Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion and analysis of the financial condition of AbbVie Inc. (AbbVie or the company) as of December 31, 2017 and 2016 and results of operations for each of the three years in the period ended December 31, 2017. This commentary should be read in conjunction with the consolidated financial statements and accompanying notes appearing in Item 8, "Financial Statements and Supplementary Data."

EXECUTIVE OVERVIEW

Company Overview

AbbVie is a global, research-based biopharmaceutical company formed in 2013 following separation from Abbott Laboratories (Abbott). AbbVie's mission is to use its expertise, dedicated people and unique approach to innovation to develop and market advanced therapies that address some of the world's most complex and serious diseases. AbbVie's products are focused on treating conditions such as chronic autoimmune diseases in rheumatology, gastroenterology and dermatology; oncology, including blood cancers; virology, including hepatitis C (HCV) and human immunodeficiency virus (HIV); neurological disorders, such as Parkinson's disease and multiple sclerosis; metabolic diseases, including thyroid disease and complications associated with cystic fibrosis; as well as other serious health conditions. AbbVie also has a pipeline of promising new medicines across such important medical specialties as immunology, oncology and neurology, with additional targeted investment in cystic fibrosis and women's health.

AbbVie's products are generally sold worldwide directly to wholesalers, distributors, government agencies, health care facilities, specialty pharmacies and independent retailers from AbbVie-owned distribution centers and public warehouses. In the United States, AbbVie distributes pharmaceutical products principally through independent wholesale distributors, with some sales directly to pharmacies and patients. Outside the United States, sales are made either directly to customers or through distributors, depending on the market served. Certain products are co-marketed or co-promoted with other companies. AbbVie has approximately 29,000 employees. AbbVie operates in one business segment—pharmaceutical products.

2017 Financial Results

AbbVie's strategy has focused on delivering strong financial results, advancing and investing in its pipeline and returning value to shareholders while ensuring a strong, sustainable growth business over the long term. The company's financial performance in 2017 included delivering worldwide net revenues of $28.2 billion, operating earnings of $9.6 billion and diluted earnings per share of $3.30. Worldwide net revenues grew by 10% on a constant currency basis, driven primarily by the continued strength of HUMIRA, revenue growth related to IMBRUVICA and other key products including Creon and Duodopa and the launch of HCV product MAVYRET. These increases were partially offset by a decline in net revenues of HCV product VIEKIRA.

Diluted earnings per share in 2017 was $3.30 and included net charges related to the December 2017 enactment of the Tax Cuts and Jobs Act. The net charges included $4.5 billion for the one-time mandatory repatriation of previously untaxed earnings of foreign subsidiaries, partially offset by after-tax benefits of $3.3 billion due to the remeasurement of net deferred tax liabilities and other related impacts.

Additional after-tax costs that impacted 2017 diluted earnings per share included the following: (i) $809 million related to the amortization of intangible assets; (ii) $625 million for the change in fair value of contingent consideration liabilities; (iii) $327 million for acquired in-process research and development (IPR&D); (iv) litigation reserve charges of $286 million; (v) an intangible asset impairment charge of $244 million; (vi) milestone payments of $143 million; and (vii) acquisition related costs of $49 million. These costs were partially offset by an after-tax benefit of $91 million due to a tax audit settlement. 2017 financial results also reflected continued added funding to support AbbVie’s emerging mid- and late-stage pipeline assets and continued investment in AbbVie’s growth brands.

In 2017, the company generated cash flows from operations of $10.0 billion, which AbbVie utilized to continue to enhance its pipeline through licensing and collaboration activities, pay cash dividends to stockholders of $4.1 billion and repurchase approximately 13 million shares for $1.0 billion in the open market. In October 2017, AbbVie's board of directors declared a quarterly cash dividend of $0.71 per share of common stock payable in February 2018. This reflected an increase of approximately 11% over the previous quarterly dividend of $0.64 per share of common stock.

28 | 2017 Form 10-K

2018 Strategic Objectives

AbbVie's mission is to be an innovation-driven, patient-focused specialty biopharmaceutical company capable of achieving top-tier financial performance through outstanding execution and a consistent stream of innovative new medicines. AbbVie intends to continue to advance its mission in a number of ways, including: (i) growing revenues by diversifying revenue streams, driving late-stage pipeline assets to the market and ensuring strong commercial execution of new product launches; (ii) continued investment and expansion in its pipeline in support of opportunities in immunology, oncology and neurology as well as continued investment in key on-market products; (iii) expanding operating margins; and (iv) returning cash to shareholders via dividends and share repurchases. In addition, AbbVie anticipates several regulatory submissions and key data readouts from key clinical trials in the next twelve months.

AbbVie expects to achieve its strategic objectives through:

•	HUMIRA sales growth by driving biologic penetration across disease categories, maintaining market leadership and effectively managing biosimilar erosion.

•	IMBRUVICA revenue growth driven by increasing market share with its eight currently approved indications in six different disease areas.

•	The strong execution of new product launches, including MAVYRET.

•	The favorable impact of pipeline products approved in 2017 or currently under regulatory review where approval is expected in 2018. These products are described in greater detail in the section labeled "Research and Development" included as part of this Item 7.

AbbVie remains committed to driving continued expansion of operating margins and expects to achieve this objective through continued leverage from revenue growth, the reduction of HUMIRA royalty expense, productivity initiatives in supply chain and ongoing efficiency programs to optimize manufacturing, commercial infrastructure, administrative costs and general corporate expenses.

Research and Development

Research and innovation are the cornerstones of AbbVie's business as a global biopharmaceutical company. AbbVie's long-term success depends to a great extent on its ability to continue to discover and develop innovative pharmaceutical products and acquire or collaborate on compounds currently in development by other biotechnology or pharmaceutical companies.

AbbVie's pipeline currently includes more than 60 compounds or indications in clinical development individually or under collaboration or license agreements and is focused on such important medical specialties as immunology, oncology and neurology along with targeted investments in cystic fibrosis and women's health. Of these programs, more than 30 are in mid- and late-stage development.

The following sections summarize transitions of significant programs from Phase 2 development to Phase 3 development as well as developments in significant Phase 3 and registration programs. AbbVie expects multiple Phase 2 programs to transition into Phase 3 programs in the next twelve months.

Significant Programs and Developments

Immunology

Upadacitinib

•

In June 2017, AbbVie announced that top-line results from the Phase 3 SELECT-NEXT clinical trial evaluating upadacitinib (ABT-494), the company’s selective JAK1 inhibitor currently in late-stage development for rheumatoid arthritis (RA), met all primary and ranked secondary endpoints in patients with moderate to severe RA who did not adequately respond to treatment with conventional synthetic disease modifying anti-rheumatic drugs (DMARDs). The safety profile of upadacitinib was consistent with previously reported Phase 2 trials and no new safety signals were detected.

