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EX-32.1 - SECTION 906 CERTIFICATIONS - GILEAD SCIENCES INCgildq32015ex321.htm
EX-31.1 - CEO CERTIFICATION - GILEAD SCIENCES INCgildq32015ex311.htm
EX-31.2 - CFO CERTIFICATION - GILEAD SCIENCES INCgildq32015ex312.htm

 
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, 2015
or 
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 30, 2015: 1,441,180,186
 




GILEAD SCIENCES, INC.
INDEX

PART I.
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
PART II.
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 1A.
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 5.
 
 
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 


We own or have rights to various trademarks, copyrights and trade names used in our business, including the following: GILEAD®, GILEAD SCIENCES®, HARVONI®, SOVALDI®, TRUVADA®, STRIBILD®, COMPLERA®, EVIPLERA®, VIREAD®, LETAIRIS®, RANEXA®, AMBISOME®, ZYDELIG®, EMTRIVA®, TYBOST®, HEPSERA®, VITEKTA®, CAYSTON®, VOLIBRIS® and RAPISCAN®. 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 I.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in millions, except per share amounts)
 
September 30, 2015
 
December 31, 2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
13,965

 
$
10,027

Short-term marketable securities
1,749

 
101

Accounts receivable, net
6,105

 
4,635

Inventories
1,988

 
1,386

Deferred tax assets
894

 
508

Prepaid and other current assets
1,209

 
1,057

Total current assets
25,910

 
17,714

Property, plant and equipment, net
2,143

 
1,674

Long-term portion of prepaid royalties
409

 
466

Long-term deferred tax assets
291

 
236

Long-term marketable securities
9,400

 
1,598

Intangible assets, net
10,454

 
11,073

Goodwill
1,172

 
1,172

Other long-term assets
858

 
731

Total assets
$
50,637

 
$
34,664

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
1,239

 
$
955

Accrued government and other rebates
4,713

 
2,316

Other accrued liabilities
2,721

 
1,873

Deferred revenues
356

 
134

Current portion of long-term debt and other obligations, net
331

 
483

Total current liabilities
9,360

 
5,761

Long-term debt, net
21,894

 
11,921

Long-term income taxes payable
1,027

 
562

Long-term deferred tax liabilities
30

 
51

Other long-term obligations
378

 
535

Commitments and contingencies (Note 9)


 


Equity component of currently redeemable convertible notes
4

 
15

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, 2015 and December 31, 2014; shares issued and outstanding of 1,449 at September 30, 2015 and 1,499 at December 31, 2014
1

 
2

Additional paid-in capital
285

 
2,391

Accumulated other comprehensive income
167

 
301

Retained earnings
16,961

 
12,732

Total Gilead stockholders’ equity
17,414

 
15,426

Noncontrolling interest
530

 
393

Total stockholders’ equity
17,944

 
15,819

Total liabilities and stockholders’ equity
$
50,637

 
$
34,664

See accompanying notes.

2



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,
 
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
 
Product sales
 
$
8,211

 
$
5,968

 
$
23,742

 
$
17,252

Royalty, contract and other revenues
 
84

 
74

 
391

 
324

Total revenues
 
8,295

 
6,042

 
24,133

 
17,576

Costs and expenses:
 
 
 
 
 
 
 
 
Cost of goods sold
 
1,064

 
987

 
2,944

 
2,725

Research and development expenses
 
743

 
630

 
2,257

 
1,809

Selling, general and administrative expenses
 
903

 
945

 
2,360

 
2,107

Total costs and expenses
 
2,710

 
2,562

 
7,561

 
6,641

Income from operations
 
5,585

 
3,480

 
16,572

 
10,935

Interest expense
 
(165
)
 
(104
)
 
(458
)
 
(282
)
Other income (expense), net
 
52

 
(5
)
 
108

 
(27
)
Income before provision for income taxes
 
5,472

 
3,371

 
16,222

 
10,626

Provision for income taxes
 
880

 
647

 
2,801

 
2,029

Net income
 
4,592

 
2,724

 
13,421

 
8,597

Net loss attributable to noncontrolling interest
 
(8
)
 
(7
)
 
(4
)
 
(17
)
Net income attributable to Gilead
 
$
4,600

 
$
2,731

 
$
13,425

 
$
8,614

Net income per share attributable to Gilead common stockholders - basic
 
$
3.14

 
$
1.80

 
$
9.11

 
$
5.64

Shares used in per share calculation - basic
 
1,463

 
1,514

 
1,474

 
1,528

Net income per share attributable to Gilead common stockholders - diluted
 
$
3.06

 
$
1.67

 
$
8.73

 
$
5.18

Shares used in per share calculation - diluted
 
1,503

 
1,637

 
1,538

 
1,662

Cash dividends declared per share
 
$
0.43

 
$

 
$
0.86

 
$





















See accompanying notes.

3



GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(in millions)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2015
 
2014
 
2015
 
2014
Net income
 
$
4,592

 
$
2,724

 
$
13,421

 
$
8,597

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Net foreign currency translation gains (losses), net of tax
 
3

 
(10
)
 
(4
)
 
(3
)
Available-for-sale securities:
 
 
 
 
 
 
 
 
Net unrealized gains, net of tax impact of $0, $0, $2 and $1
 

 

 
3

 
1

Net change
 

 

 
3

 
1

Cash flow hedges:
 
 
 
 
 
 
 
 
Net unrealized gains, net of tax impact of $11, $6, $14 and $6
 
49

 
224

 
322

 
257

Reclassifications to net income, net of tax impact of $(5), $(1), $(14) and $(3)
 
(132
)
 
2

 
(455
)
 
44

Net change
 
(83
)
 
226

 
(133
)
 
301

Other comprehensive income (loss)
 
(80
)
 
216

 
(134
)
 
299

Comprehensive income
 
4,512

 
2,940

 
13,287

 
8,896

Comprehensive loss attributable to noncontrolling interest
 
(8
)
 
(7
)
 
(4
)
 
(17
)
Comprehensive income attributable to Gilead
 
$
4,520

 
$
2,947

 
$
13,291

 
$
8,913



























See accompanying notes.

