What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-02-25 compared with 2020-02-25 · 473 added, 293 removed, 168 unchanged (82% of the section changed)

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Additional i nformation related to the comparison of our results of operations between the years 2019 and 2018 is included in “ Item 7.

Management ’ s Discussion and Analysis of Financial Condition and Results of Operations ” of o ur 2018 Form 10-K filed with the SEC and is incorporated by reference into this Annual Report on Form 10-K.

Management ’ s Discussion and Analysis of Financial Condition and Results of Operations ” of o ur 2019 Form 10-K filed with the U.S.

Securities and Exchange Commission (the “SEC”), and is incorporated by reference into this Annual Report on Form 10-K.

Our Consolidated Financial Statements have been prepared in accordance with U.S.

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Gilead Sciences, Inc.

(Gilead, we, our or us), incorporated in Delaware on June 22, 1987, is a research-based biopharmaceutical company that discovers, develops and commercializes innovative medicines in areas of unmet medical need.

With each new discovery and investigational drug candidate, we strive to transform and simplify care for people with life-threatening illnesses around the world.

We have operations in more than 35 countries worldwide, with headquarters in Foster City, California.

Gilead’s primary areas of focus include viral diseases, inflammatory and fibrotic diseases and oncology .

We seek to add to our existing portfolio of products through our internal discovery and clinical development programs, product acquisition, in-licensing and strategic collaborations.

Our portfolio of marketed products includes AmBisome ® , Atripla ® , Biktarvy ® , Cayston ® , Complera ® /Eviplera ® , Descovy ® , Descovy for PrEP ® , Emtriva ® , Epclusa ® , Genvoya ® , Harvoni ® , Hepsera ® , Letairis ® , Odefsey ® , Ranexa ® , Sovaldi ® , Stribild ® , Truvada ® , Truvada for PrEP ® , Tybost ® , Vemlidy ® , Viread ® , Vosevi ® , Yescarta ® and Zydelig ® .

(“Gilead”, “we”, “our” or “us”) is a biopharmaceutical company that has pursued and achieved breakthroughs in medicine for more than three decades, with the goal of creating a healthier world for all people.

We are committed to advancing innovative medicines to prevent and treat life-threatening diseases, including HIV, viral hepatitis and cancer.

We operate in more than 35 countries worldwide, with headquarters in Foster City, California.

Our portfolio of marketed products includes AmBisome ® , Atripla ® , Biktarvy ® , Cayston ® , Complera ® , Descovy ® , Descovy for PrEP ® , Emtriva ® , Epclusa ® , Eviplera ® , Genvoya ® , Harvoni ® , Hepsera ® , Jyseleca ® , Letairis ® , Odefsey ® , Ranexa ® , Sovaldi ® , Stribild ® , Tecartus TM , Trodelvy ® , Truvada ® , Truvada for PrEP ® , Tybost ® , Veklury ® , Vemlidy ® , Viread ® , Vosevi ® , Yescarta ® and Zydelig ® .

The approval status of Jyseleca varies worldwide, and Jyseleca is not approved in the United States.

We also sell and distribute authorized generic versions of Epclusa and Harvoni in the United States through our separate subsidiary, Asegua Therapeutics, LLC.

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2020 Business Highlights

Our financial performance in 2019 was solid, as growth across our HIV franchise continued to drive results.

We took several significant steps to position us for future growth, including an important research and development (R&D) collaboration, the introduction of a new corporate strategy and the hiring of key members of our executive leadership team.

• We developed a new, corporate strategy to guide our work as we seek to drive growth over the next decade, with the ambitious goal of launching 10 new, transformative therapies over the next 10 years.

• We continued to make progress with our pipeline.

We currently have 40 clinical-stage programs, with 14 programs either in registrational or in label-enabling studies.

Of these programs, four have already received Breakthrough Therapy designation from U.S.

Food and Drug Administration (FDA).

• We achieved sales of $16.4 billion across our HIV franchise in 2019, an increase of 12% from 2018, reaching another all-time high.

The continued revenue growth of our HIV products was driven by the demand for Biktarvy and the increase in the number of individuals taking our products for pre-exposure prophylaxis (PrEP).

At the end of 2019, Biktarvy was available in most major markets and, in the United States, approximately 27% of individuals on PrEP were receiving Descovy.

• We entered into a transformative R&D collaboration with Galapagos NV (Galapagos) in July, building on an existing partnership, and effectively enabling us to double our R&D footprint and accelerate our development of novel treatments for inflammatory and fibrotic diseases.

We submitted a regulatory filing for filgotinib to FDA, and the compound is now under priority review for rheumatoid arthritis (RA).

We also submitted filgotinib for approval in Europe and Japan and actively prepared for competitive launches in all three regions.

We and Galapagos continued to advance the Phase 3 study of GLPG-1690 for the treatment of idiopathic pulmonary fibrosis.

With regard to nonalcoholic steatohepatitis (NASH), after the STELLAR and ATLAS studies failed to reach their primary endpoints, we continued to work to understand the results to determine appropriate next steps for these therapies, including the potential for combination therapeutic approaches.

• In cell therapy, Kite, a Gilead company (Kite), submitted KTE-X19 for regulatory approval in the United States and Europe as a treatment for relapsed or refractory mantle cell lymphoma (MCL).

If approved, Kite will be the first company with two cell therapies on the market.

We also continued to demonstrate the efficacy of Yescarta.

Data shared at the end of 2019 showed that approximately half of patients treated with Yescarta for refractory large B-cell lymphoma were still alive three years following treatment in the ZUMA-1 study, confirming Yescarta’s benefit/risk profile.

In addition to cell therapy, we continued to grow our research portfolio in immuno-oncology.

• Our business also expanded geographically, including in China, where eight products have been approved since 2017 and four products (Vemlidy, Epclusa, Harvoni and Genvoya) have been listed on the National Reimbursement Drug List effective in January 2020.

During 2019 , we continued to advance our product pipeline across our therapeutic areas with the goal of delivering best-in-class drugs that have the potential to improve the lives of patients with serious illnesses.

Key corporate, product, pipeline and other updates included:

Viral Diseases

Licensing and collaboration agreements with The Rockefeller University, Novartis AG and Lyndra Therapeutics, Inc.

Approval of Vosevi and Biktarvy by the China National Medical Products Administration.

Approval of a PrEP indication for Descovy by FDA.

Approval of Biktarvy and Epclusa by Japan’s Ministry of Health, Labour and Welfare (MHLW).

Inflammatory and Fibrotic Diseases

Collaborations with Kyverna Therapeutics, Inc.

Glympse Bio, Inc., Renown Institute for Health Innovation, Goldfinch Bio, Inc., Insitro, Inc., Novo Nordisk A/S and Yuhan Corporation.

Agreement with Eisai Co., Ltd.

for the distribution and co-promotion of filgotinib in Japan, pending regulatory approval from Japan’s MHLW, for the treatment of RA.

Submission of a New Drug Application (NDA) under priority review to FDA and submission of a NDA to Japan’s MHLW for filgotinib.

Topline results from the Phase 2 ATLAS study of combination and monotherapy investigational treatments in patients with bridging fibrosis (F3) and compensated cirrhosis (F4) due to NASH.

While the study did not meet its primary endpoint, we continued to analyze the ATLAS data to determine appropriate next steps for these therapies.

Collaboration with Galapagos and equity investment in Galapagos to gain access to Galapagos’ current and future product portfolio.

See Note 11 .

Collaborative and Other Arrangements of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information.

European Medicines Agency’s validation of the marketing authorization application for filgotinib;

the application is now under evaluation by the Agency.

FDA’s acceptance of our Biologics License Application and granting Priority Review designation for KTE-X19 for the treatment of a dult patients with relapsed or refractory MCL.

European Medicines Agency’s validation of the marketing authorization application for KTE-X19;

the application is now under evaluation by the Agency.

Collaborations with Carna Biosciences Inc., Nurix Therapeutics, Inc., Humanigen, Inc.

and Kiniksa Pharmaceuticals, Ltd.

Leadership Changes

We have put in place a diverse, highly experienced leadership team.

Senior leadership changes in 2019 included the appointment of Daniel P.

O’Day as Chairman and Chief Executive Officer, Andrew D.

Dickinson as Executive Vice President and Chief Financial Officer, Merdad V.

Parsey as Chief Medical Officer, Christi L.

Shaw as Chief Executive Officer of Kite, Johanna Mercier as Chief Commercial Officer;

the departures of John G.

McHutchison, Chief Scientific Officer and Head of Research and Development, Gregg H.

Alton, Chief Patient Officer, and Katie L.

Watson, Executive Vice President, Human Resources;

and the planned retirement of Robin L.

Washington from her role as Executive Vice President and Chief Financial Officer.

Donation to the U.S.

Centers for Disease Control and Prevention of up to 2.4 million bottles of Truvada and Descovy annually until 2030 for uninsured Americans at risk for HIV.

Our financial performance was strong in 2020, despite the global impact of the COVID-19 pandemic, which is a clear reflection of the solid underlying fundamentals of our business driven by the HIV franchise and the increased demand we saw for Veklury amid the COVID-19 pandemic.

We also continued to expand and strengthen our commercial portfolio and clinical pipeline across various therapeutic areas to drive future growth potential.

• In April, we acquired Forty Seven, Inc.

(“Forty Seven”) for approximately $4.7 billion, gaining an investigational drug candidate, magrolimab, which is currently in Phase 2/3 clinical studies for a number of hematological cancers, including myelodysplastic syndrome, acute myeloid leukemia, non-Hodgkin lymphoma and solid tumors.

• In October, we acquired Immunomedics, Inc.

(“Immunomedics”) for approximately $20.6 billion and gained Trodelvy, a Trop-2-directed antibody-drug conjugate, which was granted accelerated approval by the U.S.

Food and Drug Administration (“FDA”) for the treatment of adult patients with metastatic triple-negative breast cancer (“mTNBC”).

Trodelvy has potential broader applicability for multiple tumor types, and is being studied as a monotherapy and combination agent for additional tumor types, including HR+/HER2- breast cancer, urothelial cancer, non-small cell lung cancer and other solid tumors.

• In December, we entered into a definitive agreement to acquire MYR GmbH.

Upon closing, which is subject to regulatory clearances and other conditions, the acquisition will provide us with Hepcludex ® (bulevirtide), which was conditionally approved by the European Medicines Agency (“EMA”) for the treatment for chronic hepatitis delta virus (“HDV”) in July 2020.

