filings.toolsItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
2017 Form 10-K |  47 |
AbbVie Inc. and Subsidiaries
Consolidated Statements of Earnings
| years ended December 31 (in millions, except per share data) | 2017 | 2016 | 2015 | ||||||||
| Net revenues | $ | 28,216 | $ | 25,638 | $ | 22,859 | |||||
| Cost of products sold | 7,040 | 5,833 | 4,500 | ||||||||
| Selling, general and administrative | 6,275 | 5,855 | 6,387 | ||||||||
| Research and development | 4,982 | 4,366 | 4,285 | ||||||||
| Acquired in-process research and development | 327 | 200 | 150 | ||||||||
| Total operating costs and expenses | 18,624 | 16,254 | 15,322 | ||||||||
| Operating earnings | 9,592 | 9,384 | 7,537 | ||||||||
| Interest expense, net | 1,004 | 965 | 686 | ||||||||
| Net foreign exchange loss | 348 | 303 | 193 | ||||||||
| Other expense, net | 513 | 232 | 13 | ||||||||
| Earnings before income tax expense | 7,727 | 7,884 | 6,645 | ||||||||
| Income tax expense | 2,418 | 1,931 | 1,501 | ||||||||
| Net earnings | $ | 5,309 | $ | 5,953 | $ | 5,144 | |||||
| Per share data | |||||||||||
| Basic earnings per share | $ | 3.31 | $ | 3.65 | $ | 3.15 | |||||
| Diluted earnings per share | $ | 3.30 | $ | 3.63 | $ | 3.13 | |||||
| Cash dividends declared per common share | $ | 2.63 | $ | 2.35 | $ | 2.10 | |||||
| Weighted-average basic shares outstanding | 1,596 | 1,622 | 1,625 | ||||||||
| Weighted-average diluted shares outstanding | 1,603 | 1,631 | 1,637 |
The accompanying notes are an integral part of these consolidated financial statements.
| 48 | 2017 Form 10-K |
AbbVie Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
| years ended December 31 (in millions) | 2017 | 2016 | 2015 | ||||||||
| Net earnings | $ | 5,309 | $ | 5,953 | $ | 5,144 | |||||
| Foreign currency translation adjustments, net of tax expense (benefit) of $34 in 2017, $(31) in 2016 and $(139) in 2015 | 996 | (165 | ) | (667 | ) | ||||||
| Net investment hedging activities, net of tax expense (benefit) of $(194) in 2017, $79 in 2016 and $— in 2015 | (343 | ) | 140 | — | |||||||
| Pension and post-employment benefits, net of tax expense (benefit) of $(94) in 2017, $(75) in 2016 and $96 in 2015 | (406 | ) | (135 | ) | 230 | ||||||
| Marketable security activities, net of tax expense (benefit) of $(8) in 2017, $(11) in 2016 and $22 in 2015 | (46 | ) | (1 | ) | 44 | ||||||
| Cash flow hedging activities, net of tax expense (benefit) of $(26) in 2017, $18 in 2016 and $(6) in 2015 | (342 | ) | 136 | (137 | ) | ||||||
| Other comprehensive loss | (141 | ) | (25 | ) | (530 | ) | |||||
| Comprehensive income | $ | 5,168 | $ | 5,928 | $ | 4,614 |
The accompanying notes are an integral part of these consolidated financial statements.
| 2017 Form 10-K | 49 |
AbbVie Inc. and Subsidiaries
Consolidated Balance Sheets
| as of December 31 (in millions, except share data) | 2017 | 2016 | |||||
| Assets | |||||||
| Current assets | |||||||
| Cash and equivalents | $ | 9,303 | $ | 5,100 | |||
| Short-term investments | 486 | 1,323 | |||||
| Accounts receivable, net | 5,088 | 4,758 | |||||
| Inventories | 1,605 | 1,444 | |||||
| Prepaid expenses and other | 4,741 | 3,562 | |||||
| Total current assets | 21,223 | 16,187 | |||||
| Investments | 2,090 | 1,783 | |||||
| Property and equipment, net | 2,803 | 2,604 | |||||
| Intangible assets, net | 27,559 | 28,897 | |||||
| Goodwill | 15,785 | 15,416 | |||||
| Other assets | 1,326 | 1,212 | |||||
| Total assets | $ | 70,786 | $ | 66,099 | |||
| Liabilities and Equity | |||||||
| Current liabilities | |||||||
| Short-term borrowings | $ | 400 | $ | 377 | |||
| Current portion of long-term debt and lease obligations | 6,015 | 25 | |||||
| Accounts payable and accrued liabilities | 10,226 | 9,379 | |||||
| Total current liabilities | 16,641 | 9,781 | |||||
| Long-term debt and lease obligations | 30,953 | 36,440 | |||||
| Deferred income taxes | 2,490 | 6,890 | |||||
| Other long-term liabilities | 15,605 | 8,352 | |||||
| Commitments and contingencies | |||||||
| Stockholders’ equity | |||||||
| Common stock, $0.01 par value, 4,000,000,000 shares authorized, 1,768,738,550 shares issued as of December 31, 2017 and 1,754,900,486 as of December 31, 2016 | 18 | 18 | |||||
| Common stock held in treasury, at cost, 176,607,525 shares as of December 31, 2017 and 162,387,762 as of December 31, 2016 | (11,923 | ) | (10,852 | ) | |||
| Additional paid-in-capital | 14,270 | 13,678 | |||||
| Retained earnings | 5,459 | 4,378 | |||||
| Accumulated other comprehensive loss | (2,727 | ) | (2,586 | ) | |||
| Total stockholders’ equity | 5,097 | 4,636 | |||||
| Total liabilities and equity | $ | 70,786 | $ | 66,099 |
The accompanying notes are an integral part of these consolidated financial statements.
| 50 | 2017 Form 10-K |
AbbVie Inc. and Subsidiaries
Consolidated Statements of Equity
| years ended December 31 (in millions) | Common shares outstanding | Common stock | Treasury stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive loss | Total | |||||||||||||||||||
| Balance at December 31, 2014 | 1,591 | $ | 16 | $ | (972 | ) | $ | 4,194 | $ | 535 | $ | (2,031 | ) | $ | 1,742 | |||||||||||
| Net earnings | — | — | — | — | 5,144 | — | 5,144 | |||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | — | (530 | ) | (530 | ) | |||||||||||||||||
| Dividends declared | — | — | — | — | (3,431 | ) | — | (3,431 | ) | |||||||||||||||||
| Common shares issued to Pharmacyclics stockholders | 128 | 1 | — | 8,404 | — | — | 8,405 | |||||||||||||||||||
| Purchases of treasury stock | (119 | ) | — | (7,886 | ) | — | — | — | (7,886 | ) | ||||||||||||||||
| Stock-based compensation plans and other | 10 | — | 19 | 482 | — | — | 501 | |||||||||||||||||||
| Balance at December 31, 2015 | 1,610 | 17 | (8,839 | ) | 13,080 | 2,248 | (2,561 | ) | 3,945 | |||||||||||||||||
| Net earnings | — | — | — | — | 5,953 | — | 5,953 | |||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | — | (25 | ) | (25 | ) | |||||||||||||||||
| Dividends declared | — | — | — | — | (3,823 | ) | — | (3,823 | ) | |||||||||||||||||
| Common shares issued to Stemcentrx stockholders | 63 | — | 3,958 | (35 | ) | — | — | 3,923 | ||||||||||||||||||
| Purchases of treasury stock | (94 | ) | — | (6,018 | ) | — | — | — | (6,018 | ) | ||||||||||||||||
| Stock-based compensation plans and other | 14 | 1 | 47 | 633 | — | — | 681 | |||||||||||||||||||
| Balance at December 31, 2016 | 1,593 | 18 | (10,852 | ) | 13,678 | 4,378 | (2,586 | ) | 4,636 | |||||||||||||||||
| Net earnings | — | — | — | — | 5,309 | — | 5,309 | |||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | — | (141 | ) | (141 | ) | |||||||||||||||||
| Dividends declared | — | — | — | — | (4,221 | ) | — | (4,221 | ) | |||||||||||||||||
| Purchases of treasury stock | (15 | ) | — | (1,125 | ) | — | — | — | (1,125 | ) | ||||||||||||||||
| Stock-based compensation plans and other | 14 | — | 54 | 592 | (7 | ) | — | 639 | ||||||||||||||||||
| Balance at December 31, 2017 | 1,592 | $ | 18 | $ | (11,923 | ) | $ | 14,270 | $ | 5,459 | $ | (2,727 | ) | $ | 5,097 |
The accompanying notes are an integral part of these consolidated financial statements.
| 2017 Form 10-K | 51 |
AbbVie Inc. and Subsidiaries
Consolidated Statements of Cash Flows
| years ended December 31 (in millions) (brackets denote cash outflows) | 2017 | 2016 | 2015 | ||||||||
| Cash flows from operating activities | |||||||||||
| Net earnings | $ | 5,309 | $ | 5,953 | $ | 5,144 | |||||
| Adjustments to reconcile net earnings to net cash from operating activities: | |||||||||||
| Depreciation | 425 | 425 | 417 | ||||||||
| Amortization of intangible assets | 1,076 | 764 | 419 | ||||||||
| Change in fair value of contingent consideration liabilities | 626 | 228 | — | ||||||||
| Stock-based compensation | 365 | 353 | 282 | ||||||||
| Upfront costs and milestones related to collaborations | 470 | 280 | 280 | ||||||||
| Devaluation loss related to Venezuela | — | 298 | — | ||||||||
| Intangible asset impairment | 354 | 39 | — | ||||||||
| Impacts related to U.S. tax reform | 1,242 | — | — | ||||||||
| Other, net | 84 | 390 | 489 | ||||||||
| Changes in operating assets and liabilities, net of acquisitions: | |||||||||||
| Accounts receivable | (391 | ) | (71 | ) | (1,076 | ) | |||||
| Inventories | 93 | (38 | ) | (434 | ) | ||||||
| Prepaid expenses and other assets | (118 | ) | (393 | ) | 511 | ||||||
| Accounts payable and other liabilities | 425 | (1,187 | ) | 1,503 | |||||||
| Cash flows from operating activities | 9,960 | 7,041 | 7,535 | ||||||||
| Cash flows from investing activities | |||||||||||
| Acquisition of businesses, net of cash acquired | — | (2,495 | ) | (11,488 | ) | ||||||
| Other acquisitions and investments | (308 | ) | (262 | ) | (964 | ) | |||||
| Acquisitions of property and equipment | (529 | ) | (479 | ) | (532 | ) | |||||
| Purchases of investment securities | (2,230 | ) | (5,315 | ) | (851 | ) | |||||
| Sales and maturities of investment securities | 2,793 | 2,359 | 899 | ||||||||
| Other | — | 118 | — | ||||||||
| Cash flows from investing activities | (274 | ) | (6,074 | ) | (12,936 | ) | |||||
| Cash flows from financing activities | |||||||||||
| Net change in short-term borrowings | 22 | (29 | ) | (19 | ) | ||||||
| Proceeds from issuance of long-term debt | — | 11,627 | 20,660 | ||||||||
| Repayments of long-term debt and lease obligations | (25 | ) | (6,010 | ) | (4,018 | ) | |||||
| Debt issuance costs | — | (69 | ) | (182 | ) | ||||||
| Dividends paid | (4,107 | ) | (3,717 | ) | (3,294 | ) | |||||
| Purchases of treasury stock | (1,410 | ) | (6,033 | ) | (7,586 | ) | |||||
| Proceeds from the exercise of stock options | 254 | 268 | 155 | ||||||||
| Payments of contingent consideration liabilities | (268 | ) | — | — | |||||||
| Other, net | 22 | 35 | 36 | ||||||||
| Cash flows from financing activities | (5,512 | ) | (3,928 | ) | 5,752 | ||||||
| Effect of exchange rate changes on cash and equivalents | 29 | (338 | ) | (300 | ) | ||||||
| Net change in cash and equivalents | 4,203 | (3,299 | ) | 51 | |||||||
| Cash and equivalents, beginning of year | 5,100 | 8,399 | 8,348 | ||||||||
| Cash and equivalents, end of year | $ | 9,303 | $ | 5,100 | $ | 8,399 | |||||
| Other supplemental information | |||||||||||
| Interest paid, net of portion capitalized | $ | 1,099 | $ | 986 | $ | 536 | |||||
| Income taxes paid | 1,696 | 3,563 | 1,108 | ||||||||
| Supplemental schedule of non-cash investing and financing activities | |||||||||||
| Issuance of common shares associated with acquisitions of businesses | — | 3,923 | 8,405 |
The accompanying notes are an integral part of these consolidated financial statements.
| 52 | 2017 Form 10-K |
AbbVie Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 Background and Basis of Presentation
Background
The principal business of AbbVie Inc. (AbbVie or the company) is the discovery, development, manufacture and sale of a broad line of pharmaceutical products. 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. Substantially all of AbbVie's net revenues in the United States are to three wholesalers. Outside the United States, products are sold primarily to customers or through distributors, depending on the market served.
AbbVie was incorporated in Delaware on April 10, 2012. On January 1, 2013, AbbVie became an independent, publicly-traded company as a result of the distribution by Abbott Laboratories (Abbott) of 100% of the outstanding common stock of AbbVie to Abbott's shareholders. AbbVie incurred separation-related expenses of $270 million in 2015, which were principally classified in selling, general and administrative expenses (SG&A) in the consolidated statements of earnings.
Basis of Historical Presentation
For a certain portion of AbbVie’s operations, the legal transfer of AbbVie’s assets (net of liabilities) did not occur with the separation of AbbVie on January 1, 2013 due to the time required to transfer marketing authorizations and satisfy other regulatory requirements in certain countries. Under the terms of the separation agreement with Abbott, AbbVie was responsible for the business activities conducted by Abbott on its behalf and was subject to the risks and entitled to the benefits generated by these operations and assets. As a result, the related assets and liabilities and results of operations were reported in AbbVie’s consolidated financial statements. All of these operations were transferred to AbbVie as of December 31, 2016. Net revenues related to these operations were insignificant in 2016 and were $213 million in 2015.
Note 2 Summary of Significant Accounting Policies
Use of Estimates
The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and necessarily include amounts based on estimates and assumptions by management. Actual results could differ from those amounts. Significant estimates include amounts for rebates, pension and other post-employment benefits, income taxes, litigation, valuation of goodwill and intangible assets, contingent consideration liabilities, financial instruments and inventory and accounts receivable exposures.
Basis of Consolidation
The consolidated financial statements include the accounts of AbbVie and all of its subsidiaries in which a controlling interest is maintained. Controlling interest is determined by majority ownership interest and the absence of substantive third-party participating rights or, in the case of variable interest entities, where AbbVie is determined to be the primary beneficiary. Investments in companies over which AbbVie has a significant influence but not a controlling interest are accounted for using the equity method with AbbVie's share of earnings or losses reported in other expense, net in the consolidated statements of earnings. All other investments are generally accounted for using the cost method. Intercompany balances and transactions are eliminated.
Certain reclassifications have been made to conform the prior period consolidated financial statements to the current period presentation.
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. Provisions for discounts, rebates, sales incentives to customers, returns and other adjustments are provided for in the period the related revenues are recorded. 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 include the identification of the products subject to the
| 2017 Form 10-K | 53 |
rebate, the applicable price terms and the estimated lag time between sale and payment of the rebate, which can be significant. Sales incentives to customers are insignificant. Historical data is readily available and reliable and is used for estimating the amount of the reduction in gross revenues. Revenue from the launch of a new product, from an improved version of an existing product, or for shipments in excess of a customer's normal requirements are recorded when the conditions noted above are met. In those situations, management records a returns reserve for such revenue, if necessary. Sales of product rights for marketable products are recorded as revenue upon disposition of the rights.
