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 the related notes thereto and other disclosures included as part of our Annual Report on Form 10-K for the year ended December 31, 2022 and our unaudited Condensed Consolidated Financial Statements for the three months ended March 31, 2023 and the related notes thereto and other disclosures (including the disclosures under 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.

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

The following highlights are based on press releases recently issued. 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.

Oncology

Cell Therapy

• In February 2023, we completed the acquisition of Tmunity, a clinical stage private biotech company, which provides preclinical and clinical programs. This includes an “armored” CAR T technology platform that has the potential to be applied to a variety of CAR Ts to enhance anti-tumor activity, as well as rapid manufacturing processes.

• In March 2023, we announced primary overall survival results from the Phase 3 ZUMA-7 study for initial treatment of adult patients with relapsed or refractory (“R/R”) large B-cell lymphoma (“LBCL”), which showed a statistically significant improvement for Yescarta in overall survival versus historical treatment.

Other

• In February 2023, we received FDA approval of Trodelvy for the treatment of adult patients with unresectable locally advanced or metastatic hormone receptor-positive, human epidermal growth factor receptor 2-negative (“HR+/HER2-”) breast cancer who have received endocrine-based therapy and at least two additional systemic therapies in the metastatic setting.

Inflammation

• In March 2023, we exercised an option to license investigational targeted protein degrader molecule NX‑0479 (“GS-6791”) from Nurix. GS-6791 is a potent, selective, oral IRAK4 degrader with potential applications in the treatment of rheumatoid arthritis and other inflammatory diseases.

Key Financial Results

						Three Months Ended
						March 31,
(in millions, except percentages and per share amounts)						2023						2022						Change
Total revenues						$	6,352					$	6,590					(4)		%
Net income attributable to Gilead						$	1,010					$	19					NM
Diluted earnings per share attributable to Gilead						$	0.80					$	0.02					NM

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NM - Not Meaningful

Total revenues decreased by 4% to $6.4 billion for the three months ended March 31, 2023, compared to the same period in 2022, 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 $1.0 billion, or $0.80 diluted earnings per share, for the three months ended March 31, 2023, compared to $19 million, or $0.02 diluted earnings per share for the same period in 2022. The increase was primarily due to the following items net of their related tax effect: a $2.7 billion in-process research and development (“IPR&D”) impairment recorded in the first quarter of 2022, which did not repeat in 2023, partially offset by higher operating expenses and lower revenues in 2023.

Results of Operations

Revenues

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

						Three Months Ended March 31, 2023																								Three Months Ended March 31, 2022
(in millions, except percentages)						U.S.						Europe						Other International						Total						U.S.						Europe						Other International						Total						Change
Product sales:
HIV						$	3,364					$	528					$	298					$	4,190					$	2,862					$	550					$	295					$	3,707					13		%
Oncology						431						202						37						670						292						117						11						420						59		%
Cell Therapy						269						148						31						448						172						92						10						274						64		%
Trodelvy						162						54						6						222						119						25						2						146						52		%
Liver Disease						318						140						217						675						279						123						233						635						6		%
Chronic hepatitis C virus (“HCV”)						232						114						99						445						199						95						105						399						12		%
Chronic hepatitis B virus (“HBV”) / hepatitis delta virus (“HDV”)						86						26						117						230						80						28						128						235						(2)		%
Veklury						252						111						209						573						801						304						430						1,535						(63)		%
Other						69						72						58						199						94						81						62						236						(16)		%
Total product sales						4,434						1,053						819						6,306						4,329						1,174						1,031						6,534						(3)		%
Royalty, contract and other revenues						18						26						2						46						27						27						3						56						(18)		%
Total revenues						$	4,452					$	1,079					$	821					$	6,352					$	4,355					$	1,202					$	1,033					$	6,590					(4)		%

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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 13% to $4.2 billion for the three months ended March 31, 2023, compared to the same period in 2022, primarily due to favorable pricing dynamics, higher demand for Biktarvy and Descovy for pre-exposure prophylaxis (“PrEP”) and lower inventory draw-downs, partially offset by unfavorable foreign currency exchange impact.

