Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

	Page
Consolidated Financial Statements
Consolidated Statements of Earnings	44
Consolidated Statements of Comprehensive Income	45
Consolidated Balance Sheets	46
Consolidated Statements of Equity	47
Consolidated Statements of Cash Flows	48
Notes to Consolidated Financial Statements	49
Report of Independent Registered Public Accounting Firm	88

		2019 Form 10-K | 43

AbbVie Inc. and Subsidiaries

Consolidated Statements of Earnings

years ended December 31 (in millions, except per share data)	2019				2018				2017
Net revenues	$	33,266			$	32,753			$	28,216
Cost of products sold	7,439				7,718				7,042
Selling, general and administrative	6,942				7,399				6,295
Research and development	6,407				10,329				5,007
Acquired in-process research and development	385				424				327
Other operating expense (income)	(890		)		500				—
Total operating costs and expenses	20,283				26,370				18,671
Operating earnings	12,983				6,383				9,545
Interest expense, net	1,509				1,144				1,004
Net foreign exchange loss	42				24				348
Other expense, net	3,006				18				466
Earnings before income tax	8,426				5,197				7,727
Income tax expense (benefit)	544				(490		)		2,418
Net earnings	$	7,882			$	5,687			$	5,309
Per share data
Basic earnings per share	$	5.30			$	3.67			$	3.31
Diluted earnings per share	$	5.28			$	3.66			$	3.30
Weighted-average basic shares outstanding	1,481				1,541				1,596
Weighted-average diluted shares outstanding	1,484				1,546				1,603

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

44 | 2019 Form 10-K

AbbVie Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

years ended December 31 (in millions)	2019				2018				2017
Net earnings	$	7,882			$	5,687			$	5,309
Foreign currency translation adjustments, net of tax expense (benefit) of $(4) in 2019, $(18) in 2018 and $34 in 2017	(98		)		(391		)		996
Net investment hedging activities, net of tax expense (benefit) of $22 in 2019, $40 in 2018 and $(194) in 2017	74				138				(343		)
Pension and post-employment benefits, net of tax expense (benefit) of $(323) in 2019, $35 in 2018 and $(94) in 2017	(1,243		)		197				(406		)
Marketable security activities, net of tax expense (benefit) of $— in 2019, $— in 2018 and $(8) in 2017	10				(10		)		(46		)
Cash flow hedging activities, net of tax expense (benefit) of $70 in 2019, $23 in 2018 and $(26) in 2017	141				313				(342		)
Other comprehensive income (loss)	(1,116		)		247				(141		)
Comprehensive income	$	6,766			$	5,934			$	5,168

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

		2019 Form 10-K | 45

AbbVie Inc. and Subsidiaries

Consolidated Balance Sheets

as of December 31 (in millions, except share data)	2019				2018
Assets
Current assets
Cash and equivalents	$	39,924			$	7,289
Short-term investments	—				772
Accounts receivable, net	5,428				5,384
Inventories	1,813				1,605
Prepaid expenses and other	2,354				1,895
Total current assets	49,519				16,945
Investments	93				1,420
Property and equipment, net	2,962				2,883
Intangible assets, net	18,649				21,233
Goodwill	15,604				15,663
Other assets	2,288				1,208
Total assets	$	89,115			$	59,352
Liabilities and Equity
Current liabilities
Short-term borrowings	$	—			$	3,699
Current portion of long-term debt and finance lease obligations	3,753				1,609
Accounts payable and accrued liabilities	11,832				11,931
Total current liabilities	15,585				17,239
Long-term debt and finance lease obligations	62,975				35,002
Deferred income taxes	1,130				1,067
Other long-term liabilities	17,597				14,490
Commitments and contingencies
Stockholders’ equity (deficit)
Common stock, $0.01 par value, 4,000,000,000 shares authorized, 1,781,582,608 shares issued as of December 31, 2019 and 1,776,510,871 as of December 31, 2018	18				18
Common stock held in treasury, at cost, 302,671,146 shares as of December 31, 2019 and 297,686,473 as of December 31, 2018	(24,504		)		(24,108		)
Additional paid-in capital	15,193				14,756
Retained earnings	4,717				3,368
Accumulated other comprehensive loss	(3,596		)		(2,480		)
Total stockholders’ equity (deficit)	(8,172		)		(8,446		)
Total liabilities and equity	$	89,115			$	59,352

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

46 | 2019 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, 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
Adoption of new accounting standards(a)	—			—				—				—				(1,733		)		—				(1,733		)
Net earnings	—			—				—				—				5,687				—				5,687
Other comprehensive income, net of tax	—			—				—				—				—				247				247
Dividends declared	—			—				—				—				(6,045		)		—				(6,045		)
Purchases of treasury stock	(121	)		—				(12,215		)		—				—				—				(12,215		)
Stock-based compensation plans and other	8			—				30				486				—				—				516
Balance at December 31, 2018	1,479			18				(24,108		)		14,756				3,368				(2,480		)		(8,446		)
Net earnings	—			—				—				—				7,882				—				7,882
Other comprehensive loss, net of tax	—			—				—				—				—				(1,116		)		(1,116		)
Dividends declared	—			—				—				—				(6,533		)		—				(6,533		)
Purchases of treasury stock	(5	)		—				(428		)		—				—				—				(428		)
Stock-based compensation plans and other	5			—				32				437				—				—				469
Balance at December 31, 2019	1,479			$	18			$	(24,504	)		$	15,193			$	4,717			$	(3,596	)		$	(8,172	)

(a)	Adoption of new accounting standards primarily includes the cumulative-effect adjustment of Accounting Standards Update (ASU) No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.

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

		2019 Form 10-K | 47

AbbVie Inc. and Subsidiaries

Consolidated Statements of Cash Flows

years ended December 31 (in millions) (brackets denote cash outflows)	2019				2018				2017
Cash flows from operating activities
Net earnings	$	7,882			$	5,687			$	5,309
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation	464				471				425
Amortization of intangible assets	1,553				1,294				1,076
Change in fair value of contingent consideration liabilities	3,091				49				626
Stock-based compensation	430				421				365
Upfront costs and milestones related to collaborations	490				1,061				470
Gain on divestitures	(330		)		—				—
Intangible asset impairment	1,030				5,070				354
Impacts related to U.S. tax reform	—				424				1,242
Other, net	43				76				84
Changes in operating assets and liabilities:
Accounts receivable	(74		)		(591		)		(391		)
Inventories	(231		)		(226		)		93
Prepaid expenses and other assets	97				(499		)		(118		)
Accounts payable and other liabilities	(1,121		)		190				425
Cash flows from operating activities	13,324				13,427				9,960
Cash flows from investing activities
Acquisitions and investments	(1,135		)		(736		)		(308		)
Acquisitions of property and equipment	(552		)		(638		)		(529		)
Purchases of investment securities	(583		)		(1,792		)		(2,230		)
Sales and maturities of investment securities	2,699				2,160				2,793
Other	167				—				—
Cash flows from investing activities	596				(1,006		)		(274		)
Cash flows from financing activities
Net change in commercial paper borrowings	(699		)		299				23
Proceeds from issuance of other short-term borrowings	—				3,002				—
Repayments of other short-term borrowings	(3,000		)		—				—
Proceeds from issuance of long-term debt	31,482				5,963				—
Repayments of long-term debt and finance lease obligations	(1,536		)		(6,035		)		(25		)
Debt issuance costs	(424		)		(40		)		—
Dividends paid	(6,366		)		(5,580		)		(4,107		)
Purchases of treasury stock	(629		)		(12,014		)		(1,410		)
Proceeds from the exercise of stock options	8				73				254
Payments of contingent consideration liabilities	(163		)		(78		)		(268		)
Other, net	35				14				21
Cash flows from financing activities	18,708				(14,396		)		(5,512		)
Effect of exchange rate changes on cash and equivalents	7				(39		)		29
Net change in cash and equivalents	32,635				(2,014		)		4,203
Cash and equivalents, beginning of year	7,289				9,303				5,100
Cash and equivalents, end of year	$	39,924			$	7,289			$	9,303
Other supplemental information
Interest paid, net of portion capitalized	$	1,794			$	1,215			$	1,099
Income taxes paid (received)	1,447				(35		)		1,696

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

48 | 2019 Form 10-K

AbbVie Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1 Background

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. 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, AbbVie sells products 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.

On June 25, 2019, AbbVie announced that it entered into a definitive transaction agreement under which AbbVie will acquire Allergan plc (Allergan). See Note 5 for additional information regarding the proposed acquisition.

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. 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 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. The company recognizes shipping and handling costs as an expense in cost of products sold when the company transfers control to the customer. Payment terms vary depending on the type and location of the customer, are based on customary commercial terms and are generally less than one year. AbbVie does not adjust revenue for the effects of a significant financing component for contracts where AbbVie expects the period between the transfer of the good or service and collection to be one year or less.

Discounts, rebates, sales incentives to customers, returns and certain other adjustments are accounted for as variable consideration. Provisions for variable consideration are based on current pricing, executed contracts, government pricing legislation and historical data and 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.

		2019 Form 10-K | 49

For each type of rebate, factors used in the calculation of the accrual 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. Sales incentives to customers are insignificant.

In addition to revenue from contracts with customers, the company also recognizes certain collaboration revenues. See Note 6 for additional information related to the collaboration with Janssen Biotech, Inc. Additionally, see Note 16 for disaggregation of revenue by product and geography.

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, prior to regulatory approval, the 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 selling, general and administrative (SG&A) expense in the consolidated statements of earnings. Advertising expenses were $1.1 billion in 2019, $1.1 billion in 2018 and $846 million in 2017.

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 income (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 debt securities are classified as available-for-sale and are recorded at fair value with any

50 | 2019 Form 10-K

unrealized holding gains or losses, net of tax, included in AOCI on the consolidated balance sheets until realized, at which time the gains or losses are recognized in earnings. Investments in equity securities that have readily determinable fair values are recorded at fair value. Investments in equity securities that do not have readily determinable fair values are recorded at cost and are remeasured to fair value based on certain observable price changes or impairment events as they occur. Held-to-maturity debt securities are recorded at cost. Gains or losses on investments are included in other expense, net in the consolidated statements of earnings.

AbbVie periodically assesses its marketable debt 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, the cost basis of the investment is written down with a charge to other expense, net in the consolidated statements of earnings and an available-for-sale investment's unrealized loss is reclassified from AOCI to other expense, 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 $46 million at December 31, 2019 and $51 million at December 31, 2018.

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)	2019				2018
Finished goods	$	485			$	473
Work-in-process	942				862
Raw materials	386				270
Inventories	$	1,813			$	1,605

Property and Equipment

as of December 31 (in millions)	2019				2018
Land	$	72			$	73
Buildings	1,613				1,603
Equipment	6,012				6,362
Construction in progress	491				358
Property and equipment, gross	8,188				8,396
Less accumulated depreciation	(5,226		)		(5,513		)
Property and equipment, net	$	2,962			$	2,883

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 $464 million in 2019, $471 million in 2018 and $425 million in 2017.

		2019 Form 10-K | 51

Leases

Short-term leases with a term of 12 months or less are not recorded on the balance sheet. For leases commencing or modified in 2019 or later, AbbVie does not separate lease components from non-lease components.

