NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
1
.
|
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
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 investigational drug candidate, we strive to transform and simplify care for people with life-threatening illnesses around the world. We have operations in more than 30 countries worldwide, with headquarters in Foster City, California. Gilead’s primary areas of focus include human immunodeficiency virus (HIV), liver diseases such as chronic hepatitis C virus (HCV) infection and chronic hepatitis B virus (HBV) infection, hematology/oncology, cardiovascular and inflammation/respiratory diseases. We seek to add to our existing portfolio of products through our internal discovery and clinical development programs and through product acquisition and in-licensing strategies.
Our portfolio of marketed products includes AmBisome
®
, Atripla
®
, Cayston
®
, Complera
®
/Eviplera
®
, Descovy
®
, Emtriva
®
, Epclusa
®
, Genvoya
®
, Harvoni
®
, Hepsera
®
, Letairis
®
, Odefsey
®
, Ranexa
®
, Sovaldi
®
, Stribild
®
, Truvada
®
, Tybost
®
, Vemlidy
®
, Viread
®
, Vitekta
®
, and Zydelig
®
. We have U.S. and international commercial sales operations, with marketing subsidiaries in over 30 countries. We also sell and distribute certain products through our corporate partners under royalty-paying collaborative agreements.
Basis of Presentation
The accompanying Consolidated Financial Statements include the accounts of Gilead, our wholly-owned subsidiaries and certain variable interest entities for which we are the primary beneficiary. All intercompany transactions have been eliminated. For consolidated entities where we own or are exposed to less than 100% of the economics, we record net income (loss) attributable to noncontrolling interests on our Consolidated Statements of Income equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties.
We assess whether we are the primary beneficiary of a variable interest entity (VIE) at the inception of the arrangement and at each reporting date. This assessment is based on our power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and our obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. As of December 31, 2016, the only material VIE was our joint venture with Bristol-Myers Squibb (BMS) which is described in Note
10
, Collaborative Arrangements.
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, we evaluate our significant accounting policies and estimates. We base our estimates on historical experience and on various market specific and other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ significantly from these estimates.
Revenue Recognition
Product Sales
We recognize revenue from product sales when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed or determinable and collectability is reasonably assured. Upon recognition of revenue from product sales, provisions are made for government and other rebates such as Medicaid reimbursements, customer incentives such as cash discounts for prompt payment, distributor fees and expected returns of expired products, as appropriate.
Items Deducted from Gross Product Sales
Rebates and Chargebacks
We estimate reductions to our revenues for amounts paid to payers and healthcare providers in the United States, including Medicaid rebates, AIDS Drug Assistance Programs, Veterans Administration and Public Health Service discounts, and other rebates, as well as foreign government rebates. Rebates and chargebacks are based on contractual arrangements or statutory requirements which may vary by product, by payer and individual payer plans. Our estimates are based on products sold, historical utilization rates, and as available, pertinent third-party industry information, estimated patient population, known market events or trends, and for our U.S. product sales, channel inventory data obtained from our major U.S. wholesalers in accordance with our inventory management agreements. We also take into consideration, as available, new information regarding changes in programs’ regulations and guidelines that would impact the amount of the actual rebates and/or our expectations regarding future utilization rates for these programs. Government and other chargebacks that are payable to our direct customers are classified as reductions of accounts receivable on our Consolidated Balance Sheets. Government and other rebates that are invoiced directly to us are recorded in Accrued government and other rebates on our Consolidated Balance Sheets.
Cash Discounts
We estimate cash discounts based on contractual terms, historical utilization rates and our expectations regarding future utilization rates.
Distributor Fees
Under our inventory management agreements with our significant U.S. wholesalers, we pay the wholesalers a fee primarily for the compliance of certain contractually determined covenants such as the maintenance of agreed upon inventory levels. These distributor fees are based on a contractually determined fixed percentage of sales.
Product Returns
We do not provide our customers with a general right of product return, but typically permit returns if the product is damaged or defective when received by the customer, or in the case of product sold in the United States and certain countries outside the United States, if the product has expired. We will accept returns for product that will expire within six months or that have expired up to one year after their expiration dates. Our estimates for expected returns of expired products are based primarily on an ongoing analysis of our historical return patterns, historical industry information reporting the return rates for similar products and contractual agreements intended to limit the amount of inventory maintained by our wholesalers.
Royalty, Contract and Other Revenues
Royalty revenue from sales of our other products is generally recognized when received, which is generally in the quarter following the quarter in which the corresponding sales occur or in the month following the month in which the corresponding sales occur.
Revenue from non-refundable up-front license fees and milestone payments, such as under a development collaboration or an obligation to supply product, is recognized as performance occurs and our obligations are completed. In accordance with the specific terms of our obligations under these arrangements, revenue is recognized as the obligation is fulfilled or ratably over the development or manufacturing period. Revenue associated with substantive at-risk milestones is recognized based upon the achievement of the milestones set forth in the respective agreements. Advance payments received in excess of amounts earned are classified as deferred revenue on our Consolidated Balance Sheets.
Research and Development Expenses
Research and development (R&D) expenses consist primarily of personnel costs, including salaries, benefits and stock-based compensation, clinical studies performed by contract research organizations (CROs), materials and supplies, licenses and fees, up-front and milestone payments under collaboration arrangements and overhead allocations consisting of various support and facility-related costs.
We charge R&D costs, including clinical study costs, to expense when incurred
.
Clinical study costs are a significant component of R&D expenses. Most of our clinical studies are performed by third-party CROs. We monitor levels of performance under each significant contract including the extent of patient enrollment and other activities through communications with our CROs. We accrue costs for clinical studies performed by CROs over the service periods specified in the contracts and adjust our estimates, if required, based upon our ongoing review of the level of effort and costs actually incurred by the CROs. All of our
material CRO contracts are terminable by us upon written notice and we are generally only liable for actual services completed by the CRO and certain non-cancelable expenses incurred at any point of termination.
Advertising Expenses
We expense the costs of advertising, including promotional expenses, as incurred. Advertising expenses were
$618 million
in
2016
,
$601 million
in
2015
and
$393 million
in
2014
.
Cash and Cash Equivalents
We consider highly liquid investments with insignificant interest rate risk and an original maturity of three months or less on the purchase date to be cash equivalents. Eligible instruments under our investment policy that are included in cash equivalents primarily include commercial paper, money market funds, overnight repurchase agreements (repos) with major banks and authorized dealers and other bank obligations.
Marketable and Nonmarketable Securities
We determine the appropriate classification of our marketable securities, which consist primarily of debt securities, at the time of purchase and reevaluate such designation at each balance sheet date. All of our marketable securities are considered available-for-sale and carried at estimated fair values and reported in cash equivalents, short-term marketable securities or long-term marketable securities. Unrealized gains and losses on available-for-sale securities are excluded from net income and reported in accumulated other comprehensive income (loss) (AOCI) as a separate component of stockholders’ equity. Other income (expense), net, includes interest, dividends, amortization of purchase premiums and discounts, realized gains and losses on sales of securities and other-than-temporary declines in the fair value of securities, if any. The cost of securities sold is based on the specific identification method. We regularly review all of our investments for other-than-temporary declines in fair value. Our review includes the consideration of the cause of the impairment, including the creditworthiness of the security issuers, the number of securities in an unrealized loss position, the severity and duration of the unrealized losses, whether we have the intent to sell the securities and whether it is more likely than not that we will be required to sell the securities before the recovery of their amortized cost basis. When we determine that the decline in fair value of an investment is below our accounting basis and the decline is other-than-temporary, we reduce the carrying value of the security we hold and record a loss for the amount of such decline.
As a result of entering into collaborations, from time to time, we may hold investments in public or non-public companies. We record investments in public companies as available-for-sale securities at market value and record investments in non-public companies at cost, less any amounts for other-than-temporary impairment, in other assets on our Consolidated Balance Sheets. Unrealized gains and losses on the available-for-sale securities are excluded from net income and reported in AOCI. We regularly review our securities for indicators of impairment. Investments in non-public companies are not material for the periods presented.
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, Europe and Japan. As of
December 31, 2016
, our accounts receivable, net in Southern Europe, specifically Greece, Italy, Portugal and Spain, totaled approximately
$317 million
, of which
$110 million
were greater than 120 days past due, including
$45 million
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 December 31, 2016.
Certain of the raw materials and components that we utilize in our operations are obtained through single suppliers. Certain of the raw materials that we utilize in our operations are made at only one facility. Since the suppliers of key components and raw materials must be named in a new drug application (NDA) filed with U.S. Food and Drug Administration (FDA) for a product, significant delays can occur if the qualification of a new supplier is required. If delivery of material from our suppliers was interrupted for any reason, we may be unable to ship our commercial products or to supply our product candidates for clinical trials.
Accounts Receivable
Trade accounts receivable are recorded net of allowances for wholesaler chargebacks related to government and other programs, cash discounts for prompt payment and doubtful accounts. Estimates for wholesaler chargebacks for government and other programs and cash discounts are based on contractual terms, historical trends and our expectations regarding the utilization rates for these programs. Estimates of our allowance for doubtful accounts are determined based on existing contractual payment terms, historical payment patterns of our customers and individual customer circumstances, an analysis of days sales outstanding by geographic region and a review of the local economic environment and its potential impact on government funding and reimbursement practices. Historically, the amounts of uncollectible accounts receivable that have been written off have been insignificant.
Inventories
Inventories are recorded at the lower of cost or market, with cost determined on a first-in, first-out basis. We periodically review the composition of our inventories in order to identify obsolete, slow-moving or otherwise unsaleable items. If unsaleable items are observed and there are no alternate uses for the inventory, we will record a write-down to net realizable value in the period that the impairment is first recognized.
When future commercialization is considered probable and the future economic benefit is expected to be realized, based on management’s judgment, we capitalize pre-launch inventory costs prior to regulatory approval. A number of factors are taken into consideration, including the current status in the regulatory approval process, potential impediments to the approval process such as safety or efficacy, anticipated R&D initiatives that could impact the indication in which the compound will be used, viability of commercialization and marketplace trends. As of
December 31, 2016
and
2015
, the amount of pre-launch inventory on our Consolidated Balance Sheets was not significant.
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization are recognized using the straight-line method. Repairs and maintenance costs are expensed as incurred. Estimated useful lives in years are generally as follows:
|
|
|
Description
|
Estimated Useful Life
|
Buildings and improvements
|
20-35
|
Laboratory and manufacturing equipment
|
4-10
|
Office and computer equipment
|
3-7
|
Leasehold improvements
|
Shorter of useful life or lease term
|
Office and computer equipment includes capitalized software. We had unamortized capitalized software costs on our Consolidated Balance Sheets of
$141 million
as of
December 31, 2016
and
$115 million
as of
December 31, 2015
. Capitalized interest on construction in-progress is included in property, plant and equipment. Interest capitalized in
2016
,
2015
and
2014
was not significant.
Goodwill and Intangible Assets
Goodwill represents the excess of the consideration transferred over the estimated fair value of assets acquired and liabilities assumed in a business combination. Intangible assets with indefinite useful lives are related to purchased in-process research and development (IPR&D) projects and are measured at their respective fair values as of the acquisition date. We do not amortize goodwill and intangible assets with indefinite useful lives. Intangible assets related to IPR&D projects are considered to be indefinite-lived until the completion or abandonment of the associated R&D efforts. If and when development is complete, which generally occurs if and when regulatory approval to market a product is obtained, the associated assets are deemed finite-lived and are amortized based on their respective estimated useful lives at that point in time. We test goodwill and other indefinite-lived intangible assets for impairment on an annual basis and in between annual tests if we become aware of any events or changes that would indicate the fair values of the assets are below their carrying amounts.
Intangible assets with finite useful lives are amortized over their estimated useful lives, primarily on a straight-line basis, and are reviewed for impairment when facts or circumstances suggest that the carrying value of these assets may not be recoverable.
Impairment of Long-Lived Assets
Long-lived assets, including property, plant and equipment and finite-lived intangible assets, are reviewed for impairment whenever facts or circumstances either internally or externally may suggest that the carrying value of an asset or asset group may not be recoverable. Should there be an indication of impairment, we test for recoverability by comparing the estimated undiscounted future cash flows expected to result from the use of the asset or asset group and its eventual disposition to the carrying amount of the asset or asset group. Any excess of the carrying value of the asset or asset group over its estimated fair value is recognized as an impairment loss.
Foreign Currency Translation, Transaction Gains and Losses, and Hedging Contracts
Non-U.S. entity operations are recorded in the functional currency of each entity. Results of operations for non-U.S. dollar functional currency entities are translated into U.S. dollars using average currency rates. Assets and liabilities are translated using currency rates at period end. Foreign currency translation adjustments are recorded as a component of AOCI within stockholders’ equity. Foreign currency transaction gains and losses are recorded in Other income (expense), net on our Consolidated Statements of Income. Net foreign currency transaction gains and losses were immaterial for the years ended December 31, 2016, 2015 and 2014.
We 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 and option contracts. In general, the market risk related to these contracts is offset by corresponding gains and losses on the hedged transactions. The credit risk associated with these contracts is driven by changes in interest and currency exchange rates and, as a result, varies over time. By working only with major banks and closely monitoring current market conditions, we seek to limit the risk that counterparties to these contracts may be unable to perform. We also seek to limit our risk of loss by entering into contracts that permit net settlement at maturity. Therefore, our overall risk of loss in the event of a counterparty default is limited to the amount of any unrecognized gains on outstanding contracts (i.e., those contracts that have a positive fair value) at the date of default. We do not enter into derivative contracts for trading purposes, nor do we hedge our net investment in any of our foreign subsidiaries.
Fair Value of Financial Instruments
We apply fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. We define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities which are required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risks.
Derivative Financial Instruments
We recognize all derivative instruments as either assets or liabilities at fair value on our Consolidated Balance Sheets. Changes in the fair value of derivatives are recorded each period in current earnings or AOCI, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. We classify the cash flows from these instruments in the same category as the cash flows from the hedged items. We do not hold or issue derivative instruments for trading or speculative purposes.
We assess, both at inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting the changes in cash flows or fair values of the hedged items. We also assess hedge ineffectiveness on a quarterly basis and record the gain or loss related to the ineffective portion to current earnings to the extent significant. If we determine that a forecasted transaction is probable of not occurring, we discontinue hedge accounting for the affected portion of the hedge instrument, and any related unrealized gain or loss on the contract is recognized in Other income (expense), net on our Consolidated Statements of Income.
Income Taxes
Our income tax provision is computed under the liability method. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Significant estimates are required in determining our provision for income taxes. Some of these estimates are based on interpretations of existing tax laws or regulations.
We record liabilities related to uncertain tax positions in accordance with the guidance that 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. 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.
Branded Prescription Drug (BPD) Fee
We, along with other pharmaceutical manufacturers of branded drug products, are required to pay a portion of the BPD fee, which is estimated based on select government sales during each calendar year as a percentage of total industry government sales and is trued-up upon receipt of invoices from the Internal Revenue Service (IRS). In 2014, the IRS issued final regulations related to the BPD fee which accelerated the expense recognition criteria for the fee obligation from the year in which the fee is paid, to the year in which the related sales and market share used to allocate the fee is determined. Our BPD fee expenses were
$270 million
in
2016
,
$414 million
in
2015
and
$590 million
in
2014
and are recorded as Selling, general and administrative (SG&A) expense on our Consolidated Statements of Income.
