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 2019 and 2018 is included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2019 Form 10-K filed with the U.S. Securities and Exchange Commission (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

Gilead Sciences, Inc. (“Gilead”, “we”, “our” or “us”) is a biopharmaceutical company that has pursued and achieved breakthroughs in medicine for more than three decades, with the goal of creating a healthier world for all people. We are committed to advancing innovative medicines to prevent and treat life-threatening diseases, including HIV, viral hepatitis and cancer. We operate in more than 35 countries worldwide, with headquarters in Foster City, California.

Our portfolio of marketed products includes AmBisome®, Atripla®, Biktarvy®, Cayston®, Complera®, Descovy®, Descovy for PrEP®, Emtriva®, Epclusa®, Eviplera®, Genvoya®, Harvoni®, Hepsera®, Jyseleca®, Letairis®, Odefsey®, Ranexa®, Sovaldi®, Stribild®, TecartusTM, Trodelvy®, Truvada®, Truvada for PrEP®, Tybost®, Veklury®, Vemlidy®, Viread®, Vosevi®, Yescarta® and Zydelig®. The approval status of Jyseleca varies worldwide, and Jyseleca is not approved in the United States. 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.

2020 Business Highlights

Our financial performance was strong in 2020, despite the global impact of the COVID-19 pandemic, which is a clear reflection of the solid underlying fundamentals of our business driven by the HIV franchise and the increased demand we saw for Veklury amid the COVID-19 pandemic. We also continued to expand and strengthen our commercial portfolio and clinical pipeline across various therapeutic areas to drive future growth potential.

•In April, we acquired Forty Seven, Inc. (“Forty Seven”) for approximately $4.7 billion, gaining an investigational drug candidate, magrolimab, which is currently in Phase 2/3 clinical studies for a number of hematological cancers, including myelodysplastic syndrome, acute myeloid leukemia, non-Hodgkin lymphoma and solid tumors.

•In October, we acquired Immunomedics, Inc. (“Immunomedics”) for approximately $20.6 billion and gained Trodelvy, a Trop-2-directed antibody-drug conjugate, which was granted accelerated approval by the U.S. Food and Drug Administration (“FDA”) for the treatment of adult patients with metastatic triple-negative breast cancer (“mTNBC”). Trodelvy has potential broader applicability for multiple tumor types, and is being studied as a monotherapy and combination agent for additional tumor types, including HR+/HER2- breast cancer, urothelial cancer, non-small cell lung cancer and other solid tumors.

•In December, we entered into a definitive agreement to acquire MYR GmbH. Upon closing, which is subject to regulatory clearances and other conditions, the acquisition will provide us with Hepcludex® (bulevirtide), which was conditionally approved by the European Medicines Agency (“EMA”) for the treatment for chronic hepatitis delta virus (“HDV”) in July 2020.

•We significantly expanded our oncology portfolio through licensing, strategic collaboration as well as equity investments with our third-party collaboration partners. Additional information is included in Note 11. Collaborations and Other Arrangements of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

In addition to the assets we acquired pursuant to our strategic transactions, we developed several other therapies and treatments in our portfolio: Jyseleca, Tecartus and Veklury, the first FDA-approved antiviral therapy for COVID-19. These efforts demonstrate our continued commitment to advancing innovative medicines in areas of unmet need.

Key Product, Pipeline and Corporate Updates(1)

Category Therapeutic Area and Description

Regulatory Approval & Submission Viral Diseases

Oncology

Inflammatory Diseases

Corporate Development Viral Diseases

______________________________________________________

(1) We announced and discussed these updates in further detail in press releases available on our website at https://www.gilead.com/news-and-press/press-room/press-releases. Additional information can be found in our disclosures filed or furnished with the SEC, including its Current Reports on Form 8-K and on Quarterly Reports on Form 10-Q, as applicable. Readers are also encouraged to review all other press releases available on our website mentioned above.

2020 Financial Highlights

2020 Compared to 2019

Total revenues increased by 10% to $24.7 billion in 2020, compared to $22.4 billion in 2019, primarily due to Veklury sales and higher product sales in our HIV products, including the continued patient uptake of Biktarvy and growth of Descovy for pre-exposure prophylaxis (“PrEP”). The increase was partially offset by lower sales volume of our Truvada (emtricitabine (“FTC”) and tenofovir disoproxil fumarate (“TDF”))-based products primarily due to the loss of exclusivity of Truvada and Atripla in the United States in October 2020, lower sales of HCV products due to the impact of the COVID-19 pandemic and the expected declines in sales of Letairis and Ranexa after generic entries in the first half of 2019.

Net income attributable to Gilead was $123 million or $0.10 per diluted share in 2020, compared to $5.4 billion or $4.22 per diluted share in 2019, primarily due to unfavorable changes in the fair value of our equity investments in Galapagos, the $1.2 billion discrete tax benefit recorded in 2019 related to intra-entity transfers of intangible assets to different tax jurisdictions, higher acquired in-process research and development (“IPR&D”) expenses related to our acquisition of Forty Seven and our collaborations and other investments we entered into during the year, as well as higher acquisition-related expenses.

Strategy and Outlook 2021

Our purpose is to deliver life-changing medications to patients in need through scientific breakthroughs, innovation and strong operational execution. Our strategic ambitions are to (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 2021, we will continue to focus on executing our strategy to expand and strengthen our commercial portfolio and clinical pipelines in new therapeutic areas, including oncology and inflammation, while maintaining our leadership in antiviral medications through the continued growth of Biktarvy, the development of lenacapavir, the expansion of our viral hepatitis business and our on-going efforts to develop safe and effective antivirals to patients suffering from viral infections. Beyond expanding our products and pipeline, we also continue to focus on our employees, the evolution of our culture and our efforts to promote racial equity.

The COVID-19 pandemic continues to impact our business and broader market dynamics. We expect a gradual recovery in underlying market dynamics starting the second quarter 2021. Truvada and Atripla sales are expected to continue to decline in the first quarter of 2021 and beyond as multiple generics are expected to enter the market starting in the second quarter of 2021. Biktarvy, Trodelvy, Vemlidy and cell therapy are expected to be key growth drivers in 2021 absorbing the full year impact of the loss of exclusivity for Truvada and Atripla in the United States. Veklury sales are generated in a highly dynamic and complex global environment, which continues to evolve. As a result, Veklury sales are subject to significant volatility and uncertainty. Future product demand will depend on the nature of the COVID-19 pandemic, including duration of the pandemic, infection rates, hospitalizations, and availability of alternative therapies and vaccines being developed. The acquisition of

Immunomedics will continue to contribute to our revenue growth in 2021. Our capital allocation priorities remain unchanged from 2020 and we plan to prioritize investment in our business and R&D pipeline and maintain a rigorous focus on disciplined expense management.

Our ability to deliver on our strategy and 2021 objectives is subject to a number of uncertainties, including, but not limited to, the effects of the COVID-19 pandemic, which remains unpredictable; the continuation of an uncertain global macroeconomic environment; our ability to realize the potential benefits of our acquisitions, collaborations or licensing arrangements; our ability to initiate, progress or complete clinical trials within currently anticipated timeframes; the possibility of unfavorable results from new and ongoing clinical trials; additional pricing pressures from payers and competitors; higher than anticipated effects of the loss of exclusivity from Truvada and Atripla; slower than anticipated growth in Biktarvy, Trodelvy, Vemlidy and cell therapy 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 generics; loss of exclusivity of our products; inaccuracies in our HCV patient start estimates; potential government actions 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) 2020 Change 2019 Change 2018

Product sales:

Veklury 2,811 NM — NM —

Trodelvy 49 NM — NM —

________________________________

NM - Not Meaningful

2020 Compared to 2019

Total Product Sales

Total product sales increased by 10% to $24.4 billion in 2020, compared to $22.1 billion in 2019, primarily due to Veklury sales and higher product sales in our HIV products, including the continued patient uptake of Biktarvy and growth of Descovy for PrEP. The increase was partially offset by lower sales volume of our Truvada (FTC/TDF)-based products primarily due to the loss of exclusivity of Truvada and Atripla in the United States in October 2020, lower HCV sales due to lower patient starts due to the COVID-19 pandemic and the expected declines in sales of Letairis and Ranexa after generic entries in the first half of 2019.