The company records lease liabilities based on the present value of lease payments over the lease term. AbbVie generally uses an incremental borrowing rate to discount its lease liabilities, as the rate implicit in the lease is typically not readily determinable. Certain lease agreements include renewal options that are under the company's control. AbbVie includes optional renewal periods in the lease term only when it is reasonably certain that AbbVie will exercise its option.

Variable lease payments include payments to lessors for taxes, maintenance, insurance and other operating costs as well as payments that are adjusted based on an index or rate. The company's lease agreements do not contain any significant residual value guarantees or restrictive covenants.

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.

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, 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 not to exceed 12 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 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

52 | 2019 Form 10-K

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 income (loss) (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.

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

ASU No. 2016-02

In February 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-02, Leases (Topic 842). The standard outlined a comprehensive lease accounting model that superseded the previous lease guidance and required lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms greater than 12 months. The guidance also changed the definition of a lease and expanded the disclosure requirements of lease arrangements. AbbVie adopted the standard in the first quarter of 2019 using the modified retrospective method. Results for reporting periods beginning after December 31, 2018 have been presented in accordance with the standard, while results for prior periods have not been adjusted and continue to be reported in accordance with AbbVie's historical accounting. The cumulative effect of initially applying the new leases standard was recognized as an adjustment to the opening consolidated balance sheet as of January 1, 2019.

The company elected a package of practical expedients for leases that commenced prior to January 1, 2019 and did not reassess historical conclusions on: (i) whether any expired or existing contracts are or contain leases; (ii) lease classification for any expired or existing leases; and (iii) initial direct costs capitalization for any existing leases.

		2019 Form 10-K | 53

Under the new standard, on January 1, 2019, the company recognized a cumulative-effect adjustment to its consolidated balance sheet primarily related to the recognition of liabilities and corresponding right-of-use assets for operating leases. The adjustment to the consolidated balance sheet included: (i) a $405 million increase to other assets; (ii) a $115 million increase to accounts payable and accrued liabilities; and (iii) a $290 million increase to other long-term liabilities. Other cumulative-effect adjustments to the consolidated balance sheet were insignificant.

Adoption of the standard did not have a significant impact on AbbVie's consolidated statement of earnings in 2019.

ASU No. 2018-02

In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allowed a reclassification from AOCI to retained earnings for stranded tax effects related to adjustments to deferred taxes resulting from the December 2017 enactment of the Tax Cuts and Jobs Act (the Act). AbbVie adopted the standard in the first quarter of 2019. Upon adoption, the company made an election to not reclassify the income tax effects of the Act from AOCI to retained earnings. Therefore, the adoption of the standard had no impact on AbbVie's consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

ASU No. 2016-13

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326). The standard changes how credit losses are measured for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other financial instruments, the standard requires the use of a new forward-looking "expected credit loss" model that generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, the standard now requires allowances to be recorded instead of reducing the amortized cost of the investment. Additionally, the standard requires new disclosures and will be effective for AbbVie starting with the first quarter of 2020. With certain exceptions, adjustments are to be applied using a modified-retrospective approach by reflecting adjustments through a cumulative-effect impact to retained earnings as of the beginning of the fiscal year of adoption. AbbVie has completed its assessment of the new standard as of December 31, 2019 and concluded that the adoption will not have a material impact on its consolidated financial statements based on the company's current portfolio of financial assets.

ASU No. 2019-12

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740). The standard includes simplifications related to accounting for income taxes including removing certain exceptions related to the approach for intraperiod tax allocation and the recognition of deferred tax liabilities for outside basis differences. The standard also clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard will be effective for AbbVie starting with the first quarter of 2021, with early adoption permitted. AbbVie is currently assessing the impact and timing of adopting this guidance on its consolidated financial statements.

54 | 2019 Form 10-K

Note 3 Supplemental Financial Information

Interest Expense, Net

years ended December 31 (in millions)	2019				2018				2017
Interest expense	$	1,784			$	1,348			$	1,150
Interest income	(275		)		(204		)		(146		)
Interest expense, net	$	1,509			$	1,144			$	1,004

Accounts Payable and Accrued Liabilities

as of December 31 (in millions)	2019				2018
Sales rebates	$	4,484			$	3,939
Dividends payable	1,771				1,607
Accounts payable	1,452				1,546
Salaries, wages and commissions	830				787
Royalty and license arrangements	324				304
Other	2,971				3,748
Accounts payable and accrued liabilities	$	11,832			$	11,931

Other Long-Term Liabilities

as of December 31 (in millions)	2019				2018
Contingent consideration liabilities	$	7,201			$	4,306
Income taxes payable	3,453				4,311
Pension and other post-employment benefits	2,949				1,840
Liabilities for unrecognized tax benefits	2,772				2,726
Other	1,222				1,307
Other long-term liabilities	$	17,597			$	14,490

Note 4 Earnings Per Share

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

		2019 Form 10-K | 55

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

	Years ended December 31,
(in millions, except per share data)	2019				2018				2017
Basic EPS
Net earnings	$	7,882			$	5,687			$	5,309
Earnings allocated to participating securities	40				30				26
Earnings available to common shareholders	$	7,842			$	5,657			$	5,283
Weighted-average basic shares outstanding	1,481				1,541				1,596
Basic earnings per share	$	5.30			$	3.67			$	3.31
Diluted EPS
Net earnings	$	7,882			$	5,687			$	5,309
Earnings allocated to participating securities	40				30				26
Earnings available to common shareholders	$	7,842			$	5,657			$	5,283
Weighted-average shares of common stock outstanding	1,481				1,541				1,596
Effect of dilutive securities	3				5				7
Weighted-average diluted shares outstanding	1,484				1,546				1,603
Diluted earnings per share	$	5.28			$	3.66			$	3.30

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

Proposed Acquisition of Allergan plc

On June 25, 2019, AbbVie announced that it entered into a definitive transaction agreement under which AbbVie will acquire Allergan plc (Allergan) in a cash and stock transaction for a transaction equity value of approximately $63 billion, based on the closing price of AbbVie’s common stock of $78.45 on June 24, 2019. Under the terms of the transaction agreement, Allergan shareholders will receive 0.8660 AbbVie shares and $120.30 in cash for each Allergan share. On October 14, 2019, Allergan shareholders approved the proposed transaction.

Allergan is a global pharmaceutical leader focused on developing, manufacturing and commercializing branded pharmaceutical, device, biologic, surgical and regenerative medicine products for patients around the world. Allergan markets a portfolio of brands and products primarily focused on key therapeutic areas including aesthetics, eye care, neuroscience, gastroenterology and women's health.

The transaction is subject to customary closing conditions and regulatory approvals. In September 2019, AbbVie and Allergan each received a Request for Additional Information (Second Request) from the Federal Trade Commission (FTC) in connection with the transaction. AbbVie and Allergan are cooperating fully with the FTC. In January 2020, the European Commission approved the proposed acquisition of Allergan by AbbVie conditional upon the divestiture of brazikumab, Allergan's IL-23 inhibitor pipeline product. In January 2020, Allergan entered into a definitive agreement to divest brazikumab contingent upon regulatory approvals and closing of AbbVie's acquisition of Allergan.

In anticipation of the proposed acquisition, AbbVie entered into several debt and financing arrangements in 2019. See Note 10 for additional information.

Other Licensing & Acquisitions Activity

Cash outflows related to other acquisitions and investments totaled $1.1 billion in 2019, $736 million in 2018 and $308 million in 2017. AbbVie recorded acquired IPR&D charges of $385 million in 2019, $424 million in 2018 and $327 million in 2017. Significant arrangements impacting 2019, 2018 and 2017, some of which require contingent milestone payments, are summarized below.

56 | 2019 Form 10-K

Reata Pharmaceuticals, Inc.

In October 2019, AbbVie and Reata Pharmaceuticals, Inc. (Reata) entered into an amended and restated license agreement. Under the terms of the agreement, Reata reacquired exclusive development, manufacturing and commercialization rights concerning its proprietary Nrf2 activator product platform originally licensed to AbbVie for territories outside of the United States with respect to bardoxolone methyl and worldwide with respect to omaveloxolone and other next-generation Nrf2 activators. As consideration for the rights reacquired by Reata, AbbVie will receive a total of $330 million in cash payable in three installments through 2021, which was recognized in other operating expense (income) in the fourth quarter of 2019. In addition, AbbVie will receive low single-digit, tiered royalties from worldwide sales of omaveloxolone and certain next-generation Nrf2 activators.

Calico Life Sciences LLC

In June 2018, AbbVie and Calico Life Sciences LLC (Calico) entered into an extension of a collaboration to discover, develop and bring to market new therapies for patients with age-related diseases, including neurodegeneration and cancer. Under the terms of the agreement, AbbVie and Calico will each contribute an additional $500 million to the collaboration and the term is extended for an additional three years. Calico will be responsible for research and early development until 2022 and will advance collaboration projects through Phase 2a through 2027. Following completion of Phase 2a, AbbVie will have the option to exclusively license collaboration compounds. AbbVie will support Calico in its early research and development efforts and, upon exercise, would be responsible for late-stage development and commercial activities. Collaboration costs and profits will be shared equally by both parties post option exercise. During 2018, AbbVie recorded $500 million in other operating expense (income) in the consolidated statement of earnings related to its commitments under the agreement.

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.

Other Arrangements

In addition to the significant arrangements described above, AbbVie entered into several other arrangements resulting in charges to IPR&D of $385 million in 2019, $424 million in 2018 and $122 million in 2017. In connection with the other individually insignificant early-stage arrangements entered into in 2019, AbbVie could make additional payments of up to $5.8 billion upon the achievement of certain development, regulatory and commercial milestones.

Note 6 Collaboration with Janssen Biotech, Inc.

In December 2011, Pharmacyclics, a wholly-owned subsidiary of AbbVie, entered into a worldwide collaboration and license agreement with Janssen Biotech, Inc. and its affiliates (Janssen), one of the Janssen Pharmaceutical companies of Johnson & Johnson, for the joint development and commercialization of IMBRUVICA, a novel, orally active, selective covalent inhibitor of Bruton's tyrosine kinase (BTK) and certain compounds structurally related to IMBRUVICA, for oncology and other indications, excluding all immune and inflammatory mediated diseases or conditions and all psychiatric or psychological diseases or conditions, in the United States and outside the United States.

The collaboration provides Janssen with an exclusive license to commercialize IMBRUVICA outside of the United States and co-exclusively with AbbVie in the United States. Both parties are responsible for the development, manufacturing and marketing of any products generated as a result of the collaboration. The collaboration has no set duration or specific expiration date and provides for potential future development, regulatory and approval milestone payments of up to $200 million to AbbVie. The collaboration also includes a cost sharing arrangement for associated collaboration activities. Except in certain cases, Janssen is responsible for approximately 60% of collaboration development costs and AbbVie is responsible for the remaining 40% of collaboration development costs.

		2019 Form 10-K | 57

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)		2019				2018				2017
United States - Janssen's share of profits (included in cost of products sold)		$	1,803			$	1,372			$	1,001
International - AbbVie's share of profits (included in net revenues)		844				622				429
Global - AbbVie's share of other costs (included in respective line items)		321				326				288

AbbVie’s receivable from Janssen, included in accounts receivable, net, was $235 million at December 31, 2019 and $177 million at December 31, 2018. AbbVie’s payable to Janssen, included in accounts payable and accrued liabilities, was $455 million at December 31, 2019 and $376 million at December 31, 2018.

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, 2017	$	15,785
Foreign currency translation	(122		)
Balance as of December 31, 2018	15,663
Foreign currency translation	(59		)
Balance as of December 31, 2019	$	15,604

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

Intangible Assets, Net

The following table summarizes intangible assets:

	2019												2018
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	$	19,547			$	(6,405	)		$	13,142			$	15,872			$	(5,614	)		$	10,258
License agreements	7,798				(2,291		)		5,507				7,865				(1,810		)		6,055
Total definite-lived intangible assets	27,345				(8,696		)		18,649				23,737				(7,424		)		16,313
Indefinite-lived research and development	—				—				—				4,920				—				4,920
Total intangible assets, net	$	27,345			$	(8,696	)		$	18,649			$	28,657			$	(7,424	)		$	21,233

58 | 2019 Form 10-K

Indefinite-Lived Intangible Assets

Indefinite-lived intangible assets represent acquired IPR&D associated with products that have not yet received regulatory approval. The company performs its annual impairment assessment of indefinite-lived intangible assets in the third quarter, or earlier if impairment indicators exist.

In April 2019, the U.S. Food and Drug Administration (FDA) and the European Commission approved SKYRIZI (risankizumab) for the treatment of moderate to severe plaque psoriasis. As a result, AbbVie reclassified $3.9 billion of indefinite-lived intangible assets related to SKYRIZI to developed product rights definite-lived intangible assets. This amount will be amortized over its estimated useful life using the estimated pattern of economic benefit.

During the fourth quarter of 2018, the company made a decision to stop enrollment for the TAHOE trial, a Phase 3 study evaluating rovalpituzumab tesirine (Rova-T) as a second-line therapy for advanced small-cell lung cancer following a recommendation from an Independent Data Monitoring Committee. This decision lowered the probabilities of success of achieving regulatory approval across Rova-T and other early-stage assets and represented a triggering event which required the company to evaluate for impairment the IPR&D assets associated with the Stemcentrx acquisition. The company utilized multi-period excess earnings models of the “income approach” and determined that the fair value was $1.0 billion as of December 31, 2018, which was lower than the carrying value of $6.1 billion and resulted in an impairment charge of $5.1 billion. This impairment charge was recorded to R&D expense in the consolidated statement of earnings for the year ended December 31, 2018. In the third quarter of 2019, following the announcement of the decision to terminate the Rova-T research and development program, the company recorded an impairment charge of $1.0 billion which represented the remaining value of the IPR&D acquired as part of the 2016 Stemcentrx acquisition. This impairment charge was recorded to R&D expense in the consolidated statement of earnings for the year ended December 31, 2019.

No indefinite-lived intangible asset impairment charges were recorded in 2017.

Definite-Lived Intangible Assets

Definite-lived intangible assets are amortized over their estimated useful lives, which range between 2 to 16 years with an average of 11 years for both developed product rights and license agreements. Amortization expense was $1.6 billion in 2019, $1.3 billion in 2018 and $1.1 billion in 2017 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, 2019 is as follows:

(in billions)	2020				2021				2022				2023				2024
Anticipated annual amortization expense	$	1.8			$	2.0			$	2.3			$	2.4			$	2.5

No definite-lived intangible asset impairment charges were recorded in 2019 or 2018. 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. The impairment charge was based on discounted cash flow analyses and was included in cost of products sold in the consolidated statements of earnings.

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. As a result, AbbVie management periodically approves individual restructuring plans to achieve these objectives. In 2019, 2018 and 2017, no such plans were individually significant. Restructuring charges recorded were $234 million in 2019, $70 million in 2018 and $86 million in 2017 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 the classification of the affected employees or operations.

		2019 Form 10-K | 59

The following table summarizes the cash activity in the restructuring reserve for 2019, 2018 and 2017:

(in millions)
Accrued balance as of December 31, 2016	$	87
2017 restructuring charges	86
Payments and other adjustments	(87		)
Accrued balance as of December 31, 2017	86
2018 restructuring charges	59
Payments and other adjustments	(46		)
Accrued balance as of December 31, 2018	99
2019 restructuring charges	219
Payments and other adjustments	(178		)
Accrued balance as of December 31, 2019	$	140

Note 9 Leases

AbbVie's lease portfolio primarily consists of real estate properties, vehicles and equipment. The following table summarizes the amounts and location of operating and finance leases on the consolidated balance sheet:

(in millions)	Balance sheet caption	December 31, 2019
Assets
Operating	Other assets	$	344
Finance	Property and equipment, net	23
Total lease assets		$	367
Liabilities
Operating
Current	Accounts payable and accrued liabilities	$	109
Noncurrent	Other long-term liabilities	251
Finance
Current	Current portion of long-term debt and finance lease obligations	7
Noncurrent	Long-term debt and finance lease obligations	20
Total lease liabilities		$	387

The following table summarizes the lease costs recognized in the consolidated statement of earnings:

year ended December 31 (in millions)		2019
Operating lease cost		$	124
Short-term lease cost		34
Variable lease cost		62
Total lease cost		$	220

Sublease income and finance lease costs were insignificant in 2019. Lease expense prior to the adoption of ASU No. 2016-02 was $161 million in 2018 and $169 million in 2017.

60 | 2019 Form 10-K

The following table presents the weighted-average remaining lease term and weighted-average discount rate for operating and finance leases:

	December 31, 2019
Weighted-average remaining lease term (years)
Operating	5
Finance	3
Weighted-average discount rate
Operating	3.9	%
Finance	3.9	%

The following table presents supplementary cash flow information regarding the company's leases:

year ended December 31 (in millions)	2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	125
Right-of-use assets obtained in exchange for new operating lease liabilities	26

Finance lease cash flows were insignificant in 2019.

The following table summarizes the future maturities of AbbVie's operating and finance lease liabilities as of December 31, 2019:

(in millions)	Operating leases				Finance leases				Total (a)(b)
2020	$	119			$	10			$	129
2021	104				9				113
2022	59				8				67
2023	38				1				39
2024	22				—				22
Thereafter	58				—				58
Total lease payments	400				28				428
Less: Interest	40				1				41
Present value of lease liabilities	$	360			$	27			$	387

(a)	Total lease payments exclude approximately $350 million of contractual minimum lease payments for leases executed but not yet commenced. These leases will commence in 2020 with lease terms of approximately 11 years.

(b)	Lease payments recognized as part of lease liabilities for optional renewal periods are insignificant.

Future minimum lease payments for non-cancelable operating leases and capital leases as of December 31, 2018 prior to the adoption of ASU No. 2016-02 did not differ materially from future lease payments, inclusive of payments for leases executed but not yet commenced, under the new standard.

		2019 Form 10-K | 61

Note 10 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 2019**(a)**			2019				Effective interest rate in 2018**(a)**			2018
Senior notes issued in 2012
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
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
0.375% notes due 2019 (€1,400 principal)	0.55	%		—				0.55	%		1,604
1.375% notes due 2024 (€1,450 principal)	1.46	%		1,625				1.46	%		1,661
2.125% notes due 2028 (€750 principal)	2.18	%		840				2.18	%		859
Senior notes issued in 2018
3.375% notes due 2021	3.51	%		1,250				3.51	%		1,250
3.75% notes due 2023	3.84	%		1,250				3.84	%		1,250
4.25% notes due 2028	4.38	%		1,750				4.38	%		1,750
4.875% notes due 2048	4.94	%		1,750				4.94	%		1,750
Senior Euro notes issued in 2019
0.75% notes due 2027 (€750 principal)	0.86	%		840				—			—
1.25% notes due 2031 (€650 principal)	1.30	%		728				—			—
Senior notes issued in 2019
Floating rate notes due May 2021	2.08	%		750				—			—
Floating rate notes due November 2021	2.12	%		750				—			—
Floating rate notes due 2022	2.29	%		750				—			—
2.15% notes due 2021	2.23	%		1,750				—			—
2.30% notes due 2022	2.42	%		3,000				—			—
2.60% notes due 2024	2.69	%		3,750				—			—
2.95% notes due 2026	3.02	%		4,000				—			—
3.20% notes due 2029	3.25	%		5,500				—			—
4.05% notes due 2039	4.11	%		4,000				—			—
4.25% notes due 2049	4.29	%		5,750				—			—
Other				27							36
Fair value hedges				(48		)					(466		)
Unamortized bond discounts				(161		)					(120		)
Unamortized deferred financing costs				(323		)					(163		)
Total long-term debt and finance lease obligations				66,728							36,611
Current portion				3,753							1,609
Noncurrent portion				$	62,975						$	35,002

(a)	Excludes the effect of any related interest rate swaps.

62 | 2019 Form 10-K

Allergan-Related Financing

In connection with the proposed acquisition of Allergan, in November 2019, the company issued $30.0 billion aggregate principal amount of unsecured senior notes, consisting of $750 million aggregate principal amount of floating rate senior notes due May 2021, $750 million aggregate principal amount of floating rate senior notes due November 2021, $750 million aggregate principal amount of floating rate senior notes due 2022, $1.75 billion aggregate principal amount of 2.15% senior notes due 2021, $3.0 billion aggregate principal amount of 2.30% senior notes due 2022, $3.75 billion aggregate principal amount of 2.60% senior notes due 2024, $4.0 billion aggregate principal amount of 2.95% senior notes due 2026, $5.5 billion aggregate principal amount of 3.20% senior notes due 2029, $4.0 billion aggregate principal amount of 4.05% senior notes due 2039 and $5.75 billion aggregate principal amount of 4.25% senior notes due 2049. These senior notes rank equally with all other unsecured and unsubordinated indebtedness of the company. AbbVie may redeem the fixed-rate senior notes prior to maturity at a redemption price equal to the greater of the principal amount or the sum of present values of the remaining scheduled payments of principal and interest on the fixed-rate senior notes to be redeemed plus a make-whole premium. With exception of the fixed-rate notes due 2021 and 2022, AbbVie may also redeem the fixed-rate senior notes at par between one and six months prior to maturity. In connection with the offering, debt issuance costs incurred totaled $173 million and debt discounts totaled $52 million, which are being amortized over the respective terms of the notes to interest expense, net in the consolidated statements of earnings. AbbVie expects to use the net proceeds to fund a portion of the aggregate cash consideration due to Allergan shareholders in connection with the proposed acquisition described in Note 5 and to pay related fees and expenses. Pending the consummation of the proposed Allergan acquisition, the net proceeds from the offering are permitted to be invested temporarily in short-term investments. All of the notes are subject to special mandatory redemption at a redemption price equal to 101% of the aggregate principal amount of the notes plus accrued and unpaid interest if the proposed acquisition of Allergan is not completed by January 30, 2021 or the company notifies the trustee in respect of the notes that it will not pursue the consummation of the proposed Allergan acquisition.

On June 25, 2019, AbbVie entered into a $38.0 billion 364-day bridge credit agreement. On July 12, 2019, AbbVie entered into a term loan credit agreement with an aggregate principal amount of $6.0 billion consisting of a $1.5 billion 364-day term loan tranche, a $2.5 billion three-year term loan tranche and a $2.0 billion five-year term loan tranche. In connection with the agreements, debt issuance costs incurred totaled $242 million and were recorded to interest expense, net in the consolidated statements of earnings. Upon commencement of the $6.0 billion term loan credit agreement and upon issuance of the $30.0 billion aggregate principal amount of senior notes, commitments under the bridge credit agreement were reduced to $2.0 billion. No amounts were drawn under the bridge credit agreement or term loan credit agreement at December 31, 2019. In February 2020, the remaining commitments under the bridge credit agreement were reduced to $0 as a result of cash on hand at AbbVie. AbbVie subsequently terminated the bridge credit agreement in its entirety as permitted under its terms.

On October 25, 2019, AbbVie commenced offers to exchange any and all outstanding notes of certain series issued by Allergan for up to $15.5 billion aggregate principal amount and €3.7 billion aggregate principal amount of new notes to be issued by AbbVie and cash, subject to conditions including the closing of the pending acquisition of Allergan. Concurrently with the offers to exchange the Allergan notes for AbbVie notes, the company solicited consents to adopt certain proposed amendments to each of the indentures governing the Allergan notes to, among other things, eliminate substantially all of the restrictive covenants in such indentures. In November 2019, the company announced that the requisite number of consents had been received to adopt the proposed amendments with respect to all Allergan notes and that Allergan executed a supplemental indenture with respect to each Allergan indenture implementing the amendments, which will become operative only upon settlement of the exchange offers. The expiration of the exchange offers is expected to occur on or about the closing date of AbbVie’s acquisition of Allergan.

Other Long-Term Debt

In September 2019, the company issued €1.4 billion aggregate principal amount of unsecured senior Euro notes, consisting of €750 million aggregate principal amount of 0.75% senior notes due 2027 and €650 million aggregate principal amount of 1.25% senior notes due 2031. 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 and may redeem the senior notes at par between one and three months prior to maturity. In connection with the offering, debt issuance costs incurred totaled $9 million and debt discounts totaled $5 million and are being amortized over the respective terms of the notes to interest expense, net in the consolidated statements of earnings. In October 2019, the company used the proceeds to redeem €1.4 billion aggregate principal amount of 0.375% senior Euro notes that were due to mature in November 2019.

In September 2018, the company issued $6.0 billion aggregate principal amount of unsecured senior notes, consisting of $1.25 billion aggregate principal amount of 3.375% senior notes due 2021, $1.25 billion aggregate principal amount of 3.75%

		2019 Form 10-K | 63

senior notes due 2023, $1.75 billion aggregate principal amount of 4.25% senior notes due 2028 and $1.75 billion aggregate principal amount of 4.875% senior notes due 2048. 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, and except for the 3.375% notes due 2021, AbbVie may redeem the senior notes at par between one and six months prior to maturity. In connection with the offering, debt issuance costs incurred totaled $37 million and debt discounts totaled $37 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 $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 used the remaining proceeds to repay term loan obligations in 2019 as they became due.

In May 2018, the company also repaid $3.0 billion aggregate principal amount of 1.80% senior notes at maturity.

AbbVie has outstanding €2.2 billion aggregate principal amount of unsecured senior Euro notes which were issued in 2016. 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 AbbVie may redeem the senior notes at par between one and three months prior to maturity.

AbbVie has outstanding $7.8 billion aggregate principal amount of unsecured senior notes which were issued in 2016 and $13.7 billion aggregate principal amount of unsecured senior notes which were issued in 2015. AbbVie may redeem the senior notes, at any time, prior to maturity at a redemption price equal to the principal amount of the senior notes redeemed plus a make-whole premium and AbbVie may redeem the senior notes at par between one and six months prior to maturity.

AbbVie has outstanding $5.7 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, 2019, 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 $699 million as of December 31, 2018. There were no commercial paper borrowings as of December 31, 2019. The weighted-average interest rate on commercial paper borrowings was 2.5% in 2019, 2.0% in 2018 and 1.3% in 2017.

In August 2019, AbbVie entered into an amended and restated $4.0 billion five-year revolving credit facility that matures in August 2024. This amended facility enables the company to borrow funds on an unsecured basis at variable interest rates and contains various covenants, all of which the company was in compliance with as of December 31, 2019. Commitment fees under AbbVie's revolving credit facilities were insignificant in 2019, 2018 and 2017. No amounts were outstanding under the company's credit facilities as of December 31, 2019 and December 31, 2018.

In March 2019, AbbVie repaid a $3.0 billion 364-day term loan credit agreement that was drawn on in June 2018 and was scheduled to mature in June 2019.

Maturities of Long-Term Debt

The following table summarizes AbbVie's debt maturities as of December 31, 2019:

as of and for the years ending December 31 (in millions)
2020	$	3,750
2021	6,300
2022	7,850
2023	2,250
2024	5,375
Thereafter	41,708
Total obligations and commitments	67,233
Fair value hedges, unamortized bond discounts, deferred financing costs and finance lease obligations	(505		)
Total long-term debt and finance lease obligations	$	66,728

64 | 2019 Form 10-K

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 11 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 $957 million at December 31, 2019 and $1.4 billion at December 31, 2018, are designated as cash flow hedges and are recorded at fair value. The durations of these forward exchange contracts were generally less than eighteen months. Accumulated gains and losses as of December 31, 2019 will be reclassified from AOCI and included in cost of products sold at the time the products are sold, generally not exceeding six months from the date of settlement.

In the third quarter of 2019, the company entered into treasury rate lock agreements with notional amounts totaling $10.0 billion to hedge exposure to variability in future cash flows resulting from changes in interest rates related to the issuance of long-term debt in connection with the proposed acquisition of Allergan. The treasury rate lock agreements were designated as cash flow hedges and recorded at fair value. The agreements were net settled upon issuance of the senior notes in November 2019 resulting in a gain of $383 million recognized in other comprehensive income (loss). This gain will be reclassified to interest expense, net over the lives of the related debt.

In the fourth quarter of 2019, the company entered into interest rate swap contracts with notional amounts totaling $2.3 billion at December 31, 2019. The effect of the hedge contracts is to change a floating-rate interest obligation to a fixed rate for that portion of the floating-rate debt. The contracts were designated as cash flow hedges and are recorded at fair value. Realized and unrealized gains or losses are included in AOCI and will be reclassified to interest expense, net over the lives of the floating-rate debt.

The company also enters into foreign currency forward exchange contracts to manage its exposure to foreign currency denominated trade payables and receivables and intercompany loans. These contracts are not designated as hedges and are recorded at fair value. Resulting gains or losses are reflected in net foreign exchange loss in the consolidated statements of earnings and are generally offset by losses or gains on the foreign currency exposure being managed. These contracts had notional amounts totaling $7.1 billion at December 31, 2019 and $8.6 billion at December 31, 2018.

The company also uses foreign currency forward exchange contracts or foreign currency denominated debt to hedge its net investments in certain foreign subsidiaries and affiliates. The company had €3.6 billion aggregate principal amount of senior Euro notes designated as net investment hedges at December 31, 2019 and December 31, 2018. In the third quarter of 2019, the company issued €1.4 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 elected to de-designate hedge accounting for €1.4 billion aggregate principal amount of existing senior Euro notes which were subsequently repaid in October 2019. In addition, in 2019, the company entered into foreign currency forward exchange contracts and designated the instruments as net investment hedges. These contracts had notional amounts totaling €971 million, £204 million and CHF62 million at December 31, 2019. The company uses the spot method of assessing hedge effectiveness for derivative

		2019 Form 10-K | 65

instruments designated as net investment hedges. Realized and unrealized gains and losses from these hedges are included in AOCI and the initial fair value of hedge components excluded from the assessment of effectiveness is recognized in interest expense, net over the life of the hedging instrument.

AbbVie is a party to interest rate swap contracts designated as fair value hedges with notional amounts totaling $10.8 billion at December 31, 2019 and December 31, 2018. The effect of the hedge contracts is to change a fixed-rate interest obligation to a floating rate for that portion of the debt. AbbVie records the contracts at fair value and adjusts the carrying amount of the fixed-rate debt by an offsetting amount.

No amounts are excluded from the assessment of effectiveness for cash flow hedges or fair value hedges.

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	2019			2018				Balance sheet caption	2019			2018
Foreign currency forward exchange contracts
Designated as cash flow hedges	Prepaid expenses and other	$	3		$	113			Accounts payable and accrued liabilities	$	14		$	—
Designated as net investment hedges	Prepaid expenses and other	—			—				Accounts payable and accrued liabilities	24			—
Not designated as hedges	Prepaid expenses and other	19			19				Accounts payable and accrued liabilities	18			26
Interest rate swap contracts
Designated as cash flow hedges	Other assets	3			—				Other long-term liabilities	—			—
Designated as fair value hedges	Prepaid expenses and other	—			—				Accounts payable and accrued liabilities	2			—
Designated as fair value hedges	Other assets	28			—				Other long-term liabilities	74			466
Total derivatives		$	53		$	132				$	132		$	492

While certain derivatives are subject to netting arrangements with the company's counterparties, the company does not offset derivative assets and liabilities within the consolidated balance sheets.

The following table presents the pre-tax amounts of gains (losses) from derivative instruments recognized in other comprehensive income (loss):

years ended in December 31 (in millions)		2019				2018				2017
Foreign currency forward exchange contracts
Designated as cash flow hedges		$	(5	)		$	175			$	(250	)
Designated as net investment hedges		33				—				—
Interest rate swap contracts designated as cash flow hedges		4				—				—
Treasury rate lock agreements designated as cash flow hedges		383				—				—

Assuming market rates remain constant through contract maturities, the company expects to transfer pre-tax losses of $10 million into cost of products sold for foreign currency cash flow hedges, pre-tax gains of $7 million into interest expense, net for interest rate swap cash flow hedges and pre-tax gains of $24 million into interest expense, net for treasury rate lock agreement cash flow hedges during the next 12 months.

Related to AbbVie’s non-derivative, foreign currency denominated debt designated as net investment hedges, the company recognized in other comprehensive income (loss) pre-tax gains of $90 million in 2019, pre-tax gains of $178 million in 2018 and pre-tax losses of $537 million in 2017.

66 | 2019 Form 10-K

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 net gains (losses) reclassified out of AOCI into net earnings. See Note 13 for the amount of net gains (losses) reclassified out of AOCI.

years ended December 31 (in millions)	Statement of earnings caption	2019				2018				2017
Foreign currency forward exchange contracts
Designated as cash flow hedges	Cost of products sold	$	167			$	(161	)		$	118
Designated as net investment hedges	Interest expense, net	27				—				—
Not designated as hedges	Net foreign exchange loss	(70		)		83				(96		)
Treasury rate lock agreements designated as cash flow hedges	Interest expense, net	3				—				—
Interest rate swap contracts
Designated as cash flow hedges	Interest expense, net	1				—				—
Designated as fair value hedges	Interest expense, net	418				(71		)		(63		)
Debt designated as hedged item in fair value hedges	Interest expense, net	(418		)		71				63

Fair Value Measures

The fair value hierarchy consists of the following three levels:

•	Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets that the company has the ability to access;

•	Level 2—Valuations based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuations in which all significant inputs are observable in the market; and

•	Level 3—Valuations using significant inputs that are unobservable in the market and include the use of judgment by the company's management about the assumptions market participants would use in pricing the asset or liability.

The following table summarizes the bases used to measure certain assets and liabilities carried at fair value on a recurring basis on the consolidated balance sheet as of December 31, 2019:

					Basis of fair value measurement
(in millions)	Total				Quoted prices in active markets for identical assets (Level 1)				Significant other observable inputs (Level 2)				Significant unobservable Inputs (Level 3)
Assets
Cash and equivalents	$	39,924			$	1,542			$	38,382			$	—
Debt securities	3				—				3				—
Equity securities	24				24				—				—
Interest rate swap contracts	31				—				31				—
Foreign currency contracts	22				—				22				—
Total assets	$	40,004			$	1,566			$	38,438			$	—
Liabilities
Interest rate swap contracts	$	76			$	—			$	76			$	—
Foreign currency contracts	56				—				56				—
Contingent consideration	7,340				—				—				7,340
Total liabilities	$	7,472			$	—			$	132			$	7,340

		2019 Form 10-K | 67

The following table summarizes the bases used to measure certain assets and liabilities carried at fair value on a recurring basis on the consolidated balance sheet as of December 31, 2018:

					Basis of fair value measurement
(in millions)	Total				Quoted prices in active markets for identical assets (Level 1)				Significant other observable inputs (Level 2)				Significant unobservable Inputs (Level 3)
Assets
Cash and equivalents	$	7,289			$	1,209			$	6,080			$	—
Time deposits	568				—				568				—
Debt securities	1,536				—				1,536				—
Equity securities	4				4				—				—
Foreign currency contracts	132				—				132				—
Total assets	$	9,529			$	1,213			$	8,316			$	—
Liabilities
Interest rate swap contracts	$	466			$	—			$	466			$	—
Foreign currency contracts	26				—				26				—
Contingent consideration	4,483				—				—				4,483
Total liabilities	$	4,975			$	—			$	492			$	4,483

The fair values of time deposits approximate their amortized cost due to the short maturities of these instruments. The fair values of available-for-sale debt securities were determined based on prices obtained from commercial pricing services. The derivatives entered into by the company were valued using observable market inputs including published interest rate curves and both forward and spot prices for foreign currencies. 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. The potential contingent consideration payments are estimated by applying a probability-weighted expected payment model for contingent milestone payments and a Monte Carlo simulation model for contingent royalty payments, which are then discounted to present value. 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 certain 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, 2019, a 50 basis point increase/decrease in the assumed discount rate would have decreased/increased the value of the contingent consideration liabilities by approximately $280 million. Additionally, at December 31, 2019, a five percentage point increase/decrease in the assumed probability of success across all potential indications would have increased/decreased the value of the contingent consideration liabilities by approximately $150 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)	2019				2018				2017
Beginning balance	$	4,483			$	4,534			$	4,213
Change in fair value recognized in net earnings	3,091				49				626
Payments	(234		)		(100		)		(305		)
Ending balance	$	7,340			$	4,483			$	4,534

The change in fair value recognized in net earnings is recorded in other expense, net in the consolidated statements of earnings. During the second quarter of 2019, the company recorded a $2.3 billion increase in the SKYRIZI contingent consideration liability due to higher probabilities of success, higher estimated future sales and declining interest rates. The higher probabilities of success resulted from the April 2019 regulatory approvals of SKYRIZI for the treatment of moderate to severe plaque psoriasis. During the third quarter of 2019, the company recorded a $91 million decrease in the Stemcentrx contingent consideration liability due to the termination of the Rova-T research and development program. During the fourth quarter of 2018, the company recorded a $428 million decrease in the Stemcentrx contingent consideration liability due to a reduction in probabilities of success of achieving regulatory approval.

68 | 2019 Form 10-K

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, 2019 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)
Liabilities
Current portion of long-term debt and finance lease obligations, excluding fair value hedges	$	3,755		$	3,760			$	3,753			$	7			$	—
Long-term debt and finance lease obligations, excluding fair value hedges	63,021			66,651				66,631				20				—
Total liabilities	$	66,776		$	70,411			$	70,384			$	27			$	—

The book values, approximate fair values and bases used to measure the approximate fair values of certain financial instruments as of December 31, 2018 are shown in the table below:

								Basis of fair value measurement
(in millions)	Book value			Approximate fair values				Quoted prices in active markets for identical assets (Level 1)				Significant other observable inputs (Level 2)				Significant unobservable Inputs (Level 3)
Liabilities
Short-term borrowings	$	3,699		$	3,693			$	—			$	3,693			$	—
Current portion of long-term debt and finance lease obligations, excluding fair value hedges	1,609			1,617				1,609				8				—
Long-term debt and finance lease obligations, excluding fair value hedges	35,468			34,052				34,024				28				—
Total liabilities	$	40,776		$	39,362			$	35,633			$	3,729			$	—

AbbVie also holds investments in equity securities that do not have readily determinable fair values. The company records these investments at cost and remeasures them to fair value based on certain observable price changes or impairment events as they occur. The carrying amount of these investments was $66 million as of December 31, 2019 and $84 million as of December 31, 2018. No significant cumulative upward or downward adjustments have been recorded for these investments as of December 31, 2019.

Available-for-sale Securities

Substantially all of the company’s investments in debt securities were classified as available-for-sale with changes in fair value recognized in other comprehensive income. In the third quarter of 2019, the company sold substantially all of its investments in debt securities. There were no debt securities classified as short-term as of December 31, 2019 and $204 million as of December 31, 2018. Long-term debt securities mature primarily within five years. Estimated fair values of available-for-sale debt securities were based on prices obtained from commercial pricing services.

The following table summarizes available-for-sale securities by type as of December 31, 2018:

	Amortized cost				Gross unrealized								Fair value
(in millions)		Gains				Losses
Asset backed securities	$	423			$	—			$	(2	)		$	421
Corporate debt securities	1,042				1				(9		)		1,034
Other debt securities	81				—				—				81
Total	$	1,546			$	1			$	(11	)		$	1,536

AbbVie had no other-than-temporary impairments as of December 31, 2019. Net realized gains and losses were insignificant in 2019 and 2018. Net realized gains were $90 million in 2017.

		2019 Form 10-K | 69

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.

Of total net accounts receivable, three U.S. wholesalers accounted for 68% as of December 31, 2019 and 63% as of December 31, 2018, and substantially all of AbbVie's net revenues in the United States were to these three wholesalers.

HUMIRA (adalimumab) is AbbVie's single largest product and accounted for approximately 58% of AbbVie's total net revenues in 2019, 61% in 2018 and 65% in 2017.

Note 12 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, 2019 and 2018.

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)	2019				2018				2019				2018
Projected benefit obligations
Beginning of period	$	6,618			$	6,985			$	561			$	813
Service cost	269				285				25				26
Interest cost	259				227				29				25
Employee contributions	2				2				—				—
Actuarial (gain) loss	1,703				(614		)		451				(287		)
Benefits paid	(206		)		(191		)		(17		)		(16		)
Other, primarily foreign currency translation adjustments	1				(76		)		1				—
End of period	8,646				6,618				1,050				561
Fair value of plan assets
Beginning of period	5,637				5,399				—				—
Actual return on plan assets	946				(384		)		—				—
Company contributions	727				873				17				16
Employee contributions	2				2				—				—
Benefits paid	(206		)		(191		)		(17		)		(16		)
Other, primarily foreign currency translation adjustments	10				(62		)		—				—
End of period	7,116				5,637				—				—
Funded status, end of period	$	(1,530	)		$	(981	)		$	(1,050	)		$	(561	)
Amounts recognized on the consolidated balance sheets
Other assets	$	395			$	321			$	—			$	—
Accounts payable and accrued liabilities	(8		)		(8		)		(18		)		(15		)
Other long-term liabilities	(1,917		)		(1,294		)		(1,032		)		(546		)
Net obligation	$	(1,530	)		$	(981	)		$	(1,050	)		$	(561	)
Actuarial loss, net	$	3,633			$	2,516			$	469			$	25
Prior service cost (credit)	10				11				(16		)		(22		)
Accumulated other comprehensive loss	$	3,643			$	2,527			$	453			$	3

Actuarial losses for 2019 in the table above were primarily driven by lower discount rates.

70 | 2019 Form 10-K

The projected benefit obligations (PBO) in the table above included $2.3 billion at December 31, 2019 and $1.9 billion at December 31, 2018, related to international defined benefit plans.

For plans reflected in the table above, the accumulated benefit obligations (ABO) were $7.6 billion at December 31, 2019 and $6.0 billion at December 31, 2018. For those plans reflected in the table above in which the ABO exceeded plan assets at December 31, 2019, the ABO was $5.8 billion, the PBO was $6.7 billion and aggregate plan assets were $4.8 billion.

Amounts Recognized in Other Comprehensive Income (Loss)

The following table summarizes the pre-tax losses (gains) included in other comprehensive income (loss):

years ended December 31 (in millions)	2019				2018				2017
Defined benefit plans
Actuarial loss	$	1,231			$	209			$	412
Amortization of actuarial loss and prior service cost	(109		)		(140		)		(107		)
Foreign exchange loss (gain) and other	(6		)		(13		)		46
Total loss	$	1,116			$	56			$	351
Other post-employment plans
Actuarial loss (gain)	$	451			$	(287	)		$	149
Amortization of actuarial loss and prior service credit	(1		)		(1		)		—
Total loss (gain)	$	450			$	(288	)		$	149

The pre-tax amounts included in AOCI at December 31, 2019 expected to be recognized in net periodic benefit cost in 2020 consisted of $219 million of expense related to actuarial losses and prior service costs for defined benefit plans and $25 million of income related to actuarial losses and prior service credits for other post-employment plans.

Net Periodic Benefit Cost

years ended December 31 (in millions)	2019				2018				2017
Defined benefit plans
Service cost	$	269			$	285			$	236
Interest cost	259				227				204
Expected return on plan assets	(474		)		(439		)		(382		)
Amortization of actuarial loss and prior service cost	109				140				107
Net periodic benefit cost	$	163			$	213			$	165
Other post-employment plans
Service cost	$	25			$	26			$	26
Interest cost	29				25				24
Amortization of actuarial loss and prior service credit	1				1				—
Net periodic benefit cost	$	55			$	52			$	50

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

Weighted-Average Assumptions Used in Determining Benefit Obligations at the Measurement Date

as of December 31	2019			2018
Defined benefit plans
Discount rate	3.0	%		4.0	%
Rate of compensation increases	4.6	%		4.6	%
Other post-employment plans
Discount rate	3.6	%		4.6	%

The assumptions used in calculating the December 31, 2019 measurement date benefit obligations will be used in the calculation of net periodic benefit cost in 2020.

		2019 Form 10-K | 71

Weighted-Average Assumptions Used in Determining Net Periodic Benefit Cost

years ended December 31	2019			2018			2017
Defined benefit plans
Discount rate for determining service cost	4.0	%		3.4	%		3.9	%
Discount rate for determining interest cost	4.0	%		3.1	%		3.7	%
Expected long-term rate of return on plan assets	7.6	%		7.7	%		7.8	%
Expected rate of change in compensation	4.6	%		4.4	%		4.4	%
Other post-employment plans
Discount rate for determining service cost	4.7	%		4.0	%		4.9	%
Discount rate for determining interest cost	4.3	%		3.7	%		4.1	%

For the December 31, 2019 post-retirement health care obligations remeasurement, the company assumed a 6.4% pre-65 (7.0% 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 2019 post-retirement health care costs, the company assumed a 6.6% pre-65 (7.3% 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 2050 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, 2019, a one percentage point change in assumed health care cost trend rates would have the following effects:

	One percentage point
year ended December 31, 2019 (in millions) (brackets denote a reduction)	Increase				Decrease
Service cost and interest cost	$	13			$	(10	)
Projected benefit obligation	244				(186		)

Defined Benefit Pension Plan Assets

					Basis of fair value measurement
as of December 31 (in millions)	2019				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)	$	884			$	884			$	—			$	—
U.S. mid cap(b)	138				138				—				—
International(c)	349				349				—				—
Fixed income securities
U.S. government securities(d)	149				21				128				—
Corporate debt instruments(d)	372				112				260				—
Non-U.S. government securities(d)	202				84				118				—
Other(d)	320				318				2				—
Absolute return funds(e)	296				4				292				—
Real assets	9				9				—				—
Other(f)	132				132				—				—
Total	$	2,851			$	2,051			$	800			$	—
Total assets measured at NAV	4,265
Fair value of plan assets	$	7,116

72 | 2019 Form 10-K

					Basis of fair value measurement
as of December 31 (in millions)	2018				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)	$	719			$	719			$	—			$	—
U.S. mid cap(b)	67				67				—				—
International(c)	226				226				—				—
Fixed income securities
U.S. government securities(d)	140				21				119				—
Corporate debt instruments(d)	385				123				262				—
Non-U.S. government securities(d)	175				48				127				—
Other(d)	232				225				7				—
Absolute return funds(e)	261				3				258				—
Real assets	7				7				—				—
Other(f)	147				147				—				—
Total	$	2,359			$	1,586			$	773			$	—
Total assets measured at NAV	3,278
Fair value of plan assets	$	5,637

(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.

(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 2019 target investment allocation for the AbbVie Pension Plan was 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.

		2019 Form 10-K | 73

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
2020	$	221			$	18
2021	235				21
2022	251				24
2023	268				26
2024	286				29
2025 to 2029	1,737				186

Defined Contribution Plan

AbbVie's principal defined contribution plan is the AbbVie Savings Plan. AbbVie recorded expense of $102 million in 2019, $89 million in 2018 and $82 million in 2017 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.

Note 13 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, 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 10 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)	2019				2018				2017
Cost of products sold	$	29			$	27			$	23
Research and development	171				169				159
Selling, general and administrative	230				225				183
Pre-tax compensation expense	430				421				365
Tax benefit	80				73				73
After-tax compensation expense	$	350			$	348			$	292

Realized excess tax benefits associated with stock-based compensation totaled $15 million in 2019, $78 million in 2018 and $71 million in 2017.

74 | 2019 Form 10-K

Stock Options

Stock options awarded to employees 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 $12.54 in 2019, $21.63 in 2018 and $9.80 in 2017.

The following table summarizes AbbVie stock option activity in 2019:

(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, 2018	6,143			$	55.05			6.2		$	242
Granted	1,002			79.02
Exercised	(375	)		23.72
Lapsed	(9	)		20.09
Outstanding at December 31, 2019	6,761			$	60.39			5.9		$	207
Exercisable at December 31, 2019	4,924			$	51.90			4.9		$	186

The total intrinsic value of options exercised was $22 million in 2019, $215 million in 2018 and $371 million in 2017. The total fair value of options vested during 2019 was $13 million. As of December 31, 2019, $6 million of unrecognized compensation cost related to stock options is expected to be recognized as expense over approximately the next two years.

RSUs and Performance Shares

RSUs awarded to employees other than senior executives and other key employees 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 are performance-based. Equity awards granted to senior executives and other key employees consist of a combination of performance-vested RSUs and performance shares as well as non-qualified stock options described above. 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 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.

The following table summarizes AbbVie RSU and performance share activity for 2019:

(share units in thousands)	Share units			Weighted-average grant date fair value
Outstanding at December 31, 2018	9,868			$	79.90
Granted	5,584			78.03
Vested	(4,616	)		71.30
Forfeited	(604	)		82.19
Outstanding at December 31, 2019	10,232			$	81.72

The fair market value of RSUs and performance shares (as applicable) vested was $371 million in 2019, $583 million in 2018 and $348 million in 2017.

		2019 Form 10-K | 75

As of December 31, 2019, $327 million of unrecognized compensation cost related to RSUs and performance shares is expected to be recognized as expense over approximately the next two years.

Cash Dividends

Cash dividends declared per common share totaled $4.39 in 2019, $3.95 in 2018 and $2.63 in 2017. The following table summarizes quarterly cash dividends declared during 2019, 2018 and 2017:

2019						2018						2017
Date Declared		Payment Date		Dividend Per Share		Date Declared		Payment Date		Dividend Per Share		Date Declared		Payment Date		Dividend Per Share
11/01/19		02/14/20		$1.18		11/02/18		02/15/19		$1.07		10/27/17		02/15/18		$0.71
09/06/19		11/15/19		$1.07		09/07/18		11/15/18		$0.96		09/08/17		11/15/17		$0.64
06/20/19		08/15/19		$1.07		06/14/18		08/15/18		$0.96		06/22/17		08/15/17		$0.64
02/21/19		05/15/19		$1.07		02/15/18		05/15/18		$0.96		02/16/17		05/15/17		$0.64

Stock Repurchase Program

The company's stock repurchase authorization permits purchases of AbbVie shares from time to time in open-market or private transactions at management’s discretion. The program has no time limit and can be discontinued at any time. Shares repurchased under these programs are recorded at acquisition cost, including related expenses and are available for general corporate purposes.

AbbVie repurchased 4 million shares for $300 million in 2019. AbbVie's remaining stock repurchase authorization was approximately $4.0 billion as of December 31, 2019.

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. Under this authorization, AbbVie repurchased approximately 109 million shares for $10.7 billion in 2018.

Under previous stock repurchase programs, AbbVie made open-market share repurchases of approximately 11 million shares for $1.3 billion in 2018 and approximately 13 million shares for $1.0 billion in 2017.

76 | 2019 Form 10-K

Accumulated Other Comprehensive Loss

The following table summarizes the changes in each component of accumulated other comprehensive loss, net of tax, for 2019, 2018 and 2017:

(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, 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		)
Other comprehensive income (loss) before reclassifications	(391		)		138				84				(14		)		156				(27		)
Net losses reclassified from accumulated other comprehensive loss	—				—				113				4				157				274
Net current-period other comprehensive income (loss)	(391		)		138				197				(10		)		313				247
Balance as of December 31, 2018	(830		)		(65		)		(1,722		)		(10		)		147				(2,480		)
Other comprehensive income (loss) before reclassifications	(98		)		95				(1,330		)		12				298				(1,023		)
Net losses (gains) reclassified from accumulated other comprehensive loss	—				(21		)		87				(2		)		(157		)		(93		)
Net current-period other comprehensive income (loss)	(98		)		74				(1,243		)		10				141				(1,116		)
Balance as of December 31, 2019	$	(928	)		$	9			$	(2,965	)		$	—			$	288			$	(3,596	)

Other comprehensive loss included foreign currency translation adjustments totaling losses of $98 million in 2019 and $391 million in 2018 which were principally due to the impact of the weakening of the Euro on the translation of the company’s Euro-denominated assets.

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 for 2019 included pension and post-employment benefit plan losses of $1.2 billion primarily due to an actuarial loss driven by lower discount rates. See Note 12 for additional information.

		2019 Form 10-K | 77

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)	2019				2018				2017
Net investment hedging activities
Gains on derivative amount excluded from effectiveness testing(a)	$	(27	)		$	—			$	—
Tax expense	6				—				—
Total reclassifications, net of tax	$	(21	)		$	—			$	—
Pension and post-employment benefits
Amortization of actuarial losses and other(b)	$	110			$	141			$	107
Tax benefit	(23		)		(28		)		(33		)
Total reclassifications, net of tax	$	87			$	113			$	74
Cash flow hedging activities
Losses (gains) on foreign currency forward exchange contracts(c)	$	(167	)		$	161			$	(118	)
Gains on treasury rate lock agreements and interest rate swap contracts(a)	(4		)		—				—
Tax expense (benefit)	14				(4		)		6
Total reclassifications, net of tax	$	(157	)		$	157			$	(112	)

(a)	Amounts are included in interest expense, net (see Note 11).

(b)	Amounts are included in the computation of net periodic benefit cost (see Note 12).

(c)	Amounts are included in cost of products sold (see Note 11).

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, 2019, no shares of preferred stock were issued or outstanding.

Note 14 Income Taxes

Earnings Before Income Tax Expense

years ended December 31 (in millions)	2019				2018				2017
Domestic	$	(2,784	)		$	(4,274	)		$	(2,678	)
Foreign	11,210				9,471				10,405
Total earnings before income tax expense	$	8,426			$	5,197			$	7,727

Income Tax Expense

years ended December 31 (in millions)	2019				2018				2017
Current
Domestic	$	102			$	593			$	6,204
Foreign	320				434				376
Total current taxes	$	422			$	1,027			$	6,580
Deferred
Domestic	$	(137	)		$	(1,497	)		$	(4,898	)
Foreign	259				(20		)		736
Total deferred taxes	$	122			$	(1,517	)		$	(4,162	)
Total income tax expense (benefit)	$	544			$	(490	)		$	2,418

78 | 2019 Form 10-K

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 reduced the U.S. federal corporate tax rate from 35% to 21% and required companies to pay a one-time transition tax on a mandatory deemed repatriation of earnings of certain foreign subsidiaries that were previously untaxed. These changes were generally effective for tax years beginning in 2018.

The Act also created a minimum tax on certain foreign sourced earnings. The company’s accounting policy for the minimum tax on foreign sourced earnings is to report the tax effects on the basis that the minimum tax will be recognized in tax expense in the year it is incurred as a period expense.

Additionally, the Act significantly changed the timing and manner in which earnings of foreign subsidiaries are subject to U.S. tax. Therefore, unremitted foreign earnings previously considered indefinitely reinvested that were subject to the Act’s transition tax are no longer considered indefinitely reinvested. Post-2017 earnings subject to the U.S. minimum tax on foreign sourced earnings and the 100 percent foreign dividends received deduction are also not considered indefinitely reinvested earnings. As such, the company records foreign withholding tax liabilities related to the future cash repatriation of such earnings. However, the company considers instances of outside basis differences in foreign subsidiaries that would incur additional U.S. tax upon reversal (e.g., capital gain distribution) to be permanent in duration. The unrecognized tax liability is not practicable to determine.

Effective Tax Rate Reconciliation

years ended December 31	2019			2018			2017
Statutory tax rate	21.0	%		21.0	%		35.0	%
Effect of foreign operations	(8.4	)		(28.7	)		(12.2	)
U.S. tax credits	(3.3	)		(7.3	)		(4.0	)
Impacts related to U.S. tax reform	(1.6	)		8.2			12.0
Stock-based compensation excess tax benefit	(0.2	)		(1.5	)		(0.9	)
Tax audit settlements	(4.7	)		(2.5	)		(1.2	)
Deferred tax remeasurements due to change in tax rate	3.1			—			—
All other, net	0.6			1.4			2.6
Effective tax rate	6.5	%		(9.4	)%		31.3	%

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 2019, 2018 and 2017 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, the cost of repatriation decisions, Boehringer Ingelheim accretion on contingent consideration and Stemcentrx impairment related expenses. 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 2019, 2018 and 2017 included impacts related to U.S. tax reform. In 2018, there was a favorable impact of the effective date of provisions of the Act related to the earnings from certain foreign subsidiaries. For 2019, the impact of the Act affected the full year earnings of these subsidiaries, resulting in additional tax expense compared to prior year. The 2019 effective income tax rate also reflects the effects of deferred tax remeasurement due to a change in foreign tax law, accretion for contingent consideration and impairment related expenses. In addition, the company recognized a net tax benefit of $400 million in 2019, $131 million in 2018 and $91 million in 2017 related to the resolution of various tax positions pertaining to prior years.

		2019 Form 10-K | 79

Deferred Tax Assets and Liabilities

as of December 31 (in millions)	2019				2018
Deferred tax assets
Compensation and employee benefits	$	810			$	529
Accruals and reserves	371				371
Chargebacks and rebates	477				417
Advance payments	615				867
Net operating losses and other credit carryforwards	838				228
Other	406				353
Total deferred tax assets	3,517				2,765
Valuation allowances	(731		)		(103		)
Total net deferred tax assets	2,786				2,662
Deferred tax liabilities
Excess of book basis over tax basis of intangible assets	(2,712		)		(2,940		)
Excess of book basis over tax basis in investments	(249		)		(211		)
Other	(440		)		(250		)
Total deferred tax liabilities	(3,401		)		(3,401		)
Net deferred tax liabilities	$	(615	)		$	(739	)

As of December 31, 2019, gross state net operating losses were $1.0 billion and tax credit carryforwards were $188 million. The state tax carryforwards expire between 2020 and 2039. As of December 31, 2019, foreign net operating loss carryforwards were $2.9 billion. Foreign net operating loss carryforwards of $2.8 billion expire between 2020 and 2036 and the remaining do not have an expiration period.

The company had valuation allowances of $731 million as of December 31, 2019 and $103 million as of December 31, 2018. These were principally related to foreign and state net operating losses and credit carryforwards that are not expected to be realized.

Unrecognized Tax Benefits

years ended December 31 (in millions)	2019				2018				2017
Beginning balance	$	2,852			$	2,701			$	1,168
Increase due to current year tax positions	113				163				1,768
Increase due to prior year tax positions	499				110				16
Decrease due to prior year tax positions	(21		)		(36		)		(2		)
Settlements	(749		)		(79		)		(233		)
Lapse of statutes of limitations	(33		)		(7		)		(16		)
Ending balance	$	2,661			$	2,852			$	2,701

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 $2.4 billion in 2019 and $2.7 billion in 2018. Of the unrecognized tax benefits recorded in the table above as of December 31, 2019, AbbVie would be indemnified for approximately $83 million. The “Increase due to current year tax positions” and "Increase due to prior year tax positions" in the table above include amounts related to federal, state and international tax items.

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 $51 million in 2019, $73 million in 2018 and $24 million in 2017, for interest and penalties related to income tax matters. AbbVie had an accrual for the payment of gross

80 | 2019 Form 10-K

interest and penalties of $191 million at December 31, 2019, $190 million at December 31, 2018 and $120 million at December 31, 2017.

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 12 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 12 months up to $54 million. All significant federal, state, local and international matters have been concluded for years through 2012. The company believes adequate provision has been made for all income tax uncertainties.

Note 15 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 $290 million as of December 31, 2019 and approximately $350 million as of December 31, 2018. Initiation of new legal proceedings or a change in the status of existing proceedings may result in a change in the estimated loss accrued by AbbVie. In addition, other operating income in 2019 included $550 million of income from a legal settlement related to an intellectual property dispute with a third party. 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.

Four lawsuits against Unimed Pharmaceuticals, LLC, Solvay Pharmaceuticals, Inc. (a company Abbott acquired in February 2010 and now known as AbbVie Products LLC) and others remained 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 direct AndroGel purchasers, generally allege Solvay's 2006 patent litigation settlement agreements and related agreements with three generic companies violate federal antitrust laws. Plaintiffs seek monetary damages and attorneys' fees. Three of those lawsuits were settled in December 2019 and will be dismissed.

In September 2014, the FTC filed a lawsuit, FTC v. AbbVie Inc., et al., against AbbVie and others in the United States District Court for the Eastern District of Pennsylvania, alleging that the 2011 patent litigation with two generic companies regarding AndroGel was sham litigation and the settlements of that litigation violated federal antitrust law. In May 2015, the court dismissed the FTC’s settlement-related claim. In June 2018, following a bench trial, the court found for the FTC on its sham litigation claim and ordered a disgorgement remedy of $448 million, plus prejudgment interest. The court denied the FTC’s request for injunctive relief. AbbVie is appealing the court’s liability and disgorgement rulings and, based on an assessment of the merits of that appeal, no liability has been accrued for this matter. The FTC is also appealing aspects of the court’s trial ruling and the dismissal of its settlement-related claim. In July 2018, a purported class action was filed in the United States District Court for the Eastern District of Pennsylvania on behalf of direct AndroGel purchasers based on the trial court’s ruling in the FTC’s case. In September 2019, two individual direct AndroGel purchasers substituted in as the plaintiffs in that lawsuit and withdrew the class allegations. That case, which was pending as Rochester Drug Co-Operative, Inc., et al. v. AbbVie Inc., et al., was settled in December 2019 and will be dismissed.

In August 2019, direct purchasers of AndroGel filed a lawsuit, King Drug Co. of Florence, Inc., et al. v. AbbVie Inc., et al., against AbbVie and others in the United States District Court for the Eastern District of Pennsylvania, making allegations similar to those in In re: AndroGel Antitrust Litigation (No. II), MDL No. 2084 (above) and FTC v. AbbVie Inc. (above).

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 Niaspan direct purchasers and one brought by Niaspan end-payers. The cases are pending in the United States District Court for the Eastern

		2019 Form 10-K | 81

District of Pennsylvania for coordinated or consolidated pre-trial proceedings under the MDL Rules as In re: Niaspan Antitrust Litigation, MDL No. 2460. In August 2019, the court certified a class of direct purchasers of Niaspan. In October 2016, the Orange County, California District Attorney’s Office filed a lawsuit on behalf of the State of California regarding the Niaspan patent litigation settlement in Orange County Superior Court, asserting a claim under the unfair competition provision of the California Business and Professions Code seeking injunctive relief, restitution, civil penalties and attorneys’ fees. In May 2018, the California Court of Appeal ruled that the District Attorney’s Office may not bring monetary claims beyond the scope of Orange County, which the District Attorney’s Office is appealing.

Between March and May 2019, 12 putative class action lawsuits were filed in the United States District Court for the Northern District of Illinois by indirect HUMIRA purchasers, alleging that AbbVie’s settlements with biosimilar manufacturers and AbbVie’s HUMIRA patent portfolio violate state and federal antitrust laws. The court consolidated these lawsuits as In re: Humira (Adalimumab) Antitrust Litigation.

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 included violations of the federal RICO Act and state consumer fraud and deceptive trade practices laws. The complaint sought monetary damages and injunctive relief. In July 2018, the court denied the plaintiff’s motion for class certification. In November 2019, the United States Court of Appeals for the Seventh Circuit affirmed the district court’s grant of the defendants’ summary judgment motion.

In July 2019, the New Mexico Attorney General filed a lawsuit, State of New Mexico ex rel. Balderas v. AbbVie Inc., et al., in New Mexico District Court for Santa Fe County against AbbVie and other companies alleging their marketing of AndroGel violated New Mexico’s Unfair Practices Act.

In September 2018, the Commissioner of the California Department of Insurance intervened in a qui tam lawsuit, State of California and Lazaro Suarez v. AbbVie Inc., et al., brought under the California Insurance Frauds Prevention Act, in California Superior Court for Alameda County. The Department of Insurance’s complaint alleges that, through patient and reimbursement support services and other services and items of value provided in connection with HUMIRA, AbbVie caused the submission of fraudulent commercial insurance claims for HUMIRA in violation of the California statute. The complaint seeks injunctive relief, an assessment of up to three times the amount of the claims at issue, and civil penalties. In addition, a federal securities lawsuit (Holwill v. AbbVie Inc., et al.) is pending in the United States District Court for the Northern District of Illinois) against AbbVie, its chief executive officer and former chief financial officer, alleging that reasons stated for HUMIRA sales growth in financial filings between 2013 and 2017 were misleading because they omitted the conduct alleged in the Department of Insurance’s complaint.

In November 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 October 2019, the court granted final approval to the parties’ class settlement agreement.

In June 2016, a lawsuit, Elliott Associates, L.P., et al. v. AbbVie Inc., was filed by five investment funds against AbbVie in the Cook County, Illinois Circuit Court alleging that AbbVie made misrepresentations and omissions in connection with its proposed transaction with Shire. Similar lawsuits were filed between July 2017 and October 2019 against AbbVie and in some instances its chief executive officer in the same court by additional investment funds. Plaintiffs seek compensatory and punitive damages.

Product liability cases were filed in which plaintiffs generally allege that AbbVie and other manufacturers of TRTs did not adequately warn about risks of certain injuries, primarily heart attacks, strokes and blood clots. Approximately 3,500 claims against AbbVie are consolidated for pre-trial purposes in the United States District Court for the Northern District of Illinois under the MDL Rules as In re: Testosterone Replacement Therapy Products Liability Litigation, MDL No. 2545. Approximately 175 claims against AbbVie are pending in various state courts. Plaintiffs generally seek compensatory and punitive damages. In November 2018, AbbVie entered into a Master Settlement Agreement with the Plaintiffs’ Steering Committee in the MDL encompassing existing claims in all courts. All proceedings in pending cases are effectively stayed during the settlement administration process.

Product liability cases are pending in which plaintiffs generally allege that AbbVie did not adequately warn about risk of certain injuries, primarily various birth defects, arising from use of Depakote. Approximately 120 cases are pending in the United States District Court for the Southern District of Illinois, and approximately 14 others are pending in various federal and state courts. Plaintiffs generally seek compensatory and punitive damages. Approximately eighty percent of these pending

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cases, plus other unfiled claims, are subject to confidential settlement agreements and are expected to be dismissed with prejudice.

Beginning in May 2016, the Patent Trial & Appeal Board of the U.S. Patent & Trademark Office (PTO) instituted five inter partes review proceedings brought by Coherus Biosciences and Boehringer Ingelheim related to three AbbVie patents covering methods of treatment of rheumatoid arthritis using adalimumab. In these proceedings, the PTO reviewed the validity of the patents and issued decisions of invalidity in May, June and July of 2017. In January 2020, the Court of Appeals for the Federal Circuit affirmed the decisions.

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 11 HCV-related patents licensed to AbbVie in 2002 are invalid.

Pharmacyclics LLC, a wholly owned subsidiary of AbbVie, is seeking to enforce its patent rights relating to ibrutinib capsules (a drug Pharmacyclics sells under the trademark IMBRUVICA®). In February 2018, cases were filed in the United States District Court for the District of Delaware against the following defendants: Fresenius Kabi USA, LLC, Fresenius Kabi USA, Inc., and Fresenius Kabi Oncology Limited; Sun Pharma Global FZE and Sun Pharmaceutical Industries Ltd.; Cipla Limited and Cipla USA Inc.; and Zydus Worldwide DMCC, Cadila Healthcare Limited, Sandoz Inc., and Lek Pharmaceuticals D.D. In each case, Pharmacyclics alleges the defendant’s proposed generic ibrutinib product infringes certain Pharmacyclics patents and seeks declaratory and injunctive relief. Janssen Biotech, Inc. which is in a global collaboration with Pharmacyclics concerning the development and marketing of IMBRUVICA, is the co-plaintiff in these suits.

