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 nine months ended September 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

• We received U.S. Food and Drug Administration (“FDA”) and European Commission approval to extend the use of Veklury to treat COVID-19 in appropriate patients with mild to severe hepatic impairment.

• We announced a collaboration with Assembly Biosciences, Inc. to advance the research and development of novel antiviral therapies, including for herpesviruses, chronic hepatitis B virus (“HBV”) and chronic hepatitis delta virus (“HDV”).

Oncology

• We discontinued the Phase 3 ENHANCE-2 study of magrolimab in first-line TP53m acute myeloid leukemia (“AML”) with TP53 mutations based on an ad hoc analysis and following review by an independent data monitoring committee. Additionally, we announced that FDA placed a partial clinical hold on magrolimab studies in AML that paused enrollment, though previously enrolled patients may continue to receive the study medicine.

• We announced a collaboration with Tentarix Biotherapeutics Inc. (“Tentarix”) to discover and develop novel therapies across oncology and inflammation, using Tentarix’s proprietary Tentacles platform.

Other

• We issued $2.0 billion aggregate principal amount of senior unsecured notes in a registered offering, comprised of $1.0 billion principal amount of 5.25% senior notes due in 2033 and $1.0 billion principal amount of 5.55% senior notes due in 2053, and repaid debt of $2.25 billion.

Key Financial Results

						Three Months Ended																		Nine Months Ended
						September 30,																		September 30,
(in millions, except percentages and per share amounts)						2023						2022						Change						2023						2022						Change
Total revenues						$	7,051					$	7,042					—		%				$	20,002					$	19,892					1		%
Net income attributable to Gilead						$	2,180					$	1,789					22		%				$	4,236					$	2,952					44		%
Diluted earnings per share attributable to Gilead						$	1.73					$	1.42					22		%				$	3.37					$	2.34					44		%

Total revenues were $7.1 billion and $20.0 billion for the three and nine months ended September 30, 2023, respectively, and remained relatively flat compared to the same periods in 2022, primarily due to higher product sales in Oncology and HIV, partially offset by lower Veklury and Liver Disease product sales.

Net income attributable to Gilead was $2.2 billion, or $1.73 diluted earnings per share, for the three months ended September 30, 2023, compared to $1.8 billion, or $1.42 diluted earnings per share, for the same period in 2022. The increase was primarily due to lower tax expense and higher interest income, partially offset by net higher total costs and expenses.

Net income attributable to Gilead was $4.2 billion, or $3.37 diluted earnings per share, for the nine months ended September 30, 2023, compared to $3.0 billion, or $2.34 diluted earnings per share, for the same period in 2022. The increase was primarily due to a $2.7 billion IPR&D impairment recorded in the first quarter of 2022, which did not repeat in 2023, lower unrealized losses on equity investments and higher interest income, partially offset by higher operating costs, including the $525 million litigation expense 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 September 30, 2023																								Three Months Ended September 30, 2022
(in millions, except percentages)						U.S.						Europe						Other International						Total						U.S.						Europe						Other International						Total						Change
Product sales:
HIV						$	3,807					$	519					$	341					$	4,667					$	3,661					$	541					$	285					$	4,487					4		%
Oncology						462						243						65						769						409						149						20						578						33		%
Cell Therapy						261						181						45						486						270						111						17						398						22		%
Trodelvy						201						62						21						283						139						38						3						180						58		%
Liver Disease						376						119						211						706						413						170						204						788						(10)		%
HCV (1)						260						85						93						438						283						143						98						524						(16)		%
HBV / HDV						116						34						119						269						131						28						106						264						2		%
Veklury						258						65						313						636						336						130						458						925						(31)		%
Other						82						72						62						216						80						75						46						200						8		%
Total product sales						4,985						1,017						992						6,994						4,900						1,064						1,013						6,978						—		%
Royalty, contract and other revenues						32						23						1						56						28						37						—						64						(13)		%
Total revenues						$	5,017					$	1,040					$	993					$	7,051					$	4,928					$	1,101					$	1,013					$	7,042					—		%

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(1) Chronic hepatitis C virus (“HCV”)

