ABBVIE INC.
10-Qs and 10-Ks
PROXIES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
March 31, 2018
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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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)
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Delaware
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32-0375147
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. employer identification number)
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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
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Accelerated Filer
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Non-Accelerated Filer
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Smaller reporting company
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(Do not check if a smaller reporting company)
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Emerging growth company
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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
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No
x
As of
April 27, 2018
, AbbVie Inc. had
1,586,879,451
shares of common stock at $
0.01
par value outstanding.
AbbVie Inc. and Subsidiaries
Table of Contents
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PART I.
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Page
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Item 1.
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Item 2.
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Item 3.
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Item 4.
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PART II.
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Item 1.
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Item 2.
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Item 6.
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2018 Form 10-Q
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1
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AbbVie Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings (unaudited)
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Three months ended
March 31, |
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(in millions, except per share data)
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2018
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2017
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||||||
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Net revenues
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$
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7,934
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$
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6,538
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Cost of products sold
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1,927
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1,616
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Selling, general and administrative
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1,791
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1,373
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Research and development
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1,244
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1,142
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Acquired in-process research and development
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69
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—
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Total operating costs and expenses
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5,031
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4,131
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Operating earnings
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2,903
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2,407
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Interest expense, net
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251
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247
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Net foreign exchange loss
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8
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13
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Other (income) expense, net
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(153
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)
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61
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Earnings before income tax expense
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2,797
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2,086
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Income tax expense
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14
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375
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Net earnings
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$
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2,783
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$
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1,711
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Per share data
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Basic earnings per share
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$
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1.74
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$
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1.07
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Diluted earnings per share
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$
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1.74
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$
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1.06
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Cash dividends declared per common share
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$
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0.96
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$
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0.64
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Weighted-average basic shares outstanding
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1,591
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1,597
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Weighted-average diluted shares outstanding
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1,596
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1,603
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The accompanying notes are an integral part of these condensed consolidated financial statements.
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2018 Form 10-Q
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2
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AbbVie Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (unaudited)
Condensed Consolidated Statements of Comprehensive Income (unaudited)
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Three months ended
March 31, |
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(in millions)
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2018
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2017
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Net earnings
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$
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2,783
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$
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1,711
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Foreign currency translation adjustments, net of tax expense (benefit) of $(3) for the three months ended March 31, 2018 and $— for the three months ended March 31, 2017
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189
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170
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Net investment hedging activities, net of tax expense (benefit) of $(30) for the three months ended March 31, 2018 and $(36) for the three months ended March 31, 2017
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(104
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)
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(64
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)
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Pension and post-employment benefits, net of tax expense (benefit) of $9 for the three months ended March 31, 2018 and $8 for the three months ended March 31, 2017
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22
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11
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Marketable security activities, net of tax expense (benefit) of $— for the three months ended March 31, 2018 and $(1) for the three months ended March 31, 2017
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(7
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)
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(8
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)
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Cash flow hedging activities, net of tax expense (benefit) of $(1) for the three months ended March 31, 2018 and $(13) for the three months ended March 31, 2017
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(3
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)
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(65
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)
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Other comprehensive income
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97
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44
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Comprehensive income
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$
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2,880
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$
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1,755
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The accompanying notes are an integral part of these condensed consolidated financial statements.
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2018 Form 10-Q
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3
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AbbVie Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
Condensed Consolidated Balance Sheets
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(in millions, except share data)
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March 31,
2018 |
December 31,
2017 |
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(unaudited)
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Assets
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Current assets
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Cash and equivalents
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$
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9,007
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$
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9,303
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Short-term investments
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467
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486
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Accounts receivable, net
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5,841
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5,088
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Inventories
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1,738
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1,605
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Prepaid expenses and other
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3,391
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4,741
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Total current assets
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20,444
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21,223
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Investments
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2,057
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2,090
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Property and equipment, net
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2,828
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2,803
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Intangible assets, net
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27,230
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27,559
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Goodwill
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15,880
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15,785
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Other assets
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903
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1,326
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Total assets
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$
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69,342
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$
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70,786
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Liabilities and Equity
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Current liabilities
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Short-term borrowings
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$
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367
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$
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400
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Current portion of long-term debt and lease obligations
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6,014
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6,015
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Accounts payable and accrued liabilities
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10,677
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10,226
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Total current liabilities
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17,058
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16,641
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Long-term debt and lease obligations
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30,906
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30,953
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Deferred income taxes
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2,304
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2,490
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Other long-term liabilities
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15,521
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15,605
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Commitments and contingencies
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Stockholders’ equity
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Common stock, $0.01 par value, 4,000,000,000 shares authorized, 1,775,505,540 shares issued as of March 31, 2018 and 1,768,738,550 as of December 31, 2017
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18
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18
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Common stock held in treasury, at cost, 188,735,571 shares as of March 31, 2018 and 176,607,525 as of December 31, 2017
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(13,331
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)
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(11,923
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)
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Additional paid-in capital
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14,519
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14,270
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Retained earnings
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4,977
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5,459
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Accumulated other comprehensive loss
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(2,630
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)
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(2,727
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)
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Total stockholders’ equity
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3,553
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5,097
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Total liabilities and equity
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$
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69,342
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$
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70,786
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The accompanying notes are an integral part of these condensed consolidated financial statements.
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2018 Form 10-Q
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4
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AbbVie Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
Condensed Consolidated Statements of Cash Flows (unaudited)
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Three months ended
March 31, |
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(in millions) (brackets denote cash outflows)
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2018
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2017
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Cash flows from operating activities
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Net earnings
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$
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2,783
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$
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1,711
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Adjustments to reconcile net earnings to net cash from operating activities:
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Depreciation
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115
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103
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Amortization of intangible assets
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330
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271
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Change in fair value of contingent consideration liabilities
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(148
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)
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85
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Stock-based compensation
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191
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141
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Upfront costs and milestones related to collaborations
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101
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28
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Other, net
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101
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45
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Changes in operating assets and liabilities:
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Accounts receivable
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(681
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)
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(34
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)
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Inventories
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(71
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)
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71
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Prepaid expenses and other assets
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(267
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)
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(53
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)
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Accounts payable and other liabilities
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191
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(266
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)
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Cash flows from operating activities
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2,645
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2,102
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Cash flows from investing activities
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Acquisitions and investments
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(372
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)
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(63
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)
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Acquisitions of property and equipment
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(119
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)
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(95
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)
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Purchases of investment securities
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(267
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)
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(970
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)
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Sales and maturities of investment securities
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311
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444
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Cash flows from investing activities
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(447
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)
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(684
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)
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Cash flows from financing activities
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Net change in short-term borrowings
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(33
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)
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23
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Repayments of long-term debt and lease obligations
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(7
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)
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(6
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)
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Dividends paid
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(1,137
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)
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(1,027
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)
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Purchases of treasury stock
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(1,431
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)
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(895
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)
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Proceeds from the exercise of stock options
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62
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85
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Other, net
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37
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26
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Cash flows from financing activities
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(2,509
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)
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(1,794
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)
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Effect of exchange rate changes on cash and equivalents
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15
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16
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Net change in cash and equivalents
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(296
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)
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(360
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)
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Cash and equivalents, beginning of period
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9,303
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5,100
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Cash and equivalents, end of period
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$
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9,007
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$
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4,740
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The accompanying notes are an integral part of these condensed consolidated financial statements.
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2018 Form 10-Q
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5
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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, 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 May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09,
Summary and Amendments That Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs - Contracts with Customers (Subtopic 340-40)
. The amendments in this standard superseded most existing 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 adopted the standard in the first quarter of 2018 using the modified retrospective method. Results for reporting periods beginning after December 31, 2017 have been presented in 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 new revenue standard was recognized as an adjustment to the opening balance of retained earnings as of January 1, 2018.
