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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
or 
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 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 such files). Yes x    No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth 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
Number of shares outstanding of the issuer’s common stock, par value $0.001 per share, as of April 30, 2020: 1,254,373,400
 





GILEAD SCIENCES, INC.
INDEX

PART I.
 
2
 
 
 
 
 
 
Item 1.
 
2
 
 
 
 
 
 
 
 
2
 
 
 
 
 
 
 
 
3
 
 
 
 
 
 
 
 
4
 
 
 
 
 
 
 
 
5
 
 
 
 
 
 
 
 
6
 
 
 
 
 
 
 
 
7
 
 
 
 
 
 
Item 2.
 
24
 
 
 
 
 
 
Item 3.
 
33
 
 
 
 
 
 
Item 4.
 
33
 
 
 
 
 
PART II.
 
34
 
 
 
 
 
 
Item 1.
 
34
 
 
 
 
 
 
Item 1A.
 
34
 
 
 
 
 
 
Item 2.
 
48
 
 
 
 
 
 
Item 3.
 
48
 
 
 
 
 
 
Item 4.
 
48
 
 
 
 
 
 
Item 5.
 
48
 
 
 
 
 
 
Item 6.
 
48
 
 
 
 
 
 
52


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 Eyetech, Inc. SYMTUZA® is a registered trademark of Janssen Sciences Ireland UC. TAMIFLU® is a registered trademark of Hoffmann-La Roche Inc. This report also includes other trademarks, service marks and trade names of other companies.







PART I.
FINANCIAL INFORMATION
Item 1.    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in millions, except per share amounts)
 
March 31, 2020
 
December 31, 2019
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
10,051

 
$
11,631

Short-term marketable securities
10,734

 
12,721

Accounts receivable, net of allowances of $793 and $758, respectively
3,907

 
3,582

Inventories
986

 
922

Prepaid and other current assets
1,272

 
1,440

Total current assets
26,950

 
30,296

Property, plant and equipment, net
4,564

 
4,502

Long-term marketable securities
3,529

 
1,488

Intangible assets, net
13,502

 
13,786

Goodwill
4,117

 
4,117

Other long-term assets
7,079

 
7,438

Total assets
$
59,741

 
$
61,627

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
590

 
$
713

Accrued government and other rebates
3,457

 
3,473

Other accrued liabilities
2,833

 
3,074

Current portion of long-term debt and other obligations, net
1,999

 
2,499

Total current liabilities
8,879

 
9,759

Long-term debt, net
22,098

 
22,094

Long-term income taxes payable
5,595

 
6,115

Other long-term obligations
990

 
1,009

Commitments and contingencies (Note 10)


 


Stockholders’ equity:
 

 
 

Preferred stock, par value $0.001 per share; 5 shares authorized; none outstanding

 

Common stock, par value $0.001 per share; 5,600 shares authorized; 1,254 and 1,266 shares issued and outstanding, respectively
1

 
1

Additional paid-in capital
3,311

 
3,051

Accumulated other comprehensive income
46

 
85

Retained earnings
18,709

 
19,388

Total Gilead stockholders’ equity
22,067

 
22,525

Noncontrolling interest
112

 
125

Total stockholders’ equity
22,179

 
22,650

Total liabilities and stockholders’ equity
$
59,741

 
$
61,627





See accompanying notes.

2



GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in millions, except per share amounts)
 
 
Three Months Ended
 
 
March 31,
 
 
2020
 
2019
Revenues:
 
 
 
 
Product sales
 
$
5,467

 
$
5,200

Royalty, contract and other revenues
 
81

 
81

Total revenues
 
5,548

 
5,281

Costs and expenses:
 
 
 
 
Cost of goods sold
 
969

 
957

Research and development expenses
 
1,101

 
1,057

Selling, general and administrative expenses
 
1,076

 
1,030

Total costs and expenses
 
3,146

 
3,044

Income from operations
 
2,402

 
2,237

Interest expense
 
(241
)
 
(254
)
Other income (expense), net
 
(158
)
 
367

Income before provision for income taxes
 
2,003

 
2,350

Provision for income taxes
 
465

 
382

Net income
 
1,538

 
1,968

Net loss attributable to noncontrolling interest
 
(13
)
 
(7
)
Net income attributable to Gilead
 
$
1,551

 
$
1,975

 
 
 
 
 
Net income per share attributable to Gilead common stockholders - basic
 
$
1.23

 
$
1.55

Shares used in per share calculation - basic
 
1,262

 
1,276

Net income per share attributable to Gilead common stockholders - diluted
 
$
1.22

 
$
1.54

Shares used in per share calculation - diluted
 
1,270

 
1,283
























See accompanying notes.

