News Column

GILEAD SCIENCES INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 4, 2014

This Quarterly Report on Form 10-Q contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. The forward-looking statements are contained principally in this section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors." Words such as "expect," "anticipate," "target," "goal," "project," "hope," "intend," "plan," "believe," "seek," "estimate," "continue," "may," "could," "should," "might," variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements other than statements of historical fact are forward-looking statements, including statements regarding overall trends, operating cost and revenue trends, liquidity and capital needs and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends and similar expressions. We have based these forward-looking statements on our current expectations about future events. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Our actual results may differ materially from those suggested by these forward-looking statements for various reasons, including those identified below under "Risk Factors." Given these risks and uncertainties, you are cautioned not to place undue reliance on forward-looking statements. The forward-looking statements included in this report are made only as of the date hereof. Except as required under federal securities laws and the rules and regulations of the Securities and Exchange Commission, we do not undertake, and specifically decline, any obligation to update any of these statements or to publicly announce the results of any revisions to any forward-looking statements after the distribution of this report, whether as a result of new information, future events, changes in assumptions or otherwise. In evaluating our business, you should carefully consider the risks described in the section entitled "Risk Factors" under Part II, Item 1A below, in addition to the other information in this Quarterly Report on Form 10-Q. Any of the risks contained herein could materially and adversely affect our business, results of operations and financial condition. You should read the following management's discussion and analysis of our financial condition and results of operations in conjunction with our audited Consolidated Financial Statements and related notes thereto included as part of our Annual Report on Form 10-K for the year ended December 31, 2013 and our unaudited Condensed Consolidated Financial Statements for the three and six months ended June 30, 2014 and other disclosures (including the disclosures under "Part II. Item 1A. Risk Factors") included in this Quarterly Report on Form 10-Q. Our Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles and are presented in U.S. dollars. Management Overview Gilead Sciences, Inc. (Gilead, we 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. Gilead's primary areas of focus include human immunodeficiency virus (HIV), liver diseases such as chronic hepatitis B virus (HBV) infection and chronic hepatitis C virus (HCV) infection, oncology and inflammation, and serious cardiovascular and respiratory conditions. Headquartered in Foster City, California, we have operations in North and South America, Europe and Asia-Pacific. We continue to add to our existing portfolio of products through our internal discovery and clinical development programs and through a product acquisition and in-licensing strategy. Our portfolio of marketed products includes Sovaldi®, Stribild®, Complera®/Eviplera®, Atripla®, Truvada®, Viread®, Vitekta®, Tybost®, Zydelig®, Hepsera®, Emtriva®, Letairis®, Ranexa®, AmBisome®, Cayston® and Tamiflu®. We have U.S. and international commercial sales operations, with marketing subsidiaries in North and South America, Europe and Asia-Pacific. We also sell and distribute certain products through our corporate partners under royalty-paying collaborative agreements. Business Highlights During the second quarter of 2014, we continued to advance our product pipeline across our therapeutic areas. Announcements made during the quarter include:



Antiviral Program • Submission of a New Drug Application (NDA) to Japan's Pharmaceutical and

Medical Devices Agency (PMDA) for approval of sofosbuvir (SOF), a

once-daily nucleotide analog polymerase inhibitor for the treatment of

chronic HCV infection. If approved, SOF would form the basis of the first

all-oral, interferon-free treatment regimen for genotype 2 patients in Japan. • Positive results from a Phase 3 clinical trial in Japan evaluating the



investigational once-daily fixed-dose combination of ledipasvir (LDV), our

NS5A inhibitor, and SOF (LDV/SOF), with and without ribavirin (RBV), for the treatment of 26

-------------------------------------------------------------------------------- genotype 1 chronic HCV infection. Based on these data, we plan to submit an NDA for the fixed-dose combination of LDV/SOF with the Japanese PMDA by the end of 2014. • U.S. Food and Drug Administration (FDA) acceptance of our refiling of two



NDAs for cobicistat and elvitegravir. The FDA set target review dates

under the Prescription Drug User Fee Act (PDUFA) of October 3, 2014 for

cobicistat and October 4, 2014 for elvitegravir.