There were no significant changes to the amounts or timing of revenue recognition for product sales, the company's primary revenue stream. For certain licensing arrangements where revenue was previously deferred and recognized over time, revenue is now recognized at the point in time when the license 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, on January 1, 2018, the company recognized a cumulative-effect adjustment to retained earnings 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
$124 million
increase to retained earnings. Other cumulative-effect adjustments to the condensed consolidated balance sheet were insignificant.
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2018 Form 10-Q
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6
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The impact of adoption on the company’s condensed consolidated statement of earnings for the three months ended March 31, 2018 was as follows:
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Three months ended
March 31, 2018 |
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(in millions, except per share data)
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As Reported
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Balances Without Adoption of
ASU 2014-09
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Effect of Change Higher/(Lower)
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Net revenues
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$
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7,934
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$
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7,891
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$
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43
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Cost of products sold
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1,927
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1,906
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21
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||||||
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Income tax expense
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14
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7
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7
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||||||
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Net earnings
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2,783
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|
2,768
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15
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Diluted earnings per share
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$
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1.74
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$
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1.73
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$
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0.01
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As of March 31, 2018, due to the impact of the adoption of ASU 2014-09, prepaid expenses and other were
$100 million
higher, inventories were
$60 million
lower, accounts payable and accrued liabilities were
$48 million
lower, other long-term liabilities were
$61 million
lower, deferred income taxes were
$19 million
higher and retained earnings were
$139 million
higher in 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 - 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. AbbVie 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
$12 million
from operating earnings to non-operating income for the
three months ended March 31, 2017
. Additionally, the company recorded approximately
$4 million
of non-operating income for the
three months ended March 31, 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.
|
2018 Form 10-Q
|
|
7
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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 using the modified retrospective approach and will be effective for AbbVie starting with the first quarter of 2019, with early adoption permitted. AbbVie will adopt the standard effective in the first quarter of 2019 and is currently assessing the impact of adopting this guidance on its consolidated financial statements and related disclosures. AbbVie does not expect the adoption will have a material impact on its consolidated 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 January 1, 2019 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 February 2018, the FASB issued ASU No. 2018-02,
Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,
which allows a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax effects related to adjustments to deferred taxes resulting from the enactment of the Tax Cuts and 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.
Note 2
Revenue Recognition
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
Interest Expense, Net
|
Three months ended
March 31, |
||||||||
|
(in millions)
|
2018
|
2017
|
||||||
|
Interest expense
|
$
|
309
|
|
$
|
273
|
|
||
|
Interest income
|
(58
|
)
|
(26
|
)
|
||||
|
Interest expense, net
|
$
|
251
|
|
$
|
247
|
|
||
Inventories
|
(in millions)
|
March 31, 2018
|
December 31, 2017
|
|||||
|
Finished goods
|
$
|
632
|
|
$
|
610
|
|
|
|
Work-in-process
|
913
|
|
822
|
|
|||
|
Raw materials
|
193
|
|
173
|
|
|||
|
Inventories
|
$
|
1,738
|
|
$
|
1,605
|
|
|
Property and Equipment
|
(in millions)
|
March 31, 2018
|
December 31, 2017
|
|||||
|
Property and equipment, gross
|
$
|
8,231
|
|
$
|
8,071
|
|
|
|
Accumulated depreciation
|
(5,403
|
)
|
(5,268
|
)
|
|||
|
Property and equipment, net
|
$
|
2,828
|
|
$
|
2,803
|
|
|
Depreciation expense was
$115 million
for the
three months ended March 31, 2018
and
$103 million
for the
three months ended March 31, 2017
.
Note 4
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
March 31, |
||||||||
|
(in millions, except per share data)
|
2018
|
2017
|
||||||
|
Basic EPS
|
||||||||
|
Net earnings
|
$
|
2,783
|
|
$
|
1,711
|
|
||
|
Earnings allocated to participating securities
|
12
|
|
9
|
|
||||
|
Earnings available to common shareholders
|
$
|
2,771
|
|
$
|
1,702
|
|
||
|
Weighted-average basic shares outstanding
|
1,591
|
|
1,597
|
|
||||
|
Basic earnings per share
|
$
|
1.74
|
|
$
|
1.07
|
|
||
|
Diluted EPS
|
||||||||
|
Net earnings
|
$
|
2,783
|
|
$
|
1,711
|
|
||
|
Earnings allocated to participating securities
|
12
|
|
9
|
|
||||
|
Earnings available to common shareholders
|
$
|
2,771
|
|
$
|
1,702
|
|
||
|
Weighted-average shares of common stock outstanding
|
1,591
|
|
1,597
|
|
||||
|
Effect of dilutive securities
|
5
|
|
6
|
|
||||
|
Weighted-average diluted shares outstanding
|
1,596
|
|
1,603
|
|
||||
|
Diluted earnings per share
|
$
|
1.74
|
|
$
|
1.06
|
|
||
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 was insignificant for all periods presented.
Note 5
Licensing, Acquisitions and Other Arrangements
Cash outflows related to acquisitions and investments totaled
$372 million
for the
three months ended March 31, 2018
and
$63 million
for the
three months ended March 31, 2017
. AbbVie recorded acquired in-process research and development (IPR&D) charges of
$69 million
for the
three months ended March 31, 2018
and recorded
no
IPR&D charges for the
three months ended March 31, 2017
.
Note 6
Collaboration 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 customer product sales. AbbVie and Janssen share pre-tax profits and losses equally from the commercialization of products. Sales of
|
2018 Form 10-Q
|
|
10
|
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
March 31, |
||||||||
|
(in millions)
|
2018
|
2017
|
||||||
|
United States - Janssen's share of profits (included in cost of products sold)
|
$
|
276
|
|
$
|
212
|
|
||
|
International - AbbVie's share of profits (included in net revenues)
|
138
|
|
94
|
|
||||
|
Global - AbbVie's share of other costs (included in respective line items)
|
71
|
|
59
|
|
||||
AbbVie’s receivable from Janssen, included in accounts receivable, net, was
$153 million
at
March 31, 2018
and
$124 million
at
December 31, 2017
. AbbVie’s payable to Janssen, included in accounts payable and accrued liabilities, was
$251 million
at
March 31, 2018
and
$253 million
at
December 31, 2017
.
Note 7
Goodwill and Intangible Assets
Goodwill
The following table summarizes the changes in the carrying amount of goodwill:
|
(in millions)
|
|||
|
Balance as of December 31, 2017
|
$
|
15,785
|
|
|
Foreign currency translation adjustments
|
95
|
|
|
|
Balance as of March 31, 2018
|
$
|
15,880
|
|
The company performs its annual goodwill impairment assessment in the third quarter, or earlier if impairment indicators exist. As of
March 31, 2018
, there were
no
accumulated goodwill impairment losses.
Intangible Assets, Net
The following table summarizes intangible assets:
|
March 31, 2018
|
December 31, 2017
|
||||||||||||||||||||||
|
(in millions)
|
Gross
carrying amount |
Accumulated
amortization |
Net
carrying amount |
Gross
carrying amount |
Accumulated
amortization |
Net
carrying amount |
|||||||||||||||||
|
Definite-lived intangible assets
|
|||||||||||||||||||||||
|
Developed product rights
|
$
|
16,141
|
|
$
|
(5,207
|
)
|
$
|
10,934
|
|
$
|
16,138
|
|
$
|
(4,982
|
)
|
$
|
11,156
|
|
|||||
|
License agreements
|
7,822
|
|
(1,516
|
)
|
6,306
|
|
7,822
|
|
(1,409
|
)
|
6,413
|
|
|||||||||||
|
Total definite-lived intangible assets
|
23,963
|
|
(6,723
|
)
|
17,240
|
|
23,960
|
|
(6,391
|
)
|
17,569
|
|
|||||||||||
|
Indefinite-lived research and development
|
9,990
|
|
—
|
|
9,990
|
|
9,990
|
|
—
|
|
9,990
|
|
|||||||||||
|
Total intangible assets, net
|
$
|
33,953
|
|
$
|
(6,723
|
)
|
$
|
27,230
|
|
$
|
33,950
|
|
$
|
(6,391
|
)
|
$
|
27,559
|
|
|||||
Amortization expense was
$330 million
for the
three months ended March 31, 2018
and
$271 million
for the
three months ended March 31, 2017
. Amortization expense was included in cost of products sold in the condensed consolidated statements of earnings.
|
2018 Form 10-Q
|
|
11
|
Indefinite-lived intangible assets represent acquired IPR&D associated with products that have not yet received regulatory approval. Indefinite-lived intangible assets as of
March 31, 2018
and
December 31, 2017
related to the 2016 acquisitions of Stemcentrx and Boehringer Ingelheim compounds. The company performs its annual impairment assessment of indefinite-lived intangible assets in the third quarter, or earlier if impairment indicators exist.