3



GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(in millions)
 
 
Three Months Ended
 
 
March 31,
 
 
2020
 
2019
Net income
 
$
1,538

 
$
1,968

Other comprehensive income:
 
 
 
 
Net foreign currency translation (loss) gain, net of tax
 
(39
)
 
21

Available-for-sale debt securities:
 
 
 
 
Net unrealized (loss) gain, net of tax
 
(23
)
 
30

Reclassifications to net income, net of tax
 
(11
)
 

Net change
 
(34
)
 
30

Cash flow hedges:
 
 
 
 
Net unrealized gain, net of tax
 
57

 
28

Reclassifications to net income, net of tax
 
(23
)
 
(29
)
Net change
 
34

 
(1
)
Other comprehensive (loss) income
 
(39
)
 
50

Comprehensive income
 
1,499

 
2,018

Comprehensive loss attributable to noncontrolling interest
 
(13
)
 
(7
)
Comprehensive income attributable to Gilead
 
$
1,512

 
$
2,025
































See accompanying notes.

4



GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited)
(in millions, except per share amounts)

 
 
Three Months Ended March 31, 2020
 
 
Gilead Stockholders’ Equity 
 
Noncontrolling
Interest
 
Total
Stockholders’
Equity
 
Common Stock 
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
 
Income
 
Retained
Earnings
 
 
Shares
 
Amount
 
 
Balance at December 31, 2019
 
1,266

 
$
1

 
$
3,051

 
$
85

 
$
19,388

 
$
125

 
$
22,650

Net income (loss)
 

 

 

 

 
1,551

 
(13
)
 
1,538

Other comprehensive loss, net of tax
 

 

 

 
(39
)
 

 

 
(39
)
Issuances under employee stock purchase plan
 
1

 

 
66

 

 

 

 
66

Issuances under equity incentive plans
 
7

 

 
111

 

 

 

 
111

Stock-based compensation
 

 

 
141

 

 

 

 
141

Repurchases of common stock
 
(20
)
 

 
(58
)
 

 
(1,356
)
 

 
(1,414
)
Dividends declared ($0.68 per share)
 

 

 

 

 
(867
)
 

 
(867
)
Cumulative effect from the adoption of new accounting standard (Note 1)
 

 

 

 

 
(7
)
 

 
(7
)
Balance at March 31, 2020
 
1,254

 
$
1

 
$
3,311

 
$
46

 
$
18,709

 
$
112

 
$
22,179


 
 
Three Months Ended March 31, 2019
 
 
Gilead Stockholders’ Equity 
 
Noncontrolling
Interest
 
Total
Stockholders’
Equity
 
Common Stock 
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
 
Income
 
Retained
Earnings
 
 
Shares
 
Amount
 
 
Balance at December 31, 2018
 
1,282

 
$
1

 
$
2,282

 
$
80

 
$
19,024

 
$
147

 
$
21,534

Net income (loss)
 

 

 

 

 
1,975

 
(7
)
 
1,968

Other comprehensive income, net of tax
 

 

 

 
50

 

 

 
50

Issuances under employee stock purchase plan
 
1

 

 
63

 

 

 

 
63

Issuances under equity incentive plans
 
4

 

 
41

 

 

 

 
41

Stock-based compensation
 

 

 
144

 

 

 

 
144

Repurchases of common stock
 
(13
)
 

 
(36
)
 

 
(867
)
 

 
(903
)
Dividends declared ($0.63 per share)
 

 

 

 

 
(814
)
 

 
(814
)
Cumulative effect from the adoption of new accounting standard
 

 

 

 

 
8

 

 
8

Balance at March 31, 2019
 
1,274

 
$
1

 
$
2,494

 
$
130

 
$
19,326

 
$
140

 
$
22,091
















See accompanying notes.

