Q3'13 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 September 30, 2013
or 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________  to ________
Commission File No. 0-19731
 
 
GILEAD SCIENCES, INC.

(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
94-3047598
(State or Other Jurisdiction of
Incorporation or Organization)
(IRS Employer
Identification No.)
 
 
333 Lakeside Drive, Foster City, California
94404
(Address of principal executive offices)
(Zip Code)
650-574-3000
Registrant’s Telephone Number, Including Area Code
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 October 18, 2013: 1,533,349,106
 




GILEAD SCIENCES, INC.
INDEX

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


We own or have rights to various trademarks, copyrights and trade names used in our business, including the following: GILEAD®, GILEAD SCIENCES®, STRIBILD®, COMPLERA®, EVIPLERA®, TRUVADA®, VIREAD®, TYBOST®, HEPSERA®, EMTRIVA®, LETAIRIS®, RANEXA®, AMBISOME®, CAYSTON®, VISTIDE®, VOLIBRIS® 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.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
 
September 30, 2013
 
December 31, 2012
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
2,010,736

 
$
1,803,694

Short-term marketable securities
79,758

 
58,556

Accounts receivable, net
1,971,926

 
1,751,388

Inventories
1,946,048

 
1,744,982

Deferred tax assets
239,287

 
262,641

Prepaid taxes
462,704

 
348,420

Prepaid expenses
148,407

 
102,364

Other current assets
109,195

 
84,302

Total current assets
6,968,061

 
6,156,347

Property, plant and equipment, net
1,133,032

 
1,100,259

Long-term portion of prepaid royalties
177,450

 
175,790

Long-term deferred tax assets
162,738

 
131,107

Long-term marketable securities
665,063

 
719,836

Intangible assets, net
12,034,457

 
11,736,393

Goodwill
1,188,157

 
1,060,919

Other long-term assets
139,470

 
159,187

Total assets
$
22,468,428

 
$
21,239,838

 
 
 
 
Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
1,350,402

 
$
1,327,339

Accrued government rebates
904,421

 
745,148

Accrued compensation and employee benefits
228,245

 
236,716

Income taxes payable
10,651

 
13,403

Other accrued liabilities
816,748

 
674,762

Deferred revenues
127,278

 
103,162

Current portion of long-term debt and other obligations, net
1,457,379

 
1,169,490

Total current liabilities
4,895,124

 
4,270,020

Long-term deferred revenues
25,398

 
20,532

Long-term debt, net
5,856,093

 
7,054,555

Long-term income taxes payable
119,589

 
115,822

Long-term deferred tax liabilities
118,660

 
10,190

Other long-term obligations
261,091

 
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; 5,600,000 shares authorized; 1,534,028 and 1,519,163 shares issued and outstanding
763

 
760

Additional paid-in capital
5,189,582

 
5,649,850

Accumulated other comprehensive loss
(42,070
)
 
(45,615
)
Retained earnings
5,735,335

 
3,704,744

Total Gilead stockholders’ equity
10,883,610

 
9,309,739

Noncontrolling interest
308,863

 
241,130

Total stockholders’ equity
11,192,473

 
9,550,869

Total liabilities and stockholders’ equity
$
22,468,428

 
$
21,239,838



See accompanying notes.

2


GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)

 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2013
 
2012
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
 
Product sales
 
$
2,709,652

 
$
2,357,978

 
$
7,760,505

 
$
6,887,560

Royalty revenues
 
69,779

 
63,915

 
310,700

 
216,126

Contract and other revenues
 
3,402

 
4,704

 
10,657

 
10,546

Total revenues
 
2,782,833

 
2,426,597

 
8,081,862

 
7,114,232

Costs and expenses:
 
 
 
 
 
 
 
 
Cost of goods sold
 
681,868

 
597,269

 
2,000,979

 
1,795,545

Research and development
 
546,244

 
465,831

 
1,567,778

 
1,320,286

Selling, general and administrative
 
406,860

 
319,583

 
1,186,147

 
1,095,209

Total costs and expenses
 
1,634,972

 
1,382,683

 
4,754,904

 
4,211,040

Income from operations
 
1,147,861

 
1,043,914

 
3,326,958

 
2,903,192

Interest expense
 
(73,949
)
 
(89,322
)
 
(233,744
)
 
(275,010
)
Other income (expense), net
 
5,777

 
(3,505
)
 