No
impairment charges were recorded for the
three months ended March 31, 2018 and 2017
.
Note 8
Restructuring Plans
AbbVie recorded restructuring charges of
$22 million
for the
three months ended March 31, 2018
and
$16 million
for the
three months ended March 31, 2017
.
The following table summarizes the cash activity in the restructuring reserve for the
three months ended March 31, 2018
:
|
(in millions)
|
|||
|
Accrued balance as of December 31, 2017
|
$
|
86
|
|
|
Restructuring charges
|
22
|
|
|
|
Payments and other adjustments
|
(7
|
)
|
|
|
Accrued balance as of March 31, 2018
|
$
|
101
|
|
Note 9
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, 2017
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
$3.2 billion
at
March 31, 2018
and
$2.2 billion
at
December 31, 2017
, are designated as cash flow hedges and are recorded at fair value. The durations of these forward exchange contracts were generally less than
eighteen months
. Accumulated gains and losses as of
March 31, 2018
will be reclassified from 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
$10.5 billion
at
March 31, 2018
and
$7.7 billion
at
December 31, 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. The company designated
€3.6 billion
aggregate principal amount of senior Euro notes as net investment hedges at
March 31, 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
March 31, 2018
and
December 31, 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.
No amounts are excluded from the assessment of effectiveness for cash flow hedges, net investment hedges or fair value hedges.
|
2018 Form 10-Q
|
|
12
|
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 |
||||||||||||||
|
(in millions)
|
Balance sheet caption
|
March 31,
2018 |
December 31, 2017
|
Balance sheet caption
|
March 31,
2018 |
December 31, 2017
|
|||||||||
|
Foreign currency forward exchange contracts
|
|||||||||||||||
|
Designated as cash flow hedges
|
Prepaid expenses and
other
|
$
|
3
|
|
$
|
1
|
|
Accounts payable and accrued liabilities
|
$
|
106
|
|
$
|
120
|
|
|
|
Designated as cash flow hedges
|
Other assets
|
1
|
|
—
|
|
Other long-term liabilities
|
2
|
|
—
|
|
|||||
|
Not designated as hedges
|
Prepaid expenses and
other
|
14
|
|
22
|
|
Accounts payable and accrued liabilities
|
19
|
|
29
|
|
|||||
|
Interest rate swaps designated as fair value hedges
|
Prepaid expenses and other
|
—
|
|
—
|
|
Accounts payable and accrued liabilities
|
10
|
|
8
|
|
|||||
|
Interest rate swaps designated as fair value hedges
|
Other assets
|
—
|
|
—
|
|
Other long-term liabilities
|
575
|
|
393
|
|
|||||
|
Total derivatives
|
$
|
18
|
|
$
|
23
|
|
$
|
712
|
|
$
|
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 losses from derivative instruments recognized in other comprehensive income:
|
Three months ended
March 31, |
||||||||
|
(in millions)
|
2018
|
2017
|
||||||
|
Foreign currency forward exchange contracts
|
$
|
(48
|
)
|
$
|
(61
|
)
|
||
Assuming market rates remain constant through contract maturities, the company expects to transfer pre-tax unrealized losses of
$178 million
into cost of products sold for foreign currency 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 pre-tax losses in other comprehensive income of
$134 million
for the
three months ended March 31, 2018
and
$100 million
for the
three months ended March 31, 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 net gains (losses) reclassified out of AOCI into net earnings. See
Note 11
for the amount of net gains (losses) reclassified out of AOCI.
|
Three months ended
March 31, |
|||||||||
|
(in millions)
|
Statement of earnings caption
|
2018
|
2017
|
||||||
|
Foreign currency forward exchange contracts
|
|||||||||
|
Designated as cash flow hedges
|
Cost of products sold
|
$
|
(44
|
)
|
$
|
17
|
|
||
|
Not designated as hedges
|
Net foreign exchange loss
|
(59
|
)
|
(46
|
)
|
||||
|
Interest rate swaps designated as fair value hedges
|
Interest expense, net
|
(184
|
)
|
(15
|
)
|
||||
|
Debt designated as hedged item in fair value hedges
|
Interest expense, net
|
184
|
|
15
|
|
||||
|
2018 Form 10-Q
|
|
13
|
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
March 31, 2018
:
|
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) |
|||||||||||
|
Assets
|
|||||||||||||||
|
Cash and equivalents
|
$
|
9,007
|
|
$
|
1,021
|
|
$
|
7,986
|
|
$
|
—
|
|
|||
|
Time deposits
|
8
|
|
—
|
|
8
|
|
—
|
|
|||||||
|
Debt securities
|
2,471
|
|
—
|
|
2,471
|
|
—
|
|
|||||||
|
Equity securities
|
1
|
|
1
|
|
—
|
|
—
|
|
|||||||
|
Foreign currency contracts
|
18
|
|
—
|
|
18
|
|
—
|
|
|||||||
|
Total assets
|
$
|
11,505
|
|
$
|
1,022
|
|
$
|
10,483
|
|
$
|
—
|
|
|||
|
Liabilities
|
|||||||||||||||
|
Interest rate hedges
|
$
|
585
|
|
$
|
—
|
|
$
|
585
|
|
$
|
—
|
|
|||
|
Foreign currency contracts
|
127
|
|
—
|
|
127
|
|
—
|
|
|||||||
|
Contingent consideration
|
4,386
|
|
—
|
|
—
|
|
4,386
|
|
|||||||
|
Total liabilities
|
$
|
5,098
|
|
$
|
—
|
|
$
|
712
|
|
$
|
4,386
|
|
|||
|
2018 Form 10-Q
|
|
14
|
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, 2017
:
|
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) |
|||||||||||
|
Assets
|
|||||||||||||||
|
Cash and equivalents
|
$
|
9,303
|
|
$
|
849
|
|
$
|
8,454
|
|
$
|
—
|
|
|||
|
Debt securities
|
2,524
|
|
—
|
|
2,524
|
|
—
|
|
|||||||
|
Equity securities
|
4
|
|
4
|
|
—
|
|
—
|
|
|||||||
|
Foreign currency contracts
|
23
|
|
—
|
|
23
|
|
—
|
|
|||||||
|
Total assets
|
$
|
11,854
|
|
$
|
853
|
|
$
|
11,001
|
|
$
|
—
|
|
|||
|
Liabilities
|
|||||||||||||||
|
Interest rate hedges
|
$
|
401
|
|
$
|
—
|
|
$
|
401
|
|
$
|
—
|
|
|||
|
Foreign currency contracts
|
149
|
|
—
|
|
149
|
|
—
|
|
|||||||
|
Contingent consideration
|
4,534
|
|
—
|
|
—
|
|
4,534
|
|
|||||||
|
Total liabilities
|
$
|
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. 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
March 31, 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 million
. Additionally, at
March 31, 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
$370 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:
|
Three months ended
March 31, |
||||||||
|
(in millions)
|
2018
|
2017
|
||||||
|
Beginning balance
|
$
|
4,534
|
|
$
|
4,213
|
|
||
|
Change in fair value recognized in net earnings
|
(148
|
)
|
85
|
|
||||
|
Ending balance
|
$
|
4,386
|
|
$
|
4,298
|
|
||
The change in fair value recognized in net earnings is recorded in other expense, net in the condensed consolidated statements of earnings.
|
2018 Form 10-Q
|
|
15
|
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
March 31, 2018
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) |
|||||||||||||
|
Liabilities
|
||||||||||||||||||
|
Short-term borrowings
|
$
|
367
|
|
$
|
367
|
|
$
|
—
|
|
$
|
367
|
|
$
|
—
|
|
|||
|
Current portion of long-term debt and lease obligations, excluding fair value hedges
|
6,024
|
|
6,026
|
|
3,997
|
|
2,029
|
|
—
|
|
||||||||
|
Long-term debt and lease obligations, excluding fair value hedges
|
31,481
|
|
31,572
|
|
31,494
|
|
78
|
|
—
|
|
||||||||
|
Total liabilities
|
$
|
37,872
|
|
$
|
37,965
|
|
$
|
35,491
|
|
$
|
2,474
|
|
$
|
—
|
|
|||
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
$44 million
as of
March 31, 2018
.
