Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                    to                                   

Commission File No. 001-35565

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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 Chicago, Illinois 60064

Telephone: (847) 932-7900

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.        Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).        Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer x
 
Accelerated Filer ¨
 
 
 
 
 
Non-Accelerated Filer ¨
 
Smaller reporting company ¨
 
(Do not check if a 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 x

As of October 24, 2017, AbbVie Inc. had 1,596,429,740 shares of common stock at $0.01 par value outstanding.







AbbVie Inc. and Subsidiaries
Table of Contents

PART I.
 
 
Page
 
 
 
Item 1.
Item 2.
Item 3.
Item 4.
 
 
 
PART II.
 
 
 
Item 1.
Item 2.
Item 6.


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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)
 
2017
 
2016
 
2017
 
2016
Net revenues
 
$
6,995

 
$
6,432

 
$
20,477

 
$
18,842

 
 
 
 
 
 
 
 
 
Cost of products sold
 
1,616

 
1,504

 
4,760

 
4,278

Selling, general and administrative
 
1,452

 
1,381

 
4,324

 
4,202

Research and development
 
1,222

 
1,106

 
3,580

 
3,176

Acquired in-process research and development
 

 
80

 
15

 
160

Total operating costs and expenses
 
4,290

 
4,071

 
12,679

 
11,816

Operating earnings
 
2,705

 
2,361

 
7,798

 
7,026

 
 
 
 
 
 
 
 
 
Interest expense, net
 
252

 
250

 
752

 
675

Net foreign exchange loss (gain)
 
9

 
(4
)
 
28

 
313

Other expense, net
 
349

 
101

 
484

 
152

Earnings before income tax expense
 
2,095

 
2,014

 
6,534

 
5,886

Income tax expense
 
464

 
416

 
1,277

 
1,324

Net earnings
 
$
1,631

 
$
1,598

 
$
5,257

 
$
4,562

 
 
 
 
 
 
 
 
 
Per share data
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
1.02

 
$
0.97

 
$
3.28

 
$
2.79

Diluted earnings per share
 
$
1.01

 
$
0.97

 
$
3.27

 
$
2.78

Cash dividends declared per common share
 
$
0.64

 
$
0.57

 
$
1.92

 
$
1.71

 
 
 
 
 
 
 
 
 
Weighted-average basic shares outstanding
 
1,597

 
1,632

 
1,596

 
1,624

Weighted-average diluted shares outstanding
 
1,603

 
1,640

 
1,602

 
1,633


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

2017 Form 10-Q |http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=11876257&doc=13 
2




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

 
Three months ended
September 30,
 
Nine months ended
September 30,
(in millions)
2017
 
2016
 
2017
 
2016
Net earnings
$
1,631

 
$
1,598

 
$
5,257

 
$
4,562

 
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax expense (benefit) of $7 for the three months and $40 for the nine months ended September 30, 2017 and $10 for the three months and $30 for the nine months ended September 30, 2016
183

 
31

 
602

 
164

Net investment hedging activities, net of tax expense (benefit) of $(52) for the three months and $(174) for the nine months ended September 30, 2017 and $— for the three months and $— for the nine months ended September 30, 2016
(90
)
 

 
(307
)
 

Pension and post-employment benefits, net of tax expense (benefit) of $8 for the three months and $23 for the nine months ended September 30, 2017 and $8 for the three months and $23 for the nine months ended September 30, 2016
8

 
15

 
21

 
48

Marketable security activities, net of tax expense (benefit) of $4 for the three months and $6 for the nine months ended September 30, 2017 and $1 for the three months and $(7) for the nine months ended September 30, 2016
(28
)
 
12

 
(18
)
 
19

Cash flow hedging activities, net of tax expense (benefit) of $(14) for the three months and $(29) for the nine months ended ended September 30, 2017 and $1 for the three months and $(3) for the nine months ended September 30, 2016
(138
)
 
(8
)
 
(325
)
 
(10
)
Other comprehensive income (loss)
(65
)
 
50

 
(27
)
 
221

Comprehensive income
$
1,566

 
$
1,648

 
$
5,230

 
$
4,783


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



2017 Form 10-Q |http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=11876257&doc=13 
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AbbVie Inc. and Subsidiaries
Condensed Consolidated Balance Sheets

(in millions, except share data)
September 30,
2017
 
December 31,
2016
 
(unaudited)
 
 
Assets
 
 
 
Current assets
 
 
 
Cash and equivalents
$
8,446

 
$
5,100

Short-term investments
1,108

 
1,323

Accounts receivable, net
4,891

 
4,758

Inventories
1,785

 
1,444

Prepaid expenses and other
2,700

 
3,562

Total current assets
18,930

 
16,187

 
 
 
 
Investments
1,971

 
1,783

Property and equipment, net
2,697

 
2,604

Intangible assets, net
28,167

 
28,897

Goodwill
15,748

 
15,416

Other assets
1,327

 
1,212

Total assets
$
68,840

 
$
66,099

 
 
 
 
Liabilities and Equity
 
 
 
Current liabilities
 
 
 
Short-term borrowings
$
800

 
$
377

Current portion of long-term debt and lease obligations
3,021

 
25

Accounts payable and accrued liabilities
9,212

 
9,379

Total current liabilities
13,033

 
9,781

 
 
 
 
Long-term debt and lease obligations
33,974

 
36,440

Deferred income taxes
6,147

 
6,890

Other long-term liabilities
8,999

 
8,352

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Stockholders’ equity
 
 
 
Common stock, $0.01 par value, 4,000,000,000 shares authorized, 1,767,419,360 shares issued as of September 30, 2017 and 1,754,900,486 as of December 31, 2016
18

 
18

Common stock held in treasury, at cost, 171,296,169 shares as of September 30, 2017 and 162,387,762 as of December 31, 2016
(11,419
)
 
(10,852
)
Additional paid-in capital
14,154

 
13,678

Retained earnings
6,547

 
4,378

Accumulated other comprehensive loss
(2,613
)
 
(2,586
)
Total stockholders’ equity
6,687

 
4,636

 
 
 
 
