Other accrued liabilities	650
Total derivatives not designated as hedges		437			650
Total derivatives		$	43,182		$	18,671



	December 31, 2012
	Asset Derivatives			Liability Derivatives
	Classification	Fair Value		Classification	Fair Value
Derivatives designated as hedges:
Foreign currency exchange contracts	Other current assets	$	14,556	Other accrued liabilities	$	54,597
Foreign currency exchange contracts	Other long-term assets	142		Other long-term obligations	10,630
Total derivatives designated as hedges		14,698			65,227
Derivatives not designated as hedges:
Foreign currency exchange contracts	Other current assets	125		Other accrued liabilities	21
Total derivatives not designated as hedges		125			21
Total derivatives		$	14,823		$	65,248

The following table summarizes the effect of our foreign currency exchange contracts on our Consolidated Statements of Income (in thousands):



	Three Months Ended
	March 31,
	2013			2012
Derivatives designated as hedges:
Net gains (losses) recognized in OCI (effective portion)	$	70,860		$	(48,886	)
Net gains reclassified from accumulated OCI into product sales (effective portion)	$	462		$	11,227
Losses recognized in other income (expense), net (ineffective portion and amounts excluded from effectiveness testing)	$	(2,132	)	$	(3,212	)
Derivatives not designated as hedges:
Net gains (losses) recognized in other income (expense), net	$	32,620		$	(27,174	)

There were no material amounts recorded in other income (expense), net, for the three months ended March 31, 2013 and 2012 as a result of the discontinuance of cash flow hedges.

As of March 31, 2013 and December 31, 2012, we held one type of financial instrument, derivative contracts related to foreign currency exchange contracts. The following table summarizes the potential effect of offsetting derivatives by type of financial instrument on our Consolidated Balance Sheets (in thousands):



March 31, 2013
Offsetting of Derivative Assets/Liabilities
									Gross Amounts Not Offset in the Consolidated Balance Sheet
Description	Gross Amounts of Recognized Assets/Liabilities			Gross Amounts Offset in the Consolidated Balance Sheet		Amounts of Assets/Liabilities Presented in the Consolidated Balance Sheet			Derivative Financial Instruments			Cash Collateral Received/Pledged		Net Amount (Legal Offset)
Derivative assets	$	43,182		$	—	$	43,182		$	(18,515	)	$	—	$	24,667
Derivative liabilities	(18,671		)	—		(18,671		)	18,515			—		(156		)



December 31, 2012
Offsetting of Derivative Assets/Liabilities
									Gross Amounts Not Offset in the Consolidated Balance Sheet
Description	Gross Amounts of Recognized Assets/Liabilities			Gross Amounts Offset in the Consolidated Balance Sheet		Amounts of Assets/Liabilities Presented in the Consolidated Balance Sheet			Derivative Financial Instruments			Cash Collateral Received/Pledged		Net Amount (Legal Offset)
Derivative assets	$	14,823		$	—	$	14,823		$	(9,644	)	$	—	$	5,179
Derivative liabilities	(65,248		)	—		(65,248		)	9,644			—		(55,604		)


5.	ACQUISITION

YM BioSciences Inc.

We completed the acquisition of YM BioSciences Inc. (YM) for total consideration transferred of $487.6 million on February 8, 2013, at which time YM became a wholly-owned subsidiary of Gilead. YM was a drug development company primarily focused on advancing momelotinib (formally known as CYT387), an orally administered, once-daily candidate for hematologic cancers.

Currently, the purchase accounting is preliminary as management is in the process of reviewing the forecasts that support the valuation. We expect to finalize the purchase accounting during the second quarter of 2013. The preliminary fair values of acquired assets and assumed liabilities include primarily, in-process research and development (IPR&D) of $362.7 million, goodwill of $127.2 million, deferred tax liabilities of $108.8 million and cash acquired of $108.9 million. Pro forma results of operations for the acquisition of YM have not been presented because this acquisition is not material to our consolidated results of operations. See Note 7, Intangible Assets and Goodwill for a description of the IPR&D acquired.


6.	INVENTORIES

Inventories are summarized as follows (in thousands):



	March 31, 2013		December 31, 2012
Raw materials	$	693,139	$	826,545
Work in process	529,157		358,525
Finished goods	577,322		559,912
Total	$	1,799,618	$	1,744,982

As of March 31, 2013 and December 31, 2012, the joint ventures formed by Gilead and BMS (See Note 8), which are included in our Consolidated Financial Statements, held $1.27 billion and $1.26 billion in inventory, respectively, of efavirenz active pharmaceutical ingredient which was purchased from BMS at BMS's estimated net selling price of efavirenz.