No
cumulative upward or downward adjustments have been recorded for these investments as of
March 31, 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, 2017
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
|
$
|
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
|
|
$
|
—
|
|
|||
|
2018 Form 10-Q
|
|
16
|
Available-for-sale Securities
Substantially all of the company’s investments in debt securities were classified as available-for-sale with changes in fair value recognized in other comprehensive income. Debt securities classified as short-term were
$458 million
as of
March 31, 2018
and
$482 million
as of
December 31, 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
March 31, 2018
:
|
Amortized cost
|
Gross unrealized
|
Fair value
|
|||||||||||||
|
(in millions)
|
Gains
|
Losses
|
|||||||||||||
|
Asset backed securities
|
$
|
911
|
|
$
|
1
|
|
$
|
(6
|
)
|
$
|
906
|
|
|||
|
Corporate debt securities
|
1,455
|
|
4
|
|
(4
|
)
|
1,455
|
|
|||||||
|
Other debt securities
|
111
|
|
—
|
|
(1
|
)
|
110
|
|
|||||||
|
Total
|
$
|
2,477
|
|
$
|
5
|
|
$
|
(11
|
)
|
$
|
2,471
|
|
|||
The following table is a summary of available-for-sale securities by type as of
December 31, 2017
:
|
Amortized cost
|
Gross unrealized
|
Fair value
|
|||||||||||||
|
(in millions)
|
Gains
|
Losses
|
|||||||||||||
|
Asset backed securities
|
$
|
930
|
|
$
|
1
|
|
$
|
(3
|
)
|
$
|
928
|
|
|||
|
Corporate debt securities
|
1,451
|
|
4
|
|
(2
|
)
|
1,453
|
|
|||||||
|
Other debt securities
|
144
|
|
—
|
|
(1
|
)
|
143
|
|
|||||||
|
Equity securities
|
4
|
|
2
|
|
(2
|
)
|
4
|
|
|||||||
|
Total
|
$
|
2,529
|
|
$
|
7
|
|
$
|
(8
|
)
|
$
|
2,528
|
|
|||
AbbVie had
no
other-than-temporary impairments as of
March 31, 2018
. Net realized gains were
insignificant
for the
three months ended March 31, 2018
and
2017
.
Concentrations of Risk
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
$320 million
as of
March 31, 2018
and
$255 million
as of
December 31, 2017
. The company also continues to do business with foreign governments in certain oil-exporting countries that have 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
$143 million
as of
March 31, 2018
and
$149 million
as of
December 31, 2017
. Outstanding governmental receivables related to Russia, net of allowances for doubtful accounts, were
$106 million
as of
March 31, 2018
and
$152 million
as of
December 31, 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.
Of total net accounts receivable,
three
U.S. wholesalers accounted for
52%
as of
March 31, 2018
and
56%
as of
December 31, 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
59%
of AbbVie’s total net revenues for the
three months ended March 31, 2018
and
63%
for the
three months ended March 31, 2017
.
Debt and Credit Facilities
Short-term borrowings included commercial paper borrowings of
$367 million
as of
March 31, 2018
and
$400 million
as of
December 31, 2017
. The weighted-average interest rate on commercial paper borrowings was
1.8%
for the
three months ended March 31, 2018
and
1.1%
for the
three months ended March 31, 2017
.
|
2018 Form 10-Q
|
|
17
|
Note 10
Post-Employment Benefits
The following is a summary of net periodic benefit cost relating to the company’s defined benefit and other post-employment plans:
|
Defined
benefit plans |
Other post-
employment plans |
||||||||||||||
|
Three months ended
March 31, |
Three months ended
March 31, |
||||||||||||||
|
(in millions)
|
2018
|
2017
|
2018
|
2017
|
|||||||||||
|
Service cost
|
$
|
72
|
|
$
|
58
|
|
$
|
8
|
|
$
|
7
|
|
|||
|
Interest cost
|
57
|
|
50
|
|
8
|
|
6
|
|
|||||||
|
Expected return on plan assets
|
(111
|
)
|
(95
|
)
|
—
|
|
—
|
|
|||||||
|
Amortization of actuarial losses and prior service costs
|
37
|
|
26
|
|
4
|
|
1
|
|
|||||||
|
Net periodic benefit cost
|
$
|
55
|
|
$
|
39
|
|
$
|
20
|
|
$
|
14
|
|
|||
The components of net periodic benefit cost other than service cost are included in other (income) expense, net in the condensed consolidated statements of earnings.
Note 11
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
March 31, |
||||||||
|
(in millions)
|
2018
|
2017
|
||||||
|
Cost of products sold
|
$
|
4
|
|
$
|
3
|
|
||
|
Research and development
|
72
|
|
64
|
|
||||
|
Selling, general and administrative
|
115
|
|
74
|
|
||||
|
Pre-tax compensation expense
|
191
|
|
141
|
|
||||
|
Tax benefit
|
29
|
|
47
|
|
||||
|
After-tax compensation expense
|
$
|
162
|
|
$
|
94
|
|
||
Stock Options
During the
three months ended March 31, 2018
, primarily in connection with the company's annual grant, AbbVie granted
0.6 million
stock options with a weighted-average grant-date fair value of
$21.63
. As of
March 31, 2018
,
$15 million
of unrecognized compensation cost related to stock options is expected to be recognized as expense over approximately the next
two years
.
RSAs, RSUs and Performance Shares
During the
three months ended March 31, 2018
, primarily in connection with the company's annual grant, AbbVie granted
3.7 million
RSUs and performance shares with a weighted-average grant-date fair value of
$115.20
. As of
March 31, 2018
,
$467 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
.
|
2018 Form 10-Q
|
|
18
|
Cash Dividends
The following table summarizes quarterly cash dividends declared during
2018
and
2017
:
|
2018
|
2017
|
|||||||||||||
|
Date Declared
|
Payment Date
|
Dividend Per Share
|
Date Declared
|
Payment Date
|
Dividend Per Share
|
|||||||||
|
02/15/18
|
05/15/18
|
$
|
0.96
|
|
10/27/17
|
02/15/18
|
$
|
0.71
|
|
|||||
|
|
09/08/17
|
11/15/17
|
$
|
0.64
|
|
|||||||||
|
|
|
|
06/22/17
|
08/15/17
|
$
|
0.64
|
|
|||||||
|
|
|
|
02/16/17
|
05/15/17
|
$
|
0.64
|
|
|||||||
Stock Repurchase Program
On February 15, 2018, AbbVie's board of directors authorized a new
$10.0 billion
stock repurchase program, which superseded AbbVie's previous stock repurchase program.
The new stock repurchase program 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 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.
As part of this repurchase program, on May 1, 2018, AbbVie announced a modified "Dutch auction" tender offer to purchase for cash up to
$7.5 billion
of its common stock at a price not less than
$99.00
per share and not more than
$114.00
per share. The tender offer expires at midnight Eastern Time, at the end of the day on May 29, 2018, unless extended or terminated by AbbVie.
