GILEAD SCIENCES INC (Form: 10-K, Received: 02/25/2020 06:21:03)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)



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

For the fiscal year ended December 31, 2019



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

For the transition period from to

Commission File No. 0-19731

GILEAD SCIENCES, INC.

(Exact Name of Registrant as Specified in Its Charter)



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

333 Lakeside Drive, Foster City, California 94404

(Address of principal executive offices) (Zip Code)

650-574-3000

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value, $0.001 per share	GILD	The Nasdaq Global Select Market

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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

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

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

Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨

Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based upon the closing price of its Common Stock on the Nasdaq Global Select Market on June 28, 2019 was $66.4 billion.*

The number of shares outstanding of the registrant’s Common Stock on February 18, 2020 was 1,263,636,656.

DOCUMENTS INCORPORATED BY REFERENCE

Specified portions of the registrant’s proxy statement, which will be filed with the Commission pursuant to Regulation 14A in connection with the registrant’s 2020 Annual Meeting of Stockholders, to be held on May 6, 2020, are incorporated by reference into Part III of this Report.

* Based on a closing price of $67.56 per share on June 28, 2019. Excludes 284,647,252 shares of the registrant’s Common Stock held by executive officers, directors and any stockholders whose ownership exceeds 5% of registrant’s common stock outstanding at June 28, 2019. Exclusion of such shares should not be construed to indicate that any such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant or that such person is controlled by or under common control with the registrant.

GILEAD SCIENCES, INC.

2019 Form 10-K Annual Report

Table of Contents



PART I
Item 1	Business	3
Item 1A	Risk Factors	13
Item 1B	Unresolved Staff Comments	26
Item 2	Properties	26
Item 3	Legal Proceedings	26
Item 4	Mine Safety Disclosures	26

PART II
Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	27
Item 6	Selected Financial Data	29
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 7A	Quantitative and Qualitative Disclosures about Market Risk	43
Item 8	Financial Statements and Supplementary Data	45
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	90
Item 9A	Controls and Procedures	90
Item 9B	Other Information	92

PART III
Item 10	Directors, Executive Officers and Corporate Governance	92
Item 11	Executive Compensation	92
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	92
Item 13	Certain Relationships and Related Transactions, and Director Independence	92
Item 14	Principal Accountant Fees and Services	92

PART IV
Item 15	Exhibits and Financial Statement Schedules	92
Item 16	Form 10-K Summary	95

SIGNATURES		96

We own or have rights to various trademarks, copyrights and trade names used in our business, including the following: GILEAD^®, GILEAD SCIENCES^®, AMBISOME^®, ATRIPLA^®, BIKTARVY^®, CAYSTON^®, COMPLERA^®, DESCOVY^®, DESCOVY FOR PREP^®, EMTRIVA^®, EPCLUSA^®, EVIPLERA^®, GENVOYA^®, HARVONI^®, HEPSERA^®, LETAIRIS^®, ODEFSEY^®, RANEXA^®, SOVALDI^®, STRIBILD^®, TRUVADA^®, TRUVADA FOR PREP^®, TYBOST^®, VEMLIDY^®, VIREAD^®, VOSEVI^®, YESCARTA^® and ZYDELIG^®. LEXISCAN^® is a registered trademark of Astellas U.S. LLC. MACUGEN^® is a registered trademark of Bausch Health Ireland Limited. SYMTUZA^® is a registered trademark of Janssen Sciences Ireland UC. TAMIFLU^® is a registered trademark of Hoffmann-La Roche Inc. This report also refers to trademarks, service marks and trade names of other companies.

This Annual Report on Form 10-K, including the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933, as amended (the Securities Act), and the Securities Exchange Act of 1934, as amended (the Exchange Act). Words such as “expect,” “anticipate,” “target,” “goal,” “project,” “hope,” “intend,” “plan,” “believe,” “seek,” “estimate,” “continue,” “may,” “could,” “should,” “might,” "forecast," variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements other than statements of historical fact are forward-looking statements, including statements regarding overall trends, operating cost and revenue trends, liquidity and capital needs and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends and similar expressions.

We have based these forward-looking statements on our current expectations about future events. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Our actual results may differ materially from those suggested by these forward-looking statements for various reasons, including those identified in Part I, Item 1A of this Annual Report on Form 10-K under the heading “Risk Factors.” Given these risks and uncertainties, you are cautioned not to place undue reliance on forward-looking statements. The forward-looking statements included in this report are made only as of the date hereof. Except as required under federal securities laws and the rules and regulations of the Securities and Exchange Commission (SEC), we do not undertake, and specifically decline, any obligation to update any of these statements or to publicly announce the results of any revisions to any forward-looking statements after the distribution of this report, whether as a result of new information, future events, changes in assumptions or otherwise.

PART I


ITEM 1.	BUSINESS

Gilead Sciences, Inc. (Gilead, we, our 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 35 countries worldwide, with headquarters in Foster City, California. Gilead’s primary areas of focus include viral diseases, inflammatory and fibrotic diseases and oncology. We seek to add to our existing portfolio of products through our internal discovery and clinical development programs, product acquisition, in-licensing and strategic collaborations.

Our Principal Products

Our innovative medicines represent advancements by offering enhanced modes of delivery, more convenient treatment regimens, improved resistance profiles, reduced side effects and greater efficacy. Our focus on innovation has allowed us to deliver more than 24 marketed products across multiple therapeutic areas.

Our principal products and the approved indications in the United States are as follows:

HIV/AIDS


•	Biktarvy^® is an oral formulation dosed once a day for the treatment of HIV-1 infection in certain patients. Biktarvy is a single tablet regimen of a fixed-dose combination of our antiretroviral medications, bictegravir, emtricitabine and tenofovir alafenamide (TAF).

•

Descovy^® is an oral formulation indicated in combination with other antiretroviral agents for the treatment of HIV-1 infection in certain patients. Descovy is a fixed-dose combination of our antiretroviral medications, emtricitabine and TAF. Descovy is also approved by U.S. Food and Drug Administration (FDA) for a pre-exposure prophylaxis (PrEP) indication to reduce the risk of sexually acquired HIV-1 infection in certain at-risk patients.


•	Odefsey^® is an oral formulation dosed once a day for the treatment of HIV-1 infection in certain patients. Odefsey is a single tablet regimen of a fixed-dose combination of our antiretroviral medications, emtricitabine and TAF, and rilpivirine marketed by Janssen Sciences Ireland UC, one of the Janssen Pharmaceutical Companies of Johnson & Johnson (Janssen).


•	Genvoya^® is an oral formulation dosed once a day for the treatment of HIV-1 infection in certain patients. Genvoya is a single tablet regimen of a fixed-dose combination of our antiretroviral medicines, elvitegravir, cobicistat, emtricitabine and TAF.


•	Stribild^® is an oral formulation dosed once a day for the treatment of HIV-1 infection in certain patients. Stribild is a single tablet regimen of a fixed-dose combination of our antiretroviral medications, elvitegravir, cobicistat, tenofovir disoproxil fumarate (TDF) and emtricitabine.


•	Complera^®/Eviplera^® is an oral formulation dosed once a day for the treatment of HIV-1 infection in certain patients. The product, marketed in the United States as Complera and in Europe as Eviplera, is a single tablet regimen of a fixed-dose combination of our antiretroviral medications, TDF and emtricitabine, and Janssen’s rilpivirine hydrochloride.


•	Atripla^® is an oral formulation indicated as a complete regimen for the treatment of HIV-1 infection in certain patients. Atripla is a fixed-dose combination of our antiretroviral medications, TDF and emtricitabine, and Bristol-Myers Squibb Company (BMS)’s efavirenz.

•

Truvada^® is an oral formulation indicated in combination with other antiretroviral agents for the treatment of HIV-1 infection in certain patients. It is a fixed-dose combination of our antiretroviral medications, TDF and emtricitabine. Truvada is also approved by FDA for a PrEP indication, in combination with safer sex practices, to reduce the risk of sexually acquired HIV-1 infection in certain at-risk patients.

Liver Diseases

•

Vosevi^® is an oral formulation of a once-daily, single tablet regimen of sofosbuvir, velpatasvir and voxilaprevir for the re-treatment of chronic hepatitis C virus (HCV) infection in adults: (i) with genotype 1, 2, 3, 4, 5 or 6 previously treated with an NS5A inhibitor-containing regimen or (ii) with genotype 1a or 3 previously treated with a sofosbuvir-containing regimen without an NS5A inhibitor.


•	Epclusa^® is an oral formulation of a once-daily single tablet regimen of sofosbuvir and velpatasvir for the treatment of chronic HCV infection in adults with genotype 1, 2, 3, 4, 5 or 6: (i) without cirrhosis or with compensated cirrhosis or (ii) with decompensated cirrhosis for use in combination with ribavirin.


•	Harvoni^® is an oral formulation of a once-daily, single tablet regimen of ledipasvir and sofosbuvir for the treatment of chronic HCV infection in: (i) adults with genotype 1, 4, 5 or 6 without cirrhosis or with compensated cirrhosis, (ii) adults with genotype 1 infection with decompensated cirrhosis, in combination with ribavirin, (iii) adults with genotype 1 or 4

who are liver transplant recipients without cirrhosis or with compensated cirrhosis, in combination with ribavirin, or (iv) certain pediatric patients with genotype 1, 4, 5 or 6 without cirrhosis or with compensated cirrhosis.


•	Vemlidy^® is an oral formulation of TAF dosed once a day for the treatment of chronic hepatitis B virus (HBV) infection in adults with compensated liver disease.


•	Viread^® is an oral formulation of TDF dosed once a day for the treatment of chronic HBV infection in adults and certain pediatric patients.

Hematology/Oncology

•

Yescarta^® (axicabtagene ciloleucel) is a chimeric antigen receptor (CAR) T cell therapy for the treatment of adult patients with relapsed or refractory large B-cell lymphoma after two or more lines of systemic therapy, including diffuse large B-cell lymphoma (DLBCL) not otherwise specified, primary mediastinal large B-cell lymphoma, high-grade B-cell lymphoma and DLBCL arising from follicular lymphoma.

•

Zydelig^® (idelalisib) is an oral formulation of a kinase inhibitor for the treatment of patients with: (i) relapsed chronic lymphocytic leukemia (CLL), in combination with rituximab, for whom rituximab alone would be considered appropriate therapy due to other co-morbidities, (ii) relapsed follicular B-cell non-Hodgkin lymphoma (FL) in patients who have received at least two prior systemic therapies or (iii) relapsed small lymphocytic lymphoma who have received at least two prior systemic therapies.

Other


•	Letairis^® (ambrisentan) is an oral formulation of an endothelin receptor antagonist for the treatment of pulmonary arterial hypertension (PAH) (WHO Group I) (i) to improve exercise capacity and delay clinical worsening or (ii) in combination with tadalafil to reduce the risks of disease progression and hospitalization for worsening PAH, and to improve exercise ability.


•	Ranexa^® (ranolazine) is an oral formulation of an extended-release tablet of an antianginal for the treatment of chronic angina.


•	AmBisome^® (amphotericin B liposome for injection) is a proprietary liposomal formulation of amphotericin B, an antifungal agent, for the treatment of serious invasive fungal infections caused by various fungal species in adults.

For information about our product revenues, including the amount of revenue contributed by each of the products listed above for each of the last three fiscal years, see Note 2. Revenues of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Commercialization and Distribution

We have U.S. and international commercial sales operations, with marketing subsidiaries in more than 35 countries. Our products are marketed through our commercial teams and/or in conjunction with third-party distributors and corporate partners. Our commercial teams promote our products through direct field contact with physicians, hospitals, clinics and other healthcare providers. We generally grant our third-party distributors the exclusive right to promote our product in a territory for a specified period of time. Most of our agreements with these distributors provide for collaborative efforts between the distributor and Gilead in obtaining and maintaining regulatory approval for the product in the specified territory.

We sell and distribute most of our products in the United States exclusively through the wholesale channel. Our product sales to three large wholesalers, AmerisourceBergen Corporation, Cardinal Health, Inc. and McKesson Corporation, each accounted for more than 10% of total revenues for each of the years ended December 31, 2019, 2018 and 2017. On a combined basis, in 2019, these wholesalers accounted for approximately 87% of our product sales in the United States and approximately 64% of our total worldwide revenues. We sell and distribute our products in Europe and countries outside the United States where the product is approved, either through our commercial teams, third-party distributors or corporate partners.

Competition

We operate in a highly competitive environment. We face significant competition from global pharmaceutical and biotechnology companies, specialized pharmaceutical firms and generic drug manufacturers. Our products compete with other commercially available products based primarily on efficacy, safety, tolerability, acceptance by doctors, ease of patient compliance, ease of use, price, insurance and other reimbursement coverage, distribution and marketing. As our products mature, private insurers and government payers often reduce the amount they will reimburse patients, which increases pressure on us to reduce prices. Further, as new branded or generic products are introduced into major markets, our ability to maintain pricing and market share may be affected. For a description of our competitors, see Item 1A. Risk Factors “We face significant competition.”

Research and Development

Our research and development (R&D) philosophy and strategy are to develop best-in-class drugs that improve safety or efficacy for unmet medical needs. We intend to continue committing significant resources to internal R&D opportunities and external business development activity.

Our product development efforts are focused primarily in viral diseases, inflammatory and fibrotic diseases and oncology. We have research scientists engaged in the discovery and development of new molecules and technologies that we hope will lead to the approval of new medicines that will advance the current standard of care and address unmet medical needs.

The development of our product candidates is subject to various risks and uncertainties. These risks and uncertainties include our ability to enroll patients in clinical trials, the possibility of unfavorable results of our clinical trials, the need to modify or delay our clinical trials or to perform additional trials and the risk of failing to obtain regulatory approvals. As a result, our product candidates may never be successfully commercialized. Drug development is inherently risky and many product candidates fail during the drug development process.

In 2019, we continued to invest in and advance our R&D pipeline across our therapeutic areas. At the end of 2019, our R&D pipeline included 104 active clinical studies, of which 27 were Phase 3 clinical trials.

Below is a summary of our key product candidates and their corresponding current stages of development.

Product Candidates in Viral Diseases



Product Candidates		Description
Phase 2
GS-6207		GS-6207, a capsid inhibitor, is being evaluated for the treatment of HIV infection.
Selgantolimod		Selgantolimod, a TLR-8 agonist, is being evaluated for the treatment of chronic HBV infection.
Phase 1
Vesatolimod		Vesatolimod, a TLR-7 agonist, is being evaluated as a potential cure for HIV infection.
Elipovimab		Elipovimab, a broadly neutralizing antibody, is being evaluated as a potential cure for HIV infection.
GS-4224		GS-4224, a PD-L1 inhibitor, is being evaluated for the treatment of chronic HBV infection.

Product Candidates in Inflammatory and Fibrotic Diseases



Product Candidates		Description
Phase 3
Filgotinib		Filgotinib, a JAK1 inhibitor, is being evaluated for the treatment of (i) Crohn’s disease, (ii) ulcerative colitis and (iii) psoriatic arthritis.
Cilofexor		Cilofexor, a FXR agonist, is being evaluated for the treatment of primary sclerosing cholangitis.
GLPG-1690⁽²⁾		GLPG-1690, an autotaxin inhibitor, is being evaluated for the treatment of idiopathic pulmonary fibrosis.
Phase 2
Filgotinib		Filgotinib is being evaluated for the treatment of (i) ankylosing spondylitis and (ii) uveitis.
GS-4875		GS-4875, a TPL2 inhibitor, is being evaluated for the treatment of ulcerative colitis.
GLPG-1972⁽¹⁾		GLPG-1972, an ADAMTS-5 inhibitor, is being evaluated for the treatment of osteoarthritis.
Selonsertib		Selonsertib, an ASK-1 inhibitor, is being evaluated for the treatment of diabetic kidney disease.
Cilofexor, firsocostat and selonsertib combinations		Cilofexor, firsocostat (an ACC inhibitor) and selonsertib combinations are being evaluated for the treatment of nonalcoholic steatohepatitis (NASH).
GLPG-1690⁽²⁾		GLPG-1690 is being evaluated for the treatment of systemic sclerosis.
GLPG-1205⁽¹⁾		GLPG-1205, a GPR84 inhibitor, is being evaluated for the treatment of idiopathic pulmonary fibrosis.
Phase 1
GLPG-0555⁽¹⁾		GLPG-0555 is being evaluated for the treatment of inflammatory diseases.
GLPG-3312⁽¹⁾		GLPG-3312 is being evaluated for the treatment of inflammatory diseases.
GLPG-3970⁽¹⁾		GLPG-3970 is being evaluated for the treatment of inflammatory diseases.
GLPG-3667⁽¹⁾		GLPG-3667 is being evaluated for the treatment of inflammatory diseases.

Product Candidates in Oncology



Product Candidates		Description
Phase 3
Axicabtagene ciloleucel		Axicabtagene ciloleucel is being evaluated for the treatment of second line DLBCL.
Phase 2
Axicabtagene ciloleucel		Axicabtagene ciloleucel is being evaluated for the treatment of indolent non-Hodgkin lymphoma. Axicabtagene ciloleucel is also being evaluated for the treatment of (i) first line DLBCL and (ii) DLBCL in combination with either rituximab or lenalidomide.
KTE-X19		KTE-X19, a CAR T cell therapy, is being evaluated for the treatment of (i) adult and pediatric acute lymphoblastic leukemia and (ii) CLL.
Phase 1
Axicabtagene ciloleucel		Axicabtagene ciloleucel is being evaluated for the treatment of DLBCL in combination with utomilumab.
KITE-718		KITE-718, a MAGE A3/A6, is being evaluated for the treatment of solid tumors.
KITE-439		KITE-439, an HPV E7, is being evaluated for the treatment of solid tumors.
GS-1423		GS-1423, a bi-specific antibody, is being evaluated for the treatment of solid tumors.
GS-4224		GS-4224, an oral PD-L1 inhibitor, is being evaluated for the treatment of solid tumors.
AGEN1223⁽¹⁾		AGEN1223, a bi-specific mAb, is being evaluated for the treatment of multiple indications in oncology.
AGEN2373⁽¹⁾		AGEN2373, an anti-CD137 mAb, is being evaluated for the treatment of multiple indications in oncology.

