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 and six months ended June 30, 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, coronavirus disease 2019 (“COVID-19”), and cancer. We operate in more than 35 countries worldwide, with headquarters in Foster City, California.

Key Business Updates

The following updates are based on press releases recently issued since our last quarterly report. 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.

Virology

• Received U.S. Food and Drug Administration (“FDA”) and European Commission (“EC”) approval to extend the use of Veklury to treat COVID-19 in people with severe renal impairment, including those on dialysis.

• Received full marketing authorization from EC for Hepcludex (bulevirtide) for the treatment of adults with chronic hepatitis delta virus (“HDV”) and compensated liver disease. Hepcludex was initially granted conditional marketing authorization in July 2020. Bulevirtide remains the only approved treatment for HDV in the EU and is not approved in the U.S.

Oncology

• Announced that the Phase 3 ENHANCE study in higher-risk myelodysplastic syndromes (“MDS”) has been discontinued due to futility based on a planned analysis. The safety data seen in this study is consistent with the known magrolimab profile and adverse events that are typical in this patient population. Magrolimab is an anti-CD47 immunotherapy with a clinical development program spanning ten potential indications including ongoing trials in solid tumors and two pivotal trials: ENHANCE-2 study in acute myeloid leukemia (“AML”) with TP53 mutations and ENHANCE-3 in first-line, unfit AML.

• Received EC approval for Trodelvy as monotherapy for the treatment of adult patients with unresectable 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 advanced setting.

• Announced, through Fosun Kite Biotechnology Co., Ltd., a joint venture between Kite and Shanghai Fosun Pharmaceutical (Group) Co., Ltd., the approval of axicabtagene ciloleucel (under the trade name Yikaida®) by the China National Medical Products Administration for the treatment of adult patients with relapsed or refractory (“R/R”) large B-cell lymphoma (“LBCL”) who failed first-line immunochemotherapy or relapsed within 12 months after first-line immunochemotherapy.

• Completed the transfer of Yescarta’s marketing authorization in Japan from Daiichi Sankyo Co., Ltd. to Gilead Sciences K.K.

• Announced the acquisition of XinThera, Inc. (“XinThera”), adding additional pipeline assets including rights to a portfolio of small molecule inhibitors targeting PARP1 for oncology as well as MK2 for inflammatory diseases.

Inflammation

• Announced expansion of the Arcus Biosciences, Inc. (“Arcus”) collaboration to include research programs in inflammatory diseases.

Key Financial Results

						Three Months Ended																		Six Months Ended
						June 30,																		June 30,
(in millions, except percentages and per share amounts)						2023						2022						Change						2023						2022						Change
Total revenues						$	6,599					$	6,260					5		%				$	12,951					$	12,850					1		%
Net income attributable to Gilead						$	1,045					$	1,144					(9)		%				$	2,055					$	1,163					77		%
Diluted earnings per share attributable to Gilead						$	0.83					$	0.91					(9)		%				$	1.63					$	0.92					77		%

Total revenues increased by 5% and 1% to $6.6 billion and $13.0 billion for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022, primarily due to higher product sales in HIV and Oncology, partially offset by lower sales of Veklury.

Net income attributable to Gilead was $1.0 billion, or $0.83 diluted earnings per share, for the three months ended June 30, 2023, compared to $1.1 billion, or $0.91 diluted earnings per share, for the same period in 2022. The decrease was primarily due to a $525 million litigation accrual for settlements with certain plaintiffs in the HIV antitrust litigation, as well as other higher operating costs and tax expense, partially offset by higher product revenues and unrealized gains on equity investments compared to unrealized losses in 2022.

Net income attributable to Gilead was $2.1 billion, or $1.63 diluted earnings per share, for the six months ended June 30, 2023, compared to $1.2 billion, or $0.92 diluted earnings per share, for the same period in 2022. The increase was primarily due to 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, lower unrealized losses on equity investments and higher product revenues, partially offset by higher tax expense and higher operating costs, including the $525 million litigation accrual for settlements with certain plaintiffs in the HIV antitrust litigation.

Results of Operations

Revenues

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

						Three Months Ended June 30, 2023																								Three Months Ended June 30, 2022
(in millions, except percentages)						U.S.						Europe						Other International						Total						U.S.						Europe						Other International						Total						Change
Product sales:
HIV						$	3,778					$	521					$	326					$	4,626					$	3,383					$	562					$	282					$	4,228					9		%
Oncology						462						215						51						728						366						141						21						527						38		%
Cell Therapy						272						162						34						469						246						105						17						368						27		%
Trodelvy						189						53						17						260						120						35						3						159						63		%
Liver Disease						356						131						225						711						363						124						195						682						4		%
Chronic hepatitis C virus (“HCV”)						259						95						98						452						263						94						91						448						1		%
Chronic hepatitis B virus (“HBV”) / HDV						97						35						127						259						100						30						104						234						11		%
Veklury						97						52						107						256						41						126						278						445						(43)		%
Other						85						80						78						243						101						88						67						256						(5)		%
Total product sales						4,777						999						788						6,564						4,254						1,042						842						6,138						7		%
Royalty, contract and other revenues						6						28						1						35						85						34						2						122						(71)		%
Total revenues						$	4,784					$	1,027					$	789					$	6,599					$	4,339					$	1,076					$	844					$	6,260					5		%

