Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

GILEAD SCIENCES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Years ended December 31, 2018, 2017 and 2016

CONTENTS

Report of Independent Registered Public Accounting Firm47
Audited Consolidated Financial Statements:
Consolidated Balance Sheets48
Consolidated Statements of Income49
Consolidated Statements of Comprehensive Income50
Consolidated Statements of Stockholders’ Equity51
Consolidated Statements of Cash Flows52
Notes to Consolidated Financial Statements53
Selected Quarterly Financial Information (Unaudited)90
Schedule II: Valuation and Qualifying Accounts91

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders 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, 2018 and 2017, 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, 2018, and the related notes and financial statement schedule listed in the index at Item 15(a) (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, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, 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, 2018, 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, 2019 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.

/s/ Ernst & Young LLP

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

San Jose, California

February 25, 2019

GILEAD SCIENCES, INC.

Consolidated Balance Sheets

(in millions, except per share amounts)

December 31,
20182017
Assets
Current assets:
Cash and cash equivalents$17,940$7,588
Short-term marketable securities12,14917,922
Accounts receivable, net of allowances of $583 and $455, respectively3,3273,851
Inventories814801
Prepaid and other current assets1,6061,661
Total current assets35,83631,823
Property, plant and equipment, net4,0063,295
Long-term marketable securities1,42311,184
Intangible assets, net15,73817,100
Goodwill4,1174,159
Other long-term assets2,5552,722
Total assets$63,675$70,283
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$790$814
Accrued government and other rebates3,9284,704
Other accrued liabilities3,1393,370
Current portion of long-term debt and other obligations, net2,7482,747
Total current liabilities10,60511,635
Long-term debt, net24,57430,795
Long-term income taxes payable5,9226,794
Other long-term obligations1,040558
Commitments and contingencies (Note 13)
Stockholders’ equity:
Preferred stock, par value $0.001 per share; 5 shares authorized; none outstanding——
Common stock, par value $0.001 per share; 5,600 authorized; 1,282 and 1,308 shares issued and outstanding, respectively11
Additional paid-in capital2,2821,264
Accumulated other comprehensive income80165
Retained earnings19,02419,012
Total Gilead stockholders’ equity21,38720,442
Noncontrolling interest14759
Total stockholders’ equity21,53420,501
Total liabilities and stockholders’ equity$63,675$70,283

See accompanying notes.

GILEAD SCIENCES, INC.

Consolidated Statements of Income

(in millions, except per share amounts)

Year Ended December 31,
201820172016
Revenues:
Product sales$21,677$25,662$29,953
Royalty, contract and other revenues450445437
Total revenues22,12726,10730,390
Costs and expenses:
Cost of goods sold4,8534,3714,261
Research and development expenses5,0183,7345,098
Selling, general and administrative expenses4,0563,8783,398
Total costs and expenses13,92711,98312,757
Income from operations8,20014,12417,633
Interest expense(1,077)(1,118)(964)
Other income (expense), net676523428
Income before provision for income taxes7,79913,52917,097
Provision for income taxes2,3398,8853,609
Net income5,4604,64413,488
Net income (loss) attributable to noncontrolling interest516(13)
Net income attributable to Gilead$5,455$4,628$13,501
Net income per share attributable to Gilead common stockholders - basic$4.20$3.54$10.08
Shares used in per share calculation - basic1,2981,3071,339
Net income per share attributable to Gilead common stockholders - diluted$4.17$3.51$9.94
Shares used in per share calculation - diluted1,3081,3191,358

See accompanying notes.

GILEAD SCIENCES, INC.

Consolidated Statements of Comprehensive Income

(in millions)

Year Ended December 31,
201820172016
Net income$5,460$4,644$13,488
Other comprehensive income (loss):
Net foreign currency translation gain (loss), net of tax(38)(47)177
Available-for-sale securities:
Net unrealized gain, net of tax impact of $0, $6 and $19, respectively432187
Reclassifications to net income (loss), net of tax impact of $0, ($9) and $0, respectively4(8)(7)
Net change47210—
Cash flow hedges:
Net unrealized gain (loss), net of tax impact of $2, ($11) and $0, respectively112(304)5
Reclassification to net income, net of tax impact of $0, $0 and $(8), respectively87288
Net change199(276)13
Other comprehensive income (loss)208(113)190
Comprehensive income5,6684,53113,678
Comprehensive income (loss) attributable to noncontrolling interest516(13)
Comprehensive income attributable to Gilead$5,663$4,515$13,691

See accompanying notes.

GILEAD SCIENCES, INC.

Consolidated Statements of Stockholders’ Equity

(in millions, except per share amounts)

Gilead Stockholders’ EquityNoncontrolling InterestTotal Stockholders’ Equity
Common StockAdditional Paid-In CapitalAccumulated Other Comprehensive Income (Loss)Retained Earnings
SharesAmount
Balance at December 31, 20151,42214448818,00157919,113
Change in noncontrolling interest—————(90)(90)
Net income (loss)————13,501(13)13,488
Other comprehensive income, net of tax———190——190
Issuances under employee stock purchase plan1—84———84
Issuances under equity incentive plans13—128———128
Tax benefits from employee stock plans——186———186
Stock-based compensation——381———381
Repurchases of common stock(126)—(302)—(10,883)—(11,185)
Warrants settlement——(469)———(469)
Convertible notes settlement——(95)———(95)
Convertible note hedges settlement——95———95
Dividends declared ($1.84 per share)————(2,465)—(2,465)
Reclassification of conversion spread of convertible notes——(733)———(733)
Reclassification of convertible note hedges——733———733
Reclassification to equity component of currently redeemable convertible notes——2———2
Balance at December 31, 20161,310145427818,15447619,363
Change in noncontrolling interest——(3)——(433)(436)
Net income————4,628164,644
Other comprehensive loss, net of tax———(113)——(113)
Issuances under employee stock purchase plan1—83———83
Issuances under equity incentive plans11—146———146
Stock-based compensation——618———618
Repurchases of common stock(14)—(34)—(1,028)—(1,062)
Dividends declared ($2.08 per share)————(2,742)—(2,742)
Balance at December 31, 20171,30811,26416519,0125920,501
Change in noncontrolling interest—————8383
Net income————5,45555,460
Other comprehensive income, net of tax———208——208
Issuances under employee stock purchase plan2—91———91
Issuances under equity incentive plans14—197———197
Stock-based compensation——842———842
Repurchases of common stock(42)—(112)—(2,940)—(3,052)
Dividends declared ($2.28 per share)————(2,986)—(2,986)
Cumulative effect from the adoption of new accounting standards———(293)483—190
Balance at December 31, 20181,282$1$2,282$80$19,024$147$21,534

See accompanying notes.

GILEAD SCIENCES, INC.

Consolidated Statements of Cash Flows

(in millions)

Year Ended December 31,
201820172016
Operating Activities:
Net income$5,460$4,644$13,488
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense226233177
Amortization expense1,2031,053981
Stock-based compensation expense845638380
Deferred income taxes289(82)(119)
In-process research and development impairment820—432
Inventory reserves for excess raw materials440——
Other56304162
Changes in operating assets and liabilities:
Accounts receivable, net4807541,192
Inventories(310)(253)(488)
Prepaid expenses and other903358(520)
Accounts payable(39)(430)47
Income taxes payable(1,459)5,4971,010
Accrued liabilities(514)(818)305
Net cash provided by operating activities8,40011,89817,047
Investing Activities:
Purchases of marketable securities(10,233)(23,314)(25,619)
Proceeds from sales of marketable securities1,52210,44013,039
Proceeds from maturities of marketable securities24,3367,8211,700
Other investments(346)—(357)
Acquisitions, net of cash acquired—(10,426)—
Capital expenditures(924)(590)(748)
Net cash provided by (used in) investing activities14,355(16,069)(11,985)
Financing Activities:
Proceeds from debt financing, net of issuance costs—8,9855,293
Proceeds from convertible note hedges——956
Proceeds from issuances of common stock289234208
Repurchases of common stock(2,900)(954)(11,001)
Repayments of debt and other obligations(6,250)(1,811)(1,981)
Payments to settle warrants——(469)
Payment of dividends(2,971)(2,731)(2,455)
Other(486)(330)(276)
Net cash provided by (used in) financing activities(12,318)3,393(9,725)
Effect of exchange rate changes on cash and cash equivalents(85)13741
Net change in cash and cash equivalents10,352(641)(4,622)
Cash and cash equivalents at beginning of period7,5888,22912,851
Cash and cash equivalents at end of period$17,940$7,588$8,229
Supplemental disclosure of cash flow information:
Interest paid, net of amounts capitalized$1,070$1,038$885
Income taxes paid$3,198$3,342$2,436

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/AIDS, liver diseases, hematology/oncology and inflammation/respiratory diseases. We seek to add to our existing portfolio of products through our internal discovery and clinical development programs, product acquisition, in-licensing and strategic collaborations.

Our portfolio of marketed products includes AmBisome®, Atripla®, Biktarvy®, Cayston®, Complera®/Eviplera®, Descovy®, Emtriva®, Epclusa®, Genvoya®, Harvoni®, Hepsera®, Letairis®, Odefsey®, Ranexa®, Sovaldi®, Stribild®, Truvada®, Tybost®, Vemlidy®, Viread®, Vosevi®, Yescarta® and Zydelig®. We also sell and distribute certain products through our corporate partners under collaborative agreements.

Basis of Presentation

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

We assess whether we are the primary beneficiary of a variable interest entity (VIE) at the inception of the arrangement and at each reporting date. This assessment is based on our power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and our obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. As of December 31, 2018, we did not have any material VIEs.

Significant Accounting Policies, Estimates and Judgments

The preparation of these Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. On an ongoing basis, we evaluate our significant accounting policies and estimates. We base our estimates on historical experience and on various market specific and other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ significantly from these estimates.

Revenue Recognition

On January 1, 2018, we adopted Accounting Standards Update No. 2014-09 “Revenue from Contracts with Customers” (Topic 606) using the modified retrospective method. Topic 606 supersedes the revenue recognition requirements in Topic 605 “Revenue Recognition” (Topic 605). As a result, we have changed our accounting policies for revenue recognition as detailed below.

Policy Elections and Practical Expedients Taken

•We account for shipping and handling activities that are performed after a customer has obtained control of a good as fulfillment costs rather than as separate performance obligations; and
•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.

Product Sales

We recognize revenue from product sales when control of the product transfers, generally upon shipment or delivery, to the customer, or in certain cases, upon the corresponding sales by our customer to a third party. Upon recognition of revenue from product sales, provisions are made for various forms of variable consideration, which include government and other rebates such as Medicaid reimbursements, customer incentives such as cash discounts for prompt payment, distributor fees and expected returns of expired products, as appropriate. Our payment terms to customers generally range from 30 to 90 days.

Variable Consideration

Rebates and Chargebacks

We estimate reductions to our revenues for amounts paid to payers and healthcare providers in the United States, including Medicaid rebates, AIDS Drug Assistance Program rebates and chargebacks, Veterans Administration and Public Health Service chargebacks and other rebates, as well as foreign government rebates. Rebates and chargebacks are based on contractual arrangements or statutory requirements which may vary by product, payer and individual payer plans. Our estimates are based on products sold, historical payer mix, and as available, pertinent third-party industry information, estimated patient population, known market events or trends, and for our U.S. product sales, channel inventory data obtained from our major U.S. wholesalers in accordance with our inventory management agreements. We also take into consideration, as available, new information regarding changes in programs’ regulations and guidelines that would impact the amount of the actual rebates and/or our expectations regarding future payer mix for these programs. Government and other chargebacks that are payable to our direct customers are classified as reductions of Accounts receivable on our Consolidated Balance Sheets. Government and other rebates that are invoiced directly to us are recorded in Accrued government and other rebates on our Consolidated Balance Sheets.

Cash Discounts

We estimate cash discounts based on contractual terms, historical 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.

Product Returns

We do not provide our customers with a general right of product return, but typically permit returns if the product is damaged, defective, or otherwise cannot be used when received by the customer, or in the case of product sold in the United States and certain other countries, if the product has expired. We will accept returns for product that will expire within six months or that have expired up to one year after their expiration dates. Our estimates for expected returns of expired products are based primarily on an ongoing analysis of our historical return patterns, historical industry information reporting the return rates for similar products and contractual agreements intended to limit the amount of inventory maintained by our wholesalers.

Royalty, Contract and Other Revenues

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

Research and Development Expenses

Research and development (R&D) expenses consist primarily of personnel costs, including salaries, benefits and stock-based compensation, clinical studies performed by contract research organizations (CROs), materials and supplies, licenses and fees, up-front and milestone payments under collaboration arrangements and overhead allocations consisting of various support and facility-related costs.

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

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 fee.

We expense the costs of advertising, including promotional expenses, as incurred. Advertising expenses were $587 million, $600 million and $618 million for the years ended December 31, 2018, 2017 and 2016, 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, dividends, amortization of purchase premiums and discounts, realized gains and losses on sales of securities and other-than-temporary declines in the fair value of securities, if any. The cost of securities sold is based on the specific identification method. We regularly review all of our investments for other-than-temporary declines in fair value. Our review includes the consideration of the cause of the impairment, including the creditworthiness of the security issuers, the number of securities in an unrealized loss position, the severity and duration of the unrealized losses, whether we have the intent to sell the securities and whether it is more likely than not that we will be required to sell the securities before the recovery of their amortized cost basis. When we determine that the decline in fair value of an investment is below our accounting basis and the decline is other-than-temporary, we reduce the carrying value of the security we hold and record a loss for the amount of such decline.

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. Equity securities with no 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. Our investments in equity securities are recorded in Prepaid and other current assets or Other long term assets on our Consolidated Balance Sheet. Unrealized gains and losses are recorded as part of Other income (expense), net. We regularly review our securities for indicators of impairment. Investments in non-public companies are not material for the periods presented.

Concentrations of Risk

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

We are also subject to credit risk from our accounts receivable related to our product sales. The majority of our trade accounts receivable arises from product sales in the United States, Europe and Japan. To date, we have not experienced significant losses with respect to the collection of our accounts receivable. We believe that our allowance for doubtful accounts was adequate at December 31, 2018.