• Presentations of data on SOF-based regimens in chronic HCV patients included: • Positive data from two Phase 2 studies and a compassionate access study in which a regimen containing Sovaldi was administered for the treatment of chronic HCV infection in patients with advanced liver disease. • Positive data from two Phase 2 studies, evaluating



investigational

all-oral regimens containing SOF for the treatment of chronic HCV infection. • Positive results from an open-label clinical trial, evaluating Sovaldi for the retreatment of chronic HCV infection among patients who failed prior therapy.



• Priority review granted by the FDA of the NDA for a once-daily fixed-dose

combination of LDV/SOF for the treatment of chronic HCV genotype 1 infection in adults. The FDA set a target review date under PDUFA of October 10, 2014.



Oncology Program • Approval by the FDA of Zydelig (idelalisib) for the treatment of three

B-cell blood cancers. Zydelig is indicated in combination with rituximab

for patients with relapsed chronic lymphocytic leukemia (CLL) for whom

rituximab alone would be considered appropriate therapy and as monotherapy

for patients with relapsed follicular B-cell non-Hodgkin lymphoma and

small lymphocytic lymphoma who have received at least two prior systemic

therapies. • Updated interim results of a Phase 2 study evaluating GS-9973, our investigational oral inhibitor of spleen tyrosine kinase (Syk), for the



