GILEAD SCIENCES, INC.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is intended to help the reader understand our
results of operations and financial condition. MD&A is provided as a supplement
to, and should be read in conjunction with, our audited Consolidated Financial
Statements and the accompanying Notes to Consolidated Financial Statements and
other disclosures included in this Annual Report on Form 10-K (including the
disclosures under Part I, Item 1A. Risk Factors). Additional information related
to the comparison of our results of operations between the years 2020 and 2019
is included in Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations of our 2020 Form 10-K filed with the
U.S. Securities and Exchange Commission (the "SEC"). Our Consolidated Financial
Statements have been prepared in accordance with U.S. generally accepted
accounting principles and are presented in U.S. dollars.
MANAGEMENT OVERVIEW
Gilead Sciences, Inc. ("Gilead," "we," "our" or "us") is a biopharmaceutical company that has pursued and achieved breakthroughs in medicine for more than three decades, with the goal of creating a healthier world for all people. We are committed to advancing innovative medicines to prevent and treat life-threatening diseases, including HIV, viral hepatitis and cancer. We operate in more than 35 countries worldwide, with headquarters inFoster City, California . Our portfolio of marketed products includes AmBisome®, Atripla®, Biktarvy®, Cayston®, Complera®, Descovy®, Descovy for PrEP®, Emtriva®, Epclusa®, Eviplera®, Genvoya®, Harvoni®, Hepcludex® (bulevirtide), Hepsera®, Jyseleca® (filgotinib), Letairis®, Odefsey®, Ranexa®, Sovaldi®, Stribild®, Tecartus®, Trodelvy®, Truvada®, Truvada for PrEP®, Tybost®, Veklury®, Vemlidy®, Viread®, Vosevi®, Yescarta® and Zydelig®. The approval status of Hepcludex and Jyseleca vary worldwide, and Hepcludex and Jyseleca are not approved inthe United States . We also sell and distribute authorized generic versions of Epclusa and Harvoni inthe United States through our separate subsidiary,Asegua Therapeutics, LLC . In addition, we sell and distribute certain products through our corporate partners under collaborative agreements. Business Highlights(1) We delivered strong financial performance in 2021. Veklury continued to play a critical role in addressing the coronavirus disease 2019 ("COVID-19") pandemic. Veklury's performance helped mitigate the impacts of COVID-19 on other parts of the business, including on our HIV and chronic hepatitis C virus ("HCV") franchises, and the impacts of theOctober 2020 loss of exclusivity of Truvada and Atripla inthe United States . Despite these transitory headwinds, underlying demand for our virology portfolio remained strong, led by the continued growth of our Biktarvy franchise. We also received increased contributions from our oncology franchise, experiencing growth in Trodelvy, as well as ourCell Therapy franchise. 33 -------------------------------------------------------------------------------- We continued to expand and strengthen both our commercial portfolio and clinical pipeline across therapeutic focus areas to drive future growth potential. During 2021, we announced an additional six filings for regulatory approval. In addition to investing in our internal pipeline programs, we also continued to enter into and leverage our existing strategic collaborations and partnerships, including opting into four additional pipeline assets from our collaboration with Arcus Biosciences, Inc. ("Arcus") to further develop the foundation for a more sustainable and diversified business.
Viral Diseases
•InOctober 2021 ,U.S. Food and Drug Administration ("FDA") approved a new low-dose tablet dosage form of Biktarvy for pediatric patients weighing at least 14 kg to less than 25 kg who are virologically suppressed or new to antiretroviral therapy. •InAugust 2021 , our Marketing Authorization Application for lenacapavir, an investigational, long-acting HIV-1 capsid inhibitor, was fully validated and is now under evaluation with theEuropean Medicines Agency ("EMA"). •InJune 2021 , FDA granted approval of a new oral pellet formulation of Epclusa, expanding the pediatric indication to treat children as young as 3 years of age with chronic HCV. •InJune 2021 , we submitted a New Drug Application to FDA for lenacapavir, an investigational, long-acting agent in development for the treatment of HIV-1 in people with limited therapy options.
•In
•In
COVID-19
•In
•InDecember 2021 , theEuropean Commission granted approval to expand the indication for Veklury for use in the earlier stages of the disease in adult patients who do not require supplemental oxygen and are at increased risk of progressing to severe COVID-19. •InApril 2021 , we announced that we will (i) provide assistance and support for expansion of local manufacturing capacity of remdesivir inIndia and will donate the active pharmaceutical ingredient and (ii) donate a minimum of 450,000 vials of Veklury (remdesivir) to the government ofIndia .
Oncology
•InJanuary 2022 , FDA approved an update to the prescribing information for Yescarta to include the use of prophylactic corticosteroids across all approved indications. Yescarta is now the first and only chimeric antigen receptor ("CAR") T-cell therapy with information in the label to help physicians manage, and potentially prevent, treatment side effects. •InOctober 2021 , FDA approved Tecartus for the treatment of adult patients with relapsed or refractory B-cell precursor acute lymphoblastic leukemia ("ALL"). Tecartus is the first and only CAR T cell therapy approved for adults with ALL. •InSeptember 2021 , Kite, a Gilead company ("Kite") submitted a supplemental Biologics License Application to FDA for Yescarta to expand its current indication to include the treatment of adults with relapsed or refractory large B-cell lymphoma ("LBCL") in the second-line setting. •InAugust 2021 ,Kite and Appia Bio, Inc. entered into a collaboration and license agreement to research and develop hematopoietic stem cell derived cell therapies directed toward hematological malignancies.
•In
•InJune 2021 ,Fosun Kite Biotechnology Co. Ltd , a joint venture betweenKite and Shanghai Fosun Pharmaceutical (Group) Co., Ltd, received approval from theChina National Medical Products Administration for axicabtagene ciloleucel for the treatment of adult patients with relapsed or refractory LBCL inChina .
