| Financial Instruments and Fair Value Measures | Financial Instruments and Fair Value Measures Risk Management Policy The company is exposed to foreign currency exchange rate and interest rate risks related to its business operations. The company’s hedging policy attempts to manage these risks to an acceptable level based on the company’s judgment of the appropriate trade-off between risk, opportunity and costs. The company uses derivative instruments to reduce its exposure to foreign currency exchange rates. The company is also exposed to the risk that its earnings and cash flows could be adversely impacted by fluctuations in interest rates. The company periodically enters into interest rate swaps, based on judgment, to manage interest costs in which the company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional amount. Derivative instruments are not used for trading purposes or to manage exposure to changes in interest rates for investment securities and none of the company’s outstanding derivative instruments contain credit risk related contingent features; collateral is generally not required. 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 $2.9 billion as of September 30, 2016 and $1.5 billion as of December 31, 2015 were designated as cash flow hedges and were recorded at fair value. The duration of these forward exchange contracts were generally less than eighteen months . Accumulated gains and losses as of September 30, 2016 will be 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 were not designated as hedges and were recorded at fair value. Resulting gains or losses were reflected in net foreign exchange loss in the consolidated statements of earnings and were generally offset by losses or gains on the foreign currency exposure being managed. The notional amounts of these foreign currency forward exchange contracts were $6.5 billion as of September 30, 2016 and $6.8 billion as of December 31, 2015 . AbbVie is a party to interest rate hedge contracts designated as fair value hedges with notional amounts totaling $15.8 billion at September 30, 2016 and $11.0 billion at December 31, 2015 . The effect of the hedge is to change a fixed-rate interest obligation to a floating rate for that portion of the debt. AbbVie recorded the contracts at fair value and adjusted the carrying amount of the fixed-rate debt by an offsetting amount. Additionally, in the nine months ended September 30, 2016 , AbbVie entered into treasury rate lock agreements in order to mitigate the risks associated with changes in interest rates related to an issuance of long-term debt. The treasury rate locks were not designated as hedges and were terminated upon the issuance of debt. In the nine months ended September 30, 2016 , AbbVie recorded a charge of $12 million related to the treasury rate locks which was classified in other expense, net in the condensed consolidated statements of earnings. The following table summarizes the amounts and location of AbbVie’s derivative instruments as of September 30, 2016 : Fair value – Fair value – (in millions) Balance sheet caption Amount Balance sheet caption Amount Foreign currency forward exchange contracts — Hedging instruments Prepaid expenses and other $ 41 Accounts payable and accrued liabilities $ 10 Hedging instruments Other long-term assets 3 Other long-term liabilities 1 Others not designated as hedges Prepaid expenses and other 11 Accounts payable and accrued liabilities 20 Interest rate swaps designated as fair value hedges Other long-term assets 250 Other long-term liabilities 1 Total derivatives $ 305 $ 32 The following table summarizes the amounts and location of AbbVie’s derivative instruments as of December 31, 2015 : Fair value – Fair value – (in millions) Balance sheet caption Amount Balance sheet caption Amount Foreign currency forward exchange contracts — Hedging instruments Prepaid expenses and other $ 33 Accounts payable and accrued liabilities $ — Others not designated as hedges Prepaid expenses and other 28 Accounts payable and accrued liabilities 21 Interest rate swaps designated as fair value hedges Other long-term assets 9 Other long-term liabilities 81 Total derivatives $ 70 $ 102 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 summarizes the impact of the effective portions of the derivative instruments designated as cash flow hedges recognized in other comprehensive income (loss), net of tax. The amount of hedge ineffectiveness was insignificant for all periods presented. Three months ended Nine months ended (in millions) 2016 2015 2016 2015 Unrealized gain/(loss) $ (4 ) $ 2 $ 13 $ 78 The following table summarizes the location in the condensed consolidated statements of earnings and the amount of gain/(loss) recognized into net earnings for derivative instruments, including the effective portions of the gain/(loss) reclassified out of accumulated other comprehensive loss into net earnings: Three months ended Nine months ended (in millions) (brackets denote losses) Statement of earnings caption 2016 2015 2016 2015 Foreign currency forward exchange contracts — Designated as cash flow hedges Cost of products sold $ 4 $ 89 $ 23 $ 171 Not designated as hedges Net foreign exchange loss (15 ) (5 ) (122 ) (170 ) Non-designated treasury rate lock agreements Other expense, net — — (12 ) — Interest rate swaps designated as fair value hedges Interest expense, net (49 ) 235 321 236 The gain/(loss) related to 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. Fair Value Measures The fair value hierarchy under the accounting standard for fair value measurements 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 that were carried at fair value on a recurring basis in the condensed consolidated balance sheet as of September 30, 2016 : Basis of