treatment of patients with relapsed CLL. Based on these data, we plan to

initiate new CLL study cohorts to include patients who have relapsed

following treatment with other inhibitors of the B-cell receptor signaling

pathway. Financial Highlights During the second quarter of 2014, total revenues increased to $6.53 billion, compared to $2.77 billion in the second quarter of 2013, driven primarily by the launch of Sovaldi. Sales of Sovaldi were $3.48 billion for the three months ended June 30, 2014. Sovaldi was approved in the United States in December 2013 and in the European Union in January 2014. Since its launch, we estimate approximately 80,000 patients in the United States and Europe have begun treatment for HCV with Sovaldi. Research and development (R&D) expenses increased 11% to $583.9 million for the second quarter of 2014 compared to the same period in 2013 due to increases in headcount and other costs to support expansion of our R&D activities. Selling, general and administrative (SG&A) expenses increased 51% to $613.6 million for the second quarter of 2014 compared to the same period in 2013 due to increases in headcount and other costs to support our business expansion related to Sovaldi and pre-launch activities for Zydelig and our fixed-dose combination of LDV/SOF. Net income attributable to Gilead for the second quarter of 2014 increased to $3.66 billion or $2.20 per diluted share, compared to the same period in 2013, due primarily to the launch of Sovaldi, partially offset by the increase in R&D and SG&A expenses. As of June 30, 2014, our cash, cash equivalents and marketable securities totaled $9.58 billion, an increase of $2.72 billion compared to March 31, 2014. During the second quarter of 2014, we generated $4.19 billion of operating cash flows, which reflected strong accounts receivable collections in the quarter and included a larger than normal component related to first quarter sales given the launch of Sovaldi. We also repurchased $1.20 billion of common stock and repaid $309.7 million in debt, net of convertible note hedges. As of June 30, 2014, we had $1.70 billion remaining in our $5.00 billion stock repurchase program announced in January 2011 (2011 Program), which is expected to be completed by September 2014. In May 2014, our Board of Directors authorized an additional repurchase of up to $5.00 billion of our common stock. 27 -------------------------------------------------------------------------------- Results of Operations Total Revenues Total revenues include product sales and royalty, contract and other revenues. Total revenues for the three months ended June 30, 2014 were $6.53 billion, compared to $2.77 billion for the same period in 2013. Total revenues for the six months ended June 30, 2014 were $11.53 billion, compared to $5.30 billion for the same period in 2013. Increases in total revenues for both periods were driven by growth in product sales resulting primarily from the launch of Sovaldi. Product Sales Total product sales were $6.41 billion for the three months ended June 30, 2014, an increase of 141% compared to the same period in 2013. Total product sales were $11.28 billion for the six months ended June 30, 2014, an increase of 123% compared to the same period in 2013. Increases in product sales for both periods were driven by increases in antiviral and cardiovascular product sales. Antiviral product sales, including Sovaldi, totaled $6.01 billion and $10.52 billion for the three and six months ended June 30, 2014, an increase of 160% and 140%, respectively, compared to the same periods in 2013. Cardiovascular product sales, which include Letairis and Ranexa, totaled $266.7 million and $501.2 million for the three and six months ended June 30, 2014, an increase of 14% and 12%, respectively, compared to the same periods in 2013. During the three and six months ended June 30, 2014, approximately 25% of our product sales were generated outside of the United States and as a result, we face exposure to adverse movements in foreign currency exchange rates, primarily in Euro. We used foreign currency exchange contracts to hedge a percentage of our foreign currency exposure. Foreign currency exchange, net of hedges, had a favorable impact of $37.8 million and $32.7 million on our product sales for the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013. Product sales in the United States increased by 195% to $4.82 billion and 178% to $8.45 billion for the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013, due primarily to sales of Sovaldi, which launched in December 2013, and increases in sales of Stribild and Complera. Product sales in Europe increased by 60% to $1.31 billion and 42% to $2.33 billion for the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013, due primarily to sales of Sovaldi, which launched in January 2014, and increases in sales of Stribild and Eviplera. In light of the continued fiscal and debt crises experienced by several countries in the European Union, several governments have announced or implemented measures to manage healthcare expenditures. We continue to experience pricing pressure such as increases in the amount of discounts required on our products and delayed reimbursement which could negatively impact our future product sales and results of operations. Foreign currency exchange, net of hedges, had a favorable impact of $45.3 million and $44.0 million on our European product sales for the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013. The following table summarizes the period over period changes in our product sales: Three Months Ended Six Months Ended June 30, June 30, (In thousands, except percentages) 2014 2013 Change 2014 2013 Change Antiviral products: Sovaldi $ 3,480,326 $ - - $ 5,754,675 $ - - Atripla 870,708 938,108 (7 )% 1,650,302 1,815,181 (9 )% Truvada 806,610 807,779 0 % 1,566,310 1,508,021 4 % Complera/Eviplera 299,464 188,683 59 % 550,197 336,872 63 % Stribild 269,520 99,394 171 % 484,791 191,542 153 % Viread 260,734 250,188 4 % 471,359 460,520 2 % LDV/SOF 439 - - 439 - - Other antiviral products 24,343 29,387 (17 )% 42,568 62,481 (32 )% Total antiviral products 6,012,144 2,313,539 160 %

10,520,641 4,374,617 140 % Letairis 144,716 128,257 13 % 267,601 246,364 9 % Ranexa 121,956 106,597 14 % 233,574 202,883 15 % AmBisome 94,794 75,137 26 % 186,887 160,412 17 % Other products 39,327 33,755 17 %



75,208 66,577 13 % Total product sales $ 6,412,937$ 2,657,285 141 % $ 11,283,911$ 5,050,853 123 %