•In
34
--------------------------------------------------------------------------------Other
•InJanuary 2022 , we entered into a clinical trial collaboration agreement with Merck to evaluate Trodelvy in combination with Merck's anti-programmed death receptor-1 ("PD-1") therapy, Keytruda, in a first-line setting for patients with non-small cell lung cancer ("NSCLC"). •InNovember 2021 , theEuropean Commission granted marketing authorization for Trodelvy for treatment of metastatic triple-negative breast cancer ("TNBC") in adult patients with unresectable or metastatic TNBC who have received two or more prior systemic therapies, at least one of them for advanced disease. •InNovember 2021 , we exercised options to three programs in the clinical-stage portfolio of Arcus, including anti-TIGIT molecules domvanalimab and AB308, as well as clinical candidates etrumadenant (dual adenosine A2a/A2b receptor antagonist) and quemliclustat (small molecule CD73 inhibitor). The transaction closed inDecember 2021 . •InOctober 2021 , we entered into a clinical trial collaboration and supply agreement with Merck to evaluate the efficacy of Trodelvy in combination with Keytruda as a first-line treatment for patients with locally advanced or metastatic TNBC. •InSeptember 2021 ,Health Canada approved Trodelvy for the treatment of adult patients with unresectable locally advanced or metastatic TNBC who have received two or more therapies, at least one of them for metastatic disease.Canada joinedAustralia ,Great Britain ,Switzerland andthe United States among the countries that have approved Trodelvy for use underProject Orbis , a global collaborative review program for high impact oncology marketing applications across participating countries. •InApril 2021 , FDA granted accelerated approval of Trodelvy for use in adult patients with locally advanced or metastatic urothelial cancer ("UC"), a new indication. •InApril 2021 , FDA granted full approval of Trodelvy for adult patients with unresectable locally advanced or metastatic TNBC. ______________________________________________________ (1) We announced and discussed these updates in further detail in press releases available on our website at www.gilead.com. Readers are also encouraged to review all other press releases available on our website mentioned above. The content on the referenced websites does not constitute a part of and is not incorporated by reference into this Annual Report on Form 10-K. 2021 Financial Highlights (in millions, except percentages and per share amounts) 2021 2020 Change Total revenues$ 27,305 $ 24,689 11 % Net income attributable to Gilead$ 6,225 $ 123 NM
Net income per share attributable to Gilead common stockholders - diluted
$ 4.93 $ 0.10 NM
________________________________
NM - Not Meaningful
Total revenues increased by 11% to$27.3 billion in 2021, compared to$24.7 billion in 2020, primarily due to increased sales of Veklury, our FDA-approved treatment for hospitalized patients with COVID-19. The increase also reflects the continued growth of Biktarvy in all geographies and the continued uptake of Trodelvy,Cell Therapy and chronic hepatitis B virus ("HBV") and HDV products. The increases were partially offset by the decrease in Truvada and Atripla sales inthe United States , as expected, primarily due to the continued generic competition following theOctober 2020 loss of exclusivity inthe United States . Net income attributable to Gilead was$6.2 billion or$4.93 diluted earnings per share in 2021, compared to$123 million or$0.10 diluted earnings per share in 2020. The increase was primarily due to lower acquired in-process research and development ("IPR&D") charges, revenue growth and lower unrealized losses from our equity investments, partially offset by a$1.25 billion charge for a settlement related to bictegravir litigation, and a charge of$625 million related to the Arcus collaboration opt-in. Our acquired IPR&D expenses in 2020 were$5.9 billion primarily related to our acquisition of Forty Seven as well as collaborations and other investments that we entered into during the year with Arcus,Pionyr Immunotherapeutics, Inc. ("Pionyr"), Tango Therapeutics, Inc. ("Tango"),Tizona Therapeutics, Inc. ("Tizona") and Jounce Therapeutics, Inc. ("Jounce"). Strategy and Outlook 2022 Our purpose is to deliver life-changing medications to patients in need through scientific breakthroughs, innovation and strong operational execution. Our strategic ambitions are to (i) bring 10+ transformative therapies to patients by 2030; (ii) be the biotech employer and partner of choice; and (iii) deliver shareholder value in a sustainable and responsible manner. Our strategic priorities reflect how we will deliver those ambitions: (i) expand internal and external innovation; (ii) strengthen portfolio strategy and decision making; (iii) increase patient benefit and access; and (iv) continue to evolve our culture. 35 -------------------------------------------------------------------------------- In 2022, we will continue to focus on executing our strategy to expand and diversify our commercial portfolio and clinical pipelines across our three therapeutic focus areas: virology, oncology and inflammation. Specifically, we plan to significantly increase clinical development studies across our novel oncology portfolio while maintaining our leadership in antiviral medications through our work in HIV, hepatitis, the COVID-19 pandemic and emerging viruses. Our collaboration with Arcus provides additional opportunities for us to further develop the foundation for a more sustainable and diversified business. Beyond expanding our products and pipeline, we also continue to focus on our employees, the evolution of our culture and our efforts to promote racial equity and social justice. Additionally, we expect to maintain a rigorous focus on disciplined expense management. While, the COVID-19 pandemic continues to impact our business and broader market dynamics, we expect revenue growth of between 2 - 4% in 2022 product sales, excluding Veklury, as compared to 2021. Our HIV product sales will continue to recover from the COVID-19 pandemic and demonstrate year-over-year growth, as the financial impact of the Truvada and Atripla loss of exclusivity will be largely behind us starting in the second quarter of 2022. We also expect our oncology businesses, includingCell Therapy and Trodelvy, to contribute to our growth. Veklury sales are generated in a highly dynamic and complex global environment, which continues to evolve. As a result, Veklury sales are subject to