2,222

 
(38,665
)
Income before provision for income taxes
 
1,079,689

 
951,087

 
3,095,436

 
2,589,517

Provision for income taxes
 
294,473

 
280,052

 
824,892

 
774,877

Net income
 
785,216

 
671,035

 
2,270,544

 
1,814,640

Net loss attributable to noncontrolling interest
 
3,390

 
4,470

 
12,853

 
14,385

Net income attributable to Gilead
 
$
788,606

 
$
675,505

 
$
2,283,397

 
$
1,829,025

 Net income per share attributable to Gilead common stockholders—basic
 
$
0.51

 
$
0.45

 
$
1.50

 
$
1.21

Shares used in per share calculation—basic
 
1,532,105

 
1,514,770

 
1,526,847

 
1,514,064

 Net income per share attributable to Gilead common stockholders—diluted
 
$
0.47

 
$
0.43

 
$
1.35

 
$
1.17

Shares used in per share calculation—diluted
 
1,691,898

 
1,584,608

 
1,689,647

 
1,567,648



















See accompanying notes.

3


GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(in thousands)

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2013
 
2012
 
2013
 
2012
Net income
 
$
785,216

 
$
671,035

 
$
2,270,544

 
$
1,814,640

Other comprehensive income:
 
 
 
 
 
 
 
 
Net foreign currency translation gain, net of tax
 
2,381

 
5,090

 
5,155

 
7,346

Available-for-sale securities:
 
 
 
 
 
 
 
 
Net unrealized gain, net of tax impact of $2,182, $(848), $2,310 and $(660)
 
4,316

 
1,476

 
4,082

 
1,146

Reclassifications to net income, net of tax impact of $(38), $1,396, $(79) and $849
 
(65
)
 
2,429

 
(140
)
 
32,979

Net change
 
4,251

 
3,905

 
3,942

 
34,125

Cash flow hedges:
 
 
 
 
 
 
 
 
Net unrealized loss, net of tax impact of $6,083, $3,180, $2,504 and $460
 
(82,453
)
 
(67,674
)
 
(3,371
)
 
(9,084
)
Reclassifications to net income, net of tax impact of $(358), $(1,760), $(610) and $(3,156)
 
3,380

 
(37,449
)
 
(2,181
)
 
(62,338
)
Net change
 
(79,073
)
 
(105,123
)
 
(5,552
)
 
(71,422
)
Other comprehensive income (loss)
 
(72,441
)
 
(96,128
)
 
3,545

 
(29,951
)
Comprehensive income
 
712,775

 
574,907

 
2,274,089

 
1,784,689

Comprehensive loss attributable to noncontrolling interest
 
3,390

 
4,470

 
12,853

 
14,385

Comprehensive income attributable to Gilead
 
$
716,165

 
$
579,377

 
$
2,286,942

 
$
1,799,074



























See accompanying notes.

4


GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
 
Nine Months Ended
 
 
September 30,
 
 
2013
 
2012
Operating Activities:
 
 
 
 
Net income
 
$
2,270,544

 
$
1,814,640

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation expense
 
76,046

 
60,488

Amortization expense
 
140,699

 
144,087

Stock-based compensation expense
 
180,293

 
151,598

Excess tax benefits from stock-based compensation
 
(168,728
)
 
(64,955
)
Tax benefits from employee stock plans
 
169,916

 
61,401

Deferred income taxes
 
(12,400
)
 
21,374

Other
 
45,116

 
(2,037
)
Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable, net
 
(226,308
)
 
160,831

Inventories
 
(216,650
)
 
(224,742
)
Prepaid expenses and other assets
 
(111,199
)
 
(109,550
)
Accounts payable
 
23,131

 
146,458

Income taxes payable
 
(87,081
)
 
(75,674
)
Accrued liabilities
 
265,765

 
397,831

Deferred revenues
 
29,057

 
7,238

Net cash provided by operating activities
 
2,378,201

 
2,488,988

 
 
 
 
 
Investing Activities:
 
 
 
 
Purchases of marketable securities
 
(254,657
)
 
(1,148,751
)
Proceeds from sales of marketable securities
 
226,291

 
130,463

Proceeds from maturities of marketable securities
 
57,556

 
25,975

Purchases of other investments
 
—

 
(25,000
)
Acquisitions, net of cash acquired
 
(378,645
)
 
(10,751,636
)
Capital expenditures
 
(121,310
)
 