28 -------------------------------------------------------------------------------- Antiviral Products Antiviral product sales increased for the three and six months ended June 30, 2014 compared to the same periods in 2013 due primarily to the launch of Sovaldi, which was approved in the United States in December 2013 and in the European Union in January 2014, and increased sales of Stribild and Complera/Eviplera. The increase in the six months ended June 30, 2014 was partially offset by a decrease in wholesaler and sub-wholesaler inventories in the United States associated primarily with our HIV products. Following is additional discussion of our results by product: • Sovaldi For the three and six months ended June 30, 2014, sales of Sovaldi were $3.48 billion and $5.75 billion, respectively. Sovaldi sales accounted for 58% and 55% of our total antiviral product sales for the three and six months ended June 30, 2014. Sovaldi sales in the United States were $3.03 billion and $5.13 billion for the three and six months ended June 30, 2014. Sovaldi sales in Europe were $400.2 million and $563.9 million for the three and six months ended June 30, 2014. Since its launch in December 2013, we estimate approximately 80,000 patients in the United States and Europe have begun treatment for HCV with Sovaldi. While Sovaldi has regulatory approval in the European Union, pricing and reimbursement is obtained on a country-by-country process, with some countries completing the process more quickly than others. We currently have approved reimbursement in Germany, Austria, Sweden, Finland, Norway and Denmark. We also sell Sovaldi in France under the Temporary Authorisations for Use Program. While we believe the sales of Sovaldi for the three and six months ended June 30, 2014 are indicative of significant unmet medical need, current period results may not be indicative of future results. Future results are difficult to estimate as demand will depend on a number of factors. For example, we have submitted marketing applications for a once-daily fixed-dose combination of LDV/SOF for the treatment of HCV. Doctors may choose to wait to treat their genotype 1 HCV-infected patients until the approval of the fixed-dose combination of LDV/SOF or another competitor's all-oral regimen. Also, pricing pressures could influence private and public payers' decisions to list Sovaldi on formulary or limit the types of patients for whom coverage will be provided, thus impacting future demand for Sovaldi. Product sales related to LDV/SOF in the table above for the three and six months ended June 30, 2014 represent early access sales in Europe as part of a compassionate use program, as the drug is not yet commercially approved. In the United States, the FDA has set a target review date under PDUFA of October 10, 2014 for the fixed-dose combination of LDV/SOF. • Atripla Atripla sales accounted for 14% and 16% of our total antiviral product sales for the three and six months ended June 30, 2014, respectively, and decreased by 7% and 9% compared to the same periods in 2013, due primarily to declines in volume as doctors prescribed newer treatments such as Complera/Eviplera and Stribild to patients. The decline for the six months ended June 30, 2014 was also due to declines in wholesaler and sub-wholesaler inventories in the United States. The efavirenz component of Atripla, which has a gross margin of zero, comprised $318.4 million and $600.9 million of our Atripla sales for the three and six months ended June 30, 2014. For the three and six months ended June 30, 2013, the efavirenz component of Atripla comprised $352.1 million and $680.2 million of our Atripla sales. A generic version of Bristol-Myers Squibb Company's Sustiva (efavirenz), a component of our Atripla, was made available in Canada and Europe during 2013 and will be made available in the United States in 2015. As a result, while we have observed some pricing pressure related to the Sustiva component of our Atripla sales, we have not yet observed any meaningful splitting of the Atripla single tablet regimen. • Truvada Truvada sales accounted for 13% and 15% of our total antiviral product sales for the three and six months ended June 30, 2014, respectively. Truvada sales remained relatively flat for the three months ended June 30, 2014 compared to the same period in 2013 and increased by 4% for the six months ended June 30, 2014 compared to the same period in 2013, due primarily to an increase in the average net selling price during the first quarter of 2014. • Complera/Eviplera Complera/Eviplera sales increased by 59% and 63% for the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013, due primarily to increased sales volume in Europe and the United States. Complera/Eviplera was approved in the United States in August 2011 and in Europe in November 2011. • Stribild Sales of Stribild increased by 171% and 153% for the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013, due primarily to increased sales volume in the United States and Europe. Stribild was approved in the United States in August 2012 and in Europe in May 2013. 