significant volatility and uncertainty. Future product demand will depend on the nature of the COVID-19 pandemic, including duration, infection rates, hospitalizations, and availability and adoption of alternative therapies and vaccines. While we anticipate a year-over-year decline in Veklury product sales, we expect Veklury to continue to play a key role in the pandemic and contribute meaningfully to our revenue in 2022, more heavily weighted towards the beginning of the year. Our ability to deliver on our strategy is subject to a number of uncertainties, including, but not limited to, the effects of the COVID-19 pandemic, which remains unpredictable; the uncertainty regarding the amount and timing of future Veklury sales; the continuation of an uncertain global macroeconomic environment; our ability to realize the potential benefits of our acquisitions, collaborations or licensing arrangements; our ability to initiate, progress or complete clinical trials within currently anticipated timeframes, including as a result of any current or future holds on clinical trials; the possibility of unfavorable results from new and ongoing clinical trials; our ability to submit new drug applications for new product candidates or expanded indications in the currently anticipated timelines; our ability to receive regulatory approvals in a timely manner or at all; market share and price erosion caused by the introduction of generics; loss of exclusivity of our products; higher than anticipated effects of the loss of exclusivity from Truvada and Atripla; slower than anticipated growth in Biktarvy, Trodelvy, Vemlidy andCell Therapy products; inaccuracies in our patient start estimates; additional pricing pressures from payers and competitors; an increase in discounts, chargebacks and rebates due to ongoing contracts and future negotiations with commercial and government payers; potential government actions that could have the effect of lowering prices; a larger-than anticipated shift in payer mix to a more highly discounted payer segment; and volatility in foreign currency exchange rates. RESULTS OF OPERATIONS Revenues The following table summarizes the period-over-period changes in our revenues: Year Ended December 31, 2021 Year Ended December 31, 2020 (in millions, except percentages)U.S. Europe Other International TotalU.S. Europe Other International Total Change Product sales: HIV$ 12,828 $ 2,366 $ 1,121$ 16,315 $ 13,651 $ 2,287 $ 1,000$ 16,938 (4) % Veklury 3,640 1,095 830 5,565 2,026 607 178 2,811 98 % HCV 1,018 421 442 1,881 1,088 414 562 2,064 (9) % HBV/HDV 397 104 468 969 380 71 409 860 13 %Cell Therapy 542 293 36 871 396 201 10 607 43 % Trodelvy 370 10 - 380 49 - - 49 NM Other 381 389 257 1,027 551 314 161 1,026 - % Total product sales 19,176 4,678 3,154 27,008 18,141 3,894 2,320 24,355 11 % Royalty, contract and other revenues 91 196 10 297 76 241 17 334 (11) % Total revenues$ 19,267 $ 4,874 $ 3,164$ 27,305 $ 18,217 $ 4,135 $ 2,337$ 24,689 11 %
________________________________
NM - Not Meaningful
36
--------------------------------------------------------------------------------Product Sales HIV HIV product sales decreased by 4% to$16.3 billion in 2021, compared to$16.9 billion in 2020, due to the anticipated decline in sales volume of our Truvada (emtricitabine ("FTC") and tenofovir disoproxil fumarate ("TDF"))-based products driven by the continued generic competition following theOctober 2020 loss of exclusivity of Truvada and Atripla inthe United States . Truvada and Atripla product sales were$1.3 billion lower in 2021, compared to 2020. The decrease was also impacted by lower sales of Genvoya driven by decrease in volume worldwide primarily due to patients switching to Biktarvy. These declines were partially offset by an increase in Biktarvy product sales worldwide driven by higher demand, higher net average selling price driven by favorable changes in estimates of government rebates and discounts inthe United States . We expect that our HIV business will continue to recover from the COVID-19 pandemic in 2022. We also expect the impact of the Truvada and Atripla loss of exclusivity will be largely behind us starting in the second quarter of 2022.
Veklury
Veklury product sales were$5.6 billion in 2021, compared to$2.8 billion in 2020. Veklury became commercially available in the third quarter of 2020, resulting in a partial year of sales in 2020. The increase was also attributable to higher hospital demand worldwide. Sales of Veklury are generally affected by COVID-19 related rates of infections, hospitalizations and vaccinations as well as the availability, uptake and effectiveness of alternative treatments for COVID-19. As a result, future sales of Veklury are difficult to predict.
HCV
HCV product sales decreased by 9% to$1.9 billion in 2021, compared to$2.1 billion in 2020, primarily due to lower demand driven by fewer patient starts worldwide due to the impact of the COVID-19 pandemic. The slight increase in HCV sales inEurope in 2021 was due to a favorable change in estimate of government rebates, which offset the revenue decrease associated with lower demand.
HBV / HDV
HBV and HDV product sales increased by 13% to$969 million in 2021, compared to$860 million in 2020, primarily due to higher Vemlidy product sales due to higher demand in all geographies, partially offset by lower Viread product sales in Other international locations. Hepcludex sales in 2021 were$37 million as launch activities continued acrossEurope following our first quarter 2021 acquisition of MYR.
Cell Therapy product sales, which include Yescarta and Tecartus, increased by 43% to$871 million in 2021, compared to$607 million in 2020. The growth was primarily due to theJuly 2020 launch of Tecartus inthe United States for the treatment of adult patients with relapsed or refractory mantle cell lymphoma ("MCL") and theDecember 2020 launch of Tecartus for MCL inEurope , resulting in partial year of sales in 2020. The increase was also driven by continued higher demand for Yescarta worldwide for LBCL and volume growth related to approval of Yescarta for FL inthe United States in 2021.
Trodelvy
Trodelvy product sales increased to$380 million in 2021, compared to$49 million in 2020. We obtained Trodelvy through the fourth quarter 2020 acquisition of Immunomedics, resulting in a partial year of sales in 2020. In addition, 2021 revenues include continued uptake of Trodelvy following the full regulatory approval for metastatic TNBC inthe United States andEurope and accelerated approval for metastatic UC inthe United States .
