Gilead Sciences 10-Q 2022-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2022

or

For the transition period from ________ to ________

Commission File No. 0-19731

GILEAD SCIENCES, INC.

(Exact Name of Registrant as Specified in Its Charter)

333 Lakeside Drive, Foster City, California 94404

(Address of principal executive offices) (Zip Code)

650-574-3000

(Registrant’s Telephone Number, Including Area Code)

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

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

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

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

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

Smaller reporting company ☐ Emerging growth company ☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No x

Number of shares outstanding of the issuer’s common stock, par value $0.001 per share, as of October 31, 2022: 1,254,243,845

GILEAD SCIENCES, INC.

INDEX

We own or have rights to various trademarks and trade names used in our business, including the following: GILEAD®, GILEAD SCIENCES®, AMBISOME®, ATRIPLA®, BIKTARVY®, CAYSTON®, COMPLERA®, DESCOVY®, DESCOVY FOR PREP®, EMTRIVA®, EPCLUSA®, EVIPLERA®, GENVOYA®, HARVONI®, HEPCLUDEX®, HEPSERA®, JYSELECA®, LETAIRIS®, ODEFSEY®, RANEXA®, SOVALDI®, STRIBILD®, SUNLENCA®, TECARTUS®, TRODELVY®, TRUVADA®, TRUVADA FOR PREP®, TYBOST®, VEKLURY®, VEMLIDY®, VIREAD®, VOSEVI®, YESCARTA® and ZYDELIG®. This report also refers to trademarks, service marks and trade names of other companies.

This Quarterly Report on Form 10-Q, including Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Part II, Item 1A. Risk Factors, 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. Words such as “expect,” “anticipate,” “target,” “goal,” “project,” “hope,” “intend,” “plan,” “believe,” “seek,” “estimate,” “continue,” “may,” “could,” “should,” “might,” “forecast” 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; plans and expectations with respect to products, product candidates, corporate strategy, business and operations, financial projections and the use of capital; collaboration and licensing arrangements; patent protection and estimated loss of exclusivity for our products and product candidates*;* ongoing litigation and investigation matters; statements regarding the anticipated future impact on our business of the 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 in Part II, Item 1A. 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 Part II, Item 1A. Risk Factors 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.

PART I. FINANCIAL INFORMATION

GILEAD SCIENCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

See accompanying notes.

GILEAD SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

See accompanying notes.

GILEAD SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

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The following discussion and analysis is intended to provide material information around events and uncertainties known to management relevant to an assessment of the financial condition and results of operations of Gilead and should therefore be read 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 and nine months ended September 30, 2022 and related notes thereto (including Note 1. Organization and Summary of Significant Accounting Policies and Note 6. Acquisitions, Collaborations and Other Arrangements) and other disclosures (including Part II, Item 1A. Risk Factors) included in this Quarterly Report on Form 10-Q where other material events and uncertainties not otherwise discussed below are disclosed. 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.

Key Business Updates(1)

Virology

• In October 2022, we announced that Merck & Co., Inc. (“Merck”) and Gilead plan to resume their Phase 2 study under an amended protocol. The study will evaluate an investigational once-weekly oral combination treatment regimen of Merck’s islatravir at a lower weekly dose and Gilead’s lenacapavir.

• In August 2022, we announced that European Commission (“EC”) has granted Marketing Authorization for Sunlenca (lenacapavir) for the treatment of HIV infection, in combination with other antiretroviral(s), in adults with multi-drug resistant HIV infection for whom it is otherwise not possible to construct a suppressive antiviral regimen.

Oncology

• In October 2022, we received European Marketing Authorization for Yescarta use in adults with second-line diffuse large B-cell lymphoma and high-grade B-cell lymphoma (“LBCL”). Additionally, EC granted Marketing Authorization for Tecartus for the treatment of adult relapsed or refractory (“r/r”) B-cell precursor acute lymphoblastic leukemia (“ALL”), and in Canada, we received conditional marketing authorization for Yescarta for r/r follicular lymphoma after two or more lines of systemic therapy.

