Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. The forward-looking statements are contained principally in this section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors.” Words such as “expect,” “anticipate,” “target,” “goal,” “project,” “hope,” “intend,” “plan,” “believe,” “seek,” “estimate,” “continue,” “may,” “could,” “should,” “might,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements other than statements of historical fact are forward-looking statements, including statements regarding overall trends, operating cost and revenue trends, liquidity and capital needs, collaboration and licensing arrangements, ongoing litigation and investigation matters, statements regarding the anticipated future impact on our business of the ongoing coronavirus disease 2019 (“COVID-19”) and related public health measures and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends and similar expressions. We have based these forward-looking statements on our current expectations about future events. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Our actual results may differ materially from those suggested by these forward-looking statements for various reasons, including those identified below under Risk Factors. Given these risks and uncertainties, you are cautioned not to place undue reliance on forward-looking statements. The forward-looking statements included in this report are made only as of the date hereof unless otherwise specified. Except as required under federal securities laws and the rules and regulations of the U.S. Securities and Exchange Commission, we do not undertake and specifically decline any obligation to update any of these statements or to publicly announce the results of any revisions to any forward-looking statements after the distribution of this report, whether as a result of new information, future events, changes in assumptions or otherwise. In evaluating our business, you should carefully consider the risks described in the section entitled Risk Factors under Part II, Item 1A of this Quarterly Report in addition to the other information in this Quarterly Report on Form 10-Q. Any of the risks contained herein could materially and adversely affect our business, results of operations and financial condition.

You should read the following management’s discussion and analysis of our financial condition and results of operations in conjunction with our audited Consolidated Financial Statements and related notes thereto included as part of our Annual Report on Form 10-K for the year ended December 31, 2021 and our unaudited Condensed Consolidated Financial Statements for the three months ended March 31, 2022 and other disclosures (including the disclosures under Part II, Item 1A. Risk Factors) included in this Quarterly Report on Form 10-Q. Our Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles and are presented in U.S. dollars. Certain amounts and percentages herein may not sum or recalculate due to rounding.

MANAGEMENT OVERVIEW

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

Our portfolio of marketed products includes AmBisome®, Atripla®, Biktarvy®, Cayston®, Complera®, Descovy®, Descovy for PrEP®, Emtriva®, Epclusa®, Eviplera®, Genvoya®, Harvoni®, Hepcludex® (bulevirtide), Hepsera®, Jyseleca® (filgotinib), Letairis®, Odefsey®, Ranexa®, Sovaldi®, Stribild®, Tecartus®, Trodelvy®, Truvada®, Truvada for PrEP®, Tybost®, Veklury®, Vemlidy®, Viread®, Vosevi®, Yescarta® and Zydelig®. The approval status of Hepcludex and Jyseleca vary worldwide, and Hepcludex and Jyseleca are not approved in the United States. We also sell and distribute authorized generic versions of Epclusa and Harvoni in the United States through our separate subsidiary, Asegua Therapeutics, LLC. In addition, we sell and distribute certain products through our corporate partners under collaborative agreements.

Business Highlights(1)

• In April 2022, we entered into a strategic research collaboration agreement with Dragonfly Therapeutics, Inc. (“Dragonfly”) (the “Dragonfly Collaboration Agreement”) to develop natural killer cell engager-based immunotherapies for oncology and inflammation indications. Upon closing of the Dragonfly Collaboration Agreement, we will make a $300 million upfront payment to Dragonfly, subject to antitrust clearances required by the U.S. Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

• In April 2022, U.S. Food and Drug Administration (“FDA”) approved a supplemental new drug application for Veklury for the treatment of pediatric patients under 12 years of age for the treatment of COVID-19.

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(1) We announced and discussed these updates in further detail in press releases available on our website at www.gilead.com. Readers are also encouraged to review all other press releases available on our website mentioned above. The content on the referenced websites does not constitute a part of and is not incorporated by reference into this Quarterly Report on Form 10-Q.

• In April 2022, FDA approved commercial production at our new CAR T-cell therapy manufacturing facility in Frederick, Maryland.

• In April 2022, FDA granted approval to Yescarta as initial treatment for adults with large B-cell lymphoma (“LBCL”) that is refractory to or relapses within 12 months of first-line chemoimmunotherapy.

• In March 2022, we announced results from the Phase 3 TROPiCS-02 study evaluating Trodelvy in patients with hormone receptor-positive, human epidermal growth factor receptor 2-negative (“HR+/HER2-”) metastatic breast cancer who received prior endocrine therapy, cyclin-dependent kinase (“CDK”) 4/6 inhibitors and two to four lines of chemotherapy.