4



GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in millions)
 
 
Nine Months Ended
 
 
September 30,
 
 
2015
 
2014
Operating Activities:
 
 
 
 
Net income
 
$
13,421

 
$
8,597

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation expense
 
116

 
94

Amortization expense
 
704

 
681

Stock-based compensation expense
 
285

 
265

Excess tax benefits from stock-based compensation
 
(498
)
 
(358
)
Tax benefits from exercise and vesting of stock-based awards
 
499

 
360

Deferred income taxes
 
(442
)
 
(67
)
Other
 
34

 
51

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable, net
 
(1,610
)
 
(827
)
Inventories
 
(659
)
 
101

Prepaid expenses and other assets
 
(167
)
 
(429
)
Accounts payable
 
288

 
(75
)
Income taxes payable
 
523

 
136

Accrued liabilities
 
2,617

 
1,256

Deferred revenues
 
344

 
12

Net cash provided by operating activities
 
15,455

 
9,797

 
 
 
 
 
Investing Activities:
 
 
 
 
Purchases of marketable securities
 
(12,291
)
 
(1,532
)
Proceeds from sales of marketable securities
 
2,464

 
477

Proceeds from maturities of marketable securities
 
371

 
27

Capital expenditures
 
(581
)
 
(390
)
Net cash used in investing activities
 
(10,037
)
 
(1,418
)
 
 
 
 
 
Financing Activities:
 
 
 
 
Proceeds from debt financing, net of issuance costs
 
9,902

 
3,965

Proceeds from convertible note hedges
 
600

 
1,629

Purchases of convertible note hedges
 

 
(26
)
Repayments of debt and other obligations
 
(763
)
 
(2,860
)
Payment of contingent consideration
 
(2
)
 
(98
)
Payments to settle warrants
 
(3,865
)
 
(4,093
)
Proceeds from issuances of common stock
 
281

 
275

Repurchases of common stock
 
(6,951
)
 
(3,348
)
Payments of dividends
 
(1,260
)
 

Excess tax benefits from stock-based compensation
 
498

 
358

Contributions from (distributions to) noncontrolling interest
 
141

 
(61
)
Net cash used in financing activities
 
(1,419
)
 
(4,259
)
Effect of exchange rate changes on cash and cash equivalents
 
(61
)
 
(24
)
Net change in cash and cash equivalents
 
3,938

 
4,096

Cash and cash equivalents at beginning of period
 
10,027

 
2,113

Cash and cash equivalents at end of period
 
$
13,965

 
$
6,209

See accompanying notes.

5



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 only 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. For consolidated entities where we own or are exposed to less than 100% of the economics, we record net income (loss) attributable to noncontrolling interests 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. All intercompany transactions have been eliminated. The Condensed Consolidated Financial Statements include the results of companies acquired by us from the date of each acquisition for the applicable reporting periods.
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, 2014, 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, management evaluates its 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. Actual results may differ significantly from these estimates. Estimates are assessed each period and updated to reflect current information.
Concentrations of Risk
We are subject to credit risk from our portfolio of 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 and Europe.
As of September 30, 2015, our accounts receivable in Southern Europe, specifically Greece, Italy, Portugal and Spain, totaled approximately $1.8 billion, of which $198 million were greater than 120 days past due, including $27 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, 2015.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB), jointly with the International Accounting Standards Board, issued a comprehensive new standard on revenue recognition 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. In August 2015, the FASB issued an accounting standard update which defers the effective date of the new standard by one year.

6



The standard will become effective for us beginning in the first quarter of 2018. Early application is permitted in 2017. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt this new guidance. We are currently evaluating the impact of our pending adoption of this standard on our Condensed Consolidated Financial Statements.
In April 2015, the FASB issued an accounting standard update which requires presentation of debt issuance costs as a direct deduction from the carrying amount of a recognized debt liability on the balance sheet. The update does not change the guidance on the recognition and measurement of debt issuance costs. This guidance will become effective for us for annual periods beginning after December 15, 2015, and interim periods thereafter. At the time of adoption, we will reclassify debt issuance costs to a liability as a direct deduction from the carrying value of the debt, consistent with the presentation of a debt discount. We do not expect that the adoption of this update will have a material impact 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 principally of cash and cash equivalents, marketable securities, accounts receivable, foreign currency exchange contracts, accounts payable and short-term and long-term debt. Cash and cash equivalents, marketable securities and foreign currency exchange contracts that hedge accounts receivable and forecasted sales are reported at their respective fair values on our Condensed Consolidated Balance Sheets. Short-term and long-term debt are reported at their amortized cost on our Condensed Consolidated Balance Sheets. The remaining financial instruments are reported on 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.

