Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2017
OR
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 001-35565
AbbVie Inc.
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| | |
(Exact name of registrant as specified in its charter) |
Delaware | | 32-0375147 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. employer identification number) |
1 North Waukegan Road
North Chicago, Illinois 60064
Telephone: (847) 932-7900
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer x | | Accelerated Filer ¨ | |
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Non-Accelerated Filer ¨ | | Smaller reporting company ¨ | |
(Do not check if a smaller reporting company) | | | |
| | Emerging growth company ¨ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of July 24, 2017, AbbVie Inc. had 1,594,094,698 shares of common stock at $0.01 par value outstanding.
AbbVie Inc. and Subsidiaries
Table of Contents
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PART I. | |
| | Page |
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Item 1. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
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PART II. | |
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Item 1. | | |
Item 2. | | |
Item 6. | | |
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2017 Form 10-Q | | 1 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AbbVie Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings (unaudited)
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| | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
(in millions, except per share data) | | 2017 | | 2016 | | 2017 | | 2016 |
Net revenues | | $ | 6,944 |
| | $ | 6,452 |
| | $ | 13,482 |
| | $ | 12,410 |
|
| | | | | | | | |
Cost of products sold | | 1,528 |
| | 1,405 |
| | 3,144 |
| | 2,774 |
|
Selling, general and administrative | | 1,504 |
| | 1,466 |
| | 2,872 |
| | 2,821 |
|
Research and development | | 1,223 |
| | 1,124 |
| | 2,358 |
| | 2,070 |
|
Acquired in-process research and development | | 15 |
| | 70 |
| | 15 |
| | 80 |
|
Total operating costs and expenses | | 4,270 |
| | 4,065 |
| | 8,389 |
| | 7,745 |
|
Operating earnings | | 2,674 |
| | 2,387 |
| | 5,093 |
| | 4,665 |
|
| | | | | | | | |
Interest expense, net | | 253 |
| | 225 |
| | 500 |
| | 425 |
|
Net foreign exchange loss | | 6 |
| | 15 |
| | 19 |
| | 317 |
|
Other expense, net | | 62 |
| | 51 |
| | 135 |
| | 51 |
|
Earnings before income tax expense | | 2,353 |
| | 2,096 |
| | 4,439 |
| | 3,872 |
|
Income tax expense | | 438 |
| | 486 |
| | 813 |
| | 908 |
|
Net earnings | | $ | 1,915 |
| | $ | 1,610 |
| | $ | 3,626 |
| | $ | 2,964 |
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| | | | | | | | |
Per share data | | | | | | | | |
Basic earnings per share | | $ | 1.20 |
| | $ | 0.99 |
| | $ | 2.26 |
| | $ | 1.82 |
|
Diluted earnings per share | | $ | 1.19 |
| | $ | 0.98 |
| | $ | 2.25 |
| | $ | 1.81 |
|
Cash dividends declared per common share | | $ | 0.64 |
| | $ | 0.57 |
| | $ | 1.28 |
| | $ | 1.14 |
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| | | | | | | | |
Weighted-average basic shares outstanding | | 1,595 |
| | 1,624 |
| | 1,595 |
| | 1,620 |
|
Weighted-average diluted shares outstanding | | 1,600 |
| | 1,632 |
| | 1,602 |
| | 1,629 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
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2017 Form 10-Q | | 2 |
AbbVie Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (unaudited)
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| | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
(in millions) | | 2017 | | 2016 | | 2017 | | 2016 |
Net earnings | | $ | 1,915 |
| | $ | 1,610 |
| | $ | 3,626 |
| | $ | 2,964 |
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| | | | | | | | |
Foreign currency translation adjustments, net of tax expense (benefit) of $33 for the three months and $33 for the six months ended June 30, 2017 and $(21) for the three months and $20 for the six months ended June 30, 2016 | | 249 |
| | (55 | ) | | 419 |
| | 133 |
|
Net investment hedging activities, net of tax expense (benefit) of $(86) for the three months and $(122) for the six months ended June 30, 2017 and $— for the three months and $— for the six months ended June 30, 2016 | | (153 | ) | | — |
| | (217 | ) | | — |
|
Pension and post-employment benefits, net of tax expense (benefit) of $7 for the three months and $15 for the six months ended June 30, 2017 and $7 for the three months and $15 for the six months ended June 30, 2016 | | 2 |
| | 18 |
| | 13 |
| | 33 |
|
Marketable security activities, net of tax expense (benefit) of $3 for the three months and $2 for the six months ended June 30, 2017 and $(1) for the three months and $(8) for the six months ended June 30, 2016 | | 18 |
| | 32 |
| | 10 |
| | 7 |
|
Cash flow hedging activities, net of tax expense (benefit) of $(2) for the three months and $(15) for the six months ended ended June 30, 2017 and $3 for the three months and $(4) for the six months ended June 30, 2016 | | (122 | ) | | 38 |
| | (187 | ) | | (2 | ) |
Other comprehensive income (loss) | | (6 | ) | | 33 |
| | 38 |
| | 171 |
|
Comprehensive income | | $ | 1,909 |
| | $ | 1,643 |
| | $ | 3,664 |
| | $ | 3,135 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
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2017 Form 10-Q | | 3 |
AbbVie Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
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(in millions, except share data) | June 30, 2017 | | December 31, 2016 |
| (unaudited) | | |
Assets | | | |
Current assets | | | |
Cash and equivalents | $ | 6,088 |
| | $ | 5,100 |
|
Short-term investments | 1,117 |
| | 1,323 |
|
Accounts receivable, net | 4,859 |
| | 4,758 |
|
Inventories | 1,582 |
| | 1,444 |
|
Prepaid expenses and other | 3,316 |
| | 3,562 |
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Total current assets | 16,962 |
| | 16,187 |
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| | | |
Investments | 2,052 |
| | 1,783 |
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Property and equipment, net | 2,657 |
| | 2,604 |
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Intangible assets, net | 28,366 |
| | 28,897 |
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Goodwill | 15,652 |
| | 15,416 |
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Other assets | 1,305 |
| | 1,212 |
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Total assets | $ | 66,994 |
| | $ | 66,099 |
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| | | |
Liabilities and Equity | | | |
Current liabilities | | | |
Short-term borrowings | $ | 400 |
| | $ | 377 |
|
Current portion of long-term debt and lease obligations | 3,020 |
| | 25 |
|
Accounts payable and accrued liabilities | 8,839 |
| | 9,379 |
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Total current liabilities | 12,259 |
| | 9,781 |
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| | | |
Long-term debt and lease obligations | 33,817 |
| | 36,440 |
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Deferred income taxes | 6,391 |
| | 6,890 |
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Other long-term liabilities | 8,518 |
| | 8,352 |
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Commitments and contingencies |
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Stockholders’ equity | | | |
Common stock, $0.01 par value, 4,000,000,000 shares authorized, 1,765,143,081 shares issued as of June 30, 2017 and 1,754,900,486 as of December 31, 2016 | 18 |
| | 18 |
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Common stock held in treasury, at cost, 171,422,208 shares as of June 30, 2017 and 162,387,762 as of December 31, 2016 | (11,427 | ) | | (10,852 | ) |
Additional paid-in capital | 14,015 |
| | 13,678 |
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Retained earnings | 5,951 |
| | 4,378 |
|
Accumulated other comprehensive loss | (2,548 | ) | | (2,586 | ) |
Total stockholders’ equity | 6,009 |
| | 4,636 |
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| | | |
Total liabilities and equity | $ | 66,994 |
| | $ | 66,099 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
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2017 Form 10-Q | | 4 |
AbbVie Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited) |
| | | | | | | |
| Six months ended June 30, |
(in millions) (brackets denote cash outflows) | 2017 | | 2016 |
Cash flows from operating activities | | | |
Net earnings | $ | 3,626 |
| | $ | 2,964 |
|
Adjustments to reconcile net earnings to net cash from operating activities: | | | |
Depreciation | 213 |
| | 211 |
|
Amortization of intangible assets | 540 |
| | 346 |
|
Change in fair value of contingent consideration | 146 |
| | 41 |
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Stock-based compensation | 217 |
| | 209 |
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Upfront costs and milestones related to collaborations | 53 |
| | 150 |
|
Devaluation loss related to Venezuela | — |
| | 298 |
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Other, net | 134 |
| | 74 |
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Changes in operating assets and liabilities, net of acquisitions: | | | |
Accounts receivable | (167 | ) | | (194 | ) |
Inventories | 1 |
| | — |
|
Prepaid expenses and other assets | (128 | ) | | (142 | ) |
Accounts payable and other liabilities | (530 | ) | | 89 |
|
Cash flows from operating activities | 4,105 |
| | 4,046 |
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| | | |
Cash flows from investing activities | | | |