Total liabilities and equity
$
68,840

 
$
66,099


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

2017 Form 10-Q |http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=11876257&doc=13 
4




AbbVie Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
 
Nine months ended
September 30,
(in millions) (brackets denote cash outflows)
2017
 
2016
Cash flows from operating activities
 
 
 
Net earnings
$
5,257

 
$
4,562

Adjustments to reconcile net earnings to net cash from operating activities:
 
 
 
Depreciation
324

 
307

Amortization of intangible assets
808

 
554

Change in fair value of contingent consideration liabilities
547

 
143

Stock-based compensation
288

 
278

Upfront costs and milestones related to collaborations
85

 
230

Devaluation loss related to Venezuela

 
298

Other, net
(73
)
 
326

Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable
(163
)
 
(129
)
Inventories
(119
)
 
28

Prepaid expenses and other assets
(22
)
 
(122
)
Accounts payable and other liabilities
444

 
(975
)
Cash flows from operating activities
7,376

 
5,500

 
 
 
 
Cash flows from investing activities
 
 
 
Acquisitions of businesses, net of cash acquired

 
(2,477
)
Other acquisitions and investments
(180
)
 
(172
)
Acquisitions of property and equipment
(347
)
 
(365
)
Purchases of investment securities
(1,838
)
 
(4,520
)
Sales and maturities of investment securities
1,890

 
1,579

Cash flows from investing activities
(475
)
 
(5,955
)
 
 
 
 
Cash flows from financing activities
 
 
 
Net change in short-term borrowings
423

 
(406
)
Proceeds from issuance of long-term debt

 
7,771

Repayments of long-term debt and lease obligations
(18
)
 
(2,006
)
Debt issuance costs

 
(52
)
Dividends paid
(3,077
)
 
(2,784
)
Purchases of treasury stock
(905
)
 
(4,223
)
Proceeds from the exercise of stock options
214

 
210

Payments of contingent consideration liabilities
(268
)
 

Other, net
47

 
64

Cash flows from financing activities
(3,584
)
 
(1,426
)
Effect of exchange rate changes on cash and equivalents
29

 
(300
)
Net change in cash and equivalents
3,346

 
(2,181
)
Cash and equivalents, beginning of period
5,100

 
8,399

 
 
 
 
Cash and equivalents, end of period
$
8,446

 
$
6,218

 
 
 
 
Supplemental schedule of non-cash investing and financing activities
 
 
 
Issuance of common shares associated with acquisitions of businesses
$

 
$
3,923


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

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AbbVie Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
Note 1    Basis of Presentation
 
Basis of Historical Presentation
The unaudited interim condensed consolidated financial statements of AbbVie Inc. (AbbVie or the company) have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) have been omitted. These unaudited interim condensed consolidated financial statements should be read in conjunction with the company’s audited consolidated financial statements and notes included in the company’s Annual Report on Form 10-K for the year ended December 31, 2016.

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

In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The standard provides clarifying guidance to assist in the evaluation of whether transactions are treated as business combinations or asset acquisitions. AbbVie elected to early adopt the changes prospectively in the first quarter of 2017.

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. AbbVie adopted the standard in the first quarter of 2017. As a result, all excess tax benefits associated with stock-based awards are recognized in the statement of earnings when the awards vest or settle, rather than in stockholders' equity. In addition, excess tax benefits in the statement of cash flows are now classified as an operating activity rather than as a financing activity. AbbVie adopted these changes prospectively. Accordingly, the company recognized excess tax benefits in income tax expense of $14 million for the three months and $53 million for the nine months ended September 30, 2017 and classified them within cash flows from operating activities.

Recent Accounting Pronouncements Not Yet Adopted

In May 2014, the FASB issued ASU No. 2014-09, Summary and Amendments That Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs-Contracts with Customers (Subtopic 340-40). The amendments in this standard supersede most current revenue recognition requirements. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. AbbVie can apply the amendments using one of the following two methods: (i) retrospectively to each prior reporting period presented, or (ii) modified retrospectively with the cumulative effect of initially applying the amendments recognized at the date of initial application. AbbVie will adopt the standard effective the first quarter of 2018 and apply the amendments using the modified retrospective method. The company has made substantial progress in its review of the new standard and will complete its assessment by December 31, 2017. AbbVie does not expect significant changes to the amounts or timing of revenue recognition for product sales, which is its primary revenue stream. However, the company expects that the adoption of the new standard will require a cumulative-effect adjustment to retained earnings on January 1, 2018 of approximately $130 million, net of tax, primarily related to certain deferred license revenues that were originally expected to be recognized through early 2020.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The standard requires several targeted changes including that equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) be measured at fair value with changes in fair value recognized in net earnings. These provisions will not impact the accounting for AbbVie's investments

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in debt securities. The new guidance also changes certain disclosure requirements and other aspects of current U.S. GAAP. Amendments are to be applied as a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. This standard will be effective for AbbVie starting with the first quarter of 2018. The standard does not permit early adoption with the exception of certain targeted provisions. AbbVie is unable to estimate the impact of adopting this standard on its financial statements as it will be dependent upon the composition of its equity investment portfolio as of the adoption date and future changes in fair value subsequent to the adoption date. However, based on historical trends, AbbVie does not believe the adoption will have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The standard outlines a comprehensive lease accounting model that supersedes the current lease guidance and requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms greater than 12 months. The guidance also changes the definition of a lease and expands the disclosure requirements of lease arrangements. The new standard must be adopted using the modified retrospective approach and will be effective for AbbVie starting with the first quarter of 2019, with early adoption permitted. AbbVie will adopt the standard effective in the first quarter of 2019 and is currently assessing the impact of adopting this guidance on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326). The standard changes how credit losses are measured for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other financial instruments, the standard requires the use of a new forward-looking "expected credit loss" model that generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, the standard now requires allowances to be recorded instead of reducing the amortized cost of the investment. Additionally, the standard requires new disclosures and will be effective for AbbVie starting with the first quarter of 2020. Early adoption beginning in the first quarter of 2019 is permitted. With certain exceptions, adjustments are to be applied using a modified-retrospective approach by reflecting adjustments through a cumulative-effect impact to retained earnings as of the beginning of the fiscal year of adoption. AbbVie is currently assessing the impact and timing of adopting this guidance on its consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740). The new standard requires entities to recognize the income tax consequences of an intercompany transfer of an asset other than inventory when the transfer occurs. Under current U.S. GAAP, the income tax consequences of these intercompany asset transfers are deferred until the asset is sold to a third party or otherwise recovered through use. The standard will be effective for AbbVie starting with the first quarter of 2018. Adjustments for this update are to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings with any adjustments reflected 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. As of September 30, 2017, AbbVie had approximately $1.8 billion of prepaid income tax assets that will be affected by this standard, of which $1.3 billion was included in prepaid expenses and other on the condensed consolidated balance sheet.

