Financial Instruments and Fair Value Measures | Financial Instruments and Fair Value Measures Risk Management Policy See Note 11 to the company’s Annual Report on Form 10-K for the year ended December 31, 2023 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 $2.6 billion at September 30, 2024 and $1.8 billion at December 31, 2023, are designated as cash flow hedges and are recorded at fair value. The durations of these forward exchange contracts were generally less than 18 months. Accumulated gains and losses as of September 30, 2024 are reclassified from accumulated other comprehensive income (loss) (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. In 2019, the company entered into treasury rate lock agreements with notional amounts totaling $10.0 billion to hedge exposure to variability in future cash flows resulting from changes in interest rates related to the issuance of long-term debt in connection with the acquisition of Allergan. The treasury rate lock agreements were designated as cash flow hedges and recorded at fair value. The agreements were net settled upon issuance of the senior notes in 2019 and the resulting net gain was recognized in AOCI. This gain is reclassified to interest expense, net over the term of the related debt. In June 2023, the company entered into a cross-currency swap contract that matured in November 2023 with a notional amount totaling €433 million to hedge the company’s exposure to changes in future cash flows of foreign currency denominated debt related to changes in foreign exchange rates. The cross-currency swap contract was designated as a cash flow hedge and effectively converted the interest and principal payments of the related foreign currency denominated debt to U.S. dollars. The unrealized gains and losses on the contract were included in AOCI and reclassified to net foreign exchange loss over the term of the related debt. 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 gain or loss in the condensed 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 $7.7 billion at September 30, 2024 and $7.9 billion at December 31, 2023. 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. The company had an aggregate principal amount of senior Euro notes designated as net investment hedges of €3.2 billion at September 30, 2024 and €5.4 billion at December 31, 2023. In addition, the company had foreign currency forward exchange contracts designated as net investment hedges with notional amounts totaling €6.2 billion, SEK1.9 billion, CAD750 million and CHF70 million at September 30, 2024 and €4.9 billion, SEK1.4 billion, CAD750 million and CHF50 million at December 31, 2023. The company uses the spot method of assessing hedge effectiveness for derivative instruments designated as net investment hedges. Realized and unrealized gains and losses from these hedges are included in AOCI and the initial fair value of hedge components excluded from the assessment of effectiveness is recognized in interest expense, net over the life of the hedging instrument. The company is a party to interest rate swap contracts designated as fair value hedges with notional amounts totaling $3.5 billion at September 30, 2024 and $5.0 billion at December 31, 2023. 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. No amounts are excluded from the assessment of effectiveness for cash flow 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 – Fair value – (in millions) Balance sheet caption September 30, December 31, Balance sheet caption September 30, December 31, Foreign currency forward exchange contracts Designated as cash flow hedges Prepaid expenses and other $ 8 $ 12 Accounts payable and accrued liabilities $ 45 $ 32 Designated as net investment hedges Prepaid expenses and other 12 13 Accounts payable and accrued liabilities 32 66 Designated as net investment hedges Other assets — — Other long-term liabilities 108 69 Not designated as hedges Prepaid expenses and other 24 41 Accounts payable and accrued liabilities 17 36 Interest rate swap contracts Designated as fair value hedges Other assets — — Other long-term liabilities 244 293 Total derivatives $ 44 $ 66 $ 446 $ 496 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 (loss): Three months ended Nine months ended (in millions) 2024 2023 2024 2023 Foreign currency forward exchange contracts Designated as cash flow hedges $ (45) $ 76 $ 30 $ 81 Designated as net investment hedges (238) 241 (16) 153 Cross-currency swap contracts designated as cash flow hedges — (14) — (5) Assuming market rates remain constant through contract maturities, the company expects to reclassify pre-tax gains of $6 million into cost of products sold for foreign currency cash flow hedges and pre-tax gains of $21 million into interest expense, net for treasury rate lock agreement cash flow hedges during the next 12 months. Related to AbbVie’s non-derivative, foreign currency denominated debt designated as net investment hedges, the company recognized in other comprehensive income (loss) pre-tax losses of $151 million for the three months and pre-tax gains of $56 million for the nine months ended September 30, 2024 and pre-tax gains of $173 million for the three months and pre-tax gains of $47 million for the nine months ended September 30, 2023. 