•

In September 2017, AbbVie announced that top-line results from the Phase 3 SELECT-BEYOND clinical trial evaluating upadacitinib met all primary and ranked secondary endpoints in patients with moderate to severe RA who did not adequately respond or were intolerant to treatment with biologic DMARDs. The safety profile of upadacitinib was consistent with previously reported Phase 2 trials and the Phase 3 SELECT-NEXT clinical trial, with no new safety signals detected.

		2017 Form 10-K | 29

•

In December 2017, AbbVie announced that top-line results from the Phase 3 SELECT-MONOTHERAPY clinical trial evaluating upadacitinib met all primary and key secondary endpoints in patients with moderate to severe RA who did not adequately respond to treatment with methotrexate. The safety profile of upadacitinib was consistent with previously reported Phase 3 SELECT clinical trials and Phase 2 trials, with no new safety signals detected.

•	In 2017, AbbVie initiated Phase 3 clinical trials to evaluate the safety and efficacy of upadacitinib in subjects with moderately to severely active Crohn’s disease and in subjects with moderately to severely active psoriatic arthritis.

•	In January 2018, the U.S. Food and Drug Administration (FDA) granted breakthrough therapy designation for upadacitinib in adult patients with moderate to severe atopic dermatitis who are candidates for systemic therapy.

Risankizumab

•

In October 2017, AbbVie announced that top-line results from three Phase 3 clinical trials evaluating risankizumab, an investigational interleukin-23 (IL-23) inhibitor, with 12-week dosing compared to ustekinumab and adalimumab met all co-primary and ranked secondary endpoints for the treatment of patients with moderate to severe chronic plaque psoriasis. The safety profile was consistent with all previously reported studies, and there were no new safety signals detected across the three studies.

•

In December 2017, AbbVie announced that top-line results from the Phase 3 IMMhance clinical trial evaluating risankizumab at 16 weeks and 52 weeks of treatment compared to placebo met all primary and ranked secondary endpoints for the treatment of patients with moderate to severe plaque psoriasis. The safety profile was consistent with all previously reported Phase 3 studies, and there were no new safety signals detected across the Phase 3 program.

•	In December 2017, AbbVie initiated a Phase 3 clinical trial to evaluate the safety and efficacy of risankizumab in subjects with moderately to severely active Crohn’s disease.

Oncology

IMBRUVICA

•

In January 2017, the FDA approved IMBRUVICA for the treatment of patients with relapsed/refractory marginal zone lymphoma (MZL) who require systemic therapy and have received at least one prior anti-CD20-based therapy. This indication is approved under accelerated approval based on overall response rate (ORR) and continued approval may be contingent upon verification and description of clinical benefit in a confirmatory trial. MZL is a slow-growing form of non-Hodgkin's lymphoma.

•

In August 2017, the FDA approved IMBRUVICA for the treatment of adult patients with chronic graft-versus-host-disease (cGVHD) after failure of one or more lines of systemic therapy. IMBRUVICA is the first therapy specifically approved for adults with cGVHD, a severe and potentially life-threatening consequence of stem cell or bone marrow transplant. This marked the sixth U.S. disease indication for IMBRUVICA since the medication's initial approval in 2013 and the first approved indication outside of cancer.

•	In December 2017, AbbVie announced that the Phase 3 iNNOVATE clinical trial evaluating IMBRUVICA in combination with rituximab in patients with untreated (treatment-naïve) and previously-treated Waldenström’s macroglobulinemia (WM) met its primary endpoint. This is the first and only treatment approved for newly or previously-treated patients with WM.

VENCLEXTA

•	In February 2017, AbbVie initiated a Phase 3 clinical trial to study the safety and efficacy of venetoclax in combination with azacitidine in treatment-naïve elderly subjects with acute myeloid leukemia (AML) who are ineligible for standard induction therapy (high-dose chemotherapy).

30 | 2017 Form 10-K

•	In May 2017, AbbVie initiated a Phase 3 clinical trial to evaluate if venetoclax when co-administered with low dose cytarabine (LDAC) improves overall survival (OS) versus LDAC and placebo, in treatment naïve subjects with AML.

•	In September 2017, AbbVie announced that top-line results from the Phase 3 MURANO clinical trial evaluating venetoclax tablets in combination with Rituxan (rituximab) met the primary endpoint of prolonged progression-free survival compared with bendamustine in combination with Rituxan in patients with relapsed/refractory chronic lymphocytic leukemia (CLL).

•	In December 2017, AbbVie submitted a supplemental New Drug Application (sNDA) to the FDA for VENCLEXTA (venetoclax) in combination with Rituxan in patients with relapsed or refractory CLL and in January 2018, AbbVie submitted an sNDA for VENCLEXTA monotherapy in patients with CLL who have relapsed or are refractory to B-cell receptor inhibitors.

Rova-T

•	In February 2017, AbbVie initiated a Phase 3 clinical trial to evaluate the efficacy of rovalpituzumab tesirine (Rova-T) as maintenance therapy following first-line platinum based chemotherapy in participants with extensive stage small cell lung cancer (SCLC).

•	In April 2017, AbbVie initiated a Phase 3 clinical trial to evaluate Rova-T compared with topotecan for subjects with advanced or metastatic SCLC with high levels of delta-like protein 3 who have first disease progression during or following front-line platinum-based chemotherapy.

ABT-414

•

In November 2017, AbbVie presented results from the INTELLANCE-2 trial, a potential registration-enabling Phase 2 study evaluating depatuxizumab mafodotin (ABT-414), an investigational, antibody drug conjugate (ADC) targeting epidermal growth factor receptor (EGFR) alone or in combination with temozolomide (TMZ) in subjects with recurrent glioblastoma multiforme (GBM). Results from the INTELLANCE-2 study failed to meet the primary endpoint of overall survival and AbbVie will not be submitting regulatory applications for ABT-414 in recurrent GBM. In INTELLANCE-2, the combination of ABT-414 and TMZ performed numerically better than lomustine or TMZ and a positive trend in overall survival was observed. While AbbVie will not file in recurrent GBM based on these data, the Phase 2/3 INTELLANCE-1 trial evaluating the safety and efficacy of ABT-414 in combination with TMZ in subjects with newly diagnosed GBM with EGFR amplification is ongoing.

Veliparib

•

In April 2017, AbbVie announced that two Phase 3 studies evaluating veliparib, an investigational, oral poly (adenosine diphosphate-ribose) polymerase (PARP) inhibitor in combination with chemotherapy did not meet their primary endpoints. The studies evaluated veliparib in combination with carboplatin and paclitaxel in patients with squamous non-small cell lung cancer (NSCLC) and triple negative breast cancer (TNBC). Ongoing Phase 3 studies include non-squamous non-small cell lung cancer, BRCA1/2 breast cancer and ovarian cancer.

Virology/Liver Disease

•	In February 2017, the European Committee for Medicinal Products for Human Use (CHMP) granted a positive opinion for a shorter, eight-week treatment of VIEKIRAX (ombitasvir/paritaprevir/ritonavir tablets) + EXVIERA (dasabuvir tablets) as an option for previously untreated adult patients with genotype 1b chronic HCV and minimal to moderate fibrosis.