Oncology

Cell Therapy

Cell Therapy product sales increased by 64% to $448 million the three months ended March 31, 2023, compared to the same period in 2022, primarily due to increased Yescarta demand for the treatment of R/R LBCL and increased Tecartus demand for R/R mantle cell lymphoma and R/R adult acute lymphoblastic leukemia.

Trodelvy

Trodelvy product sales increased by 52% to $222 million for the three months ended March 31, 2023, compared to the same period in 2022, primarily due to increased adoption in metastatic triple-negative breast cancer in the U.S. and Europe as well as the launch of the indication for pre-treated HR+/HER2- metastatic breast cancer in the U.S.

Liver Disease

HCV

HCV product sales increased by 12% to $445 million for the three months ended March 31, 2023, compared to the same period in 2022, primarily due to favorable pricing dynamics and timing of purchases in the U.S.

HBV / HDV

HBV and HDV product sales were $230 million during the three months ended March 31, 2023 and remained relatively flat compared to the same period in 2022.

Veklury

Veklury product sales decreased by 63% to $573 million for the three months ended March 31, 2023, compared to the same period in 2022, primarily due to lower demand driven by reduced hospitalization rates in all regions. Sales of Veklury generally reflect COVID-19 related rates and severity 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.

Other

Other product sales decreased by 16% to $199 million for the three months ended March 31, 2023, compared to the same period in 2022, primarily due to lower demand for AmBisome and Letairis.

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 34% were generated outside the U.S. for the three months ended March 31, 2023 and 2022, respectively. Foreign currency exchange, net of hedges, had an unfavorable impact on our total product sales of $106 million for the three months ended March 31, 2023, based on a comparison using foreign currency exchange rates from three months ended March 31, 2022.

Costs and Expenses

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

						Three Months Ended
						March 31,
(in millions, except percentages)						2023						2022						Change
Cost of goods sold						$	1,401					$	1,424					(2)		%
Product gross margin						77.8		%				78.2		%				-42 bps
Research and development expenses						$	1,447					$	1,178					23		%
Acquired in-process research and development expenses						$	481					$	8					NM
In-process research and development impairment						$	—					$	2,700					NM
Selling, general and administrative expenses						$	1,319					$	1,083					22		%

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NM - Not Meaningful

Product Gross Margin

Product gross margin was 77.8% for the three months ended March 31, 2023 and remained relatively flat compared to the same period in 2022.

Research and Development Expenses

Research and development (“R&D”) expenses consist primarily of personnel costs including salaries, benefits and stock-based compensation expense, infrastructure, materials and supplies and other support costs, research and clinical studies performed by contract research organizations and our collaboration partners and other outside services.

We manage our R&D expenses by identifying the R&D activities we expect to be performed during a given period and then prioritizing efforts based on scientific data, probability of successful technical development and regulatory approval, market potential, available human and capital resources and other considerations. We regularly review our R&D activities based on unmet medical need and, as necessary, reallocate resources among our internal R&D portfolio and external opportunities that we believe will best support the long-term growth of our business. We do not track total R&D expenses by product candidate, therapeutic area or development phase.

The following table provides a breakout of expenses by major cost type:

						Three Months Ended
						March 31,
(in millions)						2023						2022
Personnel, infrastructure and other support costs						$	817					$	682
Clinical studies and other costs						629						496
Total						$	1,447					$	1,178

Research and development expenses increased by 23% to $1.4 billion for the three months ended March 31, 2023, compared to the same period in 2022. Personnel, infrastructure and other support costs as well as Clinical studies and other costs both increased due to new study launches and clinical activities primarily related to oncology.

Acquired In-Process Research and Development Expenses

Acquired in-process research and development expenses are recorded when incurred and reflect costs of externally-developed IPR&D projects, acquired directly in a transaction other than a business combination, that do not have an alternative future use, including upfront and milestone payments related to various collaborations and the costs of rights to IPR&D projects.