fair value measurement (in millions) Total Quoted prices in active markets for identical Significant Significant Assets Cash and equivalents $ 6,218 $ 991 $ 5,227 $ — Time deposits 1,500 — 1,500 — Debt securities 1,476 — 1,476 — Equity securities 93 93 — — Interest rate hedges 250 — 250 — Foreign currency contracts 55 — 55 — Total assets $ 9,592 $ 1,084 $ 8,508 $ — Liabilities Interest rate hedges $ 1 $ — $ 1 $ — Foreign currency contracts 31 — 31 — Contingent consideration 4,128 — — 4,128 Total liabilities $ 4,160 $ — $ 32 $ 4,128 The following table summarizes the bases used to measure certain assets and liabilities that were carried at fair value on a recurring basis in the condensed consolidated balance sheet as of December 31, 2015 : Basis of fair value measurement (in millions) Total Quoted prices in active markets for identical Significant Significant Assets Cash and equivalents $ 8,399 $ 798 $ 7,601 $ — Time deposits 8 — 8 — Equity securities 111 111 — — Interest rate hedges 9 — 9 — Foreign currency contracts 61 — 61 — Total assets $ 8,588 $ 909 $ 7,679 $ — Liabilities Interest rate hedges $ 81 $ — $ 81 $ — Foreign currency contracts 21 — 21 — Total liabilities $ 102 $ — $ 102 $ — The fair values for time deposits included in cash and equivalents and short-term investments were determined based on a discounted cash flow analysis reflecting quoted market rates for the same or similar instruments. 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 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 were determined based on significant unobservable inputs, including the estimated probabilities and timing of achieving specified development, regulatory, and commercial milestones and the estimated amount of future sales of the product candidates acquired. Changes in discount rates or changes which increase or decrease the probabilities of achieving the milestones, shorten or lengthen the time required to achieve the milestones, or increase or decrease estimated future sales would result in corresponding changes in the fair values of the contingent consideration. There have been no transfers of assets or liabilities between the fair value measurement levels. The following table is a reconciliation of the fair value measurements that use significant unobservable inputs (Level 3), which consist of contingent payments related to the acquisitions of Stemcentrx and BI. See Note 4 for additional information. (in millions) Fair value as of December 31, 2015 $ — Additions 3,985 Change in fair value recognized in net earnings 143 Fair value as of September 30, 2016 $ 4,128 The change in fair value recognized in net earnings was recorded in other expense, net in the condensed consolidated statements of net earnings for the three and nine months ended September 30, 2016 . In addition to the financial instruments that the company is required to recognize at fair value on the condensed consolidated balance sheets, the company has certain financial instruments that were recognized 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, 2016 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 Significant observable Significant Assets Investments $ 41 $ 42 $ — $ 5 $ 37 Total assets $ 41 $ 42 $ — $ 5 $ 37 Liabilities Current portion of long-term debt and lease obligations $ 26 $ 26 $ — $ 26 $ — Long-term debt and lease obligations, excluding fair value hedges 37,035 38,426 36,358 2,068 — Total liabilities $ 37,061 $ 38,452 $ 36,358 $ 2,094 $ — The book values, approximate fair values and bases used to measure the approximate fair values of certain financial instruments as of December 31, 2015 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 Significant observable Significant Assets Investments $ 34 $ 37 $ — $ — $ 37 Total assets $ 34 $ 37 $ — $ — $ 37 Liabilities Short-term borrowings $ 406 $ 406 $ — $ 406 $ — Current portion of long-term debt and lease obligations 2,025 2,016 — 2,016 — Long-term debt and lease obligations, excluding fair value hedges 29,312 29,143 27,061 2,082 — Total liabilities $ 31,743 $ 31,565 $ 27,061 $ 4,504 $ — Investments primarily consist of cost method investments. To determine the fair values of other cost method investments, the company takes into consideration recent transactions, as well as the financial information of the investee, which represents a Level 3 basis of fair value measurement. The fair values of short-term and current 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. Available-for-sale Securities Substantially all of the company’s investments in debt and equity securities were classified as available-for-sale. As of September 30, 2016 , $232 million of debt securities were classified as short-term. Long-term debt securities mature primarily within five years . There were no significant debt securities outstanding as of December 31, 2015 . Estimated fair values of available-for-sale securities were generally 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, 2016 : Amortized Cost Gross unrealized Fair Value (in millions) Gains Losses Asset backed securities $ 670 $ 1 $ — $ 671 Corporate debt securities 726 2 — 728 Other debt securities 77 — — 77 Equity securities 19 74 — 93 Total $ 1,492 $ 77 $ — $ 1,569 AbbVie periodically assesses its investment securities for other-than-temporary impairment losses. This evaluation is based on a number of factors, including the length of time and the extent to which the fair value has been below the cost basis and adverse conditions related specifically to the security including any changes to the credit rating of the security, and the intent to sell, or whether AbbVie will more likely than not be required to sell the security before recovery of its amortized cost basis. AbbVie’s assessment of whether a security is other-than-temporarily impaired could change in the future due to new developments or changes in assumptions related to any particular security. Based on a review of these securities, AbbVie had no other-than-temporary impairments on these securities as of September 30, 2016 . Realized gains and losses on sales of investments were computed using the first-in, first-out method adjusted for any other-than-temporary declines in fair value that were recorded in net earnings. For the three and nine months ended September 30, 2016 and 2015 , realized gains and losses were insignificant. 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. At December 31, 2015 , there were three legal exchange mechanisms administered by the Venezuelan government. These were the official rate of 6.3 Venezuelan bolivars (VEF) per U.S. dollar, the Supplementary System for the Administration of Foreign Currency (SICAD) rate of approximately 13.5 VEF per U.S. dollar, and the Foreign Exchange Marginal System (SIMADI) rate of approximately 200 VEF per U.S. dollar. Effective March 10, 2016, the Venezuelan government devalued the official rate of 6.3 to 10 VEF per U.S. dollar, eliminated the SICAD rate, and replaced SIMADI with a new exchange mechanism, Divisa Complementaria (DICOM). As of September 30, 2016 , the DICOM rate was approximately 658 VEF per U.S. dollar. 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 were no longer expected to be settled at the official rate of 10 VEF per U.S. dollar, but rather at the 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, 2016 , AbbVie’s net monetary assets in Venezuela were approximately $3 million . AbbVie continues to do business with foreign governments in certain countries, including Greece, Portugal, Italy and Spain, which have experienced a deterioration in credit and economic conditions. Substantially all of AbbVie’s trade receivables in Greece, Portugal, Italy and Spain are with government health systems. Outstanding net governmental receivables in these countries totaled $401 million at September 30, 2016 and $525 million at December 31, 2015 . The company also continues to do business with foreign governments in certain oil-exporting countries, which have experienced a deterioration in economic conditions, including Saudi Arabia and Russia. Outstanding net governmental receivables were $160 million related to Saudi Arabia and $139 million related to Russia as of September 30, 2016 . Due to the decline in the price of oil compared to the prior year, liquidity issues in certain countries may result in delays in the collection of receivables. Global economic conditions and customer-specific factors may require the company to re-evaluate the collectability of its receivables and the company could potentially incur credit losses. Of total net accounts receivable, three U.S. wholesalers accounted for 47% as of September 30, 2016 and 51% as of December 31, 2015 and substantially all of AbbVie’s net revenues in the United States are to these three wholesalers. HUMIRA® (adalimumab) is AbbVie’s single largest product and accounted for approximately 63% of AbbVie’s total net revenues for the nine months ended September 30, 2016 and 63% for the nine months ended September 30, 2015 . Debt and Credit Facilities In May 2016, the company issued $7.8 billion aggregate principal amount of unsecured senior notes, consisting of $1.8 billion aggregate principal amount of its 2.30% senior notes due 2021, $1.0 billion aggregate principal amount of its 2.85% senior notes due 2023, $2.0 billion aggregate principal amount of its 3.20% senior notes due 2026, $1.0 billion aggregate principal amount of its 4.30% senior notes due 2036, and $2.0 billion aggregate principal amount of its 4.45% senior notes due 2046. 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. In connection with the offering, debt issuance costs totaled $52 million and debt discounts incurred totaled $29 million and are being amortized over the respective terms of the notes to interest expense, net in the condensed consolidated statements of earnings. Of the $7.7 billion net proceeds, $2.0 billion was used to repay the company’s outstanding term loan that was due to mature in November 2016, approximately $1.9 billion was used to finance the acquisition of Stemcentrx and approximately $3.8 billion was used to finance an ASR with a third party financial institution. See Note 4 for additional information related to the acquisition of Stemcentrx and Note 10 for additional information related to the ASR. In May 2015, the company issued $16.7 billion aggregate principal amount of unsecured senior notes. Debt issuance costs incurred in connection with the offering totaled $93 million and are being amortized over the respective terms of the notes to interest expense, net in the condensed consolidated statements of earnings. Of the $16.6 billion net proceeds, approximately $11.5 billion was used to finance the acquisition of Pharmacyclics and approximately $5.0 billion was used to finance an ASR with a third party financial institution. In March 2015, AbbVie entered into a bridge loan in support of the then planned acquisition of Pharmacyclics. No amounts were drawn under the bridge loan, which was terminated as a result of the company’s May 2015 issuance of the senior notes. Interest expense, net included costs related to the bridge loan of $86 million for the nine months ended September 30, 2015 . Short-term borrowings included commercial paper of $400 million as of December 31, 2015 . There were no short term borrowings outstanding as of September 30, 2016 . The weighted-average interest rate on commercial paper borrowings was 0.6% for the nine months ended September 30, 2016 and was 0.2% for the nine months ended September 30, 2015 . |