29 -------------------------------------------------------------------------------- Cardiovascular Products Cardiovascular product sales, which include Letairis and Ranexa, increased 14% and 12% during the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013. During the three and six months ended June 30, 2014, sales of Letairis increased by 13% and 9% compared to the same periods in 2013 due primarily to increased sales volume. During the three and six months ended June 30, 2014, sales of Ranexa increased by 14% and 15% compared to the same periods in 2013 due to an increase in the average net selling price during the first quarter of 2014 and increased sales volume. Royalty, Contract and Other Revenues The following table summarizes the period over period changes in our royalty, contract and other revenues: Three Months Ended Six Months Ended June 30, June 30, (In thousands, except percentages) 2014 2013 Change 2014 2013 Change Royalty, contract and other revenues $ 122,006$ 110,109 11 % $ 249,988$ 248,176 1 % Royalty, contract and other revenues increased by 11% and 1% for the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013, due primarily to higher royalty revenues from GlaxoSmithKline, Inc. and Japan Tobacco Inc. as well as seasonality in the royalty revenues from F. Hoffmann-La Roche Ltd for Tamiflu. The majority of our royalties are recognized in the quarter following the quarter in which the corresponding product sales occur. 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: Three Months Ended Six Months Ended June 30, June 30, (In thousands, except percentages) 2014 2013 Change 2014 2013 Change Total product sales $ 6,412,937$ 2,657,285 141 % $ 11,283,911$ 5,050,853 123 % Cost of goods sold $ 924,709$ 684,663 35 % $ 1,737,914$ 1,319,111 32 % Product gross margin 86 % 74 % 85 % 74 % Product gross margins were 86% and 85% for the three and six months ended June 30, 2014, respectively, compared to 74% for the same periods in 2013. The increases were driven primarily by sales of Sovaldi which impacted product mix, partially offset by amortization of the intangible asset related to sofosbuvir following the approval and commercial launch of Sovaldi. Research and Development Expenses Three Months Ended Six Months Ended June 30, June 30, (In thousands, except percentages) 2014 2013 Change 2014 2013 Change Research and development expenses $ 583,924$ 523,902 11 % $ 1,178,902$ 1,021,534 15 % We do not track total R&D expenses by product candidate, therapeutic area or development phase. However, we manage our R&D expenses by identifying the R&D activities we anticipate will be performed during a given period and then prioritizing efforts based on scientific data, probability of successful development, market potential, available human and capital resources and other considerations. We continually review our R&D pipeline and the status of development and, as necessary, reallocate resources among the R&D portfolio that we believe will best support the future growth of our business. R&D expenses summarized above consist primarily of clinical studies performed by contract research organizations, materials and supplies, licenses and fees, milestone payments under collaboration arrangements, personnel costs, including salaries, benefits and stock-based compensation and overhead allocations consisting of various support and facilities-related costs. R&D expenses for the three months ended June 30, 2014 increased by $60.0 million or 11% compared to the same period in 2013 due primarily to an increase of $40.4 million in personnel and infrastructure expenses to support the progression of clinical study activity, primarily in oncology and HIV, geographic expansion and marketed product support. 