UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20172018
OR
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 001-35565
AbbVie Inc.
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(Exact name of registrant as specified in its charter) |
Delaware | | 32-0375147 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. employer identification number) |
1 North Waukegan Road
North Chicago, Illinois 60064
Telephone: (847) 932-7900
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer x | | Accelerated Filer ¨ | |
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Non-Accelerated Filer ¨ | | Smaller reporting company ¨ | |
(Do not check if a smaller reporting company) | | | |
| | Emerging growth company ¨ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of October 24, 2017,31, 2018, AbbVie Inc. had 1,596,429,7401,504,216,327 shares of common stock at $0.01 par value outstanding.
AbbVie Inc. and Subsidiaries
Table of Contents
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Item 1. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
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Item 1. | | |
Item 2. | | |
Item 6. | | |
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20172018 Form 10-Q | | 1 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AbbVie Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings (unaudited)
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended September 30, | | Nine months ended September 30, |
(in millions, except per share data) | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Net revenues | | $ | 6,995 |
| | $ | 6,432 |
| | $ | 20,477 |
| | $ | 18,842 |
| | $ | 8,236 |
| | $ | 6,995 |
| | $ | 24,448 |
| | $ | 20,477 |
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| | | | | | | | | | | | | | | | |
Cost of products sold | | 1,616 |
| | 1,504 |
| | 4,760 |
| | 4,278 |
| | 1,835 |
| | 1,616 |
| | 5,696 |
| | 4,761 |
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Selling, general and administrative | | 1,452 |
| | 1,381 |
| | 4,324 |
| | 4,202 |
| | 1,919 |
| | 1,457 |
| | 5,470 |
| | 4,339 |
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Research and development | | 1,222 |
| | 1,106 |
| | 3,580 |
| | 3,176 |
| | 1,268 |
| | 1,228 |
| | 3,834 |
| | 3,599 |
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Acquired in-process research and development | | — |
| | 80 |
| | 15 |
| | 160 |
| | 55 |
| | — |
| | 124 |
| | 15 |
|
Other expense | | | — |
| | — |
| | 500 |
| | — |
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Total operating costs and expenses | | 4,290 |
| | 4,071 |
| | 12,679 |
| | 11,816 |
| | 5,077 |
| | 4,301 |
| | 15,624 |
| | 12,714 |
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Operating earnings | | 2,705 |
| | 2,361 |
| | 7,798 |
| | 7,026 |
| | 3,159 |
| | 2,694 |
| | 8,824 |
| | 7,763 |
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| | | | | | | | | | | | | | | | |
Interest expense, net | | 252 |
| | 250 |
| | 752 |
| | 675 |
| | 302 |
| | 252 |
| | 825 |
| | 752 |
|
Net foreign exchange loss (gain) | | 9 |
| | (4 | ) | | 28 |
| | 313 |
| |
Net foreign exchange loss | | | 2 |
| | 9 |
| | 18 |
| | 28 |
|
Other expense, net | | 349 |
| | 101 |
| | 484 |
| | 152 |
| | 94 |
| | 338 |
| | 411 |
| | 449 |
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Earnings before income tax expense | | 2,095 |
| | 2,014 |
| | 6,534 |
| | 5,886 |
| | 2,761 |
| | 2,095 |
| | 7,570 |
| | 6,534 |
|
Income tax expense | | 464 |
| | 416 |
| | 1,277 |
| | 1,324 |
| | 14 |
| | 464 |
| | 57 |
| | 1,277 |
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Net earnings | | $ | 1,631 |
| | $ | 1,598 |
| | $ | 5,257 |
| | $ | 4,562 |
| | $ | 2,747 |
| | $ | 1,631 |
| | $ | 7,513 |
| | $ | 5,257 |
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Per share data | | | | | | | | | | | | | | | | |
Basic earnings per share | | $ | 1.02 |
| | $ | 0.97 |
| | $ | 3.28 |
| | $ | 2.79 |
| | $ | 1.81 |
| | $ | 1.02 |
| | $ | 4.81 |
| | $ | 3.28 |
|
Diluted earnings per share | | $ | 1.01 |
| | $ | 0.97 |
| | $ | 3.27 |
| | $ | 2.78 |
| | $ | 1.81 |
| | $ | 1.01 |
| | $ | 4.79 |
| | $ | 3.27 |
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Cash dividends declared per common share | | $ | 0.64 |
| | $ | 0.57 |
| | $ | 1.92 |
| | $ | 1.71 |
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| | | | | | | | | | | | | | | | |
Weighted-average basic shares outstanding | | 1,597 |
| | 1,632 |
| | 1,596 |
| | 1,624 |
| | 1,511 |
| | 1,597 |
| | 1,556 |
| | 1,596 |
|
Weighted-average diluted shares outstanding | | 1,603 |
| | 1,640 |
| | 1,602 |
| | 1,633 |
| | 1,515 |
| | 1,603 |
| | 1,561 |
| | 1,602 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
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20172018 Form 10-Q | | 2 |
AbbVie Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (unaudited)
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| Three months ended September 30, | | Nine months ended September 30, |
(in millions) | 2017 | | 2016 | | 2017 | | 2016 |
Net earnings | $ | 1,631 |
| | $ | 1,598 |
| | $ | 5,257 |
| | $ | 4,562 |
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| | | | | | | |
Foreign currency translation adjustments, net of tax expense (benefit) of $7 for the three months and $40 for the nine months ended September 30, 2017 and $10 for the three months and $30 for the nine months ended September 30, 2016 | 183 |
| | 31 |
| | 602 |
| | 164 |
|
Net investment hedging activities, net of tax expense (benefit) of $(52) for the three months and $(174) for the nine months ended September 30, 2017 and $— for the three months and $— for the nine months ended September 30, 2016 | (90 | ) | | — |
| | (307 | ) | | — |
|
Pension and post-employment benefits, net of tax expense (benefit) of $8 for the three months and $23 for the nine months ended September 30, 2017 and $8 for the three months and $23 for the nine months ended September 30, 2016 | 8 |
| | 15 |
| | 21 |
| | 48 |
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Marketable security activities, net of tax expense (benefit) of $4 for the three months and $6 for the nine months ended September 30, 2017 and $1 for the three months and $(7) for the nine months ended September 30, 2016 | (28 | ) | | 12 |
| | (18 | ) | | 19 |
|
Cash flow hedging activities, net of tax expense (benefit) of $(14) for the three months and $(29) for the nine months ended ended September 30, 2017 and $1 for the three months and $(3) for the nine months ended September 30, 2016 | (138 | ) | | (8 | ) | | (325 | ) | | (10 | ) |
Other comprehensive income (loss) | (65 | ) | | 50 |
| | (27 | ) | | 221 |
|
Comprehensive income | $ | 1,566 |
| | $ | 1,648 |
| | $ | 5,230 |
| | $ | 4,783 |
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| Three months ended September 30, | | Nine months ended September 30, |
(in millions) | 2018 | | 2017 | | 2018 | | 2017 |
Net earnings | $ | 2,747 |
| | $ | 1,631 |
| | $ | 7,513 |
| | $ | 5,257 |
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Foreign currency translation adjustments, net of tax expense (benefit) of $3 for the three months and $(16) for the nine months ended September 30, 2018 and $7 for the three months and $40 for the nine months ended September 30, 2017 | 30 |
| | 183 |
| | (250 | ) | | 602 |
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Net investment hedging activities, net of tax expense (benefit) of $(9) for the three months and $22 for the nine months ended September 30, 2018 and $(52) for the three months and $(174) for the nine months ended September 30, 2017 | (32 | ) | | (90 | ) | | 73 |
| | (307 | ) |
Pension and post-employment benefits, net of tax expense (benefit) of $8 for the three months and $24 for the nine months ended September 30, 2018 and $8 for the three months and $23 for the nine months ended September 30, 2017 | 28 |
| | 8 |
| | 99 |
| | 21 |
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Marketable security activities, net of tax expense (benefit) of $— for the three months and $— for the nine months ended September 30, 2018 and $4 for the three months and $6 for the nine months ended September 30, 2017 | — |
| | (28 | ) | | (2 | ) | | (18 | ) |
Cash flow hedging activities, net of tax expense (benefit) of $1 for the three months and $18 for the nine months ended September 30, 2018 and $(14) for the three months and $(29) for the nine months ended September 30, 2017 | 54 |
| | (138 | ) | | 248 |
| | (325 | ) |
Other comprehensive income (loss) | 80 |
| | (65 | ) | | 168 |
| | (27 | ) |
Comprehensive income | $ | 2,827 |
| | $ | 1,566 |
| | $ | 7,681 |
| | $ | 5,230 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
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20172018 Form 10-Q | | 3 |
AbbVie Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
| | (in millions, except share data) | September 30, 2017 | | December 31, 2016 | September 30, 2018 | | December 31, 2017 |
| (unaudited) | | | (unaudited) | | |
Assets | | | | | | |
Current assets | | | | | | |
Cash and equivalents | $ | 8,446 |
| | $ | 5,100 |
| $ | 8,015 |
| | $ | 9,303 |
|
Short-term investments | 1,108 |
| | 1,323 |
| 770 |
| | 486 |
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Accounts receivable, net | 4,891 |
| | 4,758 |
| 5,780 |
| | 5,088 |
|
Inventories | 1,785 |
| | 1,444 |
| 1,786 |
| | 1,605 |
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Prepaid expenses and other | 2,700 |
| | 3,562 |
| 2,114 |
| | 4,741 |
|
Total current assets | 18,930 |
| | 16,187 |
| 18,465 |
| | 21,223 |
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| | | | | | |
Investments | 1,971 |
| | 1,783 |
| 1,463 |
| | 2,090 |
|
Property and equipment, net | 2,697 |
| | 2,604 |
| 2,950 |
| | 2,803 |
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Intangible assets, net | 28,167 |
| | 28,897 |
| 26,625 |
| | 27,559 |
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Goodwill | 15,748 |
| | 15,416 |
| 15,718 |
| | 15,785 |
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Other assets | 1,327 |
| | 1,212 |
| 943 |
| | 1,326 |
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Total assets | $ | 68,840 |
| | $ | 66,099 |
| $ | 66,164 |
| | $ | 70,786 |
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Liabilities and Equity | | | | | | |
Current liabilities | | | | | | |
Short-term borrowings | $ | 800 |
| | $ | 377 |
| $ | 3,002 |
| | $ | 400 |
|
Current portion of long-term debt and lease obligations | 3,021 |
| | 25 |
| 1,019 |
| | 6,015 |
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Accounts payable and accrued liabilities | 9,212 |
| | 9,379 |
| 11,366 |
| | 10,226 |
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Total current liabilities | 13,033 |
| | 9,781 |
| 15,387 |
| | 16,641 |
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Long-term debt and lease obligations | 33,974 |
| | 36,440 |
| 36,487 |
| | 30,953 |
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Deferred income taxes | 6,147 |
| | 6,890 |
| 1,490 |
| | 2,490 |
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Other long-term liabilities | 8,999 |
| | 8,352 |
| 15,721 |
| | 15,605 |
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Commitments and contingencies |
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Stockholders’ equity | | | | |
Common stock, $0.01 par value, 4,000,000,000 shares authorized, 1,767,419,360 shares issued as of September 30, 2017 and 1,754,900,486 as of December 31, 2016 | 18 |
| | 18 |
| |
Common stock held in treasury, at cost, 171,296,169 shares as of September 30, 2017 and 162,387,762 as of December 31, 2016 | (11,419 | ) | | (10,852 | ) | |
Stockholders’ equity (deficit) | | | | |
Common stock, $0.01 par value, 4,000,000,000 shares authorized, 1,776,109,692 shares issued as of September 30, 2018 and 1,768,738,550 as of December 31, 2017 | | 18 |
| | 18 |
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Common stock held in treasury, at cost, 271,949,381 shares as of September 30, 2018 and 176,607,525 as of December 31, 2017 | | (21,849 | ) | | (11,923 | ) |
Additional paid-in capital | 14,154 |
| | 13,678 |
| 14,680 |
| | 14,270 |
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Retained earnings | 6,547 |
| | 4,378 |
| 6,789 |
| | 5,459 |
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Accumulated other comprehensive loss | (2,613 | ) | | (2,586 | ) | (2,559 | ) | | (2,727 | ) |
Total stockholders’ equity | 6,687 |
| | 4,636 |
| |
Total stockholders’ equity (deficit) | | (2,921 | ) | | 5,097 |
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Total liabilities and equity | $ | 68,840 |
| | $ | 66,099 |
| $ | 66,164 |
| | $ | 70,786 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
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20172018 Form 10-Q | | 4 |
AbbVie Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited) | | | Nine months ended September 30, | Nine months ended September 30, |
(in millions) (brackets denote cash outflows) | 2017 | | 2016 | 2018 | | 2017 |
Cash flows from operating activities | | | | | | |
Net earnings | $ | 5,257 |
| | $ | 4,562 |
| $ | 7,513 |
| | $ | 5,257 |
|
Adjustments to reconcile net earnings to net cash from operating activities: | | | | | | |
Depreciation | 324 |
| | 307 |
| 349 |
| | 324 |
|
Amortization of intangible assets | 808 |
| | 554 |
| 974 |
| | 808 |
|
Change in fair value of contingent consideration liabilities | 547 |
| | 143 |
| 432 |
| | 547 |
|
Stock-based compensation | 288 |
| | 278 |
| 351 |
| | 288 |
|
Upfront costs and milestones related to collaborations | 85 |
| | 230 |
| 711 |
| | 85 |
|
Devaluation loss related to Venezuela | — |
| | 298 |
| |
Other, net | (73 | ) | | 326 |
| 423 |
| | (73 | ) |
Changes in operating assets and liabilities, net of acquisitions: | | | | |
Changes in operating assets and liabilities: | | | | |
Accounts receivable | (163 | ) | | (129 | ) | (806 | ) | | (163 | ) |
Inventories | (119 | ) | | 28 |
| (367 | ) | | (119 | ) |
Prepaid expenses and other assets | (22 | ) | | (122 | ) | (426 | ) | | (22 | ) |
Accounts payable and other liabilities | 444 |
| | (975 | ) | 881 |
| | 444 |
|
Cash flows from operating activities | 7,376 |
| | 5,500 |
| 10,035 |
| | 7,376 |
|
| | | | | | |
Cash flows from investing activities | | | | | | |
Acquisitions of businesses, net of cash acquired | — |
| | (2,477 | ) | |
Other acquisitions and investments | (180 | ) | | (172 | ) | |
Acquisitions and investments | | (541 | ) | | (180 | ) |
Acquisitions of property and equipment | (347 | ) | | (365 | ) | (515 | ) | | (347 | ) |
Purchases of investment securities | (1,838 | ) | | (4,520 | ) | (1,581 | ) | | (1,838 | ) |
Sales and maturities of investment securities | 1,890 |
| | 1,579 |
| 1,914 |
| | 1,890 |
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Cash flows from investing activities | (475 | ) | | (5,955 | ) | (723 | ) | | (475 | ) |
| | | | | | |
Cash flows from financing activities | | | | | | |
Net change in short-term borrowings | 423 |
| | (406 | ) | |
Net change in commercial paper borrowings | | (400 | ) | | 423 |
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Proceeds from issuance of other short-term borrowings | | 3,002 |
| | — |
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Proceeds from issuance of long-term debt | — |
| | 7,771 |
| 5,963 |
| | — |
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Repayments of long-term debt and lease obligations | (18 | ) | | (2,006 | ) | (5,021 | ) | | (18 | ) |
Debt issuance costs | — |
| | (52 | ) | (34 | ) | | — |
|
Dividends paid | (3,077 | ) | | (2,784 | ) | (4,129 | ) | | (3,077 | ) |
Purchases of treasury stock | (905 | ) | | (4,223 | ) | (9,956 | ) | | (905 | ) |
Proceeds from the exercise of stock options | 214 |
| | 210 |
| 66 |
| | 214 |
|
Payments of contingent consideration liabilities | (268 | ) | | — |
| (78 | ) | | (268 | ) |
Other, net | 47 |
| | 64 |
| 16 |
| | 47 |
|
Cash flows from financing activities | (3,584 | ) | | (1,426 | ) | (10,571 | ) | | (3,584 | ) |
Effect of exchange rate changes on cash and equivalents | 29 |
| | (300 | ) | (29 | ) | | 29 |
|
Net change in cash and equivalents | 3,346 |
| | (2,181 | ) | (1,288 | ) | | 3,346 |
|
Cash and equivalents, beginning of period | 5,100 |
| | 8,399 |
| 9,303 |
| | 5,100 |
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Cash and equivalents, end of period | $ | 8,446 |
| | $ | 6,218 |
| $ | 8,015 |
| | $ | 8,446 |
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Supplemental schedule of non-cash investing and financing activities | | | | |
Issuance of common shares associated with acquisitions of businesses | $ | — |
| | $ | 3,923 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
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20172018 Form 10-Q | | 5 |
AbbVie Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
Note 1 Basis of Presentation
Basis of Historical Presentation
The unaudited interim condensed consolidated financial statements of AbbVie Inc. (AbbVie or the company) have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) have been omitted. These unaudited interim condensed consolidated financial statements should be read in conjunction with the company’s audited consolidated financial statements and notes included in the company’s Annual Report on Form 10-K for the year ended December 31, 2016.
2017.
It is management’s opinion that these financial statements include all normal and recurring adjustments necessary for a fair presentation of the company’s financial position and operating results. Net revenues and net earnings for any interim period are not necessarily indicative of future or annual results. Certain reclassifications were made to conform the prior period interim condensed consolidated financial statements to the current period presentation.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
ASU No. 2014-09
In January 2017,May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-01, Business Combinations (Topic 805):Clarifying the Definition of a Business. The standard provides clarifying guidance to assist in the evaluation of whether transactions are treated as business combinations or asset acquisitions. AbbVie elected to early adopt the changes prospectively in the first quarter of 2017.
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. AbbVie adopted the standard in the first quarter of 2017. As a result, all excess tax benefits associated with stock-based awards are recognized in the statement of earnings when the awards vest or settle, rather than in stockholders' equity. In addition, excess tax benefits in the statement of cash flows are now classified as an operating activity rather than as a financing activity. AbbVie adopted these changes prospectively. Accordingly, the company recognized excess tax benefits in income tax expense of $14 million for the three months and $53 million for the nine months ended September 30, 2017 and classified them within cash flows from operating activities.
Recent Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09, Summary and Amendments That Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs-ContractsCosts - Contracts with Customers (Subtopic 340-40). The amendments in this standard supersedesuperseded most currentexisting revenue recognition requirements. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of 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. AbbVie can applyadopted the amendmentsstandard in the first quarter of 2018 using one of the following two methods: (i) retrospectively to each priormodified retrospective method. Results for reporting periodperiods beginning after December 31, 2017 have been presented or (ii) modified retrospectivelyin accordance with the standard, while results for prior periods have not been adjusted and continue to be reported in accordance with AbbVie’s historical accounting. The cumulative effect of initially applying the amendmentsnew revenue standard was recognized atas an adjustment to the dateopening balance of initial application. AbbVie will adopt the standard effective the first quarterretained earnings as of 2018 and apply the amendments using the modified retrospective method. The company has made substantial progress in its review of the new standard and will complete its assessment by December 31, 2017. AbbVie does not expectJanuary 1, 2018.
There were no significant changes to the amounts or timing of revenue recognition for product sales, which is itsthe company's primary revenue stream. However,For certain licensing arrangements where revenue was previously deferred and recognized over time, revenue is now recognized at the company expects thatpoint in time when the adoptionlicense is granted. Additionally, for certain contract manufacturing arrangements where revenue was previously recognized at a point in time at the end of the manufacturing process, revenue is now recognized over time throughout the manufacturing process.
Under the new standard, will requireon January 1, 2018, the company recognized a cumulative-effect adjustment to retained earnings on January 1, 2018 of approximately $130 million, net of tax, primarily related to certain deferred license revenues that were originally expected to be recognized through early 2020. The adjustment to the condensed consolidated balance sheet included: (i) a $42 million increase to prepaid expenses and other; (ii) a $39 million decrease to inventories; (iii) a $57 million decrease to accounts payable and accrued liabilities; (iv) a $75 million decrease to other long-term liabilities; (v) a $22 million increase to deferred income taxes; and (vi) a $124 million increase to retained earnings. Other cumulative-effect adjustments to the condensed consolidated balance sheet were insignificant.
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| |
2018 Form 10-Q | | 6 |
The impact of adoption on the company’s condensed consolidated statements of earnings for the three and nine months ended September 30, 2018 was as follows:
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| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2018 | | Nine months ended September 30, 2018 |
(in millions, except per share data) | | As Reported | | Balances Without Adoption of ASU 2014-09 | | Effect of Change Higher/(Lower) | | As Reported | | Balances Without Adoption of ASU 2014-09 | | Effect of Change Higher/(Lower) |
Net revenues | | $ | 8,236 |
| | $ | 8,270 |
| | $ | (34 | ) | | $ | 24,448 |
| | $ | 24,452 |
| | $ | (4 | ) |
Cost of products sold | | 1,835 |
| | 1,851 |
| | (16 | ) | | 5,696 |
| | 5,696 |
| | — |
|
Income tax expense | | 14 |
| | 16 |
| | (2 | ) | | 57 |
| | 52 |
| | 5 |
|
Net earnings | | 2,747 |
| | 2,763 |
| | (16 | ) | | 7,513 |
| | 7,522 |
| | (9 | ) |
Diluted earnings per share | | $ | 1.81 |
| | $ | 1.82 |
| | $ | (0.01 | ) | | $ | 4.79 |
| | $ | 4.80 |
| | $ | (0.01 | ) |
As of September 30, 2018, due to the impact of the adoption of ASU 2014-09, prepaid expenses and other were $81 million higher, inventories were $38 million lower, accounts payable and accrued liabilities were $47 million lower, other long-term liabilities were $32 million lower, deferred income taxes were $14 million higher and retained earnings were $115 million higher on the company’s condensed consolidated balance sheet than they would have been had ASU 2014-09 not been adopted. Other impacts to the condensed consolidated balance sheet were insignificant.
ASU No. 2016-01
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-OverallInstruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The standard requires several targeted changes including that equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) be measured at fair value with changes in fair value recognized in net earnings. These provisions willAbbVie adopted the standard in the first quarter of 2018. The adoption did not impact the accounting for AbbVie's investments in debt securities and did not have a material impact on the company's consolidated financial statements.
ASU No. 2016-16
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740). The standard requires entities to recognize the income tax consequences of an intercompany transfer of an asset other than inventory when the transfer occurs. Under previous U.S. GAAP, the income tax consequences of these intercompany asset transfers were deferred until the asset was sold to a third party or otherwise recovered through use. AbbVie adopted the standard in the first quarter of 2018 using the modified retrospective method. As a result, on January 1, 2018, the company recorded a cumulative-effect adjustment to its condensed consolidated balance sheet that included a $1.9 billion decrease to retained earnings, a $1.4 billion decrease to prepaid expenses and other and a $0.5 billion decrease to other assets.
