Edgar Filing: GILEAD SCIENCES INC

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2016



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ________ to ________

Commission File No. 0-19731

GILEAD SCIENCES, INC.

(Exact Name of Registrant as Specified in Its Charter)



Delaware	94-3047598
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)

333 Lakeside Drive, Foster City, California	94404
(Address of principal executive offices)	(Zip Code)

650-574-3000

Registrant’s Telephone Number, Including Area Code

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

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

Large accelerated filer ý Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

Number of shares outstanding of the issuer’s common stock, par value $0.001 per share, as of October 31, 2016: 1,317,456,071

GILEAD SCIENCES, INC.

INDEX



PART I.	FINANCIAL INFORMATION		2

	Item 1.	Condensed Consolidated Financial Statements	2

		Condensed Consolidated Balance Sheets at September 30, 2016 and December 31, 2015 (unaudited)	2

		Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)	3

		Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)	4

		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015 (unaudited)	5

		Notes to Condensed Consolidated Financial Statements (unaudited)	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36

	Item 4.	Controls and Procedures	36

PART II.	OTHER INFORMATION		38

	Item 1.	Legal Proceedings	38

	Item 1A.	Risk Factors	38

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53

	Item 3.	Defaults Upon Senior Securities	53

	Item 4.	Mine Safety Disclosures	53

	Item 5.	Other Information	53

	Item 6.	Exhibits	53

SIGNATURES			54

We own or have rights to various trademarks, copyrights and trade names used in our business, including the following: GILEAD^®, GILEAD SCIENCES^®, AMBISOME^®, CAYSTON^®, COMPLERA^®, DESCOVY^®, EMTRIVA^®, EPCLUSA^®, EVIPLERA^®, GENVOYA^®, HARVONI^®, HEPSERA^®, LETAIRIS^®, ODEFSEY^®, RANEXA^®, RAPISCAN^®, SOVALDI^®, STRIBILD^®, TRUVADA^®, TYBOST^®, VIREAD^®, VITEKTA^®, VOLIBRIS^® and ZYDELIG^®. ATRIPLA^® is a registered trademark belonging to Bristol-Myers Squibb & Gilead Sciences, LLC. LEXISCAN^® is a registered trademark belonging to Astellas U.S. LLC. MACUGEN^® is a registered trademark belonging to Eyetech, Inc. SUSTIVA^® is a registered trademark of Bristol-Myers Squibb Pharma Company. TAMIFLU^® is a registered trademark belonging to Hoffmann-La Roche Inc. This report also includes other trademarks, service marks and trade names of other companies.


PART I.	FINANCIAL INFORMATION


Item 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

GILEAD SCIENCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in millions, except per share amounts)



	September 30, 2016			December 31, 2015
Assets
Current assets:
Cash and cash equivalents	$	9,809		$	12,851
Short-term marketable securities	2,457			1,756
Accounts receivable, net of allowances of $935 at September 30, 2016 and $1,032 at December 31, 2015	5,075			5,854
Inventories	1,900			1,955
Deferred tax assets	762			828
Prepaid and other current assets	1,422			1,518
Total current assets	21,425			24,762
Property, plant and equipment, net	2,714			2,276
Long-term portion of prepaid royalties	439			400
Long-term deferred tax assets	481			324
Long-term marketable securities	19,345			11,601
Intangible assets, net	9,386			10,247
Goodwill	1,172			1,172
Other long-term assets	1,647			934
Total assets	$	56,609		$	51,716
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,052		$	1,178
Accrued government and other rebates	5,482			4,118
Other accrued liabilities	3,478			3,172
Deferred revenues	361			440
Current portion of long-term debt and other obligations, net	700			982
Total current liabilities	11,073			9,890
Long-term debt, net	26,371			21,073
Long-term income taxes payable	1,621			1,243
Other long-term obligations	184			395
Commitments and contingencies (Note 10)
Equity component of currently redeemable convertible notes	—			2
Stockholders’ equity:
Preferred stock, par value $0.001 per share; 5 shares authorized; none outstanding	—			—
Common stock, par value $0.001 per share; shares authorized of 5,600 at September 30, 2016 and December 31, 2015; shares issued and outstanding of 1,322 at September 30, 2016 and 1,422 at December 31, 2015	1			1
Additional paid-in capital	321			444
Accumulated other comprehensive income (loss)	(108		)	88
Retained earnings	16,654			18,001
Total Gilead stockholders’ equity	16,868			18,534
Noncontrolling interest	492			579
Total stockholders’ equity	17,360			19,113
Total liabilities and stockholders’ equity	$	56,609		$	51,716

See accompanying notes.

GILEAD SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

(in millions, except per share amounts)



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015
Revenues:
Product sales	$	7,405		$	8,211		$	22,737		$	23,742
Royalty, contract and other revenues	95			84			333			391
Total revenues	7,500			8,295			23,070			24,133
Costs and expenses:
Cost of goods sold	1,129			1,064			3,186			2,944
Research and development expenses	1,141			743			3,890			2,257
Selling, general and administrative expenses	831			903			2,406			2,360
Total costs and expenses	3,101			2,710			9,482			7,561
Income from operations	4,399			5,585			13,588			16,572
Interest expense	(242		)	(165		)	(699		)	(458		)
Other income (expense), net	119			52			288			108
Income before provision for income taxes	4,276			5,472			13,177			16,222
Provision for income taxes	951			880			2,788			2,801
Net income	3,325			4,592			10,389			13,421
Net loss attributable to noncontrolling interest	(5		)	(8		)	(4		)	(4		)
Net income attributable to Gilead	$	3,330		$	4,600		$	10,393		$	13,425
Net income per share attributable to Gilead common stockholders - basic	$	2.52		$	3.14		$	7.72		$	9.11
Shares used in per share calculation - basic	1,322			1,463			1,347			1,474
Net income per share attributable to Gilead common stockholders - diluted	$	2.49		$	3.06		$	7.59		$	8.73
Shares used in per share calculation - diluted	1,339			1,503			1,369			1,538
Cash dividends declared per share	$	0.47		$	0.43		$	1.37		$	0.86

See accompanying notes.

GILEAD SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(in millions)



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015
Net income	$	3,325		$	4,592		$	10,389		$	13,421
Other comprehensive income (loss):
Net foreign currency translation gains (losses), net of tax	(50		)	3			(39		)	(4		)
Available-for-sale securities:
Net unrealized gains, net of tax impact of $1, $0, $19 and $2, respectively	29			—			159			3
Reclassifications to net income, net of tax	(6		)	—			(8		)	—
Net change	23			—			151			3
Cash flow hedges:
Net unrealized gains (losses), net of tax impact of $2, $11, $(9) and $14, respectively	(45		)	49			(249		)	322
Reclassifications to net income, net of tax impact of $(1), $(5), $(8) and $(14), respectively	10			(132		)	(59		)	(455		)
Net change	(35		)	(83		)	(308		)	(133		)
Other comprehensive loss	(62		)	(80		)	(196		)	(134		)
Comprehensive income	3,263			4,512			10,193			13,287
Comprehensive loss attributable to noncontrolling interest	(5		)	(8		)	(4		)	(4		)
Comprehensive income attributable to Gilead	$	3,268		$	4,520		$	10,197		$	13,291

See accompanying notes.

GILEAD SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in millions)



	Nine Months Ended
	September 30,
	2016			2015
Operating Activities:
Net income	$	10,389		$	13,421
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	129			116
Amortization expense	737			704
Stock-based compensation expense	278			285
Excess tax benefits from stock-based compensation	(162		)	(498		)
Tax benefits from exercise and vesting of stock-based awards	157			499
Deferred income taxes	(95		)	(442		)
In-process research and development impairment	231			—
Other	(15		)	34
Changes in operating assets and liabilities:
Accounts receivable, net	770			(1,610		)
Inventories	(274		)	(659		)
Prepaid expenses and other	(785		)	(167		)
Accounts payable	(115		)	288
Income taxes payable	1,029			523
Accrued liabilities	1,057			2,617
Deferred revenues	(148		)	344
Net cash provided by operating activities	13,183			15,455

Investing Activities:
Purchases of marketable securities	(19,881		)	(12,291		)
Proceeds from sales of marketable securities	10,376			2,464
Proceeds from maturities of marketable securities	1,131			371
Other investments	(357		)	—
Capital expenditures	(579		)	(581		)
Net cash used in investing activities	(9,310		)	(10,037		)

Financing Activities:
Proceeds from debt financing, net of issuance costs	5,293			9,902
Proceeds from convertible note hedges	956			600
Proceeds from issuances of common stock	180			281
Repurchases of common stock	(10,001		)	(6,951		)
Repayments of debt and other obligations	(1,251		)	(763		)
Payments to settle warrants	(469		)	(3,865		)
Payments of dividends	(1,836		)	(1,260		)
Excess tax benefits from stock-based compensation	162			498
Payment of contingent consideration	(3		)	(2		)
Contributions from (distributions to) noncontrolling interest	(83		)	141
Net cash used in financing activities	(7,052		)	(1,419		)
Effect of exchange rate changes on cash and cash equivalents	137			(61		)
Net change in cash and cash equivalents	(3,042		)	3,938
Cash and cash equivalents at beginning of period	12,851			10,027
Cash and cash equivalents at end of period	$	9,809		$	13,965

See accompanying notes.

