XMEX:GILD Gilead Sciences Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
 
 
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012
or 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission File No. 0-19731
 
 
GILEAD SCIENCES, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
94-3047598
(State or Other Jurisdiction of
Incorporation or Organization)
(IRS Employer
Identification No.)
 
 
333 Lakeside Drive, Foster City, California
94404
(Address of principal executive offices)
(Zip Code)
650-574-3000
Registrant’s Telephone Number, Including Area Code
 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ý    Accelerated  filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Number of shares outstanding of the issuer’s common stock, par value $0.001 per share, as of April 27, 2012: 757,321,824
 




GILEAD SCIENCES, INC.
INDEX
PART I.
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
PART II.
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 1A.
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 5.
 
 
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 
We own or have rights to various trademarks, copyrights and trade names used in our business, including the following: GILEAD®, GILEAD SCIENCES®, TRUVADA®, VIREAD®, HEPSERA®, AMBISOME®, EMTRIVA®, COMPLERA®, EVIPLERA®, VISTIDE®, LETAIRIS®, VOLIBRIS®, RANEXA®, CAYSTON® and RAPISCAN®. ATRIPLA® is a registered trademark belonging to Bristol-Myers Squibb & Gilead Sciences, LLC. LEXISCAN® is a registered trademark belonging to Astellas U.S. LLC. MACUGEN® is a registered trademark belonging to Valeant Pharmaceuticals International, Inc. SUSTIVA® is a registered trademark of Bristol-Myers Squibb Pharma Company. TAMIFLU® is a registered trademark belonging to Hoffmann-La Roche Inc. This report also includes other trademarks, service marks and trade names of other companies.

2



PART I.
FINANCIAL INFORMATION
ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
 
March 31,
2012
 
December 31,
2011
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,451,942

 
$
9,883,777

Short-term marketable securities

 
16,491

Accounts receivable, net
2,163,659

 
1,951,167

Inventories
1,418,033

 
1,389,983

Deferred tax assets
193,938

 
208,155

Prepaid taxes
333,739

 
246,444

Prepaid expenses
89,592

 
95,922

Other current assets
175,629

 
126,846

Total current assets
5,826,532

 
13,918,785

Property, plant and equipment, net
782,867

 
774,406

Noncurrent portion of prepaid royalties
169,836

 
174,584

Noncurrent deferred tax assets
107,729

 
144,015

Long-term marketable securities
48,168

 
63,704

Intangible assets, net
11,767,027

 
1,062,864

Goodwill
1,078,919

 
1,004,102

Other noncurrent assets
169,308

 
160,674

Total assets
$
19,950,386

 
$
17,303,134

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
1,339,257

 
$
1,206,052

Accrued government rebates
652,703

 
547,473

Accrued compensation and employee benefits
136,626

 
173,316

Income taxes payable
14,491

 
40,583

Other accrued liabilities
593,063

 
471,129

Deferred revenues
100,191

 
74,665

Current portion of long-term debt and other obligations, net
1,351,573

 
1,572

Total current liabilities
4,187,904

 
2,514,790

Long-term deferred revenues
26,506

 
31,870

Long-term debt, net
8,077,246

 
7,605,734

Long-term income taxes payable
140,655

 
135,655

Other long-term obligations
153,991

 
147,736

Commitments and contingencies (Note 10)
 
 
 
Stockholders’ equity:
 
 
 
Preferred stock, par value $0.001 per share; 5,000 shares authorized; none outstanding

 

Common stock, par value $0.001 per share; 2,800,000 shares authorized; 758,190 and 753,106 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively
758

 
753

Additional paid-in capital
5,100,624

 
4,903,143

Accumulated other comprehensive income
33,591

 
58,200

Retained earnings
2,178,639

 
1,776,760

Total Gilead stockholders’ equity
7,313,612

 
6,738,856

Noncontrolling interest
50,472

 
128,493

Total stockholders’ equity
7,364,084

 
6,867,349

Total liabilities and stockholders’ equity
$
19,950,386

 
$
17,303,134

See accompanying notes.

3



GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
 
Three Months Ended
 
March 31,
 
2012
 
2011
Revenues:
 
 
 
Product sales
$
2,208,342

 
$
1,863,578

Royalty revenues
71,105

 
58,665

Contract and other revenues
3,002

 
3,851

Total revenues
2,282,449

 
1,926,094

Costs and expenses:
 
 
 
Cost of goods sold
580,931

 
474,111

Research and development
458,211

 
254,446

Selling, general and administrative
443,121

 
295,568

Total costs and expenses
1,482,263

 
1,024,125

Income from operations
800,186

 
901,969

Interest expense
(97,270
)
 
(41,216
)
Other income (expense), net
(34,085
)
 
13,832

Income before provision for income taxes
668,831

 
874,585

Provision for income taxes
231,300

 
227,282

Net income
437,531

 
647,303

Net loss attributable to noncontrolling interest
4,425

 
3,838

Net income attributable to Gilead
$
441,956

 
$
651,141

Net income per share attributable to Gilead common stockholders—basic
$
0.58

 
$
0.82

Shares used in per share calculation—basic
756,286

 
796,115

Net income per share attributable to Gilead common stockholders—diluted
$
0.57

 
$
0.80

Shares used in per share calculation—diluted
777,388

 
811,857














See accompanying notes.

4



GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(in thousands)
 
Three Months Ended
 
March 31,
 
2012
 
2011
Net income
$
437,531

 
$
647,303

Other comprehensive loss:

 

Net foreign currency translation gain
4,897

 
7,194

Available-for-sale securities:

 

Net unrealized loss, net of tax impact of $266 and $(372), respectively
(463
)
 
(1,684
)
Reclassifications to net income, net of tax impact of $(519) and $(899), respectively
30,600

 
(1,435
)
Net change
30,137

 
(3,119
)
Cash flow hedges:

 

Net unrealized loss, net of tax impact of $1,802 and $1,168, respectively
(48,816
)
 
(126,331
)
Reclassifications to net income, net of tax impact of $(400) and $(91), respectively
(10,827
)
 
(9,838
)
Net change
(59,643
)
 
(136,169
)
Other comprehensive loss
(24,609
)
 
(132,094
)
Comprehensive income
412,922

 
515,209

Comprehensive loss attributable to noncontrolling interest
4,425

 
3,838

Comprehensive income attributable to Gilead
$
417,347

 
$
519,047



















See accompanying notes.

5



GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)

 
Three Months Ended
 
March 31,
 
2012
 
2011
Operating Activities:
 
 
 
Net income
$
437,531

 
$
647,303

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation expense
19,710

 
18,285

Amortization expense
46,457

 
62,629

Stock-based compensation expense
48,731

 
49,470

Excess tax benefits from stock-based compensation
(23,304
)
 
(14,255
)
Tax benefits from employee stock plans
18,153

 
12,136

Deferred income taxes
51,385

 
20,546

Other non-cash transactions
13,767

 
(7,249
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(196,531
)
 
(107,876
)
Inventories
(26,833
)
 
(97,174
)
Prepaid expenses and other assets
(75,176
)
 
(23,903
)
Accounts payable
107,652

 
176,114

Income taxes payable
(99,151
)
 
31,473

Accrued liabilities
110,402

 
61,414

Deferred revenues
20,176

 
(8,371
)
Net cash provided by operating activities
452,969

 
820,542

Investing Activities:
 
 
 
Purchases of marketable securities

 
(1,519,142
)
Proceeds from sales of marketable securities
56,719

 
1,285,547

Proceeds from maturities of marketable securities

 
169,189

Acquisitions, net of cash acquired
(10,751,636
)
 
(221,105
)
Purchases of other investments
(25,000
)
 

Capital expenditures
(23,199
)
 
(14,870
)
Net cash used in investing activities
(10,743,116
)
 
(300,381
)
Financing Activities:
 
 
 
Proceeds from issuances of senior notes, net of issuance costs

 
987,370

Proceeds from issuances of common stock
132,530

 
58,879

Proceeds from credit facilities, net of issuance costs
1,146,844

 

Proceeds from term loan, net of issuance costs
997,889

 

Repayments of term loan
(350,000
)
 

Repurchases of common stock
(20,770
)
 
(548,699
)
Repayments of other long-term obligations
(612
)
 
(1,533
)
Excess tax benefits from stock-based compensation
23,304

 
14,255

Contributions from (distributions to) noncontrolling interest
(73,595
)
 
(25,162
)
Net cash provided by financing activities
1,855,590

 
485,110

Effect of exchange rate changes on cash
2,722

 
(77,172
)
Net change in cash and cash equivalents
(8,431,835
)
 
928,099

Cash and cash equivalents at beginning of period
9,883,777

 
907,879

Cash and cash equivalents at end of period
$
1,451,942

 
$
1,835,978



See accompanying notes.