• We significantly expanded our oncology portfolio through licensing, strategic collaboration as well as equity investments with our third-party collaboration partners.

Additional information is included in Note 11.

Collaborations and Other Arrangements of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

In addition to the assets we acquired pursuant to our strategic transactions, we developed several other therapies and treatments in our portfolio:

Jyseleca, Tecartus and Veklury, the first FDA-approved antiviral therapy for COVID-19.

These efforts demonstrate our continued commitment to advancing innovative medicines in areas of unmet need.

Key Product, Pipeline and Corporate Updates (1)

Category Therapeutic Area and Description

Regulatory Approval & Submission Viral Diseases

• FDA, European Commission (“EC”) and Japanese Ministry of Health, Labour and Welfare (“JMHLW”) granted full approval, conditional marketing authorization and regulatory approval, respectively, to Veklury for the treatment of patients with COVID-19.

• FDA approved a supplemental New Drug Application for Epclusa for the treatment of children ages 6 and older (or weighing at least 17 kg) with hepatitis C virus (“HCV”).

• FDA and EC granted accelerated approval and conditional marketing authorization, respectively, for Tecartus for the treatment of adult patients with relapsed or refractory mantle cell lymphoma.

• We submitted a supplemental Biologics License Application (“sBLA”) to FDA for approval of Trodelvy as a treatment for adult patients with mTNBC based on the overall efficacy and safety results in the Phase 3 ASCENT trial.

• Kite Pharma, Inc.

(“Kite”) submitted an sBLA to FDA for Yescarta for the treatment of relapsed or refractory indolent non-Hodgkin’s lymphoma.

Kite also received EMA approval to implement a variation to the Yescarta Marketing Authorization for end-to-end manufacturing.

• FDA granted Breakthrough Therapy designation for magrolimab, a first-in-class, investigational, monoclonal antibody for the treatment of newly diagnosed myelodysplastic syndrome.

Inflammatory Diseases

• EMA validated and is reviewing the application of Gilead and Galapagos NV (“Galapagos”) for a new indication to the approved license for filgotinib 200mg.

The proposed indication is for the treatment of adults with moderately to severely active ulcerative colitis.

• JMHLW and EC granted regulatory approval and marketing authorization of Jyseleca, respectively, for the treatment of adults with moderate to severe active rheumatoid arthritis.

Corporate Development Viral Diseases

• Gilead and Vir Biotechnology, Inc.

established a clinical collaboration related to hepatitis B virus in January 2021.

• Gilead and Gritstone Oncology, Inc.

announced that the companies have entered into a collaboration, option and license agreement related to a curative treatment of HIV in February 2021.

Other • Veklury Distribution:

◦ Beginning October 1, 2020, we started distributing Veklury in the United States upon conclusion of the previous distribution agreement with the U.S.

Federal government.

◦ Gilead and European Union signed a joint procurement agreement, which covers purchases of Veklury for a six-month period through April 2021 and has the option to be extended by the parties for additional six-month periods.

• Board Appointments:

Bluestone, Ph.D., the President and Chief Executive Officer (“CEO”) of Sonoma Biotherapeutics.

Horning, retired Chief Medical Officer and Global Head of Product Development for Roche.

Rodriguez, the CEO of DaVita Inc.

◦ Anthony Welters, retired Senior Advisor to the Office of the CEO of UnitedHealth Group, Inc.

• Community Support:

◦ In February 2021, we announced a new partnership with the Wake Forest University School of Divinity, as part of the ongoing COMPASS Initiative, to help mitigate the HIV epidemic in the Southern United States.

◦ We launched the Racial Equity Community Impact Fund to initially provide $10 million in grants to 20 organizations working in community advocacy and mobilization, social justice and educational innovation.

We donated 1.5 million individual doses of remdesivir free of charge.

◦ We made various donations to support current nonprofit grantees through the global Gilead COVID-19 Acute Relief and Emergency Support Grantee Fund.

◦ We also made donations to the San Mateo Strong Fund and the Mayor’s Fund for Los Angeles.

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(1) We announced and discussed these updates in further detail in press releases available on our website at https://www.gilead.com/news-and-press/press-room/press-releases.

Additional information can be found in our disclosures filed or furnished with the SEC, including its Current Reports on Form 8-K and on Quarterly Reports on Form 10-Q, as applicable.

Readers are also encouraged to review all other press releases available on our website mentioned above.

2020 Financial Highlights

Total revenues increased to $22.4 billion and total product sales increased to $22.1 billion in 2019 , compared to $22.1 billion and $21.7 billion in 2018 , respectively, primarily due to higher sales of our HIV products, partially offset by lower sales of Ranexa and Letairis and our HCV products.

In the United States, product sales were $16.6 billion in 2019 , compared to $16.2 billion in 2018 .

In Europe, product sales were $3.6 billion in 2019 , compared to $3.7 billion in 2018 .

Product sales in other international locations were $2.0 billion in 2019 , compared to $1.8 billion in 2018 .

Cost of goods sold decreased to $4.7 billion in 2019 , compared to $4.9 billion in 2018 , primarily due to $259 million of lower royalty expenses, and lower amortization expenses related to intangible assets associated with Ranexa, partially offset by higher inventory write-downs.

In 2019 and 2018 , we recorded write-downs of $547 million and $440 million , respectively, for

slow moving and excess raw material and work in process inventory primarily due to lower long-term demand for our HCV products.

R&D expenses increased to $9.1 billion in 2019 , compared to $5.0 billion in 2018 , primarily due to up-front collaboration and licensing expenses of $3.9 billion related to our collaboration with Galapagos as well as higher personnel costs largely to support our cell therapy business, partially offset by lower stock-based compensation expense.

In 2019 and 2018 , we recorded impairment charges of $800 million and $820 million , respectively, related to in-process R&D (IPR&D) intangible assets acquired in connection with the acquisition of Kite Pharma, Inc.

Selling, general and administrative (SG&A) expenses increased to $4.4 billion in 2019 , compared to $4.1 billion in 2018 , primarily due to promotional expenses in the United States and expenses associated with the expansion of our business in Japan and China, partially offset by lower stock-based compensation expense.

Net income attributable to Gilead changed to $5.4 billion or $4.22 per diluted share in 2019 , compared to $5.5 billion or $4.17 per diluted share in 2018 , primarily due to pre-tax up-front collaboration and licensing expenses of $3.9 billion related to our collaboration with Galapagos, partially offset by the net favorable fluctuation in tax effects of intra-entity intangible asset transfers to different tax jurisdictions and an increase in net unrealized gains from equity securities.

The year-over-year diluted earnings per share were favorably impacted by our stock repurchase activities.

As of December 31, 2019 , we had $25.8 billion of cash, cash equivalents and marketable debt securities compared to $31.5 billion as of December 31, 2018 .

During 2019 , we generated $9.1 billion in operating cash flow and paid $5.6 billion in connection with the collaboration with and equity investments in Galapagos, which was classified as cash flows from investing activities.

We also repaid $2.8 billion of principal amount of debt, paid cash dividends of $3.2 billion and utilized $1.7 billion on repurchases of common stock in 2019 .

(In millions, except percentages and per share amounts) 2020 Change 2019 Change 2018

Total revenues $ 24,689 10 % $ 22,449 1 % $ 22,127

Net income attributable to Gilead $ 123 (98) % $ 5,386 (1) % $ 5,455

Diluted earnings per share $ 0.10 (98) % $ 4.22 1 % $ 4.17

2020 Compared to 2019

Total revenues increased by 10% to $24.7 billion in 2020, compared to $22.4 billion in 2019, primarily due to Veklury sales and higher product sales in our HIV products, including the continued patient uptake of Biktarvy and growth of Descovy for pre-exposure prophylaxis (“PrEP”).

The increase was partially offset by lower sales volume of our Truvada (emtricitabine (“FTC”) and tenofovir disoproxil fumarate (“TDF”))-based products primarily due to the loss of exclusivity of Truvada and Atripla in the United States in October 2020, lower sales of HCV products due to the impact of the COVID-19 pandemic and the expected declines in sales of Letairis and Ranexa after generic entries in the first half of 2019.

Net income attributable to Gilead was $123 million or $0.10 per diluted share in 2020, compared to $5.4 billion or $4.22 per diluted share in 2019, primarily due to unfavorable changes in the fair value of our equity investments in Galapagos, the $1.2 billion discrete tax benefit recorded in 2019 related to intra-entity transfers of intangible assets to different tax jurisdictions, higher acquired in-process research and development (“IPR&D”) expenses related to our acquisition of Forty Seven and our collaborations and other investments we entered into during the year, as well as higher acquisition-related expenses.

Strategy and Outlook 2021

Our focus is to create possibilities for patients through scientific breakthroughs and innovation, by leveraging our pillars of a durable core business, existing pipeline opportunities and our strategy to drive additional growth.

Our strategy includes ambitions and priorities, which enable us to achieve those ambitions.

Our strategic ambitions define what success looks like over the next decade and are summarized as (i) bring 10+ transformative therapies to patients by 2030;

Our purpose is to deliver life-changing medications to patients in need through scientific breakthroughs, innovation and strong operational execution.

Our strategic ambitions are to (i) bring 10+ transformative therapies to patients by 2030;

(ii) be the biotech employer and partner of choice;

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and (iv) continue to evolve our culture.

In 2020, we expect underlying growth in our base business, which is expected to offset the full-year impact of our cardiopulmonary products loss of exclusivity, which occurred in 2019, and the initial generic version of Truvada in the United States in late 2020.

We will also continue to invest to support the growth of Biktarvy, our Descovy for PrEP launch, preparation for competitive launches of filgotinib in RA in the United States, Japan and Europe, and continued investments in our pipeline, cell therapy and external partnerships.

Our overall plan is now guided by our newly established corporate strategy that provides focus and guides resource and capital allocation priorities.

We expect data read-outs in 2020 including filgotinib for ulcerative colitis, KTE-X19 for acute lymphoblastic leukemia (ALL), axicabtagene ciloleucel CD19 for indolent B-cell non-Hodgkin lymphoma (iNHL) and second line diffuse large B-cell lymphoma and GLPG-1972 for osteoarthritis.

To further augment our product pipeline, we continue to pursue opportunities for collaborations, partnerships and strategic investments that fit into our long-term strategic plan.