Prior to the new authorization, AbbVie repurchased approximately
10.9 million
shares in the open market for
$1.3 billion
during the
three months ended March 31, 2018
. AbbVie's stock repurchase authorization was
$10.0 billion
as of
March 31, 2018
.
Accumulated Other Comprehensive Loss
The following table summarizes the changes in each component of accumulated other comprehensive loss, net of tax, for the
three months ended March 31, 2018
:
|
(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, 2017
|
$
|
(439
|
)
|
$
|
(203
|
)
|
$
|
(1,919
|
)
|
$
|
—
|
|
$
|
(166
|
)
|
$
|
(2,727
|
)
|
|||||
|
Other comprehensive income (loss) before reclassifications
|
189
|
|
(104
|
)
|
(11
|
)
|
(7
|
)
|
(45
|
)
|
22
|
|
|||||||||||
|
Net losses reclassified from accumulated other comprehensive loss
|
—
|
|
—
|
|
33
|
|
—
|
|
42
|
|
75
|
|
|||||||||||
|
Net current-period other comprehensive income (loss)
|
189
|
|
(104
|
)
|
22
|
|
(7
|
)
|
(3
|
)
|
97
|
|
|||||||||||
|
Balance as of March 31, 2018
|
$
|
(250
|
)
|
$
|
(307
|
)
|
$
|
(1,897
|
)
|
$
|
(7
|
)
|
$
|
(169
|
)
|
$
|
(2,630
|
)
|
|||||
Other comprehensive income for the
three months ended March 31, 2018
included foreign currency translation adjustments totaling a gain of
$189 million
, which was principally due to the impact of the improvement in the Euro in the
three months ended March 31, 2018
on the translation of the company’s assets denominated in the Euro.
|
2018 Form 10-Q
|
|
19
|
The following table summarizes the changes in each component of accumulated other comprehensive loss, net of tax, for the
three months ended March 31, 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
|
170
|
|
(64
|
)
|
(8
|
)
|
2
|
|
(49
|
)
|
51
|
|
|||||||||||
|
Net losses (gains) reclassified from accumulated other comprehensive loss
|
—
|
|
—
|
|
19
|
|
(10
|
)
|
(16
|
)
|
(7
|
)
|
|||||||||||
|
Net current-period other comprehensive income (loss)
|
170
|
|
(64
|
)
|
11
|
|
(8
|
)
|
(65
|
)
|
44
|
|
|||||||||||
|
Balance as of March 31, 2017
|
$
|
(1,265
|
)
|
$
|
76
|
|
$
|
(1,502
|
)
|
$
|
38
|
|
$
|
111
|
|
$
|
(2,542
|
)
|
|||||
Other comprehensive income for the
three months ended March 31, 2017
included foreign currency translation adjustments totaling a gain of
$170 million
, which was principally due to the impact of the improvement in the Euro in the
three months ended March 31, 2017
on the translation of the company’s assets denominated in the Euro.
The table below presents the impact on AbbVie’s condensed consolidated statements of earnings for significant amounts reclassified out of each component of accumulated other comprehensive loss:
|
Three months ended
March 31, |
||||||||
|
(in millions) (brackets denote gains)
|
2018
|
2017
|
||||||
|
Pension and post-employment benefits
|
||||||||
|
Amortization of actuarial losses and other
(a)
|
$
|
41
|
|
$
|
27
|
|
||
|
Tax (benefit)
|
(8
|
)
|
(8
|
)
|
||||
|
Total reclassifications, net of tax
|
$
|
33
|
|
$
|
19
|
|
||
|
Cash flow hedging activities
|
||||||||
|
Losses (gains) on designated cash flow hedges
(b)
|
$
|
44
|
|
$
|
(17
|
)
|
||
|
Tax expense (benefit)
|
(2
|
)
|
1
|
|
||||
|
Total reclassifications, net of tax
|
$
|
42
|
|
$
|
(16
|
)
|
||
(a) Amounts are included in the computation of net periodic benefit cost (see
Note 10
).
(b) Amounts are included in cost of products sold (see
Note 9
).
Note 12
Income Taxes
The effective tax rate was
1%
for the
three months ended March 31, 2018
and
18%
for the
three months ended March 31, 2017
. The effective tax rate in each period differed from the U.S. statutory tax rates 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.
The change in the effective tax rate for the
three months ended March 31, 2018
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 the U.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
|
2018 Form 10-Q
|
|
20
|
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 other aspects of the Act that could result in adjustments to the 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 months ended March 31, 2018
. The Act also created a minimum tax on certain foreign sourced earnings. The taxability of the foreign sourced earnings and the applicable 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 tax effects of the Act were reported on the basis that the minimum tax will be recognized in tax expense in the 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
$38 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. 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.
Note 13
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
$560 million
as of
March 31, 2018
and
$445 million
as of
December 31, 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.
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-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 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.
|
2018 Form 10-Q
|
|
21
|
In September 2014, the FTC filed suit 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 patent litigation settlement with one of those generic companies violates federal antitrust laws. The FTC's complaint seeks monetary damages and injunctive relief. In May 2015, the court dismissed the FTC's claim regarding the patent litigation settlement.
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 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 payers 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.
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
4,300
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
200
claims are pending in various state courts. Plaintiffs generally seek compensatory and punitive damages. In March 2018, a jury in the United States District Court for the Northern District of Illinois reached a verdict in the retrial of the first case that had been tried in July 2017. In orders from December 2017 and February 2018, the court vacated the original verdict in that case for AbbVie on two claims and for the plaintiff on one claim and the jury’s award of
$150 million
in punitive damages with
no
compensatory damages, and ordered a new trial. In the retrial, the jury reached a verdict for AbbVie on strict liability and fraud and for the plaintiff on negligence, and awarded
$200,000
in compensatory damages and
$3 million
in punitive damages, which is the subject to post-trial proceedings. In a second trial, a jury in the Cook County, Illinois Circuit Court reached a verdict for AbbVie in August 2017 on all claims, which is the subject of post-trial proceedings. In a third trial, a jury in the United States District Court for the Northern District of Illinois reached a verdict for AbbVie in October 2017 on strict liability but for the plaintiff on remaining claims and awarded
$140,000
in compensatory damages and
$140 million
in punitive damages, which is the subject of post-trial proceedings. In a fourth trial, a jury in the United States District Court for the Northern District of Illinois reached a verdict for AbbVie in January 2018 on all claims.
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
619
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.
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 connec
tion with its proposed t
ransaction with Shire. Similar lawsuits were filed between July and September 2017 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 seeks unspecified compensatory damages for AbbVie, among other relief.
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.
|
2018 Form 10-Q
|
|
22
|
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.