6



GILEAD SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. The financial statements include all adjustments (consisting only of normal recurring adjustments) that the management of Gilead Sciences, Inc. (Gilead, we or us) believes are necessary for a fair presentation of the periods presented. These interim financial results are not necessarily indicative of results expected for the full fiscal year or for any subsequent interim period.
The preparation of these Condensed Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an ongoing basis, we evaluate our estimates, including critical accounting policies or estimates related to revenue recognition, intangible assets, allowance for doubtful accounts, prepaid royalties, clinical trial accruals, our tax provision and stock-based compensation. We 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.
The accompanying Condensed Consolidated Financial Statements include the accounts of Gilead, our wholly-owned subsidiaries and our joint ventures with Bristol-Myers Squibb Company (BMS), for which we are the primary beneficiary. We record a noncontrolling interest in our Condensed Consolidated Financial Statements to reflect BMS’s interest in the joint ventures. All intercompany transactions have been eliminated. The Condensed Consolidated Financial Statements include the results of companies acquired by us from the date of each acquisition for the applicable reporting periods.
The accompanying Condensed Consolidated Financial Statements and related financial information should be read in conjunction with the audited Consolidated Financial Statements and the related notes thereto for the year ended December 31, 2011, included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (SEC). Certain amounts within our Condensed Consolidated Balance Sheets have been reclassified to conform to the current presentation.
Net Income Per Share Attributable to Gilead Common Stockholders
Basic net income per share attributable to Gilead common stockholders is calculated based on the weighted-average number of shares of our common stock outstanding during the period. Diluted net income per share attributable to Gilead common stockholders is calculated based on the weighted-average number of shares of our common stock outstanding and other dilutive securities outstanding during the period. The potential dilutive shares of our common stock resulting from the assumed exercise of outstanding stock options, performance shares and the assumed exercise of warrants relating to the convertible senior notes due in May 2013 (May 2013 Notes), May 2014 (May 2014 Notes) and May 2016 (May 2016 Notes) (collectively, the Convertible Notes) are determined under the treasury stock method.
Because the principal amount of the Convertible Notes will be settled in cash, only the conversion spread relating to the Convertible Notes is included in our calculation of diluted net income per share attributable to Gilead common stockholders. Our common stock resulting from the assumed settlement of the conversion spread of the Convertible Notes has a dilutive effect when the average market price of our common stock during the period exceeds the conversion prices of $38.10, $45.08 and $45.41 for the May 2013 Notes, May 2014 Notes and May 2016 Notes, respectively.
In 2011, our convertible senior notes due in May 2011 (May 2011 Notes) matured and the related warrants expired and as a result, we have only considered their impact for the period they were outstanding on our net income per share calculations. Our common stock resulting from the assumed settlement of the conversion spread of the May 2011 Notes had a dilutive effect when the average market price of our common stock during the period exceeded the conversion price of $38.75. During the three months ended March 31, 2011, the average market price of our common stock exceeded the conversion price of the May 2011 Notes and the dilutive effect is included in the accompanying table. Warrants related to the May 2011 Notes had a dilutive effect when the average market price of our common stock during the period exceeded the warrants’ exercise price of $50.80. The average market price of our common stock during the three months ended March 31, 2011 did not exceed the warrants’ exercise price related to the May 2011 Notes; therefore, these warrants did not have a dilutive effect on our net income per share for that period.

7



During the three months ended March 31, 2012, the average market price of our common stock exceeded the conversion prices of the May 2013 Notes, May 2014 Notes and May 2016 Notes and the dilutive effects are included in the accompanying table. During the three months ended March 31, 2011, the average market price of our common stock exceeded the conversion price of the May 2013 Notes and the dilutive effect is included in the accompanying table. During the three months ended March 31, 2011, the average market price of our common stock did not exceed the conversion prices of the May 2014 Notes and May 2016 Notes and therefore, these notes did not have a dilutive effect on our net income per share for that period.
Warrants relating to the May 2013 Notes, May 2014 Notes and May 2016 Notes have a dilutive effect when the average market price of our common stock during the period exceeds the warrants’ exercise prices of $53.90, $56.76 and $60.10, respectively. The average market prices of our common stock during each of the three months ended March 31, 2012 and 2011 did not exceed the warrants’ exercise prices relating to any of the Convertible Notes; therefore, these warrants did not have a dilutive effect on our net income per share for those periods.
Stock options to purchase approximately 10.9 million and 22.1 million weighted-average shares of our common stock were outstanding during the three months ended March 31, 2012 and 2011, respectively, but were not included in the computation of diluted net income per share attributable to Gilead common stockholders because their effect was antidilutive.
The following table is a reconciliation of the numerator and denominator used in the calculation of basic and diluted net income per share attributable to Gilead common stockholders (in thousands):
 
Three Months Ended
 
March 31,
 
2012
 
2011
Numerator:
 
 
 
Net income attributable to Gilead
$
441,956

 
$
651,141

Denominator:
 
 
 
Weighted-average shares of common stock outstanding used in the calculation of basic net income per share attributable to Gilead common stockholders
756,286

 
796,115

Effect of dilutive securities:
 
 
 
Stock options and equivalents
14,873

 
15,007

Conversion spread related to the May 2011 Notes

 
224

Conversion spread related to the May 2013 Notes
3,423

 
511

Conversion spread related to the May 2014 Notes
1,505

 

Conversion spread related to the May 2016 Notes
1,301

 

Weighted-average shares of common stock outstanding used in the calculation of diluted net income per share attributable to Gilead common stockholders
777,388

 
811,857

Concentrations of Risk
We are subject to credit risk from our portfolio of cash equivalents and marketable securities. Under our investment policy, we limit amounts invested in such securities by credit rating, maturity, industry group, investment type and issuer, except for securities issued by the U.S. government. We are not exposed to any significant concentrations of credit risk from these financial instruments. The goals of our investment policy, in order of priority, are as follows: safety and preservation of principal and diversification of risk; liquidity of investments sufficient to meet cash flow requirements; and a competitive after-tax rate of return.
We are also subject to credit risk from our accounts receivable related to our product sales. The majority of our trade accounts receivable arises from product sales in the United States and Europe. As of March 31, 2012, our accounts receivable in Southern Europe, specifically Greece, Italy, Portugal and Spain, totaled approximately $1.25 billion, of which $719.5 million were greater than 120 days past due and $313.3 million were greater than 365 days past due. To date, we have not experienced significant losses with respect to the collection of our accounts receivable. We believe that our allowance for doubtful accounts was adequate at March 31, 2012.
Recent Accounting Pronouncements
There have been no new accounting pronouncements during the three months ended March 31, 2012 that are of significance to us.

8



2.
FAIR VALUE MEASUREMENTS
We determine the fair value of financial and non-financial assets and liabilities using the fair value hierarchy, which establishes three levels of inputs that may be used to measure fair value, as follows:
Level 1 inputs which include quoted prices in active markets for identical assets or liabilities;
Level 2 inputs which include observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. For our marketable securities, we review trading activity and pricing as of the measurement date. When sufficient quoted pricing for identical securities is not available, we use market pricing and other observable market inputs for similar securities obtained from various third-party data providers. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data; and
Level 3 inputs which include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation.
Our financial instruments consist principally of cash and cash equivalents, marketable securities, accounts receivable, foreign currency exchange forward and option contracts, accounts payable, and short-term and long-term debt. Cash and cash equivalents, marketable securities and foreign currency exchange contracts that hedge accounts receivable and forecasted sales are reported at their respective fair values on our Condensed Consolidated Balance Sheets. The carrying value and fair value of the Convertible Notes were $2.94 billion and $3.99 billion, respectively, as of March 31, 2012. The carrying value and fair value of the Convertible Notes were $2.92 billion and $3.53 billion, respectively, as of December 31, 2011.
In March 2011, we issued senior unsecured notes due in April 2021 (April 2021 Notes) in a registered offering for an aggregate principal amount of $1.00 billion. The carrying value and fair value of the April 2021 Notes were $992.3 million and $1.06 billion, respectively, as of March 31, 2012. The carrying value and fair value of the April 2021 Notes were $992.1 million and $1.06 billion, respectively, as of December 31, 2011. In December 2011, we issued senior unsecured notes due in December 2014 (December 2014 Notes), December 2016 (December 2016 Notes), December 2021 (December 2021 Notes) and December 2041 (December 2041 Notes) in a registered offering for an aggregate principal amount of $3.70 billion. The carrying value and fair value of these notes were $3.69 billion and $3.89 billion, respectively, as of March 31, 2012. The carrying value and fair value of these notes were $3.69 billion and $3.93 billion, respectively, as of December 31, 2011. The fair values of the Convertible Notes and senior unsecured notes were determined using Level 2 inputs based on their quoted market values.
The remaining financial instruments are reported on our Condensed Consolidated Balance Sheets at amounts that approximate current fair values.


9



The following table summarizes, for assets or liabilities recorded at fair value, the respective fair value and the classification by level of input within the fair value hierarchy defined above (in thousands):
 
March 31, 2012
 
December 31, 2011
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
518,248

 
$

 
$

 
$
518,248

 
$
7,455,982

 
$

 
$

 
$
7,455,982

Certificates of deposit

 

 

 

 

 
1,139,982

 

 
1,139,982

Non-U.S. government securities

 

 

 

 

 

 
24,741

 
24,741

Corporate debt securities

 

 

 

 

 
404,989

 

 
404,989

Student loan-backed securities

 

 
48,168

 
48,168

 

 

 
46,952

 
46,952

Total debt securities
518,248

 

 
48,168

 
566,416

 
7,455,982

 
1,544,971

 
71,693

 
9,072,646

Equity securities

 

 

 

 
8,503

 

 

 
8,503

Derivatives

 
51,958

 

 
51,958

 

 
100,475

 

 
100,475

 
$
518,248

 
$
51,958

 
$
48,168

 
$
618,374

 
$
7,464,485


$
1,645,446


$
71,693


$
9,181,624

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration
$

 
$

 
$
138,328

 
$
138,328

 
$

 
$

 
$
135,591

 
$
135,591

Derivatives

 
18,404

 

 
18,404

 

 
5,710

 

 
5,710

 
$

 
$
18,404

 
$
138,328

 
$
156,732

 
$

 
$
5,710

 
$
135,591

 
$
141,301

Level 3 Inputs
Assets measured at fair value using Level 3 inputs at March 31, 2012 were comprised of auction rate securities within our available-for-sale investment portfolio. The following table provides a rollforward of assets measured using Level 3 inputs (in thousands):  
 
Three Months Ended
 
March 31,
 
2012
 
2011
Balance, beginning of period
$
71,693

 
$
80,365

Total realized and unrealized gains (losses) included in:
 
 
 
Other income (expense), net
(40,096
)
 
1,246

Other comprehensive income, net
33,094

 
2,160

Sales of marketable securities
(16,523
)
 
(20,830
)
Transfers into Level 3

 
53,882

Balance, end of period
$
48,168

 
$
116,823

Our policy is to recognize transfers into or out of Level 3 classification as of the actual date of the event or change in circumstances that caused the transfer.


