Quarterly Report (10-q)

Date : 11/06/2019 @ 3:18PM
Source : Edgar (US Regulatory)
Stock : AbbVie Inc (ABBV)
Quote : 87.84  -0.89 (-1.00%) @ 1:00AM
After Hours
Last Trade
Last $ 87.90 ▲ 0.06 (0.07%)

Quarterly Report (10-q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2019
 
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                                    to                                   
  
Commission File Number: 001-35565
 
ABBVIEIMAGE1A29.JPG
AbbVie Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
32-0375147
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. employer identification number) 
 
1 North Waukegan Road
North ChicagoIllinois 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 No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).        Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Accelerated Filer
Non-Accelerated Filer
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).        Yes No
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, par value $0.01 per share
 
ABBV
 
New York Stock Exchange
 
 
 
 
Chicago Stock Exchange
1.375% Senior Notes due 2024
 
ABBV24
 
New York Stock Exchange
0.750% Senior Notes due 2027
 
ABBV27
 
New York Stock Exchange
2.125% Senior Notes due 2028
 
ABBV28
 
New York Stock Exchange
1.250% Senior Notes due 2031
 
ABBV31
 
New York Stock Exchange
As of October 29, 2019, AbbVie Inc. had 1,478,821,109 shares of common stock at $0.01 par value outstanding.




AbbVie Inc. and Subsidiaries
Table of Contents



2019 Form 10-Q | ABBVIEIMAGE2A13.GIF
1




PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
AbbVie Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings (unaudited)

 
 
Three months ended
September 30,
 
Nine months ended
September 30,
(in millions, except per share data)
 
2019
 
2018
 
2019
 
2018
Net revenues
 
$
8,479

 
$
8,236

 
$
24,562

 
$
24,448

 
 
 
 
 
 
 
 
 
Cost of products sold
 
1,920

 
1,835

 
5,433

 
5,696

Selling, general and administrative
 
1,657

 
1,919

 
4,991

 
5,470

Research and development
 
2,285

 
1,268

 
4,865

 
3,834

Acquired in-process research and development
 

 
55

 
246

 
124

Other expense
 

 

 

 
500

Total operating costs and expenses
 
5,862

 
5,077

 
15,535

 
15,624

Operating earnings
 
2,617

 
3,159

 
9,027

 
8,824

 
 
 
 
 
 
 
 
 
Interest expense, net
 
420

 
302

 
1,054

 
825

Net foreign exchange loss
 
19

 
2

 
31

 
18

Other expense, net
 
177

 
94

 
2,590

 
411

Earnings before income tax expense
 
2,001

 
2,761

 
5,352

 
7,570

Income tax expense
 
117

 
14

 
271

 
57

Net earnings
 
$
1,884

 
$
2,747

 
$
5,081

 
$
7,513

 
 
 
 
 
 
 
 
 
Per share data
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
1.27

 
$
1.81

 
$
3.41

 
$
4.81

Diluted earnings per share
 
$
1.26

 
$
1.81

 
$
3.41

 
$
4.79

 
 
 
 
 
 
 
 
 
Weighted-average basic shares outstanding
 
1,481

 
1,511

 
1,480

 
1,556

Weighted-average diluted shares outstanding
 
1,483

 
1,515

 
1,483

 
1,561


The accompanying notes are an integral part of these condensed consolidated financial statements.

2019 Form 10-Q | ABBVIEIMAGE2A13.GIF
2




AbbVie Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (unaudited)

 
Three months ended
September 30,
 
Nine months ended
September 30,
(in millions)
2019
 
2018
 
2019
 
2018
Net earnings
$
1,884

 
$
2,747

 
$
5,081

 
$
7,513

 
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax expense (benefit) of $(16) for the three months and $(10) for the nine months ended September 30, 2019 and $3 for the three months and $(16) for the nine months ended September 30, 2018
(256
)
 
30

 
(288
)
 
(250
)
Net investment hedging activities, net of tax expense (benefit) of $45 for the three months and $53 for the nine months ended September 30, 2019 and $(9) for the three months and $22 for the nine months ended September 30, 2018
156

 
(32
)
 
184

 
73

Pension and post-employment benefits, net of tax expense (benefit) of $7 for the three months and $19 for the nine months ended September 30, 2019 and $8 for the three months and $24 for the nine months ended September 30, 2018
33

 
28

 
78

 
99

Marketable security activities, net of tax expense (benefit) of $— for the three months and $— for the nine months ended September 30, 2019 and $— for the three months and $— for the nine months ended September 30, 2018
(1
)
 

 
10

 
(2
)
Cash flow hedging activities, net of tax expense (benefit) of $18 for the three months and $9 for the nine months ended September 30, 2019 and $1 for the three months and $18 for the nine months ended September 30, 2018
31

 
54

 
(32
)
 
248

Other comprehensive income (loss)
(37
)
 
80

 
(48
)
 
168

Comprehensive income
$
1,847

 
$
2,827

 
$
5,033

 
$
7,681


The accompanying notes are an integral part of these condensed consolidated financial statements.