Quarterly Financial Highlights

						Three Months Ended
						March 31,
(in millions, except percentages and per share amounts)						2022						2021						Change
Total revenues						$	6,590					$	6,423					3		%
Net income attributable to Gilead						$	19					$	1,729					(99)		%
Net income per share attributable to Gilead common stockholders - diluted						$	0.02					$	1.37					(99)		%

Total revenues increased by 3% to $6.6 billion for the three months ended March 31, 2022, compared to $6.4 billion for the same period in 2021, primarily due to the continued growth of Biktarvy sales, the continued uptake of cell therapy products and Trodelvy, and increased sales of Veklury. The increases were partially offset by the decrease in Truvada sales, as expected, primarily due to the continued generic competition following the October 2020 loss of exclusivity in the United States.

Net income attributable to Gilead was $19 million, or $0.02 diluted earnings per share, for the three months ended March 31, 2022, compared to $1.7 billion, or $1.37 diluted earnings per share for the same period in 2021. The decrease was primarily due to a partial in-process research and development (“IPR&D”) impairment charge of $2.7 billion during the three months ended March 31, 2022 related to assets we acquired from Immunomedics, Inc. (“Immunomedics”) in 2020, partially offset by increased operating income as a result of higher revenues and lower net unrealized losses from our equity investments.

RESULTS OF OPERATIONS

Revenues

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

						Three Months Ended March 31, 2022																								Three Months Ended March 31, 2021
(in millions, except percentages)						U.S.						Europe						Other International						Total						U.S.						Europe						Other International						Total						Change
Product sales:
HIV						$	2,862					$	550					$	295					$	3,707					$	2,786					$	578					$	286					$	3,650					2		%
Veklury						801						304						430						1,535						820						388						248						1,456						5		%
Chronic hepatitis C virus (“HCV”)						199						95						105						399						258						135						117						510						(22)		%
Chronic hepatitis B virus (“HBV”) / hepatitis delta virus (“HDV”)						80						28						128						235						81						23						116						220						7		%
Cell therapy						172						92						10						274						119						65						7						191						43		%
Trodelvy						119						25						2						146						72						—						—						72						103		%
Other						94						81						62						236						104						86						51						241						(2)		%
Total product sales						4,329						1,174						1,031						6,534						4,240						1,275						825						6,340						3		%
Royalty, contract and other revenues						27						27						3						56						20						61						2						83						(33)		%
Total revenues						$	4,355					$	1,202					$	1,033					$	6,590					$	4,260					$	1,336					$	827					$	6,423					3		%

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See Note 2. Revenues of the Notes to Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q for further disaggregation of revenue by product.

Product Sales

HIV

HIV product sales increased by 2% to $3.7 billion for the three months ended March 31, 2022, compared to the same period in 2021, primarily due to continued higher demand for Biktarvy worldwide and for Descovy for pre-exposure prophylaxis ("PrEP") in the United States, partially offset by lower demand for Truvada due to loss of exclusivity in the United States in October 2020, and for Genvoya, primarily due to patients switching to Biktarvy. We expect that our HIV business will continue to recover from the COVID-19 pandemic in 2022. We also expect the impact of the Truvada loss of exclusivity will be largely behind us starting in the second quarter of 2022.

Veklury

Veklury product sales increased by 5% to $1.5 billion for the three months ended March 31, 2022, compared to the same period in 2021, primarily due to higher demand in Asia, partially offset by lower demand in Europe. Sales of Veklury are generally affected by COVID-19 related rates of infections, hospitalizations and vaccinations as well as the availability, uptake and effectiveness of alternative treatments for COVID-19. As a result, future sales of Veklury are difficult to predict and may vary significantly from one period to the next.

HCV

HCV product sales decreased by 22% to $399 million for the three months ended March 31, 2022, compared to the same period in 2021, primarily due to lower average net selling price driven by government and commercial rebates in the United States and Europe, and lower demand driven by fewer patient starts in the United States.

HBV / HDV

HBV and HDV product sales increased by 7% to $235 million for the three months ended March 31, 2022, compared to the same period in 2021, primarily due to higher demand for Vemlidy and the continued uptake of Hepcludex in Europe.

Cell therapy

Cell therapy product sales increased by 43% to $274 million for the three months ended March 31, 2022, compared to the same period in 2021, primarily due to the continued uptake of Yescarta for the treatment of relapsed or refractory LBCL in the United States and Europe, and follicular lymphoma in the United States. The increase was also driven by higher Tecartus sales volumes resulting from expansion of use in Europe for mantle cell lymphoma and continued adoption in adult patients with relapsed or refractory B-cell precursor acute lymphoblastic leukemia in the United States.

Trodelvy

Trodelvy product sales increased by 103% to $146 million for the three months ended March 31, 2022, compared to the same period in 2021 primarily due to the continued uptake in the second line setting for the treatment of metastatic triple-negative breast cancer in the United States and Europe as well as second-line metastatic urothelial cancer in the United States.