Acquired in-process research and development expenses were $481 million for the three months ended March 31, 2023, primarily related to a $244 million charge associated with our acquisition of Tmunity in February 2023 and a $212 million upfront payment associated with the collaboration with Arcellx, which we entered into in January 2023. Expenses for the three months ended March 31, 2022 were minimal. 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-process research and development impairment was $2.7 billion for the three months ended March 31, 2022 related to a partial impairment charge on our HR+/HER2- IPR&D intangible asset. No IPR&D impairment charges were recorded during the three months ended March 31, 2023.

Selling, General and Administrative Expenses

Selling, general and administrative expenses are recorded when incurred and consist primarily of personnel costs, facilities and overhead costs, outside marketing, advertising and legal expenses, and other general and administrative costs related to sales and marketing, finance, human resources, legal and other administrative activities.

Selling, general and administrative expenses increased by 22% to $1.3 billion for the three months ended March 31, 2023, compared to the same period in 2022, primarily due to increased commercial activities, mainly in oncology, and increased corporate spend, including an increase in our allocation of the branded prescription drug fee and corporate grants.

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)						2023						2022						Change
Interest expense						$	(230)					$	(238)					(4)		%
Other income (expense), net						$	(174)					$	(111)					57		%

Interest expense for the three months ended March 31, 2023 decreased by 4% to $230 million, compared to the same period in 2022, primarily due to lower outstanding debt balances.

The changes in Other income (expense), net for the three months ended March 31, 2023 compared to the same period in 2022, primarily reflect higher net unrealized losses from equity securities, partially offset by higher interest income due to rising interest rates.

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)						2023						2022						Change
Income (loss) before income taxes						$	1,300					$	(152)					$	1,453
Income tax benefit (expense)						$	(316)					$	164					$	480
Effective tax rate						24.3		%				107.9		%				(83.6)		%

Our effective tax rate decreased for the three months ended March 31, 2023 compared to the same period in 2022, 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

We continually evaluate our liquidity and capital resources, including our access to external capital, so that we can adequately and efficiently finance our operations.

Liquidity

Cash, cash equivalents and marketable debt securities were $7.2 billion and $7.6 billion as of March 31, 2023 and December 31, 2022, respectively. Cash and cash equivalents decreased by $476 million from December 31, 2022 to March 31, 2023. The following table summarizes our cash flow activities:

						Three Months Ended
						March 31,
(in millions)						2023						2022
Net cash provided by (used in):
Operating activities						$	1,744					$	1,840
Investing activities						$	(826)					$	(1,070)
Financing activities						$	(1,406)					$	(1,794)
Effect of exchange rate changes on cash and cash equivalents						$	13					$	(18)

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 $1.7 billion for the three months ended March 31, 2023 compared to $1.8 billion for the same period in 2022. The change was primarily due to lower collections as well as higher inventory and operating spend in 2023, partially offset by the effect of the non-recurring payment of a $1.25 billion settlement related to bictegravir litigation in 2022.

Investing Activities

Net cash used in investing activities was $826 million for the three months ended March 31, 2023 compared to $1.1 billion for the same period in 2022. The change was primarily due to a decrease in acquisition spend, including acquired IPR&D.

Financing Activities

Net cash used in financing activities was $1.4 billion for the three months ended March 31, 2023 compared to $1.8 billion for the same period in 2022. During the three months ended March 31, 2023, we utilized cash of $969 million for dividend payments and $400 million for common stock repurchases. During the three months ended March 31, 2022, we utilized cash of $500 million for debt repayments, $945 million for dividend payments and $352 million for common stock repurchases.

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, 2022. See Notes 6. Acquisitions, Collaborations and Other Arrangements, 9. Debt and Credit Facilities, 10. Commitments and Contingencies and 12. 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 material changes to our capital resources and material cash requirements during the three months ended March 31, 2023.

Critical Accounting Estimates

A summary of our critical accounting estimates is presented in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022. There were no material changes to our critical accounting estimates during the three months ended March 31, 2023.