10



The underlying assets of our auction rate securities consist of student loans. Although auction rate securities would typically be measured using Level 2 inputs, the failure of auctions and the lack of market activity and liquidity experienced since the beginning of 2008 required that these securities be measured using Level 3 inputs. The fair value of our auction rate securities was determined using a discounted cash flow model that considered projected cash flows for the issuing trusts, underlying collateral and expected yields. Projected cash flows were estimated based on the underlying loan principal, bonds outstanding and payout formulas. The weighted-average life over which the cash flows were projected considered the collateral composition of the securities and related historical and projected prepayments. The underlying student loans have a weighted-average expected life of two to seven years. The discount rates used in our discounted cash flow model were based on market conditions for comparable or similar term asset-backed and other fixed income securities, adjusted for an illiquidity discount. This resulted in an annual discount rate of 2.18%. Our auction rate securities reset every seven to 14 days with maturity dates ranging from 2025 through 2040 and have annual interest rates ranging from 0.12% to 0.77%. As of March 31, 2012, our auction rate securities continued to earn interest. Although there continued to be failed auctions as well as lack of market activity and liquidity, we believe we had no other-than-temporary impairments on these securities as of March 31, 2012. We have the ability to hold these securities until the recovery of their amortized cost basis.
In 2010, the Greek government agreed to settle the majority of its aged outstanding accounts receivable with zero-coupon bonds, which were expected to trade at a discount to face value. We estimated the fair value of the Greek zero-coupon bonds using Level 3 inputs due to the then current lack of market activity and liquidity. The discount rates used in our fair value model for these bonds were based on credit default swap rates. In March 2012, the Greek government restructured its sovereign debt which impacted all holders of Greek bonds. As a result, we recorded a $40.1 million loss related to the debt restructuring as part of other income (expense), net on our Condensed Consolidated Statement of Income and exchanged the Greek government-issued bonds for new securities, which we liquidated during the first quarter of 2012.
As of March 31, 2012 and December 31, 2011, our auction rate securities were recorded in long-term marketable securities on our Condensed Consolidated Balance Sheets. As of December 31, 2011, our Greek government-issued bonds were recorded in short-term and long-term marketable securities on our Condensed Consolidated Balance Sheets.
The following table provides a rollforward of our contingent consideration liabilities (in thousands):
 
Three Months Ended
 
March 31,
 
2012
 
2011
Balance, beginning of period
$
135,591

 
$
11,100

Changes in valuation
2,737

 

Balance, end of period
$
138,328

 
$
11,100

The estimated fair value of the contingent consideration liabilities for our acquisitions was based on the present value of the total earnout amount giving consideration to significant inputs such as the probability of technical and regulatory success, the discount rate used and the timeline to achieve each of the milestone events. Significant increases in the probability of success in isolation would result in a significantly higher fair value measurement while significant decreases in the probability of success in isolation would result in a significantly lower fair value measurement. Similarly, significant increases in the discount rate or timeline in isolation would result in a significantly lower fair value measurement while significant decreases in the discount rate or timeline in isolation would result in a significantly higher fair value measurement. We evaluate changes in each of the assumptions used to calculate fair values of our contingent consideration liabilities at the end of each period.

11



3.
AVAILABLE-FOR-SALE SECURITIES
The following table is a summary of available-for-sale debt and equity securities included in cash and cash equivalents or marketable securities in our Condensed Consolidated Balance Sheets. During the quarter ended March 31, 2012, we liquidated a portion of our investment portfolio to partially fund the acquisition of Pharmasset, Inc. (Pharmasset). Estimated fair values of available-for-sale securities are generally based on prices obtained from commercial pricing services (in thousands):
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
March 31, 2012
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
Money market funds
$
518,248

 
$

 
$

 
$
518,248

Certificates of deposit

 

 

 

Non-U.S. government securities

 

 

 

Corporate debt securities

 

 

 

Student loan-backed securities
51,500

 

 
(3,332
)
 
48,168

Total debt securities
569,748

 

 
(3,332
)
 
566,416

Equity securities

 

 

 

Total
$
569,748

 
$

 
$
(3,332
)
 
$
566,416

December 31, 2011
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
Money market funds
$
7,455,982

 
$

 
$

 
$
7,455,982

Certificates of deposit
1,140,000

 

 
(18
)
 
1,139,982

Non-U.S. government securities
55,246

 

 
(30,505
)
 
24,741

Corporate debt securities
404,994

 

 
(5
)
 
404,989

Student loan-backed securities
51,500

 

 
(4,548
)
 
46,952

Total debt securities
9,107,722

 

 
(35,076
)

9,072,646

Equity securities
1,451

 
7,052

 

 
8,503

Total
$
9,109,173

 
$
7,052

 
$
(35,076
)
 
$
9,081,149

The following table summarizes the classification of the available-for-sale debt and equity securities on our Condensed Consolidated Balance Sheets (in thousands):
 
March 31,
2012
 
December 31,
2011
Cash and cash equivalents
$
518,248

 
$
9,000,954

Short-term marketable securities

 
16,491

Long-term marketable securities
48,168

 
63,704

Total
$
566,416

 
$
9,081,149

The following table summarizes our portfolio of available-for-sale debt securities by contractual maturity (in thousands):
 
March 31, 2012
 
Amortized Cost
 
Fair Value
Less than one year
$
518,248

 
$
518,248

Greater than one year but less than five years

 

Greater than five years but less than ten years

 

Greater than ten years
51,500

 
48,168

Total
$
569,748

 
$
566,416


12



The following table summarizes the gross realized gains and losses related to sales of marketable securities (in thousands):
 
Three Months Ended
 
March 31,
 
2012
 
2011
Gross realized gains on sales
$
10,015

 
$
3,697

Gross realized losses on sales
$
(40,096
)
 
$
(1,362
)
The cost of securities sold was determined based on the specific identification method.
The following table summarizes our available-for-sale debt securities that were in a continuous unrealized loss position, but were not deemed to be other-than-temporarily impaired (in thousands):
 
Less Than 12 Months
 
12 Months or Greater
 
Total
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
$

 
$

 
$

 
$

 
$

 
$

Non-U.S. government securities

 

 

 

 

 

Corporate debt securities

 

 

 

 

 

Student loan-backed securities

 

 
(3,332
)
 
48,168

 
(3,332
)
 
48,168

Total
$

 
$

 
$
(3,332
)
 
$
48,168

 
$
(3,332
)
 
$
48,168

December 31, 2011
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
$
(18
)
 
$
1,019,982

 
$

 
$

 
$
(18
)
 
$
1,019,982

Non-U.S. government securities
(30,505
)
 
24,741

 

 

 
(30,505
)
 
24,741

Corporate debt securities
(5
)
 
224,989

 

 

 
(5
)
 
224,989

Student loan-backed securities

 

 
(4,548
)
 
46,952

 
(4,548
)
 
46,952

Total
$
(30,528
)
 
$
1,269,712

 
$
(4,548
)
 
$
46,952

 
$
(35,076
)
 
$
1,316,664

As of March 31, 2012 and December 31, 2011, we held a total of 12 and 42 securities, respectively, that were in an unrealized loss position.
4.
DERIVATIVE FINANCIAL INSTRUMENTS
We operate in foreign countries, which exposes us to market risk associated with foreign currency exchange rate fluctuations between the U.S. dollar and various foreign currencies, the most significant of which is the Euro. In order to manage this risk, we hedge a portion of our foreign currency exposures related to outstanding monetary assets and liabilities as well as forecasted product sales using foreign currency exchange forward and option contracts. In general, the market risk related to these contracts is offset by corresponding gains and losses on the hedged transactions. The credit risk associated with these contracts is driven by changes in interest and currency exchange rates and, as a result, varies over time. We work only with major banks and closely monitor current market conditions, which limits the risk that counterparties to our contracts may be unable to perform. We also limit our risk of loss by entering into contracts that permit net settlement at maturity. Therefore, our overall risk of loss in the event of a counterparty default is limited to the amount of any unrecognized gains on outstanding contracts (i.e., those contracts that have a positive fair value) at the date of default. We do not enter into derivative contracts for trading purposes, nor do we hedge our net investment in any of our foreign subsidiaries.
We hedge our exposure to foreign currency exchange rate fluctuations for certain monetary assets and liabilities of our foreign subsidiaries that are denominated in a non-functional currency. The derivative instruments we use to hedge this exposure are not designated as hedges, and as a result, changes in their fair value are recorded in other income (expense), net on our Condensed Consolidated Statements of Income.

13



We hedge our exposure to foreign currency exchange rate fluctuations for forecasted product sales that are denominated in a non-functional currency. The derivative instruments we use to hedge this exposure are designated as cash flow hedges and have maturity dates of 18 months or less. Upon executing a hedging contract and quarterly thereafter, we assess prospective hedge effectiveness using a regression analysis which calculates the change in cash flow as a result of the hedge instrument. On a monthly basis, we assess retrospective hedge effectiveness using a dollar offset approach. We exclude time value from our effectiveness testing and recognize changes in the time value of the hedge in other income (expense), net. The effective component of our hedge is recorded as an unrealized gain or loss on the hedging instrument in accumulated other comprehensive income (OCI) within stockholders’ equity. When the hedged forecasted transaction occurs, the hedge is de-designated and the unrealized gains or losses are reclassified into product sales. The majority of gains and losses related to the hedged forecasted transactions reported in accumulated OCI at March 31, 2012 will be reclassified to product sales within 12 months.
We had notional amounts on foreign currency exchange contracts outstanding of $3.90 billion and $4.03 billion at March 31, 2012 and December 31, 2011, respectively.
The following table summarizes information about the fair values of derivative instruments on our Condensed Consolidated Balance Sheets (in thousands):
 
March 31, 2012
 
Asset Derivatives
 
Liability Derivatives
 
Classification
 
Fair Value
 
Classification
 
Fair Value
Derivatives designated as hedges:
 
 
 
 
 
 
 
Foreign currency exchange contracts
Other current assets
 
$
47,498

 
Other accrued liabilities
 
$
14,564

Foreign currency exchange contracts
Other noncurrent assets
 
4,459

 
Other long-term obligations
 
3,778

Total derivatives designated as hedges
 
 
51,957

 
 