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 was interrupted for any reason, we may be unable to ship our commercial products or to supply our product candidates for clinical trials.

Accounts Receivable

Trade accounts receivable are recorded net of allowances for wholesaler chargebacks related to government and other programs, cash discounts for prompt payment and doubtful accounts. Estimates for wholesaler chargebacks for government and other programs and cash discounts are based on contractual terms, historical trends and our expectations regarding the utilization rates for these programs. Estimates of our allowance for doubtful accounts are determined based on existing contractual payment terms, historical payment patterns of our customers and individual customer circumstances, an analysis of days sales outstanding by geographic region and a review of the local economic environment and its potential impact on government funding and

reimbursement practices. Historically, the amounts of uncollectible accounts receivable that have been written off have been insignificant.

Inventories

Inventories are recorded at the lower of cost or 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, excess or unsaleable items are observed and there are no alternate uses for the inventory, we record an inventory valuation reserve through a charge to Cost of goods sold on our Consolidated Statements of Income. The establishment of inventory valuation reserves, together with the calculation of the amount of such reserves, 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 taken into consideration, including the current status in the regulatory approval process, potential impediments to the approval process such as safety or efficacy, anticipated R&D initiatives that could impact the indication in which the compound will be used, viability of commercialization and marketplace trends. As of December 31, 2018 and 2017, the amount of pre-launch inventory on our Consolidated Balance Sheets was not significant.

Property, Plant and Equipment

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

DescriptionEstimated Useful Life
Buildings and improvementsShorter of 35 years or useful life
Laboratory and manufacturing equipment4-10
Office and computer equipment3-7
Leasehold improvementsShorter of useful life or lease term

Acquisitions

We account for business combinations using the acquisition method of accounting, which requires that assets acquired, including in-process research and development (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 purchase price 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 rather than a business combination and, therefore, no goodwill is recorded.

Goodwill and Intangible Assets

Goodwill represents the excess of the consideration transferred over the estimated fair value of assets acquired and liabilities assumed in a business combination. Intangible assets with indefinite useful lives are related to purchased IPR&D projects and are measured at their respective fair values as of the acquisition date. We do not amortize goodwill and intangible assets with indefinite useful lives. Intangible assets related to IPR&D projects are considered to be indefinite-lived until the completion or abandonment of the associated R&D efforts. If and when development is complete, which generally occurs if and when regulatory approval to market a product is obtained, the associated assets are deemed finite-lived and are amortized based on their respective estimated useful lives at that point in time. We test goodwill and other indefinite-lived intangible assets for impairment on an annual basis and in between annual tests if we become aware of any events or circumstances that would indicate the fair values of the assets are below their carrying amounts.

Intangible assets with finite useful lives are amortized over their estimated useful lives, primarily on a straight-line basis, and are reviewed for impairment when facts or circumstances suggest that the carrying value of these assets may not be recoverable.

Impairment of Long-Lived Assets

Long-lived assets, including property, plant and equipment and finite-lived intangible assets, are reviewed for impairment whenever facts or circumstances either internally or externally may suggest that the carrying value of an asset 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. Any excess of the carrying value of the asset or asset group over its estimated fair value is recognized as an impairment loss.

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

Non-U.S. entity operations are recorded in the functional currency of each entity. Results of operations for non-U.S. dollar functional currency entities are translated into U.S. dollars using average currency rates. Assets and liabilities are translated using currency rates at period end. Foreign currency translation adjustments are recorded as a component of AOCI within stockholders’ equity. Foreign currency transaction gains and losses are recorded in Other income (expense), net, on our Consolidated Statements of Income. Net foreign currency transaction gains and losses were immaterial for the years ended December 31, 2018, 2017 and 2016.

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 are recorded each period in current earnings or AOCI, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction.

We 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, 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.

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Topic 606. Entities adopting Topic 606 had the option of using either a full retrospective or a modified retrospective approach.

On January 1, 2018, we adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. As such, results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting under Topic 605.

As discussed further above, our product sales are recognized when control of the product transfers, generally upon shipment or delivery to the customer, or in certain cases, upon the corresponding sale by our customer to a third party. Certain product sales that were deferred under the sell-through or cash basis methods of accounting because fees were not fixed or determinable prior to the adoption of Topic 606 are now recognized upon transfer of control. Royalty revenue is recognized in the period in which the corresponding sales by our corporate partners occur. Prior to the adoption of Topic 606, royalty revenue was generally recognized in the quarter following the quarter in which the corresponding sales by our corporate partners occurred.

The cumulative effect of the changes made to our Consolidated Balance Sheets as of January 1, 2018 for the adoption of Topic 606 was as follows (in millions):

December 31, 2017Adjustments Due to Topic 606January 1, 2018
Prepaid and other current assets$1,661$96$1,757
Other long-term assets$2,722$10$2,732
Other accrued liabilities$3,370$(115)$3,255
Other long-term obligations$558$31$589
Retained earnings$19,012$190$19,202

In 2018, the impact to our Consolidated Financial Statements as a result of applying Topic 606 in place of Topic 605 was not material.

In January 2016, the FASB issued Accounting Standards Update No. 2016-01 “Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities” (ASU 2016-01). ASU 2016-01 changes accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. Additionally, ASU 2016-01 clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. On January 1, 2018, we adopted this standard using a modified retrospective approach. The standard requires that equity investments with readily determinable fair values be measured at fair value with any changes in fair value recognized in earnings. As a result of the adoption, we reclassified $293 million of unrealized net gain from AOCI to retained earnings on January 1, 2018, which primarily consisted of $278 million unrealized gain from our equity investment in Galapagos NV.

In August 2017, the FASB issued Accounting Standards Update No. 2017-12 “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities” (ASU 2017-12). The amendments in ASU 2017-12 more closely align the results of hedge accounting with risk management activities. ASU 2017-12 also amends the presentation and disclosure requirements and eases documentation and effectiveness assessment requirements. On January 1, 2018, we early adopted this standard on a prospective basis. Upon adoption of ASU 2017-12, we no longer recognize hedge ineffectiveness in our Consolidated Statements of Income, but we instead recognize the entire change in the fair value of the hedge contract in AOCI. The adoption did not have a material impact on our Consolidated Financial Statements. The primary impact of adoption was required disclosure changes. See Note 5, Derivative Financial Instruments, for additional information.

In March 2018, the FASB issued Accounting Standards Update No. 2018-05 “Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118” (ASU 2018-05). ASU 2018-05 amends Topic 740 by incorporating the SEC Staff Accounting Bulletin No. 118 (SAB 118) issued on December 22, 2017. SAB 118 provides guidance on accounting for the effects of Tax Reform and allows a company to record provisional amounts during a measurement period not to extend beyond one year from the enactment date. See Note 18, Income Taxes, for additional information.

Recently Issued Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued Accounting Standards Update No. 2016-02 “Leases” (Topic 842). Topic 842 amends a number of aspects of lease accounting, including requiring lessees to recognize leases with a term greater than one year as a right-of-use asset and corresponding liability, measured at the present value of the lease payments. In July 2018, the FASB issued supplemental adoption guidance and clarification to Topic 842 within ASU 2018-10 “Codification Improvements to Topic 842, Leases” and ASU 2018-11 “Leases (Topic 842): Targeted Improvements.” The guidance will become effective for us beginning

in the first quarter of 2019. The modified retrospective transition approach is required. We plan to adopt these standards on the effective date by recording a cumulative effect adjustment to the opening balance of retained earnings on January 1, 2019.

Based on our lease portfolio as of December 31, 2018, we anticipate recognition of lease assets and liabilities of approximately $500 million on our consolidated balance sheet upon adoption with no material impact to our consolidated statements of income. We will elect the practical expedients upon transition to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs. We will also elect the practical expedient for lessees to combine lease and nonlease components for all asset classes. We are in the process of finalizing key system functionality and updating our controls and procedures for maintaining and accounting for our lease portfolio under the new guidance.

In June 2016, the FASB issued Accounting Standards Update No. 2016-13 “Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments” (ASU 2016-13). ASU 2016-13 requires measurement and recognition of expected credit losses for financial assets. This guidance will become effective for us beginning in the first quarter of 2020 and must be adopted using a modified retrospective approach, with certain exceptions. Early adoption is permitted beginning in the first quarter of 2019. We are evaluating the impact of the adoption of this standard on our Consolidated Financial Statements.

In 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 collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account, adds unit-of-account guidance in Topic 808 to align with the guidance in Topic 606, and precludes entities from presenting amounts related to transactions with a collaborative arrangement participant that is not a customer as revenue, unless those transactions are directly related to third-party sales. This guidance will become effective for us beginning in the first quarter of 2020 and should be applied retrospectively to January 1, 2018 when we initially adopted Topic 606. Early adoption is permitted. We are evaluating the impact of the adoption of this standard but we currently do not expect a material impact on our revenue.

2.REVENUES

Disaggregation of Revenues

The following table disaggregates our product sales by product and geographic region and disaggregates our royalty, contract and other revenues by geographic region for the years ended December 31, 2018, 2017 and 2016. The information for the years ended December 31, 2017 and 2016 has not been adjusted in accordance with our modified retrospective adoption of Topic 606 and continues to be reported in accordance with our historical accounting under Topic 605.

Year Ended December 31, 2018Year Ended December 31, 2017Year Ended December 31, 2016
(In millions)U.S.EuropeOther InternationalTotalU.S.EuropeOther InternationalTotalU.S.EuropeOther InternationalTotal
Product Sales:
Atripla$967$131$108$1,206$1,288$335$183$1,806$1,898$520$187$2,605
Biktarvy1,1443911,184————————
Complera/Eviplera2763275065340650357966821580561,457
Descovy1,217308561,581958226341,218226693298
Genvoya3,6317941994,6243,0335341073,6741,301160231,484
Odefsey1,242335211,598964132101,10630227—329
Stribild5059742644811195471,0531,523314771,914
Truvada2,6052601322,9972,2666442243,1342,3849132693,566
Other HIV(1)4071461436958416—47
Revenue share - Symtuza(2)2752—79————————
AmBisome462291454202820713136620209127356
Epclusa9346543781,9662,4048692373,5101,591141201,752
Harvoni8021442761,2223,0537046134,3704,9411,8102,3309,081
Letairis943——943887——887819——819
Ranexa758——758717——717677——677
Vemlidy2451264321111561223——3
Viread50821753075142382941,0465913022931,186
Vosevi3047814396267224293————
Yescarta2631—2647——7————
Zydelig617021336977314991761168
Other(3)137761073202833145831,1802,0369491,2264,211
Total product sales16,1973,6961,78421,67718,1095,0112,54225,66219,2656,0764,61229,953
Royalty, contract and other revenues723106845085300604458928959437
Total revenues$16,269$4,006$1,852$22,127$18,194$5,311$2,602$26,107$19,354$6,365$4,671$30,390
____________________
Notes:
(1)Includes Emtriva and Tybost
(2)Represents Gilead’s revenue from cobicistat (C), emtricitabine (FTC) and tenofovir alafenamide (TAF) in Symtuza (darunavir/C/FTC/TAF), a fixed dose combination product commercialized by Janssen Sciences Ireland UC (Janssen)
(3)Includes Cayston, Hepsera and Sovaldi

Revenues Recognized from Performance Obligations Satisfied in Prior Periods

During the year ended December 31, 2018, revenues recognized from performance obligations satisfied in prior years related to royalties for licenses of our intellectual property were $541 million. Changes in estimates for variable consideration related to sales made in prior years resulted in a $56 million decrease in revenues during the year ended December 31, 2018.

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 $125 million and $132 million as of December 31, 2018 and January 1, 2018, respectively.

Contract liabilities were not material as of December 31, 2018 and January 1, 2018.

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 and equity securities, and foreign currency exchange contracts are reported at their respective fair values on our Consolidated Balance Sheets. 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):

December 31, 2018December 31, 2017
Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total
Assets:
Available-for-sale debt securities:
U.S. treasury securities$3,969$—$—$3,969$4,061$—$—$4,061
Certificates of deposit—4,361—4,361—5,131—5,131
U.S. government agencies securities—938—938—926—926
Non-U.S. government securities—305—305—664—664
Corporate debt securities—13,067—13,067—14,747—14,747
Residential mortgage and asset-backed securities—1,524—1,524—4,058—4,058
Marketable equity securities:
Money market funds5,305——5,3054,714——4,714
Equity securities881——881635——635
Deferred compensation plan124——124116——116
Foreign currency derivative contracts—78—78—13—13
Total$10,279$20,273$—$30,552$9,526$25,539$—$35,065
Liabilities:
Deferred compensation plan$124$—$—$124$116$—$—$116
Foreign currency derivative contracts—1—1—93—93
Total$124$1$—$125$116$93$—$209

For the year ended December 31, 2018, changes in the fair value of marketable equity securities resulted in net unrealized gains of $115 million, which were included in Other income (expense), net, on our Consolidated Statements of Income.

The following table summarizes the classification of our marketable equity securities in our Consolidated Balance Sheets (in millions):

December 31, 2018December 31, 2017
Cash and cash equivalents$5,305$4,714
Prepaid and other current assets863637
Other long-term assets142114
Total$6,310$5,465

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

Level 2 Inputs

We estimate the fair values of Level 2 instruments by taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income-based and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate 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 valuations obtained from a third-party valuation service that utilizes an income-based industry standard valuation model for which all significant inputs are observable, either directly or indirectly. These inputs include foreign currency exchange rates, London Interbank Offered Rates (LIBOR) and swap rates. These inputs, where applicable, are observable at commonly quoted intervals.

The total estimated fair values of our short-term and long-term debt, determined using Level 2 inputs based on their quoted market values, were approximately $27.1 billion and $35.5 billion at December 31, 2018 and 2017, respectively, and the carrying values were $27.3 billion and $33.5 billion at December 31, 2018 and 2017, respectively.