5



GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in millions)
 
 
Three Months Ended
 
 
March 31,
 
 
2020
 
2019
Operating Activities:
 
 
 
 
Net income
 
$
1,538

 
$
1,968

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation expense
 
68

 
60

Amortization expense
 
281

 
299

Stock-based compensation expense
 
141

 
143

Deferred income taxes
 
56

 
24

Net unrealized loss (gain) from equity securities
 
283

 
(197
)
Up-front and milestone expense related to collaborative and other arrangements
 
111

 
133

Other
 
59

 
40

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable, net
 
(376
)
 
32

Inventories
 
15

 
(15
)
Prepaid expenses and other
 
46

 
(43
)
Accounts payable
 
(109
)
 
(201
)
Income taxes payable
 
(127
)
 
(249
)
Accrued liabilities and other
 
(550
)
 
(417
)
Net cash provided by operating activities
 
1,436

 
1,577

 
 
 
 
 
Investing Activities:
 
 
 
 
Purchases of marketable debt securities
 
(13,158
)
 
(6,722
)
Proceeds from sales of marketable debt securities
 
9,656

 
575

Proceeds from maturities of marketable debt securities
 
3,449

 
6,511

Up-front and milestone payments related to collaborative and other arrangements
 
(112
)
 
(133
)
Purchases of equity securities
 
(8
)
 
(56
)
Capital expenditures
 
(171
)
 
(237
)
Other
 

 
(182
)
Net cash used in investing activities
 
(344
)
 
(244
)
 
 
 
 
 
Financing Activities:
 
 
 
 
Proceeds from issuances of common stock
 
177

 
103

Repurchases of common stock
 
(1,328
)
 
(834
)
Repayments of debt and other obligations
 
(500
)
 
(750
)
Payments of dividends
 
(874
)
 
(817
)
Other
 
(86
)
 
(68
)
Net cash used in financing activities
 
(2,611
)
 
(2,366
)
Effect of exchange rate changes on cash and cash equivalents
 
(61
)
 
20

Net change in cash and cash equivalents
 
(1,580
)
 
(1,013
)
Cash and cash equivalents at beginning of period
 
11,631

 
17,940

Cash and cash equivalents at end of period
 
$
10,051

 
$
16,927




See accompanying notes.

6



GILEAD SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. The financial statements include all adjustments consisting of normal recurring adjustments that the management of Gilead Sciences, Inc. (Gilead, we, our or us) believes are necessary for a fair presentation of the periods presented. These interim financial results are not necessarily indicative of results expected for the full fiscal year or for any subsequent interim period.
The accompanying Condensed Consolidated Financial Statements include the accounts of Gilead, our wholly-owned subsidiaries and certain variable interest entities for which we are the primary beneficiary. All intercompany transactions have been eliminated. For consolidated entities where we own or are exposed to less than 100% of the economics, we record net income (loss) attributable to noncontrolling interest in our Condensed Consolidated Statements of Income equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties.
We assess whether we are the primary beneficiary of a variable interest entity (VIE) at the inception of the arrangement and at each reporting date. This assessment is based on our power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and our obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.
The accompanying Condensed Consolidated Financial Statements and related Notes to Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the related notes thereto for the year ended December 31, 2019, included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission.
Segment Information
We have one operating segment, which focuses on the discovery, development and commercialization of innovative medicines in areas of unmet medical need. Our Chief Executive Officer (CEO), as the chief operating decision-maker, manages and allocates resources to the operations of our company on an entity-wide basis. Managing and allocating resources on an entity-wide basis enables our CEO to assess the overall level of resources available and how to best deploy these resources across functions and research and development (R&D) projects based on unmet medical need and, as necessary, reallocate resources among our internal R&D portfolio and external opportunities to best support the long-term growth of our business. See Note 2. Revenues for additional information.
Significant Accounting Policies, Estimates and Judgments
The preparation of these Condensed Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. On an ongoing basis, we evaluate our significant accounting policies and estimates. We base our estimates on historical experience and on various market-specific and other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates are assessed each period and updated to reflect current information, such as the economic considerations related to the impact that the recent coronavirus disease (COVID-19) could have on our significant accounting estimates. Actual results could differ materially from these estimates under different assumptions or conditions.
Reclassification
Certain amounts for the three months ended March 31, 2019 were reclassified to conform to the current period presentation. Up-front and milestone payments related to collaborative and other arrangements of $133 million previously classified as cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows are now presented as cash flows from investing activities.
Concentrations of Risk
We are subject to credit risk from our portfolio of cash equivalents and marketable securities. Under our investment policy, we limit amounts invested in such securities by credit rating, maturity, industry group, investment type and issuer, except for securities issued by the U.S. government. We are not exposed to any significant concentrations of credit risk from our investment portfolio. The goals of our investment policy, in order of priority, are as follows: safety and preservation of principal and diversification of risk; liquidity of investments sufficient to meet cash flow requirements; and a competitive after-tax rate of return.