Our BPD fee accrual totaled
$536 million
as of
December 31, 2016
and
$780 million
as of
December 31, 2015
on our Consolidated Balance Sheets.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update No. 2014-09 (ASU 2014-09) “Revenue from Contracts with Customers.” The standard’s core principle is that a reporting entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard will become effective for us beginning in the first quarter of 2018. Early adoption is permitted in 2017. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt this new guidance. The FASB issued supplemental adoption guidance and clarification to ASU 2014-09 in March 2016, April 2016, May 2016, and December 2016 within ASU 2016-08 “Revenue from Contracts with Customers: Principal vs. Agent Considerations,” ASU 2016-10 “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing,” ASU 2016-12 “Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients,” and ASU 2016-20 “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” respectively. We expect to adopt the accounting standard update using the modified retrospective approach. The cumulative effect of adopting the accounting standard update will be recorded to retained earnings on January 1, 2018. We have completed our initial assessment of the effect of adoption. Based on this assessment, we expect changes in our revenue recognition policy relating to royalty revenues and certain other revenues that are currently recognized on a cash basis or sell through method. Upon adoption of the accounting standard updates, these revenues will be recognized in the periods in which the sales occur, subject to the constraint on variable consideration. We currently do not expect that these accounting standard updates will have a material impact on our Consolidated Financial Statements.
In November 2015, the FASB issued Accounting Standard Update No. 2015-17 (ASU 2015-17) “Balance Sheet Classification of Deferred Taxes.” ASU 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent on the balance sheet. Previous guidance required deferred tax liabilities and assets to be separated into current and noncurrent amounts on the balance sheet. We plan to adopt the guidance in the first quarter of 2017 on a retrospective basis and will reclassify current deferred tax amounts on our Consolidated Balance Sheets as noncurrent.
In January 2016, the FASB issued Accounting Standard Update No. 2016-01(ASU 2016-01) “Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 changes accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. In addition, it clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The guidance will become effective for us beginning in the first quarter of 2018 and must be adopted using a modified retrospective approach, with certain exceptions. Early adoption is permitted for certain provisions. We are evaluating the impact of the adoption of this standard on our Consolidated Financial Statements.
In February 2016, the FASB issued Accounting Standard Update No. 2016-02 (ASU 2016-02) “Leases.” ASU 2016-02 amends a number of aspects of lease accounting, including requiring lessees to recognize almost all leases with a term greater than one year as a right-of-use asset and corresponding liability, measured at the present value of the lease payments. The guidance will become effective for us beginning in the first quarter of 2019 and is required to be adopted using a modified retrospective approach. Early adoption is permitted. We are evaluating the impact of the adoption of this standard on our Consolidated Financial Statements, however, we anticipate recognition of additional assets and corresponding liabilities related to leases on our Consolidated Balance Sheets.
In March 2016, the FASB issued Accounting Standard Update No. 2016-09 (ASU 2016-09) “Improvements to Employee Share-Based Payment Accounting.” The new guidance requires that excess tax benefits and deficiencies that arise upon vesting or exercise of share-based payments be recognized in the income statement, whereas under the current guidance the tax effects are recorded to additional paid-in-capital. The guidance also amends the presentation of certain share-based payment items in the statement of cash flows. We will adopt the guidance in the first quarter of 2017. We will adopt the aspects of the new guidance affecting the cash flow presentation retrospectively. We have elected to continue to estimate potential forfeitures. We anticipate that the adoption of the guidance will result in an increase in the shares used in the calculation of diluted earnings per share
depending primarily on the timing of when employees exercise stock options and our stock price at that time. We do not anticipate a cumulative-effect adjustment to be recorded in retained earnings upon adoption related to any of the amendments that require modified retrospective transition. We currently do not expect that adopting this guidance will have a material impact on our Consolidated Financial Statements.
In June 2016, the FASB issued Accounting Standard Update No. 2016-13 (ASU 2016-13) “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires measurement and recognition of expected credit losses for financial assets. This guidance will become effective for us beginning in the first quarter of 2020 and must be adopted using a modified retrospective approach, with certain exceptions. Early adoption is permitted beginning in the first quarter of 2019. We are evaluating the impact of the adoption of this standard on our Consolidated Financial Statements.
In January 2017, FASB issued Accounting Standards Update No. 2017-01 (ASU 2017-01) “Clarifying the Definition of a Business.” The new guidance clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. This guidance will become effective for us beginning in the first quarter of 2018. Early adoption is permitted. We are evaluating the impact of the adoption of this standard on our Consolidated Financial Statements.
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2
.
|
FAIR VALUE MEASUREMENTS
|
We determine the fair value of financial and non-financial assets and liabilities using the fair value hierarchy, which establishes three levels of inputs that may be used to measure fair value, as follows:
|
|
•
|
Level 1 inputs which include quoted prices in active markets for identical assets or liabilities;
|
|
|
•
|
Level 2 inputs which include observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. For our marketable securities, we review trading activity and pricing as of the measurement date. When sufficient quoted pricing for identical securities is not available, we use market pricing and other observable market inputs for similar securities obtained from various third-party data providers. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data; and
|
|
|
•
|
Level 3 inputs which include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability. Our Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques and significant management judgment or estimation.
|
Our financial instruments consist primarily of cash and cash equivalents, marketable securities, accounts receivable, foreign currency exchange contracts, equity securities, accounts payable and short-term and long-term debt. Cash and cash equivalents, marketable securities, foreign currency exchange contracts and equity securities are reported at their respective fair values on our Consolidated Balance Sheets. Short-term and long-term debt are reported at their amortized costs on our Consolidated Balance Sheets. The remaining financial instruments are reported on our Consolidated Balance Sheets at amounts that approximate current fair values. There were no transfers between Level 1, Level 2 and Level 3 in the periods presented.
The following table summarizes the types of assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy (in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
$
|
—
|
|
|
$
|
12,603
|
|
|
$
|
—
|
|
|
$
|
12,603
|
|
|
$
|
—
|
|
|
$
|
5,773
|
|
|
$
|
—
|
|
|
$
|
5,773
|
|
U.S. treasury securities
|
5,529
|
|
|
—
|
|
|
—
|
|
|
5,529
|
|
|
4,389
|
|
|
—
|
|
|
—
|
|
|
4,389
|
|
Money market funds
|
5,464
|
|
|
—
|
|
|
—
|
|
|
5,464
|
|
|
10,161
|
|
|
—
|
|
|
—
|
|
|
10,161
|
|
Residential mortgage and asset-backed securities
|
—
|
|
|
3,602
|
|
|
—
|
|
|
3,602
|
|
|
—
|
|
|
1,695
|
|
|
—
|
|
|
1,695
|
|
U.S. government agencies securities
|
—
|
|
|
975
|
|
|
—
|
|
|
975
|
|
|
—
|
|
|
707
|
|
|
—
|
|
|
707
|
|
Certificates of deposit
|
—
|
|
|
943
|
|
|
—
|
|
|
943
|
|
|
—
|
|
|
448
|
|
|
—
|
|
|
448
|
|
Non-U.S. government securities
|
—
|
|
|
720
|
|
|
—
|
|
|
720
|
|
|
—
|
|
|
313
|
|
|
—
|
|
|
313
|
|
Foreign currency derivative contracts
|
—
|
|
|
336
|
|
|
—
|
|
|
336
|
|
|
—
|
|
|
210
|
|
|
—
|
|
|
210
|
|
Deferred compensation plan
|
84
|
|
|
—
|
|
|
—
|
|
|
84
|
|
|
66
|
|
|
—
|
|
|
—
|
|
|
66
|
|
Municipal debt securities
|
—
|
|
|
27
|
|
|
—
|
|
|
27
|
|
|
—
|
|
|
34
|
|
|
—
|
|
|
34
|
|
Equity securities
|
428
|
|
|
—
|
|
|
—
|
|
|
428
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
11,505
|
|
|
$
|
19,206
|
|
|
$
|
—
|
|
|
$
|
30,711
|
|
|
$
|
14,616
|
|
|
$
|
9,180
|
|
|
$
|
—
|
|
|
$
|
23,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan
|
$
|
84
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
84
|
|
|
$
|
66
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
66
|
|
Foreign currency derivative contracts
|
—
|
|
|
37
|
|
|
—
|
|
|
37
|
|
|
—
|
|
|
41
|
|
|
—
|
|
|
41
|
|
Contingent consideration
|
—
|
|
|
—
|
|
|
25
|
|
|
25
|
|
|
—
|
|
|
—
|
|
|
59
|
|
|
59
|
|
Total
|
$
|
84
|
|
|
$
|
37
|
|
|
$
|
25
|
|
|
$
|
146
|
|
|
$
|
66
|
|
|
$
|
41
|
|
|
$
|
59
|
|
|
$
|
166
|
|
Level 2 Inputs
We estimate the fair values of Level 2 instruments by taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income- and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities; prepayment/default projections based on historical data; and other observable inputs.
Substantially all of our foreign currency derivative contracts have maturities within an 18 month time horizon and all are with counterparties that have a minimum credit rating of A- or equivalent by Standard & Poor’s Ratings Services, Moody’s Investors Service, Inc. or Fitch, Inc. We estimate the fair values of these contracts by taking into consideration valuations obtained from a third-party valuation service that utilizes an income-based industry standard valuation model for which all significant inputs are observable, either directly or indirectly. These inputs include foreign currency exchange rates, London Interbank Offered Rates (LIBOR) and swap rates. These inputs, where applicable, are at commonly quoted intervals.
The total estimated fair values of our short-term and long-term debt, determined using Level 2 inputs based on their quoted market values, were approximately
$27.0 billion
at
December 31, 2016
and
$23.7 billion
at
December 31, 2015
, and the carrying values were
$26.3 billion
at
December 31, 2016
and
$22.1 billion
at
December 31, 2015
.
Level 3 Inputs
As of
December 31, 2016
and
2015
, the only assets or liabilities that were measured using Level 3 inputs on a recurring basis were our contingent consideration liabilities, which were immaterial. On a nonrecurring basis, we measure certain assets including intangible assets at fair value when the carrying value of the asset exceeds its fair value. During
2016
, the estimated fair value of our IPR&D related to momelotinib and simtuzumab was written down to
zero
due to termination of clinical developments of such programs, and as a result, we recorded impairment charges of
$432 million
. See Note
7
, Intangible Assets for additional information.
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.
3
. AVAILABLE-FOR-SALE SECURITIES
Estimated fair values of available-for-sale securities are generally based on prices obtained from commercial pricing services. The following table is a summary of available-for-sale securities (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$
|
12,657
|
|
|
$
|
7
|
|
|
$
|
(61
|
)
|
|
$
|
12,603
|
|
|
$
|
5,795
|
|
|
$
|
1
|
|
|
$
|
(23
|
)
|
|
$
|
5,773
|
|
U.S. treasury securities
|
|
5,558
|
|
|
1
|
|
|
(30
|
)
|
|
5,529
|
|
|
4,407
|
|
|
—
|
|
|
(18
|
)
|
|
4,389
|
|
Money market funds
|
|
5,464
|
|
|
—
|
|
|
—
|
|
|
5,464
|
|
|
10,161
|
|
|
—
|
|
|
—
|
|
|
10,161
|
|
Residential mortgage and asset-backed securities
|
|
3,613
|
|
|
2
|
|
|
(13
|
)
|
|
3,602
|
|
|
1,701
|
|
|
—
|
|
|
(6
|
)
|
|
1,695
|
|
U.S. government agencies securities
|
|
981
|
|
|
—
|
|
|
(6
|
)
|
|
975
|
|
|
709
|
|
|
—
|
|
|
(2
|
)
|
|
707
|
|
Certificates of deposit
|
|
943
|
|
|
—
|
|
|
—
|
|
|
943
|
|
|
448
|
|
|
—
|
|
|
—
|
|
|
448
|
|
Non-U.S. government securities
|
|
725
|
|
|
—
|
|
|
(5
|
)
|
|
720
|
|
|
315
|
|
|
—
|
|
|
(2
|
)
|
|
313
|
|
Municipal debt securities
|
|
27
|
|
|
—
|
|
|
—
|
|
|
27
|
|
|
34
|
|
|
—
|
|
|
—
|
|
|
34
|
|
Equity securities
|
|
357
|
|
|
71
|
|
|
—
|
|
|
428
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
30,325
|
|
|
$
|
81
|
|
|
$
|
(115
|
)
|
|
$
|
30,291
|
|
|
$
|
23,570
|
|
|
$
|
1
|
|
|
$
|
(51
|
)
|
|
$
|
23,520
|
|
The following table summarizes the classification of the available-for-sale securities on our Consolidated Balance Sheets (in millions):
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
Cash and cash equivalents
|
$
|
5,712
|
|
|
$
|
10,163
|
|
Short-term marketable securities
|
3,666
|
|
|
1,756
|
|
Long-term marketable securities
|
20,485
|
|
|
11,601
|
|
Other long-term assets
|
428
|
|
|
—
|
|
Total
|
$
|
30,291
|
|
|
$
|
23,520
|
|
Cash and cash equivalents in the table above excludes cash of
$2.5 billion
as of
December 31, 2016
and
$2.7 billion
as of
December 31, 2015
.
The following table summarizes our portfolio of available-for-sale debt securities by contractual maturity (in millions):
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Amortized Cost
|
|
Fair Value
|
Less than one year
|
$
|
9,379
|
|
|
$
|
9,378
|
|
Greater than one year but less than five years
|
19,853
|
|
|
19,757
|
|
Greater than five years but less than ten years
|
610
|
|
|
603
|
|
Greater than ten years
|
126
|
|
|
125
|
|
Total
|
$
|
29,968
|
|
|
$
|
29,863
|
|
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 millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
12 Months or Greater
|
|
Total
|
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$
|
(60
|
)
|
|
$
|
8,685
|
|
|
$
|
(1
|
)
|
|
$
|
155
|
|
|
$
|
(61
|
)
|
|
$
|
8,840
|
|
U.S. treasury securities
|
|
(30
|
)
|
|
5,081
|
|
|
—
|
|
|
—
|
|
|
(30
|
)
|
|
5,081
|
|
Residential mortgage and asset-backed securities
|
|
(13
|
)
|
|
2,180
|
|
|
—
|
|
|
42
|
|
|
(13
|
)
|
|
2,222
|
|
U.S. government agencies securities
|
|
(6
|
)
|
|
897
|
|
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
897
|
|
Non-U.S. government securities
|
|
(5
|
)
|
|
714
|
|
|
—
|
|
|
5
|
|
|
(5
|
)
|
|
719
|
|
Certificates of deposit
|
|
—
|
|
|
15
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15
|
|
Municipal debt securities
|
|
—
|
|
|
11
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11
|
|
Total
|
|
$
|
(114
|
)
|
|
$
|
17,583
|
|
|
$
|
(1
|
)
|
|
$
|
202
|
|
|
$
|
(115
|
)
|
|
$
|
17,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$
|
(23
|
)
|
|
$
|
4,891
|
|
|
$
|
—
|
|
|
$
|
43
|
|
|
$
|
(23
|
)
|
|
$
|
4,934
|
|
U.S. treasury securities
|
|
(18
|
)
|
|
4,342
|
|
|
—
|
|
|
—
|
|
|
(18
|
)
|
|
4,342
|
|
Residential mortgage and asset-backed securities
|
|
(6
|
)
|
|
1,626
|
|
|
—
|
|
|
20
|
|
|
(6
|
)
|
|
1,646
|
|
U.S. government agencies securities
|
|
(2
|
)
|
|
707
|
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
707
|
|
Non-U.S. government securities
|
|
(2
|
)
|
|
313
|
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
313
|
|
Municipal debt securities
|
|
—
|
|
|
21
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
21
|
|
Total
|
|
$
|
(51
|
)
|
|
$
|
11,900
|
|
|
$
|
—
|
|
|
$
|
63
|
|
|
$
|
(51
|
)
|
|
$
|
11,963
|
|
We held a total of
2,709
positions as of
December 31, 2016
and
2,742
positions as of
December 31, 2015
related to our debt securities that were in an unrealized loss position.