Research and Development Expenses
Internal research and development (R&D) costs are expensed as incurred. Clinical trial costs incurred by third parties are expensed as the contracted work is performed. Where contingent milestone payments are due to third parties under research and development collaborations for pre-commercialization milestones, the milestone payment obligations are expensed when the milestone results are achieved. Payments made to third parties subsequent to regulatory approval are capitalized as intangible assets and amortized to cost of products sold over the remaining useful life of the related product.
Collaborations and Other Arrangements
The company enters into collaborative agreements with third parties to develop and commercialize drug candidates. Collaborative activities may include joint research and development and commercialization of new products. AbbVie generally receives certain licensing rights under these arrangements. These collaborations often require upfront payments and may include additional milestone, research and development cost sharing, royalty or profit share payments, contingent upon the occurrence of certain future events linked to the success of the asset in development and commercialization. Upfront payments associated with collaborative arrangements during the development stage are expensed to acquired in-process research and development (IPR&D) expenses in the consolidated statements of earnings. Subsequent payments made to the partner for the achievement of milestones during the development stage are expensed to R&D expense in the consolidated statements of earnings when the milestone is achieved. Milestone payments made to the partner subsequent to regulatory approval are capitalized as intangible assets and amortized to cost of products sold over the estimated useful life of the related asset. Royalties are expensed to cost of products sold in the consolidated statements of earnings when incurred.
Advertising
Costs associated with advertising are expensed as incurred and are included in SG&A in the consolidated statements of earnings. Advertising expenses were $846 million in 2017, $764 million in 2016 and $704 million in 2015.
Pension and Other Post-Employment Benefits
AbbVie records annual expenses relating to its defined benefit pension and other post-employment benefit plans based on calculations which utilize various actuarial assumptions, including discount rates, rates of return on assets, compensation increases, turnover rates and health care cost trend rates. AbbVie reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends. Actuarial gains and losses are deferred in accumulated other comprehensive loss (AOCI), net of tax and are amortized over the remaining service attribution periods of the employees under the corridor method. Differences between the expected long-term return on plan assets and the actual annual return are amortized to net periodic benefit cost over a five-year period.
Income Taxes
Income taxes are accounted for 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 amounts 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.
Cash and Equivalents
Cash and equivalents include money market funds and time deposits with original maturities of three months or less.
Investments
Investments consist primarily of time deposits, marketable debt securities, held-to-maturity debt securities and equity securities. Investments in marketable securities are classified as available-for-sale and are recorded at fair value with any unrealized holding gains or losses, net of tax, included in AOCI on the consolidated balance sheets. Investments in equity securities that are not traded on public stock exchanges and held-to-maturity debt securities are recorded at cost.
| 54 | 2017 Form 10-K |
AbbVie periodically assesses its investment securities for other-than-temporary impairment losses. This evaluation is based on a number of factors, including the length of time and the extent to which the fair value has been below the cost basis and adverse conditions related specifically to the security, including any changes to the credit rating of the security, intent to sell, or whether AbbVie will more likely than not be required to sell the security before recovery of its amortized cost basis. AbbVie also considers industry factors and general market trends. When AbbVie determines that an other than temporary decline has occurred, a cost basis investment is written down with a charge to other expense (income), net in the consolidated statements of earnings and an available-for-sale investment's unrealized loss is reclassified from AOCI to other expense (income), net in the consolidated statements of earnings. Realized gains and losses on sales of investments are computed using the first-in, first-out method adjusted for any other-than-temporary declines in fair value that were recorded in net earnings.
Accounts Receivable
Accounts receivable are stated at their net realizable value. The allowance for doubtful accounts reflects the best estimate of probable losses inherent in the receivables portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other currently available information. Accounts receivable are written off after all reasonable means to collect the full amount (including litigation, where appropriate) have been exhausted. The allowance for doubtful accounts was $58 million at December 31, 2017 and $72 million at December 31, 2016.
Inventories
Inventories are valued at the lower of cost (first-in, first-out basis) or market. Cost includes material and conversion costs. Inventories consisted of the following:
| as of December 31 (in millions) | 2017 | 2016 | |||||
| Finished goods | $ | 610 | $ | 223 | |||
| Work-in-process | 822 | 1,080 | |||||
| Raw materials | 173 | 141 | |||||
| Inventories | $ | 1,605 | $ | 1,444 |
Property and Equipment
| as of December 31 (in millions) | 2017 | 2016 | |||||
| Land | $ | 48 | $ | 46 | |||
| Buildings | 1,428 | 1,344 | |||||
| Equipment | 5,991 | 5,726 | |||||
| Construction in progress | 604 | 410 | |||||
| Property and equipment, gross | 8,071 | 7,526 | |||||
| Less accumulated depreciation | (5,268 | ) | (4,922 | ) | |||
| Property and equipment, net | $ | 2,803 | $ | 2,604 |
Depreciation for property and equipment is recorded on a straight-line basis over the estimated useful lives of the assets. The estimated useful life for buildings ranges from 10 to 50 years. Buildings include leasehold improvements which are amortized over the life of the related facility lease (including any renewal periods, if appropriate) or the asset, whichever is shorter. The estimated useful life for equipment ranges from 2 to 25 years. Equipment includes certain computer software and software development costs incurred in connection with developing or obtaining software for internal use and is amortized over 3 to 10 years. Depreciation expense was $425 million in 2017, $425 million in 2016 and $417 million in 2015. Assets related to capital leases were insignificant at December 31, 2017 and 2016.
Litigation and Contingencies
Loss contingency provisions are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing information. When a best estimate cannot be made, the minimum loss contingency amount in a probable range is recorded. Legal fees are expensed as incurred. AbbVie accrues for product liability claims on an undiscounted basis. The liabilities are evaluated quarterly and adjusted if necessary as additional information becomes available. Receivables for insurance recoveries for product liability claims, if any, are recorded as assets on an undiscounted basis when it is probable that a recovery will be realized.
| 2017 Form 10-K | 55 |
Business Combinations
AbbVie utilizes the acquisition method of accounting for business combinations. This method requires, among other things, that results of operations of acquired companies are included in AbbVie's results of operations beginning on the respective acquisition dates and that assets acquired and liabilities assumed are recognized at fair value as of the acquisition date. Any excess of the fair value of consideration transferred over the fair values of the net assets acquired is recognized as goodwill. Contingent consideration liabilities are recognized at the estimated fair value on the acquisition date. Subsequent changes to the fair value of contingent consideration liabilities are recognized in other expense (income), net in the consolidated statements of earnings. The fair value of assets acquired and liabilities assumed in certain cases may be subject to revision based on the final determination of fair value during a period of time generally not to exceed twelve months from the acquisition date. Legal costs, due diligence costs, business valuation costs and all other business acquisition costs are expensed when incurred.
Goodwill and Intangible Assets
Intangible assets acquired in a business combination are recorded at fair value using a discounted cash flow model. The discounted cash flow model requires assumptions about the timing and amount of future net cash flows, risk, the cost of capital and terminal values of market participants. Definite-lived intangibles are amortized over their estimated useful lives using the estimated pattern of economic benefit. 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. AbbVie first compares the projected undiscounted cash flows to be generated by the asset to its carrying value. If the undiscounted cash flows of an intangible asset are less than the carrying value, the intangible asset is written down to its fair value. Where cash flows cannot be identified for an individual asset, the review is applied at the lowest level for which cash flows are largely independent of the cash flows of other assets and liabilities.
Goodwill and indefinite-lived assets are not amortized, but are subject to an impairment review annually and more frequently when indicators of impairment exist. An impairment of goodwill could occur if the carrying amount of a reporting unit exceeded the fair value of that reporting unit. An impairment of indefinite-lived intangible assets would occur if the fair value of the intangible asset is less than the carrying value.
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. 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, future foreign currency exchange rates, the selection of an appropriate discount rate, asset groupings and other assumptions and estimates. The 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.
Acquired In-Process Research and Development
In an asset acquisition, the initial costs of rights to IPR&D projects acquired are expensed as IPR&D in the consolidated statements of earnings unless the project has an alternative future use. These costs include initial payments incurred prior to regulatory approval in connection with research and development collaboration agreements that provide rights to develop, manufacture, market and/or sell pharmaceutical products. In a business combination, the fair value of IPR&D projects acquired are capitalized and accounted for as indefinite-lived intangible assets until the underlying project receives regulatory approval, at which point the intangible asset will be accounted for as a definite-lived intangible asset, or discontinuation, at which point the intangible asset will be written off. R&D costs incurred after the acquisition are expensed as incurred.
Foreign Currency Translation
Foreign subsidiary earnings are translated into U.S. dollars using average exchange rates. The net assets of foreign subsidiaries are translated into U.S. dollars using period-end exchange rates. The U.S. dollar effects that arise from translating the net assets of these subsidiaries at changing rates are recognized in other comprehensive (loss) income (OCI) in the consolidated statements of comprehensive income. The net assets of subsidiaries in highly inflationary economies are remeasured as if the functional currency were the reporting currency. The remeasurement is recognized in net foreign exchange loss in the consolidated statements of earnings.
| 56 | 2017 Form 10-K |
Derivatives
All derivative instruments are recognized as either assets or liabilities at fair value on the consolidated balance sheets and are classified as current or long-term based on the scheduled maturity of the instrument.
For derivatives formally designated as hedges, the company assesses at inception and quarterly thereafter, whether the hedging derivatives are highly effective in offsetting changes in the fair value or cash flows of the hedged item. The changes in fair value of a derivative designated as a fair value hedge and of the hedged item attributable to the hedged risk are recognized in earnings immediately. The effective portions of changes in the fair value of a derivative designated as a cash flow hedge are reported in AOCI and are subsequently recognized in earnings consistent with the underlying hedged item. If it is determined that a derivative is no longer highly effective as a hedge, the company discontinues hedge accounting prospectively. If a hedged forecasted transaction becomes probable of not occurring, any gains or losses are reclassified from AOCI to earnings. Derivatives that are not designated as hedges are adjusted to fair value through current earnings.
The company also uses derivative instruments or foreign currency denominated debt to hedge its net investments in certain foreign subsidiaries and affiliates. Realized and unrealized gains and losses from these hedges are included in AOCI.
Derivative cash flows, with the exception of net investment hedges, are principally classified in the operating section of the consolidated statements of cash flows, consistent with the underlying hedged item. Cash flows related to net investment hedges are classified in the investing section of the consolidated statements of cash flows.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The standard provides clarifying guidance to assist in the evaluation of whether transactions are treated as business combinations or asset acquisitions. AbbVie elected to early adopt the changes prospectively in the first quarter of 2017.
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. AbbVie adopted the standard in the first quarter of 2017. As a result, all excess tax benefits associated with stock-based awards are recognized in the statement of earnings when the awards vest or settle, rather than in stockholders' equity. In addition, excess tax benefits in the statement of cash flows are now classified as an operating activity rather than as a financing activity. AbbVie adopted these changes prospectively. Accordingly, the company recognized excess tax benefits in income tax expense of $71 million in 2017 and classified them within cash flows from operating activities.
Recent Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09, Summary and Amendments That Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs-Contracts with Customers (Subtopic 340-40). The amendments in this standard supersede most current revenue recognition requirements. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. AbbVie can apply the amendments using one of the following two methods: (i) retrospectively to each prior reporting period presented, or (ii) modified retrospectively with the cumulative effect of initially applying the amendments recognized at the date of initial application. AbbVie will adopt the standard effective the first quarter of 2018 and apply the amendments using the modified retrospective method. The company has completed its assessment of the new standard as of December 31, 2017. AbbVie does not expect significant changes to the amounts or timing of revenue recognition for product sales, which is its primary revenue stream. However, the adoption of the new standard will require a cumulative-effect adjustment to retained earnings on January 1, 2018 of approximately $120 million, net of tax, primarily related to certain deferred license revenues that were originally expected to be recognized through early 2020.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The standard requires several targeted changes including that equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) be measured at fair value with changes in fair value recognized in net earnings. These provisions will not impact the accounting for AbbVie's investments in debt securities. The new guidance also changes certain disclosure requirements and other aspects of current U.S. GAAP. Amendments are to be applied as a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. This standard will be effective for AbbVie starting with the
| 2017 Form 10-K | 57 |
first quarter of 2018. Based on historical trends, AbbVie does not believe the adoption will have a material impact on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The standard outlines a comprehensive lease accounting model that supersedes the current lease guidance and requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms greater than 12 months. The guidance also changes the definition of a lease and expands the disclosure requirements of lease arrangements. The new standard must be adopted using the modified retrospective approach and will be effective for AbbVie starting with the first quarter of 2019, with early adoption permitted. AbbVie will adopt the standard effective in the first quarter of 2019 and is currently assessing the impact of adopting this guidance on its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326). The standard changes how credit losses are measured for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other financial instruments, the standard requires the use of a new forward-looking "expected credit loss" model that generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, the standard now requires allowances to be recorded instead of reducing the amortized cost of the investment. Additionally, the standard requires new disclosures and will be effective for AbbVie starting with the first quarter of 2020. Early adoption beginning in the first quarter of 2019 is permitted. With certain exceptions, adjustments are to be applied using a modified-retrospective approach by reflecting adjustments through a cumulative-effect impact to retained earnings as of the beginning of the fiscal year of adoption. AbbVie is currently assessing the impact and timing of adopting this guidance on its consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740). The new standard requires entities to recognize the income tax consequences of an intercompany transfer of an asset other than inventory when the transfer occurs. Under current U.S. GAAP, the income tax consequences of these intercompany asset transfers are deferred until the asset is sold to a third party or otherwise recovered through use. The standard will be effective for AbbVie starting with the first quarter of 2018. Adjustments for this update are to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings with any adjustments reflected as of the beginning of the fiscal year of adoption. The company has completed its assessment of the new standard as of December 31, 2017. The adoption will require a cumulative-effect adjustment to retained earnings on January 1, 2018 of approximately $1.8 billion related to prepaid income tax assets that will be affected by this standard, of which $1.4 billion was included in prepaid expenses and other on the consolidated balance sheet as of December 31, 2017.