|
2018 Form 10-Q
|
|
23
|
Note 14
Segment Information
AbbVie operates in
one
business segment—pharmaceutical products. The following table details AbbVie’s worldwide net revenues:
|
Three months ended
March 31, |
||||||||
|
(in millions)
|
2018
|
2017
|
||||||
|
HUMIRA
|
||||||||
|
United States
|
$
|
3,003
|
|
$
|
2,696
|
|
||
|
International
|
1,706
|
|
1,422
|
|
||||
|
Total
|
$
|
4,709
|
|
$
|
4,118
|
|
||
|
IMBRUVICA
|
||||||||
|
United States
|
$
|
624
|
|
$
|
457
|
|
||
|
Collaboration revenues
|
138
|
|
94
|
|
||||
|
Total
|
$
|
762
|
|
$
|
551
|
|
||
|
HCV
|
||||||||
|
United States
|
$
|
343
|
|
$
|
38
|
|
||
|
International
|
576
|
|
225
|
|
||||
|
Total
|
$
|
919
|
|
$
|
263
|
|
||
|
Creon
|
||||||||
|
United States
|
$
|
209
|
|
$
|
185
|
|
||
|
Lupron
|
||||||||
|
United States
|
$
|
177
|
|
$
|
155
|
|
||
|
International
|
42
|
|
39
|
|
||||
|
Total
|
$
|
219
|
|
$
|
194
|
|
||
|
Synthroid
|
||||||||
|
United States
|
$
|
182
|
|
$
|
192
|
|
||
|
Synagis
|
||||||||
|
International
|
$
|
321
|
|
$
|
300
|
|
||
|
AndroGel
|
||||||||
|
United States
|
$
|
130
|
|
$
|
136
|
|
||
|
Duodopa
|
||||||||
|
United States
|
$
|
18
|
|
$
|
14
|
|
||
|
International
|
85
|
|
66
|
|
||||
|
Total
|
$
|
103
|
|
$
|
80
|
|
||
|
Sevoflurane
|
||||||||
|
United States
|
$
|
17
|
|
$
|
18
|
|
||
|
International
|
89
|
|
89
|
|
||||
|
Total
|
$
|
106
|
|
$
|
107
|
|
||
|
Kaletra
|
||||||||
|
United States
|
$
|
13
|
|
$
|
19
|
|
||
|
International
|
60
|
|
96
|
|
||||
|
Total
|
$
|
73
|
|
$
|
115
|
|
||
|
All other
|
$
|
201
|
|
$
|
297
|
|
||
|
Total net revenues
|
$
|
7,934
|
|
$
|
6,538
|
|
||
|
2018 Form 10-Q
|
|
24
|
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
March 31, 2018
and
December 31, 2017
and the results of operations for the
three months ended March 31, 2018
and
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 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; 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, oncology and 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
29,000
employees. AbbVie operates in one business segment—pharmaceutical products.
2018
Strategic Objectives
AbbVie'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 by diversifying revenue streams, driving late-stage pipeline assets to the market and ensuring strong commercial execution of new product launches; (ii) continued investment and expansion in its pipeline in support of opportunities in immunology, oncology and neurology as well as continued investment in key on-market products; (iii) expanding operating margins; and (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
three months ended March 31, 2018
included delivering worldwide net revenues of
$7.9 billion
, operating earnings of
$2.9 billion
and diluted earnings per share of
$1.74
. Worldwide net revenues grew by
18%
on a constant currency basis, driven primarily by the continued strength of HUMIRA, revenue growth related to IMBRUVICA and HCV product MAVYRET. These increases were partially offset by a decline in net revenues of HCV product VIEKIRA.
Diluted earnings per share was
$1.74
for the
three months ended March 31, 2018
and included the following after-tax costs: (i)
$272 million
related to the amortization of intangible assets; (ii) litigation reserve charges of
$100 million
; (iii)
$69 million
for acquired in-process research and development (IPR&D); and (iv) milestone payments of
$32 million
. These costs were partially offset by an after-tax benefit of
$148 million
for the change in fair value of contingent consideration liabilities. Financial results for the
three months ended March 31, 2018
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 AbbVie’s emerging mid- and late-stage pipeline assets and continued investment in AbbVie’s growth brands.
The company generated cash flows from operations of
$2.6 billion
for the
three months ended March 31, 2018
, which AbbVie utilized to continue to enhance its pipeline through licensing and collaboration activities, repurchase approximately
10.9 million
shares for
$1.3 billion
in the open market and pay cash dividends to stockholders of
$1.1 billion
. In February 2018, the company announced that its board of directors declared an increase in the company's quarterly cash dividend from
$0.71
per share to
$0.96
|
2018 Form 10-Q
|
|
25
|
per share beginning with the dividend payable in May 2018. This reflects an increase of approximately
35%
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 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 April 2018, AbbVie announced that top-line results from the Phase 3 SELECT-COMPARE clinical trial evaluating upadacitinib met all primary and ranked secondary endpoints in patients with moderate to severe rheumatoid arthritis (RA) who are on a stable background of methotrexate and who have an inadequate response. The safety profile of upadacitinib was consistent with previously reported clinical trials and no new safety signals were detected.
|
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 with 12-week dosing compared to ustekinumab met 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 two studies.
|
|
•
|
In April 2018, AbbVie submitted a Biologics License Application (BLA) to the FDA and a Marketing Authorisation Application (MAA) to the European Medicines Agency (EMA) for risankizumab for the treatment of plaque psoriasis in adults.
|
Oncology
IMBRUVICA
|
•
|
In April 2018, AbbVie submitted a supplemental New Drug Application (sNDA) to the FDA for IMBRUVICA in combination with Rituxan (rituximab) in patients with Waldenström’s macroglobulinemia.
|
VENCLEXTA
|
•
|
In January 2018, AbbVie submitted an sNDA to the FDA for VENCLEXTA monotherapy in patients with chronic lymphocytic leukemia (CLL) who are refractory to or have relapsed B-cell receptor pathway inhibitors.
|
|
2018 Form 10-Q
|
|
26
|
|
•
|
In January 2018, AbbVie submitted a Type II variation to the EMA to extend the current approved indication based on the results of the Phase 3 MURANO study. The new additional proposed indication is venetoclax tablets in combination with Rituxan for treatment of adult patients with CLL who have received at least one prior therapy. This submission followed the December 2017 sNDA submission to the FDA for VENCLEXTA in combination with Rituxan in patients with relapsed or refractory CLL.
|
Rova-T
|
•
|
In March 2018, AbbVie announced top-line results from the Phase 2 TRINITY study evaluating rovalpituzumab tesirine (Rova-T) for third-line relapsed/refractory (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 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 second-line SCLC.
|
Neurology
|
•
|
In March 2018, Biogen and AbbVie announced the voluntary worldwide withdrawal of marketing authorizations for ZINBRYTA, a prescription medicine used to treat adults with relapsing forms of multiple sclerosis.
|
Other
|
•
|
In February 2018, AbbVie announced that top-line results from the Phase 3 ELARIS UF-I study evaluating elagolix, an investigational, orally administered gonadotropin-releasing hormone (GnRH) antagonist, being investigated 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 April 2018, AbbVie announced notification by the FDA that extended time is required to review additional information regarding the results of liver function tests provided by AbbVie in connection with its New Drug Application (NDA) for elagolix in endometriosis-associated pain. The Prescription Drug User Fee Act (PDUFA) date has been extended three months to the third quarter of 2018.
|
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, 2017
.