2019 Form 10-Q | ABBVIEIMAGE2A13.GIF
3




AbbVie Inc. and Subsidiaries
Condensed Consolidated Balance Sheets

(in millions, except share data)
September 30,
2019
 
December 31,
2018
 
(unaudited)
 
 
Assets
 
 
 
Current assets
 
 
 
Cash and equivalents
$
10,648

 
$
7,289

Short-term investments

 
772

Accounts receivable, net
5,529

 
5,384

Inventories
1,929

 
1,605

Prepaid expenses and other
2,060

 
1,895

Total current assets
20,166

 
16,945

 
 
 
 
Investments
131

 
1,420

Property and equipment, net
2,894

 
2,883

Intangible assets, net
19,036

 
21,233

Goodwill
15,537

 
15,663

Other assets
1,677

 
1,208

Total assets
$
59,441

 
$
59,352

 
 
 
 
Liabilities and Equity
 
 
 
Current liabilities
 
 
 
Short-term borrowings
$

 
$
3,699

Current portion of long-term debt and finance lease obligations
5,276

 
1,609

Accounts payable and accrued liabilities
12,217

 
11,931

Total current liabilities
17,493

 
17,239

 
 
 
 
Long-term debt and finance lease obligations
33,126

 
35,002

Deferred income taxes
1,058

 
1,067

Other long-term liabilities
15,990

 
14,490

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Stockholders’ equity (deficit)
 
 
 
Common stock, $0.01 par value, 4,000,000,000 shares authorized, 1,781,429,626 shares issued as of September 30, 2019 and 1,776,510,871 as of December 31, 2018
18

 
18

Common stock held in treasury, at cost, 302,647,520 shares as of September 30, 2019 and 297,686,473 as of December 31, 2018
(24,501
)
 
(24,108
)
Additional paid-in capital
15,112

 
14,756

Retained earnings
3,673

 
3,368

Accumulated other comprehensive loss
(2,528
)
 
(2,480
)
Total stockholders’ equity (deficit)
(8,226
)
 
(8,446
)
 
 
 
 
Total liabilities and equity
$
59,441

 
$
59,352


The accompanying notes are an integral part of these condensed consolidated financial statements.

2019 Form 10-Q | ABBVIEIMAGE2A13.GIF
4




AbbVie Inc. and Subsidiaries
Condensed Consolidated Statements of Equity (unaudited)

(in millions)
Common shares outstanding
 
Common stock
 
Treasury stock
 
Additional paid-in capital
 
Retained earnings
 
Accumulated other comprehensive loss
 
Total
Balance at June 30, 2018
1,514

 
$
18

 
$
(20,845
)
 
$
14,596

 
$
5,495

 
$
(2,639
)
 
$
(3,375
)
Net earnings

 

 

 

 
2,747

 

 
2,747

Other comprehensive income, net of tax

 

 

 

 

 
80

 
80

Dividends declared

 

 

 

 
(1,453
)
 

 
(1,453
)
Purchases of treasury stock
(10
)
 

 
(1,009
)
 

 

 

 
(1,009
)
Stock-based compensation plans and other

 

 
5

 
84

 

 

 
89

Balance at September 30, 2018
1,504

 
$
18

 
$
(21,849
)
 
$
14,680

 
$
6,789

 
$
(2,559
)
 
$
(2,921
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2019
1,478

 
$
18

 
$
(24,505
)
 
$
15,028

 
$
3,384

 
$
(2,491
)
 
$
(8,566
)
Net earnings

 

 

 

 
1,884

 

 
1,884

Other comprehensive loss, net of tax

 

 

 

 

 
(37
)
 
(37
)
Dividends declared

 

 

 

 
(1,595
)
 

 
(1,595
)
Purchases of treasury stock

 

 
(3
)
 

 

 

 
(3
)
Stock-based compensation plans and other
1

 

 
7

 
84

 

 

 
91

Balance at September 30, 2019
1,479


$
18


$
(24,501
)

$
15,112


$
3,673


$
(2,528
)

$
(8,226
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
1,592

 
$
18

 
$
(11,923
)
 
$
14,270

 
$
5,459

 
$
(2,727
)
 
$
5,097

Adoption of new accounting standards

 

 

 

 
(1,733
)
 

 
(1,733
)
Net earnings

 

 

 

 
7,513

 

 
7,513

Other comprehensive income, net of tax

 

 

 

 

 
168

 
168

Dividends declared

 

 

 

 
(4,450
)
 

 
(4,450
)
Purchases of treasury stock
(95
)
 

 
(9,956
)
 

 

 

 
(9,956
)
Stock-based compensation plans and other
7

 

 
30

 
410

 

 

 
440

Balance at September 30, 2018
1,504

 
$
18

 
$
(21,849
)
 
$
14,680

 
$
6,789

 
$
(2,559
)
 
$
(2,921
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
1,479

 
$
18

 
$
(24,108
)
 
$
14,756

 
$
3,368

 
$
(2,480
)
 
$
(8,446
)
Net earnings

 

 

 

 
5,081

 

 
5,081

Other comprehensive loss, net of tax

 

 

 

 

 
(48
)
 
(48
)
Dividends declared

 

 

 

 
(4,776
)
 

 
(4,776
)
Purchases of treasury stock
(5
)
 

 
(425
)
 

 

 

 
(425
)
Stock-based compensation plans and other
5

 

 
32

 
356

 

 

 
388

Balance at September 30, 2019
1,479

 
$
18

 
$
(24,501
)
 
$
15,112

 
$
3,673

 
$
(2,528
)
 
$
(8,226
)

The accompanying notes are an integral part of these condensed consolidated financial statements.