HIV Product Sales

HIV product sales increased by 3% to $16.9 billion in 2020, compared to $16.4 billion in 2019, primarily due to the continued patient uptake of Biktarvy and growth of Descovy for PrEP, partially offset by lower sales volume of our Truvada (FTC/TDF)-based products driven by the loss of exclusivity of Truvada and Atripla in the United States in October 2020 and lower average net selling price driven by unfavorable payer mix primarily due to higher public health service utilization. Our HIV franchise, including PrEP was also unfavorably impacted by the COVID-19 pandemic. HIV product sales in 2019 included favorable net adjustments primarily due to government rebates and discounts.

Descovy (FTC/TAF)-based product sales increased in all major markets in 2020 compared to 2019. The increase in the United States was primarily due to the continued patient uptake of Biktarvy and growth of Descovy for PrEP, partially offset by lower sales volume of Genvoya. The increase in Europe and other international locations was primarily due to higher sales volume of Biktarvy, partially offset by lower sales volume of Genvoya.

Truvada (FTC/TDF)-based product sales decreased in the United States and Europe in 2020 compared to 2019. The decrease in the United States was primarily due to lower sales volume driven by the loss of exclusivity of Truvada and Atripla in October 2020 and patients switching to regimens containing FTC/TAF. We expect Truvada sales to continue to decline in 2021 and beyond as multiple generics are expected to enter the market starting in the second quarter 2021. The decrease in European sales was primarily due to lower sales volume as a result of the broader availability of generic versions of Truvada and patients switching to regimens containing FTC/TAF.

HCV Product Sales

HCV product sales decreased by 30% to $2.1 billion in 2020, compared to $2.9 billion in 2019, primarily due to lower sales volume driven by lower patient starts in the United States and Europe attributable to the COVID-19 pandemic and the continuing decline of total market patient starts unrelated to the pandemic, as well as lower average net selling price reflecting higher sales return provisions and discounts. HCV product sales in 2019 included favorable net adjustments primarily due to government rebates and discounts.

The decrease in HCV product sales in the United States and Europe in 2020 compared to 2019 was primarily due to lower patient starts, including declines attributable to a decrease in health care provider visits and screenings due to the COVID-19 pandemic as well as lower average net selling price. The decrease in Europe was also impacted by favorable net adjustments primarily due to government rebates and discounts in 2019, which did not reoccur in 2020. The decrease in HCV product sales in other international locations in 2020 compared to 2019 was primarily due to lower sales volume.

Veklury

Veklury generated $2.8 billion in sales in 2020 primarily in the United States and Europe, reflecting higher hospitalization and treatment rates due to the fourth quarter COVID-19 surge.

Cell Therapy Product Sales

Cell therapy product sales, which include Yescarta and Tecartus, increased by 33% to $607 million in 2020, compared to $456 million in 2019, primarily due to the continued uptake of Yescarta in Europe and the third quarter 2020 product launch of Tecartus in the United States.

Trodelvy

Trodelvy generated $49 million in sales in the United States, following our acquisition of Immunomedics on October 23, 2020.

Other Product Sales

Other product sales, which include Vemlidy, Viread, Letairis, Ranexa, Zydelig, AmBisome, Cayston and Jyseleca, decreased by 18% to $1.9 billion in 2020, compared to $2.3 billion in 2019, primarily due to the expected declines in sales of Letairis and Ranexa after generic entries in the first half of 2019, partially offset by higher sales volume of Vemlidy in other international locations.

Gross-to-Net Deductions

We record product sales net of estimated government and other rebates and chargebacks, cash discounts for prompt payment, distributor fees, sales return provisions and other related costs. These deductions to product sales are generally referred to as gross-to-net (“GTN”) deductions, which totaled $15.3 billion, or 39% of gross product sales in 2020, compared to $15.3 billion, or 41% of gross product sales in 2019. Of the $15.3 billion in 2020, $13.0 billion or 33% of gross product sales was related to government and other rebates and chargebacks, $1.7 billion was related to cash discounts for prompt payment, distributor fees and other related costs and $572 million was related to sales return provisions.

Product Sales by Geographic Area

Of our total product sales, 26% and 25% were generated outside the United States in 2020 and 2019, respectively. 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 unfavorable impact on our product sales of $29 million in 2020, based on a comparison using foreign currency exchange rates from 2019.

Product sales in the United States increased by 10% to $18.1 billion in 2020, compared to $16.6 billion in 2019, primarily due to sales of Veklury, the continued patient uptake of Biktarvy and growth of Descovy for PrEP, partially offset by decreases in sales of Truvada (FTC/TDF)-based products driven by the loss of exclusivity of Truvada and Atripla in the United States in October 2020. The increase was also partially offset by lower sales volume of Letairis and Ranexa and lower sales of our HCV products. The decrease in sales of our HCV products was primarily due to lower patient starts and average net selling price as discussed above.

Product sales in Europe increased by 9% to $3.9 billion in 2020, compared to $3.6 billion in 2019, primarily due to sales of Veklury, and the continued patient uptake of Biktarvy and Yescarta. The increase was partially offset by lower patient starts and average net selling price as discussed above. Product sales in Europe in 2019 included favorable net adjustments primarily due to government rebates and discounts.

Product sales in other international locations increased by 17% to $2.3 billion in 2020, compared to $2.0 billion in 2019, primarily due to higher sales volumes of Biktarvy, Veklury and Vemlidy.

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

(In millions, except percentages) 2020 Change 2019 Change 2018

HIV Products

Descovy (FTC/TAF) Based Products

Biktarvy – Other International 429 NM 143 NM 1

Revenue share – Symtuza(1) – Other International 8 NM — NM —

Total Descovy (FTC/TAF) Based Products – Other International 868 38 % 630 NM 277

Truvada (FTC/TDF) Based Products

Complera / Eviplera – Other International 21 (34) % 32 (36) % 50

Stribild – Other International 17 (35) % 26 (38) % 42

Total Truvada (FTC/TDF) Based Products – Europe 261 (42) % 450 (45) % 815

Other HIV(2) – Europe 5 — % 5 (29) % 7

Other HIV(2) – Other International 28 NM 12 (14) % 14

HCV Products

Ledipasvir / Sofosbuvir(3) – Other International 151 (42) % 260 (6) % 276

Sofosbuvir / Velpatasvir(4) – Other International 398 (10) % 441 17 % 378

Veklury

Veklury – U.S. 2,026 NM — NM —

Veklury – Europe 607 NM — NM —

Veklury – Other International 178 NM — NM —

Cell Therapy Products

Yescarta – Europe 191 NM 83 NM 1

Yescarta – Other International 10 NM — NM —

Tecartus – U.S. 34 NM — NM —

Tecartus – Europe 10 NM — NM —

Tecartus – Other International — NM — NM —

44 NM — NM —

Total Cell Therapy – Europe 201 NM 83 NM 1

Total Cell Therapy – Other International 10 NM — NM —

Trodelvy - U.S. 49 NM — NM —

Other Products

Zydelig – Other International 2 — % 2 — % 2

Other(6) – Other International 14 56 % 9 13 % 8

_______________________________

NM - Not Meaningful

(1) 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 Unlimited Company.

(2) Includes Emtriva and Tybost.

(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 Vosevi and Sovaldi.

(6) Includes Cayston, Hepsera and Jyseleca.

Costs and Expenses

The following table summarizes the period-over-period changes in our costs and expenses:

(In millions, except percentages) 2020 Change 2019 Change 2018

_______________________________

NM - Not Meaningful

Cost of Goods Sold and Product Gross Margin

In 2020, cost of goods sold decreased by $103 million compared to 2019, primarily due to the 2019 inventory write-down charges 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. The decrease in cost of goods sold was partially offset by higher manufacturing ramp-up expenses related to Veklury as a treatment for COVID-19 and acquisition-related expenses from amortization of finite-lived intangible assets and inventory step-up charges, as well as accelerated stock-based compensation expenses related to our acquisition of Immunomedics. In addition, royalty expenses decreased by $126 million in 2020, compared to 2019, primarily due to lower sales of products containing elvitegravir, Letairis and Atripla.

In 2020, product gross margin increased compared to 2019, primarily due to factors described above.