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 net gains (losses) reclassified out of AOCI into net earnings. See Note 10 for the amount of net gains (losses) reclassified out of AOCI. Three months ended Nine months ended (in millions) Statement of earnings caption 2024 2023 2024 2023 Foreign currency forward exchange contracts Designated as cash flow hedges Cost of products sold $ 19 $ 11 $ 41 $ 67 Designated as net investment hedges Interest expense, net 32 28 90 85 Not designated as hedges Net foreign exchange loss (gain) (30) (41) (14) (7) Treasury rate lock agreements designated as cash flow hedges Interest expense, net 6 6 18 18 Cross-currency swap contracts designated as cash flow hedges Net foreign exchange loss (gain) — (14) — (6) Interest rate swap contracts Designated as fair value hedges Interest expense, net 60 (58) 49 (44) Debt designated as hedged item in fair value hedges Interest expense, net (60) 58 (49) 44 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, 2024: Basis of fair value measurement (in millions) Total Quoted prices in active markets for identical assets Significant other observable Significant unobservable inputs Assets Cash and equivalents $ 7,257 $ 6,080 $ 1,177 $ — Money market funds and time deposits 10 — 10 — Debt securities 32 — 32 — Equity securities 100 71 29 — Foreign currency contracts 44 — 44 — Total assets $ 7,443 $ 6,151 $ 1,292 $ — Liabilities Interest rate swap contracts $ 244 $ — $ 244 $ — Foreign currency contracts 202 — 202 — Financing liability 253 — — 253 Contingent consideration 21,926 — — 21,926 Total liabilities $ 22,625 $ — $ 446 $ 22,179 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, 2023: Basis of fair value measurement (in millions) Total Quoted prices in active markets for identical assets Significant other observable Significant unobservable inputs Assets Cash and equivalents $ 12,814 $ 6,223 $ 6,591 $ — Money market funds and time deposits 10 — 10 — Debt securities 26 — 26 — Equity securities 111 86 25 — Foreign currency contracts 66 — 66 — Total assets $ 13,027 $ 6,309 $ 6,718 $ — Liabilities Interest rate swap contracts $ 293 $ — $ 293 $ — Foreign currency contracts 203 — 203 — Contingent consideration 19,890 — — 19,890 Total liabilities $ 20,386 $ — $ 496 $ 19,890 Money market funds and time deposits are valued using relevant observable market inputs including quoted prices for similar assets and interest rate curves. Equity securities primarily consist of investments for which the fair values were determined by using the published market prices per unit multiplied by the number of units held, without consideration of transaction costs. The derivatives entered into by the company were valued using observable market inputs including published interest rate curves and both forward and spot prices for foreign currencies. The financing liability is related to funding agreements entered into by Cerevel Therapeutics prior to the acquisition and assumed by AbbVie. The funding agreements represent financial instruments that are accounted for as financing arrangements and the company elected to account for the financing liability in accordance with the fair value option, as permitted under ASC 825 Financial Instruments . The fair value measurement of the financing liability was determined based on significant unobservable inputs. Potential payments are estimated by applying a probability-weighted expected payment model for regulatory milestone payments and a Monte Carlo simulation model for sales milestones and royalty payments, which are then discounted to present value. Changes to the fair value of the financing liability can result from changes to one or a number of inputs, including discount rates, estimated probabilities and timing of achieving milestones and estimated amounts of future sales. The change in fair value recognized in net earnings is recorded in other expense (income), net in the condensed consolidated statements of earnings and the change in fair value attributable to instrument-specific credit risk is recognized in other comprehensive loss. Changes in fair value recognized in other expense (income), net and other comprehensive loss for the three months ended September 30, 2024 were not significant. 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. The potential contingent consideration payments are estimated by applying a probability-weighted expected payment model for contingent milestone payments and a Monte Carlo simulation model for contingent royalty payments, which are then discounted to present value. 