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 The standard outlined a comprehensive lease accounting model that superseded the previous lease guidance and required lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms greater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 six months ended June 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
|
|
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 on its consolidated financial statements.
Note 2
Supplemental Financial Information
Interest Expense, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
(in millions)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Interest expense
|
|
$
|
358
|
|
|
$
|
320
|
|
|
$
|
745
|
|
|
$
|
629
|
|
Interest income
|
|
(49
|
)
|
|
(48
|
)
|
|
(111
|
)
|
|
(106
|
)
|
Interest expense, net
|
|
$
|
309
|
|
|
$
|
272
|
|
|
$
|
634
|
|
|
$
|
523
|
|
Inventories
|
|
|
|
|
|
|
|
|
(in millions)
|
June 30, 2019
|
|
December 31, 2018
|
Finished goods
|
$
|
638
|
|
|
$
|
473
|
|
Work-in-process
|
969
|
|
|
862
|
|
Raw materials
|
288
|
|
|
270
|
|
Inventories
|
$
|
1,895
|
|
|
$
|
1,605
|
|
Property and Equipment
|
|
|
|
|
|
|
|
|
(in millions)
|
June 30, 2019
|
|
December 31, 2018
|
Property and equipment, gross
|
$
|
8,443
|
|
|
$
|
8,396
|
|
Accumulated depreciation
|
(5,564
|
)
|
|
(5,513
|
)
|
Property and equipment, net
|
$
|
2,879
|
|
|
$
|
2,883
|
|
Depreciation expense was
$114 million
for the three months and
$232 million
for the
six months ended June 30, 2019
and
$119 million
for the three months and
$234 million
for the
six months ended June 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
|
|
8
|
The following table summarizes the impact of the two-class method:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
(in millions, except per share data)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Basic EPS
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
741
|
|
|
$
|
1,983
|
|
|
$
|
3,197
|
|
|
$
|
4,766
|
|
Earnings allocated to participating securities
|
|
8
|
|
|
10
|
|
|
17
|
|
|
22
|
|
Earnings available to common shareholders
|
|
$
|
733
|
|
|
$
|
1,973
|
|
|
$
|
3,180
|
|
|
$
|
4,744
|
|
Weighted-average basic shares outstanding
|
|
1,480
|
|
|
1,568
|
|
|
1,480
|
|
|
1,579
|
|
Basic earnings per share
|
|
$
|
0.49
|
|
|
$
|
1.26
|
|
|
$
|
2.15
|
|
|
$
|
3.00
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
741
|
|
|
$
|
1,983
|
|
|
$
|
3,197
|
|
|
$
|
4,766
|
|
Earnings allocated to participating securities
|
|
8
|
|
|
10
|
|
|
17
|
|
|
22
|
|
Earnings available to common shareholders
|
|
$
|
733
|
|
|
$
|
1,973
|
|
|
$
|
3,180
|
|
|
$
|
4,744
|
|
Weighted-average shares of common stock outstanding
|
|
1,480
|
|
|
1,568
|
|
|
1,480
|
|
|
1,579
|
|
Effect of dilutive securities
|
|
4
|
|
|
4
|
|
|
3
|
|
|
5
|
|
Weighted-average diluted shares outstanding
|
|
1,484
|
|
|
1,572
|
|
|
1,483
|
|
|
1,584
|
|
Diluted earnings per share
|
|
$
|
0.49
|
|
|
$
|
1.26
|
|
|
$
|
2.14
|
|
|
$
|
2.99
|
|
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.
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.
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.
The transaction is expected to close in early 2020, subject to regulatory and Allergan shareholder approvals.
Other Licensing & Acquisitions Activity
Cash outflows related to other acquisitions and investments totaled
$440 million
for the
six months ended June 30, 2019
and
$401 million
for the
six months ended June 30, 2018
. AbbVie recorded acquired in-process research and development (IPR&D) charges of
$91 million
for the three months and
$246 million
for the
six months ended June 30, 2019
. AbbVie recorded
no
acquired IPR&D charges for the
three months ended June 30, 2018
and recorded acquired IPR&D charges of
$69 million
for the
six months ended June 30, 2018
.
|
|
|
2019 Form 10-Q
|
|
9
|
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. During the
six months ended June 30, 2018
, AbbVie recorded
$500 million
in other expense in the condensed consolidated statement of earnings related to its commitments under the agreement.
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.
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
June 30,
|
|
Six months ended
June 30,
|
(in millions)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
United States - Janssen's share of profits (included in cost of products sold)
|
|
$
|
422
|
|
|
$
|
325
|
|
|
$
|
808
|
|
|
$
|
601
|
|
International - AbbVie's share of profits (included in net revenues)
|
|
213
|
|
|
157
|
|
|
406
|
|
|
295
|
|
Global - AbbVie's share of other costs (included in respective line items)
|
|
77
|
|
|
80
|
|
|
149
|
|
|
151
|
|
AbbVie’s receivable from Janssen, included in accounts receivable, net, was
$230 million
at
June 30, 2019
and
$177 million
at
December 31, 2018
. AbbVie’s payable to Janssen, included in accounts payable and accrued liabilities, was
$405 million
at
June 30, 2019
and
$376 million
at
December 31, 2018
.
|
|
|
2019 Form 10-Q
|
|
10
|
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
|
(21
|
)
|
Balance as of June 30, 2019
|
$
|
15,642
|
|
The company performs its annual goodwill impairment assessment in the third quarter, or earlier if impairment indicators exist. As of
June 30, 2019
, there were
no
accumulated goodwill impairment losses.