GILEAD SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)


1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. The financial statements include all adjustments, consisting of normal recurring adjustments that the management of Gilead Sciences, Inc. (Gilead, we or us) believes are necessary for a fair presentation of the periods presented. These interim financial results are not necessarily indicative of results expected for the full fiscal year or for any subsequent interim period.

The accompanying Condensed Consolidated Financial Statements include the accounts of Gilead, our wholly-owned subsidiaries and certain variable interest entities for which we are the primary beneficiary. All intercompany transactions have been eliminated. For consolidated entities where we own or are exposed to less than 100% of the economics, we record net income or loss attributable to noncontrolling interest in our Condensed Consolidated Statements of Income equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties.

We assess whether we are the primary beneficiary of a variable interest entity (VIE) at the inception of the arrangement and at each reporting date. This assessment is based on our power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and our obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. As of September 30, 2016, the only material VIE was our joint venture with Bristol-Myers Squibb Company (BMS) which is described in Note 8, Collaborative Arrangements.

The accompanying Condensed Consolidated Financial Statements and related Notes to Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the related notes thereto for the year ended December 31, 2015, included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission.

Significant Accounting Policies, Estimates and Judgments

The preparation of these Condensed Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses 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.

Concentrations of Risk

We are subject to credit risk from our portfolio of cash, cash equivalents and marketable securities. Under our investment policy, we limit amounts invested in such securities by credit rating, maturity, industry group, investment type and issuer, except for securities issued by the U.S. government. We are not exposed to any significant concentrations of credit risk from these financial instruments. The goals of our investment policy, in order of priority, are as follows: safety and preservation of principal and diversification of risk; liquidity of investments sufficient to meet cash flow requirements; and a competitive after-tax rate of return.

We are also subject to credit risk from our accounts receivable related to our product sales. The majority of our trade accounts receivable arises from product sales in the United States, Europe and Japan.

As of September 30, 2016, our accounts receivable in Southern Europe, specifically Greece, Italy, Portugal and Spain, totaled approximately $566 million, of which $132 million were greater than 120 days past due, including $62 million greater than 365 days past due. To date, we have not experienced significant losses with respect to the collection of our accounts receivable. We believe that our allowance for doubtful accounts was adequate at September 30, 2016.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update No. 2014-09 (ASU 2014-09) “Revenue from Contracts with Customers.” The standard’s core principle is that a reporting entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard will become effective for us beginning in the first quarter of 2018. Early adoption is permitted in 2017. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt this new guidance. The FASB issued supplemental adoption guidance and clarification to ASU 2014-09 in

March 2016, April 2016 and May 2016 within ASU 2016-08 “Revenue from Contracts with Customers: Principal vs. Agent Considerations,” ASU 2016-10 “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing” and ASU 2016-12 “Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients,” respectively. We are evaluating the impact of the adoption of these standards on our Condensed Consolidated Financial Statements.

In November 2015, the FASB issued Accounting Standard Update No. 2015-17 (ASU 2015-17) “Balance Sheet Classification of Deferred Taxes.” ASU 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent on the balance sheet. Previous guidance required deferred tax liabilities and assets to be separated into current and noncurrent amounts on the balance sheet. The guidance will become effective for us beginning in the first quarter of 2017 and may be applied either prospectively or retrospectively. Early adoption is permitted. We plan to adopt the guidance in the first quarter of 2017 on a retrospective basis and will reclassify current deferred tax amounts on our Condensed Consolidated Balance Sheets as noncurrent.

In January 2016, the FASB issued Accounting Standard Update No. 2016-01(ASU 2016-01) “Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 changes accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. In addition, it clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The guidance will become effective for us beginning in the first quarter of 2018 and must be adopted using a modified retrospective approach, with certain exceptions. Early adoption is permitted for certain provisions. We are evaluating the impact of the adoption of this standard on our Condensed Consolidated Financial Statements.

In February 2016, the FASB issued Accounting Standard Update No. 2016-02 (ASU 2016-02) “Leases.” ASU 2016-02 amends a number of aspects of lease accounting, including requiring lessees to recognize almost all leases with a term greater than one year as a right-of-use asset and corresponding liability, measured at the present value of the lease payments. The guidance will become effective for us beginning in the first quarter of 2019 and is required to be adopted using a modified retrospective approach. Early adoption is permitted. We are evaluating the impact of the adoption of this standard on our Condensed Consolidated Financial Statements, however, we anticipate recognition of additional assets and corresponding liabilities related to leases on our Condensed Consolidated Balance Sheets.

In March 2016, the FASB issued Accounting Standard Update No. 2016-09 (ASU 2016-09) “Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 simplifies several aspects of employee share-based payment accounting, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This guidance will become effective for us beginning in the first quarter of 2017. Early adoption is permitted. We plan to adopt the guidance in the first quarter of 2017. We are evaluating the impact of the adoption of this standard on our Condensed Consolidated Financial Statements.

In June 2016, the FASB issued Accounting Standard Update No. 2016-13 (ASU 2016-13) “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires measurement and recognition of expected credit losses for financial assets held. This guidance will become effective for us beginning in the first quarter of 2020 and must be adopted using a modified retrospective approach, with certain exceptions. Early adoption is permitted beginning in the first quarter of 2019. We are evaluating the impact of the adoption of this standard on our Condensed Consolidated Financial Statements.


2.	FAIR VALUE MEASUREMENTS

We determine the fair value of financial and non-financial assets and liabilities using the fair value hierarchy, which establishes three levels of inputs that may be used to measure fair value, as follows:


•	Level 1 inputs which include quoted prices in active markets for identical assets or liabilities;

•

Level 2 inputs which include observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. For our marketable securities, we review trading activity and pricing as of the measurement date. When sufficient quoted pricing for identical securities is not available, we use market pricing and other observable market inputs for similar securities obtained from various third-party data providers. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data; and

•

Level 3 inputs which include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability. Our Level 3 liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques and significant management judgment or estimation.

Our financial instruments consist primarily of cash and cash equivalents, marketable securities, accounts receivable, foreign currency exchange contracts, equity securities, accounts payable and short-term and long-term debt. Cash and cash equivalents, marketable securities, foreign currency exchange contracts and equity securities are reported at their respective fair values in our Condensed Consolidated Balance Sheets. Short-term and long-term debt are reported at their amortized costs in our Condensed Consolidated Balance Sheets. The remaining financial instruments are reported in our Condensed Consolidated Balance Sheets at amounts that approximate current fair values. There were no transfers between Level 1, Level 2 and Level 3 in the periods presented.

The following table summarizes the types of assets and liabilities measured at fair value on a recurring basis, by level, within the fair value hierarchy (in millions):



	September 30, 2016								December 31, 2015
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	7,362	$	—	$	—	$	7,362	$	10,161	$	—	$	—	$	10,161
Corporate debt securities	—		11,180		—		11,180		—		5,773		—		5,773
U.S. treasury securities	5,176		—		—		5,176		4,389		—		—		4,389
Residential mortgage and asset-backed securities	—		3,359		—		3,359		—		1,695		—		1,695
U.S. government agencies securities	—		1,234		—		1,234		—		707		—		707
Non-U.S. government securities	—		609		—		609		—		313		—		313
Certificates of deposit	—		244		—		244		—		448		—		448
Municipal debt securities	—		30		—		30		—		34		—		34
Equity securities	432		—				432		—		—		—		—
Foreign currency derivative contracts	—		65		—		65		—		210		—		210
Deferred compensation plan	82		—		—		82		66		—		—		66
	$	13,052	$	16,721	$	—	$	29,773	$	14,616	$	9,180	$	—	$	23,796

Liabilities:
Contingent consideration	$	—	$	—	$	25	$	25	$	—	$	—	$	59	$	59
Deferred compensation plan	82		—		—		82		66		—		—		66
Foreign currency derivative contracts	—		162		—		162		—		41		—		41
	$	82	$	162	$	25	$	269	$	66	$	41	$	59	$	166

Level 2 Inputs

We estimate the fair values of Level 2 instruments by taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income- and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities; prepayment/default projections based on historical data; and other observable inputs.