7



We are also subject to credit risk from our accounts receivable related to our product sales. Trade accounts receivable are recorded net of allowances for wholesaler chargebacks related to government and other programs, cash discounts for prompt payment and credit losses. Estimates of our allowance for credit losses consider a number of factors including existing contractual payment terms, individual customer circumstances, historical payment patterns of our customers, a review of the local economic environment and its potential impact on expected future customer payment patterns and government funding and reimbursement practices. The majority of our trade accounts receivable arises from product sales in the United States, Europe and Japan. Our allowance for credit losses was $55 million and $47 million as of March 31, 2020 and January 1, 2020, respectively. There were no write-offs charged against the allowance for the three months ended March 31, 2020.
Recently Adopted Accounting Standards
In June 2016, the FASB issued Accounting Standards Update No. 2016-13 “Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments” (ASU 2016-13) and has since modified the standard with several ASUs (collectively the “new credit loss standard”). The new credit loss standard requires measurement and recognition of expected credit losses for financial assets. On January 1, 2020, we adopted this standard using a modified retrospective approach. The adoption did not have a material impact on our Condensed Consolidated Financial Statements.
In November 2018, the FASB issued Accounting Standards Update No. 2018-18 “Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606” (ASU 2018-18). ASU 2018-18 clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under ASC 606 when the counterparty is a customer. In addition, the update precludes an entity from presenting consideration from a transaction in a collaborative arrangement as customer revenue if the counterparty is not a customer for that transaction. On January 1, 2020, we adopted this standard and applied it retrospectively to January 1, 2018 when we initially adopted Topic 606. The adoption did not have an impact on our Condensed Consolidated Financial Statements.


8



2.
REVENUES
Disaggregation of Revenues
The following table disaggregates our product sales by product and geographic region and disaggregates our royalty, contract and other revenues by geographic region (in millions):
 
 
Three Months Ended March 31, 2020
 
Three Months Ended March 31, 2019
 
 
U.S.
 
Europe
 
Other Locations
 
Total
 
U.S.
 
Europe
 
Other Locations
 
Total
Product sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Atripla
 
$
81

 
$
7

 
$
7

 
$
95

 
$
133

 
$
16

 
$
22

 
$
171

Biktarvy
 
1,412

 
181

 
100

 
1,693

 
739

 
48

 
6

 
793

Complera/Eviplera
 
24

 
47

 
5

 
76

 
44

 
62

 
9

 
115

Descovy
 
363

 
61

 
34

 
458

 
233

 
68

 
41

 
342

Genvoya
 
612

 
151

 
61

 
824

 
728

 
193

 
94

 
1,015

Odefsey
 
269

 
127

 
13

 
409

 
282

 
106

 
9

 
397

Stribild
 
34

 
17

 
2

 
53

 
67

 
18

 
11

 
96

Truvada
 
383

 
8

 
15

 
406

 
551

 
33

 
22

 
606

Other HIV(1)
 
3

 
2

 
3

 
8

 
11

 
1

 
5

 
17

Revenue share – Symtuza(2)
 
72

 
38

 
2

 
112

 
42

 
24

 

 
66

AmBisome
 
18

 
59

 
42

 
119

 
8

 
57

 
28

 
93

Ledipasvir/Sofosbuvir(3)
 
53

 
11

 
48

 
112

 
117

 
27

 
81

 
225

Letairis
 
83

 

 

 
83

 
197

 

 

 
197

Ranexa
 
8

 

 

 
8

 
155

 

 

 
155

Sofosbuvir/Velpatasvir(4)
 
311

 
122

 
131

 
564

 
230

 
154

 
107

 
491

Vemlidy
 
73

 
7

 
56

 
136

 
65

 
4

 
32

 
101

Viread
 
4

 
11

 
25

 
40

 
12

 
14

 
46

 
72

Vosevi
 
33

 
11

 
4

 
48

 
45

 
16

 
2

 
63

Yescarta
 
103

 
37

 

 
140

 
90

 
6

 

 
96

Zydelig
 
8

 
12

 

 
20

 
11

 
15

 
1

 
27

Other(5)
 
42

 
18

 
3

 
63

 
36

 
20

 
6

 
62

Total product sales
 
3,989

 
927

 
551

 
5,467

 
3,796

 
882

 
522

 
5,200

Royalty, contract and other revenues
 
17

 
48

 
16

 
81

 
22

 
56

 
3

 
81

Total revenues
 
$
4,006

 
$
975

 
$
567

 
$
5,548

 
$
3,818

 
$
938

 
$
525

 
$
5,281

____________________
Notes:
(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.

9



Revenues from Major Customers
The following table summarizes revenues from each of our customers who individually accounted for 10% or more of our total revenues (as a percentage of total revenues):
 
 
Three Months Ended
 
 
March 31,
 
 
2020
 
2019
AmerisourceBergen Corp.
 
22
%
 
21
%
Cardinal Health, Inc.
 