7



The following table summarizes the assets and liabilities measured at fair value on a recurring basis, by level, within the fair value hierarchy (in millions):
 
September 30, 2015
 
December 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
12,029

 
$

 
$

 
$
12,029

 
$
7,926

 
$

 
$

 
$
7,926

Corporate debt securities

 
4,824

 

 
4,824

 

 
938

 

 
938

U.S. treasury securities
3,378

 

 

 
3,378

 
363

 

 

 
363

Residential mortgage and asset-backed securities

 
1,306

 

 
1,306

 

 
269

 

 
269

U.S. government agencies securities

 
864

 

 
864

 

 
113

 

 
113

Certificates of deposit

 
489

 

 
489

 

 

 

 

Non-U.S. government securities

 
301

 

 
301

 

 

 

 

Foreign currency derivative contracts

 
267

 

 
267

 

 
349

 

 
349

Municipal debt securities

 
29

 

 
29

 

 
16

 

 
16

Deferred compensation plan
61

 

 

 
61

 
54

 

 

 
54

 
$
15,468

 
$
8,080

 
$

 
$
23,548

 
$
8,343

 
$
1,685

 
$

 
$
10,028

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Contingent consideration
$

 
$

 
$
127

 
$
127

 
$

 
$

 
$
133

 
$
133

Deferred compensation plan
61

 

 

 
61

 
54

 

 

 
54

Foreign currency derivative contracts

 
35

 

 
35

 

 

 

 

 
$
61

 
$
35

 
$
127

 
$
223

 
$
54

 
$

 
$
133

 
$
187

Level 2 Inputs
We estimate the fair values of our corporate debt securities, residential mortgage and asset-backed securities, government related securities and certificates of deposit 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 primarily over an 18-month time horizon and all are with counterparties that have a minimum credit rating of A- or equivalent by Standard & Poor's, 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 rates, London Interbank Offered Rates (LIBOR) and swap rates. These inputs, where applicable, are at commonly quoted intervals.

8



The fair values of our convertible senior notes and senior unsecured notes were determined using Level 2 inputs based on their quoted market values. The following table summarizes the carrying values and fair values of our convertible senior notes and senior unsecured notes (in millions):
 
 
 
 
September 30, 2015
 
December 31, 2014
Type of Borrowing
 
Description
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Convertible Senior
 
May 2016 Notes
 
$
331

 
$
1,434

 
$
483

 
$
2,097

Senior Unsecured
 
April 2021 Notes
 
995

 
1,090

 
995

 
1,108

Senior Unsecured
 
December 2016 Notes
 
700

 
717

 
700

 
727

Senior Unsecured
 
December 2021 Notes
 
1,248

 
1,356

 
1,248

 
1,377

Senior Unsecured
 
December 2041 Notes
 
998

 
1,145

 
998

 
1,229

Senior Unsecured
 
April 2019 Notes
 
499

 
503

 
499

 
500

Senior Unsecured
 
April 2024 Notes
 
1,748

 
1,798

 
1,747

 
1,836

Senior Unsecured
 
April 2044 Notes
 
1,747

 
1,767

 
1,747

 
1,954

Senior Unsecured
 
February 2020 Notes
 
499

 
504

 
499

 
504

Senior Unsecured
 
February 2025 Notes
 
1,748

 
1,766

 
1,748

 
1,797

Senior Unsecured
 
February 2045 Notes
 
1,740

 
1,693

 
1,740

 
1,872

Senior Unsecured
 
September 2018 Notes
 
1,000

 
1,008

 

 

Senior Unsecured
 
September 2020 Notes
 
1,996

 
2,014

 

 

Senior Unsecured
 
September 2022 Notes
 
999

 
1,011

 

 

Senior Unsecured
 
March 2026 Notes
 
2,739

 
2,767

 

 

Senior Unsecured
 
September 2035 Notes
 
997

 
1,007

 

 

Senior Unsecured
 
March 2046 Notes
 
2,241

 
2,263

 

 

Level 3 Inputs
As of September 30, 2015 and December 31, 2014, the only assets or liabilities that were measured using Level 3 inputs were contingent consideration liabilities of $127 million and $133 million, respectively. 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.
The contingent consideration liabilities primarily included the potential future contingent consideration payments resulting from the acquisition of Arresto Biosciences, Inc. for royalty obligations on future sales once specified sales-based milestones are achieved, and the acquisitions of CGI Pharmaceuticals, Inc. and Calistoga Pharmaceuticals, Inc. upon achievement of development or regulatory approval-based milestones.
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 available-for-sale securities recorded in cash and cash equivalents or marketable securities in our Condensed Consolidated Balance Sheets (in millions):
 
 
September 30, 2015
 
December 31, 2014
 
 
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
 
$
12,029

 
$

 
$

 
$
12,029

 
$
7,926

 
$

 
$

 
$
7,926

Corporate debt securities
 
4,832

 
5

 
(13
)
 
4,824

 
941

 

 
(3
)
 
938

U.S. treasury securities
 
3,370

 
8

 

 
3,378

 
363

 

 

 
363

Residential mortgage and asset-backed securities
 
1,305

 
2

 
(1
)
 
1,306

 
269

 

 

 
269

Certificates of deposit
 
489

 

 

 
489

 

 

 

 

U.S. government agencies securities
 
863

 
1

 

 
864

 
113

 

 

 
113

Non-U.S. government securities
 
301

 

 

 
301

 

 

 

 

Municipal debt securities
 
29

 

 

 
29

 
16

 

 

 
16

Total
 
$
23,218

 
$
16

 
$
(14
)
 
$
23,220

 
$
9,628

 
$

 
$
(3
)
 
$
9,625


9



The following table summarizes the classification of the available-for-sale securities on our Condensed Consolidated Balance Sheets (in millions):
 
 
September 30, 2015
 
December 31, 2014
Cash and cash equivalents
 
$
12,071

 
$
7,926

Short-term marketable securities
 
1,749

 
101

Long-term marketable securities
 
9,400

 
1,598

Total
 
$
23,220

 
$
9,625

Cash and cash equivalents in the table above exclude cash of $1.9 billion as of September 30, 2015 and $2.1 billion as of December 31, 2014.
The following table summarizes our portfolio of available-for-sale securities by contractual maturity (in millions):
 
