# GILEAD SCIENCES, INC. (GILD) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from GILEAD SCIENCES, INC.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/882095/000088209524000007/gild-20231231.htm
Accession: 0000882095-24-000007
Filing date: 2024-02-23
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/GILD/
All MD&A years: /company/GILD/mda/
Previous year: /company/GILD/mda/fy2022/ (FY 2022)
Next year: /company/GILD/mda/fy2024/ (FY 2024)

ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is intended to provide material information around events and uncertainties known to management that are relevant to an assessment of the financial condition and results of operations of Gilead and should therefore be read in conjunction with our audited Consolidated Financial Statements and the related notes thereto and other disclosures included as part of this Annual Report on Form 10-K (including the disclosures under Part I, Item 1A. Risk Factors). Additional information related to the comparison of our results of operations between the years 2022 and 2021 is included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 2022 Form 10-K filed with U.S. Securities and Exchange Commission.

Management Overview

Gilead Sciences, Inc. (including its consolidated subsidiaries, referred to as “Gilead,” the “company,” “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, coronavirus disease 2019 (“COVID-19”) and cancer. We operate in more than 35 countries worldwide, with headquarters in Foster City, California.

During 2023, we continued to advance our portfolio and broaden available therapies while delivering continued growth in our HIV and Oncology product sales. In terms of capital resources, we continued to invest in our business and research and development (“R&D”) pipeline through acquisitions and collaborations. We also continued to provide shareholder returns through dividends and share repurchases.

Key Business Updates

The following updates are based on press releases issued since our last annual report. Readers are encouraged to review all press releases available on our website at www.gilead.com. The content on the referenced website does not constitute a part of and is not incorporated by reference into this Annual Report on Form 10-K.

Virology

•Announced that the Phase 3 OAKTREE trial of obeldesivir in non-hospitalized participants without risk factors for developing severe COVID-19 did not meet its primary endpoint of improvement in time to symptom alleviation. Obeldesivir was well-tolerated in this large study population.

•Received U.S. Food and Drug Administration (“FDA”) and European Commission (“EC”) approval to extend the use of Veklury to treat COVID-19 in appropriate patients with mild to severe hepatic impairment as well as people with severe renal impairment, including those on dialysis.

•Announced a collaboration with Assembly Biosciences, Inc. (“Assembly”) to advance the research and development of novel antiviral therapies, including for herpesviruses, chronic hepatitis B virus (“HBV”) and chronic hepatitis delta virus (“HDV”).

•Received full marketing authorization from EC for Hepcludex (bulevirtide) for the treatment of adults with HDV and compensated liver disease. Hepcludex was initially granted conditional marketing authorization in July 2020. Bulevirtide remains the only approved treatment for HDV in the European Union (“EU”) and is not approved in the U.S.

Oncology

•Announced a full clinical hold placed by FDA on all magrolimab studies in myelodysplastic syndromes and acute myeloid leukemia, and that we will not pursue further development of magrolimab in hematologic cancers.

•Announced that the Phase 3 EVOKE-01 study of Trodelvy versus docetaxel in previously treated metastatic non-small cell lung cancer did not meet its primary endpoint of overall survival. While not statistically powered, we observed an encouraging trend in a subgroup of patients non-responsive to prior anti-PD-(L)1 immunotherapy, that we may potentially explore further.

•Received FDA approval of Yescarta’s label update to include overall survival data from the Phase 3 ZUMA-7 study, which showed a statistically significant overall survival improvement for Yescarta in second-line relapsed or refractory (“R/R”) large B-cell lymphoma (“LBCL”) versus standard of care.

•Received FDA approval of a manufacturing process change resulting in reduced median turnaround time for Yescarta in the U.S. to an anticipated 14 days (from 16 days previously).

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•Entered into a strategic collaboration with Arcellx, Inc. (“Arcellx”) to co-develop and co-commercialize CART-ddBCMA, a late-stage clinical asset in development for the treatment of patients with relapsed or refractory multiple myeloma, and later announced expansion of the Arcellx collaboration to include exercising an option for the ARC-SparX ACLX-001 program in multiple myeloma, expanding the scope of the existing anito-cel collaboration to include lymphomas, and a further equity investment.