Level 3 Inputs

As of December 31, 2018 and 2017, the only assets or liabilities that were measured using Level 3 inputs on a recurring basis were our contingent consideration liabilities, which were immaterial. On a nonrecurring basis, we measure certain assets including intangible assets at fair value when the carrying value of the asset exceeds its fair value. In 2018, we recorded an impairment charge of $820 million to write down to zero the carrying value of the KITE-585 program (an anti-BCMA being evaluated for the treatment of multiple myeloma). See Note 9, Intangible Assets, for additional information.

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

  1. AVAILABLE-FOR-SALE DEBT SECURITIES

The following table summarizes our available-for-sale debt securities (in millions):

December 31, 2018December 31, 2017
Amortized CostGross Unrealized GainsGross Unrealized LossesEstimated Fair ValueAmortized CostGross Unrealized GainsGross Unrealized LossesEstimated Fair Value
U.S. treasury securities$3,978$—$(9)$3,969$4,090$—$(29)$4,061
Certificates of deposit4,361——4,3615,131——5,131
U.S. government agencies securities943—(5)938934—(8)926
Non-U.S. government securities307—(2)305668—(4)664
Corporate debt securities13,0951(29)13,06714,7903(46)14,747
Residential mortgage and asset-backed securities1,532—(8)1,5244,0721(15)4,058
Total$24,216$1$(53)$24,164$29,685$4$(102)$29,587

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

December 31, 2018December 31, 2017
Cash and cash equivalents$10,592$481
Short-term marketable securities12,14917,922
Long-term marketable securities1,42311,184
Total$24,164$29,587

The following table summarizes our available-for-sale debt securities by contractual maturity (in millions):

December 31, 2018
Amortized CostFair Value
Within one year$22,786$22,741
After one year through five years1,3641,358
After five years through ten years4645
After ten years2020
Total$24,216$24,164

The following table summarizes our available-for-sale debt securities that were in a continuous unrealized loss position, but were not deemed to be other-than-temporarily impaired (in millions):

Less Than 12 Months12 Months or GreaterTotal
Gross Unrealized LossesEstimated Fair ValueGross Unrealized LossesEstimated Fair ValueGross Unrealized LossesEstimated Fair Value
December 31, 2018
U.S. treasury securities$—$896$(9)$1,383$(9)$2,279
U.S. government agencies securities—30(5)553(5)583
Non-U.S. government securities—86(2)192(2)278
Corporate debt securities(1)1,600(28)4,204(29)5,804
Residential mortgage and asset-backed securities—192(8)1,186(8)1,378
Total$(1)$2,804$(52)$7,518$(53)$10,322
December 31, 2017
U.S. treasury securities$(2)$821$(27)$3,240$(29)$4,061
U.S. government agencies securities(1)206(7)700(8)906
Non-U.S. government securities(1)203(3)461(4)664
Corporate debt securities(14)7,674(32)3,561(46)11,235
Residential mortgage and asset-backed securities(4)2,245(11)1,206(15)3,451
Total$(22)$11,149$(80)$9,168$(102)$20,317

We held a total of 1,348 and 2,957 positions, which were in an unrealized loss position as of December 31, 2018 and 2017, respectively.

Based on our review of these securities, we believe we had no other-than-temporary impairments as of December 31, 2018 and 2017, because we do not intend to sell these securities nor do we believe that we will be required to sell these securities before the recovery of their amortized cost basis. Gross realized gains and gross realized losses were not material for the years presented.

5.DERIVATIVE FINANCIAL INSTRUMENTS

Our operations in foreign countries expose us to market risk associated with foreign currency exchange rate fluctuations between the U.S. dollar and various foreign currencies, primarily the Euro. In order to manage this risk, we may hedge a portion of our foreign currency exposures related to outstanding monetary assets and liabilities as well as forecasted product sales using foreign currency exchange forward or option contracts. In general, the market risk related to these contracts is offset by corresponding gains and losses on the hedged transactions. The credit risk associated with these contracts is driven by changes in interest and currency exchange rates and, as a result, varies over time. By working only with major banks and closely monitoring current market conditions, we seek to limit the risk that counterparties to these contracts may be unable to perform. We also seek to limit our risk of loss by entering into contracts that permit net settlement at maturity. Therefore, our overall risk of loss in the event of a counterparty default is limited to the amount of any unrecognized gains on outstanding contracts (i.e., those contracts that have a positive fair value) at the date of default. We do not enter into derivative contracts for trading purposes.

We hedge our exposure to foreign currency exchange rate fluctuations for certain monetary assets and liabilities of our entities that are denominated in a non-functional currency. The derivative instruments we use to hedge this exposure are not designated as hedges, and as a result, changes in their fair value are recorded in Other income (expense), net, on our Consolidated Statements of Income.

We hedge our exposure to foreign currency exchange rate fluctuations for forecasted product sales that are denominated in a non-functional currency. The derivative instruments we use to hedge this exposure are designated as cash flow hedges and have maturities of 18 months or less. Upon executing a hedging contract and quarterly thereafter, we assess hedge effectiveness using regression analysis. Prior to January 2018, we excluded time value from our effectiveness testing and recognized changes in the time value of the hedge in Other income (expense), net, on our Consolidated Statements of Income. Starting in January 2018, we include time value in our effectiveness testing and the entire change in the value of hedge contracts is recorded as unrealized gains or losses in AOCI within Stockholders’ equity on our Consolidated Balance Sheets. The unrealized gains or losses in AOCI are reclassified into product sales when the respective hedged transactions affect earnings. The majority of gains and losses related to the hedged forecasted transactions reported in AOCI at December 31, 2018 are expected to be reclassified to product sales within 12 months.

The cash flow effects of our derivative contracts for the years ended December 31, 2018, 2017 and 2016 are included within Net cash provided by operating activities on our Consolidated Statements of Cash Flows.

We had notional amounts on foreign currency exchange contracts outstanding of $2.2 billion and $2.8 billion at December 31, 2018 and 2017, respectively.

While all of our derivative contracts allow us the right to offset assets and liabilities, we have presented amounts on a gross basis. The following table summarizes the classification and fair values of derivative instruments in our Consolidated Balance Sheets (in millions):

December 31, 2018
Asset DerivativesLiability Derivatives
ClassificationFair ValueClassificationFair Value
Derivatives designated as hedges:
Foreign currency exchange contractsOther current assets$73Other accrued liabilities$(1)
Foreign currency exchange contractsOther long-term assets5Other long-term obligations—
Total derivatives designated as hedges78(1)
Derivatives not designated as hedges:
Foreign currency exchange contractsOther current assets—Other accrued liabilities—
Total derivatives not designated as hedges——
Total derivatives$78$(1)
December 31, 2017
Asset DerivativesLiability Derivatives
ClassificationFair ValueClassificationFair Value
Derivatives designated as hedges:
Foreign currency exchange contractsOther current assets$2Other accrued liabilities$(89)
Foreign currency exchange contractsOther long-term assets1Other long-term obligations(3)
Total derivatives designated as hedges3(92)
Derivatives not designated as hedges:
Foreign currency exchange contractsOther current assets10Other accrued liabilities(1)
Total derivatives not designated as hedges10(1)
Total derivatives$13$(93)

The following table summarizes the effect of our foreign currency exchange contracts on our Consolidated Financial Statements (in millions):

Year Ended December 31,
201820172016
Derivatives designated as hedges:
Gains (losses) recognized in AOCI$114$(315)$5
Gains (losses) reclassified from AOCI into product sales$(87)$(28)$73
Gains (losses) recognized in Other income (expense), net$—$41$(32)
Derivatives not designated as hedges:
Gains (losses) recognized in Other income (expense), net$(2)$(113)$206

From time to time, we may discontinue cash flow hedges, and as a result, record related amounts in Other income (expense), net, on our Consolidated Statements of Income. There were no material amounts recorded in Other income (expense), net, on our Consolidated Statements of Income for the years presented as a result of the discontinuance of cash flow hedges.

As of December 31, 2018 and 2017, we only held foreign currency exchange contracts. The following table summarizes the potential effect of offsetting derivatives by type of financial instrument on our Consolidated Balance Sheets (in millions):

As of December 31, 2018
Offsetting of Derivative Assets/Liabilities
Gross Amounts Not Offset on the Consolidated Balance Sheets
DescriptionGross Amounts of Recognized Assets/LiabilitiesGross Amounts Offset on the Consolidated Balance SheetsAmounts of Assets/Liabilities Presented on the Consolidated Balance SheetsDerivative Financial InstrumentsCash Collateral Received/PledgedNet Amount (Legal Offset)
Derivative assets$78$—$78$(1)$—$77
Derivative liabilities(1)—(1)1——
As of December 31, 2017
Offsetting of Derivative Assets/Liabilities
Gross Amounts Not Offset on the Consolidated Balance Sheets
DescriptionGross Amounts of Recognized Assets/LiabilitiesGross Amounts Offset on the Consolidated Balance SheetsAmounts of Assets/Liabilities Presented on the Consolidated Balance SheetsDerivative Financial InstrumentsCash Collateral Received/PledgedNet Amount (Legal Offset)
Derivative assets$13$—$13$(8)$—$5
Derivative liabilities(93)—(93)8—(85)
  1. ACQUISITIONS

Kite Pharma, Inc.

On October 3, 2017 (the Acquisition Date), we completed a tender offer for all of the outstanding common stock of Kite Pharma, Inc. (Kite) for $180 per share in cash. As a result, Kite became our wholly-owned subsidiary. The acquisition of Kite helps establish our foundation for improving the treatment of hematological malignancies and solid tumors.

The consideration transferred for the acquisition was $11,155 million, consisting of $10,420 million in cash to the outstanding Kite common stockholders, $645 million cash payment to vested equity award holders, $15 million to warrant holders and $75 million representing the portion of the replaced stock-based awards attributable to the pre-combination period. In addition, $733 million was excluded from the consideration transferred, representing the portion of the replaced stock-based awards attributable to the post combination period, which is expected to be recognized through 2021.

The acquisition of Kite was accounted for as a business combination using the acquisition method of accounting. This method requires, among other things, that assets acquired and liabilities assumed be recognized at fair value as of the acquisition date. The determination of estimated fair value requires us to make significant estimates and assumptions. During 2018, we recorded a $42 million reduction to goodwill primarily due to revision of deferred income taxes as a result of finalization of Kite’s pre-acquisition federal income tax return. The fair value estimates for the assets acquired and liabilities assumed have been completed.

The following table summarizes the acquisition date fair values of assets acquired and liabilities assumed, and the consideration transferred (in millions):

Cash and cash equivalents$652
Identifiable intangible assets
Indefinite-lived intangible assets - IPR&D8,950
Outlicense acquired91
Deferred income taxes(1,564)
Other assets acquired (liabilities assumed), net81
Total identifiable net assets8,210
Goodwill2,945
Total consideration transferred$11,155

Identifiable Intangible Assets

We acquired intangible assets primarily related to IPR&D for axicabtagene ciloleucel, KITE-585, and KTE-X19 (formerly KTE-C19, being evaluated for the treatment of adult and pediatric acute lymphoblastic leukemia), which had an estimated aggregate fair value of $8,950 million as of the Acquisition Date.

Intangible assets related to IPR&D projects are considered to be indefinite-lived assets until the completion or abandonment of the associated R&D efforts. In October 2017, upon FDA approval of Yescarta for the treatment of adult patients with relapsed or refractory DLBCL after two or more lines of systemic therapy, $6,200 million of the purchased IPR&D was reclassified as a finite-lived intangible asset and is being amortized over an estimated useful life of 18 years using the straight-line method. In 2018, we recorded an impairment charge of $820 million to write down to zero the estimated fair value of the KITE-585 program. See Note 9, Intangible Assets, for additional information.

Additionally, we acquired an outlicensing arrangement with Daiichi Sankyo Company Limited, which had an estimated fair value of $91 million as of the Acquisition Date. This definite-lived intangible asset is being amortized over an estimated useful life of 14 years on a straight-line basis. The fair value was determined by estimating the probability-weighted net cash flows attributable to the outlicense discounted to present value using a discount rate that represents the estimated rate that market participants would use to value this intangible asset.

Goodwill

The $2,945 million goodwill represents the excess of the consideration transferred over the fair values of assets acquired and liabilities assumed and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. None of the goodwill is deductible for income tax purposes.

Cell Design Labs, Inc.

In December 2017, we acquired all of the issued and outstanding stock of Cell Design Labs, Inc., a privately held company (Cell Design Labs), which was in addition to the approximately 12.2% of shares in Cell Design Labs we obtained in the acquisition of Kite. With this acquisition, we gained new technology platforms that will enhance research and development efforts in cellular therapy.

The cash consideration totaled $150 million, net of acquired cash. Additionally, the shareholders of Cell Design Labs, other than us, are eligible to receive contingent development and regulatory milestone-based payments of up to $322 million. Our 12.2% equity interest in Cell Design Labs had a carrying value of $30 million. The transaction was accounted for as an asset acquisition. As a result, $172 million was expensed as acquired IPR&D within Research and development expenses on our Consolidated Statements of Income.

Nimbus Apollo, Inc.

In May 2016, we acquired Nimbus Apollo, Inc., a privately held company, and its Acetyl-CoA Carboxylase inhibitor program, which is being evaluated for the potential treatment of non-alcoholic steatohepatitis, hepatocellular carcinoma and other diseases. The consideration included a payment of $400 million and contingent development and regulatory milestone-based payments of up to $800 million. The transaction was accounted for as an asset acquisition. As a result, the payment of $400 million was expensed as acquired IPR&D within Research and development expenses on our Consolidated Statements of Income. During 2016, based on the achievement of certain clinical development milestones, we recorded a $200 million expense within Research and development expenses on our Consolidated Statements of Income.

7.INVENTORIES

Inventories are summarized as follows (in millions):

December 31,
20182017
Raw materials$1,888$1,880
Work in process235352
Finished goods507670
Total$2,630$2,902
Reported as:
Inventories$814$801
Other long-term assets1,8162,101
Total$2,630$2,902

Amounts reported as other long-term assets primarily consisted of raw materials as of December 31, 2018 and 2017.