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
March 31, |
Percent change
|
|||||||||||||
|
At actual
currency rates |
At constant
currency rates |
|||||||||||||
|
(dollars in millions)
|
2018
|
|
2017
|
|||||||||||
|
United States
|
$
|
4,790
|
|
$
|
4,052
|
|
18.3
|
%
|
18.3
|
%
|
||||
|
International
|
3,144
|
|
2,486
|
|
26.4
|
%
|
16.6
|
%
|
||||||
|
Net revenues
|
$
|
7,934
|
|
$
|
6,538
|
|
21.4
|
%
|
17.6
|
%
|
||||
|
2018 Form 10-Q
|
|
27
|
The following table details AbbVie’s worldwide net revenues:
|
Three months ended
March 31, |
Percent change
|
|||||||||||||
|
At actual
currency rates |
At constant
currency rates |
|||||||||||||
|
(dollars in millions)
|
2018
|
2017
|
||||||||||||
|
HUMIRA
|
||||||||||||||
|
United States
|
$
|
3,003
|
|
$
|
2,696
|
|
11.4
|
%
|
11.4
|
%
|
||||
|
International
|
1,706
|
|
1,422
|
|
20.0
|
%
|
9.3
|
%
|
||||||
|
Total
|
$
|
4,709
|
|
$
|
4,118
|
|
14.4
|
%
|
10.7
|
%
|
||||
|
IMBRUVICA
|
||||||||||||||
|
United States
|
$
|
624
|
|
$
|
457
|
|
36.7
|
%
|
36.7
|
%
|
||||
|
Collaboration revenues
|
138
|
|
94
|
|
47.2
|
%
|
47.2
|
%
|
||||||
|
Total
|
$
|
762
|
|
$
|
551
|
|
38.5
|
%
|
38.5
|
%
|
||||
|
HCV
|
||||||||||||||
|
United States
|
$
|
343
|
|
$
|
38
|
|
>100.0
|
|
>100.0
|
|
||||
|
International
|
576
|
|
225
|
|
>100.0
|
|
>100.0
|
|
||||||
|
Total
|
$
|
919
|
|
$
|
263
|
|
>100.0
|
|
>100.0
|
|
||||
|
Creon
|
||||||||||||||
|
United States
|
$
|
209
|
|
$
|
185
|
|
13.0
|
%
|
13.0
|
%
|
||||
|
Lupron
|
||||||||||||||
|
United States
|
$
|
177
|
|
$
|
155
|
|
14.8
|
%
|
14.8
|
%
|
||||
|
International
|
42
|
|
39
|
|
7.8
|
%
|
2.5
|
%
|
||||||
|
Total
|
$
|
219
|
|
$
|
194
|
|
13.3
|
%
|
12.2
|
%
|
||||
|
Synthroid
|
||||||||||||||
|
United States
|
$
|
182
|
|
$
|
192
|
|
(5.3
|
)%
|
(5.3
|
)%
|
||||
|
Synagis
|
||||||||||||||
|
International
|
$
|
321
|
|
$
|
300
|
|
6.9
|
%
|
0.4
|
%
|
||||
|
AndroGel
|
||||||||||||||
|
United States
|
$
|
130
|
|
$
|
136
|
|
(4.6
|
)%
|
(4.6
|
)%
|
||||
|
Duodopa
|
||||||||||||||
|
United States
|
$
|
18
|
|
$
|
14
|
|
30.8
|
%
|
30.8
|
%
|
||||
|
International
|
85
|
|
66
|
|
28.5
|
%
|
13.6
|
%
|
||||||
|
Total
|
$
|
103
|
|
$
|
80
|
|
28.9
|
%
|
16.5
|
%
|
||||
|
Sevoflurane
|
||||||||||||||
|
United States
|
$
|
17
|
|
$
|
18
|
|
(3.6
|
)%
|
(3.6
|
)%
|
||||
|
International
|
89
|
|
89
|
|
(0.3
|
)%
|
(5.4
|
)%
|
||||||
|
Total
|
$
|
106
|
|
$
|
107
|
|
(0.8
|
)%
|
(5.0
|
)%
|
||||
|
Kaletra
|
||||||||||||||
|
United States
|
$
|
13
|
|
$
|
19
|
|
(29.3
|
)%
|
(29.3
|
)%
|
||||
|
International
|
60
|
|
96
|
|
(37.4
|
)%
|
(40.6
|
)%
|
||||||
|
Total
|
$
|
73
|
|
$
|
115
|
|
(36.0
|
)%
|
(38.7
|
)%
|
||||
|
All other
|
$
|
201
|
|
$
|
297
|
|
(32.3
|
)%
|
(48.4
|
)%
|
||||
|
Total net revenues
|
$
|
7,934
|
|
$
|
6,538
|
|
21.4
|
%
|
17.6
|
%
|
||||
The following discussion and analysis of AbbVie’s net revenues by product is presented on a constant currency basis.
Global HUMIRA sales increased
11%
for the
three months ended March 31, 2018
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
11%
for the
three months ended March 31, 2018
driven by market growth across all indications and favorable pricing. Internationally, HUMIRA sales increased
9%
for the
three months ended March 31, 2018
driven primarily by market growth across indications. AbbVie continues to pursue strategies intended to further differentiate HUMIRA from competing products and add to the sustainability and future growth of HUMIRA.
|
2018 Form 10-Q
|
|
28
|
Net revenues for IMBRUVICA represent product sales in the United States and collaboration revenues outside of the United States related to AbbVie’s 50% share of IMBRUVICA profit. Global IMBRUVICA sales increased
38%
for the
three months ended March 31, 2018
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 increased by
more than 100%
for the
three months ended March 31, 2018
as a result of the launch of MAVYRET in certain geographies beginning in the second half of 2017 and was partially offset by a decrease in revenues of VIEKIRA.
Net revenues for Creon increased
13%
for the
three months ended March 31, 2018
driven primarily by continued market growth and higher market share. Creon maintains market leadership in the pancreatic enzyme market.
Net revenues for Duodopa increased
16%
for the
three months ended March 31, 2018
primarily as a result of increased market penetration.
Gross Margin
|
Three months ended
March 31, |
|||||||||||
|
(dollars in millions)
|
2018
|
2017
|
% change
|
||||||||
|
Gross margin
|
$
|
6,007
|
|
$
|
4,922
|
|
22
|
%
|
|||
|
as a % of net revenues
|
76
|
%
|
75
|
%
|
|||||||
Gross margin as a percentage of net revenues increased for the
three months ended March 31, 2018
compared to the prior year. Gross margin percentage for the
three months ended March 31, 2018
was favorably impacted by product mix and operational efficiencies, partially offset by the unfavorable impact of higher intangible asset amortization, foreign exchange and the IMBRUVICA profit sharing arrangement.
Selling, General and Administrative
|
Three months ended
March 31, |
|||||||||||
|
(dollars in millions)
|
2018
|
|
2017
|
|
% change
|
||||||
|
Selling, general and administrative
|
$
|
1,791
|
|
$
|
1,373
|
|
30
|
%
|
|||
|
as a % of net revenues
|
23
|
%
|
21
|
%
|
|||||||
SG&A expenses as a percentage of net revenues increased for the
three months ended March 31, 2018
compared to the prior year. SG&A expense percentage for the
three months ended March 31, 2018
was unfavorably impacted by new product launch expenses as well as litigation reserve charges of
$118 million
, partially offset by continued leverage from revenue growth.
Research and Development and Acquired In-Process Research and Development
|
Three months ended
March 31, |
|||||||||||
|
(dollars in millions)
|
2018
|
2017
|
% change
|
||||||||
|
Research and development
|
$
|
1,244
|
|
$
|
1,142
|
|
9
|
%
|
|||
|
as a % of net revenues
|
16
|
%
|
17
|
%
|
|||||||
|
Acquired in-process research and development
|
$
|
69
|
|
$
|
—
|
|
n/m
|
|
|||
Research and Development
(R&D) expenses for the
three months ended March 31, 2018
increased compared to the prior year principally due to increased funding to support the company’s emerging mid- and late-stage pipeline assets.
Acquired in-process research and development (IPR&D) expenses reflect upfront payments related to various collaborations. There were no individually significant transactions during the
three months ended March 31, 2018
and
2017
.
|
2018 Form 10-Q
|
|
29
|
Other Non-Operating Expenses
|
Three months ended
March 31, |
||||||||
|
(in millions)
|
2018
|
2017
|
||||||
|
Interest expense
|
$
|
309
|
|
$
|
273
|
|
||
|
Interest income
|
(58
|
)
|
(26
|
)
|
||||
|
Interest expense, net
|
$
|
251
|
|
$
|
247
|
|
||
|
Net foreign exchange loss
|
$
|
8
|
|
$
|
13
|
|
||
|
Other (income) expense, net
|
(153
|
)
|
61
|
|
||||
Interest expense, net increased for the
three months ended March 31, 2018
compared to the prior year primarily due to the unfavorable impact of higher interest rates on the company's floating rate obligations, partially offset by an increase in interest income due to growth in the company's cash and investments and higher interest rates.
Other (income) expense, net included a
$148 million
benefit related to changes in fair value of the Boehringer Ingelheim and Stemcentrx contingent consideration liabilities for the
three months ended March 31, 2018
compared to a charge of
$85 million
for the
three months ended March 31, 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 March 31, 2018
, the change in fair value represented the effect of rising interest rates partially offset by the passage of time.
Income Tax Expense
The effective tax rate was
1%
for the
three months ended March 31, 2018
and
18%
for the
three months ended March 31, 2017
. The effective tax rate in each period differed from the U.S. statutory tax rates 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.
