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 2019
and 2018 is included in "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" of our 2019 Form 10-K filed
with the U.S. Securities and Exchange Commission (the "SEC"), and is
incorporated by reference into this Annual Report on Form 10-K. 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 in Foster City,
California .
Our portfolio of marketed products includes AmBisome®, Atripla®, Biktarvy®,
Cayston®, Complera®, Descovy®, Descovy for PrEP®, Emtriva®, Epclusa®, Eviplera®,
Genvoya®, Harvoni®, Hepsera®, Jyseleca®, Letairis®, Odefsey®, Ranexa®, Sovaldi®,
Stribild®, TecartusTM, Trodelvy®, Truvada®, Truvada for PrEP®, Tybost®,
Veklury®, Vemlidy®, Viread®, Vosevi®, Yescarta® and Zydelig®. The approval
status of Jyseleca varies worldwide, and Jyseleca is not approved in the United
States . We also sell and distribute authorized generic versions of Epclusa and
Harvoni in the United States through our separate subsidiary, Asegua
Therapeutics, LLC . In addition, we sell and distribute certain products through
our corporate partners under collaborative agreements.
2020 Business Highlights
Our financial performance was strong in 2020, despite the global impact of the
COVID-19 pandemic, which is a clear reflection of the solid underlying
fundamentals of our business driven by the HIV franchise and the increased
demand we saw for Veklury amid the COVID-19 pandemic. We also continued to
expand and strengthen our commercial portfolio and clinical pipeline across
various therapeutic areas to drive future growth potential.
•In April, we acquired Forty Seven, Inc. ("Forty Seven") for approximately $4.7
billion , gaining an investigational drug candidate, magrolimab, which is
currently in Phase 2/3 clinical studies for a number of hematological cancers,
including myelodysplastic syndrome, acute myeloid leukemia, non-Hodgkin lymphoma
and solid tumors.
•In October, we acquired Immunomedics, Inc. ("Immunomedics") for approximately
$20.6 billion and gained Trodelvy, a Trop-2-directed antibody-drug conjugate,
which was granted accelerated approval by the U.S. Food and Drug Administration
("FDA") for the treatment of adult patients with metastatic triple-negative
breast cancer ("mTNBC"). Trodelvy has potential broader applicability for
multiple tumor types, and is being studied as a monotherapy and combination
agent for additional tumor types, including HR+/HER2- breast cancer, urothelial
cancer, non-small cell lung cancer and other solid tumors.
•In December, we entered into a definitive agreement to acquire MYR GmbH . Upon
closing, which is subject to regulatory clearances and other conditions, the
acquisition will provide us with Hepcludex® (bulevirtide), which was
conditionally approved by the European Medicines Agency ("EMA") for the
treatment for chronic hepatitis delta virus ("HDV") in July 2020 .
•We significantly expanded our oncology portfolio through licensing, strategic
collaboration as well as equity investments with our third-party collaboration
partners. Additional information is included in Note 11. Collaborations and
Other Arrangements of the Notes to Consolidated Financial Statements included in
Item 8 of this Annual Report on Form 10-K.
In addition to the assets we acquired pursuant to our strategic transactions, we
developed several other therapies and treatments in our portfolio: Jyseleca,
Tecartus and Veklury, the first FDA-approved antiviral therapy for COVID-19.
These efforts demonstrate our continued commitment to advancing innovative
medicines in areas of unmet need.
33
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Key Product, Pipeline and Corporate Updates(1)
Category Therapeutic Area and Description
Regulatory Approval & Viral Diseases
Submission
•FDA, European Commission ("EC") and Japanese
Ministry of Health,
Welfare ("JMHLW") granted full approval, conditional marketing authorization
and regulatory approval, respectively, to Veklury for the treatment of
patients with COVID-19.
•FDA approved a supplemental New Drug Application for Epclusa for the
treatment of children ages 6 and older (or weighing at least 17 kg) with
hepatitis C virus ("HCV").
Oncology
•FDA and EC granted accelerated approval and conditional marketing
authorization, respectively, for Tecartus for the treatment of adult
patients with relapsed or refractory mantle cell lymphoma.
•We submitted a supplemental BiologicsLicense Application ("sBLA") to FDA
for approval of Trodelvy as a treatment for adult patients with mTNBC based
on the overall efficacy and safety results in the Phase 3 ASCENT trial.
•Kite Pharma, Inc. ("Kite") submitted an sBLA to FDA for Yescarta for the
treatment of relapsed or refractory indolent non-Hodgkin's lymphoma. Kite
also received EMA approval to implement a variation to the Yescarta
Marketing Authorization for end-to-end manufacturing.
•FDA granted Breakthrough Therapy designation for magrolimab, a
first-in-class, investigational, monoclonalantibody for the treatment of
newly diagnosed myelodysplastic syndrome.
Inflammatory Diseases
•EMA validated and is reviewing the
application of
("Galapagos") for a new indication to the approved license for filgotinib
200mg. The proposed indication is for the treatment of adults with
moderately to severely active ulcerative colitis.
•JMHLW and EC granted regulatory approval and marketing authorization of
Jyseleca, respectively, for the treatment ofadults with moderate to severe
active rheumatoid arthritis.
Corporate Development Viral Diseases
•Gilead and Vir Biotechnology, Inc. established a clinical collaboration
related to hepatitis B virus in January 2021 .
•Gilead and Gritstone Oncology, Inc. announced that the companies have
entered into a collaboration, option and license agreement related to a
curative treatment of HIV in February 2021 .
Other •Veklury Distribution:
•Beginning October 1, 2020 , we started distributing Veklury in the United
States upon conclusion of the previous
distribution agreement with the
Federal government.