Our progress on all of these initiatives is subject to a number of uncertainties, including, but not limited to, the possibility of unfavorable results from new and ongoing clinical trials;

In 2021, we will continue to focus on executing our strategy to expand and strengthen our commercial portfolio and clinical pipelines in new therapeutic areas, including oncology and inflammation, while maintaining our leadership in antiviral medications through the continued growth of Biktarvy, the development of lenacapavir, the expansion of our viral hepatitis business and our on-going efforts to develop safe and effective antivirals to patients suffering from viral infections.

Beyond expanding our products and pipeline, we also continue to focus on our employees, the evolution of our culture and our efforts to promote racial equity.

The COVID-19 pandemic continues to impact our business and broader market dynamics.

We expect a gradual recovery in underlying market dynamics starting the second quarter 2021.

Truvada and Atripla sales are expected to continue to decline in the first quarter of 2021 and beyond as multiple generics are expected to enter the market starting in the second quarter of 2021.

Biktarvy, Trodelvy, Vemlidy and cell therapy are expected to be key growth drivers in 2021 absorbing the full year impact of the loss of exclusivity for Truvada and Atripla in the United States.

Veklury sales are generated in a highly dynamic and complex global environment, which continues to evolve.

As a result, Veklury sales are subject to significant volatility and uncertainty.

Future product demand will depend on the nature of the COVID-19 pandemic, including duration of the pandemic, infection rates, hospitalizations, and availability of alternative therapies and vaccines being developed.

The acquisition of

Immunomedics will continue to contribute to our revenue growth in 2021.

Our capital allocation priorities remain unchanged from 2020 and we plan to prioritize investment in our business and R&D pipeline and maintain a rigorous focus on disciplined expense management.

Our ability to deliver on our strategy and 2021 objectives is subject to a number of uncertainties, including, but not limited to, the effects of the COVID-19 pandemic, which remains unpredictable;

the continuation of an uncertain global macroeconomic environment;

our ability to realize the potential benefits of our acquisitions, collaborations or licensing arrangements;

our ability to initiate, progress or complete clinical trials within currently anticipated timeframes;

the possibility of unfavorable results from new and ongoing clinical trials;

additional pricing pressures from payers and competitors;

slower than anticipated growth in our HIV products;

higher than anticipated effects of the loss of exclusivity from Truvada and Atripla;

slower than anticipated growth in Biktarvy, Trodelvy, Vemlidy and cell therapy products;

an increase in discounts, chargebacks and rebates due to ongoing contracts and future negotiations with commercial and government payers;

market share and price erosion caused by the introduction of generic versions of products containing tenofovir disoproxil fumarate (TDF) outside the United States and Viread, Letairis and Ranexa in the United States;

market share and price erosion caused by the introduction of generics;

loss of exclusivity of our products;

inaccuracies in our HCV patient start estimates;

potential amendments to the Affordable Care Act or other government action that could have the effect of lowering prices;

potential government actions that could have the effect of lowering prices;

a larger-than anticipated shift in payer mix to more highly discounted payer segment;

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The following table summarizes the period-over-period changes in our revenues:

(In millions, except percentages)

(In millions, except percentages) 2020 Change 2019 Change 2018

Product sales:

HIV products $ 16,938 3 % $ 16,438 12 % $ 14,627

2,064 (30) % 2,936 (20) % 3,686

Veklury 2,811 NM — NM —

Cell therapy products 607 33 % 456 73 % 264

Trodelvy 49 NM — NM —

Other Products 1,886 (18) % 2,289 (26) % 3,100

Total product sales 24,355 10 % 22,119 2 % 21,677

Royalty, contract and other revenues 334 1 % 330 (27) % 450

Total revenues $ 24,689 10 % $ 22,449 1 % $ 22,127

Product Sales

________________________________

NM - Not Meaningful

2020 Compared to 2019

Total product sales increased by 2% to $22.1 billion in 2019 , compared to $21.7 billion in 2018 , primarily due to higher sales of our HIV products, partially offset by lower sales of Ranexa and Letairis and our HCV products.

HIV product sales increased by 12% to $16.4 billion in 2019 , compared to $14.6 billion in 2018 , primarily due to higher sales volume as a result of the continued uptake of Biktarvy.

The increase was partially offset by decreases in sales volumes of Genvoya and our Truvada (emtricitabine (FTC)/TDF)-based products and lower average net selling price.

HCV product sales decreased by 20% to $2.9 billion in 2019 , compared to $3.7 billion in 2018 , primarily due to lower average net selling price, including a decline in U.S.

Medicare prices in 2019.

Yescarta sales increased by 73% to $456 million in 2019 , compared to $264 million in 2018 , primarily due to a higher number of therapies provided to patients and the continued expansion in Europe.

Other product sales, which include Vemlidy, Viread, Letairis, Ranexa, Zydelig, AmBisome and Cayston, decreased by 26% to $2.3 billion in 2019 , compared to $3.1 billion in 2018 , primarily due to the expected decline in sales of Ranexa and Letairis after the entry of generic versions in the United States in early 2019.

Of our total product sales, 25% were generated outside the United States in 2019 .

Total Product Sales

Total product sales increased by 10% to $24.4 billion in 2020, compared to $22.1 billion in 2019, primarily due to Veklury sales and higher product sales in our HIV products, including the continued patient uptake of Biktarvy and growth of Descovy for PrEP.

The increase was partially offset by lower sales volume of our Truvada (FTC/TDF)-based products primarily due to the loss of exclusivity of Truvada and Atripla in the United States in October 2020, lower HCV sales due to lower patient starts due to the COVID-19 pandemic and the expected declines in sales of Letairis and Ranexa after generic entries in the first half of 2019.

HIV Product Sales

HIV product sales increased by 3% to $16.9 billion in 2020, compared to $16.4 billion in 2019, primarily due to the continued patient uptake of Biktarvy and growth of Descovy for PrEP, partially offset by lower sales volume of our Truvada (FTC/TDF)-based products driven by the loss of exclusivity of Truvada and Atripla in the United States in October 2020 and lower average net selling price driven by unfavorable payer mix primarily due to higher public health service utilization.

Our HIV franchise, including PrEP was also unfavorably impacted by the COVID-19 pandemic.

HIV product sales in 2019 included favorable net adjustments primarily due to government rebates and discounts.

Descovy (FTC/TAF)-based product sales increased in all major markets in 2020 compared to 2019.

The increase in the United States was primarily due to the continued patient uptake of Biktarvy and growth of Descovy for PrEP, partially offset by lower sales volume of Genvoya.

The increase in Europe and other international locations was primarily due to higher sales volume of Biktarvy, partially offset by lower sales volume of Genvoya.

Truvada (FTC/TDF)-based product sales decreased in the United States and Europe in 2020 compared to 2019.

The decrease in the United States was primarily due to lower sales volume driven by the loss of exclusivity of Truvada and Atripla in October 2020 and patients switching to regimens containing FTC/TAF.

We expect Truvada sales to continue to decline in 2021 and beyond as multiple generics are expected to enter the market starting in the second quarter 2021.

The decrease in European sales was primarily due to lower sales volume as a result of the broader availability of generic versions of Truvada and patients switching to regimens containing FTC/TAF.

HCV Product Sales

HCV product sales decreased by 30% to $2.1 billion in 2020, compared to $2.9 billion in 2019, primarily due to lower sales volume driven by lower patient starts in the United States and Europe attributable to the COVID-19 pandemic and the continuing decline of total market patient starts unrelated to the pandemic, as well as lower average net selling price reflecting higher sales return provisions and discounts.

HCV product sales in 2019 included favorable net adjustments primarily due to government rebates and discounts.

The decrease in HCV product sales in the United States and Europe in 2020 compared to 2019 was primarily due to lower patient starts, including declines attributable to a decrease in health care provider visits and screenings due to the COVID-19 pandemic as well as lower average net selling price.

The decrease in Europe was also impacted by favorable net adjustments primarily due to government rebates and discounts in 2019, which did not reoccur in 2020.

The decrease in HCV product sales in other international locations in 2020 compared to 2019 was primarily due to lower sales volume.

Veklury generated $2.8 billion in sales in 2020 primarily in the United States and Europe, reflecting higher hospitalization and treatment rates due to the fourth quarter COVID-19 surge.

Cell Therapy Product Sales

Cell therapy product sales, which include Yescarta and Tecartus, increased by 33% to $607 million in 2020, compared to $456 million in 2019, primarily due to the continued uptake of Yescarta in Europe and the third quarter 2020 product launch of Tecartus in the United States .

Trodelvy generated $49 million in sales in the United States, following our acquisition of Immunomedics on October 23, 2020.

Other Product Sales

Other product sales, which include Vemlidy, Viread, Letairis, Ranexa, Zydelig, AmBisome, Cayston and Jyseleca, decreased by 18% to $1.9 billion in 2020, compared to $2.3 billion in 2019, primarily due to the expected declines in sales of Letairis and Ranexa after generic entries in the first half of 2019, partially offset by higher sales volume of Vemlidy in other international locations.

Gross-to-Net Deductions

We record product sales net of estimated government and other rebates and chargebacks, cash discounts for prompt payment, distributor fees, sales return provisions and other related costs.

These deductions to product sales are generally referred to as gross-to-net (“GTN”) deductions, which totaled $15.3 billion, or 39% of gross product sales in 2020, compared to $15.3 billion, or 41% of gross product sales in 2019.

Of the $15.3 billion in 2020, $13.0 billion or 33% of gross product sales was related to government and other rebates and chargebacks, $1.7 billion was related to cash discounts for prompt payment, distributor fees and other related costs and $572 million was related to sales return provisions.

Product Sales by Geographic Area

Of our total product sales, 26% and 25% were generated outside the United States in 2020 and 2019, respectively.

We faced exposure to movements in foreign currency exchange rates, primarily in the Euro.

We used foreign currency exchange contracts to hedge a percentage of our foreign currency exposure.

Foreign currency exchange, net of hedges, had an immaterial impact on our product sales in 2019 , based on a comparison using foreign currency exchange rates from 2018 .

We record product sales net of estimated government and other rebates and chargebacks, cash discounts for prompt payment, distributor fees and other related costs.

These deductions are generally referred to as gross-to-net deductions, which totaled $15.3 billion , or 41% of gross product sales in 2019 , compared to $16.5 billion , or 43% of gross product sales in 2018 .

Of the $15.3 billion in 2019 , $13.5 billion or 36% of gross product sales in 2019 was related to government and other rebates and chargebacks, and $1.8 billion was related to cash discounts for prompt payment, distributor fees and other related costs.