						Six Months Ended June 30, 2023																								Six Months Ended June 30, 2022
(in millions, except percentages)						U.S.						Europe						Other International						Total						U.S.						Europe						Other International						Total						Change
Product sales:
HIV						$	7,142					$	1,049					$	624					$	8,816					$	6,245					$	1,112					$	577					$	7,935					11		%
Oncology						893						417						88						1,398						658						258						32						947						48		%
Cell Therapy						542						310						65						916						418						197						27						642						43		%
Trodelvy						351						107						23						482						240						61						5						305						58		%
Liver Disease						674						271						441						1,386						642						247						427						1,317						5		%
HCV						491						209						197						897						462						189						196						847						6		%
HBV / HDV						183						62						244						489						180						57						232						470						4		%
Veklury						349						163						317						829						843						430						708						1,980						(58)		%
Other						153						152						137						442						195						169						129						493						(10)		%
Total product sales						9,211						2,052						1,607						12,870						8,582						2,216						1,873						12,672						2		%
Royalty, contract and other revenues						25						54						3						81						112						61						5						178						(54)		%
Total revenues						$	9,236					$	2,106					$	1,610					$	12,951					$	8,694					$	2,277					$	1,878					$	12,850					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 9% and 11% to $4.6 billion and $8.8 billion for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022, primarily due to favorable pricing dynamics and higher demand for Biktarvy and Descovy for pre-exposure prophylaxis (“PrEP”), partially offset by unfavorable foreign currency exchange impact. The increase for the three months ended June 30, 2023 was also partially offset by lower channel inventory.

Oncology

Cell Therapy

Cell Therapy product sales increased by 27% and 43% to $469 million and $916 million for the three and six months ended June 30, 2023, respectively, compared to the same periods 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 63% and 58% to $260 million and $482 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022, primarily due to the launch of the indication for pre-treated HR+/HER2- metastatic breast cancer in the U.S. and the increased adoption in metastatic triple-negative breast cancer.

Liver Disease

Liver Disease product sales increased by 4% and 5% to $711 million and $1.4 billion for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022, primarily due to higher demand, partially offset by unfavorable pricing dynamics.

Veklury

Veklury product sales decreased by 43% and 58% to $256 million and $829 million for the three and six months ended June 30, 2023, respectively, compared to the same periods 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.

Other

Other product sales were $243 million for the three months ended June 30, 2023 and remained relatively flat compared to the same period in 2022.

Other product sales decreased by 10% to $442 million for the six months ended June 30, 2023, compared to the same period in 2022, primarily due to lower demand for AmBisome and Letairis.

Royalty, contract and other revenues

Royalty, contract and other revenues decreased by 71% and 54% to $35 million and $81 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022, primarily due to higher milestone payments received in 2022 and lower royalty revenues in 2023 due to the impact of generic launches.

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, 27% and 31% were generated outside the U.S. for the three months ended June 30, 2023 and 2022, respectively. Foreign currency exchange, net of hedges, had an unfavorable impact on our total product sales of $82 million for the three months ended June 30, 2023, based on a comparison using foreign currency exchange rates from three months ended June 30, 2022.

Of our total product sales, 28% and 32% were generated outside the U.S. for the six months ended June 30, 2023 and 2022, respectively. Foreign currency exchange, net of hedges, had an unfavorable impact on our total product sales of $188 million for the six months ended June 30, 2023, based on a comparison using foreign currency exchange rates from six months ended June 30, 2022.

Costs and Expenses

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

						Three Months Ended																		Six Months Ended
						June 30,																		June 30,
(in millions, except percentages)						2023						2022						Change						2023						2022						Change
Cost of goods sold						$	1,442					$	1,442					—		%				$	2,843					$	2,866					(1)		%
Product gross margin						78.0		%				76.5		%				152 bps						77.9		%				77.4		%				53 bps
Research and development expenses						$	1,407					$	1,102					28		%				$	2,854					$	2,280					25		%
Acquired in-process research and development expenses						$	236					$	330					(29)		%				$	717					$	338					NM
In-process research and development impairment						$	—					$	—					NM						$	—					$	2,700					NM
Selling, general and administrative expenses						$	1,849					$	1,357					36		%				$	3,168					$	2,440					30		%

---

NM - Not Meaningful

Product Gross Margin

Product gross margin was 78.0% and 77.9% for the three and six months ended June 30, 2023, respectively, and remained relatively flat compared to the same periods 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												Six Months Ended
						June 30,												June 30,
(in millions)						2023						2022						2023						2022
Personnel, infrastructure and other support costs						$	788					$	634					$	1,606					$	1,317
Clinical studies and other costs						619						468						1,248						964
Total						$	1,407					$	1,102					$	2,854					$	2,280

Research and development expenses increased by 28% and 25% to $1.4 billion and $2.9 billion for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022. Personnel, infrastructure and other support costs as well as Clinical studies and other costs both increased due to clinical activities primarily related to oncology, including progression and acceleration of trials, as well as new study launches.