 
September 30, 2015
 
 
Amortized Cost
 
Fair Value
Less than one year
 
$
13,821

 
$
13,820

Greater than one year but less than five years
 
9,254

 
9,257

Greater than five years but less than ten years
 
118

 
118

Greater than ten years
 
25

 
25

Total
 
$
23,218

 
$
23,220

The following table summarizes our available-for-sale debt 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, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
 
$
(13
)
 
$
2,343

 
$

 
$
58

 
$
(13
)
 
$
2,401

Residential mortgage and asset-backed securities
 
(1
)
 
527

 

 
17

 
(1
)
 
544

Non-U.S. government securities
 

 
188

 

 

 

 
188

U.S. government agencies securities
 

 
52

 

 

 

 
52

U.S. treasury securities
 

 
42

 

 

 

 
42

Municipal debt securities
 

 
5

 

 

 

 
5

Total
 
$
(14
)
 
$
3,157

 
$

 
$
75

 
$
(14
)
 
$
3,232

 
 
 

 
 

 
 

 
 

 
 

 
 

December 31, 2014
 
 

 
 

 
 

 
 

 
 

 
 

Corporate debt securities
 
$
(3
)
 
$
802

 
$

 
$

 
$
(3
)
 
$
802

Residential mortgage and asset-backed securities
 

 
227

 

 
1

 

 
228

U.S. treasury securities
 

 
206

 

 

 

 
206

U.S. government agencies securities
 

 
22

 

 

 

 
22

Municipal debt securities
 

 
2

 

 

 

 
2

Total
 
$
(3
)
 
$
1,259

 
$

 
$
1

 
$
(3
)
 
$
1,260

We held a total of 1,165 positions as of September 30, 2015 and 468 positions as of December 31, 2014 that were in an unrealized loss position. The unrealized losses were immaterial both individually and in aggregate. We did not record any other-than-temporary impairments on these securities as of September 30, 2015, because we do not intend to sell these securities nor do we believe that we will be required to sell them before they recover their amortized costs at maturity. Gross realized gains and gross realized losses were immaterial for the three and nine months ended September 30, 2015 and 2014.

10



4.
DERIVATIVE FINANCIAL INSTRUMENTS
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 is the Euro. In order to manage this risk, we 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 on 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 (OCI) within stockholders' equity. When the hedged forecasted transaction occurs, the hedge is de-designated and the unrealized gains or losses are reclassified into product sales. The majority of gains and losses related to the hedged forecasted transactions reported in accumulated OCI at September 30, 2015 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, 2015 and 2014 are included within net cash provided by operating activities in the Condensed Consolidated Statements of Cash Flows.
We had notional amounts on foreign currency exchange contracts outstanding of $7.9 billion at September 30, 2015 and $6.4 billion at December 31, 2014.
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 on our Condensed Consolidated Balance Sheets (in millions):
 
 
September 30, 2015
 
 
Asset Derivatives
 
Liability Derivatives
 
 
Classification
 
Fair Value 
 
Classification
 
Fair Value
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
Other current assets
 
$
258

 
Other accrued liabilities
 
$
(29
)
Foreign currency exchange contracts
 
Other long-term assets
 
9

 
Other long-term obligations
 
(6
)
Total derivatives
 
 
 
$
267

 
 
 
$
(35
)
 

11



 
 
December 31, 2014
 
 
Asset Derivatives
 
Liability Derivatives
 
 
Classification
 
Fair Value 
 
Classification
 
Fair Value
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
Other current assets
 
$
314

 
Other accrued liabilities
 
$

Foreign currency exchange contracts
 
Other long-term assets
 
35

 
Other long-term obligations
 

Total derivatives
 
 
 
$
349

 
 
 
$

The following table summarizes the effect of our foreign currency exchange contracts on our Condensed Consolidated Financial Statements (in millions):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2015
 
2014
 
2015
 
2014
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
Gains recognized in accumulated OCI (effective portion)
 
$
60

 
$
230

 
$
336

 
$
263

Gains (losses) reclassified from accumulated OCI into product sales (effective portion)
 
$
137

 
$
(1
)
 
$
469

 
$
(41
)
Gains (losses) recognized in other income (expense), net (ineffective portion and amounts excluded from effectiveness testing)
 
$
4

 
$
(3
)
 
$
11

 
$
(7
)
Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
Gains recognized in other income (expense), net
 
$
21

 
$
73

 
$
89

 
$
83

From time to time, we may discontinue cash flow hedges and as a result, record related amounts in other income (expense), net on 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, 2015 and 2014 as a result of the discontinuance of cash flow hedges.
As of September 30, 2015 and December 31, 2014, 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 on our Condensed Consolidated Balance Sheets (in millions):
As of September 30, 2015
Offsetting of Derivative Assets/Liabilities
 
 
 
 
 
 
 
 
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)
Derivative assets
 
$
267

 
$

 
$
267

 
$
(35
)
 
$

 
$
232

Derivative liabilities
 
(35
)
 

 
(35
)
 
35

 

 

As of December 31, 2014
Offsetting of Derivative Assets/Liabilities
 
 
 
 
 
 
 
 
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)
Derivative assets
 
$
349

 
$

 
$
349

 
$

 
$

 
$
349

Derivative liabilities
 

 

 

 

 

 


12



5.
SUPPLEMENTAL FINANCIAL INFORMATION
Inventories
Inventories are summarized as follows (in millions):
 
 
September 30, 2015
 
December 31, 2014
Raw materials
 
$
1,198

 
$
909

Work in process
 
622

 
500

Finished goods
 
744

 
466

Total
 
$
2,564

 
$
1,875

 
 