Acquisitions of businesses, net of cash acquired | — |
| | (2,455 | ) |
Other acquisitions and investments | (100 | ) | | (132 | ) |
Acquisitions of property and equipment | (221 | ) | | (252 | ) |
Purchases of investment securities | (1,391 | ) | | (4,020 | ) |
Sales and maturities of investment securities | 1,346 |
| | 1,103 |
|
Cash flows from investing activities | (366 | ) | | (5,756 | ) |
| | | |
Cash flows from financing activities | | | |
Net change in short-term borrowings | 23 |
| | 88 |
|
Proceeds from issuance of long-term debt | — |
| | 7,771 |
|
Repayments of long-term debt and lease obligations | (13 | ) | | (2,005 | ) |
Debt issuance cost | — |
| | (52 | ) |
Dividends paid | (2,051 | ) | | (1,851 | ) |
Purchases of treasury stock | (900 | ) | | (4,217 | ) |
Proceeds from the exercise of stock options | 149 |
| | 169 |
|
Other, net | 18 |
| | 42 |
|
Cash flows from financing activities | (2,774 | ) | | (55 | ) |
Effect of exchange rate changes on cash and equivalents | 23 |
| | (307 | ) |
Net change in cash and equivalents | 988 |
| | (2,072 | ) |
Cash and equivalents, beginning of period | 5,100 |
| | 8,399 |
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| | | |
Cash and equivalents, end of period | $ | 6,088 |
| | $ | 6,327 |
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| | | |
Supplemental schedule of non-cash investing and financing activities | | | |
Issuance of common shares associated with acquisitions of businesses | $ | — |
| | $ | 3,923 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
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2017 Form 10-Q | | 5 |
AbbVie Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
Note 1 Basis of Presentation
Basis of Historical Presentation
The unaudited interim condensed consolidated financial statements of AbbVie Inc. (AbbVie or the company) have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) have been omitted. These unaudited interim condensed consolidated financial statements should be read in conjunction with the company’s audited consolidated financial statements and notes included in the company’s Annual Report on Form 10-K for the year ended December 31, 2016.
It is management’s opinion that these financial statements include all normal and recurring adjustments necessary for a fair presentation of the company’s financial position and operating results. Net revenues and net earnings for any interim period are not necessarily indicative of future or annual results. Certain reclassifications were made to conform the prior period interim condensed consolidated financial statements to the current period presentation.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The standard provides clarifying guidance to assist in the evaluation of whether transactions are treated as business combinations or asset acquisitions. AbbVie elected to early adopt the standard in the first quarter of 2017. This standard will be applied prospectively to any transactions occurring after adoption.
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. AbbVie adopted the standard in the first quarter of 2017. As a result, all excess tax benefits associated with stock-based awards are recognized in the statement of earnings when the awards vest or settle, rather than in stockholders' equity. In addition, excess tax benefits in the statement of cash flows are now classified as an operating activity rather than as a financing activity. AbbVie adopted these changes prospectively. Accordingly, the company recognized excess tax benefits in income tax expense of $13 million for the three months and $39 million for the six months ended June 30, 2017 and classified them within cash flows from operating activities.
Recent Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09, Summary and Amendments That Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs-Contracts with Customers (Subtopic 340-40). The amendments in this standard supersede most current revenue recognition requirements. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. AbbVie can apply the amendments using one of the following two methods: (i) retrospectively to each prior reporting period presented, or (ii) modified retrospectively with the cumulative effect of initially applying the amendments recognized at the date of initial application. AbbVie will adopt the standard effective the first quarter of 2018 and apply the amendments using the modified retrospective method. The company has made substantial progress in its review of the new standard and will complete its assessment by December 31, 2017. AbbVie does not expect significant changes to the amounts or timing of revenue recognition for product sales, which is its primary revenue stream. However, the company expects that the new standard will require a cumulative-effect adjustment of certain deferred license revenues that were originally expected to be recognized through early 2020. Under the new standard, on January 1, 2018, the company expects to reclassify approximately $120 million of deferred revenue, net of tax, directly to retained earnings.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The standard requires several targeted changes including that equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) be measured at fair value with changes in fair value recognized in net earnings. These provisions will not impact the accounting for AbbVie's investments
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2017 Form 10-Q | | 6 |
in debt securities. The new guidance also changes certain disclosure requirements and other aspects of current U.S. GAAP. Amendments are to be applied as a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. This standard will be effective for AbbVie starting with the first quarter of 2018. The standard does not permit early adoption with the exception of certain targeted provisions. AbbVie is unable to estimate the impact of adopting this standard on its financial statements as it will be dependent upon the composition of its equity investment portfolio as of the adoption date and future changes in fair value subsequent to the adoption date. However, based on historical trends, AbbVie does not believe the adoption will have a material impact on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU 2016-02 outlines a comprehensive lease accounting model and supersedes the current lease guidance. The new standard requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms greater than 12 months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. The new standard must be adopted using the modified retrospective approach and will be effective for AbbVie starting with the first quarter of 2019. Early adoption is permitted. AbbVie is currently assessing the impact and timing of adopting this guidance on its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326). The standard changes how credit losses are measured for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other financial instruments, the standard requires the use of a new forward-looking "expected credit loss" model that generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, the standard now requires allowances to be recorded instead of reducing the amortized cost of the investment. Additionally, the standard requires new disclosures and will be effective for AbbVie starting with the first quarter of 2020. Early adoption beginning in the first quarter of 2019 is permitted. With certain exceptions, adjustments are to be applied using a modified-retrospective approach by reflecting adjustments through a cumulative-effect impact to retained earnings as of the beginning of the fiscal year of adoption. AbbVie is currently assessing the impact and timing of adopting this guidance on its consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740). The new standard requires entities to recognize the income tax consequences of an intercompany transfer of an asset other than inventory when the transfer occurs. Under current U.S. GAAP, the income tax consequences of these intercompany asset transfers are deferred until the asset is sold to a third party or otherwise recovered through use. The standard will be effective for AbbVie starting with the first quarter of 2018. Adjustments for this update are to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings with any adjustments reflected as of the beginning of the fiscal year of adoption. AbbVie is currently assessing the impact of adopting this guidance on its consolidated financial statements. As of June 30, 2017, AbbVie had approximately $1.8 billion of prepaid income tax assets that will be affected by this standard, of which $1.3 billion was included in prepaid expenses and other on the condensed consolidated balance sheet.
In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The standard requires that an employer continue to report the service cost component of net periodic benefit cost in the same income statement line item or items as other employee compensation costs arising from services rendered during the period. The other components of net periodic benefit cost are required to be presented separately outside of income from operations and are not eligible for capitalization. The standard will be effective for AbbVie starting with the first quarter of 2018. Upon adoption, the company will apply the income statement classification provisions of this standard retrospectively and preliminarily expects to reclassify income of approximately $50 million from operating earnings to non-operating income for the year ending December 31, 2017.