•Announced an exclusive license agreement with Compugen Ltd. (“Compugen”) for later-stage development and commercialization of novel pre-clinical anti-IL18 binding protein antibodies, including COM503, that have the potential to treat various tumor types.

•Announced a collaboration with Tentarix Biotherapeutics Inc. (“Tentarix”) to discover and develop novel therapies across oncology and inflammation, using Tentarix’s proprietary Tentacles platform.

•Received EC approval for Trodelvy as monotherapy for the treatment of adult patients with unresectable or metastatic hormone receptor-positive, human epidermal growth factor receptor 2-negative (“HR+/HER2-”) breast cancer who have received endocrine-based therapy, and at least two additional systemic therapies in the advanced setting.

•Announced, through Fosun Kite Biotechnology Co., Ltd., a joint venture between us and Shanghai Fosun Pharmaceutical (Group) Co., Ltd., the approval of axicabtagene ciloleucel (under the trade name Yikaida®) by the China National Medical Products Administration for the treatment of adult patients with R/R LBCL who failed first-line immunochemotherapy or relapsed within 12 months after first-line immunochemotherapy.

•Completed the transfer of Yescarta’s marketing authorization in Japan from Daiichi Sankyo Co., Ltd. to Gilead Sciences K.K.

•Announced the acquisition of XinThera, Inc. (“XinThera”), adding additional pipeline assets including rights to a portfolio of small molecule inhibitors targeting PARP1 for oncology as well as MK2 for inflammatory diseases.

•Completed the acquisition of Tmunity Therapeutics, Inc. (“Tmunity”), a clinical stage private biotech company, which provides preclinical and clinical programs. This includes an “armored” CAR T technology platform that has the potential to be applied to a variety of CAR Ts to enhance anti-tumor activity, as well as rapid manufacturing processes.

•Received FDA approval of Trodelvy for the treatment of adult patients with unresectable locally advanced or metastatic HR+/HER2- breast cancer who have received endocrine-based therapy and at least two additional systemic therapies in the metastatic setting.

Inflammation

•Announced that we entered into a definitive agreement to acquire all of the outstanding common stock of CymaBay Therapeutics, Inc. (“CymaBay”) and its lead product candidate, seladelpar, which is an investigational treatment for primary biliary cholangitis.

•Announced an amendment expanding the collaboration agreement with Arcus Biosciences, Inc. (“Arcus”), including research programs in inflammatory diseases, an update to the domvanalimab collaboration program, and an additional equity investment.

•Exercised an option to license investigational targeted protein degrader molecule NX‑0479 (“GS-6791”) from Nurix Therapeutics, Inc. GS-6791 is a potent, selective, oral IRAK4 degrader with potential applications in the treatment of rheumatoid arthritis and other inflammatory diseases.

Other

•Issued $2.0 billion aggregate principal amount of senior unsecured notes in a registered offering, comprised of $1.0 billion principal amount of 5.25% senior notes due in 2033 and $1.0 billion principal amount of 5.55% senior notes due in 2053, and repaid debt of $2.25 billion.

Key Financial Results

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(in millions, except percentages and per share amounts)","","2023","","2022","","Change"],["Total revenues","","$","27,116","","","$","27,281","","","(1)","%"],["Net income attributable to Gilead","","$","5,665","","","$","4,592","","","23","%"],["Diluted earnings per share attributable to Gilead","","$","4.50","","","$","3.64","","","24","%"]]
[[/GREPCENT_TABLE]]

Total revenues decreased 1% to $27.1 billion in 2023, compared to 2022, driven by lower Veklury sales, largely offset by higher HIV and Oncology sales.

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Net income attributable to Gilead was $5.7 billion and diluted earnings per share attributable to Gilead was $4.50 in 2023, compared to $4.6 billion and $3.64 diluted earnings per share attributable to Gilead in 2022. The increase was primarily due to lower in-process research and development (“IPR&D”) impairment expenses, lower net unrealized losses on equity investments and higher interest income, partially offset by higher costs of goods sold and operating expenses, and lower revenues.