______________________________________________________


(1)	Optionable partner program


(2)	Optioned partner program

In addition to our internal discovery and clinical development programs, we seek to add to our portfolio of products through product acquisition, in-licensing and strategic collaborations. In 2019, we completed 27 strategic partnerships, licensing deals and equity investments, which reflects our commitment to developing our pipeline across a range of diseases to address areas of significant unmet medical need and positioning ourselves for the long-term growth of our business.

Patents and Proprietary Rights

U.S. and European Patent Expiration

We have a number of U.S. and foreign patents, patent applications and rights to patents related to our compounds, products and technology, but we cannot be certain that issued patents will be enforceable or provide adequate protection or that pending patent applications will result in issued patents.

The following table shows the estimated expiration dates (including patent term extensions, supplementary protection certificates and/or pediatric exclusivity where granted) in the United States and the European Union for the primary (typically compound) patents for our Phase 3 product candidates. For our product candidates that are fixed-dose combinations of single tablet regimens, the estimated patent expiration date provided corresponds to the latest expiring compound patent for one of the active ingredients in the single tablet regimen.



Phase 3 Product Candidates	Patent Expiration
	U.S.	E.U.
Product Candidates in Inflammatory and Fibrotic Diseases:
Filgotinib for the treatment of rheumatoid arthritis, Crohn’s disease, ulcerative colitis and psoriatic arthritis	2030	2030
GLPG-1690 for the treatment of idiopathic pulmonary fibrosis	2034	2034
Cilofexor for the treatment of primary sclerosing cholangitis	2032	2032
Product Candidate in Oncology:
Axicabtagene ciloleucel for the treatment of second line DLBCL	2027	*

__________________________________________


*	The composition of matter patent has expired in the European Union. In the European Union and the United States, patent applications are pending relating to proprietary manufacturing processes of Kite, a Gilead company.

The following table shows the actual or estimated expiration dates (including patent term extensions, supplementary protection certificates and/or pediatric exclusivity where granted) in the United States and the European Union for the primary (typically compound) patents for our principal products. For our products that are fixed-dose combinations or single tablet regimens,

the estimated patent expiration dates provided correspond to the latest expiring compound patent for one of the active ingredients in the single tablet regimen.



Products	Patent Expiration
	U.S.		E.U.
Letairis	2018	⁽¹⁾	2020
Ranexa	2019	⁽²⁾	2023
Atripla	2021	⁽³⁾	2017
Truvada	2021	⁽³⁾	2017	⁽⁴⁾
Descovy	2022	⁽⁵⁾	2026
Vemlidy	2022	⁽⁵⁾	2026
Complera/Eviplera	2025		2026
Zydelig	2025	⁽⁶⁾	2025	⁽⁶⁾
Odefsey	2025		2026
Yescarta	2027	⁽⁶⁾	-	⁽⁷⁾
Stribild	2029		2028
Genvoya	2029		2028
Harvoni	2030		2030	⁽⁶⁾
Epclusa	2032		2032
Biktarvy	2033		2033
Vosevi	2034		2033
_________________________________________
These estimated expiration dates do not include any potential additional exclusivity (e.g., patent term extensions, supplementary protection certificates or pediatric exclusivity) that has not yet been granted.

__________________________________________


(1)	In 2017, Gilead and Watson Laboratories, Inc. reached an agreement to settle a patent litigation matter related to Letairis.


(2)	In 2013, Gilead and Lupin Limited reached an agreement to settle a patent litigation matter related to Ranexa.


(3)	In 2014, Gilead and Teva Pharmaceuticals reached an agreement to settle the patent litigation concerning patents that protect emtricitabine in our Truvada and Atripla products. For additional information, see Item 1A. Risk Factors “We face significant competition.”


(4)	Supplementary protection certificates (SPCs) have been granted in several European countries. The validity of these SPCs has been challenged by several generic manufacturers, many of whom launched their competing products in 2017.


(5)	An application for patent term extension was filed in the United States that, if granted, would extend the U.S. expiration date to at least 2025.


(6)	Applications for patent term extensions are pending in the United States and/or SPCs are pending in one or more countries in the European Union for these products.


(7)	The composition of matter patent has expired in the European Union. In the European Union and the United States, patent applications are pending relating to proprietary manufacturing processes of Kite.

Patent Protection and Certain Challenges

Patents and other proprietary rights are very important to our business. If we have a properly drafted and enforceable patent, it can be more difficult for our competitors to use our technology to create competitive products and more difficult for our competitors to obtain a patent that prevents us from using technology we create. As part of our business strategy, we actively seek patent protection both in the United States and internationally and file additional patent applications, when appropriate, to cover improvements in our compounds, products and technology.

Patents covering certain of the active pharmaceutical ingredients (API) of most of our HIV products as well as Yescarta are held by third parties. We acquired exclusive rights to these patents in the agreements we have with these parties.

We may obtain patents for certain products many years before marketing approval is obtained. Because patents have a limited life that may begin to run prior to the commercial sale of the related product, the commercial value of the patent may be limited. However, we may be able to apply for patent term extensions or supplementary protection certificates in some countries. For example, extensions for the patents or supplementary protection certificates on many of our products have been granted in the United States and in a number of European countries, compensating in part for delays in obtaining marketing approval. Similar patent term extensions may be available for other products we are developing, but we cannot be certain we will obtain them in some countries.

It is also important that we do not infringe the valid patents of third parties. If we infringe the valid patents of third parties, our reputation may be harmed and we may be required to pay significant monetary damages, we may be prevented from commercializing products or we may be required to obtain licenses from these third parties. We may not be able to obtain alternative technologies or any required license on reasonable terms or at all. If we fail to obtain these licenses or alternative technologies, we may be unable to develop or commercialize some or all of our products. For example, we are aware of patents and patent

applications owned by other parties that such parties may claim to cover the use of sofosbuvir, axicabtagene ciloleucel and bictegravir.

Because patent applications are confidential for a period of time until a patent is issued, we may not know if our competitors have filed patent applications for technology covered by our pending applications or if we were the first to invent or first to file an application directed toward the technology that is the subject of our patent applications. Competitors may have filed patent applications or received patents and may obtain additional patents and proprietary rights that block or compete with our products. In addition, if competitors file patent applications covering our technology, we may have to participate in interference/derivation proceedings or litigation to determine the right to a patent. Litigation and interference/derivation proceedings are unpredictable and expensive, such that, even if we are ultimately successful, our results of operations may be adversely affected by such events.

Patents relating to pharmaceutical, biopharmaceutical and biotechnology products, compounds and processes such as those that cover our existing compounds, products and processes and those that we will likely file in the future, do not always provide complete or adequate protection. Future litigation or other proceedings regarding the enforcement or validity of our existing patents or any future patents could result in the invalidation of our patents or substantially reduce their protection. From time to time, certain individuals or entities may challenge our patents.

Our pending patent applications and the patent applications filed by our collaborative partners may not result in the issuance of any patents or may result in patents that do not provide adequate protection. As a result, we may not be able to prevent third parties from developing compounds or products that are closely related to those which we have developed or are developing. In addition, certain countries do not provide effective enforcement of our patents, and third-party manufacturers may be able to sell generic versions of our products in those countries.

For a description of our significant pending legal proceedings, see Note 14. Commitments and Contingencies - Legal Proceedings of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Trade Secrets

We also rely on unpatented trade secrets and improvements, unpatented internal know-how and technological innovation. For example, a great deal of our liposomal manufacturing expertise, which is a key component of our liposomal technology, is not covered by patents but is instead protected as a trade secret. We protect these rights mainly through confidentiality agreements with our corporate partners, employees, consultants and vendors. These agreements provide that all confidential information developed or made known to an individual during the course of their relationship with us will be kept confidential and will not be used or disclosed to third parties except in specified circumstances. In the case of employees, the agreements provide that all inventions made by an individual while employed by us will be our exclusive property. We cannot be certain that these parties will comply with these confidentiality agreements, that we have adequate remedies for any breach or that our trade secrets will not otherwise become known or be independently discovered by our competitors. Under some of our R&D agreements, inventions become jointly owned by us and our corporate partners and in other cases become the exclusive property of one party. In certain circumstances, it can be difficult to determine who owns a particular invention and disputes could arise regarding those inventions. If our trade secrets or confidential information become known or independently discovered by competitors, or if we enter into disputes over ownership of inventions, our business and results of operations could be adversely affected.

Manufacturing and Raw Materials

Our products are manufactured either at our own facilities or by third-party contract manufacturers. We depend on third parties to perform manufacturing activities for the majority of our API and drug products. For most of our products, including our HIV and HCV products, we use multiple third-party contract manufacturers so that we have primary and back-up suppliers and manufacturing sites. For Yescarta, we have established clinical and commercial manufacturing facilities for cell processing activities. For our future products, we continue to develop additional manufacturing capabilities and establish additional third-party suppliers to manufacture sufficient quantities of our product candidates to undertake clinical trials and to manufacture sufficient quantities of any product that is approved for commercial sale.

Our Manufacturing Facilities

We own or lease manufacturing facilities to manufacture and distribute certain products and API for clinical and/or commercial uses. These facilities are located in Foster City, San Dimas, La Verne, Oceanside and El Segundo, California; Dublin and Cork, Ireland; Hoofddorp, Netherlands; and Edmonton, Canada.


•	Foster City, California: We conduct process chemistry research and formulation development activities, manufacture API and drug product for our clinical trials and oversee our third-party contract manufacturers.


•	San Dimas and La Verne, California: We manufacture AmBisome and also package and label the majority of our commercial products for distribution to the Americas and Pacific Rim.


•	Oceanside, California: We utilize the facility for clinical manufacturing and process development of our biologics candidates.


•	El Segundo, California: We utilize the facility for clinical and commercial manufacturing and processing of Yescarta.


•	Cork and Dublin, Ireland: We utilize the Cork facility for commercial manufacturing, packaging and labeling of our products. We also perform quality control testing, labeling, packaging and final release of many of our products for distribution to the European Union and other international markets. The Dublin facility is also responsible for distribution activities for our products.


•	Edmonton, Canada: We conduct process chemistry research and scale-up activities for our clinical development candidates, manufacture API for both investigational and commercial products and conduct chemical development activities to improve existing commercial manufacturing processes.


•	Hoofddorp, Netherlands: We utilize the facility for commercial manufacturing and processing of Yescarta.

Third-Party Manufacturers

We believe the technology we use to manufacture our products is proprietary. For products manufactured by our third-party contract manufacturers, we have disclosed all necessary aspects of this technology to enable them to manufacture the products for us. We have agreements with these third-party manufacturers that are intended to restrict them from using or revealing this technology, but we cannot be certain that these third-party manufacturers will comply with these restrictions.

For more information about our third-party manufacturers, see Item 1A. Risk Factors “Manufacturing problems, including at our third-party manufacturers and corporate partners, could cause inventory shortages and delay product shipments and regulatory approvals, which may adversely affect our results of operations.”

Regulation of Manufacturing Process

The manufacturing process for pharmaceutical products is highly regulated and regulators may shut down manufacturing facilities that they believe do not comply with regulations. We, our third-party manufacturers and our corporate partners are subject to current Good Manufacturing Practices, which are extensive regulations governing manufacturing processes, stability testing, record keeping and quality standards as defined by FDA and the European Medicines Agency. Similar regulations are in effect in other jurisdictions. Our manufacturing operations are subject to routine inspections by regulatory agencies.

For Yescarta, we are required by FDA to comply with the Risk Evaluation and Mitigation Strategy program, which includes educating and certifying medical personnel regarding the therapy procedures and the potential side effect profile of our therapy, such as the potential adverse side effects related to cytokine release syndrome and neurologic toxicities. Additionally, we are required to maintain a complex chain of identity and custody with respect to patient material as such material moves to the manufacturing facilities, through the manufacturing process, and back to the patient.

Access to Raw Materials

We need access to certain raw materials to conduct our clinical trials and manufacture our products. These raw materials are generally available from multiple sources, purchased worldwide and normally available in quantities adequate to meet the needs of our business. We attempt to manage the risks associated with our supply chain by inventory management, relationship management and evaluation of alternative sources when feasible. For more information, see Item 1A. Risk Factors “We may not be able to obtain materials or supplies necessary to conduct clinical trials or to manufacture and sell our products, which could limit our ability to generate revenues.”

Seasonality of Operations and Backlog

Our worldwide product sales do not reflect any significant degree of seasonality in end-user demand. In the United States, fluctuations in wholesaler inventory levels have impacted our product sales. We have observed that strong wholesaler and sub-wholesaler purchases of our products in the fourth quarter have resulted in inventory draw-down by wholesalers and sub-wholesalers in the subsequent first quarter. Several other factors, including government budgets, annual grant cycles for federal and state funds and other buying patterns, have impacted the product sales recorded in a particular quarter. For more information, see Item 1A. Risk Factors “Our inability to accurately predict demand for our products and fluctuations in purchasing patterns or wholesaler inventories makes it difficult for us to accurately forecast sales and may cause our forecasted revenues and earnings to fluctuate, which could adversely affect our financial results and stock price.”

For the most part, we operate in markets characterized by short lead times and the absence of significant backlogs. We do not believe that backlog information is material to our business as a whole.

Government Regulation

Our operations and activities are subject to extensive regulation by numerous government authorities in the United States, the European Union and other countries, including laws and regulations governing the testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion of our products. As a result of these regulations, product

development and product approval processes are very expensive and time consuming. The regulatory requirements applicable to drug development and approval are subject to change. Any legal and regulatory changes may impact our operations in the future.

A country’s regulatory agency, such as FDA in the United States and European Commission for the European Union, as well as the national authorities of the European Union Member States, must approve a drug before it can be sold in the respective country or countries. The general process for drug approval in the United States is summarized below. Many other countries, including countries in the European Union, have similar regulatory structures.

Preclinical Testing

Before we can test a drug candidate in humans, we must study the drug in laboratory experiments and in animals to generate data to support the drug candidate’s potential benefits and safety. We submit this data to FDA in an investigational new drug (IND) application seeking its approval to test the compound in humans.

Clinical Trials

If FDA accepts the IND, the drug candidate can then be studied in human clinical trials to determine if the drug candidate is safe and effective. These clinical trials involve three separate phases that often overlap, can take many years and are very expensive. These three phases, which are subject to considerable regulation, are as follows:


•	Phase 1. The drug candidate is given to a small number of healthy human control subjects or patients suffering from the indicated disease, to test for safety, dose tolerance, pharmacokinetics, metabolism, distribution and excretion.

•

Phase 2. The drug candidate is given to a limited patient population to determine the effect of the drug candidate in treating the disease, the best dose of the drug candidate, and the possible side effects and safety risks of the drug candidate. It is not uncommon for a drug candidate that appears promising in Phase 1 clinical trials to fail in the more rigorous and extensive Phase 2 clinical trials.

•

Phase 3. If a drug candidate appears to be effective and safe in Phase 2 clinical trials, Phase 3 clinical trials are commenced to confirm those results. Phase 3 clinical trials are conducted over a longer term, involve a significantly larger population, are conducted at numerous sites in different geographic regions and are carefully designed to provide reliable and conclusive data regarding the safety and benefits of a drug candidate. It is not uncommon for a drug candidate that appears promising in Phase 2 clinical trials to fail in the more rigorous and extensive Phase 3 clinical trials.

FDA Approval Process

When we believe that the data from our clinical trials show an acceptable benefit-risk profile, we submit the appropriate filing, usually in the form of a New Drug Application (NDA) or supplemental NDA, with FDA seeking approval to sell the drug candidate for a particular use. At FDA’s discretion, FDA may hold a public hearing where an independent advisory committee of expert advisors asks additional questions and makes recommendations regarding the drug candidate. This committee makes a recommendation to FDA that is not binding but is generally followed by FDA. If FDA agrees that the compound has met the required level of safety and efficacy for a particular use, it will allow us to sell the drug candidate in the United States for that use. It is not unusual, however, for FDA to reject an application because it believes that the drug candidate is not safe enough or efficacious enough or because it does not believe that the data submitted is reliable or conclusive.

At any point in this process, the development of a drug candidate can be stopped for a number of reasons including safety concerns and lack of treatment benefit. We cannot be certain that any clinical trials that we are currently conducting or any that we conduct in the future will be completed successfully or within any specified time period. We may choose, or FDA may require us, to delay or suspend our clinical trials at any time if it appears that patients are being exposed to an unacceptable health risk or if the drug candidate does not appear to have sufficient treatment benefit.

FDA may also require Phase 4 non-registrational studies to explore scientific questions to further characterize safety and efficacy during commercial use of our drug. FDA may also require us to provide additional data or information, improve our manufacturing processes, procedures or facilities or may require extensive surveillance to monitor the safety or benefits of our product candidates if it determines that our filing does not contain adequate evidence of the safety and benefits of the drug. In addition, even if FDA approves a drug, it could limit the uses of the drug. FDA can withdraw approvals if it does not believe that we are complying with regulatory standards or if concerns about the safety or efficacy are uncovered or occur after approval.

In addition to obtaining FDA approval for each drug, we obtain FDA approval of the manufacturing facilities for any drug we sell, including those of companies who manufacture our drugs for us. All of these facilities are subject to periodic inspections by FDA. FDA must also approve foreign establishments that manufacture products to be sold in the United States and these facilities are subject to periodic regulatory inspection. Our manufacturing facilities located in California also must be licensed by the State of California in compliance with local regulatory requirements. Our manufacturing facilities in Canada, Ireland and Netherlands also must obtain local licenses and permits in compliance with local regulatory requirements.

Drugs that treat serious or life-threatening diseases and conditions that are not adequately addressed by existing drugs, and for which the development program is designed to address the unmet medical need, may be designated as fast track candidates by

FDA and may be eligible for priority review. Drugs for the treatment of HIV infection that are designated for use under the U.S. President’s Emergency Plan for AIDS Relief may also qualify for an expedited review.

European Union Regulatory System and Approval Process

In the European Union (EU), our products are subject to a variety of EU and EU Member State regulations governing clinical trials, commercial sales and distribution. We are required to obtain a marketing authorization in the EU before we can market our medicinal products on the relevant market. The conduct of clinical trials in the EU is governed by, among others, Directive 2001/20/EC and the EU Good Clinical Practice rules. These impose legal and regulatory obligations that are similar to those provided in applicable U.S. laws. The conduct of clinical trials in the EU must be approved by the competent authorities of each EU Member States in which the clinical trials take place, and a positive opinion must be obtained from the relevant Ethics Committee in the relevant Member State. In 2014, the EU legislator adopted Regulation (EU) No 536/2014 to replace Directive 2001/20/EC and to introduce a coordinated procedure for authorization of clinical trials. This Regulation is expected to apply in 2021 or 2022.