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2017 Form 10-Q | | 7 |
Note 2 Supplemental Financial Information
Interest Expense, Net |
| | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
(in millions) | | 2017 | | 2016 | | 2017 | | 2016 |
Interest expense | | $ | 284 |
| | $ | 245 |
| | $ | 557 |
| | $ | 460 |
|
Interest income | | (31 | ) | | (20 | ) | | (57 | ) | | (35 | ) |
Interest expense, net | | $ | 253 |
| | $ | 225 |
| | $ | 500 |
| | $ | 425 |
|
Inventories |
| | | | | | | |
(in millions) | June 30, 2017 | | December 31, 2016 |
Finished goods | $ | 384 |
| | $ | 223 |
|
Work-in-process | 1,055 |
| | 1,080 |
|
Raw materials | 143 |
| | 141 |
|
Inventories | $ | 1,582 |
| | $ | 1,444 |
|
Property and Equipment |
| | | | | | | |
(in millions) | June 30, 2017 | | December 31, 2016 |
Property and equipment, gross | $ | 7,786 |
| | $ | 7,526 |
|
Accumulated depreciation | (5,129 | ) | | (4,922 | ) |
Property and equipment, net | $ | 2,657 |
| | $ | 2,604 |
|
Depreciation expense was $110 million for the three months and $213 million for the six months ended June 30, 2017 and $108 million for the three months and $211 million for the six months ended June 30, 2016.
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2017 Form 10-Q | | 8 |
Note 3 Earnings Per Share
AbbVie grants certain shares of restricted stock awards (RSAs) and restricted stock units (RSUs) that are considered to be participating securities. Due to the presence of participating securities, AbbVie calculates earnings per share (EPS) using the more dilutive of the treasury stock or the two-class method. For all periods presented, the two-class method was more dilutive.
The following table summarizes the impact of the two-class method:
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| | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
(in millions, except per share information) | | 2017 | | 2016 | | 2017 | | 2016 |
Basic EPS | | | | | | | | |
Net earnings | | $ | 1,915 |
| | $ | 1,610 |
| | $ | 3,626 |
| | $ | 2,964 |
|
Earnings allocated to participating securities | | 9 |
| | 8 |
| | 18 |
| | 15 |
|
Earnings available to common shareholders | | $ | 1,906 |
| | $ | 1,602 |
| | $ | 3,608 |
| | $ | 2,949 |
|
Weighted-average basic shares outstanding | | 1,595 |
| | 1,624 |
| | 1,595 |
| | 1,620 |
|
Basic earnings per share | | $ | 1.20 |
| | $ | 0.99 |
| | $ | 2.26 |
| | $ | 1.82 |
|
| | | | | | | | |
Diluted EPS | | | | | | | | |
Net earnings | | $ | 1,915 |
| | $ | 1,610 |
| | $ | 3,626 |
| | $ | 2,964 |
|
Earnings allocated to participating securities | | 9 |
| | 8 |
| | 18 |
| | 15 |
|
Earnings available to common shareholders | | $ | 1,906 |
| | $ | 1,602 |
| | $ | 3,608 |
| | $ | 2,949 |
|
Weighted-average shares of common stock outstanding | | 1,595 |
| | 1,624 |
| | 1,595 |
| | 1,620 |
|
Effect of dilutive securities | | 5 |
| | 8 |
| | 7 |
| | 9 |
|
Weighted-average diluted shares outstanding | | 1,600 |
| | 1,632 |
| | 1,602 |
| | 1,629 |
|
Diluted earnings per share | | $ | 1.19 |
| | $ | 0.98 |
| | $ | 2.25 |
| | $ | 1.81 |
|
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 were insignificant for all periods presented.
Note 4 Licensing, Acquisitions and Other Arrangements
Acquisition of Stemcentrx
On June 1, 2016, AbbVie acquired all of the outstanding equity interests in Stemcentrx, a privately-held biotechnology company. The transaction expanded AbbVie’s oncology pipeline by adding the late-stage asset rovalpituzumab tesirine (Rova-T), four additional early-stage clinical compounds in solid tumor indications and a significant portfolio of pre-clinical assets. Rova-T is currently in registrational trials for small cell lung cancer.
The acquisition of Stemcentrx was accounted for as a business combination using the acquisition method of accounting. The aggregate upfront consideration for the acquisition of Stemcentrx consisted of approximately 62.4 million shares of AbbVie common stock, issued from common stock held in treasury, and cash. AbbVie may make up to $4.0 billion in additional payments upon the achievement of certain development and regulatory milestones. The acquisition-date fair value of this contingent consideration totaled $620 million and was estimated using a combination of probability-weighted discounted cash flow models and Monte Carlo simulation models. The estimate was determined based on significant inputs that are not observable in the market, referred to as Level 3 inputs, as described in more detail in Note 8.
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2017 Form 10-Q | | 9 |
The following table summarizes total consideration:
|
| | | |
(in millions) | |
Cash | $ | 1,883 |
|
Fair value of AbbVie common stock | 3,923 |
|
Contingent consideration | 620 |
|
Total consideration | $ | 6,426 |
|
The following table summarizes fair values of assets acquired and liabilities assumed as of the June 1, 2016 acquisition date:
|
| | | |
(in millions) | |
Assets acquired and liabilities assumed | |
Accounts receivable | $ | 1 |
|
Prepaid expenses and other | 7 |
|
Property and equipment | 17 |
|
Intangible assets - Indefinite-lived research and development | 6,100 |
|
Accounts payable and accrued liabilities | (31 | ) |
Deferred income taxes | (1,933 | ) |
Other long-term liabilities | (7 | ) |
Total identifiable net assets | 4,154 |
|
Goodwill | 2,272 |
|
Total assets acquired and liabilities assumed | $ | 6,426 |
|
Intangible assets were related to acquired in-process research and development (IPR&D) for Rova-T, four additional early-stage clinical compounds in solid tumor indications and several additional pre-clinical compounds. The estimated fair value of the acquired IPR&D was determined using the multi-period excess earnings model of the “income approach,” which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the more significant assumptions inherent in the development of those asset valuations include the estimated annual cash flows for each asset or product (including net revenues, cost of sales, research and development (R&D) costs, selling and marketing costs and working capital/contributory asset charges), the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, the regulatory approval probabilities, commercial success risks, competitive landscape as well as other factors.
The goodwill recognized from the acquisition of Stemcentrx represents expected synergies, including the ability to: (i) leverage the respective strengths of each business; (ii) expand the combined company’s product portfolio; (iii) accelerate AbbVie's clinical and commercial presence in oncology; and (iv) establish a strong leadership position in oncology. Goodwill was also impacted by the establishment of a deferred tax liability for the acquired identifiable intangible assets which have no tax basis. The goodwill is not deductible for tax purposes.
Pro Forma Financial Information
The following table presents the unaudited pro forma combined results of operations of AbbVie and Stemcentrx for the three and six months ended June 30, 2016 as if the acquisition of Stemcentrx had occurred on January 1, 2015:
|
| | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
(in millions, except per share information) | | 2016 | | 2016 |
Net revenues | | $ | 6,454 |
| | $ | 12,413 |
|
Net earnings | | 1,649 |
| | 2,936 |
|
Basic earnings per share | | $ | 0.99 |
| | $ | 1.76 |
|
Diluted earnings per share | | $ | 0.99 |
| | $ | 1.75 |
|
|
| |
2017 Form 10-Q | | 10 |
The unaudited pro forma financial information was prepared using the acquisition method of accounting and was based on the historical financial information of AbbVie and Stemcentrx. In order to reflect the occurrence of the acquisition on January 1, 2015 as required, the unaudited pro forma financial information includes adjustments to reflect the additional interest expense associated with the issuance of debt to finance the acquisition and the reclassification of acquisition, integration and financing-related costs incurred during 2016 to the three and six months ended June 30, 2015. The unaudited pro forma financial information is not necessarily indicative of what the consolidated results of operations would have been had the acquisition been completed on January 1, 2015. In addition, the unaudited pro forma financial information is not a projection of the future results of operations of the combined company nor does it reflect the expected realization of any cost savings or synergies associated with the acquisition.