Results of Operations

Revenues

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

[[GREPCENT_TABLE]]
[["","","Year Ended December 31, 2023","","Year Ended December 31, 2022"],["(in millions, except percentages)","","U.S.","","Europe","","Other International","","Total","","U.S.","","Europe","","Other International","","Total","","Change"],["Product sales:"],["HIV","","$","14,848","","","$","2,102","","","$","1,226","","","$","18,175","","","$","13,820","","","$","2,219","","","$","1,155","","","$","17,194","","","6","%"],["Oncology","","1,833","","","875","","","224","","","2,932","","","1,494","","","573","","","73","","","2,139","","","37","%"],["Cell Therapy","","1,055","","","658","","","156","","","1,869","","","968","","","430","","","60","","","1,459","","","28","%"],["Trodelvy","","777","","","217","","","68","","","1,063","","","525","","","143","","","12","","","680","","","56","%"],["Liver Disease","","1,421","","","511","","","852","","","2,784","","","1,440","","","525","","","833","","","2,798","","","(1)","%"],["HCV (1)","","1,002","","","378","","","386","","","1,767","","","1,005","","","413","","","392","","","1,810","","","(2)","%"],["HBV / HDV","","418","","","133","","","466","","","1,017","","","435","","","112","","","441","","","988","","","3","%"],["Veklury","","972","","","408","","","805","","","2,184","","","1,575","","","702","","","1,628","","","3,905","","","(44)","%"],["Other","","304","","","301","","","255","","","859","","","388","","","323","","","235","","","946","","","(9)","%"],["Total product sales","","19,377","","","4,197","","","3,361","","","26,934","","","18,716","","","4,342","","","3,924","","","26,982","","","\u2014","%"],["Royalty, contract and other revenues","","62","","","114","","","7","","","182","","","168","","","127","","","4","","","299","","","(39)","%"],["Total revenues","","$","19,438","","","$","4,310","","","$","3,368","","","$","27,116","","","$","18,884","","","$","4,469","","","$","3,928","","","$","27,281","","","(1)","%"]]
[[/GREPCENT_TABLE]]

________________________________

See Note 2. Revenues of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for further disaggregation of revenue by product.

(1)    Chronic hepatitis C virus (“HCV”)

HIV

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

[[GREPCENT_TABLE]]
[["","","Year Ended December 31, 2023","","Year Ended December 31, 2022"],["(in millions, except percentages)","","U.S.","","Europe","","Other International","","Total","","U.S.","","Europe","","Other International","","Total","","Change"],["Biktarvy","","$","9,692","","","$","1,253","","","$","905","","","$","11,850","","","$","8,510","","","$","1,103","","","$","777","","","$","10,390","","","14","%"],["Complera/Eviplera","","47","","","70","","","12","","","129","","","74","","","113","","","13","","","200","","","(35)","%"],["Descovy","","1,771","","","100","","","114","","","1,985","","","1,631","","","118","","","123","","","1,872","","","6","%"],["Genvoya","","1,752","","","205","","","103","","","2,060","","","1,983","","","284","","","136","","","2,404","","","(14)","%"],["Odefsey","","1,012","","","294","","","44","","","1,350","","","1,058","","","364","","","47","","","1,469","","","(8)","%"],["Stribild","","72","","","21","","","8","","","101","","","88","","","29","","","10","","","127","","","(20)","%"],["Truvada","","82","","","13","","","19","","","114","","","113","","","15","","","18","","","147","","","(22)","%"],["Revenue share - Symtuza(1)","","382","","","133","","","13","","","529","","","348","","","168","","","14","","","530","","","\u2014","%"],["Other HIV(2)","","37","","","12","","","7","","","56","","","15","","","24","","","17","","","57","","","(1)","%"],["Total HIV","","$","14,848","","","$","2,102","","","$","1,226","","","$","18,175","","","$","13,820","","","$","2,219","","","$","1,155","","","$","17,194","","","6","%"]]
[[/GREPCENT_TABLE]]

_______________________________

(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 (“Janssen”). See Note 7. Collaborations 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.

(2)    Includes Atripla, Emtriva, Sunlenca and Tybost.