•

In July 2017, the European Commission granted marketing authorization for MAVIRET (glecaprevir/pibrentasvir), a once-daily, ribavirin-free treatment for adults with HCV infection across all major genotypes (GT1-6). MAVIRET is also indicated for patients with specific treatment challenges, including those with compensated cirrhosis across all major genotypes, and those who previously had limited treatment options, such as patients with severe chronic kidney disease (CKD) or those with genotype 3 chronic HCV infection.

•	In August 2017, the FDA approved MAVYRET (glecaprevir/pibrentasvir) for the treatment of patients with chronic HCV genotype 1-6 infection without cirrhosis and with compensated cirrhosis (Child-Pugh A). MAVYRET is also

		2017 Form 10-K | 31

indicated for the treatment of adult patients with HCV genotype 1 infection, who previously have been treated with a regimen containing an HCV NS5A inhibitor or an NS3/4A protease inhibitor, but not both. MAVYRET/MAVIRET is an 8-week, pan-genotypic treatment for patients without cirrhosis and who are new to treatment.

Other

•

In September 2017, AbbVie submitted a New Drug Application to the FDA for elagolix, an investigational, orally administered gonadotropin-releasing hormone (GnRH) antagonist, being evaluated for the management of endometriosis with associated pain. In October, AbbVie was granted priority review for elagolix by the FDA for the management of endometriosis with associated pain. In November, AbbVie announced detailed results from two replicate Phase 3 extension studies evaluating the long-term efficacy and safety of elagolix, being evaluated for the management of endometriosis with associated pain.

•

In December 2017, AbbVie announced the strategic decision to close the SONAR study, a Phase 3 clinical trial evaluating the effects of the investigational compound atrasentan on progression of kidney disease in patients with stage 2 to 4 chronic kidney disease and type 2 diabetes when added to standard of care. The ongoing monitoring of renal events observed in the study revealed considerably fewer endpoints than expected at the time of analysis, which will likely affect the ability to test the SONAR study hypothesis. Therefore, AbbVie determined that it cannot justify continuing the participation of patients in the study. The decision to close the SONAR study early was not related to any safety concerns.

RESULTS OF OPERATIONS

Net Revenues

The comparisons presented at constant currency rates reflect comparative local currency net revenues at the prior year's foreign exchange rates. This measure provides information on the change in net revenues assuming that foreign currency exchange rates had not changed between the prior and the current periods. AbbVie believes that the non-GAAP measure of change in net revenues at constant currency rates, when used in conjunction with the GAAP measure of change in net revenues at actual currency rates, may provide a more complete understanding of the company's operations and can facilitate analysis of the company's results of operations, particularly in evaluating performance from one period to another.

													Percent change
													At actual currency rates						At constant currency rates
for the years ended (dollars in millions)	2017				2016				2015				2017			2016			2017			2016
United States	$	18,251			$	15,947			$	13,561			14.4	%		17.6	%		14.4	%		17.6	%
International	9,965				9,691				9,298				2.8	%		4.2	%		2.1	%		7.3	%
Net revenues	$	28,216			$	25,638			$	22,859			10.1	%		12.2	%		9.8	%		13.5	%

32 | 2017 Form 10-K

The following table details AbbVie's worldwide net revenues:

													Percent change
													At actual currency rates						At constant currency rates
Years ended December 31 (dollars in millions)	2017				2016				2015				2017			2016			2017			2016
HUMIRA
United States	$	12,361			$	10,432			$	8,405			18.5	%		24.1	%		18.5	%		24.1	%
International	6,066				5,646				5,607				7.4	%		0.7	%		6.7	%		4.3	%
Total	$	18,427			$	16,078			$	14,012			14.6	%		14.7	%		14.4	%		16.1	%
IMBRUVICA
United States	$	2,144			$	1,580			$	659			35.8	%		>100.0	%		35.8	%		>100.0	%
Collaboration revenues	429				252				95				70.0	%		>100.0	%		70.0	%		>100.0	%
Total	$	2,573			$	1,832			$	754			40.5	%		>100.0	%		40.5	%		>100.0	%
HCV
United States	$	338			$	342			$	804			(1.4	)%		(57.4	)%		(1.4	)%		(57.4	)%
International	936				1,180				835				(20.6	)%		41.3	%		(20.5	)%		42.7	%
Total	$	1,274			$	1,522			$	1,639			(16.3	)%		(7.1	)%		(16.2	)%		(6.4	)%
Lupron
United States	$	669			$	663			$	653			0.8	%		1.5	%		0.8	%		1.5	%
International	160				158				173				1.4	%		(8.5	)%		0.5	%		(5.2	)%
Total	$	829			$	821			$	826			0.9	%		(0.6	)%		0.7	%		0.1	%
Creon
United States	$	831			$	730			$	632			13.9	%		15.5	%		13.9	%		15.5	%
Synagis
International	$	738			$	730			$	740			1.2	%		(1.5	)%		0.6	%		(0.4	)%
Synthroid
United States	$	781			$	763			$	755			2.3	%		1.1	%		2.3	%		1.1	%
AndroGel
United States	$	577			$	675			$	694			(14.5	)%		(2.8	)%		(14.5	)%		(2.8	)%
Kaletra
United States	$	71			$	116			$	163			(38.6	)%		(28.8	)%		(38.6	)%		(28.8	)%
International	352				433				537				(18.8	)%		(19.3	)%		(21.1	)%		(13.3	)%
Total	$	423			$	549			$	700			(22.9	)%		(21.5	)%		(24.7	)%		(16.9	)%
Sevoflurane
United States	$	78			$	80			$	81			(2.1	)%		(1.0	)%		(2.1	)%		(1.0	)%
International	332				348				393				(4.6	)%		(11.4	)%		(3.7	)%		(6.9	)%
Total	$	410			$	428			$	474			(4.1	)%		(9.7	)%		(3.4	)%		(6.0	)%
Duodopa
United States	$	61			$	37			$	12			66.1	%		>100.0	%		66.1	%		>100.0	%
International	294				256				219				14.6	%		16.9	%		13.1	%		18.1	%
Total	$	355			$	293			$	231			21.1	%		26.9	%		19.8	%		28.1	%
All other	$	998			$	1,217			$	1,402			(18.0	)%		(13.2	)%		(18.2	)%		(12.3	)%
Total net revenues	$	28,216			$	25,638			$	22,859			10.1	%		12.2	%		9.8	%		13.5	%

		2017 Form 10-K | 33

The following discussion and analysis of AbbVie's net revenues by product is presented on a constant currency basis.