(127,175
)
Net cash used in investing activities
 
(470,765
)
 
(11,896,124
)
 
 
 
 
 
Financing Activities:
 
 
 
 
Proceeds from debt financing, net of issuance costs
 
—

 
2,144,733

Proceeds from convertible note hedges
 
1,257,869

 
—

Proceeds from issuances of common stock
 
240,671

 
350,264

Repurchases of common stock
 
(182,259
)
 
(467,000
)
Repayments of debt financing
 
(2,224,724
)
 
(1,050,000
)
Payments to settle warrants
 
(1,039,695
)
 
—

Repayments of other long-term obligations
 
(58
)
 
(2,167
)
Excess tax benefits from stock-based compensation
 
168,728

 
64,955

Contributions from (distributions to) noncontrolling interest
 
80,586

 
32,412

Net cash provided by (used in) financing activities
 
(1,698,882
)
 
1,073,197

Effect of exchange rate changes on cash
 
(1,512
)
 
872

Net change in cash and cash equivalents
 
207,042

 
(8,333,067
)
Cash and cash equivalents at beginning of period
 
1,803,694

 
9,883,777

Cash and cash equivalents at end of period
 
$
2,010,736

 
$
1,550,710


See accompanying notes.

5


GILEAD SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. The financial statements include all adjustments (consisting 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 Condensed 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 Condensed Consolidated Financial Statements to reflect BMS’s interest in the joint ventures. All intercompany transactions have been eliminated. The Condensed Consolidated Financial Statements include the results of companies acquired by us from the date of each acquisition for the applicable reporting periods.
The accompanying Condensed Consolidated Financial Statements and related Notes to Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the related notes thereto for the year ended December 31, 2012, included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission.
Significant Accounting Policies, Estimates and Judgments
The preparation of these Condensed Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. On an ongoing basis, 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 $22.54 for the May 2014 Notes and $22.71 for the May 2016 Notes. 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 $28.38 for the May 2014 Notes and $30.05 for the May 2016 Notes.
Our May 2013 Notes matured and as a result, we have only included their impact for the period they were outstanding on our net income per share calculations for the nine months ended September 30, 2013. Our common stock resulting from the assumed settlement of the conversion spread of the May 2013 Notes had a dilutive effect when the average market price of our common stock during the period exceeded the conversion price of $19.05. Warrants related to our May 2013 Notes settled in August 2013 and as a result, we have only included their impact for the period they were outstanding on our net income per share calculation for the three and nine months ended September 30, 2013. The related warrants had a dilutive effect when the average market price of our common stock during the period exceeded the warrants’ exercise price of $26.95.
We have excluded stock options to purchase 0.1 million weighted-average shares of our common stock that were outstanding during the three months ended September 30, 2013, 0.9 million shares during the nine months ended September 30, 2013, 4.2 million shares during three months ended September 30, 2012 and 11.5 million shares during the nine months ended

6


September 30, 2012 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
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2013
 
2012
 
2013
 
2012
Numerator:
 
 
 
 
 
 
 
 
Net income attributable to Gilead
 
$
788,606

 
$
675,505

 
$
2,283,397

 
$
1,829,025

Denominator:
 
 
 
 
 
 
 
 
Weighted-average shares of common stock outstanding used in the calculation of basic net income per share attributable to Gilead common stockholders
 
1,532,105

 
1,514,770

 
1,526,847

 
1,514,064

Effect of dilutive securities:
 
 
 
 
 
 
 
 
Stock options and equivalents
 
38,575

 
32,478

 
39,085

 
30,926

Conversion spread related to the May 2013 Notes
 
—

 
11,446

 
5,268

 
8,950

Conversion spread related to the May 2014 Notes
 
24,335

 
11,860

 
27,435

 
7,058

Conversion spread related to the May 2016 Notes
 
33,873

 
11,452

 
30,587

 
6,650

Warrants related to the Convertible Notes
 
63,010

 
2,602

 
60,425

 
—

Weighted-average shares of common stock outstanding used in the calculation of diluted net income per share attributable to Gilead common stockholders
 
1,691,898

 
1,584,608

 
1,689,647

 
1,567,648

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 September 30, 2013, our accounts receivable in Southern Europe, specifically Greece, Italy, Portugal and Spain, totaled approximately $939.9 million, of which $429.3 million were greater than 120 days past due and $179.9 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 September 30, 2013.
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (FASB) 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 believe that the adoption of this update will not have a material impact on our Consolidated Financial Statements.