HIV product sales increased 6% to $18.2 billion in 2023, compared to 2022, primarily due to higher demand across treatment and prevention, in addition to higher average realized price and favorable channel inventory dynamics. In particular, Biktarvy sales increased primarily reflecting higher demand, including patients switching from other Gilead HIV products, as well as higher average realized price. Also, Descovy sales increased primarily driven by favorable channel inventory dynamics and higher demand.

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Oncology

Cell Therapy

Cell Therapy product sales increased 28% to $1.9 billion in 2023, compared to 2022, primarily due to increased Yescarta demand for the treatment of R/R LBCL and increased Tecartus demand for the treatment of R/R adult acute lymphoblastic leukemia and R/R mantle cell lymphoma.

Trodelvy

Trodelvy product sales increased 56% to $1.1 billion in 2023, compared to 2022, primarily due to higher demand in new and existing geographies.

Liver Disease

Liver Disease product sales decreased 1% to $2.8 billion in 2023, compared to 2022, primarily due to unfavorable HCV pricing dynamics and foreign exchange rates, partially offset by higher demand across HCV, HDV and HBV products.

Veklury

Veklury product sales decreased 44% to $2.2 billion in 2023, compared to 2022, primarily due to lower demand driven by lower rates of COVID-19 related hospitalizations in all regions.

Other

Other product sales decreased 9% to $859 million in 2023, compared to 2022, primarily due to loss of exclusivity for Letairis.

Gross-to-Net Deductions

A substantial portion of our product sales is subject to significant discounts from list price, including government and commercial rebates and chargebacks, as well as other deductions, including patient co-pay assistance, cash discounts for prompt payment, distributor fees, and sales return provisions. These deductions to product sales are generally referred to as gross-to-net deductions and are primarily a function of product sales volume, product mix, contractual or statutory discounts and estimated payer mix.

Rebates and chargebacks are based on contractual arrangements or statutory requirements and include amounts due to payers and healthcare providers under various programs. These amounts may vary by product, payer and individual plans. Providers qualified under certain programs can purchase our products through wholesalers or other distributors at a discount. The wholesalers or distributors then charge the discount back to us.

Other gross-to-net deductions include patient co-pay assistance, cash discounts for prompt payment, distributor fees that we pay under our inventory management agreements with our significant U.S. wholesalers and are based on contractually-determined fixed percentage of sales, and sales return provisions.

Our gross-to-net deductions totaled $16.4 billion, or 38% of gross product sales in 2023, compared to $14.6 billion, or 35% of gross product sales in 2022. The increase to 38% was primarily due to changes in product mix, where decreases in Veklury product sales in all regions were offset by increased sales in HIV and oncology products, and changes in payer mix. Of the $16.4 billion in 2023, $14.3 billion or 33% of gross product sales was related to rebates and chargebacks, $2.2 billion or 5% was primarily related to patient co-pay assistance, cash discounts for prompt payment, distributor fees, and sales return provisions. Of the $14.6 billion in 2022, $12.6 billion or 30% of gross product sales was related to rebates and chargebacks, $2.0 billion or 5% was primarily related to patient co-pay assistance, cash discounts for prompt payment, distributor fees, and sales return provisions.

Current year gross-to-net deductions as a percent of gross product sales may not be indicative of future results.

Foreign Currency Exchange Impact

We generally face exposure to movements in foreign currency exchange rates, primarily in the Euro. We use foreign currency exchange contracts to hedge a portion of our foreign currency exposures.

Approximately 26% and 29% of our product sales were denominated in foreign currencies during 2023 and 2022, respectively. Foreign currency exchange, net of hedges, had an unfavorable impact on our total product sales of $224 million in 2023, based on a comparison using foreign currency exchange rates from 2022.

Royalty, Contract and Other Revenues

Royalty, contract and other revenues decreased 39% to $182 million in 2023, compared to 2022, primarily due to higher milestone payments received in 2022 and lower royalty revenues in 2023 due to the impact of generic launches.