Other Product Sales
Other product sales, which include AmBisome, Cayston, Jyseleca, Letairis, Ranexa and Zydelig, were$1.0 billion in 2021 and remained flat as compared to 2020. AmBisome sales volume increased due to higher demand in geographies outsidethe United States . The increase was mostly offset by lower Letairis sales inthe United States , as anticipated, due to continued generic competition following the loss of exclusivity in 2019.
Gross-to-Net Deductions
We record product sales net of estimated government and other rebates and chargebacks, cash discounts for prompt payment, distributor fees, sales returns and other related costs. These deductions totaled$14.4 billion , or 35% of gross product sales in 2021, compared to$15.3 billion , or 39% of gross product sales in 2020. The reduction is driven by changes in product mix, primarily due to higher Veklury sales in 2021. Of the$14.4 billion in 2021,$12.6 billion , or 30% of gross product sales, was related to government and other rebates and chargebacks and$1.8 billion was related to cash discounts for prompt payment, distributor fees, sales returns and other related costs. 37 --------------------------------------------------------------------------------
Foreign Currency Exchange Impact
Of our total product sales, 29% and 26% were generated outsidethe United States in 2021 and 2020, respectively. We generally face exposure to movements in foreign currency exchange rates, primarily in the Euro. We use foreign currency exchange contracts to hedge a portion of our foreign currency exposures. Foreign currency exchange, net of hedges, had a favorable impact on our total product sales of$141 million in 2021, based on a comparison using foreign currency exchange rates from 2020, largely driven by Euro-based product sales. 38 --------------------------------------------------------------------------------
The following table summarizes the period-over-period changes in our product sales:
Year Ended December 31, 2021 Year Ended December 31, 2020
(in millions, except percentages) U.S. Europe Other International Total U.S. Europe Other International Total Change
HIV Products Descovy (FTC /TAF) Based Products Biktarvy$ 7,049 $ 969 $ 606$ 8,624 $ 6,095 $ 735 $ 429$ 7,259 19 % Descovy 1,397 164 139 1,700 1,526 197 138 1,861 (9) % Genvoya 2,267 391 221 2,879 2,605 490 243 3,338 (14) % Odefsey 1,076 440 52 1,568 1,172 450 50 1,672 (6) % Revenue share - Symtuza(1) 355 165 11 531 331 149 8 488 9 % Total Descovy (FTC /TAF) Based Products 12,144 2,129 1,029 15,302 11,729 2,021 868 14,618 5 % Truvada (FTC /TDF) Based Products Atripla 121 12 12 145 307 21 21 349 (58) % Complera/Eviplera 102 142 14 258 89 159 21 269 (4) % Stribild 132 43 14 189 125 54 17 196 (4) % Truvada 314 22 35 371 1,376 27 45 1,448 (74) % Total Truvada (FTC /TDF) Based Products 669 219 75 963 1,897 261 104 2,262 (57) % Other HIV(2) 15 18 17 50 25 5 28 58 (14) % Total HIV 12,828 2,366 1,121 16,315 13,651 2,287 1,000 16,938 (4) % Veklury 3,640 1,095 830 5,565 2,026 607 178 2,811 98 % HCV Products Ledipasvir/Sofosbuvir(3) 84 31 97 212 92 29 151 272 (22) % Sofosbuvir/Velpatasvir(4) 815 316 331 1,462 864 337 398 1,599 (9) % Other HCV(5) 119 74 14 207 132 48 13 193 7 % Total HCV 1,018 421 442 1,881 1,088 414 562 2,064 (9) % HBV/HDV Products Vemlidy 384 34 396 814 356 29 272 657 24 % Viread 11 28 72 111 14 34 137 185 (40) % Other HBV/HDV(6) 2 42 - 44 10 8 - 18 NM Total HBV/HDV 397 104 468 969 380 71 409 860 13 % Cell Therapy Products Tecartus 136 40 - 176 34 10 - 44 NM Yescarta 406 253 36 695 362 191 10 563 23 % TotalCell Therapy 542 293 36 871 396 201 10 607 43 % Trodelvy 370 10 - 380 49 - - 49 NM Other Products AmBisome 39 274 227 540 61 230 145 436 24 % Letairis 206 - - 206 314 - - 314 (34) % Ranexa 10 - - 10 9 - - 9 11 % Zydelig 26 35 1 62 31 39 2 72 (14) % Other(7) 100 80 29 209 136 45 14 195 7 % Total Other 381 389 257 1,027 551 314 161 1,026 - % Total product sales 19,176 4,678 3,154 27,008$ 18,141 $ 3,894 $ 2,320$ 24,355 11 %
_______________________________
NM - Not Meaningful
(1) Represents our revenue from cobicistat ("C"), emtricitabine FTC and
tenofovir alafenamide ("TAF") in Symtuza (darunavir/C/FTC /TAF), a fixed dose
combination product commercialized by Janssen Sciences Ireland Unlimited
Company .
(2) Includes Emtriva and Tybost.
(3) Amounts consist of sales of Harvoni and the authorized generic version of
Harvoni sold by our separate subsidiary, Asegua Therapeutics LLC .
(4) Amounts consist of sales of Epclusa and the authorized generic version of
Epclusa sold by our separate subsidiary, Asegua Therapeutics LLC .
(5) Includes Vosevi and Sovaldi.
(6) Includes Hepcludex and Hepsera.
(7) Includes Cayston and Jyseleca.