30 -------------------------------------------------------------------------------- R&D expenses for the six months ended June 30, 2014 increased by $157.4 million or 15% compared to the same period in 2013 due primarily to $84.7 million related to the progression of clinical study activity, primarily in oncology and HIV, and $82.9 million related to personnel and infrastructure expenses to support our ongoing clinical study activity, geographic expansion and marketed product support. We expect R&D expenses to increase through the second half of 2014 to support the expansion of our clinical studies in various therapeutic areas including HCV, HIV, inflammation and respiratory. Selling, General and Administrative Expenses Three Months Ended Six Months Ended June 30, June 30, (In thousands, except percentages) 2014 2013 Change 2014 2013 Change Selling, general and administrative expenses $ 613,555$ 404,991 51 % $ 1,161,678$ 779,287 49 % SG&A expenses relate to sales and marketing, finance, human resources, legal and other administrative activities. Expenses are primarily comprised of facilities and overhead costs, outside marketing, advertising and legal expenses, and other general and administrative costs. SG&A expenses for the three months ended June 30, 2014 increased by $208.6 million or 51% compared to the same period in 2013 due primarily to an increase in headcount related and other expenses of $130.4 million to support our ongoing growth, including the expansion of our business related to Sovaldi and the anticipated launches of Zydelig and our fixed-dose combination of LDV/SOF. SG&A expenses for the six months ended June 30, 2014 increased by $382.4 million or 49% compared to the same period in 2013 due primarily to an increase in headcount related and other expenses of $244.0 million to support our ongoing growth, including the expansion of our business related to Sovaldi and the anticipated launches of Zydelig and our fixed-dose combination of LDV/SOF. We expect SG&A expenses to increase through the second half of 2014 from our continued investments in these areas. Interest Expense Interest expense for the three months ended June 30, 2014 was $102.0 million, an increase of $24.0 million compared to the same period in 2013. Interest expense for the six months ended June 30, 2014 was $178.3 million, an increase of $18.5 million compared to the same period in 2013. The increases for both periods were primarily a result of the March 2014 issuance of our senior unsecured notes due in April 2019 (April 2019 Notes), April 2024 (April 2024 Notes) and April 2044 (April 2044 Notes). Other Income (Expense), Net Other income (expense), net was not significant for the three and six months ended June 30, 2014 and 2013. Provision for Income Taxes Our provision for income taxes was $656.6 million and $1.38 billion for the three and six months ended June 30, 2014, respectively, compared to $308.0 million and $530.4 million for the same periods in 2013, respectively. Our effective tax rates were 15.2% and 19.1% for the three and six months ended June 30, 2014, respectively, compared to 28.6% and 26.3% for the same periods in 2013, respectively. The effective tax rate for the three months ended June 30, 2014 includes a cumulative catch up adjustment of 3.9 percentage points to the first quarter tax rate to reduce the year to date effective tax rate to 19.1%. The effective tax rates for the three and six months ended June 30, 2014 were lower than the effective tax rates for the same periods in 2013 due primarily to higher earnings from non-U.S. subsidiaries that are considered indefinitely reinvested, offset by the expiration of the federal research tax credit as of December 31, 2013 and amortization expense of the intangible asset related to sofosbuvir for which we receive no tax benefit. The effective tax rates for the three and six months ended June 30, 2014 differed from the U.S. federal statutory rate of 35% due primarily to certain operating earnings from non-U.S. subsidiaries that are considered indefinitely reinvested and tax credits, partially offset by state taxes, our portion of the non-tax deductible pharmaceutical excise tax and amortization expense of the intangible asset related to sofosbuvir for which we receive no tax benefit. We do not provide for U.S. income taxes on undistributed earnings of our foreign operations that are intended to be indefinitely reinvested in our foreign subsidiaries. 