Substantially all of our foreign currency derivative contracts have maturities within an 18 months time horizon and all are with counterparties that have a minimum credit rating of A- or equivalent by Standard & Poor’s Ratings Services, Moody’s Investors Service, Inc. or Fitch, Inc. We estimate the fair values of these contracts by taking into consideration valuations obtained from a third-party valuation service that utilizes an income-based industry standard valuation model for which all significant inputs are observable, either directly or indirectly. These inputs include foreign currency exchange rates, London Interbank Offered Rates (LIBOR) and swap rates. These inputs, where applicable, are at commonly quoted intervals.

The total estimated fair values of our short-term and long-term debt, determined using Level 2 inputs based on their quoted market values, were approximately $29.3 billion at September 30, 2016 and $23.7 billion at December 31, 2015, and the carrying values were $27.1 billion at September 30, 2016 and $22.1 billion at December 31, 2015.

Level 3 Inputs

As of September 30, 2016 and December 31, 2015, the only assets or liabilities that were measured using Level 3 inputs were our contingent consideration liabilities, which were immaterial. Our policy is to recognize transfers into or out of Level 3 classification as of the actual date of the event or change in circumstances that caused the transfer.


3.	AVAILABLE-FOR-SALE SECURITIES

Estimated fair values of available-for-sale securities are generally based on prices obtained from commercial pricing services. The following table is a summary of our available-for-sale securities (in millions):



	September 30, 2016									December 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value

Money market funds	$	7,362	$	—	$	—		$	7,362	$	10,161	$	—	$	—		$	10,161
Corporate debt securities	11,152		35		(7		)	11,180		5,795		1		(23		)	5,773
U.S. treasury securities	5,172		6		(2		)	5,176		4,407		—		(18		)	4,389
Residential mortgage and asset-backed securities	3,349		11		(1		)	3,359		1,701		—		(6		)	1,695
U.S. government agencies securities	1,234		1		(1		)	1,234		709		—		(2		)	707
Non-U.S. government securities	609		1		(1		)	609		315		—		(2		)	313
Certificates of deposit	244		—		—			244		448		—		—			448
Municipal debt securities	30		—		—			30		34		—		—			34
Equity securities	357		75		—			432		—		—		—			—
Total	$	29,509	$	129	$	(12	)	$	29,626	$	23,570	$	1	$	(51	)	$	23,520

The following table summarizes the classification of the available-for-sale securities in our Condensed Consolidated Balance Sheets (in millions):



	September 30, 2016		December 31, 2015
Cash and cash equivalents	$	7,392	$	10,163
Short-term marketable securities	2,457		1,756
Long-term marketable securities	19,345		11,601
Other long-term assets	432		—
Total	$	29,626	$	23,520

Cash and cash equivalents in the table above exclude cash of $2.4 billion as of September 30, 2016 and $2.7 billion as of December 31, 2015.

The following table summarizes our portfolio of available-for-sale debt securities by contractual maturity (in millions):



	September 30, 2016
	Amortized Cost		Fair Value
Less than one year	$	9,848	$	9,849
Greater than one year but less than five years	18,620		18,661
Greater than five years but less than ten years	531		531
Greater than ten years	153		153
Total	$	29,152	$	29,194

The following table summarizes our available-for-sale securities that were in a continuous unrealized loss position, but were not deemed to be other-than-temporarily impaired (in millions):



	Less Than 12 Months					12 Months or Greater					Total
	Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value
September 30, 2016
Corporate debt securities	$	(6	)	$	3,565	$	—		$	166	$	(6	)	$	3,731
U.S. treasury securities	(2		)	1,810		—			—		(2		)	1,810
Residential mortgage and asset-backed securities	(1		)	389		(1		)	35		(2		)	424
U.S. government agencies securities	(1		)	553		—			—		(1		)	553
Non-U.S. government securities	(1		)	299		—			11		(1		)	310
Total	$	(11	)	$	6,616	$	(1	)	$	212	$	(12	)	$	6,828

December 31, 2015
Corporate debt securities	$	(23	)	$	4,891	$	—		$	43	$	(23	)	$	4,934
U.S. treasury securities	(18		)	4,342		—			—		(18		)	4,342
Residential mortgage and asset-backed securities	(6		)	1,626		—			20		(6		)	1,646
U.S. government agencies securities	(2		)	707		—			—		(2		)	707
Non-U.S. government securities	(2		)	313		—			—		(2		)	313
Municipal debt securities	—			21		—			—		—			21
Total	$	(51	)	$	11,900	$	—		$	63	$	(51	)	$	11,963

We held a total of 1,058 positions as of September 30, 2016 and 2,742 positions as of December 31, 2015 related to our debt securities that were in an unrealized loss position.

Based on our review of our available-for-sale securities, we believe we had no other-than-temporary impairments on these securities as of September 30, 2016 and December 31, 2015, because we do not intend to sell these securities nor do we believe that we will be required to sell these securities before the recovery of their amortized cost basis. Gross realized gains and gross realized losses were immaterial for the three and nine months ended September 30, 2016 and 2015.


4.	DERIVATIVE FINANCIAL INSTRUMENTS

Foreign Currency Exposure

Our operations in foreign countries expose us to market risk associated with foreign currency exchange rate fluctuations between the U.S. dollar and various foreign currencies, the most significant of which are the Euro and Yen. In order to manage this risk, we may hedge a portion of our foreign currency exposures related to outstanding monetary assets and liabilities as well as forecasted product sales using foreign currency exchange forward or option contracts. In general, the market risk related to these contracts is offset by corresponding gains and losses on the hedged transactions. The credit risk associated with these contracts is driven by changes in interest and currency exchange rates and as a result, varies over time. By working only with major banks and closely monitoring current market conditions, we seek to limit the risk that counterparties to these contracts may be unable to perform. We also seek to limit our risk of loss by entering into contracts that permit net settlement at maturity. Therefore, our overall risk of loss in the event of a counterparty default is limited to the amount of any unrecognized gains on outstanding contracts (i.e., those contracts that have a positive fair value) at the date of default. We do not enter into derivative contracts for trading purposes.

We hedge our exposure to foreign currency exchange rate fluctuations for certain monetary assets and liabilities of our entities that are denominated in a non-functional currency. The derivative instruments we use to hedge this exposure are not designated as hedges, and as a result, changes in their fair value are recorded in Other income (expense), net, in our Condensed Consolidated Statements of Income.

We hedge our exposure to foreign currency exchange rate fluctuations for forecasted product sales that are denominated in a non-functional currency. The derivative instruments we use to hedge this exposure are designated as cash flow hedges and have maturity dates of 18 months or less. Upon executing a hedging contract and quarterly thereafter, we assess prospective hedge effectiveness using regression analysis which calculates the change in cash flow as a result of the hedge instrument. On a quarterly basis, we assess retrospective hedge effectiveness using a dollar offset approach. We exclude time value from our effectiveness

testing and recognize changes in the time value of the hedge in Other income (expense), net. The effective component of our hedge is recorded as an unrealized gain or loss on the hedging instrument in Accumulated other comprehensive income (loss) (AOCI) within stockholders’ equity and the gains or losses are reclassified into product sales when the hedged transactions affect earnings. The majority of gains and losses related to the hedged forecasted transactions reported in AOCI at September 30, 2016 are expected to be reclassified to product sales within 12 months.

The cash flow effects of our derivative contracts for the nine months ended September 30, 2016 and 2015 are included within Net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows.

We had notional amounts on foreign currency exchange contracts outstanding of $8.8 billion at September 30, 2016 and $9.1 billion at December 31, 2015.