7.	INTANGIBLE ASSETS AND GOODWILL

Intangible Assets

The following table summarizes the carrying amount of our intangible assets (in thousands):



	March 31, 2013		December 31, 2012
Indefinite-lived intangible assets	$	11,348,900	$	10,986,200
Finite-lived intangible assets	728,648		750,193
Total intangible assets	$	12,077,548	$	11,736,393

Indefinite-Lived Intangible Assets

Our indefinite-lived intangible assets consisted primarily of the purchased IPR&D from our acquisition of Pharmasset, Inc. (Pharmasset) in January 2012. We completed our acquisition of YM in February 2013. Of the total $487.6 million preliminary fair value of acquired assets and assumed liabilities, we attributed approximately $362.7 million to IPR&D related to momelotinib on our Consolidated Balance Sheet. The following table summarizes our indefinite-lived intangible assets (in thousands):



	March 31, 2013		December 31, 2012
Indefinite-lived intangible asset - Sofosbuvir	$	10,720,000	$	10,720,000
Indefinite-lived intangible asset - Momelotinib (formerly CYT387)	362,700		—
Indefinite-lived intangible assets - Other	266,200		266,200
Total	$	11,348,900	$	10,986,200

Finite-Lived Intangible Assets

The following table summarizes our finite-lived intangible assets (in thousands):



	March 31, 2013				December 31, 2012
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Intangible asset - Ranexa	$	688,400	$	147,552	$	688,400	$	133,119
Intangible asset - Lexiscan	262,800		101,902		262,800		95,466
Other	42,995		16,093		42,995		15,417
Total	$	994,195	$	265,547	$	994,195	$	244,002

Amortization expense related to finite-lived intangible assets included in cost of goods sold in our Consolidated Statement of Income totaled $21.5 million and $15.8 million for the three months ended March 31, 2013 and 2012, respectively. The weighted-average amortization period for these intangible assets is approximately 11 years. As of March 31, 2013, the estimated future amortization expense associated with our intangible assets for the remaining nine months of 2013 and each of the five succeeding fiscal years is as follows (in thousands):



Fiscal Year	Amount
2013 (remaining nine months)	$	64,636
2014	92,441
2015	97,673
2016	107,312
2017	116,137
2018	124,561
Total	$	602,760

Goodwill

Upon completing the acquisition of YM in February 2013, we preliminarily attributed $127.2 million to goodwill on our Consolidated Balance Sheet. The following table summarizes the changes in the carrying amount of goodwill (in thousands):



Balance at December 31, 2012	$	1,060,919
Goodwill resulting from the acquisition of YM	127,238
Balance at March 31, 2013	$	1,188,157


8.	COLLABORATIVE ARRANGEMENTS

From time to time, as a result of entering into strategic collaborations, we may hold investments in non-public companies. We review our interests in investee companies for consolidation and/or appropriate disclosure based on applicable guidance. For variable interest entities (VIEs), we may be required to consolidate an entity if the contractual terms of the arrangement essentially provide us with control over the entity, even if we do not have a majority voting interest. We assess whether we are the primary beneficiary of a VIE based on our power to direct the activities of the VIE that most significantly impact the VIE's economic performance and our obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. As of March 31, 2013, we determined that certain of our investee companies are VIEs; however, other than with respect to our joint ventures with BMS, we are not the primary beneficiary and therefore do not consolidate these investees.

Bristol-Myers Squibb Company

North America

In 2004, we entered into a collaboration arrangement with BMS in the United States to develop and commercialize a single tablet regimen containing our Truvada and BMS's Sustiva (efavirenz). This combination was approved for use in the United States in 2006 and is sold under the brand name Atripla. We and BMS structured this collaboration as a joint venture that operates as a limited liability company named Bristol-Myers Squibb & Gilead Sciences, LLC, which we consolidate. Under the terms of the collaboration we and BMS granted royalty free sublicenses to the joint venture for the use of our respective company owned technologies and, in return, were granted a license by the joint venture to use any intellectual property that results from the collaboration. In 2006, we and BMS amended the joint venture's collaboration agreement to allow the joint venture to sell Atripla into Canada. The economic interests of the joint venture held by us and BMS (including share of revenues and out-of-pocket expenses) is based on the portion of the net selling price of Atripla attributable to efavirenz and Truvada. Since the net selling price for Truvada may change over time relative to the net selling price of efavirenz, both our and BMS's respective economic interests in the joint venture may vary annually.