Marketing authorization holders, manufacturers, importers, wholesalers and distributors of medicinal products placed on the market in the EU are required to comply with a number of regulatory requirements including pharmacovigilance, Good Manufacturing Practices compliance and the requirement to obtain manufacturing, import and/or distribution licenses issued by the competent authorities of the EU Member States. Failure to comply with these requirements may lead to the imposition of civil, criminal or administrative sanctions, including suspension of marketing or manufacturing authorizations.

Pricing and Reimbursement

Successful commercialization of our products depends, in part, on the availability of governmental and third-party payer reimbursement for the cost of such products and related treatments in the markets where we sell our products. Government health authorities, private health insurers and other organizations generally provide reimbursement. In the United States, the European Union and other significant or potentially significant markets for our products and product candidates, government authorities and third-party payers are increasingly attempting to limit or regulate the price of medical products and services. A significant portion of our sales of the majority of our products are subject to substantial discounts from their list prices. As a result, the price increases we implement from time to time on certain products may have a limited effect on our product sales in certain markets. In addition, standard reimbursement structures may not adequately reimburse for innovative therapies.

As our products mature, private insurers and government payers often reduce the amount they will reimburse providers, which increases pressure on us to reduce prices. Further, as new branded or generic products are introduced into major markets, our ability to maintain pricing and market share may be affected.

For more information, see Item 1A. Risk Factors “Our existing products are subject to reimbursement from government agencies and other third parties, and we may be required to provide rebates and other discounts on our products, which may result in an adjustment to our product revenues. Pharmaceutical pricing and reimbursement pressures may adversely affect our profitability and our results of operations” and “Our inability to accurately predict demand for our products and fluctuations in purchasing patterns or wholesaler inventories makes it difficult for us to accurately forecast sales and may cause our forecasted revenues and earnings to fluctuate, which could adversely affect our financial results and stock price.”

Patient Assistance Programs

Recently, there has been enhanced scrutiny of company-sponsored patient assistance programs, including co-pay assistance programs and manufacturer donations to third-party charities that provide such assistance. There has also been enhanced scrutiny by governments on reimbursement support offerings, clinical education programs and promotional speaker programs. If we, or our agents and vendors, are deemed to have failed to comply with laws, regulations or government guidance in any of these areas, we could be subject to criminal and civil sanctions. Any similar violations by our competitors could also negatively impact our industry reputation and increase scrutiny over our business and our products.

Health Care Fraud and Abuse Laws; Anti-Bribery Laws

We are subject to various U.S. federal and state laws pertaining to health care “fraud and abuse,” including anti-kickback laws and false claim laws. Anti-kickback laws make it illegal for a prescription drug manufacturer to solicit, offer, receive or pay any remuneration in exchange for, or to induce, the referral of business, including the purchase or prescription of a particular drug. Due to the breadth of the statutory provisions and the attention being given to them by law enforcement authorities, it is possible that certain of our practices may be challenged under anti-kickback or similar laws. False claims laws generally prohibit anyone from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment by federal and certain state payers (including Medicare and Medicaid), or knowingly making, using or causing to be made or used, a false record or statement material to a false or fraudulent claim. Our sales, marketing, patient support and medical activities may be subject to scrutiny under these laws. Similarly, in Europe, interactions between pharmaceutical companies and physicians are subject to strict laws, regulations, industry self‑regulation codes of conduct and physicians’ codes of professional conduct, as applicable, including the EU Member States anti-corruption laws and the UK Bribery Act 2010.

In addition, the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws generally prohibit companies and their intermediaries from making improper payments for the purpose of obtaining or retaining business. Our policies mandate compliance with these anti-bribery laws. We operate in parts of the world that have experienced governmental corruption to some degree. In certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices or may require us to interact with doctors and hospitals, some of which may be state controlled, in a manner that is different than local custom.

Despite our training and compliance program, our internal control policies and procedures may not protect us from reckless or criminal acts committed by our employees or agents. Violations of fraud and abuse laws or anti-bribery laws may be punishable by criminal and/or civil sanctions, including fines and civil monetary penalties, as well as the possibility of exclusion from federal health care programs (including Medicare and Medicaid). Violations can also lead to the imposition of a Corporate Integrity Agreement or similar government oversight program.

U.S. Healthcare Reform

The U.S. federal and state governments continue to propose and pass legislation designed to regulate the healthcare industry, including legislation that seeks to indirectly or directly regulate pharmaceutical drug pricing.

For more information, see Item 1A. Risk Factors “Our results of operations may be adversely affected by current and potential future healthcare legislative and regulatory actions” and “Laws and regulations applicable to the health care industry could impose new obligations on us, require us to change our business practices and restrict our operations in the future.”

Employees

As of January 31, 2020, we had approximately 11,800 employees. We believe we have good relations with our employees.

Environment

We are subject to a number of laws and regulations that require compliance with federal, state, and local regulations for the protection of the environment. The regulatory landscape continues to evolve, and we anticipate additional regulations in the future. Laws and regulations are implemented and under consideration to mitigate the effects of climate change mainly caused by greenhouse gas emissions. Our business is not energy intensive. Therefore, we do not anticipate being subject to a cap and trade system or other mitigation measure that would materially impact our capital expenditures, operations or competitive position.

Other Information

We are subject to the information requirements of the Securities Exchange Act of 1934 (Exchange Act). Therefore, we file periodic reports, proxy and information statements and other information with the SEC. The SEC maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

The mailing address of our headquarters is 333 Lakeside Drive, Foster City, California 94404, and our telephone number at that location is 650-574-3000. Our website is www.gilead.com. Through a link on the “Investors” page of our website (under “SEC Filings” section), we make available the following filings free of charge as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: our Annual Reports on Form 10-K; Quarterly Reports on Form 10-Q; Current Reports on Form 8-K; and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act.


ITEM 1A.	RISK FACTORS

In evaluating our business, you should carefully consider the following risks in addition to the other information in this Annual Report on Form 10-K. A manifestation of any of the following risks could materially and adversely affect our business, results of operations and financial condition. We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. It is not possible to predict or identify all such factors and, therefore, you should not consider the following risks to be a complete statement of all the potential risks or uncertainties that we face.

A substantial portion of our revenues is derived from sales of our HIV products. If we are unable to increase or maintain our HIV sales, then our results of operations may be adversely affected.

We receive a substantial portion of our revenue from sales of our products for the treatment and prevention of HIV infection. During the year ended December 31, 2019, sales of our HIV products accounted for approximately 74% of our total product sales, and our HIV products account for a higher percentage of our total product sales in 2019 than in 2018. Most of our HIV products contain tenofovir alafenamide (TAF), tenofovir disoproxil fumarate (TDF) and/or emtricitabine (FTC), which belong to the nucleoside class of antiviral therapeutics. If the treatment paradigm for HIV changes, causing nucleoside-based therapeutics to fall out of favor, or if we are unable to maintain or increase our HIV product sales, our results of operations would likely suffer and we would likely need to scale back our operations, including our future drug development and spending on research and development (R&D) efforts.

In addition, future sales of our HIV products depend, in part, on the extent of reimbursement of our products by private and public payers. We may continue to experience global pricing pressure that could result in larger discounts or rebates on our products or delayed reimbursement, which negatively impacts our product sales and results of operations. Also, private and public payers can choose to exclude our products from their formulary coverage lists or limit the types of patients for whom coverage will be provided, which would negatively impact the demand for, and revenues of, our products. Any change in the formulary coverage, reimbursement levels or discounts or rebates offered on our products to payers may impact our anticipated revenues. If we are unable to achieve our forecasted HIV sales, our stock price could be adversely impacted.

We may be unable to sustain or increase sales of our HIV products for any number of reasons including, but not limited to, the reasons discussed above and the following:

•

As our products are used over a longer period of time in many patients and in combination with other products, and additional studies are conducted, new issues with respect to safety, resistance and interactions with other drugs may arise, which could cause us to provide additional warnings or contraindications on our labels, narrow our approved indications or halt sales of a product, each of which could reduce our revenues.


•	As our products mature, private insurers and government payers often reduce the amount they will reimburse patients for these products, which increases pressure on us to reduce prices.


•	If physicians do not see the benefit of our HIV products, the sales of our HIV products will be limited.


•	As new branded or generic products are introduced into major markets, our ability to maintain pricing and market share may be affected.

If we fail to develop and commercialize new products or expand the indications for existing products, our prospects for future revenues and our results of operations may be adversely affected.

The success of our business depends on our ability to introduce new products as well as expand the indications for our existing products to address areas of unmet medical need. The launch of commercially successful products is necessary to cover our substantial R&D expenses and to offset revenue losses when our existing products lose market share due to various factors such as competition and loss of patent exclusivity, as well as to provide for the growth of our business. There are many difficulties and uncertainties inherent in drug development and the introduction of new products. The product development cycle is characterized by significant investments of resources, long lead times and unpredictable outcomes due to the nature of developing medicines for human use. We expend significant time and resources on our product pipeline without any assurance that we will recoup our investments or that our efforts will be commercially successful. A high rate of failure is inherent in the discovery and development of new products, and failure can occur at any point in the process, including late in the process after substantial investment. For example, see “We face risks in our clinical trials, including the potential for unfavorable results, delays in anticipated timelines and disruption, which may adversely affect our prospects for future revenue growth and our results of operations.” We cannot state with certainty when or whether any of our product candidates under development will be approved or launched; whether we will be able to develop, license or acquire additional product candidates or products; or whether any products, once launched, will be commercially successful. Failure to launch commercially successful new products or new indications for existing products could have a material adverse effect on our future revenues, results of operations and long-term success.

Our inability to accurately predict demand for our products and fluctuations in purchasing patterns or wholesaler inventories makes it difficult for us to accurately forecast sales and may cause our forecasted revenues and earnings to fluctuate, which could adversely affect our financial results and stock price.

We may be unable to accurately predict demand for our products, including the uptake of new products, as demand depends on a number of factors. For example, the non-retail sector in the United States, which includes government institutions, including state AIDS Drug Assistance Programs (ADAPs), the U.S. Department of Veterans Affairs, correctional facilities and large health maintenance organizations, tends to be less consistent in terms of buying patterns and often causes quarter-over-quarter fluctuations that do not necessarily mirror patient demand for our products. Federal and state budget pressures, as well as the annual grant cycles for federal and state funds, may cause purchasing patterns to not reflect patient demand for our products. We expect to continue to experience fluctuations in the purchasing patterns of our non-retail customers, which may result in fluctuations in our product sales, revenues and earnings in the future. In light of the budget crises faced by many European countries, we have observed variations in purchasing patterns induced by cost containment measures in Europe. We believe these measures have caused some government agencies and other purchasers to reduce inventory of our products in the distribution channels, which has decreased our revenues and caused fluctuations in our product sales and earnings. We may continue to see this trend in the future.

We sell and distribute most of our products in the United States exclusively through the wholesale channel. During the year ended December 31, 2019, approximately 87% of our product sales in the United States were to three wholesalers, AmerisourceBergen Corporation, Cardinal Health, Inc. and McKesson Corporation. The U.S. wholesalers with whom we have entered into inventory management agreements make estimates to determine end user demand and may not be completely effective in matching their inventory levels to actual end user demand. As a result, changes in inventory levels held by those wholesalers can cause our operating results to fluctuate unexpectedly if our sales to these wholesalers do not match end user demand. In addition, inventory is held at retail pharmacies and other non-wholesaler locations with whom we have no inventory management agreements and no control over buying patterns. Adverse changes in economic conditions, increased competition or other factors may cause retail pharmacies to reduce their inventories of our products, which would reduce their orders from wholesalers and, consequently, the wholesalers’ orders from us, even if end user demand has not changed. In addition, we have observed that strong wholesaler and sub-wholesaler purchases of our products in the fourth quarter typically results in inventory draw-down by wholesalers and sub-wholesalers in the subsequent first quarter. As inventory in the distribution channel fluctuates from quarter to quarter, we may continue to see fluctuations in our earnings and a mismatch between prescription demand for our products and our revenues.

We face significant competition.

We face significant competition from global pharmaceutical and biotechnology companies, specialized pharmaceutical firms and generic drug manufacturers. Our products compete with other available products based primarily on efficacy, safety, tolerability, acceptance by doctors, ease of patient compliance, ease of use, price, insurance and other reimbursement coverage, distribution and marketing.

Our TAF-containing HIV products compete primarily with products from ViiV Healthcare Company (ViiV). We also face competition from generic HIV products. Generic versions of efavirenz, a component of Atripla, are available in the United States, Canada and Europe. We have observed some pricing pressure related to the efavirenz component of our Atripla sales. TDF, one of the active pharmaceutical ingredients in Truvada, Atripla, Complera/Eviplera and Stribild, faces generic competition in the European Union, the United States and certain other countries. In addition, because FTC, the other active pharmaceutical ingredient of Truvada, faces generic competition in the European Union, Truvada also faces generic competition in the European Union and certain other countries outside of the United States. Pursuant to a settlement agreement relating to patents that protect Truvada and Atripla, Teva Pharmaceuticals is permitted to launch generic fixed-dose combinations of FTC and TDF and generic fixed-dose combinations of FTC, TDF and efavirenz in the United States on September 30, 2020.

Our hepatitis C virus (HCV) products compete primarily with products marketed by AbbVie Inc. and Merck & Co., Inc.

Our hepatitis B virus (HBV) products face competition from existing therapies for treating patients with HBV as well as generic versions of TDF. Our HBV products also compete with products marketed by Bristol-Myers Squibb Company and Novartis Pharmaceuticals Corporation (Novartis).

Yescarta competes with a CAR T cell therapy marketed by Novartis and a non-CAR T product marketed by Roche and is expected to compete with products from other companies developing advanced T cell therapies. Yescarta and other commercial products also face competition from certain clinical trials that are enrolling CAR T eligible patients.

In addition, a number of companies are pursuing the development of technologies which are competitive with our existing products or research programs. These competing companies include specialized pharmaceutical firms and large pharmaceutical companies acting either independently or together with other pharmaceutical companies. Furthermore, academic institutions, government agencies and other public and private organizations conducting research may seek patent protection and may establish collaborative arrangements for competitive products or programs. If any of these competitors gain market share as a result of new technologies, commercialization strategies or otherwise, it could adversely affect our results of operations and stock price.

We may be required to pay significant damages and royalty payments as a result of ongoing litigation related to Yescarta and Biktarvy.

Adverse outcomes in ongoing litigation related to our Yescarta and Biktarvy products could require us to pay significant monetary damages and royalty payments for past and future sales. We cannot predict the ultimate outcome of these litigation matters, but the timing and magnitude of any such payments could have a material adverse impact on our results of operations, financial condition and stock price.

In October 2017, Juno Therapeutics, Inc. and Sloan Kettering Cancer Center (collectively, Juno) filed a lawsuit against us in the U.S. District Court for the Central District of California alleging that the commercialization of axicabtagene ciloleucel, sold commercially as Yescarta, infringes on U.S. Patent No. 7,446,190 (the ‘190 patent). A jury trial was held on the ‘190 patent, and in December 2019, the jury found that the asserted claims of the ‘190 patent were valid, and that we willfully infringed the asserted claims of the ‘190 patent. The jury also awarded Juno damages in amounts of $585 million in an up-front payment and a 27.6% running royalty from October 2017 through the date of the jury’s verdict. The parties filed post-trial motions in January 2020 and will file further briefings during the first quarter of 2020, and we expect the judge to rule on these matters later in 2020. Once the district court has issued these rulings and has entered judgment, the case may be appealed to the U.S. Court of Appeals for the Federal Circuit. Although we cannot predict with certainty the ultimate outcome of this litigation, we believe the jury’s verdict to be in error, and we also believe that errors were made by the court with respect to certain rulings before and during trial.

If the jury’s verdict is not upheld on appeal, the loss will be zero, If the jury’s verdict is upheld in its entirety on appeal, we estimate the upper end of the range of possible loss through December 31, 2019 to be approximately $1.6 billion, which consists of (i) the $585 million up-front payment determined by the jury, (ii) approximately $200 million, which represents estimated royalties on our adjusted revenues from Yescarta from October 18, 2017 through December 31, 2019, and (iii) enhanced damages requested by Juno of up to two times the sum of (i) and (ii) above as a result of the jury’s finding of willfulness. This sum excludes costs and pre-judgment interest. Supplemental damages consisting of royalties on sales of Yescarta after December 13, 2019 through the date of judgment could be subject to the 27.6% royalty in the jury’s verdict, the 33.1% prospective royalty proposed by Juno, or to enhancement. Any post-judgment sales of Yescarta would be subject to prospective royalties, which we have estimated could be up to 33.1%, and which would be payable on adjusted Yescarta revenues after the judgment in 2020 until the expiry of the ‘190 patent in August 2024. We expect the judge to rule on the amount of prospective royalties and any enhanced damages in the course of deciding the post-trial motions. The court’s determination of prospective royalties and 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 to Juno could be significant, and such payment could have a material adverse impact on our results of operations, financial condition and stock price.

In February 2018, ViiV filed a lawsuit against us in the U.S. District Court of Delaware, alleging that the commercialization of bictegravir, sold commercially in combination with TAF and FTC as Biktarvy, infringes on ViiV’s U.S. Patent No. 8,129,385 (the ‘385 patent), covering ViiV’s dolutegravir. Bictegravir is structurally different from dolutegravir, and we believe that bictegravir does not infringe the claims of the ‘385 patent. To the extent that ViiV’s patent claims are interpreted to cover bictegravir, we believe those claims are invalid. The court has set a trial date of September 2020 for this lawsuit. For more information about this litigation, as well as related litigation in countries outside of the United States, see Note 14. Commitments and Contingencies of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. Although we cannot predict with certainty the ultimate outcome of this litigation, an adverse judgment could result in significant monetary damages and royalty payments on past and future sales, which could have a material impact on our results of operations, financial condition and stock price.

Our results of operations may be adversely affected by current and potential future healthcare legislative and regulatory actions.