The change in the effective tax rate for the
three months ended March 31, 2018
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 the U.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.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
|
Three months ended
March 31, |
|||||||
|
(in millions)
|
2018
|
2017
|
|||||
|
Cash flows provided by (used in):
|
|||||||
|
Operating activities
|
$
|
2,645
|
|
$
|
2,102
|
|
|
|
Investing activities
|
(447
|
)
|
(684
|
)
|
|||
|
Financing activities
|
(2,509
|
)
|
(1,794
|
)
|
|||
Operating cash flows for the
three months ended March 31, 2018
increased from the prior year due to improved results of operations resulting from revenue growth and an improvement in operating earnings. Operating cash flows also reflected AbbVie’s voluntary contributions to its principal domestic defined benefit plan of
$150 million
for both the
three months ended March 31, 2018
and
2017
. The company plans to make additional voluntary contributions of
$600 million
to its various defined benefit plans in 2018.
|
2018 Form 10-Q
|
|
30
|
Investing cash flows for the
three months ended March 31, 2018
included payments made for acquisitions and investments of
$372 million
, capital expenditures of
$119 million
and net sales and maturities of investment securities totaling
$44 million
. Investing cash flows for the
three months ended March 31, 2017
included net purchases of investment securities totaling
$526 million
, capital expenditures of
$95 million
and payments made for acquisitions and investments of
$63 million
.
Financing cash flows included cash dividend payments of
$1.1 billion
for the
three months ended March 31, 2018
and
$1.0 billion
for the
three months ended March 31, 2017
. The increase in cash dividend payments was driven by an increase in the quarterly dividend rate. On October 27, 2017, AbbVie announced that its board of directors declared an increase in the company's quarterly cash dividend from $0.64 per share to $0.71 per share beginning with the dividend payable on February 15, 2018 to stockholders of record as of January 12, 2018. On February 15, 2018, AbbVie announced that its board of directors declared an increase in the company's quarterly cash dividend from
$0.71
per share to
$0.96
per share beginning with the dividend payable on May 15, 2018 to stockholders of record as of April 13, 2018. 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 15, 2018, AbbVie's board of directors authorized a new
$10.0 billion
stock repurchase program, which superseded AbbVie's previous stock repurchase program. Prior to the new authorization, the company repurchased approximately
10.9 million
shares for
$1.3 billion
in the open market in the
three months ended March 31, 2018
.
The new stock repurchase program 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 no time limit and can be discontinued at any time.
As part of this repurchase program, on May 1, 2018, AbbVie announced a modified "Dutch auction" tender offer to purchase for cash up to
$7.5 billion
of its common stock at a price not less than
$99.00
per share and not more than
$114.00
per share. The tender offer expires at midnight Eastern Time, at the end of the day on May 29, 2018, unless extended or terminated by AbbVie.
During the
three months ended March 31, 2018
and
2017
, the company issued and redeemed commercial paper. The balance of commercial paper outstanding was
$367 million
as of
March 31, 2018
and
$400 million
as of
December 31, 2017
. AbbVie may issue additional commercial paper or retire commercial paper to meet liquidity requirements as 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
$320 million
as of
March 31, 2018
and
$255 million
as of
December 31, 2017
. The company also continues to do business with foreign governments in certain oil-exporting countries that have 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
$143 million
as of
March 31, 2018
and
$149 million
as of
December 31, 2017
. Outstanding governmental receivables related to Russia, net of allowances for doubtful accounts, were
$106 million
as of
March 31, 2018
and
$152 million
as of
December 31, 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
March 31, 2018
.
|
2018 Form 10-Q
|
|
31
|
Credit Facility, Access to Capital and Credit Ratings
Credit Facility
AbbVie currently has a
$3.0 billion
five-year revolving credit facility, which matures in October 2019. The revolving credit facility enables the company to borrow funds on an unsecured basis at variable interest rates and contains various covenants. At
March 31, 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 credit facility as of
March 31, 2018
and
December 31, 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 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
three months ended March 31, 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, “Summary of Significant Accounting Policies” in AbbVie's Annual Report on Form 10-K for the year ended
December 31, 2017
. Significant changes in the company’s application of its critical accounting policies include the 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, 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, 2017
.
|
2018 Form 10-Q
|
|
32
|
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, 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
March 31, 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 errors 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.
|
2018 Form 10-Q
|
|
33
|
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information pertaining to legal proceedings is provided in
Note 13
to the condensed 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 |
||||||
|
January 1, 2018 – January 31, 2018
|
2,920,187
|
|
(1)
|
$116.16
|
(1)
|
2,874,402
|
|
$3,701,741,091
|
||
|
February 1, 2018 – February 28, 2018
|
8,050,487
|
|
(1)
|
$113.81
|
(1)
|
8,043,265
|
|
$10,000,000,000
|
(2)
|
|
|
March 1, 2018 – March 31, 2018
|
35,246
|
|
(1)
|
$95.61
|
(1)
|
—
|
|
$10,000,000,000
|
(2)
|
|
|
Total
|
11,005,920
|
|
(1)
|
$114.38
|
(1)
|
10,917,667
|
|
$10,000,000,000
|
(2)
|
|
|
1.
|
In addition to AbbVie shares repurchased on the open market under a publicly announced program, if any, these shares included the shares deemed surrendered to AbbVie to pay the exercise price in connection with the exercise of employee stock options –
44,659
in
January
;
6,244
in
February
; and
1,108
in
March
, with average prices of
$101.95
in
January
;
$112.16
in
February
; and
$112.47
in
March
.
|
These shares also included the shares purchased on the open market for the benefit of participants in the AbbVie Employee Stock Purchase Plan –
1,126
in
January
;
978
in
February
; and
34,138
in
March
.
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.
|
2.
|
On February 15, 2018, AbbVie's board of directors authorized a new
$10.0 billion
stock repurchase program. This new program superseded AbbVie's previous stock repurchase program, of which
$2.7 billion
remained available at the time of termination and under which no further purchases will be made.
The new stock repurchase program 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 no time limit and can be discontinued at any time.
|
As part of this repurchase program, on May 1, 2018, AbbVie announced a modified "Dutch auction" tender offer to purchase for cash up to
$7.5 billion
of its common stock at a price not less than
$99.00
per share and not more than
$114.00
per share. The tender offer expires at midnight Eastern Time, at the end of the day on May 29, 2018, unless extended or terminated by AbbVie.
|
2018 Form 10-Q
|
|
34
|
ITEM 6. EXHIBITS
Exhibits 32.1 and 32.2 are furnished herewith and should not be deemed to be “filed” under the Securities Exchange Act of 1934.
|
Exhibit No.
|
Exhibit Description
|
|
|
101
|
The following financial statements and notes from the AbbVie Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, filed on May 4, 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.
|
|
_______________________________________________________________________________
|
*
|
Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit hereto.
|
|
2018 Form 10-Q
|
|
35
|
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.
|
ABBVIE INC.
|
||
|
By:
|
/s/ William J. Chase
|
|
|
William J. Chase
|
||
|
Executive Vice President,
|
||
|
Chief Financial Officer
|
||
Date:
May 4, 2018
|
2018 Form 10-Q
|
|
36
|
TABLE OF CONTENTS
Part I. Financial InformationprintItem 1. Financial Statements and Supplementary DataprintNote 1 Basis Of PresentationprintNote 2 Revenue RecognitionprintNote 3 Supplemental Financial InformationprintNote 4 Earnings Per ShareprintNote 5 Licensing, Acquisitions and Other ArrangementsprintNote 6 Collaboration with Janssen Biotech, IncprintNote 7 Goodwill and Intangible AssetsprintNote 8 Restructuring PlansprintNote 9 Financial Instruments and Fair Value MeasuresprintNote 10 Post-employment BenefitsprintNote 11 EquityprintNote 12 Income TaxesprintNote 13 Legal Proceedings and ContingenciesprintNote 14 Segment InformationprintItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 3. Quantitative and Qualitative Disclosures About Market RiskprintItem 4. Controls and ProceduresprintPart II. Other InformationprintItem 1. Legal ProceedingsprintItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsprintItem 6. Exhibitsprint