39
--------------------------------------------------------------------------------Costs and Expenses
The following table summarizes the period-over-period changes in our costs and expenses:
(In millions, except percentages) 2021 2020 Change Cost of goods sold$ 6,601 $ 4,572 44 % Product gross margin 75.6 % 81.2 % -560 bps Research and development ("R&D") expenses$ 5,363 $ 5,039 6 % Acquired IPR&D expenses$ 177 $ 5,856 (97) %
Selling, general and administrative ("SG&A") expenses
2 %
Product Gross Margin
In 2021, product gross margin decreased to 75.6% as compared to 81.2% in 2020,
primarily due to a $1.25 billion charge for a settlement related to bictegravir
litigation as well as an increase of $848 million in acquisition-related
expenses from amortization of finite-lived intangible assets and recognition of
inventory step-up charges primarily driven by our acquisitions of Immunomedics
and MYR. Product gross margin was also impacted by higher inventory write-down
charges and changes in product mix. The increases were partially offset by lower
royalty expenses due to lower sales of products containing emtricitabine and
elvitegravir and the reversal of a previously recorded $175 million litigation
accrual following a favorable court decision related to axicabtagene ciloleucel.
Research and Development Expenses
R&D expenses consist primarily of clinical studies performed by contract research organizations, materials and supplies, payments under collaborative and other arrangements including milestone payments, licenses and fees, expense reimbursements to the collaboration partners, personnel costs including salaries, benefits and stock-based compensation expense, and overhead allocations consisting of various support and infrastructure costs.
We manage our R&D expenses by identifying the R&D activities we anticipate will be performed during a given period and then prioritizing efforts based on scientific data, probability of technical and regulatory successful development, market potential, available human and capital resources and other considerations. We continually review our R&D projects based on unmet medical need and, as necessary, reallocate resources among our internal R&D portfolio and external opportunities that we believe will best support the long-term growth of our business. In 2021, R&D expenses increased by$324 million compared to 2020, primarily due to the Arcus collaboration opt-in charge of$625 million , as well as higher investments in Trodelvy and magrolimab clinical activities. These increases were partially offset by (i) a decline of approximately$200 million in external expenses related to wind-down or completion of certain remdesivir clinical studies, (ii)$190 million (€160 million) charge recorded in 2020 in connection with the agreement to amend the existing arrangement with Galapagos for the commercialization and development of Jyseleca, and (iii) lower stock-based compensation expense. R&D expenses for 2020 included accelerated stock-based compensation expenses of$166 million related to our acquisitions of Immunomedics and Forty Seven.
Acquired IPR&D expenses reflect IPR&D impairments as well as the initial costs of externally developed IPR&D projects, acquired directly in a transaction other than a business combination, that do not have an alternative future use, including upfront payments related to various collaborations and the initial costs of rights to IPR&D projects. Acquired IPR&D expenses of$177 million in 2021 were related to licensing, collaboration, investment and other arrangements we entered into during the year. Acquired IPR&D expenses of$5.9 billion in 2020 were primarily related to our acquisition of Forty Seven as well as collaborations and other investments we entered into during the year with Arcus, Pionyr, Tango, Tizona and Jounce.
Selling, General and Administrative Expenses
SG&A expenses relate to sales and marketing, finance, human resources, legal and
other administrative activities, including information technology investments.
SG&A expenses consist primarily of personnel costs, facilities and overhead
costs, outside marketing, advertising and legal expenses and other general and
administrative costs. SG&A expenses also include the Branded Prescription Drug
("BPD") fee. In the United States , we, along with other pharmaceutical
manufacturers of branded drug products, are required to pay a portion of the BPD
fee, which is estimated based on select government sales during the prior year
as a percentage of total industry government sales.
40
--------------------------------------------------------------------------------
In 2021, SG&A expenses increased by $95 million compared to 2020, primarily due
to an expense of $212 million related to the donation of certain equity
securities at fair value to the Gilead Foundation , a California nonprofit
organization (the "Foundation"), and increased commercial activities, including
higher promotional and marketing activities primarily driven by Trodelvy. SG&A
expenses for 2020 included accelerated stock-based compensation expense of $204
million related to our acquisitions of Immunomedics and Forty Seven, and a
charge of $97 million related to a U.S. Department of Justice investigation,
which was settled in the third quarter of 2020.
Interest Expense and Other Income (Expense), Net
The following table summarizes the period-over-period changes in our Interest expense and Other income (expense), net:
(in millions, except percentages) 2021 2020 Change
Interest expense $ (1,001) $ (984) 2 %
Other income (expense), net $ (639) $ (1,418) (55) %
Interest expense for 2021 increased by $17 million , or 2%, compared to 2020,
primarily due to an increase in borrowing related to the fourth quarter 2020
acquisition of Immunomedics, partially offset by lower interest expense due to
debt maturities and repayments.
The changes in Other income (expense), net for 2021, compared to 2020, primarily
reflects lower unrealized losses from fair value adjustments of our investments
in equity securities largely driven by our investment in Galapagos, partially
offset by lower interest income. Changes in the fair value of equity securities
resulted in net unrealized losses of $610 million and $1.7 billion for the years
ended December 31, 2021 and 2020, respectively.
Income Taxes
The following table summarizes the period-over-period changes in our Income tax (expense) benefit:
(in millions, except percentages) 2021 2020
Income before income taxes $ 8,278 $ 1,669
Income tax expense $ (2,077) $ (1,580)
Effective tax rate 25.1 % 94.7 %
Our effective tax rate decreased in 2021, compared to 2020, primarily due to a
$4.5 billion acquired IPR&D charge recorded in connection with our acquisition
of Forty Seven and $511 million of certain other acquired IPR&D charges in 2020
that were non-deductible for tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents, and marketable debt securities were
Cash Flows
The following table summarizes our cash flow activities:
(in millions) 2021 2020
Net cash provided by (used in):
Operating activities $ 11,384 $ 8,168
Investing activities $ (3,131) $ (14,615)
Financing activities $ (8,877) $ 770
Operating Activities
Cash provided by operating activities represents the cash receipts and
disbursements related to all of our activities other than investing and
financing activities. Operating cash flow is derived by adjusting our net income
for non-cash items and changes in operating assets and liabilities. Cash
provided by operating activities increased by $3.2 billion to $11.4 billion in
2021 compared to 2020. The increase was primarily due to revenue growth from
sales of Veklury as well as higher collection of receivables in 2021.