Based on our review of our available-for-sale securities, we believe we had
no
other-than-temporary impairments on these securities as of
December 31, 2016
and
2015
, because we do not intend to sell these securities nor do we believe that we will be required to sell these securities before the recovery of their amortized cost basis. Gross realized gains and gross realized losses were immaterial for the years ended
December 31, 2016
,
2015
and
2014
.
|
|
4
.
|
DERIVATIVE FINANCIAL INSTRUMENTS
|
Foreign Currency Exposure
Our operations in foreign countries expose us to market risk associated with foreign currency exchange rate fluctuations between the U.S. dollar and various foreign currencies, the most significant of which are the Euro and Yen. In order to manage this risk, we may hedge a portion of our foreign currency exposures related to outstanding monetary assets and liabilities as well as forecasted product sales using foreign currency exchange forward or option contracts. In general, the market risk related to these contracts is offset by corresponding gains and losses on the hedged transactions. The credit risk associated with these contracts is driven by changes in interest and currency exchange rates and, as a result, varies over time. By working only with major banks and closely monitoring current market conditions, we seek to limit the risk that counterparties to these contracts may be unable to perform. We also seek to limit our risk of loss by entering into contracts that permit net settlement at maturity. Therefore, our overall risk of loss in the event of a counterparty default is limited to the amount of any unrecognized gains on outstanding contracts (i.e., those contracts that have a positive fair value) at the date of default. We do not enter into derivative contracts for trading purposes.
We hedge our exposure to foreign currency exchange rate fluctuations for certain monetary assets and liabilities of our entities that are denominated in a non-functional currency. The derivative instruments we use to hedge this exposure are not designated as hedges, and as a result, changes in their fair value are recorded in Other income (expense), net on our 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 quarterly basis, we assess retrospective hedge effectiveness using a dollar offset approach. We exclude time value from our effectiveness testing and recognize changes in the time value of the hedge in Other income (expense), net. The effective component of our hedge is recorded as an unrealized gain or loss on the hedging instrument in AOCI within Stockholders’ equity and the gains or losses are reclassified into product sales when the hedged transactions affect earnings. The majority of gains and losses related to the hedged forecasted transactions reported in AOCI at
December 31, 2016
are expected to be reclassified to product sales within 12 months.
The cash flow effects of our derivative contracts for the three years ended
December 31, 2016
,
2015
and
2014
are included within net cash provided by operating activities on the Consolidated Statements of Cash Flows.
We had notional amounts on foreign currency exchange contracts outstanding of
$6.2 billion
at
December 31, 2016
and
$9.1 billion
at
December 31, 2015
.
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 classification and fair values of derivative instruments on our Consolidated Balance Sheets (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
Classification
|
|
Fair Value
|
|
Classification
|
|
Fair
Value
|
Derivatives designated as hedges:
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
Other current assets
|
|
$
|
225
|
|
|
Other accrued liabilities
|
|
$
|
(1
|
)
|
Foreign currency exchange contracts
|
|
Other long-term assets
|
|
20
|
|
|
Other long-term obligations
|
|
—
|
|
Total derivatives designated as hedges
|
|
|
|
245
|
|
|
|
|
(1
|
)
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
Other current assets
|
|
81
|
|
|
Other accrued liabilities
|
|
(34
|
)
|
Foreign currency exchange contracts
|
|
Other long-term assets
|
|
10
|
|
|
Other long-term obligations
|
|
(2
|
)
|
Total derivatives not designated as hedges
|
|
|
|
91
|
|
|
|
|
(36
|
)
|
Total derivatives
|
|
|
|
$
|
336
|
|
|
|
|
$
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
Classification
|
|
Fair Value
|
|
Classification
|
|
Fair
Value
|
Derivatives designated as hedges:
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
Other current assets
|
|
$
|
200
|
|
|
Other accrued liabilities
|
|
$
|
(32
|
)
|
Foreign currency exchange contracts
|
|
Other long-term assets
|
|
9
|
|
|
Other long-term obligations
|
|
(8
|
)
|
Total derivatives designated as hedges
|
|
|
|
209
|
|
|
|
|
(40
|
)
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
Other current assets
|
|
1
|
|
|
Other accrued liabilities
|
|
(1
|
)
|
Total derivatives not designated as hedges
|
|
|
|
1
|
|
|
|
|
(1
|
)
|
Total derivatives
|
|
|
|
$
|
210
|
|
|
|
|
$
|
(41
|
)
|
The following table summarizes the effect of our foreign currency exchange contracts on our Consolidated Financial Statements (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Derivatives designated as hedges:
|
|
|
|
|
|
|
Gains recognized in AOCI (effective portion)
|
|
$
|
5
|
|
|
$
|
410
|
|
|
$
|
446
|
|
Gains reclassified from AOCI into product sales (effective portion)
|
|
$
|
73
|
|
|
$
|
602
|
|
|
$
|
—
|
|
Gains (losses) recognized in Other income (expense), net (ineffective portion and amounts excluded from effectiveness testing)
|
|
$
|
(32
|
)
|
|
$
|
13
|
|
|
$
|
(7
|
)
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
|
|
Gains recognized in Other income (expense), net
|
|
$
|
206
|
|
|
$
|
117
|
|
|
$
|
135
|
|
From time to time, we may discontinue cash flow hedges and as a result, record related amounts in Other income (expense), net on our Consolidated Statements of Income. There were
no
material amounts recorded in Other income (expense), net for the years ended
December 31, 2016
,
2015
and
2014
as a result of the discontinuance of cash flow hedges.
As of
December 31, 2016
and
2015
, 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 millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
Offsetting of Derivative Assets/Liabilities
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset on the Consolidated Balance Sheets
|
|
|
Description
|
|
Gross Amounts of Recognized Assets/Liabilities
|
|
Gross Amounts Offset on the Consolidated Balance Sheets
|
|
Amounts of Assets/Liabilities Presented on the Consolidated Balance Sheets
|
|
Derivative Financial Instruments
|
|
Cash Collateral Received/Pledged
|
|
Net Amount (Legal Offset)
|
Derivative assets
|
|
$
|
336
|
|
|
$
|
—
|
|
|
$
|
336
|
|
|
$
|
(37
|
)
|
|
$
|
—
|
|
|
$
|
299
|
|
Derivative liabilities
|
|
(37
|
)
|
|
—
|
|
|
(37
|
)
|
|
37
|
|
|
—
|
|
|
—
|
|
|
As of December 31, 2015
|
Offsetting of Derivative Assets/Liabilities
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset on the Consolidated Balance Sheets
|
|
|
Description
|
|
Gross Amounts of Recognized Assets/Liabilities
|
|
Gross Amounts Offset on the Consolidated Balance Sheets
|
|
Amounts of Assets/Liabilities Presented on the Consolidated Balance Sheets
|
|
Derivative Financial Instruments
|
|
Cash Collateral Received/Pledged
|
|
Net Amount (Legal Offset)
|
Derivative assets
|
|
$
|
210
|
|
|
$
|
—
|
|
|
$
|
210
|
|
|
$
|
(38
|
)
|
|
$
|
—
|
|
|
$
|
172
|
|
Derivative liabilities
|
|
(41
|
)
|
|
—
|
|
|
(41
|
)
|
|
38
|
|
|
—
|
|
|
(3
|
)
|
May 2016 Convertible Senior Notes and Convertible Note Hedges
In March 2016, we exercised our option to elect cash for the settlement of the conversion value in excess of the principal amount (the conversion spread) of our remaining convertible senior notes due in May 2016 (the Convertible Notes) and for the related convertible note hedges. Until our cash settlement election, the conversion spread of the Convertible Notes and the convertible note hedges met the applicable criteria for equity classification and were therefore recorded in Stockholders’ equity on our Consolidated Balance Sheets. Upon our cash settlement election, we reclassified
$733 million
of the fair value of the conversion spread from Stockholders’ equity to
Current portion of long-term debt and other obligations, net
, and reclassified
$733 million
of the fair value of the convertible note hedges from Stockholders’ equity to
Prepaid and other current assets
on our Consolidated Balance Sheets. Upon maturity of the Convertible Notes in 2016, we settled the conversion spread and the convertible note hedges in cash at
$861 million
, respectively, and recorded a loss of
$128 million
on the conversion spread and a gain of
$128 million
on the convertible note hedges on our Consolidated Statements of Income.
Inventories are summarized as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
Raw materials
|
|
$
|
1,610
|
|
|
$
|
1,332
|
|
Work in process
|
|
626
|
|
|
542
|
|
Finished goods
|
|
928
|
|
|
852
|
|
Total
|
|
$
|
3,164
|
|
|
$
|
2,726
|
|
|
|
|
|
|
Reported as:
|
|
|
|
|
Inventories
|
|
$
|
1,587
|
|
|
$
|
1,955
|
|
Other long-term assets
|
|
1,577
|
|
|
771
|
|
Total
|
|
$
|
3,164
|
|
|
$
|
2,726
|
|
Amounts reported as other long-term assets primarily consisted of raw materials as of
December 31, 2016
and
December 31, 2015
.
The joint ventures formed by Gilead Sciences, LLC and BMS (See Note
10
, Collaborative Arrangements), which are included on our Consolidated Financial Statements, held efavirenz active pharmaceutical ingredient in inventory. This efavirenz inventory was purchased from BMS at BMS’s estimated net selling price of efavirenz and totaled
$1.1 billion
as of
December 31, 2016
and
$1.3 billion
as of
December 31, 2015
.
|
|
6
.
|
PROPERTY, PLANT AND EQUIPMENT
|
Property, plant and equipment is summarized as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
Land
|
|
$
|
394
|
|
|
$
|
393
|
|
Buildings and improvements (including leasehold improvements)
|
|
1,713
|
|
|
1,320
|
|
Laboratory and manufacturing equipment
|
|
469
|
|
|
377
|
|
Office and computer equipment
|
|
466
|
|
|
395
|
|
Construction in progress
|
|
641
|
|
|
554
|
|
Subtotal
|
|
3,683
|
|
|
3,039
|
|
Less accumulated depreciation and amortization
|
|
(818
|
)
|
|
(763
|
)
|
Total
|
|
$
|
2,865
|
|
|
$
|
2,276
|
|
The following table summarizes the carrying amount of our Intangible assets, net (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
Finite-lived intangible assets
|
|
$
|
8,971
|
|
|
$
|
9,815
|
|
Indefinite-lived intangible assets
|
|
—
|
|
|
432
|
|
Total
|
|
$
|
8,971
|
|
|
$
|
10,247
|
|
Finite-Lived Intangible Assets
The following table summarizes our finite-lived intangible assets (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
Intangible asset - sofosbuvir
|
|
$
|
10,720
|
|
|
$
|
2,156
|
|
|
$
|
8,564
|
|
|
$
|
10,720
|
|
|
$
|
1,456
|
|
|
$
|
9,264
|
|
Intangible asset - Ranexa
|
|
688
|
|
|
467
|
|
|
221
|
|
|
688
|
|
|
363
|
|
|
325
|
|
Other
|
|
455
|
|
|
269
|
|
|
186
|
|
|
455
|
|
|
229
|
|
|
226
|
|
Total
|
|
$
|
11,863
|
|
|
$
|
2,892
|
|
|
$
|
8,971
|
|
|
$
|
11,863
|
|
|
$
|
2,048
|
|
|
$
|
9,815
|
|
Amortization expense related to finite-lived intangible assets, included primarily in Cost of goods sold on our Consolidated Statements of Income, totaled
$844 million
in
2016
,
$826 million
in
2015
and
$818 million
in
2014
. As of
December 31, 2016
, the estimated future amortization expense associated with our finite-lived intangible assets for each of the five succeeding fiscal years is as follows (in millions):
|
|
|
|
|
Fiscal Year
|
Amount
|
2017
|
$
|
839
|
|
2018
|
850
|
|
2019
|
739
|
|
2020
|
713
|
|
2021
|
713
|
|
Thereafter
|
5,117
|
|
Total
|
$
|
8,971
|
|
Indefinite-Lived Intangible Assets
The following table summarizes our indefinite-lived intangible assets (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
Indefinite-lived intangible asset - momelotinib
|
|
$
|
—
|
|
|
$
|
315
|
|
Indefinite-lived intangible asset - simtuzumab
|
|
—
|
|
|
117
|
|
Total
|
|
$
|
—
|
|
|
$
|
432
|
|
In 2016, the estimated fair value of our IPR&D related to momelotinib and simtuzumab was written down to
zero
due to termination of clinical developments of such programs, and as a result, we recorded impairment charges of
$432 million
within Research and development expenses on our Consolidated Statements of Income.
|
|
8
.
|
OTHER FINANCIAL INFORMATION
|
Prepaid and other current assets
The components of Prepaid and other current assets are summarized as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
Prepaid taxes
|
|
$
|
299
|
|
|
$
|
773
|
|
Prepaid expenses
|
|
231
|
|
|
240
|
|
Other current assets
|
|
1,062
|
|
|
505
|
|
Total
|
|
$
|
1,592
|
|
|
$
|
1,518
|
|
Other accrued liabilities
The components of Other accrued liabilities are summarized as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
BPD fee
|
|
$
|
481
|
|
|
$
|
649
|
|
Compensation and employee benefits
|
|
398
|
|
|
380
|
|
Accrued interest
|
|
290
|
|
|
232
|
|
Other accrued expenses
|
|
1,621
|
|
|
1,911
|
|
Total
|
|
$
|
2,790
|
|
|
$
|
3,172
|
|
In May 2016, we acquired Nimbus Apollo, Inc., a privately held company, and its Acetyl-CoA Carboxylase inhibitor program, which is being evaluated for the potential treatment of non-alcoholic steatohepatitis, hepatocellular carcinoma and other diseases. The consideration included a payment of
$400 million
and contingent development and regulatory milestone-based payments of up to
$800 million
. The transaction did not meet the requirements to be accounted for as a business combination under ASC 805 - Business Combinations and therefore was accounted for as an asset acquisition. As a result, the payment of
$400 million
was recorded within Research and development expenses on our Consolidated Statements of Income. During 2016, based on the achievement of certain clinical development milestones, we recorded a
$200 million
expense within Research and development expenses on our Consolidated Statements of Income.
|
|
10
.
|
COLLABORATIVE ARRANGEMENTS
|
We enter into collaborative arrangements with third parties for the development and commercialization of certain products. Both parties are active participants in the operating activities of the collaboration and are exposed to significant risks and rewards depending on the commercial success of the activities. The following are our significant collaborative arrangements.