Research and Development Expenses

R&D expenses consist primarily of clinical studies performed by contract research organizations, materials and supplies, payments under collaborative and other arrangements including milestone payments, licenses and fees, expense reimbursements to the collaboration partners, 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) 2020 Change 2019 Change 2018

In 2020, R&D expenses increased by $1.0 billion compared to 2019, primarily due to higher clinical trial expenses related to the investigation of remdesivir as a treatment for COVID-19 including material costs, the fourth quarter charge of $190 million (€160 million) in connection with the agreement to amend the existing arrangement with Galapagos for the commercialization and development of Jyseleca, accelerated stock-based compensation expenses of $166 millionrelated to our acquisitions of Immunomedics and Forty Seven, higher investments in oncology programs including magrolimab, an investigational anti-CD47 monoclonal antibody, and to a lesser extent, Trodelvy, and accruals for milestone payments of $70 million to Pionyr Immunotherapeutics, Inc. (“Pionyr”). The increase was partially offset by lower clinical trial expenses from the completion of certain inflammation programs and lower costs as a result of our pause or postponement of certain clinical trials due to the COVID-19 pandemic.

Acquired In-Process Research and DevelopmentExpenses

Acquired IPR&D expenses reflect IPR&D impairments as well as the initial costs of externally developed IPR&D projects, acquired directly in a transaction other than a business combination, that do not have an alternative future use, including upfront payments related to various collaborations and the initial costs of rights to IPR&D projects. Beginning in the second quarter of 2020, acquired IPR&D expenses were reported separately from Research and development expenses on our Consolidated Statements of Income. IPR&D assets capitalized are tested for impairment in the fourth quarter of each year, or earlier if impairment indicators exist. No IPR&D impairment charges were recorded in 2020.

Acquired IPR&D expenses of $5.9 billion for 2020 were primarily related to our acquisition of Forty Seven as well as collaborations and other investments we entered into during the year with Arcus Biosciences, Inc., Pionyr, Tango Therapeutics, Inc., Tizona Therapeutics, Inc. and Jounce Therapeutics, Inc.

Acquired IPR&D expenses of $5.1 billion for 2019 included $3.9 billion in upfront charges related to our global research and development collaboration agreement with Galapagos and the $800 million impairment charge from assets obtained in our Kite acquisition.

Selling, General and Administrative Expenses

SG&A expenses relate to sales and marketing, finance, human resources, legal and other administrative activities, including information technology investments. 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 2020, SG&A expenses increased by $770 million compared to 2019, primarily due to accelerated stock-based compensation expenses of $204 million related to our acquisitions of Immunomedics and Forty Seven, a $97 million charge related to a previously disclosed legal settlement, increased corporate grants, costs associated with the commercialization efforts for Veklury and to a lesser extent, Trodelvy, higher marketing expenses related to Biktarvy and donations of remdesivir. The increases were partially offset by lower travel and other spend due to the COVID-19 pandemic.

BPD fee expenses were $198 million, $247 million and $229 million in 2020, 2019 and 2018, respectively. BPD fee expenses are not tax-deductible.

Other Income (Expense), Net and Interest Expense

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

(In millions, except percentages) 2020 Change 2019 Change 2018

Other income (expense), net $ (1,418) NM $ 1,868 NM $ 676

_______________________________

NM - Not Meaningful

The unrealized losses primarily relating to our investments in Galapagos unfavorably impacted Other income (expense), net in 2020, compared to unrealized gains in 2019.

Income Taxes

The following table summarizes the period-over-period changes in our income tax expense (benefit):

Our effective tax rate increased in 2020, compared to 2019, primarily due to a $4.5 billion acquired IPR&D charge recorded in connection with our acquisition of Forty Seven, $511 million of certain other acquired IPR&D charges and $1.8 billion of unfavorable changes in the fair value of our equity investments in Galapagos that are non-deductible for tax purposes. The 2019 effective tax rate included a $1.2 billion discrete tax benefit related to intra-entity intangible asset transfers to different tax jurisdictions.

LIQUIDITY AND CAPITAL RESOURCES

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

December 31,

Cash, cash equivalents and marketable debt securities $ 7,910 $ 25,840

Cash, Cash Equivalents and Marketable Debt Securities

Cash, cash equivalents and marketable debt securities as of December 31, 2020, decreased by $17.9 billion, or 69%, compared to December 31, 2019. During 2020, we generated $8.2 billion in operating cash flow, utilized $25.7 billion on acquisitions, including IPR&D, net of cash acquired, issued senior unsecured notes in an aggregate principal amount of $7.2 billion, net of issuance costs, borrowed an aggregate principal amount of $1.0 billion under a three-year term loan facility, repaid $2.5 billion of principal amount of debt, paid cash dividends of $3.4 billion and utilized $1.6 billion on repurchases of common stock. In January 2021, we repaid $1.0 billion of senior unsecured notes prior to the April 2021 maturity.

We may choose to repay certain of our long-term debt obligations prior to their maturity dates based on our assessment of current and long-term liquidity and capital requirements. Our acquisition of MYR GmbH is expected to close in the first quarter of 2021. Per the agreement, we will make a consideration payment of approximately €1.2 billion in cash (or approximately $1.4 billion) upon closing.

Working Capital

Working capital, which is current assets less current liabilities, decreased by $15.9 billion, or 78%, compared to December 31, 2019, primarily due to the utilization of significant cash, cash equivalents and marketable debt securities for our acquisitions of Immunomedics and Forty Seven as noted above and reclassifications of senior unsecured notes from Long-term debt, net. The decrease was partially offset by increased accounts receivables due to Veklury sales and the reclassification of a portion of our Galapagos equity investments from Other long-term assets.

Accounts receivable increased by $1.3 billion, compared to December 31, 2019, primarily reflecting increased sales driven by Veklury due to COVID-19 surge in the fourth quarter of 2020.

Other accrued liabilities increased by $1.3 billion compared to December 31, 2019, primarily due to a reclassification from long-term income taxes payable for certain tax payments expected to be made within a year.

Cash Flows

The following table summarizes our cash flow activities:

Net cash provided by (used in):

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 decreased by $976 million to $8.2 billion in 2020 compared to 2019. The decrease was primarily the result of changes in working capital reflecting increases in accounts receivable from the fourth quarter 2020 Veklury sales and certain tax payments made to taxing authorities.

Investing Activities

Cash used in / provided by investing activities primarily consists of purchases, sales and maturities of our marketable debt securities, capital expenditures, acquisitions, including IPR&D, net of cash acquired, purchases of equity securities and other investments. Cash used in investing activities was $14.6 billion in 2020 compared to $7.8 billion in 2019. The change in cash used in / provided by investing activities was due to $25.7 billion of payments made primarily related to our acquisitions of Immunomedics and Forty Seven in 2020, compared to $4.3 billion of payments made primarily related to our collaboration with and equity investments in Galapagos in 2019.

Financing Activities

The change in cash provided by / used in financing activities in 2020 compared to 2019, was primarily due to $7.2 billion in proceeds from the September 2020 senior unsecured notes offering, net of issuance costs and $995 million borrowed under a three-year term loan facility, net of issuance costs in October 2020 in connection with our acquisition of Immunomedics.

Debt and Credit Facilities

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. We may choose to repay certain of our long-term debt obligations prior to maturity dates based on our assessment of current and long-term liquidity and capital requirements.

Senior Unsecured Notes Offering

In September 2020, in connection with our acquisition of Immunomedics, we issued senior unsecured notes consisting of (i) $500 million principal amount of floating rate notes due September 2021 and $500 million principal amount of floating rate notes due September 2023; and (ii) $2.0 billion principal amount of 0.75% senior notes due September 2023, $750 million principal amount of 1.20% senior notes due October 2027, $1.0 billion principal amount of 1.65% senior notes due October 2030, $1.0 billion principal amount of 2.60% senior notes due October 2040 and $1.5 billion principal amount of 2.80% senior notes due October 2050.

Senior Unsecured Notes Repayments

In 2020 and 2019, we repaid at maturity $2.5 billion and $2.8 billion principal amount of senior unsecured notes, respectively. In January 2021, we repaid $1.0 billion of senior unsecured notes prior to the April 2021 maturity.

Term Loan Facility

In October 2020, in connection with our acquisition of Immunomedics, we borrowed an aggregate principal amount of $1.0 billion under a three-year term loan facility (“Term Loan Facility”).

Liability Related to Future Royalties

In connection with our acquisition of Immunomedics, we assumed a liability related to a funding arrangement, which was originally entered into by Immunomedics and RPI Finance Trust (“RPI”). The liability related to future royalties was primarily included in Long-term debt, net on our Consolidated Balance Sheets. See Note 6. Acquisitions of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information.