In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The standard requires that an employer continue to report the service cost component of net periodic benefit cost in the same income statement line item or items as other employee compensation costs arising from services rendered during the period. The other components of net periodic benefit cost are required to be presented separately outside of income from operations and are not eligible for capitalization. The standard will be effective for AbbVie starting with the first quarter of 2018. Upon adoption, the company will apply the income statement classification provisions of this standard retrospectively and will reclassify income of $47 million from operating earnings to non-operating income for the year ended December 31, 2017. Additionally, the company preliminarily expects to record approximately $20 million of non-operating income in 2018 which would have been recorded in operating earnings under the previous guidance.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The standard simplifies the application of hedge accounting and more closely aligns the accounting with an entity’s risk management activities. AbbVie will early adopt the standard effective in the first quarter of 2018 and does not believe the adoption will have a material impact on its consolidated financial statements.
| 58 | 2017 Form 10-K |
Note 3 Supplemental Financial Information
Interest Expense, Net
| 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 |
Accounts Payable and Accrued Liabilities
| as of December 31 (in millions) | 2017 | 2016 | |||||
| Sales rebates | $ | 3,069 | $ | 2,887 | |||
| Accounts payable | 1,474 | 1,407 | |||||
| Dividends payable | 1,143 | 1,028 | |||||
| Salaries, wages and commissions | 763 | 644 | |||||
| Royalty and license arrangements | 514 | 434 | |||||
| Other | 3,263 | 2,979 | |||||
| Accounts payable and accrued liabilities | $ | 10,226 | $ | 9,379 |
Other Long-Term Liabilities
| as of December 31 (in millions) | 2017 | 2016 | |||||
| Contingent consideration liabilities | $ | 4,266 | $ | 3,941 | |||
| Pension and other post-employment benefits | 2,740 | 2,085 | |||||
| Liabilities for unrecognized tax benefits | 2,683 | 1,166 | |||||
| Income taxes payable | 4,675 | — | |||||
| Other | 1,241 | 1,160 | |||||
| Other long-term liabilities | $ | 15,605 | $ | 8,352 |
Note 4 Earnings Per Share
AbbVie grants certain restricted stock awards (RSAs) and restricted stock units (RSUs) that are considered to be participating securities. Due to the presence of participating securities, AbbVie calculates earnings per share (EPS) using the more dilutive of the treasury stock or the two-class method. For all periods presented, the two-class method was more dilutive.
| 2017 Form 10-K | 59 |
The following table summarizes the impact of the two-class method:
| Years ended December 31, | |||||||||||
| (in millions, except per share information) | 2017 | 2016 | 2015 | ||||||||
| Basic EPS | |||||||||||
| Net earnings | $ | 5,309 | $ | 5,953 | $ | 5,144 | |||||
| Earnings allocated to participating securities | 26 | 30 | 26 | ||||||||
| Earnings available to common shareholders | $ | 5,283 | $ | 5,923 | $ | 5,118 | |||||
| Weighted-average basic shares outstanding | 1,596 | 1,622 | 1,625 | ||||||||
| Basic earnings per share | $ | 3.31 | $ | 3.65 | $ | 3.15 | |||||
| Diluted EPS | |||||||||||
| Net earnings | $ | 5,309 | $ | 5,953 | $ | 5,144 | |||||
| Earnings allocated to participating securities | 26 | 30 | 26 | ||||||||
| Earnings available to common shareholders | $ | 5,283 | $ | 5,923 | $ | 5,118 | |||||
| Weighted-average shares of common stock outstanding | 1,596 | 1,622 | 1,625 | ||||||||
| Effect of dilutive securities | 7 | 9 | 12 | ||||||||
| Weighted-average diluted shares outstanding | 1,603 | 1,631 | 1,637 | ||||||||
| Diluted earnings per share | $ | 3.30 | $ | 3.63 | $ | 3.13 |
As further described in Note 12, AbbVie entered into and executed an accelerated share repurchase agreement (ASR) with third party financial institutions in 2016 and 2015. For purposes of calculating EPS, AbbVie reflected the ASR as a repurchase of AbbVie common stock in the relevant periods.
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 5 Licensing, Acquisitions and Other Arrangements
Acquisition of Stemcentrx
On June 1, 2016, AbbVie acquired all of the outstanding equity interests in Stemcentrx, a privately-held biotechnology company. The transaction expanded AbbVie’s oncology pipeline by adding the late-stage asset rovalpituzumab tesirine (Rova-T), four additional early-stage clinical compounds in solid tumor indications and a significant portfolio of pre-clinical assets. Rova-T is currently in registrational trials for small cell lung cancer.
The acquisition of Stemcentrx was accounted for as a business combination using the acquisition method of accounting. The aggregate upfront consideration for the acquisition of Stemcentrx consisted of approximately 62.4 million shares of AbbVie common stock, issued from common stock held in treasury, and cash. AbbVie may make certain contingent payments upon the achievement of defined development and regulatory milestones. As of the acquisition date, the maximum aggregate amount payable for development and regulatory milestones was $4.0 billion. The acquisition-date fair value of these milestones was $620 million and was estimated using a combination of probability-weighted discounted cash flow models and Monte Carlo simulation models. The estimate was determined based on significant inputs that are not observable in the market, referred to as Level 3 inputs, as described in more detail in Note 10.
The following table summarizes total consideration:
| (in millions) | |||
| Cash | $ | 1,883 | |
| Fair value of AbbVie common stock | 3,923 | ||
| Contingent consideration | 620 | ||
| Total consideration | $ | 6,426 |
| 60 | 2017 Form 10-K |
The following table summarizes fair values of assets acquired and liabilities assumed as of the June 1, 2016 acquisition date:
| (in millions) | |||
| Assets acquired and liabilities assumed | |||
| Accounts receivable | $ | 1 | |
| Prepaid expenses and other | 7 | ||
| Property and equipment | 17 | ||
| Intangible assets - Indefinite-lived research and development | 6,100 | ||
| Accounts payable and accrued liabilities | (31 | ) | |
| Deferred income taxes | (1,933 | ) | |
| Other long-term liabilities | (7 | ) | |
| Total identifiable net assets | 4,154 | ||
| Goodwill | 2,272 | ||
| Total assets acquired and liabilities assumed | $ | 6,426 |
Intangible assets were related to IPR&D for Rova-T, four additional early-stage clinical compounds in solid tumor indications and several additional pre-clinical compounds. The estimated fair value of the acquired IPR&D was determined using the multi-period excess earnings model of the “income approach,” which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the more significant assumptions inherent in the development of those asset valuations include the estimated annual cash flows for each asset or product (including net revenues, cost of sales, R&D costs, selling and marketing costs and working capital/contributory asset charges), the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, the regulatory approval probabilities, commercial success risks, competitive landscape as well as other factors.
The goodwill recognized represents expected synergies, including the ability to: (i) leverage the respective strengths of each business; (ii) expand the combined company’s product portfolio; (iii) accelerate AbbVie's clinical and commercial presence in oncology; and (iv) establish a strong leadership position in oncology. Goodwill was also impacted by the establishment of a deferred tax liability for the acquired identifiable intangible assets which have no tax basis. The goodwill is not deductible for tax purposes.
Following the acquisition date, the operating results of Stemcentrx have been included in the company's financial statements. AbbVie’s consolidated statement of earnings for the year ended December 31, 2016 included no net revenues and an operating loss of $165 million associated with Stemcentrx's operations. This operating loss included $43 million of post-acquisition stock-based compensation expense for Stemcentrx options and excluded interest expense and certain acquisition costs.
Pro Forma Financial Information
The following table presents the unaudited pro forma combined results of operations of AbbVie and Stemcentrx for the years ended December 31, 2016 and 2015 as if the acquisition of Stemcentrx had occurred on January 1, 2015:
| Years ended December 31, | |||||||
| (in millions, except per share information) | 2016 | 2015 | |||||
| Net revenues | $ | 25,641 | $ | 22,869 | |||
| Net earnings | 5,907 | 4,894 | |||||
| Basic earnings per share | $ | 3.58 | $ | 2.90 | |||
| Diluted earnings per share | $ | 3.56 | $ | 2.88 |
The unaudited pro forma financial information was prepared using the acquisition method of accounting and was based on the historical financial information of AbbVie and Stemcentrx. In order to reflect the occurrence of the acquisition on January 1, 2015 as required, the unaudited pro forma financial information includes adjustments to reflect the additional interest expense associated with the issuance of debt to finance the acquisition and the reclassification of acquisition,
| 2017 Form 10-K | 61 |
integration and financing-related costs incurred during the year ended December 31, 2016 to the year ended December 31, 2015. The unaudited pro forma financial information is not necessarily indicative of what the consolidated results of operations would have been had the acquisition been completed on January 1, 2015. In addition, the unaudited pro forma financial information is not a projection of the future results of operations of the combined company nor does it reflect the expected realization of any cost savings or synergies associated with the acquisition.
Acquisition of BI 655066 and BI 655064 from Boehringer Ingelheim
On April 1, 2016, AbbVie acquired all rights to risankizumab (BI 655066), an anti-IL-23 monoclonal biologic antibody in Phase 3 development for psoriasis, from Boehringer Ingelheim (BI) pursuant to a global collaboration agreement. AbbVie is also evaluating the potential of this biologic therapy in other indications, including Crohn’s disease, psoriatic arthritis and asthma. In addition to risankizumab, AbbVie also gained rights to an anti-CD40 antibody, BI 655064, currently in Phase 1 development. BI will retain responsibility for further development of BI 655064, and AbbVie may elect to advance the program after completion of certain clinical achievements. The acquired assets include all patents, data, know-how, third-party agreements, regulatory filings and manufacturing technology related to BI 655066 and BI 655064.
The company concluded that the acquired assets met the definition of a business and accounted for the transaction as a business combination using the acquisition method of accounting. Under the terms of the agreement, AbbVie made an upfront payment of $595 million. Additionally, $18 million of payments to BI, pursuant to a contractual obligation to reimburse BI for certain development costs it incurred prior to the acquisition date, were initially deferred. AbbVie may make certain contingent payments upon the achievement of defined development, regulatory and commercial milestones, as well as royalty payments based on net revenues of licensed products. As of the acquisition date, the maximum aggregate amount payable for development and regulatory milestones was approximately $1.6 billion. The acquisition-date fair value of these milestones was $606 million. The acquisition-date fair value of contingent royalty payments was $2.8 billion. The potential contingent consideration payments were estimated by applying a probability-weighted expected payment model for contingent milestone payments and a Monte Carlo simulation model for contingent royalty payments, which were then discounted to present value. The fair value measurements were based on Level 3 inputs.
The following table summarizes total consideration:
| (in millions) | |||
| Cash | $ | 595 | |
| Deferred consideration payable | 18 | ||
| Contingent consideration | 3,365 | ||
| Total consideration | $ | 3,978 |
The following table summarizes fair values of assets acquired as of the April 1, 2016 acquisition date:
| (in millions) | |||
| Assets acquired | |||
| Identifiable intangible assets - Indefinite-lived research and development | $ | 3,890 | |
| Goodwill | 88 | ||
| Total assets acquired | $ | 3,978 |
The estimated fair value of the acquired IPR&D was determined using the multi-period excess earnings model of the “income approach.” The goodwill recognized represents expected synergies, including an expansion of the company’s immunology product portfolio.
Pro forma results of operations for this acquisition have not been presented because this acquisition is insignificant to AbbVie’s consolidated results of operations.
Acquisition of Pharmacyclics
On May 26, 2015, AbbVie acquired Pharmacyclics, a biopharmaceutical company that develops and commercializes novel therapies for people impacted by cancer. Pharmacyclics markets IMBRUVICA (ibrutinib), a Bruton's tyrosine kinase (BTK) inhibitor, targeting B-cell malignancies.
| 62 | 2017 Form 10-K |
The acquisition of Pharmacyclics was accounted for as a business combination using the acquisition method of accounting. The total consideration for the acquisition of Pharmacyclics consisted of cash and approximately 128 million shares of AbbVie common stock and is summarized as follows:
| (in millions) | |||
| Cash | $ | 12,365 | |
| Fair value of AbbVie common stock | 8,405 | ||
| Total consideration | $ | 20,770 |
The following table summarizes the fair values of assets acquired and liabilities assumed as of the May 26, 2015 acquisition date:
| (in millions) | |||
| Assets acquired and liabilities assumed | |||
| Cash and equivalents | $ | 877 | |
| Short-term investments | 11 | ||
| Accounts receivable | 106 | ||
| Inventories | 492 | ||
| Other assets | 212 | ||
| Intangible assets | |||
| Definite-lived developed product rights | 4,590 | ||
| Definite-lived license agreements | 6,780 | ||
| Indefinite-lived research and development | 7,180 | ||
| Accounts payable and accrued liabilities | (381 | ) | |
| Deferred income taxes | (6,453 | ) | |
| Other long-term liabilities | (254 | ) | |
| Total identifiable net assets | 13,160 | ||
| Goodwill | 7,610 | ||
| Total assets acquired and liabilities assumed | $ | 20,770 |
The amortization of the fair market value step-up for acquired inventory was included in cost of products sold and R&D in the consolidated statements of earnings. The related amortization was $58 million in 2017, $274 million in 2016 and $113 million in 2015.
Intangible assets were related to the IMBRUVICA developed product rights, IPR&D in the United States for additional IMBRUVICA indications and the contractual rights to IMBRUVICA profits and losses outside the United States as a result of the collaboration agreement with Janssen Biotech, Inc. and its affiliates (Janssen), one of the Janssen Pharmaceutical companies of Johnson & Johnson. See Note 6 for additional information regarding the collaboration with Janssen. The acquired definite-lived intangible assets are being amortized over a weighted-average estimated useful life of 12 years using the estimated pattern of economic benefit. The estimated fair value of the IPR&D and identifiable intangible assets was determined using the "income approach."
The goodwill recognized from the acquisition of Pharmacyclics includes expected synergies, including the ability to leverage the respective strengths of each business, expanding the combined company's product portfolio, acceleration of clinical and commercial presence in oncology and establishment of a strong leadership position in hematological oncology. The goodwill is not deductible for tax purposes.
From the acquisition date through December 31, 2015, AbbVie's 2015 consolidated statement of earnings included net revenues of $774 million and an operating loss of $519 million associated with Pharmacyclics' operations. The operating loss included $346 million of acquisition-related compensation expense, $261 million of inventory step-up and intangible asset amortization and $100 million of transaction and integration costs. Of these costs, $294 million was recorded within SG&A expenses, $152 million within R&D expense and $261 million within cost of products sold in the 2015 consolidated statement of earnings.
| 2017 Form 10-K | 63 |
Pro Forma Financial Information
The following table presents the unaudited pro forma combined results of operations of AbbVie and Pharmacyclics for 2015 as if the acquisition of Pharmacyclics had occurred on January 1, 2014:
| year ended December 31 (in millions, except per share information) | 2015 | ||
| Net revenues | $ | 23,215 | |
| Net earnings | 5,345 | ||
| Basic earnings per share | $ | 3.18 | |
| Diluted earnings per share | $ | 3.16 |
The unaudited pro forma financial information was prepared using the acquisition method of accounting and was based on the historical financial information of AbbVie and Pharmacyclics. In order to reflect the occurrence of the acquisition on January 1, 2014 as required, the unaudited pro forma financial information includes adjustments to reflect the incremental amortization expense to be incurred based on the fair values of the identifiable intangible assets acquired; the incremental cost of products sold related to the fair value adjustments associated with the acquisition-date inventory; the additional interest expense associated with the issuance of debt to finance the acquisition; and the reclassification of acquisition, integration and financing-related costs incurred during the year ended December 31, 2015 to the year ended December 31, 2014. The unaudited pro forma financial information is not necessarily indicative of what the consolidated results of operations would have been had the acquisition been completed on January 1, 2014. In addition, the unaudited pro forma financial information is not a projection of the future results of operations of the combined company nor does it reflect the expected realization of any cost savings or synergies associated with the acquisition.
Other Licensing & Acquisitions Activity
Excluding the acquisitions above, cash outflows related to other acquisitions and investments totaled $308 million in 2017, $262 million in 2016 and $964 million in 2015. AbbVie recorded IPR&D charges of $327 million in 2017, $200 million in 2016 and $150 million in 2015. Significant arrangements impacting 2017, 2016 and 2015, some of which require contingent milestone payments, are summarized below.
Alector, Inc.
In October 2017, AbbVie entered into a global strategic collaboration with Alector, Inc. (Alector) to develop and commercialize medicines to treat Alzheimer’s disease and other neurodegenerative disorders. AbbVie and Alector have agreed to research a portfolio of antibody targets and AbbVie has an option to global development and commercial rights to two targets. The terms of the arrangement included an initial upfront payment of $205 million, which was expensed to IPR&D in the fourth quarter of 2017. Alector will conduct exploratory research, drug discovery and development for lead programs up to the conclusion of the proof of concept studies. If the option is exercised, AbbVie will lead development and commercialization activities and could make additional payments to Alector of up to $986 million upon achievement of certain development and regulatory milestones. Alector and AbbVie will co-fund development and commercialization and will share global profits equally.
C2N Diagnostics
In March 2015, AbbVie entered 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. As part of the agreement, AbbVie made an initial upfront payment of $100 million, which was expensed to IPR&D in 2015. AbbVie made additional payments of $35 million in both 2016 and 2017, which were recorded in R&D expense, due to the achievement of development milestones under the license agreement. Upon the achievement of certain development, regulatory and commercial milestones, AbbVie could make additional payments of up to $615 million, as well as royalties on net revenues.