Bristol-Myers Squibb Company
North America
In 2004, we entered into a collaboration arrangement with BMS to develop and commercialize a single-tablet regimen containing our Truvada and BMS’s Sustiva (efavirenz) in the United States. 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. 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 a 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. Starting in the second quarter of 2011, except for a limited number of activities that are jointly managed, the parties no longer coordinate detailing and promotional activities in the United States, and the parties reduced their joint promotional efforts since we launched Complera in August 2011 and Stribild in August 2012. The parties continue to collaborate on activities such as manufacturing, regulatory, compliance and pharmacovigilance. The daily operations of the joint venture are governed by several 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 terminating party then has the right to continue to sell Atripla and become the continuing party, but will be obligated to pay the terminated party certain royalties for a three-year period following the effective date of the termination. The loss of exclusivity in the United States for Sustiva is expected in December 2017.
As of
December 31, 2016
and
2015
, 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 were primarily included in Inventories on our Consolidated Balance Sheets.
Selected financial information for the joint venture was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
Total assets
|
|
$
|
1,918
|
|
|
$
|
2,464
|
|
Cash and cash equivalents
|
|
92
|
|
|
166
|
|
Accounts receivable, net
|
|
229
|
|
|
269
|
|
Inventories
|
|
1,579
|
|
|
2,027
|
|
Total liabilities
|
|
772
|
|
|
1,055
|
|
Accounts payable
|
|
434
|
|
|
606
|
|
Other accrued liabilities
|
|
338
|
|
|
449
|
|
These asset and liability amounts do not reflect the impact of intercompany eliminations that are included on 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 Ireland UC, our wholly-owned subsidiary, and BMS entered into a collaboration agreement which sets forth the terms and conditions under which we and BMS 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 are jointly managed, the parties no longer coordinate detailing and promotional activities in the European Territory. We are responsible for accounting, financial reporting and tax reporting for the collaboration. As of
December 31, 2016
and
2015
, 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 the European Territory. 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.
The agreement will terminate upon the expiration of the last-to-expire patent which affords market exclusivity to Atripla or one of its components in the European Territory. In addition, since December 31, 2013, either party may terminate the agreement for any reason and such termination will be effective two calendar quarters after notice of termination. The non-terminating party has the right to continue to sell Atripla and become the continuing party, but will be obligated to pay the terminating party certain royalties for a three-year period following the effective date of the termination. In the event the continuing party decides not to sell Atripla, the effective date of the termination will be the date Atripla is withdrawn in each country or the date on which a third party assumes distribution of Atripla, whichever is earlier.
Japan Tobacco Inc.
In 2005, Japan Tobacco Inc. (Japan Tobacco) granted us exclusive rights to develop and commercialize elvitegravir, a novel HIV integrase inhibitor, in all countries of the world, excluding Japan, where Japan Tobacco retained such rights. Under the agreement, we are responsible for seeking regulatory approval in our territories and are required to use diligent efforts to commercialize elvitegravir for the treatment of HIV infection. We bear all costs and expenses associated with such commercialization efforts.
We received approval of Stribild (an elvitegravir-containing product) from FDA in August 2012 and from the European Commission in May 2013. We received approval of Genvoya (an elvitegravir-containing product) from FDA and the European Commission in November 2015.
The agreement and our obligation to pay royalties to Japan Tobacco will terminate on a product-by-product basis as patents providing exclusivity for the product expire or, if later, on the tenth anniversary of commercial launch for such product. We may terminate the agreement for any reason in which case the license granted by Japan Tobacco to us would terminate. Either party may terminate the agreement in response to a material breach by the other party.
Janssen
In 2009, we entered into a license and collaboration agreement with Janssen Sciences Ireland UC (Janssen), formerly Tibotec Pharmaceuticals, to develop and commercialize a fixed-dose combination of our Truvada and Janssen’s non-nucleoside reverse transcriptase inhibitor rilpivirine. This combination was approved in the United States and European Union in 2011 and is sold under the brand name Complera in the United States and Eviplera in the European Union. Under this original agreement, Janssen granted us an exclusive license to Complera/Eviplera worldwide excluding certain middle income and developing world countries and Japan.
In 2011 and 2013, we amended the agreement to include distribution of Complera/Eviplera to the rest of the world. In 2014, we amended the agreement to expand the collaboration to include another product containing Janssen’s rilpivirine and our emtricitabine and tenofovir alafenamide (Odefsey). Under the amended agreement, Janssen granted us an exclusive license to Complera/Eviplera and Odefsey worldwide, but retained rights to distribute both combination products in 18 countries including Mexico, Russia and Japan. Neither party is restricted from combining its drugs with any other drug products except those which are similar to the components of Complera/Eviplera and Odefsey.
We are responsible for manufacturing Complera/Eviplera and Odefsey and have the lead role in registration, distribution and commercialization of both products except in the countries where Janssen distributes. Janssen has exercised a right to co-detail the combination product in some of the countries where Gilead is the selling party.
Under the initial agreement, the price of Complera/Eviplera was expected to be the sum of the price of Truvada and the price of rilpivirine purchased separately. The cost of rilpivirine purchased by us from Janssen for Complera/Eviplera was approximately the market price of rilpivirine, less a specified percentage of up to
30%
in major markets. The 2014 amendment, effective in 2015, enables the selling party to set the price of the combined products and the parties share revenues based on the ratio of the net selling prices of the party’s component(s), subject to certain restrictions and adjustments. We will continue to retain a specified percentage of Janssen’s share of revenues, up to 30% in major markets.
Either party may terminate the collaboration agreement with respect to a product and a country if the product is withdrawn from the market in such country or with respect to a product in all countries if the other party materially breaches the agreement with respect to a product. The agreement and the parties’ obligation to share revenues will expire on a product-by-product and country-by-country basis as Janssen patents providing exclusivity for the product expire or, if later, on the tenth anniversary of commercial launch for such product. We may terminate the agreement without cause with respect to the countries where we sell the products in which case Janssen has the right to become the selling party for such country if the product has launched but has been on the market for fewer than 10 years.
Galapagos NV
In 2016, we closed on a license and collaboration agreement with Galapagos NV (Galapagos), a clinical-stage biotechnology company based in Belgium, for the development and commercialization of filgotinib, a JAK1-selective inhibitor being evaluated for inflammatory disease indications.
Upon closing of the license and collaboration agreement, we made an up-front license fee payment of
$300 million
and a
$425 million
equity investment in Galapagos by subscribing for new shares at a price of
€58
per share, including issuance premium. As a result, we received
6.8 million
new shares of Galapagos, representing
14.75%
of their outstanding share capital. The license fee payment of
$300 million
and the issuance premium on the equity investment of
$68 million
were recorded within Research and development expenses on our Consolidated Statements of Income. The equity investment, net of issuance premium, of
$357 million
was recorded as an available-for-sale security in Other long-term assets on our Consolidated Balance Sheets. Galapagos is eligible to receive development and regulatory milestone-based payments of up to
$755 million
, sales-based milestone payments of up to
$600 million
, plus tiered royalties on global sales starting at
20%
, with the exception of certain co-promotion territories where profits would be shared equally. During 2016, based on the achievement of certain clinical development milestones, we recorded a
$60 million
expense within Research and development expenses on our Consolidated Statements of Income.
Under the terms of the agreement, we have an exclusive, worldwide, royalty-bearing, sublicensable license for filgotinib and products containing filgotinib. We are primarily responsible for development and seeking regulatory approval related to filgotinib. We are responsible for
80%
and Galapagos is responsible for
20%
of the development costs incurred. We are also responsible for the manufacturing and commercialization activities. Galapagos has the option to co-promote filgotinib in certain territories, in which case, we and Galapagos will share profits equally.
|
|
11
.
|
DEBT AND CREDIT FACILITY
|
Financing Arrangements
The following table summarizes the carrying amount of our borrowings under various financing arrangements (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
Type of Borrowing
|
|
Issue Date
|
|
Due Date
|
|
Interest Rate
|
|
2016
|
|
2015
(1)
|
Convertible Notes
|
|
July 2010
|
|
May 2016
|
|
1.625%
|
|
$
|
—
|
|
|
$
|
283
|
|
Senior Unsecured
|
|
December 2011
|
|
December 2016
|
|
3.05%
|
|
—
|
|
|
699
|
|
Senior Unsecured
|
|
September 2015
|
|
September 2018
|
|
1.85%
|
|
998
|
|
|
997
|
|
Senior Unsecured
|
|
March 2014
|
|
April 2019
|
|
2.05%
|
|
499
|
|
|
498
|
|
Senior Unsecured
|
|
November 2014
|
|
February 2020
|
|
2.35%
|
|
498
|
|
|
497
|
|
Senior Unsecured
|
|
September 2015
|
|
September 2020
|
|
2.55%
|
|
1,991
|
|
|
1,989
|
|
Senior Unsecured
|
|
March 2011
|
|
April 2021
|
|
4.50%
|
|
994
|
|
|
992
|
|
Senior Unsecured
|
|
December 2011
|
|
December 2021
|
|
4.40%
|
|
1,245
|
|
|
1,244
|
|
Senior Unsecured
|
|
September 2016
|
|
March 2022
|
|
1.95%
|
|
497
|
|
|
—
|
|
Senior Unsecured
|
|
September 2015
|
|
September 2022
|
|
3.25%
|
|
995
|
|
|
995
|
|
Senior Unsecured
|
|
September 2016
|
|
September 2023
|
|
2.50%
|
|
744
|
|
|
—
|
|
Senior Unsecured
|
|
March 2014
|
|
April 2024
|
|
3.70%
|
|
1,741
|
|
|
1,740
|
|
Senior Unsecured
|
|
November 2014
|
|
February 2025
|
|
3.50%
|
|
1,743
|
|
|
1,742
|
|
Senior Unsecured
|
|
September 2015
|
|
March 2026
|
|
3.65%
|
|
2,726
|
|
|
2,724
|
|
Senior Unsecured
|
|
September 2016
|
|
March 2027
|
|
2.95%
|
|
1,243
|
|
|
—
|
|
Senior Unsecured
|
|
September 2015
|
|
September 2035
|
|
4.60%
|
|
989
|
|
|
988
|
|
Senior Unsecured
|
|
September 2016
|
|
September 2036
|
|
4.00%
|
|
739
|
|
|
—
|
|
Senior Unsecured
|
|
December 2011
|
|
December 2041
|
|
5.65%
|
|
995
|
|
|
995
|
|
Senior Unsecured
|
|
March 2014
|
|
April 2044
|
|
4.80%
|
|
1,732
|
|
|
1,732
|
|
Senior Unsecured
|
|
November 2014
|
|
February 2045
|
|
4.50%
|
|
1,729
|
|
|
1,728
|
|
Senior Unsecured
|
|
September 2015
|
|
March 2046
|
|
4.75%
|
|
2,214
|
|
|
2,212
|
|
Senior Unsecured
|
|
September 2016
|
|
March 2047
|
|
4.15%
|
|
1,723
|
|
|
—
|
|
Floating-rate Borrowings
|
|
May 2016
|
|
May 2019
|
|
Variable
|
|
311
|
|
|
—
|
|
Total debt, net
|
|
26,346
|
|
|
22,055
|
|
Less current portion
|
|
—
|
|
|
982
|
|
Total long-term debt, net
|
|
$
|
26,346
|
|
|
$
|
21,073
|
|
_______________________
|
|
|
|
|
|
|
|
|
|
|
Note:
|
|
(1)
|
In connection with our adoption of the Accounting Standard Update relating to the presentation of debt issuance costs during the first quarter of 2016, debt balances at December 31, 2015 have been retrospectively adjusted by
$123 million
to include unamortized debt issuance costs. Prior to our adoption of the ASU, these unamortized debt issuance costs were included in Prepaid and other current assets and Other long-term assets on our Consolidated Balance Sheets.
|
Senior Unsecured Notes
In 2016, we issued
$5.0 billion
aggregate principal amount of senior unsecured notes (the 2016 Notes) in a registered offering. In 2015, we issued
$10.0 billion
aggregate principal amount of senior unsecured notes (the 2015 Notes) in a registered offering.
The 2016 Notes and 2015 Notes were issued for general corporate purposes, which may include the repayment of debt, working capital, payment of dividends, repurchase of our outstanding common stock pursuant to our authorized share repurchase programs and future acquisitions.
We collectively refer to the 2016 Notes, the 2015 Notes and our senior unsecured notes issued in March and November 2014 (the 2014 Notes) and in March and December 2011 (the 2011 Notes) as our Senior Notes. Our Senior Notes may be redeemed at our option at a redemption price equal to the greater of (i)
100%
of the principal amount of the notes to be redeemed and (ii) the sum, as determined by an independent investment banker, of the present value of the remaining scheduled payments of principal and interest on the notes to be redeemed (exclusive of interest accrued to the date of redemption) discounted to the redemption date on a semiannual basis at the Treasury Rate plus a make-whole premium as defined in the indenture. Our Senior Notes maturing
after 2020 also have a call feature, exercisable at our option, to redeem the notes at par in whole or in part one to six months immediately preceding maturity. In each case, accrued and unpaid interest is also required to be redeemed to the date of redemption. In 2016, we repaid at maturity
$700 million
of principal balance related to the 2011 Notes.
In the event of the occurrence of a change in control and a downgrade in the rating of our Senior Notes below investment grade by Standard & Poor’s Ratings Services and Moody’s Investors Service, Inc., the holders may require us to purchase all or a portion of the Senior Notes at a price equal to
101%
of the aggregate principal amount of the notes repurchased, plus accrued and unpaid interest to the date of repurchase. We are required to comply with certain covenants under our Senior Notes and as of December 31, 2016 and 2015, we were not in violation of any covenants.
We recognized
$907 million
in
2016
,
$605 million
in
2015
, and
$350 million
in
2014
of interest expense on our Senior Notes related to the contractual coupon rates and amortization of the debt discount and issuance costs.
Convertible Notes
In July 2010, we issued
$1.3 billion
of Convertible Notes due in May 2016 in a private placement pursuant to Rule 144A of the Securities Act of 1933, as amended. In 2016 and 2015, portions of the Convertible Notes were converted and on May 1, 2016, the remainder matured. We repaid an aggregate principal balance of
$285 million
and
$213 million
during 2016 and 2015, respectively. We also paid in cash
$956 million
and
$784 million
during 2016 and 2015, respectively, related to the conversion spread of the Convertible Notes, which represents the conversion value in excess of the principal amount. We received
$956 million
and
$784 million
in cash during 2016 and 2015, respectively, from our convertible note hedges related to the Convertible Notes. During 2015, a portion of the warrants related to the Convertible Notes was modified and settled, and in August 2016, the remainder expired. We paid
$469 million
and
$3.9 billion
during 2016 and 2015, respectively, to settle the warrants as the average market price of our common stock exceeded the warrants’ exercise price.
The Convertible Notes were issued at par and bore an annual interest rate of
1.625%
. The initial conversion rate for the Convertible Notes was
44.0428
shares per
$1,000
principal amount (which represented an initial conversion price of approximately
$22.71
per share). The conversion rates were subject to customary anti-dilution adjustments, including quarterly dividend distributions. Upon conversion or maturity, a holder received an amount in cash equal to the lesser of (i) the principal amount of the note or (ii) the conversion value for such note, as measured under the indenture governing the relevant notes. If the conversion value exceeded the principal amount, we delivered, at our option, cash or common stock or a combination of cash and common stock for the conversion value in excess of the principal amount.