Acquisition of BI 655066 and BI 655064 from Boehringer Ingelheim
On April 1, 2016, AbbVie acquired all rights to risankizumab (BI 655066), an anti-IL-23 monoclonal biologic antibody in Phase 3 development for psoriasis, from Boehringer Ingelheim (BI) pursuant to a global collaboration agreement. AbbVie is also evaluating the potential of this biologic therapy in Crohn’s disease, psoriatic arthritis and asthma. In addition to risankizumab, AbbVie also gained rights to an anti-CD40 antibody, BI 655064, currently in Phase 1 development. BI will retain responsibility for further development of BI 655064, and AbbVie may elect to advance the program after completion of certain clinical achievements. The acquired assets include all patents, data, know-how, third-party agreements, regulatory filings and manufacturing technology related to BI 655066 and BI 655064.
The company concluded that the acquired assets met the definition of a business and accounted for the transaction as a business combination using the acquisition method of accounting. Under the terms of the agreement, AbbVie made an upfront payment of $595 million. Additionally, $18 million of payments to BI, pursuant to a contractual obligation to reimburse BI for certain development costs it incurred prior to the acquisition date, were initially deferred. AbbVie may make certain contingent payments upon the achievement of defined development, regulatory and commercial milestones, as well as royalty payments based on net revenues of licensed products. The maximum aggregate amount payable for development and regulatory milestones is approximately $1.6 billion. The acquisition-date fair value of these milestones was $606 million. The acquisition-date fair value of contingent royalty payments was $2.8 billion. The potential contingent consideration payments were estimated by applying a probability-weighted expected payment model for contingent milestone payments and a Monte Carlo simulation model for contingent royalty payments, which were then discounted to present value. The fair value measurements were based on Level 3 inputs. The following table summarizes total consideration:
|
| | | |
(in millions) | |
Cash | $ | 595 |
|
Deferred consideration payable | 18 |
|
Contingent consideration | 3,365 |
|
Total consideration | $ | 3,978 |
|
The following table summarizes fair values of assets acquired as of the April 1, 2016 acquisition date: |
| | | |
(in millions) | |
Assets acquired | |
Identifiable intangible assets - Indefinite-lived research and development | $ | 3,890 |
|
Goodwill | 88 |
|
Total assets acquired | $ | 3,978 |
|
The estimated fair value of the acquired IPR&D was determined using the multi-period excess earnings model of the “income approach.” The goodwill recognized from this acquisition represents expected synergies, including an expansion of the combined company’s immunology product portfolio.
Pro forma results of operations for this acquisition have not been presented because this acquisition is insignificant to AbbVie’s consolidated results of operations.
|
| |
2017 Form 10-Q | | 11 |
Other Licensing & Acquisitions Activity
Excluding the acquisitions above, cash outflows related to other acquisitions and investments totaled $100 million for the six months ended June 30, 2017 and $132 million for the six months ended June 30, 2016. AbbVie recorded IPR&D charges of $15 million for the three and six months ended June 30, 2017 and IPR&D charges of $70 million for the three months and $80 million for the six months ended June 30, 2016.
Note 5 Collaboration with Janssen Biotech, Inc.
In December 2011, Pharmacyclics, a wholly-owned subsidiary of AbbVie, entered into a worldwide collaboration and license agreement with Janssen Biotech, Inc. and its affiliates (Janssen), one of the Janssen Pharmaceutical companies of Johnson & Johnson for the joint development and commercialization of IMBRUVICA, a novel, orally active, selective covalent inhibitor of Bruton's tyrosine kinase (BTK) and certain compounds structurally related to IMBRUVICA, for oncology and other indications, excluding all immune and inflammatory mediated diseases or conditions and all psychiatric or psychological diseases or conditions, in the United States and outside the United States.
The collaboration provides Janssen with an exclusive license to commercialize IMBRUVICA outside of the United States and co-exclusively with AbbVie in the United States. Both parties are responsible for the development, manufacturing and marketing of any products generated as a result of the collaboration. The collaboration has no set duration or specific expiration date and provides for potential future development, regulatory and approval milestone payments of up to $200 million to AbbVie. The collaboration also includes a cost sharing arrangement for associated collaboration activities. Except in certain cases, Janssen is responsible for approximately 60% of collaboration development costs and AbbVie is responsible for the remaining 40% of collaboration development costs.
In the United States, both parties have co-exclusive rights to commercialize the products; however, AbbVie is the principal in the end customer product sales. AbbVie and Janssen share pre-tax profits and losses equally from the commercialization of products. Sales of IMBRUVICA are included in AbbVie's net revenues. Janssen's share of profits is included in AbbVie's cost of products sold. Other costs incurred under the collaboration are reported in their respective expense line items, net of Janssen's share.
Outside the United States, Janssen is responsible for and has exclusive rights to commercialize IMBRUVICA. AbbVie and Janssen share pre-tax profits and losses equally from the commercialization of products. AbbVie's share of profits is included in AbbVie's net revenues. Other costs incurred under the collaboration are reported in their respective expense line items, net of Janssen's share.
The following table shows the profit and cost sharing relationship between Janssen and AbbVie:
|
| | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
(in millions) | | 2017 | | 2016 | | 2017 | | 2016 |
United States - Janssen's share of profits (included in cost of products sold) | | $ | 247 |
| | $ | 175 |
| | $ | 459 |
| | $ | 329 |
|
International - AbbVie's share of profits (included in net revenues) | | 98 |
| | 55 |
| | 192 |
| | 111 |
|
Global - AbbVie's share of other costs (included in respective line items) | | 75 |
| | 64 |
| | 134 |
| | 125 |
|
|
| |
2017 Form 10-Q | | 12 |
Note 6 Goodwill and Intangible Assets
Goodwill
The following table summarizes the changes in the carrying amount of goodwill:
|
| | | |
(in millions) | |
Balance as of December 31, 2016 | $ | 15,416 |
|
Foreign currency translation adjustments | 236 |
|
Balance as of June 30, 2017 | $ | 15,652 |
|
The latest impairment assessment of goodwill was completed in the third quarter of 2016. As of June 30, 2017, there were no accumulated goodwill impairment losses. Future impairment tests for goodwill will be performed annually in the third quarter, or earlier if impairment indicators exist.
Intangible Assets, Net
The following table summarizes intangible assets:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2017 | | December 31, 2016 |
(in millions) | Gross carrying amount | | Accumulated amortization | | Net carrying amount | | Gross carrying amount | | Accumulated amortization | | Net carrying amount |
Definite-lived intangible assets | | | | | | | | | | | |
Developed product rights | $ | 16,446 |
| | $ | (4,610 | ) | | $ | 11,836 |
| | $ | 16,464 |
| | $ | (4,256 | ) | | $ | 12,208 |
|
License agreements | 7,804 |
| | (1,264 | ) | | 6,540 |
| | 7,809 |
| | (1,110 | ) | | 6,699 |
|
Total definite-lived intangible assets | 24,250 |
| | (5,874 | ) | | 18,376 |
| | 24,273 |
| | (5,366 | ) | | 18,907 |
|
Indefinite-lived research and development | 9,990 |
| | — |
| | 9,990 |
| | 9,990 |
| | — |
| | 9,990 |
|
Total intangible assets, net | $ | 34,240 |
| | $ | (5,874 | ) | | $ | 28,366 |
| | $ | 34,263 |
| | $ | (5,366 | ) | | $ | 28,897 |
|
Amortization expense was $269 million for the three months and $540 million for the six months ended June 30, 2017 and $181 million for the three months and $346 million for the six months ended June 30, 2016. Amortization expense was included in cost of products sold in the condensed consolidated statements of earnings.