Pharmacyclics LLC, a wholly owned subsidiary of AbbVie, is seeking to enforce its patent rights relating to ibrutinib tablets (a drug Pharmacyclics sells under the trademark IMBRUVICA®). In a case filed in the United States District Court for the District of Delaware in March 2019, Pharmacyclics alleges that Alvogen Pine Brook LLC’s and Natco Pharma Ltd.’s proposed generic ibrutinib tablet product infringes certain Pharmacyclics patents. Pharmacyclics seeks declaratory and injunctive relief. Janssen Biotech, Inc. which is in a global collaboration with Pharmacyclics concerning the development and marketing of IMBRUVICA, is the co-plaintiff in this suit.

		2019 Form 10-K | 83

Note 16 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)		2019				2018				2017
Immunology
HUMIRA	United States	$	14,864			$	13,685			$	12,361
	International	4,305				6,251				6,066
	Total	$	19,169			$	19,936			$	18,427
SKYRIZI	United States	$	311			$	—			$	—
	International	44				—				—
	Total	$	355			$	—			$	—
RINVOQ	United States	$	47			$	—			$	—
	International	—				—				—
	Total	$	47			$	—			$	—
Hematologic Oncology
IMBRUVICA	United States	$	3,830			$	2,968			$	2,144
	Collaboration revenues	844				622				429
	Total	$	4,674			$	3,590			$	2,573
VENCLEXTA	United States	$	521			$	247			$	89
	International	271				97				33
	Total	$	792			$	344			$	122
HCV
MAVYRET	United States	$	1,473			$	1,614			$	277
	International	1,420				1,824				213
	Total	$	2,893			$	3,438			$	490
VIEKIRA	United States	$	—			$	3			$	61
	International	36				175				723
	Total	$	36			$	178			$	784
Other Key Products
Creon	United States	$	1,041			$	928			$	831
Lupron	United States	$	720			$	726			$	669
	International	167				166				160
	Total	$	887			$	892			$	829
Synthroid	United States	$	786			$	776			$	781
Synagis	International	$	718			$	726			$	738
Duodopa	United States	$	97			$	80			$	61
	International	364				350				294
	Total	$	461			$	430			$	355
Sevoflurane	United States	$	74			$	74			$	78
	International	274				317				332
	Total	$	348			$	391			$	410
Kaletra	United States	$	38			$	55			$	71
	International	245				281				352
	Total	$	283			$	336			$	423
AndroGel	United States	$	172			$	469			$	577
ORILISSA	United States	$	91			$	11			$	—
	International	2				—				—
	Total	$	93			$	11			$	—
All other		$	511			$	308			$	876
Total net revenues		$	33,266			$	32,753			$	28,216

84 | 2019 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)	2019				2018				2017
United States	$	23,907			$	21,524			$	18,251
Japan	1,211				1,591				764
Germany	909				1,292				1,157
Canada	813				730				659
France	695				783				730
Spain	472				611				521
United Kingdom	372				855				807
Italy	372				652				475
Brazil	359				350				410
The Netherlands	163				352				362
All other countries	3,993				4,013				4,080
Total net revenues	$	33,266			$	32,753			$	28,216

Long-lived assets, primarily net property and equipment, by geographic area were as follows:

as of December 31 (in millions)	2019				2018
United States and Puerto Rico	$	2,026			$	1,993
Europe	646				599
All other	290				291
Total long-lived assets	$	2,962			$	2,883

		2019 Form 10-K | 85

Note 17 Quarterly Financial Data (unaudited)

(in millions except per share data)	2019				2018
First Quarter
Net revenues	$	7,828			$	7,934
Gross margin	6,134				6,007
Net earnings(a)	2,456				2,783
Basic earnings per share	$	1.65			$	1.74
Diluted earnings per share	$	1.65			$	1.74
Cash dividends declared per common share	$	1.07			$	0.96
Second Quarter
Net revenues	$	8,255			$	8,278
Gross margin	6,436				6,344
Net earnings(b)	741				1,983
Basic earnings per share	$	0.49			$	1.26
Diluted earnings per share	$	0.49			$	1.26
Cash dividends declared per common share	$	1.07			$	0.96
Third Quarter
Net revenues	$	8,479			$	8,236
Gross margin	6,559				6,401
Net earnings(c)	1,884				2,747
Basic earnings per share	$	1.27			$	1.81
Diluted earnings per share	$	1.26			$	1.81
Cash dividends declared per common share	$	1.07			$	0.96
Fourth Quarter
Net revenues	$	8,704			$	8,305
Gross margin	6,698				6,283
Net earnings (loss)(d)	2,801				(1,826		)
Basic earnings (loss) per share	$	1.88			$	(1.23	)
Diluted earnings (loss) per share	$	1.88			$	(1.23	)
Cash dividends declared per common share	$	1.18			$	1.07

(a)

First quarter results in 2019 included after-tax charges of $171 million related to the change in fair value of contingent consideration liabilities and restructuring charges of $133 million. First quarter results in 2018 included an after-tax benefit of $148 million related to the change in fair value of contingent consideration liabilities partially offset by after-tax litigation reserves charges of $100 million.

(b)

Second quarter results in 2019 included an after-tax charge of $2.3 billion related to the change in fair value of contingent consideration liabilities resulting from the April 2019 regulatory approvals of SKYRIZI for the treatment of moderate to severe plaque psoriasis. Second quarter results in 2018 included after-tax charges of $500 million as a result of a collaboration agreement extension with Calico and $485 million related to the change in fair value of contingent consideration liabilities.

(c)	Third quarter results in 2019 included after-tax charges of $912 million related to intangible asset impairment and $182 million related to the change in fair value of contingent consideration liabilities. Third quarter results in 2018 included after-tax litigation reserves charges of $176 million and $95 million related to the change in fair value of contingent consideration liabilities.

86 | 2019 Form 10-K

(d)

Fourth quarter results in 2019 included an after-tax charge of $438 million related to the change in fair value of contingent consideration liabilities offset by after-tax income of $435 million from a legal settlement related to an intellectual property dispute with a third party and $297 million from an amended and restated license agreement between AbbVie and Reata. Fourth quarter results in 2018 included an after-tax intangible asset impairment charge of $4.5 billion partially offset by an after-tax benefit of $375 million related to the change in fair value of contingent consideration liabilities.

		2019 Form 10-K | 87

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, 2019 and 2018, 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, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, 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, 2019, 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 21, 2020 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.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

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		Sales rebate accruals for Medicaid, Medicare and managed care programs
Description of the Matter		As discussed in Note 2 to the consolidated financial statements under the caption “Revenue Recognition,” the Company established provisions for sales rebates in the same period as the related product is sold. At December 31, 2019, the Company had $4,484 million in sales rebate accruals, a large portion of which were for rebates provided to pharmacy benefit managers, state government Medicaid programs, insurance companies that administer Medicare drug plans and private entities for Medicaid, Medicare and managed care programs. In order to establish these sales rebate accruals, the Company estimated its rebates based upon the identification of the products subject to a rebate, the applicable price and rebate terms and the estimated lag time between the sale and payment of the rebate. Auditing the Medicaid, Medicare and managed care sales rebate accruals was complex and required significant auditor judgment because the accruals consider multiple subjective and complex estimates and assumptions. These estimates and assumptions included the estimated inventory in the distribution channel, which impacts the lag time between the sale to the customer and payment of the rebate and the final payer related to product sales, which impacts the applicable price and rebate terms. In deriving these estimates and assumptions, the Company used both internal and external sources of information to estimate product in the distribution channels, payer mix, prescription volumes and historical experience. Management supplemented its historical data analysis with qualitative adjustments based upon changes in rebate trends, rebate programs and contract terms, legislative changes, or other significant events which indicate a change in the reserve is appropriate.
How We Addressed the Matter in Our Audit		We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s sales rebate accruals for Medicaid, Medicare and managed care programs. This included testing controls over management’s review of the significant assumptions and other inputs used in the estimation of Medicaid, Medicare and managed care rebates, among others, including the significant assumptions discussed above. The testing was inclusive of management’s controls to evaluate the accuracy of its reserve judgments to actual rebates paid, rebate validation and processing, and controls to ensure that the data used to evaluate and support the significant assumptions was complete, accurate and, where applicable, verified to external data sources. To test the sales rebate accruals for Medicaid, Medicare, and managed care programs, our audit procedures included, among others, understanding and evaluating the significant assumptions and underlying data used in management’s calculations. Our testing of significant assumptions included corroboration to external data sources. We evaluated the reasonableness of assumptions in light of industry and economic trends, product profiles, and other regulatory factors. We assessed the historical accuracy of management’s estimates by comparing actual activity to previous estimates and performed analytical procedures, based on internal and external data sources, to evaluate the completeness of the reserves. For Medicaid, we involved a specialist with an understanding of statutory reimbursement requirements to assess the consistency of the Company’s calculation methodologies with applicable government regulations and policy.
		Valuation of contingent consideration
Description of the Matter		As discussed in Note 2 to the consolidated financial statements under the caption “Business Combinations” and in Note 11 under the caption “Financial Instruments and Fair Value Measures,” the Company recognized contingent consideration liabilities at the estimated fair value on the acquisition date in connection with applying the acquisition method of accounting for business combinations. Subsequent changes to the fair value of the contingent consideration liabilities were recorded within the consolidated statement of earnings in the period of change. At December 31, 2019, the Company had $7,340 million in contingent consideration liabilities, which represented a ‘Level 3’ fair value measurement in the fair value hierarchy due to the significant unobservable inputs used in determining the fair value and the use of management judgment about the assumptions market participants would use in pricing the liabilities. Auditing the valuation of contingent consideration liabilities was complex and required significant auditor judgment due to the use of a Monte Carlo simulation model and the high degree of subjectivity in evaluating certain assumptions required to estimate the fair value of contingent royalty payments. In particular, the fair value measurement was sensitive to the significant assumptions underlying the estimated amount of future sales of the acquired products. Management utilized its expertise within the industry and knowledge of clinical development and regulatory approval processes to determine certain of these assumptions.

		2019 Form 10-K | 89

How We Addressed the Matter in Our Audit		We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s contingent consideration liabilities process including, among others, management’s process to establish the significant assumptions and measure the liability. This included testing controls over management’s review of the significant assumptions and other inputs used in the determination of fair value. The testing was inclusive of key management review controls to monitor and evaluate clinical development of the acquired products and estimated future sales, and controls to ensure that the data used to evaluate and support the significant assumptions was complete, accurate and, where applicable, verified to external data sources. To test the estimated fair value of contingent consideration liabilities, our audit procedures included, among others, inspecting the terms of the executed agreement, assessing the Monte Carlo simulation model used and testing the key contractual inputs and significant assumptions discussed above. We evaluated the assumptions and judgments in light of observable industry and economic trends and standards, external data sources and regulatory factors. Estimated amounts of future sales were evaluated for reasonableness in relation to internal and external analyses, clinical development progress and timelines, probability of success benchmarks, and regulatory notices. Our procedures included evaluating the data sources used by management in determining its assumptions and, where necessary, included an evaluation of available information that either corroborated or contradicted management’s conclusions. We involved a valuation specialist to assess the Company’s Monte Carlo simulation model and to perform corroborative fair value calculations.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2013.

Chicago, Illinois

February 21, 2020

90 | 2019 Form 10-K