Intangible Assets, Net
The following table summarizes intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 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
|
$
|
19,611
|
|
|
$
|
(5,963
|
)
|
|
$
|
13,648
|
|
|
$
|
15,872
|
|
|
$
|
(5,614
|
)
|
|
$
|
10,258
|
|
License agreements
|
7,798
|
|
|
(2,017
|
)
|
|
5,781
|
|
|
7,865
|
|
|
(1,810
|
)
|
|
6,055
|
|
Total definite-lived intangible assets
|
27,409
|
|
|
(7,980
|
)
|
|
19,429
|
|
|
23,737
|
|
|
(7,424
|
)
|
|
16,313
|
|
Indefinite-lived research and development
|
1,030
|
|
|
—
|
|
|
1,030
|
|
|
4,920
|
|
|
—
|
|
|
4,920
|
|
Total intangible assets, net
|
$
|
28,439
|
|
|
$
|
(7,980
|
)
|
|
$
|
20,459
|
|
|
$
|
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.
No
indefinite-lived intangible asset impairment charges were recorded for the
six months ended June 30, 2019 and 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.
In the fourth quarter of 2018, the company recorded an impairment charge of
$5.1 billion
related to IPR&D acquired as part of the 2016 Stemcentrx acquisition following the decision to stop enrollment in the TAHOE trial. AbbVie continues to evaluate information as it becomes available with respect to the Stemcentrx-related clinical development programs and will monitor the remaining
$1.0 billion
of IPR&D assets for further impairment.
Definite-Lived Intangible Assets
Amortization expense was
$388 million
for the three months and
$773 million
for the
six months ended June 30, 2019
and
$324 million
for the three months and
$654 million
for the
six months ended June 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
six months ended June 30, 2019 and 2018
.
|
|
|
2019 Form 10-Q
|
|
11
|
Note 7
Restructuring Plans
AbbVie recorded restructuring charges of
$19 million
for the three months and
$186 million
for the
six months ended June 30, 2019
and
$1 million
for the three months and
$23 million
for the
six months ended June 30, 2018
. Restructuring charges for the
three and six months ended June 30, 2019
primarily related to severance costs.
The following table summarizes the cash activity in the restructuring reserve for the
six months ended June 30, 2019
:
|
|
|
|
|
(in millions)
|
|
Accrued balance as of December 31, 2018
|
$
|
99
|
|
Restructuring charges
|
172
|
|
Payments and other adjustments
|
(80
|
)
|
Accrued balance as of June 30, 2019
|
$
|
191
|
|
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.
The following table summarizes the amounts and location of operating and finance leases on the condensed consolidated balance sheet:
|
|
|
|
|
|
(in millions)
|
Balance sheet caption
|
June 30,
2019
|
Assets
|
|
|
Operating
|
Other assets
|
$
|
380
|
|
Finance
|
Property and equipment, net
|
27
|
|
Total lease assets
|
|
$
|
407
|
|
Liabilities
|
|
|
Operating
|
|
|
Current
|
Accounts payable and accrued liabilities
|
$
|
111
|
|
Noncurrent
|
Other long-term liabilities
|
290
|
|
Finance
|
|
|
Current
|
Current portion of long-term debt and finance lease obligations
|
9
|
|
Noncurrent
|
Long-term debt and finance lease obligations
|
22
|
|
Total lease liabilities
|
|
$
|
432
|
|
|
|
|
2019 Form 10-Q
|
|
12
|
The following table summarizes the lease costs recognized in the condensed consolidated statements of earnings:
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
(in millions)
|
|
2019
|
|
2019
|
Operating lease cost
|
|
$
|
32
|
|
|
$
|
64
|
|
Finance lease cost
|
|
|
|
|
Amortization of right-of-use assets
|
|
2
|
|
|
4
|
|
Interest on lease liabilities
|
|
—
|
|
|
—
|
|
Short-term lease cost
|
|
9
|
|
|
15
|
|
Variable lease cost
|
|
14
|
|
|
29
|
|
Total lease cost
|
|
$
|
57
|
|
|
$
|
112
|
|
Sublease income was insignificant for the
three and six months ended June 30, 2019
.