22
%
 
20
%
McKesson Corp.
 
21
%
 
20
%

Revenues Recognized from Performance Obligations Satisfied in Prior Periods
Revenues recognized from performance obligations satisfied in prior years related to royalties for licenses of our intellectual property were $188 million and $155 million for the three months ended March 31, 2020 and 2019, respectively. Changes in estimates for variable consideration related to sales made in prior years resulted in a $38 million and $107 million increase in revenues for the three months ended March 31, 2020 and 2019, respectively.
Contract Balances
Our contract assets, which consist of unbilled amounts primarily from arrangements where the licensing of intellectual property is the only or predominant performance obligation, totaled $140 million and $144 million as of March 31, 2020 and December 31, 2019, respectively. Contract liabilities were not material as of March 31, 2020 and December 31, 2019.
3.
FAIR VALUE MEASUREMENTS
We determine the fair value of financial and non-financial assets and liabilities using the fair value hierarchy, which establishes three levels of inputs that may be used to measure fair value, as follows:
Level 1 inputs include quoted prices in active markets for identical assets or liabilities;
Level 2 inputs include observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. For our marketable securities, we review trading activity and pricing as of the measurement date. When sufficient quoted pricing for identical securities is not available, we use market pricing and other observable market inputs for similar securities obtained from various third-party data providers. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data; and
Level 3 inputs include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability. Our Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques and significant management judgment or estimation.
Our financial instruments consist primarily of cash and cash equivalents, marketable debt securities, accounts receivable, foreign currency exchange contracts, equity securities, accounts payable and short-term and long-term debt. Cash and cash equivalents, marketable debt securities, certain equity securities and foreign currency exchange contracts are reported at their respective fair values in our Condensed Consolidated Balance Sheets. Equity securities without readily determinable fair values are recorded using the measurement alternative of cost less impairment, if any, adjusted for observable price changes in orderly transactions for identical or similar investments of the same issuer. Short-term and long-term debt are reported at their amortized costs in our Condensed Consolidated Balance Sheets. The remaining financial instruments are reported in our Condensed Consolidated Balance Sheets at amounts that approximate current fair values.

10



The following table summarizes the types of assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy (in millions):
 
March 31, 2020
 
December 31, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury securities
$
2,072

 
$

 
$

 
$
2,072

 
$
2,433

 
$

 
$

 
$
2,433

Certificates of deposit

 
3,201

 

 
3,201

 

 
3,517

 

 
3,517

U.S. government agencies securities

 
134

 

 
134

 

 
1,081

 

 
1,081

Non-U.S. government securities

 
22

 

 
22

 

 
174

 

 
174

Corporate debt securities

 
9,235

 

 
9,235

 

 
9,204

 

 
9,204

Residential mortgage and asset-backed securities

 
256

 

 
256

 

 
91

 

 
91

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity investment in Galapagos
3,316

 

 

 
3,316

 
3,477

 

 

 
3,477

Money market funds
7,763

 

 

 
7,763

 
7,069

 

 

 
7,069

Other publicly traded equity securities
239

 

 

 
239

 
322

 

 

 
322

Deferred compensation plan
156

 

 

 
156

 
171

 

 

 
171

Foreign currency derivative contracts

 
76

 

 
76

 

 
37

 

 
37

Total
$
13,546

 
$
12,924

 
$

 
$
26,470

 
$
13,472

 
$
14,104

 
$

 
$
27,576

Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Deferred compensation plan
$
156

 
$

 
$

 
$
156

 
$
171

 
$

 
$

 
$
171

Foreign currency derivative contracts

 
5

 

 
5

 

 
8

 

 
8

Total
$
156

 
$
5

 
$

 
$
161

 
$
171

 
$
8

 
$

 
$
179


Changes in the fair value of equity securities resulted in a net unrealized loss of $283 million and a net unrealized gain of $197 million for the three months ended March 31, 2020 and 2019, respectively, which were included in Other income (expense), net on our Condensed Consolidated Statements of Income.
Our equity investment in Galapagos NV (Galapagos) is classified as Other long-term assets on our Condensed Consolidated Balance Sheets. The following table summarizes the classification of our equity securities in our Condensed Consolidated Balance Sheets (in millions):
 