Other Arrangements
In addition to the significant arrangements described above, AbbVie entered into several other arrangements resulting in charges to IPR&D of $122 million in 2017, $200 million in 2016 and $50 million in 2015. In connection with the other individually insignificant early stage arrangements entered into in 2017, AbbVie could make additional payments of up to $2.4 billion upon the achievement of certain development, regulatory and commercial milestones.
| 64 | 2017 Form 10-K |
Other Activity
Priority Review Voucher (PRV)
In August 2015, AbbVie entered into an agreement to purchase a rare pediatric disease PRV from a third party. The PRV entitles AbbVie to receive an FDA priority review of a single New Drug Application or Biologics License Application, which reduces the target review time and could lead to an expedited approval. In exchange for the PRV, AbbVie made a payment of $350 million, which was recorded in R&D expense in the consolidated statement of earnings and as an operating cash outflow in the consolidated statement of cash flows for 2015. AbbVie intends to use the PRV for an existing R&D project.
Note 6 Collaboration with Janssen Biotech, Inc.
In December 2011, Pharmacyclics entered into a worldwide collaboration and license agreement with Janssen for the joint development and commercialization of IMBRUVICA, a novel, orally active, selective covalent inhibitor of BTK and certain compounds structurally related to IMBRUVICA, for oncology and other indications, excluding all immune and inflammatory mediated diseases or conditions and all psychiatric or psychological diseases or conditions, in the United States and outside the United States.
The collaboration provides Janssen with an exclusive license to commercialize IMBRUVICA outside of the United States and co-exclusively with AbbVie in the United States. Both parties are responsible for the development, manufacturing and marketing of any products generated as a result of the collaboration. The collaboration has no set duration or specific expiration date and provides for potential future development, regulatory and approval milestone payments of up to $200 million to AbbVie. The collaboration also includes a cost sharing arrangement for associated collaboration activities. Except in certain cases, Janssen is responsible for approximately 60% of collaboration development costs and AbbVie is responsible for the remaining 40% of collaboration development costs.
In the United States, both parties have co-exclusive rights to commercialize the products; however, AbbVie is the principal in the end customer product sales. AbbVie and Janssen share pre-tax profits and losses equally from the commercialization of products. Sales of IMBRUVICA are included in AbbVie's net revenues. Janssen's share of profits is included in AbbVie's cost of products sold. Other costs incurred under the collaboration are reported in their respective expense line items, net of Janssen's share.
Outside the United States, Janssen is responsible for and has exclusive rights to commercialize IMBRUVICA. AbbVie and Janssen share pre-tax profits and losses equally from the commercialization of products. AbbVie's share of profits is included in AbbVie's net revenues. Other costs incurred under the collaboration are reported in their respective expense line items, net of Janssen's share.
The following table shows the profit and cost sharing relationship between Janssen and AbbVie:
| years ended December 31 (in millions) | 2017 | 2016 | 2015 | |||||||||
| United States - Janssen's share of profits (included in cost of products sold) | $ | 1,001 | $ | 735 | $ | 306 | ||||||
| International - AbbVie's share of profits (included in net revenues) | 429 | 252 | 95 | |||||||||
| Global - AbbVie's share of other costs (included in respective line items) | 288 | 262 | 159 |
| 2017 Form 10-K | 65 |
Note 7 Goodwill and Intangible Assets
Goodwill
The following table summarizes the changes in the carrying amount of goodwill:
| (in millions) | |||
| Balance as of December 31, 2015 | $ | 13,168 | |
| Additions (see Note 5) | 2,360 | ||
| Foreign currency translation | (112 | ) | |
| Balance as of December 31, 2016 | 15,416 | ||
| Foreign currency translation | 369 | ||
| Balance as of December 31, 2017 | $ | 15,785 |
The latest impairment assessment of goodwill was completed in the third quarter of 2017. As of December 31, 2017, there were no accumulated goodwill impairment losses. Future impairment tests for goodwill will be performed annually in the third quarter, or earlier if impairment indicators exist.
Intangible Assets, Net
The following table summarizes intangible assets:
| 2017 | 2016 | ||||||||||||||||||||||
| as of December 31 (in millions) | Gross carrying amount | Accumulated amortization | Net carrying amount | Gross carrying amount | Accumulated amortization | Net carrying amount | |||||||||||||||||
| Definite-lived intangible assets | |||||||||||||||||||||||
| Developed product rights | $ | 16,138 | $ | (4,982 | ) | $ | 11,156 | $ | 16,464 | $ | (4,256 | ) | $ | 12,208 | |||||||||
| License agreements | 7,822 | (1,409 | ) | 6,413 | 7,809 | (1,110 | ) | 6,699 | |||||||||||||||
| Total definite-lived intangible assets | 23,960 | (6,391 | ) | 17,569 | 24,273 | (5,366 | ) | 18,907 | |||||||||||||||
| Indefinite-lived research and development | 9,990 | — | 9,990 | 9,990 | — | 9,990 | |||||||||||||||||
| Total intangible assets, net | $ | 33,950 | $ | (6,391 | ) | $ | 27,559 | $ | 34,263 | $ | (5,366 | ) | $ | 28,897 |
Definite-lived intangible assets are amortized over their estimated useful lives, which range between 2 to 16 years with an average of 12 years for developed product rights and 11 years for license agreements. Amortization expense was $1.1 billion in 2017, $764 million in 2016 and $419 million in 2015 and was included in cost of products sold in the consolidated statements of earnings. The anticipated annual amortization expense for definite-lived intangible assets recorded as of December 31, 2017 is as follows:
| (in billions) | 2018 | 2019 | 2020 | 2021 | 2022 | ||||||||||||||
| Anticipated annual amortization expense | $ | 1.3 | $ | 1.5 | $ | 1.7 | $ | 1.9 | $ | 2.1 |
In 2017, an impairment charge of $354 million was recorded related to ZINBRYTA that reduced both the gross carrying amount and net carrying amount of the underlying intangible assets due to lower expected future cash flows for the product. In 2016, an impairment charge of $39 million was recorded related to certain developed product rights in the United States due to a decline in the market for the product. In 2015, no intangible asset impairment charges were recorded. The 2017 and 2016 impairment charges were based on discounted cash flow analyses and were included in cost of products sold in the consolidated statements of earnings.
Indefinite-lived intangible assets represent acquired IPR&D associated with products that have not yet received regulatory approval. Indefinite-lived intangible assets as of December 31, 2017 and 2016 related to the acquisitions of Stemcentrx and BI compounds. See Note 5 for additional information. The latest impairment assessment of indefinite-lived intangible assets was completed in the third quarter of 2017. No impairment charges were recorded in 2017, 2016 and 2015. Future impairment tests for indefinite-lived intangible assets will be performed annually in the third quarter, or earlier if impairment indicators exist.
| 66 | 2017 Form 10-K |
Note 8 Restructuring Plans
AbbVie continuously evaluates its operations to identify opportunities to optimize its manufacturing and R&D operations, commercial infrastructure and administrative costs and to respond to changes in its business environment, for example, in conjunction with the loss and expected loss of exclusivity of certain products. As a result, AbbVie management periodically approves individual restructuring plans to achieve these objectives. In 2017, 2016 and 2015, no such plans were individually significant. Restructuring charges recorded were $86 million in 2017, $52 million in 2016 and $138 million in 2015 and were primarily related to employee severance and contractual obligations. These charges were recorded in cost of products sold, R&D expense and SG&A expenses in the consolidated statements of earnings based on classification of the affected employees or operations.
The following summarizes the cash activity in the restructuring reserve for 2017, 2016 and 2015:
| (in millions) | |||
| Accrued balance at December 31, 2014 | $ | 122 | |
| 2015 restructuring charges | 126 | ||
| Payments and other adjustments | (100 | ) | |
| Accrued balance at December 31, 2015 | 148 | ||
| 2016 restructuring charges | 52 | ||
| Payments and other adjustments | (113 | ) | |
| Accrued balance at December 31, 2016 | 87 | ||
| 2017 restructuring charges | 86 | ||
| Payments and other adjustments | (87 | ) | |
| Accrued balance at December 31, 2017 | $ | 86 |
| 2017 Form 10-K | 67 |
Note 9 Debt, Credit Facilities and Commitments and Contingencies
The following table summarizes long-term debt:
| as of December 31 (dollars in millions) | Effective interest rate in 2017(a) | 2017 | Effective interest rate in 2016(a) | 2016 | |||||||||
| Senior notes issued in 2012 | |||||||||||||
| 2.00% notes due 2018 | 2.15 | % | 1,000 | 2.15 | % | 1,000 | |||||||
| 2.90% notes due 2022 | 2.97 | % | 3,100 | 2.97 | % | 3,100 | |||||||
| 4.40% notes due 2042 | 4.46 | % | 2,600 | 4.46 | % | 2,600 | |||||||
| Senior notes issued in 2015 | |||||||||||||
| 1.80% notes due 2018 | 1.92 | % | 3,000 | 1.92 | % | 3,000 | |||||||
| 2.50% notes due 2020 | 2.65 | % | 3,750 | 2.65 | % | 3,750 | |||||||
| 3.20% notes due 2022 | 3.28 | % | 1,000 | 3.28 | % | 1,000 | |||||||
| 3.60% notes due 2025 | 3.66 | % | 3,750 | 3.66 | % | 3,750 | |||||||
| 4.50% notes due 2035 | 4.58 | % | 2,500 | 4.58 | % | 2,500 | |||||||
| 4.70% notes due 2045 | 4.73 | % | 2,700 | 4.73 | % | 2,700 | |||||||
| Senior notes issued in 2016 | |||||||||||||
| 2.30% notes due 2021 | 2.40 | % | 1,800 | 2.40 | % | 1,800 | |||||||
| 2.85% notes due 2023 | 2.91 | % | 1,000 | 2.91 | % | 1,000 | |||||||
| 3.20% notes due 2026 | 3.28 | % | 2,000 | 3.28 | % | 2,000 | |||||||
| 4.30% notes due 2036 | 4.37 | % | 1,000 | 4.37 | % | 1,000 | |||||||
| 4.45% notes due 2046 | 4.50 | % | 2,000 | 4.50 | % | 2,000 | |||||||
| Senior Euro notes issued in 2016 | |||||||||||||
| 0.38% notes due 2019 (€1,400 principal) | 0.55 | % | 1,673 | 0.55 | % | 1,464 | |||||||
| 1.38% notes due 2024 (€1,450 principal) | 1.46 | % | 1,733 | 1.46 | % | 1,516 | |||||||
| 2.13% notes due 2028 (€750 principal) | 2.18 | % | 896 | 2.18 | % | 784 | |||||||
| Term loan facilities | |||||||||||||
| Floating rate notes due 2018 | 2.26 | % | 2,000 | 1.64 | % | 2,000 | |||||||
| Other | 110 | 113 | |||||||||||
| Fair value hedges | (401 | ) | (338 | ) | |||||||||
| Unamortized bond discounts | (97 | ) | (110 | ) | |||||||||
| Unamortized deferred financing costs | (146 | ) | (164 | ) | |||||||||
| Total long-term debt and lease obligations | 36,968 | 36,465 | |||||||||||
| Current portion | 6,015 | 25 | |||||||||||
| Noncurrent portion | $ | 30,953 | $ | 36,440 |
| (a) | Excludes the effect of any related interest rate swaps. |
In November 2016, the company issued €3.6 billion aggregate principal amount of unsecured senior Euro notes. These senior notes rank equally with all other unsecured and unsubordinated indebtedness of the company. AbbVie may redeem the senior notes prior to maturity at a redemption price equal to the principal amount of the senior notes redeemed plus a make-whole premium. AbbVie may redeem the senior notes at par between one and three months prior to maturity. In connection with the offering, debt issuance costs totaled $17 million and debt discounts incurred totaled $9 million and are being amortized over the respective terms of the senior notes to interest expense, net in the consolidated statements of earnings. 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. As a result of this redemption, the company incurred a charge of $39 million ($25 million after tax) related to the make-whole premium, write-off of unamortized debt issuance costs and other expenses. The charge was recorded in interest expense, net in the consolidated statement of earnings.
| 68 | 2017 Form 10-K |
In May 2016, the company issued $7.8 billion aggregate principal amount of unsecured senior notes. These senior notes rank equally with all other unsecured and unsubordinated indebtedness of the company. AbbVie may redeem the senior notes prior to maturity at a redemption price equal to the principal amount of the senior notes redeemed plus a make-whole premium. AbbVie may redeem the senior notes at par between one and six months prior to maturity. In connection with the offering, debt issuance costs totaled $52 million and debt discounts incurred totaled $29 million and are being amortized over the respective terms of the senior notes to interest expense, net in the consolidated statements of earnings. Of the $7.7 billion net proceeds, $2.0 billion was used to repay the company’s outstanding term loan that was due to mature in November 2016, approximately $1.9 billion was used to finance the acquisition of Stemcentrx and approximately $3.8 billion was used to finance an ASR with a third party financial institution. See Note 5 for additional information related to the acquisition of Stemcentrx and Note 12 for additional information related to the ASR.
In September 2015, AbbVie entered into a $2.0 billion three-year term loan credit agreement and a $2.0 billion 364-day term loan credit agreement (collectively, the term loan facilities). In November 2015, AbbVie drew on these term loan facilities and used the proceeds to refinance its $4.0 billion of senior notes that matured in November 2015. In connection with the May 2016 unsecured senior notes issuance, AbbVie repaid the 364-day term loan credit agreement. The borrowings under the term loan facilities bear interest at variable rates which are adjusted based on AbbVie's public debt ratings.
In May 2015, the company issued $16.7 billion aggregate principal amount of unsecured senior notes. The senior notes rank equally with all other unsecured and unsubordinated indebtedness of the company. AbbVie may redeem the senior notes prior to maturity at a redemption price equal to the principal amount of the senior notes redeemed plus a make-whole premium and, except for the 1.80% notes due 2018, AbbVie may redeem the senior notes at par between one and six months prior to maturity. Debt issuance costs incurred in connection with the offering totaled $93 million and are being amortized over the respective terms of the senior notes to interest expense, net in the consolidated statements of earnings. Approximately $11.5 billion of the net proceeds were used to finance the acquisition of Pharmacyclics and approximately $5.0 billion of the net proceeds were used to finance an ASR with a third party financial institution. See Note 5 for additional information related to the acquisition of Pharmacyclics and Note 12 for additional information related to the ASR.
In March 2015, AbbVie entered into an $18.0 billion bridge loan in support of the then planned acquisition of Pharmacyclics. No amounts were drawn under the bridge loan, which was terminated as a result of the company's May 2015 senior notes issuance. Interest expense, net in 2015 included $86 million of costs related to the bridge loan.
AbbVie has outstanding $6.7 billion aggregate principal amount of unsecured senior notes which were issued in 2012. AbbVie may redeem all of the senior notes of each series, at any time, or some of the senior notes of each series, from time to time, at a redemption price equal to the principal amount of the senior notes redeemed plus a make-whole premium.
At December 31, 2017, the company was in compliance with its senior note covenants and term loan covenants.
Short-Term Borrowings
Short-term borrowings included commercial paper borrowings of $400 million at December 31, 2017 and $377 million at December 31, 2016. The weighted-average interest rate on commercial paper borrowings was 1.3% in 2017, 0.6% in 2016 and 0.3% in 2015.
In October 2014, AbbVie entered into 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 AbbVie's revolving credit facilities were insignificant in 2017, 2016 and 2015. No amounts were outstanding under the credit facility as of December 31, 2017 and December 31, 2016.
| 2017 Form 10-K | 69 |
Maturities of Long-Term Debt and Capital Lease Obligations
The following table summarizes AbbVie's future minimum lease payments under non-cancelable operating leases, debt maturities and future minimum lease payments for capital lease obligations as of December 31, 2017:
| as of and for the years ending December 31 (in millions) | Operating leases | Debt maturities and capital leases | |||||
| 2018 | $ | 143 | $ | 6,026 | |||
| 2019 | 126 | 1,698 | |||||
| 2020 | 109 | 3,771 | |||||
| 2021 | 85 | 1,836 | |||||
| 2022 | 66 | 4,102 | |||||
| Thereafter | 428 | 20,179 | |||||
| Total obligations and commitments | 957 | 37,612 | |||||
| Fair value hedges, unamortized bond discounts and deferred financing costs | (644 | ) | |||||
| Total long-term debt and lease obligations | $ | 957 | $ | 36,968 |
Lease expense was $169 million in 2017, $159 million in 2016 and $146 million in 2015. AbbVie's operating leases generally include renewal options and provide for the company to pay taxes, maintenance, insurance and other operating costs of the leased property. As of December 31, 2017, annual future minimum lease payments for capital lease obligations were insignificant.