The following table presents the weighted-average remaining lease term and weighted-average discount rate for operating and finance leases:
|
|
|
|
|
June 30,
2019
|
Weighted-average remaining lease term (in years)
|
|
Operating
|
6
|
|
Finance
|
3
|
|
Weighted-average discount rate
|
|
Operating
|
4.0
|
%
|
Finance
|
4.4
|
%
|
The following table presents supplementary cash flow information regarding the company's operating and finance leases:
|
|
|
|
|
|
Six months ended
June 30,
|
(in millions)
|
2019
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
Operating cash flows from operating leases
|
$
|
58
|
|
Operating cash flows from finance leases
|
—
|
|
Financing cash flows from finance leases
|
4
|
|
Right-of-use assets obtained in exchange for new finance lease liabilities
|
—
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
15
|
|
|
|
|
2019 Form 10-Q
|
|
13
|
The following table summarizes the future maturities of AbbVie's operating and finance lease liabilities as of
June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Operating
leases
|
|
Finance
leases
|
|
Total
(a)(b)
|
2019
|
$
|
65
|
|
|
$
|
8
|
|
|
$
|
73
|
|
2020
|
121
|
|
|
11
|
|
|
132
|
|
2021
|
100
|
|
|
9
|
|
|
109
|
|
2022
|
55
|
|
|
3
|
|
|
58
|
|
2023
|
35
|
|
|
1
|
|
|
36
|
|
Thereafter
|
79
|
|
|
—
|
|
|
79
|
|
Total lease payments
|
455
|
|
|
32
|
|
|
487
|
|
Less: Interest
|
54
|
|
|
1
|
|
|
55
|
|
Present value of lease liabilities
|
$
|
401
|
|
|
$
|
31
|
|
|
$
|
432
|
|
(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
$503 million
at
June 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
June 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.
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
$7.9 billion
at
June 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 continued to designate
€3.6 billion
aggregate principal amount of senior Euro notes as net investment hedges at
June 30, 2019
and
December 31, 2018
. 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 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
June 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.
|
|
|
2019 Form 10-Q
|
|
14
|
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
|
June 30,
2019
|
December 31, 2018
|
|
Balance sheet caption
|
June 30,
2019
|
December 31, 2018
|
Foreign currency forward exchange contracts
|
|
|
|
|
|
|
|
Designated as cash flow hedges
|
Prepaid expenses and
other
|
$
|
22
|
|
$
|
113
|
|
|
Accounts payable and accrued liabilities
|
$
|
—
|
|
$
|
—
|
|
Designated as net investment hedges
|
Prepaid expenses and
other
|
11
|
|
—
|
|
|
Accounts payable and accrued liabilities
|
1
|
|
—
|
|
Not designated as hedges
|
Prepaid expenses and
other
|
40
|
|
19
|
|
|
Accounts payable and accrued liabilities
|
38
|
|
26
|
|
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
|
24
|
|
—
|
|
|
Other long-term liabilities
|
117
|
|
466
|
|
Total derivatives
|
|
$
|
97
|
|
$
|
132
|
|
|
|
$
|
164
|
|
$
|
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
June 30,
|
|
Six months ended
June 30,
|
(in millions)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Foreign currency forward exchange contracts
|
|
|
|
|
|
|
|
|
Designated as cash flow hedges
|
|
$
|
2
|
|
|
$
|
169
|
|
|
$
|
5
|
|
|
$
|
121
|
|
Designated as net investment hedges
|
|
10
|
|
|
—
|
|
|
10
|
|
|
—
|
|
Assuming market rates remain constant through contract maturities, the company expects to reclass pre-tax gains of
$90 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 in other comprehensive income (loss) a pre-tax
loss
of
$49 million
for the three months and
a pre-tax
gain
of
$35 million
for the
six months ended June 30, 2019
and recognized pre-tax gains of
$270 million
for the three months and
$136 million
for the
six months ended June 30, 2018
.
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
June 30,
|
|
Six months ended
June 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
|
|
$
|
37
|
|
|
$
|
(46
|
)
|
|
$
|
77
|
|
|
$
|
(90
|
)
|
Designated as net investment hedges
|
Interest expense, net
|
|
9
|
|
|
—
|
|
|
9
|
|
|
—
|
|
Not designated as hedges
|
Net foreign exchange loss
|
|
(25
|
)
|
|
128
|
|
|
(40
|
)
|
|
69
|
|
Interest rate swaps designated as fair value hedges
|
Interest expense, net
|
|
253
|
|
|
(59
|
)
|
|
365
|
|
|
(243
|
)
|
Debt designated as hedged item in fair value hedges
|
Interest expense, net
|
|
(253
|
)
|
|
59
|
|
|
(365
|
)
|
|
243
|
|
|
|
|
2019 Form 10-Q
|
|
15
|
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
June 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
|
$
|
5,172
|
|
|
$
|
1,388
|
|
|
$
|
3,784
|
|
|
$
|
—
|
|
Debt securities
|
1,573
|
|
|
—
|
|
|
1,573
|
|
|
—
|
|
Equity securities
|
79
|
|
|
79
|
|
|
—
|
|
|
—
|
|
Interest rate hedges
|
24
|
|
|
—
|
|
|
24
|
|
|
—
|
|
Foreign currency contracts
|
73
|
|
|
—
|
|
|
73
|
|
|
—
|
|
Total assets
|
$
|
6,921
|
|
|
$
|
1,467
|
|
|
$
|
5,454
|
|
|
$
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
Interest rate hedges
|
$
|
125
|
|
|
$
|
—
|
|
|
$
|
125
|
|
|
$
|
—
|
|
Foreign currency contracts
|
39
|
|
|
—
|
|
|
39
|
|
|
—
|
|
Contingent consideration
|
6,789
|
|
|
—
|
|
|
—
|
|
|
6,789
|
|
Total liabilities
|
$
|
6,953
|
|
|
$
|
—
|
|
|
$
|
164
|
|
|
$
|
6,789
|
|
|
|
|
2019 Form 10-Q
|
|
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 published spot curves for interest rate hedges and published 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. 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
June 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
June 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
$210 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:
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
June 30,
|
(in millions)
|
|
2019
|
|
2018
|
Beginning balance
|
|
$
|
4,483
|
|
|
$
|
4,534
|
|
Change in fair value recognized in net earnings
|
|
2,473
|
|
|
337
|
|
Milestone payments
|
|
(167
|
)
|
|
(50
|
)
|
Ending balance
|
|
$
|
6,789
|
|
|
$
|
4,821
|
|
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.