Legislative and regulatory actions affecting government prescription drug procurement and reimbursement programs occur relatively frequently. In the United States, the Affordable Care Act (ACA) was enacted in 2010 to expand healthcare coverage. Since then, numerous efforts have been made to repeal, amend or administratively limit the ACA in whole or in part. For example, in December 2019, the U.S. Court of Appeals for the Fifth Circuit held that the individual health insurance mandate in the ACA is unconstitutional and remanded the case back to the district court to determine whether the other provisions of the ACA can stand without the individual health insurance mandate. The ongoing challenges to the ACA and new legislative proposals have resulted in uncertainty regarding the ACA’s future viability and destabilization of the health insurance market. The resulting impact on our business is uncertain and could be material.

Efforts to control prescription drug prices could also have a material adverse effect on our business. For example, in 2018, President Trump and the Secretary of the U.S. Department of Health and Human Services (HHS) released the “American Patients First Blueprint” and have begun implementing certain portions. The initiative includes proposals to increase generic drug and biosimilar competition, enable the Medicare program to negotiate drug prices more directly, improve transparency regarding drug prices and lower consumers’ out-of-pocket costs. The Trump administration also proposed to establish an “international pricing index” that would be used as a benchmark to determine the costs and potentially limit the reimbursement of drugs under Medicare

Part B. In addition, in December 2019, U.S. Food and Drug Administration (FDA) issued a proposal to implement two pathways for the legal importation of certain prescription drugs from Canada and prescription drugs that are FDA-approved, manufactured abroad, authorized for sale in a foreign country and originally intended for sale in that foreign country. Among other pharmaceutical manufacturer industry-related proposals, Congress has proposed bills to change the Medicare Part D benefit to impose an inflation-based rebate in Medicare Part D and to alter the benefit structure to increase manufacturer contributions in some or all benefit phases. The volume of drug pricing-related bills has dramatically increased under the current Congress, and the resulting impact on our business is uncertain and could be material.

In addition, a majority of states have enacted legislation that seeks to indirectly or directly regulate pharmaceutical drug pricing, such as by requiring biopharmaceutical manufacturers to publicly report proprietary pricing information or creating review boards for recommending price caps or other means for controlling prices of pharmaceutical products purchased by state agencies. For example, in 2017, California’s governor signed a prescription drug price transparency state bill into law, requiring prescription drug manufacturers to provide advance notice and explanation for price increases of certain drugs that exceed a specified threshold. Many other states have proposed or enacted similar legislation. In addition, many state legislatures are considering, or have already passed, various bills that would reform drug purchasing and price negotiations, facilitate the import of lower-priced drugs from outside the United States, and encourage the use of generic drugs. Such initiatives and legislation may cause added pricing pressures on our products.

Changes to the Medicaid program at the federal or state level could also have a material adverse effect on our business. Proposals that could impact coverage and reimbursement of our products, including giving states more flexibility to manage drugs covered under the Medicaid program, could have a material adverse effect by limiting our products’ use and coverage. Furthermore, state Medicaid programs could request additional supplemental rebates on our products for many reasons. To the extent that private insurers or managed care programs follow Medicaid coverage and payment developments, they could use the enactment of these increased rebates to exert pricing pressure on our products, and the adverse effects may be magnified by their adoption of lower payment schedules.

Other proposed regulatory actions affecting manufacturers could have a material adverse effect on our business. It is difficult to predict the impact, if any, of any such proposed legislative and regulatory actions or resulting state actions on the use and reimbursement of our products in the United States, but such actions may adversely affect our results of operations.

Many countries outside the United States, including the European Union (EU) Member States, have established complex and lengthy procedures to obtain price approvals, coverage and reimbursement. Many EU Member States review periodically their decisions concerning the pricing and reimbursement of medicinal products. The outcome of this review cannot be predicted and could have an adverse effect on the pricing and reimbursement of our medicinal products in the EU Member States. Reductions in the pricing of our medicinal products in one EU Member State could affect the price in other EU Member States and have a negative impact on our financial results.

Our existing products are subject to reimbursement from government agencies and other third parties, and we may be required to provide rebates and other discounts on our products, which may result in an adjustment to our product revenues. Pharmaceutical pricing and reimbursement pressures may adversely affect our profitability and our results of operations.

Successful commercialization of our products depends, in part, on the availability of governmental and third-party payer reimbursement for the cost of such products and related treatments in the markets where we sell our products. Government health authorities, private health insurers and other organizations generally provide reimbursement. In the United States, the European Union and other significant or potentially significant markets for our products and product candidates, government authorities and third-party payers are increasingly attempting to limit or regulate the price of medical products and services. A substantial portion of our product sales is subject to significant discounts from list price, including rebates that we may be required to pay certain governmental agencies. In addition, standard reimbursement structures may not adequately reimburse for innovative therapies.

For example, for fiscal year 2020, the Centers for Medicare and Medicaid Services (CMS) has established Medicare inpatient reimbursement for Yescarta that includes payment for a severity adjusted diagnosis related group (DRG) 016, a new technology add-on payment (NTAP) for Yescarta that at most will cover 65% of the cost of Yescarta and may cover less than that, and, in some cases, an outlier payment. Taken together, the total payment may not be sufficient to reimburse hospitals for their cost of care for patients receiving Yescarta. CMS also has not made a decision as to how much it will pay for Yescarta in fiscal year 2021 and beyond. If Medicare does not adequately reimburse for the cost of Yescarta, this could impact the willingness of some hospitals to offer the therapy and of doctors to recommend the therapy and could lessen the attractiveness of our therapy to patients, which could have an adverse effect on sales of Yescarta and on our results of operations. Additionally, in the European Union, there are barriers to reimbursement in individual countries that could limit the uptake of Yescarta.

In addition, we estimate the rebates we will be required to pay in connection with sales during a particular quarter based on claims data from prior quarters. In the United States, actual rebate claims are typically made by payers one to three quarters in arrears. Actual claims and payments may vary significantly from our estimates which can cause an adjustment to our product

revenues. To the extent our actual or anticipated product revenues fall short of investors’ expectations, our stock price could be adversely impacted.

For more information concerning the EU pricing and reimbursement regime, please see “Our results of operations may be adversely affected by current and potential future healthcare legislative and regulatory actions.”

Laws and regulations applicable to the health care industry could impose new obligations on us, require us to change our business practices and restrict our operations in the future.

The health care industry is subject to various federal, state and international laws and regulations pertaining to drug reimbursement, rebates, price reporting, health care fraud and abuse, and data privacy and security. In the United States, these laws include anti-kickback and false claims laws, laws and regulations relating to the Medicare and Medicaid programs and other federal and state programs, the Medicaid Rebate Statute, individual state laws relating to pricing and sales and marketing practices, the Health Insurance Portability and Accountability Act (HIPAA) and other federal and state laws relating to the privacy and security of health information.

Violations of these laws or any related regulations may be punishable by criminal and/or civil sanctions, including, in some instances, substantial fines, civil monetary penalties, exclusion from participation in federal and state health care programs, including Medicare, Medicaid, Veterans Administration health programs, and federal employee health benefit programs, actions against executives overseeing our business and significant remediation measures. In addition, these laws and regulations are broad in scope and they are subject to change and evolving interpretations, which could require us to incur substantial costs associated with compliance or to alter one or more of our sales or marketing practices. Violations of these laws, or allegations of such violations, could also result in negative publicity or other consequences that could harm our reputation, disrupt our business or adversely affect our results of operations. If any or all of these events occur, our business and stock price could be materially and adversely affected.

Recently, there has been enhanced scrutiny of company-sponsored patient assistance programs, including co-pay assistance programs, and manufacturer donations to third-party charities that provide such assistance. There has also been enhanced scrutiny by governments on reimbursement support offerings, clinical education programs and promotional speaker programs. If we, or our agents and vendors, are deemed to have failed to comply with laws, regulations or government guidance in any of these areas, we could be subject to criminal or civil sanctions. Any similar violations by our competitors could also negatively impact our industry reputation and increase scrutiny over our business and our products.

In addition, government price reporting and payment regulations are complex and we are continually assessing the methods by which we calculate and report pricing in accordance with these obligations. Our methodologies for calculations are inherently subjective and may be subject to review and challenge by various government agencies, which may disagree with our interpretation. If the government disagrees with our reported calculations, we may need to restate previously reported data and could be subject to additional financial and legal liability as described above.

For a description of our government investigations and related litigation, see Note 14. Commitments and Contingencies of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Yescarta, a chimeric antigen receptor (CAR) T cell therapy, represents a novel approach to cancer treatment that creates significant challenges for us, which may impact our ability to increase sales of Yescarta.

Yescarta, a CAR T cell therapy, involves (i) harvesting T cells from the patient’s blood, (ii) engineering T cells to express cancer-specific receptors, (iii) increasing the number of engineered T cells and (iv) infusing the functional cancer-specific T cells back into the patient. Advancing this novel and personalized therapy creates significant challenges, including:


•	educating and certifying medical personnel regarding the procedures and the potential side effect profile of our therapy, such as the potential adverse side effects related to cytokine release syndrome and neurologic toxicities, in compliance with the Risk Evaluation and Mitigation Strategy program required by FDA for Yescarta;


•	using medicines to manage adverse side effects of our therapy, such as tocilizumab and corticosteroids, which may not be available in sufficient quantities, may not adequately control the side effects and/or may have a detrimental impact on the efficacy of the treatment;


•	developing a robust and reliable process, while limiting contamination risks, for engineering a patient’s T cells ex vivo and infusing the engineered T cells back into the patient; and


•	conditioning patients with chemotherapy in advance of administering our therapy, which may increase the risk of adverse side effects.

The use of engineered T cells as a potential cancer treatment is a recent development and may not be broadly accepted by physicians, patients, hospitals, cancer treatment centers, payers and others in the medical community. We may not be able to establish or demonstrate to the medical community or commercial or governmental payers the safety and efficacy of Yescarta and

the potential advantages compared to existing and future therapeutics. For challenges related to the reimbursement of Yescarta, see also “Our existing products are subject to reimbursement from government agencies and other third parties, and we may be required to provide rebates and other discounts on our products, which may result in an adjustment to our product revenues. Pharmaceutical pricing and reimbursement pressures may adversely affect our profitability and our results of operations.” If we fail to overcome these significant challenges, our sales of Yescarta, results of operations and stock price could be adversely affected.

We have engaged in, and may in the future engage in, business acquisitions, licensing arrangements, collaborations, disposals of our assets and other strategic transactions, which could cause us to incur significant expenses and could adversely affect our financial condition and results of operations.

We have engaged in, and may in the future engage in, business acquisitions, licensing arrangements, collaborations, disposals of our assets and other transactions, as part of our business strategy. We may not identify suitable transactions in the future and, if we do, we may not complete such transactions in a timely manner, on a cost-effective basis, or at all, and may not realize the expected benefits. For example, if we are successful in making an acquisition, the products and technologies that are acquired may not be successful or may require significantly greater resources and investments than originally anticipated. We also may not be able to integrate acquisitions successfully into our existing business and could incur or assume significant debt and unknown or contingent liabilities. We have also acquired, and may in the future acquire, equity investments in our strategic transactions, such as in connection with our collaboration with Galapagos NV, and the value of our equity investments may fluctuate and decline in value. Further, we conduct annual impairment testing of our goodwill and other indefinite-lived intangible assets in the fourth quarter, and earlier if impairment indicators exist, as required under U.S. generally accepted accounting principles, which may result in impairment charges. For example, during the fourth quarter of 2019 and 2018, we recognized $800 million and $820 million, respectively, of impairment charges related to indefinite-lived intangible assets acquired in connection with our acquisition of Kite Pharma, Inc. If we fail to overcome these risks, it could cause us to incur significant expenses and negatively affect profitability, which could have an adverse effect on our results of operations. We could also experience negative effects on our reported results of operations from acquisition or disposition-related charges, amortization of expenses related to intangibles and charges for impairment of long-term assets.

We face risks associated with our global operations, which may adversely affect our financial condition and results of operations.

Our operations outside of the United States are accompanied by certain financial, political, economic and other risks, including those listed below:

•

Foreign Currency Exchange: In 2019, approximately 25% of our product sales were outside the United States. Because a significant percentage of our product sales is denominated in foreign currencies, primarily the Euro, we face exposure to adverse movements in foreign currency exchange rates. Overall, we are a net receiver of foreign currencies, and therefore, we benefit from a weaker U.S. dollar and are adversely affected by a stronger U.S. dollar. While we use foreign currency exchange forward and options contracts to hedge a percentage of our forecasted international sales, our hedging program does not eliminate our exposure to currency fluctuations. We cannot predict future fluctuations in the foreign currency exchange rates of the U.S. dollar. If the U.S. dollar appreciates significantly against certain currencies and our hedging program does not sufficiently offset the effects of such appreciation, our results of operations will be adversely affected and our stock price may decline.

•

Anti-Bribery: We are subject to the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws that govern our international operations with respect to payments to government officials. Our international operations are heavily regulated and require significant interaction with foreign officials. Though our policies mandate compliance with these anti-bribery laws, we operate in parts of the world that have experienced governmental corruption to some degree. In certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices or may require us to interact with doctors and hospitals, some of which may be state controlled, in a manner that is different than local custom. It is possible that certain of our practices may be challenged under these laws. In addition, despite our training and compliance program, our internal control policies and procedures may not protect us from reckless or criminal acts committed by our employees and agents. Enforcement activities under anti-bribery laws could subject us to administrative and legal proceedings and actions, which could result in civil and criminal sanctions, including monetary penalties and exclusion from health care programs.


•	Other risks inherent in conducting a global business include:

◦

Our international operations, including the use of third-party manufacturers, distributors and collaboration arrangements outside the United States, expose us to increased risk of theft of our intellectual property and other proprietary technology, particularly in jurisdictions with less robust intellectual property protections than the United States, as well as restrictive government actions against our intellectual property and other foreign assets such as nationalization, expropriation or the imposition of compulsory licenses.


◦	We may be subject to protective economic policies taken by foreign governments, such as trade protection measures and import and export licensing requirements, which may result in the imposition of trade sanctions or similar restrictions by the United States or other governments.

◦

Our operations may be adversely affected if there is instability, disruption or destruction in a geographic region where we operate, regardless of cause, including war, terrorism, social unrest and political changes and instability. For example, on January 31, 2020, the United Kingdom (UK) withdrew from the European Union (EU), which initiated a transition period during which the UK and EU will negotiate their future relationship. There is uncertainty concerning any changes in the laws and regulations governing the conduct of clinical trials and marketing of medicinal products in the UK following the country’s exit from the EU. This uncertainty may lead to significant complexity and risks for our company and our ability to research, develop and market medicinal products in the EU and the UK. See also “Business disruptions from natural or man-made disasters may adversely affect our revenues and materially reduce our earnings.”

If we were to encounter any of these risks, our global operations may be adversely affected, which could have an adverse effect on our overall business and results of operations.

If significant safety issues arise for our marketed products or our product candidates, our reputation may be harmed and our future sales may be reduced, which could adversely affect our results of operations.

The data supporting the marketing approvals for our products and forming the basis for the safety warnings in our product labels were obtained in controlled clinical trials of limited duration and, in some cases, from post-approval use. As our products are used over longer periods of time by patients with underlying health problems or other medicines, we expect to continue finding new issues related to safety, resistance or drug interactions. Any such issues may require changes to our product labels, such as additional warnings, contraindications or even narrowed indications. If any of these were to occur, it could reduce the market acceptance and sales of our products.

Regulatory authorities have been moving towards more active and transparent pharmacovigilance and are making greater amounts of stand-alone safety information and clinical trial data directly available to the public through websites and other means, such as periodic safety update report summaries, risk management plan summaries and various adverse event data. Safety information, without the appropriate context and expertise, may be misinterpreted and lead to misperception or legal action which may potentially cause our product sales or stock price to decline.

Further, if serious safety, resistance or drug interaction issues arise with our marketed products, sales of these products could be limited or halted by us or by regulatory authorities and our results of operations could be adversely affected.

Our operations depend on compliance with complex FDA and comparable international regulations. Failure to obtain broad approvals on a timely basis or to maintain compliance could delay or halt commercialization of our products.

The products we develop must be approved for marketing and sale by regulatory authorities and, once approved, are subject to extensive regulation by FDA, the European Medicines Agency (EMA) and comparable regulatory agencies in other countries. We are continuing clinical trials for many of our products for currently approved and additional uses. We anticipate that we will file for marketing approval in additional countries and for additional indications and products over the next several years. These products may fail to receive such marketing approvals on a timely basis, or at all.

Further, how we manufacture and sell our products is subject to extensive regulation and review. Discovery of previously unknown problems with our marketed products or problems with our manufacturing, safety reporting or promotional activities may result in restrictions on our products, including withdrawal of the products from the market. If we fail to comply with applicable regulatory requirements, including those related to promotion and manufacturing, we could be subject to penalties including fines, suspensions of regulatory approvals, product recalls, seizure of products and criminal prosecution.

For example, under FDA rules, we are often required to conduct post-approval clinical studies to assess a known serious risk, signals of serious risk or to identify an unexpected serious risk. In certain circumstances, we may be required to implement a Risk Evaluation and Mitigation Strategy program for our products, which could include a medication guide, patient package insert, a communication plan to healthcare providers, restrictions on distribution or use of a product and other elements FDA deems necessary to assure safe use of the drug. Failure to comply with these or other requirements imposed by FDA could result in significant civil monetary penalties and our operating results may be adversely affected.

We face risks in our clinical trials, including the potential for unfavorable results, delays in anticipated timelines and disruption, which may adversely affect our prospects for future revenue growth and our results of operations.

We are required to demonstrate the safety and efficacy of products that we develop for each intended use through extensive preclinical studies and clinical trials. The results from preclinical and early clinical studies do not always accurately predict results in later, large-scale clinical trials. Even successfully completed large-scale clinical trials may not result in marketable products.

For example, in February 2019, we announced that our KITE-585 program, an anti-B cell maturation antigen being evaluated for the treatment of multiple myeloma, would not be moving forward. We also recently announced that STELLAR-3 and STELLAR-4, Phase 3 studies evaluating the safety and efficacy of selonsertib for the treatment of nonalcoholic steatohepatitis (NASH), did not meet the pre-specified week 48 primary endpoints. If any of our product candidates fails to achieve its primary endpoint in clinical trials, if safety issues arise or if the results from our clinical trials are otherwise inadequate to support regulatory approval of our product candidates, commercialization of that product candidate could be delayed or halted. In addition, we may also face challenges in clinical trial protocol design.