Product sales in the United States increased by 2% to $16.6 billion in 2019 , compared to $16.2 billion in 2018 , primarily due to higher sales of our HIV products, partially offset by lower sales of Ranexa and Letairis following the entry of generic versions in 2019 and lower sales of our HCV products.

The increase in sales of our HIV products was primarily due to the continued uptake of Biktarvy and an increase in the number of individuals taking PrEP, partially offset by the decreases in sales volumes of our other HIV products including Genvoya, Atripla and Stribild.

The decrease in sales of our HCV products was primarily due to lower average net selling price, including a decline in U.S.

Medicare prices in 2019.

Product sales in Europe decreased by 3% to $3.6 billion in 2019 , compared to $3.7 billion in 2018 , primarily due to lower sales of our HCV products and the broader availability of generic versions of Truvada and Atripla.

The decrease in sales of our HCV products was primarily due to lower patient starts and lower average net selling price.

The decrease was partially offset by the continued uptake of Biktarvy, Odefsey and Yescarta, and favorable net adjustments for government rebates related to sales made in prior years.

Product sales in other international locations increased by 11% to $2.0 billion in 2019 , compared to $1.8 billion in 2018 , primarily due to higher HIV product sales in Japan, as a result of acquiring the rights to certain products in our HIV portfolio in Japan effective January 1, 2019, and higher HCV product sales in Japan due to the launch of Epclusa in 2019.

Foreign currency exchange, net of hedges, had an unfavorable impact on our product sales of $29 million in 2020, based on a comparison using foreign currency exchange rates from 2019.

Product sales in the United States increased by 10% to $18.1 billion in 2020, compared to $16.6 billion in 2019, primarily due to sales of Veklury, the continued patient uptake of Biktarvy and growth of Descovy for PrEP, partially offset by decreases in sales of Truvada (FTC/TDF)-based products driven by the loss of exclusivity of Truvada and Atripla in the United States in October 2020.

The increase was also partially offset by lower sales volume of Letairis and Ranexa and lower sales of our HCV products.

The decrease in sales of our HCV products was primarily due to lower patient starts and average net selling price as discussed above.

Product sales in Europe increased by 9% to $3.9 billion in 2020, compared to $3.6 billion in 2019, primarily due to sales of Veklury, and the continued patient uptake of Biktarvy and Yescarta.

The increase was partially offset by lower patient starts and average net selling price as discussed above.

Product sales in Europe in 2019 included favorable net adjustments primarily due to government rebates and discounts.

Product sales in other international locations increased by 17% to $2.3 billion in 2020, compared to $2.0 billion in 2019, primarily due to higher sales volumes of Biktarvy, Veklury and Vemlidy.

The following table summarizes the period-over-period changes in our product sales:

(In millions, except percentages)

Complera/Eviplera

Other HIV (1)

Revenue share - Symtuza (2)

Ledipasvir/Sofosbuvir (3)

Sofosbuvir/Velpatasvir (4)

Total product sales

(In millions, except percentages) 2020 Change 2019 Change 2018

Descovy (FTC/TAF) Based Products

Biktarvy – U.S.

$ 6,095 44 % $ 4,225 NM $ 1,144

Biktarvy – Europe 735 99 % 370 NM 39

Biktarvy – Other International 429 NM 143 NM 1

7,259 53 % 4,738 NM 1,184

Descovy – U.S.

1,526 42 % 1,078 (11) % 1,217

Percentage is greater than 100%

Descovy – Europe 197 (23) % 255 (17) % 308

Descovy – Other International 138 (17) % 167 NM 56

1,861 24 % 1,500 (5) % 1,581

Genvoya – U.S.

2,605 (13) % 2,984 (18) % 3,631

Genvoya – Europe 490 (26) % 664 (16) % 794

Genvoya – Other International 243 (14) % 283 42 % 199

3,338 (15) % 3,931 (15) % 4,624

Odefsey – U.S.

1,172 (1) % 1,180 (5) % 1,242

Odefsey – Europe 450 3 % 438 31 % 335

Odefsey – Other International 50 35 % 37 76 % 21

1,672 1 % 1,655 4 % 1,598

Revenue share – Symtuza (1) – U.S.

331 33 % 249 NM 27

Revenue share – Symtuza (1) – Europe

149 15 % 130 NM 52

Revenue share – Symtuza (1) – Other International

488 29 % 379 NM 79

Total Descovy (FTC/TAF) Based Products – U.S.

11,729 21 % 9,716 34 % 7,261

Total Descovy (FTC/TAF) Based Products – Europe 2,021 9 % 1,857 22 % 1,528

Total Descovy (FTC/TAF) Based Products – Other International 868 38 % 630 NM 277

14,618 20 % 12,203 35 % 9,066

Truvada (FTC/TDF) Based Products

Atripla – U.S.

307 (39) % 501 (48) % 967

Atripla – Europe 21 (65) % 60 (54) % 131

Atripla – Other International 21 (46) % 39 (64) % 108

349 (42) % 600 (50) % 1,206

Complera / Eviplera – U.S.

89 (44) % 160 (42) % 276

Complera / Eviplera – Europe 159 (26) % 214 (35) % 327

Complera / Eviplera – Other International 21 (34) % 32 (36) % 50

269 (34) % 406 (38) % 653

Stribild – U.S.

125 (53) % 268 (47) % 505

Stribild – Europe 54 (28) % 75 (23) % 97

Stribild – Other International 17 (35) % 26 (38) % 42

196 (47) % 369 (43) % 644

Truvada – U.S.

1,376 (48) % 2,640 1 % 2,605

Truvada – Europe 27 (73) % 101 (61) % 260

Truvada – Other International 45 (38) % 72 (45) % 132

1,448 (49) % 2,813 (6) % 2,997

Total Truvada (FTC/TDF) Based Products – U.S.

1,897 (47) % 3,569 (18) % 4,353

Total Truvada (FTC/TDF) Based Products – Europe 261 (42) % 450 (45) % 815

Total Truvada (FTC/TDF) Based Products – Other International 104 (38) % 169 (49) % 332

2,262 (46) % 4,188 (24) % 5,500

Other HIV (2) – U.S.

25 (17) % 30 (25) % 40

Other HIV (2) – Europe

5 — % 5 (29) % 7

Other HIV (2) – Other International

28 NM 12 (14) % 14

58 23 % 47 (23) % 61

Total HIV – U.S.

13,651 3 % 13,315 14 % 11,654

Total HIV – Europe 2,287 (1) % 2,312 (2) % 2,350

Total HIV – Other International 1,000 23 % 811 30 % 623

16,938 3 % 16,438 12 % 14,627

Ledipasvir / Sofosbuvir (3) – U.S.

92 (71) % 312 (61) % 802

Ledipasvir / Sofosbuvir (3) – Europe

29 (59) % 71 (51) % 144

Ledipasvir / Sofosbuvir (3) – Other International

151 (42) % 260 (6) % 276

272 (58) % 643 (47) % 1,222

Sofosbuvir / Velpatasvir (4) – U.S.

864 (11) % 971 4 % 934

Sofosbuvir / Velpatasvir (4) – Europe

337 (39) % 553 (15) % 654

Sofosbuvir / Velpatasvir (4) – Other International

398 (10) % 441 17 % 378

1,599 (19) % 1,965 — % 1,966

Other HCV (5) – U.S.

132 (27) % 182 (37) % 287

Other HCV (5) – Europe

48 (59) % 118 20 % 98

Other HCV (5) – Other International

13 (54) % 28 (75) % 113

193 (41) % 328 (34) % 498

Total HCV – U.S.

1,088 (26) % 1,465 (28) % 2,023

Total HCV – Europe 414 (44) % 742 (17) % 896

Total HCV – Other International 562 (23) % 729 (5) % 767

2,064 (30) % 2,936 (20) % 3,686

Veklury – U.S.

2,026 NM — NM —

Veklury – Europe 607 NM — NM —

Veklury – Other International 178 NM — NM —

2,811 NM — NM —

Cell Therapy Products

Yescarta – U.S.

362 (3) % 373 42 % 263

Yescarta – Europe 191 NM 83 NM 1

Yescarta – Other International 10 NM — NM —

563 23 % 456 73 % 264

Tecartus – U.S.

Tecartus – Europe 10 NM — NM —

Tecartus – Other International — NM — NM —

Total Cell Therapy – U.S.

396 6 % 373 42 % 263

Total Cell Therapy – Europe 201 NM 83 NM 1

Total Cell Therapy – Other International 10 NM — NM —

607 33 % 456 73 % 264

Trodelvy - U.S.

Other Products

AmBisome – U.S.

61 65 % 37 (20) % 46

AmBisome – Europe 230 (2) % 234 2 % 229

AmBisome – Other International 145 7 % 136 (6) % 145

436 7 % 407 (3) % 420

Letairis – U.S.

314 (49) % 618 (34) % 943

Ranexa – U.S.

9 (96) % 216 (72) % 758

Vemlidy – U.S.

356 15 % 309 26 % 245

Vemlidy – Europe 29 38 % 21 75 % 12

Vemlidy – Other International 272 72 % 158 NM 64

657 35 % 488 52 % 321

Viread – U.S.

14 (56) % 32 (36) % 50

Viread – Europe 34 (51) % 69 (16) % 82

Viread – Other International 137 (4) % 142 (19) % 175

185 (24) % 243 (21) % 307

Zydelig – U.S.

31 (34) % 47 (23) % 61

Zydelig – Europe 39 (28) % 54 (23) % 70

Zydelig – Other International 2 — % 2 — % 2

72 (30) % 103 (23) % 133

Other (6) – U.S.

146 (5) % 153 (1) % 154

Other (6) – Europe

53 2 % 52 (7) % 56

Other (6) – Other International

14 56 % 9 13 % 8

213 — % 214 (2) % 218

Total Other – U.S.

931 (34) % 1,412 (37) % 2,257

Total Other – Europe 385 (10) % 430 (4) % 449

Total Other – Other International 570 28 % 447 13 % 394

1,886 (18) % 2,289 (26) % 3,100

Total product sales – U.S.

18,141 10 % 16,565 2 % 16,197

Total product sales – Europe 3,894 9 % 3,567 (3) % 3,696

Total product sales – Other International 2,320 17 % 1,987 11 % 1,784

$ 24,355 10 % $ 22,119 2 % $ 21,677

_______________________________

NM - Not Meaningful

(1) Represents our revenue from cobicistat (C), emtricitabine (FTC) and tenofovir alafenamide (TAF) in Symtuza (darunavir/C/FTC/TAF), a fixed dose combination product commercialized by Janssen Sciences Ireland Unlimited Company.