We and BMS shared marketing and sales efforts. Since the second quarter of 2011, except for a limited number of activities that will be jointly managed, the parties no longer coordinate detailing and promotional activities in the United States, and the parties have begun to reduce their joint promotional efforts since we launched Complera in August 2011 and Stribild in August 2012. The parties will continue to collaborate on activities such as manufacturing, regulatory, compliance and pharmacovigilance. The daily operations of the joint venture are governed by four primary joint committees formed by both BMS and Gilead. We are responsible for accounting, financial reporting, tax reporting, manufacturing and product distribution for the joint venture. Both parties provide their respective bulk active pharmaceutical ingredients to the joint venture at their approximate market values. The agreement will continue until terminated by the mutual agreement of the parties. In addition, either party may terminate the other party's participation in the collaboration within 30 days after the launch of at least one generic version of such other party's single agent products (or the double agent products). The non-terminating party then has the right to continue to sell Atripla, but will be obligated to pay the terminating party certain royalties for a three-year period following the effective date of the termination.

As of March 31, 2013 and December 31, 2012, the joint venture held efavirenz active pharmaceutical ingredient which it purchased from BMS at BMS's estimated net selling price of efavirenz in the U.S. market. These amounts are included in inventories on our Consolidated Balance Sheets. As of March 31, 2013, total assets held by the joint venture were $2.24 billion and consisted primarily of cash and cash equivalents of $147.7 million, accounts receivable of $291.7 million and inventories of $1.74 billion; total liabilities were $1.61 billion and consisted primarily of accounts payable of $569.9 million and other accrued expenses of $367.3 million. As of December 31, 2012, total assets held by the joint venture were $1.95 billion and consisted primarily of cash and cash equivalents of $191.1 million, accounts receivable of $223.7 million and inventories of $1.54 billion; total liabilities were $1.32 billion and consisted primarily of accounts payable of $501.7 million and other accrued expenses of $291.5 million. These asset and liability amounts do not reflect the impact of intercompany eliminations that are included in our Consolidated Balance Sheets. Although we consolidate the joint venture, the legal structure of the joint

venture limits the recourse that its creditors will have over our general credit or assets. Similarly, the assets held in the joint venture can be used only to settle obligations of the joint venture.

Europe

In 2007, Gilead Sciences Limited, our wholly-owned subsidiary in Ireland, and BMS entered into a collaboration agreement with BMS which sets forth the terms and conditions under which we and BMS will commercialize and distribute Atripla in the European Union, Iceland, Liechtenstein, Norway and Switzerland (collectively, the European Territory). The parties formed a limited liability company which we consolidate, to manufacture Atripla for distribution in the European Territory using efavirenz that it purchases from BMS at BMS's estimated net selling price of efavirenz in the European Territory. We are responsible for manufacturing, product distribution, inventory management and warehousing. Through our local subsidiaries, we have primary responsibility for order fulfillment, collection of receivables, customer relations and handling of sales returns in all the territories where we and BMS promote Atripla. In general, the parties share revenues and out-of-pocket expenses in proportion to the net selling prices of the components of Atripla, Truvada and efavirenz.

Starting in 2012, except for a limited number of activities that will be jointly managed, the parties no longer coordinate detailing and promotional activities in the region. We are responsible for accounting, financial reporting and tax reporting for the collaboration. As of March 31, 2013 and December 31, 2012, efavirenz purchased from BMS at BMS's estimated net selling price of efavirenz in the European Territory is included in inventories on our Consolidated Balance Sheets.

The parties also formed a limited liability company to hold the marketing authorization for Atripla in Europe. We have primary responsibility for regulatory activities. In the major market countries, both parties have agreed to independently continue to use commercially reasonable efforts to promote Atripla.


9.	LONG-TERM OBLIGATIONS

Financing Arrangements

The following table summarizes the carrying amount of our borrowings under various financing arrangements (in thousands):



