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 March 31, 2019

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 Number: 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).        Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer x
 
Accelerated Filer ¨
 
Non-Accelerated Filer ¨
 
Smaller reporting company ¨
 
 
 
Emerging growth company ¨
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).        Yes ¨ No x
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, par value $0.01 per share
 
ABBV
 
New York Stock Exchange
 
 
 
 
Chicago Stock Exchange
As of April 26, 2019, AbbVie Inc. had 1,478,332,177 shares of common stock at $0.01 par value outstanding.




AbbVie Inc. and Subsidiaries
Table of Contents

 
 
Page
 
 
 
Item 1.
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
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
March 31,
(in millions, except per share data)
 
2019
 
2018
Net revenues
 
$
7,828

 
$
7,934

 
 
 
 
 
Cost of products sold
 
1,694

 
1,927

Selling, general and administrative
 
1,680

 
1,791

Research and development
 
1,289

 
1,244

Acquired in-process research and development
 
155

 
69

Total operating costs and expenses
 
4,818

 
5,031

Operating earnings
 
3,010

 
2,903

 
 
 
 
 
Interest expense, net
 
325

 
251

Net foreign exchange loss
 
6

 
8

Other (income) expense, net
 
135

 
(153
)
Earnings before income tax expense
 
2,544

 
2,797

Income tax expense
 
88

 
14

Net earnings
 
$
2,456

 
$
2,783

 
 
 
 
 
Per share data
 
 
 
 
Basic earnings per share
 
$
1.65

 
$
1.74

Diluted earnings per share
 
$
1.65

 
$
1.74

 
 
 
 
 
Weighted-average basic shares outstanding
 
1,480

 
1,591

Weighted-average diluted shares outstanding
 
1,483

 
1,596


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

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

 
Three months ended
March 31,
(in millions)
2019
 
2018
Net earnings
$
2,456

 
$
2,783

 
 
 
 
Foreign currency translation adjustments, net of tax expense (benefit) of $1 for the three months ended March 31, 2019 and $(3) for the three months ended March 31, 2018
(103
)
 
189

Net investment hedging activities, net of tax expense (benefit) of $19 for the three months ended March 31, 2019 and $(30) for the three months ended March 31, 2018
65

 
(104
)
Pension and post-employment benefits, net of tax expense (benefit) of $6 for the three months ended March 31, 2019 and $9 for the three months ended March 31, 2018
25

 
22

Marketable security activities, net of tax expense (benefit) of $— for the three months ended March 31, 2019 and $— for the three months ended March 31, 2018
7

 
(7
)
Cash flow hedging activities, net of tax expense (benefit) of $(7) for the three months ended March 31, 2019 and $(1) for the three months ended March 31, 2018
(30
)
 
(3
)
Other comprehensive income (loss)
(36
)
 
97

Comprehensive income
$
2,420

 
$
2,880


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





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AbbVie Inc. and Subsidiaries
Condensed Consolidated Balance Sheets

(in millions, except share data)
March 31,
2019
 
December 31,
2018
 
(unaudited)
 
 
Assets
 
 
 
Current assets
 
 
 
Cash and equivalents
$
4,897

 
$
7,289

Short-term investments
331

 
772

Accounts receivable, net
5,680

 
5,384

Inventories
1,702

 
1,605

Prepaid expenses and other
1,803

 
1,895

Total current assets
14,413

 
16,945

 
 
 
 
Investments
1,477

 
1,420

Property and equipment, net
2,860

 
2,883

Intangible assets, net
20,846

 
21,233

Goodwill
15,606

 
15,663

Other assets
1,567

 
1,208

Total assets
$
56,769

 
$
59,352

 
 
 
 
Liabilities and Equity
 
 
 
Current liabilities
 
 
 
Short-term borrowings
$
499

 
$
3,699

Current portion of long-term debt and finance lease obligations
1,579

 
1,609

Accounts payable and accrued liabilities
11,826

 
11,931

Total current liabilities
13,904

 
17,239

 
 
 
 
Long-term debt and finance lease obligations
35,066

 
35,002

Deferred income taxes
1,116

 
1,067

Other long-term liabilities
14,509

 
14,490

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Stockholders’ equity (deficit)
 
 
 