Global HUMIRA sales increased 14% in 2017 and 16% in 2016. The sales increases in 2017 and 2016 were driven by market growth across therapeutic categories and geographies as well as favorable pricing in certain geographies. The sales increase in 2016 was also driven by the approval of new indications. In the United States, HUMIRA sales increased 18% in 2017 and 24% in 2016. The sales increase in 2017 was driven by market growth across all indications and favorable pricing. The sales increase in 2016 was driven by market growth across all indications, higher market share and favorable pricing. Internationally, HUMIRA revenues increased 7% in 2017 and 4% in 2016, driven primarily by market growth across indications. AbbVie continues to pursue strategies intended to further differentiate HUMIRA from competing products and add to the sustainability and future growth of HUMIRA.

Net revenues for IMBRUVICA represent product revenues in the United States and collaboration revenues outside of the United States related to AbbVie's 50% share of IMBRUVICA profit. Net revenues for IMBRUVICA commenced following the completion of the Pharmacyclics acquisition on May 26, 2015. Global IMBRUVICA sales increased 40% in 2017 as a result of continued penetration of IMBRUVICA as a first-line treatment for patients with CLL as well as favorable pricing. The sales increase in 2016 was driven by market share gains following the FDA and EMA approval of IMBRUVICA as a first-line treatment for patients with CLL as well as having a full year of sales in 2016.

Global HCV sales decreased 16% in 2017 and 6% in 2016. The sales decrease in 2017 and 2016 was a result of market contraction, lower market share and price erosion of VIEKIRA. These factors were partially offset for 2017 by the launch of MAVYRET in certain geographies during the second half of 2017.

Net revenues for Creon increased 14% in 2017 and 15% in 2016, driven primarily by continued market growth and higher market share. Creon maintains market leadership in the pancreatic enzyme market.

Global Kaletra net revenues decreased 25% in 2017 and 17% in 2016, primarily due to lower market share resulting from the impact of increasing competition in the HIV marketplace. AbbVie expects net revenues for Kaletra to continue to decline in 2018.

Net revenues for Duodopa increased 20% in 2017 and 28% in 2016, primarily as a result of market penetration and geographic expansion.

Gross Margin

													Percent change
years ended December 31 (dollars in millions)	2017				2016				2015				2017			2016
Gross margin	$	21,176			$	19,805			$	18,359			7	%		8	%
as a percent of net revenues	75		%		77		%		80		%

Gross margin as a percentage of net revenues in 2017 decreased from 2016 primarily due to an intangible asset impairment charge of $354 million in 2017, as well as the unfavorable impacts of higher intangible asset amortization and the IMBRUVICA profit sharing arrangement. These drivers were partially offset by lower amortization of the fair market value step-up of acquisition-date inventory of Pharmacyclics as well as favorable changes in product mix and operational efficiencies.

Gross margin as a percentage of net revenues in 2016 decreased from 2015 primarily due to unfavorable foreign exchange rates as well as unfavorable impacts of higher intangible asset amortization, the IMBRUVICA profit sharing arrangement and higher amortization of the fair market value step-up of acquisition-date inventory of Pharmacyclics. Additionally, 2016 gross margin included an intangible asset impairment charge of $39 million and 2015 gross margin included milestone revenue of $40 million from an oncology collaboration partner. These drivers were partially offset by favorable changes in product mix and operational efficiencies.

34 | 2017 Form 10-K

Selling, General and Administrative

													Percent change
years ended December 31 (dollars in millions)	2017				2016				2015				2017			2016
Selling, general and administrative	$	6,275			$	5,855			$	6,387			7	%		(8	)%
as a percent of net revenues	22		%		23		%		28		%

SG&A expenses as a percentage of net revenues in 2017 decreased from 2016 due to continued leverage from revenue growth partially offset by litigation reserve charges of $370 million in 2017 and new product launch expenses.

SG&A expenses as a percentage of net revenues in 2016 decreased from 2015 due to continued leverage from revenue growth and lower costs in 2016. SG&A expenses in 2015 included costs associated with the separation from Abbott of $265 million, Pharmacyclics acquisition and integration costs of $294 million and litigation reserve charges of $165 million. Additionally, SG&A expense in 2015 reflected marketing support for the global launch of VIEKIRA.

Research and Development and Acquired In-Process Research and Development

													Percent change
years ended December 31 (dollars in millions)	2017				2016				2015				2017			2016
Research and development	$	4,982			$	4,366			$	4,285			14	%		2	%
as a percent of net revenues	18		%		17		%		19		%
Acquired in-process research and development	$	327			$	200			$	150			64	%		33	%

Research and Development (R&D) expenses in 2017 increased from 2016 principally due to increased funding to support the company’s emerging mid- and late-stage pipeline assets, the impact of the post-acquisition R&D expenses of Stemcentrx and Boehringer Ingelheim (BI) compounds and an increase in development milestones of $63 million. These factors were partially offset by a decrease in acquisition related costs of $135 million.

R&D expenses in 2016 increased from 2015 due primarily to increased funding to support the company’s emerging mid- and late-stage pipeline assets. This increase was partially offset by the following factors: (i) 2015 R&D expenses included a $350 million charge related to the purchase of a priority review voucher from a third party; (ii) development milestones decreased by $53 million; and (iii) 2015 results included restructuring charges of $32 million.

Acquired in-process research and development (IPR&D) expenses reflect upfront payments related to various collaborations. Acquired IPR&D expense in 2017 included a charge of $205 million as a result of entering into a global strategic collaboration with Alector, Inc. (Alector) to develop and commercialize medicines to treat Alzheimer’s disease and other neurodegenerative disorders. There were no individually significant transactions or cash flows during 2016. Acquired IPR&D expense in 2015 included a charge of $100 million as a result of entering into an exclusive worldwide license agreement with C2N Diagnostics (C2N) to develop and commercialize anti-tau antibodies for the treatment of Alzheimer's disease and other neurological disorders. See Note 5 to the Consolidated Financial Statements for additional information regarding the Alector and C2N agreements.

Other Non-Operating Expenses

years ended December 31 (in millions)		2017				2016				2015
Interest expense		$	1,150			$	1,047			$	719
Interest income		(146		)		(82		)		(33		)
Interest expense, net		$	1,004			$	965			$	686
Net foreign exchange loss		$	348			$	303			$	193
Other expense, net		513				232				13

Interest expense in 2017 increased compared to 2016 due to a full year of expense associated with the May 2016 issuance of $7.8 billion aggregate principal amount of senior notes which were issued primarily to finance the acquisition of Stemcentrx and to repay an outstanding term loan.

		2017 Form 10-K | 35

Interest expense in 2016 increased compared to 2015 due to a full year of expense associated with the May 2015 issuance of $16.7 billion aggregate principal amount of senior notes which were issued primarily to finance the acquisition of Pharmacyclics in addition to the incremental expense associated with the May 2016 senior notes issuance discussed above. Interest expense in 2016 also included a debt extinguishment charge of $39 million related to the redemption of the 1.75% senior notes that were due to mature in November 2017. These increases were partially offset by the absence of bridge financing-related costs of $86 million in 2015 incurred in connection with the acquisition of Pharmacyclics. Interest income continued to increase in both 2017 and 2016 due to growth in the company’s investment securities.