7


In July 2013, the FASB issued an update related to presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This guidance will become effective for us beginning in the first quarter of 2014. We believe that the adoption of this update will not 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 Condensed Consolidated Balance Sheets. Short-term and long-term debt are reported at their amortized cost on our Condensed Consolidated Balance Sheets. The remaining financial instruments are reported on our Condensed 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):
 
 
 
 
September 30, 2013
 
December 31, 2012
Type of Borrowing
 
Description
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Convertible Senior
 
May 2013 Notes
 
$
—

 
$
—

 
$
419,433

 
$
815,297

Convertible Senior
 
May 2014 Notes
 
857,322

 
2,443,534

 
1,210,213

 
2,040,363

Convertible Senior
 
May 2016 Notes
 
1,168,117

 
3,464,641

 
1,157,692

 
2,110,938

Senior Unsecured
 
April 2021 Notes
 
993,567

 
1,079,470

 
992,923

 
1,146,990

Senior Unsecured
 
December 2014 Notes
 
749,631

 
765,015

 
749,394

 
772,650

Senior Unsecured
 
December 2016 Notes
 
699,268

 
738,171

 
699,095

 
748,902

Senior Unsecured
 
December 2021 Notes
 
1,247,644

 
1,336,600

 
1,247,428

 
1,420,725

Senior Unsecured
 
December 2041 Notes
 
997,866

 
1,111,730

 
997,810

 
1,252,090


8


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):
 
September 30, 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
$
160,274

 
$
—

 
$
—

 
$
160,274

 
$
81,903

 
$
—

 
$
—

 
$
81,903

Money market funds
1,547,868

 
—

 
—

 
1,547,868

 
1,416,355

 
—

 
—

 
1,416,355

U.S. government agencies securities
—

 
146,778

 
—

 
146,778

 
—

 
248,952

 
—

 
248,952

Municipal debt securities
—

 
12,018

 
—

 
12,018

 
—

 
12,088

 
—

 
12,088

Corporate debt securities
—

 
366,682

 
—

 
366,682

 
—

 
352,718

 
—

 
352,718

Residential mortgage and asset-backed securities
—

 
78,319

 
—

 
78,319

 
—

 
82,732

 
—

 
82,732

Total debt securities
1,708,142

 
603,797

 
—

 
2,311,939

 
1,498,258

 
696,490

 
—

 
2,194,748

Derivatives
—

 
8,985

 
—

 
8,985

 
—

 
14,823

 
—

 
14,823

 
$
1,708,142

 
$
612,782

 
$
—

 
$
2,320,924

 
$
1,498,258

 
$
711,313

 
$
—

 
$
2,209,571

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Contingent consideration
$
—

 
$
—

 
$
252,502

 
$
252,502

 
$
—

 
$
—

 
$
205,060

 
$
205,060

Derivatives
—

 
61,107

 
—

 
61,107

 
—

 
65,248

 
—

 
65,248

 
$
—

 
$
61,107

 
$
252,502

 
$
313,609

 
$
—

 
$
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
As of September 30, 2013 and December 31, 2012, the only assets or liabilities that were measured using Level 3 inputs were contingent consideration liabilities. During 2012, we held auction rate securities and Greek government bonds which were measured at fair value using Level 3 inputs. 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
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 Condensed Consolidated Statements of Income.

9


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
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 Condensed Consolidated Statements 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 Condensed 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 $190.8 million as of September 30, 2013 and $159.3 million as of December 31, 2012. The remainder of the contingent consideration liabilities accrual as of September 30, 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 Condensed Consolidated Balance Sheets (in thousands):
Balance at December 31, 2012
 
$
205,060

Additions from new acquisitions
 
—

Net changes in valuation
 
47,442

Balance at September 30, 2013
 
$
252,502


10


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 Condensed Consolidated Balance Sheets (in thousands):
 
 
September 30, 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
 
$
160,177

 
$
191

 
$
(94
)
 
$
160,274

 
$
81,752

 
$
151

 
$
—

 
$
81,903

Money market funds
 
1,547,868

 
—

 
—

 
1,547,868

 
1,416,356

 
—

 
—

 
1,416,356

U.S. government agencies securities
 
146,414

 
364

 
—

 
146,778

 
248,595

 
386

 
(29
)
 