Common stock, $0.01 par value, 4,000,000,000 shares authorized, 1,780,885,882 shares issued as of March 31, 2019 and 1,776,510,871 as of December 31, 2018
18

 
18

Common stock held in treasury, at cost, 302,648,065 shares as of March 31, 2019 and 297,686,473 as of December 31, 2018
(24,502
)
 
(24,108
)
Additional paid-in capital
14,940

 
14,756

Retained earnings
4,234

 
3,368

Accumulated other comprehensive loss
(2,516
)
 
(2,480
)
Total stockholders’ equity (deficit)
(7,826
)
 
(8,446
)
 
 
 
 
Total liabilities and equity
$
56,769

 
$
59,352


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

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

(in millions)
Common shares outstanding
 
Common stock
 
Treasury stock
 
Additional paid-in capital
 
Retained earnings
 
Accumulated other comprehensive loss
 
Total
Balance at December 31, 2017
1,592

 
$
18

 
$
(11,923
)
 
$
14,270

 
$
5,459

 
$
(2,727
)
 
$
5,097

Adoption of new accounting standards

 

 

 

 
(1,733
)
 

 
(1,733
)
Net earnings

 

 

 

 
2,783

 

 
2,783

Other comprehensive income, net of tax

 

 

 

 

 
97

 
97

Dividends declared

 

 

 

 
(1,532
)
 

 
(1,532
)
Purchases of treasury stock
(12
)
 

 
(1,431
)
 

 

 

 
(1,431
)
Stock-based compensation plans and other
7

 

 
23

 
249

 

 

 
272

Balance at March 31, 2018
1,587

 
$
18

 
$
(13,331
)
 
$
14,519

 
$
4,977

 
$
(2,630
)
 
$
3,553

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
1,479

 
$
18

 
$
(24,108
)
 
$
14,756

 
$
3,368

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

 

 

 

 
2,456

 

 
2,456

Other comprehensive loss, net of tax

 

 

 

 

 
(36
)
 
(36
)
Dividends declared

 

 

 

 
(1,590
)
 

 
(1,590
)
Purchases of treasury stock
(5
)
 

 
(419
)
 

 

 

 
(419
)
Stock-based compensation plans and other
4

 

 
25

 
184

 

 

 
209

Balance at March 31, 2019
1,478

 
$
18

 
$
(24,502
)
 
$
14,940

 
$
4,234

 
$
(2,516
)
 
$
(7,826
)

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

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

 
Three months ended
March 31,
(in millions) (brackets denote cash outflows)
2019
 
2018
Cash flows from operating activities
 
 
 
Net earnings
$
2,456

 
$
2,783

Adjustments to reconcile net earnings to net cash from operating activities:
 
 
 
Depreciation
118

 
115

Amortization of intangible assets
385

 
330

Change in fair value of contingent consideration liabilities
169

 
(148
)
Stock-based compensation
189

 
191

Upfront costs and milestones related to collaborations
195

 
101

Other, net
(33
)
 
101

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(316
)
 
(681
)
Inventories
(128
)
 
(71
)
Prepaid expenses and other assets
(112
)
 
(267
)
Accounts payable and other liabilities
94

 
191

Cash flows from operating activities
3,017

 
2,645

 
 
 
 
Cash flows from investing activities
 
 
 
Acquisitions and investments
(320
)
 
(372
)
Acquisitions of property and equipment
(107
)
 
(119
)
Purchases of investment securities
(194
)
 
(267
)
Sales and maturities of investment securities
594

 
311

Cash flows from investing activities
(27
)
 
(447
)
 
 
 
 
Cash flows from financing activities
 
 
 
Net change in commercial paper borrowings
(200
)
 
(33
)
Repayments of other short-term borrowings
(3,000
)
 

Repayments of long-term debt and lease obligations

 
(7
)
Dividends paid
(1,588
)
 
(1,137
)
Purchases of treasury stock
(620
)
 
(1,431
)
Proceeds from the exercise of stock options
4

 
62

Other, net
21

 
37

Cash flows from financing activities
(5,383
)
 
(2,509
)
Effect of exchange rate changes on cash and equivalents
1

 
15

Net change in cash and equivalents
(2,392
)
 
(296
)
Cash and equivalents, beginning of period
7,289

 
9,303

 
 
 
 
Cash and equivalents, end of period
$
4,897

 
$
9,007


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, 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 outlines a comprehensive lease accounting model that supersedes the previous 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. 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 statement of earnings for the three months ended March 31, 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 allows a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax effects related to adjustments to deferred taxes resulting from the 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.