						Nine Months Ended September 30, 2023																								Nine Months Ended September 30, 2022
(in millions, except percentages)						U.S.						Europe						Other International						Total						U.S.						Europe						Other International						Total						Change
Product sales:
HIV						$	10,949					$	1,568					$	965					$	13,482					$	9,906					$	1,653					$	863					$	12,422					9		%
Oncology						1,354						660						153						2,167						1,067						407						52						1,525						42		%
Cell Therapy						802						491						109						1,402						688						308						44						1,040						35		%
Trodelvy						551						169						44						764						379						98						8						485						58		%
Liver Disease						1,051						390						652						2,093						1,056						417						631						2,104						(1)		%
HCV						751						294						289						1,335						745						332						294						1,371						(3)		%
HBV / HDV						299						96						363						758						311						85						337						733						3		%
Veklury						607						227						630						1,465						1,179						560						1,166						2,905						(50)		%
Other						236						224						199						658						275						244						174						693						(5)		%
Total product sales						14,196						3,069						2,599						19,864						13,482						3,281						2,887						19,650						1		%
Royalty, contract and other revenues						57						77						4						138						140						98						4						242						(43)		%
Total revenues						$	14,253					$	3,146					$	2,603					$	20,002					$	13,622					$	3,378					$	2,891					$	19,892					1		%

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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 4% to $4.7 billion for the three months ended September 30, 2023 compared to the same period in 2022, primarily due to higher demand for Biktarvy and channel inventory dynamics, partially offset by lower average realized price due to a shift in channel mix.

HIV product sales increased by 9% to $13.5 billion for the nine months ended September 30, 2023 compared to the same period in 2022, primarily due to favorable pricing dynamics, higher demand and channel inventory dynamics, partially offset by unfavorable foreign currency exchange impact.

Oncology

Cell Therapy

Cell Therapy product sales increased by 22% and 35% to $486 million and $1.4 billion for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022, primarily due to increased Yescarta demand for the treatment of relapsed or refractory (“R/R”) large B-cell lymphoma and increased Tecartus demand for the treatment of R/R mantle cell lymphoma and R/R adult acute lymphoblastic leukemia.

Trodelvy

Trodelvy product sales increased by 58% to $283 million and $764 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022, primarily due to higher demand in both the U.S. and Europe.

Liver Disease

Liver Disease product sales decreased by 10% and 1% to $706 million and $2.1 billion for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022, as higher HCV patient starts were more than offset by unfavorable pricing dynamics, primarily due to the resolution of a rebate claim in HCV in the third quarter of 2022.

Veklury

Veklury product sales decreased by 31% and 50% to $636 million and $1.5 billion for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022, primarily due to lower demand driven by reduced hospitalizations 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.

Royalty, Contract and Other Revenues

Royalty, contract and other revenues decreased by 13% and 43% to $56 million and $138 million for the three and nine months ended September 30, 2023, respectively, compared to the same period in 2022, primarily due to lower royalty revenues in 2023 due to the impact of generic launches. The decrease for the nine months ended September 30, 2023 was also due to higher milestone payments received in 2022.

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, 29% and 30% were generated outside the U.S. for the three months ended September 30, 2023 and 2022, respectively. Foreign currency exchange, net of hedges, had a relatively flat impact on our total product sales for the three months ended September 30, 2023, based on a comparison using foreign currency exchange rates from the three months ended September 30, 2022.

Of our total product sales, 29% and 31% were generated outside the U.S. for the nine months ended September 30, 2023 and 2022, respectively. Foreign currency exchange, net of hedges, had an unfavorable impact on our total product sales of $191 million for the nine months ended September 30, 2023, based on a comparison using foreign currency exchange rates from the nine months ended September 30, 2022.

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)						2023						2022						Change						2023						2022						Change
Cost of goods sold						$	1,565					$	1,395					12		%				$	4,408					$	4,261					3		%
Product gross margin						77.6		%				80.0		%				-239 bps						77.8		%				78.3		%				-51 bps
Research and development expenses						$	1,457					$	1,149					27		%				$	4,310					$	3,429					26		%
Acquired in-process research and development expenses						$	91					$	448					(80)		%				$	808					$	786					3		%
In-process research and development impairment						$	—					$	—					NM						$	—					$	2,700					NM
Selling, general and administrative expenses						$	1,315					$	1,213					8		%				$	4,482					$	3,653					23		%

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NM - Not Meaningful

Product Gross Margin

Product gross margin decreased to 77.6% for the three months ended September 30, 2023 compared to the same period in 2022, primarily driven by intangible asset amortization expenses related to the pretreated hormone receptor-positive, human epidermal growth factor receptor 2-negative (“HR+/HER2-”) metastatic breast cancer indication for Trodelvy following its approval in February 2023, as well as product mix.

Product gross margin decreased to 77.8% for the nine months ended September 30, 2023 compared to the same period in 2022, primarily driven by intangible asset amortization expenses related to the pretreated HR+/HER2- metastatic breast cancer indication for Trodelvy following its approval in February 2023, partially offset by higher amortization of inventory step-up charges 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												Nine Months Ended
						September 30,												September 30,
(in millions)						2023						2022						2023						2022
Personnel, infrastructure and other support costs						$	776					$	688					$	2,382					$	2,004
Clinical studies and other costs						681						461						1,928						1,425
Total						$	1,457					$	1,149					$	4,310					$	3,429

Research and development expenses increased by 27% and 26% to $1.5 billion and $4.3 billion for the three and nine months ended September 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 and costs associated with the discontinuation of two Phase 3 magrolimab studies.