ASU No. 2017-07
In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The standard requires that an employer continue to report the service cost component of net periodic benefit cost in the same income statement line item or items as other employee compensation costs arising from services rendered during the period. The other components of net periodic benefit cost are required to be presented separately outside of income from operations and are not eligible for capitalization. AbbVie adopted the standard in the first quarter of 2018 and applied the income statement classification provisions of this standard retrospectively. As a result, the company reclassified income of $10 million from operating earnings to non-operating income for the three months and $34 million for the nine months ended September 30, 2017. Additionally, the company recorded approximately $8 million of non-operating income for the three months and $26 million for the nine months ended September 30, 2018 which would have been recorded in operating earnings under the previous guidance.
ASU No. 2017-12
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The standard simplifies the application of hedge accounting and more closely aligns the accounting with an entity’s risk management activities. AbbVie elected to early adopt the standard in the first quarter of 2018. The adoption did not have a material impact on the company's consolidated financial statements.
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| |
20172018 Form 10-Q | | 67 |
in debt securities. The new guidance also changes certain disclosure requirements and other aspects of current U.S. GAAP. Amendments are to be applied as a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. This standard will be effective for AbbVie starting with the first quarter of 2018. The standard does not permit early adoption with the exception of certain targeted provisions. AbbVie is unable to estimate the impact of adopting this standard on its financial statements as it will be dependent upon the composition of its equity investment portfolio as of the adoption date and future changes in fair value subsequent to the adoption date. However, based on historical trends, AbbVie does not believe the adoption will have a material impact on its consolidated financial statements.Recent Accounting Pronouncements Not Yet Adopted
ASU No. 2016-02
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The standard outlines a comprehensive lease accounting model that supersedes the current lease guidance and requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms greater than 12 months. The guidance also changes the definition of a lease and expands the disclosure requirements of lease arrangements. The new standard must be adopted usingAbbVie is currently assessing the modified retrospective approachimpact of adopting this guidance on its consolidated financial statements and will be effective for AbbVie starting with the first quarter of 2019, with early adoption permitted.related disclosures. AbbVie will adopt the standard effective in the first quarter of 2019 and is currently assessingwill not restate comparative periods upon adoption. AbbVie will elect a package of practical expedients for leases that commenced prior to January 1, 2019 and will not reassess: (i) whether any expired or existing contracts are or contain leases; (ii) lease classification for any expired or existing leases; and (iii) initial direct costs capitalization for any existing leases. AbbVie does not expect the adoption will have a material impact of adopting this guidance on its consolidated financial statements.statement of earnings. However, the new standard will require AbbVie to establish liabilities and corresponding right-of-use assets on its consolidated balance sheet for operating leases that exist as of the adoption date.
ASU No. 2016-13
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326). The standard changes how credit losses are measured for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other financial instruments, the standard requires the use of a new forward-looking "expected credit loss" model that generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, the standard now requires allowances to be recorded instead of reducing the amortized cost of the investment. Additionally, the standard requires new disclosures and will be effective for AbbVie starting with the first quarter of 2020. Early adoption beginning in the first quarter of 2019 is permitted. With certain exceptions, adjustments are to be applied using a modified-retrospective approach by reflecting adjustments through a cumulative-effect impact to retained earnings as of the beginning of the fiscal year of adoption. AbbVie is currently assessing the impact and timing of adopting this guidance on its consolidated financial statements.
ASU No. 2018-02
In October 2016,February 2018, the FASB issued ASU No. 2016-16,2018-02, Income TaxesStatement - Reporting Comprehensive Income (Topic 740)220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, . The new standard requires entities to recognize thewhich allows a reclassification from accumulated other comprehensive income tax consequences of an intercompany transfer of an asset other than inventory when the transfer occurs. Under current U.S. GAAP, the income tax consequences of these intercompany asset transfers are deferred until the asset is sold to a third party or otherwise recovered through use. The standard will be effective for AbbVie starting with the first quarter of 2018. Adjustments for this update are to be applied on a modified retrospective basis through a cumulative-effect adjustment directly(AOCI) to retained earnings with anyfor stranded tax effects related to adjustments reflected asto deferred taxes resulting from the December 2017 enactment of the beginning of the fiscal year of adoption. AbbVie is currently assessing the impact of adopting this guidance on its consolidated financial statements. As of September 30, 2017, AbbVie had approximately $1.8 billion of prepaid income tax assets that will be affected by this standard, of which $1.3 billion was included in prepaid expensesTax Cuts and other on the condensed consolidated balance sheet.
In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The standard requires that an employer continue to report the service cost component of net periodic benefit cost in the same income statement line item or items as other employee compensation costs arising from services rendered during the period. The other components of net periodic benefit cost are required to be presented separately outside of income from operations and are not eligible for capitalization. The standard will be effective for AbbVie starting with the first quarter of 2018. Upon adoption, the company will apply the income statement classification provisions of this standard retrospectively and preliminarily expects to reclassify income of approximately $50 million from operating earnings to non-operating income for the year ending December 31, 2017.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The standard simplifies the application of hedge accounting and more closely aligns the accounting with an entity’s risk management activities.Jobs Act. The standard will be effective for AbbVie starting with the first quarter of 2019, with early adoption permitted. AbbVie is currently assessing the impact and timing of adopting this guidance on its consolidated financial statements.
|
| |
2017 Form 10-Q | | 7 |
Note 2 Supplemental Financial Information
AbbVie recognizes revenue when control of promised goods or services is transferred to the company’s customers, in an amount that reflects the consideration AbbVie expects to be entitled to in exchange for those goods or services. Sales, value add and other taxes collected concurrent with revenue-producing activities are excluded from revenue. AbbVie generates revenue primarily from product sales. For the majority of sales, the company transfers control, invoices the customer and recognizes revenue upon shipment to the customer. The company recognizes shipping and handling costs as an expense in cost of products sold when the company transfers control to the customer. Payment terms vary depending on the type and location of the customer, are based on customary commercial terms and are generally less than one year. AbbVie does not adjust revenue for the effects of a significant financing component for contracts where AbbVie expects the period between the transfer of the good or service and collection to be one year or less.
Discounts, rebates, sales incentives to customers, returns and certain other adjustments are accounted for as variable consideration. Provisions for variable consideration are based on current pricing, executed contracts, government pricing legislation and historical data and are provided for in the period the related revenues are recorded. Rebate amounts are typically based upon the volume of purchases using contractual or statutory prices, which may vary by product and by payer. For each type of rebate, factors used in the calculation of the accrual include the identification of the products subject to the rebate, the applicable price terms and the estimated lag time between sale and payment of the rebate, which can be significant. Sales incentives to customers are insignificant.
|
| |
2018 Form 10-Q | | 8 |
In addition to revenue from contracts with customers, the company also recognizes certain collaboration revenues. See Note 6 for additional information related to the collaboration with Janssen Biotech, Inc. Additionally, see Note 14 for disaggregation of revenue by product and geography.
Note 3 Supplemental Financial Information
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended September 30, | | Nine months ended September 30, |
(in millions) | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Interest expense | | $ | 293 |
| | $ | 271 |
| | $ | 851 |
| | $ | 731 |
| | $ | 339 |
| | $ | 293 |
| | $ | 968 |
| | $ | 851 |
|
Interest income | | (41 | ) | | (21 | ) | | (99 | ) | | (56 | ) | | (37 | ) | | (41 | ) | | (143 | ) | | (99 | ) |
Interest expense, net | | $ | 252 |
| | $ | 250 |
| | $ | 752 |
| | $ | 675 |
| | $ | 302 |
| | $ | 252 |
| | $ | 825 |
| | $ | 752 |
|
| | (in millions) | September 30, 2017 | | December 31, 2016 | September 30, 2018 | | December 31, 2017 |
Finished goods | $ | 353 |
| | $ | 223 |
| $ | 522 |
| | $ | 610 |
|
Work-in-process | 1,271 |
| | 1,080 |
| 1,054 |
| | 822 |
|
Raw materials | 161 |
| | 141 |
| 210 |
| | 173 |
|
Inventories | $ | 1,785 |
| | $ | 1,444 |
| $ | 1,786 |
| | $ | 1,605 |
|
| | (in millions) | September 30, 2017 | | December 31, 2016 | September 30, 2018 | | December 31, 2017 |
Property and equipment, gross | $ | 7,894 |
| | $ | 7,526 |
| $ | 8,449 |
| | $ | 8,071 |
|
Accumulated depreciation | (5,197 | ) | | (4,922 | ) | (5,499 | ) | | (5,268 | ) |
Property and equipment, net | $ | 2,697 |
| | $ | 2,604 |
| $ | 2,950 |
| | $ | 2,803 |
|
Depreciation expense was $115 million for the three months and $349 million for the nine months ended September 30, 2018 and $111 million for the three months and $324 million for the nine months ended September 30, 2017 and $96 million for the three months and $307 million for the nine months ended September 30, 2016.2017.
|
| |
2017 Form 10-Q | | 8 |
Note 34 Earnings Per Share
AbbVie grants certain restricted stock awards (RSAs) and restricted stock units (RSUs) that are considered to be participating securities. Due to the presence of participating securities, AbbVie calculates earnings per share (EPS) using the more dilutive of the treasury stock or the two-class method. For all periods presented, the two-class method was more dilutive.
|
| |
2018 Form 10-Q | | 9 |
The following table summarizes the impact of the two-class method:
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended September 30, | | Nine months ended September 30, |
(in millions, except per share information) | | 2017 | | 2016 | | 2017 | | 2016 | |
(in millions, except per share data) | | | 2018 | | 2017 | | 2018 | | 2017 |
Basic EPS | | | | | | | | | | | | | | | | |
Net earnings | | $ | 1,631 |
| | $ | 1,598 |
| | $ | 5,257 |
| | $ | 4,562 |
| | $ | 2,747 |
| | $ | 1,631 |
| | $ | 7,513 |
| | $ | 5,257 |
|
Earnings allocated to participating securities | | 8 |
| | 8 |
| | 26 |
| | 23 |
| | 12 |
| | 8 |
| | 34 |
| | 26 |
|
Earnings available to common shareholders | | $ | 1,623 |
| | $ | 1,590 |
| | $ | 5,231 |
| | $ | 4,539 |
| | $ | 2,735 |
| | $ | 1,623 |
| | $ | 7,479 |
| | $ | 5,231 |
|
Weighted-average basic shares outstanding | | 1,597 |
| | 1,632 |
| | 1,596 |
| | 1,624 |
| | 1,511 |
| | 1,597 |
| | 1,556 |
| | 1,596 |
|
Basic earnings per share | | $ | 1.02 |
| | $ | 0.97 |
| | $ | 3.28 |
| | $ | 2.79 |
| | $ | 1.81 |
| | $ | 1.02 |
| | $ | 4.81 |
| | $ | 3.28 |
|
| | | | | | | | | | | | | | | | |
Diluted EPS | | | | | | | | | | | | | | | | |
Net earnings | | $ | 1,631 |
| | $ | 1,598 |
| | $ | 5,257 |
| | $ | 4,562 |
| | $ | 2,747 |
| | $ | 1,631 |
| | $ | 7,513 |
| | $ | 5,257 |
|
Earnings allocated to participating securities | | 8 |
| | 8 |
| | 26 |
| | 23 |
| | 12 |
| | 8 |
| | 34 |
| | 26 |
|
Earnings available to common shareholders | | $ | 1,623 |
| | $ | 1,590 |
| | $ | 5,231 |
| | $ | 4,539 |
| | $ | 2,735 |
| | $ | 1,623 |
| | $ | 7,479 |
| | $ | 5,231 |
|
Weighted-average shares of common stock outstanding | | 1,597 |
| | 1,632 |
| | 1,596 |
| | 1,624 |
| | 1,511 |
| | 1,597 |
| | 1,556 |
| | 1,596 |
|
Effect of dilutive securities | | 6 |
| | 8 |
| | 6 |
| | 9 |
| | 4 |
| | 6 |
| | 5 |
| | 6 |
|
Weighted-average diluted shares outstanding | | 1,603 |
| | 1,640 |
| | 1,602 |
| | 1,633 |
| | 1,515 |
| | 1,603 |
| | 1,561 |
| | 1,602 |
|
Diluted earnings per share | | $ | 1.01 |
| | $ | 0.97 |
| | $ | 3.27 |
| | $ | 2.78 |
| | $ | 1.81 |
| | $ | 1.01 |
| | $ | 4.79 |
| | $ | 3.27 |
|
Certain shares issuable under stock-based compensation plans were excluded from the computation of EPS because the effect would have been antidilutive. The number of common shares excluded werewas insignificant for all periods presented.
Note 4 5Licensing, Acquisitions and Other Arrangements
AcquisitionCash outflows related to acquisitions and investments totaled $541 million for the nine months ended September 30, 2018 and $180 million for the nine months ended September 30, 2017. AbbVie recorded $55 million acquired in-process research and development (IPR&D) charges for the three months ended September 30, 2018 and $124 million for the nine months ended September 30, 2018. Abbvie recorded no acquired IPR&D charges for the three months ended September 30, 2017 and recorded acquired IPR&D charges of Stemcentrx$15 million for the nine months ended September 30, 2017.
OnCalico Life Sciences LLC
In June 1, 2016,2018, AbbVie acquired alland Calico Life Sciences LLC (Calico) entered into an extension of a collaboration to discover, develop and bring to market new therapies for patients with age-related diseases, including neurodegeneration and cancer. Under the terms of the outstanding equity interestsagreement, AbbVie and Calico will each contribute an additional $500 million to the collaboration and the term is extended for an additional 3 years. Calico will be responsible for research and early development until 2022 and will advance collaboration projects through Phase 2a through 2027. Following completion of Phase 2a, AbbVie will have the option to exclusively license collaboration compounds. AbbVie will support Calico in Stemcentrx, a privately-held biotechnology company. The transaction expanded AbbVie’s oncology pipeline by adding theits early research and development efforts and, upon exercise, would be responsible for late-stage asset rovalpituzumab tesirine (Rova-T), four additional early-stage clinical compounds in solid tumor indications and a significant portfolio of pre-clinical assets. Rova-T is currently in registrational trials for small cell lung cancer.
The acquisition of Stemcentrx was accounted for as a business combination using the acquisition method of accounting. The aggregate upfront consideration for the acquisition of Stemcentrx consisted of approximately 62.4 million shares of AbbVie common stock, issued from common stock held in treasury, and cash. AbbVie may make certain contingent payments upon the achievement of defined development and regulatory milestones. As ofcommercial activities. Collaboration costs and profits will be shared equally by both parties post option exercise. During the acquisition date, the maximum aggregate amount payable for development and regulatory milestones was $4.0 billion. The acquisition-date fair value of these milestones was $620nine months ended September 30, 2018, AbbVie recorded $500 million and was estimated using a combination of probability-weighted discounted cash flow models and Monte Carlo simulation models. The estimate was determined based on significant inputs that are not observablein other expense in the market, referredcondensed consolidated statement of earnings related to as Level 3 inputs, as described in more detail in Note 8.
its commitments under the agreement.
|
| |
2017 Form 10-Q | | 9 |
The following table summarizes total consideration:
|
| | | |
(in millions) | |
Cash | $ | 1,883 |
|
Fair value of AbbVie common stock | 3,923 |
|
Contingent consideration | 620 |
|
Total consideration | $ | 6,426 |
|
The following table summarizes fair values of assets acquired and liabilities assumed as of the June 1, 2016 acquisition date:
|
| | | |
(in millions) | |
Assets acquired and liabilities assumed | |
Accounts receivable | $ | 1 |
|
Prepaid expenses and other | 7 |
|
Property and equipment | 17 |
|
Intangible assets - Indefinite-lived research and development | 6,100 |
|
Accounts payable and accrued liabilities | (31 | ) |
Deferred income taxes | (1,933 | ) |
Other long-term liabilities | (7 | ) |
Total identifiable net assets | 4,154 |
|
Goodwill | 2,272 |
|
Total assets acquired and liabilities assumed | $ | 6,426 |
|
Intangible assets were related to acquired in-process research and development (IPR&D) for Rova-T, four additional early-stage clinical compounds in solid tumor indications and several additional pre-clinical compounds. The estimated fair value of the acquired IPR&D was determined using the multi-period excess earnings model of the “income approach,” which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the more significant assumptions inherent in the development of those asset valuations include the estimated annual cash flows for each asset or product (including net revenues, cost of sales, research and development (R&D) costs, selling and marketing costs and working capital/contributory asset charges), the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, the regulatory approval probabilities, commercial success risks, competitive landscape as well as other factors.
The goodwill recognized represents expected synergies, including the ability to: (i) leverage the respective strengths of each business; (ii) expand the combined company’s product portfolio; (iii) accelerate AbbVie's clinical and commercial presence in oncology; and (iv) establish a strong leadership position in oncology. Goodwill was also impacted by the establishment of a deferred tax liability for the acquired identifiable intangible assets which have no tax basis. The goodwill is not deductible for tax purposes.
Pro Forma Financial Information
The following table presents the unaudited pro forma combined results of operations of AbbVie and Stemcentrx for the three and nine months ended September 30, 2016 as if the acquisition of Stemcentrx had occurred on January 1, 2015:
|
| | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(in millions, except per share information) | | 2016 | | 2016 |
Net revenues | | $ | 6,432 |
| | $ | 18,845 |
|
Net earnings | | 1,579 |
| | 4,515 |
|
Basic earnings per share | | $ | 0.97 |
| | $ | 2.72 |
|
Diluted earnings per share | | $ | 0.96 |
| | $ | 2.71 |
|
The unaudited pro forma financial information was prepared using the acquisition method of accounting and was based on the historical financial information of AbbVie and Stemcentrx. In order to reflect the occurrence of the acquisition on January 1, 2015 as
|
| |
20172018 Form 10-Q | | 10 |
required, the unaudited pro forma financial information includes adjustments to reflect the additional interest expense associated with the issuance of debt to finance the acquisition and the reclassification of acquisition, integration and financing-related costs incurred during 2016 to the three and nine months ended September 30, 2015. The unaudited pro forma financial information is not necessarily indicative of what the consolidated results of operations would have been had the acquisition been completed on January 1, 2015. In addition, the unaudited pro forma financial information is not a projection of the future results of operations of the combined company nor does it reflect the expected realization of any cost savings or synergies associated with the acquisition.
Acquisition of BI 655066 and BI 655064 from Boehringer Ingelheim
On April 1, 2016, AbbVie acquired all rights to risankizumab (BI 655066), an anti-IL-23 monoclonal biologic antibody in Phase 3 development for psoriasis, from Boehringer Ingelheim (BI) pursuant to a global collaboration agreement. AbbVie is also evaluating the potential of this biologic therapy in Crohn’s disease, psoriatic arthritis and asthma. In addition to risankizumab, AbbVie also gained rights to an anti-CD40 antibody, BI 655064, currently in Phase 1 development. BI will retain responsibility for further development of BI 655064, and AbbVie may elect to advance the program after completion of certain clinical achievements. The acquired assets include all patents, data, know-how, third-party agreements, regulatory filings and manufacturing technology related to BI 655066 and BI 655064.
The company concluded that the acquired assets met the definition of a business and accounted for the transaction as a business combination using the acquisition method of accounting. Under the terms of the agreement, AbbVie made an upfront payment of $595 million. Additionally, $18 million of payments to BI, pursuant to a contractual obligation to reimburse BI for certain development costs it incurred prior to the acquisition date, were initially deferred. AbbVie may make certain contingent payments upon the achievement of defined development, regulatory and commercial milestones, as well as royalty payments based on net revenues of licensed products. As of the acquisition date, the maximum aggregate amount payable for development and regulatory milestones was approximately $1.6 billion. The acquisition-date fair value of these milestones was $606 million. The acquisition-date fair value of contingent royalty payments was $2.8 billion. The potential contingent consideration payments were estimated by applying a probability-weighted expected payment model for contingent milestone payments and a Monte Carlo simulation model for contingent royalty payments, which were then discounted to present value. The fair value measurements were based on Level 3 inputs.
The following table summarizes total consideration:
|
| | | |
(in millions) | |
Cash | $ | 595 |
|
Deferred consideration payable | 18 |
|
Contingent consideration | 3,365 |
|
Total consideration | $ | 3,978 |
|
The following table summarizes fair values of assets acquired as of the April 1, 2016 acquisition date: |
| | | |
(in millions) | |
Assets acquired | |
Identifiable intangible assets - Indefinite-lived research and development | $ | 3,890 |
|
Goodwill | 88 |
|
Total assets acquired | $ | 3,978 |
|
The estimated fair value of the acquired IPR&D was determined using the multi-period excess earnings model of the “income approach.” The goodwill recognized represents expected synergies, including an expansion of the company’s immunology product portfolio.
Pro forma results of operations for this acquisition have not been presented because this acquisition is insignificant to AbbVie’s consolidated results of operations.
|
| |
2017 Form 10-Q | | 11 |
Other Licensing & Acquisitions Activity
Excluding the acquisitions above, cash outflows related to other acquisitions and investments totaled $180 million for the nine months ended September 30, 2017 and $172 million for the nine months ended September 30, 2016. AbbVie recorded no IPR&D charges for the three months ended September 30, 2017 and recorded IPR&D charges of $15 million for the nine months ended September 30, 2017. AbbVie recorded IPR&D charges of $80 million for the three months and $160 million for the nine months ended September 30, 2016.
In October 2017, AbbVie entered into a global strategic collaboration with Alector, Inc. (Alector) to develop and commercialize medicines to treat Alzheimer’s disease and other neurodegenerative disorders. AbbVie and Alector have agreed to research a portfolio of antibody targets and AbbVie has an option to global development and commercial rights to two targets. AbbVie will make an initial upfront payment of $205 million, which will be expensed to IPR&D in the fourth quarter of 2017. Alector will conduct exploratory research, drug discovery and development for lead programs up to the conclusion of the proof of concept studies. If the option is exercised, AbbVie will lead development and commercialization activities and could make additional payments to Alector of up to $986 million upon achievement of certain development and regulatory milestones. Alector and AbbVie will co-fund development and commercialization and will share global profits equally.
Note 5 6Collaboration with Janssen Biotech, Inc.
In December 2011, Pharmacyclics, a wholly-owned subsidiary of AbbVie, entered into a worldwide collaboration and license agreement with Janssen Biotech, Inc. and its affiliates (Janssen), one of the Janssen Pharmaceutical companies of Johnson & Johnson, for the joint development and commercialization of IMBRUVICA, a novel, orally active, selective covalent inhibitor of Bruton's tyrosine kinase (BTK) and certain compounds structurally related to IMBRUVICA, for oncology and other indications, excluding all immune and inflammatory mediated diseases or conditions and all psychiatric or psychological diseases or conditions, in the United States and outside the United States.