• In October 2022, we announced a strategic collaboration with MacroGenics, Inc. (“MacroGenics”) to develop bispecific antibodies to treat various cancers. The agreement includes an upfront payment by us of $60 million to MacroGenics and an exclusive option granted to us on MGD024, an investigational CD123 and CD3 bispecific.

• In October 2022, we announced that U.S. Food and Drug Administration (“FDA”) accepted for Priority Review the supplemental Biologics License Application of Trodelvy for the treatment of patients with pre-treated hormone receptor-positive, human epidermal growth factor receptor 2-negative (“HR+/HER2-”) metastatic breast cancer. Trodelvy has not been approved by any regulatory agency for the treatment of HR+/HER2- metastatic breast cancer, and its safety and efficacy have not been established for this indication.

• In August 2022, we announced an agreement to acquire the remaining worldwide development and commercialization rights to Trodelvy from Everest Medicines in Greater China, South Korea, and other Asian markets.

Inflammation

• In September 2022, we completed the acquisition of MiroBio Ltd. (“MiroBio”) for $414 million in cash. MiroBio is a U.K.-based biotechnology company focused on restoring immune balance with agonists targeting immune inhibitory receptors.

(1) Readers are encouraged to review all press releases available on our website at www.gilead.com. The content on the referenced website does not constitute a part of and is not incorporated by reference into this Quarterly Report on Form 10-Q.

Quarterly Financial Highlights

Total revenues decreased by 5% and 1% to $7.0 billion and $19.9 billion for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, primarily due to lower sales of Veklury, partially offset by higher product sales in HIV, cell therapy and Trodelvy.

Net income attributable to Gilead was $1.8 billion, or $1.42 diluted earnings per share, for the three months ended September 30, 2022, compared to $2.6 billion, or $2.05 diluted earnings per share for the same period in 2021. The decrease was primarily due to a charge of $389 million related to our acquisition of MiroBio, lower product sales and higher costs of goods sold, partially offset by lower income tax expense.

Net income attributable to Gilead was $3.0 billion, or $2.34 diluted earnings per share, for the nine months ended September 30, 2022, compared to $5.8 billion, or $4.63 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, a charge of $389 million related to our acquisition of MiroBio, higher costs of goods sold and lower product sales, partially offset by lower income tax expense.

RESULTS OF OPERATIONS

Revenues

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

See Note 2. Revenues of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further disaggregation of revenue by product.

HIV

HIV product sales increased by 7% and 5% to $4.5 billion and $12.4 billion for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, primarily due to changes in product and channel mix leading to higher average realized price and continued higher demand for Biktarvy worldwide, partially offset by lower demand for Truvada driven by the loss of exclusivity in the U.S., and for Genvoya, primarily due to patients switching to Biktarvy.

Veklury

Veklury product sales decreased by 52% and 31% to $925 million and $2.9 billion for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, primarily due to lower demand driven by reduced hospitalization rates in the U.S., partially offset by higher demand in Other International. Sales of Veklury are generally affected by coronavirus disease 2019 (“COVID-19”) related rates of infections and hospitalizations as well as the availability, uptake and effectiveness of vaccinations and 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 increased by 22% to $524 million for the three months ended September 30, 2022, compared to the same period in 2021, primarily due to a favorable resolution of a prior year rebate claim in Europe and other favorable pricing dynamics in the U.S.

HCV product sales decreased by 8% to $1.4 billion for the nine months ended September 30, 2022, compared to the same period in 2021, primarily due to fewer patient starts and lower average net selling price, partially offset by a favorable resolution of a prior year rebate claim in Europe.

HBV / HDV

HBV and HDV product sales increased by 7% and 4% to $264 million and $733 million for the three and nine months ended September 30, 2022, respectively, compared to the same periods 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 79% and 65% to $398 million and $1.0 billion for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, primarily due to the continued uptake of Yescarta for the treatment of r/r LBCL in the U.S. and Europe. The increase was also driven by higher Tecartus sales volumes resulting from expansion of use in the U.S. and Europe for mantle cell lymphoma and continued adoption in adult patients with r/r ALL in the U.S.