Credit Facility

In June 2020, we terminated our $2.5 billion revolving credit facility maturing in May 2021 (the “2016 Revolving Credit Facility”) and entered into a new $2.5 billion revolving credit facility maturing in June 2025 (the “2020 Revolving Credit Facility”), which had terms substantially similar to the 2016 Revolving Credit Facility. The 2020 Revolving Credit Facility can be used for working capital requirements and for general corporate purposes, including, without limitation, acquisitions. As of December 31, 2020 and 2019, there were no amounts outstanding under these revolving credit facilities.

We are required to comply with certain covenants under our notes indentures, and as of December 31, 2020, we were not in violation of any covenants.

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.

We purchased 22 million and 26 million shares of our common stock under the 2016 Program for $1.6 billion and $1.7 billion in 2020 and 2019, respectively.

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.

As of December 31, 2020, the remaining authorized repurchase amount from both programs was $6.8 billion.

Dividends

We declared and paid quarterly cash dividends for an aggregate amount of $3.4 billion or $2.72 per share of our common stock and $3.2 billion or $2.52 per share of our common stock in 2020 and 2019, respectively.

On February 4, 2021, we announced that our Board of Directors declared a quarterly cash dividend increase of 4.4% from $0.68 to $0.71 per share of our common stock, with a payment date of March 30, 2021 to all stockholders of record as of the close of business on March 15, 2021. Future dividends are subject to declaration by our 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

Government and other rebates and chargebacks represent the majority of our GTN deductions and are subject to a complex estimation process, which requires significant judgment by management in part due to the lag between the date of the product sales and the date the related rebates or chargeback claims are settled. Government and other rebates and chargebacks include amounts payable to payers and healthcare providers under various programs, and 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. Rebates and chargebacks are estimated primarily based on product sales, and expected payer mix and discount rates, which require significant estimates and judgment. Additionally, in developing our estimates of government and other rebates and chargebacks, we consider the following factors:

•historical and estimated payer mix;

•statutory discount requirements and contractual terms;

•historical claims experience and processing time lags;

•estimated patient population;

•known market events or trends;

•market research;

•channel inventory data obtained from our major U.S. wholesalers; and

•other pertinent internal or external information.

We assess and update our estimates every quarter to reflect actual claims and other current information. Our actual government and other rebates and chargebacks claimed for prior periods have varied from our estimates by less than 3% of the amounts deducted from product sales for the years ended December 31, 2020 and 2019. 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.

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 $552 million and $655 million at December 31, 2020 and 2019, respectively. See Note 10. Other Financial Information of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information. Government and other rebates that are payable to third party payers and healthcare providers are generally recorded in Accrued government and other rebates on our Consolidated Balance Sheets and totaled $3.5 billion at December 31, 2020 and 2019. The allowance for sales returns is generally recorded in Other accrued liabilities on our Consolidated Balance Sheets and totaled $587 million and $137 million at December 31, 2020 and 2019, respectively. The increase in the allowance for sales returns in 2020 reflects the estimated Veklury sales returns and an increase of HCV and HIV sales return provisions.

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

Acquisitions and Valuation of Intangibles

We make certain judgments to determine whether transactions should be accounted for as acquisitions of assets or as business combinations. If it is determined that substantially all of the fair value of gross assets acquired in a transaction is concentrated in a single asset (or a group of similar assets), the transaction is treated as an acquisition of assets. We evaluate the inputs, processes, and outputs associated with the acquired set of activities. If the assets in a transaction include an input and a substantive process that together significantly contribute to the ability to create outputs, the transaction is treated as an acquisition of a business.

We account for business combinations using the acquisition method of accounting, which requires that assets acquired and liabilities assumed generally be recorded at their fair values as of the acquisition date. Excess of consideration over the fair value of net assets acquired is recorded as goodwill. Estimating fair value requires us to make significant judgments and assumptions. We perform impairment testing of goodwill annually, or more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired.

In transactions accounted for as acquisitions of assets, no goodwill is recorded and contingent consideration such as payments upon achievement of various developmental, regulatory and commercial milestones generally is not recognized at the acquisition date. In an asset acquisition, upfront payments allocated to IPR&D projects at the acquisition date are expensed unless there is an alternative future use. In addition, product development milestones are expensed upon achievement.

Valuation of Intangible Assets

We have acquired, and expect to continue to acquire, intangible assets through asset acquisition, business combination or consolidation of variable interest entities. The identifiable intangible assets are measured at their respective fair values as of the acquisition date. Intangible assets acquired through business combinations are subject to potential adjustments within the measurement period, which is up to one year from the acquisition date. The fair values of the intangible 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:

•identification of product candidates with sufficient substance requiring separate recognition;

•estimates of projected future cash flows including 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;

•appropriate discount rate;

•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.

Impairment and Amortization of Intangible Assets

Intangible assets related to IPR&D projects acquired in a business combination are capitalized as indefinite-lived intangible assets until the completion or abandonment of the associated R&D efforts. During the period the assets are considered indefinite-lived, they are not amortized. When development is complete, which generally occurs if and when regulatory approval to market a product is obtained, the associated assets would be deemed finite-lived and then be amortized based on their respective estimated useful lives at that point in time primarily on a straight-line basis.

Indefinite-lived intangible assets are tested for impairment annually, or more frequently if events or changes in circumstances indicate that it is more likely than not that the assets are impaired. Estimates of fair value result from a complex series of judgments about future events and uncertainties and make assumptions at a point in time (acquisition date or subsequent impairment assessment date). Changes in estimates and assumptions, including the timing of product launch, pricing reductions, failure to obtain anticipated regulatory approval, deterioration in U.S. and global financial markets or other unanticipated events and circumstances, may decrease the projected cash flows or increase the discount rate and could potentially result in an impairment charge.

The eventual realized value of the acquired IPR&D project may vary from its fair value at the date of acquisition. If the carrying value of an intangible asset exceeds its estimated fair value, an impairment charge is recorded to write down the intangible asset to its estimated fair value. For example, in 2019, we recognized an $800 million impairment charge related to IPR&D projects primarily for the treatment of indolent non-Hodgkin lymphoma due to changes in estimated market opportunities. A high rate of failure is inherent in the discovery and development of new products. For example, in 2018, we concluded that the KITE-585 program acquired in connection with our acquisition of Kite did not justify further efforts based on the totality of the clinical data gathered and discontinued the program. As a result, the carrying value of the IPR&D relating to the KITE-585 program was written down to zero and we recorded an impairment charge of $820 million.

Intangible assets are also periodically reviewed for changes in facts or circumstances resulting in a reduction to the estimated useful life of the asset, requiring the acceleration of amortization.

See Note 9. Goodwill and Intangible Assets of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information on the impairment charges related to our indefinite-lived IPR&D intangible assets.

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, 2020 and 2019.

Income Taxes

We estimate our income tax provision, including deferred tax assets and liabilities, based on significant management judgment. We evaluate the realization of all or a portion of our deferred tax assets on a quarterly basis. We record a valuation allowance to reduce our deferred tax assets to the amounts that are more likely than not to be realized. We consider future taxable income, ongoing tax planning strategies and our historical financial performance in assessing the need for a valuation allowance. If we expect to realize deferred tax assets for which we have previously recorded a valuation allowance, we will reduce the valuation allowance in the period in which such determination is first made.

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. For example, the United States enacted significant tax reform, and certain provisions of the new law will continue to significantly affect us. We cannot predict the form or timing of potential legislative changes that could have a material adverse impact on our results of operations. In addition, significant judgment is required in determining our worldwide provision for income taxes.

We record liabilities related to uncertain tax positions in accordance with the guidance that clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. An adverse resolution of one or more of these uncertain tax positions in any period could have a material impact on the results of operations for that period.

See Note 18. Income Taxes of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information.

OFF BALANCE SHEET ARRANGEMENTS

We do not have any off balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.

CONTRACTUAL OBLIGATIONS

Contractual obligations represent future cash commitments related to significant enforceable and legally binding obligations and certain purchase obligations that we are likely to continue regardless of the fact that they may be cancelable. The expected timing and payment amounts presented below are estimated based on existing contracts and do not reflect any future modifications to, or terminations of, existing contracts or anticipated or potential new contracts.