The collaboration provides Janssen with an exclusive license to commercialize IMBRUVICA outside of the United States and co-exclusively with AbbVie in the United States. Both parties are responsible for the development, manufacturing and marketing of any products generated as a result of the collaboration. The collaboration has no set duration or specific expiration date and provides for potential future development, regulatory and approval milestone payments of up to $200 million to AbbVie. The collaboration also includes a cost sharing arrangement for associated collaboration activities. Except in certain cases, Janssen is responsible for approximately 60% of collaboration development costs and AbbVie is responsible for the remaining 40% of collaboration development costs.
In the United States, both parties have co-exclusive rights to commercialize the products; however, AbbVie is the principal in the end customerend-customer product sales. AbbVie and Janssen share pre-tax profits and losses equally from the commercialization of products. Sales of IMBRUVICA are included in AbbVie's net revenues. Janssen's share of profits is included in AbbVie's cost of products sold. Other costs incurred under the collaboration are reported in their respective expense line items, net of Janssen's share.
Outside the United States, Janssen is responsible for and has exclusive rights to commercialize IMBRUVICA. AbbVie and Janssen share pre-tax profits and losses equally from the commercialization of products. AbbVie's share of profits is included in AbbVie's net revenues. Other costs incurred under the collaboration are reported in their respective expense line items, net of Janssen's share.
The following table shows the profit and cost sharing relationship between Janssen and AbbVie:
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended September 30, | | Nine months ended September 30, |
(in millions) | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
United States - Janssen's share of profits (included in cost of products sold) | | $ | 268 |
| | $ | 211 |
| | $ | 727 |
| | $ | 540 |
| | $ | 377 |
| | $ | 268 |
| | $ | 978 |
| | $ | 727 |
|
International - AbbVie's share of profits (included in net revenues) | | 114 |
| | 64 |
| | 306 |
| | 175 |
| | 160 |
| | 114 |
| | 455 |
| | 306 |
|
Global - AbbVie's share of other costs (included in respective line items) | | 75 |
| | 70 |
| | 209 |
| | 195 |
| | 81 |
| | 75 |
| | 232 |
| | 209 |
|
|
| |
2017 Form 10-QAbbVie’s receivable from Janssen, included in accounts receivable, net, was $177 million at September 30, 2018 and $124 million at December 31, 2017. AbbVie’s payable to Janssen, included in accounts payable and accrued liabilities, was $362 million at September 30, 2018 and $253 million at December 31, 2017. | | 12 |
Note 67 Goodwill and Intangible Assets
Goodwill
The following table summarizes the changes in the carrying amount of goodwill:
| | (in millions) | | |
Balance as of December 31, 2016 | $ | 15,416 |
| |
Balance as of December 31, 2017 | | $ | 15,785 |
|
Foreign currency translation adjustments | 332 |
| (67 | ) |
Balance as of September 30, 2017 | $ | 15,748 |
| |
Balance as of September 30, 2018 | | $ | 15,718 |
|
The latestcompany performs its annual goodwill impairment assessment of goodwill was completed in the third quarter of 2017. As of September 30, 2017, there were no accumulated goodwill impairment losses. Future impairment tests for goodwill will be performed annually in the third quarter, or earlier if impairment indicators exist. As of September 30, 2018, there were no accumulated goodwill impairment losses.
|
| |
2018 Form 10-Q | | 11 |
Intangible Assets, Net
The following table summarizes intangible assets:
| | | September 30, 2017 | | December 31, 2016 | September 30, 2018 | | December 31, 2017 |
(in millions) | Gross carrying amount | | Accumulated amortization | | Net carrying amount | | Gross carrying amount | | Accumulated amortization | | Net carrying amount | Gross carrying amount | | Accumulated amortization | | Net carrying amount | | Gross carrying amount | | Accumulated amortization | | Net carrying amount |
Definite-lived intangible assets | | | | | | | | | | | | | | | | | | | | | | |
Developed product rights | $ | 16,456 |
| | $ | (4,805 | ) | | $ | 11,651 |
| | $ | 16,464 |
| | $ | (4,256 | ) | | $ | 12,208 |
| $ | 15,877 |
| | $ | (5,394 | ) | | $ | 10,483 |
| | $ | 16,138 |
| | $ | (4,982 | ) | | $ | 11,156 |
|
License agreements | 7,869 |
| | (1,343 | ) | | 6,526 |
| | 7,809 |
| | (1,110 | ) | | 6,699 |
| 7,865 |
| | (1,713 | ) | | 6,152 |
| | 7,822 |
| | (1,409 | ) | | 6,413 |
|
Total definite-lived intangible assets | 24,325 |
| | (6,148 | ) | | 18,177 |
| | 24,273 |
| | (5,366 | ) | | 18,907 |
| 23,742 |
| | (7,107 | ) | | 16,635 |
| | 23,960 |
| | (6,391 | ) | | 17,569 |
|
Indefinite-lived research and development | 9,990 |
| | — |
| | 9,990 |
| | 9,990 |
| | — |
| | 9,990 |
| 9,990 |
| | — |
| | 9,990 |
| | 9,990 |
| | — |
| | 9,990 |
|
Total intangible assets, net | $ | 34,315 |
| | $ | (6,148 | ) | | $ | 28,167 |
| | $ | 34,263 |
| | $ | (5,366 | ) | | $ | 28,897 |
| $ | 33,732 |
| | $ | (7,107 | ) | | $ | 26,625 |
| | $ | 33,950 |
| | $ | (6,391 | ) | | $ | 27,559 |
|
Amortization expense was $320 million for the three months and $974 million for the nine months ended September 30, 2018 and $268 million for the three months and $808 million for the nine months ended September 30, 2017 and $208 million for the three months and $554 million for the nine months ended September 30, 2016.2017. Amortization expense was included in cost of products sold in the condensed consolidated statements of earnings.
For the nine months ended September 30, 2017, no impairment charges were recorded to intangible assets. For the nine months ended September 30, 2016, an impairment charge of $39 million was recorded related to certain developed product rights in the United States due to a decline in the market for the product. The fair value was determined based on a discounted cash flow analysis and the charge was included in cost of products sold in the condensed consolidated statement of earnings.
The indefinite-livedIndefinite-lived intangible assets represent acquired IPR&D associated with products that have not yet received regulatory approval. The indefinite-livedIndefinite-lived intangible assets as of September 30, 20172018 and December 31, 2016 primarily related2017 relate to the 2016 acquisitions of Stemcentrx and BIBoehringer Ingelheim compounds. See Note 4 for additional information. The latestcompany performs its annual impairment assessment of indefinite-lived intangible assets was completed in the third quarter, of 2017.or earlier if impairment indicators exist. No impairment charges were recorded for the nine months ended September 30, 20172018 and 2016. Future impairment tests for indefinite-lived intangible assets will be performed annually in the third quarter, or earlier if impairment indicators exist.2017.
|
| |
2017 Form 10-Q | | 13 |
Note 78 Restructuring Plans
AbbVie recorded restructuring charges of $22 million for the three months and $45 million for the nine months ended September 30, 2018 and $7 million for the three months and $34 million for the nine months ended September 30, 2017 and $5 million for the three months and $35 million for the nine months ended September 30, 2016.2017.
The following table summarizes the cash activity in the restructuring reserve for the nine months ended September 30, 2017:2018:
| | (in millions) | | |
Accrued balance as of December 31, 2016 | $ | 87 |
| |
Accrued balance as of December 31, 2017 | | $ | 86 |
|
Restructuring charges | 34 |
| 34 |
|
Payments and other adjustments | (65 | ) | (33 | ) |
Accrued balance as of September 30, 2017 | $ | 56 |
| |
Accrued balance as of September 30, 2018 | | $ | 87 |
|
Note 89 Financial Instruments and Fair Value Measures
Risk Management Policy
See Note 10 to the company's Annual Report on Form 10-K for the year ended December 31, 20162017 for a summary of AbbVie's risk management policy and use of derivative instruments.
Financial Instruments
Various AbbVie foreign subsidiaries enter into foreign currency forward exchange contracts to manage exposures to changes in foreign exchange rates for anticipated intercompany transactions denominated in a currency other than the functional currency of the local entity. These contracts, with notional amounts totaling $3.0$1.9 billion at September 30, 20172018 and $2.2 billion at December 31, 2016,2017, are designated as cash flow hedges and are recorded at fair value. The durations of these forward exchange contracts were
|
| |
2018 Form 10-Q | | 12 |
generally less than eighteen months. Accumulated gains and losses as of September 30, 20172018 will be reclassified from accumulated other comprehensive loss (AOCI)AOCI and included in cost of products sold at the time the products are sold, generally not exceeding six months from the date of settlement.
The company also enters into foreign currency forward exchange contracts to manage its exposure to foreign currency denominated trade payables and receivables and intercompany loans. These contracts are not designated as hedges and are recorded at fair value. Resulting gains or losses are reflected in net foreign exchange loss in the consolidated statements of earnings and are generally offset by losses or gains on the foreign currency exposure being managed. These contracts had notional amounts totaling $7.4$11.1 billion at September 30, 20172018 and $6.6$7.7 billion at December 31, 2016.2017.
The company also uses foreign currency forward exchange contracts or foreign currency denominated debt to hedge its net investments in certain foreign subsidiaries and affiliates. In the fourth quarter of 2016, theThe company issueddesignated €3.6 billion aggregate principal amount of senior Euro notes and designated the principal amounts of this foreign denominated debt as net investment hedges.hedges at September 30, 2018 and December 31, 2017. Realized and unrealized gains and losses from these hedges are included in AOCI.
AbbVie is a party to interest rate hedge contracts designated as fair value hedges with notional amounts totaling $11.8 billion at September 30, 20172018 and December 31, 2016.2017. The effect of the hedge contracts is to change a fixed-rate interest obligation to a floating rate for that portion of the debt. AbbVie records the contracts at fair value and adjusts the carrying amount of the fixed-rate debt by an offsetting amount.
|
| |
2017 Form 10-Q | | 14 |
No amounts are excluded from the assessment of effectiveness for cash flow hedges, net investment hedges or fair value hedges.
The following table summarizes the amounts and location of AbbVie’s derivative instruments on the condensed consolidated balance sheets:
| | | Fair value – Derivatives in asset position | | Fair value – Derivatives in liability position | Fair value – Derivatives in asset position | | Fair value – Derivatives in liability position |
(in millions) | Balance sheet caption | September 30, 2017 | December 31, 2016 | | Balance sheet caption | September 30, 2017 | December 31, 2016 | Balance sheet caption | September 30, 2018 | December 31, 2017 | | Balance sheet caption | September 30, 2018 | December 31, 2017 |
Foreign currency forward exchange contracts | | | | | | | | |
Designated as cash flow hedges | Prepaid expenses and other | $ | 1 |
| $ | 170 |
| | Accounts payable and accrued liabilities | $ | 150 |
| $ | 5 |
| Prepaid expenses and other | $ | 95 |
| $ | 1 |
| | Accounts payable and accrued liabilities | $ | 2 |
| $ | 120 |
|
Designated as cash flow hedges | Other assets | — |
| — |
| | Other long-term liabilities | 6 |
| — |
| Other assets | 3 |
| — |
| | Other long-term liabilities | — |
| — |
|
Not designated as hedges | Prepaid expenses and other | 52 |
| 55 |
| | Accounts payable and accrued liabilities | 47 |
| 33 |
| Prepaid expenses and other | 17 |
| 22 |
| | Accounts payable and accrued liabilities | 14 |
| 29 |
|
Interest rate swaps designated as fair value hedges | Other assets | — |
| — |
| | Other long-term liabilities | 295 |
| 338 |
| Prepaid expenses and other | — |
| — |
| | Accounts payable and accrued liabilities | 7 |
| 8 |
|
Interest rate swaps designated as fair value hedges | | Other assets | — |
| — |
| | Other long-term liabilities | 700 |
| 393 |
|
Total derivatives | | $ | 53 |
| $ | 225 |
| | $ | 498 |
| $ | 376 |
| | $ | 115 |
| $ | 23 |
| | $ | 723 |
| $ | 550 |
|
While certain derivatives are subject to netting arrangements with the company’s counterparties, the company does not offset derivative assets and liabilities within the condensed consolidated balance sheets.
The following table presents the pre-tax amounts of gains (losses) from derivative instruments recognized in other comprehensive income/income (loss):
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended September 30, | | Nine months ended September 30, |
(in millions) | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Foreign currency forward exchange contracts | | $ | (114 | ) | | $ | (5 | ) | | $ | (253 | ) | | $ | 7 |
| | $ | 1 |
| | $ | (114 | ) | | $ | 122 |
| | $ | (253 | ) |
The amount of hedge ineffectiveness was insignificant for all periods presented. Assuming market rates remain constant through contract maturities, the company expects to transfer pre-tax unrealized lossesgains of $117$63 million into cost of products sold for foreign currency cash flow hedges during the next 12 months.
|
| |
2018 Form 10-Q | | 13 |
Related to AbbVie’s non-derivative, foreign currency denominated debt designated as net investment hedges, the company recognized a pre-tax loss in other comprehensive income (loss) of $41 million for the three months and a pre-tax gain of $95 million for the nine months ended September 30, 2018 and recognized pre-tax losses in other comprehensive income (loss) of $142 million for the three months and $481 million for the nine months ended September 30, 2017.
The following table summarizes the pre-tax amounts and location of derivative instrument net gains (losses) recognized in the condensed consolidated statements of earnings, including the effective portions of the net gains (losses) reclassified out of AOCI into net earnings. See Note 1011 for the amount of net gains (losses) reclassified out of AOCI.
|
| | | | | | | | | | | | | | | | | |
| | | Three months ended September 30, | | Nine months ended September 30, |
(in millions) | Statement of earnings caption | | 2017 | | 2016 | | 2017 | | 2016 |
Foreign currency forward exchange contracts | | | | | | | | | |
Designated as cash flow hedges | Cost of products sold | | $ | 38 |
| | $ | 4 |
| | $ | 101 |
| | $ | 23 |
|
Not designated as hedges | Net foreign exchange loss | | (17 | ) | | (15 | ) | | (88 | ) | | (122 | ) |
Non-designated treasury rate lock agreements | Other expense, net | | — |
| | — |
| | — |
| | (12 | ) |
Interest rate swaps designated as fair value hedges | Interest expense, net | | 11 |
| | (49 | ) | | 43 |
| | 321 |
|
Total | | | $ | 32 |
| | $ | (60 | ) | | $ | 56 |
| | $ | 210 |
|
The gain (loss) related to outstanding interest rate swaps designated as fair value hedges is recognized in interest expense, net and directly offsets the (loss) gain on the underlying hedged item, the fixed-rate debt, resulting in no net impact to interest expense, net for all periods presented.
|
| |
2017 Form 10-Q | | 15 |
|
| | | | | | | | | | | | | | | | | |
| | | Three months ended September 30, | | Nine months ended September 30, |
(in millions) | Statement of earnings caption | | 2018 | | 2017 | | 2018 | | 2017 |
Foreign currency forward exchange contracts | | | | | | | | | |
Designated as cash flow hedges | Cost of products sold | | $ | (54 | ) | | $ | 38 |
| | $ | (144 | ) | | $ | 101 |
|
Not designated as hedges | Net foreign exchange loss | | 22 |
| | (17 | ) | | 91 |
| | (88 | ) |
Interest rate swaps designated as fair value hedges | Interest expense, net | | (63 | ) | | 11 |
| | (306 | ) | | 43 |
|
Debt designated as hedged item in fair value hedges | Interest expense, net | | 63 |
| | (11 | ) | | 306 |
| | (43 | ) |
Fair Value Measures
The fair value hierarchy consists of the following three levels:
Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets that the company has the ability to access;
Level 2 – Valuations based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuations in which all significant inputs are observable in the market; and
Level 3 – Valuations using significant inputs that are unobservable in the market and include the use of judgment by the company’s management about the assumptions market participants would use in pricing the asset or liability.
The following table summarizes the bases used to measure certain assets and liabilities carried at fair value on a recurring basis on the condensed consolidated balance sheet as of September 30, 2017:2018:
| | | | | Basis of fair value measurement | | | Basis of fair value measurement |
(in millions) | Total | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) | Total | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
Assets | | | | | | | | | | | | | | |
Cash and equivalents | $ | 8,446 |
| | $ | 669 |
| | $ | 7,777 |
| | $ | — |
| $ | 8,015 |
| | $ | 653 |
| | $ | 7,362 |
| | $ | — |
|
Time deposits | 500 |
| | — |
| | 500 |
| | — |
| 559 |
| | — |
| | 559 |
| | — |
|
Debt securities | 2,475 |
| | — |
| | 2,475 |
| | — |
| 1,591 |
| | — |
| | 1,591 |
| | — |
|
Equity securities | 57 |
| | 57 |
| | — |
| | — |
| 5 |
| | 5 |
| | — |
| | — |
|
Foreign currency contracts | 53 |
| | — |
| | 53 |
| | — |
| 115 |
| | — |
| | 115 |
| | — |
|
Total assets | $ | 11,531 |
| | $ | 726 |
| | $ | 10,805 |
| | $ | — |
| $ | 10,285 |
| | $ | 658 |
| | $ | 9,627 |
| | $ | — |
|
Liabilities | | | | | | | | | | | | | | |
Interest rate hedges | $ | 295 |
| | $ | — |
| | $ | 295 |
| | $ | — |
| $ | 707 |
| | $ | — |
| | $ | 707 |
| | $ | — |
|
Foreign currency contracts | 203 |
| | — |
| | 203 |
| | — |
| 16 |
| | — |
| | 16 |
| | — |
|
Contingent consideration | 4,455 |
| | — |
| | — |
| | 4,455 |
| 4,866 |
| | — |
| | — |
| | 4,866 |
|
Total liabilities | $ | 4,953 |
| | $ | — |
| | $ | 498 |
| | $ | 4,455 |
| $ | 5,589 |
| | $ | — |
| | $ | 723 |
| | $ | 4,866 |
|
|
| |
20172018 Form 10-Q | | 1614 |
The following table summarizes the bases used to measure certain assets and liabilities carried at fair value on a recurring basis on the condensed consolidated balance sheet as of December 31, 2016:2017:
| | | | | Basis of fair value measurement | | | Basis of fair value measurement |
(in millions) | Total | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) | Total | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
Assets | | | | | | | | | | | | | | |
Cash and equivalents | $ | 5,100 |
| | $ | 1,191 |
| | $ | 3,909 |
| | $ | — |
| $ | 9,303 |
| | $ | 849 |
| | $ | 8,454 |
| | $ | — |
|
Time deposits | 1,014 |
| | — |
| | 1,014 |
| | — |
| |
Debt securities | 1,974 |
| | — |
| | 1,974 |
| | — |
| 2,524 |
| | — |
| | 2,524 |
| | — |
|
Equity securities | 76 |
| | 76 |
| | — |
| | — |
| 4 |
| | 4 |
| | — |
| | — |
|
Foreign currency contracts | 225 |
| | — |
| | 225 |
| | — |
| 23 |
| | — |
| | 23 |
| | — |
|
Total assets | $ | 8,389 |
| | $ | 1,267 |
| | $ | 7,122 |
| | $ | — |
| $ | 11,854 |
| | $ | 853 |
| | $ | 11,001 |
| | $ | — |
|
Liabilities | | | | | | | | | | | | | | |
Interest rate hedges | $ | 338 |
| | $ | — |
| | $ | 338 |
| | $ | — |
| $ | 401 |
| | $ | — |
| | $ | 401 |
| | $ | — |
|
Foreign currency contracts | 38 |
| | — |
| | 38 |
| | — |
| 149 |
| | — |
| | 149 |
| | — |
|
Contingent consideration | 4,213 |
| | — |
| | — |
| | 4,213 |
| 4,534 |
| | — |
| | — |
| | 4,534 |
|
Total liabilities | $ | 4,589 |
| | $ | — |
| | $ | 376 |
| | $ | 4,213 |
| $ | 5,084 |
| | $ | — |
| | $ | 550 |
| | $ | 4,534 |
|
The fair values of time deposits approximate their amortized cost due to the short maturities of these instruments. The fair values of available-for-sale debt securities were determined based on prices obtained from commercial pricing services. Available-for-sale equity securities consists of investments for which the fair values were determined by using the published market price per unit multiplied by the number of units held, without consideration of transaction costs. The derivatives entered into by the company were valued using publicized spot curves for interest rate hedges and publicized forward curves for foreign currency contracts. The fair value measurements of the contingent consideration liabilities were determined based on significant unobservable inputs, including the discount rate, estimated probabilities and timing of achieving specified development, regulatory and commercial milestones and the estimated amount of future sales of the acquired products still in development. Changes to the fair value of the contingent consideration liabilities can result from changes to one or a number of inputs, including discount rates, the probabilities of achieving the milestones, the time required to achieve the milestones and estimated future sales. Significant judgment is employed in determining the appropriateness of these inputs. Changes to the inputs described above could have a material impact on the company's financial position and results of operations in any given period. At September 30, 2017,2018, a 50 basis point increase/decrease in the assumed discount rate would have decreased/increased the value of the contingent consideration liabilities by approximately $160$170 million. Additionally, at September 30, 2017,2018, a five percentage point increase/decrease in the assumed probability of success across all potential indications would have increased/decreased the value of the contingent consideration liabilities by approximately $340$410 million.
There have been no transfers of assets or liabilities between the fair value measurement levels. The following table presents the changes in fair value of contingent consideration liabilities which are measured using Level 3 inputs:
| | | | Nine months ended September 30, | | Nine months ended September 30, |
(in millions) | | 2017 | | 2016 | | 2018 | | 2017 |
Beginning balance | | $ | 4,213 |
| | $ | — |
| | $ | 4,534 |
| | $ | 4,213 |
|
Additions (see Note 4) | | — |
| | 3,985 |
| |
Change in fair value recognized in net earnings | | 547 |
| | 143 |
| | 432 |
| | 547 |
|
Milestone payments | | (305 | ) | | — |
| | (100 | ) | | (305 | ) |
Ending balance | | $ | 4,455 |
| | $ | 4,128 |
| | $ | 4,866 |
| | $ | 4,455 |
|
The change in fair value recognized in net earnings wasis recorded in other expense, net in the condensed consolidated statements of earnings for both the three and nine months ended September 30, 2017 and 2016.
earnings.
|
| |
20172018 Form 10-Q | | 1715 |
In addition to the financial instruments that the company carries at fair value on the condensed consolidated balance sheets, certain
Certain financial instruments are carried at historical cost or some basis other than fair value. The book values, approximate fair values and bases used to measure the approximate fair values of certain financial instruments as of September 30, 20172018 are shown in the table below:
| | | | | Basis of fair value measurement | | | Basis of fair value measurement |
(in millions) | Book Value | Approximate fair value | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) | Book value | Approximate fair value | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
Assets | | | | | | | | |
Investments | $ | 47 |
| $ | 47 |
| | $ | — |
| | $ | 2 |
| | $ | 45 |
| |
Total assets | $ | 47 |
| $ | 47 |
| | $ | — |
| | $ | 2 |
| | $ | 45 |
| |
Liabilities | | | | | | | | | | | | | | |
Short-term borrowings | $ | 800 |
| $ | 800 |
| | $ | — |
| | $ | 800 |
| | $ | — |
| $ | 3,002 |
| $ | 3,002 |
| | $ | — |
| | $ | 3,002 |
| | $ | — |
|
Current portion of long-term debt and lease obligations | 3,021 |
| 3,027 |
| | 3,004 |
| | 23 |
| | — |
| |
Current portion of long-term debt and lease obligations, excluding fair value hedges | | 1,026 |
| 1,025 |
| | 999 |
| | 26 |
| | — |
|
Long-term debt and lease obligations, excluding fair value hedges | 34,269 |
| 35,647 |
| | 33,575 |
| | 2,072 |
| | — |
| 37,187 |
| 36,392 |
| | 36,320 |
| | 72 |
| | — |
|
Total liabilities | $ | 38,090 |
| $ | 39,474 |
| | $ | 36,579 |
| | $ | 2,895 |
| | $ | — |
| $ | 41,215 |
| $ | 40,419 |
| | $ | 37,319 |
| | $ | 3,100 |
| | $ | — |
|
AbbVie also holds investments in equity securities that do not have readily determinable fair values. The company records these investments at cost and remeasures them to fair value based on certain observable price changes or impairment events as they occur. The carrying amount of these investments was $78 million as of September 30, 2018. No significant cumulative upward or downward adjustments have been recorded for these investments as of September 30, 2018. Prior to the adoption of ASU No. 2016-01 discussed in Note 1, these investments were accounted for under the cost method and disclosed in the table below as of December 31, 2017.