41
--------------------------------------------------------------------------------Investing Activities
Cash used in investing activities primarily consists of purchases, sales and maturities of our marketable debt securities, capital expenditures, acquisitions, including IPR&D, net of cash acquired, purchases of equity securities and other investments. Cash used in investing activities was$3.1 billion in 2021 compared to$14.6 billion in 2020. The decrease in cash used in investing activities was primarily due to a decrease in cash outflows related to acquisitions, including IPR&D, net of cash acquired. We made a$1.2 billion payment in the first quarter of 2021 for our acquisition of MYR as compared to the$4.7 billion and$20.6 billion payments made in 2020 related to our acquisitions of Forty Seven and Immunomedics, respectively. The decrease was partially offset by net cash generated by investing activities in 2020 related to proceeds from sales and maturities of marketable debt securities used to partially fund these acquisitions.
Financing Activities
Cash used in financing activities for the year endedDecember 31, 2021 was$8.9 billion , compared to cash provided by financing activities of$770 million in 2020. In 2021, we utilized cash for$4.75 billion of debt repayments,$3.6 billion of dividend payments and$546 million of common stock repurchases. In 2020, we obtained$8.2 billion in proceeds from debt financing, net of issuance costs, to fund our fourth quarter 2020 acquisition of Immunomedics, partially offset by cash utilized for$3.4 billion of dividend payments,$2.5 billion of debt repayments and$1.6 billion of common stock repurchases.
Debt and Credit Facilities
A summary of our borrowings under various financing arrangements is included in Note 12. Debt and Credit Facilities of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. We may choose to repay certain of our long-term debt obligations prior to maturity dates based on our assessment of current and long-term liquidity and capital requirements.
Senior Unsecured Notes and Term Loan
In 2021, we repaid$4.75 billion of debt, consisting of$3.75 billion senior unsecured notes and$1.0 billion on our senior unsecured term loan facility. We repaid$1.0 billion of senior unsecured notes dueApril 2021 in the first quarter of 2021 and$1.25 billion of senior unsecured notes dueDecember 2021 in the third quarter of 2021. Additionally, we repaid$500 million of senior unsecured notes due upon maturity inSeptember 2021 . InOctober 2021 , we exercised our option to call$500 million of senior unsecured floating rate notes and$500 million of 0.75% senior unsecured notes, both having a final maturity date ofSeptember 2023 . These two early repayments totaling$1.0 billion principal amount were made in the fourth quarter of 2021. InDecember 2021 , we exercised our option to call$500 million of senior unsecured notes having a final maturity ofMarch 2022 . The notes were repaid inFebruary 2022 . No new debt was issued in 2021. We are required to comply with certain covenants under our note indentures governing our senior unsecured notes. As ofDecember 31, 2021 and 2020, we were not in violation of any covenants.
Liability Related to Future Royalties
In connection with our acquisition of Immunomedics, we assumed a liability related to a funding arrangement, which was originally entered into by Immunomedics andRPI Finance Trust prior to our acquisition of Immunomedics. The liability related to future royalties was primarily included in Long-term debt, net on our Consolidated Balance Sheets. See Note 6. Acquisitions of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information.
Credit Facility
InJune 2020 , we terminated our$2.5 billion five-year revolving credit facility maturing inMay 2021 (the "2016 Revolving Credit Facility") and entered into a new$2.5 billion five-year revolving credit facility maturing inJune 2025 (the "2020 Revolving Credit Facility"). The 2020 Revolving Credit Facility can be used for working capital requirements and for general corporate purposes, including, without limitation, acquisitions. As ofDecember 31, 2021 and 2020, there were no amounts outstanding under the 2020 Revolving Credit Facility. The 2020 Revolving Credit Facility contains customary representations, warranties, affirmative and negative covenants and events of default. As ofDecember 31, 2021 , we were in compliance with all covenants.
Capital Return Program
The details of our Stock Repurchase Programs and Dividends are included in Note 15. Stockholders' Equity of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Stock Repurchase Programs
In the first quarter of 2016, our Board of Directors authorized a$12.0 billion stock repurchase program (the "2016 Program"), under which repurchases may be made in the open market or in privately negotiated transactions. We started repurchases under the 2016 Program inApril 2016 . 42 -------------------------------------------------------------------------------- In the first quarter of 2020, our Board of Directors authorized a new$5.0 billion stock repurchase program (the "2020 Program"), which will commence upon the completion of the 2016 Program. Purchases under the 2020 Program may be made in the open market or in privately negotiated transactions.
We purchased 8 million and 22 million shares of our common stock under the 2016
Program for
As of
Dividends We declared and paid quarterly cash dividends for an aggregate amount of$3.6 billion or$2.84 per share of our common stock and$3.4 billion or$2.72 per share of our common stock in 2021 and 2020, respectively.
On
Capital Resources
We believe our existing capital resources, supplemented by cash flows generated from our operations, will be adequate to satisfy our capital needs for the foreseeable future. Our future capital requirements will depend on many factors, including but not limited to the following:
•the commercial performance of our current and future products;
•the progress and scope of our R&D efforts, including preclinical studies and clinical trials;
•the cost, timing and outcome of regulatory reviews;
•the expansion of our sales and marketing capabilities;
•the possibility of acquiring additional manufacturing capabilities or office facilities;
•the possibility of acquiring other companies or new products;
•debt service requirements;
•the establishment of additional collaborative relationships with other companies; and
•costs associated with the defense, settlement and adverse results of government investigations and litigation.