Concurrent with the issuance of the Convertible Notes, we purchased convertible note hedges and sold warrants in private transactions. The convertible note hedges covered, subject to customary anti-dilution adjustments,
55 million
shares of our common stock at strike price that initially correspond to the initial conversion price of the Convertible Notes and were subject to adjustments similar to those applicable to the conversion price of the related notes, including quarterly dividend distributions. If the market value per share of our common stock at the time of conversion of the Convertible Notes were above the strike price of the applicable convertible note hedges, we would have been entitled to receive from the counterparties in the transactions shares of our common stock or, to the extent we have made a corresponding election with respect to the related convertible notes, cash or a combination of cash and shares of our common stock, at our option, for the excess of the market value of the common stock over the strike price of the convertible note hedges. The convertible note hedges would have terminated upon the maturity of the Convertible Notes or when none of the Convertible Notes remained outstanding due to conversion or otherwise.
There were
55 million
shares of our common stock underlying the warrants associated with our Convertible Notes. The warrants had an original exercise price of
$30.05
per share, subject to customary anti-dilution adjustments including quarterly dividend distributions. In 2015, we entered into modified agreements with our warrant counterparties which changed the timing of the expiration for
46 million
of the warrants. The modified agreements allowed us to settle the
46 million
warrants at our option, in cash or shares. According to the terms of the modified agreements, these warrants expired during a 32 trading-day period which commenced on May 11, 2015 and ended on June 24, 2015. We exercised our option to settle the warrants in cash. In 2016, the remaining
9 million
warrants expired during a 40 trading-day period commencing on August 1, 2016 and ending on September 26, 2016. We exercised our option to settle the remaining warrants in cash. Because these warrants could have been settled at our option, in cash or shares of common stock, under both the original and the modified agreements and these contracts met all of the applicable criteria for equity classification, the settlement payments were recorded as a reduction to Stockholders’ equity on our Consolidated Balance Sheets.
In March 2016, we exercised our option to elect cash for the settlement of the conversion spread of the remaining Convertible Notes and for the related convertible note hedges. As a result, the Convertible Notes and the related convertible note hedges were accounted for as derivative instruments with fair values classified as liability or asset on our Consolidated Balance Sheets (see Note 4, Derivative Financial Instruments).
Until our cash settlement election, we bifurcated the conversion option of the Convertible Notes from the debt instrument, classified the conversion option in equity and accreted the resulting debt discount as interest expense over the contractual terms of the Convertible Notes. The following table summarizes information about the equity and liability components of the Convertible Notes (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value of
Equity Component
|
|
Net Carrying Amount of
Liability Component
|
|
Unamortized Discount of
Liability Component
|
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Convertible Notes
|
|
$
|
—
|
|
|
$
|
35
|
|
|
$
|
—
|
|
|
$
|
283
|
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
We recognized interest expense of
$3 million
in
2016
,
$16 million
in
2015
and
$35 million
in
2014
related to the contractual coupon rate and amortization of the debt discount and issuance cost for the Convertible Notes. The effective interest rate on the liability components of Convertible Notes was
4.00%
.
Credit Facilities
In 2016, we terminated our
five
-year
$1.3 billion
revolving credit facility and entered into a new
$2.5 billion
five
-year revolving credit facility agreement maturing in May 2021 (the Five-Year Revolving Credit Agreement). The new revolving credit facility can be used for working capital requirements and for general corporate purposes, including, without limitation, acquisitions. As of December 31, 2016 and 2015, there were
no
amounts outstanding under these credit facilities.
The Five-Year Revolving Credit Agreement contains customary representations, warranties, affirmative and negative covenants and events of default. At December 31, 2016 we were not in violation of any covenants. Loans under the new credit facility bear interest at either (i) the Eurodollar Rate plus the Applicable Percentage, or (ii) the Base Rate plus the Applicable Percentage, each as defined in the Five-Year Revolving Credit Agreement. We may terminate or reduce the commitments, and may prepay any loans under the new credit facility in whole or in part at any time without premium or penalty.
Contractual Maturities of Financing Obligations
As of
December 31, 2016
, the aggregate future principal maturities of financing obligations for each of the next five years, based on contractual due dates, are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
Contractual Maturities
|
|
$
|
—
|
|
|
$
|
1,000
|
|
|
$
|
812
|
|
|
$
|
2,500
|
|
|
$
|
2,250
|
|
|
|
12
.
|
COMMITMENTS AND CONTINGENCIES
|
Lease Arrangements
We lease facilities and equipment related primarily to administrative, R&D, sales and marketing activities under various long-term non-cancelable operating leases in the United States and international markets. Our leases expire on various dates between 2017 and 2068, with many of our leases containing options to renew. Lease expense under our operating leases was approximately
$81 million
in
2016
,
$78 million
in
2015
and
$66 million
in
2014
.
Aggregate non-cancelable future minimum rental payments under operating leases are as follows (in millions):
|
|
|
|
|
2017
|
$
|
75
|
|
2018
|
67
|
|
2019
|
53
|
|
2020
|
38
|
|
2021
|
34
|
|
Thereafter
|
102
|
|
Total
|
$
|
369
|
|
Legal Proceedings
We are a party to various legal actions. The most significant of these are described below. We recognize accruals for such actions to the extent that we conclude that a loss is both probable and reasonably estimable. We accrue for the best estimate of a loss within a range; however, if no estimate in the range is better than any other, then we accrue the minimum amount in the range. If we determine that a loss is reasonably possible and the loss or range of loss can be estimated, we disclose the possible loss.
Unless otherwise noted, it is not possible to determine the outcome of these matters, and we cannot reasonably estimate the maximum potential exposure or the range of possible loss.
We did not recognize any accruals for litigation on our Consolidated Balance Sheets as of December 31, 2016 and 2015 as we did not believe losses were probable.
Litigation Related to Sofosbuvir
In January 2012, we acquired Pharmasset, Inc. (Pharmasset). Through the acquisition, we acquired sofosbuvir, a nucleotide analog that acts to inhibit the replication of the hepatitis C virus (HCV). In December 2013, we received FDA approval of sofosbuvir, now known commercially as Sovaldi. In October 2014, we also received approval of the fixed-dose combination of ledipasvir and sofosbuvir, now known commercially as Harvoni. In June 2016, we received approval of the fixed-dose combination of sofosbuvir and velpatasvir, now known commercially as Epclusa. We have received a number of contractual and intellectual property claims regarding sofosbuvir. While we have carefully considered these claims both prior to and following the acquisition and believe they are without merit, we cannot predict the ultimate outcome of such claims or range of loss, except where stated otherwise herein.
We own patents and patent applications that claim sofosbuvir (Sovaldi) as a chemical entity and its metabolites and the fixed-dose combinations of ledipasvir and sofosbuvir (Harvoni) and sofosbuvir and velpatasvir (Epclusa). Third parties may have, or may obtain rights to, patents that allegedly could be used to prevent or attempt to prevent us from commercializing Epclusa, Harvoni or Sovaldi. For example, we are aware of patents and patent applications owned by other parties that have been or may in the future be alleged by such parties to cover the use of Epclusa, Harvoni and Sovaldi. We cannot predict the ultimate outcome of intellectual property claims related to Epclusa, Harvoni or Sovaldi. We have spent, and will continue to spend, significant resources defending against these claims.
If third parties successfully obtain valid and enforceable patents, and successfully prove infringement of those patents by Epclusa, Harvoni and/or Sovaldi, we could be prevented from selling these products unless we were able to obtain a license under such patents. Such a license may not be available on commercially reasonable terms or at all.
Interference Proceedings and Litigation with Idenix Pharmaceuticals, Inc. (Idenix), Universita Degli Studi di Cagliari (UDSG), Centre National de la Recherche Scientifique and L’Universite Montpellier II
In February 2012, we received notice that the U.S. Patent and Trademark Office (USPTO) had declared Interference No. 105,871 (First Idenix Interference) between our U.S. Patent No. 7,429,572 (the ’572 patent) and Idenix’s pending U.S. Patent Application No. 12/131,868 to determine who was the first to invent certain nucleoside compounds. In January 2014, the USPTO Patent Trial and Appeal Board (PTAB) determined that Pharmasset and not Idenix was the first to invent the compounds. Idenix has appealed the PTAB’s decisions to the U.S. District Court for the District of Delaware, which has stayed that appeal pending the outcome of the appeal of the interference involving Idenix’s U.S. Patent No. 7,608,600 (the ’600 patent) as described below.
In December 2013, after receiving our request to do so, the USPTO declared Interference No. 105,981 (Second Idenix Interference) between our pending U.S. Patent Application No. 11/854,218 and Idenix’s U.S. Patent No. 7,608,600 (the ’600 patent). The ’600 patent includes claims directed to methods of treating HCV with nucleoside compounds. In March 2015, the PTAB determined that Pharmasset and not Idenix was the first to invent the claimed methods of treating HCV. Idenix appealed this decision in both the U.S. District Court for the District of Delaware and the U.S. Court of Appeal for the Federal Circuit (CAFC). The CAFC heard oral arguments in September 2016, and we are awaiting its decision. We filed a motion to dismiss the appeal in Delaware, and the court has stayed the appeal relating to the Second Idenix Interference.
We believe that the Idenix claims involved in the First and Second Idenix Interferences, and similar U.S. and foreign patents claiming the same compounds, metabolites and uses thereof, are invalid. As a result, we filed an Impeachment Action in the Federal Court of Canada to invalidate Idenix Canadian Patent No. 2,490,191 (the ’191 patent), which is the Canadian patent that corresponds to the ’600 patent. Idenix asserted that the commercialization of Sovaldi in Canada will infringe its ’191 patent and that our Canadian Patent No. 2,527,657, corresponding to our ’572 patent, is invalid. In November 2015, the Canadian court held that Idenix’s patent is invalid and that our patent is valid. Idenix appealed the decision to the Canadian Federal Court of Appeal in November 2015. The appeal hearing was held in January 2017 and we are awaiting the decision.
We filed a similar legal action in Norway in the Oslo District Court seeking to invalidate Idenix’s Norwegian patent corresponding to the ’600 patent. In September 2013, Idenix filed an invalidation action in the Norwegian proceedings against our Norwegian Patent No. 333700, which corresponds to the ’572 patent. In March 2014, the Norwegian court found all claims in the Idenix Norwegian patent to be invalid and upheld the validity of all claims in our patent. Idenix appealed the decision to the Norwegian Court of Appeal. In April 2016, the Court of Appeal issued its decision invalidating the Idenix patent and upholding our patent. Idenix has not filed a further appeal.
In January 2013, we filed a legal action in the Federal Court of Australia seeking to invalidate Idenix’s Australian patent corresponding to the ’600 patent. In April 2013, Idenix asserted that the commercialization of Sovaldi in Australia infringes its
Australian patent corresponding to the ’600 patent. In March 2016, the Australian court revoked Idenix’s Australian patent. Idenix has appealed this decision. The appeal hearing was held in November 2016 and we are awaiting the decision.
In March 2014, the European Patent Office (EPO) granted Idenix European Patent No. 1 523 489 (the ’489 patent), which corresponds to the ’600 patent. The same day that the ’489 patent was granted, we filed an opposition with the EPO seeking to revoke the ’489 patent. An opposition hearing was held in February 2016, and the EPO ruled in our favor and revoked the ’489 patent. Idenix has appealed. In March 2014, Idenix also initiated infringement proceedings against us in the United Kingdom (UK), Germany and France alleging that the commercialization of Sovaldi would infringe the UK, German and French counterparts of the ’489 patent. A trial was held in the UK in October 2014. In December 2014, the High Court of Justice of England and Wales (UK Court) invalidated all challenged claims of the ’489 patent on multiple grounds. Idenix appealed. In November 2016, the appeals court affirmed the UK Court’s decision invalidating Idenix’s patent. In March 2015, the German court in Düsseldorf determined that the Idenix patent was highly likely to be invalid and stayed the infringement proceedings pending the outcome of the opposition hearing held by the EPO in February 2016. Idenix has not appealed this decision of the German court staying the proceedings. Upon Idenix’s request, the French proceedings have been stayed. Idenix has not been awarded patents corresponding to the ’600 patent in Japan or China.
In December 2013, Idenix, Universita Degli Studi di Cagliari (UDSG), Centre National de la Recherche Scientifique and L’Université Montpellier II sued us in U.S. District Court for the District of Delaware alleging that the commercialization of sofosbuvir will infringe the ’600 patent and that an interference exists between the ’600 patent and our U.S. Patent No. 8,415,322. Also in December 2013, Idenix and UDSG sued us in the U.S. District Court for the District of Massachusetts alleging that the commercialization of sofosbuvir will infringe U.S. Patent Nos. 6,914,054 (the ‘054 patent) and 7,608,597 (the ‘597 patent). In June 2014, the court transferred the Massachusetts litigation to the U.S. District Court for the District of Delaware. Idenix was acquired by Merck & Co. Inc. (Merck) in August 2014.
Prior to trial in December 2016, Idenix committed to give us a covenant not to sue with respect to any claims arising out of the ‘054 patent related to sofosbuvir and withdrew that patent from the trial. In addition, Idenix declined to litigate the ‘600 patent infringement action at trial in light of the appeal currently pending at the CAFC. In January 2017, the District Court stayed Idenix’s infringement claim on the ‘600 patent pending the outcome of the appeal of the interference decision on that patent, described above. A jury trial was held in December 2016 on the remaining ‘597 patent. In December 2016, the jury found that we willfully infringed the asserted claims of the ‘597 patent and awarded Idenix
$2.54 billion
in past damages. The parties will file post-trial motions and briefings during the first quarter of 2017, and we expect the judge to rule in the third or fourth quarter of 2017. Once the judge has issued these rulings, the case will move to the CAFC.
Although we cannot predict with certainty the ultimate outcome of this litigation, we believe the jury verdict to be in error, and also believe that errors were also made by the court with respect to certain rulings made before and during trial. We are confident in the merits of our case and will vigorously pursue this position in post-trial motions and on appeal. We expect that our arguments in the forthcoming post-trial motions and on appeal will focus on one or more of the arguments that we made to the judge and jury, those being (i) when properly construed, Gilead does not infringe the claims of the ’597 patent, (ii) the patent is invalid for failure to properly describe the claimed invention and (iii) the patent is invalid because it does not enable one of skill in the art to practice the claimed invention.
In assessing whether we should accrue a liability for this litigation on our consolidated financial statements, we considered various factors, including the legal and factual circumstances of the case, the USPTO’s invalidation of an Idenix patent similar to the ‘597 patent in dispute in this case, the jury’s verdict, the Court’s post-trial orders, the current status of the proceedings, applicable law, the views of legal counsel and the likelihood that the jury’s verdict will be upheld on appeal. As a result of this review, we have determined, in accordance with applicable accounting standards that it is not probable that we will incur a loss as a result of this litigation, and therefore have not recorded a liability for this matter. While we believe a loss is not probable, it is reasonably possible that a loss could occur. If the jury’s verdict is not upheld on appeal, the loss will be zero. If the jury’s verdict is upheld on appeal, our estimated potential loss as of December 31, 2016 would include (i) the
$2.54 billion
determined by the jury, which represents
10%
of our adjusted revenues from sofosbuvir containing products from launch through August 2016, (ii) approximately
$230 million
, which represents
10%
of our adjusted revenues from sofosbuvir containing products from September 2016 through December 31, 2016, (iii) pre-judgment interest, (iv) enhanced damages of up to three times the sum of (i) and (ii) above as a result of the jury’s finding of willfulness, and (v) attorney’s fees. Therefore, we estimate the range of possible loss through December 31, 2016 to be between
zero
and
$8.5 billion
. This sum excludes (i) an immaterial amount related to pre-judgment sales and interest in January 2017, and (ii) going forward royalties yet to be assessed by the court, which we have estimated would be
10%
, but which could be up to three times higher as a result of the jury’s finding of willfulness, and which would be payable based on adjusted revenues from sofosbuvir-containing products for the period from January 26, 2017 through expiry of the Idenix patent in May 2021. We expect the judge to rule on the amount of going forward royalties and any enhanced damages in the course of deciding the post-trial motions at a time to be determined by the judge in this case. The court’s determination of enhanced damages, if any, can also be appealed.