Type of Borrowing	Description	Issue Date	Due Date	Interest Rate	March 31, 2013		December 31, 2012
Convertible Senior	May 2013 Notes	April 2006	May 2013	0.625%	$	342,759	$	419,433
Convertible Senior	May 2014 Notes	July 2010	May 2014	1.00%	1,211,072		1,210,213
Convertible Senior	May 2016 Notes	July 2010	May 2016	1.625%	1,156,632		1,157,692
Senior Unsecured	April 2021 Notes	March 2011	April 2021	4.50%	993,138		992,923
Senior Unsecured	December 2014 Notes	December 2011	December 2014	2.40%	749,473		749,394
Senior Unsecured	December 2016 Notes	December 2011	December 2016	3.05%	699,152		699,095
Senior Unsecured	December 2021 Notes	December 2011	December 2021	4.40%	1,247,501		1,247,428
Senior Unsecured	December 2041 Notes	December 2011	December 2041	5.65%	997,828		997,810
Credit Facility	Five-Year Revolver	January 2012	January 2017	Variable	600,000		750,000
Total debt, net					$	7,997,555	$	8,223,988
Less current portion					942,759		1,169,433
Total long-term debt, net					$	7,054,796	$	7,054,555

Convertible Senior Notes

During the three months ended March 31, 2013, a portion of the Convertible Notes was converted and we repaid $97.1 million of the principal balance. We also paid $100.8 million in cash related to the conversion spread of the notes, which represents the conversion value in excess of the principal amount, and received $100.8 million in cash from our convertible note hedges related to these notes.

Credit Facility

During the first quarter of 2013, we repaid $150.0 million under the Five-Year Revolving Credit Agreement. The Five-Year Revolving Credit Agreement bears interest at either (i) the Eurodollar Rate plus the Applicable Margin or (ii) the Base Rate plus the Applicable Margin, each as defined in the credit agreement. We may reduce the commitments and may prepay the loan in whole or in part at any time without premium or penalty. We are required to comply with certain covenants under the credit agreement and notes indentures and as of March 31, 2013, we were in compliance with all such covenants.


10.	COMMITMENTS AND CONTINGENCIES

Legal Proceedings

Department of Justice Investigation

In June 2011, we received a subpoena from the U.S. Attorney's Office for the Northern District of California requesting documents related to the manufacture, and related quality and distribution practices, of Atripla, Emtriva, Hepsera, Letairis, Truvada, Viread and Complera. We have been cooperating and will continue to cooperate with this governmental inquiry. An estimate of a possible loss or range of losses cannot be determined.

Litigation with Generic Manufacturers

As part of the approval process of some of our products, the U.S. Food and Drug Administration (FDA) granted a New Chemical Entity (NCE) exclusivity period during which other manufacturers' applications for approval of generic versions of our product will not be granted. Generic manufacturers may challenge the patents protecting products that have been granted exclusivity one year prior to the end of the exclusivity period. Generic manufacturers have sought and may continue to seek FDA approval for a similar or identical drug through an abbreviated new drug application (ANDA), the application form typically used by manufacturers seeking approval of a generic drug.

We received notices that generic manufacturers have submitted ANDAs to manufacture a generic version of Atripla, Truvada, Viread, Hepsera, Ranexa and Tamiflu in the United States and Atripla, Truvada and Viread in Canada. We expect to begin trial with some of the generic manufacturers in 2013. In February 2013, Gilead and Teva reached an agreement in principle to settle the ongoing patent litigation concerning the four patents that protect tenofovir disoproxil fumarate in our Viread, Truvada and Atripla products. Under the agreement, Teva will be allowed to launch a generic version of Viread on December 15, 2017. The settlement agreement was recently filed with the Federal Trade Commission (FTC) and Department of Justice (DOJ) and will be final after 45 days if the FTC and DOJ do not object. As a result of the recent invalidation of the patents protecting entecavir and due to declining sales of Hepsera in the United States, in March 2013, we granted Sigmapharm Labs (Sigmapharm) a Covenant Not to Sue if it launches a generic version of Hepsera prior to the expiration of our patents and then filed a motion to dismiss all claims in the lawsuit related to the Hepsera patents. Once Sigmapharm obtains FDA approval of its product, it may launch its generic product. The trial related to ten of the patents associated with Ranexa is scheduled to begin in April 2013. This trial related to three of the patents associated with Truvada in Canada is currently scheduled for hearing in September 2013. The trial related to the two patents protecting emtricitabine patent in our Atripla is scheduled to begin in October 2013.

We cannot predict the ultimate outcome of these actions, and we may spend significant resources enforcing and defending these patents. If we are unsuccessful in these lawsuits, some or all of our original claims in the patents may be narrowed or invalidated and the patent protection for Atripla, Truvada, Viread Ranexa and Tamiflu in the United States and Atripla, Truvada and Viread in Canada could be substantially shortened. Further, if all of the patents covering one or more products are invalidated, the FDA or Canadian Ministry of Health could approve the requests to manufacture a generic version of such products in the United States or Canada, respectively, prior to the expiration date of those patents. The sale of generic versions of these products earlier than their patent expiration would have a significant negative effect on our revenues and results of operations.