While all of our derivative contracts allow us the right to offset assets or liabilities, we have presented amounts on a gross basis. Under the International Swap Dealers Association, Inc. master agreements with the respective counterparties of the foreign currency exchange contracts, subject to applicable requirements, we are allowed to net settle transactions of the same currency with a single net amount payable by one party to the other. The following table summarizes the classification and fair values of derivative instruments in our Condensed Consolidated Balance Sheets (in millions):



	September 30, 2016
	Asset Derivatives			Liability Derivatives
	Classification	Fair Value		Classification	Fair Value
Derivatives designated as hedges:
Foreign currency exchange contracts	Other current assets	$	57	Other accrued liabilities	$	(156	)
Foreign currency exchange contracts	Other long-term assets	7		Other long-term obligations	(5		)
Total derivatives designated as hedges		64			(161		)
Derivatives not designated as hedges:
Foreign currency exchange contracts	Other current assets	1		Other accrued liabilities	(1		)
Total derivatives not designated as hedges		1			(1		)
Total derivatives		$	65		$	(162	)



	December 31, 2015
	Asset Derivatives			Liability Derivatives
	Classification	Fair Value		Classification	Fair Value
Derivatives designated as hedges:
Foreign currency exchange contracts	Other current assets	$	200	Other accrued liabilities	$	(32	)
Foreign currency exchange contracts	Other long-term assets	9		Other long-term obligations	(8		)
Total derivatives designated as hedges		209			(40		)
Derivatives not designated as hedges:
Foreign currency exchange contracts	Other current assets	1		Other accrued liabilities	(1		)
Total derivatives not designated as hedges		1			(1		)
Total derivatives		$	210		$	(41	)

The following table summarizes the effect of our foreign currency exchange contracts in our Condensed Consolidated Financial Statements (in millions):



	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2016			2015		2016			2015
Derivatives designated as hedges:
Gains (losses) recognized in AOCI (effective portion)	$	(43	)	$	60	$	(258	)	$	336
Gains (losses) reclassified from AOCI into product sales (effective portion)	$	(9	)	$	137	$	67		$	469
Gains recognized in Other income (expense), net (ineffective portion and amounts excluded from effectiveness testing)	$	11		$	4	$	38		$	11
Derivatives not designated as hedges:
Gains (losses) recognized in Other income (expense), net	$	(62	)	$	21	$	(328	)	$	89

From time to time, we may discontinue cash flow hedges and as a result, record related amounts in Other income (expense), net in our Condensed Consolidated Statements of Income. There were no material amounts recorded in Other income (expense), net for the three and nine months ended September 30, 2016 and 2015 as a result of the discontinuance of cash flow hedges.

As of September 30, 2016 and December 31, 2015, we held one type of financial instrument, derivative contracts related to foreign currency exchange contracts. The following table summarizes the potential effect of offsetting derivatives by type of financial instrument in our Condensed Consolidated Balance Sheets (in millions):



									Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet
Description	Gross Amounts of Recognized Assets/Liabilities			Gross Amounts Offset in the Condensed Consolidated Balance Sheet		Amounts of Assets/Liabilities Presented in the Condensed Consolidated Balance Sheet			Derivative Financial Instruments			Cash Collateral Received/Pledged		Net Amount (Legal Offset)
As of September 30, 2016
Derivative assets	$	65		$	—	$	65		$	(65	)	$	—	$	—
Derivative liabilities	(162		)	—		(162		)	65			—		(97		)
As of December 31, 2015
Derivative assets	$	210		$	—	$	210		$	(38	)	$	—	$	172
Derivative liabilities	(41		)	—		(41		)	38			—		(3		)

May 2016 Convertible Senior Notes and Convertible Note Hedges

In March 2016, we exercised our option to elect cash for the settlement of the conversion value in excess of the principal amount (the conversion spread) of our remaining convertible senior notes due in May 2016 (the Convertible Notes) and for the related convertible note hedges. Until our cash settlement election, the conversion spread of the Convertible Notes and the convertible note hedges met the applicable criteria for equity classification and were therefore recorded in Stockholders’ equity in our Condensed Consolidated Balance Sheets. Upon our cash settlement election, we reclassified $733 million of the fair value of the conversion spread from Stockholders’ equity to Current portion of long-term debt and other obligations, net, and reclassified $733 million of the fair value of the convertible note hedges from Stockholders’ equity to Prepaid and other current assets in our Condensed Consolidated Balance Sheets. At March 31, 2016, we revalued both the conversion spread and the convertible note hedges at $792 million, respectively, and recorded a loss of $59 million on the conversion spread and a gain of $59 million on the convertible note hedges in our Condensed Consolidated Statements of Income.

During the second quarter of 2016, we settled both the conversion spread and the convertible note hedges associated with the Convertible Notes. Upon settlement, we revalued both the conversion spread and the convertible note hedges at $861 million, respectively, and recorded a loss of $69 million on the conversion spread and a gain of $69 million on the convertible note hedges in our Condensed Consolidated Statements of Income.


5.	OTHER FINANCIAL INFORMATION

Inventories

Inventories are summarized as follows (in millions):



	September 30, 2016		December 31, 2015
Raw materials	$	1,522	$	1,332
Work in process	553		542
Finished goods	891		852
Total	$	2,966	$	2,726

Reported as:
Inventories	$	1,900	$	1,955
Other long-term assets	1,066		771
Total	$	2,966	$	2,726

Amounts reported as Other long-term assets primarily consisted of raw materials as of September 30, 2016 and December 31, 2015.

The joint ventures formed by Gilead Sciences, LLC and BMS, which are included in our Condensed Consolidated Financial Statements, held efavirenz active pharmaceutical ingredient in inventory. This efavirenz inventory was purchased from BMS at BMS’s estimated net selling price of efavirenz and totaled $1.2 billion as of September 30, 2016 and $1.3 billion as of December 31, 2015. See Note 8, Collaborative Arrangements for further information.

Prepaid and other current assets

The components of Prepaid and other current assets are summarized as follows (in millions):



	September 30, 2016		December 31, 2015
Prepaid taxes	$	322	$	773
Other prepaid expenses	280		240
Other current assets	820		505
Total prepaid and other current assets	$	1,422	$	1,518

Other accrued liabilities

The components of Other accrued liabilities are summarized as follows (in millions):



	September 30, 2016		December 31, 2015
Output tax payable	$	599	$	376
Branded prescription drug fee	405		649
Income taxes payable	390		65
Other accrued expenses	2,084		2,082
Total other accrued liabilities	$	3,478	$	3,172


6.	INTANGIBLE ASSETS

The following table summarizes the carrying amounts of our Intangible assets, net (in millions):



	September 30, 2016		December 31, 2015
Finite-lived intangible assets	$	9,185	$	9,815
Indefinite-lived intangible assets	201		432
Total intangible assets	$	9,386	$	10,247

Finite-Lived Intangible Assets

The following table summarizes our finite-lived intangible assets (in millions):



	September 30, 2016				December 31, 2015
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Intangible asset - sofosbuvir	$	10,720	$	1,981	$	10,720	$	1,456
Intangible asset - Ranexa	688		437		688		363
Other	455		260		455		229
Total	$	11,863	$	2,678	$	11,863	$	2,048

Amortization expense related to finite-lived intangible assets included primarily in Cost of goods sold in our Condensed Consolidated Statements of Income totaled $210 million and $630 million for the three and nine months ended September 30, 2016 and $206 million and $619 million for the three and nine months ended September 30, 2015, respectively. As of September 30, 2016, the estimated future amortization expense associated with our finite-lived intangible assets for the remaining three months of 2016 and each of the five succeeding fiscal years and thereafter is as follows (in millions):



Fiscal Year	Amount
2016 (remaining three months)	$	209
2017	844
2018	849
2019	741
2020	713
2021 and thereafter	5,829
Total	$	9,185

Indefinite-Lived Intangible Assets

The following table summarizes our indefinite-lived intangible assets (in-process research and development) (in millions):



	September 30, 2016		December 31, 2015
Indefinite-lived intangible asset - momelotinib	$	201	$	315
Indefinite-lived intangible asset - Other	—		117
Total	$	201	$	432

In the first quarter of 2016, the estimated fair value of the intangible asset related to momelotinib declined to $201 million due to changes in its planned clinical development, and as a result, we recorded an impairment charge of $114 million within Research and development expenses in our Condensed Consolidated Statements of Income. In the third quarter of 2016, the estimated fair value of our Indefinite-lived intangible asset - Other, related to simtuzumab, declined to zero due to changes in clinical development plans, and as a result, we recorded an impairment charge of $117 million within Research and development expenses in our Condensed Consolidated Statements of Income.


7.	ACQUISITION

In May 2016, we acquired Nimbus Apollo, Inc., a privately held company, and its Acetyl-CoA Carboxylase inhibitor program, which is being evaluated in Phase 1 trials for the potential treatment of non-alcoholic steatohepatitis, hepatocellular carcinoma and other diseases. The consideration included a payment of $400 million and contingent development and regulatory milestone-based payments of up to $800 million. The transaction did not meet the requirements to be accounted for as a business combination under ASC 805 - Business Combinations and therefore was accounted for as an asset acquisition. As a result, the payment of $400 million was recorded within Research and development expenses in our Condensed Consolidated Statements of Income. During the third quarter of 2016, based on the achievement of certain clinical development milestones, we recorded a $200 million expense within Research and development expenses in our Condensed Consolidated Statements of Income.