Other

Other product sales decreased by 2% to $236 million for the three months ended March 31, 2022, compared to the same period in 2021, primarily due to lower demand for Letairis, driven by the continued generic competition following the loss of exclusivity in 2019, partially offset by higher demand for AmBisome.

Foreign Currency Exchange Impact

Of our total product sales, 34% and 33% were generated outside the United States for the three months ended March 31, 2022 and 2021, respectively. We generally face exposure to movements in foreign currency exchange rates, primarily in the Euro. We use foreign currency exchange contracts to hedge a portion of our foreign currency exposures. Foreign currency exchange, net of hedges, had an unfavorable impact on our total product sales of $97 million for the first quarter of 2022, based on a comparison using foreign currency exchange rates from first quarter of 2021.

Costs and Expenses

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

						Three Months Ended
						March 31,
(in millions, except percentages)						2022						2021						Change
Cost of goods sold						$	1,424					$	1,361					5		%
Product gross margin						78.2		%				78.5		%				-30 bps
Research and development expenses						$	1,186					$	1,055					12		%
In-process research and development impairment						$	2,700					$	—					NM
Acquired in-process research and development expenses						$	—					$	62					NM
Selling, general and administrative expenses						$	1,083					$	1,055					3		%

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NM - Not Meaningful

Product Gross Margin

Product gross margin for the three months ended March 31, 2022 decreased to 78.2% compared to 78.5% for the same period in 2021, primarily due to changes in product mix and restructuring costs for the closing of a New Jersey manufacturing site, partially offset by lower inventory reserve adjustments.

Research and Development Expenses

Research and development (“R&D”) expenses for the three months ended March 31, 2022 increased by $131 million or 12%, compared to the same period in 2021, primarily due to ramp-up in Trodelvy development and costs related to headcount growth.

In-Process Research and Development Impairment

In connection with our acquisition of Immunomedics in 2020, we allocated a portion of the purchase price to acquired IPR&D intangible assets. Approximately $8.8 billion was assigned to IPR&D intangible assets related to Trodelvy for treatment of patients with HR+/HER2- metastatic breast cancer. In March 2022, we received data from the Phase 3 TROPiCS-02 study evaluating Trodelvy in patients with HR+/HER2- metastatic breast cancer who have received prior endocrine therapy, CDK4/6 inhibitors and two to four lines of chemotherapy (“third-line plus patients”). Based on our evaluation of the study results, and in connection with the preparation of the financial statements for the quarter, we updated our estimate of the fair value of our HR+/HER2- IPR&D intangible asset to $6.1 billion as of March 31, 2022. Our estimate of fair value used a probability-weighted income approach that discounts expected future cash flows to the present value. The expected cash flows included cash flows from HR+/HER2- metastatic breast cancer for third-line plus patients and patients in earlier lines of therapy which are the subject to separate clinical studies. Our revised discounted cash flows were lower primarily due to a delay in launch timing for third-line plus patients which caused a decrease in our market share assumptions based on the expected competitive environment. There were no changes in our plans or assumptions related to our estimated cash flows for patients in the earlier lines of therapy. We determined the revised estimated fair value was below the carrying value of the asset and, as a result, we recognized a partial impairment charge of $2.7 billion in In-process research and development impairment on our Condensed Consolidated Statements of Income during the three months ended March 31, 2022. The remaining balance of the IPR&D intangible asset for the HR+/HER2- metastatic breast cancer indication can be ascribed to cash flows from earlier lines of therapy, where we have Phase 3 pivotal studies in development, in addition to the revised cash flows related to the third-line plus patient setting. If future events result in adverse changes in the key assumptions used in determining fair value, including the timing of product launches, information on the competitive landscape of treatments in this indication, changes to the probability of technical or regulatory success, failure to obtain anticipated regulatory approval or discount rate, among others, additional impairments may be recorded and could be material to our financial statements. No IPR&D impairment charges were recorded during the three months ended March 31, 2021.

Acquired In-Process Research and Development Expenses

Acquired IPR&D expenses of $62 million for the three months ended March 31, 2021 were related to licensing, collaboration, investment and other arrangements we entered into during the period. There were no such arrangements during the three months ended March 31, 2022.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended March 31, 2022 increased by $28 million or 3%, compared to the same period in 2021, primarily due to higher promotional and marketing expenses largely related to Trodelvy.

Interest Expense and Other Income (Expense), Net

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

						Three Months Ended
						March 31,
(in millions, except percentages)						2022						2021						Change
Interest expense						$	(238)					$	(257)					(7)		%
Other income (expense), net						$	(111)					$	(369)					(70)		%

Interest expense for the three months ended March 31, 2022 decreased by $19 million or 7%, compared to the same period in 2021, primarily due to lower debt balances.