 
 
 
Reported as:
 
 
 
 
Inventories
 
$
1,988

 
$
1,386

Other long-term assets
 
576

 
489

Total
 
$
2,564

 
$
1,875

Amounts reported as other long-term assets primarily consisted of raw materials as of September 30, 2015 and December 31, 2014.
The joint venture formed by Gilead Sciences, LLC and Bristol-Myers Squibb Company (BMS) (See Note 7, Collaborative Arrangements), which is 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 $1.3 billion as of September 30, 2015 and $806 million as of December 31, 2014.
Prepaid and other current assets
The components of prepaid and other current assets are summarized as follows (in millions):
 
 
September 30, 2015
 
December 31, 2014
Prepaid taxes
 
$
479

 
$
391

Prepaid expenses
 
240

 
194

Other current assets
 
490

 
472

Total prepaid and other current assets
 
$
1,209

 
$
1,057

Other accrued liabilities
The components of other accrued liabilities are summarized as follows (in millions):
 
 
September 30, 2015
 
December 31, 2014
Income taxes payable
 
$
159

 
$
105

Compensation and employee benefits
 
288

 
316

Branded Prescription Drug Fee
 
651

 
186

Other accrued expenses
 
1,623

 
1,266

Total other accrued liabilities
 
$
2,721

 
$
1,873

6.
INTANGIBLE ASSETS
The following table summarizes the carrying amounts of our intangible assets (in millions):
 
 
September 30, 2015
 
December 31, 2014
Finite-lived intangible assets
 
$
10,022

 
$
10,641

Indefinite-lived intangible assets
 
432

 
432

Total intangible assets
 
$
10,454

 
$
11,073


13



Finite-Lived Intangible Assets
The following table summarizes our finite-lived intangible assets (in millions):
 
 
September 30, 2015
 
December 31, 2014
 
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Intangible asset - sofosbuvir
 
$
10,720

 
$
1,281

 
$
10,720

 
$
757

Intangible asset - Ranexa
 
688

 
341

 
688

 
277

Other
 
455

 
219

 
455

 
188

Total
 
$
11,863

 
$
1,841

 
$
11,863

 
$
1,222

Amortization expense related to finite-lived intangible assets included primarily in cost of goods sold on our Condensed Consolidated Statements of Income totaled $206 million and $619 million for the three and nine months ended September 30, 2015 and $202 million and $601 million for the three and nine months ended September 30, 2014. As of September 30, 2015, the estimated future amortization expense associated with our finite-lived intangible assets for the remaining three months of 2015 and each of the five succeeding fiscal years is as follows (in millions):
Fiscal Year
 
Amount
2015 (remaining three months)
 
$
206

2016
 
832

2017
 
846

2018
 
853

2019
 
741

2020
 
713

Total
 
$
4,191

Indefinite-Lived Intangible Assets
The following table summarizes our indefinite-lived intangible assets as of September 30, 2015 and December 31, 2014 (in millions):
 
 
Amount
Indefinite-lived intangible asset - momelotinib (formerly CYT387)
 
$
315

Indefinite-lived intangible assets - Other
 
117

Total
 
$
432

7.
COLLABORATIVE ARRANGEMENTS
We enter into collaboration 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 are exposed to significant risks and rewards depending on the commercial success of the activities. Collaboration arrangements are assessed at their inception, and at each reporting date to determine whether we are the primary beneficiary of an entity determined to be a variable interest entity (VIE) and therefore would be required to consolidate the third party.
For VIEs, we may be required to consolidate an entity if the contractual terms of the arrangement essentially provide us with control over the entity, even if we do not have a majority voting interest. We assess whether we are the primary beneficiary of a VIE 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 such, we have consolidated those entities in our consolidated financial statements. As of September 30, 2015, the only material VIE was our joint venture with BMS which is described below.
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

14



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 will be 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 will 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, 2015 and December 31, 2014, 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 on our Condensed Consolidated Balance Sheets.
Selected financial information for the joint venture was as follows (in millions):
 
 
September 30, 2015
 
December 31, 2014
Total assets
 
$
2,796

 
$
2,138

Cash and cash equivalents
 
257

 
250

Accounts receivable, net
 
294

 
297

Inventories
 
2,244

 
1,590

Total liabilities
 
1,503

 
1,157

Accounts payable
 
1,045

 
749

Other accrued liabilities
 
457

 
408

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 Unlimited Company, our wholly-owned subsidiary, and BMS entered into a collaboration agreement with BMS which sets forth the terms and conditions under which we and BMS commercialize and distribute Atripla in the European Union (EU), 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 will be jointly managed, the parties no longer coordinate detailing and promotional activities in the region. We are responsible for accounting, financial reporting and tax reporting for the collaboration. As of September 30, 2015 and December 31, 2014, efavirenz purchased from BMS at BMS's estimated net selling price of efavirenz in the European Territory is included in inventories on our Condensed Consolidated Balance Sheets.