Trodelvy

Trodelvy product sales increased by 78% and 85% to $180 million and $485 million for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, primarily due to the continued uptake in the second- and third-line setting for the treatment of metastatic triple-negative breast cancer in the U.S. and Europe as well as second-line metastatic urothelial cancer in the U.S.

Other

Other product sales decreased by 18% and 11% to $200 million and $693 million for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, primarily due to lower demand for AmBisome and lower demand for Letairis driven by the loss of exclusivity.

Foreign Currency Exchange Impact

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.

Of our total product sales, 30% and 26% were generated outside the U.S. for the three months ended September 30, 2022 and 2021, respectively. Foreign currency exchange, net of hedges, had an unfavorable impact on our total product sales of $205 million for the three months ended September 30, 2022, based on a comparison using foreign currency exchange rates from three months ended September 30, 2021.

Of our total product sales, 31% and 30% were generated outside the U.S. for the nine months ended September 30, 2022 and 2021, respectively. Foreign currency exchange, net of hedges, had an unfavorable impact on our total product sales of $386 million for the nine months ended September 30, 2022, based on a comparison using foreign currency exchange rates from nine months ended September 30, 2021.

Costs and Expenses

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

NM - Not Meaningful

Product Gross Margin

Product gross margin for the three months ended September 30, 2022 decreased to 80.0% compared to 83.4% for the same period in 2021, primarily due to a favorable court decision in the third quarter of 2021 that led to the reversal of the previously recorded $175 million litigation reserve during that period, higher royalty expenses driven by Biktarvy royalties and changes in product mix, partially offset by lower inventory reserve adjustments.

Product gross margin for the nine months ended September 30, 2022 decreased to 78.3% compared to 80.0% for the same period in 2021, primarily due to the reversal of the aforementioned previously recorded litigation reserve following a favorable court decision, higher royalty expenses driven by Biktarvy royalties, 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 expenses increased by 4% and 6% to $1.1 billion and $3.4 billion, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, primarily due to higher clinical development spend related mostly to Trodelvy and the Arcus Biosciences, Inc. collaboration.

Acquired In-Process Research and Development Expenses

Acquired in-process research and development expenses were $448 million and $786 million for the three and nine months ended September 30, 2022, respectively, primarily related to a $389 million charge associated with our acquisition of MiroBio in September 2022 and a $300 million upfront payment associated with the collaboration with Dragonfly Therapeutics, Inc., which we entered into in April 2022. Expenses for the three and nine months ended September 30, 2021 were primarily related to smaller licensing, collaboration, investment and other arrangements we entered into during the periods. See Note 6. Acquisitions, Collaborations and Other Arrangements of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.

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 first 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 of 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 other IPR&D impairment charges were recorded during both the three and nine months ended September 30, 2022 and 2021.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three and nine months ended September 30, 2022 remained relatively unchanged compared to the same periods in 2021. Slightly higher expenses in 2022 related primarily to increased spending on promotional and marketing activities and information technology projects, partially offset by a reduction in donations to the Gilead Foundation.

Interest Expense and Other Income (Expense), Net

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

Interest expense for the three and nine months ended September 30, 2022 decreased by 9% and 7% to $229 million and $709 million, respectively, compared to the same periods in 2021, primarily due to lower outstanding debt balances.

The changes in Other income (expense), net for the three and nine months ended September 30, 2022 compared to the same periods in 2021 primarily reflect higher and lower net unrealized losses from equity securities, respectively, as well as higher interest income due to rising interest rates.

Income Taxes

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

Our effective tax rate increased for the three months ended September 30, 2022 compared to the same period in 2021, primarily due to $389 million of non-deductible Acquired in-process research and development expenses recorded in connection with our acquisition of MiroBio.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and marketable debt securities as of September 30, 2022 decreased by $887 million or 11%, compared to December 31, 2021.