|
|
|
2019 Form 10-Q
|
|
17
|
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
June 30, 2019
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
|
$
|
306
|
|
$
|
306
|
|
|
$
|
—
|
|
|
$
|
306
|
|
|
$
|
—
|
|
Current portion of long-term debt and finance lease obligations, excluding fair value hedges
|
5,343
|
|
5,357
|
|
|
5,348
|
|
|
9
|
|
|
—
|
|
Long-term debt and finance lease obligations, excluding fair value hedges
|
31,712
|
|
32,753
|
|
|
32,731
|
|
|
22
|
|
|
—
|
|
Total liabilities
|
$
|
37,361
|
|
$
|
38,416
|
|
|
$
|
38,079
|
|
|
$
|
337
|
|
|
$
|
—
|
|
The book values, approximate fair values and bases used to measure the approximate fair values of certain financial instruments as of
December 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
|
$
|
3,699
|
|
$
|
3,693
|
|
|
$
|
—
|
|
|
$
|
3,693
|
|
|
$
|
—
|
|
Current portion of long-term debt and finance lease obligations, excluding fair value hedges
|
1,609
|
|
1,617
|
|
|
1,609
|
|
|
8
|
|
|
—
|
|
Long-term debt and finance lease obligations, excluding fair value hedges
|
35,468
|
|
34,052
|
|
|
34,024
|
|
|
28
|
|
|
—
|
|
Total liabilities
|
$
|
40,776
|
|
$
|
39,362
|
|
|
$
|
35,633
|
|
|
$
|
3,729
|
|
|
$
|
—
|
|
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
$65 million
as of
June 30, 2019
and
$84 million
as of
December 31, 2018
.
No
significant cumulative upward or downward adjustments have been recorded for these investments as of
June 30, 2019
.
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
$244 million
as of
June 30, 2019
and
$204 million
as of
December 31, 2018
. 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 summarizes available-for-sale securities by type as of
June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
Gross unrealized
|
|
Fair value
|
(in millions)
|
|
Gains
|
|
Losses
|
|
Asset backed securities
|
$
|
375
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
374
|
|
Corporate debt securities
|
1,095
|
|
|
4
|
|
|
(2
|
)
|
|
1,097
|
|
Other debt securities
|
102
|
|
|
—
|
|
|
—
|
|
|
102
|
|
Total
|
$
|
1,572
|
|
|
$
|
4
|
|
|
$
|
(3
|
)
|
|
$
|
1,573
|
|
|
|
|
2019 Form 10-Q
|
|
18
|
The following table summarizes available-for-sale securities by type as of
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
Gross unrealized
|
|
Fair value
|
(in millions)
|
|
Gains
|
|
Losses
|
|
Asset backed securities
|
$
|
423
|
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
$
|
421
|
|
Corporate debt securities
|
1,042
|
|
|
1
|
|
|
(9
|
)
|
|
1,034
|
|
Other debt securities
|
81
|
|
|
—
|
|
|
—
|
|
|
81
|
|
Total
|
$
|
1,546
|
|
|
$
|
1
|
|
|
$
|
(11
|
)
|
|
$
|
1,536
|
|
AbbVie had
no
other-than-temporary impairments as of
June 30, 2019
. Net realized gains and losses were
insignificant
for both the
three and six months ended June 30, 2019
and
2018
.
Concentrations of Risk
Of total net accounts receivable,
three
U.S. wholesalers accounted for
66%
as of
June 30, 2019
and
63%
as of
December 31, 2018
, 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
58%
of AbbVie’s total net revenues for the
six months ended June 30, 2019
and
61%
for the
six months ended June 30, 2018
.
Debt and Credit Facilities
Short-Term Borrowings
Short-term borrowings included commercial paper borrowings of
$306 million
as of
June 30, 2019
and
$699 million
as of
December 31, 2018
. The weighted-average interest rate on commercial paper borrowings was
2.7%
for the
six months ended June 30, 2019
and
1.9%
for the
six months ended June 30, 2018
.
In March 2019, AbbVie repaid its
$3.0 billion
364
-day
term loan credit agreement that was scheduled to mature in June 2019
.
In connection with the proposed acquisition of Allergan, on June 25, 2019, AbbVie entered into a
364
-day bridge credit agreement and on July 12, 2019, AbbVie entered into a term loan credit agreement.
See Note 4 for additional information.