If the jury’s verdict is upheld on appeal, the amount we could be required to pay could be material. The timing and magnitude of the amount of any such payment could have a material adverse impact on our results of operations and stock price.
Litigation with Merck
In August 2013, Merck contacted us requesting that we pay royalties on the sales of sofosbuvir and obtain a license to U.S. Patent No. 7,105,499 (the ’499 patent) and U.S. Patent No. 8,481,712 (the ’712 patent), which it co-owns with Ionis Pharmaceuticals, Inc. The ’499 and ’712 patents cover compounds which do not include, but may relate to, sofosbuvir. We filed a lawsuit in August 2013 in the U.S. District Court for the Northern District of California seeking a declaratory judgment that the Merck patents are invalid and not infringed. During patent prosecution, Merck amended its patent application in an attempt to cover compounds related to sofosbuvir. Initially, in March 2016, a jury determined that we had not established that Merck’s patents are invalid for lack of written description or lack of enablement and awarded Merck $200 million in damages. However, in June 2016, the court ruled in Gilead’s favor on our defense of unclean hands and determined that Merck may not recover any damages from us for the ’499 and ’712 patents. The judge has determined that Merck is required to pay our attorney’s fees due to the exceptional nature of this case. The amount of fees owed to us by Merck is yet to be determined by the court.
Merck has filed a notice of appeal to the Court of Appeals for the Federal Circuit regarding the court’s decision on our defense of unclean hands. We appealed the issue relating to the invalidity of Merck’s patent. If the decision on our defense of unclean hands is reversed on appeal and Merck’s patent is upheld, we may be required to pay damages and a royalty on sales of sofosbuvir-containing products following the appeal. In that event, the judge has indicated that she will determine the amount of the royalty, if necessary, at the conclusion of any appeal in this case.
Litigation with the University of Minnesota
The University of Minnesota (the University) has obtained Patent No. 8,815,830 (the ’830 patent), which purports to broadly cover nucleosides with antiviral and anticancer activity. In August 2016, the University filed a lawsuit against us in the U.S. District Court for the District of Minnesota, alleging that the commercialization of sofosbuvir-containing products infringes the ’830 patent. We believe that the ’830 patent is invalid and will not be infringed by the continued commercialization of sofosbuvir.
European Patent Claims
In February 2015, several parties filed oppositions in the EPO requesting revocation of our granted European patent covering sofosbuvir that expires in 2028. In October 2016, the EPO upheld the validity of certain claims of our sofosbuvir patent. We anticipate that the challengers will appeal this decision in favor of our patent. The appeal process may take several years.
In January 2016, several parties filed oppositions in the EPO requesting revocation of our granted European patent covering TAF that expires in 2021.
In March 2016, three parties filed oppositions in the EPO requesting revocation of our granted European patent covering cobicistat that expires in 2027. While we are confident in the strength of our patents, we cannot predict the ultimate outcome of these oppositions.
If we are unsuccessful in defending these oppositions, some or all of our patent claims may be narrowed or revoked and the patent protection for sofosbuvir, TAF and cobicistat in Europe could be substantially shortened or eliminated entirely. If our patents are revoked, and no other European patents are granted covering these compounds, our exclusivity may be based entirely on regulatory exclusivity granted by the European Medicines Agency. Sovaldi has been granted regulatory exclusivity that will prevent generic sofosbuvir from entering the European Union for 10 years following approval of Sovaldi, or January 2024. If we lose exclusivity for Sovaldi prior to 2028, our expected revenues and results of operations could be negatively impacted for the years including and succeeding the year in which such exclusivity is lost, which may cause our stock price to decline.
Litigation with Generic Manufacturers
As part of the approval process for some of our products, FDA granted us a New Chemical Entity (NCE) exclusivity period during which other manufacturers’ applications for approval of generic versions of our product will not be approved. Generic manufacturers may challenge the patents protecting products that have been granted NCE exclusivity one year prior to the end of the NCE exclusivity period. Generic manufacturers have sought and may continue to seek FDA approval for a similar or identical drug through an abbreviated new drug application (ANDA), the application form typically used by manufacturers seeking approval of a generic drug. The sale of generic versions of our products earlier than their patent expiration would have a significant negative effect on our revenues and results of operations. To seek approval for a generic version of a product having NCE status, a generic company may submit its ANDA to FDA four years after the branded product’s approval. For sofosbuvir, this date falls in December 2017. Consequently, it is possible that one or more generics may file an ANDA for Sovaldi in December 2017.
Current legal proceedings of significance with generic manufacturers include:
HIV Products
In November 2011, December 2011 and August 2012, we received notices that Teva submitted an abbreviated new drug submission (ANDS) to the Canadian Minister of Health requesting permission to manufacture and market generic versions of Truvada, Atripla and Viread. In the notices, Teva alleges that the patents associated with Truvada, Atripla and Viread are invalid, unenforceable and/or will not be infringed by Teva’s manufacture, use or sale of generic versions of those products. We filed lawsuits against Teva in the Federal Court of Canada seeking an order of prohibition against approval of these applications.
In December 2013, the court issued an order prohibiting the Canadian Minister of Health from approving Teva’s generic versions of our Viread, Truvada and Atripla products until expiry of our patents in July 2017. Teva has appealed that decision. The court’s decision did not rule on the validity of the patents and accordingly the only issue on appeal is whether the Canadian Minister of Health should be prohibited from approving Teva’s products. In November 2016, we and Teva entered into a settlement agreement to resolve the ongoing contested proceedings concerning Teva’s ANDS for generic versions of Truvada, Atripla, and Viread as well as Gilead’s patents associated with Truvada, Atripla, and Viread.
In June 2014, we received notice that Apotex Inc. (Apotex) submitted an ANDS to the Canadian Minister of Health requesting permission to manufacture and market a generic version of Truvada and a separate ANDS requesting permission to manufacture and market a generic version of Viread. In the notice, Apotex alleges that three of the patents associated with Truvada and two of the patents associated with Viread are invalid, unenforceable and/or will not be infringed by Apotex’s manufacture, use or sale of a generic version of Truvada or Viread. In August 2014, we filed lawsuits against Apotex in the Federal Court of Canada seeking orders of prohibition against approval of these ANDS. A hearing in those cases was held in April 2016. In July 2016, the court issued an order prohibiting the Canadian Minister of Health from approving Apotex’s generic version of our Viread product until the expiry of our patents in July 2017. The court declined to prohibit approval of Apotex’s generic version of our Truvada product. The court’s decision did not rule on the validity of the patents. The launch of Apotex’s generic version of our Truvada product would be at risk of infringement of our patents, including patents that we were unable to assert in the present lawsuit, and liability for our damages. Apotex has appealed the court’s decision.
In February 2016, we received notice that Mylan Pharmaceuticals, Inc. (Mylan) submitted an ANDA to FDA requesting permission to manufacture and market a generic version of Tybost (cobicistat). In the notice, Mylan alleges that the patent covering cobicistat is invalid as obvious and that Mylan’s generic product cannot infringe an invalid claim. In March 2016, we filed lawsuits against Mylan in the U.S. District Court for the District of Delaware and U.S. District Court for the Northern District of West Virginia. In January 2017, we received a letter from Mylan notifying us that it had submitted a duplicate ANDA to FDA for this same product. We are currently evaluating Mylan’s letter. The trial in Delaware is scheduled for January 2018. The patent in suit that covers Tybost is also listed in the Orange Book for Stribild and Genvoya.
Letairis
In February 2015, we received notice that Watson Laboratories, Inc. (Watson) submitted an ANDA to FDA requesting permission to manufacture and market a generic version of Letairis. In the notice, Watson alleges that one of the patents associated with ambrisentan tablets is invalid, unenforceable and/or will not be infringed by Watson’s manufacture, use or sale of a generic version of Letairis. In April 2015, we filed a lawsuit against Watson in the U.S. District Court for the District of New Jersey for infringement of our patents. In January 2017, we reached an agreement with Watson to settle the litigation.
In June 2015, we received notice that SigmaPharm Laboratories, LLC (SigmaPharm) submitted an ANDA to FDA requesting permission to manufacture and market a generic version of Letairis. In the notice, SigmaPharm alleges that one of the patents associated with ambrisentan tablets is invalid, unenforceable and/or will not be infringed by SigmaPharm’s manufacture, use or sale of a generic version of Letairis. In June 2015, we filed a lawsuit against SigmaPharm in the U.S. District Court for the District of New Jersey for infringement of our patents. The date for trial against SigmaPharm is not yet set but estimated to occur in the second quarter of 2017.
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 our products could be substantially shortened. Further, if all of the patents covering one or more products are invalidated, FDA or the Canadian Minister 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 could have a significant negative effect on our revenues and results of operations.
TAF Litigation
In January 2016, AIDS Healthcare Foundation, Inc. (AHF) filed a complaint with the U.S. District Court for the Northern District of California against Gilead, Japan Tobacco, Inc. and Japan Tobacco International, U.S.A. (together, JT), and Emory University (Emory). In April 2016, AHF amended its complaint to add Janssen and Johnson & Johnson Inc. (J&J) as defendants. AHF claims that U.S. Patent Nos. 7,390,791; 7,800,788; 8,754,065; 8,148,374; and 8,633,219 are invalid. In addition, AHF claims that Gilead, independently and together with JT, Akros, Janssen and J&J, is violating federal and state antitrust and unfair competition laws in the market for sales of TAF by offering TAF as part of a fixed-dose combination product with elvitegravir, cobicistat and emtricitabine (Genvoya), a fixed-dose combination product with elvitegravir and rilpivirine (Odefsey) and in a fixed-dosed combination product with elvitegravir (Descovy). AHF sought a declaratory judgment of invalidity against each of the patents as well as monetary damages. In May 2016, we, JT, Janssen, and J&J filed motions to dismiss all of AHF’s claims, which AHF opposed. In June 2016, a hearing was held on the motions to dismiss. In July 2016, the judge granted our and the other defendants’ motions and dismissed all of AHF’s claims. AHF has appealed the court’s decision dismissing the challenge to the validity of our TAF patents.
Department of Justice Investigations
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 cooperated with the government’s inquiry. In April 2014, the United States Department of Justice informed us that, following an investigation, it declined to intervene in a False Claims Act lawsuit filed by two former employees. In April 2014, the former employees served a First Amended Complaint. In January 2015, the federal district court issued an order granting in its entirety, without prejudice, our motion to dismiss the First Amended Complaint. In February 2015, the plaintiffs filed a Second Amended Complaint and in June 2015, the federal district court issued an order granting our motion to dismiss the Second Amended Complaint. In July 2015, the plaintiffs filed a notice of appeal in the U.S. Court of Appeals for Ninth Circuit.
In February 2016, we received a subpoena from the U.S. Attorney’s Office for the District of Massachusetts requesting documents related to our support of 501(c)(3) organizations that provide financial assistance to patients, and for our HCV products, documents concerning our provision of financial assistance to patients. Other companies have disclosed similar inquiries. We are cooperating with this inquiry.
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.
Other Commitments
In the normal course of business, we enter into various firm purchase commitments primarily related to active pharmaceutical ingredients and certain inventory related items. As of
December 31, 2016
, these commitments for the next five years were approximately
$1.1 billion
in
2017
,
$345 million
in
2018
,
$59 million
in
2019
,
$20 million
in
2020
and
$20 million
in
2021
. The amounts related to active pharmaceutical ingredients represent minimum purchase commitments. Actual payments for the purchases related to active pharmaceutical ingredients were
$2.0 billion
in
2016
,
$2.2 billion
in
2015
and
$1.8 billion
in
2014
.
|
|
13
.
|
STOCKHOLDERS’ EQUITY
|
Stock Repurchase Programs
In February 2016, our Board of Directors authorized a
$12.0 billion
stock repurchase program (2016 Program). Purchases under the 2016 Program may be made in the open market or in privately negotiated transactions. The 2016 Program commenced after the
$15.0 billion
stock repurchase program authorized by our Board of Directors in January 2015 was completed in the second quarter of 2016. The
$5.0 billion
stock repurchase program authorized by our Board of Directors in May 2014 (2014 Program) was completed in the first quarter of 2015. The
$5.0 billion
repurchase program authorized by our Board of Directors in January 2011 (2011 Program) was completed in 2014. As of December 31, 2016, the remaining authorized repurchase amount under the 2016 Program was
$9.0 billion
.
In February 2016, we entered into an accelerated stock repurchase program (ASR) to repurchase
$5.0 billion
of our common stock under the 2015 Program. We made an upfront payment of
$5.0 billion
and received
46 million
shares of our common stock. The
46 million
shares represented approximately 80% of the total shares calculated based on our common stock closing price of
$86.68
per share on the date we entered into the ASR. In April 2016, the ASR settled, and we received an additional
8 million
shares of our common stock based on the average price of our common stock during the ASR purchase period less a predetermined discount. As a result, the average purchase price of our common stock from the ASR was
$92.09
per share.
We accounted for the ASR as two separate transactions: (a) as shares of common stock acquired in a treasury stock transaction recorded on the transaction date and (b) as a forward contract indexed to our own common stock. As such, the up-front payment of $5.0 billion was accounted for as a reduction to Stockholders’ equity on our Consolidated Balance Sheets in the period the payment was made. The ASR met all of the applicable criteria for equity classification and therefore was not accounted for as a derivative instrument. The shares received under the ASR were retired in the periods they were received.
The following table summarizes our stock repurchases under the above-described programs (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2016
(1)
|
|
2015
(2)
|
|
2014
(3)
|
Shares repurchased and retired
|
|
123
|
|
|
95
|
|
|
59
|
|
Amount
|
|
$
|
11,001
|
|
|
$
|
10,002
|
|
|
$
|
5,349
|
|
Average price per share
|
|
$
|
89.15
|
|
|
$
|
104.91
|
|
|
$
|
90.29
|
|
_______________________
|
|
|
|
|
|
|
|
|
|
Notes:
|
(1)
|
Includes 36 million shares repurchased for $3.0 billion under the 2016 Program and 87 million shares repurchased for $8.0 billion under the 2015 Program.
|
(2)
|
Includes 65 million shares repurchased for $7.0 billion under the 2015 Program and 30 million shares repurchased for $3.0 billion under the 2014 Program.
|
(3)
|
Includes 19 million shares repurchased for $2.0 billion under the 2014 Program and 40 million shares repurchased for $3.3 billion under the 2011 Program.
|
In addition to repurchases from our stock repurchase programs, we repurchased shares of common stock withheld by us from employee restricted stock awards to satisfy our applicable tax withholding obligations, which are immaterial and excluded from the table above.
We use the par value method of accounting for our stock repurchases. Under the par value method, common stock is first charged with the par value of the shares involved. The excess of the cost of shares acquired over the par value is allocated to additional paid-in capital (APIC) based on an estimated average sales price per issued share with the excess amounts charged to retained earnings.