 
18,342

Derivatives not designated as hedges:
 
 
 
 
 
 
 
Foreign currency exchange contracts
Other current assets
 
1

 
Other accrued liabilities
 
61

Total derivatives not designated as hedges
 
 
1

 
 
 
61

Total derivatives
 
 
$
51,958

 
 
 
$
18,403

 
 
December 31, 2011
 
Asset Derivatives
 
Liability Derivatives
 
Classification
 
Fair Value
 
Classification
 
Fair Value
Derivatives designated as hedges:
 
 
 
 
 
 
 
Foreign currency exchange contracts
Other current assets
 
$
77,066

 
Other accrued liabilities
 
$
5,052

Foreign currency exchange contracts
Other noncurrent assets
 
23,169

 
Other long-term obligations
 
620

Total derivatives designated as hedges
 
 
100,235

 
 
 
5,672

Derivatives not designated as hedges:
 
 
 
 
 
 
 
Foreign currency exchange contracts
Other current assets
 
240

 
Other accrued liabilities
 
38

Total derivatives not designated as hedges
 
 
240

 
 
 
38

Total derivatives
 
 
$
100,475

 
 
 
$
5,710


14



The following table summarizes the effect of our foreign currency exchange contracts on our Condensed Consolidated Statements of Income (in thousands):
 
Three Months Ended
 
March 31,
 
2012
 
2011
Derivatives designated as hedges:
 
 
 
Net gains (losses) recognized in OCI (effective portion)
$
(48,886
)
 
$
(127,499
)
Net gains (losses) reclassified from accumulated OCI into product sales (effective portion)
$
11,227

 
$
9,929

Net gains (losses) recognized in other income (expense), net (ineffective portion and amounts excluded from effectiveness testing)
$
(3,212
)
 
$
995

Derivatives not designated as hedges:
 
 
 
Net gains (losses) recognized in other income (expense), net
$
(27,174
)
 
$
(85,846
)
There were no material amounts recorded in other income (expense), net, for the three months ended March 31, 2012 and 2011 as a result of the discontinuance of cash flow hedges.
5.
ACQUISITION OF PHARMASSET, INC.
On January 17, 2012, we completed the acquisition of Pharmasset, a publicly-held clinical-stage pharmaceutical company committed to discovering, developing and commercializing novel drugs to treat viral infections. Pharmasset's primary focus was the development of oral therapeutics for the treatment of HCV infection. We believe the acquisition of Pharmasset will provide us with an opportunity to complement our existing HCV portfolio and help advance our effort to develop all-oral regimens for the treatment of HCV.
We acquired all of the outstanding shares of common stock of Pharmasset for $137 per share in cash through a tender offer and subsequent merger under the terms of an agreement and plan of merger entered into in November 2011. The aggregate cash payment to acquire all of the outstanding shares of common stock was $11.1 billion. We financed the transaction with approximately $5.2 billion in cash on hand, $2.2 billion in bank debt issued in January 2012 and $3.7 billion in senior unsecured notes issued in December 2011.
Pharmasset's lead compound, now known as GS-7977, is a nucleotide analog being evaluated in Phase 2 and Phase 3 clinical studies for the treatment of HCV infection across genotypes. Since the acquisition, we have received data from clinical trials evaluating GS-7977. For example:
In February 2012, we announced that data indicates that a 12 week course of treatment of GS-7977 with ribavirin in genotype 1 patients with a prior “null” response to an interferon-containing regimen will not be sufficient to cure their disease.
In April 2012, we announced data from our ELECTRON and QUANTUM studies, which found that 88% and 59% of genotype 1 patients and treatment-naïve patients, respectively, taking a 12-week all-oral regimen of GS-7977 and ribavirin achieved a sustained viral response four weeks after the completion of a 12-week course of therapy. We also announced data from our ATOMIC study, which found that 90% of genotype 1 HCV patients achieved a sustained viral response 12 weeks after a 12-week course of therapy with GS-7977 plus ribavirin and interferon. 
Also in April 2012, Bristol-Myers Squibb Company (BMS) also announced data from its Phase 2 study evaluating GS-7977 in combination with daclatasvir with and without ribavirin in genotype 1 and genotype 2 and 3 treatment-naïve infected patients. The data showed that 100% of genotype 1 and 91% of genotype 2 and 3 patients achieved a sustained viral response four weeks after the completion of a 24-week course of treatment.
The Pharmasset acquisition was accounted for as a business combination. The results of operations of Pharmasset have been included in our Condensed Consolidated Statement of Income since January 13, 2012, the date on which we acquired approximately 88% of the outstanding shares of common stock of Pharmasset, cash consideration was transferred, and as a result, we obtained effective control of Pharmasset. During the first quarter of 2012, Pharmasset was integrated into Gilead's operations. As we do not track earnings results by product candidate or therapeutic area, we do not maintain separate earnings results for Pharmasset. The acquisition was completed on January 17, 2012, at which time Pharmasset became a wholly-owned subsidiary of Gilead.

15



The following table summarizes the components of the cash paid to acquire Pharmasset (in thousands):
Total consideration transferred
$
10,858,372

Stock-based compensation expense
193,937

Total cash paid
$
11,052,309

The $11.1 billion cash payment consisted of a $10.38 billion cash payment to the outstanding common stockholders as well as a $668.3 million cash payment to option holders under the Pharmasset stock option plans. The $10.38 billion cash payment to the outstanding common stockholders and $474.3 million of the cash payment to the option holders under the Pharmasset stock option plans were accounted for as consideration transferred. The remaining $193.9 million of cash payment was accounted for as stock-based compensation expense resulting from the accelerated vesting of Pharmasset employee options immediately prior to the acquisition.
The following table summarizes the allocation of the consideration transferred to the acquisition date fair values of assets acquired and liabilities assumed (in thousands):
Intangible assets - in-process research and development
$
10,720,000

Cash and cash equivalents
106,737

Other assets acquired (liabilities assumed), net
(43,182
)
Total identifiable net assets
10,783,555

Goodwill
74,817

Total consideration transferred
$
10,858,372

In-Process Research and Development (IPR&D)
The estimated fair value of the acquired IPR&D related to GS-7977 was $10.72 billion, which was determined using a probability-weighted income approach, that discounts expected future cash flows to present value. The estimated net cash flows were discounted using a discount rate of 12%, which is based on the estimated weighted-average cost of capital for companies with profiles similar to that of Pharmasset. This rate is comparable to the estimated internal rate of return for the acquisition and represents the rate that market participants would use to value the intangible asset. The projected cash flows from GS-7977 were based on key assumptions such as: the time and resources needed to complete its development considering its stage of development on the acquisition date, the probability of obtaining approval from the U.S. Food and Drug Administration (FDA) and other regulatory agencies, estimates of revenues and operating profits, the life of the potential commercialized product and other associated risks related to the viability of and potential alternative treatments in future target markets. Intangible assets related to IPR&D projects are considered to be indefinite-lived assets until the completion or abandonment of the associated R&D efforts.
Goodwill
The $74.8 million of goodwill represents the excess of the consideration transferred over the fair values of assets acquired and liabilities assumed and is attributable to the synergies expected from combining our R&D operations with Pharmasset's. None of the goodwill is expected to be deductible for income tax purposes.
Stock-Based Compensation Expense
The stock-based compensation expense recognized for the accelerated vesting of employee options immediately prior to the acquisition was reported in our Condensed Consolidated Statement of Income as follows (in thousands):
Research and development expense
$
100,149

Selling, general and administrative expense
93,788

Total stock-based compensation expense
$
193,937


16



Other Costs
Other costs incurred in connection with the acquisition include (in thousands):
 
Three Months Ended
 
March 31, 2012
 
December 31, 2011
Transaction costs (e.g. investment advisory, legal and accounting fees)
$
9,040

 
$
28,461

Bridge financing costs
7,333

 
23,817

Restructuring costs
8,343

 

Total other costs
$
24,716

 
$
52,278

The following table summarizes these costs by the line item in the Condensed Consolidated Statement of Income in which these costs were recognized (in thousands).
 
Three Months Ended
 
March 31, 2012
 
December 31, 2011
Research and development expense
$
5,557

 
$

Selling, general and administrative expense
11,826

 
28,461

Interest expense
7,333

 
23,817

Total other costs
$
24,716

 
$
52,278

Pro Forma Information
The following unaudited pro forma information presents the combined results of operations of Gilead and Pharmasset as if the acquisition of Pharmasset had been completed on January 1, 2011, with adjustments to give effect to pro forma events that are directly attributable to the acquisition. The unaudited pro forma results do not reflect any operating efficiencies or potential cost savings which may result from the consolidation of the operations of Gilead and Pharmasset. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations of the combined company would have been if the acquisition had occurred at the beginning of the period presented, nor are they indicative of future results of operations (in thousands):
 
Three Months Ended
 
March 31,
 
2012
 
2011
Total revenues
$
2,282,449

 
$
1,926,094

Net income attributable to Gilead
$
574,375

 
$
397,165

The unaudited pro forma consolidated results include the following non-recurring pro forma adjustments:
Stock-based compensation expense of $193.9 million and other costs of $16.4 million were excluded from the net income attributable to Gilead for the three months ended March 31, 2012 and were included in the net income attributable to Gilead for the three months ended March 31, 2011;
Other costs of $52.3 million incurred during the three months ended December 31, 2011 were included in the net income attributable to Gilead for the three months ended March 31, 2011.
6.
INVENTORIES
Inventories are summarized as follows (in thousands):
 
March 31,
2012
 
December 31,
2011
Raw materials
$
584,835

 
$
697,621

Work in process
603,428

 
466,499

Finished goods
229,770

 
225,863

Total
$
1,418,033

 
$
1,389,983

As of March 31, 2012 and December 31, 2011, we held $974.3 million and $995.7 million of efavirenz in inventory, which was purchased from BMS at BMS’s estimated net selling price of efavirenz.