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Costs and Expenses

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

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(in millions, except percentages)","","2023","","2022","","Change"],["Cost of goods sold","","$","6,498","","","$","5,657","","","15","%"],["Product gross margin","","75.9","%","","79.0","%","","-316 bps"],["Research and development expenses","","$","5,718","","","$","4,977","","","15","%"],["Acquired in-process research and development expenses","","$","1,155","","","$","944","","","22","%"],["In-process research and development impairments","","$","50","","","$","2,700","","","(98)","%"],["Selling, general and administrative expenses","","$","6,090","","","$","5,673","","","7","%"]]
[[/GREPCENT_TABLE]]

Product Gross Margin

Product gross margin decreased to 75.9% in 2023, compared to 2022, primarily driven by higher intangible asset amortization expenses related to the pretreated HR+/HER2- metastatic breast cancer indication for Trodelvy following its approval in February 2023, restructuring expenses related to changes in our manufacturing strategy, which resulted in write-offs of certain manufacturing facilities, related inventories and other costs totaling $479 million, and product mix, partially offset by higher amortization of inventory step-up charges in 2022.

Research and Development Expenses

Research and development (“R&D”) expenses consist primarily of personnel costs including salaries, benefits and stock-based compensation expense, infrastructure, materials and supplies and other support costs, research and clinical studies performed by contract research organizations and our collaboration partners and other outside services.

We manage our R&D expenses by identifying the R&D activities we expect to be performed during a given period and then prioritizing efforts based on scientific data, probability of successful technical development and regulatory approval, market potential, available human and capital resources and other considerations. We regularly review our R&D activities based on unmet medical need and, as necessary, reallocate resources among our internal R&D portfolio and external opportunities that we believe will best support the long-term growth of our business. We do not track total R&D expenses by product candidate, therapeutic area or development phase.

The following table provides a breakout of expenses by major cost type:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(in millions)","","2023","","2022"],["Personnel, infrastructure and other support costs","","$","3,204","","","$","2,811"],["Clinical studies and other costs","","2,514","","","2,166"],["Total","","$","5,718","","","$","4,977"]]
[[/GREPCENT_TABLE]]

Research and development expenses increased $741 million in 2023, compared to 2022. Personnel, infrastructure and other support costs as well as Clinical studies and other costs both increased due to clinical activities primarily related to oncology and virology, including progression and acceleration of trials, as well as new study launches.

Acquired In-Process Research and Development Expenses

Acquired in-process research and development expenses are recorded when incurred and reflect 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 and milestone payments related to various collaborations and the costs of rights to IPR&D projects.

Acquired in-process research and development expenses were $1.2 billion in 2023, primarily comprised of $313 million associated with the Arcellx collaboration, $269 million associated with the Tmunity acquisition, $218 million associated with the XinThera acquisition, $97 million associated with the Assembly collaboration and $60 million associated with the Compugen licensing agreement. Acquired in-process research and development expenses were $944 million in 2022, primarily comprised of $389 million associated with the acquisition of MiroBio Ltd, $315 million associated with the collaboration with Dragonfly Therapeutics, Inc., $82 million associated with the collaboration with Jounce Therapeutics, Inc. and acquisition of GS-1811, and $60 million associated with the collaboration with MacroGenics, Inc. See Note 6. Acquisitions and Note 7. Collaborations 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.

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In-Process Research and Development Impairments

In-process research and development impairments included $50 million in 2023 related to a partial impairment charge on our bulevirtide IPR&D intangible asset due to a change in assumptions primarily around probability and timing of regulatory approval, and $2.7 billion in 2022 related to a partial impairment charge on our HR+/HER2- IPR&D intangible asset.

As of December 31, 2023, approximately $5.9 billion was assigned to an indefinite-lived IPR&D intangible asset related to Trodelvy for metastatic non-small cell lung cancer (“NSCLC”). In addition to NSCLC, Trodelvy is being explored for potential investigational use in a range of tumor types where Trop-2 is highly expressed. Gilead’s clinical development program in metastatic NSCLC includes multiple ongoing registrational Phase 3 studies and several ongoing Phase 2 studies for Trodelvy as a first- or second-line indication.

