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

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

						Three Months Ended																		Nine Months Ended
						September 30,																		September 30,
(in millions, except percentages and per share amounts)						2022						2021						Change						2022						2021						Change
Total revenues						$	7,042					$	7,421					(5)		%				$	19,892					$	20,061					(1)		%
Net income attributable to Gilead						$	1,789					$	2,592					(31)		%				$	2,952					$	5,843					(49)		%
Net income per share attributable to Gilead common stockholders – diluted						$	1.42					$	2.05					(31)		%				$	2.34					$	4.63					(49)		%

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:

						Three Months Ended September 30, 2022																								Three Months Ended September 30, 2021
(in millions, except percentages)						U.S.						Europe						Other International						Total						U.S.						Europe						Other International						Total						Change
Product sales:
HIV						$	3,661					$	541					$	285					$	4,487					$	3,302					$	602					$	285					$	4,189					7		%
Veklury						336						130						458						925						1,527						109						287						1,923						(52)		%
Chronic hepatitis C virus (“HCV”)						283						143						98						524						224						94						111						429						22		%
Chronic hepatitis B virus (“HBV”) / hepatitis delta virus (“HDV”)						131						28						106						264						104						29						114						247						7		%
Cell therapy						270						111						17						398						135						78						9						222						79		%
Trodelvy						139						38						3						180						100						1						—						101						78		%
Other						80						75						46						200						87						84						74						245						(18)		%
Total product sales						4,900						1,064						1,013						6,978						5,479						997						880						7,356						(5)		%
Royalty, contract and other revenues						28						37						—						64						30						34						1						65						(1)		%
Total revenues						$	4,928					$	1,101					$	1,013					$	7,042					$	5,509					$	1,031					$	881					$	7,421					(5)		%

						Nine Months Ended September 30, 2022																								Nine Months Ended September 30, 2021
(in millions, except percentages)						U.S.						Europe						Other International						Total						U.S.						Europe						Other International						Total						Change
Product sales:
HIV						$	9,906					$	1,653					$	863					$	12,422					$	9,132					$	1,776					$	869					$	11,777					5		%
Veklury						1,179						560						1,166						2,905						2,763						761						684						4,208						(31)		%
HCV						745						332						294						1,371						809						322						357						1,488						(8)		%
HBV/HDV						311						85						337						733						275						76						353						704						4		%
Cell therapy						688						308						44						1,040						394						213						25						632						65		%
Trodelvy						379						98						8						485						261						1						—						262						85		%
Other						275						244						174						693						298						270						209						777						(11)		%
Total product sales						13,482						3,281						2,887						19,650						13,932						3,419						2,497						19,848						(1)		%
Royalty, contract and other revenues						140						98						4						242						70						140						3						213						14		%
Total revenues						$	13,622					$	3,378					$	2,891					$	19,892					$	14,002					$	3,559					$	2,500					$	20,061					(1)		%

---

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:

						Three Months Ended																		Nine Months Ended
						September 30,																		September 30,
(in millions, except percentages)						2022						2021						Change						2022						2021						Change
Cost of goods sold						$	1,395					$	1,223					14		%				$	4,261					$	3,974					7		%
Product gross margin						80.0		%				83.4		%				-337 bps						78.3		%				80.0		%				-166 bps
Research and development expenses						$	1,149					$	1,101					4		%				$	3,429					$	3,243					6		%
Acquired in-process research and development expenses						$	448					$	65					NM						$	786					$	270					NM
In-process research and development impairment						$	—					$	—					NM						$	2,700					$	—					NM
Selling, general and administrative expenses						$	1,213					$	1,190					2		%				$	3,653					$	3,596					2		%

---

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:

						Three Months Ended																		Nine Months Ended
						September 30,																		September 30,
(in millions, except percentages)						2022						2021						Change						2022						2021						Change
Interest expense						$	(229)					$	(250)					(9)		%				$	(709)					$	(763)					(7)		%
Other income (expense), net						$	(176)					$	(154)					15		%				$	(571)					$	(696)					(18)		%

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:

						Three Months Ended																		Nine Months Ended
						September 30,																		September 30,
(in millions, except percentages)						2022						2021						Change						2022						2021						Change
Income before income taxes						$	2,432					$	3,438					$	(1,006)					$	3,783					$	7,519					$	(3,736)
Income tax expense						$	(646)					$	(852)					$	(206)					$	(850)					$	(1,694)					$	(844)
Effective tax rate						26.6		%				24.8		%				1.8		%				22.5		%				22.5		%				—		%

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:

						Nine Months Ended
						September 30,
(in millions)						2022						2021
Net cash provided by (used in):
Operating activities						$	6,505					$	8,179
Investing activities						$	(2,091)					$	(2,853)
Financing activities						$	(4,915)					$	(6,935)

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.