In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The standard requires that an employer continue to report the service cost component of net periodic benefit cost in the same income statement line item or items as other employee compensation costs arising from services rendered during the period. The other components of net periodic benefit cost are required to be presented separately outside of income from operations and are not eligible for capitalization. The standard will be effective for AbbVie starting with the first quarter of 2018. Upon adoption, the company will apply the income statement classification provisions of this standard retrospectively and preliminarily expects to reclassify income of approximately $50 million from operating earnings to non-operating income for the year ending December 31, 2017.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The standard simplifies the application of hedge accounting and more closely aligns the accounting with an entity’s risk management activities. The standard will be effective for AbbVie starting with the first quarter of 2019, with early adoption permitted. AbbVie is currently assessing the impact and timing of adopting this guidance on its consolidated financial statements.

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Note 2    Supplemental Financial Information
 
Interest Expense, Net
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
(in millions)
 
2017
 
2016
 
2017
 
2016
Interest expense
 
$
293

 
$
271

 
$
851

 
$
731

Interest income
 
(41
)
 
(21
)
 
(99
)
 
(56
)
Interest expense, net
 
$
252

 
$
250

 
$
752

 
$
675

Inventories
(in millions)
September 30, 2017
 
December 31, 2016
Finished goods
$
353

 
$
223

Work-in-process
1,271

 
1,080

Raw materials
161

 
141

Inventories
$
1,785

 
$
1,444

Property and Equipment
(in millions)
September 30, 2017
 
December 31, 2016
Property and equipment, gross
$
7,894

 
$
7,526

Accumulated depreciation
(5,197
)
 
(4,922
)
Property and equipment, net
$
2,697

 
$
2,604

Depreciation expense was $111 million for the three months and $324 million for the nine months ended September 30, 2017 and $96 million for the three months and $307 million for the nine months ended September 30, 2016.

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Note 3    Earnings Per Share
 

AbbVie grants certain restricted stock awards (RSAs) and restricted stock units (RSUs) that are considered to be participating securities. Due to the presence of participating securities, AbbVie calculates earnings per share (EPS) using the more dilutive of the treasury stock or the two-class method. For all periods presented, the two-class method was more dilutive.

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 information)
 
2017
 
2016
 
2017
 
2016
Basic EPS
 
 
 
 
 
 
 
 
Net earnings
 
$
1,631

 
$
1,598

 
$
5,257

 
$
4,562

Earnings allocated to participating securities
 
8

 
8

 
26

 
23

Earnings available to common shareholders
 
$
1,623

 
$
1,590

 
$
5,231

 
$
4,539

Weighted-average basic shares outstanding
 
1,597

 
1,632

 
1,596

 
1,624

Basic earnings per share
 
$
1.02

 
$
0.97

 
$
3.28

 
$
2.79

 
 
 
 
 
 
 
 
 
Diluted EPS
 
 
 
 
 
 
 
 
Net earnings
 
$
1,631

 
$
1,598

 
$
5,257

 
$
4,562

Earnings allocated to participating securities
 
8

 
8

 
26

 
23

Earnings available to common shareholders
 
$
1,623

 
$
1,590

 
$
5,231

 
$
4,539

Weighted-average shares of common stock outstanding
 
1,597

 
1,632

 
1,596

 
1,624

Effect of dilutive securities
 
6

 
8

 
6

 
9

Weighted-average diluted shares outstanding
 
1,603

 
1,640

 
1,602

 
1,633

Diluted earnings per share
 
$
1.01

 
$
0.97

 
$
3.27

 
$
2.78


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 were insignificant for all periods presented.
Note 4    Licensing, Acquisitions and Other Arrangements
 

Acquisition of Stemcentrx

On June 1, 2016, AbbVie acquired all of the outstanding equity interests in Stemcentrx, a privately-held biotechnology company. The transaction expanded AbbVie’s oncology pipeline by adding the late-stage asset rovalpituzumab tesirine (Rova-T), four additional early-stage clinical compounds in solid tumor indications and a significant portfolio of pre-clinical assets. Rova-T is currently in registrational trials for small cell lung cancer.

The acquisition of Stemcentrx was accounted for as a business combination using the acquisition method of accounting. The aggregate upfront consideration for the acquisition of Stemcentrx consisted of approximately 62.4 million shares of AbbVie common stock, issued from common stock held in treasury, and cash. AbbVie may make certain contingent payments upon the achievement of defined development and regulatory milestones. As of the acquisition date, the maximum aggregate amount payable for development and regulatory milestones was $4.0 billion. The acquisition-date fair value of these milestones was $620 million and was estimated using a combination of probability-weighted discounted cash flow models and Monte Carlo simulation models. The estimate was determined based on significant inputs that are not observable in the market, referred to as Level 3 inputs, as described in more detail in Note 8.