(2) Includes Emtriva and Tybost.

Represents our revenue from cobicistat (C), emtricitabine (FTC) and tenofovir alafenamide (TAF) in Symtuza (darunavir/C/FTC/TAF), a fixed dose combination product commercialized by Janssen Sciences Ireland UC

(3) Amounts consist of sales of Harvoni and the authorized generic version of Harvoni sold by our separate subsidiary, Asegua Therapeutics LLC.

(4) Amounts consist of sales of Epclusa and the authorized generic version of Epclusa sold by our separate subsidiary, Asegua Therapeutics LLC.

Includes Cayston, Hepsera and Sovaldi

The following is additional discussion of sales of our HIV and HCV products:

Descovy (FTC/TAF)-based products:

Biktarvy, Descovy, Genvoya, Odefsey and Revenue Share - Symtuza

The following table summarizes the period-over-period changes in our sales of Descovy (FTC/TAF)-based products:

(In millions, except percentages)

Other locations

% of total product sales

% of HIV product sales

Descovy (FTC/TAF)-based product sales increased in all major markets in 2019 compared to 2018 .

The increase in both the United States and Europe was primarily due to higher demand and a shift in product mix toward Biktarvy.

The increase in other international locations was primarily due to higher product sales in Japan as a result of acquiring the rights to certain products in our HIV portfolio in Japan effective January 1, 2019.

Truvada (FTC/TDF)-based products:

Atripla, Complera/Eviplera, Stribild and Truvada

The following table summarizes the period-over-period changes in our sales of Truvada (FTC/TDF)-based products:

(In millions, except percentages)

Other locations

% of total product sales

Truvada (FTC/TDF)-based product sales decreased in the United States and Europe in 2019 compared to 2018 .

The decrease in U.S.

sales was primarily due to lower sales volume as a result of patients switching to newer regimens containing FTC/TAF, partially offset by the increased usage of Truvada for PrEP.

The decrease in Europe sales was primarily due to lower sales volumes of Truvada and Atripla as a result of the broader availability of generic versions and patients switching to newer regimens containing FTC/TAF.

We expect a decline in our sales of Truvada in the United States as patients switch to Descovy for PrEP from Truvada for PrEP and the expected entry of generic versions in late 2020.

HCV products:

Epclusa, Harvoni, Sovaldi, Vosevi and Authorized Generics of Epclusa and Harvoni

The following table summarizes the period-over-period changes in our sales of HCV products:

(In millions, except percentages)

Other locations

% of total product sales

The decrease in HCV product sales in the United States in 2019 compared to 2018 was primarily due to lower average net selling price, including a decline in U.S.

Medicare prices in 2019.

The decrease in HCV product sales in Europe in 2019 compared to 2018 was primarily due to lower patient starts and lower average net selling price, partially offset by favorable net adjustments for government rebates and discounts related to sales made in prior years.

The decrease in HCV product sales in other international locations in 2019 compared to 2018 was primarily due to lower sales of Sovaldi, partially offset by higher sales of Epclusa.

Cost of Goods Sold and Product Gross Margin

The following table summarizes the period-over-period changes in our product sales, cost of goods sold and product gross margin:

(In millions, except percentages)

Total product sales

(5) Includes Vosevi and Sovaldi.

(6) Includes Cayston, Hepsera and Jyseleca.

Costs and Expenses

The following table summarizes the period-over-period changes in our costs and expenses:

(In millions, except percentages) 2020 Change 2019 Change 2018

Cost of goods sold $ 4,572 (2) % $ 4,675 (4) % $ 4,853

Product gross margin

In 2019 , cost of goods sold decreased by $178 million compared to 2018 , primarily due to lower royalty expenses and lower amortization expense related to the intangible assets associated with Ranexa, which was fully amortized in the first quarter of 2019, partially offset by higher inventory write-downs.

In 2019 , we recorded inventory write-downs of $649 million , of which $547 million was related to slow moving and excess raw material and work in process inventory primarily due to lower long-term demand for our HCV products.

In 2018 , we recorded inventory write-downs of $572 million , of which $440 million was related to excess raw materials primarily due to a sustained decrease in demand for Harvoni as a result of a shift in the market from Harvoni to Epclusa.

Royalty expenses decreased by $259 million in 2019 , compared to 2018 , primarily due to lower sales of Atripla, Ranexa, Letairis and products containing elvitegravir .

Product gross margin 81.2 % 230 bps 78.9 % 130 bps 77.6 %

Research and development (“R&D”) expenses $ 5,039 24 % $ 4,055 3 % $ 3,920

Acquired IPR&D expenses $ 5,856 16 % $ 5,051 NM $ 1,098

Selling, general and administrative (“SG&A”) expenses $ 5,151 18 % $ 4,381 8 % $ 4,056

_______________________________

NM - Not Meaningful

Cost of Goods Sold and Product Gross Margin

In 2020, cost of goods sold decreased by $103 million compared to 2019, primarily due to the 2019 inventory write-down charges of $649 million, of which $547 million was related to slow moving and excess raw material and work in process inventory primarily due to lower long-term demand for our HCV products.

The decrease in cost of goods sold was partially offset by higher manufacturing ramp-up expenses related to Veklury as a treatment for COVID-19 and acquisition-related expenses from amortization of finite-lived intangible assets and inventory step-up charges, as well as accelerated stock-based compensation expenses related to our acquisition of Immunomedics.

In addition, royalty expenses decreased by $126 million in 2020, compared to 2019, primarily due to lower sales of products containing elvitegravir, Letairis and Atripla.

In 2020, product gross margin increased compared to 2019, primarily due to factors described above.

Research and Development Expenses

The following table summarizes the period-over-period changes in our R&D expenses:

(In millions, except percentages)

R&D expenses consist primarily of clinical studies performed by contract research organizations, materials and supplies, payments under collaborative and other arrangements, including up-front and milestone payments, licenses and fees, as well as expense reimbursements to the collaboration partners, IPR&D impairment charges, personnel costs, including salaries, benefits and stock-based compensation expense, and overhead allocations consisting of various support and infrastructure costs.

R&D expenses consist primarily of clinical studies performed by contract research organizations, materials and supplies, payments under collaborative and other arrangements including milestone payments, licenses and fees, expense reimbursements to the collaboration partners, personnel costs including salaries, benefits and stock-based compensation expense, and overhead allocations consisting of various support and infrastructure costs.

We do not track total R&D expenses by product candidate, therapeutic area or development phase.

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The following table provides a breakout of our R&D expenses by major cost type:

(In millions, except percentages)

Up-front collaboration and licensing expenses

Personnel, infrastructure and other expenses

(In millions, except percentages) 2020 Change 2019 Change 2018

Clinical studies and outside services $ 2,317 32 % $ 1,750 5 % $ 1,665

IPR&D impairment charges

Personnel, infrastructure and other expenses 2,260 12 % 2,016 7 % 1,876

Stock-based compensation expenses 462 60 % 289 (24) % 379

_________________________________________

Percentage is greater than 100%

In 2019 , R&D expenses increased by $4.1 billion compared to 2018 , primarily due to $3.9 billion of up-front collaboration and licensing expenses related to our collaboration with Galapagos as well as higher personnel costs largely to support our cell therapy business and increased investment in our research projects, partially offset by lower stock-based compensation expense.

In 2019 , we recorded an impairment charge of $800 million related to IPR&D intangible assets acquired in connection with our acquisition of Kite Pharma, Inc.

primarily for the treatment of indolent non-Hodgkin lymphoma largely driven by changes in the estimated market opportunities as new therapies or combinations of existing therapies were approved.

In 2018 , we recorded an impairment charge of $820 million related to IPR&D intangible assets for the KITE-585 program (an anti-B cell maturation antigen being evaluated for the treatment of multiple myeloma) due to its discontinuance.

Stock-based compensation expense for 2019 decreased by $90 million , compared to 2018 , primarily due to the 2018 impact of stock-based compensation expense associated with our acquisition of Kite Pharma, Inc.

Total $ 5,039 24 % $ 4,055 3 % $ 3,920

In 2020, R&D expenses increased by $1.0 billion compared to 2019, primarily due to higher clinical trial expenses related to the investigation of remdesivir as a treatment for COVID-19 including material costs, the fourth quarter charge of $190 million (€160 million) in connection with the agreement to amend the existing arrangement with Galapagos for the commercialization and development of Jyseleca, accelerated stock-based compensation expenses of $166 million related to our acquisitions of Immunomedics and Forty Seven, higher investments in oncology programs including magrolimab, an investigational anti-CD47 monoclonal antibody, and to a lesser extent, Trodelvy, and accruals for milestone payments of $70 million to Pionyr Immunotherapeutics, Inc.

The increase was partially offset by lower clinical trial expenses from the completion of certain inflammation programs and lower costs as a result of our pause or postponement of certain clinical trials due to the COVID-19 pandemic.

Acquired In-Process Research and Development Expenses

Acquired IPR&D expenses reflect IPR&D impairments as well as the initial costs of externally developed IPR&D projects, acquired directly in a transaction other than a business combination, that do not have an alternative future use, including upfront payments related to various collaborations and the initial costs of rights to IPR&D projects.

Beginning in the second quarter of 2020, acquired IPR&D expenses were reported separately from Research and development expenses on our Consolidated Statements of Income.

IPR&D assets capitalized are tested for impairment in the fourth quarter of each year, or earlier if impairment indicators exist.

No IPR&D impairment charges were recorded in 2020.

Acquired IPR&D expenses of $5.9 billion for 2020 were primarily related to our acquisition of Forty Seven as well as collaborations and other investments we entered into during the year with Arcus Biosciences, Inc., Pionyr, Tango Therapeutics, Inc., Tizona Therapeutics, Inc.

and Jounce Therapeutics, Inc.

Acquired IPR&D expenses of $5.1 billion for 2019 included $3.9 billion in upfront charges related to our global research and development collaboration agreement with Galapagos and the $800 million impairment charge from assets obtained in our Kite acquisition.

Selling, General and Administrative Expenses

The following table summarizes the period-over-period changes in our SG&A expenses:

(In millions, except percentages)

SG&A expenses

SG&A expenses relate to sales and marketing, finance, human resources, legal and other administrative activities.