17



7.
INTANGIBLE ASSETS AND GOODWILL
The following table summarizes the carrying amount of our intangible assets and goodwill (in thousands):
 
March 31,
2012
 
December 31,
2011
Indefinite-lived intangible assets
$
10,986,200

 
$
266,200

Finite-lived intangible assets
780,827

 
796,664

Total intangible assets
11,767,027

 
1,062,864

Goodwill
1,078,919

 
1,004,102

Total intangible assets and goodwill
$
12,845,946

 
$
2,066,966

Indefinite-Lived Intangible Assets
In January 2012, we acquired $10.72 billion of purchased IPR&D as part of our acquisition of Pharmasset that we have classified as indefinite-lived intangible assets (See Note 5).
As of December 31, 2011, we had indefinite-lived intangible assets of $266.2 million, which consisted of $117.0 million and $149.2 million of purchased IPR&D from our acquisitions of Arresto Biosciences, Inc. and Calistoga Pharmaceuticals, Inc., respectively.
Finite-Lived Intangible Assets
The following table summarizes our finite-lived intangible assets (in thousands):
 
March 31, 2012
 
December 31, 2011
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Intangible asset - Ranexa
$
688,400

 
$
106,104

 
$
688,400

 
$
97,099

Intangible asset - Lexiscan
262,800

 
76,159

 
262,800

 
69,723

Other
24,995

 
13,105

 
24,995

 
12,709

Total
$
976,195

 
$
195,368

 
$
976,195

 
$
179,531

Amortization expense related to intangible assets was $15.8 million and $17.4 million for the three months ended March 31, 2012 and 2011, respectively, and was recorded in cost of goods sold in our Condensed Consolidated Statements of Income.
As of March 31, 2012, the estimated future amortization expense associated with our intangible assets for the remaining nine months of 2012 and each of the five succeeding fiscal years are as follows (in thousands):
Fiscal Year
Amount
2012 (remaining nine months)
$
47,509

2013
64,283

2014
66,735

2015
73,261

2016
100,048

2017
132,786

Total
$
484,622

Goodwill
The following table summarizes the changes in the carrying amount of goodwill (in thousands):
Balance at December 31, 2011
$
1,004,102

Goodwill resulting from the acquisition of Pharmasset
74,817

Balance at March 31, 2012
$
1,078,919


18



8.
COLLABORATIVE ARRANGEMENTS
From time to time, as a result of entering into strategic collaborations, we may hold investments in non-public companies. We review our interests in investee companies for consolidation and/or appropriate disclosure based on applicable guidance. Contractual terms which provide us control over an entity may require us to consolidate the entity. Entities consolidated because they are controlled by means other than a majority voting interest are referred to as variable interest entities (VIE). We assess whether we are the primary beneficiary of a VIE based on our power to direct the activities of the VIE that most significantly impact the VIE's economic performance and our obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. As of March 31, 2012, we determined that certain of our investee companies are VIEs; however, other than with respect to our joint ventures with BMS, we are not the primary beneficiary and therefore do not consolidate these investees.
Bristol-Myers Squibb Company
North America
In 2004, we entered into a collaboration arrangement with BMS in the United States to develop and commercialize a single-tablet regimen containing our Truvada and BMS's Sustiva (efavirenz), which we sell as Atripla. The collaboration is structured as a joint venture and operates as a limited liability company named Bristol-Myers Squibb & Gilead Sciences, LLC, which we consolidate. The ownership interests of the joint venture and thus the sharing of product revenue and costs reflect the respective economic interests of BMS and Gilead and are based on the proportions of the net selling price of Atripla attributable to efavirenz and Truvada. Since the net selling price for Truvada may change over time relative to the net selling price of efavirenz, both BMS's and our respective economic interests in the joint venture may vary annually.
We and BMS share marketing and sales efforts, with both parties providing equivalent sales force efforts at levels agreed to annually by BMS and Gilead. Since the second quarter of 2011, except for a limited number of activities that will be jointly managed, the parties no longer coordinate detailing and promotional activities in the United States and the parties have begun to reduce their joint promotional efforts in Canada as we launched Complera and in anticipation of the launch of Quad. The parties will continue to collaborate on activities such as manufacturing, regulatory, compliance and pharmacovigilance. We are responsible for accounting, financial reporting, tax reporting, manufacturing and product distribution for the joint venture. Both parties provide their respective bulk active pharmaceutical ingredients to the joint venture at their approximate market values. In 2006, we and BMS amended the joint venture's collaboration agreement to allow the joint venture to sell Atripla into Canada. As of March 31, 2012 and December 31, 2011, the joint venture held efavirenz active pharmaceutical ingredient which it purchased from BMS at BMS's estimated net selling price of efavirenz in the U.S. market. These amounts are included in inventories on our Condensed Consolidated Balance Sheets. As of March 31, 2012, total assets held by the joint venture were $1.70 billion and consisted primarily of cash and cash equivalents of $204.7 million, accounts receivable (including intercompany receivables with Gilead) of $278.1 million and inventories of $1.20 billion; total liabilities were $1.56 billion and consisted primarily of accounts payable (including intercompany payables with Gilead) of $611.7 million and other accrued expenses of $284.3 million. As of December 31, 2011, total assets held by the joint venture were $1.62 billion and consisted primarily of cash and cash equivalents of $156.9 million, accounts receivable (including intercompany receivables with Gilead) of $266.5 million and inventories of $1.19 billion; total liabilities were $1.27 billion and consisted primarily of accounts payable (including intercompany payables with Gilead) of $561.1 million and other accrued expenses of $232.9 million. These asset and liability amounts do not reflect the impact of intercompany eliminations that are included in our Condensed Consolidated Balance Sheets. Although we are the primary beneficiary of the joint venture, the legal structure of the joint venture limits the recourse that its creditors will have over our general credit or assets.
Europe
In 2007, Gilead Sciences Limited, a wholly-owned subsidiary in Ireland, and BMS entered into a collaboration arrangement to commercialize and distribute Atripla in the European Union, Iceland, Liechtenstein, Norway and Switzerland (collectively, the European Territory). The parties formed a limited liability company which we consolidate, to manufacture Atripla for distribution in the European Territory using efavirenz that it purchases from BMS at BMS's estimated net selling price of efavirenz in the European Territory. We are responsible for product distribution, inventory management and warehousing. Through our local subsidiaries, we have primary responsibility for order fulfillment, collection of receivables, customer relations and handling of sales returns in all the territories where we co-promote Atripla with BMS.
Starting in 2012, except for a limited number of activities that will be jointly managed, the parties no longer coordinate detailing and promotional activities in the region. We are also responsible for accounting, financial reporting and tax reporting for the collaboration. As of March 31, 2012 and December 31, 2011, efavirenz purchased from BMS at BMS's estimated net selling price of efavirenz in the European Territory is included in inventories on our Condensed Consolidated Balance Sheets.

19



The parties also formed a limited liability company to hold the marketing authorization for Atripla in Europe. We have primary responsibility for regulatory activities and we share marketing and sales efforts with BMS. In the major market countries, both parties have agreed to provide equivalent sales force efforts. Revenue and cost sharing is based on the relative ratio of the respective net selling prices of Truvada and efavirenz.
9.LONG-TERM OBLIGATIONS
Financing Arrangements
The following table summarizes the carrying amount of our borrowings under various financing arrangements (in thousands):
Type of Borrowing
Description
Issue Date
Due Date
Interest Rate
March 31,
2012
 
December 31,
2011
Convertible Senior
May 2013 Notes
April 2006
May 2013
0.625%
$
614,791

 
$
607,036

Convertible Senior
May 2014 Notes
July 2010
May 2014
1.00%
1,188,594

 
1,181,525

Convertible Senior
May 2016 Notes
July 2010
May 2016
1.625%
1,138,538

 
1,132,293

Senior Unsecured
April 2021 Notes

March 2011
April 2021
4.50%
992,280

 
992,066

Senior Unsecured
December 2014 Notes

December 2011
December 2014
2.40%
749,157

 
749,078

Senior Unsecured
December 2016 Notes

December 2011
December 2016
3.05%
698,921

 
698,864

Senior Unsecured
December 2021 Notes
December 2011
December 2021
4.40%
1,247,212

 
1,247,138

Senior Unsecured
December 2041 Notes

December 2011
December 2041
5.65%
997,753

 
997,734

Term Loan Facility
Term Loan
January 2012
January 2015
Variable
650,000

 

Credit Facility
Short-Term Revolver
January 2012
January 2013
Variable
400,000

 

Credit Facility
Five-Year Revolver
January 2012
January 2017
Variable
750,000

 

Total debt, net
 
 
 
 
$
9,427,246

 
$
7,605,734

Less current portion
 
 
 
 
1,350,000

 

Total long-term debt, net
 
 
 
 
$
8,077,246

 
$
7,605,734

Credit Facilities
We were eligible to borrow up to an aggregate of $1.25 billion in revolving credit loans under an amended and restated credit agreement that we entered into in 2007. The credit agreement also included a sub-facility for swing-line loans and letters of credit. As of December 31, 2011, we had $4.0 million in letters of credit outstanding under the credit agreement. In January 2012, we fully repaid the outstanding obligations under this credit agreement and terminated the credit agreement.
In January 2012, in conjunction with our acquisition of Pharmasset, we entered into a five-year $1.25 billion revolving credit facility credit agreement (the Five-Year Revolving Credit Agreement), a $750.0 million short-term revolving credit facility credit agreement (the Short-Term Revolving Credit Agreement) and a $1.00 billion term loan facility (the Term Loan Credit Agreement). We borrowed $750.0 million under the Five-Year Revolving Credit Agreement, $400.0 million under the Short-Term Revolving Credit Agreement and $1.00 billion under the Term Loan Credit Agreement, upon the close of the acquisition. In March 2012, we repaid $350.0 million of the outstanding debt under the Term Loan Credit Agreement.
All three credit agreements contain customary representations, warranties, affirmative, negative and financial maintenance covenants and events of default. The loans bear interest at either (i) the Eurodollar Rate plus the Applicable Margin or (ii) the Base Rate plus the Applicable Margin, each as defined in the applicable credit agreement. We may reduce the commitments and may prepay loans under any of these agreements in whole or in part at any time without premium or penalty.
The Five-Year Revolving Credit Agreement was inclusive of a $30.0 million swing line loan sub-facility and a $25.0 million letter of credit sub-facility. As of March 31, 2012, we had $4.0 million in letters of credit outstanding under the Five-Year Revolving Credit Agreement. The Five-Year Revolving Credit Agreement will terminate and all unpaid borrowings thereunder shall be due and payable in January 2017. The Short-Term Revolving Credit Agreement will terminate and all unpaid borrowings thereunder shall be due and payable in January 2013; however, at our request, the maturity date may be extended until January 2014. All principal repayment installments under the Term Loan Credit Agreement will be due and payable as specified in the Term Loan Credit Agreement, with the final principal installment payment due and payable in January 2015.