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The following table summarizes total consideration:
(in millions)
 
Cash
$
1,883

Fair value of AbbVie common stock
3,923

Contingent consideration
620

Total consideration
$
6,426


The following table summarizes fair values of assets acquired and liabilities assumed as of the June 1, 2016 acquisition date:
(in millions)
 
Assets acquired and liabilities assumed
 
Accounts receivable
$
1

Prepaid expenses and other
7

Property and equipment
17

Intangible assets - Indefinite-lived research and development
6,100

Accounts payable and accrued liabilities
(31
)
Deferred income taxes
(1,933
)
Other long-term liabilities
(7
)
Total identifiable net assets
4,154

Goodwill
2,272

Total assets acquired and liabilities assumed
$
6,426


Intangible assets were related to acquired in-process research and development (IPR&D) for Rova-T, four additional early-stage clinical compounds in solid tumor indications and several additional pre-clinical compounds. The estimated fair value of the acquired IPR&D was determined using the multi-period excess earnings model of the “income approach,” which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the more significant assumptions inherent in the development of those asset valuations include the estimated annual cash flows for each asset or product (including net revenues, cost of sales, research and development (R&D) costs, selling and marketing costs and working capital/contributory asset charges), the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, the regulatory approval probabilities, commercial success risks, competitive landscape as well as other factors.

The goodwill recognized represents expected synergies, including the ability to: (i) leverage the respective strengths of each business; (ii) expand the combined company’s product portfolio; (iii) accelerate AbbVie's clinical and commercial presence in oncology; and (iv) establish a strong leadership position in oncology. Goodwill was also impacted by the establishment of a deferred tax liability for the acquired identifiable intangible assets which have no tax basis. The goodwill is not deductible for tax purposes.

Pro Forma Financial Information

The following table presents the unaudited pro forma combined results of operations of AbbVie and Stemcentrx for the three and nine months ended September 30, 2016 as if the acquisition of Stemcentrx had occurred on January 1, 2015:
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
(in millions, except per share information)
 
2016
 
2016
Net revenues
 
$
6,432

 
$
18,845

Net earnings
 
1,579

 
4,515

Basic earnings per share
 
$
0.97

 
$
2.72

Diluted earnings per share
 
$
0.96

 
$
2.71


The unaudited pro forma financial information was prepared using the acquisition method of accounting and was based on the historical financial information of AbbVie and Stemcentrx. In order to reflect the occurrence of the acquisition on January 1, 2015 as

2017 Form 10-Q | http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=11876257&doc=13
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required, the unaudited pro forma financial information includes adjustments to reflect the additional interest expense associated with the issuance of debt to finance the acquisition and the reclassification of acquisition, integration and financing-related costs incurred during 2016 to the three and nine months ended September 30, 2015. The unaudited pro forma financial information is not necessarily indicative of what the consolidated results of operations would have been had the acquisition been completed on January 1, 2015. In addition, the unaudited pro forma financial information is not a projection of the future results of operations of the combined company nor does it reflect the expected realization of any cost savings or synergies associated with the acquisition.

Acquisition of BI 655066 and BI 655064 from Boehringer Ingelheim

On April 1, 2016, AbbVie acquired all rights to risankizumab (BI 655066), an anti-IL-23 monoclonal biologic antibody in Phase 3 development for psoriasis, from Boehringer Ingelheim (BI) pursuant to a global collaboration agreement. AbbVie is also evaluating the potential of this biologic therapy in Crohn’s disease, psoriatic arthritis and asthma. In addition to risankizumab, AbbVie also gained rights to an anti-CD40 antibody, BI 655064, currently in Phase 1 development. BI will retain responsibility for further development of BI 655064, and AbbVie may elect to advance the program after completion of certain clinical achievements. The acquired assets include all patents, data, know-how, third-party agreements, regulatory filings and manufacturing technology related to BI 655066 and BI 655064.

The company concluded that the acquired assets met the definition of a business and accounted for the transaction as a business combination using the acquisition method of accounting. Under the terms of the agreement, AbbVie made an upfront payment of $595 million. Additionally, $18 million of payments to BI, pursuant to a contractual obligation to reimburse BI for certain development costs it incurred prior to the acquisition date, were initially deferred. AbbVie may make certain contingent payments upon the achievement of defined development, regulatory and commercial milestones, as well as royalty payments based on net revenues of licensed products. As of the acquisition date, the maximum aggregate amount payable for development and regulatory milestones was approximately $1.6 billion. The acquisition-date fair value of these milestones was $606 million. The acquisition-date fair value of contingent royalty payments was $2.8 billion. The potential contingent consideration payments were estimated by applying a probability-weighted expected payment model for contingent milestone payments and a Monte Carlo simulation model for contingent royalty payments, which were then discounted to present value. The fair value measurements were based on Level 3 inputs.

The following table summarizes total consideration:
(in millions)
 
Cash
$
595

Deferred consideration payable
18

Contingent consideration
3,365

Total consideration
$
3,978


The following table summarizes fair values of assets acquired as of the April 1, 2016 acquisition date:
(in millions)
 
Assets acquired
 
Identifiable intangible assets - Indefinite-lived research and development
$
3,890

Goodwill
88

Total assets acquired
$
3,978


The estimated fair value of the acquired IPR&D was determined using the multi-period excess earnings model of the “income approach.” The goodwill recognized represents expected synergies, including an expansion of the company’s immunology product portfolio.

Pro forma results of operations for this acquisition have not been presented because this acquisition is insignificant to AbbVie’s consolidated results of operations.


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Other Licensing & Acquisitions Activity

Excluding the acquisitions above, cash outflows related to other acquisitions and investments totaled $180 million for the nine months ended September 30, 2017 and $172 million for the nine months ended September 30, 2016. AbbVie recorded no IPR&D charges for the three months ended September 30, 2017 and recorded IPR&D charges of $15 million for the nine months ended September 30, 2017. AbbVie recorded IPR&D charges of $80 million for the three months and $160 million for the nine months ended September 30, 2016.