SG&A expenses relate to sales and marketing, finance, human resources, legal and other administrative activities, including information technology investments.

Expenses consist primarily of personnel costs, facilities and overhead costs, outside marketing, advertising and legal expenses and other general and administrative costs.

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In the United States, we, along with other pharmaceutical manufacturers of branded drug products, are required to pay a portion of the BPD fee, which is estimated based on select government sales during the prior year as a percentage of total industry government sales and is trued-up upon receipt of invoices from the Internal Revenue Service.

In 2019 , SG&A expenses increased by $325 million compared to 2018 , primarily due to higher promotional expenses in the United States and expenses associated with the expansion of our business in Japan and China, partially offset by lower stock-based compensation expense.

Stock-based compensation expense for 2019 decreased by $106 million , compared to 2018 , primarily due to the 2018 impact of stock-based compensation expense associated with our acquisition of Kite Pharma, Inc.

In 2020, SG&A expenses increased by $770 million compared to 2019, primarily due to accelerated stock-based compensation expenses of $204 million related to our acquisitions of Immunomedics and Forty Seven, a $97 million charge related to a previously disclosed legal settlement, increased corporate grants, costs associated with the commercialization efforts for Veklury and to a lesser extent, Trodelvy, higher marketing expenses related to Biktarvy and donations of remdesivir.

The increases were partially offset by lower travel and other spend due to the COVID-19 pandemic.

BPD fee expenses were $198 million, $247 million and $229 million in 2020, 2019 and 2018, respectively.

BPD fee expenses are not tax-deductible.

Other Income (Expense), Net

The following table summarizes the period-over-period changes in our Other income (expense), net:

(In millions, except percentages)

Other income (expense), net

The change in Other income (expense), net in 2019 , compared to 2018 , was primarily due to higher net unrealized gains of $1.1 billion from changes in the fair value of our equity securities largely relating to our equity investments in Galapagos.

Starting in January 2018, we recorded unrealized gains (losses) from changes in the fair value of our marketable equity securities in Other income (expense), net, on our Consolidated Statements of Income as a result of the adoption of Accounting Standards Update No.

2016-01 “Financial Instruments - Overall:

Recognition and Measurement of Financial Assets and Financial Liabilities.”

Provision for Income Taxes

The following table summarizes the period-over-period changes in our Provision for income taxes:

Other Income (Expense), Net and Interest Expense

The following table summarizes the period-over-period changes in our Other income (expense), net and Interest expense:

(In millions, except percentages) 2020 Change 2019 Change 2018

Other income (expense), net $ (1,418) NM $ 1,868 NM $ 676

Interest expense $ (984) (1) % $ (995) (8) % $ (1,077)

_______________________________

NM - Not Meaningful

The unrealized losses primarily relating to our investments in Galapagos unfavorably impacted Other income (expense), net in 2020, compared to unrealized gains in 2019.

The following table summarizes the period-over-period changes in our income tax expense (benefit):

(In millions, except percentages) 2020 2019 2018

Income before income taxes $ 1,669 $ 5,160 $ 7,799

Income tax expense (benefit) $ 1,580 $ (204) $ 2,339

Effective tax rate 94.7 % (4.0) % 30.0 %

Provision for income taxes

The decrease in effective tax rate and provision for income taxes in 2019 , compared to 2018 , was primarily due to a $1.2 billion deferred tax benefit in 2019 related to intangible asset transfers from a foreign subsidiary to Ireland and the United States.

The 2018 effective tax rate included a $588 million deferred tax charge resulting from a transfer of acquired intangible assets from a foreign subsidiary to the United States.

The decrease in effective tax rate and provision for income taxes in 2018 , compared to 2017 , was primarily due to a $5.5 billion net tax charge in 2017 and a reduction to the U.S.

corporate tax rate in 2018 as a result of the enactment of the Tax Cuts and Jobs Act (Tax Reform) in December 2017.

The 2018 effective tax rate was further decreased due to a $202 million tax benefit recorded in 2018 related to settlement of tax examinations, offset by the $588 million deferred tax charge in 2018 discussed above, changes to the geographic mix of earnings and the tax on Global Intangible Low-Taxed Income (enacted as part of Tax Reform).

See Note 19 .

Income Taxes of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional details on Tax Reform.

Our effective tax rate increased in 2020, compared to 2019, primarily due to a $4.5 billion acquired IPR&D charge recorded in connection with our acquisition of Forty Seven, $511 million of certain other acquired IPR&D charges and $1.8 billion of unfavorable changes in the fair value of our equity investments in Galapagos that are non-deductible for tax purposes.

The 2019 effective tax rate included a $1.2 billion discrete tax benefit related to intra-entity intangible asset transfers to different tax jurisdictions.

LIQUIDITY AND CAPITAL RESOURCES

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Cash, Cash Equivalents and Marketable Debt Securities

Cash, cash equivalents and marketable debt securities decreased by $5.7 billion , or 18% , compared to December 31, 2018 .

During 2019 , we generated $9.1 billion in operating cash flow, paid $5.6 billion in connection with our collaboration with and equity investments in Galapagos, repaid $2.8 billion of debt, paid cash dividends of $3.2 billion and repurchased 26 million shares of our common stock for $1.7 billion through open market transactions.

Cash, cash equivalents and marketable debt securities as of December 31, 2020, decreased by $17.9 billion, or 69%, compared to December 31, 2019.

During 2020, we generated $8.2 billion in operating cash flow, utilized $25.7 billion on acquisitions, including IPR&D, net of cash acquired, issued senior unsecured notes in an aggregate principal amount of $7.2 billion, net of issuance costs, borrowed an aggregate principal amount of $1.0 billion under a three-year term loan facility, repaid $2.5 billion of principal amount of debt, paid cash dividends of $3.4 billion and utilized $1.6 billion on repurchases of common stock.

In January 2021, we repaid $1.0 billion of senior unsecured notes prior to the April 2021 maturity.

We may choose to repay certain of our long-term debt obligations prior to their maturity dates based on our assessment of current and long-term liquidity and capital requirements.

Our acquisition of MYR GmbH is expected to close in the first quarter of 2021.

Per the agreement, we will make a consideration payment of approximately €1.2 billion in cash (or approximately $1.4 billion) upon closing.

Working Capital

Working capital decreased by $4.7 billion , or 19% , compared to December 31, 2018 , primarily due to the use of cash noted above under the heading Cash, Cash Equivalents and Marketable Debt Securities.

Working capital, which is current assets less current liabilities, decreased by $15.9 billion, or 78%, compared to December 31, 2019, primarily due to the utilization of significant cash, cash equivalents and marketable debt securities for our acquisitions of Immunomedics and Forty Seven as noted above and reclassifications of senior unsecured notes from Long-term debt, net.

The decrease was partially offset by increased accounts receivables due to Veklury sales and the reclassification of a portion of our Galapagos equity investments from Other long-term assets.

Accounts receivable increased by $1.3 billion, compared to December 31, 2019, primarily reflecting increased sales driven by Veklury due to COVID-19 surge in the fourth quarter of 2020.

Other accrued liabilities increased by $1.3 billion compared to December 31, 2019, primarily due to a reclassification from long-term income taxes payable for certain tax payments expected to be made within a year.

The following table summarizes our cash flow activities:

(In millions) 2020 2019 2018

Cash provided by (used in):

Net cash provided by (used in):

Operating activities $ 8,168 $ 9,144 $ 8,400

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Financing activities $ 770 $ (7,634) $ (12,318)

Cash Provided by Operating Activities

Operating Activities

Cash provided by operating activities represents the cash receipts and disbursements related to all of our activities other than investing and financing activities.

Operating cash flow is derived by adjusting our net income for non-cash items and changes in operating assets and liabilities.

Cash provided by operating activities increased by $744 million to $9.1 billion in 2019 compared to 2018 , primarily due to lower tax payments in 2019, partially offset by lower collections on accounts receivable in 2019 and the collection of a receivable from Bristol-Myers Squibb Company in 2018 following the termination of a collaboration pursuant to the terms of the existing agreements.

The tax payments made in 2018 included a $500 million payment related to the first annual installment of the Tax Reform transition tax, a $771 million deemed early payment of the Tax Reform transition tax and a $514 million settlement of a tax examination.

Starting in 2019, up-front and milestone payments related to collaborative and other arrangements are classified as cash flows from investing activities in our Consolidated Statements of Cash Flows.

Comparative prior year amounts were not material and were not reclassified to investing activities from operating activities.

Cash Provided by (Used in) Investing Activities

Cash provided by ( used in ) investing activities primarily consists of purchases, sales and maturities of our marketable debt securities, capital expenditures, up-front and milestone payments related to collaborative and other arrangements, purchases of equity securities and other investments.

Cash used in investing activities was $7.8 billion in 2019 compared to cash provided by investing activities of $14.4 billion in 2018 .

The change in cash provided by (used in) investing activities was primarily due to higher purchases of marketable debt securities and the $5.6 billion payments made in connection with our collaboration with and equity investments in Galapagos, partially offset by higher proceeds from sales of marketable debt securities.

The higher purchases of marketable debt securities were the result of a shift in our investment strategy to investing in longer dated securities in 2019 compared to 2018.

In addition, we paid Japan Tobacco Inc.

$365 million during 2019 in connection with acquiring the rights to market and distribute certain HIV products in Japan.

Cash provided by investing activities was $14.4 billion in 2018 compared to cash used in investing activities of $16.1 billion in 2017 .

The change in cash provided by ( used in ) investing activities was primarily due to higher proceeds from maturities of our marketable debt securities and lower purchases of marketable debt securities, partially offset by lower proceeds from sales of our marketable debt securities.

In addition, $10.4 billion cash was used to acquire Kite Pharma, Inc.

in 2017, whereas no cash was used for business combinations in 2018.

Cash Provided by (Used in) Financing Activities

Cash used in financing activities decreased by $4.7 billion to $7.6 billion in 2019 compared to 2018 , primarily due to $3.5 billion lower repayments of debt and $1.2 billion lower repurchases of our common stock during 2019.

Cash used in financing activities was $12.3 billion in 2018 , compared to cash provided by financing activities of $3.4 billion in 2017 .

The change in cash provided by ( used in ) financing activities was primarily due to higher repayment of debt and repurchases of our common stock in 2018.

In addition, we had $9.0 billion net proceeds from debt issuances to partially fund our acquisition of Kite Pharma, Inc.

in 2017, whereas no debt was issued in 2018.