If the clinical trials for any of the product candidates in our pipeline are delayed or terminated, our prospects for future revenue growth and our results of operations may be adversely impacted. For example, we face numerous risks and uncertainties with our product candidates, including filgotinib for the treatment of rheumatoid arthritis, Crohn’s disease, ulcerative colitis and psoriatic arthritis; GLPG-1690 for the treatment of idiopathic pulmonary fibrosis; cilofexor for the treatment of primary sclerosing cholangitis; and axicabtagene ciloleucel for the treatment of second line diffuse large B-cell lymphoma, each currently in Phase 3 clinical trials, that could prevent completion of development of these product candidates. These risks include our ability to enroll patients in clinical trials, the possibility of unfavorable results of our clinical trials, the need to modify or delay our clinical trials or to perform additional trials and the risk of failing to obtain FDA and other regulatory body approvals. As a result, our product candidates may never be successfully commercialized. Further, we may make a strategic decision to discontinue development of our product candidates if, for example, we believe commercialization will be difficult relative to other opportunities in our pipeline. If these programs and others in our pipeline cannot be completed on a timely basis or at all, then our prospects for future revenue growth and our results of operations may be adversely impacted. In addition, clinical trials involving our commercial products could raise new safety issues for our existing products, which could in turn adversely affect our results of operations and harm our business.

In addition, we extensively outsource our clinical trial activities and usually perform only a small portion of the start-up activities in-house. We rely on independent third-party contract research organizations (CROs) to perform most of our clinical studies, including document preparation, site identification, screening and preparation, pre-study visits, training, program management, patient enrollment, ongoing monitoring, site management and bioanalytical analysis. Many important aspects of the services performed for us by the CROs are out of our direct control. If there is any dispute or disruption in our relationship with our CROs, our clinical trials may be delayed. Moreover, in our regulatory submissions, we rely on the quality and validity of the clinical work performed by third-party CROs. If any of our CROs’ processes, methodologies or results were determined to be invalid or inadequate, our own clinical data and results and related regulatory approvals may be adversely affected.

We depend on relationships with third parties for sales and marketing performance, technology, development, logistics and commercialization of products. Failure to maintain these relationships, poor performance by these companies or disputes with these third parties could negatively impact our business.

We rely on a number of collaborative relationships with third parties for our sales and marketing performance in certain territories. For example, we have collaboration arrangements with Janssen Sciences Ireland UC for Odefsey, Complera/Eviplera and Symtuza. In some countries, we rely on international distributors for sales of certain of our products. Some of these relationships also involve the clinical development of these products by our partners. Reliance on collaborative relationships poses a number of risks, including the risk that:


•	we are unable to control the resources our corporate partners devote to our programs or products;


•	disputes may arise with respect to the ownership of rights to technology developed with our corporate partners;


•	disagreements with our corporate partners could cause delays in, or termination of, the research, development or commercialization of product candidates or result in litigation or arbitration;


•	contracts with our corporate partners may fail to provide significant protection or may fail to be effectively enforced if one of these partners fails to perform;


•	our corporate partners have considerable discretion in electing whether to pursue the development of any additional products and may pursue alternative technologies or products either on their own or in collaboration with our competitors;


•	our corporate partners with marketing rights may choose to pursue competing technologies or to devote fewer resources to the marketing of our products than they do to products of their own development; and


•	our distributors and our corporate partners may be unable to pay us.

Given these risks, there is a great deal of uncertainty regarding the success of our current and future collaborative efforts. If these efforts fail, our product development or commercialization of new products could be delayed or revenues from products could decline.

In addition, we rely on third-party sites to collect patients’ white blood cells, known as apheresis centers, shippers, couriers, and hospitals for the logistical collection of patients’ white blood cells and ultimate delivery of Yescarta to patients. Any disruption or difficulties encountered by any of these vendors could result in product loss and regulatory action and harm our Yescarta business

and our reputation. To ensure that any apheresis center is prepared to ship cells to our manufacturing facilities, we plan to conduct quality certifications of each apheresis center. However, apheresis centers may choose not to participate in the certification process or we may be unable to complete certification in a timely manner or at all, which could delay or restrain our manufacturing and commercialization efforts. As a result, our sales of Yescarta may be limited which could harm our results of operations.

Our success depends to a significant degree on our ability to defend our patents and other intellectual property rights both domestically and internationally. We may not be able to obtain effective patents to protect our technologies from use by competitors.

Patents and other proprietary rights are very important to our business. Our success depends to a significant degree on our ability to:


•	obtain patents and licenses to patent rights;


•	preserve trade secrets and internal know-how;


•	defend against infringement of our patents and efforts to invalidate them; and


•	operate without infringing on the intellectual property of others.

If we have a properly drafted and enforceable patent, it can be more difficult for our competitors to use our technology to create competitive products and more difficult for our competitors to obtain a patent that prevents us from using technology we create. As part of our business strategy, we actively seek patent protection both in the United States and internationally and file additional patent applications, when appropriate, to cover improvements in our compounds, products and technology.

Patent applications are confidential for a period of time before a patent is issued. As a result, we may not know if our competitors filed patent applications for technology covered by our pending applications or if we were the first to invent or first to file an application directed toward the technology that is the subject of our patent applications. In addition, if competitors file patent applications covering our technology, we may have to participate in litigation, post-grant proceedings before the U.S. Patent and Trademark Office (USPTO) or other proceedings to determine the right to a patent or validity of any patent granted. Litigation, post-grant proceedings before the USPTO or other proceedings are unpredictable and expensive, and could divert management attention from other operations, such that, even if we are ultimately successful, our results of operations may be adversely affected by such events.

Generic manufacturers have sought, and may continue to seek, FDA approval to market generic versions of our products through an abbreviated new drug application (ANDA), the application process typically used by manufacturers seeking approval of a generic drug. For a description of our ANDA litigation, see Note 14. Commitments and Contingencies of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. The entry of generic versions of our products has, and may in the future, lead to market share and price erosion and have a negative impact on our business and results of operations.

Our success depends in large part on our ability to operate without infringing upon the patents or other proprietary rights of third parties.

If we are found to infringe the valid patents of third parties, we may be required to pay significant monetary damages or we may be prevented from commercializing products or may be required to obtain licenses from these third parties. We may not be able to obtain alternative technologies or any required license on commercially reasonable terms or at all. If we fail to obtain these licenses or alternative technologies, we may be unable to develop or commercialize some or all of our products. For example, we are aware of patents and patent applications owned by third parties that such parties may claim cover the use of sofosbuvir, axicabtagene ciloleucel or bictegravir. See “We may be required to pay significant damages and royalty payments as a result of ongoing litigation related to Yescarta and Biktarvy.” See also a description of our litigation regarding sofosbuvir, axicabtagene ciloleucel, bictegravir, and TDF or TAF in combination with FTC for the use of pre-exposure prophylaxis in Note 14. Commitments and Contingencies of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Furthermore, we also rely on unpatented trade secrets and improvements, unpatented internal know-how and technological innovation. For example, a great deal of our liposomal manufacturing expertise, which is a key component of our liposomal technology, is not covered by patents but is instead protected as a trade secret. We protect these rights mainly through confidentiality agreements with our corporate partners, employees, consultants and vendors. We cannot be certain that these parties will comply with these confidentiality agreements, that we have adequate remedies for any breach or that our trade secrets, internal know-how or technological innovation will not otherwise become known or be independently discovered by our competitors. Under some of our R&D agreements, inventions become jointly owned by us and our corporate partner and in other cases become the exclusive property of one party. In certain circumstances, it can be difficult to determine who owns a particular invention and disputes could arise regarding those inventions. If our trade secrets, internal know-how, technological innovation or confidential information become known or independently discovered by competitors or if we enter into disputes over ownership of inventions, our business and results of operations could be adversely affected.

Manufacturing problems, including at our third-party manufacturers and corporate partners, could cause inventory shortages and delay product shipments and regulatory approvals, which may adversely affect our results of operations.

In order to generate revenue from our products, we must be able to produce sufficient quantities of our products to satisfy demand. Many of our products are the result of complex manufacturing processes. The manufacturing process for pharmaceutical products is also highly regulated and regulators may shut down manufacturing facilities that they believe do not comply with regulations.

Our products are either manufactured at our own facilities or by third-party manufacturers or corporate partners. We depend on third parties to perform manufacturing activities effectively and on a timely basis for the majority of our solid dose products. We, our third-party manufacturers and our corporate partners are subject to Good Manufacturing Practices (GMP), which are extensive regulations governing manufacturing processes, stability testing, record keeping and quality standards as defined by FDA and EMA. Similar regulations are in effect in other jurisdictions.

Our third-party manufacturers and corporate partners are independent entities subject to their own unique operational and financial risks that are out of our control. If we or any of these third-party manufacturers or corporate partners fail to perform as required, this could impair our ability to deliver our products on a timely basis or receive royalties or could cause delays in our clinical trials and applications for regulatory approval. Further, we may have to write off the costs of manufacturing any batch that fails to pass quality inspection or meet regulatory approval. In addition, we, our third-party manufacturers and our corporate partners may only be able to produce some of our products at one or a limited number of facilities and, therefore, have limited manufacturing capacity for certain products, and we may not be able to locate additional or replacement facilities on a reasonable basis or at all. Our sales of such products could also be adversely impacted by our reliance on such limited number of facilities. To the extent these risks materialize and affect their performance obligations to us, our financial results may be adversely affected.

Our manufacturing operations are subject to routine inspections by regulatory agencies. If we are unable to remedy any deficiencies cited by FDA in these inspections, our currently marketed products and the timing of regulatory approval of products in development could be adversely affected. Further, there is risk that regulatory agencies in other countries where marketing applications are pending will undertake similar additional reviews or apply a heightened standard of review, which could delay the regulatory approvals for products in those countries. If approval of any of our product candidates were delayed or if production of our marketed products were interrupted, our anticipated revenues and our stock price may be adversely affected.

We may not be able to obtain materials or supplies necessary to conduct clinical trials or to manufacture and sell our products, which could limit our ability to generate revenues.

We need access to certain supplies and products to conduct our clinical trials and to manufacture and sell our products. If we are unable to purchase sufficient quantities of these materials or find suitable alternative materials in a timely manner, our development efforts for our product candidates may be delayed or our ability to manufacture our products could be limited, which could limit our ability to generate revenues.

Suppliers of key components and materials must be named in the new drug application or marketing authorization application filed with the regulatory authority for any product candidate for which we are seeking marketing approval, and significant delays can occur if the qualification of a new supplier is required. Even after a manufacturer is qualified by the regulatory authority, the manufacturer must continue to expend time, money and effort in the area of production and quality control to ensure full compliance with GMP. Manufacturers are subject to regular periodic inspections by regulatory authorities following initial approval. If, as a result of these inspections, a regulatory authority determines that the equipment, facilities, laboratories or processes do not comply with applicable regulations and conditions of product approval, the regulatory authority may suspend the manufacturing operations. If the manufacturing operations of any of the single suppliers for our products are suspended, we may be unable to generate sufficient quantities of commercial or clinical supplies of product to meet market demand, which could in turn decrease our revenues and harm our business. In addition, if deliveries of materials from our suppliers were interrupted for any reason, we may be unable to ship certain of our products for commercial supply or to supply our product candidates in development for clinical trials. In addition, some of our products and the materials that we utilize in our operations are manufactured at only one facility, which we may not be able to replace in a timely manner and on commercially reasonable terms, or at all. Problems with any of the single suppliers we depend on, including in the event of a disaster, such as an earthquake, equipment failure or other difficulty, may negatively impact our development and commercialization efforts.

A significant portion of the raw materials and intermediates used to manufacture our antiviral products are supplied by third-party manufacturers and corporate partners outside of the United States. As a result, any political or economic factors in a specific country or region, including any changes in or interpretations of trade regulations, compliance requirements or tax legislation, that would limit or prevent third parties outside of the United States from supplying these materials could adversely affect our ability to manufacture and supply our antiviral products to meet market needs and have a material and adverse effect on our operating results.

If we were to encounter any of these difficulties, our ability to conduct clinical trials on product candidates and to manufacture and sell our products could be impaired, which could have an adverse effect on our business.

Imports from countries where our products are available at lower prices and unapproved generic or counterfeit versions of our products could have a negative impact on our reputation and business.

Prices for our products are based on local market economics and competition and sometimes differ from country to country. Our sales in countries with relatively higher prices may be reduced if products can be imported and resold into those countries from lower price markets. If our HIV, HBV and HCV products, which we have agreed to make available at substantially reduced prices to certain low- and middle-income countries participating in our Gilead Access Program, are re-exported into the United States, Europe or other higher price markets, our revenues could be adversely affected. In addition, we have entered into agreements with generic drug manufacturers as well as a licensing agreement with the Medicines Patent Pool, a United Nations-backed public health organization, which allows generic drug manufacturers to manufacture certain generic versions of our products for distribution in certain low- and middle-income countries. If generic versions of our products produced and/or distributed under these agreements are then re-exported to the United States, Europe or other higher price markets, our revenues could be adversely affected.

In the European Union, we are required to permit products purchased in one EU member state to be sold in another EU member state. Purchases of our products in countries where our selling prices are relatively low for resale in countries in which our selling prices are relatively high can affect the inventory level held by our wholesalers and can cause the relative sales levels in the various countries to fluctuate from quarter to quarter and not reflect the actual consumer demand in any given quarter. These quarterly fluctuations may impact our earnings, which could adversely affect our stock price and harm our business.

Additionally, use of diverted products could occur in countries where they have not been approved and patients could source the product outside the legitimate supply chain. Therefore, the products may be handled, shipped and stored inappropriately, which may affect the efficacy of the product and could harm patients, our brands or the commercial or scientific reputation of our products.

We are also aware of the existence of various “Buyers Clubs” around the world that promote the personal importation of generic versions of our HCV and HIV products that have not been approved for use in the countries into which they are imported. As a result, patients may be at risk of taking unapproved medications which may not be what they purport to be, may not have the potency they claim to have or may contain harmful substances. To the extent patients take unapproved generic versions of one or more of our medications and are injured by these generic products, our brands or the commercial or scientific reputation of our HCV and HIV products could be harmed.

Further, third parties may illegally distribute and sell counterfeit versions of our products, which do not meet the rigorous quality standards of our manufacturing and supply chain. We actively take actions to discourage the distribution and sale of counterfeits of our products around the world, including working with local regulatory and legal authorities to enforce laws against counterfeit drugs, raising public awareness of the dangers of counterfeit drugs and promoting public policies to hinder the sale and availability of counterfeit drugs. Counterfeit drugs pose a serious risk to patient health and safety and may raise the risk of product recalls. Our reputation and business could suffer as a result of counterfeit drugs sold under our brand names.

Expensive litigation and government investigations have increased our expenses which may continue to reduce our earnings.

We are involved in a number of litigation, investigation and other dispute-related matters that require us to expend substantial internal and financial resources. We expect these matters will continue to require a high level of internal and financial resources for the foreseeable future. These matters have reduced and will continue to reduce our earnings and require significant management attention. For a description of our litigation, investigations and other dispute-related matters, see Note 14. Commitments and Contingencies of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. See also “We may be required to pay significant damages and royalty payments as a result of ongoing litigation related to Yescarta and Biktarvy.” The outcome of such legal proceedings or any other legal proceedings that may be brought against us, the investigations or any other investigations that may be initiated and any other dispute-related matters, are inherently uncertain, and adverse developments or outcomes can result in significant expenses, monetary damages, penalties or injunctive relief against us that could significantly reduce our earnings and cash flows and harm our business and reputation.

We may face significant liability resulting from our products and such liability could materially reduce our earnings.

The testing, manufacturing, marketing and use of our commercial products, as well as product candidates in development, involve substantial risk of product liability claims. These claims may be made directly by consumers, healthcare providers, pharmaceutical companies or others. We have limited insurance for product liabilities that may arise. If claims exceed our coverage, our financial condition will be adversely affected. In addition, negative publicity associated with any claims, regardless of their merit, may decrease the future demand for our products and impair our financial condition. For a description of our product liability

matters, see Note 14. Commitments and Contingencies of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

If we fail to attract, develop and retain highly qualified personnel, our business and operations may be adversely affected.

Our future success will depend in large part on our continued ability to attract, develop and retain highly qualified scientific, technical and management personnel, as well as personnel with expertise in clinical testing, governmental regulation and commercialization. We face competition for personnel from other companies, universities, public and private research institutions, government entities and other organizations. Competition for qualified personnel in the biopharmaceutical field is intense, and there is a limited pool of qualified potential employees to recruit. We may not be able to attract and retain quality personnel on acceptable terms. Our ability to do so also depends on how well we maintain a strong workplace culture that is attractive to employees, particularly during the leadership transition that we are currently experiencing. Additionally, changes to U.S. immigration and work authorization laws and regulations could make it more difficult for employees to work in or transfer to jurisdictions in which we have operations and could impair our ability to attract and retain qualified personnel. If we are unsuccessful in our recruitment, development and retention efforts or we fail to maintain a strong workplace culture, our business and reputation may be harmed.

We have recently made significant changes to our senior leadership team. In 2019, we appointed Daniel O’Day as Chairman and Chief Executive Officer, Andrew Dickinson as Chief Financial Officer, Johanna Mercier as Chief Commercial Officer, Merdad Parsey as Chief Medical Officer, Brett Pletcher as Executive Vice President, Corporate Affairs and General Counsel, Jyoti Mehra as Executive Vice President, Human Resources, and Christi Shaw as Chief Executive Officer of Kite. Changes in management and other key personnel may lead to potential organizational realignments and additional personnel changes, which may disrupt our business and adversely affect our operations.

Business disruptions from natural or man-made disasters may adversely affect our revenues and materially reduce our earnings.