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 $91 million and $808 million for the three and nine months ended September 30, 2023, respectively, primarily related to a $56 million upfront payment associated with our collaboration with Tentarix entered into in August 2023, 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 our collaboration with Arcellx, Inc. entered into in January 2023. 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 our collaboration with Dragonfly Therapeutics, Inc. entered into in April 2022. 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 nine months ended September 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 nine months ended September 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 8% to $1.3 billion for the three months ended September 30, 2023 compared to the same period in 2022, primarily due to increased commercial activities in oncology and HIV, as well as higher corporate activities.

Selling, general and administrative expenses increased by 23% to $4.5 billion for the nine months ended September 30, 2023 compared to the same period in 2022, primarily due to a $525 million litigation expense for settlements with certain plaintiffs in the HIV antitrust litigation in the second quarter of 2023, increased commercial activities in oncology and HIV, as well as higher corporate activities, 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)						2023						2022						Change						2023						2022						Change
Interest expense						$	(232)					$	(229)					2		%				$	(692)					$	(709)					(2)		%
Other income (expense), net						$	(72)					$	(176)					(59)		%				$	(95)					$	(571)					(83)		%

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NM - Not Meaningful

Interest expense was $232 million and $692 million for the three and nine months ended September 30, 2023, respectively, and remained relatively flat compared to the same periods in 2022. See 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 for additional information.

The changes in Other income (expense), net for the three and nine months ended September 30, 2023 compared to the same periods in 2022 primarily reflect higher interest income due to rising interest rates, as well as fewer net unrealized losses on equity investments.

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)						2023						2022						Change						2023						2022						Change
Income before income taxes						$	2,318					$	2,432					$	(114)					$	5,206					$	3,783					$	1,424
Income tax expense						$	(146)					$	(646)					$	(500)					$	(1,010)					$	(850)					$	160
Effective tax rate						6.3		%				26.6		%				(20.3)		%				19.4		%				22.5		%				(3.1)		%

Our effective tax rate decreased for the three and nine months ended September 30, 2023 compared to the same periods in 2022, primarily due to a decrease in unrecognized tax benefits as a result of reaching agreement with a tax authority on certain tax positions in the three months ended September 30, 2023 and a non-deductible acquired IPR&D charge recorded associated with our acquisition of MiroBio in September 2022. The decrease in our effective tax rate for the nine months ended September 30, 2023 was partially offset by remeasurement of certain deferred tax liabilities related to acquired intangible assets and non-deductible acquired IPR&D expenses recorded associated with our acquisitions of XinThera and Tmunity in 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 September 30, 2023 and December 31, 2022, respectively. Cash and cash equivalents increased by $293 million from December 31, 2022 to September 30, 2023. The following table summarizes our cash flow activities:

						Nine Months Ended
						September 30,
(in millions)						2023						2022
Net cash provided by (used in):
Operating activities						$	5,837					$	6,505
Investing activities						$	(1,538)					$	(2,091)
Financing activities						$	(4,026)					$	(4,915)
Effect of exchange rate changes on cash and cash equivalents						$	20					$	(138)

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 $5.8 billion for the nine months ended September 30, 2023 compared to $6.5 billion for the same period in 2022. The change was primarily due to higher inventory and operating spend, which includes HIV antitrust litigation payments, in 2023, reduced by the effect of a non-recurring payment of a $1.25 billion settlement related to bictegravir litigation in 2022.

Investing Activities

Net cash used in investing activities was $1.5 billion for the nine months ended September 30, 2023 compared to $2.1 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 $4.0 billion for the nine months ended September 30, 2023 compared to $4.9 billion for the same period in 2022. During the nine months ended September 30, 2023, we utilized cash of $2.25 billion for debt repayments, $2.9 billion for dividend payments and $850 million for common stock repurchases. These were partially offset by $2.0 billion in proceeds from the issuance of senior unsecured notes in September 2023, net of issuance costs. During the nine months ended September 30, 2022, we utilized cash of $1.5 billion for debt repayments, $2.8 billion for dividend payments and $604 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. Other than as disclosed in 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, there were no material changes to our capital resources and material cash requirements during the nine months ended September 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. Other than as disclosed in Notes 2. Revenues, 7. Intangible Assets, 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, there were no material changes to our critical accounting estimates during the nine months ended September 30, 2023.