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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
March 31,
(in millions)
 
2019
 
2018
Interest expense
 
$
387

 
$
309

Interest income
 
(62
)
 
(58
)
Interest expense, net
 
$
325

 
$
251

Inventories
(in millions)
March 31, 2019
 
December 31, 2018
Finished goods
$
583

 
$
473

Work-in-process
880

 
862

Raw materials
239

 
270

Inventories
$
1,702

 
$
1,605

Property and Equipment
(in millions)
March 31, 2019
 
December 31, 2018
Property and equipment, gross
$
8,370

 
$
8,396

Accumulated depreciation
(5,510
)
 
(5,513
)
Property and equipment, net
$
2,860

 
$
2,883

Depreciation expense was $118 million for the three months ended March 31, 2019 and $115 million for the three months ended March 31, 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.


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

 
 
Three months ended
March 31,
(in millions, except per share data)
 
2019
 
2018
Basic EPS
 
 
 
 
Net earnings
 
$
2,456

 
$
2,783

Earnings allocated to participating securities
 
12

 
12

Earnings available to common shareholders
 
$
2,444

 
$
2,771

Weighted-average basic shares outstanding
 
1,480

 
1,591

Basic earnings per share
 
$
1.65

 
$
1.74

 
 
 
 
 
Diluted EPS
 
 
 
 
Net earnings
 
$
2,456

 
$
2,783

Earnings allocated to participating securities
 
12

 
12

Earnings available to common shareholders
 
$
2,444

 
$
2,771

Weighted-average shares of common stock outstanding
 
1,480

 
1,591

Effect of dilutive securities
 
3

 
5

Weighted-average diluted shares outstanding
 
1,483

 
1,596

Diluted earnings per share
 
$
1.65

 
$
1.74


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
 

Cash outflows related to acquisitions and investments totaled $320 million for the three months ended March 31, 2019 and $372 million for the three months ended March 31, 2018. AbbVie recorded acquired in-process research and development (IPR&D) charges of $155 million for the three months ended March 31, 2019 and $69 million for the three months ended March 31, 2018.
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

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IMBRUVICA are included in AbbVie's net revenues. Janssen's share of profits is included in AbbVie's cost of products sold. Other costs incurred under the collaboration are reported in their respective expense line items, net of Janssen's share.

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

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

 
 
Three months ended
March 31,
(in millions)
 
2019
 
2018
United States - Janssen's share of profits (included in cost of products sold)
 
$
386

 
$
276

International - AbbVie's share of profits (included in net revenues)
 
193

 
138

Global - AbbVie's share of other costs (included in respective line items)
 
72

 
71


AbbVie’s receivable from Janssen, included in accounts receivable, net, was $218 million at March 31, 2019 and $177 million at December 31, 2018. AbbVie’s payable to Janssen, included in accounts payable and accrued liabilities, was $373 million at March 31, 2019 and $376 million at December 31, 2018.
Note 6    Goodwill and Intangible Assets
 

Goodwill

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

Foreign currency translation adjustments
(57
)
Balance as of March 31, 2019
$
15,606


The company performs its annual goodwill impairment assessment in the third quarter, or earlier if impairment indicators exist. As of March 31, 2019, there were no accumulated goodwill impairment losses.
Intangible Assets, Net

The following table summarizes intangible assets:
 
March 31, 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
$
15,865

 
$
(5,857
)
 
$
10,008

 
$
15,872

 
$
(5,614
)
 
$
10,258

License agreements
7,865

 
(1,947
)
 
5,918

 
7,865

 
(1,810
)
 
6,055

Total definite-lived intangible assets
23,730

 
(7,804
)
 
15,926

 
23,737

 
(7,424
)
 
16,313

Indefinite-lived research and development
4,920

 

 
4,920

 
4,920

 

 
4,920

Total intangible assets, net
$
28,650

 
$
(7,804
)
 
$
20,846

 
$
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. Indefinite-lived intangible assets as of March 31, 2019 and December 31, 2018 relate to the 2016 acquisitions of Boehringer

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Ingelheim compounds and Stemcentrx. 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 three months ended March 31, 2019 and 2018.
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 $385 million for the three months ended March 31, 2019 and $330 million for the three months ended March 31, 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 three months ended March 31, 2019 and 2018.
Note 7    Restructuring Plans
 

AbbVie recorded restructuring charges of $167 million for the three months ended March 31, 2019 and $22 million for the three months ended March 31, 2018. Restructuring charges for the three months ended March 31, 2019 primarily related to severance costs.