2019 Form 10-Q | ABBVIEIMAGE2A13.GIF
5




AbbVie Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)

 
Nine months ended
September 30,
(in millions) (brackets denote cash outflows)
2019
 
2018
Cash flows from operating activities
 
 
 
Net earnings
$
5,081

 
$
7,513

Adjustments to reconcile net earnings to net cash from operating activities:
 
 
 
Depreciation
346

 
349

Amortization of intangible assets
1,162

 
974

Change in fair value of contingent consideration liabilities
2,653

 
432

Stock-based compensation
351

 
351

Upfront costs and milestones related to collaborations
341

 
711

Intangible asset impairment
1,030

 

Other, net
92

 
423

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(207
)
 
(806
)
Inventories
(401
)
 
(367
)
Prepaid expenses and other assets
183

 
(426
)
Accounts payable and other liabilities
(582
)
 
881

Cash flows from operating activities
10,049

 
10,035

 
 
 
 
Cash flows from investing activities
 
 
 
Acquisitions and investments
(476
)
 
(541
)
Acquisitions of property and equipment
(389
)
 
(515
)
Purchases of investment securities
(579
)
 
(1,581
)
Sales and maturities of investment securities
2,655

 
1,914

Cash flows from investing activities
1,211

 
(723
)
 
 
 
 
Cash flows from financing activities
 
 
 
Net change in commercial paper borrowings
(699
)
 
(400
)
Proceeds from issuance of other short-term borrowings

 
3,002

Repayments of other short-term borrowings
(3,000
)
 

Proceeds from issuance of long-term debt
1,534

 
5,963

Repayments of long-term debt and finance lease obligations
(5
)
 
(5,021
)
Debt issuance costs
(248
)
 
(34
)
Dividends paid
(4,771
)
 
(4,129
)
Purchases of treasury stock
(627
)
 
(9,956
)
Proceeds from the exercise of stock options
6

 
66

Payments of contingent consideration liabilities
(120
)
 
(78
)
Other, net
36

 
16

Cash flows from financing activities
(7,894
)
 
(10,571
)
Effect of exchange rate changes on cash and equivalents
(7
)
 
(29
)
Net change in cash and equivalents
3,359

 
(1,288
)
Cash and equivalents, beginning of period
7,289

 
9,303

 
 
 
 
Cash and equivalents, end of period
$
10,648

 
$
8,015


The accompanying notes are an integral part of these condensed consolidated financial statements.

2019 Form 10-Q | ABBVIEIMAGE2A13.GIF
6




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, 2018.
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. 2016-02
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). The standard outlined a comprehensive lease accounting model that superseded the previous lease guidance and required lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms greater than 12 months. The guidance also changed the definition of a lease and expanded the disclosure requirements of lease arrangements. AbbVie adopted the standard in the first quarter of 2019 using the modified retrospective method. Results for reporting periods beginning after December 31, 2018 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 leases standard was recognized as an adjustment to the opening condensed consolidated balance sheet as of January 1, 2019.
The company elected a package of practical expedients for leases that commenced prior to January 1, 2019 and did not reassess historical conclusions on: (i) whether any expired or existing contracts are or contain leases; (ii) lease classification for any expired or existing leases; and (iii) initial direct costs capitalization for any existing leases.
Under the new standard, on January 1, 2019, the company recognized a cumulative-effect adjustment to its condensed consolidated balance sheet primarily related to the recognition of liabilities and corresponding right-of-use assets for operating leases. The adjustment to the condensed consolidated balance sheet included: (i) a $405 million increase to other assets; (ii) a $115 million increase to accounts payable and accrued liabilities; and (iii) a $290 million increase to other long-term liabilities. Other cumulative-effect adjustments to the condensed consolidated balance sheet were insignificant.
Adoption of the standard did not have a significant impact on AbbVie's condensed consolidated statements of earnings for the three and nine months ended September 30, 2019.
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 allowed a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax effects related to adjustments to deferred taxes resulting from the December 2017 enactment of the Tax Cuts and Jobs Act (the Act). AbbVie adopted the standard in the first quarter of 2019. Upon adoption, the company made an election to not reclassify the income tax effects of the Act from AOCI to retained earnings. Therefore, the adoption of the standard had no impact on AbbVie's consolidated financial statements.