The following table summarizes the aggregate maturities of our contractual obligations as of December 31, 2020:

Payments due by Period

_______________________________

(1) Debt includes principal and future interest payments of senior unsecured notes and the Term Loan Facility. Interest payments for our fixed rate senior unsecured notes are incurred and calculated based on terms of the related notes. Debt also includes a liability related to future royalty obligations we assumed through the acquisition of Immunomedics. See Note 6. Acquisitions and 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 for additional information.

(2) See Note 13. Leases of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information.

(3) Amounts primarily relate to active pharmaceutical ingredients (“API”) with minimum purchase commitments and certain inventory-related items, R&D commitments and capital commitments. Significant R&D commitments related to clinical studies performed by contract research organizations (“CRO”s) are excluded from the table as material CRO contracts are cancelable by us.

(4) In connection with Tax Reform we recorded a federal income tax payable for transition tax on the mandatory deemed repatriation of foreign earnings that is payable over an eight-year period. The amounts included in the table above represent the remaining federal income tax payable at December 31, 2020.

(5) As of December 31, 2020, our long-term income taxes payable includes unrecognized tax benefits, interest and penalties totaling $1.1 billion. Due to the high degree of uncertainty on the timing of future cash settlement and other events that could extinguish these unrecognized tax benefits, we are unable to estimate the period of cash settlement and therefore we have excluded these unrecognized tax benefits from the table above.

(6) We have committed to make potential future milestone and other payments to third parties as part of licensing, collaboration, development and other arrangements. Payments under these agreements generally are contingent upon certain future events including achievement of certain developmental, regulatory or commercial milestones. Because the achievement of these events is neither probable nor reasonably estimable and such potential payments have not been recorded in our Consolidated Balance Sheets, they have not been included in the table above.

(7) The consideration payment of approximately €1.2 billion in cash (or approximately $1.4 billion) for our acquisition of MYR GmbH, which is expected to close by the end of the first quarter of 2021, is excluded from the table above. See Note 6. Acquisitions of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information.

RECENT ACCOUNTING PRONOUNCEMENTS

The information required by this item is included in Note 1. Organization and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks that may result from changes in foreign currency exchange rates, interest rates, credit risks and market price. To reduce certain of these risks, we enter into various types of foreign currency or interest rate derivative hedging transactions, follow investment guidelines and monitor outstanding receivables as part of our risk management program.

Foreign Currency Exchange Risk

We have operations in more than 35 countries worldwide. As a result, our financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which we distribute our products. Our operating results are exposed to changes in foreign currency exchange rates between the U.S. dollar and various foreign currencies, the most significant of which is the Euro. When the U.S. dollar strengthens against these currencies, the relative value of sales made in the respective foreign currency decreases. Conversely, when the U.S. dollar weakens against these currencies, the relative amounts of such sales increase. Overall, we are a net receiver of foreign currencies and, therefore, benefit from a weaker U.S. dollar and are adversely affected by a stronger U.S. dollar relative to those foreign currencies in which we transact significant amounts of business.

Approximately 26% of our product sales were denominated in foreign currencies during 2020. To partially mitigate the impact of changes in currency exchange rates on net cash flows from our foreign currency denominated sales, we may enter into foreign currency exchange forward and option contracts. We also hedge certain monetary assets and liabilities denominated in foreign currencies, which reduces but does not eliminate our exposure to currency fluctuations between the date a transaction is recorded and the date that cash is collected or paid. In general, the market risks of these contracts are offset by corresponding gains and losses on the transactions being hedged.

As of December 31, 2020 and 2019, we had open foreign currency forward contracts with notional amounts of $2.4 billion and $2.9 billion, respectively. A hypothetical 10% adverse movement in foreign currency exchange rates compared with the U.S. dollar relative to exchange rates at December 31, 2020 and 2019 would have resulted in a reduction in fair value of these contracts of approximately $249 million and $285 million, respectively, on this date and, if realized, would negatively affect earnings over the remaining life of the contracts. The analysis does not consider the impact that hypothetical changes in foreign currency exchange rates would have on anticipated transactions that these foreign currency sensitive instruments were designed to offset.

Interest Rate Risk

Our portfolio of available-for-sale debt securities and our senior unsecured notes create an exposure to interest rate risk. With respect to our investment portfolio, we adhere to an investment policy that requires us to limit amounts invested in securities based on credit rating, maturity, industry group and investment type and issuer, except for securities issued by the U.S. government. 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

• competitive after-tax rate of return.

The following table summarizes the expected maturities and average interest rates of our interest-generating assets and interest-bearing liabilities at December 31, 2020:

Expected Maturity Total Fair Value

Assets

Liabilities

Average interest rate 0.38 % — % 1.15 % — % — % — %

_______________________________

(1) Amounts represent principal balances. In addition to the senior unsecured fixed rate notes, we have a $2.5 billion five-year revolving credit facility that matures in June 2025. There were no amounts outstanding under the five-year revolving credit facility as of December 31, 2020. See 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 for additional information.

Market Price Risk

We hold shares of common stock of certain publicly traded biotechnology companies primarily in connection with license and collaboration agreements. These equity securities are measured at fair value with any changes in fair value recognized in earnings.

The fair value of these equity securities was approximately $2.4 billion and $3.8 billion as of December 31, 2020 and 2019, respectively. Changes in fair value of these equity securities are impacted by the volatility of the stock market and changes in general economic conditions, among other factors. A hypothetical 20% increase or decrease in the stock prices of these equity securities would increase or decrease their fair value at December 31, 2020 and 2019 by approximately $478 million and $760 million, respectively.

ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

GILEAD SCIENCES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Years ended December 31, 2020, 2019 and 2018

CONTENTS

Report of Independent Registered Public Accounting Firm 52

Audited Consolidated Financial Statements:

Consolidated Balance Sheets 55

Consolidated Statements of Income 56

Consolidated Statements of Comprehensive Income 57

Consolidated Statements of Stockholders’ Equity 58

Consolidated Statements of Cash Flows 59

Notes to Consolidated Financial Statements 60

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Gilead Sciences, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Gilead Sciences, Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 25, 2021 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Government and commercial rebates

Valuation of in-process research and development intangible assets

Valuation of intangible assets acquired in a business combination

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 1988.

San Jose, California

February 25, 2021

GILEAD SCIENCES, INC.

Consolidated Balance Sheets

December 31,

(in millions, except per share amounts) 2020 2019

Assets

Current assets:

Prepaid and other current assets 2,013 1,440

Property, plant and equipment, net 4,967 4,502

Long-term marketable securities 502 1,488

Liabilities and Stockholders’ Equity

Current liabilities:

Accrued government and other rebates 3,460 3,473

Current portion of long-term debt and other obligations, net 2,757 2,499

Long-term income taxes payable 5,016 6,115

Commitments and contingencies (Note 14)

Stockholders’ equity:

Accumulated other comprehensive income (60) 85

Noncontrolling interest 19 125

Total liabilities and stockholders’ equity $ 68,407 $ 61,627

See accompanying notes.

GILEAD SCIENCES, INC.

Consolidated Statements of Income

Year Ended December 31,

Revenues:

Royalty, contract and other revenues 334 330 450

Costs and expenses:

Acquired in-process research and development expenses 5,856 5,051 1,098

Selling, general and administrative expenses 5,151 4,381 4,056

Net (loss) income attributable to noncontrolling interest (34) (22) 5

Shares used in per share calculation - basic 1,257 1,270 1,298

Shares used in per share calculation - diluted 1,263 1,277 1,308

See accompanying notes.

GILEAD SCIENCES, INC.

Consolidated Statements of Comprehensive Income

Year Ended December 31,

Other comprehensive income (loss):

Net foreign currency translation gain (loss), net of tax (2) 6 (38)

Available-for-sale debt securities:

Net unrealized gain, net of tax 43 54 43

Reclassifications to net income, net of tax (42) (1) 4

Cash flow hedges:

Net unrealized gain (loss), net of tax (103) 72 112

Reclassification to net income, net of tax (41) (126) 87

Other comprehensive income (loss) (145) 5 208

Comprehensive income (loss) attributable to noncontrolling interest (34) (22) 5

Comprehensive income (loss) attributable to Gilead $ (22) $ 5,391 $ 5,663

See accompanying notes.

GILEAD SCIENCES, INC.