Contingencies and Guarantees
In connection with the separation, AbbVie has indemnified Abbott for all liabilities resulting from the operation of AbbVie's business other than income tax liabilities with respect to periods prior to the distribution date and other liabilities as agreed to by AbbVie and Abbott. AbbVie has no material exposures to off-balance sheet arrangements and no special-purpose entities. In the ordinary course of business, AbbVie has periodically entered into third-party agreements, such as the assignment of product rights, which have resulted in AbbVie becoming secondarily liable for obligations for which AbbVie had previously been primarily liable. Based upon past experience, the likelihood of payments under these agreements is remote.
Note 10 Financial Instruments and Fair Value Measures
Risk Management Policy
The company is exposed to foreign currency exchange rate and interest rate risks related to its business operations. AbbVie's hedging policy attempts to manage these risks to an acceptable level based on the company's judgment of the appropriate trade-off between risk, opportunity and costs. The company uses derivative and nonderivative instruments to reduce its exposure to foreign currency exchange rates. AbbVie also periodically enters into interest rate swaps, in which the company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional amount. Derivative instruments are not used for trading purposes or to manage exposure to changes in interest rates for investment securities, and none of the company's outstanding derivative instruments contain credit risk related contingent features; collateral is generally not required.
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 $2.2 billion at December 31, 2017 and $2.2 billion at December 31, 2016, are designated as cash flow hedges and are recorded at fair value. The durations of these forward exchange contracts were generally less than eighteen months. Accumulated gains and losses as of December 31, 2017 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
| 70 | 2017 Form 10-K |
earnings and are generally offset by losses or gains on the foreign currency exposure being managed. These contracts had notional amounts totaling $7.7 billion at December 31, 2017 and $6.6 billion at December 31, 2016.
The company also uses foreign currency forward exchange contracts or foreign currency denominated debt to hedge its net investments in certain foreign subsidiaries and affiliates. In the fourth quarter of 2016, the company issued €3.6 billion aggregate principal amount of senior Euro notes and designated the principal amounts of this foreign denominated debt as net investment hedges. Concurrently, the company settled foreign currency forward exchange contracts with aggregate notional amounts of €3.5 billion that were designated as net investment hedges.
AbbVie is a party to interest rate hedge contracts designated as fair value hedges with notional amounts totaling $11.8 billion at December 31, 2017 and $11.8 billion at December 31, 2016. The effect of the hedge contracts is to change a fixed-rate interest obligation to a floating rate for that portion of the debt. AbbVie records the contracts at fair value and adjusts the carrying amount of the fixed-rate debt by an offsetting amount.
The following table summarizes the amounts and location of AbbVie's derivative instruments on the consolidated balance sheets:
| Fair value - Derivatives in asset position | Fair value - Derivatives in liability position | ||||||||||||||
| as of December 31 (in millions) | Balance sheet caption | 2017 | 2016 | Balance sheet caption | 2017 | 2016 | |||||||||
| Foreign currency forward exchange contracts | |||||||||||||||
| Designated as cash flow hedges | Prepaid expenses and other | $ | 1 | $ | 170 | Accounts payable and accrued liabilities | $ | 120 | $ | 5 | |||||
| Not designated as hedges | Prepaid expenses and other | 22 | 55 | Accounts payable and accrued liabilities | 29 | 33 | |||||||||
| Interest rate swaps designated as fair value hedges | Prepaid expenses and other | — | — | Accounts payable and accrued liabilities | 8 | — | |||||||||
| Interest rate swaps designated as fair value hedges | Other assets | — | — | Other long-term liabilities | 393 | 338 | |||||||||
| Total derivatives | $ | 23 | $ | 225 | $ | 550 | $ | 376 |
While certain derivatives are subject to netting arrangements with the company's counterparties, the company does not offset derivative assets and liabilities within the consolidated balance sheets.
The following table presents the pre-tax amounts of gains (losses) from derivative instruments recognized in other comprehensive loss:
| 2017 | 2016 | 2015 | ||||||||||||||||||||||||||||
| years ended December 31 (in millions) | Cash Flow Hedges | Net Investment Hedges | Total | Cash Flow Hedges | Net Investment Hedges | Total | Cash Flow Hedges | Net Investment Hedges | Total | |||||||||||||||||||||
| Foreign currency forward exchange contracts | $ | (250 | ) | $ | — | $ | (250 | ) | $ | 174 | $ | 118 | $ | 292 | $ | 122 | $ | — | $ | 122 |
The amount of hedge ineffectiveness was insignificant for all periods presented. Assuming market rates remain constant through contract maturities, the company expects to transfer pre-tax unrealized losses of $174 million into cost of products sold for foreign currency cash flow hedges during the next 12 months.
The company recognized, in other comprehensive loss, pre-tax losses of $537 million in 2017 and pre-tax gains of $101 million in 2016 related to non-derivative, foreign currency denominated debt designated as net investment hedges.
| 2017 Form 10-K | 71 |
The following table summarizes the pre-tax amounts and location of derivative instrument net gains (losses) recognized in the consolidated statements of earnings, including the effective portions of the net gains (losses) reclassified out of AOCI into net earnings. See Note 12 for the amount of net gains (losses) reclassified out of AOCI.
| years ended December 31 (in millions) | Statement of earnings caption | 2017 | 2016 | 2015 | ||||||||
| Foreign currency forward exchange contracts | ||||||||||||
| Designated as cash flow hedges | Cost of products sold | $ | 118 | $ | 20 | $ | 265 | |||||
| Not designated as hedges | Net foreign exchange loss | (96 | ) | 6 | (155 | ) | ||||||
| Non-designated treasury rate lock agreements | Other expense, net | — | (12 | ) | — | |||||||
| Interest rate swaps designated as fair value hedges | Interest expense, net | (63 | ) | (266 | ) | 108 | ||||||
| Total | $ | (41 | ) | $ | (252 | ) | $ | 218 |
The gain (loss) related to outstanding interest rate swaps designated as fair value hedges is recognized in interest expense, net and directly offsets the (loss) gain on the underlying hedged item, the fixed-rate debt, resulting in no net impact to interest expense, net for all periods presented.
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 that were carried at fair value on a recurring basis on the consolidated balance sheet as of December 31, 2017:
| Basis of fair value measurement | |||||||||||||||
| (in millions) | Total | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable Inputs (Level 3) | |||||||||||
| Assets | |||||||||||||||
| Cash and equivalents | $ | 9,303 | $ | 849 | $ | 8,454 | $ | — | |||||||
| Debt securities | 2,524 | — | 2,524 | — | |||||||||||
| Equity securities | 4 | 4 | — | — | |||||||||||
| Foreign currency contracts | 23 | — | 23 | — | |||||||||||
| Total assets | $ | 11,854 | $ | 853 | $ | 11,001 | $ | — | |||||||
| Liabilities | |||||||||||||||
| Interest rate hedges | $ | 401 | $ | — | $ | 401 | $ | — | |||||||
| Foreign currency contracts | 149 | — | 149 | — | |||||||||||
| Contingent consideration | 4,534 | — | — | 4,534 | |||||||||||
| Total liabilities | $ | 5,084 | $ | — | $ | 550 | $ | 4,534 |
| 72 | 2017 Form 10-K |
The following table summarizes the bases used to measure certain assets and liabilities that were carried at fair value on a recurring basis on the consolidated balance sheet as of December 31, 2016:
| Basis of fair value measurement | |||||||||||||||
| (in millions) | Total | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable Inputs (Level 3) | |||||||||||
| Assets | |||||||||||||||
| Cash and equivalents | $ | 5,100 | $ | 1,191 | $ | 3,909 | $ | — | |||||||
| Time deposits | 1,014 | — | 1,014 | — | |||||||||||
| Debt securities | 1,974 | — | 1,974 | — | |||||||||||
| Equity securities | 76 | 76 | — | — | |||||||||||
| Foreign currency contracts | 225 | — | 225 | — | |||||||||||
| Total assets | $ | 8,389 | $ | 1,267 | $ | 7,122 | $ | — | |||||||
| Liabilities | |||||||||||||||
| Interest rate hedges | $ | 338 | $ | — | $ | 338 | $ | — | |||||||
| Foreign currency contracts | 38 | — | 38 | — | |||||||||||
| Contingent consideration | 4,213 | — | — | 4,213 | |||||||||||
| Total liabilities | $ | 4,589 | $ | — | $ | 376 | $ | 4,213 |
The fair values of time deposits approximate their amortized cost due to the short maturities of these instruments. The fair values of available-for-sale debt securities were determined based on prices obtained from commercial pricing services. Available-for-sale equity securities consists of investments for which the fair values were determined by using the published market price per unit multiplied by the number of units held, without consideration of transaction costs. The derivatives entered into by the company were valued using publicized spot curves for interest rate hedges and publicized forward curves for foreign currency contracts. The fair value measurements of the contingent consideration liabilities were determined based on significant unobservable inputs, including the discount rate, estimated probabilities and timing of achieving specified development, regulatory and commercial milestones and the estimated amount of future sales of the acquired products still in development. Changes to the fair value of the contingent consideration liabilities can result from changes to one or a number of inputs, including discount rates, the probabilities of achieving the milestones, the time required to achieve the milestones and estimated future sales. Significant judgment is employed in determining the appropriateness of these inputs. Changes to the inputs described above could have a material impact on the company's financial position and results of operations in any given period. At 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.
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:
| years ended December 31 (in millions) | 2017 | 2016 | ||||||
| Beginning balance | $ | 4,213 | $ | — | ||||
| Additions (See Note 5) | — | 3,985 | ||||||
| Change in fair value recognized in net earnings | 626 | 228 | ||||||
| Milestone payments | (305 | ) | — | |||||
| Ending balance | $ | 4,534 | $ | 4,213 |
The change in fair value recognized in net earnings was recorded in other expense, net in the consolidated statements of earnings in 2017 and 2016.
| 2017 Form 10-K | 73 |
In addition to the financial instruments that the company carries at fair value on the consolidated balance sheets, certain financial instruments are carried at historical cost or some basis other than fair value. The book values, approximate fair values and bases used to measure the approximate fair values of certain financial instruments as of December 31, 2017 are shown in the table below:
| Basis of fair value measurement | ||||||||||||||||||
| (in millions) | Book Value | Approximate fair values | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable Inputs (Level 3) | |||||||||||||
| Assets | ||||||||||||||||||
| Investments | $ | 48 | $ | 48 | $ | — | $ | — | $ | 48 | ||||||||
| Total assets | $ | 48 | $ | 48 | $ | — | $ | — | $ | 48 | ||||||||
| Liabilities | ||||||||||||||||||
| Short-term borrowings | $ | 400 | $ | 400 | $ | — | $ | 400 | $ | — | ||||||||
| Current portion of long-term debt and lease obligations, excluding fair value hedges | 6,023 | 6,034 | 4,004 | 2,030 | — | |||||||||||||
| Long-term debt and lease obligations, excluding fair value hedges | 31,346 | 32,846 | 32,763 | 83 | — | |||||||||||||
| Total liabilities | $ | 37,769 | $ | 39,280 | $ | 36,767 | $ | 2,513 | $ | — |
The book values, approximate fair values and bases used to measure the approximate fair values of certain financial instruments as of December 31, 2016 are shown in the table below:
| Basis of fair value measurement | ||||||||||||||||||
| (in millions) | Book Value | Approximate fair values | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable Inputs (Level 3) | |||||||||||||
| Assets | ||||||||||||||||||
| Investments | $ | 42 | $ | 42 | $ | — | $ | 5 | $ | 37 | ||||||||
| Total assets | $ | 42 | $ | 42 | $ | — | $ | 5 | $ | 37 | ||||||||
| Liabilities | ||||||||||||||||||
| Short-term borrowings | $ | 377 | $ | 377 | $ | — | $ | 377 | $ | — | ||||||||
| Current portion of long-term debt and lease obligations, excluding fair value hedges | 25 | 25 | — | 25 | — | |||||||||||||
| Long-term debt and lease obligations, excluding fair value hedges | 36,778 | 36,664 | 34,589 | 2,075 | — | |||||||||||||
| Total liabilities | $ | 37,180 | $ | 37,066 | $ | 34,589 | $ | 2,477 | $ | — |
Investments primarily consist of cost method investments, for which the company takes into consideration recent transactions and financial information of the investee, which represents a Level 3 basis of fair value measurement. The fair values of short-term borrowings approximate the carrying values due to the short maturities of these instruments.
The fair values of long-term debt, excluding fair value hedges and the term loans, were determined by using the published market price for the debt instruments, without consideration of transaction costs, which represents a Level 1 basis of fair value measurement. The fair values of the term loans were determined based on a discounted cash flow analysis using quoted market rates, which represents a Level 2 basis of fair value measurement. The counterparties to financial instruments consist of select major international financial institutions.
| 74 | 2017 Form 10-K |
Available-for-sale Securities
Substantially all of the company’s investments in debt and equity securities were classified as available-for-sale. Debt securities classified as short-term were $482 million as of December 31, 2017 and $309 million as of December 31, 2016. Long-term debt securities mature primarily within five years. Estimated fair values of available-for-sale securities were based on prices obtained from commercial pricing services.
The following table summarizes available-for-sale securities by type as of December 31, 2017:
| Amortized Cost | Gross unrealized | Fair Value | |||||||||||||
| (in millions) | Gains | Losses | |||||||||||||
| Asset backed securities | $ | 930 | $ | 1 | $ | (3 | ) | $ | 928 | ||||||
| Corporate debt securities | 1,451 | 4 | (2 | ) | 1,453 | ||||||||||
| Other debt securities | 144 | — | (1 | ) | 143 | ||||||||||
| Equity securities | 4 | 2 | (2 | ) | 4 | ||||||||||
| Total | $ | 2,529 | $ | 7 | $ | (8 | ) | $ | 2,528 |
The following table summarizes available-for-sale securities by type as of December 31, 2016:
| Amortized Cost | Gross unrealized | Fair Value | |||||||||||||
| (in millions) | Gains | Losses | |||||||||||||
| Asset backed securities | $ | 891 | $ | 1 | $ | (4 | ) | $ | 888 | ||||||
| Corporate debt securities | 961 | 1 | (2 | ) | 960 | ||||||||||
| Other debt securities | 127 | — | (1 | ) | 126 | ||||||||||
| Equity securities | 18 | 60 | (2 | ) | 76 | ||||||||||
| Total | $ | 1,997 | $ | 62 | $ | (9 | ) | $ | 2,050 |
AbbVie had no other-than-temporary impairments as of December 31, 2017. Net realized gains were $90 million in 2017. Net realized gains in 2016 and 2015 were insignificant.
Concentrations of Risk
The company invests excess cash in time deposits, money market funds and debt securities to diversify the concentration of cash among different financial institutions. The company has established credit exposure limits and monitors concentrations of credit risk associated with financial institution deposits.
The functional currency of the company's Venezuela operations is the U.S. dollar due to the hyperinflationary status of the Venezuelan economy. During the first quarter of 2016, in consideration of declining economic conditions in Venezuela and a decline in transactions settled at the official rate, AbbVie determined that its net monetary assets denominated in the Venezuelan bolivar (VEF) were no longer expected to be settled at the official rate of 10 VEF per U.S. dollar, but rather at the Divisa Complementaria (DICOM) rate. Therefore, during the first quarter of 2016, AbbVie recorded a charge of $298 million to net foreign exchange loss to revalue its bolivar-denominated net monetary assets using the DICOM rate then in effect of approximately 270 VEF per U.S. dollar. As of December 31, 2017 and 2016, AbbVie’s net monetary assets in Venezuela were insignificant.