2019 Form 10-Q | ABBVIEIMAGE2A13.GIF
7




Recent Accounting Pronouncements Not Yet Adopted
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. 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 of adopting this guidance but does not expect a material impact on its consolidated financial statements based on the company’s current portfolio of financial assets.
Note 2    Supplemental Financial Information
 

Interest Expense, Net
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
(in millions)
 
2019
 
2018
 
2019
 
2018
Interest expense
 
$
480

 
$
339

 
$
1,225

 
$
968

Interest income
 
(60
)
 
(37
)
 
(171
)
 
(143
)
Interest expense, net
 
$
420

 
$
302

 
$
1,054

 
$
825


Inventories
(in millions)
September 30, 2019
 
December 31, 2018
Finished goods
$
449

 
$
473

Work-in-process
1,120

 
862

Raw materials
360

 
270

Inventories
$
1,929

 
$
1,605


Property and Equipment
(in millions)
September 30, 2019
 
December 31, 2018
Property and equipment, gross
$
8,492

 
$
8,396

Accumulated depreciation
(5,598
)
 
(5,513
)
Property and equipment, net
$
2,894

 
$
2,883


Depreciation expense was $114 million for the three months and $346 million for the nine months ended September 30, 2019 and $115 million for the three months and $349 million for the nine months ended September 30, 2018.
Note 3    Earnings Per Share
 

AbbVie grants certain 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.


2019 Form 10-Q | ABBVIEIMAGE2A13.GIF
8




The following table summarizes the impact of the two-class method:

 
 
Three months ended
September 30,
 
Nine months ended
September 30,
(in millions, except per share data)
 
2019
 
2018
 
2019
 
2018
Basic EPS
 
 
 
 
 
 
 
 
Net earnings
 
$
1,884

 
$
2,747

 
$
5,081

 
$
7,513

Earnings allocated to participating securities
 
10

 
12

 
27

 
34

Earnings available to common shareholders
 
$
1,874

 
$
2,735

 
$
5,054

 
$
7,479

Weighted-average basic shares outstanding
 
1,481

 
1,511

 
1,480

 
1,556

Basic earnings per share
 
$
1.27

 
$
1.81

 
$
3.41

 
$
4.81

 
 
 
 
 
 
 
 
 
Diluted EPS
 
 
 
 
 
 
 
 
Net earnings
 
$
1,884

 
$
2,747

 
$
5,081

 
$
7,513

Earnings allocated to participating securities
 
10

 
12

 
27

 
34

Earnings available to common shareholders
 
$
1,874

 
$
2,735

 
$
5,054

 
$
7,479

Weighted-average shares of common stock outstanding
 
1,481

 
1,511

 
1,480

 
1,556

Effect of dilutive securities
 
2

 
4

 
3

 
5

Weighted-average diluted shares outstanding
 
1,483

 
1,515

 
1,483

 
1,561

Diluted earnings per share
 
$
1.26

 
$
1.81

 
$
3.41

 
$
4.79



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 4 Licensing, Acquisitions and Other Arrangements
 

Proposed Acquisition of Allergan plc
On June 25, 2019, AbbVie announced that it entered into a definitive transaction agreement under which AbbVie will acquire Allergan plc (Allergan) in a cash and stock transaction for a transaction equity value of approximately $63 billion, based on the closing price of AbbVie’s common stock of $78.45 on June 24, 2019. Under the terms of the transaction agreement, Allergan shareholders will receive 0.8660 AbbVie shares and $120.30 in cash for each Allergan share. On October 14, 2019, Allergan shareholders approved the proposed transaction.
In connection with the proposed acquisition of Allergan, on June 25, 2019, AbbVie entered into a $38.0 billion 364-day bridge credit agreement. On July 12, 2019, AbbVie entered into a term loan credit agreement with an aggregate principal amount of $6.0 billion consisting of a $1.5 billion 364-day term loan tranche, a $2.5 billion three-year term loan tranche and a $2.0 billion five-year term loan tranche, with the commitments under the bridge credit agreement to be reduced by such amount to $32.0 billion. No amounts have been drawn under the bridge credit agreement or term loan credit agreement.
On October 25, 2019, AbbVie commenced offers to exchange any and all outstanding notes of certain series issued by Allergan for up to $15.5 billion aggregate principal amount and €3.7 billion aggregate principal amount of new notes to be issued by AbbVie and cash, subject to conditions including the closing of the pending acquisition of Allergan. Concurrently with the offers to exchange the Allergan notes for AbbVie notes, the company solicited consents to adopt certain proposed amendments to each of the indentures governing the Allergan notes to, among other things, eliminate substantially all of the restrictive covenants in such indentures.
Allergan is a global pharmaceutical leader focused on developing, manufacturing and commercializing branded pharmaceutical, device, biologic, surgical and regenerative medicine products for patients around the world. Allergan markets a portfolio of brands and products primarily focused on key therapeutic areas including medical aesthetics, eye care, neuroscience, gastroenterology and women's health.