Cash Flows

The following table summarizes our cash flow activities:

Operating 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 was $6.5 billion for the nine months ended September 30, 2022 compared to $8.2 billion for the same period in 2021. The decrease was primarily due to the $1.25 billion payment made in the first quarter of 2022 in connection with the legal settlement related to bictegravir litigation as well as higher income tax payments made in 2022.

Investing Activities

Net cash used in investing activities was $2.1 billion for the nine months ended September 30, 2022 compared to $2.9 billion for the same period in 2021. The decrease was primarily due to lower net purchases of marketable debt and equity securities, partially offset by higher capital expenditures.

Financing Activities

Net cash used in financing activities was $4.9 billion for the nine months ended September 30, 2022 compared to $6.9 billion for the same period in 2021. During the nine months ended September 30, 2022, we utilized cash for $1.5 billion of debt repayments, $2.8 billion of dividend payments and $604 million of common stock repurchases. During the nine months ended September 30, 2021, we utilized cash for $3.75 billion of debt repayments, $2.7 billion of dividend payments and $497 million of common stock repurchases.

Debt and Credit Facilities

A summary of our borrowing activities, balances and compliance with certain debt covenants 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 1 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.

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, research and development expenses are required to be capitalized and amortized rather than immediately deducted. Absent a change in law, the isolated impact of the required capitalization creates incremental cash tax liabilities. See Notes 6. Acquisitions, Collaborations and Other Arrangements, 9. Debt and Credit Facilities, 10. Commitments and Contingencies and 13. Income Taxes of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for any other material changes to our capital resources and material cash requirements during the three and nine months ended September 30, 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 nine months ended September 30, 2022.

Information about our market risk is presented in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2021. See Notes 3. Fair Value Measurements, 4. Available-For-Sale Debt Securities and Equity Securities and 5. Derivative Financial Instruments of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for any material changes to these disclosures.

Evaluation of Disclosure Controls and Procedures

An evaluation as of September 30, 2022 was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our “disclosure controls and procedures,” which are defined in Rule 13a-15(e) under the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), as controls and other procedures of a company that are designed to ensure that the information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2022.

Changes in Internal Control over Financial Reporting

Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated any changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2022, and has concluded that there was no change during such quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures were effective to provide reasonable assurance that the objectives of our disclosure control system were met.

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

For a description of our significant pending legal proceedings, please see Note 10. Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

In evaluating our business, you should carefully consider the following discussion of material risks, events and uncertainties that make an investment in us speculative or risky in addition to the other information in this Quarterly Report on Form 10-Q. A manifestation of any of the following risks and uncertainties could, in circumstances we may or may not be able to accurately predict, materially and adversely affect our business and operations, growth, reputation (including the commercial or scientific reputation of our products), prospects, product pipeline and sales, operating and financial results, financial condition, cash flows, liquidity and stock price. We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. It is not possible to predict or identify all such factors; our operations could also be affected by factors, events or uncertainties that are not presently known to us or that we currently do not consider to present significant risks to our operations. Therefore, you should not consider the following risks to be a complete statement of all the potential risks or uncertainties that we face.

Product and Commercialization Risks

Certain of our products subject us to additional or heightened risks.

HIV

We receive a substantial portion of our revenue from sales of our products for the treatment and prevention of HIV infection. During the nine months ended September 30, 2022, sales of our HIV products accounted for approximately 63% of our total product sales. We may be unable to sustain or increase sales of our HIV products for any number of reasons, including market share gains by competitive products, including generics, or the inability to introduce new HIV medications necessary to remain competitive. In such case, we may need to scale back our operations, including our future drug development and spending on research and development (“R&D”) efforts. For example, many of our HIV products contain tenofovir alafenamide (“TAF”), which belongs to the nucleoside class of antiviral therapeutics, and any changes to the treatment paradigm for HIV may cause nucleoside-based therapeutics to fall out of favor.