March 31, 2020
 
December 31, 2019
Cash and cash equivalents
$
7,763

 
$
7,069

Prepaid and other current assets
239

 
319

Other long-term assets
3,472

 
3,651

Total
$
11,474

 
$
11,039


Our available-for-sale debt securities are classified as cash equivalents, short-term marketable securities and long-term marketable securities in our Condensed Consolidated Balance Sheets. See Note 4. Available-For-Sale Debt Securities for additional information.
Level 2 Inputs
We estimate the fair values of Level 2 instruments by taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income-based and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate the fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities, issuer credit spreads, benchmark securities, prepayment/default projections based on historical data and other observable inputs.
Substantially all of our foreign currency derivative contracts have maturities within an 18-month time horizon and all are with counterparties that have a minimum credit rating of A- or equivalent by S&P Global Ratings, Moody’s Investors Service, Inc. or Fitch Ratings, Inc. We estimate the fair values of these contracts by taking into consideration the valuations obtained from

11



a third-party valuation service that utilizes an income-based industry standard valuation model for which all significant inputs are observable, either directly or indirectly. These inputs include foreign currency exchange rates, London Interbank Offered Rates (LIBOR) and swap rates. These inputs, where applicable, are observable at commonly quoted intervals.
The total estimated fair values of our short-term and long-term debt, determined using Level 2 inputs based on their quoted market values, were approximately $27.7 billion and $27.3 billion as of March 31, 2020 and December 31, 2019, respectively, and the carrying values were $24.1 billion and $24.6 billion as of March 31, 2020 and December 31, 2019, respectively.
4.
AVAILABLE-FOR-SALE DEBT SECURITIES
The following table summarizes our available-for-sale debt securities (in millions):
 
 
March 31, 2020
 
December 31, 2019
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value 
U.S. treasury securities
 
$
2,048

 
$
24

 
$

 
$
2,072

 
$
2,433

 
$

 
$

 
$
2,433

Certificates of deposit
 
3,201

 

 

 
3,201

 
3,517

 

 

 
3,517

U.S. government agencies securities
 
134

 

 

 
134

 
1,081

 

 

 
1,081

Non-U.S. government securities
 
22

 

 

 
22

 
174

 

 

 
174

Corporate debt securities
 
9,287

 
3

 
(55
)
 
9,235

 
9,203

 
2

 
(1
)
 
9,204

Residential mortgage and asset-backed securities
 
260

 

 
(4
)
 
256

 
91

 

 

 
91

Total
 
$
14,952

 
$
27

 
$
(59
)
 
$
14,920

 
$
16,499

 
$
2

 
$
(1
)
 
$
16,500


The following table summarizes the classification of our available-for-sale debt securities in our Condensed Consolidated Balance Sheets (in millions):
 
 
March 31, 2020
 
December 31, 2019
Cash and cash equivalents
 
$
657

 
$
2,291

Short-term marketable securities
 
10,734

 
12,721

Long-term marketable securities
 
3,529

 
1,488

Total
 
$
14,920

 
$
16,500


Accrued interest receivable excluded from both the fair value and amortized cost basis of the available-for-sale debt securities was $60 million and $37 million as of March 31, 2020 and December 31, 2019, respectively, and is recorded in Prepaid and other current assets on our Condensed Consolidated Balance Sheets. In connection with the adoption of the new credit loss standard, we made an accounting policy election to not measure an allowance for credit losses for accrued interest receivable. There were no write-offs of accrued interest receivable during the three months ended March 31, 2020.
The following table summarizes our available-for-sale debt securities by contractual maturity (in millions):
 
 
March 31, 2020
 
 
Amortized Cost
 
Fair Value
Within one year
 
$
11,420

 
$
11,391

After one year through five years
 
3,513

 
3,510

After five years
 
19

 
19

Total
 
$
14,952

 
$
14,920



12



The following table summarizes our available-for-sale debt securities in an unrealized loss position (in millions):
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
 
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
 
$
(55
)
 
$
5,639

 
$

 
$

 
$
(55
)
 
$
5,639

Residential mortgage and asset-backed securities
 
(4
)
 
229

 

 
6

 
(4
)
 
235

Total
 
$
(59
)
 
$
5,868

 
$

 
$
6

 
$
(59
)
 
$
5,874

 
 
 

 
 

 
 

 
 

 
 

 
 

December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
 
$
(1
)
 
$
1,866

 
$

 
$
4

 
$
(1
)
 