We may in the future require additional funding, which could be in the form of proceeds from equity or debt financings. If such funding is required, we cannot guarantee that it will be available to us on favorable terms, if at all.
Material Cash Requirements
We continually evaluate our liquidity and capital resources, including our access to external capital to ensure that we can adequately and efficiently finance our operations. As ofDecember 31, 2021 , our material cash requirements consisted primarily of the repayment of outstanding borrowings, the remaining obligations for the one-time repatriation transition tax from the Tax Cuts and Jobs Act, our settlement related to bictegravir litigation, purchases of inventory, operating leases obligations, capital expenditures and milestone and other payments related to our collaborative agreements. See Notes 11. Collaborations and Other Arrangements, 12. Debt and Credit Facilities, 13. Leases, 14. Commitments and Contingencies and 18. Income Taxes of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information. We anticipate our cash requirements related to capital expenditures will increase in 2022 as compared to the prior year as we work to expand our site infrastructure and capabilities.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS
The discussion and analysis of our financial condition and results of operations is based on our Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K, which have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of these 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 and base our estimates on historical experience and on various other 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.
We believe the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of our Consolidated Financial Statements.
43
--------------------------------------------------------------------------------Government and Other Rebates and Chargebacks
Revenues from product sales are recognized net of estimated government and other rebates and chargebacks, cash discounts for prompt payment, distributor fees, sales return provisions and other related deductions. These deductions to product sales are referred to as gross-to-net deductions and are estimated and recorded in the period in which the related product sales occur. Revenues from product sales, net of these deductions, are recorded only to the extent a significant reversal of the amount of cumulative revenue recognized is not probable of occurring when the uncertainty associated with gross-to-net deductions is subsequently resolved. Government and other rebates and chargebacks are subject to a complex estimation process, which requires significant judgment by management in part due to the lag between the date of the product sales and the date the related rebates or chargeback claims are settled. Government and other rebates and chargebacks include amounts payable to payers and healthcare providers under various programs, and may vary by product, by payer and by individual payer plans. For qualified programs that can purchase our products through wholesalers or other distributors at a lower contractual price, the wholesalers or distributors charge back to us the difference between their acquisition cost and the lower contractual price. Rebates and chargebacks are estimated primarily based on product sales, and expected payer mix and discount rates, which require significant estimates and judgment. Additionally, in developing our estimates of government and other rebates and chargebacks, we consider the following:
•historical and estimated payer mix;
•statutory discount requirements and contractual terms;
•historical claims experience and processing time lags;
•estimated patient population;
•known market events or trends;
•market research;
•channel inventory data obtained from our major
•other pertinent internal or external information.
The following table summarizes the consolidated activities and ending balances in our government and other rebates and chargebacks accounts:
Balance at
Beginning of Decrease/(Increase) to Balance at End
(in millions) Year Product Sales Payments of Year
Year ended December 31, 2021 :
Activity related to 2021 sales $ - $ 13,211 $ (9,714) $ 3,497
Activity related to sales prior to 2021 4,012 (617) (2,977) 418
Total $ 4,012 $ 12,594 $ (12,691) $ 3,915
Year ended December 31, 2020 :
Activity related to 2020 sales $ - $ 13,199 $ (9,500) $ 3,699
Activity related to sales prior to 2020 4,108 (235) (3,560) 313
Total $ 4,108 $ 12,964 $ (13,060) $ 4,012
Product sales in 2021 include the impact of $617 million for changes in
estimates related to our 2020 product sales, primarily in the United States . In
2020, we had assumed higher rebate claims from government payer segments
resulting in part from the COVID-19 pandemic and its anticipated impacts, which
did not materialize.
We assess and update our estimates each reporting period to reflect actual
claims and other current information. We believe the methodology that we use to
estimate our government and other rebates and chargebacks is reasonable and
appropriate given the current facts and circumstances. However, actual results
may differ significantly from our estimates. Historically, our actual government
and other rebates and chargebacks claimed for prior periods have varied by less
than 5% from our estimates.
Government and other chargebacks that are payable to our direct customers are
classified as reductions of Accounts receivable in our Consolidated Balance
Sheets and totaled $671 million and $552 million as of December 31, 2021 and
2020, respectively. See Note 10. Other Financial Information of the Notes to
Consolidated Financial Statements included in Item 8 of this Annual Report on
Form 10-K for additional information. Government and other rebates that are
payable to third party payers and healthcare providers are generally recorded in
Accrued government and other rebates on our Consolidated Balance Sheets and
totaled $3.2 billion and $3.5 billion as of December 31, 2021 and 2020,
respectively.
44
--------------------------------------------------------------------------------Acquisitions and Valuation of Intangibles
We make certain judgments to determine whether transactions should be accounted for as acquisitions of assets or as business combinations. If it is determined that substantially all of the fair value of gross assets acquired in a transaction is concentrated in a single asset (or a group of similar assets), the transaction is treated as an acquisition of assets. We evaluate the inputs, processes, and outputs associated with the acquired set of activities and assets. If the assets in a transaction include an input and a substantive process that together significantly contribute to the ability to create outputs, the transaction is treated as an acquisition of a business. We account for business combinations using the acquisition method of accounting, which requires that assets acquired and liabilities assumed generally be recorded at their fair values as of the acquisition date. Excess of consideration over the fair value of net assets acquired is recorded as goodwill. Estimating fair value requires us to make significant judgments and assumptions. We perform impairment testing of goodwill annually or more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. In transactions accounted for as acquisitions of assets, no goodwill is recorded and contingent consideration, such as payments upon achievement of various developmental, regulatory and commercial milestones, generally is not recognized at the acquisition date. In an asset acquisition, upfront payments allocated to IPR&D projects at the acquisition date are expensed unless there is an alternative future use. In addition, product development milestones are expensed upon achievement.