•Gilead and European Union signed a joint procurement agreement, which
covers purchases of Veklury for a six-month
period through
has the option to be extended by the parties for additional six-month
periods.
•Board Appointments:
•Jeffrey A. Bluestone, Ph.D., the President and Chief Executive Officer
("CEO") of Sonoma Biotherapeutics.
•Sandra J. Horning, retired Chief Medical Officer and Global Head of Product
Development for Roche.
•Javier J. Rodriguez, the CEO of DaVita Inc.
•Anthony Welters, retired Senior Advisor to the Office of the CEO of
UnitedHealth Group, Inc.
34
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•Community Support:
•In February 2021 , we announced a new partnership
with the
University School of Divinity , as part of the ongoing
COMPASS Initiative,
to help mitigate the HIV epidemic in the Southern
•We launched the Racial Equity Community Impact Fund to initially provide
$10 million in grants to 20 organizations working in
community advocacy and
mobilization, social justice and educational innovation.
•COVID-19: We donated 1.5 million individual doses of remdesivir free of
charge.
•We made various donations to support current nonprofit grantees through
the global Gilead COVID-19 Acute Relief and Emergency
•We also made donations to the San Mateo Strong Fund and the
for Los Angeles .
______________________________________________________
(1) We announced and discussed these updates in further detail in press releases available on our website at https://www.gilead.com/news-and-press/press-room/press-releases. Additional information can be found in our disclosures filed or furnished with theSEC , including its Current Reports on Form 8-K and on Quarterly Reports on Form 10-Q, as applicable. Readers are also encouraged to review all other press releases available on our website mentioned above. 2020 Financial Highlights (In millions, except percentages and per share amounts) 2020 Change 2019 Change 2018 Total revenues$ 24,689 10 %$ 22,449 1 %$ 22,127 Net income attributable to Gilead$ 123 (98) %$ 5,386 (1) %$ 5,455 Diluted earnings per share$ 0.10 (98) %$ 4.22 1 %$ 4.17 2020 Compared to 2019 Total revenues increased by 10% to$24.7 billion in 2020, compared to$22.4 billion in 2019, primarily due to Veklury sales and higher product sales in our HIV products, including the continued patient uptake of Biktarvy and growth of Descovy for pre-exposure prophylaxis ("PrEP"). The increase was partially offset by lower sales volume of our Truvada (emtricitabine ("FTC") and tenofovir disoproxil fumarate ("TDF"))-based products primarily due to the loss of exclusivity of Truvada and Atripla inthe United States inOctober 2020 , lower sales of HCV products due to the impact of the COVID-19 pandemic and the expected declines in sales of Letairis and Ranexa after generic entries in the first half of 2019. Net income attributable to Gilead was$123 million or$0.10 per diluted share in 2020, compared to$5.4 billion or$4.22 per diluted share in 2019, primarily due to unfavorable changes in the fair value of our equity investments in Galapagos, the$1.2 billion discrete tax benefit recorded in 2019 related to intra-entity transfers of intangible assets to different tax jurisdictions, higher acquired in-process research and development ("IPR&D") expenses related to our acquisition of Forty Seven and our collaborations and other investments we entered into during the year, as well as higher acquisition-related expenses. Strategy and Outlook 2021 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. In 2021, we will continue to focus on executing our strategy to expand and strengthen our commercial portfolio and clinical pipelines in new therapeutic areas, including oncology and inflammation, while maintaining our leadership in antiviral medications through the continued growth of Biktarvy, the development of lenacapavir, the expansion of our viral hepatitis business and our on-going efforts to develop safe and effective antivirals to patients suffering from viral infections. 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. The COVID-19 pandemic continues to impact our business and broader market dynamics. We expect a gradual recovery in underlying market dynamics starting the second quarter 2021. Truvada and Atripla sales are expected to continue to decline in the first quarter of 2021 and beyond as multiple generics are expected to enter the market starting in the second quarter of 2021. Biktarvy, Trodelvy, Vemlidy and cell therapy are expected to be key growth drivers in 2021 absorbing the full year impact of the loss of exclusivity for Truvada and Atripla inthe United States . 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 of the pandemic, infection rates, hospitalizations, and availability of alternative therapies and vaccines being developed. The acquisition of 35 -------------------------------------------------------------------------------- Immunomedics will continue to contribute to our revenue growth in 2021. Our capital allocation priorities remain unchanged from 2020 and we plan to prioritize investment in our business and R&D pipeline and maintain a rigorous focus on disciplined expense management. Our ability to deliver on our strategy and 2021 objectives is subject to a number of uncertainties, including, but not limited to, the effects of the COVID-19 pandemic, which remains unpredictable; 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; the possibility of unfavorable results from new and ongoing clinical trials; additional pricing pressures from payers and competitors; higher than anticipated effects of the loss of exclusivity from Truvada and Atripla; slower than anticipated growth in Biktarvy, Trodelvy, Vemlidy and cell therapy products; an increase in discounts, chargebacks and rebates due to ongoing contracts and future negotiations with commercial and government payers; market share and price erosion caused by the introduction of generics; loss of exclusivity of our products; inaccuracies in our HCV patient start estimates; potential government actions that could have the effect of lowering prices; a larger-than anticipated shift in payer mix to more highly discounted payer segment; and volatility in foreign currency exchange rates. RESULTS OF OPERATIONS Total Revenues