The changes in Other income (expense), net for the three months ended March 31, 2022, compared to the same period in 2021, primarily reflect lower net unrealized losses from equity securities.

Income Taxes

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

						Three Months Ended
						March 31,
(in millions, except percentages)						2022						2021						Change
Income (loss) before income taxes						$	(152)					$	2,264					$	(2,416)
Income tax benefit (expense)						$	164					$	(542)					$	(706)
Effective tax rate						107.9		%				23.9		%				NM

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NM - Not Meaningful

Income tax benefit (expense) and effective tax rate differed for the three months ended March 31, 2022, compared to the same period in 2021, primarily due to a partial IPR&D impairment charge of $2.7 billion recorded in the three months ended March 31, 2022.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and marketable debt securities as of March 31, 2022 decreased by $1.1 billion or 14%, compared to December 31, 2021.

Cash Flows

The following table summarizes our cash flow activities:

						Three Months Ended
						March 31,
(in millions)						2022						2021
Net cash provided by (used in):
Operating activities						$	1,840					$	2,610
Investing activities						$	(1,070)					$	(2,042)
Financing activities						$	(1,794)					$	(2,477)

Operating Activities

Net cash provided by operating activities represents the cash receipts and disbursements related to all activities other than investing and financing activities. Net cash provided by operating activities is derived by adjusting our net income for non-cash items and changes in operating assets and liabilities. Net cash provided by operating activities decreased by $770 million to $1.8 billion for the three months ended March 31, 2022, compared to the same period in 2021. The decrease was primarily due to the payment of the $1.25 billion settlement related to bictegravir litigation, partially offset by higher product sales during the three months ended March 31, 2022.

Investing Activities

Net cash used in investing activities primarily consists of purchases, sales and maturities of our marketable debt securities, capital expenditures, acquisitions, including IPR&D, net of cash acquired, purchases of equity securities and other investments. Net cash used in investing activities decreased by $1.0 billion to $1.1 billion for the three months ended March 31, 2022, compared to the same period in 2021. The decrease in Net cash used in investing activities was primarily due to a decrease in cash outflows related to acquisitions, including IPR&D, net of cash acquired. The decrease was partially offset by an increase in cash outflows for collaborations, primarily related to the opt-in payments of $725 million made to Arcus Biosciences, Inc. in January 2022, classified in Other in investing activities.

Financing Activities

Net cash used in financing activities for the three months ended March 31, 2022 was $1.8 billion, compared to $2.5 billion for the same period in 2021. During the three months ended March 31, 2022, we utilized cash for $500 million of debt repayments, $945 million of dividend payments and $352 million of common stock repurchases. During the three months ended March 31, 2021, we utilized cash for $1.25 billion of debt repayments, $917 million of dividend payments and $309 million of common stock repurchases.

Debt and Credit Facilities

A summary of our borrowings under various financing arrangements is included in Note 9. Debt and Credit Facilities of the Notes to Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q. We may choose to repay certain of our long-term debt obligations prior to maturity dates based on our assessment of current and long-term liquidity and capital requirements.

In February 2022, we repaid $500 million of senior unsecured notes prior to the March 2022 maturity by exercising a par call option. No new debt was issued during the three months ended March 31, 2022. We are required to comply with certain covenants under our note indentures governing our senior unsecured notes. As of March 31, 2022, we were not in violation of any covenants.

Capital Resources and Material Cash Requirements

A summary of our capital resources and material cash requirements is presented in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021. As of January 1, 2022, for U.S. tax purposes, R&D expenses are required to be capitalized and amortized rather than immediately deducted. As a result, our annual cash tax payments to the U.S Treasury may increase in the current year. Other than as described above, there were no material changes to our capital resources and material cash requirements during the three months ended March 31, 2022.

CRITICAL ACCOUNTING ESTIMATES

The preparation of our Condensed Consolidated Financial Statements in accordance with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts in the financial statements and related disclosures. On an ongoing basis, we evaluate our significant accounting policies and estimates. We base our estimates on historical experience and on various market-specific and other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates are assessed each period and updated to reflect current information. Actual results may differ significantly from these estimates. A summary of our critical accounting policies and estimates is presented in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021. With the exception of our revised estimates related to our HR+/HER2- IPR&D intangible assets as described in “Result of Operations” above, there were no material changes to our critical accounting policies and estimates during the three months ended March 31, 2022.

RECENT ACCOUNTING PRONOUNCEMENTS

There have been no new accounting pronouncements issued nor adopted during the three months ended March 31, 2022 that are of significance to us.

ACQUISITIONS, COLLABORATIONS AND OTHER ARRANGEMENTS

See Note 6. Acquisitions, Collaborations and Other Arrangements of the Notes to Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q for additional information.