31 -------------------------------------------------------------------------------- Liquidity and Capital Resources We believe that our existing capital resources, supplemented by our cash flows generated from operating activities will be adequate to satisfy our capital needs for the foreseeable future. The following table summarizes our cash, cash equivalents and marketable securities, our working capital and our cash flow activities as of the end of, and for each of, the periods presented: (In thousands) June 30, 2014 December 31, 2013 Cash, cash equivalents and marketable securities $ 9,581,383 $ 2,570,590 Working capital $ 9,271,342 $ 948,332 Six Months Ended June 30, (In thousands) 2014 2013 Cash provided by (used in): Operating activities $ 5,753,311$ 1,625,105 Investing activities $ (648,188 )$ (462,733 ) Financing activities $ 1,512,545$ (756,649 ) Cash, Cash Equivalents and Marketable Securities As of June 30, 2014, cash, cash equivalents and marketable securities totaled $9.58 billion, an increase of $7.01 billion or 273% from December 31, 2013. During the six months ended June 30, 2014, we generated $5.75 billion in cash flows from operations, received $3.97 billion from the issuance of senior unsecured notes in March 2014 and repaid $1.15 billion in debt, net of convertible note hedges. During the six months ended June 30, 2014, we also repurchased $1.65 billion of common stock. Of the total cash, cash equivalents and marketable securities at June 30, 2014, approximately $3.76 billion was generated from operations in foreign jurisdictions and is intended for use in our foreign operations. We do not rely on unrepatriated earnings as a source of funds for our domestic business as we expect to have sufficient cash flow and borrowing capacity in the United States to fund our domestic operational and strategic needs. Working Capital Working capital was $9.27 billion at June 30, 2014. The increase of $8.32 billion in working capital from December 31, 2013 was driven primarily by an increase in cash and cash equivalents due to the issuance of senior unsecured notes in March 2014, an increase in accounts receivable, net, driven by increased sales and a decrease in the current portion of long-term debt, net, related to the repayment of our bank debt and conversions of our convertible senior notes. Cash Provided by Operating Activities Cash provided by operating activities was $5.75 billion for the six months ended June 30, 2014 and consisted primarily of net income of $5.87 billion, adjusted for non-cash items such as $507.9 million of depreciation and amortization expenses. This was partially offset by $770.4 million of net cash outflow related to changes in operating assets and liabilities. Cash provided by operating activities was $1.63 billion for the six months ended June 30, 2013 and consisted primarily of net income of $1.49 billion, adjusted for non-cash items such as $147.5 million of depreciation and amortization expenses and $117.7 million of stock-based compensation expenses. This was partially offset by $179.4 million of net cash outflow related to changes in operating assets and liabilities. Cash Used in Investing Activities Cash used in investing activities for the six months ended June 30, 2014 was $648.2 million, consisting primarily of $393.7 million in net purchases of marketable securities and $254.5 million in capital expenditures related to the expansion of our business. Cash used in investing activities for the six months ended June 30, 2013 was $462.7 million, consisting primarily of $378.6 million used in our acquisition of YM BioSciences Inc., net of the cash acquired. 32 -------------------------------------------------------------------------------- Cash Provided by (Used in) Financing Activities Cash provided by financing activities for the six months ended June 30, 2014 was $1.51 billion, consisting primarily of $3.97 billion in net proceeds from the issuance of our April 2019 Notes, April 2024 Notes and April 2044 Notes, partially offset by $1.15 billion used to repay debt, net of convertible note hedges and $1.65 billion used to repurchase common stock under our stock repurchase program. Cash used in financing activities for the six months ended June 30, 2013 was $756.6 million, driven primarily by $2.14 billion used to repay debt financing which included the maturity and conversions of our convertible senior notes, partially offset by net proceeds of $1.21 billion related to our convertible note hedges and proceeds of $146.3 million from issuances of common stock under our employee stock plans. Long-Term Obligations The following is a summary of our borrowings under various financing arrangements (in thousands): June 30,