During the year ended December 31, 2018, we recorded inventory reserves of $572 million, of which $440 million was related to excess raw materials primarily due to a sustained decrease in demand for Harvoni. Inventory reserves recorded for the years ended December 31, 2017 and 2016 were not material.

8.PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is summarized as follows (in millions):

December 31,
20182017
Land and land improvements$404$396
Buildings and improvements (including leasehold improvements)2,3442,176
Laboratory and manufacturing equipment697533
Office and computer equipment558494
Construction in progress1,194690
Subtotal5,1974,289
Less accumulated depreciation and amortization(1,191)(994)
Total$4,006$3,295

Office and computer equipment includes capitalized software. We had unamortized capitalized software costs on our Consolidated Balance Sheets of $121 million and $129 million as of December 31, 2018 and 2017, respectively. Capitalized interest on construction in-progress is included in property, plant and equipment. Interest capitalized in 2018, 2017 and 2016 was not material.

9.INTANGIBLE ASSETS

The following table summarizes our intangible assets, net (in millions):

December 31, 2018December 31, 2017
Gross Carrying AmountAccumulated AmortizationForeign Currency Translation AdjustmentNet Carrying AmountGross Carrying AmountAccumulated AmortizationNet Carrying Amount
Finite-lived assets
Intangible asset - sofosbuvir$10,720$(3,554)$—$7,166$10,720$(2,855)$7,865
Intangible asset - axicabtagene ciloleucel (DLBCL)6,200(416)—5,7846,200(72)6,128
Intangible asset - Ranexa688(678)—10688(566)122
Other1,096(359)(3)734546(311)235
Total finite-lived assets18,704(5,007)(3)13,69418,154(3,804)14,350
Indefinite-lived assets - IPR&D2,047—(3)2,0442,750—2,750
Total intangible assets$20,751$(5,007)$(6)$15,738$20,904$(3,804)$17,100

Amortization expense related to finite-lived intangible assets is included in Cost of goods sold on our Consolidated Statements of Income and totaled $1.2 billion, $912 million and $844 million for the years ended December 31, 2018, 2017 and 2016, respectively.

In 2018, we entered into an agreement with Japan Tobacco Inc. (Japan Tobacco) to acquire the rights to market and distribute certain products in our HIV portfolio in Japan. In connection with this agreement, we recorded an intangible asset of $550 million reflecting the estimated fair value of the marketing-related rights acquired from Japan Tobacco. The intangible asset will be amortized over nine years beginning January 1, 2019. The amortization expense will be classified as selling expense and recorded as Selling, general and administrative expenses on our Consolidated Statements of Income. See Note 11, Collaborative Arrangements, for additional information.

In 2018, we concluded that the KITE-585 program 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 within Research and development expenses on our Consolidated Statements of Income. No IPR&D impairment charges were recorded in 2017 and $432 million of IPR&D impairment charges were recorded in 2016 within Research and development expenses on our Consolidated Statements of Income.

In 2018, we entered into a collaboration agreement with Gadeta B.V. (Gadeta) to develop gamma delta T cell receptor therapies for various cancers. Gadeta is a VIE that we consolidate. Upon consolidation, we recognized a $117 million indefinite-lived intangible asset relating to IPR&D. See Note 11, Collaborative Arrangements, for additional information.

As of December 31, 2018, estimated future amortization expense associated with our finite-lived intangible assets is as follows (in millions):

Fiscal YearAmount
2019$1,149
20201,125
20211,124
20221,124
20231,124
Thereafter8,048
Total$13,694
10.OTHER FINANCIAL INFORMATION

Other Accrued Liabilities

The components of Other accrued liabilities are summarized as follows (in millions):

December 31,
20182017
Compensation and employee benefits$555$455
Accrued payment for marketing-related rights acquired from Japan Tobacco365—
Income taxes payable190713
Other accrued expenses2,0292,202
Total$3,139$3,370
11.COLLABORATIVE ARRANGEMENTS

We enter into collaborative arrangements with third parties for the development and commercialization of certain products and product candidates. These arrangements involve two or more parties who are active participants in the operating activities of the collaboration and are exposed to significant risks and rewards depending on the commercial success of the activities. These arrangements may include non-refundable, up-front payments, payments by us for options to acquire certain rights, contingent obligations by us for potential development and regulatory milestone payments and/or sales-based milestone payments, royalty payments, revenue or profit-sharing arrangements, cost-sharing arrangements, equity investments, or a combination of these terms.

Janssen

Complera/Eviplera and Odefsey

In 2009, we entered into a license and collaboration agreement with Janssen Sciences Ireland UC (Janssen), formerly Tibotec Pharmaceuticals, to develop and commercialize a fixed-dose combination of our Truvada and Janssen’s non-nucleoside reverse transcriptase inhibitor, rilpivirine. This combination was approved in the United States and European Union in 2011 and is sold under the brand name Complera in the United States and Eviplera in the European Union.

The agreement was amended in 2014 to expand the collaboration to include another product containing Janssen’s rilpivirine and our emtricitabine and tenofovir alafenamide (Odefsey).

Under the amended agreement, Janssen granted us an exclusive license to Complera/Eviplera and Odefsey worldwide, but retained rights to distribute both combination products in certain countries outside of the United States. Neither party is restricted from combining its drugs with any other drug products except those which are similar to the components of Complera/Eviplera and Odefsey.

We are responsible for manufacturing Complera/Eviplera and Odefsey and have the lead role in registration, distribution and commercialization of both products except in the countries where Janssen distributes. Janssen has exercised a right to co-detail the combination product in some of the countries where we are the selling party.

Under the financial provisions of the 2014 amendment, the selling party sets the price of the combined products and the parties share revenues based on the ratio of the net selling prices of the party’s component(s), subject to certain restrictions and adjustments. We retain a specified percentage of Janssen’s share of revenues, up to 30% in major markets. Sales of these products are included in Product sales and Janssen’s shares of revenues are included in Cost of goods sold on our Consolidated Statements of Income. Cost of goods sold relating to Janssen’s shares were $608 million, $561 million and $459 million for the years ended December 31, 2018, 2017 and 2016, respectively.

Termination of the agreement may be on a product or country basis and will depend on the circumstances, including withdrawal of a product from the market, material breach by either party or expiry of revenue share payment term. We may terminate the agreement without cause with respect to the countries where we sell the products in which case Janssen has the right to become the selling party for such country if the product has launched but has been on the market for fewer than 10 years.

Symtuza

In 2014, we amended a license and collaboration agreement with Janssen to develop and commercialize a fixed-dose combination of Janssen’s darunavir and our cobicistat, emtricitabine and tenofovir alafenamide. This combination was approved in the United States and European Union in July 2018 and September 2017, respectively, and is sold under the brand name Symtuza.

Under the terms of the 2014 amendment, we granted Janssen an exclusive license to Symtuza worldwide. Janssen is responsible for manufacturing, registration, distribution and commercialization of Symtuza worldwide. We are responsible for the intellectual property related to cobicistat, emtricitabine and tenofovir alafenamide (Gilead Compounds) and are the exclusive

supplier of the Gilead Compounds. Neither party is restricted from combining its drugs with any other drug products except those which are similar to the components of Symtuza.

Janssen sets the price of Symtuza and the parties share revenue based on the ratio of the net selling prices of the party’s component(s), subject to certain restrictions and adjustments. The intellectual property license and supply obligations related to the Gilead Compounds are accounted for as a single performance obligation. As the license was deemed to be the predominant item to which the revenue share relates, we recognize our share of the Symtuza revenue in the period when the corresponding sales of Symtuza by Janssen occur. We record our share of the Symtuza revenue as Product sales on our Consolidated Statements of Income primarily because we supply the Gilead Compounds to Janssen for Symtuza. See Note 2, Revenues, for revenue recognized for the periods presented.

Termination of the agreement may be on a product or country basis and will depend on the circumstances, including withdrawal of a product from the market, material breach by either party or expiry of revenue share payment term. Janssen may terminate the agreement without cause on a country-by-country basis, in which case Gilead has the right to become the selling party for such country(ies) if the product has launched but has been on the market for fewer than 10 years. Janssen may also terminate the entire agreement without cause.

Japan Tobacco

In 2005, Japan Tobacco granted us exclusive rights to develop and commercialize elvitegravir, a novel HIV integrase inhibitor, in all countries of the world, excluding Japan, where Japan Tobacco retained such rights and paid a royalty to us based on its product sales in Japan. Under the agreement, we are responsible for seeking regulatory approval in our territories and are required to use diligent efforts to commercialize elvitegravir for the treatment of HIV infection. We bear all costs and expenses associated with such commercialization efforts and pay a royalty to Japan Tobacco based on our product sales. Japan Tobacco also marketed and distributed certain other products in our HIV portfolio in Japan and paid a royalty to us based on these product sales.

We received approval for Stribild and Genvoya (elvitegravir-containing products) in 2012 and 2015, respectively. Our sales of these products are included in Product sales, royalties due to Japan Tobacco based on our product sales are included in Cost of goods sold, and royalties due from Japan Tobacco based on its product sales in Japan are included in Royalty, contract and other revenues on our Consolidated Statements of Income. Royalty expenses recognized were $452 million, $400 million and $282 million for the years ended December 31, 2018, 2017 and 2016, respectively. Royalty income recognized was not material for the periods presented.

Effective in December 2018, we entered into an agreement with Japan Tobacco to acquire the rights to market and distribute certain products in our HIV portfolio in Japan and to expand our rights to develop and commercialize elvitegravir to include Japan. We are responsible for the marketing of the products as of January 1, 2019.

Under the terms of the agreement, we are obligated to pay Japan Tobacco $559 million in cash, of which $194 million was paid as an up-front payment and the remaining $365 million was reflected in Other accrued liabilities on our Consolidated Balance Sheets at December 31, 2018. We recognized an intangible asset of $550 million reflecting the estimated fair value of the marketing-related rights acquired from Japan Tobacco with the remaining $9 million recorded as Prepaid and other current assets on our Consolidated Balance Sheets. The intangible asset will be amortized over nine years, representing the period over which the majority of the benefits are expected to be derived from the applicable products in our HIV portfolio. The amortization expense will be classified as selling expense and recorded as Selling, general and administrative expenses on our Consolidated Statements of Income.

Termination of the agreement may be on a product or country basis and will depend on the circumstances, including material breach by either party or expiry of royalty payment term. We may also terminate the entire agreement without cause.

Galapagos

In 2016, we closed on a license and collaboration agreement with Galapagos NV (Galapagos), a clinical-stage biotechnology company based in Belgium, for the development and commercialization of filgotinib, a JAK1-selective inhibitor being evaluated for inflammatory disease indications.

Upon closing of the license and collaboration agreement, we made an up-front license fee payment of $300 million and a $425 million equity investment in Galapagos by subscribing for new shares at a price of €58 per share, including an issuance premium. As a result, we received 6.8 million new shares of Galapagos, representing 14.75% of its outstanding share capital at the closing of the license and collaboration agreement. The license fee payment of $300 million and the issuance premium on the equity investment of $68 million were recorded within Research and development expenses on our Consolidated Statements of Income in 2016. The equity investment, net of issuance premium, was recorded in Prepaid and other current assets on our Consolidated Balance Sheets. As of December 31, 2018, the fair value of the investment was $622 million.

Galapagos is eligible to receive from us development and regulatory milestone-based payments of up to $755 million, sales-based milestone payments of up to $600 million, plus tiered royalties on global net sales ranging from 20% to 30%, with the exception of certain co-promotion territories where profits would be shared equally. For the years ended December 31, 2018 and

2017, milestone payments made to Galapagos were not material. For the year ended December 31, 2016, we recorded a $60 million expense based on the achievement of certain clinical development milestones within Research and development expenses on our Consolidated Statements of Income.

Under the terms of the agreement, we have an exclusive, worldwide, royalty-bearing, sublicensable license for filgotinib and products containing filgotinib. We are primarily responsible for development and seeking regulatory approval related to filgotinib. We are responsible for 80% and Galapagos is responsible for 20% of the development costs incurred. For the years presented, the payments between Galapagos and us for the development costs were not material. We are also responsible for the manufacturing and commercialization activities. In 2017, Galapagos exercised its option to co-promote filgotinib in the UK, Germany, France, Italy, Spain, the Netherlands, Belgium and Luxembourg, and in these territories we and Galapagos will share profits equally.

Termination of the agreement may be on a country basis and will depend on the circumstances, including expiration of royalty term or in the co-promotion territory, sale of a generic product, or material breach by either party. We may also terminate the entire agreement without cause following a certain period.

Gadeta

In July 2018, we entered into a collaboration arrangement with Gadeta, a privately-held company based in Utrecht, the Netherlands, to develop gamma delta T cell receptor therapies for various cancers. Under the financial terms, we provide R&D funding for the collaboration, and Gadeta is eligible to receive future payments upon achievement of certain regulatory milestones. In addition, we made an upfront purchase of equity in Gadeta from Gadeta’s shareholders and may acquire additional equity in Gadeta upon achievement of certain R&D milestones. We also have the exclusive option to acquire the remaining equity in Gadeta for €300 million, adjusted for closing cash, transaction expenses and closing indebtedness. The option is exercisable at our discretion.

Gadeta is a VIE, and we are its primary beneficiary because we have the power to direct the activities of Gadeta that most significantly impact its economic performance and as a result of the financial terms described above. Upon the initial consolidation of Gadeta, we recorded assets of $117 million, primarily intangible assets related to IPR&D and $82 million to Noncontrolling interest on our Consolidated Balance Sheets. Gadeta does not meet the definition of a business as defined in ASC 805, “Business Combinations”, and as a result, no goodwill was recognized.

Bristol-Myers Squibb Company

North America

In 2004, we entered into a collaboration arrangement with Bristol-Myers Squibb Company (BMS) to develop and commercialize a single tablet regimen containing our Truvada and BMS’s Sustiva (efavirenz) in the United States and Canada. This combination was approved for use in the United States in 2006 and is sold under the brand name Atripla. We and BMS structured this collaboration as a joint venture that operated as a limited liability company, which we consolidated.