Other Matters

We are a party to various legal actions that arose in the ordinary course of our business. We do not believe that any of these legal actions will have a material adverse impact on our consolidated business, financial position or results of operations.


11.	STOCK-BASED COMPENSATION

The following table summarizes the stock-based compensation expense included in our Consolidated Statements of Income (in thousands):



	Three Months Ended
	March 31,
	2013			2012
Cost of goods sold	$	1,841		$	2,101
Research and development expenses	26,875			118,622
Selling, general and administrative expenses	33,051			121,945
Stock-based compensation expense included in total costs and expenses	61,767			242,668
Income tax effect	(16,387		)	(13,064		)
Stock-based compensation expense, net of tax	$	45,380		$	229,604

Total stock-based compensation for the three months ended March 31, 2012 included $100.1 million and $93.8 million in R&D and selling, general and administrative expenses, respectively, related to the acceleration of unvested stock options in connection with the acquisition of Pharmasset, which closed during the first quarter of 2012.


12.	STOCKHOLDERS’ EQUITY

Stock Repurchase Program

During the three months ended March 31, 2013, we repurchased a total of $82.2 million or 2.1 million shares of common stock under our January 2011, three-year, $5.00 billion stock repurchase program.

Accumulated Other Comprehensive Income

The following table summarizes the changes in accumulated OCI by component, net of tax (in thousands):



	Foreign Currency Items			Unrealized Gains and Losses on Available-for-Sale Securities			Unrealized Gains and Losses on Cash Flow Hedges			Total
Balance at December 31, 2012	$	30,084		$	(24,002	)	$	(51,697	)	$	(45,615	)
Other comprehensive income (loss) before reclassifications	(8,956		)	1,785			74,060			66,889
Amounts reclassified from accumulated other comprehensive income	—			(17		)	(451		)	(468		)
Net current period other comprehensive income (loss)	(8,956		)	1,768			73,609			66,421
Balance at March 31, 2013	$	21,128		$	(22,234	)	$	21,912		$	20,806

For the three months ended March 31, 2013, amounts reclassified from accumulated OCI were not significant. Amounts reclassified for gains (losses) on cash flow hedges were recorded as part of product sales on our Consolidated Statements of Income. Amounts reclassified for unrealized gains (losses) on available-for-sale securities were recorded as part of other income (expense), net on our Consolidated Statements of Income.


13.	SEGMENT INFORMATION

We operate in one business segment, which primarily focuses on the development and commercialization of human therapeutics for life threatening diseases. All products are included in one segment, because the majority of our products have similar economic and other characteristics, including the nature of the products and production processes, type of customers, distribution methods and regulatory environment.

Product sales consist of the following (in thousands):



	Three Months Ended
	March 31,
	2013		2012
Antiviral products:
Atripla	$	877,073	$	887,596
Truvada	700,242		758,263
Viread	210,332		191,693
Complera/Eviplera	148,189		52,180
Stribild	92,148		—
Hepsera	26,423		29,297
Emtriva	6,671		6,777
Total antiviral products	2,061,078		1,925,806
Letairis	118,107		87,288
Ranexa	96,286		83,201
AmBisome	85,275		84,764
Other products	32,822		27,283
Total product sales	$	2,393,568	$	2,208,342

The following table summarizes revenues from each of our customers who individually accounted for 10% or more of our total revenues (as a percentage of total revenues):



	Three Months Ended
	March 31,
	2013		2012
Cardinal Health, Inc.	19	%	20	%
McKesson Corp.	14	%	16	%
AmerisourceBergen Corp.	11	%	11	%


14.	INCOME TAXES

Our income tax rate of 23.7% for the three months ended March 31, 2013 differed from the U.S. federal statutory rate of 35% due primarily to the retroactive extension of the 2012 federal research tax credit in January 2013 and certain operating earnings from non-U.S. subsidiaries that are considered indefinitely reinvested, partially offset by state taxes and our portion of the non-deductible pharmaceutical excise tax. We do not provide for U.S. income taxes on undistributed earnings of our foreign operations that are intended to be permanently reinvested.

In January 2013, the U.S. Congress passed the American Taxpayer Relief Act of 2012 which retroactively reinstated the federal research tax credit for 2012 and 2013. As a result, our income tax provision for the first quarter of 2013 included a discrete tax benefit related to the federal research tax credit for 2012.