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 certain 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. The fair value of the company's contingent consideration liabilities was calculated using the following significant unobservable inputs: September 30, 2024 December 31, 2023 Range Weighted average (a) Range Weighted average (a) Discount rate 3.9% - 5.1% 4.1% 4.3% - 5.9% 4.5% Probability of payment for royalties by indication (b) 100% - 100% 100% 89% - 100% 99% Projected year of payments 2024 - 2034 2028 2024 - 2034 2027 (a) Unobservable inputs were weighted by the relative fair value of the contingent consideration liabilities. (b) Excluding approved indications, the estimated probability of payment was 89% at December 31, 2023. There have been no transfers of assets or liabilities into or out of Level 3 of the fair value hierarchy. The following table presents the changes in fair value of total contingent consideration liabilities which are measured using Level 3 inputs: Nine months ended (in millions) 2024 2023 Beginning balance $ 19,890 $ 16,384 Change in fair value recognized in net earnings 3,492 3,432 Payments (1,456) (1,142) Ending balance $ 21,926 $ 18,674 The change in fair value recognized in net earnings is recorded in other expense (income), net in the condensed consolidated statements of earnings. Contingent consideration payments of amounts up to the initial acquisition date fair value are classified as cash outflows from financing activities and payments of amounts in excess of the initial acquisition date fair value are classified as cash outflows from operating activities in the condensed consolidated statements of cash flows. 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, 2024 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 other Significant unobservable inputs Liabilities Current portion of long-term debt and finance lease obligations, excluding fair value hedges $ 12,558 $ 12,486 $ 12,341 $ 145 $ — Long-term debt and finance lease obligations, excluding fair value hedges 58,500 57,177 56,747 430 — Total liabilities $ 71,058 $ 69,663 $ 69,088 $ 575 $ — The book values, approximate fair values and bases used to measure the approximate fair values of certain financial instruments as of December 31, 2023 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 other Significant unobservable inputs Liabilities Current portion of long-term debt and finance lease obligations, excluding fair value hedges $ 7,191 $ 7,069 $ 6,862 $ 207 $ — Long-term debt and finance lease obligations, excluding fair value hedges 52,460 49,541 48,983 558 — Total liabilities $ 59,651 $ 56,610 $ 55,845 $ 765 $ — 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 $153 million as of September 30, 2024 and $159 million as of December 31, 2023. No significant cumulative upward or downward adjustments have been recorded for these investments as of September 30, 2024. Concentrations of Risk Of total net accounts receivable, three U.S. wholesalers accounted for 78% as of September 30, 2024 and 81% as of December 31, 2023, and substantially all of AbbVie’s pharmaceutical product net revenues in the United States were to these three wholesalers. Debt and Credit Facilities Financing Related to ImmunoGen and Cerevel Therapeutics Acquisitions In connection with the acquisitions of ImmunoGen and Cerevel Therapeutics, in February, 2024, the company issued $15.0 billion aggregate principal amount of unsecured senior notes. The notes are unsecured, unsubordinated obligations of AbbVie and will rank equally in right of payment with all of AbbVie’s existing and future unsecured, unsubordinated indebtedness, liabilities and other obligations. AbbVie may redeem the fixed-rate senior notes prior to maturity at a redemption price equal to the greater of the principal amount or the sum of present values of the remaining scheduled payments of principal and interest on the fixed-rate senior notes to be redeemed plus a make-whole premium. AbbVie may also redeem the fixed-rate senior notes at par between one and six months prior to maturity. In connection with the offering, debt issuance costs incurred totaled $99 million and debt discounts totaled $37 million, which are being amortized over the respective terms of the notes to interest expense, net in the condensed consolidated statements of earnings. AbbVie used the net proceeds received from the issuance of the notes to finance the acquisition of ImmunoGen, repay its term-loan, repay commercial paper borrowings, pay fees and expenses in respect of the foregoing, finance general corporate purposes and, together with cash on hand, fund AbbVie’s acquisition of Cerevel Therapeutics. See Note 4 for additional information. The following table