2019 Form 10-Q | ABBVIEIMAGE2A13.GIF
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The transaction is expected to close in early 2020, subject to customary closing conditions and regulatory approvals. In September 2019, AbbVie and Allergan each received a Request for Additional Information (Second Request) from the Federal Trade Commission (FTC) in connection with the transaction. AbbVie and Allergan are cooperating fully with the FTC.
Other Licensing & Acquisitions Activity
Cash outflows related to other acquisitions and investments totaled $476 million for the nine months ended September 30, 2019 and $541 million for the nine months ended September 30, 2018. AbbVie recorded no acquired in-process research and development (IPR&D) charges for the three months ended September 30, 2019 and recorded IPR&D charges of $246 million for the nine months ended September 30, 2019. AbbVie recorded IPR&D charges of $55 million for the three months and $124 million for the nine months ended September 30, 2018.

Calico Life Sciences LLC
In June 2018, AbbVie and Calico Life Sciences LLC (Calico) entered into an extension of a collaboration to discover, develop and bring to market new therapies for patients with age-related diseases, including neurodegeneration and cancer. Under the terms of the agreement, AbbVie and Calico will each contribute an additional $500 million to the collaboration and the term was extended for an additional three years. Calico will be responsible for research and early development until 2022 and will advance collaboration projects through Phase 2a through 2027. Following completion of Phase 2a, AbbVie will have the option to exclusively license collaboration compounds. AbbVie will support Calico in its early research and development efforts and, upon exercise, would be responsible for late-stage development and commercial activities. Collaboration costs and profits will be shared equally by both parties post option exercise. AbbVie recorded $500 million in other expense in the condensed consolidated statement of earnings related to its commitments under the agreement during the nine months ended September 30, 2018.
Reata Pharmaceuticals, Inc.
In October 2019, AbbVie and Reata Pharmaceuticals, Inc. (Reata) entered into an amended and restated license agreement. Under the terms of the agreement, Reata reacquired exclusive development, manufacturing and commercialization rights concerning its proprietary Nrf2 activator product platform originally licensed to AbbVie for territories outside of the United States with respect to bardoxolone methyl and worldwide with respect to omaveloxolone and other next-generation Nrf2 activators. As consideration for the rights reacquired by Reata, AbbVie will receive a total of $330 million in cash payable in three installments through 2021 which will be recognized in other income in future periods. In addition, AbbVie will receive low single-digit, tiered royalties from worldwide sales of omaveloxolone and certain next-generation Nrf2 activators.
Note 5 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 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.


2019 Form 10-Q | ABBVIEIMAGE2A13.GIF
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Outside the United States, Janssen is responsible for and has exclusive rights to commercialize IMBRUVICA. AbbVie and Janssen share pre-tax profits and losses equally from the commercialization of products. AbbVie's share of profits is included in AbbVie's net revenues. Other costs incurred under the collaboration are reported in their respective expense line items, net of Janssen's share.

The following table shows the profit and cost sharing relationship between Janssen and AbbVie:

 
 
Three months ended
September 30,
 
Nine months ended
September 30,
(in millions)
 
2019
 
2018
 
2019
 
2018
United States - Janssen's share of profits (included in cost of products sold)
 
$
489

 
$
377

 
$
1,297

 
$
978

International - AbbVie's share of profits (included in net revenues)
 
215

 
160

 
621

 
455

Global - AbbVie's share of other costs (included in respective line items)
 
81

 
81

 
230

 
232



AbbVie’s receivable from Janssen, included in accounts receivable, net, was $235 million at September 30, 2019 and $177 million at December 31, 2018. AbbVie’s payable to Janssen, included in accounts payable and accrued liabilities, was $467 million at September 30, 2019 and $376 million at December 31, 2018.
Note 6    Goodwill and Intangible Assets
 

Goodwill

The following table summarizes the changes in the carrying amount of goodwill:
(in millions)
 
Balance as of December 31, 2018
$
15,663

Foreign currency translation adjustments
(126
)
Balance as of September 30, 2019
$
15,537



The company performs its annual goodwill impairment assessment in the third quarter, or earlier if impairment indicators exist. As of September 30, 2019, there were no accumulated goodwill impairment losses.
Intangible Assets, Net

The following table summarizes intangible assets:
 
September 30, 2019
 
December 31, 2018
(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
$
19,600

 
$
(6,208
)
 
$
13,392

 
$
15,872

 
$
(5,614
)
 
$
10,258

License agreements
7,798

 
(2,154
)
 
5,644

 
7,865

 
(1,810
)
 
6,055

Total definite-lived intangible assets
27,398

 
(8,362
)
 
19,036

 
23,737

 
(7,424
)
 
16,313

Indefinite-lived research and development

 

 

 
4,920

 

 
4,920

Total intangible assets, net
$
27,398

 
$
(8,362
)
 
$
19,036

 
$
28,657

 
$
(7,424
)
 
$
21,233


Indefinite-Lived Intangible Assets
Indefinite-lived intangible assets represent acquired IPR&D associated with products that have not yet received regulatory approval. The company performs its annual impairment assessment of indefinite-lived intangible assets in the third quarter, or earlier if impairment indicators exist.
In the third quarter of 2019, following the announcement of the decision to terminate the rovalpituzumab tesirine (Rova-T) research and development program, the company recorded an impairment charge of $1.0 billion which represented the remaining value of