$
1,870


We held a total of 873 positions which were in an unrealized loss position as of March 31, 2020. The unrealized losses are largely due to changes in interest rates. We do not intend to sell these securities nor do we believe that we will be required to sell these securities before the recovery of the amortized cost basis. Accordingly, no credit losses were recognized for the three months ended March 31, 2020.
5.
DERIVATIVE FINANCIAL INSTRUMENTS
Our operations in foreign countries expose us to market risk associated with foreign currency exchange rate fluctuations between the U.S. dollar and various foreign currencies, primarily the Euro. To manage this risk, we may hedge a portion of our foreign currency exposures related to outstanding monetary assets and liabilities as well as forecasted product sales using foreign currency exchange forward or option contracts. In general, the market risk related to these contracts is offset by corresponding gains and losses on the hedged transactions. The credit risk associated with these contracts is driven by changes in interest and currency exchange rates and, as a result, varies over time. By working only with major banks and closely monitoring current market conditions, we seek to limit the risk that counterparties to these contracts may be unable to perform. We also seek to limit our risk of loss by entering into contracts that permit net settlement at maturity. Therefore, our overall risk of loss in the event of a counterparty default is limited to the amount of any unrealized gains on outstanding contracts (i.e., those contracts that have a positive fair value) at the date of default. We do not enter into derivative contracts for trading purposes.
We hedge our exposure to foreign currency exchange rate fluctuations for certain monetary assets and liabilities that are denominated in a non-functional currency. The derivative instruments we use to hedge this exposure are not designated as hedges and, as a result, changes in their fair value are recorded in Other income (expense), net on our Condensed Consolidated Statements of Income.
We hedge our exposure to foreign currency exchange rate fluctuations for forecasted product sales that are denominated in a non-functional currency. The derivative instruments we use to hedge this exposure are designated as cash flow hedges and have maturities of 18 months or less. Upon executing a hedging contract and quarterly thereafter, we assess hedge effectiveness using regression analysis. The unrealized gains or losses in Accumulated other comprehensive income (AOCI) are reclassified into product sales when the respective hedged transactions affect earnings. The majority of gains and losses related to the hedged forecasted transactions reported in AOCI as of March 31, 2020 are expected to be reclassified to product sales within 12 months.
The cash flow effects of our derivative contracts for the three months ended March 31, 2020 and 2019 were included within Net cash provided by operating activities on our Condensed Consolidated Statements of Cash Flows.
We had notional amounts on foreign currency exchange contracts outstanding of $3.0 billion and $2.9 billion as of March 31, 2020 and December 31, 2019, respectively.

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While all our derivative contracts allow us the right to offset assets and liabilities, we have presented amounts on a gross basis. The following table summarizes the classification and fair values of derivative instruments in our Condensed Consolidated Balance Sheets (in millions):
 
 
March 31, 2020
 
 
Asset Derivatives
 
Liability Derivatives
 
 
Classification
 
Fair Value
 
Classification
 
Fair Value
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
Other current assets
 
$
68

 
Other accrued liabilities
 
$
(4
)
Foreign currency exchange contracts
 
Other long-term assets
 
7

 
Other long-term obligations
 
(1
)
Total derivatives designated as hedges
 
 
 
75

 
 
 
(5
)
Derivatives not designated as hedges:
 
 
 
 

 
 
 
 

Foreign currency exchange contracts
 
Other current assets
 
1

 
Other accrued liabilities
 

Total derivatives not designated as hedges
 
 
 
1

 
 
 

Total derivatives
 
 
 
$
76

 
 
 
$
(5
)
 
 
December 31, 2019
 
 
Asset Derivatives
 
Liability Derivatives
 
 
Classification
 
Fair Value
 
Classification
 
Fair Value
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
Other current assets
 
$
36

 
Other accrued liabilities
 
$
(6
)
Foreign currency exchange contracts
 
Other long-term assets
 

 
Other long-term obligations
 
(2
)
Total derivatives designated as hedges
 
 
 
36

 
 
 
(8
)
Derivatives not designated as hedges:
 
 
 
 

 
 
 
 

Foreign currency exchange contracts
 
Other current assets
 
1

 
Other accrued liabilities
 

Total derivatives not designated as hedges
 
 
 
1

 
 
 

Total derivatives
 
 
 
$
37

 
 
 
$
(8
)

The following table summarizes the effect of our foreign currency exchange contracts on our Condensed Consolidated Financial Statements (in millions):
 
 
Three Months Ended
 
 
March 31,
 
 
2020
 
2019
Derivatives designated as hedges:
 
 
 
 
Gains recognized in AOCI
 
$
66

 
$
28

Gains reclassified from AOCI into product sales
 
27

 
29

Derivatives not designated as hedges:
 
 
 
 
Gains (losses) recognized in Other income (expense), net
 
$
24

 
$
(6
)

From time to time, we may discontinue cash flow hedges and, as a result, record related amounts in Other income (expense), net on our Condensed Consolidated Statements of Income. There was no discontinuance of cash flow hedges for the three months ended March 31, 2020 and 2019.