20



10.
COMMITMENTS AND CONTINGENCIES
Legal Proceedings
In June 2011, we received a subpoena from the United States Attorney's Office for the Northern District of California requesting documents related to the manufacture, and related quality and distribution practices, of Atripla, Emtriva, Hepsera, Letairis, Truvada, Viread and Complera. We have been cooperating and will continue to cooperate with this governmental inquiry. An estimate of a possible loss or range of losses cannot be determined given we are at the early stage of the inquiry.
We are a party to various legal actions that arose in the ordinary course of our business. We do not believe that any of these legal actions will have a material adverse impact on our consolidated business, financial position or results of operations.

11.

STOCK-BASED COMPENSATION EXPENSE
The following table summarizes the stock-based compensation expense included in our Condensed Consolidated Statements of Income (in thousands):
 
Three Months Ended
 
March 31,
 
2012
 
2011
Cost of goods sold
$
2,101

 
$
2,644

Research and development expenses
118,622

 
16,720

Selling, general and administrative expenses
121,945

 
30,106

Stock-based compensation expense included in total costs and expenses
242,668

 
49,470

Income tax effect
(13,064
)
 
(12,856
)
Stock-based compensation expense, net of tax
$
229,604

 
$
36,614

Total stock-based compensation for the three months ended March 31, 2012, included $100.1 million and $93.8 million in research and development expenses and selling, general and administrative expenses, respectively, related to the acceleration of unvested stock options in connection with the acquisition of Pharmasset.
12.
STOCKHOLDERS’ EQUITY
Stock Repurchase Program
During the three months ended March 31, 2012, we repurchased a total of $20.8 million or 0.4 million shares of common stock under our January 2011, three-year, $5.00 billion stock repurchase program.
13.
SEGMENT INFORMATION
We operate in one business segment, which primarily focuses on the development and commercialization of human therapeutics for life threatening diseases. All products are included in one segment, because the majority of our products have similar economic and other characteristics, including the nature of the products and production processes, type of customers, distribution methods and regulatory environment.

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Product sales consisted of the following (in thousands):
 
Three Months Ended
 
March 31,
 
2012
 
2011
Antiviral products:
 
 
 
Atripla
$
887,596

 
$
744,512

Truvada
758,263

 
673,111

Viread
191,693

 
168,395

Complera/Eviplera
52,180

 

Hepsera
29,297

 
38,096

Emtriva
6,777

 
6,576

Total antiviral products
1,925,806

 
1,630,690

AmBisome
84,764

 
78,506

Letairis
87,288

 
62,174

Ranexa
83,201

 
68,293

Other products
27,283

 
23,915

Total product sales
$
2,208,342

 
$
1,863,578

The following table summarizes revenues from each of our customers who individually accounted for 10% or more of our total revenues (as a percentage of total revenues): 
 
Three Months Ended
 
March 31,
 
2012
 
2011
Cardinal Health, Inc.
20
%
 
17
%
McKesson Corp.
16
%
 
15
%
AmerisourceBergen Corp.
11
%
 
13
%
14.
INCOME TAXES
Our income tax rate of 34.6% for the three months ended March 31, 2012 differed from the U.S. federal statutory rate of 35% due primarily to tax credits and certain operating earnings from non-U.S subsidiaries that are considered indefinitely invested outside of the United States, partially offset by state taxes and the stock-based compensation expense related to the Pharmasset acquisition for which we received no tax benefit. We do not provide for U.S. income taxes on undistributed earnings of our foreign operations that are intended to be permanently reinvested.
We file federal, state and foreign income tax returns in many jurisdictions in the United States and abroad. For federal income tax purposes, the statute of limitations is open for 2008 and onwards. For certain acquired entities, the statute of limitations is open for all years from inception due to our utilization of their net operating losses and credits carried over from prior years. For California income tax purposes, the statute of limitations is open for 2002 and onwards.
Our income tax returns are audited by federal, state and foreign tax authorities. We are currently under examination by the Internal Revenue Service (IRS) for the 2008 and 2009 tax years and by various state and foreign jurisdictions. There are differing interpretations of tax laws and regulations, and as a result, significant disputes may arise with these tax authorities involving issues of the timing and amount of deductions and allocations of income among various tax jurisdictions. We periodically evaluate our exposures associated with our tax filing positions.
As of March 31, 2012, we believe that it is reasonably possible that our unrecognized tax benefits will not significantly change in the next 12 months as we do not expect to have clarification from the IRS and other tax authorities around any of our uncertain tax positions.
We record liabilities related to uncertain tax positions in accordance with the income tax guidance which 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. We do not believe any of our uncertain tax positions will have a material adverse effect on our Condensed Consolidated Financial Statements, although 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.

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ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933, as amended (the Securities Act), and the Securities Exchange Act of 1934, as amended (the Exchange Act). The forward-looking statements are contained principally in this section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors.” Words such as “expect,” “anticipate,” “target,” “goal,” “project,” “hope,” “intend,” “plan,” “believe,” “seek,” “estimate,” “continue,” “may,” “could,” “should,” “might,” variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements other than statements of historical fact are forward-looking statements, including statements regarding overall trends, operating cost and revenue trends, liquidity and capital needs and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends and similar expressions. We have based these forward-looking statements on our current expectations about future events. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Our actual results may differ materially from those suggested by these forward-looking statements for various reasons, including those identified below under “Risk Factors.” Given these risks and uncertainties, you are cautioned not to place undue reliance on forward-looking statements. The forward-looking statements included in this report are made only as of the date hereof. Except as required under federal securities laws and the rules and regulations of the Securities and Exchange Commission (SEC), we do not undertake, and specifically decline, any obligation to update any of these statements or to publicly announce the results of any revisions to any forward-looking statements after the distribution of this report, whether as a result of new information, future events, changes in assumptions or otherwise. In evaluating our business, you should carefully consider the risks described in the section entitled “Risk Factors” under Part II, Item 1A below, in addition to the other information in this Quarterly Report on Form 10-Q. Any of the risks contained herein could materially and adversely affect our business, results of operations and financial condition.
You should read the following management’s discussion and analysis of our financial condition and results of operations in conjunction with our audited Consolidated Financial Statements and related notes thereto included as part of our Annual Report on Form 10-K for the year ended December 31, 2011 and our unaudited Condensed Consolidated Financial Statements for the three months ended March 31, 2012 and other disclosures (including the disclosures under “Part II. Item 1A. Risk Factors”) included in this Quarterly Report on Form 10-Q. Our Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and are presented in U.S. dollars.
Management Overview
Gilead Sciences, Inc. (Gilead, we or us) is a research-based biopharmaceutical company that discovers, develops and commercializes innovative medicines in areas of unmet medical need. With each new discovery and experimental drug candidate, we seek to improve the care of patients suffering from life-threatening diseases around the world. Our primary areas of focus include human immunodeficiency virus (HIV)/AIDS, liver diseases such as hepatitis B virus (HBV) and hepatitis C virus (HCV), serious cardiovascular/metabolic and respiratory conditions and various oncologic disease areas. Headquartered in Foster City, California, we have operations in North America, Europe and Asia Pacific. We continue to seek to add to our existing portfolio of products through our internal discovery and clinical development programs and through a product acquisition and in-licensing strategy.
Our product portfolio is comprised of Atripla®, Truvada®, Viread®, Emtriva®, Complera®/Eviplera®, Hepsera®, AmBisome®, Letairis®, Ranexa®, Cayston® and Vistide®. In addition, we also sell and distribute certain products through our corporate partners under royalty-paying collaborative agreements. For example, F. Hoffmann-La Roche Ltd (together with Hoffmann-La Roche Inc., Roche) markets Tamiflu®; GlaxoSmithKline Inc. (GSK) markets Hepsera and Viread in certain territories outside of the United States; GSK also markets Volibris® outside of the United States; Astellas Pharma US, Inc. markets AmBisome in the United States and Canada; Astellas US LLC markets Lexiscan® injection in the United States; Rapidscan Pharma Solutions, Inc. markets Rapiscan in certain territories outside of the United States; Menarini International Operations Luxembourg SA markets Ranexa in certain territories outside of the United States; and Japan Tobacco Inc. (Japan Tobacco) markets Truvada, Viread and Emtriva in Japan.
Business Highlights
During the first quarter of 2012, we continued to grow our business with increased product sales of 19% over the same quarter in 2011. We continued to advance our product pipeline through internal programs, and most recently, through our acquisition of Pharmasset, Inc. (Pharmasset) in January 2012. We believe the combination of our existing internal research programs and our recent partnerships and acquisitions will drive research and development efforts and accelerate our product pipeline so that we can continue to bring innovative therapies to individuals who are living with unmet medical needs.