Net foreign exchange loss in 2017 included $316 million of historical currency translation losses that were reclassified from accumulated other comprehensive income (AOCI) related to the liquidation of certain foreign entities following the enactment of U.S. tax reform. Net foreign exchange loss in 2016 included losses totaling $298 million related to the devaluation of AbbVie’s net monetary assets denominated in the Venezuelan bolivar. See Note 10 to the Consolidated Financial Statements for additional information regarding the Venezuelan devaluation. Net foreign exchange loss in 2015 included losses of $170 million to complete the liquidation of the company’s remaining foreign currency positions related to the terminated proposed combination with Shire.

Other expense, net included charges related to the change in fair value of the BI and Stemcentrx contingent consideration liabilities of $626 million in 2017 and $228 million in 2016. The fair value of contingent consideration liabilities is impacted by the passage of time and multiple other inputs, including the probability of success of achieving regulatory/commercial milestones, discount rates, the estimated amount of future sales of the acquired products still in development and other market-based factors. In 2017, the change in fair value represented mainly higher probabilities of success, the passage of time and declining interest rates. In 2016, the change in fair value represented mainly the passage of time, as increases to the BI contingent consideration liability due to higher probabilities of success were fully offset by the effects of rising interest rates and changes in other market-based assumptions. See Note 5 to the Consolidated Financial Statements for additional information regarding the acquisitions of Stemcentrx and BI compounds. Other expense, net for 2017 also included realized gains on available-for-sale investment securities of $90 million. Other expense, net for 2015 included impairment charges totaling $36 million related to certain of the company's equity investment securities.

Income Tax Expense

The effective income tax rate was 31% in 2017, 24% in 2016 and 23% in 2015. The effective tax rate in each period differed from the statutory tax rate 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 2017 over the prior year was principally due to the estimated tax effects of the enactment of the Tax Cuts and Jobs Act (the “Act”) in 2017. The effective tax rate in 2017 included tax expense of $4.5 billion on the one-time mandatory repatriation of previously untaxed earnings of foreign subsidiaries, partially offset by a $3.6 billion net tax benefit for the remeasurement of deferred taxes related to the Act and foreign tax law changes.

The Act significantly changed the U.S. corporate tax system. The Act reduces the U.S. federal corporate tax rate from 35% to 21% and creates a territorial tax system that includes new taxes on certain foreign sourced earnings. As a result, the effective income tax rate may change significantly in future periods. See Note 13 to the Consolidated Financial Statements for additional information regarding the Act.

The effective tax rate in 2016 included additional expense of $187 million related to the recognition of the tax effect of regulations issued by the Internal Revenue Service on December 7, 2016 that changed the determination of the U.S. taxability of foreign currency gains and losses related to certain foreign operations. The effective income tax rate in 2015 included a tax benefit of $103 million from a reduction of state valuation allowances.

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

years ended December 31 (in millions)	2017				2016				2015
Cash flows from:
Operating activities	$	9,960			$	7,041			$	7,535
Investing activities	(274		)		(6,074		)		(12,936		)
Financing activities	(5,512		)		(3,928		)		5,752

Operating cash flows in 2017 increased from 2016 primarily due to improved results of operations resulting from revenue growth, an improvement in operating earnings and a decrease in income tax payments. Operating cash flows in 2016

36 | 2017 Form 10-K

decreased from 2015 primarily due to improved results of operations resulting from revenue growth and an improvement in operating margin, offset by income tax payments. Realized excess tax benefits associated with stock-based compensation totaled $71 million in 2017 and were presented within operating cash flows as a result of the adoption of a new accounting pronouncement. Prior to the adoption of the new accounting pronouncement, realized excess benefits of $55 million in 2016 and $61 million in 2015 were presented within cash flows from financing activities. See Note 2 to the Consolidated Financial Statements for additional information regarding the adoption of this new accounting pronouncement. Operating cash flows also reflected AbbVie's voluntary contributions, primarily to its principal domestic defined benefit plan of $150 million in 2017, 2016 and 2015. In 2018, AbbVie plans to make voluntary contributions to its various defined benefit plans in excess of $750 million.

Investing cash flows in 2017 included capital expenditures of $529 million and payments made for other acquisitions and investments of $308 million, partially offset by net sales and maturities of investment securities totaling $563 million. Investing cash flows in 2016 primarily included $1.9 billion of cash consideration paid to acquire Stemcentrx in June 2016, a $595 million upfront payment to acquire certain rights from BI in April 2016, net purchases of investment securities totaling $3.0 billion and capital expenditures of $479 million. Investing activities in 2015 primarily included $11.5 billion of cash consideration paid to acquire Pharmacyclics in May 2015 (net of cash acquired of $877 million). Investing activities in 2015 also included cash outflows related to other acquisitions and investments of $964 million, including a $500 million payment to Calico, $100 million related to an exclusive worldwide license agreement with C2N to develop and commercialize anti-tau antibodies for the treatment of Alzheimer's disease and other neurological disorders and $130 million paid to Infinity due to the achievement of a development milestone under the collaboration agreement. Cash flows from investing activities in 2015 also included capital expenditures of $532 million.

In 2017, 2016 and 2015, the company issued and redeemed commercial paper. The balance of commercial paper outstanding was $400 million as of December 31, 2017 and $377 million as of December 31, 2016. AbbVie may issue additional commercial paper or retire commercial paper to meet liquidity requirements as needed.

In November 2016, the company issued €3.6 billion aggregate principal amount of unsecured senior Euro notes. The company used the proceeds to redeem $4.0 billion aggregate principal amount of 1.75% senior notes that were due to mature in November 2017. In connection with the offering, AbbVie incurred $17 million of issuance costs. In May 2016, the company issued $7.8 billion aggregate principal amount of senior notes. Approximately $2.0 billion of the net proceeds were used to repay an outstanding term loan that was due to mature in November 2016, approximately $1.9 billion of the net proceeds were used to finance the acquisition of Stemcentrx and approximately $3.8 billion of the net proceeds were used to finance an ASR. See Note 12 to the Consolidated Financial Statements for additional information on the ASR transactions. In connection with the May 2016 issuance of senior notes, AbbVie incurred $52 million of issuance costs.

In May 2015, the company issued $16.7 billion aggregate principal amount of unsecured senior notes. Approximately $11.5 billion of the net proceeds were used to finance the acquisition of Pharmacyclics and $5.0 billion of the net proceeds were used to finance an ASR. In 2015, the company paid $86 million of costs relating to an $18.0 billion, 364-Day Bridge Term Loan Credit Agreement (the bridge loan) as well as $93 million of costs relating to the May 2015 issuance of senior notes. No amounts were drawn under the bridge loan, which was terminated as a result of the issuance of the senior notes. In September 2015, AbbVie entered into a three-year $2.0 billion term loan credit facility and a 364-day $2.0 billion term loan credit facility. In November 2015, AbbVie drew on these term facilities and used the proceeds to refinance its $4.0 billion of senior notes that matured in 2015.