For the six months ended June 30, 2017, no impairment charges were recorded to intangible assets. For the six months ended June 30, 2016, an impairment charge of $39 million was recorded related to certain developed product rights in the United States due to a decline in the market for the product. The fair value was determined based on a discounted cash flow analysis and the charge was included in cost of products sold in the condensed consolidated statement of earnings.
The indefinite-lived intangible assets represent acquired IPR&D associated with products that have not yet received regulatory approval. The indefinite-lived intangible assets as of June 30, 2017 and December 31, 2016 primarily related to the acquisitions of Stemcentrx and BI compounds. See Note 4 for additional information. The latest impairment assessment of indefinite-lived intangible assets was completed in the third quarter of 2016. No impairment charges were recorded for the six months ended June 30, 2017 and 2016. Future impairment tests for indefinite-lived intangible assets will be performed annually in the third quarter, or earlier if impairment indicators exist.
|
| |
2017 Form 10-Q | | 13 |
Note 7 Restructuring Plans
AbbVie recorded restructuring charges of $11 million for the three months and $27 million for the six months ended June 30, 2017 and $27 million for the three months and $30 million for the six months ended June 30, 2016.
The following table summarizes the cash activity in the restructuring reserve for the six months ended June 30, 2017:
|
| | | |
(in millions) | |
Accrued balance as of December 31, 2016 | $ | 87 |
|
Restructuring charges | 27 |
|
Payments and other adjustments | (50 | ) |
Accrued balance as of June 30, 2017 | $ | 64 |
|
Note 8 Financial Instruments and Fair Value Measures
Risk Management Policy
See Note 10 to the company's Annual Report on Form 10-K for the year ended December 31, 2016 for a summary of AbbVie's risk management policy and use of derivative instruments.
Financial Instruments
Various AbbVie foreign subsidiaries enter into foreign currency forward exchange contracts to manage exposures to changes in foreign exchange rates for anticipated intercompany transactions denominated in a currency other than the functional currency of the local entity. These contracts, with notional amounts totaling $3.9 billion at June 30, 2017 and $2.2 billion at December 31, 2016, are designated as cash flow hedges and are recorded at fair value. The durations of these forward exchange contracts were generally less than eighteen months. Accumulated gains and losses as of June 30, 2017 will be reclassified from accumulated other comprehensive loss (AOCI) and included in cost of products sold at the time the products are sold, generally not exceeding six months from the date of settlement.
The company also enters into foreign currency forward exchange contracts to manage its exposure to foreign currency denominated trade payables and receivables and intercompany loans. These contracts are not designated as hedges and are recorded at fair value. Resulting gains or losses are reflected in net foreign exchange loss in the consolidated statements of earnings and are generally offset by losses or gains on the foreign currency exposure being managed. These contracts had notional amounts totaling $7.3 billion at June 30, 2017 and $6.6 billion at December 31, 2016.
The company also uses foreign currency forward exchange contracts or foreign currency denominated debt to hedge its net investments in certain foreign subsidiaries and affiliates. In the fourth quarter of 2016, the company issued €3.6 billion aggregate principal amount of senior Euro notes and designated the principal amounts of this foreign denominated debt as net investment hedges. Realized and unrealized gains and losses from these hedges are included in AOCI.
AbbVie is a party to interest rate hedge contracts, designated as fair value hedges, with notional amounts totaling $11.8 billion at June 30, 2017 and December 31, 2016. The effect of the hedge contracts is to change a fixed-rate interest obligation to a floating rate for that portion of the debt. AbbVie records the contracts at fair value and adjusts the carrying amount of the fixed-rate debt by an offsetting amount.
|
| |
2017 Form 10-Q | | 14 |
The following table summarizes the amounts and location of AbbVie’s derivative instruments on the condensed consolidated balance sheets:
|
| | | | | | | | | | | | | | | |
| Fair value – Derivatives in asset position | | Fair value – Derivatives in liability position |
(in millions) | Balance sheet caption | June 30, 2017 | December 31, 2016 | | Balance sheet caption | June 30, 2017 | December 31, 2016 |
Foreign currency forward exchange contracts | | | | | | | |
Designated as cash flow hedges | Prepaid expenses and other | $ | 22 |
| $ | 170 |
| | Accounts payable and accrued liabilities | $ | 70 |
| $ | 5 |
|
Designated as cash flow hedges | Other assets | — |
| — |
| | Other long-term liabilities | 10 |
| — |
|
Not designated as hedges | Prepaid expenses and other | 50 |
| 55 |
| | Accounts payable and accrued liabilities | 58 |
| 33 |
|
Interest rate swaps designated as fair value hedges | Other assets | — |
| — |
| | Other long-term liabilities | 306 |
| 338 |
|
Total derivatives | | $ | 72 |
| $ | 225 |
| | | $ | 444 |
| $ | 376 |
|
While certain derivatives are subject to netting arrangements with the company’s counterparties, the company does not offset derivative assets and liabilities within the condensed consolidated balance sheets.
The following table presents the pre-tax amounts of gains (losses) from derivative instruments recognized in other comprehensive income:
|
| | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
(in millions) | | 2017 | | 2016 | | 2017 | | 2016 |
Foreign currency forward exchange contracts | | $ | (78 | ) | | $ | 58 |
| | $ | (139 | ) | | $ | 12 |
|
The amount of hedge ineffectiveness was insignificant for all periods presented. Assuming market rates remain constant through contract maturities, the company expects to transfer pre-tax unrealized gains of $28 million into cost of products sold for foreign currency cash flow hedges during the next 12 months.
Related to AbbVie’s non-derivative, foreign currency denominated debt designated as net investment hedges, the company recognized a pre-tax loss in other comprehensive income (loss) of $239 million for the three months and $339 million for the six months ended June 30, 2017.
The following table summarizes the pre-tax amounts and location of derivative instrument net gains (losses) recognized in the condensed consolidated statements of earnings, including the effective portions of the net gains (losses) reclassified out of AOCI into net earnings. See Note 10 for the amount of net gains (losses) reclassified out of AOCI.
|
| | | | | | | | | | | | | | | | | |
| | | Three months ended June 30, | | Six months ended June 30, |
(in millions) | Statement of earnings caption | | 2017 | | 2016 | | 2017 | | 2016 |
Foreign currency forward exchange contracts | | | | | | | | | |
Designated as cash flow hedges | Cost of products sold | | $ | 46 |
| | $ | 18 |
| | $ | 63 |
| | $ | 19 |
|
Not designated as hedges | Net foreign exchange loss | | (25 | ) | | (42 | ) | | (71 | ) | | (107 | ) |
Non-designated treasury rate lock agreements | Other expense, net | | — |
| | (12 | ) | | — |
| | (12 | ) |
Interest rate swaps designated as fair value hedges | Interest expense, net | | 47 |
| | 116 |
| | 32 |
| | 370 |
|
Total | | | $ | 68 |
| | $ | 80 |
| | $ | 24 |
| | $ | 270 |
|
The gain (loss) related to outstanding interest rate swaps designated as fair value hedges is recognized in interest expense, net and directly offsets the (loss) gain on the underlying hedged item, the fixed-rate debt, resulting in no net impact to interest expense, net for all periods presented.