2019 Form 10-Q | ABBVIEIMAGE2A13.GIF
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the IPR&D acquired as part of the 2016 Stemcentrx acquisition. No indefinite-lived intangible asset impairment charges were recorded for the nine months ended September 30, 2018.
In April 2019, the U.S. Food and Drug Administration (FDA) and the European Commission approved SKYRIZI (risankizumab) for the treatment of moderate to severe plaque psoriasis. As a result, AbbVie reclassified $3.9 billion of indefinite-lived intangible assets related to SKYRIZI to developed product rights definite-lived intangible assets. This amount will be amortized over its estimated useful life using the estimated pattern of economic benefit.
Definite-Lived Intangible Assets
Amortization expense was $389 million for the three months and $1.2 billion for the nine months ended September 30, 2019 and $320 million for the three months and $974 million for the nine months ended September 30, 2018. Amortization expense was included in cost of products sold in the condensed consolidated statements of earnings. No definite-lived intangible asset impairment charges were recorded for the nine months ended September 30, 2019 and 2018.
Note 7    Restructuring Plans
 

AbbVie recorded restructuring charges of $22 million for the three months and $208 million for the nine months ended September 30, 2019 and $22 million for the three months and $45 million for the nine months ended September 30, 2018. Restructuring charges for the nine months ended September 30, 2019 primarily related to severance costs.

The following table summarizes the cash activity in the restructuring reserve for the nine months ended September 30, 2019:
(in millions)
 
Accrued balance as of December 31, 2018
$
99

Restructuring charges
194

Payments and other adjustments
(133
)
Accrued balance as of September 30, 2019
$
160


Note 8 Leases    
 
AbbVie's lease portfolio primarily consists of real estate properties, vehicles and equipment. Short-term leases with a term of 12 months or less are not recorded on the balance sheet. For leases commencing or modified in 2019 or later, AbbVie does not separate lease components from non-lease components.
The company records lease liabilities based on the present value of lease payments over the lease term. AbbVie generally uses an incremental borrowing rate to discount its lease liabilities, as the rate implicit in the lease is typically not readily determinable. Certain lease agreements include renewal options that are under the company's control. AbbVie includes optional renewal periods in the lease term only when it is reasonably certain that AbbVie will exercise its option.
Variable lease payments include payments to lessors for taxes, maintenance, insurance and other operating costs as well as payments that are adjusted based on an index or rate. The company's lease agreements do not contain any significant residual value guarantees or restrictive covenants.

2019 Form 10-Q | ABBVIEIMAGE2A13.GIF
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The following table summarizes the amounts and location of operating and finance leases on the condensed consolidated balance sheet:
(in millions)
Balance sheet caption
September 30,
2019
Assets
 
 
Operating
Other assets
$
357

Finance
Property and equipment, net
24

Total lease assets
 
$
381

Liabilities
 
 
Operating
 
 
Current
Accounts payable and accrued liabilities
$
107

Noncurrent
Other long-term liabilities
268

Finance
 
 
Current
Current portion of long-term debt and finance lease obligations
7

Noncurrent
Long-term debt and finance lease obligations
21

Total lease liabilities
 
$
403


The following table summarizes the lease costs recognized in the condensed consolidated statements of earnings:
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
(in millions)
 
2019
 
2019
Operating lease cost
 
$
30

 
$
94

Short-term lease cost
 
9

 
24

Variable lease cost
 
17

 
46

Total lease cost
 
$
56

 
$
164


Sublease income and finance lease costs were insignificant for the three and nine months ended September 30, 2019.
The following table presents the weighted-average remaining lease term and weighted-average discount rate for operating and finance leases:
 
September 30,
2019
Weighted-average remaining lease term (in years)
 
Operating
6

Finance
3

Weighted-average discount rate
 
Operating
4.0
%
Finance
4.0
%

The following table presents supplementary cash flow information regarding the company's leases:
 
Nine months ended
September 30,
(in millions)
2019
Cash paid for amounts included in the measurement of lease liabilities
 
Operating cash flows from operating leases
$
94

Right-of-use assets obtained in exchange for new operating lease liabilities
16


Finance lease cash flows were insignificant for the nine months ended September 30, 2019.