AbbVie continues to do business with foreign governments in certain countries, including Greece, Portugal, Italy and Spain, which have historically experienced challenges in credit and economic conditions. Substantially all of AbbVie’s trade receivables in Greece, Portugal, Italy and Spain are with government health systems. Outstanding governmental receivables in these countries, net of allowances for doubtful accounts, totaled $255 million as of December 31, 2017 and $244 million as of December 31, 2016. The company also continues to do business with foreign governments in certain oil-exporting countries that have 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 at 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.
| 2017 Form 10-K | 75 |
Of total net accounts receivable, three U.S. wholesalers accounted for 56% as of December 31, 2017 and 51% as of December 31, 2016, and substantially all of AbbVie's net revenues in the United States were to these three wholesalers.
HUMIRA (adalimumab) is AbbVie's single largest product and accounted for approximately 65% of AbbVie's total net revenues in 2017, 63% in 2016 and 61% in 2015.
Note 11 Post-Employment Benefits
AbbVie sponsors various pension and other post-employment benefit plans, including defined benefit, defined contribution and termination indemnity plans, which cover most employees worldwide. In addition, AbbVie provides medical benefits, primarily to eligible retirees in the United States and Puerto Rico, through other post-retirement benefit plans. Net obligations for these plans have been reflected on the consolidated balance sheets as of December 31, 2017 and 2016.
AbbVie's principal domestic defined benefit plan is the AbbVie Pension Plan. AbbVie made voluntary contributions of $150 million in 2017, 2016 and 2015 to this plan. In 2018, AbbVie plans to make voluntary contributions to its various defined benefit plans in excess of $750 million.
The following table summarizes benefit plan information for the global AbbVie-sponsored defined benefit and other post-employment plans:
| Defined benefit plans | Other post-employment plans | ||||||||||||||
| as of and for the years ended December 31 (in millions) | 2017 | 2016 | 2017 | 2016 | |||||||||||
| Projected benefit obligations | |||||||||||||||
| Beginning of period | $ | 5,829 | $ | 5,387 | $ | 627 | $ | 557 | |||||||
| Service cost | 236 | 210 | 26 | 25 | |||||||||||
| Interest cost | 204 | 201 | 24 | 24 | |||||||||||
| Employee contributions | 2 | 1 | — | — | |||||||||||
| Actuarial loss | 714 | 313 | 149 | 33 | |||||||||||
| Benefits paid | (173 | ) | (163 | ) | (15 | ) | (12 | ) | |||||||
| Other, primarily foreign currency translation adjustments | 173 | (120 | ) | 2 | — | ||||||||||
| End of period | 6,985 | 5,829 | 813 | 627 | |||||||||||
| Fair value of plan assets | |||||||||||||||
| Beginning of period | 4,572 | 4,174 | — | — | |||||||||||
| Actual return on plan assets | 684 | 383 | — | — | |||||||||||
| Company contributions | 246 | 273 | 15 | 12 | |||||||||||
| Employee contributions | 2 | 1 | — | — | |||||||||||
| Benefits paid | (173 | ) | (163 | ) | (15 | ) | (12 | ) | |||||||
| Other, primarily foreign currency translation adjustments | 68 | (96 | ) | — | — | ||||||||||
| End of period | 5,399 | 4,572 | — | — | |||||||||||
| Funded status, end of period | $ | (1,586 | ) | $ | (1,257 | ) | $ | (813 | ) | $ | (627 | ) | |||
| Amounts recognized on the consolidated balance sheets | |||||||||||||||
| Other assets | $ | 388 | $ | 240 | $ | — | $ | — | |||||||
| Accounts payable and accrued liabilities | (32 | ) | (25 | ) | (15 | ) | (14 | ) | |||||||
| Other long-term liabilities | (1,942 | ) | (1,472 | ) | (798 | ) | (613 | ) | |||||||
| Net obligation | $ | (1,586 | ) | $ | (1,257 | ) | $ | (813 | ) | $ | (627 | ) | |||
| Actuarial loss, net | $ | 2,471 | $ | 2,118 | $ | 320 | $ | 179 | |||||||
| Prior service cost (credit) | 12 | 14 | (29 | ) | (37 | ) | |||||||||
| Accumulated other comprehensive loss | $ | 2,483 | $ | 2,132 | $ | 291 | $ | 142 |
| 76 | 2017 Form 10-K |
The projected benefit obligations (PBO) in the table above included $2.0 billion at December 31, 2017 and $1.7 billion at December 31, 2016, related to international defined benefit plans.
For plans reflected in the table above, the accumulated benefit obligations (ABO) were $6.3 billion at December 31, 2017 and $5.3 billion at December 31, 2016. For those plans reflected in the table above in which the ABO exceeded plan assets at December 31, 2017, the ABO was $3.8 billion, the PBO was $4.4 billion and aggregate plan assets were $2.5 billion.
Amounts Recognized in Other Comprehensive Loss
The following table summarizes the pre-tax gains and losses included in other comprehensive loss:
| years ended December 31 (in millions) | 2017 | 2016 | 2015 | ||||||||
| Defined benefit plans | |||||||||||
| Actuarial loss (gain) | $ | 412 | $ | 284 | $ | (117 | ) | ||||
| Amortization of actuarial loss and prior service cost | (107 | ) | (85 | ) | (127 | ) | |||||
| Foreign exchange gain (loss) | 46 | (22 | ) | (37 | ) | ||||||
| Total pre-tax loss (gain) recognized in other comprehensive loss | $ | 351 | $ | 177 | $ | (281 | ) | ||||
| Other post-employment plans | |||||||||||
| Actuarial loss (gain) | $ | 149 | $ | 33 | $ | (17 | ) | ||||
| Amortization of actuarial loss and prior service cost (credit) | — | — | (2 | ) | |||||||
| Total pre-tax loss (gain) recognized in other comprehensive loss | $ | 149 | $ | 33 | $ | (19 | ) |
The pre-tax amount of actuarial loss and prior service cost included in AOCI at December 31, 2017 that is expected to be recognized in net periodic benefit cost in 2018 is $149 million for defined benefit plans and $14 million for other post-employment plans.
Net Periodic Benefit Cost
| years ended December 31 (in millions) | 2017 | 2016 | 2015 | ||||||||
| Defined benefit plans | |||||||||||
| Service cost | $ | 236 | $ | 210 | $ | 227 | |||||
| Interest cost | 204 | 201 | 219 | ||||||||
| Expected return on plan assets | (382 | ) | (354 | ) | (325 | ) | |||||
| Amortization of actuarial loss and prior service cost | 107 | 85 | 127 | ||||||||
| Net periodic benefit cost | $ | 165 | $ | 142 | $ | 248 | |||||
| Other post-employment plans | |||||||||||
| Service cost | $ | 26 | $ | 25 | $ | 25 | |||||
| Interest cost | 24 | 24 | 23 | ||||||||
| Amortization of actuarial loss and prior service cost | — | — | 2 | ||||||||
| Net periodic benefit cost | $ | 50 | $ | 49 | $ | 50 |
Weighted-Average Assumptions Used in Determining Benefit Obligations at the Measurement Date
| as of December 31 | 2017 | 2016 | |||
| Defined benefit plans | |||||
| Discount rate | 3.4 | % | 3.9 | % | |
| Rate of compensation increases | 4.5 | % | 4.4 | % | |
| Other post-employment plans | |||||
| Discount rate | 3.9 | % | 4.7 | % |
| 2017 Form 10-K | 77 |
The assumptions used in calculating the December 31, 2017 measurement date benefit obligations will be used in the calculation of net periodic benefit cost in 2018.
Weighted-Average Assumptions Used in Determining Net Periodic Benefit Cost
| years ended December 31 | 2017 | 2016 | 2015 | |||||
| Defined benefit plans | ||||||||
| Discount rate for determining service cost | 3.9 | % | 4.4 | % | 3.9 | % | ||
| Discount rate for determining interest cost | 3.7 | % | 4.0 | % | 3.9 | % | ||
| Expected long-term rate of return on plan assets | 7.8 | % | 7.9 | % | 7.8 | % | ||
| Expected rate of change in compensation | 4.4 | % | 4.4 | % | 4.4 | % | ||
| Other post-employment plans | ||||||||
| Discount rate for determining service cost | 4.9 | % | 5.1 | % | 4.5 | % | ||
| Discount rate for determining interest cost | 4.1 | % | 4.3 | % | 4.5 | % |
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.
For the December 31, 2017 post-retirement health care obligations remeasurement, the company assumed a 7.7% pre-65 (9.5% post-65) annual rate of increase in the per capita cost of covered health care benefits. The rate was assumed to decrease gradually to 4.5% in 2050 and remain at that level thereafter. For purposes of measuring the 2017 post-retirement health care costs, the company assumed a 6.8% pre-65 (7.8% post-65) annual rate of increase in the per capita cost of covered health care benefits. The rate was assumed to decrease gradually to 4.5% for 2064 and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. As of December 31, 2017, a one percentage point change in assumed health care cost trend rates would have the following effects:
| One percentage point | |||||||
| year ended December 31, 2017 (in millions) (brackets denote a reduction) | Increase | Decrease | |||||
| Service cost and interest cost | $ | 11 | $ | (9 | ) | ||
| Projected benefit obligation | 183 | (140 | ) |
| 78 | 2017 Form 10-K |
Defined Benefit Pension Plan Assets
| Basis of fair value measurement | |||||||||||||||
| as of December 31 (in millions) | 2017 | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||
| Equities | |||||||||||||||
| U.S. large cap(a) | $ | 597 | $ | 597 | $ | — | $ | — | |||||||
| U.S. mid cap(b) | 74 | 74 | — | — | |||||||||||
| International(c) | 63 | 63 | — | — | |||||||||||
| Fixed income securities | |||||||||||||||
| U.S. government securities(d) | 110 | 6 | 104 | — | |||||||||||
| Corporate debt instruments(d) | 238 | 132 | 106 | — | |||||||||||
| Non-U.S. government securities(d) | 59 | 25 | 34 | — | |||||||||||
| Other(d) | 265 | 260 | 5 | — | |||||||||||
| Absolute return funds(e) | 262 | 4 | 258 | — | |||||||||||
| Real assets | 7 | 7 | — | — | |||||||||||
| Other(f) | 40 | 40 | — | — | |||||||||||
| Total | $ | 1,715 | $ | 1,208 | $ | 507 | $ | — | |||||||
| Total assets measured at NAV | 3,684 | ||||||||||||||
| Fair value of plan assets | $ | 5,399 |
| Basis of fair value measurement | |||||||||||||||
| as of December 31 (in millions) | 2016 | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||
| Equities | |||||||||||||||
| U.S. large cap(a) | $ | 519 | $ | 519 | $ | — | $ | — | |||||||
| U.S. mid cap(b) | 63 | 63 | — | — | |||||||||||
| International(c) | 97 | 97 | — | — | |||||||||||
| Fixed income securities | |||||||||||||||
| U.S. government securities(d) | 94 | — | 94 | — | |||||||||||
| Corporate debt instruments(d) | 243 | 162 | 81 | — | |||||||||||
| Non-U.S. government securities(d) | 32 | 30 | 2 | ||||||||||||
| Other(d) | 184 | 179 | 5 | — | |||||||||||
| Absolute return funds(e) | 228 | 3 | 225 | — | |||||||||||
| Real assets | 31 | 31 | — | — | |||||||||||
| Other(f) | 61 | 61 | — | — | |||||||||||
| Total | $ | 1,552 | $ | 1,145 | $ | 407 | $ | — | |||||||
| Total assets measured at NAV | 3,020 | ||||||||||||||
| Fair value of plan assets | $ | 4,572 |
| (a) | A mix of index funds and actively managed equity accounts that are benchmarked to various large cap indices. |
| (b) | A mix of index funds and actively managed equity accounts that are benchmarked to various mid cap indices. |
| 2017 Form 10-K | 79 |
| (c) | A mix of index funds and actively managed equity accounts that are benchmarked to various non-U.S. equity indices in both developed and emerging markets. |
| (d) | Securities held by actively managed accounts, index funds and mutual funds. |
| (e) | Primarily funds having global mandates with the flexibility to allocate capital broadly across a wide range of asset classes and strategies, including but not limited to equities, fixed income, commodities, financial futures, currencies and other securities, with objectives to outperform agreed upon benchmarks of specific return and volatility targets. |
| (f) | Investments in cash and cash equivalents. |
Equities and registered investment companies having quoted prices are valued at the published market prices. Fixed income securities that are valued using significant other observable inputs are quoted at prices obtained from independent financial service industry-recognized vendors. Investments held in pooled investment funds, common collective trusts or limited partnerships are valued at the net asset value (NAV) practical expedient to estimate fair value. The NAV is provided by the fund administrator and is based on the value of the underlying assets owned by the fund minus its liabilities.
The investment mix of equity securities, fixed income and other asset allocation strategies is based upon achieving a desired return, balancing higher return, more volatile equity securities and lower return, less volatile fixed income securities. Investment allocations are established for each plan and are generally made across a range of markets, industry sectors, capitalization sizes and in the case of fixed income securities, maturities and credit quality. The target investment allocations for the AbbVie Pension Plan is 35% in equity securities, 20% in fixed income securities and 45% in asset allocation strategies and other holdings. There are no known significant concentrations of risk in the plan assets of the AbbVie Pension Plan or of any other plans.
The expected return on plan assets assumption for each plan is based on management's expectations of long-term average rates of return to be achieved by the underlying investment portfolio. In establishing this assumption, management considers historical and expected returns for the asset classes in which the plans are invested, as well as current economic and capital market conditions.
Expected Benefit Payments
The following table summarizes total benefit payments expected to be paid to plan participants including payments funded from both plan and company assets:
| years ending December 31 (in millions) | Defined benefit plans | Other post-employment plans | |||||
| 2018 | $ | 192 | $ | 16 | |||
| 2019 | 206 | 19 | |||||
| 2020 | 218 | 20 | |||||
| 2021 | 232 | 22 | |||||
| 2022 | 246 | 24 | |||||
| 2023 to 2027 | 1,474 | 153 |
Defined Contribution Plan
AbbVie's principal defined contribution plan is the AbbVie Savings Plan. AbbVie recorded expense of $82 million in 2017, $75 million in 2016 and $73 million in 2015 related to this plan. AbbVie provides certain other post-employment benefits, primarily salary continuation arrangements, to qualifying employees and accrues for the related cost over the service lives of the employees.
| 80 | 2017 Form 10-K |
Note 12 Equity
Stock-Based Compensation
AbbVie grants stock-based awards to eligible employees pursuant to the AbbVie 2013 Incentive Stock Program (2013 ISP), which provides for several different forms of benefits, including nonqualified stock options, RSAs, RSUs and various performance-based awards. Under the 2013 ISP, 100 million shares of AbbVie common stock were reserved for issuance as awards to AbbVie employees. The 2013 ISP also facilitated the assumption of certain awards granted under Abbott’s incentive stock program, which were adjusted and converted into Abbott and AbbVie stock-based awards as a result of AbbVie's separation from Abbott.
AbbVie measures compensation expense for stock-based awards based on the grant date fair value of the awards and the estimated number of awards that are expected to vest. Forfeitures are estimated based on historical experience at the time of grant and are revised in subsequent periods if actual forfeitures differ from those estimates. Compensation cost for stock-based awards is amortized over the service period, which could be shorter than the vesting period if an employee is retirement eligible. Retirement eligible employees generally are those who are age 55 or older and have at least ten years of service.