Note 10
Post-Employment Benefits
The following table summarizes 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
June 30,
|
|
Six months ended
June 30,
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
(in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Service cost
|
$
|
68
|
|
|
$
|
72
|
|
|
$
|
135
|
|
|
$
|
144
|
|
|
$
|
7
|
|
|
$
|
5
|
|
|
$
|
13
|
|
|
$
|
13
|
|
Interest cost
|
66
|
|
|
57
|
|
|
130
|
|
|
114
|
|
|
9
|
|
|
4
|
|
|
15
|
|
|
12
|
|
Expected return on plan assets
|
(119
|
)
|
|
(110
|
)
|
|
(238
|
)
|
|
(221
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of actuarial losses and prior service cost (credit)
|
29
|
|
|
39
|
|
|
55
|
|
|
76
|
|
|
1
|
|
|
(3
|
)
|
|
—
|
|
|
1
|
|
Net periodic benefit cost
|
$
|
44
|
|
|
$
|
58
|
|
|
$
|
82
|
|
|
$
|
113
|
|
|
$
|
17
|
|
|
$
|
6
|
|
|
$
|
28
|
|
|
$
|
26
|
|
The components of net periodic benefit cost other than service cost are included in other expense, net in the condensed consolidated statements of earnings.
|
|
|
2019 Form 10-Q
|
|
19
|
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
June 30,
|
|
Six months ended
June 30,
|
(in millions)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Cost of products sold
|
|
$
|
5
|
|
|
$
|
12
|
|
|
$
|
20
|
|
|
$
|
16
|
|
Research and development
|
|
33
|
|
|
35
|
|
|
105
|
|
|
107
|
|
Selling, general and administrative
|
|
49
|
|
|
38
|
|
|
151
|
|
|
153
|
|
Pre-tax compensation expense
|
|
87
|
|
|
85
|
|
|
276
|
|
|
276
|
|
Tax benefit
|
|
16
|
|
|
19
|
|
|
49
|
|
|
48
|
|
After-tax compensation expense
|
|
$
|
71
|
|
|
$
|
66
|
|
|
$
|
227
|
|
|
$
|
228
|
|
Stock Options
During the
six months ended June 30, 2019
, primarily in connection with the company's annual grant, AbbVie granted
1.0 million
stock options with a weighted-average grant-date fair value of
$12.54
. As of
June 30, 2019
,
$8.5 million
of unrecognized compensation cost related to stock options is expected to be recognized as expense over approximately the next
two years
.
RSUs and Performance Shares
During the
six months ended June 30, 2019
, primarily in connection with the company's annual grant, AbbVie granted
5.4 million
RSUs and performance shares with a weighted-average grant-date fair value of
$78.68
. As of
June 30, 2019
,
$434 million
of unrecognized compensation cost related to RSUs and performance shares is expected to be recognized as expense over approximately the next
two years
.
Cash Dividends
The following table summarizes quarterly cash dividends declared during
2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Date Declared
|
|
Payment Date
|
|
Dividend Per Share
|
|
Date Declared
|
|
Payment Date
|
|
Dividend Per Share
|
06/20/19
|
|
08/15/19
|
|
$
|
1.07
|
|
|
11/02/18
|
|
02/15/19
|
|
$
|
1.07
|
|
02/21/19
|
|
05/15/19
|
|
$
|
1.07
|
|
|
09/07/18
|
|
11/15/18
|
|
$
|
0.96
|
|
|
|
|
|
|
|
|
06/14/18
|
|
08/15/18
|
|
$
|
0.96
|
|
|
|
|
|
|
|
|
02/15/18
|
|
05/15/18
|
|
$
|
0.96
|
|
|
|
|
2019 Form 10-Q
|
|
20
|
Stock Repurchase Program
The company's stock repurchase authorization permits purchases of AbbVie shares from time to time in open-market or private transactions at management's discretion. The program has no time limit and can be discontinued at any time.
Shares repurchased under these programs are recorded at acquisition cost, including related expenses, and are available for general corporate purposes.
AbbVie repurchased
4 million
shares for
$300 million
during the
six months ended June 30, 2019
and
84 million
shares for
$8.8 billion
during the
six months ended June 30, 2018
. AbbVie's remaining stock repurchase authorization was approximately
$4.0 billion
as of
June 30, 2019
.
Accumulated Other Comprehensive Loss
The following table summarizes the changes in each component of accumulated other comprehensive loss, net of tax, for the
six months ended June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, 2018
|
$
|
(830
|
)
|
|
$
|
(65
|
)
|
|
$
|
(1,722
|
)
|
|
$
|
(10
|
)
|
|
$
|
147
|
|
|
$
|
(2,480
|
)
|
Other comprehensive income (loss) before reclassifications
|
(32
|
)
|
|
35
|
|
|
2
|
|
|
10
|
|
|
7
|
|
|
22
|
|
Net losses (gains) reclassified from accumulated other comprehensive loss
|
—
|
|
|
(7
|
)
|
|
43
|
|
|
1
|
|
|
(70
|
)
|
|
(33
|
)
|
Net current-period other comprehensive income (loss)
|
(32
|
)
|
|
28
|
|
|
45
|
|
|
11
|
|
|
(63
|
)
|
|
(11
|
)
|
Balance as of June 30, 2019
|
$
|
(862
|
)
|
|
$
|
(37
|
)
|
|
$
|
(1,677
|
)
|
|
$
|
1
|
|
|
$
|
84
|
|
|
$
|
(2,491
|
)
|
Other comprehensive loss for the
six months ended June 30, 2019
included foreign currency translation adjustments totaling a loss of
$32 million
, which was principally due to the weakening of the Euro in the
six months ended June 30, 2019
on the translation of the company’s assets denominated in the Euro.