The following table summarizes the period-over-period changes in our revenues:
(In millions, except percentages) 2020 Change 2019 Change 2018
Product sales:
HIV products $ 16,938 3 % $ 16,438 12 % $ 14,627
HCV products 2,064 (30) % 2,936 (20) % 3,686
Veklury 2,811 NM - NM -
Cell therapy products 607 33 %
456 73 % 264
Trodelvy 49 NM - NM -
Other Products 1,886 (18) % 2,289 (26) % 3,100
Total product sales 24,355 10 % 22,119 2 % 21,677
Royalty, contract and other revenues 334 1 %
330 (27) % 450
Total revenues $ 24,689 10 % $ 22,449 1 % $ 22,127 ________________________________
NM - Not Meaningful 2020 Compared to 2019 Total Product Sales Total product sales increased by 10% to$24.4 billion in 2020, compared to$22.1 billion in 2019, primarily due to Veklury sales and higher product sales in our HIV products, including the continued patient uptake of Biktarvy and growth of Descovy for PrEP. The increase was partially offset by lower sales volume of our Truvada (FTC /TDF)-based products primarily due to the loss of exclusivity of Truvada and Atripla inthe United States inOctober 2020 , lower HCV sales due to lower patient starts due to the COVID-19 pandemic and the expected declines in sales of Letairis and Ranexa after generic entries in the first half of 2019. HIV Product Sales HIV product sales increased by 3% to$16.9 billion in 2020, compared to$16.4 billion in 2019, primarily due to the continued patient uptake of Biktarvy and growth of Descovy for PrEP, partially offset by lower sales volume of our Truvada (FTC /TDF)-based products driven by the loss of exclusivity of Truvada and Atripla inthe United States inOctober 2020 and lower average net selling price driven by unfavorable payer mix primarily due to higher public health service utilization. Our HIV franchise, including PrEP was also unfavorably impacted by the COVID-19 pandemic. HIV product sales in 2019 included favorable net adjustments primarily due to government rebates and discounts. Descovy (FTC /TAF)-based product sales increased in all major markets in 2020 compared to 2019. The increase inthe United States was primarily due to the continued patient uptake of Biktarvy and growth of Descovy for PrEP, partially offset by lower sales volume of Genvoya. The increase inEurope and other international locations was primarily due to higher sales volume of Biktarvy, partially offset by lower sales volume of Genvoya. 36 -------------------------------------------------------------------------------- Truvada (FTC /TDF)-based product sales decreased inthe United States andEurope in 2020 compared to 2019. The decrease inthe United States was primarily due to lower sales volume driven by the loss of exclusivity of Truvada and Atripla inOctober 2020 and patients switching to regimens containingFTC /TAF. We expect Truvada sales to continue to decline in 2021 and beyond as multiple generics are expected to enter the market starting in the second quarter 2021. The decrease in European sales was primarily due to lower sales volume as a result of the broader availability of generic versions of Truvada and patients switching to regimens containingFTC /TAF. HCV Product Sales HCV product sales decreased by 30% to$2.1 billion in 2020, compared to$2.9 billion in 2019, primarily due to lower sales volume driven by lower patient starts inthe United States andEurope attributable to the COVID-19 pandemic and the continuing decline of total market patient starts unrelated to the pandemic, as well as lower average net selling price reflecting higher sales return provisions and discounts. HCV product sales in 2019 included favorable net adjustments primarily due to government rebates and discounts. The decrease in HCV product sales inthe United States andEurope in 2020 compared to 2019 was primarily due to lower patient starts, including declines attributable to a decrease in health care provider visits and screenings due to the COVID-19 pandemic as well as lower average net selling price. The decrease inEurope was also impacted by favorable net adjustments primarily due to government rebates and discounts in 2019, which did not reoccur in 2020. The decrease in HCV product sales in other international locations in 2020 compared to 2019 was primarily due to lower sales volume. Veklury Veklury generated$2.8 billion in sales in 2020 primarily inthe United States andEurope , reflecting higher hospitalization and treatment rates due to the fourth quarter COVID-19 surge. Cell Therapy Product Sales Cell therapy product sales, which include Yescarta and Tecartus, increased by 33% to$607 million in 2020, compared to$456 million in 2019, primarily due to the continued uptake of Yescarta inEurope and the third quarter 2020 product launch of Tecartus inthe United States . Trodelvy Trodelvy generated$49 million in sales inthe United States , following our acquisition of Immunomedics onOctober 23, 2020 . Other Product Sales Other product sales, which include Vemlidy, Viread, Letairis, Ranexa, Zydelig, AmBisome, Cayston and Jyseleca, decreased by 18% to$1.9 billion in 2020, compared to$2.3 billion in 2019, primarily due to the expected declines in sales of Letairis and Ranexa after generic entries in the first half of 2019, partially offset by higher sales volume of Vemlidy in other international locations. 