The book values, approximate fair values and bases used to measure the approximate fair values of certain financial instruments as of December 31, 20162017 are shown in the table below:
|
| | | | | | | | | | | | | | | | | | |
| | | | Basis of fair value measurement |
(in millions) | Book Value | Approximate fair value | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
Assets | | | | | | | | |
Investments | $ | 42 |
| $ | 42 |
| | $ | — |
| | $ | 5 |
| | $ | 37 |
|
Total assets | $ | 42 |
| $ | 42 |
| | $ | — |
| | $ | 5 |
| | $ | 37 |
|
Liabilities | | | | | | | | |
Short-term borrowings | $ | 377 |
| $ | 377 |
| | $ | — |
| | $ | 377 |
| | $ | — |
|
Current portion of long-term debt and lease obligations | 25 |
| 25 |
| | — |
| | 25 |
| | — |
|
Long-term debt and lease obligations, excluding fair value hedges | 36,778 |
| 36,664 |
| | 34,589 |
| | 2,075 |
| | — |
|
Total liabilities | $ | 37,180 |
| $ | 37,066 |
| | $ | 34,589 |
| | $ | 2,477 |
| | $ | — |
|
Investments primarily consist of cost method investments, for which the company takes into consideration recent transactions and financial information of the investee, which represents a Level 3 basis of fair value measurement. The fair values of short-term borrowings approximate the carrying values due to the short maturities of these instruments.
The fair values of long-term debt, excluding fair value hedges and the term loans, were determined by using the published market price for the debt instruments, without consideration of transaction costs, which represents a Level 1 basis of fair value measurement. The fair values of the term loans were determined based on a discounted cash flow analysis using quoted market rates, which represents a Level 2 basis of fair value measurement. The counterparties to financial instruments consist of select major international financial institutions.
|
| | | | | | | | | | | | | | | | | | |
| | | | Basis of fair value measurement |
(in millions) | Book value | Approximate fair value | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
Assets | | | | | | | | |
Investments | $ | 48 |
| $ | 48 |
| | $ | — |
| | $ | — |
| | $ | 48 |
|
Total assets | $ | 48 |
| $ | 48 |
| | $ | — |
| | $ | — |
| | $ | 48 |
|
Liabilities | | | | | | | | |
Short-term borrowings | $ | 400 |
| $ | 400 |
| | $ | — |
| | $ | 400 |
| | $ | — |
|
Current portion of long-term debt and lease obligations, excluding fair value hedges | 6,023 |
| 6,034 |
| | 4,004 |
| | 2,030 |
| | — |
|
Long-term debt and lease obligations, excluding fair value hedges | 31,346 |
| 32,846 |
| | 32,763 |
| | 83 |
| | — |
|
Total liabilities | $ | 37,769 |
| $ | 39,280 |
| | $ | 36,767 |
| | $ | 2,513 |
| | $ | — |
|
|
| |
20172018 Form 10-Q | | 1816 |
Available-for-sale Securities
Substantially all of the company’s investments in debt and equity securities were classified as available-for-sale.available-for-sale with changes in fair value recognized in other comprehensive income. Debt securities classified as short-term were $549$210 million as of September 30, 20172018 and $309$482 million as of December 31, 2016.2017. Long-term debt securities mature primarily within five years. Estimated fair values of available-for-sale debt securities were generally determined based on prices obtained from commercial pricing services.
The following table is a summary of available-for-sale securities by type as of September 30, 2017:2018:
| | | Amortized Cost | | Gross unrealized | | Fair Value | Amortized cost | | Gross unrealized | | Fair value |
(in millions) | | Gains | | Losses | | | Gains | | Losses | |
Asset backed securities | $ | 904 |
| | $ | 1 |
| | $ | (2 | ) | | $ | 903 |
| $ | 447 |
| | $ | — |
| | $ | (2 | ) | | $ | 445 |
|
Corporate debt securities | 1,424 |
| | 4 |
| | (1 | ) | | 1,427 |
| 1,050 |
| | 3 |
| | (3 | ) | | 1,050 |
|
Other debt securities | 145 |
| | — |
| | — |
| | 145 |
| 97 |
| | — |
| | (1 | ) | | 96 |
|
Equity securities | 18 |
| | 41 |
| | (2 | ) | | 57 |
| |
Total | $ | 2,491 |
| | $ | 46 |
| | $ | (5 | ) | | $ | 2,532 |
| $ | 1,594 |
| | $ | 3 |
| | $ | (6 | ) | | $ | 1,591 |
|
The following table is a summary of available-for-sale securities by type as of December 31, 2016:2017:
| | | Amortized Cost | | Gross unrealized | | Fair Value | Amortized cost | | Gross unrealized | | Fair value |
(in millions) | | Gains | | Losses | | | Gains | | Losses | |
Asset backed securities | $ | 891 |
| | $ | 1 |
| | $ | (4 | ) | | $ | 888 |
| $ | 930 |
| | $ | 1 |
| | $ | (3 | ) | | $ | 928 |
|
Corporate debt securities | 961 |
| | 1 |
| | (2 | ) | | 960 |
| 1,451 |
| | 4 |
| | (2 | ) | | 1,453 |
|
Other debt securities | 127 |
| | — |
| | (1 | ) | | 126 |
| 144 |
| | — |
| | (1 | ) | | 143 |
|
Equity securities | 18 |
| | 60 |
| | (2 | ) | | 76 |
| 4 |
| | 2 |
| | (2 | ) | | 4 |
|
Total | $ | 1,997 |
| | $ | 62 |
| | $ | (9 | ) | | $ | 2,050 |
| $ | 2,529 |
| | $ | 7 |
| | $ | (8 | ) | | $ | 2,528 |
|
AbbVie had no other-than-temporary impairments as of September 30, 2017.2018. Net realized gains (losses) were $39 millioninsignificant for the three months and $49 million for the nine months ended September 30, 2017. Net realized gains forboth the three and nine months ended September 30, 2016 were insignificant.2018 and 2017.
Concentrations of Risk
The functional currency of the company’s Venezuela operations is the U.S. dollar due to the hyperinflationary status of the Venezuelan economy. During the first quarter of 2016, in consideration of declining economic conditions in Venezuela and a decline in transactions settled at the official rate, AbbVie determined that its net monetary assets denominated in the Venezuelan bolivar (VEF) were no longer expected to be settled at the official rate of 10 VEF per U.S. dollar, but rather at the Divisa Complementaria (DICOM) rate. Therefore, during the first quarter of 2016, AbbVie recorded a charge of $298 million to net foreign exchange loss to revalue its bolivar-denominated net monetary assets using the DICOM rate then in effect of approximately 270 VEF per U.S. dollar. As of September 30, 2017 and December 31, 2016, AbbVie’s net monetary assets in Venezuela were insignificant.
AbbVie continues to do business with foreign governments in certain countries, including Greece, Portugal, Italy and Spain, which have historically experienced challenges in credit and economic conditions. Substantially all of AbbVie’s trade receivables in Greece, Portugal, Italy and Spain are with government health systems. Outstanding governmental receivables in these countries, net of allowances for doubtful accounts, totaled $246$270 million as of September 30, 20172018 and $244$255 million as of December 31, 2016.2017. The company also continues to do business with foreign governments in certain oil-exporting countries that have recently experienced a deterioration in economic conditions, including Saudi Arabia and Russia, which may result in delays in the collection of receivables. Outstanding governmental receivables related to Saudi Arabia, net of allowances for doubtful accounts, were $141$147 million as of September 30, 20172018 and $122$149 million as of December 31, 2016.2017. Outstanding governmental receivables related to Russia, net of allowances for doubtful accounts, were $142$104 million as of September 30, 20172018 and $110$152 million as of December 31, 2016.2017. Global economic conditions and customer-specific factors may require the company to periodically re-evaluate the collectability of its receivables and the company could potentially incur credit losses.
|
| |
2017 Form 10-Q | | 19 |
Of total net accounts receivable, three U.S. wholesalers accounted for 56%61% as of September 30, 20172018 and 51%56% as of December 31, 2016,2017, and substantially all of AbbVie’s net revenues in the United States were to these three wholesalers.
HUMIRA (adalimumab) is AbbVie’s single largest product and accounted for approximately 66%61% of AbbVie’s total net revenues for the nine months ended September 30, 20172018 and 63%66% for the nine months ended September 30, 2016.2017.
Debt and Credit Facilities
In September 2018, the company issued $6.0 billion aggregate principal amount of unsecured senior notes, consisting of $1.25 billion aggregate principal amount of 3.375% senior notes due 2021, $1.25 billion aggregate principal amount of 3.75% senior notes due 2023, $1.75 billion aggregate principal amount of 4.25% senior notes due 2028 and $1.75 billion aggregate principal amount of
|
| |
2018 Form 10-Q | | 17 |
4.875% senior notes due 2048. These senior notes rank equally with all other unsecured and unsubordinated indebtedness of the company. AbbVie may redeem the senior notes prior to maturity at a redemption price equal to the principal amount of the senior notes redeemed plus a make-whole premium and, except for the 3.375% notes due 2021, AbbVie may redeem the senior notes at par between one and six months prior to maturity. In connection with the offering, debt issuance costs incurred totaled $37 million and debt discounts totaled $37 million and are being amortized over the respective terms of the senior notes to interest expense, net in the condensed consolidated statements of earnings. Of the $5.9 billion net proceeds, $2.0 billion was used to repay the company's outstanding term loan that was due to mature in November 2018. The company intends to use the remaining proceeds to repay senior note obligations in 2018 and term loan obligations in 2019 as they become due.
In May 2018, the company also repaid $3.0 billion aggregate principal amount of 1.80% senior notes at maturity.
Short-Term Borrowings
Short-term borrowings included commercial paper borrowings of $800 million as of September 30, 2017 and $377$400 million as of December 31, 2016.2017. There were no commercial paper borrowings outstanding as of September 30, 2018. The weighted-average interest rate on commercial paper borrowings was 1.9% for the nine months ended September 30, 2018 and 1.2% for the nine months ended September 30, 20172017.
In August 2018, AbbVie replaced its existing revolving credit facility with a new $3.0 billion five-year revolving credit facility that matures in August 2023. The new facility enables the company to borrow funds on an unsecured basis at variable interest rates and 0.6% forcontains various covenants, all of which the nine months endedcompany was in compliance with as of September 30, 2016.2018.
In May 2018, AbbVie entered into a $3.0 billion 364-day term loan credit agreement (term loan). In June 2018, the company drew on this term loan and as of September 30, 2018, $3.0 billion was outstanding and was included in short-term borrowings on the condensed consolidated balance sheet. Borrowings under the term loan bear interest at one month LIBOR plus applicable margin. The term loan may be prepaid without penalty upon prior notice and contains customary covenants, all of which the company was in compliance with as of September 30, 2018.
Note 9 10Post-Employment Benefits
The following is a summary of net periodic benefit costscost relating to the company’s defined benefit and other post-employment plans:
| | | Defined benefit plans | | Other post- employment plans | Defined benefit plans | | Other post- employment plans |
| Three months ended September 30, | | Nine months ended September 30, | | Three months ended September 30, | | Nine months ended September 30, | Three months ended September 30, | | Nine months ended September 30, | | Three months ended September 30, | | Nine months ended September 30, |
(in millions) | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
Service cost | $ | 59 |
| | $ | 52 |
| | $ | 176 |
| | $ | 158 |
| | $ | 6 |
| | $ | 6 |
| | $ | 19 |
| | $ | 19 |
| $ | 70 |
| | $ | 59 |
| | $ | 214 |
| | $ | 176 |
| | $ | 7 |
| | $ | 6 |
| | $ | 20 |
| | $ | 19 |
|
Interest cost | 52 |
| | 50 |
| | 153 |
| | 151 |
| | 6 |
| | 6 |
| | 18 |
| | 18 |
| 57 |
| | 52 |
| | 171 |
| | 153 |
| | 6 |
| | 6 |
| | 18 |
| | 18 |
|
Expected return on plan assets | (96 | ) | | (88 | ) | | (286 | ) | | (266 | ) | | — |
| | — |
| | — |
| | — |
| (109 | ) | | (96 | ) | | (330 | ) | | (286 | ) | | — |
| | — |
| | — |
| | — |
|
Amortization of actuarial losses and prior service costs | 27 |
| | 22 |
| | 80 |
| | 64 |
| | 1 |
| | — |
| | 1 |
| | — |
| 38 |
| | 27 |
| | 114 |
| | 80 |
| | — |
| | 1 |
| | 1 |
| | 1 |
|
Net periodic benefit cost | $ | 42 |
| | $ | 36 |
| | $ | 123 |
| | $ | 107 |
| | $ | 13 |
| | $ | 12 |
| | $ | 38 |
| | $ | 37 |
| $ | 56 |
| | $ | 42 |
| | $ | 169 |
| | $ | 123 |
| | $ | 13 |
| | $ | 13 |
| | $ | 39 |
| | $ | 38 |
|
The components of net periodic benefit cost other than service cost are included in other expense, net in the condensed consolidated statements of earnings.
AbbVie's principal domestic defined benefit plan is the AbbVie Pension Plan. AbbVie made voluntary contributions to this plan of $150 million in both the nine months ended September 30, 2017 and 2016. |
| |
2018 Form 10-Q | | 18 |
Note 1011 Equity
Stock-Based Compensation
Stock-based compensation expense is principally related to awards issued pursuant to the AbbVie 2013 Incentive Stock Program and is summarized as follows:
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended September 30, | | Nine months ended September 30, |
(in millions) | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Cost of products sold | | $ | 7 |
| | $ | 6 |
| | $ | 20 |
| | $ | 19 |
| | $ | 7 |
| | $ | 7 |
| | $ | 23 |
| | $ | 20 |
|
Research and development | | 30 |
| | 6 |
| | 127 |
| | 161 |
| | 32 |
| | 30 |
| | 139 |
| | 127 |
|
Selling, general and administrative | | 34 |
| | 35 |
| | 141 |
| | 141 |
| | 36 |
| | 34 |
| | 189 |
| | 141 |
|
Pre-tax compensation expense | | 71 |
| | 47 |
| | 288 |
| | 321 |
| | 75 |
| | 71 |
| | 351 |
| | 288 |
|
Tax benefit | | 20 |
| | 13 |
| | 85 |
| | 83 |
| | 13 |
| | 20 |
| | 61 |
| | 85 |
|
After-tax compensation expense | | $ | 51 |
| | $ | 34 |
| | $ | 203 |
| | $ | 238 |
| | $ | 62 |
| | $ | 51 |
| | $ | 290 |
| | $ | 203 |
|
Stock Options
During the nine months ended September 30, 2017,2018, primarily in connection with the company's annual grant, AbbVie granted 1.20.6 million stock options with a weighted-average grant-date fair value of $9.80.$21.63. As of September 30, 2017, $202018, $8 million of unrecognized compensation cost related to stock options is expected to be recognized as expense over approximately the next two years.
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2017 Form 10-Q | | 20 |
RSAs, RSUs and Performance Shares
During the nine months ended September 30, 2017,2018, primarily in connection with the company's annual grant, AbbVie granted 6.13.9 million RSUs and performance shares with a weighted-average grant-date fair value of $61.68.$114.37. As of September 30, 2017, $2922018, $331 million of unrecognized compensation cost related to RSAs, RSUs and performance shares is expected to be recognized as expense over approximately the next two years.
Cash Dividends
The following table summarizes quarterly cash dividends declared during 20172018 and 2016:2017:
|
| | | | | | | | | | | | | | |
2017 | | 2016 |
Date Declared | | Payment Date | | Dividend Per Share | | Date Declared | | Payment Date | | Dividend Per Share |
10/27/17 | | 02/15/18 | | $ | 0.71 |
| | 10/28/16 | | 02/15/17 | | $ | 0.64 |
|
09/08/17 | | 11/15/17 | | $ | 0.64 |
| | 09/09/16 | | 11/15/16 | | $ | 0.57 |
|
06/22/17 | | 08/15/17 | | $ | 0.64 |
| | 06/16/16 | | 08/15/16 | | $ | 0.57 |
|
02/16/17 | | 05/15/17 | | $ | 0.64 |
| | 02/18/16 | | 05/16/16 | | $ | 0.57 |
|
|
| | | | | | | | | | | | | | |
2018 | | 2017 |
Date Declared | | Payment Date | | Dividend Per Share | | Date Declared | | Payment Date | | Dividend Per Share |
11/02/18 | | 02/15/19 | | $ | 1.07 |
| | 10/27/17 | | 02/15/18 | | $ | 0.71 |
|
09/07/18 | | 11/15/18 | | $ | 0.96 |
| | 09/08/17 | | 11/15/17 | | $ | 0.64 |
|
06/14/18 | | 08/15/18 | | $ | 0.96 |
| | 06/22/17 | | 08/15/17 | | $ | 0.64 |
|
02/15/18 | | 05/15/18 | | $ | 0.96 |
| | 02/16/17 | | 05/15/17 | | $ | 0.64 |
|
Stock Repurchase Program
On February 16, 2017,15, 2018, AbbVie's board of directors authorized a $5.0new $10.0 billion increase tostock repurchase program, which superseded AbbVie's existingprevious stock repurchase program. The new stock repurchase authorizationprogram permits purchases of AbbVie shares from time to time in open-market or private transactions, including accelerated share repurchases, at management's direction depending on the company's cash flows, net debt level and market conditions.discretion. The program has no time limit and can be discontinued at any time. Shares repurchased under this program are recorded at acquisition cost, including related expenses, and are available for general corporate purposes.
Under the new authorization, AbbVie repurchased approximately 7.883.2 million shares for $8.5 billion during the nine months ended September 30, 2018. AbbVie's remaining stock repurchase authorization was $1.5 billion as of September 30, 2018.
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2018 Form 10-Q | | 19 |
Prior to the new $10.0 billion authorization, AbbVie repurchased 10.9 million shares in the open market for $500 million$1.3 billion during the nine months ended September 30, 2017. During the nine months ended September 30, 2017, AbbVie cash-settled $285 million of its open market purchases made at the end of 2016. AbbVie's remaining stock repurchase authorization was $4.5 billion as of September 30, 2017.2018.
Accumulated Other Comprehensive Loss
The following table summarizes the changes in each component of accumulated other comprehensive loss, net of tax, for the nine months ended September 30, 2017:2018:
| | (in millions) | Foreign currency translation adjustments | | Net investment hedging activities | | Pension and post- employment benefits | | Marketable security activities | | Cash flow hedging activities | | Total | Foreign currency translation adjustments | | Net investment hedging activities | | Pension and post- employment benefits | | Marketable security activities | | Cash flow hedging activities | | Total |
Balance as of December 31, 2016 | $ | (1,435 | ) | | $ | 140 |
| | $ | (1,513 | ) | | $ | 46 |
| | $ | 176 |
| | $ | (2,586 | ) | |
Balance as of December 31, 2017 | | $ | (439 | ) | | $ | (203 | ) | | $ | (1,919 | ) | | $ | — |
| | $ | (166 | ) | | $ | (2,727 | ) |
Other comprehensive income (loss) before reclassifications | 602 |
| | (307 | ) | | (37 | ) | | 31 |
| | (229 | ) | | 60 |
| (250 | ) | | 73 |
| | 7 |
| | (6 | ) | | 110 |
| | (66 | ) |
Net losses (gains) reclassified from accumulated other comprehensive loss | — |
| | — |
| | 58 |
| | (49 | ) | | (96 | ) | | (87 | ) | |
Net losses reclassified from accumulated other comprehensive loss | | — |
| | — |
| | 92 |
| | 4 |
| | 138 |
| | 234 |
|
Net current-period other comprehensive income (loss) | 602 |
| | (307 | ) | | 21 |
| | (18 | ) | | (325 | ) | | (27 | ) | (250 | ) | | 73 |
| | 99 |
| | (2 | ) | | 248 |
| | 168 |
|
Balance as of September 30, 2017 | $ | (833 | ) | | $ | (167 | ) | | $ | (1,492 | ) | | $ | 28 |
| | $ | (149 | ) | | $ | (2,613 | ) | |
Balance as of September 30, 2018 | | $ | (689 | ) | | $ | (130 | ) | | $ | (1,820 | ) | | $ | (2 | ) | | $ | 82 |
| | $ | (2,559 | ) |
Other comprehensive income for the nine months ended September 30, 2018 included foreign currency translation adjustments totaling a loss of $250 million, which was principally due to the weakening of the Euro in the nine months ended September 30, 2018 on the translation of the company’s assets denominated in the Euro.
The following table summarizes the changes in each component of accumulated other comprehensive loss, net of tax, for the nine months ended September 30, 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Foreign currency translation adjustments | | Net investment hedging activities | | Pension and post- employment benefits | | Marketable security activities | | Cash flow hedging activities | | Total |
Balance as of December 31, 2016 | $ | (1,435 | ) | | $ | 140 |
| | $ | (1,513 | ) | | $ | 46 |
| | $ | 176 |
| | $ | (2,586 | ) |
Other comprehensive income (loss) before reclassifications | 602 |
| | (307 | ) | | (37 | ) | | 31 |
| | (229 | ) | | 60 |
|
Net losses (gains) reclassified from accumulated other comprehensive loss | — |
| | — |
| | 58 |
| | (49 | ) | | (96 | ) | | (87 | ) |
Net current-period other comprehensive income (loss) | 602 |
| | (307 | ) | | 21 |
| | (18 | ) | | (325 | ) | | (27 | ) |
Balance as of September 30, 2017 | $ | (833 | ) | | $ | (167 | ) | | $ | (1,492 | ) | | $ | 28 |
| | $ | (149 | ) | | $ | (2,613 | ) |
Other comprehensive loss for the nine months ended September 30, 2017 included foreign currency translation adjustments totaling a gain of $602 million, which was principally due to the impact of the improvement in the Euro in the nine months ended September 30, 2017 on the translation of the company’s assets denominated in the Euro.