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

Restructuring charges
154

Payments and other adjustments
(44
)
Accrued balance as of March 31, 2019
$
209

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

2019 Form 10-Q | http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12878595&doc=18
11




The following table summarizes the amounts and location of operating and finance leases on the condensed consolidated balance sheet:
(in millions)
Balance sheet caption
March 31,
2019
Assets
 
 
Operating
Other assets
$
405

Finance
Property and equipment, net
28

Total lease assets
 
$
433

Liabilities
 
 
Operating
 
 
Current
Accounts payable and accrued liabilities
$
110

Noncurrent
Other long-term liabilities
307

Finance
 
 
Current
Current portion of long-term debt and finance lease obligations
10

Noncurrent
Long-term debt and finance lease obligations
23

Total lease liabilities
 
$
450

The following table summarizes the lease costs recognized in the condensed consolidated statement of earnings:
 
 
Three months ended
March 31,
(in millions)
 
2019
Operating lease cost
 
$
32

Finance lease cost
 
 
Amortization of right-of-use assets
 
2

Interest on lease liabilities
 

Short-term lease cost
 
6

Variable lease cost
 
15

Total lease cost
 
$
55

Sublease income was insignificant for the three months ended March 31, 2019.
The following table presents the weighted-average remaining lease term and weighted-average discount rate for operating and finance leases:
 
 
Three months ended
March 31,
 
 
2019
Weighted-average remaining lease term (in years)
 
 
Operating
 
6

Finance
 
3

Weighted-average discount rate
 
 
Operating
 
4.0
%
Finance
 
4.5
%

2019 Form 10-Q | http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12878595&doc=18
12




The following table presents supplementary cash flow information regarding the company's operating and finance leases:
 
Three months ended
March 31,
(in millions)
2019
Cash paid for amounts included in the measurement of lease liabilities
 
Operating cash flows from operating leases
$
26

Operating cash flows from finance leases

Financing cash flows from finance leases
2

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

Right-of-use assets obtained in exchange for new operating lease liabilities
8

The following table summarizes the future maturities of AbbVie's operating and finance lease liabilities as of March 31, 2019:
(in millions)
Operating
leases
 
Finance
leases
 
Total (a)(b)
2019
$
93

 
$
10

 
$
103

2020
117

 
11

 
128

2021
97

 
10

 
107

2022
52

 
2

 
54

2023
34

 
1

 
35

Thereafter
78

 

 
78

Total lease payments
471

 
34

 
505

Less: Interest
54

 
1

 
55

Present value of lease liabilities
$
417

 
$
33

 
$
450

(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 $802 million at March 31, 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 March 31, 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 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 $9.9 billion at March 31, 2019 and $8.6 billion at December 31, 2018.

2019 Form 10-Q | http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12878595&doc=18
13




The company also uses foreign currency forward exchange contracts or foreign currency denominated debt to hedge its net investments in certain foreign subsidiaries and affiliates. The company designated €3.6 billion aggregate principal amount of senior Euro notes as net investment hedges at March 31, 2019 and December 31, 2018. 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 $10.8 billion at March 31, 2019 and December 31, 2018. The effect of the hedge contracts is to change a fixed-rate interest obligation to a floating rate for that portion of the debt. AbbVie records the contracts at fair value and adjusts the carrying amount of the fixed-rate debt by an offsetting amount.