We file federal, state and foreign income tax returns in many jurisdictions in the United States and abroad. For federal income tax purposes, the statute of limitations is open for 2008 and onwards. For certain acquired entities, the statute of limitations is open for all years from inception due to our utilization of their net operating losses and credits carried over from prior years. For California income tax purposes, the statute of limitations is open for 2008 and onwards.

Our income tax returns are audited by federal, state and foreign tax authorities. We are currently under examination by the Internal Revenue Service (IRS) for the 2008 and 2009 tax years and by various state and foreign jurisdictions. There are differing interpretations of tax laws and regulations, and as a result, significant disputes may arise with these tax authorities involving issues of the timing and amount of deductions and allocations of income among various tax jurisdictions. We periodically evaluate our exposures associated with our tax filing positions.

As of March 31, 2013, we believe that it is reasonably possible that our unrecognized tax benefits will decrease by approximately$18 million in the next 12 months as we expect to have clarification from the IRS and other tax authorities regarding some of our uncertain tax positions. With respect to the remaining unrecognized tax benefits, we are currently unable to make a reasonable estimate as to the period of cash settlement, if any, with the respective tax authorities.

We record liabilities related to uncertain tax positions in accordance with the income tax guidance which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We do not believe any of our uncertain tax positions will have a material adverse effect on our Consolidated Financial Statements, although an adverse resolution of one or more of these uncertain tax positions in any period could have a material impact on the results of operations for that period.


ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

You should read the following management’s discussion and analysis of our financial condition and results of operations in conjunction with our audited Consolidated Financial Statements and related notes thereto included as part of our Annual Report on Form 10-K for the year ended December 31, 2012 and our unaudited Consolidated Financial Statements for the three months ended March 31, 2013 and other disclosures (including the disclosures under “Part II. Item 1A. Risk Factors”) included in this Quarterly Report on Form 10-Q. Our Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and are presented in U.S. dollars.

Management Overview

Gilead Sciences, Inc. (Gilead, we or us), incorporated in Delaware on June 22, 1987, is a research-based biopharmaceutical company that discovers, develops and commercializes innovative medicines in areas of unmet medical need. With each new discovery and experimental drug candidate, we seek to improve the care of patients suffering from life-threatening diseases around the world. Gilead's primary areas of focus include human immunodeficiency virus (HIV), liver diseases such as hepatitis B virus (HBV) and hepatitis C virus (HCV), serious cardiovascular and respiratory conditions and oncology/inflammation. Headquartered in Foster City, California, we have operations in North America, Europe and Asia-Pacific. We continue to add to our existing portfolio of products through our internal discovery and clinical development programs and through our product acquisition and in-licensing strategy.

Our product portfolio is comprised of Stribild^®, Complera^®/Eviplera^®, Atripla^®, Truvada^®, Viread^®, Hepsera^®, Emtriva^®, Letairis^®, Ranexa^®, AmBisome^®, Cayston^® and Vistide^®. We have U.S. and international commercial sales operations, with marketing subsidiaries in North America, Europe and Asia-Pacific. In addition, we also sell and distribute certain products through our corporate partners under royalty-paying collaborative agreements.

Business Highlights

During the first quarter of 2013, our product sales increased 8% over the same quarter in 2012, and we continued to advance our product pipeline across all therapeutic areas. We believe the combination of our existing internal research programs and our recent acquisitions and partnerships will allow us to continue to bring innovative therapies to individuals who are living with unmet medical needs. During the quarter, we made the following announcements:

HIV Program


•	Initiated two Phase 3 clinical trials evaluating a single tablet regimen containing tenofovir alafenamide (TAF) for the treatment of HIV-1 infection in treatment-naïve adults;


•	Announced Phase 2 study results evaluating a once-daily single tablet regimen containing TAF was similar to a regimen of Stribild;


•	Reached an agreement with Teva Pharmaceuticals (Teva) to settle ongoing patent litigation under which Teva will be allowed to launch a generic version of Viread on December 15, 2017; and


•	The scientific committee of the European Medicines Agency adopted a positive opinion on our marketing authorisation application for Stribild.

In April, the U.S. Food and Drug Administration (FDA) issued complete response letters on our new drug applications (NDAs) for elvitegravir and cobicistat for us as part of HIV treatment regimens. The letters noted that the FDA cannot approve the applications in their current form due to deficiencies in documentation and validation of certain observations noted during a recent inspection. We are taking all necessary steps to address the agency's questions and move the applications forward. The FDA did not raise any concerns with the safety profiles of elvitegravir and cobicistat. This regulatory action does not affect the marketing authorization or continued use of Stribild.