Type of Borrowing Description Issue Date Due Date Interest Rate 2014 December 31, 2013 Convertible Senior May 2014 Notes July 2010May 2014

1.00% $ - $ 234,217



Convertible Senior May 2016 Notes July 2010May 2016

1.625% 822,139 1,113,043



Senior Unsecured April 2021 Notes March 2011April 2021

4.50% 994,210 993,781



Senior Unsecured December 2014 Notes December 2011December 2014

2.40% 749,868 749,710



Senior Unsecured December 2016 Notes December 2011December 2016

3.05% 699,441 699,326



Senior Unsecured December 2021 Notes December 2011December 2021

4.40% 1,247,861 1,247,716 Senior Unsecured December 2041 Notes December 2011 December 2041 5.65% 997,923 997,885 Senior Unsecured April 2019 Notes March 2014 April 2019 2.05% 499,189 - Senior Unsecured April 2024 Notes March 2014 April 2024 3.70% 1,747,271 -



Senior Unsecured April 2044 Notes March 2014April 2044

4.80% 1,746,641 -



Credit Facility Five-Year Revolver January 2012January 2017

Variable - 600,000 Total debt, net 9,504,543 6,635,678 Less current portion 1,572,007 2,696,970 Total long-term debt, net $ 7,932,536 $ 3,938,708 Debt Financing In March 2014, we issued senior unsecured notes in a registered offering for a total aggregate principal amount of $4.00 billion. We issued the April 2019 Notes for $500.0 million which pay interest at a fixed annual rate of 2.05%, the April 2024 Notes for $1.75 billion which pay interest at a fixed annual rate of 3.70% and the April 2044 Notes for $1.75 billion which pay interest at a fixed annual rate of 4.80%. We have begun using the net proceeds from this debt financing for general corporate purposes, which may include the repayment of debt and related payments, working capital and the repurchase of outstanding common stock under our authorized stock repurchase program. Convertible Senior Notes During the six months ended June 30, 2014, our convertible senior notes due in May 2014 (May 2014 Notes) matured and a portion of our convertible senior notes due in May 2016 (May 2016 Notes) (together, the Notes) was converted. During the six months ended June 30, 2014, we repaid $553.1 million of principal balance relating to the Notes. We also paid $1.29 billion in cash related to the conversion spread of the Notes, which represents the conversion value in excess of the principal amount, and received $1.29 billion in cash from the convertible note hedges related to the Notes. As of June 30, 2014, the May 2016 Notes were classified as current given that their conversion criteria had been met. As a result, the related unamortized discount of $35.9 million was classified as equity component of currently redeemable convertible notes on our Condensed Consolidated Balance Sheet. There are 55.5 million shares of our common stock underlying our warrants expiring in 2014 (the 2014 Warrants). The 2014 Warrants have a strike price of $28.38 per share and expire during the 40 trading-day period commencing August 1, 2014 and ending on September 26, 2014. On July 29, 2014, we exercised our option to settle the warrants in cash. As a result, during the third quarter of 2014, we expect to pay approximately $3.14 billion to $3.69 billion in cash to settle the warrants. Because the warrants could have been settled, at our option, in cash or shares of our common stock, and the related contracts met all of the applicable criteria for equity classification, the settlement will be recorded as a reduction of additional paid-in capital in our Condensed Consolidated Balance Sheet. 33 -------------------------------------------------------------------------------- There are 55.1 million shares of our common stock underlying our warrants expiring in 2016 (the 2016 Warrants). The 2016 Warrants have a strike price of $30.05 per share and are exercisable only on their expiration date. If the market value of our common stock at the time of the exercise of the warrants exceeds their strike price, we will be required to net settle in cash or shares of our common stock, at our option, for the value of the warrants in excess of the warrant strike price. Credit Facilities During the first quarter of 2014, we repaid the remaining balance of $600.0 million that was outstanding under the revolving credit facility credit agreement. There were no amounts outstanding under the revolving credit facility credit agreement as of June 30, 2014. We are required to comply with certain covenants under the credit agreement and note indentures and as of June 30, 2014, we believe we were in compliance with all such covenants. Stock Repurchase Program Under our 2011 Program, we repurchased a total of $1.20 billion or 15.2 million shares of common stock during the three months ended June 30, 2014, and a total of $1.65 billion or 20.9 million shares of common stock during the six months ended June 30, 2014. As of June 30, 2014, we had $1.70 billion remaining in our 2011 Program, which is expected to be completed by September 2014. In May 2014, our Board of Directors authorized a new stock repurchase program of up to $5.00 billion of our common stock through open market and private block transactions pursuant to Rule 10b5-1 plans, privately negotiated transactions or other means. This new program expires three years after the completion of the 2011 Program. We intend to use the additional authorization to repurchase shares opportunistically and to offset the dilution created by shares issued under employee stock plans. Critical Accounting Policies, Estimates and Judgments There have been no material changes in our critical accounting policies, estimates and judgments during the six months ended June 30, 2014 compared to the disclosures in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2013. Off Balance Sheet Arrangements We do not have any off balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K. Recent Accounting Pronouncements In May 2014, the Financial Accounting Standards Board, jointly with the International Accounting Standards Board, issued a comprehensive new standard on revenue recognition from contracts with customers. The standard's core principle is that a reporting entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying this new guidance to contracts within its scope, an entity will: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. Additionally, this new guidance will require significantly expanded revenue recognition disclosures. This guidance will become effective for us beginning in the first quarter of 2017. Early application is not permitted. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt this new guidance. We are currently evaluating the impact of our pending adoption of this standard on our Condensed Consolidated Financial Statements. 34



--------------------------------------------------------------------------------


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters