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

The following is a discussion and analysis of the financial condition of AbbVie Inc. (AbbVie or the company) as of December 31, 2018 and 2017 and results of operations for each of the three years in the period ended December 31, 2018. This commentary should be read in conjunction with the consolidated financial statements and accompanying notes appearing in Item 8, "Financial Statements and Supplementary Data."

EXECUTIVE OVERVIEW

Company Overview

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

AbbVie's products are generally sold worldwide directly to wholesalers, distributors, government agencies, health care facilities, specialty pharmacies and independent retailers from AbbVie-owned distribution centers and public warehouses. In the United States, AbbVie distributes pharmaceutical products principally through independent wholesale distributors, with some sales directly to pharmacies and patients. Outside the United States, products are sold primarily to customers or through distributors, depending on the market served. Certain products are co-marketed or co-promoted with other companies. AbbVie has approximately 30,000 employees. AbbVie operates in one business segment—pharmaceutical products.

2018 Financial Results

AbbVie's strategy has focused on delivering strong financial results, advancing and investing in its pipeline and returning value to shareholders while ensuring a strong, sustainable growth business over the long term. The company's financial performance in 2018 included delivering worldwide net revenues of $32.8 billion, operating earnings of $6.4 billion, diluted earnings per share of $3.66 and cash flows from operations of $13.4 billion. Worldwide net revenues grew by 16%, or 15% on a constant currency basis, driven primarily by revenue growth related to MAVYRET, IMBRUVICA and VENCLEXTA, and the continued strength of HUMIRA.

Diluted earnings per share in 2018 was $3.66 and included the following after-tax costs: (i) a Stemcentrx-related impairment charge of $4.1 billion net of the related fair value adjustment to contingent consideration liabilities; (ii) $1.1 billion of intangible asset amortization; (iii) $500 million as a result of a collaboration agreement extension with Calico Life Sciences LLC (Calico); (iv) $424 million for acquired in-process research and development (IPR&D); (v) $478 million for the change in fair value of contingent consideration liabilities excluding the fair value adjustment associated with the Stemcentrx-related impairment; (vi) litigation reserve charges of $282 million; (vii) charitable contributions of $271 million as part of AbbVie's previously announced plan to make contributions to U.S. not-for-profit organizations in 2018; and (viii) milestone payments of $137 million. 2018 financial results were also impacted by U.S. tax reform and the timing of the new legislation's phase in on certain subsidiaries. Additionally, financial results reflected continued added funding to support all stages of AbbVie’s emerging pipeline assets and continued investment in AbbVie’s growth brands.

In November 2018, AbbVie's board of directors declared a quarterly cash dividend of $1.07 per share of common stock payable in February 2019. This reflected an increase of approximately 11.5% over the previous quarterly dividend of $0.96 per share of common stock.

26 | 2018 Form 10-K

2019 Strategic Objectives

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

AbbVie expects to achieve its strategic objectives through:

•	Hematologic oncology revenue growth from both IMBRUVICA and VENCLEXTA.

•	The strong execution of new product launches across multiple therapeutic areas.

•	HUMIRA U.S. sales growth by driving biologic penetration across disease categories and maintaining market leadership.

•	Effective management of HUMIRA international biosimilar erosion.

•	The favorable impact of pipeline products and indications recently approved or currently under regulatory review where approval is expected in 2019. These products are described in greater detail in the section labeled "Research and Development" included as part of this Item 7.

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

Research and Development

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

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

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

Significant Programs and Developments

Immunology

Upadacitinib

•	In January 2018, the U.S. Food and Drug Administration (FDA) granted breakthrough therapy designation for upadacitinib, an investigational oral JAK1-selective inhibitor, in adult patients with moderate to severe atopic dermatitis who are candidates for systemic therapy.

•

In April 2018, AbbVie announced that top-line results from the Phase 3 SELECT-COMPARE clinical trial evaluating upadacitinib met all primary and ranked secondary endpoints in patients with moderate to severe rheumatoid arthritis (RA) who are on a stable background of methotrexate and who have an inadequate response. The safety profile of upadacitinib was consistent with previously reported clinical trials and no new safety signals were detected.

		2018 Form 10-K | 27

•	In June 2018, AbbVie announced that top-line results from the Phase 3 SELECT-EARLY clinical trial evaluating upadacitinib versus methotrexate in adult patients with moderate to severe RA who were methotrexate-naïve met all primary and ranked secondary endpoints. The safety profile of upadacitinib was consistent with previously reported clinical trials and no new safety signals were detected.

•	In July 2018, AbbVie initiated two Phase 3 clinical trials to evaluate the efficacy and safety of upadacitinib in subjects with moderate to severe atopic dermatitis.

•	In September 2018, AbbVie initiated a Phase 3 clinical trial to evaluate the efficacy and safety of upadacitinib in subjects with moderate to severe ulcerative colitis.

•	In December 2018, AbbVie submitted a New Drug Application (NDA) to the FDA and a marketing authorisation application (MAA) to the European Medicines Agency (EMA) for upadacitinib for the treatment of adult patients with moderate to severe RA.

Risankizumab

•	In January 2018, AbbVie initiated two Phase 3 clinical trials to evaluate the efficacy and safety of risankizumab, an investigational interleukin-23 (IL-23) inhibitor, versus placebo during induction therapy in subjects with moderately to severely active Crohn’s disease.

•

In February 2018, AbbVie announced that top-line results from two Phase 3 clinical trials evaluating risankizumab with 12-week dosing compared to ustekinumab met ranked additional secondary endpoints for the treatment of patients with moderate to severe chronic plaque psoriasis. The initial results from these clinical trials were previously announced in October 2017. The safety profile was consistent with all previously reported studies, and there were no new safety signals detected across the two studies.

•	In April 2018, AbbVie submitted a Biologics License Application (BLA) to the FDA and an MAA to the EMA for risankizumab for the treatment of plaque psoriasis in adults.

•	In May 2018, AbbVie initiated a Phase 2b/3 clinical trial to evaluate the efficacy and safety of risankizumab versus placebo in subjects with moderately to severely active ulcerative colitis.

Oncology

IMBRUVICA

•	In April 2018, AbbVie initiated a Phase 3 clinical trial to evaluate the safety and efficacy of IMBRUVICA in combination with VENCLEXTA versus chlorambucil plus GAZYVA (obinutuzumab) for the first-line treatment of subjects with chronic lymphocytic leukemia (CLL)/small lymphocytic lymphoma (SLL).

•	In May 2018, AbbVie announced that results from the Phase 3 iLLUMINATE study evaluating IMBRUVICA in combination with GAZYVA in previously untreated CLL/SLL met its primary endpoint. In December 2018, AbbVie announced additional results from the Phase 3 iLLUMINATE study that demonstrated significantly prolonged progression-free survival (PFS).

•	In June 2018, AbbVie announced that results from an interim analysis of the Phase 3 iNNOVATE study evaluating IMBRUVICA plus Rituxan (rituximab) in previously untreated and relapsed/refractory (R/R) patients with Waldenström’s macroglobulinemia (WM) met its primary endpoint.

•	In July 2018, AbbVie announced that results from a Phase 3 study evaluating the addition of IMBRUVICA to a chemotherapy regimen consisting of five different agents used in combination did not meet its primary endpoint in a subset of untreated diffuse large B-cell lymphoma patients identified to have the non-germinal center B-cell or activated B-cell subtypes of this disease.

•	In August 2018, the FDA approved IMBRUVICA, in combination with Rituxan, for the treatment of adult patients with WM.

•	In December 2018, AbbVie announced that results from an interim analysis of the Phase 3 ECOG1912E study evaluating IMBRUVICA in combination with Rituxan versus the chemoimmunotherapy FCR (fludarabine, cyclophosphamide and rituximab) in previously untreated and younger CLL patients met its primary endpoint.

•	In January 2019, AbbVie announced an update on the Phase 3 RESOLVE study evaluating IMBRUVICA in combination with nab-paclitaxel and gemcitabine versus nab-paclitaxel and gemcitabine combination in patients

28 | 2018 Form 10-K

with metastatic pancreatic adenocarcinoma. Results showed the study did not meet its primary endpoint of improving PFS or overall survival (OS) benefit among the study population. Safety data collected from the study were consistent with the existing safety information for the study therapies.

•	In January 2019, the FDA approved IMBRUVICA, in combination with GAZYVA, for adult patients with previously untreated CLL/SLL.

VENCLEXTA

•	In January 2018, AbbVie submitted an sNDA to the FDA for VENCLEXTA monotherapy in patients with CLL who are refractory to or have relapsed B-cell receptor pathway inhibitors.

•	In June 2018, the FDA approved VENCLEXTA in combination with Rituxan for the treatment of patients with CLL/SLL, with or without 17p deletion, who have received at least one prior therapy. VENCLEXTA plus Rituxan is the first oral-based, chemotherapy-free combination in CLL that allows patients an option for fixed treatment duration.

•	In September 2018, the FDA expanded the label for VENCLEXTA in combination with Rituxan to include information about patients with previously-treated CLL who achieved minimal residual disease (MRD)-negativity in the Phase 3 MURANO trial.

•

In October 2018, the European Commission approved the type-II variation application for VENCLYXTO in combination with Rituxan for the treatment of patients with R/R CLL who have received at least one prior therapy. In November, AbbVie received notification from the European Commission that conditions of the original conditional marketing authorisation have been fulfilled, granting VENCLYXTO official receipt of approval.

•	In October 2018, AbbVie announced that the results from the Phase 3 CLL14 study comparing the efficacy and safety of VENCLEXTA plus obinutuzumab versus obinutuzumab plus chlorambucil in previously untreated patients with CLL and coexisting medical conditions met its primary endpoint.

•

In November 2018, the FDA granted accelerated approval for VENCLEXTA in combination with azacitidine, or decitabine, or low dose cytarabine (LDAC) for the treatment of newly-diagnosed acute myeloid leukemia (AML) in adults who are age 75 years or older, or who have comorbidities that preclude use of intensive induction chemotherapy. This indication is approved under accelerated approval based on response rates. Continued approval for this indication may be contingent upon verification and description of clinical benefit in confirmatory trials.

Rova-T

•

In March 2018, AbbVie announced top-line results from the Phase 2 TRINITY study evaluating rovalpituzumab tesirine (Rova-T) for third-line R/R small cell lung cancer (SCLC). Although Rova-T demonstrated single agent responses in advanced SCLC patients, after consulting with the FDA, based on the magnitude of effect across multiple parameters in this single-arm study, the company will not seek accelerated approval for Rova-T in third-line R/R SCLC.

•

In December 2018, AbbVie announced the decision to stop enrollment for the TAHOE trial, a Phase 3 study evaluating Rova-T as a second-line therapy for advanced SCLC. An Independent Data Monitoring Committee recommended stopping enrollment in TAHOE due to shorter overall survival in the Rova-T arm compared with the topotecan control arm. AbbVie will continue its ongoing Phase 3 study of Rova-T in first-line SCLC.

Other

•	In November 2018, Bristol-Myers Squibb Company (BMS) announced that the FDA expanded the label for Empliciti in combination with pomalidomide and dexamethasone for the treatment of adult patients with multiple myeloma who have received at least two prior therapies. BMS and AbbVie are co-developing Empliciti, with BMS solely responsible for commercial activities.

		2018 Form 10-K | 29

Virology/Liver Disease

•	In November 2018, AbbVie presented EXPEDITION 8 data at the Annual Meeting of the American Association for the Study of Liver Diseases (AASLD), in which 8 weeks of MAVYRET in treatment naïve, cirrhotic patients was safe and effective with no virologic failures reported.

Neuroscience

•	In March 2018, Biogen and AbbVie announced the voluntary worldwide withdrawal of marketing authorizations for ZINBRYTA, a prescription medicine used to treat adults with relapsing forms of multiple sclerosis.

Other

•	In February 2018, AbbVie announced that top-line results from the Phase 3 ELARIS UF-I study evaluating elagolix, an investigational, orally administered gonadotropin-releasing hormone (GnRH) antagonist, being investigated in combination with low-dose hormone (add-back) therapy for uterine fibroids met its primary efficacy endpoint and all ranked secondary endpoints.

•	In March 2018, AbbVie announced that top-line results from the Phase 3 ELARIS UF-II study evaluating elagolix in combination with low-dose hormone (add-back) therapy for uterine fibroids met its primary efficacy endpoint and all ranked secondary endpoints.

•	In July 2018, the FDA approved ORILISSA (elagolix) for the management of moderate to severe pain associated with endometriosis.

•	In August 2018, AbbVie announced that top-line results from the Phase 3 ELARIS UF-EXTEND study evaluating elagolix in combination with low-dose hormone (add-back) therapy for uterine fibroids were consistent with findings observed in the ELARIS UF-I and ELARIS UF-II Phase 3 studies.

•

In October 2018, AbbVie announced that it will assume full development and commercial responsibility for its collaboration with Galapagos to discover and develop new therapies to treat cystic fibrosis (CF). Under a revised agreement, AbbVie will assume full development and commercial responsibility over the investigational program comprising several clinical and pre-clinical compounds originally discovered and developed jointly by AbbVie and Galapagos. Galapagos will not pursue further research and development in CF, but is eligible for future milestones and royalties on commercialized programs.

RESULTS OF OPERATIONS

Net Revenues

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

													Percent change
													At actual currency rates						At constant currency rates
for the years ended (dollars in millions)	2018				2017				2016				2018			2017			2018			2017
United States	$	21,524			$	18,251			$	15,947			17.9	%		14.4	%		17.9	%		14.4	%
International	11,229				9,965				9,691				12.8	%		2.8	%		10.4	%		2.1	%
Net revenues	$	32,753			$	28,216			$	25,638			16.1	%		10.1	%		15.2	%		9.8	%

30 | 2018 Form 10-K

The following table details AbbVie's worldwide net revenues:

													Percent change
													At actual currency rates						At constant currency rates
years ended December 31 (dollars in millions)	2018				2017				2016				2018			2017			2018			2017
Immunology
HUMIRA
United States	$	13,685			$	12,361			$	10,432			10.7	%		18.5	%		10.7	%		18.5	%
International	6,251				6,066				5,646				3.1	%		7.4	%		0.6	%		6.7	%
Total	$	19,936			$	18,427			$	16,078			8.2	%		14.6	%		7.4	%		14.4	%
Hematologic Oncology
IMBRUVICA
United States	$	2,968			$	2,144			$	1,580			38.4	%		35.8	%		38.4	%		35.8	%
Collaboration revenues	622				429				252				45.0	%		70.0	%		45.0	%		70.0	%
Total	$	3,590			$	2,573			$	1,832			39.5	%		40.5	%		39.5	%		40.5	%
VENCLEXTA
United States	$	247			$	89			$	17			>100.0%			>100.0%			>100.0%			>100.0%
International	97				33				1				>100.0%			>100.0%			>100.0%			>100.0%
Total	$	344			$	122			$	18			>100.0%			>100.0%			>100.0%			>100.0%
HCV
MAVYRET
United States	$	1,614			$	277			$	—			>100.0%			n/m			>100.0%			n/m
International	1,824				213				—				>100.0%			n/m			>100.0%			n/m
Total	$	3,438			$	490			$	—			>100.0%			n/m			>100.0%			n/m
VIEKIRA
United States	$	3			$	61			$	342			(96.7	)%		(82.8	)%		(96.7	)%		(82.8	)%
International	175				723				1,180				(75.6	)%		(38.7	)%		(74.8	)%		(38.6	)%
Total	$	178			$	784			$	1,522			(77.2	)%		(48.6	)%		(76.5	)%		(48.5	)%
Other Key Products
Creon
United States	$	928			$	831			$	730			11.7	%		13.9	%		11.7	%		13.9	%
Lupron
United States	$	726			$	669			$	663			8.6	%		0.8	%		8.6	%		0.8	%
International	166				160				158				3.4	%		1.4	%		4.7	%		0.5	%
Total	$	892			$	829			$	821			7.6	%		0.9	%		7.9	%		0.7	%
Synthroid
United States	$	776			$	781			$	763			(0.6	)%		2.3	%		(0.6	)%		2.3	%
Synagis
International	$	726			$	738			$	730			(1.6	)%		1.2	%		(2.8	)%		0.6	%
AndroGel
United States	$	469			$	577			$	675			(18.8	)%		(14.5	)%		(18.8	)%		(14.5	)%
Duodopa
United States	$	80			$	61			$	37			31.4	%		66.1	%		31.4	%		66.1	%
International	350				294				256				19.1	%		14.6	%		14.8	%		13.1	%
Total	$	430			$	355			$	293			21.2	%		21.1	%		17.7	%		19.8	%
Sevoflurane
United States	$	74			$	78			$	80			(6.2	)%		(2.1	)%		(6.2	)%		(2.1	)%
International	317				332				348				(4.4	)%		(4.6	)%		(4.3	)%		(3.7	)%
Total	$	391			$	410			$	428			(4.7	)%		(4.1	)%		(4.6	)%		(3.4	)%
Kaletra
United States	$	55			$	71			$	116			(22.1	)%		(38.6	)%		(22.1	)%		(38.6	)%
International	281				352				433				(20.2	)%		(18.8	)%		(20.1	)%		(21.1	)%
Total	$	336			$	423			$	549			(20.5	)%		(22.9	)%		(20.4	)%		(24.7	)%
All other	$	319			$	876			$	1,199			(63.6	)%		(26.9	)%		(71.9	)%		(27.9	)%
Total net revenues	$	32,753			$	28,216			$	25,638			16.1	%		10.1	%		15.2	%		9.8	%

n/m – Not meaningful

		2018 Form 10-K | 31

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

Global HUMIRA sales increased 7% in 2018 and 14% in 2017. The sales increases in 2018 and 2017 were driven primarily by market growth across therapeutic categories and geographies as well as favorable pricing in certain geographies. In the United States, HUMIRA sales increased 11% in 2018 and 18% in 2017. The sales increase in 2018 and 2017 was driven by market growth across all indications and favorable pricing. Internationally, HUMIRA revenues increased 1% in 2018 and 7% in 2017. The sales increase in 2018 was driven primarily by market growth across indications partially offset by direct biosimilar competition in Europe following the expiration of the European Union composition of matter patent for adalimumab in October 2018. Due to the entry of biosimilar competition, AbbVie expects international HUMIRA net revenues to decline in 2019. Biosimilar competition for HUMIRA is not expected in the United States until 2023. AbbVie continues to pursue strategies intended to further differentiate HUMIRA from competing products and add to the sustainability of HUMIRA.

Net revenues for IMBRUVICA represent product revenues in the United States and collaboration revenues outside of the United States related to AbbVie's 50% share of IMBRUVICA profit. AbbVie's global IMBRUVICA revenues increased 39% in 2018 and 40% in 2017 as a result of continued penetration of IMBRUVICA as a first-line treatment for patients with CLL as well as favorable pricing.

Net revenues for VENCLEXTA increased by more than 100% in 2018 primarily due to market share gains following FDA and EMA approvals of VENCLEXTA in combination with Rituxan for certain patients with R/R CLL.

Global MAVYRET sales increased by more than 100% in 2018 as a result of market share gains following the FDA and EMA approvals of MAVYRET in the second half of 2017 as well as further geographic expansion in 2018. Global VIEKIRA sales decreased by 76% in 2018 and 49% in 2017 primarily due to lower market share following the launch of MAVYRET.

Net revenues for Creon increased 12% in 2018 and 14% in 2017, driven primarily by continued market growth, higher market share and favorable pricing. Creon maintains market leadership in the pancreatic enzyme market.

AndroGel net revenues decreased 19% in 2018 and 14% in 2017 primarily due to market contraction and the entry of generic competition for the AndroGel 1.62% formulation in October 2018. AbbVie expects net revenues for AndroGel to continue to decline in 2019.

Net revenues for Duodopa increased 18% in 2018 and 20% in 2017, primarily as a result of market penetration.

Gross Margin

													Percent change
years ended December 31 (dollars in millions)	2018				2017				2016				2018			2017
Gross margin	$	25,035			$	21,174			$	19,806			18	%		7	%
as a percent of net revenues	76		%		75		%		77		%

Gross margin as a percentage of net revenues in 2018 increased from 2017 primarily due to the reduction of HUMIRA royalty expense and a 2017 intangible asset impairment charge of $354 million partially offset by the IMBRUVICA profit sharing arrangement.

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

Selling, General and Administrative

													Percent change
years ended December 31 (dollars in millions)	2018				2017				2016				2018			2017
Selling, general and administrative	$	7,399			$	6,295			$	5,881			18	%		7	%
as a percent of net revenues	23		%		22		%		23		%

Selling, general and administrative (SG&A) expenses as a percentage of net revenues in 2018 increased from 2017 primarily due to the unfavorable impacts of new product launch expenses and charitable contributions of $350 million to

32 | 2018 Form 10-K

select U.S. not-for-profit organizations in 2018 as part of AbbVie's previously announced plan partially offset by continued leverage from revenue growth.

SG&A expense percentage in 2017 decreased from 2016. SG&A expense percentage in 2017 was favorably impacted by continued leverage from revenue growth partially offset by litigation reserves charges that increased by $370 million in 2017 compared to the prior year and new product launch expenses.

Research and Development and Acquired In-Process Research and Development

													Percent change
years ended December 31 (dollars in millions)	2018				2017				2016				2018			2017
Research and development	$	10,329			$	5,007			$	4,385			>100%			14	%
as a percent of net revenues	32		%		18		%		17		%
Acquired in-process research and development	$	424			$	327			$	200			30	%		64	%

Research and Development (R&D) expenses in 2018 increased from 2017 principally due to a $5.1 billion intangible asset impairment charge related to IPR&D acquired as part of the 2016 Stemcentrx acquisition following the decision to stop enrollment in the TAHOE trial. The impairment was primarily due to lower probabilities of success of achieving regulatory approval across Rova-T and other early-stage assets obtained in the acquisition. The remaining increase reflected greater funding to support all stages of the company's pipeline assets. See Note 7 to the Consolidated Financial Statements for additional information regarding the impairment charge.

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

Acquired IPR&D expenses reflect upfront payments related to various collaborations. There were no individually significant transactions or cash flows during 2018. Acquired IPR&D expense in 2017 included a charge of $205 million as a result of entering into a global strategic collaboration with Alector, Inc. (Alector) to develop and commercialize medicines to treat Alzheimer’s disease and other neurodegenerative disorders. There were no individually significant transactions or cash flows during 2016. See Note 5 to the Consolidated Financial Statements for additional information regarding the Alector agreement.

Other Operating Expenses

Other operating expenses in 2018 included a $500 million charge related to the extension of the previously announced Calico collaboration to discover, develop and bring to market new therapies for patients with age-related diseases, including neurodegeneration and cancer.

Other Non-Operating Expenses

years ended December 31 (in millions)		2018				2017				2016
Interest expense		$	1,348			$	1,150			$	1,047
Interest income		(204		)		(146		)		(82		)
Interest expense, net		$	1,144			$	1,004			$	965
Net foreign exchange loss		$	24			$	348			$	303
Other expense, net		18				466				188

Interest expense in 2018 increased compared to 2017 primarily due to the unfavorable impact of higher interest rates on the company's debt obligations and a higher average outstanding debt balance during 2018. Interest expense in 2017 increased compared to 2016 due to a full year of expense associated with the May 2016 issuance of $7.8 billion aggregate principal amount of senior notes which were issued primarily to finance the acquisition of Stemcentrx and to repay an outstanding term loan.

Interest income in 2018 increased compared to 2017 primarily due to higher interest rates. Interest income in 2017 increased compared to 2016 primarily due to growth in the company’s investment securities.

		2018 Form 10-K | 33

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

Other expense, net included charges related to the change in fair value of the BI and Stemcentrx contingent consideration liabilities of $49 million in 2018, $626 million in 2017 and $228 million in 2016. The fair value of contingent consideration liabilities is impacted by the passage of time and multiple other inputs, including the probability of success of achieving regulatory/commercial milestones, discount rates, the estimated amount of future sales of the acquired products still in development and other market-based factors. In 2018, the BI contingent consideration liability increased due to the passage of time and higher estimated future sales partially offset by the effect of rising interest rates. The increase in the BI contingent consideration liability was primarily offset by a $428 million decrease in the Stemcentrx contingent consideration liability recorded during the fourth quarter of 2018 due to a reduction in probabilities of success of achieving regulatory approval across Rova-T and other early-stage assets obtained in the acquisition. In 2017, the change in fair value represented mainly higher probabilities of success, the passage of time and declining interest rates. In 2016, the change in fair value represented mainly the passage of time, as increases to the BI contingent consideration liability due to higher probabilities of success were fully offset by the effects of rising interest rates and changes in other market-based assumptions. See Note 5 to the Consolidated Financial Statements for additional information regarding the acquisitions of Stemcentrx and BI compounds. Other expense, net for 2017 also included realized gains on available-for-sale investment securities of $90 million.

Income Tax Expense

The effective income tax rate was negative 9% in 2018, was 31% in 2017 and was 24% in 2016. The effective tax rate in each period differed from the statutory tax rate principally due to the allocation of the company's taxable earnings among jurisdictions, the benefit from foreign operations which reflects the impact of lower income tax rates in locations outside the United States, tax incentives in Puerto Rico and other foreign tax jurisdictions, and business development activities. The effective tax rate for 2018 reflects the impact of the effective date of provisions of the Tax Cuts and Jobs Act (the Act) related to the earnings from certain foreign subsidiaries and the effects of Stemcentrx intangible impairment related expenses. Given these factors, the effective income tax rate may change significantly in future periods.

The effective tax rate in 2017 included tax expense of $4.5 billion on the one-time mandatory repatriation of previously untaxed earnings of foreign subsidiaries, partially offset by a $3.6 billion net tax benefit for the remeasurement of deferred taxes related to the Act and foreign tax law changes.

The Act significantly changed the U.S. corporate tax system. The Act reduced the U.S. federal corporate tax rate from 35% to 21% and created a territorial tax system that included new taxes on certain foreign sourced earnings. See Note 13 to the Consolidated Financial Statements for additional information regarding the Act.

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

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

years ended December 31 (in millions)	2018				2017				2016
Cash flows from:
Operating activities	$	13,427			$	9,960			$	7,041
Investing activities	(1,006		)		(274		)		(6,074		)
Financing activities	(14,396		)		(5,512		)		(3,928		)

Operating cash flows in 2018 increased from 2017 primarily due to improved results of operations from revenue growth and a decrease in income tax payments. Operating cash flows in 2017 increased from 2016 primarily due to improved results of operations resulting from revenue growth, an improvement in operating earnings and a decrease in income tax payments. Realized excess tax benefits associated with stock-based compensation totaled $78 million in 2018 and $71 million in 2017 and were presented within operating cash flows as a result of the adoption of a new accounting pronouncement. Prior to the adoption of the new accounting pronouncement, realized excess benefits of $55 million in 2016 were presented within cash flows from financing activities. Operating cash flows also reflected AbbVie’s contributions to its defined benefit plans of $873 million in 2018, $246 million in 2017 and $273 million in 2016.

34 | 2018 Form 10-K

Investing cash flows in 2018 included payments made for other acquisitions and investments of $736 million and capital expenditures of $638 million, partially offset by net sales and maturities of investment securities totaling $368 million. Investing cash flows in 2017 included capital expenditures of $529 million and payments made for other acquisitions and investments of $308 million, partially offset by net sales and maturities of investment securities totaling $563 million. Investing cash flows in 2016 primarily included $1.9 billion of cash consideration paid to acquire Stemcentrx in June 2016, a $595 million upfront payment to acquire certain rights from BI in April 2016, net purchases of investment securities totaling $3.0 billion and capital expenditures of $479 million.

In 2018, 2017 and 2016, the company issued and redeemed commercial paper. The balance of commercial paper outstanding was $699 million as of December 31, 2018 and $400 million as of December 31, 2017. AbbVie may issue additional commercial paper or retire commercial paper to meet liquidity requirements as needed.

Financing cash flows in 2018 also included proceeds from the issuance of a $3.0 billion 364-day term loan credit agreement (term loan) entered into in May 2018. In June 2018, the company drew on this term loan and as of December 31, 2018, $3.0 billion was outstanding and was included in short-term borrowings on the consolidated balance sheet. Borrowings under the term loan bear interest at one month LIBOR plus applicable margin. The term loan may be prepaid without penalty upon prior notice and contains customary covenants, all of which the company was in compliance with as of December 31, 2018. In September 2018, the company issued $6.0 billion aggregate principal amount of unsecured senior notes. Of the $5.9 billion net proceeds, $2.0 billion was used to repay the company's outstanding three-year term loan credit agreement in September 2018 and $1.0 billion was used to repay the aggregate principal amount of 2.00% senior notes at maturity in November 2018. The company intends to use the remaining proceeds to repay term loan obligations in 2019 as they become due. Financing cash flows in 2018 also included the May 2018 repayment of $3.0 billion aggregate principal amount of the company's 1.80% senior notes at maturity.

In November 2016, the company issued €3.6 billion aggregate principal amount of unsecured senior Euro notes. The company used the proceeds to redeem $4.0 billion aggregate principal amount of 1.75% senior notes that were due to mature in November 2017. In May 2016, the company issued $7.8 billion aggregate principal amount of senior notes. Approximately $2.0 billion of the net proceeds were used to repay an outstanding term loan that was due to mature in November 2016, approximately $1.9 billion of the net proceeds were used to finance the acquisition of Stemcentrx and approximately $3.8 billion of the net proceeds were used to finance an accelerated share repurchase (ASR). See Note 12 to the Consolidated Financial Statements for additional information on the 2016 ASR transaction.

Cash dividend payments totaled $5.6 billion in 2018, $4.1 billion in 2017 and $3.7 billion in 2016. The increase in cash dividend payments was primarily driven by an increase in the dividend rate. On November 2, 2018, AbbVie announced that its board of directors declared an increase in the company's quarterly cash dividend from $0.96 per share to $1.07 per share beginning with the dividend payable on February 15, 2019 to stockholders of record as of January 15, 2019. This reflects an increase of approximately 11.5% over the previous quarterly rate. The timing, declaration, amount of and payment of any dividends by AbbVie in the future is within the discretion of its board of directors and will depend upon many factors, including AbbVie's financial condition, earnings, capital requirements of its operating subsidiaries, covenants associated with certain of AbbVie's debt service obligations, legal requirements, regulatory constraints, industry practice, ability to access capital markets and other factors deemed relevant by its board of directors.

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. On December 13, 2018, AbbVie's board of directors authorized a $5.0 billion increase to the existing $10.0 billion stock repurchase program. The new 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. Under this authorization, AbbVie repurchased approximately 109 million shares for $10.7 billion in 2018. AbbVie cash-settled $201 million of its December 2018 open market purchases in January 2019. AbbVie's remaining stock repurchase authorization was $4.3 billion as of December 31, 2018.

Under previous stock repurchase programs, AbbVie made open market share repurchases of approximately 11 million shares for $1.3 billion in 2018, approximately 13 million shares for $1.0 billion in 2017 and approximately 34 million shares for $2.1 billion in 2016. AbbVie cash-settled $285 million of its December 2016 open market purchases in January 2017 and cash-settled $300 million of its December 2015 open market purchases in January 2016.

In 2018, AbbVie paid $100 million of contingent consideration to BI related to BLA and MAA acceptance milestones. $78 million of these payments were included in financing cash flows and $22 million of the payments were included in operating cash flows. In 2017, AbbVie paid $305 million of contingent consideration to BI related to a Phase 3 enrollment milestone. $268 million of this milestone was included in financing cash flows and $37 million was included in operating cash flows.

		2018 Form 10-K | 35

Cash and equivalents were impacted by net unfavorable exchange rate changes totaling $39 million in 2018, net favorable exchange rate changes totaling $29 million in 2017 and net unfavorable exchange rate changes totaling $338 million in 2016. The unfavorable exchange rate changes in 2018 were primarily due to the weakening of the Euro and other foreign currencies on the translation of the company's Euro-denominated assets and cash denominated in foreign currencies. The favorable exchange rate changes in 2017 were primarily due to the strengthening of the Euro and other foreign currencies on the translation of the company's Euro-denominated assets and cash denominated in foreign currencies. The unfavorable exchange rate changes in 2016 were primarily due to the devaluation of AbbVie's net monetary assets denominated in the Venezuelan bolivar.

Credit Risk

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

Credit Facility, Access to Capital and Credit Ratings

Credit Facility

In August 2018, AbbVie replaced its existing revolving credit facility with a new $3.0 billion five-year revolving credit facility. 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, 2018, the company was in compliance with all its credit facility covenants. Commitment fees under the credit facility were insignificant. No amounts were outstanding under the credit facility as of December 31, 2018 and 2017.

Access to Capital

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

Credit Ratings

There were no changes in the company’s credit ratings during 2018. Unfavorable changes to the ratings may have an adverse impact on future financing arrangements; however, they would not affect the company's ability to draw on its credit facility and would not result in an acceleration of scheduled maturities of any of the company's outstanding debt obligations.

Contractual Obligations

The following table summarizes AbbVie's estimated contractual obligations as of December 31, 2018:

(in millions)	Total				Less than one year				One to three years				Three to five years				More than five years
Short-term borrowings	$	3,699			$	3,699			$	—			$	—			$	—
Long-term debt and capital lease obligations, including current portion	37,360				1,612				6,808				6,370				22,570
Interest on long-term debt(a)	17,204				1,433				2,613				2,024				11,134
Future minimum non-cancelable operating lease commitments	809				116				205				145				343
Purchase obligations and other(b)	1,843				1,710				110				21				2
Other long-term liabilities(c) (d) (e) (f)	9,994				736				1,392				1,478				6,388
Total	$	70,909			$	9,306			$	11,128			$	10,038			$	40,437

36 | 2018 Form 10-K

(a)

Includes estimated future interest payments on long-term debt and capital lease obligations. Interest payments on debt are calculated for future periods using forecasted interest rates in effect at the end of 2018. Projected interest payments include the related effects of interest rate swap agreements. Certain of these projected interest payments may differ in the future based on changes in floating interest rates or other factors or events. The projected interest payments only pertain to obligations and agreements outstanding at December 31, 2018. See Note 9 to the Consolidated Financial Statements for additional information regarding the company's debt instruments and Note 10 for additional information on the interest rate swap agreements outstanding at December 31, 2018.

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

(c)

Amounts less than one year includes a voluntary contribution of $150 million that AbbVie made to its principal domestic defined benefit plan subsequent to December 31, 2018. Amounts otherwise exclude pension and other post-employment benefits and related deferred compensation cash outflows. Timing of future funding is uncertain and dependent on future movements in interest rates and investment returns, changes in laws and regulations and other variables. Also included in this amount are components of other long-term liabilities including restructuring. See Note 8 to the Consolidated Financial Statements for additional information on restructuring and Note 11 for additional information on the pension and other post-employment benefit plans.

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

(e)

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

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

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

Revenue Recognition

AbbVie recognizes revenue when control of promised goods or services is transferred to the company’s customers, in an amount that reflects the consideration AbbVie expects to be entitled to in exchange for those goods or services. Sales, value add and other taxes collected concurrent with revenue-producing activities are excluded from revenue. AbbVie generates revenue primarily from product sales. For the majority of sales, the company transfers control, invoices the customer and recognizes revenue upon shipment to the customer.

		2018 Form 10-K | 37

Rebates

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

Rebate and chargeback accruals are accounted for as variable consideration and are recorded as a reduction to revenue in the period the related product is sold. Rebates and chargebacks totaled $16.4 billion in 2018, $12.9 billion in 2017 and $10.8 billion in 2016. Rebate amounts are typically based upon the volume of purchases using contractual or statutory prices, which may vary by product and by payer. For each type of rebate, the factors used in the calculations of the accrual for that rebate include the identification of the products subject to the rebate, the applicable price terms and the estimated lag time between sale and payment of the rebate, which can be significant.

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

The following table is an analysis of the three largest rebate accruals and chargeback allowances, which comprise approximately 91% of the total consolidated rebate and chargebacks recorded as reductions to revenues in 2018. Remaining rebate provisions charged against gross revenues are not significant in the determination of operating earnings.

(in millions)	Medicaid and Medicare Rebates				Managed Care Rebates				Wholesaler Chargebacks
Balance at December 31, 2015	$	1,032			$	920			$	363
Provisions	2,606				3,146				3,987
Payments	(2,471		)		(2,899		)		(3,967		)
Balance at December 31, 2016	1,167				1,167				383
Provisions	2,909				3,990				5,026
Payments	(2,736		)		(3,962		)		(4,887		)
Balance at December 31, 2017	1,340				1,195				522
Provisions	3,493				4,729				6,659
Payments	(3,188		)		(4,485		)		(6,525		)
Balance at December 31, 2018	$	1,645			$	1,439			$	656

Cash Discounts and Product Returns

Cash discounts and product returns, which totaled $1.6 billion in 2018, $1.3 billion in 2017 and $964 million in 2016, are accounted for as variable consideration and are recorded as a reduction to revenue in the same period the related product is sold. The reserve for cash discounts is readily determinable because the company's experience of payment history is fairly consistent. Product returns can be reliably estimated based on the company's historical return experience.

Pension and Other Post-Employment Benefits

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

38 | 2018 Form 10-K

The discount rate is selected based on current market rates on high-quality, fixed-income investments at December 31 each year. AbbVie employs a yield-curve approach for countries where a robust bond market exists. The yield curve is developed using high-quality bonds. The yield-curve approach reflects the plans' specific cash flows (i.e. duration) in calculating the benefit obligations by applying the corresponding individual spot rates along the yield curve. Beginning in 2016, AbbVie also reflected the plans' specific cash flows and applied them to the corresponding individual spot rates along the yield curve in calculating the service cost and interest cost portions of expense. For other countries, AbbVie reviews various indices such as corporate bond and government bond benchmarks to estimate the discount rate. AbbVie's assumed discount rates have a significant effect on the amounts reported for defined benefit pension and other post-employment plans as of December 31, 2018. A 50 basis point change in the assumed discount rate would have had the following effects on AbbVie's calculation of net periodic benefit costs in 2019 and projected benefit obligations as of December 31, 2018:

	50 basis point
(in millions) (brackets denote a reduction)	Increase				Decrease
Defined benefit plans
Service and interest cost	$	(54	)		$	64
Projected benefit obligation	(512		)		578
Other post-employment plans
Service and interest cost	$	(2	)		$	4
Projected benefit obligation	(47		)		54

The expected long-term rate of return is based on the asset allocation, historical performance and the current view of expected future returns. AbbVie considers these inputs with a long-term focus to avoid short-term market influences. The current long-term rate of return on plan assets for each plan is supported by the historical performance of the trust's actual and target asset allocation. AbbVie's assumed expected long-term rate of return has a significant effect on the amounts reported for defined benefit pension plans as of December 31, 2018 and will be used in the calculation of net periodic benefit cost in 2019. A one percentage point change in assumed expected long-term rate of return on plan assets would increase or decrease the net period benefit cost of these plans in 2019 by $62 million.

The health care cost trend rate is selected by reviewing historical trends and current views on projected future health care cost increases. The current health care cost trend rate is supported by the historical trend experience of each plan. Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans as of December 31, 2018 and will be used in the calculation of net periodic benefit cost in 2019. A one percentage point change in assumed health care cost trend rates would have the following effects on AbbVie's calculation of net periodic benefit costs in 2019 and the projected benefit obligation as of December 31, 2018:

	One percentage point
(in millions) (brackets denote a reduction)	Increase				Decrease
Service and interest cost	$	17			$	(9	)
Projected benefit obligation	110				(87		)

Income Taxes

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

Litigation

The company is subject to contingencies, such as various claims, legal proceedings and investigations regarding product liability, intellectual property, commercial, securities and other matters that arise in the normal course of business. See Note 14 to the Consolidated Financial Statements for additional information. Loss contingency provisions are recorded for probable losses at management's best estimate of a loss, or when a best estimate cannot be made, a minimum loss contingency amount within a probable range is recorded. Accordingly, AbbVie is often initially unable to develop a best estimate of loss and therefore, the minimum amount, which could be zero, is recorded. As information becomes known, either the minimum

		2018 Form 10-K | 39

loss amount is increased, resulting in additional loss provisions, or a best estimate can be made, also resulting in additional loss provisions. Occasionally, a best estimate amount is changed to a lower amount when events result in an expectation of a more favorable outcome than previously expected.

Valuation of Goodwill and Intangible Assets

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

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

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

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, 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. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of the assets and could potentially impact the company's results of operations. Actual results may differ from the company's estimates.

Contingent Consideration

The fair value measurements of contingent consideration liabilities are determined as of the acquisition date based on significant unobservable inputs, including the discount rate, estimated probabilities and timing of achieving specified development, regulatory and commercial milestones and the estimated amount of future sales of the acquired products still in development. Contingent consideration liabilities are revalued to fair value at each subsequent reporting date until the related contingency is resolved. Changes to the fair value of the contingent consideration liabilities can result from changes to one or a number of inputs, including discount rates, the probabilities of achieving the milestones, the time required to achieve the milestones and estimated future sales. Significant judgment is employed in determining the appropriateness of these inputs. Changes to the inputs described above could have a material impact on the company's financial position and results of operations in any given period. At December 31, 2018, a 50 basis point increase/decrease in the assumed discount rate would have decreased/increased the value of the contingent consideration liabilities by approximately $160 million. Additionally, at December 31, 2018, 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 $420 million.

Recent Accounting Pronouncements

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

40 | 2018 Form 10-K