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 return provisions and other related costs. These deductions to product sales are generally referred to as gross-to-net ("GTN") deductions, which totaled$15.3 billion , or 39% of gross product sales in 2020, compared to$15.3 billion , or 41% of gross product sales in 2019. Of the$15.3 billion in 2020,$13.0 billion or 33% of gross product sales was related to government and other rebates and chargebacks,$1.7 billion was related to cash discounts for prompt payment, distributor fees and other related costs and$572 million was related to sales return provisions. Product Sales by Geographic Area Of our total product sales, 26% and 25% were generated outsidethe United States in 2020 and 2019, respectively. We faced exposure to movements in foreign currency exchange rates, primarily in the Euro. We used foreign currency exchange contracts to hedge a percentage of our foreign currency exposure. Foreign currency exchange, net of hedges, had an unfavorable impact on our product sales of$29 million in 2020, based on a comparison using foreign currency exchange rates from 2019. Product sales inthe United States increased by 10% to$18.1 billion in 2020, compared to$16.6 billion in 2019, primarily due to sales of Veklury, the continued patient uptake of Biktarvy and growth of Descovy for PrEP, partially offset by decreases in sales of Truvada (FTC /TDF)-based products driven by the loss of exclusivity of Truvada and Atripla inthe United States inOctober 2020 . The increase was also partially offset by lower sales volume of Letairis and Ranexa and lower sales of our HCV products. The decrease in sales of our HCV products was primarily due to lower patient starts and average net selling price as discussed above. 37 -------------------------------------------------------------------------------- Product sales inEurope increased by 9% to$3.9 billion in 2020, compared to$3.6 billion in 2019, primarily due to sales of Veklury, and the continued patient uptake of Biktarvy and Yescarta. The increase was partially offset by lower patient starts and average net selling price as discussed above. Product sales inEurope in 2019 included favorable net adjustments primarily due to government rebates and discounts. Product sales in other international locations increased by 17% to$2.3 billion in 2020, compared to$2.0 billion in 2019, primarily due to higher sales volumes of Biktarvy, Veklury and Vemlidy. The following table summarizes the period-over-period changes in our product sales: (In millions, except percentages) 2020 Change 2019 Change 2018 HIV Products Descovy (FTC /TAF) Based Products Biktarvy - U.S.$ 6,095 44 %$ 4,225 NM$ 1,144 Biktarvy - Europe 735 99 % 370 NM 39 Biktarvy - Other International 429 NM 143 NM 1 7,259 53 % 4,738 NM 1,184 Descovy - U.S. 1,526 42 % 1,078 (11) % 1,217 Descovy - Europe 197 (23) % 255 (17) % 308 Descovy - Other International 138 (17) % 167 NM 56 1,861 24 % 1,500 (5) % 1,581 Genvoya - U.S. 2,605 (13) % 2,984 (18) % 3,631 Genvoya - Europe 490 (26) % 664 (16) % 794 Genvoya - Other International 243 (14) % 283 42 % 199 3,338 (15) % 3,931 (15) % 4,624 Odefsey - U.S. 1,172 (1) % 1,180 (5) % 1,242 Odefsey - Europe 450 3 % 438 31 % 335 Odefsey - Other International 50 35 % 37 76 % 21 1,672 1 % 1,655 4 % 1,598 Revenue share - Symtuza(1) - U.S. 331 33 % 249 NM 27 Revenue share - Symtuza(1) - Europe 149 15 % 130 NM 52 Revenue share - Symtuza(1) - Other International 8 NM - NM - 488 29 % 379 NM 79 Total Descovy (FTC /TAF) Based Products - U.S. 11,729 21 % 9,716 34 % 7,261 Total Descovy (FTC /TAF) Based Products - Europe 2,021 9 % 1,857 22 % 1,528 Total Descovy (FTC /TAF) Based Products - Other International 868 38 % 630 NM 277 14,618 20 % 12,203 35 % 9,066 Truvada (FTC /TDF) Based Products Atripla - U.S. 307 (39) % 501 (48) % 967 Atripla - Europe 21 (65) % 60 (54) % 131 Atripla - Other International 21 (46) % 39 (64) % 108 349 (42) % 600 (50) % 1,206 Complera / Eviplera - U.S. 89 (44) % 160 (42) % 276 Complera / Eviplera - Europe 159 (26) % 214 (35) % 327 Complera / Eviplera - Other International 21 (34) % 32 (36) % 50 269 (34) % 406 (38) % 653 Stribild - U.S. 125 (53) % 268 (47) % 505 Stribild - Europe 54 (28) % 75 (23) % 97 Stribild - Other International 17 (35) % 26 (38) % 42 196 (47) % 369 (43) % 644 Truvada - U.S. 1,376 (48) % 2,640 1 % 2,605 Truvada - Europe 27 (73) % 101 (61) % 260 Truvada - Other International 45 (38) % 72 (45) % 132 1,448 (49) % 2,813 (6) % 2,997 Total Truvada (FTC /TDF) Based Products - U.S. 1,897 (47) % 3,569 (18) % 4,353 Total Truvada (FTC /TDF) Based Products - Europe 261 (42) % 450 (45) % 815 Total Truvada (FTC /TDF) Based Products - Other International 104 (38) % 169 (49) % 332 2,262 (46) % 4,188 (24) % 5,500 38
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Other HIV(2) - U.S. 25 (17) % 30 (25) % 40
Other HIV(2) - Europe 5 - % 5 (29) % 7
Other HIV(2) - Other International 28 NM 12 (14) % 14
58 23 % 47 (23) % 61
Total HIV - U.S. 13,651 3 % 13,315 14 % 11,654
Total HIV - Europe 2,287 (1) % 2,312 (2) % 2,350
Total HIV - Other International 1,000 23 % 811 30 % 623
16,938 3 % 16,438 12 % 14,627
HCV Products
Ledipasvir / Sofosbuvir(3) - U.S. 92 (71) % 312 (61) % 802
Ledipasvir / Sofosbuvir(3) - Europe 29 (59) % 71 (51) % 144
Ledipasvir / Sofosbuvir(3) - Other
International 151 (42) % 260 (6) % 276
272 (58) % 643 (47) % 1,222
Sofosbuvir / Velpatasvir(4) - U.S. 864 (11) % 971 4 % 934
Sofosbuvir / Velpatasvir(4) - Europe 337 (39) % 553 (15) % 654
Sofosbuvir / Velpatasvir(4) - Other
International 398 (10) % 441 17 % 378
1,599 (19) % 1,965 - % 1,966
Other HCV(5) - U.S. 132 (27) % 182 (37) % 287
Other HCV(5) - Europe 48 (59) % 118 20 % 98
Other HCV(5) - Other International 13 (54) % 28 (75) % 113
193 (41) % 328 (34) % 498
Total HCV - U.S. 1,088 (26) % 1,465 (28) % 2,023
Total HCV - Europe 414 (44) % 742 (17) % 896
Total HCV - Other International 562 (23) % 729 (5) % 767
2,064 (30) % 2,936 (20) % 3,686
Veklury