On December 31, 2017, we terminated BMS’s participation in the collaboration following the launch of a generic version of Sustiva in the U.S. and became the sole owner of the joint venture. BMS is not permitted to commercialize Atripla in the United States and Canada but is entitled to receive from us certain fees based on net sales of Atripla in 2018, 2019 and 2020 on a declining annual scale. We may continue to purchase efavirenz from BMS at cost plus a markup as needed to continue manufacturing Atripla for the United States and Canada markets. For the year ended December 31, 2018, we recorded $198 million of fee expenses within Cost of goods sold on our Consolidated Statements of Income.

Europe

In 2007, Gilead Sciences Ireland UC, our wholly-owned subsidiary, and BMS entered into a collaboration agreement which sets forth the terms and conditions under which we and BMS commercialize and distribute Atripla in the European Union, Iceland, Liechtenstein, Norway and Switzerland (collectively, the European Territory). The parties formed a limited liability company which we consolidate, to manufacture Atripla for distribution in the European Territory using efavirenz that it purchases from BMS at BMS’s estimated net selling price of efavirenz in the European Territory. We are responsible for manufacturing, product distribution, inventory management and warehousing. Through our local subsidiaries, we have primary responsibility for order fulfillment, collection of receivables, customer relations and handling of sales returns in all the territories where we and BMS promote Atripla. In general, the parties share revenues and out-of-pocket expenses in proportion to the net selling prices of the components of Atripla, Truvada and efavirenz.

Starting in 2012, except for a limited number of activities that are jointly managed, the parties no longer coordinate detailing and promotional activities in the European Territory. We are responsible for accounting, financial reporting and tax reporting for the collaboration. As of December 31, 2018 and 2017, efavirenz purchased from BMS at BMS’s estimated net selling price of efavirenz in the European Territory was included in Inventories on our Consolidated Balance Sheets.

The parties also formed a limited liability company to hold the marketing authorization for Atripla in the European Territory. We have primary responsibility for regulatory activities. In the major market countries, both parties have agreed to independently continue to use commercially reasonable efforts to promote Atripla.

The agreement will terminate upon the expiration of the last-to-expire patent which affords market exclusivity to Atripla or one of its components in the European Territory. In addition, since December 31, 2013, either party may terminate the agreement for any reason and such termination will be effective two calendar quarters after notice of termination. The non-terminating party has the right to continue to sell Atripla and become the continuing party, but will be obligated to pay the terminating party certain fees based on net sales for a three-year period following the effective date of the termination. In the event the continuing party decides not to sell Atripla, the effective date of the termination will be the date Atripla is withdrawn in each country or the date on which a third party assumes distribution of Atripla, whichever is earlier.

Other collaboration arrangements that are not individually significant

During 2018, we entered into several other collaboration arrangements that resulted in cash payments of $474 million, of which $278 million was recorded as up-front collaboration expense within Research and development expenses on our Consolidated Statements of Income and the remaining amounts were recorded in current and other long-term assets on our Consolidated Balance Sheets. We do not consider any of these collaborations arrangements to be individually material. We made no material initial cash payments related to individually insignificant collaboration arrangements in 2017 or 2016.

Under the financial terms of these arrangements, we may be required to make payments upon achievement of various developmental, regulatory and commercial milestones, which could be significant. In addition, we may be required to pay significant royalties on future sales if products related to these arrangements are commercialized. The payment of these amounts, however, is contingent upon the occurrence of various future events, which have a high degree of uncertainty of occurrence. Future milestone payments and royalties, if any, will be reflected on our Consolidated Statements of Income when the corresponding events become probable.

12.DEBT AND CREDIT FACILITIES

The following table summarizes the carrying amount of our borrowings under various financing arrangements (in millions):

December 31,
Type of BorrowingIssue DateDue DateInterest Rate20182017
Senior UnsecuredSeptember 2015September 20181.85%$—$999
Senior UnsecuredSeptember 2017September 20183-month LIBOR + 0.17%—749
Term LoanOctober 2017October 2018Variable—999
Senior UnsecuredSeptember 2017March 20193-month LIBOR + 0.22%750748
Senior UnsecuredMarch 2014April 20192.05%500499
Senior UnsecuredSeptember 2017September 20191.85%999997
Senior UnsecuredSeptember 2017September 20193-month LIBOR + 0.25%499499
Senior UnsecuredNovember 2014February 20202.35%499499
Senior UnsecuredSeptember 2015September 20202.55%1,9961,994
Term LoanOctober 2017October 2020Variable—998
Senior UnsecuredMarch 2011April 20214.50%997995
Senior UnsecuredDecember 2011December 20214.40%1,2471,246
Senior UnsecuredSeptember 2016March 20221.95%498497
Senior UnsecuredSeptember 2015September 20223.25%997996
Term LoanOctober 2017October 2022Variable—2,497
Senior UnsecuredSeptember 2016September 20232.50%746745
Senior UnsecuredMarch 2014April 20243.70%1,7441,742
Senior UnsecuredNovember 2014February 20253.50%1,7451,744
Senior UnsecuredSeptember 2015March 20263.65%2,7312,729
Senior UnsecuredSeptember 2016March 20272.95%1,2451,244
Senior UnsecuredSeptember 2015September 20354.60%990990
Senior UnsecuredSeptember 2016September 20364.00%740740
Senior UnsecuredDecember 2011December 20415.65%995995
Senior UnsecuredMarch 2014April 20444.80%1,7341,733
Senior UnsecuredNovember 2014February 20454.50%1,7301,730
Senior UnsecuredSeptember 2015March 20464.75%2,2162,215
Senior UnsecuredSeptember 2016March 20474.15%1,7241,723
Total debt, net27,32233,542
Less current portion2,7482,747
Total long-term debt, net$24,574$30,795

Senior Unsecured Notes

In 2017, in connection with our acquisition of Kite, we issued $3.0 billion aggregate principal amount of senior unsecured notes in a registered offering consisting of $750 million principal amount of floating rate notes due September 2018, $750 million principal amount of floating rate notes due March 2019, and $500 million principal amount of floating rate notes due September 2019 (collectively, the Floating Rate Notes) and $1.0 billion principal amount of 1.85% senior notes due September 2019 (the Fixed Rate Notes, and collectively with the Floating Rate Notes, the 2017 Notes), the terms of which are summarized in the table above. In 2018, we repaid at maturity $750 million of principal balance related to the Floating Rate Notes.

We collectively refer to the 2017 Notes, and our senior unsecured notes issued in September 2016 (the 2016 Notes), in September 2015 (the 2015 Notes), in March and November 2014 (the 2014 Notes) and in March and December 2011 (the 2011 Notes) as our Senior Notes. In 2018, we repaid at maturity $1.0 billion of principal balance related to the 2015 Notes.

Our Senior Notes, except for the Floating Rate Notes, may be redeemed at our option at a redemption price equal to the greater of (i) 100% of the principal amount of the notes to be redeemed and (ii) the sum, as determined by an independent investment

banker, of the present values of the remaining scheduled payments of principal and interest on the notes to be redeemed (exclusive of interest accrued to the date of redemption) discounted to the redemption date on a semiannual basis at the Treasury Rate, plus a make-whole premium as defined in the indenture. Our Senior Notes maturing after 2020 also have a call feature, exercisable at our option, to redeem the notes at par in whole or in part one to six months immediately preceding maturity. In each case, accrued and unpaid interest is also required to be redeemed to the date of redemption. We do not have the option to redeem any series of the Floating Rate Notes, in whole or in part, prior to the maturity date.

In the event of the occurrence of a change in control and a downgrade in the rating of our Senior Notes below investment grade by Moody’s Investors Service, Inc. and S&P Global Ratings, the holders may require us to purchase all or a portion of their notes at a price equal to 101% of the aggregate principal amount of the notes repurchased, plus accrued and unpaid interest to the date of repurchase. We are required to comply with certain covenants under our Senior Notes and as of December 31, 2018 and 2017, we were not in violation of any covenants.

Interest expense on our Senior Notes related to the contractual coupon rates and amortization of the debt discount and issuance costs was $1.1 billion, $1.0 billion and $907 million in 2018, 2017 and 2016, respectively.

Term Loan Facilities

In September 2017, we entered into a $6.0 billion aggregate principal amount term loan facility credit agreement consisting of a $1.0 billion principal amount 364-day senior unsecured term loan facility, a $2.5 billion principal amount three-year senior unsecured term loan facility and a $2.5 billion principal amount five-year senior unsecured term loan facility (collectively, the Term Loan Facilities). In October 2017, we drew $6.0 billion principal amount on the Term Loan Facilities and used the proceeds to finance our acquisition of Kite, of which $1.5 billion was repaid in 2017 and the remaining $4.5 billion was repaid in 2018. The term loan facility credit agreement was terminated in 2018.

Credit Facilities

In 2016, we entered into a $2.5 billion five-year revolving credit facility agreement maturing in May 2021 (the Five-Year Revolving Credit Agreement). The revolving credit facility can be used for working capital requirements and for general corporate purposes, including, without limitation, acquisitions. As of December 31, 2018 and 2017, there were no amounts outstanding under the Five-Year Revolving Credit Agreement.

The Five-Year Revolving Credit Agreement contains customary representations, warranties, affirmative and negative covenants and events of default. At December 31, 2018, we were not in violation of any covenants. Loans under the Five-Year Revolving Credit Agreement bear interest at either (i) the Eurodollar Rate plus the Applicable Percentage, or (ii) the Base Rate plus the Applicable Percentage, each as defined in the Five-Year Revolving Credit Agreement. We may terminate or reduce the commitments, and may prepay any loans under the Five-Year Revolving Credit Agreement in whole or in part at any time without premium or penalty.

Contractual Maturities of Financing Obligations

As of December 31, 2018, the aggregate future principal maturities of financing obligations for each of the next five years, based on contractual due dates, are as follows (in millions):

20192020202120222023
Contractual Maturities$2,750$2,500$2,250$1,500$750
13.COMMITMENTS AND CONTINGENCIES

Lease Arrangements

We lease facilities and equipment related primarily to administrative, R&D, sales and marketing activities under various long-term non-cancelable operating leases in the United States and international markets. Our leases expire on various dates between 2018 and 2068, with many of our leases containing options to renew. Lease expense under our operating leases was $109 million, $84 million and $81 million in 2018, 2017 and 2016, respectively.

Aggregate undiscounted non-cancelable future minimum rental payments under operating leases are as follows (in millions):

2019$89
202078
202166
202260
202352
Thereafter229
Total$574

Legal Proceedings

We are a party to various legal actions. The most significant of these are described below. We recognize accruals for such actions to the extent that we conclude that a loss is both probable and reasonably estimable. We accrue for the best estimate of a loss within a range; however, if no estimate in the range is better than any other, then we accrue the minimum amount in the range. If we determine that a loss is reasonably possible and the loss or range of loss can be estimated, we disclose the possible loss. Unless otherwise noted, it is not possible to determine the outcome of these matters, and we cannot reasonably estimate the maximum potential exposure or the range of possible loss.

We did not recognize any accruals for the actions described below in our Consolidated Balance Sheets as of December 31, 2018 and 2017, as we did not believe losses were probable.

Litigation Related to Sofosbuvir

In January 2012, we acquired Pharmasset, Inc. (Pharmasset). Through the acquisition, we acquired sofosbuvir, a nucleotide analog that acts to inhibit the replication of the hepatitis C virus (HCV). In December 2013, we received approval from U.S. Food and Drug Administration (FDA) for sofosbuvir, now known commercially as Sovaldi. Sofosbuvir is also included in all of our marketed HCV products. We have received a number of claims regarding sofosbuvir. While we have carefully considered these claims both prior to and following the acquisition and believe they are without merit, we cannot predict the ultimate outcome of such claims or range of loss.

We are aware of patents and patent applications owned by third parties that have been or may in the future be alleged by such parties to cover the use of our HCV products. If third parties obtain valid and enforceable patents, and successfully prove infringement of those patents by our HCV products, we could be required to pay significant monetary damages. We cannot predict the ultimate outcome of intellectual property claims related to our HCV products. We have spent, and will continue to spend, significant resources defending against these claims.

Litigation with Idenix Pharmaceuticals, Inc. (Idenix), Universita Degli Studi di Cagliari (UDSG), Centre National de la Recherche Scientifique and L’Universite Montpellier II

In 2013, Idenix, UDSG, Centre National de la Recherche Scientifique and L’Université Montpellier II sued us in U.S. District Court for the District of Delaware alleging that the commercialization of sofosbuvir will infringe U.S. Patent No. 7,608,600 (the ‘600 patent). Also in 2013, Idenix and UDSG sued us in the U.S. District Court for the District of Massachusetts alleging that the commercialization of sofosbuvir will infringe U.S. Patent Nos. 6,914,054 (the ‘054 patent) and 7,608,597 (the ‘597 patent). In 2014, the court transferred the Massachusetts litigation to the U.S. District Court for the District of Delaware.

Prior to trial in 2016, Idenix committed to give us a covenant not to sue with respect to any claims arising out of the ‘054 patent related to sofosbuvir and withdrew that patent from the trial. A jury trial was held in 2016 on the ‘597 patent, and the jury found that we willfully infringed the asserted claims of the ‘597 patent and awarded Idenix $2.54 billion in past damages. In 2018, the judge invalidated Idenix’s ‘597 patent and vacated the jury’s award of $2.54 billion in past damages. Idenix appealed this decision to the U.S. Court of Appeals for the Federal Circuit (CAFC), and briefing is now complete. We believe the Delaware

court’s decision correctly found that, as a matter of law, the ‘597 patent is invalid, and we remain confident in the merits of our case on appeal. We believe that the possibility of a material adverse outcome on this matter is remote.