In January 2024, we announced that our Phase 3 EVOKE-01 study of Trodelvy evaluating sacituzumab govitecan-hziy (“SG”) did not meet its primary endpoint of overall survival (“OS”) in previously treated NSCLC. However, a numerical improvement in OS favoring SG was observed in the study, including in patients with both squamous and non-squamous histology. The safety profile for Trodelvy was consistent with prior studies. In addition, a more than three-month difference in median OS favoring SG was observed in a sub-group of patients non-responsive to last prior anti-PD-(L)1 therapy, representing over 60% of the trial population. This analysis was pre-specified in the protocol, but not alpha-controlled for formal statistical testing and we are continuing to analyze this data. Gilead intends to explore potential pathways to further understand the role SG may have in these patients. We plan to discuss this data with regulators and key opinion leaders to determine the most appropriate next steps.

We believe that this new information represents an indicator of potential impairment in the first quarter of 2024 and, as a result, the fair value of the indefinite-lived IPR&D intangible asset related to Trodelvy may be below its carrying value. We expect to complete an interim impairment assessment of the related IPR&D intangible asset during the first quarter of 2024. To the extent that the estimated fair value is less than the carrying value of the asset, we will be required to record an impairment charge on our Consolidated Statements of Income during the three months ended March 31, 2024. Any such impairment charge, which we are unable to reasonably estimate at this time, could have a material impact on our consolidated results of operations.

Selling, General and Administrative Expenses

Selling, general and administrative expenses are recorded when incurred and consist primarily of personnel costs, facilities and overhead costs, and sales, marketing and advertising expenses, as well as other general and administrative costs related to finance, human resources, legal and other administrative activities.

Selling, general and administrative expenses increased $417 million in 2023, compared to 2022, primarily due to a $525 million litigation expense for settlements with certain plaintiffs in the HIV antitrust litigation in the second quarter of 2023 and increased commercial activities in oncology and HIV, partially offset by a $406 million non-recurring charge in 2022 associated with the termination of the Trodelvy license collaboration agreement with Everest Medicines.

Interest Expense and Other Income (Expense), Net

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

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(in millions, except percentages)","","2023","","2022","","Change"],["Interest expense","","$","(944)","","","$","(935)","","","1","%"],["Other income (expense), net","","$","198","","","$","(581)","","","NM"]]
[[/GREPCENT_TABLE]]

_______________________________

NM - Not Meaningful

Interest expense remained relatively flat in 2023 compared to 2022. See Note 11. 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.

Other income (expense), net in 2023 included $376 million of interest income, partially offset by $167 million of net unrealized losses on equity investments. Other income (expense), net in 2022 included $657 million of net unrealized losses on equity investments, partially offset by $106 million of interest income.

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Income Taxes

The following table summarizes the period-over-period changes in Income tax expense:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(in millions, except percentages)","","2023","","2022","","Change"],["Income before income taxes","","$","6,859","","","$","5,814","","","$","1,045"],["Income tax expense","","$","(1,247)","","","$","(1,248)","","","$","2"],["Effective tax rate","","18.2","%","","21.5","%","","(3.3)","%"]]
[[/GREPCENT_TABLE]]

Our effective tax rate decreased in 2023, compared to 2022, primarily due to a decrease in unrecognized tax benefits as a result of reaching agreement with a tax authority on certain tax positions in 2023.

The Organisation for Economic Co-operation and Development has a framework to implement a global minimum corporate tax of 15% for companies with global revenues and profits above certain thresholds (referred to as Pillar Two), with certain aspects effective January 1, 2024 and other aspects effective January 1, 2025. Certain countries in which we operate have adopted Pillar Two legislation and other countries are in the process of introducing legislation to implement Pillar Two. We do not expect Pillar Two to have a material impact on our results of operations, liquidity or capital resources.

Liquidity and Capital Resources

We regularly evaluate our liquidity and capital resources, including our access to external capital, to ensure that we can adequately and efficiently finance our operations.

Liquidity

Cash, cash equivalents, and marketable debt securities were $8.4 billion and $7.6 billion as of December 31, 2023 and 2022, respectively. Cash and cash equivalents increased by $673 million from December 31, 2022 to December 31, 2023.