The following table summarizes the reduction of common stock and APIC and the charge to retained earnings as a result of our stock repurchases (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Reduction of common stock and APIC
|
|
$
|
302
|
|
|
$
|
223
|
|
|
$
|
133
|
|
Charge to retained earnings
|
|
$
|
10,883
|
|
|
$
|
10,115
|
|
|
$
|
5,475
|
|
Dividends
The following table summarizes cash dividends declared on our common stock (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
Dividend Per Share
|
|
Amount
|
|
Dividend Per Share
|
|
Amount
|
First quarter
|
|
$
|
0.43
|
|
|
$
|
587
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Second quarter
|
|
0.47
|
|
|
631
|
|
|
0.43
|
|
|
639
|
|
Third quarter
|
|
0.47
|
|
|
625
|
|
|
0.43
|
|
|
631
|
|
Fourth quarter
|
|
0.47
|
|
|
622
|
|
|
0.43
|
|
|
620
|
|
Total
|
|
$
|
1.84
|
|
|
$
|
2,465
|
|
|
$
|
1.29
|
|
|
$
|
1,890
|
|
Our restricted stock and performance-based stock units have dividend equivalent rights entitling holders to dividend equivalents to be paid upon vesting for each share of the underlying units.
On
February 7, 2017
, we announced that our Board of Directors declared a quarterly cash dividend of
$0.52
per share of our common stock, with a payment date of
March 30, 2017
to all stockholders of record as of the close of business on
March 16, 2017
. Future dividends are subject to declaration by the Board of Directors.
Preferred Stock
We have
5 million
shares of authorized preferred stock issuable in series. Our Board is authorized to determine the designation, powers, preferences and rights of any such series. There was
no
preferred stock outstanding as of
December 31, 2016
and
2015
.
Accumulated Other Comprehensive Income
The following table summarizes the changes in AOCI by component, net of tax (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation
|
|
Unrealized Gains and Losses on Available-for-Sale Securities
|
|
Unrealized Gains and Losses on Cash Flow Hedges
|
|
Total
|
Balance at December 31, 2014
|
|
$
|
(54
|
)
|
|
$
|
12
|
|
|
$
|
343
|
|
|
$
|
301
|
|
Other comprehensive income (loss) before reclassifications
|
|
9
|
|
|
(29
|
)
|
|
389
|
|
|
369
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
—
|
|
|
1
|
|
|
(583
|
)
|
|
(582
|
)
|
Net current period other comprehensive income (loss)
|
|
9
|
|
|
(28
|
)
|
|
(194
|
)
|
|
(213
|
)
|
Balance at December 31, 2015
|
|
(45
|
)
|
|
(16
|
)
|
|
149
|
|
|
88
|
|
Other comprehensive income before reclassifications
|
|
177
|
|
|
7
|
|
|
5
|
|
|
189
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
—
|
|
|
(7
|
)
|
|
8
|
|
|
1
|
|
Net current period other comprehensive income
|
|
177
|
|
|
—
|
|
|
13
|
|
|
190
|
|
Balance at December 31, 2016
|
|
$
|
132
|
|
|
$
|
(16
|
)
|
|
$
|
162
|
|
|
$
|
278
|
|
The amounts reclassified for gains (losses) on cash flow hedges were recorded as part of Product sales on our Consolidated Statements of Income. See Note 4, Derivative Financial Instruments for additional information. Amounts reclassified for gains (losses) on available-for-sale securities were recorded as part of Other income (expense), net on our Consolidated Statements of Income.
We utilize share based compensation in the form of various types of equity-based awards, including restricted stock units (RSUs), performance-based restricted stock units (PSUs) and stock options. Compensation expense is recognized on the Consolidated Statements of Income based on the estimated fair value of the award on the grant date. The estimated fair value of RSUs is based on the closing price of our common stock. For PSUs, estimated fair value is based on either the Monte Carlo valuation methodology or the stock price on the date of grant. For stock option awards, estimated fair value is based on the Black-Scholes option valuation model.
2004 Equity Incentive Plan
In May 2004, our stockholders approved and we adopted the Gilead Sciences, Inc. 2004 Equity Incentive Plan (as amended, the 2004 Plan). The 2004 Plan is a broad based incentive plan that provides for the grant of equity-based awards, including stock options, restricted stock units, restricted stock awards and performance awards, to employees, directors and consultants. The 2004 Plan authorizes the issuance of a total of
243 million
shares of common stock. As of
December 31, 2016
, a total of
60 million
shares remain available for future grant under the 2004 Plan.
Stock Options
The 2004 Plan provides for option grants designated as either non-qualified or incentive stock options. Prior to January 1, 2006, we granted both non-qualified and incentive stock options, but all stock options granted after January 1, 2006 have been non-qualified stock options. Under the 2004 Plan, employee stock options granted prior to 2011 generally vest over
five years
and stock options granted starting in 2011 generally vest over
four years
. All options are exercisable over a period not to exceed the contractual term of
ten years
from the date the stock options are issued and are granted at prices not less than the fair market value of our common stock on the grant date. Stock option exercises are settled with common stock from the 2004 Plan’s previously authorized and available pool of shares.
The following table summarizes activity and related information under our stock option plans. All option grants presented in the table had exercise prices not less than the fair value of the underlying common stock on the grant date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
(in thousands)
|
|
Weighted-
Average
Exercise Price
(in dollars)
|
|
Weighted-Average Remaining Contractual Term (Years)
|
|
Aggregate Intrinsic Value (in millions)
|
Outstanding at December 31, 2015
|
|
27,413
|
|
|
$
|
28.56
|
|
|
|
|
|
Granted
|
|
2,927
|
|
|
$
|
82.78
|
|
|
|
|
|
Forfeited
|
|
(244
|
)
|
|
$
|
87.86
|
|
|
|
|
|
Expired
|
|
(42
|
)
|
|
$
|
92.39
|
|
|
|
|
|
Exercised
|
|
(6,897
|
)
|
|
$
|
18.46
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
23,157
|
|
|
$
|
37.69
|
|
|
4.05
|
|
$
|
864
|
|
Exercisable at December 31, 2016
|
|
19,264
|
|
|
$
|
28.16
|
|
|
3.07
|
|
$
|
860
|
|
Expected to vest, net of estimated forfeitures at December 31, 2016
|
|
3,660
|
|
|
$
|
84.88
|
|
|
8.85
|
|
$
|
3
|
|
Aggregate intrinsic value represents the value of our closing stock price on the last trading day of the year in excess of the weighted-average exercise price multiplied by the number of options outstanding or exercisable. Total intrinsic value of options exercised was
$452 million
for
2016
,
$1.1 billion
for
2015
and
$1.2 billion
for
2014
.
The weighted-average grant date fair value of the stock options granted was
$20.04
per share for
2016
,
$29.73
per share for
2015
and
$27.63
per share for
2014
.
As of
December 31, 2016
, there was
$72 million
of unrecognized compensation cost related to stock options, which is expected to be recognized over an estimated weighted-average period of
2.85
years.
Performance-Based Restricted Stock Units
Under the 2004 Plan, we grant PSUs which vest upon the achievement of specified market or performance goals, which could include achieving a total shareholder return compared to a pre-determined peer group or achieving revenue targets. The actual number of common shares ultimately issued is calculated by multiplying the number of PSUs by a payout percentage ranging from
0%
to
200%
and these awards generally vest only when a committee (or subcommittee) of our Board has determined that the specified market and performance goals have been achieved. The fair value of each PSU is estimated at the date of grant or when performance objectives are defined for the grants. Depending on the terms of the award, fair value on the date of grant is determined based on either the Monte Carlo valuation methodology or the closing stock price on the date of grant.
In addition, we have also granted other PSUs to certain of our employees under the 2004 Plan. The vesting of these awards is subject to the achievement of specified individual performance goals, typically within a
one year
period. The fair value of such an award is equal to the closing price of our common stock on the grant date.
The following table summarizes activity and related information for all of our PSUs:
|
|
|
|
|
|
|
|
|
|
|
Shares
(1)
(in thousands)
|
|
Weighted-
Average
Grant-Date Fair Value Per Share
(1)
(in dollars)
|
Outstanding at December 31, 2015
|
|
487
|
|
|
$
|
85.83
|
|
Granted
|
|
606
|
|
|
$
|
71.60
|
|
Vested
|
|
(527
|
)
|
|
$
|
62.13
|
|
Forfeited
|
|
(57
|
)
|
|
$
|
95.67
|
|
Outstanding at December 31, 2016
|
|
509
|
|
|
$
|
92.32
|
|
_______________________
|
|
|
|
|
Note:
|
|
(1)
|
Weighted-average grant-date fair value per share excludes shares related to grants that currently have no grant-date fair value as the performance objectives have not yet been defined.
|
The weighted-average grant date fair value of our PSUs granted was
$71.60
per share for
2016
,
$61.71
per share for
2015
and
$56.38
per share for
2014
. The total grant date fair value of our vested PSUs was
$33 million
for
2016
,
$76 million
for
2015
and
$46 million
for
2014
, and total fair value as of the respective vesting dates was
$45 million
for
2016
,
$160 million
for
2015
and
$145 million
for
2014
.
We recognized stock-based compensation expenses of
$20 million
in
2016
,
$40 million
in
2015
and
$57 million
in
2014
related to these PSUs. As of
December 31, 2016
, there was
$19 million
of unrecognized compensation costs related to these PSUs, which is expected to be recognized over an estimated weighted-average period of
1.3
years.
Restricted Stock Units
We grant time-based RSUs to certain employees as part of our annual employee equity compensation review program as well as to new hire employees and to non-employee members of our Board. RSUs are share awards that entitle the holder to receive freely tradable shares of our common stock upon vesting. RSUs vest over
four years
from the date of grant.
The fair value of an RSU is equal to the closing price of our common stock on the grant date. The following table summarizes our RSU activities and related information:
|
|
|
|
|
|
|
|
|
|
|
Shares
(in thousands)
|
|
Weighted-
Average
Grant-Date Fair Value Per Share
(in dollars)
|
Outstanding at December 31, 2015
|
|
11,028
|
|
|
$
|
73.93
|
|
Granted
|
|
4,897
|
|
|
$
|
84.51
|
|
Vested
|
|
(4,826
|
)
|
|
$
|
58.77
|
|
Forfeited
|
|
(1,054
|
)
|
|
$
|
83.02
|
|
Outstanding at December 31, 2016
|
|
10,045
|
|
|
$
|
85.41
|
|
The weighted-average grant date fair value of RSUs granted was
$84.51
per share for
2016
,
$103.19
per share for
2015
,
$86.75
per share for
2014
. The total grant date fair value of our vested RSUs was
$284 million
for
2016
,
$249 million
for
2015
and
$182 million
for
2014
, and total fair value as of the respective vesting dates was
$408 million
for
2016
,
$666 million
for
2015
and
$535 million
for
2014
.
As of
December 31, 2016
, there was
$577 million
of unrecognized compensation cost related to unvested RSUs which is expected to be recognized over a weighted-average period of
2.4
years.
Employee Stock Purchase Plan
Under our Employee Stock Purchase Plan and the International Employee Stock Purchase Plan (together, as amended, the ESPP), employees can purchase shares of our common stock based on a percentage of their compensation subject to certain limits. The purchase price per share is equal to the lower of
85%
of the fair market value of our common stock on the offering date or the purchase date. Prior to 2016, the ESPP offered a two-year look-back feature as well as an automatic reset feature that provides for an offering period to be reset to a new lower-priced offering if the offering price of the new offering period is less than that of the current offering period. Beginning in the first quarter of 2016, the look-back feature for ESPP offering periods became six-months. ESPP purchases are settled with common stock from the ESPP’s previously authorized and available pool of shares. During
2016
,
1 million
shares were issued under the ESPP for
$84 million
. A total of
79 million
shares of common stock have been authorized for issuance under the ESPP, and there were
13 million
shares available for issuance under the ESPP as of
December 31, 2016
.
As of
December 31, 2016
, there was
$5 million
of unrecognized compensation cost related to the ESPP, which is expected to be recognized over an estimated weighted-average period of
0.1
years.
Stock-Based Compensation
The following table summarizes the stock-based compensation expenses included on our Consolidated Statements of Income (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Cost of goods sold
|
|
$
|
14
|
|
|
$
|
11
|
|
|
$
|
10
|
|
Research and development expenses
|
|
176
|
|
|
173
|
|
|
152
|
|
Selling, general and administrative expenses
|
|
190
|
|
|
198
|
|
|
198
|
|
Stock-based compensation expense included in total costs and expenses
|
|
380
|
|
|
382
|
|
|
360
|
|
Income tax effect
|
|
(104
|
)
|
|
(131
|
)
|
|
(64
|
)
|
Stock-based compensation expense, net of tax
|
|
$
|
276
|
|
|
$
|
251
|
|
|
$
|
296
|
|
We capitalized stock-based compensation costs to inventory totaling
$15 million
in
2016
,
$13 million
in
2015
and
$12 million
in
2014
. The capitalized stock-based compensation costs remaining in inventory were
$9 million
as of
December 31, 2016
,
$8 million
as of
December 31, 2015
and
$6 million
as of
December 31, 2014
.
Stock-based compensation is recognized as expense over the requisite service periods on our Consolidated Statements of Income using the straight-line expense attribution approach, reduced for estimated forfeitures. We estimate forfeitures based on our historical experience.
Valuation Assumptions
Fair value of options granted under our 2004 Plan and purchases under our ESPP were estimated at grant or purchase dates using a Black-Scholes option valuation model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including expected stock price volatility and expected award life. We used the following assumptions to calculate the estimated fair value of the awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Expected volatility:
|
|
|
|
|
|
|
Stock options
|
|
30
|
%
|
|
35
|
%
|
|
34
|
%
|
ESPP
|
|
30
|
%
|
|
32
|
%
|
|
32
|
%
|
Expected term in years:
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
5.5
|
|
|
5.7
|
|
|
5.5
|
|
ESPP
|
|
0.5
|
|
|
1.2
|
|
|
1.2
|
|
Risk-free interest rate:
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
1.4
|
%
|
|
1.4
|
%
|
|
1.8
|
%
|
ESPP
|
|
1.1
|
%
|
|
1.4
|
%
|
|
1.5
|
%
|
Expected dividend yield
|
|
1.9
|
%
|
|
1.7
|
%
|
|
—
|
%
|
The fair value of stock options granted was calculated using the single option approach. We use a blend of historical volatility along with implied volatility for traded options on our common stock to determine our expected volatility. The expected term of stock-based awards represents the weighted-average period the awards are expected to remain outstanding. We estimate the weighted-average expected term based on historical cancellation and historical exercise data related to our stock options as well as the contractual term and vesting terms of the awards. The risk-free interest rate is based upon observed interest rates appropriate for the term of the stock-based awards. The dividend yield is based on our history and expectation of dividend payouts.
Deferred Compensation
We maintain a retirement saving plan under which eligible U.S. employees may defer compensation for income tax purposes under Section 401(k) of the Internal Revenue Code (the Gilead Sciences 401k Plan). In certain foreign subsidiaries, we maintain defined benefit plans as required by local regulatory requirements. Our total matching contribution expense under the Gilead Sciences 401k Plan and other defined benefit plans was
$69 million
during
2016
,
$47 million
during
2015
and
$40 million
during
2014
.
We maintain a deferred compensation plan under which our directors and key employees may defer compensation. Amounts deferred by participants are deposited into a rabbi trust. The total assets and liabilities associated with the deferred compensation plan were
$84 million
as of
December 31, 2016
and
$66 million
as of
December 31, 2015
.
|
|
15
.
|
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 and equivalents, the assumed conversion of our outstanding Convertible Notes and the assumed exercise of the 2016 Warrants were determined under the treasury stock method.