Veklury - U.S. 2,026 NM - NM -
Veklury - Europe 607 NM - NM -
Veklury - Other International 178 NM - NM -
2,811 NM - NM -
Cell Therapy Products
Yescarta - U.S. 362 (3) % 373 42 % 263
Yescarta - Europe 191 NM 83 NM 1
Yescarta - Other International 10 NM - NM -
563 23 % 456 73 % 264
Tecartus - U.S. 34 NM - NM -
Tecartus - Europe 10 NM - NM -
Tecartus - Other International - NM - NM -
44 NM - NM -
Total Cell Therapy - U.S. 396 6 % 373 42 % 263
Total Cell Therapy - Europe 201 NM 83 NM 1
Total Cell Therapy - Other International 10 NM - NM -
607 33 % 456 73 % 264
Trodelvy - U.S. 49 NM - NM -
Other Products
AmBisome - U.S. 61 65 % 37 (20) % 46
AmBisome - Europe 230 (2) % 234 2 % 229
AmBisome - Other International 145 7 % 136 (6) % 145
436 7 % 407 (3) % 420
Letairis - U.S. 314 (49) % 618 (34) % 943
Ranexa - U.S. 9 (96) % 216 (72) % 758
Vemlidy - U.S. 356 15 % 309 26 % 245
Vemlidy - Europe 29 38 % 21 75 % 12
Vemlidy - Other International 272 72 % 158 NM 64
657 35 % 488 52 % 321
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Viread - U.S. 14 (56) % 32 (36) % 50
Viread - Europe 34 (51) % 69 (16) % 82
Viread - Other International 137 (4) % 142 (19) % 175
185 (24) % 243 (21) % 307
Zydelig - U.S. 31 (34) % 47 (23) % 61
Zydelig - Europe 39 (28) % 54 (23) % 70
Zydelig - Other International 2 - % 2 - % 2
72 (30) % 103 (23) % 133
Other(6) - U.S. 146 (5) % 153 (1) % 154
Other(6) - Europe 53 2 % 52 (7) % 56
Other(6) - Other International 14 56 % 9 13 % 8
213 - % 214 (2) % 218
Total Other - U.S. 931 (34) % 1,412 (37) % 2,257
Total Other - Europe 385 (10) % 430 (4) % 449
Total Other - Other International 570 28 % 447 13 % 394
1,886 (18) % 2,289 (26) % 3,100
Total product sales - U.S. 18,141 10 % 16,565 2 % 16,197
Total product sales - Europe 3,894 9 % 3,567 (3) % 3,696
Total product sales - Other International 2,320 17 % 1,987 11 % 1,784
$ 24,355 10 % $ 22,119 2 % $ 21,677 _______________________________
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 byJanssen 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 Cayston, Hepsera and Jyseleca. Costs and Expenses The following table summarizes the period-over-period changes in our costs and expenses: (In millions, except percentages) 2020 Change 2019 Change 2018 Cost of goods sold$ 4,572 (2) %$ 4,675 (4) %$ 4,853 Product gross margin 81.2 % 230 bps 78.9 % 130 bps 77.6 % Research and development ("R&D") expenses$ 5,039 24 %$ 4,055 3 %$ 3,920 Acquired IPR&D expenses$ 5,856 16 %$ 5,051 NM$ 1,098 Selling, general and administrative ("SG&A") expenses$ 5,151 18 %$ 4,381 8 %$ 4,056
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NM - Not Meaningful Cost of Goods Sold and Product Gross Margin In 2020, cost of goods sold decreased by$103 million compared to 2019, primarily due to the 2019 inventory write-down charges of$649 million , of which$547 million was related to slow moving and excess raw material and work in process inventory primarily due to lower long-term demand for our HCV products. The decrease in cost of goods sold was partially offset by higher manufacturing ramp-up expenses related to Veklury as a treatment for COVID-19 and acquisition-related expenses from amortization of finite-lived intangible assets and inventory step-up charges, as well as accelerated stock-based compensation expenses related to our acquisition of Immunomedics. In addition, royalty expenses decreased by$126 million in 2020, compared to 2019, primarily due to lower sales of products containing elvitegravir, Letairis and Atripla. In 2020, product gross margin increased compared to 2019, primarily due to factors described above. Research and Development Expenses R&D expenses consist primarily of clinical studies performed by contract research organizations, materials and supplies, payments under collaborative and other arrangements including milestone payments, licenses and fees, expense reimbursements to the collaboration partners, personnel costs including salaries, benefits and stock-based compensation expense, and overhead allocations consisting of various support and infrastructure costs. 40 -------------------------------------------------------------------------------- We do not track total R&D expenses by product candidate, therapeutic area or development phase. However, we manage our R&D expenses by identifying the R&D activities we anticipate will be performed during a given period and then prioritizing efforts based on scientific data, probability of technical and regulatory successful development, market potential, available human and capital resources and other considerations. We continually review our R&D projects based on unmet medical need and, as necessary, reallocate resources among our internal R&D portfolio and external opportunities that we believe will best support the long-term growth of our business. The following table provides a breakout of our R&D expenses by major cost type: (In millions, except percentages) 2020 Change 2019 Change 2018 Clinical studies and outside services$ 2,317 32 %$ 1,750 5 %$ 1,665 Personnel, infrastructure and other expenses 2,260 12 % 2,016 7 % 1,876 Stock-based compensation expenses 462 60 % 289 (24) % 379 Total$ 5,039 24 %$ 4,055 3 %$ 3,920 In 2020, R&D expenses increased by$1.0 billion compared to 2019, primarily due to higher clinical trial expenses related to the investigation of remdesivir as a treatment for COVID-19 including material costs, the fourth quarter charge of$190 million (€160 million) in connection with the agreement to amend the existing arrangement with Galapagos for the commercialization and development of Jyseleca, accelerated stock-based compensation expenses of$166 million related to our acquisitions of Immunomedics and Forty Seven, higher investments in oncology programs including magrolimab, an investigational anti-CD47 monoclonal antibody, and to a lesser extent, Trodelvy, and accruals