23



HIV Product Development and New Drug Applications
In January 2012, we announced that the U.S. Food and Drug Administration (FDA) has approved Viread in combination with other antiretroviral agents for the treatment of HIV-1 infection in pediatric patients ages 2-12. The FDA approved a supplemental New Drug Application (sNDA) for three lower-strength once-daily tablets of Viread for children ages 6-12. The FDA also approved a New Drug Application (NDA) for an oral powder formulation of Viread for children ages 2-5.
Also in January 2012, we announced the initiation of a Phase 2 clinical trial evaluating GS-7340 for the treatment of HIV-1 infection in treatment-naïve adults. The Phase 2 study will evaluate GS-7340 as part of a once-daily, co-formulated single-tablet regimen that will also contain the boosting agent cobicistat, the integrase inhibitor elvitegravir, and Emtriva. The GS-7340-containing single-tablet regimen will be compared to our Quad, a once-daily single tablet regimen of elvitegravir, cobicistat, emtricitabine and tenofovir disoproxil fumarate for the treatment of HIV-1 infection. We plan to initiate a second Phase 2 trial for GS-7340 later in 2012 that will assess GS-7340 as part of another single-tablet regimen containing cobicistat, Emtriva and Tibotec Pharmaceuticals' (Tibotec) Prezista® (darunavir).
In February 2012, we announced that the FDA has accepted the sNDA and granted a six-month Priority Review for Truvada for pre-exposure prophylaxis (PrEP) to reduce the risk of HIV-1 infection among uninfected adults. The FDA has set a target review date for Truvada for PrEP of June 15, 2012 under the Prescription Drug User Fee Act (PDUFA). The FDA has also indicated that Truvada for PrEP will be discussed at the FDA Antiviral Drugs Advisory Committee meeting scheduled for May 10, 2012. If the sNDA is approved, Truvada would be the first agent indicated for uninfected individuals to reduce the risk of acquiring HIV.
In March 2012, we announced full Phase 3 clinical trial results from studies evaluating Quad versus a standard of care among HIV-1 infected antiretroviral treatment-naïve adults. The first study, Study 102, demonstrated that Quad is non-inferior to Atripla after 48 weeks of therapy in treatment-naïve adults. The second study, Study 103, found that Quad was non-inferior to a protease-based regimen of ritonavir-boosted atazanavir plus Truvada at 48 weeks of therapy among HIV-1 infected treatment-naïve adults. We submitted a NDA for Quad in October 2011, and the FDA has set a PDUFA target review date of August 27, 2012. The FDA has indicated that a panel will be convened on May 11, 2012 to provide expert advice on the application. In November 2011, we submitted a marketing application for Quad to the European Medicines Agency, whose review may be complete by the end of 2012.
Acquisition
On January 17, 2012, we completed the acquisition of Pharmasset, a publicly-held clinical-stage pharmaceutical company committed to discovering, developing and commercializing novel drugs to treat viral infections. Pharmasset's primary focus was the development of oral therapeutics for the treatment of HCV infection. We believe the acquisition of Pharmasset will provide us with an opportunity to complement our existing HCV portfolio and help advance our effort to develop all-oral regimens for the treatment of HCV.
We acquired all of the outstanding shares of common stock of Pharmasset for $137 per share in cash through a tender offer and subsequent merger under the terms of an agreement and plan of merger entered into in November 2011. The aggregate cash payment to acquire all of the outstanding shares of common stock was $11.1 billion. We financed the transaction with approximately $5.2 billion in cash on hand, $2.2 billion in bank debt issued in January 2012 and $3.7 billion in senior unsecured notes issued in December 2011.
Pharmasset's lead compound now known as GS-7977, is a nucleotide analog being evaluated in Phase 2 and Phase 3 clinical studies for the treatment of HCV-infection across genotypes.
Since the acquisition, we have received data from clinical trials evaluating GS-7977. For example:
In February 2012, we announced that data indicates that a 12 week course of treatment of GS-7977 with ribavirin in genotype 1 patients with a prior “null” response to an interferon-containing regimen will not be sufficient to cure their disease.
In April 2012, we announced data from our ELECTRON and QUANTUM studies, which found that 88% and 59% of genotype 1 patients and treatment-naïve patients, respectively, taking a 12-week all-oral regimen of GS-7977 and ribavirin achieved a sustained viral response four weeks after the completion of a 12-week course of therapy. We also announced data from our ATOMIC study, which found that 90% of genotype 1 HCV patients achieved a sustained viral response 12 weeks after a 12-week course of therapy with GS-7977 plus ribavirin and interferon. 
Also in April 2012, Bristol-Myers Squibb Company (BMS) also announced data from its Phase 2 study evaluating GS-7977 in combination with daclatasvir with and without ribavirin in genotype 1 and genotype 2

24



and 3 treatment-naïve infected patients. The data showed that 100% of genotype 1 and 91% of genotype 2 and 3 patients achieved a sustained viral response four weeks after the completion of a 24-week course of treatment.
We expect additional data from our Phase 2 and Phase 3 clinical studies of GS-7977, including in combination with other compounds, in the second and third quarters of 2012. If Phase 3 data for genotype 2 and 3 patients is consistent with data from our Phase 2 trials, we would expect to file a NDA for the treatment of genotype 2 and 3 patients in 2013 for potential approval in late 2013 or early 2014.
The Pharmasset acquisition was accounted for as a business combination. The results of operations of Pharmasset have been included in our Condensed Consolidated Statement of Income since January 13, 2012, the date on which we acquired approximately 88% of the outstanding shares of common stock of Pharmasset, cash consideration was transferred, and as a result, we obtained effective control of Pharmasset. During the first quarter of 2012, Pharmasset was integrated into Gilead's operations. As we do not track earnings results by product candidate or therapeutic area, we do not maintain separate earnings results for Pharmasset. The acquisition was completed on January 17, 2012, at which time Pharmasset became a wholly-owned subsidiary of Gilead.
The following table summarizes the components of the cash paid to acquire Pharmasset (in thousands):
Total consideration transferred
$
10,858,372

Stock-based compensation expense
193,937

Total cash paid
$
11,052,309

The $11.1 billion cash payment consisted of a $10.38 billion cash payment to the outstanding common stockholders as well as a $668.3 million cash payment to option holders under the Pharmasset stock option plans. The $10.38 billion cash payment to the outstanding common stockholders and $474.3 million of the cash payment to the option holders under the Pharmasset stock option plans were accounted for as consideration transferred. The remaining $193.9 million of cash payment was accounted for as stock-based compensation expense resulting from the accelerated vesting of Pharmasset employee options immediately prior to the acquisition.
The following table summarizes the allocation of the consideration transferred to the acquisition date fair values of assets acquired and liabilities assumed (in thousands):
Intangible assets - in-process research and development
$
10,720,000

Cash and cash equivalents
106,737

Other assets acquired (liabilities assumed), net
(43,182
)
Total identifiable net assets
10,783,555

Goodwill
74,817

Total consideration transferred
$
10,858,372

In-Process Research and Development (IPR&D)
The estimated fair value of the acquired IPR&D related to GS-7977 was $10.72 billion, which was determined using a probability-weighted income approach, that discounts expected future cash flows to present value. The estimated net cash flows were discounted using a discount rate of 12%, which is based on the estimated weighted-average cost of capital for companies with profiles similar to that of Pharmasset. This rate is comparable to the estimated internal rate of return for the acquisition and represents the rate that market participants would use to value the intangible asset. The projected cash flows from GS-7977 were based on key assumptions such as: the time and resources needed to complete its development considering its stage of development on the acquisition date, the probability of obtaining approval from the U.S. Food and Drug Administration (FDA) and other regulatory agencies, estimates of revenues and operating profits, the life of the potential commercialized product and other associated risks related to the viability of and potential alternative treatments in future target markets. Intangible assets related to IPR&D projects are considered to be indefinite-lived assets until the completion or abandonment of the associated R&D efforts.

25



Goodwill
The $74.8 million of goodwill represents the excess of the consideration transferred over the fair values of assets acquired and liabilities assumed and is attributable to the synergies expected from combining our R&D operations with Pharmasset's. None of the goodwill is expected to be deductible for income tax purposes.
Stock-Based Compensation Expense
The stock-based compensation expense recognized for the accelerated vesting of employee options immediately prior to the acquisition was reported in our Condensed Consolidated Statement of Income as follows (in thousands):
Research and development expense
$
100,149

Selling, general and administrative expense
93,788

Total stock-based compensation expense
$
193,937

Other Costs
Other costs incurred in connection with the acquisition include (in thousands):
 
Three Months Ended
 
March 31, 2012
 
December 31, 2011
Transaction costs (e.g. investment advisory, legal and accounting fees)
$
9,040

 
$
28,461

Bridge financing costs
7,333

 
23,817

Restructuring costs
8,343

 

Total other costs
$
24,716

 
$
52,278

The following table summarizes these costs by the line item in the Condensed Consolidated Statement of Income in which these costs were recognized (in thousands).
 
Three Months Ended
 
March 31, 2012
 
December 31, 2011
Research and development expense
$
5,557

 
$

Selling, general and administrative expense
11,826

 
28,461

Interest expense
7,333

 
23,817

Total other costs
$
24,716

 
$
52,278

Pro Forma Information
The following unaudited pro forma information presents the combined results of operations of Gilead and Pharmasset as if the acquisition of Pharmasset had been completed on January 1, 2011, with adjustments to give effect to pro forma events that are directly attributable to the acquisition. The unaudited pro forma results do not reflect any operating efficiencies or potential cost savings which may result from the consolidation of the operations of Gilead and Pharmasset. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations of the combined company would have been if the acquisition had occurred at the beginning of the period presented, nor are they indicative of future results of operations (in thousands):
 
Three Months Ended
 
March 31,
 
2012
 
2011
Total revenues
$
2,282,449

 
$
1,926,094

Net income attributable to Gilead
$
574,375

 
$
397,165

The unaudited pro forma consolidated results include the following non-recurring pro forma adjustments:
Stock-based compensation expense of $193.9 million and other costs of $16.4 million were excluded from the net income attributable to Gilead for the three months ended March 31, 2012 and were included in the net income attributable to Gilead for the three months ended March 31, 2011;