The following table summarizes the changes in each component of accumulated other comprehensive loss, net of tax, for the
six months ended June 30, 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
|
(280
|
)
|
|
105
|
|
|
9
|
|
|
(6
|
)
|
|
110
|
|
|
(62
|
)
|
Net losses reclassified from accumulated other comprehensive loss
|
—
|
|
|
—
|
|
|
62
|
|
|
4
|
|
|
84
|
|
|
150
|
|
Net current-period other comprehensive income (loss)
|
(280
|
)
|
|
105
|
|
|
71
|
|
|
(2
|
)
|
|
194
|
|
|
88
|
|
Balance as of June 30, 2018
|
$
|
(719
|
)
|
|
$
|
(98
|
)
|
|
$
|
(1,848
|
)
|
|
$
|
(2
|
)
|
|
$
|
28
|
|
|
$
|
(2,639
|
)
|
Other comprehensive income for the
six months ended June 30, 2018
included foreign currency translation adjustments totaling a loss of
$280 million
, which was principally due to the weakening of the Euro in the
six months ended June 30, 2018
on the translation of the company’s assets denominated in the Euro.
|
|
|
2019 Form 10-Q
|
|
21
|
The following table 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
June 30,
|
|
Six months ended
June 30,
|
(in millions) (brackets denote gains)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Pension and post-employment benefits
|
|
|
|
|
|
|
|
Amortization of actuarial losses and other
(a)
|
$
|
30
|
|
|
$
|
36
|
|
|
$
|
55
|
|
|
$
|
77
|
|
Tax benefit
|
(7
|
)
|
|
(7
|
)
|
|
(12
|
)
|
|
(15
|
)
|
Total reclassifications, net of tax
|
$
|
23
|
|
|
$
|
29
|
|
|
$
|
43
|
|
|
$
|
62
|
|
Cash flow hedging activities
|
|
|
|
|
|
|
|
Losses (gains) on designated cash flow hedges
(b)
|
$
|
(37
|
)
|
|
$
|
46
|
|
|
$
|
(77
|
)
|
|
$
|
90
|
|
Tax expense (benefit)
|
2
|
|
|
(4
|
)
|
|
7
|
|
|
(6
|
)
|
Total reclassifications, net of tax
|
$
|
(35
|
)
|
|
$
|
42
|
|
|
$
|
(70
|
)
|
|
$
|
84
|
|
Net investment hedging activities
|
|
|
|
|
|
|
|
Gains on derivative amount excluded from effectiveness testing
(c)
|
$
|
(9
|
)
|
|
$
|
—
|
|
|
$
|
(9
|
)
|
|
$
|
—
|
|
Tax expense
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
Total reclassifications, net of tax
|
$
|
(7
|
)
|
|
$
|
—
|
|
|
$
|
(7
|
)
|
|
$
|
—
|
|
(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
).
(c) Amounts are included in interest expense, net (see
Note 9
).
Note 12
Income Taxes
The effective tax rate was
8%
for the three months and
5%
for the
six months ended June 30, 2019
and
2%
for the three months and
1%
for the
six months ended June 30, 2018
. The effective tax rate in each period differed from the U.S. statutory tax rate of
21%
principally due to
the benefit from foreign operations which reflects the impact of lower income tax rates in locations outside the United States, tax incentives in Puerto Rico and other foreign tax jurisdictions and business development activities.
The
increase
in the effective tax rate for the
three and six months ended June 30, 2019
over the prior year was principally due to the beneficial impact of the timing of provisions of the
Act
related to earnings from certain foreign subsidiaries in prior year and changes in the jurisdictional mix of earnings, including a change in fair value of contingent consideration liabilities. These increases were partially offset by the favorable resolution of various tax positions in the current year.
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
$41 million
.
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
$330 million
as of
June 30, 2019
and
$350 million
as of
December 31, 2018
. 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.
|
|
|
2019 Form 10-Q
|
|
22
|
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.
Four lawsuits 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 direct AndroGel purchasers, generally allege Solvay's 2006 patent litigation settlement agreements and related agreements with
three
generic companies violate federal antitrust laws. Plaintiffs seek monetary damages and attorneys' fees.
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 Niaspan direct purchasers and
one
brought by Niaspan end-payers. The cases are pending in the United States District Court for the Eastern District of Pennsylvania for coordinated or consolidated pre-trial proceedings under the MDL Rules as
In re: Niaspan Antitrust Litigation
, MDL No. 2460. In October 2016, the Orange County, California District Attorney’s Office filed a lawsuit on behalf of the State of California 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. In May 2018, the California Court of Appeal ruled that the District Attorney’s Office may not bring monetary claims beyond the scope of Orange County, which the District Attorney’s Office is appealing.