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20172018 Form 10-Q | | 2120 |
The following table summarizes the changes in each component of accumulated other comprehensive loss, net of tax, for the nine months ended September 30, 2016:
|
| | | | | | | | | | | | | | | | | | | |
(in millions) | Foreign currency translation adjustments | | Pension and post- employment benefits | | Marketable security activities | | Cash flow hedging activities | | Total |
Balance as of December 31, 2015 | $ | (1,270 | ) | | $ | (1,378 | ) | | $ | 47 |
| | $ | 40 |
| | $ | (2,561 | ) |
Other comprehensive income before reclassifications | 164 |
| | 7 |
| | 23 |
| | 13 |
| | 207 |
|
Net losses (gains) reclassified from accumulated other comprehensive loss | — |
| | 41 |
| | (4 | ) | | (23 | ) | | 14 |
|
Net current-period other comprehensive income (loss) | 164 |
| | 48 |
| | 19 |
| | (10 | ) | | 221 |
|
Balance as of September 30, 2016 | $ | (1,106 | ) | | $ | (1,330 | ) | | $ | 66 |
| | $ | 30 |
| | $ | (2,340 | ) |
Other comprehensive income for the nine months ended September 30, 2016 included foreign currency translation adjustments totaling a gain of $164 million, which was principally due to the impact of the improvement in the Euro and Japanese yen in the nine months ended September 30, 2016 on the translation of the company’s assets denominated in the Euro and Japanese yen.
The table below presents the impact on AbbVie’s condensed consolidated statements of earnings for significant amounts reclassified out of each component of AOCI:accumulated other comprehensive loss:
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended September 30, | | Nine months ended September 30, |
(in millions) (brackets denote gains) | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Pension and post-employment benefits | | | | | | | | | | | | | | | | |
Amortization of actuarial losses and other(a) | | $ | 28 |
| | $ | 22 |
| | $ | 81 |
| | $ | 64 |
| | $ | 38 |
| | $ | 28 |
| | $ | 115 |
| | $ | 81 |
|
Tax benefit | | (8 | ) | | (8 | ) | | (23 | ) | | (23 | ) | | (8 | ) | | (8 | ) | | (23 | ) | | (23 | ) |
Total reclassifications, net of tax | | $ | 20 |
| | $ | 14 |
| | $ | 58 |
| | $ | 41 |
| | $ | 30 |
| | $ | 20 |
| | $ | 92 |
| | $ | 58 |
|
Cash flow hedging activities | | | | | | | | | | | | | | | | |
Gains on designated cash flow hedges(b) | | $ | (38 | ) | | $ | (2 | ) | | $ | (101 | ) | | $ | (21 | ) | |
Losses (gains) on designated cash flow hedges(b) | | | $ | 54 |
| | $ | (38 | ) | | $ | 144 |
| | $ | (101 | ) |
Tax expense (benefit) | | — |
| | (2 | ) | | 5 |
| | (2 | ) | | — |
| | — |
| | (6 | ) | | 5 |
|
Total reclassifications, net of tax | | $ | (38 | ) | | $ | (4 | ) | | $ | (96 | ) | | $ | (23 | ) | | $ | 54 |
| | $ | (38 | ) | | $ | 138 |
| | $ | (96 | ) |
(a) Amounts are included in the computation of net periodic benefit cost (see Note 9)10).
(b) Amounts are included in cost of products sold (see Note 8)9).
Note 1112 Income Taxes
The effective tax rate was 1% for the three and nine months ended September 30, 2018 and 22% for the three months and 20% for the nine months ended September 30, 2017 and 21% for the three months and 22% for the nine months ended September 30, 2016.2017. The effective tax rate in each period differed from the U.S. statutory tax raterates of 21% in 2018 and 35% in 2017, principally due to the benefit from foreign operations which reflects the impact of lower income tax rates in locations outside the United States, tax exemptions and incentives in Puerto Rico and other foreign tax jurisdictions and business development activities together with the cost of repatriation decisions. activities.
The change in the effective tax rate for both the three and nine months ended September 30, 20172018 over the prior year was principally due to the effects of the enactment of the Tax Cuts and Jobs Act (the “Act”) in December 2017. The Act significantly changes in the jurisdictional mixU.S. corporate tax system, reducing the U.S. federal corporate tax rate from 35% to 21%, requiring companies to pay a one-time transition tax on a mandatory deemed repatriation of earnings of certain foreign subsidiaries that were previously untaxed and creating new taxes on certain foreign sourced earnings. The Act also creates a territorial tax system that generally excludes dividends from foreign subsidiaries from U.S. taxation. Specific to 2018, there is a beneficial impact due to timing of provisions related to the earnings from certain foreign subsidiaries.
Given the complexity of the Act and anticipated guidance from the U.S. Treasury about implementing the Act, the company’s analysis and accounting for the tax effects of the enactment of the Act is preliminary. In the fourth quarter of 2017, the company recorded, as a direct result of the Act, $4.5 billion of transition tax expense, as well as $4.1 billion of net tax benefit for deferred tax remeasurement. Both of these amounts are provisional estimates, as the company has not fully completed its analysis and calculation of foreign earnings subject to the transition tax or its analysis of certain discrete factors and events, including collaborations, the impactother aspects of the prior year non-deductible devaluation loss relatedAct that could result in adjustments to Venezuelathe remeasurement of deferred tax balances. Upon completion of the analysis in 2018, these estimates may be adjusted through income tax expense in the consolidated statement of earnings. No adjustments to these provisional estimates were made during the three and nine months ended September 30, 2018. The Act also created a minimum tax on certain foreign sourced earnings. The taxability of the foreign sourced earnings and the impactapplicable tax rates are dependent on future events. While the company is still evaluating its accounting policy for the minimum tax on foreign sourced earnings, the provisional estimates of the adoptiontax effects of ASU No. 2016-09, which changed the accounting treatment for excessAct were reported on the basis that the minimum tax benefits associated with stock-based awards. See Note 1 for additional information related towill be recognized in tax expense in the adoption of this accounting pronouncement.year it is incurred as a period expense.
Due to the potential for resolution of federal, state and foreign examinations and the expiration of various statutes of limitations, it is reasonably possible that the company’s gross unrecognized tax benefits balance may change within the next twelve months by up to $246$550 million. At the time of separation, AbbVie and Abbott Laboratories (Abbott) entered into a tax sharing agreement which provides that Abbott is liable for and has indemnified AbbVie against all income tax liabilities for periods prior to the separation.
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2017 Form 10-Q | | 22 |
Accordingly, Abbott will indemnify and hold AbbVie harmless if the tax positions are settled for amounts in excess of recorded liabilities, and AbbVie will not benefit if prior tax positions are resolved more favorably than recorded amounts.
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2018 Form 10-Q | | 21 |
Note 1213 Legal Proceedings and Contingencies
AbbVie is subject to contingencies, such as various claims, legal proceedings and investigations regarding product liability, intellectual property, commercial, securities and other matters that arise in the normal course of business. Loss contingency provisions are recorded for probable losses at management’s best estimate of a loss, or when a best estimate cannot be made, a minimum loss contingency amount within a probable range is recorded. The recorded accrual balance for litigation was approximately $215$770 million as of September 30, 20172018 and $225$445 million as of December 31, 2016.2017. Initiation of new legal proceedings or a change in the status of existing proceedings may result in a change in the estimated loss accrued by AbbVie. While it is not feasible to predict the outcome of all proceedings and exposures with certainty, management believes that their ultimate disposition should not have a material adverse effect on AbbVie’s consolidated financial position, results of operations or cash flows.
Subject to certain exceptions specified in the separation agreement by and between Abbott and AbbVie, AbbVie assumed the liability for, and control of, all pending and threatened legal matters related to its business, including liabilities for any claims or legal proceedings related to products that had been part of its business, but were discontinued prior to the distribution, as well as assumed or retained liabilities, and will indemnify Abbott for any liability arising out of or resulting from such assumed legal matters.
Several pending lawsuits filed against Unimed Pharmaceuticals, Inc., Solvay Pharmaceuticals, Inc. (a company Abbott acquired in February 2010 and now known as AbbVie Products LLC) and others are consolidated for pre-trial purposes in the United States District Court for the Northern District of Georgia under the Multi-District Litigation (MDL) Rules as In re: AndroGel Antitrust Litigation, MDL No. 2084. These cases, brought by private plaintiffs and the Federal Trade Commission (FTC), generally allege Solvay's patent litigation involving AndroGel was sham litigation and the 2006 patent litigation settlement agreements and related agreements with three generic companies violate federal antitrust laws. Plaintiffs generally seek monetary damages and/or injunctive relief and attorneys' fees. These cases include: (a) four individual plaintiff lawsuits; (b) three purported class actions; and (c) Federal Trade Commission v. Actavis, Inc. et al. Following the district court's dismissal of all plaintiffs' claims, appellate proceedings led to the reinstatement of the claims regarding the patent litigation settlements, which are proceeding in the district court. In July 2018, the court denied the plaintiffs' motion for class certification.
Lawsuits are pending against AbbVie and others generally alleging that the 2005 patent litigation settlement involving Niaspan entered into between Kos Pharmaceuticals, Inc. (a company acquired by Abbott in 2006 and presently a subsidiary of AbbVie) and a generic company violates federal and state antitrust laws and state unfair and deceptive trade practices and unjust enrichment laws. Plaintiffs generally seek monetary damages and/or injunctive relief and attorneys' fees. The lawsuits consist of four individual plaintiff lawsuits and two consolidated purported class actions: one brought by three named direct purchasers of Niaspan and the other brought by ten named end-payorend-payer purchasers of Niaspan. The cases are consolidated for pre-trial proceedings in the United States District Court for the Eastern District of Pennsylvania under the MDL Rules as In re: Niaspan Antitrust Litigation, MDL No. 2460. In October 2016, the Orange County, California District Attorney’s Office filed a lawsuit on behalf of the State of California filed a lawsuit regarding the Niaspan patent litigation settlement in Orange County Superior Court, asserting a claim under the unfair competition provision of the California Business and Professions Code seeking injunctive relief, restitution, civil penalties and attorneys’ fees. In May 2018, the California Court of Appeals ruled that the District Attorney’s Office may not bring monetary claims beyond the scope of Orange County.
In September 2014, the FTC filed suita lawsuit against AbbVie and others in the United States District Court for the Eastern District of Pennsylvania, against AbbVie and others, alleging that the 2011 patent litigation with two generic companies regarding AndroGel was sham litigation and the patentsettlements of that litigation settlement with one of those generic companies violatesviolated federal antitrust laws. The FTC's complaint seeks monetary damages and injunctive relief.law. In May 2015, the court dismissed the FTC'sFTC’s settlement-related claim. In June 2018, following a bench trial, the court found for the FTC on its sham litigation claim regardingand ordered a disgorgement remedy of $448 million, plus prejudgment interest. The court denied the patentFTC’s request for injunctive relief. AbbVie is appealing the court’s liability and disgorgement rulings and, based on an assessment of the merits of that appeal, no liability has been accrued for this matter. The FTC is also appealing aspects of the court’s trial ruling and the dismissal of its settlement-related claim. In July and August 2018, several direct AndroGel purchasers brought two individual and one class action cases in the United States District Court for the Eastern District of Pennsylvania alleging sham litigation settlement.based on the court’s trial ruling in the FTC’s case. Those cases are stayed pending the appeals in the FTC’s case.
In March 2015, the State of Louisiana filed a lawsuit, State of Louisiana v. Fournier Industrie et Sante, et al., against AbbVie, Abbott and affiliated Abbott entities in Louisiana state court. Plaintiff alleges that patent applications and patent litigation filed and other alleged conduct from the early 2000's and before related to the drug TriCor violated Louisiana State antitrust and unfair trade practices laws. The lawsuit seeks monetary damages and attorneys' fees. In August 2015, the court dismissed the case as time-barred. In December 2016, the appellate court for the state’s appeal remanded for the trial court to determine whether the state is a proper party in interest. On remand, the trial court denied AbbVie’s motion to dismiss.
In August 2013, a putative class action lawsuit, Sidney Hillman Health Center of Rochester, et al. v. AbbVie Inc., et al., was filed against AbbVie in the United States District Court for the Northern District of Illinois by three healthcare benefit providers alleging violations
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20172018 Form 10-Q | | 2322 |
of Federal Racketeer Influenced and Corrupt Organizations (RICO) statutes and state deceptive business practice and unjust enrichment laws in connection with reimbursements for certain uses of Depakote from 1998 to 2012. Plaintiffs seek monetary damages and/or equitable relief and attorneys' fees. In February 2017, the court dismissed this lawsuit with prejudice and in October 2017, the United States Court of Appeals for the Seventh Circuit affirmed the dismissal.
In November 2014, a putative class action lawsuit, Medical Mutual of Ohio v. AbbVie Inc., et al., was filed against several manufacturers of testosterone replacement therapies (TRTs), including AbbVie, in the United States District Court for the Northern District of Illinois on behalf of all insurance companies, health benefit providers, and other third party payorspayers who paid for TRTs, including AndroGel. The claims asserted include violations of the federal RICO Act and state consumer fraud and deceptive trade practices laws. The complaint seeks monetary damages and injunctive relief. A similar lawsuit, Allied Services Division Welfare Fund v. AbbVie Inc., et al., filed inIn July 2018, the same court in October 2015 on behalf ofdenied the same putativeplaintiff’s motion for class members and a putative class of consumers, was voluntarily dismissed in September 2017.certification.
Product liability cases are pending in which plaintiffs generally allege that AbbVie and other manufacturers of TRTs did not adequately warn about risks of certain injuries, primarily heart attacks, strokes and blood clots. Approximately 4,3004,067 claims are consolidated for pre-trial purposes in the United States District Court for the Northern District of Illinois under the MDL Rules as In re: Testosterone Replacement Therapy Products Liability Litigation, MDL No. 2545. Approximately 210205 claims against AbbVie are pending in various state courts. Plaintiffs generally seek compensatory and punitive damages. In July 2017, a jurySix cases have gone to trial. Four of those have resulted in complete verdicts for AbbVie: three by juries in the United States District Court for the Northern District of Illinois reached a verdict in the first case to be tried. The jury found for AbbVie on the plaintiff's strict liabilityJanuary, May, and negligence claimsJune 2018, and for the plaintiff on the plaintiff's fraud claim, but awarded no compensatory damages. The jury's award of $150 million in punitive damages without an underlying compensatory damage award will be subject to post-trial briefing. AbbVie expects the punitive damage award will not stand. In August 2017,one by a jury in the Circuit Court of Cook County, Illinois reached a verdict for AbbVie on all claims. In October 2017, a juryCircuit Court in August 2017. Another case in the United States District Court for the Northern District of Illinois resulted in a jury verdict for AbbVie on two claims and for the plaintiff on one claim and an award of $150 million in punitive damages with no compensatory damages in July 2017. In orders from December 2017 and February 2018, the court vacated that verdict and ordered a new trial. In the March 2018 retrial, the jury reached a verdict for AbbVie on strict liability butand fraud and for the plaintiff on negligence and awarded $200,000 in compensatory damages and $3 million in punitive damages, which is the subject of post-trial proceedings. Another case in the United States District Court for the Northern District of Illinois resulted in a jury verdict for AbbVie on strict liability and for the plaintiff on remaining claims and awardedan award of $140,000 in compensatory damages and $140 million in punitive damages which will bein August 2017. In July 2018, the court vacated that verdict and ordered a new trial. In September 2018, AbbVie entered into a confidential term sheet with representatives of the Plaintiffs’ Steering Committee in the MDL proceeding for the settlement of existing claims in all courts. That settlement is subject to the execution of post-trial proceedings.a definitive settlement agreement and other contingencies.
Product liability cases are pending in which plaintiffs generally allege that AbbVie did not adequately warn about risk of certain injuries, primarily various birth defects, arising from use of Depakote. Over ninety percent of the approximately 625595 claims are pending in the United States District Court for the Southern District of Illinois, and the rest are pending in various other federal and state courts. Plaintiffs generally seek compensatory and punitive damages. Over ninety percent of the claims pending in all courts, plus other unfiled claims, are subject to confidential settlement agreements and are expected to be dismissed with prejudice.
In November 2014, five individuals filed a putative class action lawsuit, Rubinstein, et al. v Gonzalez, et al., on behalf of purchasers and sellers of certain Shire plc (Shire) securities between June 20 and October 14, 2014, against AbbVie and its chief executive officer in the United States District Court for the Northern District of Illinois alleging that the defendants made and/or are responsible for material misstatements in violation of federal securities laws in connection with AbbVie's proposed transaction with Shire.
In June 2016, a lawsuit, Elliott Associates, L.P., et al. v. AbbVie Inc., was filed by five investment funds against AbbVie in the Cook County, Illinois Circuit Court alleging that AbbVie made misrepresentations and omissions in connection with its proposed transaction with Shire. Similar lawsuits were filed between July 2017 and September 2017October 2018 against AbbVie and in some instances its chief executive officer in the same court by twelve additional investment funds. Plaintiffs seek compensatory and punitive damages.
In May 2017, a shareholder derivative lawsuit, Ellis v. Gonzalez, et al., was filed in Delaware Chancery Court, alleging that AbbVie's directors breached their fiduciary duties in connection with statements made regarding the Shire transaction. The lawsuit seekssought unspecified compensatory damages for AbbVie, among other relief. In July 2018, the court dismissed this case with prejudice. In August 2018, plaintiff appealed that dismissal to the Delaware Supreme Court.
In September 2018, the Commissioner of the California Department of Insurance intervened in a qui tam lawsuit, State of California and Lazaro Suarez v. AbbVie Inc., et al., brought under the California Insurance Frauds Prevention Act, in California Superior Court for Alameda County. The Department of Insurance’s complaint alleges that, through patient and reimbursement support services and other services and items of value provided in connection with HUMIRA, AbbVie caused the submission of fraudulent commercial insurance claims for HUMIRA in violation of the California statute. The complaint seeks injunctive relief, an assessment of up to three times the amount of the claims at issue, and civil penalties. In addition, two federal securities lawsuits were filed in September (Pippins v. AbbVie Inc., et al., in the United States District Court for the Central District of California) and October (Holwill v. AbbVie Inc., et al., in the United States District Court for the Northern District of Illinois) against AbbVie, its chief executive officer and then-chief financial officer, alleging that reasons stated for HUMIRA sales growth in financial filings between 2013 and 2017 were misleading because they omitted the conduct alleged in the Department of Insurance’s complaint.
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2018 Form 10-Q | | 23 |
Beginning in May 2016, the Patent Trial & Appeal Board of the U.S. Patent & Trademark Office (PTO) instituted five inter partes review proceedings brought by Coherus Biosciences and Boehringer Ingelheim related to three AbbVie patents covering methods of treatment of rheumatoid arthritis using adalimumab. In these proceedings, the PTO reviewed the validity of the patents and issued decisions of invalidity in May, June and July of 2017. AbbVie’s appeal of the decisions is pending in the Court of Appeals for the Federal Circuit.
AbbVie is seeking to enforce certain patent rights related to adalimumab (a drug AbbVie sells under the trademark HUMIRA®). In a case filed in United States District Court for the District of Delaware in August 2016, AbbVie alleged that Amgen Inc.’s and Amgen Manufacturing, Limited’s proposed biosimilar adalimumab product infringed certain AbbVie patents. AbbVie sought declaratory and injunctive relief. In September 2017, the parties settled this case and it was dismissed without prejudice.
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2017 Form 10-Q | | 24 |
In March 2017, AbbVie filed a lawsuit, AbbVie Inc. v. Novartis Vaccines and Diagnostics, Inc. and Grifols Worldwide Operations Ltd., in the United States District Court for the Northern District of California against Novartis Vaccines and Grifols Worldwide seeking a declaratory judgment that eleven HCV-related patents licensed to AbbVie in 2002 are invalid.
AbbVie is seeking to enforce certain patent rights related to adalimumab (a drug AbbVie sells under the trademark HUMIRA®). In a case filed in United States District Court for the District of Delaware in August 2017, AbbVie alleges that Boehringer Ingelheim International GmbH’s, Boehringer Ingelheim Pharmaceutical, Inc.’s, and Boehringer Ingelheim Fremont, Inc.’s proposed biosimilar adalimumab product infringes certain AbbVie patents. AbbVie seeks declaratory and injunctive relief.
Pharmacyclics LLC, a wholly owned subsidiary of AbbVie, is seeking to enforce its patent rights relating to ibrutinib capsules (a drug Pharmacyclics sells under the trademark IMBRUVICA®). In February 2018, four separate cases were filed in the United States District Court for the District of Delaware against the following defendants: Fresenius Kabi USA, LLC, Fresenius Kabi USA, Inc., and Fresenius Kabi Oncology Limited; Shilpa Medicare Limited, Sun Pharma Global FZE and Sun Pharmaceutical Industries Ltd.; Cipla Limited and Cipla USA Inc.; and Zydus Worldwide DMCC, Cadila Healthcare Limited, Teva Pharmaceuticals USA, Inc., Teva Pharmaceutical Industries Ltd., Sandoz Inc., and Lek Pharmaceuticals D.D. In each case, Pharmacyclics alleges the defendant’s proposed generic ibrutinib product infringes certain Pharmacyclics patents and seeks declaratory and injunctive relief. Janssen Biotech, Inc. which is in a global collaboration with Pharmacyclics concerning the development and marketing of IMBRUVICA, is the co-plaintiff in these suits.