|
| |
2017 Form 10-Q | | 15 |
Fair Value Measures
The fair value hierarchy consists of the following three levels:
| |
• | Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets that the company has the ability to access; |
| |
• | Level 2 – Valuations based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuations in which all significant inputs are observable in the market; and |
| |
• | Level 3 – Valuations using significant inputs that are unobservable in the market and include the use of judgment by the company’s management about the assumptions market participants would use in pricing the asset or liability. |
The following table summarizes the bases used to measure certain assets and liabilities carried at fair value on a recurring basis on the condensed consolidated balance sheet as of June 30, 2017:
|
| | | | | | | | | | | | | | | |
| | | Basis of fair value measurement |
(in millions) | Total | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
Assets | | | | | | | |
Cash and equivalents | $ | 6,088 |
| | $ | 852 |
| | $ | 5,236 |
| | $ | — |
|
Time deposits | 515 |
| | — |
| | 515 |
| | — |
|
Debt securities | 2,527 |
| | — |
| | 2,527 |
| | — |
|
Equity securities | 81 |
| | 81 |
| | — |
| | — |
|
Foreign currency contracts | 72 |
| | — |
| | 72 |
| | — |
|
Total assets | $ | 9,283 |
| | $ | 933 |
| | $ | 8,350 |
| | $ | — |
|
Liabilities | | | | | | | |
Interest rate hedges | $ | 306 |
| | $ | — |
| | $ | 306 |
| | $ | — |
|
Foreign currency contracts | 138 |
| | — |
| | 138 |
| | — |
|
Contingent consideration | 4,359 |
| | — |
| | — |
| | 4,359 |
|
Total liabilities | $ | 4,803 |
| | $ | — |
| | $ | 444 |
| | $ | 4,359 |
|
|
| |
2017 Form 10-Q | | 16 |
The following table summarizes the bases used to measure certain assets and liabilities carried at fair value on a recurring basis on the condensed consolidated balance sheet as of December 31, 2016:
|
| | | | | | | | | | | | | | | |
| | | Basis of fair value measurement |
(in millions) | Total | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
Assets | | | | | | | |
Cash and equivalents | $ | 5,100 |
| | $ | 1,191 |
| | $ | 3,909 |
| | $ | — |
|
Time deposits | 1,014 |
| | — |
| | 1,014 |
| | — |
|
Debt securities | 1,974 |
| | — |
| | 1,974 |
| | — |
|
Equity securities | 76 |
| | 76 |
| | — |
| | — |
|
Foreign currency contracts | 225 |
| | — |
| | 225 |
| | — |
|
Total assets | $ | 8,389 |
| | $ | 1,267 |
| | $ | 7,122 |
| | $ | — |
|
Liabilities | | | | | | | |
Interest rate hedges | $ | 338 |
| | $ | — |
| | $ | 338 |
| | $ | — |
|
Foreign currency contracts | 38 |
| | — |
| | 38 |
| | — |
|
Contingent consideration | 4,213 |
| | — |
| | — |
| | 4,213 |
|
Total liabilities | $ | 4,589 |
| | $ | — |
| | $ | 376 |
| | $ | 4,213 |
|
The fair values of time deposits approximate their amortized cost due to the short maturities of these instruments. The fair values of available-for-sale debt securities were determined based on prices obtained from commercial pricing services. Available-for-sale equity securities consists of investments for which the fair values were determined by using the published market price per unit multiplied by the number of units held, without consideration of transaction costs. The derivatives entered into by the company were valued using publicized spot curves for interest rate hedges and publicized forward curves for foreign currency contracts. The fair value measurements of the contingent consideration liabilities were determined based on significant unobservable inputs, including the discount rate, estimated probabilities and timing of achieving specified development, regulatory and commercial milestones and the estimated amount of future sales of the acquired products still in development. Changes to the fair value of the contingent consideration liabilities can result from changes to one or a number of inputs, including discount rates, the probabilities of achieving the milestones, the time required to achieve the milestones and estimated future sales. Significant judgment is employed in determining the appropriateness of these inputs. Changes to the inputs described above could have a material impact on the company's financial position and results of operations in any given period. At June 30, 2017, a 50 basis point increase/decrease in the assumed discount rate would have decreased/increased the value of the contingent consideration liabilities by approximately $160 million. Additionally, at June 30, 2017, a five percentage point increase/decrease in the assumed probability of success across all potential indications would have increased/decreased the value of the contingent consideration liabilities by approximately $340 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:
|
| | | | | | | | |
| | Six months ended June 30, |
(in millions) | | 2017 | | 2016 |
Beginning balance | | $ | 4,213 |
| | $ | — |
|
Additions (see Note 4) | | — |
| | 4,130 |
|
Change in fair value recognized in net earnings | | 146 |
| | 41 |
|
Ending balance | | $ | 4,359 |
| | $ | 4,171 |
|
The change in fair value recognized in net earnings was recorded in other expense, net in the condensed consolidated statements of earnings for both the three and six months ended June 30, 2017 and 2016.
|
| |
2017 Form 10-Q | | 17 |
In addition to the financial instruments that the company carries at fair value on the condensed consolidated balance sheets, certain financial instruments are carried at historical cost or some basis other than fair value. The book values, approximate fair values and bases used to measure the approximate fair values of certain financial instruments as of June 30, 2017 are shown in the table below:
|
| | | | | | | | | | | | | | | | | | |
| | | | Basis of fair value measurement |
(in millions) | Book Value | Approximate fair value | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
Assets | | | | | | | | |
Investments | $ | 46 |
| $ | 46 |
| | $ | — |
| | $ | 4 |
| | $ | 42 |
|
Total assets | $ | 46 |
| $ | 46 |
| | $ | — |
| | $ | 4 |
| | $ | 42 |
|
Liabilities | | | | | | | | |
Short-term borrowings | $ | 400 |
| $ | 400 |
| | $ | — |
| | $ | 400 |
| | $ | — |
|
Current portion of long-term debt and lease obligations | 3,020 |
| 3,022 |
| | 2,999 |
| | 23 |
| | — |
|
Long-term debt and lease obligations, excluding fair value hedges | 34,123 |
| 35,187 |
| | 33,115 |
| | 2,072 |
| | — |
|
Total liabilities | $ | 37,543 |
| $ | 38,609 |
| | $ | 36,114 |
| | $ | 2,495 |
| | $ | — |
|
The book values, approximate fair values and bases used to measure the approximate fair values of certain financial instruments as of December 31, 2016 are shown in the table below:
|
| | | | | | | | | | | | | | | | | | |
| | | | Basis of fair value measurement |
(in millions) | Book Value | Approximate fair value | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
Assets | | | | | | | | |
Investments | $ | 42 |
| $ | 42 |
| | $ | — |
| | $ | 5 |
| | $ | 37 |
|
Total assets | $ | 42 |
| $ | 42 |
| | $ | — |
| | $ | 5 |
| | $ | 37 |
|
Liabilities | | | | | | | | |
Short-term borrowings | $ | 377 |
| $ | 377 |
| | $ | — |
| | $ | 377 |
| | $ | — |
|
Current portion of long-term debt and lease obligations | 25 |
| 25 |
| | — |
| | 25 |
| | — |
|
Long-term debt and lease obligations, excluding fair value hedges | 36,778 |
| 36,664 |
| | 34,589 |
| | 2,075 |
| | — |
|
Total liabilities | $ | 37,180 |
| $ | 37,066 |
| | $ | 34,589 |
| | $ | 2,477 |
| | $ | — |
|
Investments primarily consist of cost method investments, for which the company takes into consideration recent transactions and financial information of the investee, which represents a Level 3 basis of fair value measurement. The fair values of short-term borrowings approximate the carrying values due to the short maturities of these instruments.
The fair values of long-term debt, excluding fair value hedges and the term loans, were determined by using the published market price for the debt instruments, without consideration of transaction costs, which represents a Level 1 basis of fair value measurement. The fair values of the term loans were determined based on a discounted cash flow analysis using quoted market rates, which represents a Level 2 basis of fair value measurement. The counterparties to financial instruments consist of select major international financial institutions.
|
| |
2017 Form 10-Q | | 18 |
Available-for-sale Securities
Substantially all of the company’s investments in debt and equity securities were classified as available-for-sale. Debt securities classified as short-term were $562 million as of June 30, 2017 and $309 million as of December 31, 2016. Long-term debt securities mature primarily within five years. Estimated fair values of available-for-sale securities were generally determined based on prices obtained from commercial pricing services.