Valuation of Intangible Assets
We have acquired, and expect to continue to acquire, intangible assets through asset acquisitions or business combinations. The identifiable intangible assets are measured at their respective fair values as of the acquisition date. Intangible assets acquired through business combinations are subject to potential adjustments within the measurement period, which may be up to one year from the acquisition date. The fair values of the intangible assets are generally determined using a probability-weighted income approach that discounts expected future cash flows to present value. The estimated net cash flows are discounted using a discount rate that is based on the estimated weighted-average cost of capital for companies with profiles similar to our profile and represents the rate that market participants would use to value the intangible assets. The discounted cash flow models used in valuing these intangible assets require the use of significant estimates and assumptions including but not limited to:
•identification of product candidates with sufficient substance requiring separate recognition;
•estimates of projected future cash flows including revenues and operating profits related to the products or product candidates;
•the probability of technical and regulatory success for unapproved product candidates considering their stages of development;
•the time and resources needed to complete the development and approval of product candidates;
•appropriate discount rate;
•the life of the potential commercialized products and associated risks, including the inherent difficulties and uncertainties in developing a product candidate such as obtaining FDA and other regulatory approvals; and
•risks related to the viability of and potential alternative treatments in any future target markets.
We believe the fair values used to record intangible assets acquired are based upon reasonable estimates and assumptions given the facts and circumstances as of the related valuation dates.
Impairment and Amortization of Intangible Assets
Intangible assets related to IPR&D projects acquired in a business combination are capitalized as indefinite-lived intangible assets until the completion or abandonment of the associated R&D efforts. During the period the assets are considered indefinite-lived, they are not amortized. When development is successfully completed, which generally occurs when regulatory approval is obtained, the associated assets are deemed finite-lived and amortized over their respective estimated useful lives beginning at that point in time primarily on a straight-line basis. Indefinite-lived intangible assets, composed of IPR&D projects acquired in a business combination that lack regulatory approval at the time of acquisition, are tested for impairment annually, whenever events or changes in circumstances indicate that it is more likely than not that the assets are impaired and upon regulatory approval. Estimates of fair value result from a complex series of judgments about future events and uncertainties and make assumptions at a point in time (acquisition date or subsequent impairment assessment date). Changes in estimates and assumptions, including the timing of product launch, pricing reductions, failure to obtain anticipated regulatory approval, deterioration inU.S. and global financial markets or other unanticipated events and circumstances, may decrease the projected cash flows or increase the discount rate and could potentially result in an impairment charge. 45 -------------------------------------------------------------------------------- The eventual realized value of the acquired IPR&D project may vary from its fair value at the date of acquisition. If the carrying value of an intangible asset exceeds its estimated fair value, an impairment charge is recorded to write down the intangible asset to its estimated fair value. For example, in 2019, we recognized an$800 million impairment charge related to IPR&D projects primarily for the treatment of indolent B-cell non-Hodgkin lymphoma due to changes in estimated market opportunities. A high rate of failure is inherent in the discovery and development of new products.
Intangible assets are also periodically reviewed for changes in facts or circumstances resulting in a reduction to the estimated useful life of the asset, requiring the acceleration of amortization.
See Note 9.
Legal Contingencies We are a party to various legal actions. The most significant of these are described in Note 14. Commitments and Contingencies of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. It is not possible to determine the outcome of these matters. We recognize accruals for such actions to the extent that we conclude that a loss is both probable and reasonably estimable. We accrue for the best estimate of a loss within a range; however, if no estimate in the range is better than any other, then we accrue the minimum amount in the range. If we determine that a material loss is reasonably possible, we disclose the possible loss or range of loss, or that the amount of loss cannot be estimated at this time. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of the inherent uncertainty and unpredictability related to these matters, accruals are based on what we believe to be the best information available at the time of our assessment, including the legal facts and circumstances of the case, status of the proceedings, applicable law and the views of legal counsel. Upon the final resolution of such matters, it is possible that there may be a loss in excess of the amount recorded, and such amounts could have a material adverse effect on our results of operations, cash flows or financial position. We periodically reassess these matters when additional information becomes available and adjust our estimates and assumptions when facts and circumstances indicate the need for any changes. In the fourth quarter of 2021, we recorded an accrual of$1.25 billion in Accrued and other current liabilities on our Consolidated Balance Sheets for the settlement related to bictegravir litigation. See Note 14. Commitments and Contingencies of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information.
Income Taxes
We estimate our income tax provision, including deferred tax assets and liabilities, based on significant management judgment. We evaluate the realization of our deferred tax assets each reporting period. We record a valuation allowance to reduce our deferred tax assets to the amounts that are more likely than not to be realized. We consider future taxable income, ongoing tax planning strategies and our historical financial performance in assessing the need for a valuation allowance. If we expect to realize deferred tax assets for which we have previously recorded a valuation allowance, we will reduce the valuation allowance in the period in which such determination is first made. We are subject to income taxes inthe United States and various foreign jurisdictions, includingIreland . Due to economic and political conditions, various countries are actively considering or have made changes to existing tax laws. We cannot predict the form or timing of potential legislative changes that could have a material adverse impact on our results of operations. In addition, significant judgment is required in determining our worldwide provision for income taxes. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by tax authorities based on the technical merits of the position. The tax benefit recognized in the Consolidated Financial Statements for a particular tax position is based on the largest benefit that is more likely than not to be realized. The amount of unrecognized tax benefits ("UTB") is adjusted as appropriate for changes in facts and circumstances, such as significant amendments to existing tax law, new regulations or interpretations by tax authorities, new information obtained during a tax examination or resolution of an examination. We recognize both accrued interest and penalties, where appropriate, related to UTB in Income tax (expense) benefit on our Consolidated Statements of Income.
RECENT ACCOUNTING PRONOUNCEMENTS
There have been no new accounting pronouncements issued nor adopted during the
year ended
46--------------------------------------------------------------------------------
© Edgar Online, source