248,952

Municipal debt securities
 
12,022

 
3

 
(7
)
 
12,018

 
12,062

 
33

 
(7
)
 
12,088

Corporate debt securities
 
365,726

 
1,161

 
(205
)
 
366,682

 
351,309

 
1,492

 
(84
)
 
352,717

Residential mortgage and asset-backed securities
 
78,478

 
28

 
(187
)
 
78,319

 
82,717

 
156

 
(141
)
 
82,732

Total
 
$
2,310,685

 
$
1,747

 
$
(493
)
 
$
2,311,939

 
$
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 Condensed Consolidated Balance Sheets (in thousands):
 
 
September 30, 2013
 
December 31, 2012
Cash and cash equivalents
 
$
1,567,118

 
$
1,416,356

Short-term marketable securities
 
79,758

 
58,556

Long-term marketable securities
 
665,063

 
719,836

Total
 
$
2,311,939

 
$
2,194,748

Cash and cash equivalents in the table above exclude cash of $443.6 million as of September 30, 2013 and $387.3 million as of December 31, 2012.
The following table summarizes our portfolio of available-for-sale debt securities by contractual maturity (in thousands):
 
 
September 30, 2013
 
 
Amortized Cost
 
Fair Value
Less than one year
 
$
1,646,748

 
$
1,646,876

Greater than one year but less than five years
 
652,601

 
653,837

Greater than five years but less than ten years
 
—

 
—

Greater than ten years
 
11,336

 
11,226

Total
 
$
2,310,685

 
$
2,311,939


11


The following table summarizes the gross realized gains and losses related to sales of marketable securities (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2013
 
2012
 
2013
 
2012
Gross realized gains on sales
 
$
269

 
$
25

 
$
652

 
$
10,124

Gross realized losses on sales
 
$
(166
)
 
$
(3,850
)
 
$
(433
)
 
$
(43,951
)
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
September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
(94
)
 
$
41,591

 
$
—

 
$
—

 
$
(94
)
 
$
41,591

Municipal debt securities
 
(7
)
 
9,168

 
—

 
—

 
(7
)
 
9,168

Corporate debt securities
 
(205
)
 
88,186

 
—

 
2,026

 
(205
)
 
90,212

Residential mortgage and asset-backed securities
 
(67
)
 
42,029

 
(120
)
 
12,441

 
(187
)
 
54,470

Total
 
$
(373
)
 
$
180,974

 
$
(120
)
 
$
14,467

 
$
(493
)
 
$
195,441

 
 
 

 
 

 
 

 
 

 
 

 
 

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

We held a total of 68 securities that were in an unrealized loss position as of September 30, 2013 compared to 47 securities as of December 31, 2012. Based on our review of these securities, we believe we had no other-than-temporary impairments on these securities as of September 30, 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.

12


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 Condensed Consolidated Statements of Income.
We hedge our exposure to foreign currency exchange rate fluctuations for forecasted product sales that are denominated in a non-functional currency. The derivative instruments we use to hedge this exposure are designated as cash flow hedges and have maturity dates of 18 months or less. Upon executing a hedging contract and quarterly thereafter, we assess prospective hedge effectiveness using 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 other comprehensive income (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 September 30, 2013 will be reclassified to product sales within 12 months.
The cash flow effects of our derivatives contracts for the nine months ended September 30, 2013 and 2012 are included within net cash provided by operating activities in the Condensed Consolidated Statements of Cash Flows.
We had notional amounts on foreign currency exchange contracts outstanding of $3.79 billion at September 30, 2013 and $3.39 billion at December 31, 2012.
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 Condensed Consolidated Balance Sheets (in thousands):
 
 
September 30, 2013
 
 
Asset Derivatives
 
Liability Derivatives
 
 
Classification
 
Fair Value 
 
Classification
 
Fair Value
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
Other current assets
 
$
8,389

 
Other accrued liabilities
 
$
52,385

Foreign currency exchange contracts
 
Other long-term assets
 
596

 
Other long-term obligations
 
8,687

Total derivatives designated as hedges
 
 
 
8,985

 
 
 
61,072

Derivatives not designated as hedges:
 
 
 
 

 
 
 
 

Foreign currency exchange contracts
 
Other current assets
 
—

 
Other accrued liabilities
 
35

Total derivatives not designated as hedges
 
 
 
—

 
 
 
35

Total derivatives
 
 
 