2019 Form 10-Q | ABBVIEIMAGE2A13.GIF
13




The following table summarizes the future maturities of AbbVie's operating and finance lease liabilities as of September 30, 2019:
(in millions)
Operating
leases
 
Finance
leases
 
Total (a)(b)
2019
$
32

 
$
6

 
$
38

2020
116

 
10

 
126

2021
99

 
9

 
108

2022
56

 
3

 
59

2023
35

 
1

 
36

Thereafter
80

 

 
80

Total lease payments
418

 
29

 
447

Less: Interest
43

 
1

 
44

Present value of lease liabilities
$
375

 
$
28

 
$
403


(a) Total lease payments exclude approximately $350 million of contractual minimum lease payments for leases executed but not yet commenced. These leases will commence between years 2019 and 2020 with lease terms of approximately 11 years.
(b) Lease payments recognized as part of lease liabilities for optional renewal periods are insignificant.
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, 2018 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 $0.2 billion at September 30, 2019 and $1.4 billion at December 31, 2018, are designated as cash flow hedges and are recorded at fair value. The durations of these forward exchange contracts were generally less than 18 months. Accumulated gains and losses as of September 30, 2019 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.
In the third quarter of 2019, the company entered into treasury rate lock agreements to hedge exposure to variability in future cash flows resulting from changes in interest rates related to the anticipated issuance of long-term debt in connection with the proposed acquisition of Allergan. The treasury rate lock agreements were designated as cash flow hedges and are recorded at fair value. Realized and unrealized gains or losses are included in AOCI and are expected to be reclassified to interest expense, net over the lives of the anticipated long-term debt issuances. These agreements had notional amounts totaling $10.0 billion at September 30, 2019.
The company also enters into foreign currency forward exchange contracts to manage its exposure to foreign currency denominated trade payables and receivables and intercompany loans. These contracts are not designated as hedges and are recorded at fair value. Resulting gains or losses are reflected in net foreign exchange gain or loss in the 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 $6.2 billion at September 30, 2019 and $8.6 billion at December 31, 2018.
The company also uses foreign currency forward exchange contracts or foreign currency denominated debt to hedge its net investments in certain foreign subsidiaries and affiliates. The company had €3.6 billion aggregate principal amount of senior Euro notes designated as net investment hedges at September 30, 2019 and December 31, 2018. In the third quarter of 2019, the company issued €1.4 billion aggregate principal amount of senior Euro notes and designated the principal amounts of this foreign denominated debt as net investment hedges. Concurrently, the company elected to de-designate hedge accounting for €1.4 billion aggregate principal amount of existing senior Euro notes. In addition, in the second quarter of 2019, the company entered into foreign currency forward exchange contracts with notional amounts totaling €971 million, £204 million and CHF62 million and designated the instruments as net investment hedges. The company uses the spot method of assessing hedge effectiveness for

2019 Form 10-Q | ABBVIEIMAGE2A13.GIF
14




derivative instruments designated as net investment hedges. Realized and unrealized gains and losses from these hedges are included in AOCI and the initial fair value of hedge components excluded from the assessment of effectiveness is recognized in interest expense, net over the life of the hedging instrument.

AbbVie is a party to interest rate hedge contracts designated as fair value hedges with notional amounts totaling $10.8 billion at September 30, 2019 and December 31, 2018. The effect of the hedge contracts is to change a fixed-rate interest obligation to a floating rate for that portion of the debt. AbbVie records the contracts at fair value and adjusts the carrying amount of the fixed-rate debt by an offsetting amount.

No amounts are excluded from the assessment of effectiveness for cash flow hedges or fair value hedges.

The following table summarizes the amounts and location of AbbVie’s derivative instruments on the condensed consolidated balance sheets:
 
Fair value –
Derivatives in asset position
 
Fair value –
Derivatives in liability position
(in millions)
Balance sheet caption
September 30,
2019
December 31, 2018
 
Balance sheet caption
September 30,
2019
December 31, 2018
Foreign currency forward exchange contracts
 
 
 
 
 
 
 
Designated as cash flow hedges
Prepaid expenses and
other
$
4

$
113

 
Accounts payable and accrued liabilities
$

$

Designated as net investment hedges
Prepaid expenses and
other
69


 
Accounts payable and accrued liabilities


Not designated as hedges
Prepaid expenses and
other
13

19

 
Accounts payable and accrued liabilities
37

26

Treasury rate lock agreements designated as cash flow hedges
Prepaid expenses and other
123


 
Accounts payable and accrued liabilities
35


Interest rate swaps designated as fair value hedges
Prepaid expenses and other


 
Accounts payable and accrued liabilities
8


Interest rate swaps designated as fair value hedges
Other assets
44


 
Other long-term liabilities
59

466

Total derivatives
 
$
253

$
132

 
 
$
139

$
492


While certain derivatives are subject to netting arrangements with the company’s counterparties, the company does not offset derivative assets and liabilities within the condensed consolidated balance sheets.

The following table presents the pre-tax amounts of gains (losses) from derivative instruments recognized in other comprehensive income (loss):
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
(in millions)
 
2019
 
2018
 
2019
 
2018
Foreign currency forward exchange contracts
 
 
 
 
 
 
 
 
Designated as cash flow hedges
 
$
3

 
$
1

 
$
8

 
$
122

Designated as net investment hedges
 
59

 

 
69

 

Treasury rate lock agreements designated as cash flow hedges
 
88

 

 
88

 



Assuming market rates remain constant through contract maturities, the company expects to reclass pre-tax gains of $50 million into cost of products sold for foreign currency cash flow hedges and pre-tax gains of $3 million into interest expense, net for treasury rate lock agreement cash flow hedges during the next 12 months.