In March 2016, we exercised our option to elect cash settlement for the conversion spread of the remaining Convertible Notes. Prior to our cash settlement election, our common stock resulting from the assumed settlement of the conversion spread of the Convertible Notes had a dilutive effect when the average market price of our common stock during the period exceeded the conversion price for the Convertible Notes. As a result, we included their dilutive impact in our net income per share calculations. Additionally, during the third quarter of 2016, our 2016 Warrants expired, and we exercised our option to settle the warrants in cash. Prior to the settlement, our common stock resulting from the assumed settlement of the 2016 Warrants had a dilutive effect when the average market price of our common stock during the period exceeded the warrants’ exercise price. As a result, we included their dilutive impact in our net income per share calculations. See Note 11, Debt and Credit Facility for additional information.
Our ASR was reflected as repurchases of our common stock upon the receipt of shares and as forward contracts indexed to our common stock. We excluded the forward contracts from the computation of diluted net income per share attributable to Gilead common stockholders because their effect was antidilutive.
We excluded stock options to purchase approximately
3 million
,
1 million
and
1 million
weighted-average shares of our common stock that were outstanding during
2016
,
2015
and
2014
, respectively, in the computation of diluted net income per share attributable to Gilead common stockholders because their effect was antidilutive.
The following table shows the calculation of basic and diluted net income per share attributable to Gilead common stockholders (in millions except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Net income attributable to Gilead
|
|
$
|
13,501
|
|
|
$
|
18,108
|
|
|
$
|
12,101
|
|
Shares used in per share calculation - basic
|
|
1,339
|
|
|
1,464
|
|
|
1,522
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
Stock options and equivalents
|
|
13
|
|
|
23
|
|
|
33
|
|
Conversion spread related to the Convertible Notes
|
|
2
|
|
|
14
|
|
|
30
|
|
Warrants related to the Convertible Notes
|
|
4
|
|
|
20
|
|
|
62
|
|
Shares used in per share calculation - diluted
|
|
1,358
|
|
|
1,521
|
|
|
1,647
|
|
Net income per share attributable to Gilead common stockholders - basic
|
|
$
|
10.08
|
|
|
$
|
12.37
|
|
|
$
|
7.95
|
|
Net income per share attributable to Gilead common stockholders - diluted
|
|
$
|
9.94
|
|
|
$
|
11.91
|
|
|
$
|
7.35
|
|
We have one operating segment, which primarily focuses on the discovery, development and commercialization of innovative medicines in areas of unmet medical need. Therefore, our results of operations are reported on a consolidated basis consistent with internal management reporting reviewed by our chief operating decision maker, our chief executive officer. Enterprise-wide disclosures about product sales, revenues and long-lived assets by geographic area, and revenues from major customers are presented below.
Product Sales
Our product sales consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Antiviral products:
|
|
|
|
|
|
|
Harvoni
|
|
$
|
9,081
|
|
|
$
|
13,864
|
|
|
$
|
2,127
|
|
Sovaldi
|
|
4,001
|
|
|
5,276
|
|
|
10,283
|
|
Truvada
|
|
3,566
|
|
|
3,459
|
|
|
3,340
|
|
Atripla
|
|
2,605
|
|
|
3,134
|
|
|
3,470
|
|
Stribild
|
|
1,914
|
|
|
1,825
|
|
|
1,197
|
|
Epclusa
|
|
1,752
|
|
|
—
|
|
|
—
|
|
Genvoya
|
|
1,484
|
|
|
45
|
|
|
—
|
|
Complera/Eviplera
|
|
1,457
|
|
|
1,427
|
|
|
1,228
|
|
Viread
|
|
1,186
|
|
|
1,108
|
|
|
1,058
|
|
Odefsey
|
|
329
|
|
|
—
|
|
|
—
|
|
Descovy
|
|
298
|
|
|
—
|
|
|
—
|
|
Other antiviral
|
|
72
|
|
|
69
|
|
|
88
|
|
Total antiviral products
|
|
27,745
|
|
|
30,207
|
|
|
22,791
|
|
Other products:
|
|
|
|
|
|
|
Letairis
|
|
819
|
|
|
700
|
|
|
595
|
|
Ranexa
|
|
677
|
|
|
588
|
|
|
510
|
|
AmBisome
|
|
356
|
|
|
350
|
|
|
388
|
|
Zydelig
|
|
168
|
|
|
132
|
|
|
23
|
|
Other products
|
|
188
|
|
|
174
|
|
|
167
|
|
Total product sales
|
|
$
|
29,953
|
|
|
$
|
32,151
|
|
|
$
|
24,474
|
|
Revenues by Geographic Region
The following table summarizes total revenues from external customers and collaboration partners by geographic region (in millions). Product sales and product-related contract revenue are attributed to regions based on ship-to location. Royalty and non-product related contract revenue are attributed to regions based on the location of the collaboration partner.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Revenues:
|
|
|
|
|
|
|
United States
|
|
$
|
19,354
|
|
|
$
|
21,234
|
|
|
$
|
18,182
|
|
Europe
|
|
6,365
|
|
|
7,528
|
|
|
5,442
|
|
Japan
|
|
2,527
|
|
|
1,935
|
|
|
53
|
|
Other countries
|
|
2,144
|
|
|
1,942
|
|
|
1,213
|
|
Total revenues
|
|
$
|
30,390
|
|
|
$
|
32,639
|
|
|
$
|
24,890
|
|
Long-lived Assets
The net book value of our property, plant and equipment (less office and computer equipment) in the United States was
$2.2 billion
as of
December 31, 2016
,
$1.8 billion
as of
December 31, 2015
and
$1.3 billion
as of December 31, 2014. The corresponding
amount in international locations was
$430 million
as of
December 31, 2016
,
$334 million
as of
December 31, 2015
and
$275 million
as of December 31, 2014. All individual international locations accounted for less than ten percent of the total balances.
Revenues from Major Customers
The following table summarizes revenues from each of our customers who individually accounted for
10%
or more of our total revenues (as a percentage of total revenues):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
McKesson Corp.
|
|
22
|
%
|
|
24
|
%
|
|
24
|
%
|
AmerisourceBergen Corp.
|
|
18
|
%
|
|
19
|
%
|
|
25
|
%
|
Cardinal Health, Inc.
|
|
16
|
%
|
|
15
|
%
|
|
14
|
%
|
17
. INCOME TAXES
Income before provision for income taxes consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Domestic
|
|
$
|
7,646
|
|
|
$
|
7,953
|
|
|
$
|
6,678
|
|
Foreign
|
|
9,451
|
|
|
13,706
|
|
|
8,178
|
|
Total income before provision for income taxes
|
|
$
|
17,097
|
|
|
$
|
21,659
|
|
|
$
|
14,856
|
|
The provision for income taxes consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Federal:
|
|
|
|
|
|
|
Current
|
|
$
|
3,351
|
|
|
$
|
3,568
|
|
|
$
|
2,810
|
|
Deferred
|
|
(85
|
)
|
|
(313
|
)
|
|
(190
|
)
|
|
|
3,266
|
|
|
3,255
|
|
|
2,620
|
|
State:
|
|
|
|
|
|
|
|
|
|
Current
|
|
131
|
|
|
158
|
|
|
152
|
|
Deferred
|
|
28
|
|
|
(21
|
)
|
|
(30
|
)
|
|
|
159
|
|
|
137
|
|
|
122
|
|
Foreign:
|
|
|
|
|
|
|
Current
|
|
261
|
|
|
212
|
|
|
85
|
|
Deferred
|
|
(77
|
)
|
|
(51
|
)
|
|
(30
|
)
|
|
|
184
|
|
|
161
|
|
|
55
|
|
Provision for income taxes
|
|
$
|
3,609
|
|
|
$
|
3,553
|
|
|
$
|
2,797
|
|
The cumulative unremitted foreign earnings that are considered indefinitely reinvested in our foreign subsidiaries and for which no U.S. taxes have been provided, were approximately
$37.6 billion
as of
December 31, 2016
and
$28.5 billion
as of
December 31, 2015
. The residual U.S. tax liability, if such amounts were remitted, would be approximately
$13.1 billion
as of
December 31, 2016
and
$9.7 billion
as of
December 31, 2015
.
The reconciliation between the federal statutory tax rate applied to income before taxes and our effective tax rate is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Federal statutory rate
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State taxes, net of federal benefit
|
|
0.7
|
%
|
|
0.5
|
%
|
|
0.6
|
%
|
Foreign earnings at different rates
|
|
(15.3
|
)%
|
|
(18.5
|
)%
|
|
(16.9
|
)%
|
Research and other credits
|
|
(0.7
|
)%
|
|
(0.7
|
)%
|
|
(0.9
|
)%
|
Net unbenefitted stock compensation
|
|
0.2
|
%
|
|
0.1
|
%
|
|
0.2
|
%
|
Other
|
|
1.2
|
%
|
|
—
|
%
|
|
0.8
|
%
|
Effective tax rate
|
|
21.1
|
%
|
|
16.4
|
%
|
|
18.8
|
%
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
Deferred tax assets:
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
175
|
|
|
$
|
199
|
|
Stock-based compensation
|
|
212
|
|
|
222
|
|
Reserves and accruals not currently deductible
|
|
617
|
|
|
676
|
|
Deferred revenue
|
|
56
|
|
|
55
|
|
Depreciation related
|
|
88
|
|
|
63
|
|
Research and other credit carryforwards
|
|
147
|
|
|
135
|
|
Other, net
|
|
221
|
|
|
118
|
|
Total deferred tax assets before valuation allowance
|
|
1,516
|
|
|
1,468
|
|
Valuation allowance
|
|
(126
|
)
|
|
(6
|
)
|
Total deferred tax assets
|
|
1,390
|
|
|
1,462
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Intangibles
|
|
(104
|
)
|
|
(280
|
)
|
Unremitted foreign earnings
|
|
—
|
|
|
—
|
|
Other
|
|
(31
|
)
|
|
(50
|
)
|
Total deferred tax liabilities
|
|
(135
|
)
|
|
(330
|
)
|
Net deferred tax assets
|
|
$
|
1,255
|
|
|
$
|
1,132
|
|
The valuation allowance was
$126 million
as of
December 31, 2016
,
$6 million
as of
December 31, 2015
and
$9 million
as of December 31, 2014. The increase of our valuation allowance from December 31, 2015 to December 31, 2016 was primarily due to write down of the IPR&D value of momelotinib during 2016.
At
December 31, 2016
, we had U.S. federal net operating loss carryforwards of approximately
$315 million
. The federal net operating loss carryforwards will start to expire in 2021, if not utilized. We also had federal tax credit carryforwards of approximately
$7 million
which will start to expire in 2018, if not utilized. In addition, we had state net operating loss and tax credit carryforwards of approximately
$269 million
and
$306 million
, respectively. The state net operating loss and tax credit carryforwards will start to expire in 2017 if not utilized.
Utilization of net operating losses and tax credits may be subject to an annual limitation due to ownership change limitations provided in the Internal Revenue Code of 1986, as amended, and similar state provisions. This annual limitation may result in the expiration of the net operating losses and credits before utilization.
We file federal, state and foreign income tax returns in the United States and in many jurisdictions abroad. For federal income tax purposes, the statute of limitations is open for 2010 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 2010 and onwards.
Our income tax returns are subject to audit by federal, state and foreign tax authorities. We are currently under examination by the IRS for the 2010, 2011, 2012, 2013 and 2014 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.
We have total federal, state and foreign unrecognized tax benefits of
$1.9 billion
as of
December 31, 2016
and
$1.4 billion
as of
December 31, 2015
. Of the total unrecognized tax benefits,
$1.8 billion
and
$1.3 billion
at
December 31, 2016
and
2015
, respectively, if recognized, would reduce our effective tax rate in the period of recognition. We have continued to classify interest and penalties related to unrecognized tax benefits as part of our income tax provision on our Consolidated Statements of Income. We had accrued interest and penalties related to unrecognized tax benefits of
$50 million
as of
December 31, 2016
and
$24 million
as of December 31,
2015
.
As of
December 31, 2016
, we do not believe our unrecognized tax benefits will significantly change in the next 12 months. Due to the high degree of uncertainly on the timing of clarification from the IRS and other tax authorities regarding our uncertain tax positions, we are unable to reasonably estimate the period of cash settlement, if any, with the respective tax authorities.
The following is a rollforward of our total gross unrecognized tax benefit liabilities (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Balance, beginning of period
|
|
$
|
1,350
|
|
|
$
|
661
|
|
|
$
|
237
|
|
Tax positions related to current year:
|
|
|
|
|
|
|
|
|
|
Additions
|
|
522
|
|
|
675
|
|
|
430
|
|
Reductions
|
|
—
|
|
|
—
|
|
|
—
|
|
Tax positions related to prior years:
|
|
|
|
|
|
|
|
|
Additions
|
|
33
|
|
|
45
|
|
|
21
|
|
Reductions
|
|
(3
|
)
|
|
—
|
|
|
(20
|
)
|
Settlements
|
|
(49
|
)
|
|
(24
|
)
|
|
(5
|
)
|
Lapse of statute of limitations
|
|
(1
|
)
|
|
(7
|
)
|
|
(2
|
)
|
Balance, end of period
|
|
$
|
1,852
|
|
|
$
|
1,350
|
|
|
$
|
661
|
|
SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following amounts are in millions, except per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
2nd Quarter
|
|
3rd Quarter
|
|
4th Quarter
|
2016
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
7,794
|
|
|
$
|
7,776
|
|
|
$
|
7,500
|
|
|
$
|
7,320
|
|
Gross profit on product sales
|
|
$
|
6,488
|
|
|
$
|
6,787
|
|
|
$
|
6,276
|
|
|
$
|
6,141
|
|
Net income
|
|
$
|
3,567
|
|
|
$
|
3,497
|
|
|
$
|
3,325
|
|
|
$
|
3,099
|
|
Net income attributable to Gilead
|
|
$
|
3,566
|
|
|
$
|
3,497
|
|
|
$
|
3,330
|
|
|
$
|
3,108
|
|
Net income per share attributable to Gilead common stockholders-basic
|
|
$
|
2.58
|
|
|
$
|
2.62
|
|
|
$
|
2.52
|
|
|
$
|
2.36
|
|
Net income per share attributable to Gilead common stockholders-diluted
|
|
$
|
2.53
|
|
|
$
|
2.58
|
|
|
$
|
2.49
|
|
|
$
|
2.34
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
7,594
|
|
|
$
|
8,244
|
|
|
$
|
8,295
|
|
|
$
|
8,506
|
|
Gross profit on product sales
|
|
$
|
6,523
|
|
|
$
|
7,128
|
|
|
$
|
7,147
|
|
|
$
|
7,347
|
|
Net income
|
|
$
|
4,332
|
|
|
$
|
4,497
|
|
|
$
|
4,592
|
|
|
$
|
4,685
|
|
Net income attributable to Gilead
|
|
$
|
4,333
|
|
|
$
|
4,492
|
|
|
$
|
4,600
|
|
|
$
|
4,683
|
|
Net income per share attributable to Gilead common stockholders-basic
|
|
$
|
2.91
|
|
|
$
|
3.05
|
|
|
$
|
3.14
|
|
|
$
|
3.26
|
|
Net income per share attributable to Gilead common stockholders-diluted
|
|
$
|
2.76
|
|
|
$
|
2.92
|
|
|
$
|
3.06
|
|
|
$
|
3.18
|
|