In October 2017, AbbVie entered into a global strategic collaboration with Alector, Inc. (Alector) to develop and commercialize medicines to treat Alzheimer’s disease and other neurodegenerative disorders. AbbVie and Alector have agreed to research a portfolio of antibody targets and AbbVie has an option to global development and commercial rights to two targets. AbbVie will make an initial upfront payment of $205 million, which will be expensed to IPR&D in the fourth quarter of 2017. Alector will conduct exploratory research, drug discovery and development for lead programs up to the conclusion of the proof of concept studies. If the option is exercised, AbbVie will lead development and commercialization activities and could make additional payments to Alector of up to $986 million upon achievement of certain development and regulatory milestones. Alector and AbbVie will co-fund development and commercialization and will share global profits equally.
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
September 30,
 
Nine months ended
September 30,
(in millions)
 
2017
 
2016
 
2017
 
2016
United States - Janssen's share of profits (included in cost of products sold)
 
$
268

 
$
211

 
$
727

 
$
540

International - AbbVie's share of profits (included in net revenues)
 
114

 
64

 
306

 
175

Global - AbbVie's share of other costs (included in respective line items)
 
75

 
70

 
209

 
195


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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, 2016
$
15,416

Foreign currency translation adjustments
332

Balance as of September 30, 2017
$
15,748


The latest impairment assessment of goodwill was completed in the third quarter of 2017. As of September 30, 2017, there were no accumulated goodwill impairment losses. Future impairment tests for goodwill will be performed annually in the third quarter, or earlier if impairment indicators exist.

Intangible Assets, Net

The following table summarizes intangible assets:
 
September 30, 2017
 
December 31, 2016
(in millions)
Gross
carrying
amount
 
Accumulated
amortization
 
Net
carrying
amount
 
Gross
carrying
amount
 
Accumulated
amortization
 
Net
carrying
amount
Definite-lived intangible assets
 
 
 
 
 
 
 
 
 
 
 
Developed product rights
$
16,456

 
$
(4,805
)
 
$
11,651

 
$
16,464

 
$
(4,256
)
 
$
12,208

License agreements
7,869

 
(1,343
)
 
6,526

 
7,809

 
(1,110
)
 
6,699

Total definite-lived intangible assets
24,325

 
(6,148
)
 
18,177

 
24,273

 
(5,366
)
 
18,907

Indefinite-lived research and development
9,990

 

 
9,990

 
9,990

 

 
9,990

Total intangible assets, net
$
34,315

 
$
(6,148
)
 
$
28,167

 
$
34,263

 
$
(5,366
)
 
$
28,897


Amortization expense was $268 million for the three months and $808 million for the nine months ended September 30, 2017 and $208 million for the three months and $554 million for the nine months ended September 30, 2016. Amortization expense was included in cost of products sold in the condensed consolidated statements of earnings.

For the nine months ended September 30, 2017, no impairment charges were recorded to intangible assets. For the nine months ended September 30, 2016, an impairment charge of $39 million was recorded related to certain developed product rights in the United States due to a decline in the market for the product. The fair value was determined based on a discounted cash flow analysis and the charge was included in cost of products sold in the condensed consolidated statement of earnings.

The indefinite-lived intangible assets represent acquired IPR&D associated with products that have not yet received regulatory approval. The indefinite-lived intangible assets as of September 30, 2017 and December 31, 2016 primarily related to the acquisitions of Stemcentrx and BI compounds. See Note 4 for additional information. The latest impairment assessment of indefinite-lived intangible assets was completed in the third quarter of 2017. No impairment charges were recorded for the nine months ended September 30, 2017 and 2016. Future impairment tests for indefinite-lived intangible assets will be performed annually in the third quarter, or earlier if impairment indicators exist.

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Note 7    Restructuring Plans
 

AbbVie recorded restructuring charges of $7 million for the three months and $34 million for the nine months ended September 30, 2017 and $5 million for the three months and $35 million for the nine months ended September 30, 2016.

The following table summarizes the cash activity in the restructuring reserve for the nine months ended September 30, 2017:
(in millions)
 
Accrued balance as of December 31, 2016
$
87

Restructuring charges
34

Payments and other adjustments
(65
)
Accrued balance as of September 30, 2017
$
56

Note 8    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, 2016 for a summary of AbbVie's risk management policy and use of derivative instruments.

Financial Instruments

Various AbbVie foreign subsidiaries enter into foreign currency forward exchange contracts to manage exposures to changes in foreign exchange rates for anticipated intercompany transactions denominated in a currency other than the functional currency of the local entity. These contracts, with notional amounts totaling $3.0 billion at September 30, 2017 and $2.2 billion at December 31, 2016, are designated as cash flow hedges and are recorded at fair value. The durations of these forward exchange contracts were generally less than eighteen months. Accumulated gains and losses as of September 30, 2017 will be reclassified from accumulated other comprehensive loss (AOCI) and included in cost of products sold at the time the products are sold, generally not exceeding six months from the date of settlement.

The company also enters into foreign currency forward exchange contracts to manage its exposure to foreign currency denominated trade payables and receivables and intercompany loans. These contracts are not designated as hedges and are recorded at fair value. Resulting gains or losses are reflected in net foreign exchange loss in the consolidated statements of earnings and are generally offset by losses or gains on the foreign currency exposure being managed. These contracts had notional amounts totaling $7.4 billion at September 30, 2017 and $6.6 billion at December 31, 2016.

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. In the fourth quarter of 2016, the company issued €3.6 billion aggregate principal amount of senior Euro notes and designated the principal amounts of this foreign denominated debt as net investment hedges. Realized and unrealized gains and losses from these hedges are included in AOCI.

AbbVie is a party to interest rate hedge contracts, designated as fair value hedges, with notional amounts totaling $11.8 billion at September 30, 2017 and December 31, 2016. 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.


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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,
2017
December 31, 2016
 
Balance sheet caption
September 30,
2017
December 31, 2016
Foreign currency forward exchange contracts
 
 
 
 
 
 
 
Designated as cash flow hedges
Prepaid expenses and
other
$
1

$
170

 
Accounts payable and accrued liabilities
$
150

$
5

Designated as cash flow hedges
Other assets


 
Other long-term liabilities
6


Not designated as hedges
Prepaid expenses and
other
52

55

 
Accounts payable and accrued liabilities
47

33

Interest rate swaps designated as fair value hedges
Other assets


 
Other long-term liabilities
295

338

Total derivatives
 
$
53

$
225

 
 
$
498

$
376


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)
 
2017
 
2016
 
2017
 
2016
Foreign currency forward exchange contracts
 
$
(114
)
 
$
(5
)
 
$
(253
)
 
$
7


The amount of hedge ineffectiveness was insignificant for all periods presented. Assuming market rates remain constant through contract maturities, the company expects to transfer pre-tax unrealized losses of $117 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 a pre-tax loss in other comprehensive income (loss) of $142 million for the three months and $481 million for the nine months ended September 30, 2017.