Stock-based compensation expense is principally related to awards issued pursuant to the 2013 ISP and is summarized as follows:
| Years ended December 31, | |||||||||||
| (in millions) | 2017 | 2016 | 2015 | ||||||||
| Cost of products sold | $ | 23 | $ | 22 | $ | 21 | |||||
| Research and development | 159 | 193 | 111 | ||||||||
| Selling, general and administrative | 183 | 181 | 150 | ||||||||
| Pre-tax compensation expense | 365 | 396 | 282 | ||||||||
| Tax benefit | 73 | 104 | 89 | ||||||||
| After-tax compensation expense | $ | 292 | $ | 292 | $ | 193 |
Stock-based compensation expense for the year ended December 31, 2016 also included the post-combination impact related to Stemcentrx options. See Note 5 for additional information related to the Stemcentrx acquisition.
The realized excess tax benefits associated with stock-based compensation totaled $71 million in 2017, $55 million in 2016 and $61 million in 2015. Beginning in 2017, all excess tax benefits associated with stock-based awards are recognized in the statement of earnings when the awards vest or settle, rather than in stockholders' equity as a result of the adoption of a new accounting pronouncement. See Note 2 for additional information regarding the adoption of this new accounting pronouncement.
Stock Options
Stock options awarded pursuant to the 2013 ISP typically have a contractual term of 10 years and generally vest in one-third increments over a three-year period. The exercise price is equal to at least 100% of the market value on the date of grant. The fair value is determined using the Black-Scholes model. The weighted-average grant-date fair values of stock options granted were $9.80 in 2017, $9.29 in 2016 and $9.96 in 2015.
| 2017 Form 10-K | 81 |
The following table summarizes AbbVie stock option activity in 2017:
| (options in thousands, aggregate intrinsic value in millions) | Options | Weighted- average exercise price | Weighted- average remaining life (in years) | Aggregate intrinsic value | ||||||||
| Outstanding at December 31, 2016 | 15,962 | $ | 33.63 | 3.7 | $ | 463 | ||||||
| Granted | 1,241 | 61.36 | ||||||||||
| Exercised | (8,836 | ) | 30.06 | |||||||||
| Lapsed | (51 | ) | 32.58 | |||||||||
| Outstanding at December 31, 2017 | 8,316 | $ | 41.69 | 5.1 | $ | 458 | ||||||
| Exercisable at December 31, 2017 | 5,661 | $ | 35.51 | 3.6 | $ | 346 |
The total intrinsic value of options exercised was $371 million in 2017, $325 million in 2016 and $216 million in 2015. The total fair value of options vested during 2017 was $32 million. On June 1, 2016, AbbVie issued stock options for 1.1 million AbbVie shares to holders of unvested Stemcentrx options as a result of the conversion of such options in connection with the Stemcentrx acquisition. These options were fair-valued using a lattice valuation model. See Note 5 for additional information related to the Stemcentrx acquisition.
As of December 31, 2017, $14 million of unrecognized compensation cost related to stock options is expected to be recognized as expense over approximately the next two years.
RSAs, RSUs and Performance Shares
RSUs awarded to employees other than senior executives and other key employees pursuant to the 2013 ISP generally vest in one-third increments over a three year period. Recipients of these RSUs are entitled to receive dividend equivalents as dividends are declared and paid during the RSU vesting period.
The majority of the equity awards AbbVie grants to its senior executives and other key employees under the 2013 ISP are performance-based. Such awards granted before 2016 consisted of RSAs (or RSUs to the extent necessary for global employees) that generally vest in one-third increments over a three-to-five year period, with vesting contingent upon AbbVie achieving a minimum annual return on equity (ROE). Recipients are entitled to receive dividends (or dividend equivalents for RSUs) as dividends are declared and paid during the award vesting period.
In 2016, AbbVie redesigned certain aspects of its long-term incentive program. As a result, equity awards granted in 2016 and 2017 to senior executives and other key employees consisted of a combination of performance-vested RSUs and performance shares. The performance-vested RSUs have the potential to vest in one-third increments during a three-year performance period based on AbbVie’s ROE relative to a defined peer group of pharmaceutical, biotech and life sciences companies. The recipient may receive one share of AbbVie common stock for each vested award. The performance shares have the potential to vest over a three-year performance period and may be earned based on AbbVie’s EPS achievement and AbbVie’s total stockholder return (TSR) (a market condition) relative to a defined peer group of pharmaceutical, biotech and life sciences companies. Dividend equivalents on performance-vested RSUs and performance shares accrue during the performance period and are payable at vesting only to the extent that shares are earned.
The weighted-average grant-date fair value of RSAs, RSUs and performance shares generally is determined based on the number of shares/units granted and the quoted price of AbbVie’s common stock on the date of grant. The weighted-average grant-date fair values of performance shares with a TSR market condition are determined using the Monte Carlo simulation model.
| 82 | 2017 Form 10-K |
The following table summarizes AbbVie RSA, RSU and performance share activity for 2017:
| (share units in thousands) | Share units | Weighted-average grant date fair value | ||||
| Outstanding at December 31, 2016 | 10,715 | $ | 56.47 | |||
| Granted | 6,109 | 61.89 | ||||
| Vested | (5,532 | ) | 56.34 | |||
| Forfeited | (610 | ) | 59.50 | |||
| Outstanding at December 31, 2017 | 10,682 | $ | 59.47 |
The fair market value of RSAs, RSUs and performance shares (as applicable) vested was $348 million in 2017, $362 million in 2016 and $335 million in 2015.
As of December 31, 2017, $250 million of unrecognized compensation cost related to RSAs, RSUs and performance shares is expected to be recognized as expense over approximately the next two years.
Cash Dividends
The following table summarizes quarterly cash dividends declared for the years ended December 31, 2017 and 2016:
| 2017 | 2016 | |||||||||
| Date Declared | Payment Date | Dividend Per Share | Date Declared | Payment Date | Dividend Per Share | |||||
| 10/27/17 | 02/15/18 | $0.71 | 10/28/16 | 02/15/17 | $0.64 | |||||
| 09/08/17 | 11/15/17 | $0.64 | 09/09/16 | 11/15/16 | $0.57 | |||||
| 06/22/17 | 08/15/17 | $0.64 | 06/16/16 | 08/15/16 | $0.57 | |||||
| 02/16/17 | 05/15/17 | $0.64 | 02/18/16 | 05/16/16 | $0.57 |
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.
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's board of directors authorized increases to its existing stock repurchase program of $4.0 billion in April 2016 in anticipation of executing an ASR in connection with the Stemcentrx acquisition and of $5.0 billion in March 2015 in anticipation of executing an ASR in connection with the Pharmacyclics acquisition. The following table shows details about AbbVie’s ASR transactions:
| (shares in millions, repurchase amounts in billions) | ||||||
| Execution date | Purchase amount | Initial delivery of shares | Final delivery of shares | Related acquisition | ||
| 05/26/15 | $5.0 | 68.1 | 5.0 | Pharmacyclics | ||
| 06/01/16 | 3.8 | 54.4 | 5.4 | Stemcentrx |
On February 16, 2017, AbbVie's board of directors authorized a $5.0 billion increase to AbbVie's existing stock repurchase program. AbbVie's remaining share 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.
| 2017 Form 10-K | 83 |
In addition to the ASRs, AbbVie repurchased on the open market approximately 13 million shares for $1.0 billion in 2017, 34 million shares for $2.1 billion in 2016 and 46 million shares for $2.8 billion in 2015.
Accumulated Other Comprehensive Loss
The following table summarizes the changes in each component of AOCI, net of tax, for 2017, 2016 and 2015:
| (in millions) (brackets denote losses) | 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, 2014 | $ | (603 | ) | $ | — | $ | (1,608 | ) | $ | 3 | $ | 177 | $ | (2,031 | ) | ||||||||
| Other comprehensive income (loss) before reclassifications | (667 | ) | — | 147 | 48 | 122 | (350 | ) | |||||||||||||||
| Net losses (gains) reclassified from accumulated other comprehensive loss | — | — | 83 | (4 | ) | (259 | ) | (180 | ) | ||||||||||||||
| Net current-period other comprehensive income (loss) | (667 | ) | — | 230 | 44 | (137 | ) | (530 | ) | ||||||||||||||
| Balance as of December 31, 2015 | (1,270 | ) | — | (1,378 | ) | 47 | 40 | (2,561 | ) | ||||||||||||||
| Other comprehensive income (loss) before reclassifications | (165 | ) | 140 | (194 | ) | 7 | 160 | (52 | ) | ||||||||||||||
| Net losses (gains) reclassified from accumulated other comprehensive loss | — | — | 59 | (8 | ) | (24 | ) | 27 | |||||||||||||||
| Net current-period other comprehensive income (loss) | (165 | ) | 140 | (135 | ) | (1 | ) | 136 | (25 | ) | |||||||||||||
| Balance as of December 31, 2016 | (1,435 | ) | 140 | (1,513 | ) | 46 | 176 | (2,586 | ) | ||||||||||||||
| Other comprehensive income (loss) before reclassifications | 680 | (343 | ) | (480 | ) | 29 | (230 | ) | (344 | ) | |||||||||||||
| Net losses (gains) reclassified from accumulated other comprehensive loss | 316 | — | 74 | (75 | ) | (112 | ) | 203 | |||||||||||||||
| Net current-period other comprehensive income (loss) | 996 | (343 | ) | (406 | ) | (46 | ) | (342 | ) | (141 | ) | ||||||||||||
| Balance as of December 31, 2017 | $ | (439 | ) | $ | (203 | ) | $ | (1,919 | ) | $ | — | $ | (166 | ) | $ | (2,727 | ) |
In 2017, AbbVie reclassified $316 million of historical currency translation losses from AOCI related to the liquidation of certain foreign entities following the enactment of U.S. tax reform. These losses were included in net foreign exchange loss in the consolidated statement of earnings and had no related income tax impacts. Other comprehensive loss in 2017 also included foreign currency translation adjustments totaling a gain of $680 million, which was principally due to the impact of the strengthening of the Euro on the translation of the company’s Euro-denominated assets. Other comprehensive loss in 2016 included foreign currency translation adjustments totaling a loss of $165 million, which was principally due to the impact of the weakening of the Euro on the translation of the company’s Euro-denominated assets. Other comprehensive loss in 2015 included foreign currency translation adjustments totaling a loss of $667 million, which was principally driven by the impact of the weakening of the Euro on the translation of the company's Euro-denominated assets.
| 84 | 2017 Form 10-K |
The table below presents the impact on AbbVie's consolidated statements of earnings for significant amounts reclassified out of each component of accumulated other comprehensive loss:
| years ended December 31 (in millions) (brackets denote gains) | 2017 | 2016 | 2015 | ||||||||
| Pension and post-employment benefits | |||||||||||
| Amortization of actuarial losses and other(a) | $ | 107 | $ | 85 | $ | 129 | |||||
| Tax benefit | (33 | ) | (26 | ) | (46 | ) | |||||
| Total reclassifications, net of tax | $ | 74 | $ | 59 | $ | 83 | |||||
| Cash flow hedging activities | |||||||||||
| Losses (gains) on designated cash flow hedges(b) | $ | (118 | ) | $ | (20 | ) | $ | (265 | ) | ||
| Tax expense (benefit) | 6 | (4 | ) | 6 | |||||||
| Total reclassifications, net of tax | $ | (112 | ) | $ | (24 | ) | $ | (259 | ) |
| (a) | Amounts are included in the computation of net periodic benefit cost (see Note 11). |
| (b) | Amounts are included in cost of products sold (see Note 10). |
Other
In addition to common stock, AbbVie's authorized capital includes 200 million shares of preferred stock, par value $0.01. As of December 31, 2017, no shares of preferred stock were issued or outstanding.
Note 13 Income Taxes
Earnings Before Income Tax Expense
| years ended December 31 (in millions) | 2017 | 2016 | 2015 | ||||||||
| Domestic | $ | (2,678 | ) | $ | (1,651 | ) | $ | (1,038 | ) | ||
| Foreign | 10,405 | 9,535 | 7,683 | ||||||||
| Total earnings before income tax expense | $ | 7,727 | $ | 7,884 | $ | 6,645 |
Income Tax Expense
| years ended December 31 (in millions) | 2017 | 2016 | 2015 | ||||||||
| Current | |||||||||||
| Domestic | $ | 6,204 | $ | 2,229 | $ | 1,036 | |||||
| Foreign | 376 | 498 | 313 | ||||||||
| Total current taxes | $ | 6,580 | $ | 2,727 | $ | 1,349 | |||||
| Deferred | |||||||||||
| Domestic | $ | (4,898 | ) | $ | (792 | ) | $ | 141 | |||
| Foreign | 736 | (4 | ) | 11 | |||||||
| Total deferred taxes | $ | (4,162 | ) | $ | (796 | ) | $ | 152 | |||
| Total income tax expense | $ | 2,418 | $ | 1,931 | $ | 1,501 |
Impacts Related to U.S. Tax Reform
The Tax Cuts and Jobs Act (the “Act”) was signed into law in December 2017, resulting in significant changes to the U.S. corporate tax system. The Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on a mandatory deemed repatriation of earnings of certain foreign subsidiaries that were previously untaxed and creates new taxes on certain foreign sourced earnings. These changes are effective beginning in 2018.
| 2017 Form 10-K | 85 |
Prior to the enactment of the Act, the company did not provide deferred income taxes on undistributed earnings of foreign subsidiaries that were indefinitely reinvested for continued use in foreign operations. Due to the provision of the Act that requires a one-time deemed repatriation of earnings of foreign subsidiaries, the company no longer considers those earnings to be indefinitely reinvested. The transition tax expense on the one-time mandatory repatriation of previously untaxed earnings of foreign subsidiaries was $4.5 billion, generally payable in eight annual installments.
Additionally, the company remeasured certain deferred tax assets and liabilities based on tax rates at which they are expected to reverse in the future. The net tax benefit of U.S. tax reform from the remeasurement of deferred taxes related to the Act and foreign tax law changes was $3.6 billion.
Given the complexity of the Act and anticipated guidance from the U.S. Treasury about implementing the Act, the company’s analysis and accounting for the tax effects of the Act is preliminary. As a direct result of the Act, the company recorded $4.5 billion of transition tax expense, as well as $4.1 billion of net tax benefit for deferred tax remeasurement. Both of these amounts are provisional estimates, as the company has not fully completed its analysis and calculation of foreign earnings subject to the transition tax or its analysis of certain other aspects of the Act that could result in adjustments to the remeasurement of deferred tax balances. Upon completion of the analysis in 2018, these estimates may be adjusted through income tax expense in the consolidated statement of earnings.
Effective Tax Rate Reconciliation
| years ended December 31 | 2017 | 2016 | 2015 | |||||
| Statutory tax rate | 35.0 | % | 35.0 | % | 35.0 | % | ||
| Effect of foreign operations | (12.2 | ) | (10.3 | ) | (9.4 | ) | ||
| U.S. tax credits | (4.0 | ) | (4.4 | ) | (4.5 | ) | ||
| Impacts related to U.S. tax reform | 12.0 | — | — | |||||
| Tax law change related to foreign currency | — | 2.4 | — | |||||
| All other, net | 0.5 | 1.8 | 1.5 | |||||
| Effective tax rate | 31.3 | % | 24.5 | % | 22.6 | % |
The effective income tax rate fluctuates year to year due to the allocation of the company's taxable earnings among jurisdictions, as well as certain discrete factors and events in each year, including changes in tax law, acquisitions and collaborations. The effective income tax rates in 2017, 2016 and 2015 differed from the statutory tax rate principally due to changes in enacted tax rates and laws, 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, business development activities and the cost of repatriation decisions. The effective tax rates for these periods also reflected the benefit from U.S. tax credits principally related to research and development credits, the orphan drug tax credit and Puerto Rico excise tax credits. The Puerto Rico excise tax credits relate to legislation enacted by Puerto Rico that assesses an excise tax on certain products manufactured in Puerto Rico. The tax is levied on gross inventory purchases from entities in Puerto Rico and is included in cost of products sold in the consolidated statements of earnings. The majority of the tax is creditable for U.S. income tax purposes.