26



Other costs of $52.3 million incurred during the three months ended December 31, 2011 were included in the net income attributable to Gilead for the three months ended March 31, 2011.
Other
In January 2012, we announced that Roy D. Baynes, MD, PhD, joined Gilead as Senior Vice President, Oncology Therapeutics to lead the efforts to advance discovery and development programs in oncology and inflammation.
Financial Highlights
During the first quarter of 2012, we delivered total product sales of $2.21 billion, an increase of 19% over the same period in 2011. The growth in product sales was primarily driven by growth in our antiviral franchise, where sales increased 18% to $1.93 billion when compared to the same period last year. Total revenues in the first quarter of 2012 grew 19% to $2.28 billion compared to $1.93 billion in the first quarter of 2011. Product gross margin decreased from 75% in the first quarter of 2011 to 74% in the first quarter of 2012 primarily due to the higher cost of efavirenz and changes in product mix. Efavirenz is the active pharmaceutical ingredient in Atripla that we purchase from Bristol-Myers Squibb Company (BMS) at BMS's estimated net selling price of efavirenz.
Research and development (R&D) expenses were $458.2 million for the first quarter of 2012 and $254.4 million for the same period in 2011, an increase of $203.8 million, or 80%. The increase was due primarily to stock-based compensation expense resulting from the Pharmasset acquisition, costs related to clinical studies and the impact of higher headcount and expenses associated with acquisitions, collaborations and the ongoing growth of our business.
Selling, general and administrative (SG&A) expenses were $443.1 million for the first quarter of 2012 and $295.6 million for the same period in 2011, an increase of $147.6 million, or 50%. The increase was due primarily to stock-based compensation expense resulting from the Pharmasset acquisition, an increase in the pharmaceutical excise tax and increased expenses associated with the ongoing growth of our business.
Net income for the first quarter of 2012 was $442.0 million, a 32% decrease from $651.1 million for the same period in 2011 due primarily to the $193.9 million of stock-based compensation expense related to the acceleration of unvested stock options in connection with the Pharmasset acquisition, the investments we made in our existing clinical programs and increased interest expense related to the additional debt we issued in connection with the Pharmasset acquisition. Our diluted earnings per share decreased by 29% to $0.57 in the first quarter of 2012 from $0.80 in the same period in 2011.
Financing Activity
Cash, cash equivalents and marketable securities decreased by $8.46 billion during the first quarter of 2012 to $1.50 billion at March 31, 2012. The primary uses of cash during the quarter were $11.1 billion for the acquisition of Pharmasset, which included the impact of the $193.9 million stock-based compensation expense and $350.0 million for the repayment of bank debt. The primary sources of cash during the quarter were operating cash flows of $453.0 million and $2.14 billion in net proceeds from the issuance of bank debt in conjunction with our acquisition of Pharmasset.
In the first quarter of 2012, we spent a total of $20.8 million of cash to repurchase and retire 0.4 million shares of our common stock under the three-year, $5.00 billion stock repurchase program authorized by our Board of Directors in January 2011. As of March 31, 2012, we had repurchased $423.8 million of our common stock under our January 2011 program.
Critical Accounting Policies, Estimates and Judgments
There have been no material changes in our critical accounting policies, estimates and judgments during the three months ended March 31, 2012 compared to the disclosures in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2011.

27



Results of Operations
Total Revenues
We had total revenues of $2.28 billion for the three months ended March 31, 2012, compared to total revenues of $1.93 billion for the same period in 2011. Total revenues included product sales, royalty revenues and contract and other revenues. Increases in total revenues were driven by growth in product sales. A significant percentage of our product sales is denominated in foreign currencies and we face exposure to adverse movements in foreign currency exchange rates. We use foreign currency exchange forward and option contracts to hedge a percentage of our forecasted international sales, primarily those denominated in Euro. Foreign currency exchange, net of hedges, had an unfavorable impact of $16.4 million on our first quarter 2012 revenues compared to the same period in 2011. Total product sales were $2.21 billion for the three months ended March 31, 2012, an increase of 19% over total product sales of $1.86 billion for the same period in 2011, driven primarily by our antiviral franchise, resulting from increased sales of Atripla and Truvada and the launch of Complera/Eviplera.

Product Sales
Product sales in the United States were $1.27 billion for the three months ended March 31, 2012, an increase of 25% over the same period in 2011, primarily driven by the continued sales growth in our antiviral franchise and the launch of Complera. Antiviral product sales for the first quarter of 2012 reflected the benefit of fiscal year-end purchases by certain state AIDS Drug Assistance Programs (ADAPs), which was ahead of patient demand. With the exception of 2011, this pattern is consistent with what we have observed in past years. The increase in U.S. product sales also reflected sales growth in our other franchises. Letairis sales contributed $87.3 million to our first quarter 2012 product sales, an increase of 40% compared to the same period in 2011. Ranexa sales contributed $83.2 million to our first quarter 2012 product sales, an increase of 22% compared to the same period in 2011.
Product sales in Europe were $763.9 million for the three months ended March 31, 2012, an increase of 7% over the same period in 2011, primarily driven by sales growth in our antiviral franchise and the launch of Eviplera. Antiviral product sales in Europe totaled $696.5 million for the three months ended March 31, 2012, an increase of 7% compared to $651.4 million for the same period in 2011, driven primarily by the sales of Truvada and Atripla. Foreign currency exchange, net of hedges, had an unfavorable impact of $21.4 million on our European product sales in the first quarter of 2012 compared to the same period last year.
The following table summarizes the period over period changes in our sales by product (in thousands):
 
Three Months Ended March 31,
 
 
 
 
2012
 
2011
 
Change
 
Antiviral products:
 
 
 
 
 
 
Atripla
$
887,596

 
$
744,512

 
19
 %
 
Truvada
758,263

 
673,111

 
13
 %
 
Viread
191,693

 
168,395

 
14
 %
 
Complera/Eviplera
52,180

 

 

 
Hepsera
29,297

 
38,096

 
(23
)%
 
Emtriva
6,777

 
6,576

 
3
 %
 
Total antiviral products
1,925,806

 
1,630,690

 
18
 %
 
AmBisome
84,764

 
78,506

 
8
 %
 
Letairis
87,288

 
62,174

 
40
 %
 
Ranexa
83,201

 
68,293

 
22
 %
 
Other
27,283

 
23,915

 
14
 %
 
Total product sales
$
2,208,342

 
$
1,863,578

 
19
 %
 

28



Antiviral Products
Antiviral product sales increased by 18% for the three months ended March 31, 2012 compared to the same period in 2011.
Atripla
Atripla sales increased by 19% for the three months ended March 31, 2012 compared to the same period in 2011, driven primarily by sales growth in the United States and Europe. Atripla sales include the efavirenz component which has a gross margin of zero. The efavirenz portion of our Atripla sales was approximately $326.4 million and $273.9 million for the three months ended March 31, 2012 and 2011, respectively. Atripla sales accounted for 46% of our total antiviral product sales for the three months ended March 31, 2012 and 2011.
Truvada
Truvada sales increased by 13% for the three months ended March 31, 2012 compared to the same period in 2011, driven primarily by sales growth in the United States and Europe. Truvada sales accounted for 39% and 41% of our total antiviral product sales for the three months ended March 31, 2012 and 2011, respectively.
Complera/Eviplera
Sales of Complera/Eviplera were $52.2 million for the three months ended March 31, 2012 and increased $32.5 million compared to the three months ended December 31, 2011. Complera and Eviplera were approved in the U.S. and European Union, respectively, in the second half of 2011.
Other Product Sales
Sales of AmBisome increased by 8% for the three months ended March 31, 2012 compared to the same period in 2011, driven primarily by sales growth in Europe and Asia. AmBisome product sales in the United States and Canada related solely to our sales of AmBisome to Astellas Pharma US, Inc., which were recorded at our manufacturing cost. Sales of Letairis increased by 40% for the three months ended March 31, 2012 compared to the same period in 2011, driven primarily by sales growth. Sales of Ranexa increased by 22% for the three months ended March 31, 2012 compared to the same period in 2011, driven primarily by sales growth.
Royalty Revenues
 
 
Three Months Ended March 31,
 
 
 
(In thousands, except percentages)
 
2012
 
2011
 
Change
 
Royalty revenues
 
$
71,105

 
$
58,665

 
21
%
 
Royalty revenues increased 21% for the three months ended March 31, 2012 compared to the same period in 2011, driven primarily by an increase in Volibris royalties from GSK and Truvada royalties from Japan Tobacco, partially offset by a decrease in Tamiflu royalties from Roche.
Cost of Goods Sold and Product Gross Margin
 
 
Three Months Ended March 31,
 
 
 
(In thousands, except percentages)
 
2012
 
2011
 
Change
 
Total product sales
 
$
2,208,342

 
$
1,863,578

 
19
%
 
Cost of goods sold
 
$
580,931

 
$
474,111

 
23
%
 
Product gross margin
 
74
%
 
75
%
 
 
 
Our product gross margin for the three months ended March 31, 2012 was 74%, a decrease of 1% compared to the same period in 2011, due primarily to the higher cost of efavirenz and changes in product mix as Atripla and Complera increase as a percentage of revenue, while Truvada decreases.

29



Research and Development Expenses
 
 
Three Months Ended March 31,
 
 
 
(In thousands, except percentages)
 
2012
 
2011
 
Change
 
Research and development
 
$
458,211

 
$
254,446

 
80
%
 
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 successful development, market potential, available human and capital resources and other similar considerations. We continually review our R&D pipeline and the status of development and, as necessary, reallocate resources among the R&D portfolio that we believe will best support the future growth of our business.
R&D expenses summarized above consist primarily of personnel costs, including salaries, benefits and stock-based compensation, clinical studies performed by contract research organizations, materials and supplies, licenses and fees, milestone payments under collaboration arrangements and overhead allocations consisting of various support and facilities-related costs.
R&D expenses for the three months ended March 31, 2012 increased by $203.8 million, or 80%, compared to the same period in 2011, due primarily to stock-based compensation expense of $100.1 million resulting from the Pharmasset acquisition; a $55.4 million increase in clinical studies and outside services mainly related to study progression in liver disease; and a $34.5 million increase in personnel expenses due to higher headcount and expenses to support the growth of our business.
Selling, General and Administrative Expenses
 
 
Three Months Ended March 31,
 
 
 
(In thousands, except percentages)
 
2012
 
2011