In September 2014, the FTC filed a lawsuit against AbbVie and others in the United States District Court for the Eastern District of Pennsylvania, alleging that the 2011 patent litigation with
two
generic companies regarding AndroGel was sham litigation and the settlements of that litigation violated federal antitrust law. In May 2015, the court dismissed the FTC’s settlement-related claim. In June 2018, following a bench trial, the court found for the FTC on its sham litigation claim and ordered a disgorgement remedy of
$448 million
, plus prejudgment interest. The court denied the FTC’s request for injunctive relief. AbbVie is appealing the court’s liability and disgorgement rulings and, based on an assessment of the merits of that appeal,
no
liability has been accrued for this matter. The FTC is also appealing aspects of the court’s trial ruling and the dismissal of its settlement-related claim.
One
purported class action on behalf of direct AndroGel purchasers based on the trial court’s ruling in the FTC’s case is also pending in the United States District Court for the Eastern District of Pennsylvania and is stayed pending the appeals in the FTC’s case.
In January and February 2019, two shareholder derivative lawsuits,
Brown v. Gonzalez, et al.,
and
Elfers v. Gonzalez, et al.
, were filed in the United States District Court for the Northern District of Illinois, alleging that certain AbbVie directors and officers breached their fiduciary duties in connection with HUMIRA patient and reimbursement support services and other services and items of value, as alleged in the
State of California
case discussed below.
Between March and May 2019,
12
putative class action lawsuits were filed in the United States District Court for the Northern District of Illinois by indirect HUMIRA purchasers, alleging that AbbVie’s settlements with biosimilar manufacturers and AbbVie’s HUMIRA patent portfolio violate state and federal antitrust laws.
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. In July 2018, the court denied the plaintiff’s motion for class certification. In February 2019, the court granted the defendants’ summary judgment motion.
In September 2018, the Commissioner of the California Department of Insurance intervened in a
qui tam
lawsuit,
State of California and Lazaro Suarez v. AbbVie Inc., et al.
, brought under the California Insurance Frauds Prevention Act, in California Superior Court for Alameda County. The Department of Insurance’s complaint alleges that, through patient and reimbursement support services and other services and items of value provided in connection with HUMIRA, AbbVie caused the submission of fraudulent commercial insurance claims for HUMIRA in violation of the California statute. The complaint seeks injunctive relief, an assessment of up to three times the amount of the claims at issue, and civil penalties. In addition, a federal securities lawsuit (
Holwill v. AbbVie Inc., et al
.) is
|
|
|
2019 Form 10-Q
|
|
23
|
pending in the United States District Court for the Northern District of Illinois) against AbbVie, its chief executive officer and former chief financial officer, alleging that reasons stated for HUMIRA sales growth in financial filings between 2013 and 2017 were misleading because they omitted the conduct alleged in the Department of Insurance’s complaint.
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 July 2019, the court granted preliminary approval to the parties’ settlement agreement.
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 2017 and October 2018 against AbbVie and in some instances its chief executive officer in the same court by additional investment funds. Plaintiffs seek compensatory and punitive damages.
Product liability cases were filed 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
3,900
claims against AbbVie 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 against AbbVie are pending in various state courts. Plaintiffs generally seek compensatory and punitive damages. In November 2018, AbbVie entered into a Master Settlement Agreement with the Plaintiffs’ Steering Committee in the MDL encompassing existing claims in all courts. All proceedings in pending cases are effectively stayed during the settlement administration process.
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. Approximately
150
cases are pending in the United States District Court for the Southern District of Illinois, and approximately
six
others are pending in various state courts. Plaintiffs generally seek compensatory and punitive damages. Approximately
ninety percent
of these pending cases, plus other unfiled claims, are subject to confidential settlement agreements and are expected to be dismissed with prejudice.
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.
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
11
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. In May 2019, the parties settled this case and it was dismissed without prejudice.
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, 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; Sun Pharma Global FZE and Sun Pharmaceutical Industries Ltd.; Cipla Limited and Cipla USA Inc.; and Zydus Worldwide DMCC, Cadila Healthcare Limited, 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.
Pharmacyclics LLC, a wholly owned subsidiary of AbbVie, is seeking to enforce its patent rights relating to ibrutinib tablets (a drug Pharmacyclics sells under the trademark IMBRUVICA®). In a case filed in the United States District Court for the District of Delaware in March 2019, Pharmacyclics alleges that Alvogen Pine Brook LLC’s and Natco Pharma Ltd.’s proposed generic ibrutinib tablet
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2019 Form 10-Q
|
|
24
|
product infringes certain Pharmacyclics patents. Pharmacyclics 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 this suit.