Consolidated Statements of Stockholders’ Equity

(in millions, except per share amounts)

Shares Amount

Change in noncontrolling interest — — — — — 83 83

Other comprehensive income, net of tax — — — 208 — — 208

Issuances under employee stock purchase plan 2 — 91 — — — 91

Issuances under equity incentive plans 14 — 197 — — — 197

Stock-based compensation — — 842 — — — 842

Dividends declared ($2.28 per share) — — — — (2,986) — (2,986)

Cumulative effect from the adoption of new accounting standards — — — — 8 — 8

Other comprehensive income, net of tax — — — 5 — — 5

Issuances under employee stock purchase plan 2 — 90 — — — 90

Issuances under equity incentive plans 10 — 118 — — — 118

Stock-based compensation — — 638 — — — 638

Dividends declared ($2.52 per share) — — — — (3,239) — (3,239)

Change in noncontrolling interest (Note 11) — — — — — (72) (72)

Net income (loss) — — — — 123 (34) 89

Other comprehensive income (loss), net of tax — — 1 (145) (1) — (145)

Issuances under employee stock purchase plan 2 — 100 — — — 100

Issuances under equity incentive plans 11 — 156 — — — 156

Stock-based compensation — — 642 — — — 642

Dividends declared ($2.72 per share) — — — — (3,464) — (3,464)

See accompanying notes.

GILEAD SCIENCES, INC.

Consolidated Statements of Cash Flows

Year Ended December 31,

Operating Activities:

Net (gains) losses from equity securities 1,662 (1,241) (115)

Acquired in-process research and development expenses 5,856 4,251 —

In-process research and development impairment — 800 820

Changes in operating assets and liabilities:

Investing Activities:

Proceeds from sales of marketable debt securities 23,239 7,523 1,522

Proceeds from maturities of marketable debt securities 9,479 22,398 24,336

Net cash (used in) provided by investing activities (14,615) (7,817) 14,355

Financing Activities:

Proceeds from debt financing, net of issuance costs 8,184 — —

Proceeds from issuances of common stock 256 209 289

Repayments of debt and other obligations (2,500) (2,750) (6,250)

Net cash provided by (used in) financing activities 770 (7,634) (12,318)

Effect of exchange rate changes on cash and cash equivalents 43 (2) (85)

Supplemental disclosure of cash flow information:

Interest paid, net of amounts capitalized $ 951 $ 982 $ 1,070

See accompanying notes.

GILEAD SCIENCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Overview

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 HIV, viral hepatitis and cancer. 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.

Basis of Presentation

The accompanying Consolidated Financial Statements include the accounts of Gilead, our wholly-owned subsidiaries and certain variable interest entities for which we are the primary beneficiary. All intercompany transactions have been eliminated. For consolidated entities where we own or are exposed to less than 100% of the economics, we record net income (loss) attributable to noncontrolling interests in our Consolidated Statements of Income equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties.

We assess whether we are the primary beneficiary of a variable interest entity (“VIE”) at the inception of the arrangement and at each reporting date. This assessment is based on our power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and our obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.

Segment Information

We have one operating segment which primarily 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 a summary of disaggregated revenues by product and geographic region.

Significant Accounting Policies, Estimates and Judgments

The preparation of these Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, 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 may differ significantly from these estimates.

Reclassification

Beginning 2020, acquired in-process research and development (“IPR&D”) expenses are reported separately from Research and development expenses on our Consolidated Statements of Income. Acquired IPR&D expenses on our Consolidated Statements of Income reflect IPR&D impairments as well as the initial costs of externally developed IPR&D projects, acquired directly in a transaction other than a business combination, that do not have an alternative future use, including upfront payments related to various collaborations and the initial costs of rights to IPR&D projects. Our Consolidated Statements of Income for the years ended December 31, 2019 and 2018 have been conformed to separately present acquired IPR&D expenses.

Our Consolidated Statement of Cash Flows for the year ended December 31, 2019, has been conformed to separately present acquired IPR&D expenses exclusive of IPR&D impairments. Comparative amounts in our Consolidated Statement of Cash Flows for the year ended December 31, 2018 were not material. There was no change in income from operations or operating cash flow as a result of these reclassifications.

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. The revenues are recognized, net of estimated government and other rebates and chargebacks, cash discounts for prompt payment, distributor fees, sales return provisions and other related deductions. These deductions to product sales are referred to as gross-to-net deductions, and are estimated and recorded in the period in which the related product sales occur. Our payment terms to customers generally range from 30 to 90 days; however, payment terms differ by jurisdiction, by customer and in some instances by type of product. 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. If we expect, at contract inception, that the period between the transfer of control and corresponding payment from the customer will be one year or less, we do not adjust the amount of consideration for the effects of a significant financing component.

Gross to Net Deductions

Rebates and Chargebacks

Government and other rebates and chargebacks include amounts payable to payers and healthcare providers under various programs, and may vary by product, by payer and individual payer plans. Rebates and chargebacks are based on contractual arrangements or statutory requirements which may vary by product, 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.

Rebates and chargebacks are estimated primarily based on product sales, and expected payer mix and discount rates, which require significant estimates and judgment. Additionally, in developing our estimates we consider: historical and estimated payer mix; statutory discount requirements and contractual terms; historical claims experience and processing time lags; estimated patient population; known market events or trends; market research; channel inventory data obtained from our major U.S. wholesalers; and other pertinent internal or external information. We assess and update our estimates every quarter to reflect actual claims and other current information.

Government and other chargebacks that are payable to our direct customers are generally classified as reductions of Accounts receivable on our Consolidated Balance Sheets. 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.

Cash Discounts

We estimate cash discounts based on contractual terms, historical customer payment patterns and our expectations regarding future customer payment patterns.

Distributor Fees

Under our inventory management agreements with our significant U.S. wholesalers, we pay the wholesalers a fee primarily for compliance with certain contractually determined covenants such as the maintenance of agreed upon inventory levels. These distributor fees are based on a contractually determined fixed percentage of sales.

Allowance for Sales Returns

Allowances are made for estimated sales returns by our customers and are recorded in the period the related revenue is recognized. We typically permit returns if the product is damaged, defective, or otherwise cannot be used by the customer. In the United States we typically permit returns six months prior to and up to one year after the product expiration date. Outside the United States returns are only allowed in certain countries on a limited basis.

Our estimates of sales returns are based primarily on analysis of our historical product return patterns, industry information reporting the return rates for similar products and contractual agreement terms. We also take into consideration known or expected changes in the marketplace specific to each product.

Shipping and Handling

Shipping and handling activities are considered to be fulfillment activities and not considered to be a separate performance obligation.

Royalty, Contract and Other Revenues

Royalty revenue is recognized in the period in which the obligation is satisfied and the corresponding sales by our corporate partners occur.

Research and Development Expenses

R&D expenses consist primarily of personnel costs, including salaries, benefits and stock-based compensation, clinical studies performed by contract research organizations (“CROs”), materials and supplies, payments under collaborative and other arrangements, including milestone payments, license and option fees, as well as expense reimbursements to the collaboration partners and overhead allocations consisting of various support and infrastructure costs. Upfront and milestone payments made to third-party collaborators are expensed as incurred up to the point of regulatory approval. Milestone payments made upon regulatory approval are capitalized and amortized over the remaining useful life of the related product. From time to time, we enter into development and collaboration agreements in which we share expenses with a collaborative partner. We record payments received from our collaborative partners for their share of the development costs as a reduction of research and development expense.

We charge R&D costs, including clinical study costs, to expense when incurred. Clinical study costs are a significant component of R&D expenses. Most of our clinical studies are performed by third-party CROs. We monitor levels of performance under each significant contract including the extent of patient enrollment and other activities through communications with our CROs. We accrue costs for clinical studies performed by CROs over the service periods specified in the contracts and adjust our estimates, if required, based upon our ongoing review of the level of effort and costs actually incurred by the CROs. All of our material CRO contracts are terminable by us upon written notice and we are generally only liable for actual services completed by the CRO and certain non-cancelable expenses incurred at any point of termination. Payments we make for research and development services prior to the services being rendered are recorded as prepaid assets in our Consolidated Balance Sheets and are expensed as the services are provided.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses relate to sales and marketing, finance, human resources, legal and other administrative activities. SG&A 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.

We expense the costs of advertising, including promotional expenses, as incurred. Advertising expenses were $795 million, $784 million and $587 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Cash and Cash Equivalents

We consider highly liquid investments with insignificant interest rate risk and an original maturity of three months or less on the purchase date to be cash equivalents.