Cash provided by operating activities decreased by $976 million to $8.2 billion in 2020 compared to 2019.

The decrease was primarily the result of changes in working capital reflecting increases in accounts receivable from the fourth quarter 2020 Veklury sales and certain tax payments made to taxing authorities.

Investing Activities

Cash used in / provided by investing activities primarily consists of purchases, sales and maturities of our marketable debt securities, capital expenditures, acquisitions, including IPR&D, net of cash acquired, purchases of equity securities and other investments.

Cash used in investing activities was $14.6 billion in 2020 compared to $7.8 billion in 2019.

The change in cash used in / provided by investing activities was due to $25.7 billion of payments made primarily related to our acquisitions of Immunomedics and Forty Seven in 2020, compared to $4.3 billion of payments made primarily related to our collaboration with and equity investments in Galapagos in 2019.

Financing Activities

The change in cash provided by / used in financing activities in 2020 compared to 2019, was primarily due to $7.2 billion in proceeds from the September 2020 senior unsecured notes offering, net of issuance costs and $995 million borrowed under a three-year term loan facility, net of issuance costs in October 2020 in connection with our acquisition of Immunomedics.

Debt and Credit Facilities

In 2019 and 2018 , we repaid at maturity $2.8 billion and $1.8 billion principal amount of senior unsecured notes, respectively.

In addition, in 2018 , we repaid $4.5 billion borrowed under our term loan facility credit agreement, at which time the term loan facility credit agreement was terminated.

In February 2020, we repaid at maturity $500 million principal amount of senior unsecured notes.

As of December 31, 2019 , no amounts were outstanding under our $2.5 billion five-year revolving credit facility maturing in May 2021.

We are required to comply with certain covenants under our notes indentures, and as of December 31, 2019 , we were not in violation of any covenants.

The summary of our borrowings under various financing arrangements is included in Note 12.

Debt and Credit Facilities of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

We may choose to repay certain of our long-term debt obligations prior to maturity dates based on our assessment of current and long-term liquidity and capital requirements.

Senior Unsecured Notes Offering

In September 2020, in connection with our acquisition of Immunomedics, we issued senior unsecured notes consisting of (i) $500 million principal amount of floating rate notes due September 2021 and $500 million principal amount of floating rate notes due September 2023;

and (ii) $2.0 billion principal amount of 0.75% senior notes due September 2023, $750 million principal amount of 1.20% senior notes due October 2027, $1.0 billion principal amount of 1.65% senior notes due October 2030, $1.0 billion principal amount of 2.60% senior notes due October 2040 and $1.5 billion principal amount of 2.80% senior notes due October 2050.

Senior Unsecured Notes Repayments

In 2020 and 2019, we repaid at maturity $2.5 billion and $2.8 billion principal amount of senior unsecured notes, respectively.

In January 2021, we repaid $1.0 billion of senior unsecured notes prior to the April 2021 maturity.

Term Loan Facility

In October 2020, in connection with our acquisition of Immunomedics, we borrowed an aggregate principal amount of $1.0 billion under a three-year term loan facility (“Term Loan Facility”).

Liability Related to Future Royalties

In connection with our acquisition of Immunomedics, we assumed a liability related to a funding arrangement, which was originally entered into by Immunomedics and RPI Finance Trust (“RPI”).

The liability related to future royalties was primarily included in Long-term debt, net on our Consolidated Balance Sheets.

Acquisitions of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information.

Credit Facility

In June 2020, we terminated our $2.5 billion revolving credit facility maturing in May 2021 (the “2016 Revolving Credit Facility”) and entered into a new $2.5 billion revolving credit facility maturing in June 2025 (the “2020 Revolving Credit Facility”), which had terms substantially similar to the 2016 Revolving Credit Facility.

The 2020 Revolving Credit Facility can be used for working capital requirements and for general corporate purposes, including, without limitation, acquisitions.

As of December 31, 2020 and 2019, there were no amounts outstanding under these revolving credit facilities.

We are required to comply with certain covenants under our notes indentures, and as of December 31, 2020, we were not in violation of any covenants.

Capital Return Program

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We started repurchases under the 2016 Program in April 2016.

Repurchases under the 2016 Program were 26 million and 40 million shares of our common stock for $1.7 billion and $2.9 billion in 2019 and 2018 , respectively.

As of December 31, 2019 , the remaining authorized repurchase amount under the 2016 Program was $3.4 billion .

We purchased 22 million and 26 million shares of our common stock under the 2016 Program for $1.6 billion and $1.7 billion in 2020 and 2019, respectively.

In the first quarter of 2020, our Board of Directors authorized a new $5.0 billion stock repurchase program (“2020 Program”), which will commence upon the completion of the 2016 Program.

Purchases under the 2020 Program may be made in the open market or in privately negotiated transactions.

As of December 31, 2020, the remaining authorized repurchase amount from both programs was $6.8 billion.

We declared and paid quarterly cash dividends for an aggregate amount of $3.4 billion or $2.72 per share of our common stock and $3.2 billion or $2.52 per share of our common stock in 2020 and 2019, respectively.

On February 4, 2021, we announced that our Board of Directors declared a quarterly cash dividend increase of 4.4% from $0.68 to $0.71 per share of our common stock, with a payment date of March 30, 2021 to all stockholders of record as of the close of business on March 15, 2021.

Future dividends are subject to declaration by the Board of Directors.

Future dividends are subject to declaration by our Board of Directors.

Capital Resources

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Revenue Recognition

Product Sales

We recognize revenue from product sales when control of the product transfers, generally upon shipment or delivery, to the customer, or in certain cases, upon the corresponding sales by our customer to a third party.

Upon recognition of revenue from product sales, provisions are made for various forms of variable consideration, which include government and other rebates such as Medicaid reimbursements, customer incentives such as cash discounts for prompt payment, distributor fees and expected returns of expired products, as appropriate.

The revenues are recognized, net of estimated government and other rebates and chargebacks, cash discounts for prompt payment, distributor fees, sales return provisions and other related deductions.

These deductions to product sales are referred to as GTN deductions, and are estimated and recorded in the period in which the related product sales occur.

Variable consideration is included in the net sales price only to the extent a significant reversal in the amount of cumulative revenue recognized is not probable of occurring when the uncertainty associated with the variable consideration is subsequently resolved.

Government and other rebates and chargebacks represent the majority of our variable consideration and require complex and significant judgment by management.

Estimates are assessed each period and updated to reflect current information.

Government and Other Rebates and Chargebacks

Government and other rebates and chargebacks include amounts paid to payers and healthcare providers in the United States, including Medicaid rebates, AIDS Drug Assistance Program rebates and chargebacks, Veterans Administration and Public Health Service chargebacks and other rebates, as well as foreign government rebates.

Rebates and chargebacks are based on contractual arrangements or statutory requirements which may vary by product, by payer and individual payer plans.

Government and other rebates and chargebacks represent the majority of our GTN deductions and are subject to a complex estimation process, which requires significant judgment by management in part due to the lag between the date of the product sales and the date the related rebates or chargeback claims are settled.

Government and other rebates and chargebacks include amounts payable to payers and healthcare providers under various programs, and may vary by product, by payer and individual payer plans.

For qualified programs that can purchase our products through wholesalers or other distributors at a lower contractual price, the wholesalers or distributors charge back to us the difference between their acquisition cost and the lower contractual price.

Our allowances for government and other rebates and chargebacks are estimated based on products sold, historical payer mix, and as available, pertinent third-party industry information, estimated patient population, known market events or trends, and for our U.S.

product sales, channel inventory data obtained from our major U.S.

wholesalers in accordance with our inventory management agreements.

We also take into consideration, as available, new information regarding changes in programs’ regulations and guidelines that would impact the amount of the actual rebates and/or our expectations regarding future payer mix for these programs.

Rebates and chargebacks are estimated primarily based on product sales, and expected payer mix and discount rates, which require significant estimates and judgment.

Additionally, in developing our estimates of government and other rebates and chargebacks, we consider the following factors:

• historical and estimated payer mix;

• statutory discount requirements and contractual terms;

• historical claims experience and processing time lags;

• estimated patient population;

• known market events or trends;

• market research;

• channel inventory data obtained from our major U.S.

• other pertinent internal or external information.

We assess and update our estimates every quarter to reflect actual claims and other current information.

Our actual government and other rebates and chargebacks claimed for prior periods have varied from our estimates by less than 3% of the amounts deducted from product sales for the years ended December 31, 2020 and 2019.

We believe the methodology that we use to estimate our government and other rebates and chargebacks is reasonable and appropriate given the current facts and circumstances.

However, actual results may differ significantly from our estimates .

Historically, our actual government rebates and chargebacks claimed for prior periods have varied by less than 5% from our estimates.

Government and other chargebacks that are payable to our direct customers are classified as reductions of Accounts receivable in our Consolidated Balance Sheets and totaled $552 million and $655 million at December 31, 2020 and 2019, respectively.

Government and other rebates that are payable to third party payers and healthcare providers are recorded in Accrued government and other rebates on our Consolidated Balance Sheets and totaled $3.5 billion and $3.9 billion at December 31, 2019 and 2018 , respectively.

Other Financial Information of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information.

Government and other rebates that are payable to third party payers and healthcare providers are generally recorded in Accrued government and other rebates on our Consolidated Balance Sheets and totaled $3.5 billion at December 31, 2020 and 2019.

The allowance for sales returns is generally recorded in Other accrued liabilities on our Consolidated Balance Sheets and totaled $587 million and $137 million at December 31, 2020 and 2019, respectively.

The increase in the allowance for sales returns in 2020 reflects the estimated Veklury sales returns and an increase of HCV and HIV sales return provisions.

The following table summarizes the consolidated activities and ending balances in our government and other rebates and chargebacks accounts:

(in millions)

Balance at Beginning of Year

Decrease/(Increase) to Product Sales

Balance at End of Year

(in millions) Balance at Beginning of Year Decrease/(Increase) to Product Sales Payments Balance at End of Year

Year ended December 31, 2020:

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Activity related to sales prior to 2020 4,108 (235) (3,560) 313

Total $ 4,108 $ 12,964 $ (13,060) $ 4,012

Year ended December 31, 2019:

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Activity related to sales prior to 2019 4,420 (279) (3,904) 237

Total $ 4,420 $ 13,512 $ (13,824) $ 4,108

Acquisitions and Valuation of Intangibles

We make certain judgments to determine whether transactions should be accounted for as acquisitions of assets or as business combinations.