for milestone payments of$70 million toPionyr Immunotherapeutics, Inc. ("Pionyr"). The increase was partially offset by lower clinical trial expenses from the completion of certain inflammation programs and lower costs as a result of our pause or postponement of certain clinical trials due to the COVID-19 pandemic.Acquired In-Process Research and Development Expenses 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. Beginning in the second quarter of 2020, acquired IPR&D expenses were reported separately from Research and development expenses on our Consolidated Statements of Income. IPR&D assets capitalized are tested for impairment in the fourth quarter of each year, or earlier if impairment indicators exist. No IPR&D impairment charges were recorded in 2020. Acquired IPR&D expenses of$5.9 billion for 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 Biosciences, Inc., Pionyr,Tango Therapeutics, Inc. ,Tizona Therapeutics, Inc. and Jounce Therapeutics, Inc. Acquired IPR&D expenses of$5.1 billion for 2019 included$3.9 billion in upfront charges related to our global research and development collaboration agreement with Galapagos and the$800 million impairment charge from assets obtained in our Kite acquisition. 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. 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. Inthe 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 and is trued-up upon receipt of invoices from the Internal Revenue Service. In 2020, SG&A expenses increased by$770 million compared to 2019, primarily due to accelerated stock-based compensation expenses of$204 million related to our acquisitions of Immunomedics and Forty Seven, a$97 million charge related to a previously disclosed legal settlement, increased corporate grants, costs associated with the commercialization efforts for Veklury and to a lesser extent, Trodelvy, higher marketing expenses related to Biktarvy and donations of remdesivir. The increases were partially offset by lower travel and other spend due to the COVID-19 pandemic. BPD fee expenses were$198 million ,$247 million and$229 million in 2020, 2019 and 2018, respectively. BPD fee expenses are not tax-deductible. 41 --------------------------------------------------------------------------------
Other Income (Expense), Net and Interest Expense The following table summarizes the period-over-period changes in our Other income (expense), net and Interest expense:
(In millions, except percentages) 2020 Change 2019 Change 2018
Other income (expense), net $ (1,418) NM $ 1,868 NM $ 676
Interest expense $ (984) (1) % $
(995) (8) %
_______________________________
NM - Not Meaningful
The unrealized losses primarily relating to our investments in Galapagos
unfavorably impacted Other income (expense), net in 2020, compared to unrealized
gains in 2019.
Income Taxes
The following table summarizes the period-over-period changes in our income tax
expense (benefit):
(In millions, except percentages) 2020 2019 2018
Income before income taxes $ 1,669 $ 5,160 $ 7,799
Income tax expense (benefit) $ 1,580 $ (204) $ 2,339
Effective tax rate 94.7 % (4.0) % 30.0 %
Our effective tax rate increased in 2020, compared to 2019, primarily due to a
$4.5 billion acquired IPR&D charge recorded in connection with our acquisition
of Forty Seven, $511 million of certain other acquired IPR&D charges and $1.8
billion of unfavorable changes in the fair value of our equity investments in
Galapagos that are non-deductible for tax purposes. The 2019 effective tax rate
included a $1.2 billion discrete tax benefit related to intra-entity intangible
asset transfers to different tax jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes our cash, cash equivalents, and marketable debt
securities and working capital:
(In millions) 2020 2019
Cash, cash equivalents and marketable debt securities $ 7,910 $ 25,840
Working capital $ 4,599 $ 20,537
Cash, Cash Equivalents and Marketable Debt Securities
Cash, cash equivalents and marketable debt securities as of December 31, 2020 ,
decreased by $17.9 billion , or 69%, compared to December 31, 2019 . During 2020,
we generated $8.2 billion in operating cash flow, utilized $25.7 billion on
acquisitions, including IPR&D, net of cash acquired, issued senior unsecured
notes in an aggregate principal amount of $7.2 billion , net of issuance costs,
borrowed an aggregate principal amount of $1.0 billion under a three-year term
loan facility, repaid $2.5 billion of principal amount of debt, paid cash
dividends of $3.4 billion and utilized $1.6 billion on repurchases of common
stock. In January 2021 , we repaid $1.0 billion of senior unsecured notes prior
to the April 2021 maturity.
We may choose to repay certain of our long-term debt obligations prior to their
maturity dates based on our assessment of current and long-term liquidity and
capital requirements. Our acquisition of MYR GmbH is expected to close in the
first quarter of 2021. Per the agreement, we will make a consideration payment
of approximately €1.2 billion in cash (or approximately $1.4 billion ) upon
closing.
Working Capital
Working capital, which is current assets less current liabilities, decreased by
$15.9 billion , or 78%, compared to December 31, 2019 , primarily due to the
utilization of significant cash, cash equivalents and marketable debt securities
for our acquisitions of Immunomedics and Forty Seven as noted above and
reclassifications of senior unsecured notes from Long-term debt, net. The
decrease was partially offset by increased accounts receivables due to Veklury
sales and the reclassification of a portion of our Galapagos equity investments
from Other long-term assets.
Accounts receivable increased by $1.3 billion , compared to December 31, 2019 ,
primarily reflecting increased sales driven by Veklury due to COVID-19 surge in
the fourth quarter of 2020.