The following table is a summary of available-for-sale securities by type as of June 30, 2017:
|
| | | | | | | | | | | | | | | |
| Amortized Cost | | Gross unrealized | | Fair Value |
(in millions) | | Gains | | Losses | |
Asset backed securities | $ | 940 |
| | $ | 1 |
| | $ | (2 | ) | | $ | 939 |
|
Corporate debt securities | 1,448 |
| | 4 |
| | (1 | ) | | 1,451 |
|
Other debt securities | 137 |
| | — |
| | — |
| | 137 |
|
Equity securities | 18 |
| | 65 |
| | (2 | ) | | 81 |
|
Total | $ | 2,543 |
| | $ | 70 |
| | $ | (5 | ) | | $ | 2,608 |
|
The following table is a summary of available-for-sale securities by type as of December 31, 2016:
|
| | | | | | | | | | | | | | | |
| Amortized Cost | | Gross unrealized | | Fair Value |
(in millions) | | Gains | | Losses | |
Asset backed securities | $ | 891 |
| | $ | 1 |
| | $ | (4 | ) | | $ | 888 |
|
Corporate debt securities | 961 |
| | 1 |
| | (2 | ) | | 960 |
|
Other debt securities | 127 |
| | — |
| | (1 | ) | | 126 |
|
Equity securities | 18 |
| | 60 |
| | (2 | ) | | 76 |
|
Total | $ | 1,997 |
| | $ | 62 |
| | $ | (9 | ) | | $ | 2,050 |
|
AbbVie had no other-than-temporary impairments as of June 30, 2017. For the three and six months ended June 30, 2017 and 2016, net realized gains were insignificant.
Concentrations of Risk
The functional currency of the company’s Venezuela operations is the U.S. dollar due to the hyperinflationary status of the Venezuelan economy. During the first quarter of 2016, in consideration of declining economic conditions in Venezuela and a decline in transactions settled at the official rate, AbbVie determined that its net monetary assets denominated in the Venezuelan bolivar (VEF) were no longer expected to be settled at the official rate of 10 VEF per U.S. dollar, but rather at the Divisa Complementaria (DICOM) rate. Therefore, during the first quarter of 2016, AbbVie recorded a charge of $298 million to net foreign exchange loss to revalue its bolivar-denominated net monetary assets using the DICOM rate then in effect of approximately 270 VEF per U.S. dollar. As of June 30, 2017 and December 31, 2016, AbbVie’s net monetary assets in Venezuela were insignificant.
AbbVie continues to do business with foreign governments in certain countries, including Greece, Portugal, Italy and Spain, which have historically experienced challenges in credit and economic conditions. Substantially all of AbbVie’s trade receivables in Greece, Portugal, Italy and Spain are with government health systems. Outstanding net governmental receivables in these countries totaled $265 million as of June 30, 2017 and $244 million as of December 31, 2016. The company also continues to do business with foreign governments in certain oil-exporting countries that have recently experienced a deterioration in economic conditions, including Saudi Arabia and Russia, which may result in delays in the collection of receivables. Outstanding net governmental receivables related to Saudi Arabia were $149 million as of June 30, 2017 and $122 million as of December 31, 2016. Outstanding net governmental receivables related to Russia were $133 million as of June 30, 2017 and $110 million as of December 31, 2016. Global economic conditions and customer-specific factors may require the company to periodically re-evaluate the collectability of its receivables and the company could potentially incur credit losses.
Of total net accounts receivable, three U.S. wholesalers accounted for 54% as of June 30, 2017 and 51% as of December 31, 2016, and substantially all of AbbVie’s net revenues in the United States were to these three wholesalers.
|
| |
2017 Form 10-Q | | 19 |
HUMIRA (adalimumab) is AbbVie’s single largest product and accounted for approximately 66% of AbbVie’s total net revenues for the six months ended June 30, 2017 and 62% for the six months ended June 30, 2016.
Debt and Credit Facilities
Short-term borrowings included commercial paper of $400 million as of June 30, 2017 and $377 million as of December 31, 2016. The weighted-average interest rate on commercial paper borrowings was 1.1% for the six months ended June 30, 2017 and 0.6% for the six months ended June 30, 2016.
Note 9 Post-Employment Benefits
The following is a summary of net periodic benefit costs relating to the company’s defined benefit and other post-employment plans:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Defined benefit plans | | Other post- employment plans |
| Three months ended June 30, | | Six months ended June 30, | | Three months ended June 30, | | Six months ended June 30, |
(in millions) | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
Service cost | $ | 59 |
| | $ | 53 |
| | $ | 117 |
| | $ | 106 |
| | $ | 6 |
| | $ | 6 |
| | $ | 13 |
| | $ | 13 |
|
Interest cost | 51 |
| | 50 |
| | 101 |
| | 101 |
| | 6 |
| | 6 |
| | 12 |
| | 12 |
|
Expected return on plan assets | (95 | ) | | (89 | ) | | (190 | ) | | (178 | ) | | — |
| | — |
| | — |
| | — |
|
Amortization of actuarial losses and prior service costs | 27 |
| | 20 |
| | 53 |
| | 42 |
| | (1 | ) | | — |
| | — |
| | — |
|
Net periodic benefit cost | $ | 42 |
| | $ | 34 |
| | $ | 81 |
| | $ | 71 |
| | $ | 11 |
| | $ | 12 |
| | $ | 25 |
| | $ | 25 |
|
AbbVie's principal domestic defined benefit plan is the AbbVie Pension Plan. AbbVie made voluntary contributions to this plan of $150 million in both the six months ended June 30, 2017 and 2016.
Note 10 Equity
Stock-Based Compensation
Stock-based compensation expense is principally related to awards issued pursuant to the AbbVie 2013 Incentive Stock Program and is summarized as follows:
|
| | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
(in millions) | | 2017 | | 2016 | | 2017 | | 2016 |
Cost of products sold | | $ | 10 |
| | $ | 8 |
| | $ | 13 |
| | $ | 13 |
|
Research and development | | 33 |
| | 97 |
| | 97 |
| | 155 |
|
Selling, general and administrative | | 33 |
| | 32 |
| | 107 |
| | 106 |
|
Pre-tax compensation expense | | 76 |
| | 137 |
| | 217 |
| | 274 |
|
Tax benefit | | 18 |
| | 42 |
| | 65 |
| | 89 |
|
After-tax compensation expense | | $ | 58 |
| | $ | 95 |
| | $ | 152 |
| | $ | 185 |
|
Stock Options
During the six months ended June 30, 2017, primarily in connection with the company's annual grant, AbbVie granted 1.2 million stock options with a weighted-average grant-date fair value of $9.80. As of June 30, 2017, $26 million of unrecognized compensation cost related to stock options is expected to be recognized as expense over approximately the next two years.
|
| |
2017 Form 10-Q | | 20 |
RSAs, RSUs and Performance Shares
During the six months ended June 30, 2017, primarily in connection with the company's annual grant, AbbVie granted 5.9 million RSUs and performance shares with a weighted-average grant-date fair value of $61.49. As of June 30, 2017, $345 million of unrecognized compensation cost related to RSAs, RSUs and performance shares is expected to be recognized as expense over approximately the next two years.
Cash Dividends
The following table summarizes quarterly cash dividends declared for the six months ended June 30, 2017 and the full year 2016:
|
| | | | | | | | | | | | | | |
2017 | | 2016 |
Date Declared | | Payment Date | | Dividend Per Share | | Date Declared | | Payment Date | | Dividend Per Share |
06/22/17 | | 08/15/17 | | $ | 0.64 |
| | 10/28/16 | | 02/15/17 | | $ | 0.64 |
|
02/16/17 | | 05/15/17 | | $ | 0.64 |
| | 09/09/16 | | 11/15/16 | | $ | 0.57 |
|
| |
| | | | 06/16/16 | | 08/15/16 | | $ | 0.57 |
|
| |
| | | | 02/18/16 | | 05/16/16 | | $ | 0.57 |
|
Stock Repurchase Program
On February 16, 2017, AbbVie's board of directors authorized a $5.0 billion increase to AbbVie's existing stock repurchase program. The stock repurchase authorization permits purchases of AbbVie shares from time to time in open-market or private transactions at management's direction depending on the company's cash flows, net debt level and market conditions. The program has no time limit and can be discontinued at any time. Shares repurchased under this program are recorded at acquisition cost, including related expenses, and are available for general corporate purposes.