If it is determined that substantially all of the fair value of gross assets acquired in a transaction is concentrated in a single asset (or a group of similar assets), the transaction is treated as an acquisition of assets.

We evaluate the inputs, processes, and outputs associated with the acquired set of activities.

If the assets in a transaction include an input and a substantive process that together significantly contribute to the ability to create outputs, the transaction is treated as an acquisition of a business.

We account for business combinations using the acquisition method of accounting, which requires that assets acquired and liabilities assumed generally be recorded at their fair values as of the acquisition date.

Excess of consideration over the fair value of net assets acquired is recorded as goodwill.

Estimating fair value requires us to make significant judgments and assumptions.

We perform impairment testing of goodwill annually, or more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired.

In transactions accounted for as acquisitions of assets, no goodwill is recorded and contingent consideration such as payments upon achievement of various developmental, regulatory and commercial milestones generally is not recognized at the acquisition date.

In an asset acquisition, upfront payments allocated to IPR&D projects at the acquisition date are expensed unless there is an alternative future use.

In addition, product development milestones are expensed upon achievement.

Valuation of Intangible Assets

We have acquired, and expect to continue to acquire, intangible assets through asset acquisition, business combination or consolidation of variable interest entities.

The identifiable intangible assets are measured at their respective fair values as of the acquisition date.

Intangible assets acquired through business combinations are subject to potential adjustments within the measurement period, which is up to one year from the acquisition date.

The fair values of the intangible assets are generally determined using a probability-weighted income approach that discounts expected future cash flows to present value.

The estimated net cash flows are discounted using a discount rate that is based on the estimated weighted-average cost of capital for companies with profiles similar to our profile and represents the rate that market participants would use to value the intangible assets.

The discounted cash flow models used in valuing these intangible assets require the use of significant estimates and assumptions including but not limited to:

• identification of product candidates with sufficient substance requiring separate recognition;

• estimates of projected future cash flows including revenues and operating profits related to the products or product candidates;

• the probability of technical and regulatory success for unapproved product candidates considering their stages of development;

• the time and resources needed to complete the development and approval of product candidates;

• appropriate discount rate;

• the life of the potential commercialized products and associated risks, including the inherent difficulties and uncertainties in developing a product candidate such as obtaining FDA and other regulatory approvals;

• risks related to the viability of and potential alternative treatments in any future target markets.

We believe the fair values used to record intangible assets acquired are based upon reasonable estimates and assumptions given the facts and circumstances as of the related valuation dates.

Impairment and Amortization of Intangible Assets

Intangible assets related to IPR&D projects acquired in a business combination are capitalized as indefinite-lived intangible assets until the completion or abandonment of the associated R&D efforts.

During the period the assets are considered indefinite-lived, they are not amortized.

When development is complete, which generally occurs if and when regulatory approval to market a product is obtained, the associated assets would be deemed finite-lived and then be amortized based on their respective estimated useful lives at that point in time primarily on a straight-line basis.

Indefinite-lived intangible assets are tested for impairment annually, or more frequently if events or changes in circumstances indicate that it is more likely than not that the assets are impaired.

Estimates of fair value result from a complex series of judgments about future events and uncertainties and make assumptions at a point in time (acquisition date or subsequent impairment assessment date).

Changes in estimates and assumptions, including the timing of product launch, pricing reductions, failure to obtain anticipated regulatory approval, deterioration in U.S.

and global financial markets or other unanticipated events and circumstances, may decrease the projected cash flows or increase the discount rate and could potentially result in an impairment charge.

The eventual realized value of the acquired IPR&D project may vary from its fair value at the date of acquisition.

If the carrying value of an intangible asset exceeds its estimated fair value, an impairment charge is recorded to write down the intangible asset to its estimated fair value.

For example, in 2019, we recognized an $800 million impairment charge related to IPR&D projects primarily for the treatment of indolent non-Hodgkin lymphoma due to changes in estimated market opportunities.

A high rate of failure is inherent in the discovery and development of new products.

For example, in 2018, we concluded that the KITE-585 program acquired in connection with our acquisition of Kite did not justify further efforts based on the totality of the clinical data gathered and discontinued the program.

As a result, the carrying value of the IPR&D relating to the KITE-585 program was written down to zero and we recorded an impairment charge of $820 million.

Intangible assets are also periodically reviewed for changes in facts or circumstances resulting in a reduction to the estimated useful life of the asset, requiring the acceleration of amortization.

Goodwill and Intangible Assets of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information on the impairment charges related to our indefinite-lived IPR&D intangible assets.

Legal Contingencies

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We did not have any material accruals in our Consolidated Balance Sheets for such matters as of December 31, 2020 and 2019.

Valuation of Intangible Assets

We have acquired, and expect to continue to acquire, intangible assets through acquisition or consolidation of variable interest entities.

The identifiable intangible assets are measured at their respective fair values as of the acquisition date and may be subject to revision within the measurement period, which may be up to one year from the acquisition date.

The fair values of the assets are generally determined using a probability-weighted income approach that discounts expected future cash flows to present value.

The discounted cash flow models used in valuing these intangible assets require the use of significant estimates and assumptions including but not limited to:

estimates of revenues and operating profits related to the products or product candidates;

the probability of technical and regulatory success for unapproved product candidates considering their stages of development;

the time and resources needed to complete the development and approval of product candidates;

the life of the potential commercialized products and associated risks, including the inherent difficulties and uncertainties in developing a product candidate such as obtaining FDA and other regulatory approvals;

risks related to the viability of and potential alternative treatments in any future target markets.

We believe the fair values used to record intangible assets acquired are based upon reasonable estimates and assumptions given the facts and circumstances as of the related valuation dates.

Intangible assets related to IPR&D projects are considered to be indefinite-lived until the completion or abandonment of the associated R&D efforts.

During the period the assets are considered indefinite-lived, they are not amortized.

When development is complete, which generally occurs if and when regulatory approval to market a product is obtained, the associated assets would

be deemed finite-lived and then be amortized based on their respective estimated useful lives at that point in time primarily on a straight-line basis.

Intangible assets are reviewed for impairment on an annual basis as well as between annual tests if we become aware of any events or changes that would indicate that it is more likely than not that the fair values of the intangible assets and/or IPR&D projects are below their respective carrying amounts.

When performing quantitative impairment assessments, we calculate the fair value using discounted cash flow models that require significant estimates and assumptions similar to the methodology for determining the acquisition date fair value of intangible assets, as described above.

If the carrying value of an intangible asset exceeds its fair value, then the intangible asset is written-down to its fair value.

Significant judgment is employed in determining these estimates and assumptions and changes to our estimates and assumptions could have a significant impact on our results of operations in any given period.

There are often major risks and uncertainties associated with IPR&D projects as we are required to obtain regulatory approvals in order to be able to market these products.

Such approvals require completing clinical trials that demonstrate a product candidate is safe and effective.

Consequently, the eventual realized value of the acquired IPR&D project may vary from its fair value at the date of acquisition, and IPR&D impairment charges may occur in future periods which could have a material adverse effect on our results of operations.

For example, in 2018, we concluded that the KITE-585 program acquired in connection with our acquisition of Kite Pharma, Inc.

did not justify further efforts based on the totality of the clinical data gathered and discontinued the program.

As a result, the carrying value of the IPR&D relating to the KITE-585 program was written down to zero and we recorded an impairment charge of $820 million .

Intangible Assets of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information on the impairment charges related to our indefinite-lived IPR&D intangible assets.

Provision for Income Taxes

We estimate our income tax provision, including deferred tax assets and liabilities, based on significant management judgment.

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An adverse resolution of one or more of these uncertain tax positions in any period could have a material impact on the results of operations for that period.

See Note 19 .

Income Taxes of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information.

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Payments due by Period

(In millions)

(In millions) Total 2021 2022-2023 2024-2025 Thereafter

$ 46,410 $ 3,752 $ 7,595 $ 5,142 $ 29,921

Operating lease obligations (2)

828 127 234 167 300

Purchase obligations (3)

3,872 2,254 1,230 265 123

Transition tax payable (4)

4,491 473 1,359 2,659 —

Debt consists of senior unsecured notes and includes principal and future interest payments.

Total (5)(6)(7)

$ 55,601 $ 6,606 $ 10,418 $ 8,233 $ 30,344

_______________________________

(1) Debt includes principal and future interest payments of senior unsecured notes and the Term Loan Facility.

Interest payments for our fixed rate senior unsecured notes are incurred and calculated based on terms of the related notes.

Debt also includes a liability related to future royalty obligations we assumed through the acquisition of Immunomedics.

Acquisitions and Note 12.

Debt and Credit Facilities of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information.

(2) See Note 13.

Leases of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information.

Amounts primarily relate to capital commitments, active pharmaceutical ingredients (API) with minimum purchase commitments and certain inventory-related items, advertising and R&D commitments.

Significant R&D commitments related to clinical studies performed by contract research organizations (CROs) are excluded from the table as material CRO contracts are cancelable by us.

In addition, the table does not reflect approximately $220 million of additional minimum purchase commitments resulting from an API contract amended in January 2020.

(3) Amounts primarily relate to active pharmaceutical ingredients (“API”) with minimum purchase commitments and certain inventory-related items, R&D commitments and capital commitments.

Significant R&D commitments related to clinical studies performed by contract research organizations (“CRO”s) are excluded from the table as material CRO contracts are cancelable by us.

(4) In connection with Tax Reform we recorded a federal income tax payable for transition tax on the mandatory deemed repatriation of foreign earnings that is payable over an eight-year period.

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(5) As of December 31, 2020, our long-term income taxes payable includes unrecognized tax benefits, interest and penalties totaling $1.1 billion.

Due to the high degree of uncertainty on the timing of future cash settlement and other events that could extinguish these unrecognized tax benefits, we are unable to estimate the period of cash settlement and therefore we have excluded these unrecognized tax benefits.

(6) We have committed to make potential future milestone and other payments to third parties as part of licensing, collaboration, development and other arrangements.

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Because the achievement of these events is neither probable nor reasonably estimable and such potential payments have not been recorded in our Consolidated Balance Sheets, they have not been included in the table above.

(7) The consideration payment of approximately €1.2 billion in cash (or approximately $1.4 billion) for our acquisition of MYR GmbH, which is expected to close by the end of the first quarter of 2021, is excluded from the table above.

Acquisitions of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information.

RECENT ACCOUNTING PRONOUNCEMENTS

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis