Licensing, Acquisitions, and Other Arrangements | Licensing, Acquisitions and Other Arrangements Acquisition of Stemcentrx On June 1, 2016, AbbVie acquired all of the outstanding equity interests in Stemcentrx, a privately-held biotechnology company. The transaction expands AbbVie’s oncology pipeline by adding the 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 has been 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 up to $4.0 billion in additional payments upon the achievement of certain development and regulatory milestones. The acquisition-date fair value of this contingent consideration totaled $620 million and was estimated using a combination of probability-weighted discounted cash flow models and Monte Carlo simulation models. The estimate was based on significant inputs that are not observable in the market, referred to as Level 3 inputs, as described in more detail in Note 10. 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 related to 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, 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 from the acquisition of Stemcentrx 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 and was 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. Subsequent to the acquisition date, the company made certain measurement period adjustments including a refinement of the discount rate assumption, to increase the fair value of consideration transferred by $273 million and made measurement period adjustments to the preliminary purchase price allocation, including: (i) an increase to indefinite-lived research and development intangible assets of $330 million ; (ii) an increase to deferred income tax liabilities of $78 million ; and (iii) an increase to goodwill of $21 million . These measurement period adjustments have been reflected in the tables above. The company made these measurement period adjustments to reflect facts and circumstances that existed as of the acquisition date and did not result from intervening events subsequent to such date. These adjustments did not have a significant impact on AbbVie's results of operations. In the fourth quarter of 2016 , the company finalized its valuation of the acquisition date assets acquired and liabilities assumed. Following the acquisition date, the operating results of Stemcentrx have been included in the company's financial statements. AbbVie’s consolidated statement of earnings for the year ended December 31, 2016 included no net revenues and an operating loss of $165 million associated with Stemcentrx's operations. This operating loss included $43 million of post-acquisition stock-based compensation expense for Stemcentrx options and excluded interest expense and certain acquisition costs. Pro Forma Financial Information The following table presents the unaudited pro forma combined results of operations of AbbVie and Stemcentrx for the years ended December 31, 2016 and 2015 as if the acquisition of Stemcentrx had occurred on January 1, 2015: Years ended December 31, (in millions, except per share information) 2016 2015 Net revenues $ 25,641 $ 22,869 Net earnings 5,907 4,894 Basic earnings per share $ 3.58 $ 2.90 Diluted earnings per share $ 3.56 $ 2.88 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 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 the year ended December 31, 2016 to the year ended December 31, 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 . $18 million of additional payments to BI pursuant to a contractual obligation to reimburse BI for certain development costs it incurred prior to the acquisition date were deferred. In addition, AbbVie may make additional contingent payments upon the achievement of defined development, regulatory and commercial milestones, as well as royalty payments based on net revenues of licensed products. The maximum aggregate amount payable for development and regulatory milestones is approximately $1.6 billion . The acquisition-date fair value of these milestones was $606 million . In addition, 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 from this acquisition includes expected synergies, including an expansion of the combined company’s immunology product portfolio. Subsequent to the acquisition date, the company made a measurement period adjustment to decrease the fair value of consideration transferred by $397 million and made measurement period adjustments to the preliminary purchase price allocation, including: (i) a decrease to indefinite-lived research and development intangible assets of $460 million ; and (ii) an increase to goodwill of $63 million . These measurement period adjustments have been reflected in the tables above. The company made these measurement period adjustments to reflect facts and circumstances that existed as of the acquisition date and did not result from intervening events subsequent to such date. In the fourth quarter of 2016 , the company finalized its valuation of the acquisition date assets acquired. Pro forma results of operations for this acquisition have not been presented because this acquisition is insignificant to AbbVie’s consolidated results of operations. Acquisition of Pharmacyclics On May 26, 2015, AbbVie acquired Pharmacyclics, a biopharmaceutical company that develops and commercializes novel therapies for people impacted by cancer. Pharmacyclics markets IMBRUVICA® (ibrutinib), a Bruton's tyrosine kinase (BTK) inhibitor, targeting B-cell malignancies. The acquisition of Pharmacyclics was accounted for as a business combination using the acquisition method of accounting. The total consideration for the acquisition of Pharmacyclics consisted of cash and approximately 128 million shares of AbbVie common stock and is summarized as follows: (in millions) Cash $ 12,365 Fair value of AbbVie common stock 8,405 Total consideration $ 20,770 The following table summarizes the fair values of assets acquired and liabilities assumed as of the May 26, 2015 acquisition date: (in millions) Assets acquired and liabilities assumed Cash and equivalents $ 877 Short-term investments 11 Accounts receivable 106 Inventories 492 Other assets 212 Intangible assets Definite-lived developed product rights 4,590 Definite-lived license agreements 6,780 Indefinite-lived research and development 7,180 Accounts payable and accrued liabilities (381 ) Deferred income taxes (6,453 ) Other long-term liabilities (254 ) Total identifiable net assets 13,160 Goodwill 7,610 Total assets acquired and liabilities assumed $ 20,770 The amortization of the fair market value step-up for acquired inventory was included in cost of products sold and R&D in the consolidated statements of earnings. The related amortization was $274 million in 2016 and $113 million in 2015 . Intangible assets relate to the IMBRUVICA developed product rights, IPR&D in the United States related to additional indications for IMBRUVICA and the contractual rights to IMBRUVICA profits and losses outside the United States as a result of the collaboration agreement with Janssen Biotech, Inc. and its affiliates (Janssen), one of the Janssen Pharmaceutical companies of Johnson & Johnson. See Note 6 for additional information regarding the collaboration with Janssen. The acquired definite-lived intangible assets are being amortized over a weighted-average estimated useful life of 12 years using the estimated pattern of economic benefit. The estimated fair value of the IPR&D and identifiable intangible assets was determined using the "income approach." The goodwill recognized from the acquisition of Pharmacyclics includes expected synergies, including the ability to leverage the respective strengths of each business, expanding the combined company's product portfolio, acceleration of clinical and commercial presence in oncology and establishment of a strong leadership position in hematological oncology. The goodwill is not deductible for tax purposes. In the second quarter of 2016 , the company finalized its valuation of the acquisition date assets acquired and liabilities assumed. There were no measurement period adjustments in 2016 . From the acquisition date through December 31, 2015, AbbVie's 2015 consolidated statement of earnings included net revenues of $774 million and an operating loss of $519 million associated with Pharmacyclics' operations. The operating loss included $346 million of acquisition-related compensation expense, $261 million of inventory step-up and intangible asset amortization and $100 million of transaction and integration costs. Of these costs, $294 million was recorded within SG&A expenses, $152 million within R&D expense and $261 million within cost of products sold in the 2015 consolidated statement of earnings. Pro Forma Financial Information The following table presents the unaudited pro forma combined results of operations of AbbVie and Pharmacyclics for 2015 and 2014 as if the acquisition of Pharmacyclics had occurred on January 1, 2014: years ended December 31 (in millions, except per share information) 2015 2014 Net revenues $ 23,215 $ 20,690 Net earnings 5,345 812 Basic earnings per share $ 3.18 $ 0.47 Diluted earnings per share $ 3.16 $ 0.47 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 Pharmacyclics. In order to reflect the occurrence of the acquisition on January 1, 2014 as required, the unaudited pro forma financial information includes adjustments to reflect the incremental amortization expense to be incurred based on the fair values of the identifiable intangible assets acquired; the incremental cost of products sold related to the fair value adjustments associated with the acquisition-date inventory; 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 the year ended December 31, 2015 to the year ended December 31, 2014. 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, 2014. 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. Other Licensing & Acquisitions Activity Excluding the acquisitions above, cash outflows related to other acquisitions and investments totaled $262 million in 2016 , $964 million in 2015 and $622 million in 2014 . AbbVie recorded IPR&D charges of $200 million in 2016 , $150 million in 2015 and $352 million in 2014 . In 2014, AbbVie also recorded other operating expenses of $750 million related to the collaboration with Calico Life Sciences LLC (Calico). Significant arrangements impacting 2016 , 2015 and 2014 , some of which require contingent milestone payments, are summarized below. C 2 N Diagnostics In March 2015, AbbVie entered into an exclusive worldwide license agreement with C 2 N Diagnostics (C 2 N) to develop and commercialize anti-tau antibodies for the treatment of Alzheimer's disease and other neurological disorders. As part of the agreement, AbbVie made an initial upfront payment of $100 million , which was expensed to IPR&D in 2015. In 2016, AbbVie made an additional payment of $35 million , which was recorded in R&D expense, due to the achievement of a development milestone under the license agreement. Upon the achievement of certain development, regulatory and commercial milestones, AbbVie could make additional payments of up to $650 million , as well as royalties on net revenues. Calico Life Sciences LLC In September 2014, AbbVie and Calico entered into a novel R&D collaboration agreement to discover, develop and commercialize new therapies for patients with age-related diseases, including neurodegeneration and cancer. In 2014, AbbVie recorded $750 million in other operating expense in the consolidated statement of earnings related to its commitments under the agreement of which $250 million was paid in 2014 and $500 million was paid in early 2015. Calico is responsible for research and early development during the first five years and will continue to advance collaboration projects through Phase 2a for a 10 year period. AbbVie will have the option to exclusively license collaboration compounds after completion of Phase 2a. AbbVie will support Calico in its early R&D efforts and, upon option exercise, would be responsible for all late-stage development and commercial activities. Collaboration costs and profits will be shared equally by both companies post option exercise. Infinity Pharmaceuticals, Inc. In September 2014, AbbVie entered into a global collaboration agreement with Infinity Pharmaceuticals, Inc. (Infinity) to develop and commercialize duvelisib (IPI-145) for the treatment of patients with cancer. As part of the agreement, AbbVie made an initial upfront payment of $275 million , which was expensed to IPR&D in the third quarter of 2014. In 2015, AbbVie made an additional payment of $130 million , which was recorded in R&D expense in the consolidated statement of earnings, due to the achievement of a development milestone under the collaboration agreement. In June 2016, AbbVie exercised its right to end its global collaboration with Infinity. Pursuant to the terms of the global collaboration agreement, the worldwide rights to duvelisib reverted to Infinity. Other Arrangements In addition to the significant arrangements described above, AbbVie entered into several other arrangements resulting in charges to IPR&D of $200 million in 2016 , $50 million in 2015 and $77 million in 2014 . In connection with the other individually insignificant early stage arrangements entered into in 2016, AbbVie could make additional payments of up to $2.6 billion upon the achievement of certain development, regulatory and commercial milestones. Other Activity Priority Review Voucher (PRV) In August 2015, AbbVie entered into an agreement to purchase a rare pediatric disease PRV from a third party. The PRV entitles AbbVie to receive an FDA priority review of a single New Drug Application or Biologics License Application, which reduces the target review time and could lead to an expedited approval. In exchange for the PRV, AbbVie made a payment of $350 million , which was recorded in R&D expense in the consolidated statement of earnings and as an operating cash outflow in the consolidated statement of cash flows for 2015. AbbVie intends to use the PRV for an existing R&D project. Termination of Proposed Combination with Shire On October 15, 2014, AbbVie's board of directors withdrew its previous recommendation to AbbVie stockholders in favor of a proposed combination with Shire and recommended stockholders vote against the proposed combination. On October 20, 2014, AbbVie and Shire mutually agreed to terminate the proposed combination. In 2014, the company incurred transaction and financing-related costs totaling $1.8 billion , of which $1.7 billion was recorded in SG&A expenses and $141 million was recorded in interest expense, net in the consolidated statement of earnings. Included in SG&A expenses was a break fee of $1.6 billion , which was tax deductible, paid by AbbVie to Shire in October 2014 as a result of the termination of the proposed combination. In addition, the company recorded $666 million of net foreign exchange losses primarily due to undesignated forward contracts that were entered into to hedge anticipated foreign currency cash outflows associated with the terminated proposed combination with Shire and the exit of certain foreign currency positions. The forward contracts were settled in 2014. In the first quarter of 2015, AbbVie recorded additional foreign exchange losses of $170 million to reflect the completed liquidation of its remaining foreign currency positions. |