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 $236 million and $717 million for the three and six months ended June 30, 2023, respectively, primarily due to a $170 million charge associated with our acquisition of XinThera in May 2023, a $244 million charge associated with our acquisition of Tmunity Therapeutics, Inc. (“Tmunity”) in February 2023 and a $212 million upfront payment associated with the collaboration with Arcellx, Inc., which we entered into in January 2023. Acquired in-process research and development expenses were $330 million and $338 million for the three and six months ended June 30, 2022, respectively, primarily related to a $300 million upfront payment for our collaboration with Dragonfly Therapeutics, Inc. 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 six months ended June 30, 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 and six months ended June 30, 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 36% and 30% to $1.8 billion and $3.2 billion for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022, primarily due to a $525 million litigation accrual for settlements with certain plaintiffs in the HIV antitrust litigation and increased commercial activities in oncology and HIV, partially offset by a reduction in donations to the Gilead Foundation and other corporate expenses.

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																		Six Months Ended
						June 30,																		June 30,
(in millions, except percentages)						2023						2022						Change						2023						2022						Change
Interest expense						$	(230)					$	(242)					(5)		%				$	(459)					$	(480)					(4)		%
Other income (expense), net						$	152					$	(284)					NM						$	(22)					$	(395)					(94)		%

---

NM - Not Meaningful

Interest expense for the three and six months ended June 30, 2023 decreased by 5% and 4% to $230 million and $459 million, respectively, compared to the same periods in 2022, primarily due to lower outstanding debt balances.

The changes in Other income (expense), net for the three and six months ended June 30, 2023 compared to the same periods in 2022 primarily reflect net unrealized gains from equity securities during the second quarter of 2023 compared to net unrealized losses during the first quarter of 2023 and the first and second quarters of 2022, 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																		Six Months Ended
						June 30,																		June 30,
(in millions, except percentages)						2023						2022						Change						2023						2022						Change
Income before income taxes						$	1,588					$	1,503					$	84					$	2,888					$	1,351					$	1,537
Income tax expense						$	(549)					$	(368)					$	181					$	(865)					$	(204)					$	660
Effective tax rate						34.6		%				24.5		%				10.1		%				29.9		%				15.1		%				14.8		%

Our effective tax rate increased for the three months ended June 30, 2023, compared to the same period in 2022, primarily due to remeasurement of certain deferred tax liabilities related to acquired intangible assets and non-deductible acquired IPR&D expenses recorded in connection with our acquisition of XinThera.

Our effective tax rate increased for the six months ended June 30, 2023, compared to the same period in 2022, primarily due to non-deductible acquired IPR&D expenses recorded in connection with our acquisition of Tmunity and a partial IPR&D impairment charge of $2.7 billion recorded in the six months ended June 30, 2022, in addition to the above mentioned drivers for the three months ended June 30, 2023.

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 $8.0 billion and $7.6 billion as of June 30, 2023 and December 31, 2022, respectively. Cash and cash equivalents increased by $292 million from December 31, 2022 to June 30, 2023. The following table summarizes our cash flow activities:

						Six Months Ended
						June 30,
(in millions)						2023						2022
Net cash provided by (used in):
Operating activities						$	4,082					$	3,642
Investing activities						$	(1,309)					$	(1,378)
Financing activities						$	(2,507)					$	(2,797)
Effect of exchange rate changes on cash and cash equivalents						$	26					$	(66)

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 $4.1 billion for the six months ended June 30, 2023 compared to $3.6 billion for the same period in 2022. The change was primarily due to the effect of the non-recurring payment of a $1.25 billion settlement related to bictegravir litigation in 2022, partially offset by higher inventory and operating spend in 2023.

Investing Activities

Net cash used in investing activities was $1.3 billion for the six months ended June 30, 2023 compared to $1.4 billion for the same period in 2022. The change was primarily due to a decrease in acquisition spend, including acquired IPR&D, and capital expenditures, partially offset by higher net purchases of marketable debt and equity securities.

Financing Activities

Net cash used in financing activities was $2.5 billion for the six months ended June 30, 2023 compared to $2.8 billion for the same period in 2022. During the six months ended June 30, 2023, we utilized cash of $1.9 billion for dividend payments and $550 million for common stock repurchases. During the six months ended June 30, 2022, we utilized cash of $500 million for debt repayments, $1.9 billion for dividend payments and $424 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 six months ended June 30, 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 six months ended June 30, 2023.