The effective income tax rate in 2017 included impacts related to U.S. tax reform. In addition, in 2017, the company recognized a net tax benefit of $91 million related to the resolution of various tax positions pertaining to prior years.
The effective income 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.
| 86 | 2017 Form 10-K |
Deferred Tax Assets and Liabilities
| as of December 31 (in millions) | 2017 | 2016 | |||||
| Deferred tax assets | |||||||
| Compensation and employee benefits | $ | 556 | $ | 718 | |||
| Accruals and reserves | 315 | 425 | |||||
| Chargebacks and rebates | 305 | 473 | |||||
| Deferred revenue | 219 | 391 | |||||
| Net operating losses and other credit carryforwards | 208 | 151 | |||||
| Other | 429 | 289 | |||||
| Total deferred tax assets | 2,032 | 2,447 | |||||
| Valuation allowances | (108 | ) | (76 | ) | |||
| Total net deferred tax assets | 1,924 | 2,371 | |||||
| Deferred tax liabilities | |||||||
| Excess of book basis over tax basis of intangible assets | (3,762 | ) | (5,487 | ) | |||
| Excess of book basis over tax basis in investments | (181 | ) | (3,367 | ) | |||
| Other | (203 | ) | (182 | ) | |||
| Total deferred tax liabilities | (4,146 | ) | (9,036 | ) | |||
| Net deferred tax liabilities | $ | (2,222 | ) | $ | (6,665 | ) |
The decreases in deferred tax assets and liabilities were primarily due to the enactment of the U.S. tax reform that reduced the U.S. federal corporate tax rate from 35% to 21% and created a territorial tax system, which will generally allow repatriation of future foreign sourced earnings without incurring additional U.S. taxes. The Act also created a minimum tax on certain foreign sourced earnings. The taxability of the foreign sourced earnings and the applicable tax rates are dependent on future events. While the company is still evaluating its accounting policy for the minimum tax on foreign sourced earnings, the provisional estimates of the tax effects of the Act were reported on the basis that the minimum tax will be recognized in tax expense in the year it is incurred as a period expense.
As of December 31, 2017, gross state net operating losses were $1.2 billion and tax credit carryforwards were $228 million. The state tax carryforwards expire between 2018 and 2038. As of December 31, 2017, foreign net operating loss carryforwards were $209 million. Foreign net operating loss carryforwards of $155 million expire between 2018 and 2027 and the remaining do not have an expiration period.
The company had valuation allowances of $108 million as of December 31, 2017 and $76 million as of December 31, 2016. These were principally related to state net operating losses and credit carryforwards that are not expected to be realized.
Current income taxes receivable were $2.1 billion as of December 31, 2017 and $347 million as of December 31, 2016 and were included in prepaid expenses and other on the consolidated balance sheets.
Unrecognized Tax Benefits
| years ended December 31 (in millions) | 2017 | 2016 | 2015 | ||||||||
| Beginning balance | $ | 1,168 | $ | 954 | $ | 421 | |||||
| Increase due to current year tax positions | 1,768 | 118 | 187 | ||||||||
| Increase due to prior year tax positions | 16 | 111 | 369 | ||||||||
| Decrease due to prior year tax positions | (2 | ) | (7 | ) | (15 | ) | |||||
| Settlements | (233 | ) | — | — | |||||||
| Lapse of statutes of limitations | (16 | ) | (8 | ) | (8 | ) | |||||
| Ending balance | $ | 2,701 | $ | 1,168 | $ | 954 |
| 2017 Form 10-K | 87 |
AbbVie and Abbott entered into a tax sharing agreement, effective on the date of separation, which provides that Abbott is liable for and has indemnified AbbVie against all income tax liabilities for periods prior to the separation. AbbVie will be responsible for unrecognized tax benefits and related interest and penalties for periods after separation or in instances where an existing entity was transferred to AbbVie upon separation.
If recognized, the net amount of potential tax benefits that would impact the company's effective tax rate is $2.6 billion in 2017 and $1.1 billion in 2016. Of the unrecognized tax benefits recorded in the table above as of December 31, 2017, AbbVie would be indemnified for approximately $85 million. The “Increases due to current year tax positions” in the table above includes amounts related to federal, state and international tax items, including a provisional estimate of the remeasurement of unrecognized tax benefits related to earnings of foreign subsidiaries following the enactment of U.S. tax reform in 2017. The "Increase due to prior year tax positions" in the table above includes amounts relating to federal, state and international items as well as prior positions acquired through business development activities during the year. Uncertain tax positions are generally included as a long-term liability on the consolidated balance sheets.
AbbVie recognizes interest and penalties related to income tax matters in income tax expense in the consolidated statements of earnings. AbbVie recognized gross income tax expense of $24 million in 2017, $35 million in 2016 and $13 million in 2015, for interest and penalties related to income tax matters. AbbVie had an accrual for the payment of gross interest and penalties of $120 million at December 31, 2017, $112 million at December 31, 2016 and $83 million at December 31, 2015.
The company is routinely audited by the tax authorities in significant jurisdictions and a number of audits are currently underway. It is reasonably possible during the next twelve months that uncertain tax positions may be settled, which could result in a decrease in the gross amount of unrecognized tax benefits. Due to the potential for resolution of federal, state and foreign examinations and the expiration of various statutes of limitation, the company's gross unrecognized tax benefits balance may change within the next twelve months up to $31 million. All significant federal, state, local and international matters have been concluded for years through 2008. The company believes adequate provision has been made for all income tax uncertainties.
Note 14 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 $445 million as of December 31, 2017 and approximately $225 million at December 31, 2016. 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 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.
| 88 | 2017 Form 10-K |
Lawsuits are pending against AbbVie and others generally alleging that the 2005 patent litigation settlement involving Niaspan entered into between Kos Pharmaceuticals, Inc. (a company acquired by Abbott in 2006 and presently a subsidiary of AbbVie) and a generic company violates federal and state antitrust laws and state unfair and deceptive trade practices and unjust enrichment laws. Plaintiffs generally seek monetary damages and/or injunctive relief and attorneys' fees. The lawsuits consist of four individual plaintiff lawsuits and two consolidated purported class actions: one brought by three named direct purchasers of Niaspan and the other brought by ten named end-payer purchasers of Niaspan. The cases are consolidated for pre-trial proceedings in the United States District Court for the Eastern District of Pennsylvania under the MDL Rules as In re: Niaspan Antitrust Litigation, MDL No. 2460. In October 2016, the State of California filed a lawsuit 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 September 2014, the FTC filed suit in the United States District Court for the Eastern District of Pennsylvania against AbbVie and others, alleging that the 2011 patent litigation with two generic companies regarding AndroGel was sham litigation and the patent litigation settlement with one of those generic companies violates federal antitrust laws. The FTC's complaint seeks monetary damages and injunctive relief. In May 2015, the court dismissed the FTC's claim regarding the patent litigation settlement.
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 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.
Product liability cases are pending 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 4,300 claims 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 210 claims are pending in various state courts. Plaintiffs generally seek compensatory and punitive damages. In July 2017, a jury in the United States District Court for the Northern District of Illinois reached a verdict in the first case to be tried. The jury found for AbbVie on the plaintiff's strict liability and negligence claims and for the plaintiff on the plaintiff's fraud claim. The jury awarded no compensatory damages, but did award plaintiffs $150 million in punitive damages. In December 2017, the court vacated the jury’s verdict and punitive damage award on the fraud claim and ordered a new trial on that claim. In a second case, a jury in the United States District Court for the Northern District of Illinois reached a verdict for AbbVie in August 2017 on all claims, which is the subject of post-trial proceedings. In another case, a jury in the United States District Court for the Northern District of Illinois reached a verdict for AbbVie in October 2017 on strict liability but for the plaintiff on remaining claims and awarded $140,000 in compensatory damages and $140 million in punitive damages, which is the subject of post-trial proceedings. In a separate case, a jury in the United States District Court for the Northern District of Illinois reached a verdict for AbbVie in January 2018 on all claims.
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. Over ninety percent of the approximately 635 claims are pending in the United States District Court for the Southern District of Illinois, and the rest are pending in various other federal and state courts. Plaintiffs generally seek compensatory and punitive damages.
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 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 and September 2017 against AbbVie and in some
| 2017 Form 10-K | 89 |
instances its chief executive officer in the same court by twelve 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 seeks unspecified compensatory damages for AbbVie, among other relief.
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.
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 a case filed in the United States District Court for the District of Delaware on February 1, 2018, Pharmacyclics alleges that Fresenius Kabi USA, LLC, Fresenius Kabi USA, Inc., and Fresenius Kabi Oncology Limited’s proposed generic ibrutinib product infringes Pharmacyclics’ patents and Pharmacyclics seeks declaratory and injunctive relief. Janssen Biotech, Inc. which is in a global collaboration with Pharmacyclics concerning the development and marketing of IMBRUVICA, is the co-plaintiff in this suit.
Note 15 Segment and Geographic Area Information
AbbVie operates in one business segment—pharmaceutical products. Substantially all of AbbVie's net revenues in the United States are to three wholesalers. Outside the United States, products are sold primarily to health care providers or through distributors, depending on the market served. The following tables detail AbbVie's worldwide net revenues:
| years ended December 31 (in millions) | 2017 | 2016 | 2015 | ||||||||
| HUMIRA | $ | 18,427 | $ | 16,078 | $ | 14,012 | |||||
| IMBRUVICA | 2,573 | 1,832 | 754 | ||||||||
| HCV | 1,274 | 1,522 | 1,639 | ||||||||
| Lupron | 829 | 821 | 826 | ||||||||
| Creon | 831 | 730 | 632 | ||||||||
| Synagis | 738 | 730 | 740 | ||||||||
| Synthroid | 781 | 763 | 755 | ||||||||
| AndroGel | 577 | 675 | 694 | ||||||||
| Kaletra | 423 | 549 | 700 | ||||||||
| Sevoflurane | 410 | 428 | 474 | ||||||||
| Duodopa | 355 | 293 | 231 | ||||||||
| All other | 998 | 1,217 | 1,402 | ||||||||
| Total net revenues | $ | 28,216 | $ | 25,638 | $ | 22,859 |
| 90 | 2017 Form 10-K |
Net revenues to external customers by geographic area, based on product shipment destination, were as follows:
| years ended December 31 (in millions) | 2017 | 2016 | 2015 | ||||||||
| United States | $ | 18,251 | $ | 15,947 | $ | 13,561 | |||||
| Germany | 1,157 | 1,104 | 1,082 | ||||||||
| United Kingdom | 807 | 776 | 688 | ||||||||
| Japan | 764 | 770 | 599 | ||||||||
| France | 730 | 713 | 597 | ||||||||
| Canada | 659 | 624 | 551 | ||||||||
| Spain | 521 | 589 | 618 | ||||||||
| Italy | 475 | 523 | 452 | ||||||||
| Brazil | 410 | 355 | 376 | ||||||||
| The Netherlands | 362 | 352 | 334 | ||||||||
| All other countries | 4,080 | 3,885 | 4,001 | ||||||||
| Total net revenues | $ | 28,216 | $ | 25,638 | $ | 22,859 |
Long-lived assets, primarily net property and equipment, by geographic area were as follows:
| as of December 31 (in millions) | 2017 | 2016 | |||||
| United States and Puerto Rico | $ | 1,862 | $ | 1,822 | |||
| Europe | 621 | 504 | |||||
| All other | 320 | 278 | |||||
| Total long-lived assets | $ | 2,803 | $ | 2,604 |
| 2017 Form 10-K | 91 |
Note 16 Quarterly Financial Data (unaudited)
| (in millions except per share data) | 2017 | 2016 | ||||||
| First Quarter | ||||||||
| Net revenues | $ | 6,538 | $ | 5,958 | ||||
| Gross margin | 4,922 | 4,589 | ||||||
| Net earnings(a) | 1,711 | 1,354 | ||||||
| Basic earnings per share | $ | 1.07 | $ | 0.83 | ||||
| Diluted earnings per share | $ | 1.06 | $ | 0.83 | ||||
| Cash dividends declared per common share | $ | 0.64 | $ | 0.57 | ||||
| Second Quarter | ||||||||
| Net revenues | $ | 6,944 | $ | 6,452 | ||||
| Gross margin | 5,416 | 5,047 | ||||||
| Net earnings(b) | 1,915 | 1,610 | ||||||
| Basic earnings per share | $ | 1.20 | $ | 0.99 | ||||
| Diluted earnings per share | $ | 1.19 | $ | 0.98 | ||||
| Cash dividends declared per common share | $ | 0.64 | $ | 0.57 | ||||
| Third Quarter | ||||||||
| Net revenues | $ | 6,995 | $ | 6,432 | ||||
| Gross margin | 5,379 | 4,928 | ||||||
| Net earnings(c) | 1,631 | 1,598 | ||||||
| Basic earnings per share | $ | 1.02 | $ | 0.97 | ||||
| Diluted earnings per share | $ | 1.01 | $ | 0.97 | ||||
| Cash dividends declared per common share | $ | 0.64 | $ | 0.57 | ||||
| Fourth Quarter | ||||||||
| Net revenues | $ | 7,739 | $ | 6,796 | ||||
| Gross margin | 5,459 | 5,241 | ||||||
| Net earnings(d) | 52 | 1,391 | ||||||
| Basic earnings per share | $ | 0.03 | $ | 0.86 | ||||
| Diluted earnings per share | $ | 0.03 | $ | 0.85 | ||||
| Cash dividends declared per common share | $ | 0.71 | $ | 0.64 |
| (a) | First quarter results in 2017 included after-tax costs of $84 million related to the change in fair value of contingent consideration liabilities. First quarter results in 2016 included a net foreign exchange loss of $298 million related to the devaluation of AbbVie’s net monetary assets denominated in the Venezuelan bolivar. |
| (b) | Second quarter results in 2017 included an after-tax charge of $62 million to increase litigation reserves and after-tax costs of $61 million related to the change in fair value of contingent consideration liabilities. Second quarter results in 2016 included after-tax costs totaling $122 million related to the acquisition of Stemcentrx and BI compounds as well as the amortization of the acquisition date fair value step-up for inventory related to the acquisition of Pharmacyclics. |
| (c) | Third quarter results in 2017 included after-tax costs of $401 million related to the change in fair value of contingent consideration liabilities. Third quarter results in 2016 included after-tax costs of $104 million related to the change in fair value of contingent consideration liabilities. |
| (d) | Fourth quarter results in 2017 were impacted by net charges related to the December 2017 enactment of the Tax Cuts and Jobs Act, including an after-tax charge of $4.5 billion related to the one-time mandatory repatriation of previously untaxed earnings of foreign subsidiaries, partially offset by after-tax benefits of $3.3 billion due to |
| 92 | 2017 Form 10-K |
remeasurement of net deferred tax liabilities and other related impacts. Additional after-tax costs that impacted fourth quarter results in 2017 included $244 million for an intangible asset impairment charge, $221 million for a charge to increase litigation reserves, $205 million as a result of entering into a global strategic collaboration with Alector, Inc. and $79 million related to the change in fair value of contingent consideration liabilities. These costs were partially offset by an after-tax benefit of $91 million due to a tax audit settlement. Fourth quarter results in 2016 included after-tax costs totaling $187 million associated with a tax law change for regulations issued in the fourth quarter of 2016 that revised the treatment of foreign currency translation gains and losses for certain operations as well as after-tax costs totaling $85 million related to the change in fair value of contingent consideration liabilities.
| 2017 Form 10-K | 93 |
Report Of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of AbbVie Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of AbbVie Inc. and subsidiaries (the Company) as of December 31, 2017 and 2016, and the related consolidated statements of earnings, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 16, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2013.
Chicago, Illinois
February 16, 2018
| 94 | 2017 Form 10-K |
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