$
8,985

 
 
 
$
61,107

 

13


 
 
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 Condensed Consolidated Statements of Income (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2013
 
2012
 
2013
 
2012
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
Net losses recognized in OCI (effective portion)
 
$
(83,528
)
 
$
(70,855
)
 
$
(867
)
 
$
(7,730
)
Net gains (losses) reclassified from accumulated OCI into product sales (effective portion)
 
$
(3,022
)
 
$
39,209

 
$
2,791

 
$
65,494

Net gains (losses) recognized in other income (expense), net (ineffective portion and amounts excluded from effectiveness testing)
 
$
1,105

 
$
(1,688
)
 
$
881

 
$
(8,444
)
Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
Net gains (losses) recognized in other income (expense), net
 
$
(41,929
)
 
$
(31,973
)
 
$
(232
)
 
$
34,445

From time to time, we may discontinue cash flow hedges and as a result, record related amounts in other income (expense), net on our Condensed Consolidated Statements of Income. For the three and nine months ended September 30, 2013 and 2012 no material amounts were recorded as a result of the discontinuance of cash flow hedges.
As of September 30, 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 Condensed Consolidated Balance Sheets (in thousands):
September 30, 2013
Offsetting of Derivative Assets/Liabilities
 
 
 
 
 
 
 
 
Gross Amounts Not Offset
in the Condensed
Consolidated Balance Sheet
 
 
Description
 
Gross Amounts of Recognized Assets/Liabilities
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheet
 
Amounts of Assets/Liabilities Presented
in the Condensed Consolidated
Balance Sheet
 
Derivative Financial Instruments
 
Cash Collateral Received/Pledged
 
Net Amount (Legal Offset)
Derivative assets
 
$
8,985

 
$
—

 
$
8,985

 
$
(8,985
)
 
$
—

 
$
—

Derivative liabilities
 
(61,107
)
 
—

 
(61,107
)
 
8,985

 
—

 
(52,122
)

14


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.
The purchase accounting was finalized during the third quarter of 2013. The 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 assets of $53.0 million with a full valuation allowance, deferred tax liabilities of $108.8 million, 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):
 
 
September 30, 2013
 
December 31, 2012
Raw materials
 
$
919,861

 
$
826,545

Work in process
 
540,395

 
358,525

Finished goods
 
485,792

 
559,912

Total
 
$
1,946,048

 
$
1,744,982

The joint ventures formed by Gilead and BMS (See Note 8, Collaborative Arrangements), which are included in our Condensed Consolidated Financial Statements, held in inventory efavirenz active pharmaceutical ingredient which was purchased from BMS at BMS's estimated net selling price of efavirenz. The inventory totaled $1.34 billion as of September 30, 2013 and $1.26 billion as of December 31, 2012.
7.
INTANGIBLE ASSETS AND GOODWILL
Intangible Assets
The following table summarizes the carrying amount of our intangible assets (in thousands):
 
 
September 30, 2013
 
December 31, 2012
Indefinite-lived intangible assets
 
$
11,348,900

 
$
10,986,200

Finite-lived intangible assets
 
685,557

 
750,193

Total intangible assets
 
$
12,034,457

 
$
11,736,393


15


Indefinite-Lived Intangible Assets
Our indefinite-lived intangible assets consisted primarily of the purchased IPR&D related to sofosbuvir 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 fair value of acquired assets and assumed liabilities for YM, we attributed $362.7 million to IPR&D related to momelotinib on our Condensed Consolidated Balance Sheet. The following table summarizes our indefinite-lived intangible assets (in thousands):
 
 
September 30, 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):
 
 
September 30, 2013
 
December 31, 2012
 
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Intangible asset - Ranexa
 
$
688,400

 
$
176,417

 
$
688,400

 
$
133,119

Intangible asset - Lexiscan
 
262,800

 
114,774

 
262,800

 
95,466

Other
 
42,995

 
17,447

 
42,995

 
15,417

Total
 
$
994,195

 
$
308,638

 
$
994,195

 
$
244,002

Amortization expense related to finite-lived intangible assets included primarily in cost of goods sold in our Condensed Consolidated Statements of Income totaled $21.3 million and $63.8 million for the three and nine months ended September 30, 2013, respectively, and $15.8 million and $47.5 million for the three and nine months ended September 30, 2012, respectively. The weighted-average amortization period for these intangible assets is approximately 11 years. As of September 30, 2013, the estimated future amortization expense associated with our intangible assets for the remaining three months of 2013 and each of the five succeeding fiscal years is as follows (in thousands):
Fiscal Year
Amount
2013 (remaining three months)
$
21,545