Marketable and Nonmarketable Securities

Marketable Debt Securities

We determine the appropriate classification of our marketable debt securities at the time of purchase and reevaluate such designation at each balance sheet date. All of our marketable debt securities are considered available-for-sale and carried at estimated fair values and reported in cash equivalents, short-term marketable securities or long-term marketable securities. Unrealized gains and losses on available-for-sale debt securities are excluded from net income and reported in accumulated other comprehensive income (loss) (“AOCI”) as a separate component of stockholders’ equity. Other income (expense), net, includes interest, amortization of purchase premiums and discounts, realized gains and losses on sales of securities and expected credit losses, if any. The cost of securities sold is based on the specific identification method. We regularly review our investments for declines in fair value below their amortized cost basis to determine whether the impairment is due to credit-related factors or noncredit-related factors. Our review includes the creditworthiness of the security issuers, the number of securities in an unrealized loss position, the severity of the unrealized losses, whether we have the intent to sell the securities and whether it is more likely than not that we will be required to sell the securities before the recovery of their amortized cost basis. When we determine that a portion of the unrealized loss is due to an expected credit loss, we recognize the loss amount in Other income (expense), net, with a corresponding allowance against the carrying value of the security we hold. The portion of the unrealized loss related to factors other than credit losses is recognized in AOCI.

Marketable and Non-Marketable Equity Securities

Investments in equity securities, other than equity method investments, are recorded at fair market value, if fair value is readily determinable and unrealized gains and losses are included in Other income (expense), net on our Consolidated Statements of Income.

For investments in entities over which we have significant influence but do not meet the requirements for consolidation and have not elected the fair value option, we use the equity method of accounting with our share of the underlying income or loss of such entities reported in Other income (expense), net on our Consolidated Statements of Income. We have elected the fair value option to account for our equity investment in Galapagos NV (“Galapagos”) over which we have significant influence. We believe the fair value option best reflects the underlying economics of the investment. See Note 11. Collaborations and Other Arrangements for additional information.

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. Certain investments in equity securities of non-public companies are accounted for using the equity method based on our ownership percentage and other factors that indicate we have significant influence over the investee. See Note 11. Collaborations and Other Arrangements for additional information.

Our investments in equity securities are recorded in Prepaid and other current assets or Other long-term assets on our Consolidated Balance Sheets. We regularly review our securities for indicators of impairment.

Concentrations of Risk

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

We are also subject to credit risk from our accounts receivable related to our product sales. 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. There were no material write-offs charged against the allowance for the year ended December 31, 2020.

Certain of the raw materials and components that we utilize in our operations are obtained through single suppliers. Certain of the raw materials that we utilize in our operations are made at only one facility. Since the suppliers of key components and raw materials must be named in a new drug application filed with U.S. Food and Drug Administration (“FDA”) for a product, significant delays can occur if the qualification of a new supplier is required. If delivery of material from our suppliers is interrupted for any reason, we may be unable to ship our commercial products or to supply our product candidates for clinical trials.

Inventories

Inventories are recorded at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. We periodically review our inventories to identify obsolete, slow moving, excess or otherwise unsaleable items. If obsolete, slow moving, excess or unsaleable items are observed and there are no alternate uses for the inventory, we record a write-down to net realizable value through a charge to Cost of goods sold on our Consolidated Statements of Income. The determination of net realizable value requires judgment including consideration of many factors, such as estimates of future product demand, product net selling prices, current and future market conditions and potential product obsolescence, among others.

When future commercialization is considered probable and the future economic benefit is expected to be realized, based on management’s judgment, we capitalize pre-launch inventory costs prior to regulatory approval. A number of factors are considered, including the current status in the regulatory approval process, potential impediments to the approval process such as safety or efficacy, anticipated R&D initiatives that could impact the indication in which the compound will be used, viability of commercialization and marketplace trends.

Property, Plant and Equipment

Property, plant and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization are recognized using the straight-line method. Repairs and maintenance costs are expensed as incurred. Estimated useful lives in years are generally as follows:

Description Estimated Useful Life

Buildings and improvements Shorter of 35 years or useful life

Laboratory and manufacturing equipment 4-10

Office, computer equipment and other 3-15

Leasehold improvements Shorter of useful life or lease term

Leases

On January 1, 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.”

We determine if an arrangement contains a lease at inception. Right-of-use assets and lease liabilities are recognized at the commencement date based on the present value of the lease payments over the lease term, which is the non-cancelable period stated in the contract adjusted for any options to extend or terminate when it is reasonably certain that we will exercise that option. Right-of-use assets are adjusted for prepaid lease payments, lease incentives and initial direct costs incurred. Operating lease expense for the minimum lease payments is recognized on a straight-line basis over the lease term.

We account for lease and nonlease components in our lease agreements as a single lease component in determining lease assets and liabilities. In addition, we do not recognize the right-of-use assets and liabilities for leases with lease terms of one year or less.

As most of our operating leases do not provide an implicit interest rate, we generally utilize a collateralized incremental borrowing rate, applied in a portfolio approach when relevant, based on the information available at the commencement date to determine the lease liability.

Acquisitions

We account for business combinations using the acquisition method of accounting, which generally requires that assets acquired, including IPR&D projects, and liabilities assumed be recorded at their fair values as of the acquisition date on our Consolidated Balance Sheets. Any excess of consideration over the fair value of net assets acquired is recorded as goodwill. The determination of estimated fair value requires us to make significant estimates and assumptions. As a result, we may record adjustments to the fair values of assets acquired and liabilities assumed within the measurement period (up to one year from the acquisition date) with the corresponding offset to goodwill. Transaction costs associated with business combinations are expensed as they are incurred.

When we determine net assets acquired do not meet the definition of a business combination under the acquisition method of accounting, the transaction is accounted for as an acquisition of assets and, therefore, no goodwill is recorded and contingent consideration such as payments upon achievement of various developmental, regulatory and commercial milestones generally is not recognized at the acquisition date. In an asset acquisition, upfront payments allocated to IPR&D projects at the acquisition date and subsequent milestone payments are charged to expense in our Consolidated Statements of Income unless there is an alternative future use.

Goodwill and Intangible Assets

Goodwill represents the excess of the consideration transferred over the estimated fair value of assets acquired and liabilities assumed in a business combination. Intangible assets are measured at their respective fair values as of the acquisition date and may be subject to adjustment within the measurement period, which may be up to one year from the acquisition date. Intangible assets related to IPR&D projects are considered to be indefinite-lived until the completion or abandonment of the associated R&D efforts. We do not amortize goodwill and intangible assets with indefinite useful lives. Goodwill and indefinite-lived intangible assets are tested for impairment annually, or more frequently if events or changes in circumstances indicate that it is more likely than not that the assets are impaired.

When development is successfully completed, which generally occurs when regulatory approval is obtained, the associated assets are deemed finite-lived and amortized over their respective estimated useful lives beginning at that point in time. Intangible assets with finite useful lives are amortized over their estimated useful lives, primarily on a straight-line basis, and are reviewed for impairment when facts or circumstances indicate that the carrying value of these assets may not be recoverable.

Impairment of Long-Lived Assets

Long-lived assets, including property, plant and equipment and finite-lived intangible assets, are reviewed for impairment whenever facts or circumstances either internally or externally may indicate that the carrying value of an asset may not be recoverable. Should there be an indication of impairment, we test for recoverability by comparing the estimated undiscounted future cash flows expected to result from the use of the asset to the carrying amount of the asset or asset group. If the asset or asset group is determined to be impaired, any excess of the carrying value of the asset or asset group over its estimated fair value is recognized as an impairment loss.

Valuation of Contingent Consideration Resulting from a Business Combination

In connection with certain acquisitions, we may be required to pay future consideration that is contingent upon the achievement of specified development, regulatory approval or sales-based milestone events. We record contingent consideration resulting from a business combination at its fair value on the acquisition date. Each quarter thereafter, we revalue these obligations and record increases or decreases in their fair value in R&D expense within our Consolidated Statement of Income until such time that the related product candidate receives marketing approval.

Increases or decreases in fair value of the contingent consideration liabilities can result from updates to assumptions such as the expected timing or probability of achieving the specified milestones, changes in projected revenues or changes in discount rates. Significant judgment is employed in determining these assumptions as of the acquisition date and for each subsequent period. Updates to assumptions could have a significant impact on our results of operations in any given period. Actual results may differ from estimates.