Cash dividend payments totaled $4.1 billion in 2017, $3.7 billion in 2016 and $3.3 billion in 2015. The increase in cash dividend payments was primarily due to an increase in the dividend rate. On October 27, 2017, AbbVie announced that its board of directors declared an increase in the company's quarterly cash dividend from $0.64 per share to $0.71 per share beginning with the dividend payable on February 15, 2018 to stockholders of record as of January 12, 2018. This reflects an increase of approximately 11% over the previous quarterly rate. On February 15, 2018, AbbVie announced that its board of directors declared an increase in the company's quarterly cash dividend from $0.71 per share to $0.96 per share beginning with the dividend payable on May 15, 2018 to stockholders of record as of April 13, 2018. The timing, declaration, amount of and payment of any dividends by AbbVie in the future is within the discretion of its board of directors and will depend upon many factors, including AbbVie's financial condition, earnings, capital requirements of its operating subsidiaries, covenants associated with certain of AbbVie's debt service obligations, legal requirements, regulatory constraints, industry practice, ability to access capital markets and other factors deemed relevant by its board of directors.

In addition to the ASRs, under AbbVie's existing stock repurchase program, the company repurchased approximately 13 million shares for $1.0 billion in 2017, approximately 34 million shares for $2.1 billion in 2016 and approximately 46 million shares for $2.8 billion in 2015 . AbbVie cash-settled $285 million of its December 2016 open market purchases in January 2017 and cash-settled $300 million of its December 2015 open market purchases in January 2016. The stock repurchase authorization permits purchases of AbbVie shares from time to time in open-market or private transactions at management's

		2017 Form 10-K | 37

discretion. The program has no time limit and can be discontinued at any time. AbbVie's remaining stock repurchase authorization was $4.0 billion as of December 31, 2017. On February 15, 2018, AbbVie's board of directors authorized a new $10.0 billion stock repurchase program, which superseded AbbVie's previous stock repurchase program. The new stock repurchase program permits purchases of AbbVie shares from time to time in open-market or private transactions, including accelerated share repurchases, at management’s discretion. The program has no time limit and can be discontinued at any time.

In 2017, AbbVie paid $305 million of contingent consideration to BI related to a Phase 3 enrollment milestone. $268 million of this milestone was included in financing cash flows and $37 million was included in operating cash flows.

Cash and equivalents were impacted by net favorable exchange rate changes totaling $29 million in 2017, net unfavorable exchange rate changes totaling $338 million in 2016 and $300 million in 2015. The favorable exchange rate changes in 2017 were primarily due to the strengthening of the Euro and other foreign currencies on the translation of the company's Euro-denominated assets and cash denominated in foreign currencies. The unfavorable exchange rate changes in 2016 were primarily due to the devaluation of AbbVie's net monetary assets denominated in the Venezuelan bolivar. The unfavorable exchange rate changes in 2015 were principally due to the weakening of the Euro and other foreign currencies on the translation of the company's Euro-denominated assets and cash denominated in foreign currencies.

Prior to the enactment of the Tax Cuts and Jobs Act in December 2017, a significant portion of cash and equivalents were considered reinvested indefinitely in foreign subsidiaries. The enactment of U.S. tax reform significantly changed the U.S. corporate tax system, including imposing a mandatory one-time transition tax on previously untaxed earnings of foreign subsidiaries and the creation of a territorial tax system that generally allows the repatriation of future foreign sourced earnings without incurring additional U.S. taxes. The company has not fully completed its analysis and calculation of foreign earnings subject to the transition tax. The provisional estimate of the one-time transition tax was $4.5 billion and is generally payable in eight annual installments. AbbVie does not expect the transition tax liability to materially affect its liquidity and capital resources.

Credit Risk

AbbVie monitors economic conditions, the creditworthiness of customers and government regulations and funding, both domestically and abroad. AbbVie regularly communicates with its customers regarding the status of receivable balances, including their payment plans and obtains positive confirmation of the validity of the receivables. AbbVie establishes an allowance against accounts receivable when it is probable they will not be collected. AbbVie may also utilize factoring arrangements to mitigate credit risk, although the receivables included in such arrangements have historically not been a significant amount of total outstanding receivables.

AbbVie continues to do business with foreign governments in certain countries, including Greece, Portugal, Italy and Spain, which have historically experienced challenges in credit and economic conditions. Substantially all of AbbVie's trade receivables in Greece, Portugal, Italy and Spain are with government health systems. Outstanding governmental receivables in these countries, net of allowances for doubtful accounts, totaled $255 million as of December 31, 2017 and $244 million at December 31, 2016. The company also continues to do business with foreign governments in certain oil-exporting countries that have experienced a deterioration in economic conditions, including Saudi Arabia and Russia, which may result in delays in the collection of receivables. Outstanding governmental receivables related to Saudi Arabia, net of allowances for doubtful accounts, were $149 million as of December 31, 2017 and $122 million as of December 31, 2016. Outstanding governmental receivables related to Russia, net of allowances for doubtful accounts, were $152 million as of December 31, 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.

Currently, AbbVie does not believe the economic conditions in oil-exporting countries will have a significant impact on the company's liquidity, cash flow or financial flexibility. However, if government funding were to become unavailable in these countries or if significant adverse changes in their reimbursement practices were to occur, AbbVie may not be able to collect the entire balance outstanding as of December 31, 2017.

Credit Facility, Access to Capital and Credit Ratings

Credit Facility

AbbVie currently has a $3.0 billion five-year revolving credit facility which matures in October 2019. The revolving credit facility enables the company to borrow funds on an unsecured basis at variable interest rates and contains various covenants. At December 31, 2017, the company was in compliance with all its credit facility covenants. Commitment fees under the credit facility were insignificant. There were no amounts outstanding under the credit facility as of December 31, 2017 and 2016.

38 | 2017 Form 10-K

Access to Capital

The company intends to fund short-term and long-term financial obligations as they mature through cash on hand, future cash flows from operations, or by issuing additional debt. The company's ability to generate cash flows from operations, issue debt or enter into financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for the company's products or in the solvency of its customers or suppliers, deterioration in the company's key financial ratios or credit ratings, or other material unfavorable changes in business conditions. At the current time, the company believes it has sufficient financial flexibility to issue debt, enter into other financing arrangements and attract long-term capital on acceptable terms to support the company's growth objectives.

Credit Ratings

There were no changes in the company’s credit ratings in 2017. Unfavorable changes to the ratings may have an adverse impact on future financing arrangements; however, they would not affect the company's ability to draw on its credit facility and would not result in an acceleration of scheduled maturities of any of the company's outstanding debt.