15



The parties also formed a limited liability company to hold the marketing authorization for Atripla in Europe. 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.
8.
DEBT AND CREDIT FACILITY
Financing Arrangements
The following table summarizes the carrying amounts of our borrowings under various financing arrangements (in millions):
Type of Borrowing
 
Description
 
Issue Date
 
Due Date
 
Interest Rate
 
September 30,
2015
 
December 31, 2014
Convertible Senior
 
May 2016 Notes
 
July 2010
 
May 2016
 
1.625%
 
$
331

 
$
483

Senior Unsecured
 
April 2021 Notes
 
March 2011
 
April 2021
 
4.50%
 
995

 
995

Senior Unsecured
 
December 2016 Notes
 
December 2011
 
December 2016
 
3.05%
 
700

 
700

Senior Unsecured
 
December 2021 Notes
 
December 2011
 
December 2021
 
4.40%
 
1,248

 
1,248

Senior Unsecured
 
December 2041 Notes
 
December 2011
 
December 2041
 
5.65%
 
998

 
998

Senior Unsecured
 
April 2019 Notes
 
March 2014
 
April 2019
 
2.05%
 
499

 
499

Senior Unsecured
 
April 2024 Notes
 
March 2014
 
April 2024
 
3.70%
 
1,748

 
1,747

Senior Unsecured
 
April 2044 Notes
 
March 2014
 
April 2044
 
4.80%
 
1,747

 
1,747

Senior Unsecured
 
February 2020 Notes
 
November 2014
 
February 2020
 
2.35%
 
499

 
499

Senior Unsecured
 
February 2025 Notes
 
November 2014
 
February 2025
 
3.50%
 
1,748

 
1,748

Senior Unsecured
 
February 2045 Notes
 
November 2014
 
February 2045
 
4.50%
 
1,740

 
1,740

Senior Unsecured
 
September 2018 Notes
 
September 2015
 
September 2018
 
1.85%
 
1,000

 

Senior Unsecured
 
September 2020 Notes
 
September 2015
 
September 2020
 
2.55%
 
1,996

 

Senior Unsecured
 
September 2022 Notes
 
September 2015
 
September 2022
 
3.25%
 
999

 

Senior Unsecured
 
March 2026 Notes
 
September 2015
 
March 2026
 
3.65%
 
2,739

 

Senior Unsecured
 
September 2035 Notes
 
September 2015
 
September 2035
 
4.60%
 
997

 

Senior Unsecured
 
March 2046 Notes
 
September 2015
 
March 2046
 
4.75%
 
2,241

 

Total debt, net
 
22,225

 
12,404

Less current portion
 
331

 
483

Total long-term debt, net
 
$
21,894

 
$
11,921

Convertible Senior Notes
During the nine months ended September 30, 2015, a portion of our convertible senior notes due in May 2016 (the May 2016 Notes) was settled and we repaid $163 million of principal balance related to these notes. We also paid $600 million in cash related to the conversion spread of the May 2016 Notes, which represents the conversion value in excess of the principal amount, and received $600 million in cash from the convertible note hedges related to the May 2016 Notes. The initial conversion rate for the May 2016 Notes was 44.0428 shares per $1,000 principal amount (which represented an initial conversion price of approximately $22.71 per share). The conversion rate for the May 2016 Notes is adjusted in connection with our quarterly cash dividend. As of September 30, 2015, the conversion rate was 44.3764 (which represented a conversion price of approximately $22.53 per share).
As of September 30, 2015 and December 31, 2014, the May 2016 Notes were classified as current given that their conversion criteria had been met. As a result, the related unamortized discount of $4 million and $15 million, as of September 30, 2015 and December 31, 2014, respectively, were classified as equity component of currently redeemable convertible notes on our Condensed Consolidated Balance Sheets.

16



As of December 31, 2014, there were 55 million shares of our common stock underlying our warrants expiring in 2016 (the 2016 Warrants). Under the terms of the original agreements, the 2016 Warrants had a strike price of $30.05 per share and were due to expire during the 40 trading-day period commencing August 1, 2016.
During the second quarter of 2015, we entered into modified agreements with our warrant counterparties which changed the timing of the expiration for 46 million of our 2016 Warrants. The modified agreements allowed us to settle the 46 million warrants at our option, in cash or shares. According to the terms of the modified agreements, these warrants expired during a 32 trading-day period which commenced on May 11, 2015 and ended on June 24, 2015. We exercised our option to settle in cash, and as a result, paid $3.9 billion as the market value of our common stock at the time of the exercise of the warrants exceeded their strike prices. Because these warrants could have been settled at our option, in cash or shares of common stock, under both the original and the modified agreements and these contracts met all of the applicable criteria for equity classification, the settlement payments were recorded as a reduction to additional paid-in capital on our Condensed Consolidated Balance Sheet. As additional paid-in capital was reduced to zero as of June 30, 2015, the remainder of the warrants settlement was recorded as a reduction in retained earnings.
As of September 30, 2015, 9 million of the 2016 Warrants remained outstanding and have a strike price of $29.19 per share and are due to expire during the 40 trading-day period commencing August 1, 2016. The strike price of the 2016 Warrants is adjusted in connection with our quarterly cash dividend. There were no other changes in terms for the remaining 9 million 2016 Warrants.
September 2015 Issuance of Senior Unsecured Notes
We issued $10.0 billion aggregate principal amount of senior unsecured notes in September 2015 (collectively, the "2015 Notes"), in six tranches with maturities ranging from 2018 to 2046, the terms of which are summarized in the table above. Debt issuance costs incurred in connection with the issuance of the 2015 Notes totaled approximately $70 million and are being amortized to interest expense over the contractual term of each of the respective notes.
The 2015 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 September 2018, 15 basis points for the notes due in September 2020, 20 basis points for the notes due in September 2022, 25 basis points for the notes due in March 2026, 25 basis points for the notes due in September 2035 and 30 basis points for the notes due in March 2046. The 2015 Notes maturing from September 2022 through March 2046 also have a call feature, exercisable at our option, to redeem the notes at par in whole or in part two 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 2015 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 dividends and the repurchase of our outstanding common stock pursuant to our authorized share repurchase program.
Credit Facility
There were no amounts outstanding under the revolving credit facility credit agreement as of September 30, 2015.
We are required to comply with certain covenants under the credit agreement and note indentures and as of September 30, 2015, we were not in violation of any covenants.
9.
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