Other accrued liabilities increased by $1.3 billion compared to December 31,
2019 , primarily due to a reclassification from long-term income taxes payable
for certain tax payments expected to be made within a year.
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Cash Flows
The following table summarizes our cash flow activities:
(In millions) 2020 2019 2018
Net cash provided by (used in):
Operating activities $ 8,168 $ 9,144 $ 8,400
Investing activities $ (14,615) $ (7,817) $ 14,355
Financing activities $ 770 $ (7,634) $ (12,318)
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 decreased by $976 million to $8.2 billion in
2020 compared to 2019. The decrease was primarily the result of changes in
working capital reflecting increases in accounts receivable from the fourth
quarter 2020 Veklury sales and certain tax payments made to taxing authorities.
Investing Activities
Cash used in / provided by 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 $14.6
billion in 2020 compared to $7.8 billion in 2019. The change in cash used in /
provided by investing activities was due to $25.7 billion of payments made
primarily related to our acquisitions of Immunomedics and Forty Seven in 2020,
compared to $4.3 billion of payments made primarily related to our collaboration
with and equity investments in Galapagos in 2019.
Financing Activities
The change in cash provided by / used in financing activities in 2020 compared
to 2019, was primarily due to $7.2 billion in proceeds from the September 2020
senior unsecured notes offering, net of issuance costs and $995 million borrowed
under a three-year term loan facility, net of issuance costs in October 2020 in
connection with our acquisition of Immunomedics.
Debt and Credit Facilities
The 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 Offering
In September 2020 , in connection with our acquisition of Immunomedics, we issued
senior unsecured notes consisting of (i) $500 million principal amount of
floating rate notes due September 2021 and $500 million principal amount of
floating rate notes due September 2023 ; and (ii) $2.0 billion principal amount
of 0.75% senior notes due September 2023 , $750 million principal amount of 1.20%
senior notes due October 2027 , $1.0 billion principal amount of 1.65% senior
notes due October 2030 , $1.0 billion principal amount of 2.60% senior notes due
October 2040 and $1.5 billion principal amount of 2.80% senior notes due October
2050 .
Senior Unsecured Notes Repayments
In 2020 and 2019, we repaid at maturity $2.5 billion and $2.8 billion principal
amount of senior unsecured notes, respectively. In January 2021 , we repaid $1.0
billion of senior unsecured notes prior to the April 2021 maturity.
Term Loan Facility
In October 2020 , in connection with our acquisition of Immunomedics, we borrowed
an aggregate principal amount of $1.0 billion under a three-year term loan
facility ("Term Loan Facility").
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 and RPI Finance Trust ("RPI"). 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.
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Credit Facility
In June 2020 , we terminated our $2.5 billion revolving credit facility maturing
in May 2021 (the "2016 Revolving Credit Facility") and entered into a new $2.5
billion revolving credit facility maturing in June 2025 (the "2020 Revolving
Credit Facility"), which had terms substantially similar to the 2016 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 of December 31, 2020 and 2019, there were no
amounts outstanding under these revolving credit facilities.
We are required to comply with certain covenants under our notes indentures, and
as of December 31, 2020 , we were not in violation of any 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 ("2016 Program"), under which repurchases may be made
in the open market or in privately negotiated transactions. We started
repurchases under the 2016 Program in April 2016 .
We purchased 22 million and 26 million shares of our common stock under the 2016
Program for $1.6 billion and $1.7 billion in 2020 and 2019, respectively.
In the first quarter of 2020, our Board of Directors authorized a new $5.0
billion stock repurchase program ("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.
As of December 31, 2020 , the remaining authorized repurchase amount from both
programs was $6.8 billion .
Dividends
We declared and paid quarterly cash dividends for an aggregate amount of $3.4
billion or $2.72 per share of our common stock and $3.2 billion or $2.52 per
share of our common stock in 2020 and 2019, respectively.
On February 4, 2021 , we announced that our Board of Directors declared a
quarterly cash dividend increase of 4.4% from $0.68 to $0.71 per share of our
common stock, with a payment date of March 30, 2021 to all stockholders of
record as of the close of business on March 15, 2021 . Future dividends are
subject to declaration by our Board of Directors.
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.
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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 with U.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.
Revenue Recognition
We recognize revenue from product sales when control of the product transfers,
generally upon shipment or delivery, to the customer, or in certain cases, upon
the corresponding sales by our customer to a third party. The revenues 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
GTN deductions, and are estimated and recorded in the period in which the
related product sales occur. Variable consideration is included in the net sales
price only to the extent a significant reversal in the amount of cumulative
revenue recognized is not probable of occurring when the uncertainty associated
with the variable consideration is subsequently resolved.
Government and other rebates and chargebacks represent the majority of our GTN
deductions and 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 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 factors:
•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 U.S. wholesalers; and
•other pertinent internal or external information.
We assess and update our estimates every quarter to reflect actual claims and
other current information. Our actual government and other rebates and
chargebacks claimed for prior periods have varied from our estimates by less
than 3% of the amounts deducted from product sales for the years ended December
31, 2020 and 2019. 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.
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 $552 million and $655 million at December 31, 2020 and 2019,
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 $3.5 billion at December 31, 2020 and 2019. The allowance for sales
returns is generally recorded in Other accrued liabilities on our Consolidated
Balance Sheets and totaled $587 million and $137 million at December 31, 2020
and 2019, respectively. The increase in the allowance for sales returns in 2020
reflects the estimated Veklury sales returns and an increase of HCV and HIV
sales return provisions.