Our worldwide operations, third-party manufacturers or corporate partners could be subject to business interruptions stemming from natural or man-made disasters, such as climate change, terrorist attacks, armed conflicts, earthquakes, hurricanes, flooding, fires or actual or threatened public health emergencies, or efforts taken by third parties to prevent or mitigate such disasters, such as public safety power shutoffs and facility shutdowns, for which we or they may be uninsured or inadequately insured. Our corporate headquarters in Foster City and our Santa Monica location, which together house a majority of our R&D activities, and our San Dimas, La Verne, Oceanside and El Segundo manufacturing facilities are located in California, a seismically active region. As we may not carry adequate earthquake insurance and significant recovery time could be required to resume operations, our financial condition and operating results could be materially adversely affected in the event of a major earthquake.

We are dependent on information technology systems, infrastructure and data, which may be subject to cyberattacks, security breaches and legal claims.

We are dependent upon information technology systems, infrastructure and data, including our Kite Konnect platform, which is critical to ensure chain of identity and chain of custody of Yescarta. The multitude and complexity of our computer systems make them inherently vulnerable to service interruption or destruction, malicious intrusion and random attack. Likewise, data privacy or security breaches by employees or others pose a risk that sensitive data, including our intellectual property or trade secrets or the personal information of our employees, patients, customers or other business partners may be exposed to unauthorized persons or to the public. Cyberattacks are increasing in their frequency, sophistication and intensity. Cyberattacks could include the deployment of harmful malware, denial-of-service, social engineering and other means to affect service reliability and threaten data confidentiality, integrity and availability. Our business and technology partners face similar risks and any security breach of their systems could adversely affect our security posture. While we have invested, and continue to invest, in the protection of our data and information technology infrastructure, there can be no assurance that our efforts, or the efforts of our partners and vendors, will prevent future service interruptions or identify breaches in our systems. Such interruptions or breaches could adversely affect our business and operations and/or cause the loss of critical or sensitive information, including personal information, which could result in financial, legal, business or reputational harm to us. In addition, our insurance may not be sufficient in type or amount to cover the financial, legal, business or reputational losses that may result from an interruption or breach of our systems.

Regulators globally are also imposing new data privacy and security requirements, including new and greater monetary fines for privacy violations. For example, the General Data Protection Regulation (GDPR) that became effective in Europe in 2018 established regulations regarding the handling of personal data, and non-compliance with the GDPR may result in monetary penalties of up to four percent of worldwide revenue. In addition, new domestic data privacy and security laws, such as the California Consumer Privacy Act (CCPA) that became effective in January 2020, and others that may be passed, similarly introduce requirements with respect to personal information, and non-compliance with CCPA may result in liability through private actions (subject to statutorily defined damages in the event of certain data breaches) and enforcement. The GDPR, CCPA and other changes,

or new laws or regulations associated with the enhanced protection of personal information, including in some cases healthcare data or other personal information, could greatly increase our cost of providing our products and services or even prevent us from offering certain services in jurisdictions in which we operate.

Changes in our effective income tax rate could reduce our earnings.

We are subject to income taxes in the United States and various foreign jurisdictions including Ireland. Due to economic and political conditions, various countries are actively considering and have made changes to existing tax laws. We cannot predict the form or timing of potential legislative and regulatory changes that could have a material adverse impact on our results of operations. For example, the United States enacted significant tax reform, and certain provisions of the new law are complex and will continue to significantly affect us.

In addition, significant judgment is required in determining our worldwide provision for income taxes. Various factors may have favorable or unfavorable effects on our income tax rate including, but not limited to, our portion of the non-tax deductible annual branded prescription drug fee, the accounting for stock options and other share-based awards, mergers and acquisitions, future levels of R&D spending, ability to maintain manufacturing and other operational activities in our Irish facilities, changes in the mix of earnings in the various tax jurisdictions in which we operate, changes in overall levels of pre-tax earnings, resolution of federal, state and foreign income tax audits. The impact on our income tax provision resulting from the above mentioned factors may be significant and could have a negative impact on our consolidated results of operations.

Our income tax returns are subject to audit by federal, state and foreign tax authorities. We are currently under examination by the Internal Revenue Service for the tax years from 2013 to 2015 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. Resolution of one or more of these exposures in any reporting period could have a material impact on the results of operations for that period.

There can be no assurance that we will continue to pay dividends or repurchase stock.

Our Board of Directors authorized a dividend program under which we intend to pay quarterly dividends of $0.68 per share, subject to quarterly declarations by our Board of Directors. In the first quarter of 2016, our Board of Directors also approved the repurchase of up to $12.0 billion of our common stock (2016 Program), of which $3.4 billion is available for repurchase as of December 31, 2019. In the first quarter of 2020, our Board of Directors authorized a new $5.0 billion stock repurchase program (2020 Program), which will commence upon the completion of the 2016 Program. Purchases under the 2020 Program may be made in the open market or in privately negotiated transactions. Any future declarations, amount and timing of any dividends and/or the amount and timing of such stock repurchases are subject to capital availability and determinations by our Board of Directors that cash dividends and/or stock repurchases are in the best interest of our stockholders and are in compliance with all respective laws and our agreements applicable to the declaration and payment of cash dividends and the repurchase of stock. Our ability to pay dividends and/or repurchase stock will depend upon, among other factors, our cash balances and potential future capital requirements for strategic transactions, including acquisitions, debt service requirements, results of operations, financial condition and other factors beyond our control that our Board of Directors may deem relevant. A reduction in or elimination of our dividend payments, our dividend program and/or stock repurchases could have a negative effect on our stock price.


ITEM 1B.	UNRESOLVED STAFF COMMENTS

Not applicable.


ITEM 2.	PROPERTIES

Our corporate headquarters are located in Foster City, California, where we house our administrative and certain of our R&D activities. We also have R&D facilities in Emeryville, Oceanside and Santa Monica, California; Gaithersburg, Maryland; Seattle, Washington; Edmonton, Canada; and Amsterdam, Netherlands. Our principal manufacturing facilities are in El Segundo, La Verne, Oceanside and San Dimas, California; Edmonton, Canada; Cork, Ireland; and Hoofddorp, Netherlands. For more information about our manufacturing facilities, see Item 1 - Business “Our Manufacturing Facilities.” Our global operations include offices in Europe, North America, Asia, South America, Africa, Australia and the Middle East.

We believe that our existing properties, including both owned and leased sites, are in good condition and suitable for the conduct of our business. We believe our capital resources are sufficient to purchase, lease or construct any additional facilities required to meet our expected long-term growth needs.


ITEM 3.	LEGAL PROCEEDINGS

For a description of our significant pending legal proceedings, please see Note 14. Commitments and Contingencies - Legal Proceedings of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, which is incorporated herein by reference.


ITEM 4.	MINE SAFETY DISCLOSURES

Not applicable.

PART II


ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on the Nasdaq Global Select Market under the symbol “GILD.”

As of February 18, 2020, we had approximately 473 stockholders of record of our common stock.

Performance Graph ⁽¹⁾

The following graph compares our cumulative total stockholder return for the past five years to two indices: the Standard & Poor’s 500 Stock Index (S&P 500 Index) and the Nasdaq Biotechnology Index (NBI Index). The stockholder return shown on the graph below is not necessarily indicative of future performance, and we do not make or endorse any predictions as to future stockholder returns.

Comparison of Cumulative Total Return on Investment for the Past Five Years⁽²⁾

______________________________________________________


⁽¹⁾	This section is not “soliciting material,” is not deemed “filed” with the SEC and is not to be incorporated by reference in any of our filings under the Securities Act or the Exchange Act whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.


⁽²⁾	Shows the cumulative return on investment assuming an investment of $100 in our common stock, the NBI Index and the S&P 500 Index on December 31, 2014, and assuming that all dividends were reinvested.

Equity Compensation Plan Information

The following table provides certain information with respect to our equity compensation plans in effect as of December 31, 2019 (in millions, except per share amounts):



	Number of Common Shares to be Issued Upon Exercise of Outstanding Options, Warrants and Rights	Weighted-average Exercise Price of Outstanding Options, Warrants and Rights⁽¹⁾		Number of Common Shares Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))
Plan Category	(a)	(b)		(c)
Equity Compensation plans approved by security holders:
2004 Equity Incentive Plan	19.5	$	61.35	79.2
Employee Stock Purchase Plan⁽²⁾				8.9
Total equity compensation plans approved by security holders	19.5	$	61.35	88.1
Equity Compensation plans not approved by security holders	—	—		—
Total	19.5	$	61.35	88.1
_________________________________________


⁽¹⁾	Does not take into account 18 million restricted stock units, performance share awards or units and phantom shares, which have no exercise price and were granted under our 2004 Equity Incentive Plan.


⁽²⁾	Under our Employee Stock Purchase Plan, participants are permitted to purchase our common stock at a discount on certain dates through payroll deductions within a pre-determined purchase period. Accordingly, these numbers are not determinable.

Issuer Purchases of Equity Securities

In the first quarter of 2016, our Board of Directors authorized a $12.0 billion share repurchase program (2016 Program) under which repurchases may be made in the open market or in privately negotiated transactions. During 2019, we repurchased and retired 26 million shares of our common stock for $1.7 billion through open market transactions under the 2016 Program.

The table below summarizes our stock repurchase activity for the three months ended December 31, 2019 (in thousands, except per share amounts):



	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of a Publicly Announced Program		Maximum Fair Value of Shares that May Yet Be Purchased Under the Program
October 1 - October 31, 2019	712		$	63.84	688		$	3,459
November 1 - November 30, 2019	768		$	65.14	557		$	3,423
December 1 - December 31, 2019	393		$	66.59	372		$	3,398
Total	1,873	⁽¹⁾	$	64.95	1,617	⁽¹⁾
_________________________________________


⁽¹⁾	The difference between the total number of shares purchased and the total number of shares purchased as part of a publicly announced program is due to shares of common stock withheld by us from employee restricted stock unit awards in order to satisfy applicable tax withholding obligations.

In the first quarter of 2020, our Board of Directors authorized a new $5.0 billion stock repurchase program (2020 Program), which will commence upon the completion of the 2016 Program. Purchases under the 2020 Program may be made in the open market or in privately negotiated transactions.


ITEM 6.	SELECTED FINANCIAL DATA

GILEAD SCIENCES, INC.

SELECTED CONSOLIDATED FINANCIAL DATA

(in millions, except per share amounts)



	Year Ended December 31,
	2019			2018		2017		2016		2015
CONSOLIDATED STATEMENT OF INCOME DATA⁽¹⁾:
Total revenues⁽²⁾	$	22,449		$	22,127	$	26,107	$	30,390	$	32,639
Total costs and expenses	$	18,162		$	13,927	$	11,983	$	12,757	$	10,446
Income from operations⁽²⁾	$	4,287		$	8,200	$	14,124	$	17,633	$	22,193
Provision for income taxes⁽³⁾	$	(204	)	$	2,339	$	8,885	$	3,609	$	3,553
Net income^(2)(3)(4)	$	5,364		$	5,460	$	4,644	$	13,488	$	18,106
Net income attributable to Gilead^(2)(3)(4)	$	5,386		$	5,455	$	4,628	$	13,501	$	18,108
Net income per share attributable to Gilead common stockholders - basic^(2)(3)(4)	$	4.24		$	4.20	$	3.54	$	10.08	$	12.37
Shares used in per share calculation - basic	1,270			1,298		1,307		1,339		1,464
Net income per share attributable to Gilead common stockholders - diluted^(2)(3)(4)	$	4.22		$	4.17	$	3.51	$	9.94	$	11.91
Shares used in per share calculation - diluted	1,277			1,308		1,319		1,358		1,521
Cash dividends declared per share	$	2.52		$	2.28	$	2.08	$	1.84	$	1.29



	December 31,
	2019		2018		2017		2016		2015
CONSOLIDATED BALANCE SHEET DATA⁽¹⁾:
Cash, cash equivalents and marketable debt securities⁽⁵⁾	$	25,840	$	31,512	$	36,694	$	32,380	$	26,208
Working capital^(3)(4)(5)(6)	$	20,537	$	25,231	$	20,188	$	10,370	$	14,044
Total assets⁽⁵⁾⁽⁶⁾	$	61,627	$	63,675	$	70,283	$	56,977	$	51,716
Other long-term obligations⁽⁶⁾	$	1,009	$	1,040	$	558	$	297	$	395
Long-term debt, including current portion⁽⁵⁾	$	24,593	$	27,322	$	33,542	$	26,346	$	22,055
Retained earnings^(2)(3)(4)(6)	$	19,388	$	19,024	$	19,012	$	18,154	$	18,001
Total stockholders’ equity^(2)(3)(4)(6)	$	22,650	$	21,534	$	20,501	$	19,363	$	19,113



_________________________________________
(1)	See Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of this Annual Report on Form 10-K for a description of our results of operations for 2019.
(2)	In 2018, we adopted Accounting Standards Update No. 2014-09 (Topic 606) “Revenue from Contracts with Customers” using the modified retrospective method. As such, results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting under Topic 605 “Revenue Recognition.”
(3)	In December 2019, we recorded a deferred tax benefit of $1.2 billion related to intangible asset transfers from a foreign subsidiary to Ireland and the United States. In 2018, we recorded a deferred tax charge of $588 million related to a transfer of acquired intangible assets from a foreign subsidiary to the United States. In December 2017, we recorded an estimated $5.5 billion net charge related to the enactment of the Tax Cuts and Jobs Act (Tax Reform). Tax Reform also lowered the corporate tax rate in the United States from 35% to 21% effective for tax years beginning after December 31, 2017. See Note 19. Income Taxes of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional details.
(4)	Investments in equity securities, other than equity method investments, for which we have not elected the fair value method of accounting, are recorded at fair market value, if fair value is readily determinable and, beginning January 1, 2018, unrealized gains and losses are included in Other income (expense), net on our Consolidated Statements of Income. For periods presented prior to January 1, 2018, unrealized gains and losses were included in accumulated other comprehensive income as a separate component of stockholders’ equity.
(5)	In 2019, we repaid $2.8 billion principal amount of our senior unsecured notes at maturity. In 2018, we repaid $1.8 billion principal amount of our senior unsecured notes at maturity and repaid $4.5 billion of term loans borrowed in connection with our acquisition of Kite Pharma, Inc. In 2017, in connection with the acquisition of Kite Pharma, Inc., we issued $3.0 billion aggregate principal amount of senior unsecured notes and borrowed $6.0 billion aggregate principal amount term loan facility credit agreement, of which $1.5 billion was repaid in 2017. In 2016, we issued $5.0 billion principal amount of senior unsecured notes and repaid $285 million of principal balance of convertible senior notes and $700 million of principal balance of senior unsecured notes at maturity. In 2015, we issued $10.0 billion principal amount of senior unsecured notes and repaid $213 million of principal balance of convertible senior notes at maturity.
(6)	In 2019, we adopted Accounting Standards Update No. 2016-02 (Topic 842) “Leases,” which requires lessees to recognize right-of-use assets and lease liabilities for operating leases with a lease term greater than one year. We adopted Topic 842 using the modified retrospective method. As such, results for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting under Topic 840 “Leases.” See Note 1. Organization and Summary of Significant Accounting Policies and Note 13. Leases, of the Notes to Consolidated Financial Statements included in Item 8 of our Annual Report on Form 10-K for further information.


ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand our results of operations and financial condition. MD&A is provided as a supplement to, and should be read in conjunction with, our audited Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements and other disclosures included in this Annual Report on Form 10-K (including the disclosures under Part I, Item 1A, “Risk Factors”). Additional information related to the comparison of our results of operations between the years 2018 and 2017 is included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2018 Form 10-K filed with the SEC and is incorporated by reference into this Annual Report on Form 10-K. Our Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles and are presented in U.S. dollars.

MANAGEMENT OVERVIEW

Our portfolio of marketed products includes AmBisome^®, Atripla^®, Biktarvy^®, Cayston^®, Complera^®/Eviplera^®, Descovy^®, Descovy for PrEP^®, Emtriva^®, Epclusa^®, Genvoya^®, Harvoni^®, Hepsera^®, Letairis^®, Odefsey^®, Ranexa^®, Sovaldi^®, Stribild^®, Truvada^®, Truvada for PrEP^®, Tybost^®, Vemlidy^®, Viread^®, Vosevi^®, Yescarta^® and Zydelig^®. We also sell and distribute authorized generic versions of Epclusa and Harvoni in the United States through our separate subsidiary, Asegua Therapeutics, LLC. In addition, we sell and distribute certain products through our corporate partners under collaborative agreements.

2019 Business Highlights

Our financial performance in 2019 was solid, as growth across our HIV franchise continued to drive results. We took several significant steps to position us for future growth, including an important research and development (R&D) collaboration, the introduction of a new corporate strategy and the hiring of key members of our executive leadership team. In 2019:

•We developed a new, corporate strategy to guide our work as we seek to drive growth over the next decade, with the ambitious goal of launching 10 new, transformative therapies over the next 10 years.

•We continued to make progress with our pipeline. We currently have 40 clinical-stage programs, with 14 programs either in registrational or in label-enabling studies. Of these programs, four have already received Breakthrough Therapy designation from U.S. Food and Drug Administration (FDA).

•We achieved sales of $16.4 billion across our HIV franchise in 2019, an increase of 12% from 2018, reaching another all-time high. The continued revenue growth of our HIV products was driven by the demand for Biktarvy and the increase in the number of individuals taking our products for pre-exposure prophylaxis (PrEP). At the end of 2019, Biktarvy was available in most major markets and, in the United States, approximately 27% of individuals on PrEP were receiving Descovy.

•We entered into a transformative R&D collaboration with Galapagos NV (Galapagos) in July, building on an existing partnership, and effectively enabling us to double our R&D footprint and accelerate our development of novel treatments for inflammatory and fibrotic diseases. We submitted a regulatory filing for filgotinib to FDA, and the compound is now under priority review for rheumatoid arthritis (RA). We also submitted filgotinib for approval in Europe and Japan and actively prepared for competitive launches in all three regions. We and Galapagos continued to advance the Phase 3 study of GLPG-1690 for the treatment of idiopathic pulmonary fibrosis. With regard to nonalcoholic steatohepatitis (NASH), after the STELLAR and ATLAS studies failed to reach their primary endpoints, we continued to work to understand the results to determine appropriate next steps for these therapies, including the potential for combination therapeutic approaches.