8.	COLLABORATIVE ARRANGEMENTS

We enter into collaborative arrangements with third parties for the development and commercialization of certain products. Both parties are active participants in the operating activities of the collaboration and exposed to significant risks and rewards depending on the commercial success of the activities. Selected information related to our collaborative arrangements follows.

Bristol-Myers Squibb Company

North America

In 2004, we entered into a collaboration arrangement with BMS to develop and commercialize a single-tablet regimen containing our Truvada and BMS’s Sustiva (efavirenz) in the United States. This combination was approved for use in the United States in 2006 and is sold under the brand name Atripla. We and BMS structured this collaboration as a joint venture that operates as a limited liability company named Bristol-Myers Squibb & Gilead Sciences, LLC, which we consolidate. We and BMS granted royalty free sublicenses to the joint venture for the use of our respective company owned technologies and, in return, were granted a license by the joint venture to use any intellectual property that results from the collaboration. In 2006, we and BMS amended the joint venture’s collaboration agreement to allow the joint venture to sell Atripla in Canada. The economic interests of the joint

venture held by us and BMS (including a share of revenues and out-of-pocket expenses) are based on the portion of the net selling price of Atripla attributable to efavirenz and Truvada. Since the net selling price for Truvada may change over time relative to the net selling price of efavirenz, both our and BMS’s respective economic interests in the joint venture may vary annually.

We and BMS shared marketing and sales efforts. Starting in the second quarter of 2011, except for a limited number of activities that are jointly managed, the parties no longer coordinate detailing and promotional activities in the United States, and the parties reduced their joint promotional efforts since we launched Complera in August 2011 and Stribild in August 2012. The parties continue to collaborate on activities such as manufacturing, regulatory, compliance and pharmacovigilance. The daily operations of the joint venture are governed by four primary joint committees formed by both BMS and Gilead. We are responsible for accounting, financial reporting, tax reporting, manufacturing and product distribution for the joint venture. Both parties provide their respective bulk active pharmaceutical ingredients to the joint venture at their approximate market values. The agreement will continue until terminated by the mutual agreement of the parties. In addition, either party may terminate the other party’s participation in the collaboration within 30 days after the launch of at least one generic version of such other party’s single agent products (or the double agent products). The terminating party then has the right to continue to sell Atripla and become the continuing party, but will be obligated to pay the terminated party certain royalties for a three-year period following the effective date of the termination.

As of September 30, 2016 and December 31, 2015, the joint venture held efavirenz active pharmaceutical ingredient which it purchased from BMS at BMS’s estimated net selling price of efavirenz in the U.S. market. These amounts were primarily included in Inventories in our Condensed Consolidated Balance Sheets.

Selected financial information for the joint venture was as follows (in millions):



	September 30, 2016		December 31, 2015
Total assets	$	2,117	$	2,464
Cash and cash equivalents	126		166
Accounts receivable, net	260		269
Inventories	1,721		2,027
Total liabilities	936		1,055
Accounts payable	519		606
Other accrued liabilities	417		449

These asset and liability amounts do not reflect the impact of intercompany eliminations that are included in our Condensed Consolidated Balance Sheets. Although we consolidate the joint venture, the legal structure of the joint venture limits the recourse that its creditors will have over our general credit or assets. Similarly, the assets held in the joint venture can be used only to settle obligations of the joint venture.

Europe

In 2007, Gilead Sciences Ireland UC, our wholly-owned subsidiary, and BMS entered into a collaboration agreement which sets forth the terms and conditions under which we and BMS commercialize and distribute Atripla in the European Union, Iceland, Liechtenstein, Norway and Switzerland (collectively, the European Territory). The parties formed a limited liability company which we consolidate, to manufacture Atripla for distribution in the European Territory using efavirenz that it purchases from BMS at BMS’s estimated net selling price of efavirenz in the European Territory. We are responsible for manufacturing, product distribution, inventory management and warehousing. Through our local subsidiaries, we have primary responsibility for order fulfillment, collection of receivables, customer relations and handling of sales returns in all the territories where we and BMS promote Atripla. In general, the parties share revenues and out-of-pocket expenses in proportion to the net selling prices of the components of Atripla, Truvada and efavirenz.

Starting in 2012, except for a limited number of activities that are jointly managed, the parties no longer coordinate detailing and promotional activities in the European Territory. We are responsible for accounting, financial reporting and tax reporting for the collaboration. As of September 30, 2016 and December 31, 2015, efavirenz purchased from BMS at BMS’s estimated net selling price of efavirenz in the European Territory is included in Inventories in our Condensed Consolidated Balance Sheets.

The parties also formed a limited liability company to hold the marketing authorization for Atripla in the European Territory. We have primary responsibility for regulatory activities. In the major market countries, both parties have agreed to independently continue to use commercially reasonable efforts to promote Atripla.

The agreement will terminate upon the expiration of the last-to-expire patent which affords market exclusivity to Atripla or one of its components in the European Territory. In addition, since December 31, 2013, either party may terminate the agreement for any reason, and such termination will be effective two calendar quarters after notice of termination. The non-terminating party has the right to continue to sell Atripla and become the continuing party, but will be obligated to pay the terminating party certain royalties for a three-year period following the effective date of the termination. In the event the continuing party decides not to sell Atripla, the effective date of the termination will be the date Atripla is withdrawn in each country or the date on which a third party assumes distribution of Atripla, whichever is earlier.

Galapagos NV

During the first quarter of 2016, we closed on a license and collaboration agreement with Galapagos NV (Galapagos), a clinical-stage biotechnology company based in Belgium, for the development and commercialization of filgotinib, a JAK1-selective inhibitor being evaluated in Phase 2 trials for inflammatory disease indications.

Upon closing of the license and collaboration agreement, we made an up-front license fee payment of $300 million and a $425 million equity investment in Galapagos by subscribing for new shares at a price of €58 per share, including issuance premium. As a result, we received 6.8 million new shares of Galapagos, representing 14.75% of their outstanding share capital. The license fee payment of $300 million and the issuance premium on the equity investment of $68 million were recorded within Research and development expenses in our Condensed Consolidated Statements of Income. The equity investment, net of issuance premium, of $357 million was recorded as an available-for-sale security in Other long-term assets in our Condensed Consolidated Balance Sheets. Galapagos is eligible to receive development and regulatory milestone-based payments of up to $755 million, sales-based milestone payments of up to $600 million, plus tiered royalties on global sales starting at 20%, with the exception of certain co-promotion territories where profits would be shared equally.

Under the terms of the agreement, we have an exclusive, worldwide, royalty-bearing, sublicensable license for filgotinib and products containing filgotinib. We are primarily responsible for development and seeking regulatory approval related to filgotinib. We are responsible for 80% and Galapagos is responsible for 20% of the development costs incurred. We are also responsible for the manufacturing and commercialization activities. Galapagos has the option to co-promote filgotinib in certain territories, in which case, we and Galapagos will share profits equally.


9.	DEBT AND CREDIT FACILITY

Financing Arrangements

The following table summarizes the carrying amount of our borrowings under various financing arrangements (in millions):



Type of Borrowing	Issue Date	Due Date	Interest Rate	September 30, 2016		December 31, 2015 ⁽¹⁾
Convertible Notes	July 2010	May 2016	1.625%	$	—	$	283
Senior Unsecured	December 2011	December 2016	3.05%	700		699
Senior Unsecured	September 2015	September 2018	1.85%	998		997
Senior Unsecured	March 2014	April 2019	2.05%	498		498
Senior Unsecured	November 2014	February 2020	2.35%	498		497
Senior Unsecured	September 2015	September 2020	2.55%	1,991		1,989
Senior Unsecured	March 2011	April 2021	4.50%	993		992
Senior Unsecured	December 2011	December 2021	4.40%	1,245		1,244
Senior Unsecured	September 2016	March 2022	1.95%	497		—
Senior Unsecured	September 2015	September 2022	3.25%	995		995
Senior Unsecured	September 2016	September 2023	2.50%	744		—
Senior Unsecured	March 2014	April 2024	3.70%	1,741		1,740
Senior Unsecured	November 2014	February 2025	3.50%	1,743		1,742
Senior Unsecured	September 2015	March 2026	3.65%	2,725		2,724
Senior Unsecured	September 2016	March 2027	2.95%	1,243		—
Senior Unsecured	September 2015	September 2035	4.60%	989		988
Senior Unsecured	September 2016	September 2036	4.00%	739		—
Senior Unsecured	December 2011	December 2041	5.65%	995		995
Senior Unsecured	March 2014	April 2044	4.80%	1,732		1,732
Senior Unsecured	November 2014	February 2045	4.50%	1,729		1,728
Senior Unsecured	September 2015	March 2046	4.75%	2,213		2,212
Senior Unsecured	September 2016	March 2047	4.15%	1,722		—
Floating-rate Borrowings	May 2016	May 2019	Variable	341		—
Total debt, net				$	27,071	$	22,055
Less current portion				700		982
Total long-term debt, net				$	26,371	$	21,073
__________________

⁽¹⁾

In connection with our adoption of the ASU relating to the presentation of debt issuance costs during the first quarter of 2016, debt balances at December 31, 2015 have been retrospectively adjusted by $123 million to include unamortized debt issuance costs. Prior to our adoption of the ASU, these unamortized debt issuance costs were included in Prepaid and other current assets and Other long-term assets in our Condensed Consolidated Balance Sheets.