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--------------------------------------------------------------------------------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, 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
Year ended December 31, 2019 :
Activity related to 2019 sales $ - $ 13,791 $ (9,920) $ 3,871
Activity related to sales prior to 2019 4,420 (279) (3,904) 237
Total $ 4,420 $ 13,512 $ (13,824) $ 4,108
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. 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 acquisition, business combination or consolidation of variable interest
entities. 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 is 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.
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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
complete, which generally occurs if and when regulatory approval to market a
product is obtained, the associated assets would be deemed finite-lived and then
be amortized based on their respective estimated useful lives at that point in
time primarily on a straight-line basis.
Indefinite-lived intangible assets are tested for impairment annually, or more
frequently if events or changes in circumstances indicate that it is more likely
than not that the assets are impaired. 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 in U.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.
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 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. For example, in 2018, we concluded that the
KITE-585 program acquired in connection with our acquisition of Kite did not
justify further efforts based on the totality of the clinical data gathered and
discontinued the program. As a result, the carrying value of the IPR&D relating
to the KITE-585 program was written down to zero and we recorded an impairment
charge of $820 million .
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. Goodwill and Intangible Assets of the Notes to Consolidated
Financial Statements included in Item 8 of this Annual Report on Form 10-K for
additional information on the impairment charges related to our indefinite-lived
IPR&D intangible assets.
Legal Contingencies
We are a party to various legal actions. The most significant of these are
described in Note 14. Commitments and Contingencies - Legal Proceedings 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 loss is reasonably possible and the loss or range of loss can
be estimated, we disclose the possible loss.
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. We did not have any material accruals in our
Consolidated Balance Sheets for such matters as of December 31, 2020 and 2019.
Income Taxes
We estimate our income tax provision, including deferred tax assets and
liabilities, based on significant management judgment. We evaluate the
realization of all or a portion of our deferred tax assets on a quarterly basis.
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 in the United States and various foreign
jurisdictions including Ireland . Due to economic and political conditions,
various countries are actively considering and have made changes to existing tax
laws. For example, the United States enacted significant tax reform, and certain
provisions of the new law will continue to significantly affect us. 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.
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We record liabilities related to uncertain tax positions in accordance with the
guidance that clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements by prescribing a minimum
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. An adverse resolution of one or more of these uncertain tax
positions in any period could have a material impact on the results of
operations for that period.
See Note 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.
OFF BALANCE SHEET ARRANGEMENTS
We do not have any off balance sheet arrangements as defined in Item
303(a)(4)(ii) of Regulation S-K.
CONTRACTUAL OBLIGATIONS
Contractual obligations represent future cash commitments related to significant
enforceable and legally binding obligations and certain purchase obligations
that we are likely to continue regardless of the fact that they may be
cancelable. The expected timing and payment amounts presented below are
estimated based on existing contracts and do not reflect any future
modifications to, or terminations of, existing contracts or anticipated or
potential new contracts.
The following table summarizes the aggregate maturities of our contractual
obligations as of December 31, 2020 :
Payments due by Period
(In millions) Total 2021 2022-2023 2024-2025 Thereafter Debt(1)$ 46,410 $ 3,752 $ 7,595 $ 5,142 $ 29,921 Operating lease obligations(2) 828 127 234 167 300 Purchase obligations(3) 3,872 2,254 1,230 265 123 Transition tax payable(4) 4,491 473 1,359 2,659 - Total(5)(6)(7)$ 55,601 $ 6,606 $ 10,418 $ 8,233 $ 30,344
_______________________________
(1) Debt includes principal and future interest payments of senior unsecured
notes and the Term Loan Facility. Interest payments for our fixed rate senior
unsecured notes are incurred and calculated based on terms of the related notes.
Debt also includes a liability related to future royalty obligations we assumed
through the acquisition of Immunomedics. See Note 6. Acquisitions and 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 for additional
information.
(2) See Note 13. Leases of the Notes to Consolidated Financial Statements
included in Item 8 of this Annual Report on Form 10-K for additional
information.
(3) Amounts primarily relate to active pharmaceutical ingredients ("API") with
minimum purchase commitments and certain inventory-related items, R&D
commitments and capital commitments. Significant R&D commitments related to
clinical studies performed by contract research organizations ("CRO"s) are
excluded from the table as material CRO contracts are cancelable by us.
(4) In connection with Tax Reform we recorded a federal income tax payable for
transition tax on the mandatory deemed repatriation of foreign earnings that is
payable over an eight-year period. The amounts included in the table above
represent the remaining federal income tax payable at December 31, 2020 .
(5) As of December 31, 2020 , our long-term income taxes payable includes
unrecognized tax benefits, interest and penalties totaling $1.1 billion . Due to
the high degree of uncertainty on the timing of future cash settlement and other
events that could extinguish these unrecognized tax benefits, we are unable to
estimate the period of cash settlement and therefore we have excluded these
unrecognized tax benefits from the table above.
(6) We have committed to make potential future milestone and other payments
to third parties as part of licensing, collaboration, development and
other arrangements. Payments under these agreements generally are contingent
upon certain future events including achievement of certain developmental,
regulatory or commercial milestones. Because the achievement of these events is
neither probable nor reasonably estimable and such potential payments have not
been recorded in our Consolidated Balance Sheets, they have not been included in
the table above.
(7) The consideration payment of approximately €1.2 billion in cash (or
approximately $1.4 billion ) for our acquisition of MYR GmbH , which is expected
to close by the end of the first quarter of 2021, is excluded from the table
above. 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.
RECENT ACCOUNTING PRONOUNCEMENTS
The information required by this item is included in Note 1. Organization and
Summary of Significant Accounting Policies of the Notes to Consolidated
Financial Statements included in Item 8 of this Annual Report on Form 10-K.
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