•In cell therapy, Kite, a Gilead company (Kite), submitted KTE-X19 for regulatory approval in the United States and Europe as a treatment for relapsed or refractory mantle cell lymphoma (MCL). If approved, Kite will be the first company with two cell therapies on the market. We also continued to demonstrate the efficacy of Yescarta. Data shared at the end of 2019 showed that approximately half of patients treated with Yescarta for refractory large B-cell lymphoma were still alive three years following treatment in the ZUMA-1 study, confirming Yescarta’s benefit/risk profile. In addition to cell therapy, we continued to grow our research portfolio in immuno-oncology.

•Our business also expanded geographically, including in China, where eight products have been approved since 2017 and four products (Vemlidy, Epclusa, Harvoni and Genvoya) have been listed on the National Reimbursement Drug List effective in January 2020.

During 2019, we continued to advance our product pipeline across our therapeutic areas with the goal of delivering best-in-class drugs that have the potential to improve the lives of patients with serious illnesses.

Key corporate, product, pipeline and other updates included:

Viral Diseases


•	Licensing and collaboration agreements with The Rockefeller University, Novartis AG and Lyndra Therapeutics, Inc.


•	Approval of Vosevi and Biktarvy by the China National Medical Products Administration.


•	Approval of a PrEP indication for Descovy by FDA.


•	Approval of Biktarvy and Epclusa by Japan’s Ministry of Health, Labour and Welfare (MHLW).

Inflammatory and Fibrotic Diseases


•	Collaborations with Kyverna Therapeutics, Inc. Glympse Bio, Inc., Renown Institute for Health Innovation, Goldfinch Bio, Inc., Insitro, Inc., Novo Nordisk A/S and Yuhan Corporation.


•	Agreement with Eisai Co., Ltd. for the distribution and co-promotion of filgotinib in Japan, pending regulatory approval from Japan’s MHLW, for the treatment of RA.


•	Submission of a New Drug Application (NDA) under priority review to FDA and submission of a NDA to Japan’s MHLW for filgotinib.


•	Topline results from the Phase 2 ATLAS study of combination and monotherapy investigational treatments in patients with bridging fibrosis (F3) and compensated cirrhosis (F4) due to NASH. While the study did not meet its primary endpoint, we continued to analyze the ATLAS data to determine appropriate next steps for these therapies.


•	Collaboration with Galapagos and equity investment in Galapagos to gain access to Galapagos’ current and future product portfolio. See Note 11. Collaborative and Other Arrangements of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information.


•	European Medicines Agency’s validation of the marketing authorization application for filgotinib; the application is now under evaluation by the Agency.

Oncology


•	FDA’s acceptance of our Biologics License Application and granting Priority Review designation for KTE-X19 for the treatment of adult patients with relapsed or refractory MCL.


•	European Medicines Agency’s validation of the marketing authorization application for KTE-X19; the application is now under evaluation by the Agency.


•	Collaborations with Carna Biosciences Inc., Nurix Therapeutics, Inc., Humanigen, Inc. and Kiniksa Pharmaceuticals, Ltd.

Leadership Changes

•

We have put in place a diverse, highly experienced leadership team. Senior leadership changes in 2019 included the appointment of Daniel P. O’Day as Chairman and Chief Executive Officer, Andrew D. Dickinson as Executive Vice President and Chief Financial Officer, Merdad V. Parsey as Chief Medical Officer, Christi L. Shaw as Chief Executive Officer of Kite, Johanna Mercier as Chief Commercial Officer; the departures of John G. McHutchison, Chief Scientific Officer and Head of Research and Development, Gregg H. Alton, Chief Patient Officer, and Katie L. Watson, Executive Vice President, Human Resources; and the planned retirement of Robin L. Washington from her role as Executive Vice President and Chief Financial Officer.

Other


•	Donation to the U.S. Centers for Disease Control and Prevention of up to 2.4 million bottles of Truvada and Descovy annually until 2030 for uninsured Americans at risk for HIV.

2019 Financial Highlights

Total revenues increased to $22.4 billion and total product sales increased to $22.1 billion in 2019, compared to $22.1 billion and $21.7 billion in 2018, respectively, primarily due to higher sales of our HIV products, partially offset by lower sales of Ranexa and Letairis and our HCV products. In the United States, product sales were $16.6 billion in 2019, compared to $16.2 billion in 2018. In Europe, product sales were $3.6 billion in 2019, compared to $3.7 billion in 2018. Product sales in other international locations were $2.0 billion in 2019, compared to $1.8 billion in 2018.

Cost of goods sold decreased to $4.7 billion in 2019, compared to $4.9 billion in 2018, primarily due to $259 million of lower royalty expenses, and lower amortization expenses related to intangible assets associated with Ranexa, partially offset by higher inventory write-downs. In 2019 and 2018, we recorded write-downs of $547 million and $440 million, respectively, for

slow moving and excess raw material and work in process inventory primarily due to lower long-term demand for our HCV products.

R&D expenses increased to $9.1 billion in 2019, compared to $5.0 billion in 2018, primarily due to up-front collaboration and licensing expenses of $3.9 billion related to our collaboration with Galapagos as well as higher personnel costs largely to support our cell therapy business, partially offset by lower stock-based compensation expense. In 2019 and 2018, we recorded impairment charges of $800 million and $820 million, respectively, related to in-process R&D (IPR&D) intangible assets acquired in connection with the acquisition of Kite Pharma, Inc.

Selling, general and administrative (SG&A) expenses increased to $4.4 billion in 2019, compared to $4.1 billion in 2018, primarily due to promotional expenses in the United States and expenses associated with the expansion of our business in Japan and China, partially offset by lower stock-based compensation expense.

Net income attributable to Gilead changed to $5.4 billion or $4.22 per diluted share in 2019, compared to $5.5 billion or $4.17 per diluted share in 2018, primarily due to pre-tax up-front collaboration and licensing expenses of $3.9 billion related to our collaboration with Galapagos, partially offset by the net favorable fluctuation in tax effects of intra-entity intangible asset transfers to different tax jurisdictions and an increase in net unrealized gains from equity securities. The year-over-year diluted earnings per share were favorably impacted by our stock repurchase activities.

As of December 31, 2019, we had $25.8 billion of cash, cash equivalents and marketable debt securities compared to $31.5 billion as of December 31, 2018. During 2019, we generated $9.1 billion in operating cash flow and paid $5.6 billion in connection with the collaboration with and equity investments in Galapagos, which was classified as cash flows from investing activities. We also repaid $2.8 billion of principal amount of debt, paid cash dividends of $3.2 billion and utilized $1.7 billion on repurchases of common stock in 2019.

Strategy and Outlook 2020

Our focus is to create possibilities for patients through scientific breakthroughs and innovation, by leveraging our pillars of a durable core business, existing pipeline opportunities and our strategy to drive additional growth. Our strategy includes ambitions and priorities, which enable us to achieve those ambitions. Our strategic ambitions define what success looks like over the next decade and are summarized as (i) bring 10+ transformative therapies to patients by 2030; (ii) be the biotech employer and partner of choice; and (iii) deliver shareholder value in a sustainable and responsible manner. Our strategic priorities reflect how we will deliver those ambitions: (i) expand internal and external innovation; (ii) strengthen portfolio strategy and decision making; (iii) increase patient benefit and access; and (iv) continue to evolve our culture.

In 2020, we expect underlying growth in our base business, which is expected to offset the full-year impact of our cardiopulmonary products loss of exclusivity, which occurred in 2019, and the initial generic version of Truvada in the United States in late 2020. We will also continue to invest to support the growth of Biktarvy, our Descovy for PrEP launch, preparation for competitive launches of filgotinib in RA in the United States, Japan and Europe, and continued investments in our pipeline, cell therapy and external partnerships. Our overall plan is now guided by our newly established corporate strategy that provides focus and guides resource and capital allocation priorities. We expect data read-outs in 2020 including filgotinib for ulcerative colitis, KTE-X19 for acute lymphoblastic leukemia (ALL), axicabtagene ciloleucel CD19 for indolent B-cell non-Hodgkin lymphoma (iNHL) and second line diffuse large B-cell lymphoma and GLPG-1972 for osteoarthritis. To further augment our product pipeline, we continue to pursue opportunities for collaborations, partnerships and strategic investments that fit into our long-term strategic plan.

Our progress on all of these initiatives is subject to a number of uncertainties, including, but not limited to, the possibility of unfavorable results from new and ongoing clinical trials; the continuation of an uncertain global macroeconomic environment; additional pricing pressures from payers and competitors; slower than anticipated growth in our HIV products; an increase in discounts, chargebacks and rebates due to ongoing contracts and future negotiations with commercial and government payers; market share and price erosion caused by the introduction of generic versions of products containing tenofovir disoproxil fumarate (TDF) outside the United States and Viread, Letairis and Ranexa in the United States; inaccuracies in our HCV patient start estimates; potential amendments to the Affordable Care Act or other government action that could have the effect of lowering prices; a larger-than anticipated shift in payer mix to more highly discounted payer segment; and volatility in foreign currency exchange rates.

RESULTS OF OPERATIONS

Total Revenues

The following table summarizes the period-over-period changes in our revenues:



(In millions, except percentages)	2019		Change		2018		Change		2017
Revenues:
Product sales	$	22,119	2	%	$	21,677	(16	)%	$	25,662
Royalty, contract and other revenues	330		(27	)%	450		1	%	445
Total revenues	$	22,449	1	%	$	22,127	(15	)%	$	26,107

Product Sales

2019 Compared to 2018

Total product sales increased by 2% to $22.1 billion in 2019, compared to $21.7 billion in 2018, primarily due to higher sales of our HIV products, partially offset by lower sales of Ranexa and Letairis and our HCV products.

HIV product sales increased by 12% to $16.4 billion in 2019, compared to $14.6 billion in 2018, primarily due to higher sales volume as a result of the continued uptake of Biktarvy. The increase was partially offset by decreases in sales volumes of Genvoya and our Truvada (emtricitabine (FTC)/TDF)-based products and lower average net selling price.

HCV product sales decreased by 20% to $2.9 billion in 2019, compared to $3.7 billion in 2018, primarily due to lower average net selling price, including a decline in U.S. Medicare prices in 2019.

Yescarta sales increased by 73% to $456 million in 2019, compared to $264 million in 2018, primarily due to a higher number of therapies provided to patients and the continued expansion in Europe.

Other product sales, which include Vemlidy, Viread, Letairis, Ranexa, Zydelig, AmBisome and Cayston, decreased by 26% to $2.3 billion in 2019, compared to $3.1 billion in 2018, primarily due to the expected decline in sales of Ranexa and Letairis after the entry of generic versions in the United States in early 2019.

Of our total product sales, 25% were generated outside the United States in 2019. We faced exposure to movements in foreign currency exchange rates, primarily in the Euro. We used foreign currency exchange contracts to hedge a percentage of our foreign currency exposure. Foreign currency exchange, net of hedges, had an immaterial impact on our product sales in 2019, based on a comparison using foreign currency exchange rates from 2018.

We record product sales net of estimated government and other rebates and chargebacks, cash discounts for prompt payment, distributor fees and other related costs. These deductions are generally referred to as gross-to-net deductions, which totaled $15.3 billion, or 41% of gross product sales in 2019, compared to $16.5 billion, or 43% of gross product sales in 2018. Of the $15.3 billion in 2019, $13.5 billion or 36% of gross product sales in 2019 was related to government and other rebates and chargebacks, and $1.8 billion was related to cash discounts for prompt payment, distributor fees and other related costs.

Product sales in the United States increased by 2% to $16.6 billion in 2019, compared to $16.2 billion in 2018, primarily due to higher sales of our HIV products, partially offset by lower sales of Ranexa and Letairis following the entry of generic versions in 2019 and lower sales of our HCV products. The increase in sales of our HIV products was primarily due to the continued uptake of Biktarvy and an increase in the number of individuals taking PrEP, partially offset by the decreases in sales volumes of our other HIV products including Genvoya, Atripla and Stribild. The decrease in sales of our HCV products was primarily due to lower average net selling price, including a decline in U.S. Medicare prices in 2019.

Product sales in Europe decreased by 3% to $3.6 billion in 2019, compared to $3.7 billion in 2018, primarily due to lower sales of our HCV products and the broader availability of generic versions of Truvada and Atripla. The decrease in sales of our HCV products was primarily due to lower patient starts and lower average net selling price. The decrease was partially offset by the continued uptake of Biktarvy, Odefsey and Yescarta, and favorable net adjustments for government rebates related to sales made in prior years.

Product sales in other international locations increased by 11% to $2.0 billion in 2019, compared to $1.8 billion in 2018, primarily due to higher HIV product sales in Japan, as a result of acquiring the rights to certain products in our HIV portfolio in Japan effective January 1, 2019, and higher HCV product sales in Japan due to the launch of Epclusa in 2019.

The following table summarizes the period-over-period changes in our product sales:



(In millions, except percentages)	2019		Change		2018		Change		2017
Atripla	$	600	(50	)%	$	1,206	(33	)%	$	1,806
Biktarvy	4,738		*		1,184		*		—
Complera/Eviplera	406		(38	)%	653		(32	)%	966
Descovy	1,500		(5	)%	1,581		30	%	1,218
Genvoya	3,931		(15	)%	4,624		26	%	3,674
Odefsey	1,655		4	%	1,598		44	%	1,106
Stribild	369		(43	)%	644		(39	)%	1,053
Truvada	2,813		(6	)%	2,997		(4	)%	3,134
Other HIV⁽¹⁾	47		(23	)%	61		5	%	58
Revenue share - Symtuza⁽²⁾	379		*		79		*		—
Total HIV	16,438		12	%	14,627		12	%	13,015
AmBisome	407		(3	)%	420		15	%	366
Ledipasvir/Sofosbuvir⁽³⁾	643		(47	)%	1,222		(72	)%	4,370
Letairis	618		(34	)%	943		6	%	887
Ranexa	216		(72	)%	758		6	%	717
Sofosbuvir/Velpatasvir⁽⁴⁾	1,965		—	%	1,966		(44	)%	3,510
Vemlidy	488		52	%	321		*		122
Viread	243		(21	)%	307		(71	)%	1,046
Vosevi	257		(35	)%	396		35	%	293
Yescarta	456		73	%	264		*		7
Zydelig	103		(23	)%	133		(11	)%	149
Other⁽⁵⁾	285		(11	)%	320		(73	)%	1,180
Total product sales	$	22,119	2	%	$	21,677	(16	)%	$	25,662



_________________________________________
*	Percentage is greater than 100%
(1)	Includes Emtriva and Tybost
(2)	Represents our revenue from cobicistat (C), emtricitabine (FTC) and tenofovir alafenamide (TAF) in Symtuza (darunavir/C/FTC/TAF), a fixed dose combination product commercialized by Janssen Sciences Ireland UC
(3)	Amounts consist of sales of Harvoni and the authorized generic version of Harvoni sold by our separate subsidiary, Asegua Therapeutics LLC
(4)	Amounts consist of sales of Epclusa and the authorized generic version of Epclusa sold by our separate subsidiary, Asegua Therapeutics LLC
(5)	Includes Cayston, Hepsera and Sovaldi

The following is additional discussion of sales of our HIV and HCV products:


•	Descovy (FTC/TAF)-based products: Biktarvy, Descovy, Genvoya, Odefsey and Revenue Share - Symtuza

The following table summarizes the period-over-period changes in our sales of Descovy (FTC/TAF)-based products:



(In millions, except percentages)	2019			Change		2018			Change		2017
U.S.	$	9,716		34	%	$	7,261		47	%	$	4,955
Europe	1,857			22	%	1,528			71	%	892
Other locations	630			127	%	277			83	%	151
Total	$	12,203		35	%	$	9,066		51	%	$	5,998
% of total product sales	55		%			42		%			23		%
% of HIV product sales	74		%			62		%			46		%

Descovy (FTC/TAF)-based product sales increased in all major markets in 2019 compared to 2018. The increase in both the United States and Europe was primarily due to higher demand and a shift in product mix toward Biktarvy. The increase in other international locations was primarily due to higher product sales in Japan as a result of acquiring the rights to certain products in our HIV portfolio in Japan effective January 1, 2019.


•	Truvada (FTC/TDF)-based products: Atripla, Complera/Eviplera, Stribild and Truvada

The following table summarizes the period-over-period changes in our sales of Truvada (FTC/TDF)-based products:



(In millions, except percentages)	2019			Change		2018			Change		2017
U.S.	$	3,569		(18	)%	$	4,353		(9	)%	$	4,771
Europe	450			(45	)%	815			(51	)%	1,677
Other locations	169			(49	)%	332			(35	)%	511
Total	$	4,188		(24	)%	$	5,500		(21	)%	$	6,959
% of total product sales	19		%			25		%			27		%

Truvada (FTC/TDF)-based product sales decreased in the United States and Europe in 2019 compared to 2018. The decrease in U.S. sales was primarily due to lower sales volume as a result of patients switching to newer regimens containing FTC/TAF, partially offset by the increased usage of Truvada for PrEP. The decrease in Europe sales was primarily due to lower sales volumes of Truvada and Atripla as a result of the broader availability of generic versions and patients switching to newer regimens containing FTC/TAF. We expect a decline in our sales of Truvada in the United States as patients switch to Descovy for PrEP from Truvada for PrEP and the expected entry of generic versions in late 2020.


•	HCV products: Epclusa, Harvoni, Sovaldi, Vosevi and Authorized Generics of Epclusa and Harvoni

The following table summarizes the period-over-period changes in our sales of HCV products:



(In millions, except percentages)	2019			Change		2018			Change		2017
U.S.	$	1,465		(28	)%	$	2,023		(65	)%	$	5,854
Europe	742			(17	)%	896			(52	)%	1,853
Other locations	729			(5	)%	767			(46	)%	1,430
Total	$	2,936		(20	)%	$	3,686		(60	)%	$	9,137
% of total product sales	13		%			17		%			36		%

The decrease in HCV product sales in the United States in 2019 compared to 2018 was primarily due to lower average net selling price, including a decline in U.S. Medicare prices in 2019. The decrease in HCV product sales in Europe in 2019 compared to 2018 was primarily due to lower patient starts and lower average net selling price, partially offset by favorable net adjustments for government rebates and discounts related to sales made in prior years. The decrease in HCV product sales in other international locations in 2019 compared to 2018 was primarily due to lower sales of Sovaldi, partially offset by higher sales of Epclusa.