Note 14
Segment Information
AbbVie operates in
one
business segment—pharmaceutical products. The following table details AbbVie’s worldwide net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
|
|
|
(in millions)
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Immunology
|
|
|
|
|
|
|
|
|
HUMIRA
|
United States
|
|
$
|
3,793
|
|
|
$
|
3,521
|
|
|
$
|
7,008
|
|
|
$
|
6,524
|
|
|
International
|
|
1,077
|
|
|
1,664
|
|
|
2,308
|
|
|
3,370
|
|
|
Total
|
|
$
|
4,870
|
|
|
$
|
5,185
|
|
|
$
|
9,316
|
|
|
$
|
9,894
|
|
SKYRIZI
|
United States
|
|
$
|
42
|
|
|
$
|
—
|
|
|
$
|
42
|
|
|
$
|
—
|
|
|
International
|
|
6
|
|
|
—
|
|
|
6
|
|
|
—
|
|
|
Total
|
|
$
|
48
|
|
|
$
|
—
|
|
|
$
|
48
|
|
|
$
|
—
|
|
Hematologic Oncology
|
|
|
|
|
|
|
|
|
IMBRUVICA
|
United States
|
|
$
|
886
|
|
|
$
|
693
|
|
|
$
|
1,715
|
|
|
$
|
1,317
|
|
|
Collaboration revenues
|
|
213
|
|
|
157
|
|
|
406
|
|
|
295
|
|
|
Total
|
|
$
|
1,099
|
|
|
$
|
850
|
|
|
$
|
2,121
|
|
|
$
|
1,612
|
|
VENCLEXTA
|
United States
|
|
$
|
117
|
|
|
$
|
47
|
|
|
$
|
222
|
|
|
$
|
88
|
|
|
International
|
|
52
|
|
|
18
|
|
|
98
|
|
|
36
|
|
|
Total
|
|
$
|
169
|
|
|
$
|
65
|
|
|
$
|
320
|
|
|
$
|
124
|
|
HCV
|
|
|
|
|
|
|
|
|
MAVYRET
|
United States
|
|
$
|
396
|
|
|
$
|
422
|
|
|
$
|
799
|
|
|
$
|
762
|
|
|
International
|
|
384
|
|
|
510
|
|
|
771
|
|
|
1,018
|
|
|
Total
|
|
$
|
780
|
|
|
$
|
932
|
|
|
$
|
1,570
|
|
|
$
|
1,780
|
|
VIEKIRA
|
United States
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
International
|
|
4
|
|
|
41
|
|
|
29
|
|
|
109
|
|
|
Total
|
|
$
|
4
|
|
|
$
|
41
|
|
|
$
|
29
|
|
|
$
|
112
|
|
Other Key Products
|
|
|
|
|
|
|
|
|
Creon
|
United States
|
|
$
|
257
|
|
|
$
|
219
|
|
|
$
|
484
|
|
|
$
|
428
|
|
Lupron
|
United States
|
|
$
|
168
|
|
|
$
|
180
|
|
|
$
|
359
|
|
|
$
|
357
|
|
|
International
|
|
41
|
|
|
43
|
|
|
79
|
|
|
85
|
|
|
Total
|
|
$
|
209
|
|
|
$
|
223
|
|
|
$
|
438
|
|
|
$
|
442
|
|
Synthroid
|
United States
|
|
$
|
203
|
|
|
$
|
193
|
|
|
$
|
385
|
|
|
$
|
375
|
|
Synagis
|
International
|
|
$
|
38
|
|
|
$
|
44
|
|
|
$
|
325
|
|
|
$
|
365
|
|
Duodopa
|
United States
|
|
$
|
24
|
|
|
$
|
20
|
|
|
$
|
46
|
|
|
$
|
38
|
|
|
International
|
|
91
|
|
|
88
|
|
|
180
|
|
|
173
|
|
|
Total
|
|
$
|
115
|
|
|
$
|
108
|
|
|
$
|
226
|
|
|
$
|
211
|
|
Sevoflurane
|
United States
|
|
$
|
18
|
|
|
$
|
19
|
|
|
$
|
35
|
|
|
$
|
36
|
|
|
International
|
|
73
|
|
|
94
|
|
|
148
|
|
|
183
|
|
|
Total
|
|
$
|
91
|
|
|
$
|
113
|
|
|
$
|
183
|
|
|
$
|
219
|
|
Kaletra
|
United States
|
|
$
|
10
|
|
|
$
|
13
|
|
|
$
|
23
|
|
|
$
|
26
|
|
|
International
|
|
67
|
|
|
78
|
|
|
132
|
|
|
138
|
|
|
Total
|
|
$
|
77
|
|
|
$
|
91
|
|
|
$
|
155
|
|
|
$
|
164
|
|
AndroGel
|
United States
|
|
$
|
22
|
|
|
$
|
128
|
|
|
$
|
96
|
|
|
$
|
258
|
|
ORILISSA
|
United States
|
|
$
|
18
|
|
|
$
|
—
|
|
|
$
|
31
|
|
|
$
|
—
|
|
|
International
|
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
Total
|
|
$
|
19
|
|
|
$
|
—
|
|
|
$
|
32
|
|
|
$
|
—
|
|
All other
|
|
|
$
|
254
|
|
|
$
|
86
|
|
|
$
|
355
|
|
|
$
|
228
|
|
Total net revenues
|
|
$
|
8,255
|
|
|
$
|
8,278
|
|
|
$
|
16,083
|
|
|
$
|
16,212
|
|
|
|
|
2019 Form 10-Q
|
|
25
|