		2017 Form 10-K | 39

Contractual Obligations

The following table summarizes AbbVie's estimated contractual obligations as of December 31, 2017:

(in millions)	Total				Less than one year				One to three years				Three to five years				More than five years
Short-term borrowings	$	400			$	400			$	—			$	—			$	—
Long-term debt and capital lease obligations, including current portion	37,612				6,026				5,469				5,938				20,179
Interest on long-term debt(a)	15,617				1,154				2,250				2,080				10,133
Future minimum non-cancelable operating lease commitments	957				143				235				151				428
Purchase obligations and other(b)	1,135				972				115				46				2
Other long-term liabilities(c) (d) (e) (f)	10,605				1,135				1,610				1,331				6,529
Total	$	66,326			$	9,830			$	9,679			$	9,546			$	37,271

(a)

Includes estimated future interest payments on long-term debt and capital lease obligations. Interest payments on debt are calculated for future periods using forecasted interest rates in effect at the end of 2017. Projected interest payments include the related effects of interest rate swap agreements. Certain of these projected interest payments may differ in the future based on changes in floating interest rates or other factors or events. The projected interest payments only pertain to obligations and agreements outstanding at December 31, 2017. See Note 9 to the Consolidated Financial Statements for additional information regarding the company's debt instruments and Note 10 for additional information on the interest rate swap agreements outstanding at December 31, 2017.

(b)	Includes the company's significant unconditional purchase obligations. These commitments do not exceed the company's projected requirements and are made in the normal course of business.

(c)

Amounts less than one year includes voluntary contributions in excess of $750 million that AbbVie plans to make to its various defined benefit plans subsequent to December 31, 2017. Amounts otherwise exclude pension and other post-employment benefits and related deferred compensation cash outflows. Timing of funding is uncertain and dependent on future movements in interest rates and investment returns, changes in laws and regulations and other variables. Also included in this amount are components of other long-term liabilities including restructuring. See Note 8 to the Consolidated Financial Statements for additional information on restructuring and Note 11 for additional information on the pension and other post-employment benefit plans.

(d)	Excludes liabilities associated with the company's unrecognized tax benefits as it is not possible to reliably estimate the timing of the future cash outflows related to these liabilities. See Note 13 to the Consolidated Financial Statements for additional information on these unrecognized tax benefits.

(e)

Includes $4.5 billion of contingent consideration liabilities related to the acquisitions of Stemcentrx and BI compounds which are recorded at fair value on the consolidated balance sheet. Potential contingent consideration payments that exceed the fair value recorded on the consolidated balance sheet are not included in the table of contractual obligations. See Notes 5 and 10 to the Consolidated Financial Statements for additional information regarding these liabilities.

(f)

Includes a one-time transition tax liability on a mandatory deemed repatriation of previously untaxed earnings of foreign subsidiaries resulting from U.S. tax reform, enacted in 2017. The one-time transition tax is generally payable in eight annual installments. See Note 13 to the Consolidated Financial Statements for additional information regarding the provisional estimates of these tax liabilities.

AbbVie enters into R&D collaboration arrangements with third parties that may require future milestone payments to third parties contingent upon the achievement of certain development, regulatory, or commercial milestones. Individually, these arrangements are insignificant in any one annual reporting period. However, if milestones for multiple products covered by these arrangements would happen to be reached in the same reporting period, the aggregate charge to expense could be material to the results of operations in that period. From a business perspective, the payments are viewed as positive because they signify that the product is successfully moving through development and is now generating or is more likely to generate future cash flows from product sales. It is not possible to predict with reasonable certainty whether these milestones will be achieved or the timing for achievement. As a result, these potential payments are not included in the table of contractual obligations. See Note 5 to the Consolidated Financial Statements for additional information on these collaboration arrangements.

40 | 2017 Form 10-K

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with generally accepted accounting principles in the United States requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenue and expenses. A summary of the company's significant accounting policies is included in Note 2 to the Consolidated Financial Statements. Certain of these policies are considered critical as these most significantly impact the company's financial condition and results of operations and require the most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Actual results may vary from these estimates.

Revenue Recognition

AbbVie recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability of the sales price is reasonably assured. Revenue from product sales is recognized when title and risk of loss have passed to the customer.

Rebates

AbbVie provides rebates to pharmacy benefit managers, state government Medicaid programs, insurance companies that administer Medicare drug plans, wholesalers, group purchasing organizations and other government agencies and private entities.

Rebate and chargeback accruals are recorded as a reduction to revenue in the period the related product is sold. Rebates and chargebacks totaled $12.9 billion in 2017, $10.8 billion in 2016 and $8.6 billion in 2015. Rebate amounts are typically based upon the volume of purchases using contractual or statutory prices, which may vary by product and by payer. For each type of rebate, the factors used in the calculations of the accrual for that rebate include the identification of the products subject to the rebate, the applicable price terms and the estimated lag time between sale and payment of the rebate, which can be significant.

In order to establish its rebate and chargeback accruals, the company uses both internal and external data to estimate the level of inventory in the distribution channel and the rebate claims processing lag time for each type of rebate. To estimate the rebate percentage or net price, the company tracks sales by product and by customer or payer. The company evaluates inventory data reported by wholesalers, available prescription volume information, product pricing, historical experience and other factors in order to determine the adequacy of its reserves. AbbVie regularly monitors its reserves and records adjustments when rebate trends, rebate programs and contract terms, legislative changes, or other significant events indicate that a change in the reserve is appropriate. Historically, adjustments to rebate accruals have not been material to net earnings.

The following table is an analysis of the three largest rebate accruals and chargeback allowances, which comprise approximately 92% of the total consolidated rebate and chargebacks recorded as reductions to revenues in 2017. Remaining rebate provisions charged against gross revenues are not significant in the determination of operating earnings.

(in millions)	Medicaid and Medicare Rebates				Managed Care Rebates				Wholesaler Chargebacks
Balance at December 31, 2014	$	712			$	476			$	253
Provisions	1,716				2,215				3,866
Payments	(1,396		)		(1,771		)		(3,756		)
Balance at December 31, 2015	1,032				920				363
Provisions	2,606				3,146				3,987
Payments	(2,471		)		(2,899		)		(3,967		)
Balance at December 31, 2016	1,167				1,167				383
Provisions	2,909				3,990				5,026
Payments	(2,736		)		(3,962		)		(4,887		)
Balance at December 31, 2017	$	1,340			$	1,195			$	522

		2017 Form 10-K | 41

Cash Discounts and Product Returns

Cash discounts and product returns, which totaled $1.3 billion in 2017, $964 million in 2016 and $898 million in 2015, are recorded as a reduction to revenue in the same period the related product is sold. The reserve for cash discounts is readily determinable because the company's experience of payment history is fairly consistent. Product returns can be reliably estimated based on the company's historical return experience.

Pension and Other Post-Employment Benefits

AbbVie engages outside actuaries to assist in the determination of the obligations and costs under the pension and other post-employment benefit plans that are direct obligations of AbbVie. The valuation of the funded status and the net periodic benefit cost for these plans are calculated using actuarial assumptions. The significant assumptions, which are reviewed annually, include the discount rate, the expected long-term rate of return on plan assets and the health care cost trend rates. The significant assumptions used in determining these calculations are disclosed in Note 11 to the Consolidated Financial Statements.