Veklury

We face risks related to our supply and distribution of Veklury, which was approved by the U.S. Food and Drug Administration (“FDA”) in October 2020 as a treatment for patients hospitalized with coronavirus disease 2019 (“COVID-19”), in January 2022 as a treatment for non-hospitalized adult and adolescent patients who are at high risk of progression to severe COVID-19, including hospitalization or death, and in April 2022 as a treatment for pediatric patients who are older than 28 days, weighing at least 3 kg, and are either hospitalized with COVID-19 or have mild-to-moderate COVID-19 and are considered high risk for progression to severe COVID-19, including hospitalization or death. While the utilization of Veklury has largely tracked rates of COVID-19 hospitalizations, we are unable to accurately predict our revenues or supply needs over the short and long term due to the dynamic nature of the pandemic, including the availability, uptake and effectiveness of vaccines and alternative treatments for COVID-19, fluctuating hospital utilization rates, the emergence of new variants and timing of surges in infection. If we do not accurately forecast demand or manufacture Veklury at levels sufficient to meet demand, then we may experience product shortages or build excess inventory that may be written off. We also remain subject to significant public attention and scrutiny over the complex decisions made regarding clinical data, supply, allocation, distribution and pricing of Veklury, all of which affects our corporate reputation.

Cell Therapy

Advancing a novel and personalized therapy such as Tecartus or Yescarta, which are chimeric antigen receptor (“CAR”) T-cell therapies, creates significant challenges, including:

• educating and certifying medical personnel regarding the procedures and the potential side effects, such as cytokine release syndrome and neurologic toxicities, in compliance with the Risk Evaluation and Mitigation Strategy program required by FDA;

• securing sufficient supply of other medications to manage side effects, such as tocilizumab and corticosteroids, which may not be available in sufficient quantities, may not adequately control the side effects and/or may have detrimental impacts on the efficacy of cell therapy;

• developing and maintaining a robust and reliable process for engineering a patient’s T cells in our facilities and infusing them back into the patient; and

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

The use of engineered T cells as a potential cancer treatment is a recent development and may not be broadly accepted by physicians, patients, hospitals, cancer treatment centers, payers and others in the medical community. While FDA has approved some cell therapies, including Tecartus and Yescarta, we must continue to demonstrate to the medical community the potential advantages of cell therapy compared to existing and future therapeutics. For challenges related to the reimbursement of Tecartus and Yescarta, see also “Our existing products are subject to reimbursement pressures from government agencies and other third parties, required rebates and other discounts on our products and other pricing pressures.”

We rely on third-party sites to collect patients’ white blood cells, known as apheresis centers, as well as shippers, couriers, and hospitals for the logistical collection of patients’ white blood cells and ultimate delivery of Tecartus and Yescarta to patients. These vendors may encounter disruptions or difficulties that could result in product loss and regulatory action. Apheresis centers may also choose not to participate in our quality certification process, or we may be unable to complete such certification in a timely manner or at all, which could delay or constrain our manufacturing and commercialization efforts.

We operate a new automated CAR T-cell therapy manufacturing facility in Frederick, Maryland, which received FDA approval for commercial production in April 2022. We have not previously manufactured our products in an automated facility on a commercial scale, and as a result, we may require additional time and resources in order to effectively increase manufacturing capacity. We also operate a new retroviral vector manufacturing facility in Oceanside, California, which received FDA approval for commercial production in October 2022. We also have not previously manufactured viral vectors on a commercial scale, and as a result, we may require additional time and resources in order to effectively increase manufacturing capacity. In addition, we may not be able to produce or otherwise obtain an amount of viral vector supply sufficient to satisfy demand for our finished products. If we are unable to meet product demand, we will have difficulty meeting sales forecasts for our finished products.

Our success depends on developing and commercializing new products or expanding the indications for existing products.

If we are unable to launch commercially successful new products or new indications for existing products, our business will be adversely impacted. The launch of commercially successful products is necessary to grow our business, cover our substantial R&D expenses, and offset revenue losses when existing products lose market share due to factors such as competition and loss of patent exclusivity. There are many difficulties and uncertainties inherent in drug development and the introduction of new products. The product development cycle is characterized by significant investments of resources, long lead times and unpredictable outcomes due to the nature of developing medicines for human use. We expend significa

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Not applicable.

Reference is made to the Exhibit Index included herein.

Exhibit Index