2014
92,441

2015
97,673

2016
107,312

2017
116,137

2018
124,561

Total
$
559,669

Goodwill
Upon completing the acquisition of YM, we attributed $127.2 million to goodwill on our Condensed Consolidated Balance Sheets. 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 September 30, 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

16


significant to the VIE. As of September 30, 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 in Canada. The economic interests of the joint venture held by us and BMS (including share of revenues and out-of-pocket expenses) are 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 September 30, 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 Condensed Consolidated Balance Sheets. As of September 30, 2013, total assets held by the joint venture were $2.06 billion and consisted primarily of cash and cash equivalents of $150.4 million, accounts receivable of $258.0 million and inventories of $1.66 billion; total liabilities were $1.27 billion and consisted primarily of accounts payable of $947.3 million and other accrued expenses of $319.4 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 $1.03 billion 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 Condensed 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. Certain prior period amounts have been reclassified to conform to the current presentation.
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

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the collaboration. As of September 30, 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 Condensed 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
 
September 30,
2013
 
December 31, 2012
Convertible Senior
 
May 2013 Notes
 
April 2006
 
May 2013
 
0.625%
 
$
—

 
$
419,433

Convertible Senior
 
May 2014 Notes
 
July 2010
 
May 2014
 
1.00%
 
857,322

 
1,210,213

Convertible Senior
 
May 2016 Notes
 
July 2010
 
May 2016
 
1.625%
 
1,168,117

 
1,157,692

Senior Unsecured
 
April 2021 Notes
 
March 2011
 
April 2021
 
4.50%
 
993,567

 
992,923

Senior Unsecured
 
December 2014 Notes
 
December 2011
 
December 2014
 
2.40%
 
749,631

 
749,394

Senior Unsecured
 
December 2016 Notes
 
December 2011
 
December 2016
 
3.05%
 
699,268

 
699,095

Senior Unsecured
 
December 2021 Notes
 
December 2011
 
December 2021
 
4.40%
 
1,247,644

 
1,247,428

Senior Unsecured
 
December 2041 Notes
 
December 2011
 
December 2041
 
5.65%
 
997,866

 
997,810

Credit Facility
 
Five-Year Revolver
 
January 2012
 
January 2017
 
Variable
 
600,000

 
750,000

Total debt, net
 
$
7,313,415

 
$
8,223,988

Less current portion
 
1,457,322

 
1,169,433

Total long-term debt, net
 
$
5,856,093

 
$
7,054,555


Maturity of May 2013 Convertible Senior Notes
During the first half of 2013, a portion of the May 2013 Notes was converted and on May 1, 2013, the remainder of the notes matured. We repaid aggregate principal of $426.3 million. We also paid $714.0 million in cash related to the conversion spread of the notes, which represents the conversion value in excess of the principal amount, and received $714.0 million in cash from the convertible note hedges related to these notes. The warrants related to the May 2013 Notes settled in August 2013. We paid $1.04 billion to settle the warrants as the average market price of our common stock exceeded the warrants' exercise price.
Convertible Senior Notes
During the nine months ended September 30, 2013, a portion of the May 2014 Notes and May 2016 Notes was converted. We repaid $390.3 million of principal balance, primarily comprised of May 2014 Notes. We also paid $543.9 million in cash related to the conversion spread of the notes, which represents the conversion value in excess of the principal amount, and received $543.9 million in cash from the 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 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 note indentures and as of September 30, 2013, we were in compliance with all such covenants.