Related to AbbVie’s non-derivative, foreign currency denominated debt designated as net investment hedges, the company recognized in other comprehensive income (loss) pre-tax gains of $152 million for the three months and $187 million for the nine months ended September 30, 2019 and recognized a pre-tax loss of $41 million for the three months and a pre-tax gain of $95 million for the nine months ended September 30, 2018.

2019 Form 10-Q | ABBVIEIMAGE2A13.GIF
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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
September 30,
 
Nine months ended
September 30,
(in millions)
Statement of earnings caption
 
2019
 
2018
 
2019
 
2018
Foreign currency forward exchange contracts
 
 
 
 
 
 
 
 
 
Designated as cash flow hedges
Cost of products sold
 
$
42

 
$
(54
)
 
$
119

 
$
(144
)
Designated as net investment hedges
Interest expense, net
 
10

 

 
19

 

Not designated as hedges
Net foreign exchange loss
 
(55
)
 
22

 
(95
)
 
91

Interest rate swaps designated as fair value hedges
Interest expense, net
 
78

 
(63
)
 
443

 
(306
)
Debt designated as hedged item in fair value hedges
Interest expense, net
 
(78
)
 
63

 
(443
)
 
306



Fair Value Measures

The fair value hierarchy consists of the following three levels:

Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets that the company has the ability to access;
Level 2 – Valuations based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuations in which all significant inputs are observable in the market; and
Level 3 – Valuations using significant inputs that are unobservable in the market and include the use of judgment by the company’s management about the assumptions market participants would use in pricing the asset or liability.

The following table summarizes the bases used to measure certain assets and liabilities carried at fair value on a recurring basis on the condensed consolidated balance sheet as of September 30, 2019:
 
 
 
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
$
10,648

 
$
1,288

 
$
9,360

 
$

Debt securities
2

 

 
2

 

Equity securities
62

 
62

 

 

Interest rate hedges
44

 

 
44

 

Foreign currency contracts
86

 

 
86

 

Treasury rate lock agreements
123

 

 
123

 

Total assets
$
10,965

 
$
1,350

 
$
9,615

 
$

Liabilities
 
 
 
 
 
 
 
Interest rate hedges
$
67

 
$

 
$
67

 
$

Foreign currency contracts
37

 

 
37

 

Treasury rate lock agreements
35

 

 
35

 

Contingent consideration
6,957

 

 

 
6,957

Total liabilities
$
7,096

 
$

 
$
139

 
$
6,957


2019 Form 10-Q | ABBVIEIMAGE2A13.GIF
16




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, 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
$
7,289

 
$
1,209

 
$
6,080

 
$

Time deposits
568

 

 
568

 

Debt securities
1,536

 

 
1,536

 

Equity securities
4

 
4

 

 

Foreign currency contracts
132

 

 
132

 

Total assets
$
9,529

 
$
1,213

 
$
8,316

 
$

Liabilities
 
 
 
 
 
 
 
Interest rate hedges
$
466

 
$

 
$
466

 
$

Foreign currency contracts
26

 

 
26

 

Contingent consideration
4,483

 

 

 
4,483

Total liabilities
$
4,975

 
$

 
$
492

 
$
4,483


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. Equity securities consist of investments for which the fair values were determined by using the published market price per unit multiplied by the number of units held, without consideration of transaction costs. The derivatives entered into by the company were valued using observable market inputs including published interest rate curves and both forward and spot prices for foreign currencies. 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. Changes to the fair value of the contingent consideration liabilities can result from changes to one or a number of inputs, including discount rates, the probabilities of achieving the milestones, the time required to achieve the milestones and estimated future sales. Significant judgment is employed in determining the appropriateness of these inputs. Changes to the inputs described above could have a material impact on the company's financial position and results of operations in any given period. At September 30, 2019, a 50 basis point increase/decrease in the assumed discount rate would have decreased/increased the value of the contingent consideration liabilities by approximately $270 million. Additionally, at September 30, 2019, a five percentage point increase/decrease in the assumed probability of success across all potential indications still in development would have increased/decreased the value of the contingent consideration liabilities by approximately $140 million.
There have been no transfers of assets or liabilities between the fair value measurement levels. The following table presents the changes in fair value of contingent consideration liabilities which are measured using Level 3 inputs:
 
 
Nine months ended
September 30,
(in millions)
 
2019
 
2018
Beginning balance
 
$
4,483

 
$
4,534

Change in fair value recognized in net earnings
 
2,653

 
432

Payments
 
(179
)
 
(100
)
Ending balance
 
$
6,957

 
$
4,866


The change in fair value recognized in net earnings is recorded in other expense, net in the condensed consolidated statements of earnings. During the second quarter of 2019, the company recorded a $2.3 billion increase in the SKYRIZI contingent consideration liability due to higher probabilities of success, higher estimated future sales and declining interest rates. The higher probabilities of success resulted from the April 2019 regulatory approvals of SKYRIZI for the treatment of moderate to severe plaque psoriasis. During the third quarter of 2019, the company recorded a