In 2014, the European Patent Office (EPO) granted Idenix's European Patent No. 1 523 489 (the ‘489 patent), which corresponds to the ‘600 patent. The same day that the ‘489 patent was granted, we filed an opposition with the EPO seeking to revoke the ‘489 patent. An opposition hearing was held in 2016, and the EPO ruled in our favor and revoked the ‘489 patent. Idenix has appealed. In 2014, Idenix also initiated infringement proceedings against us in Germany and France alleging that the commercialization of Sovaldi would infringe the German and French counterparts of the ‘489 patent. In 2015, the German court in Düsseldorf determined that the Idenix patent was highly likely to be invalid and stayed the infringement proceedings pending the outcome of the opposition hearing held by the EPO in 2016. Idenix has not appealed this decision of the German court staying the proceedings. Upon Idenix’s request, the French proceedings have been stayed.

Litigation with Merck & Co. Inc. (Merck)

In 2013, Merck contacted us requesting that we pay royalties on the sales of sofosbuvir and obtain a license to U.S. Patent No. 7,105,499 (the ‘499 patent) and U.S. Patent No. 8,481,712 (the ‘712 patent), which it co-owns with Ionis Pharmaceuticals, Inc. The ‘499 and ‘712 patents cover compounds which do not include, but may relate to, sofosbuvir. We filed a lawsuit in 2013 in the U.S. District Court for the Northern District of California seeking a declaratory judgment that the Merck patents are invalid and not infringed. Initially, in 2016, a jury determined that we had not established that Merck’s patents are invalid and awarded Merck $200 million in damages. However, in 2016, the court ruled in our favor on our defense of unclean hands and determined that Merck may not recover any damages from us for the ‘499 and ‘712 patents.

In 2018, the CAFC affirmed the court’s decision on unclean hands. In 2019, the U.S. Supreme Court denied Merck’s petition for review. The merits portion of this case is now final.

Litigation with the University of Minnesota

The University of Minnesota (the University) has obtained Patent No. 8,815,830 (the ‘830 patent), which purports to broadly cover nucleosides with antiviral and anticancer activity. In 2016, the University filed a lawsuit against us in the U.S. District Court for the District of Minnesota, alleging that the commercialization of sofosbuvir-containing products infringes the ‘830 patent. We believe the ‘830 patent is invalid and will not be infringed by the continued commercialization of sofosbuvir. In 2017, the court granted our motion to transfer the case to California. We have also filed four petitions for inter partes review with the USPTO Patent Trial and Appeal Board (PTAB) alleging that all asserted claims are invalid for anticipation and obviousness. In 2018, the District Court stayed the litigation until after the PTAB rules on our petitions for inter partes review.

Litigation Related to Axicabtagene Ciloleucel

In 2017, we acquired Kite, which is now our wholly-owned subsidiary. Through the acquisition, we acquired axicabtagene ciloleucel, a chimeric antigen receptor (CAR) T cell therapy. We received approval from FDA in 2017 for axicabtagene ciloleucel, now known commercially as Yescarta.

We own patents and patent applications that claim axicabtagene ciloleucel chimeric DNA segments. Third parties may have, or may obtain rights to, patents that allegedly could be used to prevent or attempt to prevent us from commercializing axicabtagene ciloleucel or to require us to obtain a license in order to commercialize axicabtagene ciloleucel. For example, we are aware that Juno Therapeutics, Inc. (Juno) has exclusively licensed Patent No. 7,446,190 (the ‘190 patent), which was issued to Sloan Kettering Cancer Center. In September 2017, Juno and Sloan Kettering Cancer Center filed a lawsuit against Kite in the U.S. District Court for the Central District of California, alleging that the commercialization of axicabtagene ciloleucel infringes the ‘190 patent. In October 2017, following FDA approval for Yescarta, Juno filed a second complaint alleging that axicabtagene ciloleucel infringes the ‘190 patent. Juno subsequently moved to dismiss the September 2017 complaint and has maintained the October 2017 complaint. The court has set a trial date of December 2019 for this lawsuit.

We cannot predict the ultimate outcome of intellectual property claims related to axicabtagene ciloleucel. If Juno’s patent is upheld as valid and Juno successfully proves infringement of that patent by axicabtagene ciloleucel, we could be required to pay significant monetary damages or we could be prevented from selling Yescarta unless we were able to obtain a license to this patent. Such a license may not be available on commercially reasonable terms or at all.

Litigation Related to Bictegravir

In 2018, ViiV Healthcare Company (ViiV) filed a lawsuit against us in the U.S. District Court of Delaware, alleging that the commercialization of bictegravir, now known commercially as Biktarvy, infringes ViiV’s U.S. Patent No. 8,129,385 (the ‘385 patent), which was issued to Shionogi & Co. Ltd. & GlaxoSmithKline LLC. The ‘385 patent is the compound patent covering ViiV’s dolutegravir. Bictegravir is structurally different from dolutegravir, and we believe that bictegravir does not infringe the claims of the ‘385 patent. To the extent that ViiV’s patent claims are interpreted to cover bictegravir, we believe those claims are

invalid. The U.S. Patent and Trademark Office (USPTO) has granted us patents covering bictegravir. The court has set a trial date of September 2020 for this lawsuit.

In 2018, ViiV also filed a lawsuit against us in the Federal Court of Canada, alleging that our activities relating to our bictegravir product have infringed ViiV’s Canadian Patent No. 2,606,282 (the ‘282 patent), which was issued to Shionogi & Co. Ltd. and ViiV. The ‘282 patent is the compound patent covering ViiV’s dolutegravir. We believe that bictegravir does not infringe the claims of the ‘282 patent. To the extent that ViiV’s patent claims are interpreted to cover bictegravir, we believe those claims are invalid.

We cannot predict the ultimate outcome of intellectual property claims related to bictegravir. If ViiV’s patents are upheld as valid and ViiV successfully proves infringement of those patents by bictegravir, we could be required to pay significant monetary damages.

Litigation with Generic Manufacturers

As part of the approval process for some of our products, FDA granted us a New Chemical Entity (NCE) exclusivity period during which other manufacturers’ applications for approval of generic versions of our product will not be approved. Generic manufacturers may challenge the patents protecting products that have been granted NCE exclusivity one year prior to the end of the NCE exclusivity period. Generic manufacturers have sought and may continue to seek FDA approval for a similar or identical drug through an abbreviated new drug application (ANDA), the application form typically used by manufacturers seeking approval of a generic drug. The sale of generic versions of our products earlier than their patent expiration would have a significant negative effect on our revenues and results of operations. To seek approval for a generic version of a product having NCE status, a generic company may submit its ANDA to FDA four years after the branded product’s approval.

Current legal proceedings of significance with generic manufacturers include:

HIV Products

In 2018, we received notice that Strides Pharma Inc. (Strides) submitted an ANDA to FDA requesting permission to manufacture and market a generic version of Truvada. In the notice, Strides alleges that two patents associated with emtricitabine and four patents associated with the emtricitabine and tenofovir disoproxil fumarate fixed-dose combination are invalid, unenforceable and/or will not be infringed by Strides’ manufacture, use or sale of a generic version of Truvada. In response, we filed a lawsuit against Strides in the U.S. District Court for the District of New Jersey for infringement of our patents. In 2018, we reached an agreement with Strides to resolve the lawsuit, which has been dismissed. The settlement agreement has been filed with the Federal Trade Commission and Department of Justice as required by law.

In 2018, we received notice that Zydus Pharmaceuticals (USA) Inc. (Zydus) submitted an ANDA to FDA requesting permission to manufacture and market generic versions of Truvada at various dosage strengths. In the notice, Zydus alleges that two patents associated with emtricitabine and four patents associated with the emtricitabine and tenofovir disoproxil fumarate fixed-dose combination are invalid, unenforceable and/or will not be infringed by Zydus’ manufacture, use or sale of generic versions of Truvada at various dosage strengths. In response, we filed a lawsuit against Zydus in the U.S. District Court for the District of New Jersey for infringement of our patents.

In 2018, we received notice that Mylan Pharmaceuticals Inc. (Mylan) submitted an ANDA to FDA requesting permission to manufacture and market a generic version of Stribild. In the notice, Mylan alleges that one patent owned by Japan Tobacco Inc. (JT) and associated with elvitegravir is invalid, unenforceable and/or will not be infringed by Mylan’s manufacture, use or sale of a generic version of Stribild. In 2019, JT filed a lawsuit against Mylan in the U.S. District Court for the Northern District of West Virginia for infringement of its patent.

HCV Products

In 2018, we received notices from Natco Pharma Limited (Natco) and Teva Pharmaceuticals (Teva) that they have each submitted an ANDA to FDA requesting permission to manufacture and market a generic version of Sovaldi. In Teva’s notice, it alleges that nine patents associated with sofosbuvir are invalid, unenforceable and/or will not be infringed by Teva’s manufacture, use or sale of generic versions of Sovaldi. In response, we filed lawsuits against Teva in the U.S. District Court for the District of New Jersey and the U.S. District Court for the District of Delaware for infringement of these patents. In Natco’s notice, it alleges that two patents associated with sofosbuvir are invalid, unenforceable and/or will not be infringed by Natco’s manufacture, use or sale of generic versions of Sovaldi. Natco did not challenge all patents listed on the Orange Book for Sovaldi. We also filed lawsuits against Natco in the U.S. District Court for the District of New Jersey and the U.S. District Court for the District of Delaware for infringement of these patents. In 2018, we reached an agreement with Teva to resolve the lawsuit, which has been dismissed. The settlement agreement has been filed with the Federal Trade Commission and Department of Justice as required by law.

European Patent Claims

In 2015, several parties filed oppositions in the EPO requesting revocation of one of our granted European patents covering sofosbuvir that expires in 2028. In 2016, the EPO upheld the validity of certain claims of our sofosbuvir patent. We have appealed this decision, seeking to restore all of the original claims, and several of the original opposing parties have also appealed, requesting full revocation. The appeal process may take several years.

In 2017, several parties filed oppositions in the EPO requesting revocation of our granted European patent relating to sofosbuvir that expires in 2024. The EPO conducted an oral hearing for this opposition in 2018 and upheld the claims. Two of the original opposing parties have appealed, requesting full revocation. The appeal process may take several years.

In 2016, several parties filed oppositions in the EPO requesting revocation of our granted European patent covering TAF that expires in 2021. In 2017, the EPO upheld the validity of the claims of our TAF patent. Three parties have appealed this decision. The appeal process may take several years.

In 2017, several parties filed oppositions in the EPO requesting revocation of our granted European patent relating to TAF hemifumarate that expires in 2032. We responded to these oppositions, and a hearing was held in February 2019. The patent was upheld at this hearing. The opposing parties may choose to appeal this decision, which could take several years to conclude.

In 2016, three parties filed oppositions in the EPO requesting revocation of our granted European patent covering cobicistat that expires in 2027. In 2017, the EPO upheld the validity of the claims of our cobicistat patent. One of the original opposing parties has appealed this decision. The appeal process may take several years.

While we are confident in the strength of our patents, we cannot predict the ultimate outcome of these oppositions. If we are unsuccessful in defending these oppositions, some or all of our patent claims may be narrowed or revoked and the patent protection for sofosbuvir, TAF and cobicistat in the European Union could be substantially shortened or eliminated entirely. If our patents are revoked, and no other European patents are granted covering these compounds, our exclusivity may be based entirely on regulatory exclusivity granted by the European Medicines Agency. Sovaldi has been granted regulatory exclusivity that will prevent generic sofosbuvir from entering the European Union for 10 years following approval of Sovaldi, or January 2024. If we lose patent protection for sofosbuvir prior to 2028, our revenues and results of operations could be negatively impacted for the years including and succeeding the year in which such exclusivity is lost, which may cause our stock price to decline.

Government Investigations and Related Litigation

In 2011, we received a subpoena from the U.S. Attorney’s Office for the Northern District of California requesting documents related to the manufacture, and related quality and distribution practices, of Complera, Atripla, Truvada, Viread, Emtriva, Hepsera and Letairis. We cooperated with the government’s inquiry. In 2014, the U.S. Department of Justice informed us that, following an investigation, it declined to intervene in a False Claims Act lawsuit filed by two former employees. Also in 2014, the former employees served a First Amended Complaint, and the U.S. District Court for the Northern District of California issued an order granting in its entirety, without prejudice, our motion to dismiss the First Amended Complaint. In 2015, the plaintiffs filed a Second Amended Complaint, and the District Court issued an order granting our motion to dismiss the Second Amended Complaint. The plaintiffs then filed a notice of appeal in the U.S. Court of Appeals for the Ninth Circuit. In 2017, the Ninth Circuit granted our motion to stay the case pending an appeal to the U.S. Supreme Court, and we filed a Petition for a Writ of Certiorari to the U.S. Supreme Court. In 2018, the Solicitor General submitted a brief for the United States to the Supreme Court stating its intention to file a motion to dismiss under the federal False Claims Act. In January 2019, the Supreme Court denied the Petition and the case has been remanded to the District Court.

In 2016, we received a subpoena from the U.S. Attorney’s Office for the District of Massachusetts requesting documents related to our support of 501(c)(3) organizations that provide financial assistance to patients and documents concerning our provision of financial assistance to patients for our HCV products. We are cooperating with this inquiry. In 2017, we received a subpoena from the U.S. Attorney’s Office for the District of Massachusetts requesting documents related to our copay coupon program and Medicaid price reporting methodology. We are cooperating with this inquiry.

In 2017, we received a voluntary request for information from the U.S. Attorney’s Office for the Eastern District of Pennsylvania requesting information related to our reimbursement support offerings, clinical education programs and interactions with specialty pharmacies for Sovaldi and Harvoni. In 2018, we received another voluntary request for information related to our speaker programs and advisory boards for our HCV and hepatitis B virus (HBV) products. We are cooperating with these voluntary requests.

In 2017, we received a subpoena from the California Department of Insurance and the Alameda County District Attorney’s Office requesting documents related to our marketing activities, reimbursement support offerings, clinical education programs and interactions with specialty pharmacies for Harvoni and Sovaldi. We are cooperating with this inquiry.

In 2017, we received a subpoena from the U.S. Department of Health and Human Services requesting documents related to our Frontlines of Communities in the United States (FOCUS) program. We cooperated with the inquiry, and in February 2019, the government informed us that it declined to intervene in the False Claims Act qui tam lawsuit related to the inquiry.

In 2017, we also received a subpoena from the U.S. Attorney’s Office for the Southern District of New York requesting documents related to our promotional speaker programs for HIV. We are cooperating with this inquiry.