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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 Complera, Atripla, Truvada, Viread, Emtriva, Hepsera and Letairis. 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 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, Emtriva, Ranexa and Tamiflu in the United States and Atripla, Truvada and Viread in Canada. We filed lawsuits and trials took place, as described below, against some of the generic manufacturers in 2013. In April 2013, we and Teva Pharmaceuticals (Teva) reached an agreement to settle the ongoing patent litigation concerning the four patents that protect tenofovir disoproxil fumarate in our Atripla, Truvada and Viread products in the United States. Under the agreement, Teva will be allowed to launch a generic version of Viread on December 15, 2017. The settlement agreement was filed with the Federal Trade Commission and Department of Justice as required by law. In October 2013, the court’s dismissal of the case pursuant to the settlement agreement between the parties became final. A trial in the lawsuit against Teva related to the U.S. patents protecting emtricitabine in our Atripla and Truvada products was held in October 2013. The court has not yet issued a decision in this case.
As a result of the recent invalidation of the patents protecting entecavir, which is also approved for the treatment of chronic hepatitis B, and due to declining sales of Hepsera in the United States, in March 2013, we granted Sigmapharm Labs (Sigmapharm) a Covenant Not to Sue and filed a motion to dismiss all claims in the lawsuit in March 2013. In September 2013, the FDA issued final approval for Sigmapharm's generic product. The trial related to the U.S. patents associated with Ranexa took place in April and May 2013. In August 2013, the parties reached agreement to settle the patent litigation prior to issuance of the court’s decision. Under the agreement, subject to certain conditions, Lupin would be allowed to launch a generic version of Ranexa on February 27, 2019. The settlement agreement was filed with the Federal Trade Commission and Department of Justice as required by law.
The trial related to two Canadian patents for tenofovir disoproxil fumarate associated with Atripla, Truvada and Viread took place in September 2013. The court has not yet issued a decision in this case.
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 claims in the patents may be narrowed or invalidated and the patent protection for Atripla, Truvada, Viread, Hepsera, Emtriva, 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. An estimate of a possible loss or range of losses cannot be determined.
Other Matters
We are a party to various legal actions that arose in the ordinary course of our business. We do not believe that these other legal actions will have a material adverse impact on our consolidated business, financial position or results of operations.

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11.
STOCK-BASED COMPENSATION
The following table summarizes the stock-based compensation expense included in our Condensed Consolidated Statements of Income (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2013
 
2012
 
2013
 
2012
Cost of goods sold
 
$
1,823

 
$
1,864

 
$
6,296

 
$
6,084

Research and development expenses
 
27,740

 
23,236

 
79,261

 
162,214

Selling, general and administrative expenses
 
33,010

 
29,364

 
94,736

 
177,237

Stock-based compensation expense included in total costs and expenses
 
62,573

 
54,464

 
180,293

 
345,535

Income tax effect
 
(15,997
)
 
(15,022
)
 
(47,958
)
 
(41,253
)
Stock-based compensation expense, net of tax
 
$
46,576

 
$
39,442

 
$
132,335

 
$
304,282

Total stock-based compensation for the nine months ended September 30, 2012 included $100.1 million in R&D expenses and $93.8 million in selling, general and administrative expenses 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
In August 2013, we resumed our share repurchase program which was suspended in February 2013. During the three months ended September 30, 2013, we repurchased a total of $100.0 million or 1.6 million shares of common stock under our January 2011 stock repurchase program. During the nine months ended September 30, 2013, we repurchased a total of $182.2 million or 3.7 million shares of common stock under the 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
 
$
(1,420
)
 
$
7,502

 
$
(51,697
)
 
$
(45,615
)
Other comprehensive income (loss) before reclassifications
 
5,155

 
4,082

 
(3,371
)
 
5,866

Amounts reclassified from accumulated other comprehensive income
 
—

 
(140
)
 
(2,181
)
 
(2,321
)
Net current period other comprehensive income (loss)
 
5,155

 
3,942

 
(5,552
)
 
3,545

Balance at September 30, 2013
 
$
3,735

 
$
11,444

 
$
(57,249
)
 
$
(42,070
)
For the three and nine months ended September 30, 2013, amounts reclassified from accumulated OCI to net income were not significant. Amounts reclassified for gains (losses) on cash flow hedges were recorded as part of product sales on our Condensed 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 Condensed Consolidated Statements of Income.
13.
SEGMENT INFORMATION
We operate in one business segment, which primarily focuses on the discovery, development and commercialization of innovative medicines in areas of unmet medical need. 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.

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Product sales consist of the following (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2013
 
2012
 
2013
 
2012
Antiviral products:
 
 
 
 
 
 
 
 
Atripla
 
$
899,669

 
$
865,378

 
$
2,714,850

 
$
2,656,997

Truvada
 
813,652

 
804,190

 
2,321,673

 
2,348,386

Viread
 
231,555

 
214,909

 
692,075

 
622,016

Complera/Eviplera
 
210,736

 
99,297

 
547,608

 
224,386

Stribild
 
143,953