The following table summarizes the pre-tax amounts and location of derivative instrument net gains (losses) recognized in the condensed consolidated statements of earnings, including the effective portions of the net gains (losses) reclassified out of AOCI into net earnings. See Note 10 for the amount of net gains (losses) reclassified out of AOCI.
 
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
(in millions)
Statement of earnings caption
 
2017
 
2016
 
2017
 
2016
Foreign currency forward exchange contracts
 
 
 
 
 
 
 
 
 
Designated as cash flow hedges
Cost of products sold
 
$
38

 
$
4

 
$
101

 
$
23

Not designated as hedges
Net foreign exchange loss
 
(17
)
 
(15
)
 
(88
)
 
(122
)
Non-designated treasury rate lock agreements
Other expense, net
 

 

 

 
(12
)
Interest rate swaps designated as fair value hedges
Interest expense, net
 
11

 
(49
)
 
43

 
321

Total
 
 
$
32

 
$
(60
)
 
$
56

 
$
210


The gain (loss) related to outstanding interest rate swaps designated as fair value hedges is recognized in interest expense, net and directly offsets the (loss) gain on the underlying hedged item, the fixed-rate debt, resulting in no net impact to interest expense, net for all periods presented.


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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, 2017:
 
 
 
Basis of fair value measurement
(in millions)
Total
 
Quoted prices in active markets for identical
assets
(Level 1)
 
Significant
other observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Cash and equivalents
$
8,446

 
$
669

 
$
7,777

 
$

Time deposits
500

 

 
500

 

Debt securities
2,475

 

 
2,475

 

Equity securities
57

 
57

 

 

Foreign currency contracts
53

 

 
53

 

Total assets
$
11,531

 
$
726

 
$
10,805

 
$

Liabilities
 
 
 
 
 
 
 
Interest rate hedges
$
295

 
$

 
$
295

 
$

Foreign currency contracts
203

 

 
203

 

Contingent consideration
4,455

 

 

 
4,455

Total liabilities
$
4,953

 
$

 
$
498

 
$
4,455



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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, 2016:
 
 
 
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
$
5,100

 
$
1,191

 
$
3,909

 
$

Time deposits
1,014

 

 
1,014

 

Debt securities
1,974

 

 
1,974

 

Equity securities
76

 
76

 

 

Foreign currency contracts
225

 

 
225

 

Total assets
$
8,389

 
$
1,267

 
$
7,122

 
$

Liabilities
 
 
 
 
 
 
 
Interest rate hedges
$
338

 
$

 
$
338

 
$

Foreign currency contracts
38

 

 
38

 

Contingent consideration
4,213

 

 

 
4,213

Total liabilities
$
4,589

 
$

 
$
376

 
$
4,213


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. Available-for-sale equity securities consists 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 publicized spot curves for interest rate hedges and publicized forward curves for foreign currency contracts. The fair value measurements of the contingent consideration liabilities were determined based on significant unobservable inputs, including the discount rate, estimated probabilities and timing of achieving specified development, regulatory and commercial milestones and the estimated amount of future sales of the acquired products still in development. Changes to the fair value of the contingent consideration liabilities can result from changes to one or a number of inputs, including discount rates, the probabilities of achieving the milestones, the time required to achieve the milestones and estimated future sales. Significant judgment is employed in determining the appropriateness of these inputs. Changes to the inputs described above could have a material impact on the company's financial position and results of operations in any given period. At September 30, 2017, a 50 basis point increase/decrease in the assumed discount rate would have decreased/increased the value of the contingent consideration liabilities by approximately $160 million. Additionally, at September 30, 2017, a five percentage point increase/decrease in the assumed probability of success across all potential indications would have increased/decreased the value of the contingent consideration liabilities by approximately $340 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)
 
2017
 
2016
Beginning balance
 
$
4,213

 
$

Additions (see Note 4)
 

 
3,985

Change in fair value recognized in net earnings
 
547

 
143

Milestone payments
 
(305
)
 

Ending balance
 
$
4,455

 
$
4,128

 
The change in fair value recognized in net earnings was recorded in other expense, net in the condensed consolidated statements of earnings for both the three and nine months ended September 30, 2017 and 2016.


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In addition to the financial instruments that the company carries at fair value on the condensed consolidated balance sheets, certain financial instruments are carried at historical cost or some basis other than fair value. The book values, approximate fair values and bases used to measure the approximate fair values of certain financial instruments as of September 30, 2017 are shown in the table below:

 
 
 
 
Basis of fair value measurement
(in millions)
Book Value
Approximate fair value
 
Quoted prices in 
active markets for identical assets
(Level 1)
 
Significant
other 
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
Assets
 
 
 
 
 
 
 
 
Investments
$
47

$
47

 
$

 
$
2

 
$
45

Total assets
$
47

$
47

 
$

 
$
2

 
$
45

Liabilities
 
 
 
 
 
 
 
 
Short-term borrowings
$
800

$
800

 
$

 
$
800

 
$

Current portion of long-term debt and lease obligations
3,021

3,027

 
3,004

 
23

 

Long-term debt and lease obligations, excluding fair value hedges
34,269

35,647

 
33,575

 
2,072

 

Total liabilities
$
38,090

$
39,474

 
$
36,579

 
$
2,895

 
$


The book values, approximate fair values and bases used to measure the approximate fair values of certain financial instruments as of December 31, 2016 are shown in the table below:

 
 
 
 
Basis of fair value measurement
(in millions)
Book Value
Approximate fair value
 
Quoted prices in 
active markets for identical assets
(Level 1)
 
Significant
other 
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
Assets
 
 
 
 
 
 
 
 
Investments
$
42

$
42

 
$

 
$
5

 
$
37

Total assets
$
42

$
42

 
$

 
$
5

 
$
37

Liabilities
 
 
 
 
 
 
 
 
Short-term borrowings
$
377

$
377

 
$

 
$
377

 
$

Current portion of long-term debt and lease obligations
25

25

 

 
25

 

Long-term debt and lease obligations, excluding fair value hedges
36,778

36,664

 
34,589

 
2,075

 

Total liabilities
$
37,180

$
37,066

 
$
34,589

 
$
2,477

 
$


Investments primarily consist of cost method investments, for which the company takes into consideration recent transactions and financial information of the investee, which represents a Level 3 basis of fair value measurement. The fair values of short-term borrowings approximate the carrying values due to the short maturities of these instruments.