No amounts are excluded from the assessment of effectiveness for cash flow hedges, net investment 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
March 31,
2019
December 31, 2018
 
Balance sheet caption
March 31,
2019
December 31, 2018
Foreign currency forward exchange contracts
 
 
 
 
 
 
 
Designated as cash flow hedges
Prepaid expenses and
other
$
69

$
113

 
Accounts payable and accrued liabilities
$

$

Not designated as hedges
Prepaid expenses and
other
42

19

 
Accounts payable and accrued liabilities
47

26

Interest rate swaps designated as fair value hedges
Other assets


 
Other long-term liabilities
354

466

Total derivatives
 
$
111

$
132

 
 
$
401

$
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
March 31,
(in millions)
 
2019
 
2018
Foreign currency forward exchange contracts designated as cash flow hedges
 
$
3

 
$
(48
)

Assuming market rates remain constant through contract maturities, the company expects to transfer pre-tax gains of $126 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 gain in other comprehensive income (loss) of $84 million for the three months ended March 31, 2019 and recognized a pre-tax loss in other comprehensive income (loss) of $134 million for the three months ended March 31, 2018.

2019 Form 10-Q | http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12878595&doc=18
14




The following table summarizes the pre-tax amounts and location of derivative instrument net gains (losses) recognized in the condensed consolidated statements of earnings, including the net gains (losses) reclassified out of AOCI into net earnings. See Note 11 for the amount of net gains (losses) reclassified out of AOCI.

 
 
 
Three months ended
March 31,
(in millions)
Statement of earnings caption
 
2019
 
2018
Foreign currency forward exchange contracts
 
 
 
 
 
Designated as cash flow hedges
Cost of products sold
 
$
40

 
$
(44
)
Not designated as hedges
Net foreign exchange loss
 
15

 
(59
)
Interest rate swaps designated as fair value hedges
Interest expense, net
 
112

 
(184
)
Debt designated as hedged item in fair value hedges
Interest expense, net
 
(112
)
 
184


Fair Value Measures

The fair value hierarchy consists of the following three levels:

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

The following table summarizes the bases used to measure certain assets and liabilities carried at fair value on a recurring basis on the condensed consolidated balance sheet as of March 31, 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
$
4,897

 
$
1,264

 
$
3,633

 
$

Time deposits
68

 

 
68

 

Debt securities
1,611

 

 
1,611

 

Equity securities
52

 
52

 

 

Foreign currency contracts
111

 

 
111

 

Total assets
$
6,739

 
$
1,316

 
$
5,423

 
$

Liabilities
 
 
 
 
 
 
 
Interest rate hedges
$
354

 
$

 
$
354

 
$

Foreign currency contracts
47

 

 
47

 

Contingent consideration
4,652

 

 

 
4,652

Total liabilities
$
5,053

 
$

 
$
401

 
$
4,652


2019 Form 10-Q | http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12878595&doc=18
15




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 still in development. Changes to the fair value of the contingent consideration liabilities can result from changes to one or a number of inputs, including discount rates, the probabilities of achieving the milestones, the time required to achieve the milestones and estimated future sales. Significant judgment is employed in determining the appropriateness of these inputs. Changes to the inputs described above could have a material impact on the company's financial position and results of operations in any given period. At March 31, 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 $170 million. Additionally, at March 31, 2019, 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 $410 million.
There have been no transfers of assets or liabilities between the fair value measurement levels. The following table presents the changes in fair value of contingent consideration liabilities which are measured using Level 3 inputs:
 
 
Three months ended
March 31,
(in millions)
 
2019
 
2018
Beginning balance
 
$
4,483

 
$
4,534

Change in fair value recognized in net earnings
 
169

 
(148
)
Ending balance
 
$
4,652

 
$
4,386

The change in fair value recognized in net earnings is recorded in other (income) expense, net in the condensed consolidated statements of earnings. AbbVie expects the fair value of its contingent consideration liabilities to increase in the second quarter of 2019 as a result of the April 2019 regulatory approvals of SKYRIZI (risankizumab) for the treatment of moderate to severe plaque psoriasis. The company is in the process of evaluating the impact of the regulatory approvals on the fair value, which includes an increase in the probabilities of success assumptions.