Products Liability

In 2018, plaintiffs filed a purported mass action against us in the U.S. District Court for the Northern District of California (the Holley action). Plaintiffs alleged that they suffered kidney and/or bone injuries as a result of using Viread, Truvada, Atripla, Complera and/or Stribild, and alleged that: (1) we should have altered the design of these medications by replacing one of their active ingredients, tenofovir disoproxil fumarate (TDF), with an allegedly superior ingredient, tenofovir alafenamide fumarate, and/or by reducing the dose of TDF in Stribild; and (2) we failed to adequately warn plaintiffs or their physicians about kidney and bone risks from Viread, Truvada, Atripla, Complera and Stribild and the need to monitor patients for those risks. Based on those allegations, plaintiffs asserted claims for products liability, negligence, fraud, breach of warranty and violations of state consumer protection laws. Plaintiffs seek compensatory, statutory and punitive damages and restitution. Four other federal lawsuits are pending in the U.S. District Court for the Central District of California (the Dechow action), the U.S. District Court for the Middle District of Louisiana (the Hills action), the U.S. District Court for the Western District of Louisiana (the Pierot action) and the U.S. District Court for the Northern District of California (the Dowdy action) based on allegations similar to those raised in the Holley action.

In addition to the five pending federal actions, there are three lawsuits based on plaintiffs’ allegations similar to those raised in the Holley action, pending in California state court (the Lujano, Martinez and Grim actions).

We filed motions to dismiss in the Holley, Dowdy, Hills, Pierot and Lujano actions. The motion to dismiss in the Lujano action was granted as to plaintiffs' strict products liability claim but denied as to the remaining claims. The other motions to dismiss remain pending. We also plan to file motions to dismiss in the Dechow, Martinez and Grim actions. We intend to vigorously defend ourselves in these actions. While we believe these cases are without merit, we cannot predict the ultimate outcome. If plaintiffs are successful in their claims, we could be required to pay significant monetary damages.

Other Matters

We are a party to various legal actions that arose in the ordinary course of our business. We do not believe that these other legal actions will have a material adverse impact on our consolidated business, financial position or results of operations.

Other Commitments

In the normal course of business, we enter into various firm purchase commitments primarily related to active pharmaceutical ingredients and certain inventory related items. As of December 31, 2018, these commitments for the next five years were approximately $503 million in 2019, $54 million in 2020, $51 million in 2021, $30 million in 2022 and $27 million in 2023. The amounts related to active pharmaceutical ingredients represent minimum purchase commitments. Actual payments for the purchases related to active pharmaceutical ingredients and certain inventory related items were $1.0 billion in 2018, $1.7 billion in 2017 and $2.0 billion in 2016.

14.STOCKHOLDERS’ EQUITY

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. The 2016 Program commenced in April 2016 after the $15.0 billion stock repurchase program authorized by our Board of Directors in January 2015 (2015 Program) was completed. As of December 31, 2018, the remaining authorized repurchase amount under the 2016 Program was $5.1 billion.

The following table summarizes our stock repurchases under the above-described programs (in millions, except per share data):

Year ended December 31,
2018 (1)2017 (1)2016 (2)
Shares repurchased and retired4013123
Amount$2,900$954$11,001
Average price per share$72.95$71.79$89.15
_______________________
Notes:
(1)All repurchases were under the 2016 Program.
(2)Includes 36 million shares repurchased for $3.0 billion under the 2016 Program and 87 million shares repurchased for $8.0 billion under the 2015 Program.

In addition to repurchases from our stock repurchase programs, we repurchased shares of common stock withheld by us from employee restricted stock awards to satisfy our applicable tax withholding obligations, which are immaterial and excluded from the table above.

We use the par value method of accounting for our stock repurchases. Under the par value method, common stock is first charged with the par value of the shares involved. The excess of the cost of shares acquired over the par value is allocated to APIC based on an estimated average sales price per issued share with the excess amounts charged to retained earnings.

The following table summarizes the reduction of common stock and APIC and the charge to retained earnings as a result of our stock repurchases (in millions):

Year ended December 31,
201820172016
Reduction of common stock and APIC$112$34$302
Charge to retained earnings2,940$1,028$10,883

Dividends

The following table summarizes cash dividends declared on our common stock (in millions, except per share data):

20182017
Dividend Per ShareAmountDividend Per ShareAmount
First quarter$0.57$752$0.52$685
Second quarter0.577470.52685
Third quarter0.577460.52685
Fourth quarter0.577410.52687
Total$2.28$2,986$2.08$2,742

Our restricted stock and performance-based stock units have dividend equivalent rights entitling holders to dividend equivalents to be paid upon vesting for each share of the underlying units.

On February 4, 2019, we announced that our Board of Directors declared a quarterly cash dividend of $0.63 per share of our common stock, with a payment date of March 28, 2019 to all stockholders of record as of the close of business on March 15, 2019. Future dividends are subject to declaration by the Board of Directors.

Preferred Stock

We have 5 million shares of authorized preferred stock issuable in series. Our Board is authorized to determine the designation, powers, preferences and rights of any such series. There was no preferred stock outstanding as of December 31, 2018 and 2017.

Accumulated Other Comprehensive Income (Loss)

The following table summarizes the changes in AOCI by component, net of tax (in millions):

Foreign Currency TranslationUnrealized Gains and Losses on Available-for-Sale SecuritiesUnrealized Gains and Losses on Cash Flow HedgesTotal
Balance at December 31, 2016$132$(16)$162$278
Other comprehensive income (loss) before reclassifications(47)218(304)(133)
Amounts reclassified from accumulated other comprehensive income—(8)2820
Net current period other comprehensive income (loss)(47)210(276)(113)
Balance at December 31, 2017$85$194$(114)$165
Reclassifications to retained earnings as a result of the adoption of new accounting standards—(293)—(293)
Balance at January 1, 2018$85$(99)$(114)$(128)
Net unrealized gain (loss)(38)43112117
Reclassifications to net income—48791
Net current period other comprehensive income (loss)(38)47199208
Balance at December 31, 2018$47$(52)$85$80

The amounts reclassified to net income for gains and losses on cash flow hedges are recorded as part of Product sales on our Consolidated Statements of Income. See Note 5, Derivative Financial Instruments, for additional information. The amounts reclassified to net income for gains and losses on available-for-sale debt securities are recorded as part of Other income (expense), net, on our Consolidated Statements of Income.

  1. EMPLOYEE BENEFITS

We provide share based compensation in the form of various types of equity-based awards, including restricted stock units (RSUs), performance-based restricted stock units (PSUs) and stock options. Compensation expense is recognized on the Consolidated Statements of Income based on the estimated fair value of the award on the grant date. The estimated fair value of RSUs is based on the closing price of our common stock. For PSUs, estimated fair value is based on either the Monte Carlo valuation methodology or the stock price on the date of grant. For stock option awards, estimated fair value is based on the Black-Scholes option valuation model.

2004 Equity Incentive Plan

In May 2004, our stockholders approved and we adopted the Gilead Sciences, Inc. 2004 Equity Incentive Plan (as amended, the 2004 Plan). The 2004 Plan is a broad based incentive plan that provides for the grant of equity-based awards, including stock options, restricted stock units, restricted stock awards and performance awards, to employees, directors and consultants. The 2004 Plan authorized the issuance of a total of 309 million shares of common stock. As of December 31, 2018, a total of 91 million shares remain available for future grant under the 2004 Plan.

Stock Options

The 2004 Plan provides for option grants designated as either non-qualified or incentive stock options. Prior to January 1, 2006, we granted both non-qualified and incentive stock options, but all stock options granted after January 1, 2006 have been non-qualified stock options. Under the 2004 Plan, employee stock options granted prior to 2011 generally vest over five years and stock options granted starting in 2011 generally vest over three or four years. All options are exercisable over a period not to exceed the contractual term of ten years from the date the stock options are issued and are granted at prices not less than the fair market value of our common stock on the grant date. Stock option exercises are settled with common stock from the 2004 Plan’s previously authorized and available pool of shares.

The following table summarizes activity and related information under our stock option plans. All option grants presented in the table had exercise prices not less than the fair value of the underlying common stock on the grant date:

Shares (in thousands)Weighted- Average Exercise Price (in dollars)Weighted-Average Remaining Contractual Term (Years)Aggregate Intrinsic Value (in millions)
Outstanding at December 31, 201730,220$43.93
Granted3,659$79.49
Forfeited(1,943)$70.23
Expired(284)$71.09
Exercised(8,128)$24.16
Outstanding at December 31, 201823,524$53.805.63$417
Exercisable at December 31, 201815,521$45.674.21$372
Expected to vest, net of estimated forfeitures at December 31, 20187,629$69.348.37$43

Aggregate intrinsic value represents the value of our closing stock price on the last trading day of the year in excess of the weighted-average exercise price multiplied by the number of options outstanding or exercisable. Total intrinsic value of options exercised was $412 million for 2018, $337 million for 2017 and $452 million for 2016.

The weighted-average grant date fair value of the stock options granted was $17.03 per share for 2018, $38.78 per share for 2017 and $20.04 per share for 2016. The weighted-average grant date fair value of stock options granted in 2017 was higher due to replacement awards granted in connection with our acquisitions of Kite and Cell Design Labs.

As of December 31, 2018, there was $173 million of unrecognized compensation cost related to stock options, which is expected to be recognized over an estimated weighted-average period of 2.4 years.

Performance-Based Restricted Stock Units

Under the 2004 Plan, we grant PSUs which vest upon the achievement of specified market or performance goals, which could include achieving a total shareholder return compared to a pre-determined peer group or achieving revenue targets. The actual number of common shares ultimately issued is calculated by multiplying the number of PSUs by a payout percentage ranging from 0% to 200%, and these awards generally vest only when a committee (or subcommittee) of our Board has determined that the specified market and performance goals have been achieved. The fair value of each PSU is estimated at the date of grant or when performance objectives are defined for the grants. Depending on the terms of the award, fair value on the date of grant is determined based on either the Monte Carlo valuation methodology or the closing stock price on the date of grant.

In addition, we have also granted other PSUs to certain of our employees under the 2004 Plan. The vesting of these awards is subject to the achievement of specified individual performance goals, typically within a one year period. The fair value of such an award is equal to the closing price of our common stock on the grant date.

The following table summarizes activity and related information for our PSUs:

Shares (1) (in thousands)Weighted- Average Grant Date Fair Value Per Share (1) (in dollars)
Outstanding at December 31, 2017757$82.80
Granted452$88.76
Vested(228)$83.75
Forfeited(149)$103.80
Outstanding at December 31, 2018832$82.42
_______________________

Note:

(1)Weighted-average grant-date fair value per share excludes shares related to grants that currently have no grant date as the performance objectives have not yet been defined.

The weighted-average grant date fair value of our PSUs granted was $88.76 per share for 2018, $74.42 per share for 2017 and $71.60 per share for 2016. The total grant date fair value of our vested PSUs was $19 million for 2018, $4 million for 2017

and $33 million for 2016, and total fair value as of the respective vesting dates was $18 million for 2018, $3 million for 2017 and $45 million for 2016.

We recognized stock-based compensation expenses of $31 million in 2018, $24 million in 2017 and $20 million in 2016 related to these PSUs. As of December 31, 2018, there was $33 million of unrecognized compensation costs related to these PSUs, which is expected to be recognized over an estimated weighted-average period of 1.1 years.

Restricted Stock Units

We grant time-based RSUs to certain employees as part of our annual employee equity compensation review program as well as to new hire employees and to non-employee members of our Board. RSUs are share awards that entitle the holder to receive freely tradable shares of our common stock upon vesting. RSUs generally vest over three or four years from the date of grant.

The fair value of an RSU is equal to the closing price of our common stock on the grant date. The following table summarizes our RSU activities and related information:

Shares (in thousands)Weighted- Average Grant Date Fair Value Per Share (in dollars)
Outstanding at December 31, 201715,005$79.37
Granted7,196$77.98
Vested(5,619)$82.22
Forfeited(1,688)$78.48
Outstanding at December 31, 201814,894$77.72

The weighted-average grant date fair value of RSUs granted was $77.98 per share for 2018, $73.56 per share for 2017, and $84.51 per share for 2016. The total grant date fair value of our vested RSUs was $462 million for 2018, $325 million for 2017 and $284 million for 2016, and total fair value as of the respective vesting dates was $428 million for 2018, $285 million for 2017 and $408 million for 2016.

As of December 31, 2018, there was $789 million of unrecognized compensation cost related to unvested RSUs which is expected to be recognized over a weighted-average period of 2.4 years.

Employee Stock Purchase Plan

Under our Employee Stock Purchase Plan and the International Employee Stock Purchase Plan (together, as amended, the ESPP), employees can purchase shares of our common stock based on a percentage of their compensation subject to certain limits. The purchase price per share is equal to the lower of 85% of the fair market value of our common stock on the offering date or the purchase date. Prior to 2016, the ESPP offered a two-year look-back feature as well as an automatic reset feature that provides for an offering period to be reset to a new lower-priced offering if the offering price of the new offering period is less than that of the current offering period. Beginning in the first quarter of 2016, the look-back feature for ESPP offering periods became six-months. ESPP purchases are settled with common stock from the ESPP’s previously authorized and available pool of shares. During 2018, 2 million shares were issued under the ESPP for $91 million. A total of 79 million shares of common stock have been authorized for issuance under the ESPP, and there were 10 million shares available for issuance under the ESPP as of December 31, 2018.

Stock-Based Compensation

The following table summarizes total stock-based compensation expenses included on our Consolidated Statements of Income (in millions):

Year Ended December 31,
201820172016
Cost of goods sold$61$24$14
Research and development expenses379232176
Selling, general and administrative expenses405393190
Stock-based compensation expense included in total costs and expenses845649380
Income tax effect(164)(280)(104)
Stock-based compensation expense, net of tax$681$369$276

Stock-based compensation is recognized as expense over the requisite service periods on our Consolidated Statements of Income using the straight-line expense attribution approach, reduced for estimated forfeitures. We estimate forfeitures based on our historical experience.