HCV Program


•	Announced full clinical trial results of the Phase 2 ELECTRON study that confirmed all patients achieved a sustained virologic response (SVR) four weeks after stopping therapy;


•	Initiated and provided an update on the Phase 3 ION-1 study evaluating a once-daily fixed-dose combination of sofosbuvir/ledipasvir with and without ribavirin (RBV) for 12 or 24 weeks in treatment naïve genotype 1 HCV patients. A planned review by the study's Data and Safety Monitoring Board of safety data concluded that the trial should continue without modification;


•	Began screening and completed enrollment in the second Phase 3 ION-2 study evaluating sofosbuvir/ledipasvir with RBV for 12 weeks, and with and without RBV for 24 weeks, in treatment-experienced genotype 1 HCV patients;


•	Enrolled patients in the Phase 2 LONESTAR study of sofosbuvir/ledipasvir with and without RBV for eight weeks and of sofosbuvir/ledipasvir for 12 weeks in genotype 1 treatment-naïve patients;


•	Announced topline results from the Phase 3 FISSION study, evaluating therapy with either a 12-week course of sofosbuvir plus RBV or standard of care with 24 weeks of treatment with pegylated interferon (peg-IFN) plus RBV in genotype 2 or 3 HCV patients which met its primary efficacy endpoint of non-inferiority; and


•	Announced topline results from the Phase 3 NEUTRINO and FUSION studies, evaluating 12- and 16-week courses of various therapies with sofosbuvir, RBV and peg-IFN in genotypes 1, 2, 3, 4, 5 and 6 HCV patients. The studies met their primary efficacy endpoints of superiority compared to a predefined historic control SVR rate.

In April, we filed a new drug application with the FDA for approval of sofosbuvir, a once-daily oral nucleotide analogue for the treatment of chronic HCV infection. The data submitted, primarily from four phase 3 studies, NEUTRINO, FISSION, POSITRON and FUSION, support the use of sofosbuvir and RBV as an all-oral therapy for patients with genotype 2 and 3 HCV infection and sofosbuvir in combination with RBV and peg-IFN for treatment-naïve patients with genotype 1, 4, 5 and 6 infection.

Cardiovascular Program

In March, we announced data from the Phase 4 TERISA (Type 2 Diabetes Evaluation of Ranolazine In Subjects With Chronic Stable Angina) study, which demonstrated that the addition of ranolazine to background antianginal therapy in chronic angina patients with type 2 diabetes significantly reduced the frequency of weekly angina episodes compared to background antianginal therapy alone.

Acquisition

We completed the acquisition of YM BioSciences Inc. (YM) for $487.6 million in cash on February 8, 2013, at which time YM became a wholly-owned subsidiary of Gilead. YM was a drug development company primarily focused on advancing momelotinib (formally known as CYT387), an orally administered, once-daily candidate for hematologic cancers. The acquisition of YM represents an opportunity to add a complementary clinical program in the area of hematologic cancers to our oncology portfolio.

Currently, the purchase accounting is preliminary as management is in the process of reviewing the forecasts that support the valuation. We expect to finalize the purchase accounting during the second quarter of 2013. The preliminary purchase accounting attributed $362.7 million to in-process research and development, $127.2 million to goodwill, $108.8 million to deferred tax liabilities and $108.9 million to cash acquired.

Financial Highlights

During the first quarter of 2013, total revenues increased 11% to $2.53 billion, compared to $2.28 billion in the first quarter of 2012, driven by strong underlying demand for our products and an increase in royalty revenues. Total product sales were $2.39 billion for the first quarter of 2013, an increase of 8% compared to the same period in 2012, due primarily to growth in our antiviral franchise, which increased 7% to $2.06 billion. Cardiovascular product sales, which include Letairis and Ranexa, totaled $214.4 million, an increase of 26% compared to the same period in 2012. Royalty revenues from our collaborations with corporate partners were $134.4 million, an increase of 89% compared to the prior year, due primarily to higher Tamiflu royalty revenues from Roche.

Research and development (R&D) expenses increased 9% to $497.6 million for the first quarter of 2013 compared to the same period in 2012 as we continued to progress and invest in the expansion of our product pipeline, particularly in liver disease and oncology. Selling, general and administrative (SG&A) expenses were $374.3 million for the first quarter of 2013, a decrease of $68.8 million or 16% compared to the first quarter of 2012. The decrease in operating expenses was primarily due to stock-based compensation expense of $198.1 million related to our acquisition of Pharmasset, Inc. (Pharmasset) in January 2012.