2019 Form 10-Q | http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12878595&doc=18
16




Certain financial instruments are carried at historical cost or some basis other than fair value. The book values, approximate fair values and bases used to measure the approximate fair values of certain financial instruments as of March 31, 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
$
499

$
499

 
$

 
$
499

 
$

Current portion of long-term debt and finance lease obligations, excluding fair value hedges
1,579

1,586

 
1,576

 
10

 

Long-term debt and finance lease obligations, excluding fair value hedges
35,420

35,362

 
35,339

 
23

 

Total liabilities
$
37,498

$
37,447

 
$
36,915

 
$
532

 
$

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 $77 million as of March 31, 2019 and $84 million as of December 31, 2018. No significant cumulative upward or downward adjustments have been recorded for these investments as of March 31, 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 $263 million as of March 31, 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 March 31, 2019:
 
Amortized cost
 
Gross unrealized
 
Fair value
(in millions)
 
Gains
 
Losses
 
Asset backed securities
$
425

 
$

 
$
(2
)
 
$
423

Corporate debt securities
1,069

 
3

 
(4
)
 
1,068

Other debt securities
120

 

 

 
120

Total
$
1,614

 
$
3

 
$
(6
)
 
$
1,611


2019 Form 10-Q | http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12878595&doc=18
17




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 March 31, 2019. Net realized gains and losses were insignificant for the three months ended March 31, 2019 and 2018.
Concentrations of Risk
Of total net accounts receivable, three U.S. wholesalers accounted for 63% as of March 31, 2019 and 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 57% of AbbVie’s total net revenues for the three months ended March 31, 2019 and 59% for the three months ended March 31, 2018.
Debt and Credit Facilities
Short-Term Borrowings
Short-term borrowings included commercial paper borrowings of $499 million as of March 31, 2019 and $699 million as of December 31, 2018. The weighted-average interest rate on commercial paper borrowings was 2.8% for the three months ended March 31, 2019 and 1.8% for the three months ended March 31, 2018.
In March 2019, AbbVie repaid its $3.0 billion 364-day term loan credit agreement that was scheduled to mature in June 2019.
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
March 31,
 
Three months ended
March 31,
(in millions)
2019
 
2018
 
2019
 
2018
Service cost
$
67

 
$
72

 
$
6

 
$
8

Interest cost
64

 
57

 
6

 
8

Expected return on plan assets
(119
)
 
(111
)
 

 

Amortization of actuarial losses and prior service cost (credit)
26

 
37

 
(1
)
 
4

Net periodic benefit cost
$
38

 
$
55

 
$
11

 
$
20

The components of net periodic benefit cost other than service cost are included in other (income) expense, net in the condensed consolidated statements of earnings.

2019 Form 10-Q | http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12878595&doc=18
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Note 11 Equity
 

Stock-Based Compensation

Stock-based compensation expense is principally related to awards issued pursuant to the AbbVie 2013 Incentive Stock Program and is summarized as follows:
 
 
Three months ended
March 31,
(in millions)
 
2019
 
2018
Cost of products sold
 
$
15

 
$
4

Research and development
 
72

 
72

Selling, general and administrative
 
102

 
115

Pre-tax compensation expense
 
189

 
191

Tax benefit
 
33

 
29

After-tax compensation expense
 
$
156

 
$
162


Stock Options

During the three months ended March 31, 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 March 31, 2019, $10 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 three months ended March 31, 2019, primarily in connection with the company's annual grant, AbbVie granted 5.2 million RSUs and performance shares with a weighted-average grant-date fair value of $79.07. As of March 31, 2019, $489 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
02/21/19
 
05/15/19
 
$
1.07

 
11/02/18
 
02/15/19
 
$
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 | http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12878595&doc=18
19




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 three months ended March 31, 2019 and 11 million shares for $1.3 billion during the three months ended March 31, 2018. AbbVie's remaining stock repurchase authorization was approximately $4.0 billion as of March 31, 2019.
Accumulated Other Comprehensive Loss
The following table summarizes the changes in each component of accumulated other comprehensive loss, net of tax, for the three months ended March 31, 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
(103
)
 
65

 
5

 
7

 
5

 
(21
)
Net losses (gains) reclassified from accumulated other comprehensive loss

 

 
20

 

 
(35
)
 
(15
)
Net current-period other comprehensive income (loss)
(103
)
 
65

 
25

 
7

 
(30
)
 
(36
)
Balance as of March 31, 2019
$
(933
)
 
$

 
$
(1,697
)
 
$
(3
)
 
$
117

 
$
(2,516
)