The fair values of long-term debt, excluding fair value hedges and the term loans, were determined by using the published market price for the debt instruments, without consideration of transaction costs, which represents a Level 1 basis of fair value measurement. The fair values of the term loans were determined based on a discounted cash flow analysis using quoted market rates, which represents a Level 2 basis of fair value measurement. The counterparties to financial instruments consist of select major international financial institutions.


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Available-for-sale Securities

Substantially all of the company’s investments in debt and equity securities were classified as available-for-sale. Debt securities classified as short-term were $549 million as of September 30, 2017 and $309 million as of December 31, 2016. Long-term debt securities mature primarily within five years. Estimated fair values of available-for-sale securities were generally determined based on prices obtained from commercial pricing services.

The following table is a summary of available-for-sale securities by type as of September 30, 2017:
 
Amortized Cost
 
Gross unrealized
 
Fair Value
(in millions)
 
Gains
 
Losses
 
Asset backed securities
$
904

 
$
1

 
$
(2
)
 
$
903

Corporate debt securities
1,424

 
4

 
(1
)
 
1,427

Other debt securities
145

 

 

 
145

Equity securities
18

 
41

 
(2
)
 
57

Total
$
2,491

 
$
46

 
$
(5
)
 
$
2,532


The following table is a summary of available-for-sale securities by type as of December 31, 2016:
 
Amortized Cost
 
Gross unrealized
 
Fair Value
(in millions)
 
Gains
 
Losses
 
Asset backed securities
$
891

 
$
1

 
$
(4
)
 
$
888

Corporate debt securities
961

 
1

 
(2
)
 
960

Other debt securities
127

 

 
(1
)
 
126

Equity securities
18

 
60

 
(2
)
 
76

Total
$
1,997

 
$
62

 
$
(9
)
 
$
2,050


AbbVie had no other-than-temporary impairments as of September 30, 2017. Net realized gains were $39 million for the three months and $49 million for the nine months ended September 30, 2017. Net realized gains for the three and nine months ended September 30, 2016 were insignificant.

Concentrations of Risk

The functional currency of the company’s Venezuela operations is the U.S. dollar due to the hyperinflationary status of the Venezuelan economy. During the first quarter of 2016, in consideration of declining economic conditions in Venezuela and a decline in transactions settled at the official rate, AbbVie determined that its net monetary assets denominated in the Venezuelan bolivar (VEF) were no longer expected to be settled at the official rate of 10 VEF per U.S. dollar, but rather at the Divisa Complementaria (DICOM) rate. Therefore, during the first quarter of 2016, AbbVie recorded a charge of $298 million to net foreign exchange loss to revalue its bolivar-denominated net monetary assets using the DICOM rate then in effect of approximately 270 VEF per U.S. dollar. As of September 30, 2017 and December 31, 2016, AbbVie’s net monetary assets in Venezuela were insignificant.

AbbVie continues to do business with foreign governments in certain countries, including Greece, Portugal, Italy and Spain, which have historically experienced challenges in credit and economic conditions. Substantially all of AbbVie’s trade receivables in Greece, Portugal, Italy and Spain are with government health systems. Outstanding governmental receivables in these countries, net of allowances for doubtful accounts, totaled $246 million as of September 30, 2017 and $244 million as of December 31, 2016. The company also continues to do business with foreign governments in certain oil-exporting countries that have recently experienced a deterioration in economic conditions, including Saudi Arabia and Russia, which may result in delays in the collection of receivables. Outstanding governmental receivables related to Saudi Arabia, net of allowances for doubtful accounts, were $141 million as of September 30, 2017 and $122 million as of December 31, 2016. Outstanding governmental receivables related to Russia, net of allowances for doubtful accounts, were $142 million as of September 30, 2017 and $110 million as of December 31, 2016. Global economic conditions and customer-specific factors may require the company to periodically re-evaluate the collectability of its receivables and the company could potentially incur credit losses.


2017 Form 10-Q | http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=11876257&doc=13
19




Of total net accounts receivable, three U.S. wholesalers accounted for 56% as of September 30, 2017 and 51% as of December 31, 2016, 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 66% of AbbVie’s total net revenues for the nine months ended September 30, 2017 and 63% for the nine months ended September 30, 2016.

Debt and Credit Facilities
 
Short-term borrowings included commercial paper of $800 million as of September 30, 2017 and $377 million as of December 31, 2016. The weighted-average interest rate on commercial paper borrowings was 1.2% for the nine months ended September 30, 2017 and 0.6% for the nine months ended September 30, 2016.
Note 9    Post-Employment Benefits
 

The following is a summary of net periodic benefit costs relating to the company’s defined benefit and other post-employment plans:
 
Defined
benefit plans
 
Other post-
employment plans
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
Three months ended
September 30,
 
Nine months ended
September 30,
(in millions)
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Service cost
$
59

 
$
52

 
$
176

 
$
158

 
$
6

 
$
6

 
$
19

 
$
19

Interest cost
52

 
50

 
153

 
151

 
6

 
6

 
18

 
18

Expected return on plan assets
(96
)
 
(88
)
 
(286
)
 
(266
)
 

 

 

 

Amortization of actuarial losses and prior service costs
27

 
22

 
80

 
64

 
1

 

 
1

 

Net periodic benefit cost
$
42

 
$
36

 
$
123

 
$
107

 
$
13

 
$
12

 
$
38

 
$
37


AbbVie's principal domestic defined benefit plan is the AbbVie Pension Plan. AbbVie made voluntary contributions to this plan of $150 million in both the nine months ended September 30, 2017 and 2016.
Note 10 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
September 30,
 
Nine months ended
September 30,
(in millions)
 
2017
 
2016
 
2017
 
2016
Cost of products sold
 
$
7

 
$
6

 
$
20

 
$
19

Research and development
 
30

 
6

 
127

 
161

Selling, general and administrative
 
34

 
35

 
141

 
141

Pre-tax compensation expense
 
71

 
47

 
288

 
321

Tax benefit
 
20

 
13

 
85

 
83

After-tax compensation expense
 
$
51

 
$
34

 
$
203

 
$
238


Stock Options

During the nine months ended September 30, 2017, primarily in connection with the company's annual grant, AbbVie granted 1.2 million stock options with a weighted-average grant-date fair value of $9.80. As of September 30, 2017, $20 million of unrecognized compensation cost related to stock options is expected to be recognized as expense over approximately the next two years.