Convertible Notes

During the nine months ended September 30, 2016, our Convertible Notes matured and we repaid $285 million of principal balance related to the Convertible Notes. We also paid $956 million in cash related to the conversion spread of the Convertible Notes, which represents the conversion value in excess of the principal amount, and received $956 million in cash from the convertible note hedges related to the Convertible Notes.

Warrants associated with our Convertible Notes (the 2016 Warrants) expired during the 40 trading-day period commencing on August 1, 2016 and ending on September 26, 2016. On July 27, 2016, we exercised our option to settle the warrants in cash, and as a result, we paid $469 million as the market value of our common stock at the time of the settlement of the warrants exceeded their strike price. There were 9 million shares of our common stock underlying the 2016 Warrants, which had a strike price of $27.86 per share at the time of our exercise. Because the warrants could have been settled at our option, in cash or shares of our common stock, and the related contracts met all of the applicable criteria for equity classification, the settlement was recorded as a reduction of Additional paid-in capital in our Condensed Consolidated Balance Sheet.

September 2016 Issuance of Senior Unsecured Notes

We issued $5.0 billion aggregate principal amount of senior unsecured notes in September 2016 (collectively, the 2016 Senior Notes), in five tranches with maturities ranging from 2022 to 2047, the terms of which are summarized in the table above.

The 2016 Senior Notes may be redeemed at our option at a redemption price equal to the greater of (i) 100% of the principal amount of the notes to be redeemed and (ii) the sum, as determined by an independent investment banker, of the present value of the remaining scheduled payments of principal and interest on the notes to be redeemed (exclusive of interest accrued to the date of redemption) discounted to the redemption date on a semiannual basis at the Treasury Rate plus 12.5 basis points for the notes due in March 2022, 15 basis points for the notes due in September 2023, 20 basis points for the notes due in March 2027, 25 basis points for the notes due in September 2036 and 25 basis points for the notes due in March 2047. The 2016 Senior Notes also have a call feature, exercisable at our option, to redeem the notes at par in whole or in part one to six months immediately preceding maturity. In each case, accrued and unpaid interest is also required to be redeemed to the date of redemption.

In the event of the occurrence of a change in control and a downgrade in the rating of the 2016 Senior Notes below investment grade by Standard & Poor’s Ratings Services and Moody’s Investors Service, Inc., the holders may require us to purchase all or a portion of their notes at a price equal to 101% of the aggregate principal amount of the notes repurchased, plus accrued and unpaid interest to the date of repurchase.

We intend to use the net proceeds for general corporate purposes, which may include the repayment of debt, working capital, payment of cash dividends, the repurchase of our outstanding common stock pursuant to our authorized share repurchase program and future acquisitions.

Credit Facility

In May 2016, we terminated our existing revolving credit facility and entered into a new $2.5 billion, five-year revolving credit facility maturing in May 2021. The facility can be used for working capital requirements and for general corporate purposes, including, without limitation, acquisitions. As of September 30, 2016, there were no amounts outstanding under the revolving credit facility.

We are required to comply with certain covenants under the credit agreements and note indentures governing our senior notes. As of September 30, 2016, we were not in violation of any covenants.


10.	COMMITMENTS AND CONTINGENCIES

We are a party to various legal actions. The most significant of these are described below. It is not possible to determine the outcome of these matters, and we cannot reasonably estimate the maximum potential exposure or the range of possible loss.

Litigation Related to Sofosbuvir

In January 2012, we acquired Pharmasset, Inc. (Pharmasset). Through the acquisition, we acquired sofosbuvir, a nucleotide analog that acts to inhibit the replication of the hepatitis C virus (HCV). In December 2013, we received U.S. Food and Drug Administration (FDA) approval of sofosbuvir, now known commercially as Sovaldi. In October 2014, we also received approval of the fixed-dose combination of ledipasvir and sofosbuvir (LDV/SOF), now known commercially as Harvoni. In June 2016, we received approval of the fixed-dose combination of sofosbuvir and velpatasvir (SOF/VEL), now known commercially as Epclusa. We have received a number of contractual and intellectual property claims regarding sofosbuvir. While we have carefully considered these claims both prior to and following the acquisition and believe they are without merit, we cannot predict the ultimate outcome of such claims or range of loss.

We own patents and patent applications that claim sofosbuvir (Sovaldi) as a chemical entity and its metabolites and the fixed-dose combinations of ledipasvir and sofosbuvir (Harvoni) and sofosbuvir and velpatasvir (Epclusa). Third parties may have, or may obtain rights to, patents that allegedly could be used to prevent or attempt to prevent us from commercializing Sovaldi, Harvoni or Epclusa. For example, we are aware of patents and patent applications owned by other parties that have been or may in the future be alleged by such parties to cover the use of Sovaldi, Harvoni and Epclusa. We cannot predict the ultimate outcome of intellectual property claims related to Sovaldi, Harvoni or Epclusa. We have spent, and will continue to spend, significant resources defending against these claims.

If third parties successfully obtain valid and enforceable patents, and successfully prove infringement of those patents by Sovaldi, Harvoni and/or Epclusa, we could be prevented from selling these products unless we were able to obtain a license under such patents. Such a license may not be available on commercially reasonable terms or at all.

Interference Proceedings and Litigation with Idenix Pharmaceuticals, Inc. (Idenix)

In February 2012, we received notice that the U.S. Patent and Trademark Office (USPTO) had declared Interference No. 105,871 (First Idenix Interference) between our U.S. Patent No. 7,429,572 (the ’572 patent) and Idenix’s pending U.S. Patent Application No. 12/131,868 to determine who was the first to invent certain nucleoside compounds. In January 2014, the USPTO Patent Trial and Appeal Board (PTAB) determined that Pharmasset and not Idenix was the first to invent the compounds. Idenix has appealed the PTAB’s decisions to the U.S. District Court for the District of Delaware.

In December 2013, after receiving our request to do so, the USPTO declared Interference No. 105,981 (Second Idenix Interference) between our pending U.S. Patent Application No. 11/854,218 and Idenix’s U.S. Patent No. 7,608,600 (the ’600 patent). The ’600 patent includes claims directed to methods of treating HCV with nucleoside compounds. In March 2015, the PTAB determined that Pharmasset and not Idenix was the first to invent the claimed methods of treating HCV. Idenix appealed this decision in both the U.S. District Court for the District of Delaware and the U.S. Court of Appeal for the Federal Circuit (CAFC). The CAFC heard oral arguments in September 2016, and we are awaiting its decision. We filed a motion to dismiss the appeal in Delaware, and the court has stayed the appeal relating to the Second Idenix Interference.

We believe that the Idenix claims involved in the First and Second Idenix Interferences, and similar U.S. and foreign patents claiming the same compounds, metabolites and uses thereof, are invalid. As a result, we filed an Impeachment Action in the Federal Court of Canada to invalidate Idenix Canadian Patent No. 2,490,191 (the ’191 patent), which is the Canadian patent that corresponds to the ’600 patent. Idenix asserted that the commercialization of Sovaldi in Canada will infringe its ’191 patent and that our Canadian Patent No. 2,527,657, corresponding to our ’572 patent, is invalid. In November 2015, the Canadian court held that Idenix’s patent is invalid and that our patent is valid. Idenix appealed the decision to the Canadian Federal Court of Appeal in November 2015.

We filed a similar legal action in Norway in the Oslo District Court seeking to invalidate Idenix’s Norwegian patent corresponding to the ’600 patent. In September 2013, Idenix filed an invalidation action in the Norwegian proceedings against our Norwegian Patent No. 333700 patent, which corresponds to the ’572 patent. In March 2014, the Norwegian court found all claims in the Idenix Norwegian patent to be invalid and upheld the validity of all claims in our patent. Idenix appealed the decision to the Norwegian Court of Appeal. In April 2016, the Court of Appeal issued its decision invalidating the Idenix patent and upholding our patent. Idenix has not filed a further appeal.

In January 2013, we filed a legal action in the Federal Court of Australia seeking to invalidate Idenix’s Australian patent corresponding to the ’600 patent. In April 2013, Idenix asserted that the commercialization of Sovaldi in Australia infringes its Australian patent corresponding to the ’600 patent. In March 2016, the Australian court revoked Idenix’s Australian patent. Idenix has appealed this decision. The appeal hearing is scheduled for November 2016.

In March 2014, the European Patent Office (EPO) granted Idenix European Patent No. 1 523 489 (the ’489 patent), which corresponds to the ’600 patent. The same day that the ’489 patent was granted, we filed an opposition with the EPO seeking to revoke the ’489 patent. An opposition hearing was held in February 2016, and the EPO ruled in our favor and revoked the ’489 patent. Idenix has appealed. In March 2014, Idenix also initiated infringement proceedings against us in the United Kingdom (UK), Germany and France alleging that the commercialization of Sovaldi would infringe the UK, German and French counterparts of the ’489 patent. A trial was held in the UK in October 2014. In December 2014, the High Court of Justice of England and Wales (UK Court) invalidated all challenged claims of the ’489 patent on multiple grounds. Idenix appealed. The appeal hearing was held in July 2016. In March 2015, the German court in Düsseldorf determined that the Idenix patent was highly likely to be invalid and stayed the infringement proceedings pending the outcome of the opposition hearing held by the EPO in February 2016. Idenix has not appealed this decision of the German court staying the proceedings. Upon Idenix’s request, the French proceedings have been stayed. Idenix has not been awarded patents corresponding to the ’600 patent in Japan or China.

In December 2013, Idenix, Universita Degli Studi di Cagliari (UDSG), Centre National de la Recherche Scientifique and L’Université Montpellier II sued us in U.S. District Court for the District of Delaware alleging that the commercialization of sofosbuvir will infringe the ’600 patent and that an interference exists between the ’600 patent and our U.S. Patent No. 8,415,322. Also in December 2013, Idenix and UDSG sued us in the U.S. District Court for the District of Massachusetts alleging that the commercialization of sofosbuvir will infringe U.S. Patent Nos. 6,914,054 and 7,608,597. In June 2014, the court transferred the Massachusetts litigation to the U.S. District Court for the District of Delaware. The Delaware district court has set trial for December 2016 for resolution of these issues. A decision by the district court may be appealed by either party to the CAFC.

Idenix was acquired by Merck & Co. Inc. (Merck) in August 2014, and Merck continues to pursue the Idenix claims described herein.

Litigation with Merck

In August 2013, Merck contacted us requesting that we pay royalties on the sales of sofosbuvir and obtain a license to U.S. Patent No. 7,105,499 (the ’499 patent) and U.S. Patent No. 8,481,712 (the ’712 patent), which it co-owns with Isis Pharmaceuticals, Inc. The ’499 and ’712 patents cover compounds which do not include, but may relate to, sofosbuvir. We filed a lawsuit in August 2013 in the U.S. District Court for the Northern District of California seeking a declaratory judgment that the Merck patents are invalid and not infringed. During patent prosecution, Merck amended its patent application in an attempt to cover compounds related to sofosbuvir. Initially, in March 2016, a jury determined that we had not established that Merck’s patents are invalid for lack of written description or lack of enablement and awarded Merck $200 million in damages. However, in June 2016, the court ruled in Gilead’s favor on our defense of unclean hands and determined that Merck may not recover any damages from us for the ’499 and ’712 patents. As a result, during the second quarter of 2016, we reversed the $200 million litigation reserve that was recorded in Cost of goods sold in our Condensed Consolidated Statements of Income during the first quarter of 2016. The judge has determined that Merck is required to pay our attorneys’ fees due to the exceptional nature of this case. The amount of fees owed to us by Merck is yet to be determined by the court.

Merck has filed a notice of appeal to the Court of Appeals for the Federal Circuit regarding the court’s decision on our defense of unclean hands. We appealed the issue relating to the invalidity of Merck’s patent. If the decision on our defense of unclean hands is reversed on appeal and Merck’s patent is upheld, we may be required to pay damages and a royalty on sales of sofosbuvir-containing products following the appeal. In that event, the judge has indicated that she will determine the amount of the royalty, if necessary, at the conclusion of any appeal in this case.

Litigation with the University of Minnesota

The University of Minnesota (the University) has obtained Patent No. 8,815,830 (the ’830 patent), which purports to broadly cover nucleosides with antiviral and anticancer activity. In August 2016, the University filed a lawsuit against us in the U.S. District Court for the District of Minnesota, alleging that the commercialization of sofosbuvir-containing products infringes the ’830 patent. We believe that the ’830 patent is invalid and will not be infringed by the continued commercialization of sofosbuvir.

Litigation with AbbVie, Inc. (AbbVie)

AbbVie has obtained U.S. Patent Nos. 8,466,159, 8,492,386, 8,680,106, 8,685,984, and 8,809,265 (the AbbVie Patents) which purport to cover the use of a combination of LDV/SOF (or Harvoni) for the treatment of HCV. We are aware that AbbVie has pending patent applications in the United States and granted and pending applications in other countries. We own granted, published and pending patent applications directed to the use of combinations for the treatment of HCV, and, specifically, to the combination of LDV/SOF. Certain of our applications were filed before the AbbVie Patents. For this reason and others, we believe the AbbVie Patents are invalid.

Since December 2013, several lawsuits were filed in the United States and several foreign jurisdictions, including Canada, Australia, Sweden, Switzerland, Germany and others by both Gilead and AbbVie regarding the AbbVie Patents. The AbbVie Patents have not blocked or delayed the commercialization of our combination products in the United States or any other country.

In August 2016, we and AbbVie entered into a settlement agreement to resolve the ongoing contested proceedings concerning the AbbVie Patents. Terms of the settlement are confidential.

European Patent Claims

In February 2015, several parties filed oppositions in the EPO requesting revocation of our granted European patent covering sofosbuvir that expires in 2028. In October 2016, the EPO upheld the validity of certain claims of our sofosbuvir patent. We anticipate that the challengers will appeal this decision in favor of our patent. The appeal process may take several years.

In January 2016, several parties filed oppositions in the EPO requesting revocation of our granted European patent covering tenofovir alafenamide (TAF) that expires in 2021.

In March 2016, three parties filed oppositions in the EPO requesting revocation of our granted European patent covering cobicistat that expires in 2027. While we are confident in the strength of our patents, we cannot predict the ultimate outcome of these oppositions.

If we are unsuccessful in defending these oppositions, some or all of our patent claims may be narrowed or revoked and the patent protection for sofosbuvir, TAF and cobicistat in Europe could be substantially shortened or eliminated entirely. If our patents are revoked, and no other European patents are granted covering these compounds, our exclusivity may be based entirely on regulatory exclusivity granted by the European Medicines Agency. Sovaldi has been granted regulatory exclusivity that will prevent generic sofosbuvir from entering the European Union for 10 years following approval of Sovaldi, or January 2024. If we lose exclusivity for Sovaldi prior to 2028, our expected revenues and results of operation could be negatively impacted for the years including and succeeding the year in which such exclusivity is lost, which may cause our stock price to decline.

Litigation with Generic Manufacturers

As part of the approval process for some of our products, FDA granted us a New Chemical Entity (NCE) exclusivity period during which other manufacturers’ applications for approval of generic versions of our product will not be approved. Generic manufacturers may challenge the patents protecting products that have been granted NCE exclusivity one year prior to the end of the NCE exclusivity period. Generic manufacturers have sought and may continue to seek FDA approval for a similar or identical drug through an abbreviated new drug application (ANDA), the application form typically used by manufacturers seeking approval of a generic drug. The sale of generic versions of our products earlier than their patent expiration would have a significant negative effect on our revenues and results of operations.

Current legal proceedings of significance with generic manufacturers include:

HIV Products

In November 2011, December 2011 and August 2012, we received notices that Teva Pharmaceuticals (Teva) submitted an abbreviated new drug submission (ANDS) to the Canadian Minister of Health requesting permission to manufacture and market generic versions of Truvada, Atripla and Viread. In the notices, Teva alleges that the patents associated with Truvada, Atripla and Viread are invalid, unenforceable and/or will not be infringed by Teva’s manufacture, use or sale of generic versions of those products. We filed lawsuits against Teva in the Federal Court of Canada seeking an order of prohibition against approval of these applications.

In December 2013, the court issued an order prohibiting the Canadian Minister of Health from approving Teva’s generic versions of our Viread, Truvada and Atripla products until expiry of our patents in July 2017. Teva has appealed that decision. The court’s decision did not rule on the validity of the patents and accordingly the only issue on appeal is whether the Canadian Minister of Health should be prohibited from approving Teva’s products. The appeal will be heard by the Canadian Federal Court of Appeal after the trial in the Impeachment Action filed by Teva in August 2012 seeking invalidation of one of our Canadian patents associated with Viread. The court will determine the validity of the patent in the pending Impeachment Action. A trial in the Impeachment Action is scheduled for November 2016. If Teva is successful in invalidating the patent, Teva may be able to launch generic versions of our Viread, Truvada and Atripla products in Canada prior to the expiry of our patent.

In June 2014, we received notice that Apotex Inc. (Apotex) submitted an ANDS to the Canadian Minister of Health requesting permission to manufacture and market a generic version of Truvada and a separate ANDS requesting permission to manufacture and market a generic version of Viread. In the notice, Apotex alleges that three of the patents associated with Truvada and two of the patents associated with Viread are invalid, unenforceable and/or will not be infringed by Apotex’s manufacture, use or sale of a generic version of Truvada or Viread. In August 2014, we filed lawsuits against Apotex in the Federal Court of Canada seeking orders of prohibition against approval of these ANDSs. A hearing in those cases was held in April 2016. In July 2016, the court issued an order prohibiting the Canadian Minister of Health from approving Apotex’s generic version of our Viread product until the expiry of our patents in July 2017. The court declined to prohibit approval of Apotex’s generic version of our Truvada product. The court’s decision did not rule on the validity of the patents. The launch of Apotex’s generic version of our Truvada product would be at risk of infringement of our patents, including patents that we were unable to assert in the present lawsuit, and liability for our damages. Apotex has appealed the court’s decision.

In February 2016, we received notice that Mylan Pharmaceuticals, Inc. (Mylan) submitted an ANDA to FDA requesting permission to manufacture and market a generic version of Tybost (cobicistat). In the notice, Mylan alleges that the patent covering cobicistat is invalid as obvious and that Mylan’s generic product cannot infringe an invalid claim. In March 2016, we filed lawsuits against Mylan in the U.S. District Court for the District of Delaware and U.S. District Court for the Northern District of West Virginia. The trial in Delaware is scheduled for January 2018. The patent in suit that covers Tybost is also listed in the Orange Book for Stribild and Genvoya.

In May 2016, we received notices that Aurobindo Pharma (Aurobindo) submitted ANDAs to FDA requesting permission to manufacture and market generic versions of Emtriva and Truvada. In the notices, Aurobindo alleges that two of the patents associated with our emtricitabine tablets and four of the patents associated with our emtricitabine and tenofovir disoproxil fumarate fixed dose combination tablets are invalid, unenforceable and/or will not be infringed by Aurobindo’s manufacture, use or sale of generic versions of Emtriva and Truvada, respectively. In June 2016 and July 2016, we filed lawsuits against Aurobindo in the U.S. District Court for the District of New Jersey for infringement of the patents associated with Emtriva and Truvada. In September 2016, we and Aurobindo reached agreement to settle those lawsuits. Terms of the settlement are confidential.

Letairis

In February 2015, we received notice that Watson Laboratories, Inc. (Watson) submitted an ANDA to FDA requesting permission to manufacture and market a generic version of Letairis. In the notice, Watson alleges that one of the patents associated with ambrisentan tablets is invalid, unenforceable and/or will not be infringed by Watson’s manufacture, use or sale of a generic version of Letairis. In April 2015, we filed a lawsuit against Watson in the U.S. District Court for the District of New Jersey for infringement of our patents.

In June 2015, we received notice that SigmaPharm Laboratories, LLC (SigmaPharm) submitted an ANDA to FDA requesting permission to manufacture and market a generic version of Letairis. In the notice, SigmaPharm alleges that one of the patents associated with ambrisentan tablets is invalid, unenforceable and/or will not be infringed by SigmaPharm’s manufacture, use or sale of a generic version of Letairis. In June 2015, we filed a lawsuit against SigmaPharm in the U.S. District Court for the District of New Jersey for infringement of our patents.

We cannot predict the ultimate outcome of these actions, and we may spend significant resources enforcing and defending these patents. If we are unsuccessful in these lawsuits, some or all of our claims in the patents may be narrowed or invalidated and the patent protection for our products could be substantially shortened. Further, if all of the patents covering one or more products are invalidated, FDA or the Canadian Minister of Health could approve the requests to manufacture a generic version of such products in the United States or Canada, respectively, prior to the expiration date of those patents. The sale of generic versions of these products earlier than their patent expiration would have a significant negative effect on our revenues and results of operations.

TAF Litigation

In January 2016, AIDS Healthcare Foundation, Inc. (AHF) filed a complaint with the U.S. District Court for the Northern District of California against Gilead, Japan Tobacco, Inc., Japan Tobacco International, U.S.A. (together, Japan Tobacco), and Emory University (Emory). In April 2016, AHF amended its complaint to add Janssen Sciences Ireland UC (Janssen) and Johnson & Johnson Inc. (J&J) as defendants. AHF claims that U.S. Patent Nos. 7,390,791; 7,800,788; 8,754,065; 8,148,374; and 8,633,219 are invalid. In addition, AHF claims that Gilead, independently and together with Japan Tobacco, Akros, Janssen and J&J, is violating federal and state antitrust and unfair competition laws in the market for sales of TAF by offering TAF as part of a fixed-dose combination product with elvitegravir, cobicistat and emtricitabine (Genvoya), a fixed-dose combination product with elvitegravir and rilpivirine (Odefsey) and in a fixed-dosed combination product with elvitegravir (Descovy). AHF sought a declaratory judgment of invalidity against each of the patents as well as monetary damages. In May 2016, we, Japan Tobacco, Janssen, and J&J‎ filed motions to dismiss all of AHF’s claims, which AHF opposed. In June 2016, a hearing was held on the motions to dismiss. In July 2016, the judge granted our and the other defendants’ motions and dismissed all of AHF’s claims. AHF has appealed the court’s decision dismissing the challenge to the validity of our TAF patents.

Department of Justice Investigations

In June 2011, we received a subpoena from the U.S. Attorney’s Office for the Northern District of California requesting documents related to the manufacture, and related quality and distribution practices, of Complera, Atripla, Truvada, Viread, Emtriva, Hepsera and Letairis. We cooperated with the government’s inquiry. In April 2014, the United States Department of Justice informed us that, following an investigation, it declined to intervene in a False Claims Act lawsuit filed by two former employees. In April 2014, the former employees served a First Amended Complaint. In January 2015, the federal district court issued an order granting in its entirety, without prejudice, our motion to dismiss the First Amended Complaint. In February 2015, the plaintiffs filed a Second Amended Complaint and in June 2015, the federal district court issued an order granting our motion to dismiss the Second Amended Complaint. In July 2015, the plaintiffs filed a notice of appeal in the U.S. Court of Appeals for Ninth Circuit.

In February 2016, we received a subpoena from the U.S. Attorney’s Office for the District of Massachusetts requesting documents related to our support of 501(c)(3) organizations that provide financial assistance to patients, and for our HCV products, documents concerning our provision of financial assistance to patients. Other companies have disclosed similar inquiries. We are cooperating with this inquiry.

Other Matters

We are a party to various legal actions that arose in the ordinary course of our business. We do not believe that these other legal actions will have a material adverse impact on our consolidated business, financial position or results of operations.


11.	STOCKHOLDERS’ EQUITY

The following table summarizes the changes in stockholders’ equity (in millions):



	Gilead Stockholders’ Equity										Noncontrolling Interest			Total Stockholders’ Equity
	Common Stock				Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings
	Shares	Amount			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings
Balance at December 31, 2015	1,422	$	1		$	444	$	88	$	18,001	$	579		$	19,113
Net income	—	—			—		—		10,393		(4		)	10,389
Other comprehensive loss, net of tax	—	—		<