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As of March 31, 2020 and December 31, 2019, we only held foreign currency exchange contracts. The following table summarizes the potential effect of offsetting our foreign currency exchange contracts on our Condensed Consolidated Balance Sheets (in millions):
 
 
 
 
 
 
 
 
Gross Amounts Not Offset
on our Condensed
Consolidated Balance Sheets
 
 
Description
 
Gross Amounts
 of Recognized
Assets/Liabilities
 
Gross Amounts
 Offset on our
Condensed
Consolidated
Balance Sheets
 
Amounts of Assets/Liabilities Presented
 on our Condensed Consolidated
Balance Sheets
 
Derivative
Financial
Instruments
 
Cash Collateral
Received/
Pledged
 
Net Amount
 (Legal Offset)
As of March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
 
$
76

 
$

 
$
76

 
$
(5
)
 
$

 
$
71

Derivative liabilities
 
(5
)
 

 
(5
)
 
5

 

 

As of December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
 
$
37

 
$

 
$
37

 
$
(6
)
 
$

 
$
31

Derivative liabilities
 
(8
)
 

 
(8
)
 
7

 

 
(1
)

6.
ACQUISITION, COLLABORATIONS AND OTHER ARRANGEMENTS
We continue to pursue acquisitions, in licensing and strategic collaborations and other similar arrangements with third parties for the development and commercialization of certain products and product candidates. These arrangements may include non-refundable up-front payments, expense reimbursements or payments by us for options to acquire certain rights, contingent obligations by us for potential development and regulatory milestone payments and/or sales-based milestone payments, royalty payments, revenue or profit sharing arrangements, cost sharing arrangements and equity investments.
Acquisition
Forty Seven
On April 7, 2020, we acquired all of the outstanding common stock of Forty Seven, Inc. (Forty Seven), a clinical-stage immuno-oncology company focused on developing therapies targeting cancer immune evasion pathways and specific cell targeting approaches, for a price of $95.50 per share in cash, or approximately $4.9 billion. As a result, Forty Seven became our wholly-owned subsidiary. Forty Seven’s lead program, magrolimab, is a monoclonal antibody in clinical development for the treatment of myelodysplastic syndrome, acute myeloid leukemia, non-Hodgkin lymphoma and solid tumors.
This transaction will be accounted for as an asset acquisition because the lead asset, magrolimab, represents substantially all the fair value of the assets acquired. As such, substantially all of the purchase price will be expensed as acquired in-process research and development (IPR&D) within Research and development expenses on our Condensed Consolidated Statements of Income during the three months ended June 30, 2020.
Collaborations and Other Arrangements
During the three months ended March 31, 2020 and 2019, we entered into several collaborative and other similar arrangements, including equity investments and licensing arrangements, that we do not consider to be individually material. Cash outflows and accrued expenses for up-front payments related to these arrangements totaled $105 million and $187 million for the three months ended March 31, 2020 and 2019, respectively, of which $97 million and $126 million, respectively, were recorded as up-front collaboration and licensing expenses within Research and development expenses on our Condensed Consolidated Statements of Income.
Under the financial terms of these arrangements, we may be required to make payments upon achievement of developmental, regulatory and commercial milestones, which could be significant. Future milestone payments, if any, will be reflected in our Condensed Consolidated Statements of Income when the corresponding events become probable. In addition, we may be required to pay significant royalties on future sales if products related to these arrangements are commercialized. The payment of these amounts, however, is contingent upon the occurrence of various future events, which have a high degree of uncertainty of occurrence.

15



7.
OTHER FINANCIAL INFORMATION
Inventories
The following table summarizes our Inventories (in millions):
 
 
March 31, 2020
 
December 31, 2019
Raw materials
 
$
1,237

 
$
1,348

Work in process
 
188

 
170

Finished goods
 
596

 
549

Total
 
$
2,021

 
$
2,067

 
 
 
 
 
Reported as:
 
 
 
 
Inventories
 
$
986

 
$
922

Other long-term assets
 
1,035

 
1,145