2017 Form 10-Q | http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=11876257&doc=13
20





RSAs, RSUs and Performance Shares

During the nine months ended September 30, 2017, primarily in connection with the company's annual grant, AbbVie granted 6.1 million RSUs and performance shares with a weighted-average grant-date fair value of $61.68. As of September 30, 2017, $292 million of unrecognized compensation cost related to RSAs, RSUs and performance shares is expected to be recognized as expense over approximately the next two years.

Cash Dividends

The following table summarizes quarterly cash dividends declared during 2017 and 2016:
2017
 
2016
Date Declared
 
Payment Date
 
Dividend Per Share
 
Date Declared
 
Payment Date
 
Dividend Per Share
10/27/17
 
02/15/18
 
$
0.71

 
10/28/16
 
02/15/17
 
$
0.64

09/08/17
 
11/15/17
 
$
0.64

 
09/09/16
 
11/15/16
 
$
0.57

06/22/17
 
08/15/17
 
$
0.64

 
06/16/16
 
08/15/16
 
$
0.57

02/16/17
 
05/15/17
 
$
0.64

 
02/18/16
 
05/16/16
 
$
0.57



Stock Repurchase Program

On February 16, 2017, AbbVie's board of directors authorized a $5.0 billion increase to AbbVie's existing stock repurchase program. The stock repurchase authorization permits purchases of AbbVie shares from time to time in open-market or private transactions at management's direction depending on the company's cash flows, net debt level and market conditions. The program has no time limit and can be discontinued at any time. Shares repurchased under this program are recorded at acquisition cost, including related expenses, and are available for general corporate purposes.

AbbVie repurchased approximately 7.8 million shares in the open market for $500 million during the nine months ended September 30, 2017. During the nine months ended September 30, 2017, AbbVie cash-settled $285 million of its open market purchases made at the end of 2016. AbbVie's remaining stock repurchase authorization was $4.5 billion as of September 30, 2017.

Accumulated Other Comprehensive Loss

The following table summarizes the changes in each component of accumulated other comprehensive loss, net of tax, for the nine months ended September 30, 2017:
(in millions)
Foreign
currency
translation
adjustments
 
Net investment hedging activities
 
Pension 
and post-
employment
benefits
 
Marketable
security activities
 
Cash flow hedging
activities
 
Total
Balance as of December 31, 2016
$
(1,435
)
 
$
140

 
$
(1,513
)
 
$
46

 
$
176

 
$
(2,586
)
Other comprehensive income (loss) before reclassifications
602

 
(307
)
 
(37
)
 
31

 
(229
)
 
60

Net losses (gains) reclassified from accumulated other comprehensive loss

 

 
58

 
(49
)
 
(96
)
 
(87
)
Net current-period other comprehensive income (loss)
602

 
(307
)
 
21

 
(18
)
 
(325
)
 
(27
)
Balance as of September 30, 2017
$
(833
)
 
$
(167
)
 
$
(1,492
)
 
$
28

 
$
(149
)
 
$
(2,613
)

Other comprehensive income for the nine months ended September 30, 2017 included foreign currency translation adjustments totaling a gain of $602 million, which was principally due to the impact of the improvement in the Euro in the nine months ended September 30, 2017 on the translation of the company’s assets denominated in the Euro.


2017 Form 10-Q | http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=11876257&doc=13
21




The following table summarizes the changes in each component of accumulated other comprehensive loss, net of tax, for the nine months ended September 30, 2016:
(in millions)
Foreign
currency
translation
adjustments
 
Pension 
and post-
employment
benefits
 
Marketable
 security activities
 
Cash flow hedging
activities
 
Total
Balance as of December 31, 2015
$
(1,270
)
 
$
(1,378
)
 
$
47

 
$
40

 
$
(2,561
)
Other comprehensive income before reclassifications
164

 
7

 
23

 
13

 
207

Net losses (gains) reclassified from accumulated other comprehensive loss

 
41

 
(4
)
 
(23
)
 
14

Net current-period other comprehensive income (loss)
164

 
48

 
19

 
(10
)
 
221

Balance as of September 30, 2016
$
(1,106
)
 
$
(1,330
)
 
$
66

 
$
30

 
$
(2,340
)

Other comprehensive income for the nine months ended September 30, 2016 included foreign currency translation adjustments totaling a gain of $164 million, which was principally due to the impact of the improvement in the Euro and Japanese yen in the nine months ended September 30, 2016 on the translation of the company’s assets denominated in the Euro and Japanese yen.

The table below presents the impact on AbbVie’s condensed consolidated statements of earnings for significant amounts reclassified out of each component of AOCI:
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
(in millions) (brackets denote gains)
 
2017
 
2016
 
2017
 
2016
Pension and post-employment benefits
 
 
 
 
 
 
 
 
Amortization of actuarial losses and other(a)
 
$
28

 
$
22

 
$
81

 
$
64

Tax benefit
 
(8
)
 
(8
)
 
(23
)
 
(23
)
Total reclassifications, net of tax
 
$
20

 
$
14

 
$
58

 
$
41

Cash flow hedging activities
 
 
 
 
 
 
 
 
Gains on designated cash flow hedges(b)
 
$
(38
)
 
$
(2
)
 
$
(101
)
 
$
(21
)
Tax expense (benefit)
 

 
(2
)
 
5

 
(2
)
Total reclassifications, net of tax
 
$