Foreign Currency Translation, Transaction Gains and Losses, and Hedging Contracts

Non-U.S. entity operations are recorded in the functional currency of each entity. Results of operations for non-U.S. dollar functional currency entities are translated into U.S. dollars using average currency rates. Assets and liabilities are translated using currency rates at period end. Foreign currency translation adjustments are recorded as a component of AOCI within stockholders’ equity. Foreign currency transaction gains and losses are recorded in Other income (expense), net, on our Consolidated Statements of Income. Net foreign currency transaction gains and losses were not material for the years ended December 31, 2020, 2019 and 2018.

We hedge a portion of our foreign currency exposures related to outstanding monetary assets and liabilities as well as forecasted product sales using foreign currency exchange forward 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.

Fair Value of Financial Instruments

We apply fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. We define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities which are required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risks.

Derivative Financial Instruments

We recognize all derivative instruments as either assets or liabilities at fair value on our Consolidated Balance Sheets. Changes in the fair value of derivatives designated as part of a hedge transaction are recorded each period in current earnings or AOCI. Changes in the fair value of derivatives that are not part of a hedge transaction are recorded each period in current earnings.

We assess, both at inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are effective in offsetting the changes in cash flows or fair values of the hedged items. If we determine that a forecasted transaction is probable of not occurring, we discontinue hedge accounting for the affected portion of the hedge instrument, and any related unrealized gain or loss on the contract is recognized in Other income (expense), net on our Consolidated Statements of Income.

Income Taxes

Our income tax provision is computed under the liability method. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Significant estimates are required in determining our provision for income taxes. Some of these estimates are based on interpretations of applicable tax laws or regulations.

We record liabilities related to unrecognized tax benefits in accordance with the guidance that clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. An adverse resolution of one or more of these uncertain tax positions in any period could have a material impact on the results of operations for that period.

We have elected to account for the tax on Global Intangible Low-Taxed Income (“GILTI”), enacted as part of the Tax Cuts and Jobs Act (“Tax Reform”), as a component of tax expense in the period in which the tax is incurred (“period cost method”).

Other Significant Accounting Policies

Our other significant accounting policies are described in the remaining appropriate notes to the Consolidated Financial Statements.

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13 “Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments” and has since modified the standard with several ASUs (collectively, “Topic 326”). Topic 326 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 Consolidated Financial Statements. In connection with the adoption of Topic 326, we made an accounting policy election to not measure an allowance for credit losses for accrued interest receivable.

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 Topic 606, “Revenue from Contracts with Customers” 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 Consolidated Financial Statements.

2. REVENUES

Disaggregation of Revenues

Revenues were as follows:

Product Sales:

HIV Products

Hepatitis C virus (“HCV”) Products

Cell Therapy Products

Tecartus 34 10 — 44 — — — — — — — —

Trodelvy 49 — — 49 — — — — — — — —

Other Products

_______________________________

(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 Unlimited Company.

(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 Vosevi and Sovaldi.

(6) Includes Cayston, Hepsera and Jyseleca.

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:

Year Ended December 31,

AmerisourceBergen Corporation 27 % 21 % 20 %

Cardinal Health, Inc. 21 % 21 % 21 %

McKesson Corporation 20 % 22 % 21 %

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 $841 million and $741 million for the years ended December 31, 2020 and 2019, respectively.

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. Estimates are assessed each period and updated to reflect current information. Changes in estimates for variable consideration related to sales made in prior years resulted in a $101 million increase and a $257 million increase in revenues for the years ended December 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 $198 million and $144 million as of December 31, 2020 and 2019, respectively. Contract liabilities were$97 million and $45 million as of December 31, 2020 and 2019, respectively. During 2020 and 2019, revenue recognized that was included in the contract liability balance as of the beginning of the respective years was not material. Revenue expected to be recognized in the future from contract liabilities as the related performance obligations are satisfied is not expected to be material in any one year.

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 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 Consolidated Balance Sheets. The remaining financial instruments are reported in our Consolidated Balance Sheets at amounts that approximate current fair values.

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) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total

Assets:

Available-for-sale debt securities:

U.S. government agencies securities — — — — — 1,081 — 1,081

Non-U.S. government securities — 43 — 43 — 174 — 174

Residential mortgage and asset-backed securities — 316 — 316 — 91 — 91

Equity securities:

Other publicly traded equity securities 743 — — 743 322 — — 322

Foreign currency derivative contracts — 12 — 12 — 37 — 37

Liabilities:

Deferred compensation plan $ 218 $ — $ — $ 218 $ 171 $ — $ — $ 171

Foreign currency derivative contracts — 121 — 121 — 8 — 8

Equity investments not measured at fair value and excluded from the above table were limited partnerships and other equity method investments of $58 million and $24 million at December 31, 2020 and 2019, respectively and other equity investments without readily determinable fair values of $204 million and $82 million at December 31, 2020 and 2019, respectively. These amounts were included in Other long-term assets on our Consolidated Balance Sheets.

Changes in the fair value of equity securities resulted in net unrealized losses of $1.7 billion and net unrealized gains of $1.2 billion for the years ended December 31, 2020 and 2019, respectively, which were included in Other income (expense), net, on our Consolidated Statements of Income.

The following table summarizes the classification of our equity securities in our Consolidated Balance Sheets:

Cash and cash equivalents $ 4,361 $ 7,069

Prepaid and other current assets 853 319

Our available-for-sale debt securities are classified as cash equivalents, short-term marketable securities and long-term marketable securities in our Consolidated Balance Sheets. See Note 4. Available-for-Sale Debt Securities for additional information. See Note 11. Collaborations and Other Arrangements for additional information on our equity investment in Galapagos.

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 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 and swap rates. These inputs, where applicable, are observable at commonly quoted intervals.

The total estimated fair values of our aggregate short-term and long-term senior unsecured notes and term loan facility, determined using Level 2 inputs based on their quoted market values, were approximately $34.6 billion and $27.3 billion at December 31, 2020 and 2019, respectively, and the carrying values were $30.3 billion and $24.6 billion at December 31, 2020 and 2019, respectively.

Level 3 Inputs

In 2020, we measured assets acquired and liabilities assumed at fair value on a nonrecurring basis, in connection with our acquisition of Immunomedics, Inc. (“Immunomedics”). See Note 6. Acquisitions for additional information.

In 2020, in connection with collaborations and other equity arrangements we entered into separately with Pionyr Immunotherapeutics, Inc. (“Pionyr”) and Tizona Therapeutics, Inc. (“Tizona”), we also measured fair values of our exclusive options to acquire the remaining outstanding capital stock of Pionyr and Tizona on a nonrecurring basis. See Note 11. Collaborations and Other Arrangements for additional information.

In 2019 and 2018, we measured IPR&D intangible assets acquired in connection with the acquisition of Kite Pharma, Inc. (“Kite”) at fair value on a nonrecurring basis, and recognized pre-tax impairment charges of $800 million and $820 million, respectively. The fair values of the acquired IPR&D assets are estimated based on probability-adjusted discounted cash flow calculations using Level 3 fair value measurements and inputs include estimated revenues, costs, probability of technical and regulatory success and discount rates. Amounts capitalized as IPR&D are subject to impairment testing until the completion or abandonment of the associated R&D efforts. See Note 9. Goodwill and Intangible Assets for additional information.

The other level 3 liabilities were our contingent consideration liabilities, which were not material at December 31, 2020 and 2019.

Our policy is to recognize transfers into or out of Level 3 classification as of the actual date of the event or change in circumstances that caused the transfer. There were no transfers between Level 1, Level 2 and Level 3 in the periods presented.

4. AVAILABLE-FOR-SALE DEBT SECURITIES

The following table summarizes our available-for-sale debt securities:

U.S. government agencies securities — — — — 1,081 — — 1,081

Non-U.S. government securities 43 — — 43 174 — — 174

Residential mortgage and asset-backed securities 316 — — 316 91 — — 91

The following table summarizes the classification of our available-for-sale debt securities in our Consolidated Balance Sheets:

Cash and cash equivalents $ 113 $ 2,291

GILD US Equity

GILD · 10-K · period ended 2020-12-31

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

ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

GILD US Equity☆

GILD · 10-K · period ended 2020-12-31

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

ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

GILD US Equity