The following table summarizes our cash flow activities:

[[GREPCENT_TABLE]]
[["","","","Year Ended December 31,"],["(in millions)","","2023","","2022"],["Net cash provided by (used in):"],["Operating activities","","$","8,006","","","$","9,072"],["Investing activities","","$","(2,265)","","","$","(2,466)"],["Financing activities","","$","(5,125)","","","$","(6,469)"],["Effect of exchange rate changes on cash and cash equivalents","","$","57","","","$","(63)"]]
[[/GREPCENT_TABLE]]

Operating Activities

Net cash provided by operating activities is derived by adjusting our net income for non-cash items and changes in operating assets and liabilities. Net cash provided by operating activities was $8.0 billion in 2023, compared to $9.1 billion in 2022. The change was primarily due to higher income tax payments and higher inventory and operating spend, which includes HIV antitrust litigation settlement payments, in 2023, reduced by the effect of a non-recurring payment of a $1.25 billion settlement related to bictegravir litigation in 2022 and higher collections in 2023.

Investing Activities

Net cash used in investing activities was $2.3 billion in 2023, compared to $2.5 billion in 2022. The change was primarily due to a decrease in acquisition spend, including acquired IPR&D, and capital expenditures, partially offset by higher net purchases of marketable debt and equity securities.

Financing Activities

Net cash used in financing activities was $5.1 billion in 2023, compared to $6.5 billion in 2022. In 2023, we utilized cash of $2.3 billion for debt repayments, $3.8 billion for dividend payments and $1.0 billion for common stock repurchases. These were partially offset by $2.0 billion in proceeds from the issuance of senior unsecured notes in September 2023, net of issuance costs. In 2022, we utilized cash of $1.5 billion for debt repayments, $3.7 billion for dividend payments, and $1.4 billion for common stock repurchases.

Capital Resources

We believe our existing capital resources, including cash and cash equivalents, marketable debt securities and our revolving credit facility, supplemented by cash flows generated from our operations, will be adequate to satisfy our capital needs for the foreseeable future.

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As of December 31, 2023, our material cash requirements consisted primarily of the repayment of outstanding borrowings, income tax payments, including the remaining obligations for the one-time repatriation transition tax from the Tax Cuts and Jobs Act, purchases of inventory, operating lease obligations, capital expenditures and milestone and other payments related to our collaborative agreements. See Notes 6. Acquisitions, 7. Collaborations and Other Arrangements, 11. Debt and Credit Facilities, 12. Leases, 13. Commitments and Contingencies and 16. Income Taxes of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information. We enter into certain unconditional purchase obligations, capital expenditure projects and other commitments in the normal course of business. There have been no changes to these commitments during the year that would have a material impact on the company’s ability to meet either short-term or long-term cash requirements.

Our future capital requirements will depend on many factors, including but not limited to the following:

•the commercial performance of our current and future products;

•the progress and scope of our R&D efforts, including preclinical studies and clinical trials;

•the cost, timing and outcome of regulatory reviews;

•the expansion of our sales and marketing capabilities;

•the possibility of acquiring additional manufacturing capabilities or office facilities;

•the possibility of acquiring other companies or new products;

•debt service requirements;

•future dividends subject to declaration by our Board of Directors;

•the establishment of additional collaborative relationships with other companies; and

•costs associated with the defense, settlement and adverse results of government investigations and litigation.

We may in the future require additional funding, which could be in the form of proceeds from equity or debt financings. If such funding is required, we cannot guarantee that it will be available to us on favorable terms, if at all. 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.

Critical Accounting Estimates

See Note 1. Organization and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for information about our significant accounting policies and how estimates are involved in the preparation of our financial statements. We believe the following reflect the critical accounting estimates used in the preparation of our Consolidated Financial Statements.

Rebates and Chargebacks

Rebates and chargebacks are determined using 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. Rebates and chargebacks are based on contractual arrangements or statutory requirements and include amounts due to payers and healthcare providers under various programs. These amounts may vary by product, payer and individual plans. Rebates and chargebacks are estimated primarily based on product sales, and expected payer mix and discount rates, which require significant estimates and judgment. In developing our estimates of rebates and chargebacks, we consider the following:

•product sales, including product mix and pricing;

•historical and estimated payer mix;

•statutory discount requirements and contractual terms;

•historical claims experience and processing time lags;

•estimated patient population;

•known market events or trends;

•market research;

•channel inventory data obtained from our major U.S. wholesalers; and

•other pertinent internal or external information.