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2018 Form 10-Q | | 24 |
Note 1314 Segment Information
AbbVie operates in one business segment—pharmaceutical products. The following table details AbbVie’s worldwide net revenues:
| | | | | | | | | | | | Three months ended September 30, | | Nine months ended September 30, |
| | Three months ended September 30, | | Nine months ended September 30, | |
(in millions) | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Immunology | | | | | | | | | |
HUMIRA | | $ | 4,701 |
| | $ | 4,060 |
| | $ | 13,535 |
| | $ | 11,786 |
| | | | | | | | |
United States | | | $ | 3,546 |
| | $ | 3,151 |
| | $ | 10,070 |
| | $ | 9,048 |
|
International | | | 1,578 |
| | 1,550 |
| | 4,948 |
| | 4,487 |
|
Total | | | $ | 5,124 |
| | $ | 4,701 |
| | $ | 15,018 |
| | $ | 13,535 |
|
Hematologic Oncology | | | | | | | | | |
IMBRUVICA | | 688 |
| | 501 |
| | 1,865 |
| | 1,321 |
| | | | | | | | |
United States | | | $ | 812 |
| | $ | 574 |
| | $ | 2,129 |
| | $ | 1,559 |
|
Collaboration revenues | | | 160 |
| | 114 |
| | 455 |
| | 306 |
|
Total | | | $ | 972 |
| | $ | 688 |
| | $ | 2,584 |
| | $ | 1,865 |
|
VENCLEXTA | | | | | | | | | |
United States | | | $ | 69 |
| | $ | 25 |
| | $ | 157 |
| | $ | 60 |
|
International | | | 27 |
| | 8 |
| | 63 |
| | 18 |
|
Total | | | $ | 96 |
| | $ | 33 |
| | $ | 220 |
| | $ | 78 |
|
HCV | | 276 |
| | 378 |
| | 764 |
| | 1,211 |
| | | | | | | | |
MAVYRET | | | | | | | | | |
United States | | | $ | 444 |
| | $ | 60 |
| | $ | 1,206 |
| | $ | 60 |
|
International | | | 395 |
| | 35 |
| | 1,413 |
| | 35 |
|
Total | | | $ | 839 |
| | $ | 95 |
| | $ | 2,619 |
| | $ | 95 |
|
VIEKIRA | | | | | | | | | |
United States | | | $ | — |
| | $ | — |
| | $ | 3 |
| | $ | 64 |
|
International | | | 23 |
| | 181 |
| | 132 |
| | 605 |
|
Total | | | $ | 23 |
| | $ | 181 |
| | $ | 135 |
| | $ | 669 |
|
Other Key Products | | | | | | | | | |
Creon | | | | | | | | | |
United States | | | $ | 239 |
| | $ | 215 |
| | $ | 667 |
| | $ | 596 |
|
Lupron | | 201 |
| | 193 |
| | 605 |
| | 602 |
| | | | | | | | |
Creon | | 215 |
| | 187 |
| | 596 |
| | 517 |
| |
United States | | | $ | 173 |
| | $ | 161 |
| | $ | 530 |
| | $ | 488 |
|
International | | | 41 |
| | 40 |
| | 126 |
| | 117 |
|
Total | | | $ | 214 |
| | $ | 201 |
| | $ | 656 |
| | $ | 605 |
|
Synthroid | | | | | | | | | |
United States | | | $ | 192 |
| | $ | 191 |
| | $ | 567 |
| | $ | 576 |
|
Synagis | | 116 |
| | 96 |
| | 456 |
| | 460 |
| | | | | | | | |
Synthroid | | 191 |
| | 188 |
| | 576 |
| | 558 |
| |
International | | | $ | 97 |
| | $ | 116 |
| | $ | 462 |
| | $ | 456 |
|
AndroGel | | 147 |
| | 174 |
| | 437 |
| | 501 |
| | | | | | | | |
United States | | | $ | 135 |
| | $ | 147 |
| | $ | 393 |
| | $ | 437 |
|
Duodopa | | | | | | | | | |
United States | | | $ | 19 |
| | $ | 16 |
| | $ | 57 |
| | $ | 44 |
|
International | | | 87 |
| | 78 |
| | 260 |
| | 211 |
|
Total | | | $ | 106 |
| | $ | 94 |
| | $ | 317 |
| | $ | 255 |
|
Sevoflurane | | | | | | | | | |
United States | | | $ | 18 |
| | $ | 19 |
| | $ | 54 |
| | $ | 56 |
|
International | | | 68 |
| | 81 |
| | 251 |
| | 255 |
|
Total | | | $ | 86 |
| | $ | 100 |
| | $ | 305 |
| | $ | 311 |
|
Kaletra | | 85 |
| | 137 |
| | 310 |
| | 416 |
| | | | | | | | |
Sevoflurane | | 100 |
| | 102 |
| | 311 |
| | 327 |
| |
Duodopa | | 94 |
| | 74 |
| | 255 |
| | 215 |
| |
United States | | | $ | 16 |
| | $ | 16 |
| | $ | 42 |
| | $ | 54 |
|
International | | | 72 |
| | 69 |
| | 210 |
| | 256 |
|
Total | | | $ | 88 |
| | $ | 85 |
| | $ | 252 |
| | $ | 310 |
|
All other | | 181 |
| | 342 |
| | 767 |
| | 928 |
| | $ | 25 |
| | $ | 148 |
| | $ | 253 |
| | $ | 689 |
|
Total net revenues | | $ | 6,995 |
| | $ | 6,432 |
| | $ | 20,477 |
| | $ | 18,842 |
| | $ | 8,236 |
| | $ | 6,995 |
| | $ | 24,448 |
| | $ | 20,477 |
|
|
| |
20172018 Form 10-Q | | 25 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of the financial condition of AbbVie Inc. (AbbVie or the company) as of September 30, 20172018 and December 31, 20162017 and the results of operations for the three and nine months ended September 30, 20172018 and 2016.2017. This commentary should be read in conjunction with the condensed consolidated financial statements and accompanying notes appearing in Item 1, “Financial Statements and Supplementary Data.”
EXECUTIVE OVERVIEW
Company Overview
AbbVie is a global, research-based biopharmaceutical company formed in 2013 following separation from Abbott Laboratories (Abbott). AbbVie’s mission is to useAbbVie uses its expertise, dedicated people and unique approach to innovation to develop and market advanced therapies that address some of the world’s most complex and serious diseases. AbbVie’s products are focused on treating conditions such as chronic autoimmune diseases in rheumatology, gastroenterology and dermatology; oncology, including blood cancers; virology, including hepatitis C (HCV) and human immunodeficiency virus (HIV); neurological disorders, such as Parkinson’s disease and multiple sclerosis;disease; metabolic diseases, including thyroid disease and complications associated with cystic fibrosis; as well as other serious health conditions. AbbVie also has a pipeline of promising new medicines across such important medical specialties as immunology, virology, oncology and neurology,neuroscience, with additional targeted investment in cystic fibrosis and women’s health.
AbbVie’s products are generally sold worldwide directly to wholesalers, distributors, government agencies, health care facilities, specialty pharmacies and independent retailers from AbbVie-owned distribution centers and public warehouses. In the United States, AbbVie distributes pharmaceutical products principally through independent wholesale distributors, with some sales directly to pharmacies and patients. Outside the United States, sales are made either directly to customers or through distributors, depending on the market served. Certain products are co-marketed or co-promoted with other companies. AbbVie has approximately 29,00030,000 employees. AbbVie operates in one business segment—pharmaceutical products.
20172018 Strategic Objectives
AbbVie’sAbbVie's mission is to be an innovation-driven, patient-focused specialty biopharmaceutical company capable of achieving top-tier financial performance through outstanding execution and a consistent stream of innovative new medicines. AbbVie intends to continue to advance its mission in a number of ways, including: (i) growing revenues throughby diversifying revenue streams, driving late-stage pipeline assets to the market and ensuring strong commercial execution of new product launches; (ii) continued strong performance from its existing portfolio of on-market products, including its flagship brands, HUMIRAinvestment and IMBRUVICA as well as growth from pipeline products; (ii) expanding operating margins; (iii) continued investmentexpansion in its pipeline in support of opportunities in immunology, oncology virology and neurology as well as continued investment in key on-market products; (iv) augmentation of its pipeline through concerted focus on strategic licensing, acquisition(iii) expanding operating margins; and partnering activity with a focus on identifying compelling programs that fit AbbVie’s strategic criteria; and (v)(iv) returning cash to shareholders via dividends and share repurchases. In addition, AbbVie anticipates several regulatory submissions and key data readouts from key clinical trials in the next twelve months.
Financial Results
The company's financial performance for the nine months ended September 30, 20172018 included delivering worldwide net revenues of $20.5$24.4 billion, operating earnings of $7.8$8.8 billion, and diluted earnings per share of $3.27.$4.79 and cash flows from operations of $10.0 billion. Worldwide net revenues grew by 9%18% on a constant currency basis, driven primarily by the continued strength of HUMIRA and revenue growth related to IMBRUVICA and revenue growth from other key products including Creon and Duodopa. These increases were partially offset by a decline in net revenues of HCV product VIEKIRA.
MAVYRET.
Diluted earnings per share was $3.27$4.79 for the nine months ended September 30, 20172018 and included the following after-tax costs: (i) $606$801 million related to the amortization of intangible assets; (ii) $546$500 million as a result of a collaboration agreement extension with Calico Life Sciences LLC (Calico); (iii) $432 million for the change in fair value of contingent consideration liabilities; (iii) milestone payments of $68 million; (iv) litigation reserve charges of $65$276 million; (v) acquisition related costscharitable contributions of $49 million; and$182 million as part of AbbVie's previously announced plan to make contributions to U.S. not-for-profit organizations in 2018; (vi) $15$124 million for acquired in-process research and development (IPR&D). Additionally, financial; and (vii) milestone payments of $87 million. Financial results for the nine months ended September 30, 20172018 were also impacted by U.S. tax reform and the timing of the new legislation's phase in on certain subsidiaries. Additionally, financial results reflected continued added funding to support all stages of AbbVie’s emerging mid- and late-stage pipeline assets and continued investment in AbbVie’s growth brands.
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20172018 Form 10-Q | | 26 |
The company generated cash flows from operations of $7.4 billion for the nine months ended September 30, 2017, which AbbVie utilized to continue to enhance its pipeline through licensing and collaboration activities, pay cash dividends to stockholders of $3.1 billion and repurchase approximately 7.8 million shares for $500 million in the open market. In September 2017, AbbVie’s board of directors declared a quarterly cash dividend of $0.64 per share of common stock payable in November 2017. In October 2017,2018, the company announced that its board of directors declared an increase in the company's quarterly cash dividend from $0.64$0.96 per share to $0.71$1.07 per share beginning with the dividend payable in February 2018.2019. This reflects an increase of approximately 11%11.5% over the previous quarterly rate.
In addition to these financial results, AbbVie continued to advance and augment its pipeline as further described below under the heading “Research and Development.”
Research and Development
Research and innovation are the cornerstones of AbbVie’s business as a global biopharmaceutical company. AbbVie’s long-term success depends to a great extent on its ability to continue to discover and develop innovative pharmaceutical products and acquire or collaborate on compounds currently in development by other biotechnology or pharmaceutical companies.
AbbVie’s pipeline currently includes more than 60 compounds or indications in clinical development individually or under collaboration or license agreements and is focused on such important medical specialties as immunology, oncology virology and neurology along with targeted investments in cystic fibrosis and women’s health. Of these programs, more than 30 are in mid- and late-stage development.
The following sections summarize transitions of significant programs from Phase 2 development to Phase 3 development as well as developments in significant Phase 3 and registration programs. AbbVie expects multiple Phase 2 programs to transition into Phase 3 programs in the next twelve months.
Significant Programs and Developments
Immunology
Upadacitinib
In January 2018, the U.S. Food and Drug Administration (FDA) granted breakthrough therapy designation for upadacitinib, an investigational oral JAK1-selective inhibitor, in adult patients with moderate to severe atopic dermatitis who are candidates for systemic therapy.
In June 2017,April 2018, AbbVie announced that top-line results from the Phase 3 SELECT-NEXT clinical trial evaluating upadacitinib (ABT-494), the company’s selective JAK1 inhibitor currently in late-stage development for rheumatoid arthritis (RA), met all primary and ranked secondary endpoints in patients with moderate to severe RA who did not adequately respond to treatment with conventional synthetic disease modifying anti-rheumatic drugs (DMARDs). The safety profile of upadacitinib was consistent with previously reported Phase 2 trials and no new safety signals were detected.
In September 2017, AbbVie announced that top-line results from the Phase 3 SELECT-BEYONDSELECT-COMPARE clinical trial evaluating upadacitinib met all primary and ranked secondary endpoints in patients with moderate to severe RArheumatoid arthritis (RA) who did not adequately respond or were intolerant to treatment with biologic DMARDs.are on a stable background of methotrexate and who have an inadequate response. The safety profile of upadacitinib was consistent with previously reported Phase 2clinical trials and the Phase 3 SELECT-NEXT clinical trial, with no new safety signals were detected.
Risankizumab
In October 2017,June 2018, AbbVie announced that top-line results from threethe Phase 3 SELECT-EARLY clinical trial evaluating upadacitinib versus methotrexate in adult patients with moderate to severe RA who were methotrexate-naïve met all primary and ranked secondary endpoints. The safety profile of upadacitinib was consistent with previously reported clinical trials and no new safety signals were detected.
In July 2018, AbbVie initiated two Phase 3 clinical trials to evaluate the efficacy and safety of upadacitinib in subjects with moderate to severe atopic dermatitis.
In September 2018, AbbVie initiated a Phase 3 clinical trial to evaluate the efficacy and safety of upadacitinib in subjects with moderate to severe ulcerative colitis.
Risankizumab
In January 2018, AbbVie initiated two Phase 3 clinical trials to evaluate the efficacy and safety of risankizumab, an investigational interleukin-23 (IL-23) inhibitor, versus placebo during induction therapy in subjects with moderately to severely active Crohn’s disease.
In February 2018, AbbVie announced that top-line results from two Phase 3 clinical trials evaluating risankizumab an investigational interleukin-23 (IL-23) inhibitor, with 12-week dosing compared to ustekinumab and adalimumab met all co-primary and ranked additional secondary endpoints for the treatment of patients with moderate to severe chronic plaque psoriasis. The initial results from these clinical trials were previously announced in October 2017. The safety profile was consistent with all previously reported studies, and there were no new safety signals detected across the threetwo studies.
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20172018 Form 10-Q | | 27 |
Oncology
IMBRUVICA
In January 2017,April 2018, AbbVie announced thatsubmitted a Biologics License Application (BLA) to the U.S. FoodFDA and Drug Administration (FDA) approved IMBRUVICAa Marketing Authorisation Application (MAA) to the European Medicines Agency (EMA) for risankizumab for the treatment of patients with relapsed/refractory marginal zone lymphoma (MZL) who require systemic therapy and have received at least one prior anti-CD20-based therapy. This indication is approved under accelerated approval based on overall response rate (ORR) and continued approval may be contingent upon verification and description of clinical benefitplaque psoriasis in a confirmatory trial. MZL is a slow-growing form of non-Hodgkin's lymphoma.
adults.
In August 2017, AbbVie announced that the FDA approved IMBRUVICA for the treatment of adult patients with chronic graft-versus-host-disease (cGVHD) after failure of one or more lines of systemic therapy. IMBRUVICA is the first therapy specifically approved for adults with cGVHD, a severe and potentially life-threatening consequence of stem cell or bone marrow transplant. This marks the sixth U.S. disease indication for IMBRUVICA since the medication's initial approval in 2013 and the first approved indication outside of cancer.
Venetoclax
In February 2017,May 2018, AbbVie initiated a Phase 3 clinical trial to study the safety and efficacy of venetoclax in combination with azacitidine in untreated (treatment-naïve) elderly subjects with acute myeloid leukemia (AML) who are ineligible for standard induction therapy (high-dose chemotherapy).
In May 2017, AbbVie initiated a Phase 2b/3 clinical trial to evaluate if venetoclax when co-administered with low dose cytarabine (LDAC) improves overall survival (OS)the efficacy and safety of risankizumab versus LDAC and placebo in treatment naïve subjects with AML.moderately to severely active ulcerative colitis.
Oncology
IMBRUVICA
In September 2017, AbbVie announced that top-line results from the Phase 3 MURANO clinical trial evaluating venetoclax tablets in combination with Rituxan (rituximab) met the primary endpoint of prolonged progression-free survival compared with bendamustine in combination with Rituxan in patients with relapsed/refractory chronic lymphocytic leukemia.
Rova-T
In February 2017,April 2018, AbbVie initiated a Phase 3 clinical trial to evaluate the safety and efficacy of Rova-T as maintenance therapy followingIMBRUVICA in combination with VENCLEXTA versus chlorambucil plus GAZYVA (obinutuzumab) for the first-line platinum based chemotherapy in participantstreatment of subjects with extensive stage chronic lymphocytic leukemia (CLL)/small cell lung cancer (SCLC)lymphocytic lymphoma (SLL).
In April 2017,May 2018, AbbVie initiatedannounced that results from the Phase 3 iLLUMINATE study evaluating IMBRUVICA in combination with GAZYVA in previously untreated CLL/SLL met its primary endpoint.
In June 2018, AbbVie announced that results from an interim analysis of the Phase 3 iNNOVATE study evaluating IMBRUVICA plus Rituxan (rituximab) in previously untreated and relapsed/refractory (R/R) patients with Waldenström’s macroglobulinemia (WM) met its primary endpoint.
In July 2018, AbbVie announced that results from a Phase 3 clinical trialstudy evaluating the addition of IMBRUVICA to evaluate Rova-T compared with topotecan for subjects with advanceda chemotherapy regimen consisting of five different agents used in combination did not meet its primary endpoint in a subset of untreated diffuse large B-cell lymphoma patients identified to have the non-germinal center B-cell or metastatic SCLC with high levelsactivated B-cell subtypes of delta-like protein 3 who have first disease progression during or following front-line platinum-based chemotherapy.
Veliparib
this disease.
In April 2017, AbbVie announced that two Phase 3 studies evaluating veliparib, an investigational, oral poly (adenosine diphosphate-ribose) polymerase (PARP) inhibitorAugust 2018, the FDA approved IMBRUVICA, in combination with chemotherapy did not meet their primary endpoints. The studies evaluated veliparibRituxan, for the treatment of adult patients with WM.
In October 2018, the FDA accepted for priority review AbbVie's supplemental New Drug Application (sNDA) for IMBRUVICA in combination with carboplatin and paclitaxelGAZYVA in patients with squamous non-small cell lung cancer (NSCLC) and triple negative breast cancer (TNBC). Ongoingpreviously untreated CLL/SLL.
VENCLEXTA
In January 2018, AbbVie submitted an sNDA to the FDA for VENCLEXTA monotherapy in patients with CLL who are refractory to or have relapsed B-cell receptor pathway inhibitors.
In June 2018, the FDA approved VENCLEXTA in combination with Rituxan for the treatment of patients with CLL/SLL, with or without 17p deletion, who have received at least one prior therapy. VENCLEXTA plus Rituxan is the first oral-based, chemotherapy-free combination in CLL that allows patients an option for fixed treatment duration.
In July 2018, AbbVie submitted an sNDA to the FDA for VENCLEXTA in combination with a hypomethylating agent or in combination with low dose cytarabine for treatment of newly diagnosed patients with acute myeloid leukemia who are ineligible for intensive chemotherapy. In August, AbbVie was granted priority review for VENCLEXTA by the FDA.
In September 2018, the FDA expanded the label for VENCLEXTA in combination with Rituxan to include information about patients with previously-treated CLL who achieved minimal residual disease (MRD)-negativity in the Phase 3 studies include non-squamous non-small cell lung cancer, BRCA1/2 breast cancer and ovarian cancer.
Virology/Liver Disease
MURANO trial.
In February 2017,October 2018, the European Commission approved the type-II variation application for VENCLYXTO in combination with Rituxan for the treatment of patients with R/R CLL who have received at least one prior therapy.
In October 2018, AbbVie announced that the European Committee for Medicinal Products for Human Use (CHMP) granted a positive opinion for a shorter, eight-week treatmentresults from the Phase 3 CLL14 study comparing the efficacy and safety of VIEKIRAX (ombitasvir/paritaprevir/ritonavir tablets) + EXVIERA (dasabuvir tablets) as an option forVENCLEXTA plus obinutuzumab versus obinutuzumab plus chlorambucil in previously untreated adult patients with genotype 1b chronic HCVCLL and minimal to moderate fibrosis.
In July 2017, AbbVie announced that the European Commission granted marketing authorization for MAVIRET (glecaprevir/pibrentasvir), a once-daily, ribavirin-free treatment for adults with HCV infection across all major genotypes (GT1-6). MAVIRET is also indicated for patients with specific treatment challenges, including those with compensatedcoexisting medical conditions met its primary endpoint.
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20172018 Form 10-Q | | 28 |
cirrhosisRova-T
In March 2018, AbbVie announced top-line results from the Phase 2 TRINITY study evaluating rovalpituzumab tesirine (Rova-T) for third-line R/R small cell lung cancer (SCLC). Although Rova-T demonstrated single agent responses in advanced SCLC patients, after consulting with the FDA, based on the magnitude of effect across all major genotypes,multiple parameters in this single-arm study, the company will not seek accelerated approval for Rova-T in third-line R/R SCLC. Ongoing Phase 3 studies will continue to investigate Rova-T in first- and those who previously had limited treatment options, such as patients with severe chronic kidney disease (CKD) or those with genotype 3 chronic HCV infection.second-line SCLC.
Other
In August 2017, AbbVie2018, Bristol-Myers Squibb Company (BMS) announced that the FDA approved MAVYRET (glecaprevir/pibrentasvir)accepted for priority review its supplemental Biologics License Application (sBLA) for Empliciti (elotuzumab) in combination with pomalidomide and low-dose dexamethasone for the treatment of patients with chronic HCV genotype 1-6 infection without cirrhosisrelapsed/refractory multiple myeloma (RRMM) who have received at least two prior therapies. This submission followed the BMS announcement in June 2018 that results from the Phase 2 ELOQUENT-3 study evaluating the combination of Empliciti with pomalidomide/dexamethasone in RRMM patients met its primary endpoint. BMS and AbbVie are co-developing Empliciti, with compensated cirrhosis (Child-Pugh A). MAVYRET is also indicatedBMS solely responsible for commercial activities.
Neurology
In March 2018, Biogen and AbbVie announced the treatmentvoluntary worldwide withdrawal of adult patientsmarketing authorizations for ZINBRYTA, a prescription medicine used to treat adults with HCV genotype 1 infection, who previously have been treated with a regimen containing an HCV NS5A inhibitor or an NS3/4A protease inhibitor, but not both. MAVYRET/MAVIRET is a new 8-week, pan-genotypic treatment for patients without cirrhosis and who are new to treatment.
relapsing forms of multiple sclerosis.
Other
In September 2017,February 2018, AbbVie announced that it had submitted a New Drug Application totop-line results from the FDA forPhase 3 ELARIS UF-I study evaluating elagolix, an investigational, orally administered gonadotropin-releasing hormone (GnRH) antagonist, being evaluatedinvestigated in combination with low-dose hormone (add-back) therapy for uterine fibroids met its primary efficacy endpoint and all ranked secondary endpoints.
In March 2018, AbbVie announced that top-line results from the Phase 3 ELARIS UF-II study evaluating elagolix in combination with low-dose hormone (add-back) therapy for uterine fibroids met its primary efficacy endpoint and all ranked secondary endpoints.
In July 2018, the FDA approved ORILISSA (elagolix) for the management of endometriosismoderate to severe pain associated with associated pain. endometriosis.
In August 2018, AbbVie announced that top-line results from the Phase 3 ELARIS UF-EXTEND study evaluating elagolix in combination with low-dose hormone therapy for uterine fibroids were consistent with findings observed in the ELARIS UF-I and ELARIS UF-II Phase 3 studies.
In October 2018, AbbVie was granted priority reviewannounced that it will assume full development and commercial responsibility for elagolixits collaboration with Galapagos to discover and develop new therapies to treat cystic fibrosis (CF). Under a revised agreement, AbbVie will assume full development and commercial responsibility over the investigational program comprising several clinical and pre-clinical compounds originally discovered and developed jointly by the FDA.
AbbVie and Galapagos. Galapagos will not pursue further research and development in CF, but is eligible for future milestones and royalties on commercialized programs.
For a more comprehensive discussion of AbbVie’s products and pipeline, see the company’s Annual Report on Form 10-K for the year ended December 31, 2016.2017.
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2018 Form 10-Q | | 29 |
RESULTS OF OPERATIONS
Net Revenues
The comparisons presented at constant currency rates reflect comparative local currency net revenues at the prior year’s foreign exchange rates. This measure provides information on the change in net revenues assuming that foreign currency exchange rates had not changed between the prior and the current periods. AbbVie believes that the non-GAAP measure of change in net revenues at constant currency rates, when used in conjunction with the GAAP measure of change in net revenues at actual currency rates, may provide a more complete understanding of the company’s operations and can facilitate analysis of the company’s results of operations, particularly in evaluating performance from one period to another.
| | | | Three months ended September 30, | | Percent change | | Nine months ended September 30, | | Percent change | | Three months ended September 30, | | Percent change | | Nine months ended September 30, | | Percent change |
| | At actual currency rates | | At constant currency rates | | At actual currency rates | | At constant currency rates | | At actual currency rates | | At constant currency rates | | At actual currency rates | | At constant currency rates |
(dollars in millions) | | 2017 | | 2016 | | 2017 |
| 2016 | | | 2018 | | 2017 | | 2018 |
| 2017 | |
United States | | $ | 4,586 |
| | $ | 4,081 |
| | 12.4 | % | | 12.4 | % | | $ | 13,284 |
| | $ | 11,695 |
| | 13.6 | % | | 13.6 | % | | $ | 5,597 |
| | $ | 4,586 |
| | 22.0 | % | | 22.0 | % | | $ | 15,836 |
| | $ | 13,284 |
| | 19.2 | % | | 19.2 | % |
International | | 2,409 |
| | 2,351 |
| | 2.4 | % | | 0.3 | % | | 7,193 |
| | 7,147 |
| | 0.6 | % | | 1.0 | % | | 2,639 |
| | 2,409 |
| | 9.6 | % | | 11.7 | % | | 8,612 |
| | 7,193 |
| | 19.7 | % | | 15.3 | % |
Net revenues | | $ | 6,995 |
| | $ | 6,432 |
| | 8.8 | % | | 8.1 | % | | $ | 20,477 |
| | $ | 18,842 |
| | 8.7 | % | | 8.8 | % | | $ | 8,236 |
| | $ | 6,995 |
| | 17.8 | % | | 18.5 | % | | $ | 24,448 |
| | $ | 20,477 |
| | 19.4 | % | | 17.8 | % |
|
| |
20172018 Form 10-Q | | 2930 |
The following table details AbbVie’s worldwide net revenues:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Percent change | | Nine months ended September 30, | | Percent change |
| | | At actual currency rates | | At constant currency rates | | | At actual currency rates | | At constant currency rates |
(dollars in millions) | | 2018 | | 2017 | | | 2018 | | 2017 | |
Immunology | | | | | | | | | | | | | | | | |
HUMIRA | | | | | | | | | | | | | | | | |
United States | | $ | 3,546 |
| | $ | 3,151 |
| | 12.5 | % | | 12.5 | % | | $ | 10,070 |
| | $ | 9,048 |
| | 11.3 | % | | 11.3 | % |
International | | 1,578 |
| | 1,550 |
| | 1.8 | % | | 4.2 | % | | 4,948 |
| | 4,487 |
| | 10.3 | % | | 5.9 | % |
Total | | $ | 5,124 |
| | $ | 4,701 |
| | 9.0 | % | | 9.8 | % | | $ | 15,018 |
| | $ | 13,535 |
| | 11.0 | % | | 9.5 | % |
Hematologic Oncology | | | | | | | | | | | | | | | | |
IMBRUVICA | | | | | | | | | | | | | | | | |
United States | | $ | 812 |
| | $ | 574 |
| | 41.5 | % | | 41.5 | % | | $ | 2,129 |
| | $ | 1,559 |
| | 36.6 | % | | 36.6 | % |
Collaboration revenues | | 160 |
| | 114 |
| | 40.1 | % | | 40.1 | % | | 455 |
| | 306 |
| | 48.5 | % | | 48.5 | % |
Total | | $ | 972 |
| | $ | 688 |
| | 41.3 | % | | 41.3 | % | | $ | 2,584 |
| | $ | 1,865 |
| | 38.5 | % | | 38.5 | % |
VENCLEXTA | | | | | | | | | | | | | | | | |
United States | | $ | 69 |
| | $ | 25 |
| | >100.0% |
| | >100.0% |
| | $ | 157 |
| | $ | 60 |
| | >100.0% |
| | >100.0% |
|
International | | 27 |
| | 8 |
| | >100.0% |
| | >100.0% |
| | 63 |
| | 18 |
| | >100.0% |
| | >100.0% |
|
Total | | $ | 96 |
| | $ | 33 |
| | >100.0% |
| | >100.0% |
| | $ | 220 |
| | $ | 78 |
| | >100.0% |
| | >100.0% |
|
HCV | | | | | | | | | | | | | | | | |
MAVYRET | | | | | | | | | | | | | | | | |
United States | | $ | 444 |
| | $ | 60 |
| | >100.0% |
| | >100.0% |
| | $ | 1,206 |
| | $ | 60 |
| | >100.0% |
| | >100.0% |
|
International | | 395 |
| | 35 |
| | >100.0% |
| | >100.0% |
| | 1,413 |
| | 35 |
| | >100.0% |
| | >100.0% |
|
Total | | $ | 839 |
| | $ | 95 |
| | >100.0% |
| | >100.0% |
| | $ | 2,619 |
| | $ | 95 |
| | >100.0% |
| | >100.0% |
|
VIEKIRA | | | | | | | | | | | | | | | | |
United States | | $ | — |
| | $ | — |
| | n/m |
| | n/m |
| | $ | 3 |
| | $ | 64 |
| | (96.3 | )% | | (96.3 | )% |
International | | 23 |
| | 181 |
| | (87.0 | )% | | (86.1 | )% | | 132 |
| | 605 |
| | (78.1 | )% | | (78.9 | )% |
Total | | $ | 23 |
| | $ | 181 |
| | (87.1 | )% | | (86.2 | )% | | $ | 135 |
| | $ | 669 |
| | (79.8 | )% | | (80.6 | )% |
Other Key Products | | | | | | | | | | | | | | | | |
Creon | | | | | | | | | | | | | | | | |
United States | | $ | 239 |
| | $ | 215 |
| | 11.3 | % | | 11.3 | % | | $ | 667 |
| | $ | 596 |
| | 11.8 | % | | 11.8 | % |
Lupron | | | | | | | | | | | | | | | | |
United States | | $ | 173 |
| | $ | 161 |
| | 7.6 | % | | 7.6 | % | | $ | 530 |
| | $ | 488 |
| | 8.7 | % | | 8.7 | % |
International | | 41 |
| | 40 |
| | 1.5 | % | | 7.2 | % | | 126 |
| | 117 |
| | 7.4 | % | | 6.9 | % |
Total | | $ | 214 |
| | $ | 201 |
| | 6.4 | % | | 7.5 | % | | $ | 656 |
| | $ | 605 |
| | 8.4 | % | | 8.3 | % |
Synthroid | | | | | | | | | | | | | | | | |
United States | | $ | 192 |
| | $ | 191 |
| | 0.7 | % | | 0.7 | % | | $ | 567 |
| | $ | 576 |
| | (1.5 | )% | | (1.5 | )% |
Synagis | | | | | | | | | | | | | | | | |
International | | $ | 97 |
| | $ | 116 |
| | (16.2 | )% | | (14.1 | )% | | $ | 462 |
| | $ | 456 |
| | 1.3 | % | | (2.2 | )% |
AndroGel | | | | | | | | | | | | | | | | |
United States | | $ | 135 |
| | $ | 147 |
| | (8.3 | )% | | (8.3 | )% | | $ | 393 |
| | $ | 437 |
| | (10.1 | )% | | (10.1 | )% |
Duodopa | | | | | | | | | | | | | | | | |
United States | | $ | 19 |
| | $ | 16 |
| | 18.7 | % | | 18.7 | % | | $ | 57 |
| | $ | 44 |
| | 30.0 | % | | 30.0 | % |
International | | 87 |
| | 78 |
| | 10.8 | % | | 12.2 | % | | 260 |
| | 211 |
| | 22.8 | % | | 15.6 | % |
Total | | $ | 106 |
| | $ | 94 |
| | 12.1 | % | | 13.3 | % | | $ | 317 |
| | $ | 255 |
| | 24.0 | % | | 18.1 | % |
Sevoflurane | | | | | | | | | | | | | | | | |
United States | | $ | 18 |
| | $ | 19 |
| | (2.8 | )% | | (2.8 | )% | | $ | 54 |
| | $ | 56 |
| | (2.8 | )% | | (2.8 | )% |
International | | 68 |
| | 81 |
| | (15.7 | )% | | (12.2 | )% | | 251 |
| | 255 |
| | (1.5 | )% | | (2.8 | )% |
Total | | $ | 86 |
| | $ | 100 |
| | (13.2 | )% | | (10.4 | )% | | $ | 305 |
| | $ | 311 |
| | (1.7 | )% | | (2.7 | )% |
Kaletra | | | | | | | | | | | | | | | | |
United States | | $ | 16 |
| | $ | 16 |
| | (2.9 | )% | | (2.9 | )% | | $ | 42 |
| | $ | 54 |
| | (21.4 | )% | | (21.4 | )% |
International | | 72 |
| | 69 |
| | 5.3 | % | | 8.2 | % | | 210 |
| | 256 |
| | (18.1 | )% | | (19.0 | )% |
Total | | $ | 88 |
| | $ | 85 |
| | 3.7 | % | | 6.0 | % | | $ | 252 |
| | $ | 310 |
| | (18.7 | )% | | (19.5 | )% |
All other | | $ | 25 |
| | $ | 148 |
| | (82.7 | )% | | (82.0 | )% | | $ | 253 |
| | $ | 689 |
| | (63.1 | )% | | (73.8 | )% |
Total net revenues | | $ | 8,236 |
| | $ | 6,995 |
| | 17.8 | % | | 18.5 | % | | $ | 24,448 |
| | $ | 20,477 |
| | 19.4 | % | | 17.8 | % |
n/m – Not meaningful
|
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2018 Form 10-Q | | 31 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Percent change | | Nine months ended September 30, | | Percent change |
| | | At actual currency rates | | At constant currency rates | | | At actual currency rates | | At constant currency rates |
(dollars in millions) | | 2017 | | 2016 | | | 2017 | | 2016 | |
HUMIRA | | | | | | | | | | | | | | | | |
United States | | $ | 3,151 |
| | $ | 2,647 |
| | 19.1 | % | | 19.1 | % | | $ | 9,048 |
| | $ | 7,554 |
| | 19.8 | % | | 19.8 | % |
International | | 1,550 |
| | 1,413 |
| | 9.7 | % | | 6.8 | % | | 4,487 |
| | 4,232 |
| | 6.0 | % | | 6.8 | % |
Total | | $ | 4,701 |
| | $ | 4,060 |
| | 15.8 | % | | 14.8 | % | | $ | 13,535 |
| | $ | 11,786 |
| | 14.8 | % | | 15.1 | % |
IMBRUVICA | | | | | | | | | | | | | | | | |
United States | | $ | 574 |
| | $ | 437 |
| | 31.0 | % | | 31.0 | % | | $ | 1,559 |
| | $ | 1,146 |
| | 36.0 | % | | 36.0 | % |
Collaboration revenues | | 114 |
| | 64 |
| | 80.7 | % | | 80.7 | % | | 306 |
| | 175 |
| | 75.4 | % | | 75.4 | % |
Total | | $ | 688 |
| | $ | 501 |
| | 37.3 | % | | 37.3 | % | | $ | 1,865 |
| | $ | 1,321 |
| | 41.2 | % | | 41.2 | % |
HCV | | | | | | | | | | | | | | | | |
United States | | $ | 60 |
| | $ | 76 |
| | (19.5 | )% | | (19.5 | )% | | $ | 124 |
| | $ | 288 |
| | (56.6 | )% | | (56.6 | )% |
International | | 216 |
| | 302 |
| | (28.7 | )% | | (29.8 | )% | | 640 |
| | 923 |
| | (30.7 | )% | | (30.5 | )% |
Total | | $ | 276 |
| | $ | 378 |
| | (26.8 | )% | | (27.7 | )% | | $ | 764 |
| | $ | 1,211 |
| | (36.9 | )% | | (36.7 | )% |
Lupron | | | | | | | | | | | | | | | | |
United States | | $ | 161 |
| | $ | 155 |
| | 4.1 | % | | 4.1 | % | | $ | 488 |
| | $ | 485 |
| | 0.6 | % | | 0.6 | % |
International | | 40 |
| | 38 |
| | 3.5 | % | | 1.6 | % | | 117 |
| | 117 |
| | (0.1 | )% | | (0.5 | )% |
Total | | $ | 201 |
| | $ | 193 |
| | 4.0 | % | | 3.6 | % | | $ | 605 |
| | $ | 602 |
| | 0.5 | % | | 0.4 | % |
Creon | | | | | | | | | | | | | | | | |
United States | | $ | 215 |
| | $ | 187 |
| | 14.8 | % | | 14.8 | % | | $ | 596 |
| | $ | 517 |
| | 15.3 | % | | 15.3 | % |
Synagis | | | | | | | | | | | | | | | | |
International | | $ | 116 |
| | $ | 96 |
| | 21.0 | % | | 23.5 | % | | $ | 456 |
| | $ | 460 |
| | (0.8 | )% | | (1.7 | )% |
Synthroid | | | | | | | | | | | | | | | | |
United States | | $ | 191 |
| | $ | 188 |
| | 1.5 | % | | 1.5 | % | | $ | 576 |
| | $ | 558 |
| | 3.1 | % | | 3.1 | % |
AndroGel | | | | | | | | | | | | | | | | |
United States | | $ | 147 |
| | $ | 174 |
| | (14.9 | )% | | (14.9 | )% | | $ | 437 |
| | $ | 501 |
| | (12.7 | )% | | (12.7 | )% |
Kaletra | | | | | | | | | | | | | | | | |
United States | | $ | 16 |
| | $ | 27 |
| | (39.2 | )% | | (39.2 | )% | | $ | 54 |
| | $ | 90 |
| | (39.9 | )% | | (39.9 | )% |
International | | 69 |
| | 110 |
| | (38.2 | )% | | (40.4 | )% | | 256 |
| | 326 |
| | (21.7 | )% | | (24.3 | )% |
Total | | $ | 85 |
| | $ | 137 |
| | (38.4 | )% | | (40.2 | )% | | $ | 310 |
| | $ | 416 |
| | (25.7 | )% | | (27.7 | )% |
Sevoflurane | | | | | | | | | | | | | | | | |
United States | | $ | 19 |
| | $ | 19 |
| | 0.5 | % | | 0.5 | % | | $ | 56 |
| | $ | 58 |
| | (2.4 | )% | | (2.4 | )% |
International | | 81 |
| | 83 |
| | (3.4 | )% | | (3.3 | )% | | 255 |
| | 269 |
| | (5.5 | )% | | (3.8 | )% |
Total | | $ | 100 |
| | $ | 102 |
| | (2.7 | )% | | (2.6 | )% | | $ | 311 |
| | $ | 327 |
| | (4.9 | )% | | (3.5 | )% |
Duodopa | | | | | | | | | | | | | | | | |
United States | | $ | 16 |
| | $ | 10 |
| | 56.4 | % | | 56.4 | % | | $ | 44 |
| | $ | 26 |
| | 70.8 | % | | 70.8 | % |
International | | 78 |
| | 64 |
| | 21.5 | % | | 16.6 | % | | 211 |
| | 189 |
| | 11.7 | % | | 12.3 | % |
Total | | $ | 94 |
| | $ | 74 |
| | 26.3 | % | | 22.0 | % | | $ | 255 |
| | $ | 215 |
| | 18.7 | % | | 19.2 | % |
All other | | $ | 181 |
| | $ | 342 |
| | (46.9 | )% | | (47.4 | )% | | $ | 767 |
| | $ | 928 |
| | (17.4 | )% | | (17.1 | )% |
Total net revenues | | $ | 6,995 |
| | $ | 6,432 |
| | 8.8 | % | | 8.1 | % | | $ | 20,477 |
| | $ | 18,842 |
| | 8.7 | % | | 8.8 | % |
The following discussion and analysis of AbbVie’s net revenues by product is presented on a constant currency basis.
Global HUMIRA sales increased 15%10% for both the three months and 9% for the nine months ended September 30, 20172018 primarily as a result of market growth across therapeutic categories and geographies as well as favorable pricing in certain geographies. In the United States, HUMIRA sales increased 19%13% for the three months and 20%11% for the nine months ended September 30, 20172018 driven by market growth across all indications and favorable pricing. Internationally, HUMIRA sales increased 7%4% for both the three months and 6% for the nine months ended September 30, 20172018 driven primarily by market growth.growth across indications. In October 2018, the European Union composition of matter patent for adalimumab expired and biosimilars of HUMIRA launched in Europe. Biosimilar competition is not expected in the United States until 2023. AbbVie continues to pursue strategies intended to further differentiate HUMIRA from competing products and add to the sustainability and future growth of HUMIRA.
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| |
2017 Form 10-Q | | 30 |
Net revenues for IMBRUVICA represent product revenuessales in the United States and collaboration revenues outside of the United States related to AbbVie’s 50% share of IMBRUVICA profit. GlobalAbbVie's global IMBRUVICA salesrevenues increased 37%41% for the three months and 41%39% for the nine months ended September 30, 20172018 as a result of continued penetration of IMBRUVICA as a first-line treatment for patients with chronic lymphocytic leukemia (CLL) as well as favorable pricing.
Global HCV sales decreased 28% for the three months and 37% for the nine months ended September 30, 2017 as a result of market contraction, lower market share and price erosion of VIEKIRA. These factors were partially offsetincreased by the launch of MAVYRET in certain geographies during the third quarter of 2017.
Net revenues for Creon increased 15%more than 100% for both the three and nine months ended September 30, 2018 as a result of the launch of MAVYRET in certain geographies beginning in the second half of 2017 partially offset by a decrease in revenues of VIEKIRA.
Net revenues for Creon increased 11% for the three months and 12% for the nine months ended September 30, 2018 driven primarily by continued market growth and higher market share. Creon maintains market leadership in the pancreatic enzyme market.
Synagis is a seasonal product with the majority of sales occurring in the first and fourth quarters. SynagisNet revenues for Duodopa increased 23%13% for the three months ended September 30, 2017 primarily due to seasonal acceleration in certain geographies and tender timing. Synagis revenues18% for the nine months ended September 30, 2017 decreased 2%.
Net revenues for Duodopa increased 22% for the three months and 19% for the nine months ended September 30, 20172018 primarily as a result of increased market penetration and geographic expansion.penetration.
Gross Margin
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended September 30, | | Nine months ended September 30, |
(dollars in millions) | | 2017 | | 2016 | | % change | | 2017 | | 2016 | | % change | | 2018 | | 2017 | | % change | | 2018 | | 2017 | | % change |
Gross margin | | $ | 5,379 |
| | $ | 4,928 |
| | 9 | % | | $ | 15,717 |
| | $ | 14,564 |
| | 8 | % | | $ | 6,401 |
| | $ | 5,379 |
| | 19 | % | | $ | 18,752 |
| | $ | 15,716 |
| | 19 | % |
as a % of net revenues | | 77 | % | | 77 | % | | | | 77 | % | | 77 | % | | | | 78 | % | | 77 | % | | | | 77 | % | | 77 | % | | |
Gross margin as a percentage of net revenues increased for the three months and was flat for the nine months ended September 30, 2018 compared to the prior year. Gross margin percentage for the three months ended September 30, 2018 was favorably impacted by the reduction of HUMIRA royalty expense and foreign exchange partially offset by the IMBRUVICA profit sharing arrangement. Gross margin percentage for the nine months ended September 30, 2018 was favorably impacted by the reduction of HUMIRA royalty expense offset by the IMBRUVICA profit sharing arrangement and foreign exchange.
Selling, General and Administrative
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, |
| Nine months ended September 30, |
(dollars in millions) | | 2018 | | 2017 | | % change |
| 2018 |
| 2017 |
| % change |
Selling, general and administrative | | $ | 1,919 |
| | $ | 1,457 |
| | 32 | % | | $ | 5,470 |
| | $ | 4,339 |
| | 26 | % |
as a % of net revenues | | 23 | % | | 21 | % | | | | 22 | % | | 21 | % | | |
Selling, general and administrative (SG&A) expenses as a percentage of net revenues increased for both the three and nine months ended September 30, 20172018 compared to the prior year. Gross marginSG&A expense percentage for both the three and nine months ended September 30, 2017 was favorablyunfavorably impacted by product mix and operational efficiencies, offsetlitigation reserves charges that increased by the unfavorable impact of higher intangible asset amortization and the IMBRUVICA profit sharing arrangement.
Selling, General and Administrative
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, |
| Nine months ended September 30, |
(dollars in millions) | | 2017 | | 2016 | | % change |
| 2017 |
| 2016 |
| % change |
Selling, general and administrative | | $ | 1,452 |
| | $ | 1,381 |
| | 5 | % | | $ | 4,324 |
| | $ | 4,202 |
| | 3 | % |
as a % of net revenues | | 21 | % | | 21 | % | | | | 21 | % | | 22 | % | | |
SG&A expenses as a percentage of net revenues was flat$224 million for the three months and decreased$249 million for the nine months ended September 30, 20172018 compared to the prior year.year and charitable contributions of $115 million for the three months and $235 million for the nine months ended September 30, 2018 to select organizations as part of AbbVie's previously announced plan to make $350 million in contributions to U.S. not-for-profit organizations in 2018. Additionally, new product launch expenses unfavorably impacted SG&A expense percentage for both the three and nine months ended September 30, 2017 was favorably impacted by continued leverage from revenue growth, partially offset by new product launch expenses. SG&A expense percentage for the nine months ended September 30, 2017 was also unfavorably impacted by litigation reserve charges of $97 million.2018.
|
| |
20172018 Form 10-Q | | 3132 |
Research and Development and Acquired In-Process Research and Development
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended September 30, | | Nine months ended September 30, |
(dollars in millions) | | 2017 | | 2016 | | % change | | 2017 | | 2016 | | % change | | 2018 | | 2017 | | % change | | 2018 | | 2017 | | % change |
Research and development | | $ | 1,222 |
| | $ | 1,106 |
| | 11 | % | | $ | 3,580 |
| | $ | 3,176 |
| | 13 | % | | $ | 1,268 |
| | $ | 1,228 |
| | 3 | % | | $ | 3,834 |
| | $ | 3,599 |
| | 7 | % |
as a % of net revenues | | 17 | % | | 17 | % | | | | 17 | % | | 17 | % | | | | 15 | % | | 18 | % | | | | 16 | % | | 18 | % | | |
Acquired in-process research and development | | $ | — |
| | $ | 80 |
| | (100 | )% | | $ | 15 |
| | $ | 160 |
| | (91 | )% | | $ | 55 |
| | $ | — |
| | n/m |
| | $ | 124 |
| | $ | 15 |
| | >100% |
|
Research and Development (R&D) expenses for both the three and nine months ended September 30, 20172018 increased compared to the prior year principally due to increased funding to support all stages of the company’s emerging mid- and late-stage pipeline assets and the impact of the post-acquisition R&D expenses of Stemcentrx and Boehringer Ingelheim (BI) compounds. These increases were partially offset by lower acquisition related costs, which decreased by $54 million for the three months and $130 million for the nine months ended September 30, 2017 compared to the prior year.assets.
Acquired in-process research and development (IPR&D) expenses reflect upfront payments related to various collaborations. There were no individually significant transactions or cash flows during both the three and nine months ended September 30, 20172018 and 2016.2017.
Other Operating Expenses
Other operating expenses for the nine months ended September 30, 2018 included a $500 million charge related to the extension of the previously announced Calico collaboration to discover, develop and bring to market new therapies for patients with age-related diseases, including neurodegeneration and cancer.
Other Non-Operating Expenses
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended September 30, | | Nine months ended September 30, |
(in millions) | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Interest expense | | $ | 293 |
| | $ | 271 |
| | $ | 851 |
| | $ | 731 |
| | $ | 339 |
| | $ | 293 |
| | $ | 968 |
| | $ | 851 |
|
Interest income | | (41 | ) | | (21 | ) | | (99 | ) | | (56 | ) | | (37 | ) | | (41 | ) | | (143 | ) | | (99 | ) |
Interest expense, net | | $ | 252 |
| | $ | 250 |
| | $ | 752 |
| | $ | 675 |
| | $ | 302 |
| | $ | 252 |
| | $ | 825 |
| | $ | 752 |
|
| | | | | | | | | | | | | | | | |
Net foreign exchange loss (gain) | | $ | 9 |
| | $ | (4 | ) | | $ | 28 |
| | $ | 313 |
| |
Net foreign exchange loss | | | $ | 2 |
| | $ | 9 |
| | $ | 18 |
| | $ | 28 |
|
Other expense, net | | 349 |
| | 101 |
| | 484 |
| | 152 |
| | 94 |
| | 338 |
| | 411 |
| | 449 |
|
Interest expense, net was flatincreased for both the three months ended September 30, 2017 compared to the prior year. The increase for theand nine months ended September 30, 20172018 compared to the prior year was primarily due to the May 2016 issuanceunfavorable impact of $7.8 billion aggregate principal amount of senior notes, which were issued to financehigher interest rates on the acquisition of Stemcentrx and to repay an outstanding term loan.
Net foreign exchange loss for the nine months ended September 30, 2016 included losses totaling $298 million related to the devaluation of AbbVie’s net monetary assets denominated in the Venezuelan bolivar. See Note 8 to the Condensed Consolidated Financial Statements for additional information regarding the Venezuelan devaluation.company's debt obligations.
Other expense, net included charges related to changes in fair value of the BIBoehringer Ingelheim and Stemcentrx contingent consideration liabilities which totaledof $95 million for the three months and $432 million for the nine months ended September 30, 2018 compared to charges of $401 million for the three months and $547 million for the nine months ended September 30, 2017 compared to $104 million for the three months and $145 million for the nine months ended September 30, 2016 following the initial recognition of these liabilities in the second quarter of 2016.2017. The fair value of contingent consideration liabilities is impacted by the passage of time and multiple other inputs, including the probability of success of achieving regulatory/commercial milestones, discount rates and other market-based factors. For the three months ended September 30, 2018, the change in fair value primarily represented the passage of time. For the nine months ended September 30, 2018, the change in fair value represented higher estimated future sales and the passage of time partially offset by the effect of rising interest rates. For the three and nine months ended September 30, 2017, the change in fair value represented mainly higher probabilities of success and the passage of time. See Note 4 to the Condensed Consolidated Financial Statements for additional information regarding the acquisitions of Stemcentrx and BI compounds. Other expense, net also included realized gains on available-for-sale investment securities of $39 million for the three months and $49 million for the nine months ended September 30, 2017.
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| |
2017 Form 10-Q | | 32 |
Income Tax Expense
The effective tax rate was 1% for the three and nine months ended September 30, 2018 and 22% for the three months and 20% for the nine months ended September 30, 2017 and 21% for the three months and 22% for the nine months ended September 30, 2016.2017. The effective tax rate in each period differed from the U.S. statutory tax raterates of 21% in 2018 and 35% in 2017, principally due to the benefit from foreign operations which reflects the impact of lower income tax rates in locations outside the United States, tax exemptions and incentives in Puerto Rico and other foreign tax jurisdictions and business development activities together with the cost of repatriation decisions. activities.
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2018 Form 10-Q | | 33 |
The change in the effective tax rate for both the three and nine months ended September 30, 20172018 over the prior year was principally due to the effects of the enactment of the Tax Cuts and Jobs Act (the “Act”) in December 2017. The Act significantly changes in the jurisdictional mixU.S. corporate tax system, reducing the U.S. federal corporate tax rate from 35% to 21%, requiring companies to pay a one-time transition tax on a mandatory deemed repatriation of earnings as well asof certain discrete factorsforeign subsidiaries that were previously untaxed and events, including collaborations, thecreating new taxes on certain foreign sourced earnings. The Act also creates a territorial tax system that generally excludes dividends from foreign subsidiaries from U.S. taxation. Specific to 2018, there is a beneficial impact due to timing of the prior year non-deductible devaluation loss related to Venezuela and the impact of the adoption of ASU No. 2016-09, which changed the accounting treatment for excess tax benefits associated with stock-based awards. See Note 1 to the Condensed Consolidated Financial Statements for additional informationprovisions related to the adoption of this accounting pronouncement.earnings from certain foreign subsidiaries.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
| | | Nine months ended September 30, | Nine months ended September 30, |
(in millions) | 2017 | | 2016 | 2018 | | 2017 |
Cash flows provided by (used in): | | | | | | |
Operating activities | $ | 7,376 |
| | $ | 5,500 |
| $ | 10,035 |
| | $ | 7,376 |
|
Investing activities | (475 | ) | | (5,955 | ) | (723 | ) | | (475 | ) |
Financing activities | (3,584 | ) | | (1,426 | ) | (10,571 | ) | | (3,584 | ) |
Operating cash flows for the nine months ended September 30, 2017 reflected2018 increased from the prior year due to improved results of operations resulting from revenue growth and an improvement in operating earnings as well as favorability from the timing of income tax payments compared to the prior year. Cash provided by operating activitiesearnings. Operating cash flows also reflected AbbVie’s voluntary contributions to its principal domestic defined benefit plan of $150 million for both the nine months ended September 30, 20172018 and 2016. Realized excess tax benefits associated with stock-based compensation totaled $532017. The company also made an additional voluntary contribution of $600 million for the nine months ended September 30, 2017 and were presented within cash flows from operating activities as a result of the adoption of a new accounting pronouncement. In the nine months ended September 30, 2016, prior to the adoption of the new accounting pronouncement, realized excess tax benefits of $47 million were presented within cash flows from financing activities. See Note 1 to the Condensed Consolidated Financial Statements for additional information regarding the adoption of this new accounting pronouncement.various other defined benefit plans in 2018.
Investing cash flows for the nine months ended September 30, 2018 included payments made for acquisitions and investments of $541 million, capital expenditures of $515 million and net sales and maturities of investment securities totaling $333 million. Investing cash flows for the nine months ended September 30, 2017 included capital expenditures of $347 million, payments made for acquisitions and investments of $180 million and net sales and maturities of investment securities totaling $52 million. For the nine months ended September 30, 2016, investing activities primarily included $1.9 billion of
Financing cash consideration paid to acquire Stemcentrx in June 2016, a $595 million upfront payment to acquire certain BI compounds in April 2016 and net purchases of investment securities totaling $2.9 billion. Cash flows from investing activities for the nine months ended September 30, 20172018 included proceeds from the issuance of a $3.0 billion 364-day term loan credit agreement (term loan) entered into in May 2018. In June 2018, the company drew on this term loan and 2016 also reflected capital expenditures,as of September 30, 2018, $3.0 billion was outstanding and other acquisitionswas included in short-term borrowings on the condensed consolidated balance sheet. Borrowings under the term loan bear interest at one month LIBOR plus applicable margin. The term loan may be prepaid without penalty upon prior notice and investments.
contains customary covenants, all of which the company was in compliance with as of September 30, 2018. In September 2018, the company issued $6.0 billion aggregate principal amount of unsecured senior notes. The company used a portion of the proceeds to repay the company's outstanding $2.0 billion term loan that was due to mature in November 2018. Financing cash flows for the nine months ended September 30, 2018 also included the May 2018 repayment of $3.0 billion aggregate principal amount of the company's 1.80% senior notes at maturity.
The company made cash dividend payments of $4.1 billion for the nine months ended September 30, 2018 and $3.1 billion for the nine months ended September 30, 2017 and $2.8 billion for the nine months ended September 30, 2016.2017. The increase in cash dividend payments was driven by an increase in the quarterly dividend rate from $0.57 per share to $0.64 per share beginning with the dividend that was paid in February 2017.rate. On September 8, 2017,7, 2018, the board of directors declared a quarterly cash dividend of $0.64$0.96 per share for stockholders of record at the close of business on October 13, 2017,15, 2018, payable on November 15, 2017.2018. On October 27, 2017,November 2, 2018, the company announced that its board of directors declared an increase in the company's quarterly cash dividend from $0.64$0.96 per share to $0.71$1.07 per share beginning with the dividend payable on February 15, 20182019 to stockholders of record as of January 12, 2018.15, 2019. This reflects an increase of approximately 11%11.5% over the previous quarterly rate. The timing, declaration, amount of and payment of any dividends by AbbVie in the future is within the discretion of its board of directors and will depend upon many factors, including AbbVie’s financial condition, earnings, capital requirements of its operating subsidiaries, covenants associated with certain of AbbVie’s debt service obligations, legal requirements, regulatory constraints, industry practice, ability to access capital markets and other factors deemed relevant by its board of directors.
On February 16, 2017,15, 2018, AbbVie's board of directors authorized a $5.0new $10.0 billion increase tostock repurchase program, which superseded AbbVie's existingprevious stock repurchase program. Under this program, the company repurchased approximately 7.8 million shares for $500 million in the open market in the nine months ended September 30, 2017. Additionally, during the nine months ended September 30, 2017, AbbVie cash-settled $285 million of its open market purchases made at the end of 2016. The new stock repurchase authorizationprogram permits purchases of AbbVie shares from time to time in open-market or private transactions, including accelerated share repurchases, at management's discretion. The program has
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| |
20172018 Form 10-Q | | 3334 |
shares from time to time in open-market or private transactions at management's direction depending on the company's cash flows, net debt level and market conditions. The program has no time limit and can be discontinued at any time. Under the new authorization, AbbVie repurchased 83.2 million shares for $8.5 billion during the nine months ended September 30, 2018.
Prior to the new $10.0 billion authorization, AbbVie repurchased 10.9 million shares in the open market for $1.3 billion during the nine months ended September 30, 2018.
During the nine months ended September 30, 20172018, AbbVie paid $100 million of contingent consideration to Boehringer Ingelheim related to BLA and 2016, the company issuedMAA acceptance milestones. $78 million of these payments were included in financing cash flows and redeemed commercial paper. The balance of commercial paper outstanding was $800$22 million as of September 30, 2017 and $377 million as of December 31, 2016. AbbVie may issue additional commercial paper or retire commercial paper to meet liquidity requirements as needed.
In May 2016, the company issued $7.8 billion aggregate principal amount of senior notes. Approximately $2.0 billion of the net proceedspayments were used to repay an outstanding term loan that was due to matureincluded in November 2016, approximately $1.9 billion ofoperating cash flows. During the net proceeds were used to finance the acquisition of Stemcentrx and approximately $3.8 billion of the net proceeds were used to finance an accelerated share repurchase agreement.
In the third quarter ofnine months ended September 30, 2017, AbbVie paid $305 million of contingent consideration to BI related to a Phase 3 enrollment milestone. $268 million of this milestone was included in financing cash flows and $37 million was included in operating cash flows forflows.
During the nine months ended September 30, 2017.
Cash2018 and equivalents2017, the company issued and redeemed commercial paper. The balance of commercial paper outstanding was $400 million as of December 31, 2017. There were impacted by net favorable exchange rate changes totaling $29 million for the nine months ended September 30, 2017 and net unfavorable exchange rate changes totaling $300 million for the nine months ended September 30, 2016. The unfavorable exchange rate changes in 2016 were primarily due to the devaluation of AbbVie’s net monetary assets denominated in the Venezuelan bolivar. While a significant portion of cash and equivalentsno commercial paper borrowings outstanding as of September 30, 2017 were considered reinvested indefinitely in foreign subsidiaries,2018. AbbVie does not expect such reinvestmentmay issue additional commercial paper or retire commercial paper to affect itsmeet liquidity and capital resources. If these funds were needed for operations in the United States, AbbVie would be required to accrue and pay U.S. income taxes to repatriate these funds. AbbVie believes that it has sufficient sources of liquidity to support its assumption that the amount of undistributed earningsrequirements as of September 30, 2017 has been reinvested indefinitely.
needed.
Credit Risk
AbbVie monitors economic conditions, the creditworthiness of customers and government regulations and funding, both domestically and abroad. AbbVie regularly communicates with its customers regarding the status of receivable balances, including their payment plans and obtains positive confirmation of the validity of the receivables. AbbVie establishes an allowance against accounts receivable when it is probable they will not be collected. AbbVie may also utilize factoring arrangements to mitigate credit risk, although the receivables included in such arrangements have historically not been a significant amount of total outstanding receivables.
AbbVie continues to do business with foreign governments in certain countries, including Greece, Portugal, Italy and Spain, which have historically experienced challenges in credit and economic conditions. Substantially all of AbbVie’s trade receivables in Greece, Portugal, Italy and Spain are with government health systems. Outstanding governmental receivables in these countries, net of allowances for doubtful accounts, totaled $246$270 million as of September 30, 20172018 and $244$255 million as of December 31, 2016.2017. The company also continues to do business with foreign governments in certain oil-exporting countries that have recently experienced a deterioration in economic conditions, including Saudi Arabia and Russia, which may result in delays in the collection of receivables. Outstanding governmental receivables related to Saudi Arabia, net of allowances for doubtful accounts, were $141$147 million as of September 30, 20172018 and $122$149 million as of December 31, 2016.2017. Outstanding governmental receivables related to Russia, net of allowances for doubtful accounts, were $142$104 million as of September 30, 20172018 and $110$152 million as of December 31, 2016.2017. Global economic conditions and customer-specific factors may require the company to periodically re-evaluate the collectability of its receivables and the company could potentially incur credit losses.
Currently, AbbVie does not believe the economic conditions in oil-exporting countries will have a significant impact on the company’s liquidity, cash flow or financial flexibility. However, if government funding were to become unavailable in these countries or if significant adverse changes in their reimbursement practices were to occur, AbbVie may not be able to collect the entire balance outstanding as of September 30, 2017.
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2017 Form 10-Q | | 34 |
2018.
Credit Facility, Access to Capital and Credit Ratings
Credit Facility
In September 2018, AbbVie currently hasreplaced its existing revolving credit facility with a new $3.0 billion five-year revolving credit facility, which matures in October 2019.facility. The revolving creditnew facility enables the company to borrow funds on an unsecured basis at variable interest rates and contains various covenants. At September 30, 2017,2018, the company was in compliance with all its credit facility covenants. Commitment fees under the credit facility were insignificant. There were no amounts outstanding under the company's credit facilityfacilities as of September 30, 20172018 and December 31, 2016.
2017.
Access to Capital
The company intends to fund short-term and long-term financial obligations as they mature through cash on hand, future cash flows from operations, or by issuing additional debt. The company’s ability to generate cash flows from operations, issue debt or enter into financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for the
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| |
2018 Form 10-Q | | 35 |
company’s products or in the solvency of its customers or suppliers, deterioration in the company’s key financial ratios or credit ratings, or other material unfavorable changes in business conditions. At the current time, the company believes it has sufficient financial flexibility to issue debt, enter into other financing arrangements and attract long-term capital on acceptable terms to support the company’s growth objectives.
Credit Ratings
There were no changes in the company’s credit ratings during the nine months ended September 30, 2017.2018. Unfavorable changes to the ratings may have an adverse impact on future financing arrangements; however, they would not affect the company’s ability to draw on its credit facility and would not result in an acceleration of scheduled maturities of any of the company’s outstanding debt.
CRITICAL ACCOUNTING POLICIES
A summary of the company’s significant accounting policies is included in Note 2, entitled “Summary of Significant Accounting Policies” to the company’sin AbbVie's Annual Report on Form 10-K for the year ended December 31, 2016. There have been no significant2017. Significant changes in the company’s application of its critical accounting policies duringinclude the nine months ended September 30, 2017.
adoption of a new accounting standard that establishes a new revenue recognition framework. See Notes 1 and 2 to the condensed consolidated financial statements for additional information.
FORWARD-LOOKING STATEMENTS
Some statements in this quarterly report on Form 10-Q may be forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. The words “believe,” “expect,” “anticipate,” “project,” and similar expressions, among others, generally identify forward-looking statements. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Such risks and uncertainties include, but are not limited to, challenges to intellectual property, competition from other products, difficulties inherent in the research and development process, adverse litigation or government action, and changes to laws and regulations applicable to our industry. Additional information about the economic, competitive, governmental, technological and other factors that may affect AbbVie’s operations is set forth in Item 1A, “Risk Factors,” in AbbVie’s Annual Report on Form 10-K for the year ended December 31, 2016,2017, which has been filed with the Securities and Exchange Commission. AbbVie notes these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. AbbVie undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments, except as required by law.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of the company's market risk, see Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" in AbbVie's Annual Report on Form 10-K for the year ended December 31, 2016.2017.
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| |
20172018 Form 10-Q | | 3536 |
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. The Chief Executive Officer, Richard A. Gonzalez, and the Chief Financial Officer, William J. Chase,Robert A. Michael, evaluated the effectiveness of AbbVie’s disclosure controls and procedures as of the end of the period covered by this report, and concluded that AbbVie’s disclosure controls and procedures were effective to ensure that information AbbVie is required to disclose in the reports that it files or submits with the Securities and Exchange Commission under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and to ensure that information required to be disclosed by AbbVie in the reports that it files or submits under the Exchange Act is accumulated and communicated to AbbVie’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Changes in internal control over financial reporting. There were no changes in AbbVie’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, AbbVie’s internal control over financial reporting during the quarter ended September 30, 2017.2018.
Inherent Limitations on Effectiveness of Controls. AbbVie’s management, including its Chief Executive Officer and its Chief Financial Officer, do not expect that AbbVie’s disclosure controls or internal control over financial reporting will prevent or detect all errorerrors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.
The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
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20172018 Form 10-Q | | 3637 |
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information pertaining to legal proceedings is provided in Note 1213 to the Condensed Consolidated Financial Statementscondensed consolidated financial statements and is incorporated by reference herein.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Issuer Purchases of Equity Securities
|
| | | | | | | | | |
Period | (a) Total Number of Shares (or Units) Purchased | | (b) Average Price Paid per Share (or Unit) | | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | |
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs |
July 1, 2017 – July 31, 2017 | 24,680 |
| (1) | $72.78 | (1) | — |
| | $4,536,288,945 |
August 1, 2017 – August 31, 2017 | 2,731 |
| (1) | $70.45 | (1) | — |
| | $4,536,288,945 |
September 1, 2017 – September 30, 2017 | 4,266 |
| (1) | $83.29 | (1) | — |
| | $4,536,288,945 |
Total | 31,677 |
| (1) | $74.00 | (1) | — |
| | $4,536,288,945 |
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Period | (a) Total Number of Shares (or Units) Purchased | | (b) Average Price Paid per Share (or Unit) | | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | |
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | |
July 1, 2018 – July 31, 2018 | 1,157 |
| (1) | $96.23 | (1) | — |
| | $2,500,000,000 | |
August 1, 2018 – August 31, 2018 | 10,392,841 |
| (1) | $96.23 | (1) | 10,391,816 |
| | $1,500,000,050 | |
September 1, 2018 – September 30, 2018 | 1,145 |
| (1) | $93.73 | (1) | — |
| | $1,500,000,050 | |
Total | 10,395,143 |
| (1) | $96.23 | (1) | 10,391,816 |
| | $1,500,000,050 | |
| |
1. | In addition to AbbVie shares repurchased on the open market under a publicly announced program, if any, these shares also included the shares deemed surrendered topurchased on the open market for the benefit of participants in the AbbVie to pay the exercise price in connection with the exercise of employee stock optionsEmployee Stock Purchase Plan – 3,7381,157 in July; 1,2931,025 in August; and 2,974 in September, with average exercise prices of $72.84 in July; $69.87 in August; and $86.511,145 in September. |
These shares also included the shares purchased on the open market for the benefit of participants in the AbbVie Employee Stock Purchase Plan - 20,942 in July; 1,438 in August; and 1,292 in September.
These shares do not include the shares surrendered to AbbVie to satisfy minimum tax withholding obligations in connection with the vesting or exercise of stock-based awards.
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2018 Form 10-Q | | 38 |
ITEM 6. EXHIBITS
Incorporated by reference to the Exhibit Index included herewith.
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2017 Form 10-Q | | 37 |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | ABBVIE INC. |
| | |
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| By: | /s/ William J. Chase |
| | William J. Chase |
| | Executive Vice President, |
| | Chief Financial Officer |
Date: November 7, 2017
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2017 Form 10-Q | | 38 |
EXHIBIT INDEX
Exhibits 32.1 and 32.2 are furnished herewith and should not be deemed to be “filed” under the Securities Exchange Act of 1934.
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Exhibit No. | | Exhibit Description |
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�� | | |
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101 | | The following financial statements and notes from the AbbVie Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2017,2018, filed on November 7, 2017,2018, formatted in XBRL: (i) Condensed Consolidated Statements of Earnings; (ii) Condensed Consolidated Statements of Comprehensive Income; (iii) Condensed Consolidated Balance Sheets; (iv) Condensed Consolidated Statements of Cash Flows; and (v) the Notes to Condensed Consolidated Financial Statements. |
* Incorporated herein by reference. Commission file number 001-35565.
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2018 Form 10-Q | | 39 |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | ABBVIE INC. |
| | |
| | |
| By: | /s/ Robert A. Michael |
| | Robert A. Michael |
| | Senior Vice President, |
| | Chief Financial Officer |
Date: November 7, 2018
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2018 Form 10-Q | | 40 |