Net income attributable to Gilead for the first quarter of 2013 was $722.2 million or $0.43 per diluted share, a 63% increase compared to the same period in 2012, primarily due to an increase in total revenues driven by strong underlying demand for our products and a decrease in SG&A expenses, partially offset by an increase in R&D expenses. Additionally, our effective tax rate for the first quarter of 2013 decreased primarily due to the passage of the American Taxpayer Relief Act of 2012 in January 2013 which retroactively reinstated the federal research tax credit for 2012.

As of March 31, 2013, cash, cash equivalents and marketable securities totaled $2.63 billion, an increase of $48.9 million compared to December 31, 2012. During the first quarter of 2013, we generated $672.1 million of operating cash flows, utilized $378.6 million for the acquisition of YM and repaid $247.1 million in debt, net of proceeds from convertible note hedges.

Results of Operations

Total Revenues

Total revenues include product sales, royalty revenues, and contract and other revenues. Total revenues for three months ended March 31, 2013 were $2.53 billion, up 11% compared to $2.28 billion for the same period in 2012. The increase in total revenues was driven by strong underlying demand for our products and higher royalty revenues from our collaborations with corporate partners.

Product Sales

Total product sales were $2.39 billion for the three months ended March 31, 2013, an increase of 8% compared to total product sales of $2.21 billion for the same period in 2012, driven primarily by an increase in antiviral and cardiovascular product sales. Sequentially, total product sales decreased 5% due primarily to declines in wholesaler and sub-wholesaler inventories of Truvada and Atripla in the United States.

Product sales in the United States increased by 10% for the three months ended March 31, 2013 compared to the same period in 2012, primarily driven by higher underlying demand for our antiviral products, specifically Complera and Stribild and our cardiovascular products, Letairis and Ranexa. Sequentially, total product sales in the United States decreased 7% due primarily to lower wholesaler and sub-wholesaler inventory levels. We believe the decrease was due in part to inventory-build in the prior quarter and measured purchases by the VA in the current quarter. As inventory held by our customers fluctuates from quarter to quarter, we may continue to see fluctuations in our quarterly product sales in the future.

More than 40% of our product sales are generated outside of the United States and as a result, we face exposure to adverse movements in foreign currency exchange rates, primarily in Euro. We used foreign currency exchange forward contracts to hedge a percentage of our foreign currency exposure. Foreign currency exchange, net of hedges, had an unfavorable impact of $7.3 million on our first quarter 2013 product sales compared to the same period in 2012.

Product sales in Europe increased by 7% for the three months ended March 31, 2013 to $818.3 million compared to $763.9 million for the same period in 2012, primarily driven by strong underlying demand for our antiviral products and increased sales of cardiovascular products, including Letairis and Ranexa. Antiviral product sales in Europe totaled $750.4 million for the three months ended March 31, 2013, an increase of 8% compared to $696.5 million for the same period in 2012, primarily driven by the sales of Eviplera, Truvada and Atripla. Foreign currency exchange, net of hedges, had an unfavorable impact of $7.0 million on our European product sales for the three months ended March 31, 2013 compared to the same period in 2012.

Recently, many countries in the European Union have increased the amount of discounts required on our products and these efforts could continue as countries attempt to manage healthcare expenditures, especially in light of the severe fiscal and debt crises experienced by many countries in the European Union. For example, France implemented a mandatory price decrease on HIV drugs effective April 2013.

The following table summarizes the period over period changes in our product sales (in thousands):



	Three Months Ended
	March 31,
	2013		2012		Change
Antiviral products:
Atripla	$	877,073	$	887,596	(1	)%
Truvada	700,242		758,263		(8	)%
Viread	210,332		191,693		10	%
Complera/Eviplera	148,189		52,180		184	%
Stribild	92,148		—		—
Hepsera	26,423		29,297		(10	)%
Emtriva	6,671		6,777		(2	)%
Total antiviral products	2,061,078		1,925,806		7	%
Letairis	118,107		87,288		35	%
Ranexa	96,286		83,201		16	%
AmBisome	85,275		84,764		1	%
Other	32,822		27,283		20	%
Total product sales	$	2,393,568	$	2,208,342	8	%

Antiviral Products

Antiviral product sales increased by 7% for the three months ended March 31, 2013 compared to the same period in 2012.


•	Atripla

Atripla sales