The discount rate is selected based on current market rates on high-quality, fixed-income investments at December 31 each year. AbbVie employs a yield-curve approach for countries where a robust bond market exists. The yield curve is developed using high-quality bonds. The yield curve approach reflects the plans' specific cash flows (i.e. duration) in calculating the benefit obligations by applying the corresponding individual spot rates along the yield curve. Beginning in 2016, AbbVie also reflected the plans' specific cash flows and applied them to the corresponding individual spot rates along the yield curve in calculating the service cost and interest cost portions of expense. For other countries, AbbVie reviews various indices such as corporate bond and government bond benchmarks to estimate the discount rate. AbbVie's assumed discount rates have a significant effect on the amounts reported for defined benefit pension and other post-employment plans as of December 31, 2017. A 50 basis point change in the assumed discount rate would have had the following effects on AbbVie's calculation of net periodic benefit costs in 2018 and projected benefit obligations as of December 31, 2017:

	50 basis point
(in millions) (brackets denote a reduction)	Increase				Decrease
Defined benefit plans
Service and interest cost	$	(64	)		$	72
Projected benefit obligation	(572		)		652
Other post-employment plans
Service and interest cost	$	(9	)		$	11
Projected benefit obligation	(77		)		89

Effective December 31, 2015, AbbVie elected to change the method it uses to estimate the service and interest cost components of net periodic benefit costs. Historically, AbbVie estimated these service and interest cost components of this expense utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. In late 2015, AbbVie elected to utilize a full yield curve approach in the estimation of these components by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. AbbVie elected to make this change to provide a more precise measurement of service and interest costs by improving the correlation between projected benefit cash flows to the corresponding spot yield curve rates. AbbVie accounted for this change prospectively as a change in accounting estimate that is inseparable from a change in accounting principle. This change reduced AbbVie’s net periodic benefit cost by approximately $41 million in 2016. This change had no effect on the 2015 expense and did not affect the measurement of AbbVie’s total benefit obligations.

The expected long-term rate of return is based on the asset allocation, historical performance and the current view of expected future returns. AbbVie considers these inputs with a long-term focus to avoid short-term market influences. The current long-term rate of return on plan assets for each plan is supported by the historical performance of the trust's actual and target asset allocation. AbbVie's assumed expected long-term rate of return has a significant effect on the amounts reported for defined benefit pension plans as of December 31, 2017 and will be used in the calculation of net periodic benefit cost in 2018. A one percentage point change in assumed expected long-term rate of return on plan assets would increase or decrease the net period benefit cost of these plans in 2018 by $54 million.

The health care cost trend rate is selected by reviewing historical trends and current views on projected future health care cost increases. The current health care cost trend rate is supported by the historical trend experience of each plan. Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans as of

42 | 2017 Form 10-K

December 31, 2017 and will be used in the calculation of net periodic benefit cost in 2018. A one percentage point change in assumed health care cost trend rates would have the following effects on AbbVie's calculation of net periodic benefit costs in 2018 and the projected benefit obligation as of December 31, 2017:

	One percentage point
(in millions) (brackets denote a reduction)	Increase				Decrease
Service and interest cost	$	31			$	(24	)
Projected benefit obligation	183				(140		)

Income Taxes

AbbVie accounts for income taxes under the asset and liability method. Provisions for federal, state and foreign income taxes are calculated on reported pretax earnings based on current tax laws. Deferred taxes are provided using enacted tax rates on the future tax consequences of temporary differences, which are the differences between the financial statement carrying amount of assets and liabilities and their respective tax bases and the tax benefits of carryforwards. A valuation allowance is established or maintained when, based on currently available information, it is more likely than not that all or a portion of a deferred tax asset will not be realized.

Litigation

The company 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. See Note 14 to the Consolidated Financial Statements for additional information. 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. Accordingly, AbbVie is often initially unable to develop a best estimate of loss and therefore, the minimum amount, which could be zero, is recorded. As information becomes known, either the minimum loss amount is increased, resulting in additional loss provisions, or a best estimate can be made, also resulting in additional loss provisions. Occasionally, a best estimate amount is changed to a lower amount when events result in an expectation of a more favorable outcome than previously expected.

Valuation of Goodwill and Intangible Assets

AbbVie has acquired and may continue to acquire significant intangible assets in connection with business combinations that AbbVie records at fair value. Transactions involving the purchase or sale of intangible assets occur with some frequency between companies in the pharmaceuticals industry and valuations are usually based on a discounted cash flow analysis incorporating the stage of completion. The discounted cash flow model requires assumptions about the timing and amount of future net cash flows, risk, cost of capital, terminal values and market participants. Each of these factors can significantly affect the value of the intangible asset. IPR&D acquired in a business combination is capitalized as an indefinite-lived intangible asset until regulatory approval is obtained, at which time it is accounted for as a definite-lived asset and amortized over its estimated useful life, or discontinuation, at which point the intangible asset will be written off. IPR&D acquired in transactions that are not business combinations is expensed immediately, unless deemed to have an alternative future use. Payments made to third parties subsequent to regulatory approval are capitalized and amortized over the remaining useful life.

AbbVie reviews the recoverability of definite-lived intangible assets whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Goodwill and indefinite-lived intangible assets are reviewed for impairment annually or when an event occurs that could result in an impairment. See Note 2 to the Consolidated Financial Statements for further information.

Annually, the company tests its goodwill for impairment by first assessing qualitative factors to determine whether it is more likely than not that the fair value is less than its carrying amount. Some of the factors considered in the assessment include general macro-economic conditions, conditions specific to the industry and market, cost factors, which could have a significant effect on earnings or cash flows, the overall financial performance and whether there have been sustained declines in the company's share price. If the company concludes it is more likely than not that the fair value of the reporting unit is less than its carrying amount, a quantitative impairment test is performed. AbbVie tests indefinite-lived intangible assets using a quantitative impairment test.

For its quantitative impairment tests, the company uses an estimated future cash flow approach that requires significant judgment with respect to future volume, revenue and expense growth rates, changes in working capital use, foreign currency exchange rates, the selection of an appropriate discount rate, asset groupings and other assumptions and estimates. The

		2017 Form 10-K | 43

estimates and assumptions used are consistent with the company's business plans and a market participant's views of a company and similar companies. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of the assets and potentially result in different impacts to the company's results of operations. Actual results may differ from the company's estimates.

Contingent Consideration

The fair value measurements of contingent consideration liabilities are determined as of the acquisition date 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. Contingent consideration liabilities are revalued to fair value at each subsequent reporting date until the related contingency is resolved. 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 December 31, 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 $170 million. Additionally, at December 31, 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 $390 million.

Recent Accounting Pronouncements

See Note 2 to the Consolidated Financial Statements for additional information on recent accounting pronouncements.

44 | 2017 Form 10-K