EMPLOYEE BENEFITS

We provide share based compensation in the form of various types of equity-based awards, including restricted stock units (RSUs), performance-based restricted stock units (PSUs) and stock options. Compensation expense is recognized on the Consolidated Statements of Income based on the estimated fair value of the award on the grant date. The estimated fair value of RSUs is based on the closing price of our common stock. For PSUs, estimated fair value is based on either the Monte Carlo valuation methodology or the stock price on the date of grant. For stock option awards, estimated fair value is based on the Black-Scholes option valuation model.

2004 Equity Incentive Plan

In May 2004, our stockholders approved and we adopted the Gilead Sciences, Inc. 2004 Equity Incentive Plan (as amended, the 2004 Plan). The 2004 Plan is a broad based incentive plan that provides for the grant of equity-based awards, including stock options, restricted stock units, restricted stock awards and performance awards, to employees, directors and consultants. The 2004 Plan authorized the issuance of a total of 243 million shares of common stock. In May 2017, the maximum number of shares that may be issued under the 2004 Plan was increased to 309 million shares. As of December 31, 2017, a total of 98 million shares remain available for future grant under the 2004 Plan.

Stock Options

The 2004 Plan provides for option grants designated as either non-qualified or incentive stock options. Prior to January 1, 2006, we granted both non-qualified and incentive stock options, but all stock options granted after January 1, 2006 have been non-qualified stock options. Under the 2004 Plan, employee stock options granted prior to 2011 generally vest over five years and stock options granted starting in 2011 generally vest over four years. All options are exercisable over a period not to exceed the contractual term of ten years from the date the stock options are issued and are granted at prices not less than the fair market value of our common stock on the grant date. Stock option exercises are settled with common stock from the 2004 Plan’s previously authorized and available pool of shares.

The following table summarizes activity and related information under our stock option plans. All option grants presented in the table, except for the Kite-related replacement awards, had exercise prices not less than the fair value of the underlying common stock on the grant date:



	Shares (in thousands)		Weighted- Average Exercise Price (in dollars)		Weighted-Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions)
Outstanding at December 31, 2016	23,157		$	37.69
Granted	6,056		$	71.75
Granted-replacement awards ⁽¹⁾	8,047		$	23.68
Forfeited	(275	)	$	64.66
Expired	(63	)	$	82.50
Exercised	(6,702	)	$	21.99
Outstanding at December 31, 2017	30,220		$	43.93	5.89	$	921
Exercisable at December 31, 2017	16,112		$	35.78	3.61	$	624
Expected to vest, net of estimated forfeitures at December 31, 2017	13,314		$	52.94	8.47	$	285
_______________________

Note:


⁽¹⁾	In 2017, in connection with our acquisitions of Kite and Cell Design Labs, we replaced unvested Kite and Cell Design Labs stock options with our stock options. These options were fair-valued using the lattice valuation methodology. See Note 5, Acquisitions for additional information.

Aggregate intrinsic value represents the value of our closing stock price on the last trading day of the year in excess of the weighted-average exercise price multiplied by the number of options outstanding or exercisable. Total intrinsic value of options exercised was $337 million for 2017, $452 million for 2016 and $1.1 billion for 2015.

The weighted-average grant date fair value of the stock options granted was $38.78 per share for 2017, $20.04 per share for 2016 and $29.73 per share for 2015.

As of December 31, 2017, there was $413 million of unrecognized compensation cost related to stock options, which is expected to be recognized over an estimated weighted-average period of 2.5 years.

Performance-Based Restricted Stock Units

Under the 2004 Plan, we grant PSUs which vest upon the achievement of specified market or performance goals, which could include achieving a total shareholder return compared to a pre-determined peer group or achieving revenue targets. The actual number of common shares ultimately issued is calculated by multiplying the number of PSUs by a payout percentage ranging from 0% to 200%, and these awards generally vest only when a committee (or subcommittee) of our Board has determined that the specified market and performance goals have been achieved. The fair value of each PSU is estimated at the date of grant or when performance objectives are defined for the grants. Depending on the terms of the award, fair value on the date of grant is determined based on either the Monte Carlo valuation methodology or the closing stock price on the date of grant.

In addition, we have also granted other PSUs to certain of our employees under the 2004 Plan. The vesting of these awards is subject to the achievement of specified individual performance goals, typically within a one year period. The fair value of such an award is equal to the closing price of our common stock on the grant date.

The following table summarizes activity and related information for our PSUs:



	Shares ⁽¹⁾ (in thousands)		Weighted- Average Grant Date Fair Value Per Share ⁽¹⁾ (in dollars)
Outstanding at December 31, 2016	509		$	92.32
Granted	388		$	74.42
Vested	(47	)	$	77.82
Forfeited	(93	)	$	99.61
Outstanding at December 31, 2017	757		$	82.80
_______________________

Note:


⁽¹⁾	Weighted-average grant-date fair value per share excludes shares related to grants that currently have no grant date as the performance objectives have not yet been defined.

The weighted-average grant date fair value of our PSUs granted was $74.42 per share for 2017, $71.60 per share for 2016 and $61.71 per share for 2015. The total grant date fair value of our vested PSUs was $4 million for 2017, $33 million for 2016 and $76 million for 2015, and total fair value as of the respective vesting dates was $3 million for 2017, $45 million for 2016 and $160 million for 2015.

We recognized stock-based compensation expenses of $24 million in 2017, $20 million in 2016 and $40 million in 2015 related to these PSUs. As of December 31, 2017, there was $31 million of unrecognized compensation costs related to these PSUs, which is expected to be recognized over an estimated weighted-average period of 1.3 years.

Restricted Stock Units

We grant time-based RSUs to certain employees as part of our annual employee equity compensation review program as well as to new hire employees and to non-employee members of our Board. RSUs are share awards that entitle the holder to receive freely tradable shares of our common stock upon vesting. RSUs generally vest over four years from the date of grant.

The fair value of an RSU is equal to the closing price of our common stock on the grant date. The following table summarizes our RSU activities and related information:



	Shares (in thousands)		Weighted- Average Grant Date Fair Value Per Share (in dollars)
Outstanding at December 31, 2016	10,045		$	85.41
Granted	7,156		$	69.57
Granted-replacement awards ⁽¹⁾	2,970		$	83.19
Vested	(4,103	)	$	79.19
Forfeited	(1,063	)	$	81.85
Outstanding at December 31, 2017	15,005		$	79.37
_______________________

Note:


⁽¹⁾	In 2017, in connection with our acquisition of Kite, we replaced unvested Kite restricted stock units with our restricted stock units. The estimated fair value on the date of the replacement was based on the closing price of our common stock on that date. See Note 5, Acquisitions for additional information.

The weighted-average grant date fair value of RSUs granted was $73.56 per share for 2017, $84.51 per share for 2016, and $103.19 per share for 2015. The total grant date fair value of our vested RSUs was $325 million for 2017, $284 million for 2016 and $249 million for 2015, and total fair value as of the respective vesting dates was $285 million for 2017, $408 million for 2016 and $666 million for 2015.

As of December 31, 2017, there was $810 million of unrecognized compensation cost related to unvested RSUs which is expected to be recognized over a weighted-average period of 2.6 years.

Employee Stock Purchase Plan

Under our Employee Stock Purchase Plan and the International Employee Stock Purchase Plan (together, as amended, the ESPP), employees can purchase shares of our common stock based on a percentage of their compensation subject to certain limits. The purchase price per share is equal to the lower of 85% of the fair market value of our common stock on the offering date or the purchase date. Prior to 2016, the ESPP offered a two-year look-back feature as well as an automatic reset feature that provides for an offering period to be reset to a new lower-priced offering if the offering price of the new offering period is less than that of the current offering period. Beginning in the first quarter of 2016, the look-back feature for ESPP offering periods became six-months. ESPP purchases are settled with common stock from the ESPP’s previously authorized and available pool of shares. During 2017, 1 million shares were issued under the ESPP for $83 million. A total of 79 million shares of common stock have been authorized for issuance under the ESPP, and there were 12 million shares available for issuance under the ESPP as of December 31, 2017.

Stock-Based Compensation

The following table summarizes total stock-based compensation expenses included on our Consolidated Statements of Income (in millions):



	Year Ended December 31,
	2017			2016			2015
Cost of goods sold	$	24		$	14		$	11
Research and development expenses	232			176			173
Selling, general and administrative expenses	393			190			198
Stock-based compensation expense included in total costs and expenses	649			380			382
Income tax effect	(280		)	(104		)	(131		)
Stock-based compensation expense, net of tax	$	369		$	276		$	251

We capitalized stock-based compensation costs to inventory totaling $17 million in 2017, $15 million in 2016 and $13 million in 2015. The capitalized stock-based compensation costs remaining in inventory were $11 million as of December 31, 2017, $9 million as of December 31, 2016 and $8 million as of December 31, 2015.

Stock-based compensation is recognized as expense over the requisite service periods on our Consolidated Statements of Income using the straight-line expense attribution approach, reduced for estimated forfeitures. We estimate forfeitures based on our historical experience.

Valuation Assumptions

Fair value of options granted under our 2004 Plan and purchases under our ESPP were estimated at grant or purchase dates using a Black-Scholes option valuation model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including expected stock price volatility and expected award life. We used the following assumptions to calculate the estimated fair value of the awards:



	Year Ended December 31,
	2017		2016		2015
Expected volatility:
Stock options	28	%	30	%	35	%
ESPP	28	%	30	%	32	%
Expected term in years:
Stock options	4.6		5.5		5.7
ESPP	0.5		0.5		1.2
Risk-free interest rate:
Stock options	2.1	%	1.4	%	1.4	%
ESPP	1.8	%	1.1	%	1.4	%
Expected dividend yield	2.7	%	1.9	%	1.7	%

The fair value of stock options granted was calculated using the single option approach. We use a blend of historical volatility along with implied volatility for traded options on our common stock to determine our expected volatility. The expected term of stock-based awards represents the weighted-average period the awards are expected to remain outstanding. We estimate the weighted-average expected term based on historical cancellation and historical exercise data related to our stock options as well as the contractual term and vesting terms of the awards. The risk-free interest rate is based upon observed interest rates appropriate for the term of the stock-based awards. The dividend yield is based on our history and expectation of dividend payouts.

Deferred Compensation

We maintain a retirement saving plan under which eligible U.S. employees may defer compensation for income tax purposes under Section 401(k) of the Internal Revenue Code (the Gilead Sciences 401k Plan). In certain foreign subsidiaries, we maintain defined benefit plans as required by local regulatory requirements. Our total matching contribution expense under the Gilead Sciences 401k Plan and other defined benefit plans was $74 million during 2017, $69 million during 2016 and $47 million during 2015.

We maintain a deferred compensation plan under which our directors and key employees may defer compensation. Amounts deferred by participants are deposited into a rabbi trust. The total assets and liabilities associated with the deferred compensation plan were $116 million as of December 31, 2017 and $84 million as of December 31, 2016.