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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, now known commercially as Harvoni. 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 combination of ledipasvir and sofosbuvir (Harvoni). Third parties may have, or may obtain rights to, patents that allegedly could be used to prevent or attempt to prevent us from commercializing Harvoni or Sovaldi. 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 Harvoni and Sovaldi. We cannot predict the ultimate outcome of intellectual property claims related to Harvoni or Sovaldi. 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 Harvoni and/or Sovaldi, 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. An interference is an administrative proceeding before the USPTO designed to determine who was the first to invent the subject matter claimed by both parties. On January 29, 2014, the USPTO Patent Trial and Appeal Board (PTAB) determined that Pharmasset and not Idenix was the first to invent the compounds in dispute and accordingly Gilead prevailed in the First Idenix Interference. 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 similar to those which were involved in the First Idenix Interference. The purpose of the Second Idenix Interference was to determine who was first to invent the claimed methods of treating HCV with compounds similar to those which were involved in the First Idenix Interference. On March 23, 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). We have filed a motion to dismiss the appeal in Delaware and will respond to the appeal filed in the CAFC.
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 and the Idenix patent application that was the subject of the First Idenix Interference. Idenix has asserted that the commercialization of Sovaldi in Canada will infringe its ’191 patent and that our Canadian Patent No. 2,527,657, corresponding to the ’572 patent involved in the First Idenix Interference, is invalid. A trial on these issues was held in January and February 2015, and on November 2, 2015, the Federal Court of Canada rendered its public decision holding that Idenix's patent is invalid and that Gilead's patent is valid.
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. On March 21, 2014, the Norwegian court found all claims in the Idenix Norwegian patent to be invalid and upheld the validity of all claims in the challenged Gilead patent. On April 30, 2014, Idenix appealed the March 21, 2014 decision to the Norwegian Court of Appeal. The appeal hearing from the March 2014 decision is scheduled for February 2016.
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 will infringe its Australian patent corresponding to the ’600 patent. A month-long trial on these issues was completed in October 2015 in Sydney, and we are currently awaiting a decision.
On March 12, 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. The EPO has sent an opposition hearing for February 2016. Also on that day, Idenix initiated

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infringement proceedings against Gilead 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 to determine the issues of infringement and validity of the Idenix UK patent. 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. The UK Court has granted Idenix permission to appeal the December 1, 2014 judgment. The appeal of the UK Court's decision is scheduled for July 2016. On March 12, 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 filed in the EPO. 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 the event such patents are issued, we expect to challenge them in proceedings similar to those we invoked in other countries.
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. On June 30, 2014, the court transferred the Massachusetts litigation to the U.S. District Court for the District of Delaware. The district court has set trial dates in October 2016 and 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 in August 2014. While the acquisition does not change our view of the lack of merit in the claims made by Idenix, Merck has greater resources than Idenix and may therefore choose to fund the litigation at higher levels than Idenix.
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 Nos. 7,105,499 and 8,481,712, which it co-owns with Isis Pharmaceuticals, Inc. In August 2013, we filed a lawsuit 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. Merck’s U.S. Patent Nos. 7,105,499 and 8,481,712 cover compounds which do not include, but may relate to, sofosbuvir. During patent prosecution, Merck amended its patent application in an attempt to cover compounds related to sofosbuvir. If the court determines that Merck’s patents are valid and that we have infringed those claims, we may be required to obtain a license from and pay royalties to Merck to commercialize sofosbuvir. Either party may appeal a decision by the District Court to the CAFC. The court has set a trial date of March 7, 2016 for this lawsuit.
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 (AbbVie Patents) which purport to cover the use of a fixed dose combination of ledipasvir and sofosbuvir (LDV/SOF), now known commercially as Harvoni for the treatment of HCV. Gilead is aware that AbbVie has pending patent applications in the United States and granted and pending applications in other countries. We own published and pending patent applications directed to the use of combinations for the treatment of HCV, and, specifically, to the combination of ledipasvir and sofosbuvir. Certain of our applications were filed before the AbbVie Patents. For this reason and others, we believe the AbbVie Patents are invalid.
Accordingly, in December 2013, we filed a lawsuit in the U.S. District Court for the District of Delaware seeking declaratory judgment that the AbbVie Patents are invalid and unenforceable, as well as other relief. We believe that Abbott Laboratories, Inc. and AbbVie conspired to eliminate competition in the HCV market by falsely representing to the USPTO that they, and not Gilead, invented methods of treating HCV using a combination of LDV/SOF. In February and March 2014, AbbVie responded to our lawsuit by also filing two lawsuits in the U.S. District Court for the District of Delaware alleging that our fixed-dose combination of LDV/SOF will infringe its patents. All of those lawsuits have been consolidated into a single action. In the United States, either party may appeal a decision by the District Court to the CAFC. The AbbVie Patents have not blocked or delayed the commercialization of our combination product in the United States, Canada, or Europe. We do not expect any other foreign patents to block or delay the commercialization around the world. The court has set a trial date of September 12, 2016 for this lawsuit.
Additionally, AbbVie has obtained U.S. Patent No. 9,034,832 which purports to cover a solid oral dosage form containing ledipasvir. Accordingly, in May 2015, we filed a lawsuit in the U.S. District Court for the District of Delaware seeking declaratory judgment that AbbVie’s patent is invalid, as well as other relief. We do not expect AbbVie’s patent to block the commercialization of our combination product. The court has set a trial date of July 31, 2017.

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In August 2015, we brought an impeachment action seeking a declaration that AbbVie's Canadian Patent No. 2,811,250 ('250 Patent), which purports to cover the use of a combination of LDV/SOF (or Harvoni) for the treatment of HCV, is invalid. On the same day, AbbVie brought an infringement action which asserts that commercialization of Harvoni in Canada will infringe its '250 Patent. The impeachment action has been stayed and we have counterclaimed for invalidity in the infringement proceeding. A trial date has not been set.
If a court determines that the AbbVie Patents are valid and that we have infringed those claims, we may be required to obtain a license from and pay royalties to AbbVie to commercialize sofosbuvir combination products.
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. While we are confident in the strength of our sofosbuvir patent, 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 in Europe could be substantially shortened or eliminated entirely. If the sofosbuvir patent is revoked, and no other European patents are granted covering sofosbuvir, our exclusivity will be based entirely on regulatory exclusivity granted by the European Medicines Agency (EMA). Sovaldi has been granted regulatory exclusivity that will prevent generic sofosbuvir from entering the EU 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.
Litigation with Generic Manufacturers
As part of the approval process for some of our products, the 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 these 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 some of our generic manufacturers include:
Mylan
In April 2014, we received notice that Mylan Inc. (Mylan) submitted an ANDA to the FDA requesting permission to manufacture and market a generic version of Truvada. In the notice, Mylan alleges that two of the patents associated with emtricitabine and one of our patents associated with the fixed-dose combination of emtricitabine with tenofovir disoproxil fumarate are invalid, unenforceable and/or will not be infringed by Mylan's manufacture, use or sale of a generic version of Truvada.
In June 2014, we filed a lawsuit against Mylan in U.S. District Court for the Northern District of West Virginia for infringement of our patents. In June 2014, we received notice that Mylan submitted petitions for Inter Partes Review (IPR) to the PTAB alleging that four patents associated with tenofovir disoproxil fumarate are invalid. We opposed Mylan’s petitions. In December 2014, the PTAB issued decisions denying each of Mylan’s petitions for IPR against the tenofovir disoproxil fumarate-associated patents on the grounds that Mylan had not established a reasonable likelihood of success that it would prevail in its challenge to each of these patents. In January 2015, Mylan requested a rehearing on the basis that it believes the PTAB decision is wrong. In August 2015, the PTAB denied Mylan's request for a rehearing on the three patents covering the tenofovir disoproxil prodrug.
In July 2015, we received notice that Mylan submitted an ANDA to the FDA requesting permission to manufacture and market a generic version of Complera. In the notice, Mylan alleges that our patents associated with emtricitabine and the fixed-dose combination of emtricitabine with tenofovir disoproxil fumarate, in addition to patents associated with rilpivirine, are invalid, unenforceable and/or will not be infringed by Mylan's manufacture, use or sale of a generic version of Complera. In August 2015, Gilead and Janssen filed suit in the U.S. District Court for the District of Delaware, and in September 2015, filed suit in the U.S. District Court for the Northern District of West Virginia and asserted patents associated with rilpivirine. In August 2015, we also filed suit separately in the U.S. District Court for the Northern District of West Virginia asserting patents associated with emtricitabine and the fixed-dose combination of emtricitabine with tenofovir disoproxil fumarate. In October 2015, we reached an agreement with Mylan to settle the lawsuit in the U.S. District Court for the Northern District of West Virginia relating to the patents associated with emtricitabine and the fixed-dose combination of emtricitabine with tenofovir disoproxil fumarate. The terms of the settlement agreement are confidential. The settlement agreement has been filed with the Federal Trade Commission and Department of Justice as required by law.

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Apotex
In June 2014, we received notice that Apotex Corp. (Apotex) submitted an abbreviated new drug submission (ANDS) to Health Canada requesting permission to manufacture and market a generic fixed-dose combination of emtricitabine and tenofovir disoproxil fumarate 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 a lawsuit against Apotex in the Federal Court of Canada seeking an order of prohibition against approval of this ANDS.
Teva
In August 2012, Teva Pharmaceuticals (Teva) filed an Impeachment Action in the Federal Court of Canada seeking invalidation of our two Canadian patents associated with Viread. In September 2013, a hearing on the consolidated requests for orders of prohibition in connection with all three of Teva’s ANDS filings to Health Canada (for Teva’s generic versions of Viread, Truvada, and Atripla) took place. In December 2013, the court issued our requested order prohibiting the Canadian Minister of Health from issuing a Notice of Compliance for Teva’s generic versions of our Viread, Truvada, and Atripla products until expiry of our patent in July 2017. Teva appealed the decision of the court prohibiting Health Canada from issuing the Notices of Compliance until expiry of our patent in July 2017. This decision did not rule on the validity of the patents and accordingly the only issue on appeal is whether Health Canada should be prohibited from issuing the Notices of Compliance for Teva’s products. The appeal will be heard by the Canadian Federal Court of Appeal after the trial in the Impeachment Action. Separately, the court will determine the validity of the patents in the pending Impeachment Action. A trial in the Impeachment Action is scheduled for November 2016. If Teva is successful in invalidating our patents, Teva may be able to launch generic versions of our Viread, Truvada and Atripla products in Canada prior to the expiry of our patents.
Watson
In February 2015, we received notice that Watson Laboratories, Inc. (Watson) submitted an ANDA to the 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.
SigmaPharm
In June 2015, we received notice that SigmaPharm Laboratories, LLC (SigmaPharm) submitted an ANDA to the 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.
Department of Justice Investigation
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 U.S. 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. We moved to dismiss the 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.
Other Matters
We are a party to various legal actions that arise 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.

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10.
STOCKHOLDERS’ EQUITY
The following table summarizes the changes in stockholders' equity (in millions):
 
 
Gilead Stockholders' Equity