Cost of Goods Sold and Product Gross Margin

The following table summarizes the period-over-period changes in our product sales, cost of goods sold and product gross margin:



(In millions, except percentages)	2019			Change		2018			Change		2017
Total product sales	$	22,119		2	%	$	21,677		(16	)%	$	25,662
Cost of goods sold	$	4,675		(4	)%	$	4,853		11	%	$	4,371
Product gross margin	79		%			78		%			83		%

In 2019, cost of goods sold decreased by $178 million compared to 2018, primarily due to lower royalty expenses and lower amortization expense related to the intangible assets associated with Ranexa, which was fully amortized in the first quarter of 2019, partially offset by higher inventory write-downs. In 2019, we recorded inventory write-downs of $649 million, of which $547 million was related to slow moving and excess raw material and work in process inventory primarily due to lower long-term demand for our HCV products. In 2018, we recorded inventory write-downs of $572 million, of which $440 million was related to excess raw materials primarily due to a sustained decrease in demand for Harvoni as a result of a shift in the market from Harvoni to Epclusa. Royalty expenses decreased by $259 million in 2019, compared to 2018, primarily due to lower sales of Atripla, Ranexa, Letairis and products containing elvitegravir.

Research and Development Expenses

The following table summarizes the period-over-period changes in our R&D expenses:



(In millions, except percentages)	2019		Change		2018		Change		2017
R&D expenses	$	9,106	81	%	$	5,018	34	%	$	3,734

R&D expenses consist primarily of clinical studies performed by contract research organizations, materials and supplies, payments under collaborative and other arrangements, including up-front and milestone payments, licenses and fees, as well as expense reimbursements to the collaboration partners, IPR&D impairment charges, personnel costs, including salaries, benefits and stock-based compensation expense, and overhead allocations consisting of various support and infrastructure costs.

We do not track total R&D expenses by product candidate, therapeutic area or development phase. However, we manage our R&D expenses by identifying the R&D activities we anticipate will be performed during a given period and then prioritizing efforts based on scientific data, probability of technical and regulatory successful development, market potential, available human and capital resources and other considerations. We continually review our R&D projects based on unmet medical need and, as necessary, reallocate resources among our internal R&D portfolio and external opportunities that we believe will best support the long-term growth of our business.

The following table provides a breakout of our R&D expenses by major cost type:



(In millions, except percentages)	2019		Change		2018		Change		2017
Up-front collaboration and licensing expenses	$	4,251	*		$	278	25	%	$	222
Personnel, infrastructure and other expenses	2,016		7	%	1,876		34	%	1,399
Clinical studies and outside services	1,750		5	%	1,665		(11	)%	1,881
IPR&D impairment charges	800		(2	)%	820		*		—
Stock-based compensation expenses	289		(24	)%	379		63	%	232
Total	$	9,106	81	%	$	5,018	34	%	$	3,734



_________________________________________
*	Percentage is greater than 100%

In 2019, R&D expenses increased by $4.1 billion compared to 2018, primarily due to $3.9 billion of up-front collaboration and licensing expenses related to our collaboration with Galapagos as well as higher personnel costs largely to support our cell therapy business and increased investment in our research projects, partially offset by lower stock-based compensation expense.

In 2019, we recorded an impairment charge of $800 million related to IPR&D intangible assets acquired in connection with our acquisition of Kite Pharma, Inc. primarily for the treatment of indolent non-Hodgkin lymphoma largely driven by changes in the estimated market opportunities as new therapies or combinations of existing therapies were approved. In 2018, we recorded an impairment charge of $820 million related to IPR&D intangible assets for the KITE-585 program (an anti-B cell maturation antigen being evaluated for the treatment of multiple myeloma) due to its discontinuance.

Stock-based compensation expense for 2019 decreased by $90 million, compared to 2018, primarily due to the 2018 impact of stock-based compensation expense associated with our acquisition of Kite Pharma, Inc.

Selling, General and Administrative Expenses

The following table summarizes the period-over-period changes in our SG&A expenses:



(In millions, except percentages)	2019		Change		2018		Change		2017
SG&A expenses	$	4,381	8	%	$	4,056	5	%	$	3,878

SG&A expenses relate to sales and marketing, finance, human resources, legal and other administrative activities. Expenses consist primarily of personnel costs, facilities and overhead costs, outside marketing, advertising and legal expenses and other general and administrative costs. SG&A expenses also include the Branded Prescription Drug (BPD) fee. In the United States, 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 the prior year as a percentage of total industry government sales and is trued-up upon receipt of invoices from the Internal Revenue Service.

In 2019, SG&A expenses increased by $325 million compared to 2018, primarily due to higher promotional expenses in the United States and expenses associated with the expansion of our business in Japan and China, partially offset by lower stock-based compensation expense. Stock-based compensation expense for 2019 decreased by $106 million, compared to 2018, primarily due to the 2018 impact of stock-based compensation expense associated with our acquisition of Kite Pharma, Inc.

BPD fee expenses were $247 million, $229 million and $385 million in 2019, 2018 and 2017, respectively. BPD fee expenses are not tax-deductible.

Other Income (Expense), Net

The following table summarizes the period-over-period changes in our Other income (expense), net:



(In millions, except percentages)	2019		Change		2018		Change		2017
Other income (expense), net	$	1,868	176	%	$	676	29	%	$	523

The change in Other income (expense), net in 2019, compared to 2018, was primarily due to higher net unrealized gains of $1.1 billion from changes in the fair value of our equity securities largely relating to our equity investments in Galapagos. Starting in January 2018, we recorded unrealized gains (losses) from changes in the fair value of our marketable equity securities in Other income (expense), net, on our Consolidated Statements of Income as a result of the adoption of Accounting Standards Update No. 2016-01 “Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.”

Provision for Income Taxes

The following table summarizes the period-over-period changes in our Provision for income taxes:



(In millions, except percentages)	2019			Change		2018			Change		2017
Effective tax rate	(4.0		)%	(34.0	)%	30.0		%	(35.7	)%	65.7		%
Provision for income taxes	$	(204	)			$	2,339				$	8,885

The decrease in effective tax rate and provision for income taxes in 2019, compared to 2018, was primarily due to a $1.2 billion deferred tax benefit in 2019 related to intangible asset transfers from a foreign subsidiary to Ireland and the United States. The 2018 effective tax rate included a $588 million deferred tax charge resulting from a transfer of acquired intangible assets from a foreign subsidiary to the United States.

The decrease in effective tax rate and provision for income taxes in 2018, compared to 2017, was primarily due to a $5.5 billion net tax charge in 2017 and a reduction to the U.S. corporate tax rate in 2018 as a result of the enactment of the Tax Cuts and Jobs Act (Tax Reform) in December 2017. The 2018 effective tax rate was further decreased due to a $202 million tax benefit recorded in 2018 related to settlement of tax examinations, offset by the $588 million deferred tax charge in 2018 discussed above, changes to the geographic mix of earnings and the tax on Global Intangible Low-Taxed Income (enacted as part of Tax Reform).

See Note 19. Income Taxes of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional details on Tax Reform.

LIQUIDITY AND CAPITAL RESOURCES

The following table summarizes our cash, cash equivalents, and marketable debt securities and working capital:



	December 31,
(In millions)	2019		2018
Cash, cash equivalents and marketable debt securities	$	25,840	$	31,512
Working capital	$	20,537	$	25,231

Cash, Cash Equivalents and Marketable Debt Securities

Cash, cash equivalents and marketable debt securities decreased by $5.7 billion, or 18%, compared to December 31, 2018. During 2019, we generated $9.1 billion in operating cash flow, paid $5.6 billion in connection with our collaboration with and equity investments in Galapagos, repaid $2.8 billion of debt, paid cash dividends of $3.2 billion and repurchased 26 million shares of our common stock for $1.7 billion through open market transactions.

Working Capital

Working capital decreased by $4.7 billion, or 19%, compared to December 31, 2018, primarily due to the use of cash noted above under the heading Cash, Cash Equivalents and Marketable Debt Securities.

Cash Flows

The following table summarizes our cash flow activities:



(In millions)	2019			2018			2017
Cash provided by (used in):
Operating activities	$	9,144		$	8,400		$	11,898
Investing activities	$	(7,817	)	$	14,355		$	(16,069	)
Financing activities	$	(7,634	)	$	(12,318	)	$	3,393

Cash Provided by Operating Activities

Cash provided by operating activities represents the cash receipts and disbursements related to all of our activities other than investing and financing activities. Operating cash flow is derived by adjusting our net income for non-cash items and changes in operating assets and liabilities. Cash provided by operating activities increased by $744 million to $9.1 billion in 2019 compared to 2018, primarily due to lower tax payments in 2019, partially offset by lower collections on accounts receivable in 2019 and the collection of a receivable from Bristol-Myers Squibb Company in 2018 following the termination of a collaboration pursuant to the terms of the existing agreements. The tax payments made in 2018 included a $500 million payment related to the first annual installment of the Tax Reform transition tax, a $771 million deemed early payment of the Tax Reform transition tax and a $514 million settlement of a tax examination.

Starting in 2019, up-front and milestone payments related to collaborative and other arrangements are classified as cash flows from investing activities in our Consolidated Statements of Cash Flows. Comparative prior year amounts were not material and were not reclassified to investing activities from operating activities.

Cash Provided by (Used in) Investing Activities

Cash provided by (used in) investing activities primarily consists of purchases, sales and maturities of our marketable debt securities, capital expenditures, up-front and milestone payments related to collaborative and other arrangements, purchases of equity securities and other investments. Cash used in investing activities was $7.8 billion in 2019 compared to cash provided by investing activities of $14.4 billion in 2018. The change in cash provided by (used in) investing activities was primarily due to higher purchases of marketable debt securities and the $5.6 billion payments made in connection with our collaboration with and equity investments in Galapagos, partially offset by higher proceeds from sales of marketable debt securities. The higher purchases of marketable debt securities were the result of a shift in our investment strategy to investing in longer dated securities in 2019 compared to 2018. In addition, we paid Japan Tobacco Inc. $365 million during 2019 in connection with acquiring the rights to market and distribute certain HIV products in Japan.

Cash provided by investing activities was $14.4 billion in 2018 compared to cash used in investing activities of $16.1 billion in 2017. The change in cash provided by (used in) investing activities was primarily due to higher proceeds from maturities of our marketable debt securities and lower purchases of marketable debt securities, partially offset by lower proceeds from sales of our marketable debt securities. In addition, $10.4 billion cash was used to acquire Kite Pharma, Inc. in 2017, whereas no cash was used for business combinations in 2018.

Cash Provided by (Used in) Financing Activities

Cash used in financing activities decreased by $4.7 billion to $7.6 billion in 2019 compared to 2018, primarily due to $3.5 billion lower repayments of debt and $1.2 billion lower repurchases of our common stock during 2019.

Cash used in financing activities was $12.3 billion in 2018, compared to cash provided by financing activities of $3.4 billion in 2017. The change in cash provided by (used in) financing activities was primarily due to higher repayment of debt and repurchases of our common stock in 2018. In addition, we had $9.0 billion net proceeds from debt issuances to partially fund our acquisition of Kite Pharma, Inc. in 2017, whereas no debt was issued in 2018.

Debt and Credit Facilities

In 2019 and 2018, we repaid at maturity $2.8 billion and $1.8 billion principal amount of senior unsecured notes, respectively. In addition, in 2018, we repaid $4.5 billion borrowed under our term loan facility credit agreement, at which time the term loan facility credit agreement was terminated. In February 2020, we repaid at maturity $500 million principal amount of senior unsecured notes.

As of December 31, 2019, no amounts were outstanding under our $2.5 billion five-year revolving credit facility maturing in May 2021.

We are required to comply with certain covenants under our notes indentures, and as of December 31, 2019, we were not in violation of any covenants.

The summary of our borrowings under various financing arrangements is included in Note 12. Debt and Credit Facilities of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Capital Return Program

The details of our Stock Repurchase Programs and Dividends are included in Note 15. Stockholders’ Equity of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Stock Repurchase Programs

In the first quarter of 2016, our Board of Directors authorized a $12.0 billion stock repurchase program (2016 Program), under which repurchases may be made in the open market or in privately negotiated transactions. We started repurchases under the 2016 Program in April 2016.

Repurchases under the 2016 Program were 26 million and 40 million shares of our common stock for $1.7 billion and $2.9 billion in 2019 and 2018, respectively. As of December 31, 2019, the remaining authorized repurchase amount under the 2016 Program was $3.4 billion.

Dividends

We declared and paid quarterly cash dividends for an aggregate amount of $3.2 billion or $2.52 per share of our common stock and $3.0 billion or $2.28 per share of our common stock in 2019 and 2018, respectively.

On February 4, 2020, we announced that our Board of Directors declared a quarterly cash dividend increase of 8% from $0.63 to $0.68 per share of our common stock, with a payment date of March 30, 2020 to all stockholders of record as of the close of business on March 13, 2020. Future dividends are subject to declaration by the Board of Directors.

Capital Resources

We believe our existing capital resources, supplemented by cash flows generated from our operations, will be adequate to satisfy our capital needs for the foreseeable future. Our future capital requirements will depend on many factors, including but not limited to the following:


•	the commercial performance of our current and future products;


•	the progress and scope of our R&D efforts, including preclinical studies and clinical trials;


•	the cost, timing and outcome of regulatory reviews;


•	the expansion of our sales and marketing capabilities;


•	the possibility of acquiring additional manufacturing capabilities or office facilities;


•	the possibility of acquiring other companies or new products;


•	debt service requirements;


•	the establishment of additional collaborative relationships with other companies; and


•	costs associated with the defense, settlement and adverse results of government investigations and litigation.

We may in the future require additional funding, which could be in the form of proceeds from equity or debt financings. If such funding is required, we cannot guarantee that it will be available to us on favorable terms, if at all.

CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS

The discussion and analysis of our financial condition and results of operations is based on our Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these 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 and base our estimates on historical experience and on various other 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.

We believe the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of our Consolidated Financial Statements.

Revenue Recognition

Product Sales

We recognize revenue from product sales when control of the product transfers, generally upon shipment or delivery, to the customer, or in certain cases, upon the corresponding sales by our customer to a third party. Upon recognition of revenue from product sales, provisions are made for various forms of variable consideration, which include 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. Variable consideration is included in the net sales price only to the extent a significant reversal in the amount of cumulative revenue recognized is not probable of occurring when the uncertainty associated with the variable consideration is subsequently resolved. Government and other rebates and chargebacks represent the majority of our variable consideration and require complex and significant judgment by management. Estimates are assessed each period and updated to reflect current information.

Government and Other Rebates and Chargebacks

Government and other rebates and chargebacks include amounts paid to payers and healthcare providers in the United States, including Medicaid rebates, AIDS Drug Assistance Program rebates and chargebacks, Veterans Administration and Public Health Service chargebacks 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.

For qualified programs that can purchase our products through wholesalers or other distributors at a lower contractual price, the wholesalers or distributors charge back to us the difference between their acquisition cost and the lower contractual price.

Our allowances for government and other rebates and chargebacks are estimated based on products sold, historical payer mix, 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 payer mix for these programs. We believe the methodology that we use to estimate our government and other rebates and chargebacks is reasonable and appropriate given the current facts and circumstances. However, actual results may differ significantly from our estimates. Historically, our actual government rebates and chargebacks claimed for prior periods have varied by less than 5% from our estimates.

Government and other chargebacks that are payable to our direct customers are classified as reductions of Accounts receivable in our Consolidated Balance Sheets and totaled $655 million and $492 million at December 31, 2019 and 2018, respectively. Government and other rebates that are payable to third party payers and healthcare providers are recorded in Accrued government and other rebates on our Consolidated Balance Sheets and totaled $3.5 billion and $3.9 billion at December 31, 2019 and 2018, respectively.

The following table summarizes the consolidated activities and ending balances in our government and other rebates and chargebacks accounts:



(in millions)	Balance at Beginning of Year		Decrease/(Increase) to Product Sales			Payments			Balance at End of Year
Year ended December 31, 2019:
Activity related to 2019 sales	$	—	$	13,791		$	(9,920	)	$	3,871
Activity related to sales prior to 2019	4,420		(279		)	(3,904		)	237
Total	$	4,420	$	13,512		$	(13,824	)	$	4,108
Year ended December 31, 2018:
Activity related to 2018 sales	$	—	$	14,784		$	(10,953	)	$	3,831
Activity related to sales prior to 2018	5,044		41			(4,496		)	589
Total	$	5,044	$	14,825		$	(15,449	)	$	4,420

Legal Contingencies

We are a party to various legal actions. The most significant of these are described in Note 14. Commitments and Contingencies - Legal Proceedings of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. It is not possible to determine the outcome of these matters. 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.

Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of the inherent uncertainty and unpredictability related to these matters, accruals are based on what we believe to be the best information available at the time of our assessment, including the legal facts and circumstances of the case, status of the proceedings, applicable law and the views of legal counsel. Upon the final resolution of such matters, it is possible that there may be a loss in excess of the amount recorded, and such amounts could have a material adverse effect on our results of operations, cash flows or financial position. We periodically reassess these matters when additional information becomes available and adjust our estimates and assumptions when facts and circumstances indicate the need for any changes. We did not have any material accruals in our Consolidated Balance Sheets for such matters as of December 31, 2019 and 2018.

Valuation of Intangible Assets

We have acquired, and expect to continue to acquire, intangible assets through acquisition or consolidation of variable interest entities. The identifiable intangible assets are measured at their respective fair values as of the acquisition date and may be subject to revision within the measurement period, which may be up to one year from the acquisition date. The fair values of the assets are generally determined using a probability-weighted income approach that discounts expected future cash flows to present value. The estimated net cash flows are discounted using a discount rate that is based on the estimated weighted-average cost of capital for companies with profiles similar to our profile and represents the rate that market participants would use to value the intangible assets. The discounted cash flow models used in valuing these intangible assets require the use of significant estimates and assumptions including but not limited to:


•	estimates of revenues and operating profits related to the products or product candidates;


•	the probability of technical and regulatory success for unapproved product candidates considering their stages of development;


•	the time and resources needed to complete the development and approval of product candidates;


•	the life of the potential commercialized products and associated risks, including the inherent difficulties and uncertainties in developing a product candidate such as obtaining FDA and other regulatory approvals; and


•	risks related to the viability of and potential alternative treatments in any future target markets.

We believe the fair values used to record intangible assets acquired are based upon reasonable estimates and assumptions given the facts and circumstances as of the related valuation dates.