Valuation Assumptions

Fair value of options granted under our 2004 Plan and purchases under our ESPP were estimated at grant or purchase dates using a Black-Scholes option valuation model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including expected stock price volatility and expected award life. We used the following assumptions to calculate the estimated fair value of the awards:

Year Ended December 31,
201820172016
Expected volatility:
Stock options28%28%30%
ESPP28%28%30%
Expected term in years:
Stock options5.24.65.5
ESPP0.50.50.5
Risk-free interest rate:
Stock options2.5%2.1%1.4%
ESPP2.6%1.8%1.1%
Expected dividend yield2.8%2.7%1.9%

The fair value of stock options granted was calculated using the single option approach. We use a blend of historical volatility along with implied volatility for traded options on our common stock to determine our expected volatility. The expected term of stock-based awards represents the weighted-average period the awards are expected to remain outstanding. We estimate the weighted-average expected term based on historical cancellation and historical exercise data related to our stock options as well as the contractual term and vesting terms of the awards. The risk-free interest rate is based upon observed interest rates appropriate for the term of the stock-based awards. The dividend yield is based on our history and expectation of dividend payouts.

Deferred Compensation

We maintain a retirement saving plan under which eligible U.S. employees may defer compensation for income tax purposes under Section 401(k) of the Internal Revenue Code (the Gilead Sciences 401k Plan). In certain foreign subsidiaries, we maintain defined benefit plans as required by local regulatory requirements. Our total matching contribution expense under the Gilead Sciences 401k Plan and other defined benefit plans was $91 million during 2018, $74 million during 2017 and $69 million during 2016.

We maintain a deferred compensation plan under which our directors and key employees may defer compensation. Amounts deferred by participants are deposited into a rabbi trust. The total assets and liabilities associated with the deferred compensation plan were $124 million as of December 31, 2018 and $116 million as of December 31, 2017.

16.NET INCOME PER SHARE ATTRIBUTABLE TO GILEAD COMMON STOCKHOLDERS

Basic net income per share attributable to Gilead common stockholders is calculated based on the weighted-average number of shares of our common stock outstanding during the period. Diluted net income per share attributable to Gilead common stockholders is calculated based on the weighted-average number of shares of our common stock outstanding and other dilutive securities outstanding during the period. The potentially dilutive shares of our common stock resulting from the assumed exercise of outstanding stock options and equivalents, the assumed conversion of our outstanding Convertible Notes and the assumed exercise of the warrants related to our outstanding Convertible Notes were determined under the treasury stock method. Both the Convertible Notes and the associated warrants were settled in 2016.

We excluded stock options and equivalents of approximately 13 million, 11 million and 3 million weighted-average shares of our common stock that were outstanding during 2018, 2017 and 2016, respectively, in the computation of diluted net income per share attributable to Gilead common stockholders because their effect was antidilutive.

The following table shows the calculation of basic and diluted net income per share attributable to Gilead common stockholders (in millions except per share amounts):

Year Ended December 31,
201820172016
Net income attributable to Gilead$5,455$4,628$13,501
Shares used in per share calculation - basic1,2981,3071,339
Effect of dilutive securities:
Stock options and equivalents101213
Conversion spread related to the Convertible Notes——2
Warrants related to the Convertible Notes——4
Shares used in per share calculation - diluted1,3081,3191,358
Net income per share attributable to Gilead common stockholders - basic$4.20$3.54$10.08
Net income per share attributable to Gilead common stockholders - diluted$4.17$3.51$9.94
17.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. Therefore, our results of operations are reported on a consolidated basis consistent with internal management reporting reviewed by our chief operating decision maker, who is our chief executive officer or interim chief executive officer. See Note 2, Revenues, for a summary of disaggregated revenues by product and geographic region.

Revenues From Major Customers

The following table summarizes revenues from each of our customers who individually accounted for 10% or more of our total revenues (as a percentage of total revenues):

Year Ended December 31,
201820172016
AmerisourceBergen Corp.20%20%18%
Cardinal Health, Inc.21%19%16%
McKesson Corp.21%23%22%

Long-Lived Assets

The net book value of our property, plant and equipment (less office and computer equipment) in the United States was $3.2 billion as of December 31, 2018, $2.6 billion as of December 31, 2017 and $2.2 billion as of December 31, 2016. The corresponding amount in international locations was $620 million as of December 31, 2018, $520 million as of December 31, 2017 and $430 million as of December 31, 2016. All individual international locations accounted for less than ten percent of the total balances.

  1. INCOME TAXES

Income before provision for income taxes consists of the following (in millions):

Year Ended December 31,
201820172016
Domestic$7,074$8,099$7,646
Foreign7255,4309,451
Total income before provision for income taxes$7,799$13,529$17,097

The provision for income taxes consists of the following (in millions):

Year Ended December 31,
201820172016
Federal:
Current$1,716$8,817$3,351
Deferred324(123)(85)
2,0408,6943,266
State:
Current16297131
Deferred(17)(20)28
14577159
Foreign:
Current17554261
Deferred(21)60(77)
154114184
Provision for income taxes$2,339$8,885$3,609

The 2018 provision for income taxes included a $588 million deferred tax charge on previously acquired intangible assets resulting from a transfer of these assets between wholly owned subsidiaries. The 2017 provision for income taxes included a $5.5 billion provisional charge to income tax expense related to Tax Reform enacted in December 2017.

On December 22, 2017, Tax Reform was signed into law making significant changes to the Internal Revenue Code of 1986, as amended. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, a repatriation tax on deemed repatriated earnings of foreign subsidiaries, implementation of a modified territorial tax system, which has the effect of subjecting earnings of our foreign subsidiaries to U.S. taxation on Global Intangible Low-Taxed Income (GILTI). As a result, we recorded a provisional charge to income tax expense of $5.5 billion in December 2017, which included a provisional $308 million deferred tax benefit related to the re-measurement of certain deferred tax assets and liabilities and a $5.8 billion provisional charge related to the transition tax on the mandatory deemed repatriation of accumulated foreign earnings.

The accounting for the income tax effects of Tax Reform was completed in accordance with SAB 118 in 2018 and as a result, we recorded a $4 million net tax charge to our income tax provision primarily relating to the deferred tax revaluation partially offset by the refinement to the provisional estimate of transition tax.

As of December 31, 2017, the accrued federal liability for transition tax was $6.1 billion, which was payable over an eight year period. As of December 31, 2018, the accrued federal liability for transition tax was $4.6 billion, which was included in Long-term income taxes payable on our Consolidated Balance Sheets. The decrease of $1.5 billion was primarily due to $1.3 billion of payments in 2018 and $174 million of refinements to the provisional estimate.

For the year ended December 31, 2018, we repatriated $30.4 billion of cash, cash equivalents and marketable securities to our parent company headquartered in the United States. Prior to the enactment of Tax Reform, these earnings were considered indefinitely reinvested and no U.S. taxes had been provided. In 2017 U.S. taxes have been provided on these earnings through the accrual of the transition tax.

Additionally, we completed our evaluation of the accounting policy election required with regard to the tax on GILTI. The FASB allows companies to adopt a policy election to account for the tax on GILTI under one of two methods: (i) account for the tax on GILTI as a component of tax expense in the period in which the tax is incurred (the period cost method), or (ii) account for the tax on GILTI in a company’s measurement of deferred taxes (the deferred method). We have elected to account for the tax on GILTI under the period cost method.

The reconciliation between the federal statutory tax rate applied to income before taxes and our effective tax rate is summarized as follows:

Year Ended December 31,
201820172016
Federal statutory rate21.0%35.0%35.0%
State taxes, net of federal benefit0.6%0.1%0.7%
Foreign earnings at different rates(0.9)%(11.2)%(16.0)%
Research and other credits(1.1)%(0.6)%(0.7)%
US tax on foreign earnings2.1%1.2%0.7%
Deferred tax charge on acquired intangibles7.5%—%—%
Transition tax(0.7)%42.9%—%
Deferred tax revaluation0.8%(2.3)%—%
Settlement of tax examinations(1.9)%—%—%
Other2.6%0.6%1.4%
Effective tax rate30.0%65.7%21.1%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows (in millions):

December 31,
20182017
Deferred tax assets:
Net operating loss carryforwards$344$322
Stock-based compensation163165
Reserves and accruals not currently deductible426336
Deferred revenue—27
Depreciation related6156
Research and other credit carryforwards363293
Other, net183102
Total deferred tax assets before valuation allowance1,5401,301
Valuation allowance(331)(162)
Total deferred tax assets1,2091,139
Deferred tax liabilities:
Intangibles(1,667)(1,316)
Other(80)(70)
Total deferred tax liabilities(1,747)(1,386)
Net deferred tax assets (liabilities)$(538)$(247)

The valuation allowance was $331 million and $162 million at December 31, 2018 and 2017, respectively. The increase of our valuation allowance in 2018 was primarily related to certain Kite tax attributes and certain foreign jurisdictions, which do not have sufficient history of profit to realize the benefit of the losses on a more-likely-than-not basis.

At December 31, 2018, we had U.S. federal net operating loss carryforwards of approximately $494 million. The federal net operating loss carryforwards will start to expire in 2021, if not utilized. We also had federal tax credit carryforwards of approximately $179 million which will start to expire in 2020, if not utilized. In addition, we had state net operating loss and tax credit carryforwards of approximately $1.5 billion and $414 million, respectively. The state net operating loss and tax credit carryforwards will start to expire in 2019 if not utilized.

Utilization of net operating losses and tax credits may be subject to an annual limitation due to ownership change limitations provided in the Internal Revenue Code of 1986, as amended, and similar state provisions. This annual limitation may result in the expiration of the net operating losses and credits before utilization.

We file federal, state and foreign income tax returns in the United States and in many foreign jurisdictions. For federal income tax purposes, the statute of limitations is open for 2013 and onwards and 2010 and onwards for California income tax purposes. For certain acquired entities, the statute of limitations is open for all years from inception due to our utilization of their net operating losses and credits carried over from prior years.

Our income tax returns are subject to audit by federal, state and foreign tax authorities. We are currently under examination by the IRS for the tax years from 2013 to 2015 and by various state and foreign jurisdictions. There are differing interpretations of tax laws and regulations, and as a result, significant disputes may arise with these tax authorities involving issues of the timing and amount of deductions and allocations of income among various tax jurisdictions. We periodically evaluate our exposures associated with our tax filing positions.

Of the total unrecognized tax benefits, $1.3 billion and $1.8 billion at December 31, 2018 and 2017, if recognized, would reduce our effective tax rate in the period of recognition. We include interest and penalties related to unrecognized tax benefits as part of Provision for income taxes on our Consolidated Statements of Income. We had accrued interest and penalties related to unrecognized tax benefits of $154 million and $112 million at December 31, 2018 and 2017, respectively.

As of December 31, 2018, we believe that it is reasonably possible that our unrecognized tax benefits will decrease by approximately $100 million in the next 12 months due to potential settlements with taxing authorities.

The following is a rollforward of our total gross unrecognized tax benefits (in millions):

December 31,
201820172016
Balance, beginning of period$2,181$1,852$1,350
Tax positions related to current year:
Additions64299522
Reductions———
Tax positions related to prior years:
Additions1256733
Reductions—(16)(3)
Settlements(774)(12)(49)
Lapse of statute of limitations(1)(9)(1)
Balance, end of period$1,595$2,181$1,852

SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following amounts are in millions, except per share amounts:

1st Quarter2nd Quarter3rd Quarter4th Quarter
2018
Total revenues$5,088$5,648$5,596$5,795
Gross profit on product sales$4,000$4,344$4,369$4,111
Net income(1)$1,539$1,819$2,099$3
Net income attributable to Gilead(1)$1,538$1,817$2,097$3
Net income per share attributable to Gilead common stockholders - basic(2)$1.18$1.40$1.62$—
Net income per share attributable to Gilead common stockholders - diluted(2)$1.17$1.39$1.60$—
2017
Total revenues$6,505$7,141$6,512$5,949
Gross profit on product sales$5,420$5,920$5,370$4,581
Net income (loss)(3)$2,699$3,069$2,712$(3,836)
Net income (loss) attributable to Gilead(3)$2,702$3,073$2,718$(3,865)
Net income (loss) per share attributable to Gilead common stockholders - basic(3)$2.07$2.35$2.08$(2.96)
Net income (loss) per share attributable to Gilead common stockholders - diluted(3)$2.05$2.33$2.06$(2.96)
_______________________
Notes:
(1)Amounts for the fourth quarter of 2018 included $820 million and $588 million from an impairment and a non-cash tax charge related to intangible assets acquired from Kite Pharma, Inc., respectively, and inventory reserves of $410 million for excess raw materials primarily due to a sustained decrease in demand for Harvoni. See Note 7, Inventories, Note 9, Intangible Assets and 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 details.
(2)Amounts for the fourth quarter of 2018 included an unfavorable impact of $1.31 per basic share and $1.30 per diluted share from the factors noted above.
(3)In December 2017, we recorded a $5.5 billion net charge, or $4.20 per basic share and $4.16 per diluted share, related to the enactment of the Tax Cuts and Jobs Act. 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 details.

GILEAD SCIENCES, INC.

Schedule II: Valuation and Qualifying Accounts

(in millions)

Balance at Beginning of PeriodAdditions/Charged to ExpenseDeductionsBalance at End of Period
Year ended December 31, 2018:
Accounts receivable allowances(1)$455$7,572$7,444$583
Sales return allowance$162$85$88$159
Valuation allowances for deferred tax assets$162$170$1$331
Year ended December 31, 2017:
Accounts receivable allowances(1)$763$7,682$7,990$455
Sales return allowance$195$23$56$162
Valuation allowances for deferred tax assets$126$72$36$162
Year ended December 31, 2016:
Accounts receivable allowances(1)$1,032$9,287$9,556$763
Sales return allowance$371$(141)$35$195
Valuation allowances for deferred tax assets$6$120$—$126
_______________________
Notes:
(1)Allowances are for doubtful accounts, cash discounts and chargebacks.

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