Other comprehensive loss for the three months ended March 31, 2019 included foreign currency translation adjustments totaling a loss of $103 million, which was principally due to the weakening of the Euro in the three months ended March 31, 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 three months ended March 31, 2018:
(in millions)
Foreign
currency
translation
adjustments
 
Net investment hedging activities
 
Pension 
and post-
employment
benefits
 
Marketable
 security activities
 
Cash flow hedging
activities
 
Total
Balance as of December 31, 2017
$
(439
)
 
$
(203
)
 
$
(1,919
)
 
$

 
$
(166
)
 
$
(2,727
)
Other comprehensive income (loss) before reclassifications
189

 
(104
)
 
(11
)
 
(7
)
 
(45
)
 
22

Net losses reclassified from accumulated other comprehensive loss

 

 
33

 

 
42

 
75

Net current-period other comprehensive income (loss)
189

 
(104
)
 
22

 
(7
)
 
(3
)
 
97

Balance as of March 31, 2018
$
(250
)
 
$
(307
)
 
$
(1,897
)
 
$
(7
)
 
$
(169
)
 
$
(2,630
)

Other comprehensive income for the three months ended March 31, 2018 included foreign currency translation adjustments totaling a gain of $189 million, which was principally due to the impact of the improvement in the Euro in the three months ended March 31, 2018 on the translation of the company’s assets denominated in the Euro.


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20




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
March 31,
(in millions) (brackets denote gains)
 
2019
 
2018
Pension and post-employment benefits
 
 
 
 
Amortization of actuarial losses and other(a)
 
$
25

 
$
41

Tax benefit
 
(5
)
 
(8
)
Total reclassifications, net of tax
 
$
20

 
$
33

Cash flow hedging activities
 
 
 
 
Losses (gains) on designated cash flow hedges(b)
 
$
(40
)
 
$
44

Tax expense (benefit)
 
5

 
(2
)
Total reclassifications, net of tax
 
$
(35
)
 
$
42


(a) Amounts are included in the computation of net periodic benefit cost (see Note 10).
(b) Amounts are included in cost of products sold (see Note 9).
Note 12 Income Taxes
 

The effective tax rate was 3% for the three months ended March 31, 2019 and 1% for the three months ended March 31, 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 months ended March 31, 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. Additionally, the 2019 effective tax rate reflected the favorable resolution of various tax positions and lower excess tax benefits from stock-based compensation compared to the prior 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 $311 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 $345 million as of March 31, 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.

Subject to certain exceptions specified in the separation agreement by and between Abbott and AbbVie, AbbVie assumed the liability for, and control of, all pending and threatened legal matters related to its business, including liabilities for any claims or legal proceedings related to products that had been part of its business, but were discontinued prior to the distribution, as well as assumed or retained liabilities, and will indemnify Abbott for any liability arising out of or resulting from such assumed legal matters.

Several pending lawsuits filed against Unimed Pharmaceuticals, Inc., Solvay Pharmaceuticals, Inc. (a company Abbott acquired in February 2010 and now known as AbbVie Products LLC) and others are consolidated for pre-trial purposes in the United States District Court for the Northern District of Georgia under the Multi-District Litigation (MDL) Rules as In re: AndroGel Antitrust Litigation, MDL No. 2084. These cases, brought by private plaintiffs and the Federal Trade Commission (FTC), generally allege Solvay's

2019 Form 10-Q | http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12878595&doc=18
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patent litigation involving AndroGel was sham litigation and the 2006 patent litigation settlement agreements and related agreements with three generic companies violate federal antitrust laws. Plaintiffs generally seek monetary damages and/or injunctive relief and attorneys' fees. These cases include: (a) four individual plaintiff lawsuits; (b) three purported class actions; and (c) Federal Trade Commission v. Actavis, Inc. et al. Following the district court's dismissal of all plaintiffs' claims, appellate proceedings led to the reinstatement of the claims regarding the patent litigation settlements, which are proceeding in the district court. In July 2018, the court denied the private plaintiffs' motion for class certification. In February 2019, AbbVie and the FTC reached a settlement that applies certain conditions on future patent settlements involving former Solvay products, as part of which the FTC’s claims were dismissed with prejudice. In April 2019, AbbVie settled with the plaintiffs in three of the individual lawsuits, which will be dismissed with prejudice.