AbbVie repurchased approximately 7.8 million shares in the open market for $500 million during the six months ended June 30, 2017. During the six months ended June 30, 2017, AbbVie cash-settled $285 million of its open market purchases made at the end of 2016. AbbVie's remaining stock repurchase authorization was $4.5 billion as of June 30, 2017.
Accumulated Other Comprehensive Loss
The following table summarizes the changes in each component of accumulated other comprehensive loss, net of tax, for the six months ended June 30, 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Foreign currency translation adjustments | | Net investment hedging activities | | Pension and post- employment benefits | | Marketable security activities | | Cash flow hedging activities | | Total |
Balance as of December 31, 2016 | $ | (1,435 | ) | | $ | 140 |
| | $ | (1,513 | ) | | $ | 46 |
| | $ | 176 |
| | $ | (2,586 | ) |
Other comprehensive income (loss) before reclassifications | 419 |
| | (217 | ) | | (25 | ) | | 20 |
| | (129 | ) | | 68 |
|
Net losses (gains) reclassified from accumulated other comprehensive loss | — |
| | — |
| | 38 |
| | (10 | ) | | (58 | ) | | (30 | ) |
Net current-period other comprehensive income (loss) | 419 |
| | (217 | ) | | 13 |
| | 10 |
| | (187 | ) | | 38 |
|
Balance as of June 30, 2017 | $ | (1,016 | ) | | $ | (77 | ) | | $ | (1,500 | ) | | $ | 56 |
| | $ | (11 | ) | | $ | (2,548 | ) |
Other comprehensive income for the six months ended June 30, 2017 included foreign currency translation adjustments totaling a gain of $419 million, which was principally due to the impact of the improvement in the Euro in the six months ended June 30, 2017 on the translation of the company’s assets denominated in the Euro.
|
| |
2017 Form 10-Q | | 21 |
The following table summarizes the changes in each component of accumulated other comprehensive loss, net of tax, for the six months ended June 30, 2016:
|
| | | | | | | | | | | | | | | | | | | |
(in millions) | Foreign currency translation adjustments | | Pension and post- employment benefits | | Marketable security activities | | Cash flow hedging activities | | Total |
Balance as of December 31, 2015 | $ | (1,270 | ) | | $ | (1,378 | ) | | $ | 47 |
| | $ | 40 |
| | $ | (2,561 | ) |
Other comprehensive income before reclassifications | 133 |
| | 6 |
| | 10 |
| | 17 |
| | 166 |
|
Net losses (gains) reclassified from accumulated other comprehensive loss | — |
| | 27 |
| | (3 | ) | | (19 | ) | | 5 |
|
Net current-period other comprehensive income (loss) | 133 |
| | 33 |
| | 7 |
| | (2 | ) | | 171 |
|
Balance as of June 30, 2016 | $ | (1,137 | ) | | $ | (1,345 | ) | | $ | 54 |
| | $ | 38 |
| | $ | (2,390 | ) |
Other comprehensive income for the six months ended June 30, 2016 included foreign currency translation adjustments totaling a gain of $133 million, which was principally due to the impact of the improvement in the Euro and Japanese yen in the six months ended June 30, 2016 on the translation of the company’s assets denominated in the Euro and Japanese yen.
The table below presents the impact on AbbVie’s condensed consolidated statements of earnings for significant amounts reclassified out of each component of AOCI for the three and six months ended June 30, 2017 and 2016:
|
| | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
(in millions) (brackets denote gains) | | 2017 | | 2016 | | 2017 | | 2016 |
Pension and post-employment benefits | | | | | | | | |
Amortization of actuarial losses and other(a) | | $ | 26 |
| | $ | 20 |
| | $ | 53 |
| | $ | 42 |
|
Tax benefit | | (7 | ) | | (7 | ) | | (15 | ) | | (15 | ) |
Total reclassifications, net of tax | | $ | 19 |
| | $ | 13 |
| | $ | 38 |
| | $ | 27 |
|
Cash flow hedging activities | | | | | | | | |
Gains on designated cash flow hedges(b) | | $ | (46 | ) | | $ | (18 | ) | | $ | (63 | ) | | $ | (19 | ) |
Tax expense | | 4 |
| | — |
| | 5 |
| | — |
|
Total reclassifications, net of tax | | $ | (42 | ) | | $ | (18 | ) | | $ | (58 | ) | | $ | (19 | ) |
(a) Amounts are included in the computation of net periodic benefit cost (see Note 9).
(b) Amounts are included in cost of products sold (see Note 8).
Note 11 Income Taxes
The effective tax rate was 19% for the three months and 18% for the six months ended June 30, 2017 and 23% for both the three and six months ended June 30, 2016. The effective tax rate in each period differed from the statutory tax rate principally due to the benefit from foreign operations which reflects the impact of lower income tax rates in locations outside the United States, tax exemptions and incentives in Puerto Rico and other foreign tax jurisdictions and business development activities together with the cost of repatriation decisions. The decrease in the effective tax rate for the three and six months ended June 30, 2017 over the prior year was principally due to changes in the jurisdictional mix of earnings, as well as certain discrete factors and events, including collaborations, the impact of the prior year non-deductible devaluation loss related to Venezuela and the impact of the adoption of ASU No. 2016-09, which changed the accounting treatment for excess tax benefits associated with stock-based awards. See Note 1 for additional information related to the adoption of this accounting pronouncement.
Due to the potential for resolution of federal, state and foreign examinations, and the expiration of various statutes of limitations, it is reasonably possible that the company’s gross unrecognized tax benefits balance may change within the next twelve months by up to $233 million. At the time of separation, AbbVie and Abbott Laboratories (Abbott) entered into a tax sharing agreement which provides that Abbott is liable for and has indemnified AbbVie against all income tax liabilities for periods prior to the separation.
|
| |
2017 Form 10-Q | | 22 |
Accordingly, Abbott will indemnify and hold AbbVie harmless if the tax positions are settled for amounts in excess of recorded liabilities, and AbbVie will not benefit if prior tax positions are resolved more favorably than recorded amounts.
Note 12 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 $310 million as of June 30, 2017 and $225 million as of December 31, 2016. Initiation of new legal proceedings or a change in the status of existing proceedings may result in a change in the estimated loss accrued by AbbVie. While it is not feasible to predict the outcome of all proceedings and exposures with certainty, management believes that their ultimate disposition should not have a material adverse effect on AbbVie’s consolidated financial position, results of operations or cash flows.
Subject to certain exceptions specified in the separation agreement by and between Abbott and AbbVie, AbbVie assumed the liability for, and control of, all pending and threatened legal matters related to its business, including liabilities for any claims or legal proceedings related to products that had been part of its business, but were discontinued prior to the distribution, as well as assumed or retained liabilities, and will indemnify Abbott for any liability arising out of or resulting from such assumed legal matters.
Several pending lawsuits filed against Unimed Pharmaceuticals, Inc., Solvay Pharmaceuticals, Inc. (a company Abbott acquired in February 2010 and now known as AbbVie Products LLC) and others are consolidated for pre-trial purposes in the United States District Court for the Northern District of Georgia under the Multi-District Litigation (MDL) Rules as In re: AndroGel Antitrust Litigation, MDL No. 2084. These cases, brought by private plaintiffs and the Federal Trade Commission (FTC), generally allege Solvay's patent litigation involving AndroGel was sham litigation and the 2006 patent litigation settlement agreements and related agreements with three generic companies violate federal antitrust laws. Plaintiffs generally seek monetary damages and/or injunctive relief and attorneys' fees. These cases include: (a) four individual plaintiff lawsuits; (b) three purported class a