The following table summarizes the consolidated activities and ending balances in our rebates and chargebacks accounts, including adjustments made relating to previous years’ sales as a result of changes in estimates:

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[[GREPCENT_TABLE]]
[["(in millions)","","Balance at Beginning of Year","","Decrease/(Increase) to Product Sales","","Payments","","Balance at End of Year"],["Year ended December 31, 2023:"],["Activity related to 2023 sales","","$","\u2014","","","$","14,577","","","$","(10,389)","","","$","4,187"],["Activity related to sales prior to 2023","","4,028","","","(302)","","","(3,421)","","","306"],["Total","","$","4,028","","","$","14,275","","","$","(13,810)","","","$","4,493"],["Year ended December 31, 2022:"],["Activity related to 2022 sales","","$","\u2014","","","$","13,040","","","$","(9,442)","","","$","3,598"],["Activity related to sales prior to 2022","","3,915","","","(418)","","","(3,067)","","","430"],["Total","","$","3,915","","","$","12,622","","","$","(12,509)","","","$","4,028"]]
[[/GREPCENT_TABLE]]

We assess and update our estimates each reporting period to reflect actual claims and other current information. Historically, our actual rebates and chargebacks claimed for prior years have varied by less than 5% from our estimates. However, historical results are not indicative of future results.

Valuation of Intangible Assets

Determining the fair values of intangible assets, whether as part of a business combination or impairment assessment, involves the use of a probability-weighted income approach that discounts expected future cash flows to present value and requires the use of critical estimated inputs, including:

•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, which, for example, include significant inputs such as addressable patient population, treatment duration and projected market share;

•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;

•an appropriate discount rate based on the estimated weighted-average cost of capital for companies with profiles similar to our profile, representing the rate that market participants would use to value the intangible assets;

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

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

These estimates are subject to uncertainty due to the high rate of failure inherent in the discovery and development of new products; delays that can occur in development, approval and product launch processes; unanticipated decisions made by regulatory agencies; advent of competing products; unexpected changes in U.S. and global financial markets and other unanticipated events and circumstances. If future events result in adverse changes in the critical assumptions used in determining fair value, impairment charges on our intangible assets may be recorded and could be material to our financial statements. For example, in 2022, we recognized a $2.7 billion impairment charge related to our HR+/HER2- IPR&D intangible asset related to an expected delay in launch timing which caused a decrease in our market share assumptions based on the expected competitive environment.

Legal Contingencies

We are a party to various legal actions. Certain significant matters are described in Note 13. Commitments and Contingencies of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Critical inputs to the accruals recorded and disclosures provided in relation to these matters include the probability of a certain outcome of the case, the determination as to whether an exposure is reasonably estimable and the amount of potential exposure. These inputs are subject to uncertainty due to changes in the legal facts and circumstances of the case, status of the proceedings, applicable law, the views of legal counsel and the views of any judges or jury involved in the case. Upon the final resolution of such matters, it is possible that there may be a loss in excess of the amount recorded, and such amounts could have a material adverse effect on our results of operations, cash flows or financial position. We periodically reassess these matters when additional information becomes available and adjust our estimates and assumptions when facts and circumstances indicate the need for any changes. For example, in the second quarter of 2023, we recorded an accrual of $525 million in Other current liabilities on our Consolidated Balance Sheets for settlements with certain plaintiffs in the HIV antitrust litigation, which we paid in the second half of 2023.

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Income Taxes

We are subject to income taxes in the U.S. and various foreign jurisdictions, including Ireland. Critical inputs in determining our provision for income taxes and related tax balances include forecasts of our future income and expenses, potential tax planning strategies and determination of the probability of certain tax positions being sustained upon examination by tax authorities. These inputs are subject to uncertainty due to potential changes in facts and circumstances, economic and political conditions, changes to existing tax laws and new regulations or interpretations by tax authorities. Changes in these conditions could have a material adverse impact on our results of operations and financial position. See Note 16. 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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