summarizes issued debt in connection with the acquisitions of ImmunoGen and Cerevel Therapeutics: (in millions) Senior Notes 4.80% Senior Notes due 2027 $ 2,250 4.80% Senior Notes due 2029 2,500 4.95% Senior Notes due 2031 2,000 5.05% Senior Notes due 2034 3,000 5.35% Senior Notes due 2044 750 5.40% Senior Notes due 2054 3,000 5.50% Senior Notes due 2064 1,500 Total debt issued $ 15,000 In December 2023, AbbVie entered into a $9.0 billion 364-day bridge credit agreement and $5.0 billion 364-day term loan credit agreement. In February 2024, AbbVie borrowed and repaid $5.0 billion under the term loan credit agreement. Interest charged on this borrowing was based on Secured Overnight Financing Rate Reference Rate (SOFR) +0.975% with an effective interest rate of 6.29%. Subsequent to the $15.0 billion issuance of senior notes, AbbVie terminated both the bridge and term loan credit agreements in the first quarter of 2024. In February 2024, concurrent with the ImmunoGen acquisition, the company assumed and repaid an ImmunoGen senior secured term loan at a fair value of $99 million. In connection with the acquisition of Cerevel Therapeutics, the company assumed $345 million aggregate principal of 2.5% convertible senior notes due 2027. Upon acquisition, the convertible senior notes became callable and note holders could redeem the convertible senior notes for cash at a premium. As of the acquisition date, the convertible senior notes were recognized as current portion of long-term debt on the condensed consolidated balance sheets at an aggregate fair value of $400 million. Following the acquisition date, the company repaid the convertible senior notes and there were no amounts outstanding as of September 30, 2024. The company also assumed funding agreements entered into by Cerevel Therapeutics prior to the acquisition. Under the agreements, Cerevel Therapeutics received funding to support development of tavapadon and agreed to repay regulatory milestones, sales milestones and royalties contingent upon approval of tavapadon by the U.S. Food and Drug Administration (FDA). In addition, upon acquisition the company has the option to satisfy payment obligations early by making a payment equal to the amount of funding provided to Cerevel Therapeutics plus a variable premium. In all circumstances, total repayments under the funding agreements will not exceed $531 million in aggregate. The funding agreements were accounted for as financing arrangements and the fair value of the related financing liability was $246 million as of the acquisition date. In conjunction with the funding agreements, AbbVie also assumed security agreements entered into by Cerevel Therapeutics prior to the acquisition pursuant to which Cerevel Therapeutics granted the funding investors a security interest in the assets material to the development and commercialization of tavapadon in the United States. Other Long-Term Debt In May 2024, the company repaid a €1.5 billion aggregate principal amount of 1.38% senior euro notes at maturity. In June 2024, the company repaid a €700 million aggregate principal amount of 1.25% senior euro notes and $1.0 billion aggregate principal amount of 3.85% senior notes at maturity. Subsequent to September 30, 2024, the company refinanced its $2.0 billion floating rate three-year term loan. As part of the refinancing, the company repaid the existing $2.0 billion term loan due May 2025 and borrowed $2.0 billion under a new term loan due April 2027. In January 2023, the company repaid a $1.0 billion floating rate three-year term loan that was scheduled to mature in May 2023. In March 2023, the company repaid a $350 million aggregate principal amount of 2.80% senior notes at maturity. In May 2023, the company repaid $1.0 billion aggregate principal amount of 2.85% senior notes at maturity. Short-Term Borrowings During the nine months ended September 30, 2024, the company issued and redeemed $1.7 billion of commercial paper. There were no commercial paper borrowings outstanding as of September 30, 2024 and December 31, 2023. The weighted average interest rate on commercial paper borrowings was 5.54% for the nine months ended September 30, 2024. In March 2023, AbbVie entered into an amended and restated five-year revolving credit facility. The amendment increased the unsecured revolving credit facility commitments from $4.0 billion to $5.0 billion and extended the maturity date of the facility from August 2023 to March 2028. This amended facility enables the company to borrow funds on an unsecured basis at variable interest rates and contains various covenants. At September 30, 2024, the company was in compliance with all covenants, and commitment fees under the credit facility were insignificant. No amounts were outstanding under the company's credit facilities as of September 30, 2024 and December 31, 2023. |