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, including a putative end-payer class action filed in December 2018, consist of four individual plaintiff lawsuits and three consolidated purported class actions: one brought by Niaspan direct purchasers and two 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 Appeals ruled that the District Attorney’s Office may not bring monetary claims beyond the scope of Orange County.

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. In July and August 2018, several direct AndroGel purchasers brought two individual and one class action cases in the United States District Court for the Eastern District of Pennsylvania alleging sham litigation based on the court’s trial ruling in the FTC’s case. In April 2019, AbbVie settled with the plaintiffs in the two individual cases. The remaining private plaintiff case is stayed pending the appeals in the FTC’s case.

In March 2015, the State of Louisiana filed a lawsuit, State of Louisiana v. Fournier Industrie et Sante, et al., against AbbVie, Abbott and affiliated Abbott entities in Louisiana state court. Plaintiff alleges that patent applications and patent litigation filed and other alleged conduct from the early 2000's and before related to the drug TriCor violated Louisiana State antitrust and unfair trade practices laws. The lawsuit seeks monetary damages and attorneys' fees. In April 2019, the Louisiana Supreme Court denied the plaintiff’s petition seeking to appeal the August 2018 dismissal of this lawsuit by the Louisiana Court of Appeal.

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.

In March and April 2019, 10 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.


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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, two federal securities lawsuits were filed in September (Pippins v. AbbVie Inc., et al., in the United States District Court for the Central District of California) and October (Holwill v. AbbVie Inc., et al., in the United States District Court for the Northern District of Illinois) against AbbVie, its chief executive officer and then-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 2018, the Pippins case was voluntarily dismissed.

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 April 2019, the parties reached an agreement in principle to settle this lawsuit.

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 connection with its proposed transaction 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.

In May 2017, a shareholder derivative lawsuit, Ellis v. Gonzalez, et al., was filed in Delaware Chancery Court, alleging that AbbVie's directors breached their fiduciary duties in connection with statements made regarding the Shire transaction. The lawsuit sought unspecified compensatory damages for AbbVie, among other relief. In July 2018, the court dismissed this case with prejudice. In March 2019, the Delaware Supreme Court affirmed that dismissal.

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 170 cases are pending in the United States District Court for the Southern District of Illinois, and approximately four others are pending in various state courts. Plaintiffs generally seek compensatory and punitive damages. Over 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 eleven HCV-related patents licensed to AbbVie in 2002 are invalid.

AbbVie is seeking to enforce certain patent rights related to adalimumab (a drug AbbVie sells under the trademark HUMIRA®). In a case filed in United States District Court for the District of Delaware in August 2017, AbbVie alleges that Boehringer Ingelheim International GmbH’s, Boehringer Ingelheim Pharmaceutical, Inc.’s, and Boehringer Ingelheim Fremont, Inc.’s proposed biosimilar adalimumab product infringes certain AbbVie patents. AbbVie seeks declaratory and injunctive relief.


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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 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.


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Note 14 Segment Information
 

AbbVie operates in one business segment—pharmaceutical products. The following table details AbbVie’s worldwide net revenues:
 
 
Three months ended
March 31,
 
 
(in millions)
 
2019
 
2018
Immunology
 
 
 
 
HUMIRA
 
 
 
 
United States
 
$
3,215

 
$
3,003

International
 
1,231

 
1,706

Total
 
$
4,446

 
$
4,709

Hematologic Oncology
 
 
 
 
IMBRUVICA
 
 
 
 
United States
 
$
829

 
$
624

Collaboration revenues
 
193

 
138

Total
 
$
1,022

 
$
762

VENCLEXTA
 
 
 
 
United States
 
$
105

 
$
41

International
 
46

 
18

Total
 
$
151

 
$
59

HCV
 
 
 
 
MAVYRET
 
 
 
 
United States
 
$
403

 
$
340

International
 
387

 
508

Total
 
$
790

 
$
848

VIEKIRA
 
 
 
 
United States
 
$

 
$
3

International
 
25

 
68

Total
 
$
25

 
$
71

Other Key Products
 
 
 
 
Creon
 
 
 
 
United States
 
$
227

 
$
209

Lupron
 
 
 
 
United States
 
$
191

 
$
177