AbbVie Inc. - Quarter Report: 2015 September (Form 10-Q)

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x                               QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2015

 

OR

 

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.

 

 

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 o

 

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 o

 

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.

 

Large Accelerated Filer x		Accelerated Filer o
Non-Accelerated Filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).        Yes o   No x

 

As of September 30, 2015, AbbVie Inc. had 1,634,746,917 shares of common stock at $0.01 par value outstanding.

 

Table of Contents

 

AbbVie Inc. and Subsidiaries

Table of Contents

 

PART I - FINANCIAL INFORMATION			Page
Item 1.	Financial Statements and Supplementary Data		3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		43
Item 4.	Controls and Procedures		45
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings		45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		46
Item 6.	Exhibits		46

 

2

Table of Contents

 

PART I.              FINANCIAL INFORMATION

ITEM 1.            FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

AbbVie Inc. and Subsidiaries

Condensed Consolidated Statements of Earnings (unaudited)

 

		Three months ended September 30,				Nine months ended September 30,
(in millions, except per share data)		2015		2014		2015		2014
Net revenues		$5,944		$5,019		$16,459		$14,508
Cost of products sold		1,167		1,094		3,025		3,307
Selling, general and administrative		1,474		1,595		4,650		4,383
Research and development		1,418		812		3,210		2,418
Acquired in-process research and development		—		308		150		324
Other expense		—		250		—		250
Total operating costs and expenses		4,059		4,059		11,035		10,682
Operating earnings		1,885		960		5,424		3,826
Interest expense, net		197		128		487		262
Net foreign exchange loss		13		174		191		182
Other expense (income), net		28		(29	)	25		(24	)
Earnings before income tax expense		1,647		687		4,721		3,406
Income tax expense		408		181		1,094		822
Net earnings		$1,239		$506		$3,627		$2,584
Per share data
Basic earnings per share		$0.75		$0.32		$2.22		$1.61
Diluted earnings per share		$0.74		$0.31		$2.21		$1.60
Cash dividends declared per common share		$0.51		$0.42		$1.53		$1.26
Weighted-average basic shares outstanding		1,652		1,595		1,623		1,595
Weighted-average diluted shares outstanding		1,664		1,610		1,635		1,609

 

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

 

3

Table of Contents

 

AbbVie Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (unaudited)

 

		Three months ended September 30,				Nine months ended September 30,
(in millions)		2015		2014		2015		2014
Net earnings		$1,239		$506		$3,627		$2,584
Foreign currency translation adjustments, net of tax expense (benefit) of $10 and $(76) for the three months ended September 30, 2015 and 2014, respectively, and $(98) and $(90) for the nine months ended September 30, 2015 and 2014, respectively		(48	)	(647	)	(464	)	(714	)
Pension and post-employment benefits, net of tax expense of $10 and $7 for the three months ended September 30, 2015 and 2014, respectively, and $28 and $16 for the nine months ended September 30, 2015 and 2014, respectively		23		20		91		43
Unrealized losses on marketable equity securities, net of tax benefit of $3 and $2 for the three and nine months ended September 30, 2015, respectively		(13	)	(1	)	(4	)	(1	)
Hedging activities, net of tax (benefit) expense of $(5) and $6 for the three months ended September 30, 2015 and 2014, respectively, and $(7) and $4 for the nine months ended September 30, 2015 and 2014, respectively		(87	)	135		(91	)	201
Other comprehensive loss		(125	)	(493	)	(468	)	(471	)
Comprehensive income		$1,114		$13		$3,159		$2,113

 

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

 

4

Table of Contents

 

AbbVie Inc. and Subsidiaries
Condensed Consolidated Balance Sheets

 

(in millions, except share data)		September 30, 2015		December 31, 2014
		(unaudited)
Assets
Current assets
Cash and equivalents		$9,223		$8,348
Short-term investments		26		26
Accounts and other receivables, net		4,574		3,735
Inventories, net		1,841		1,124
Deferred income taxes		1,100		896
Prepaid expenses and other		1,148		1,952
Total current assets		17,912		16,081
Investments		74		92
Property and equipment, net		2,546		2,485
Intangible assets, net of amortization		19,822		1,513
Goodwill		13,243		5,862
Other assets		1,235		1,480
Total assets		$54,832		$27,513
Liabilities and Equity
Current liabilities
Short-term borrowings		$760		$425
Current portion of long-term debt and lease obligations		8		4,014
Accounts payable and accrued liabilities		8,045		6,954
Total current liabilities		8,813		11,393
Long-term debt and lease obligations		31,359		10,538
Deferred income taxes		5,996		159
Other long-term liabilities		3,801		3,681
Commitments and contingencies		—		—
Stockholders’ equity
Common stock, $0.01 par value, authorized 4,000,000,000 shares, issued 1,748,349,152 and 1,609,519,046 shares as of September 30, 2015 and December 31, 2014, respectively		17		16
Common stock held in treasury, at cost, 113,602,235 and 18,129,715 shares as of September 30, 2015 and December 31, 2014, respectively		(7,314	)	(972	)
Additional paid-in capital		13,005		4,194
Retained earnings		1,654		535
Accumulated other comprehensive loss		(2,499	)	(2,031	)
Total stockholders’ equity		4,863		1,742
Total liabilities and equity		$54,832		$27,513

 

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

 

5

Table of Contents

 

AbbVie Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)

 

		Nine months ended September 30,
(in millions) (brackets denote cash outflows)		2015		2014
Cash flows from operating activities
Net earnings		$3,627		$2,584
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation		296		286
Amortization of intangible assets		279		307
Stock-based compensation		229		198
Upfront costs and milestones related to collaborations		280		574
Other, net		369		324
Changes in operating assets and liabilities, net of acquisitions:
Accounts and other receivables		(842	)	95
Inventories		(446	)	20
Prepaid expenses and other assets		452		(260	)
Accounts payable and other liabilities		1,328		(1	)
Cash flows from operating activities		5,572		4,127
Cash flows from investing activities
Acquisition of Pharmacyclics, Inc., net of cash acquired		(11,488	)	—
Other acquisitions and investments		(794	)	(572	)
Acquisitions of property and equipment		(387	)	(459	)
Transfer to restricted cash		—		(2,700	)
Purchases of investment securities		(851	)	(1,169	)
Sales and maturities of investment securities		862		1,460
Other		19		—
Cash flows from investing activities		(12,639	)	(3,440	)
Cash flows from financing activities
Net change in short-term borrowings		335		(112	)
Proceeds from issuance of long-term debt		16,660		—
Debt issuance cost		(179	)	(82	)
Dividends paid		(2,454	)	(1,987	)
Purchases of treasury stock		(6,342	)	(352	)
Proceeds from the exercise of stock options		123		164
Other, net		40		(42	)
Cash flows from financing activities		8,183		(2,411	)
Effect of exchange rate changes on cash and equivalents		(241	)	(152	)
Net increase (decrease) in cash and equivalents		875		(1,876	)
Cash and equivalents, beginning of period		8,348		9,595
Cash and equivalents, end of period		$9,223		$7,719
Supplemental Schedule of Non-Cash Investing and Financing Activities
Issuance of common stock associated with the acquisition of Pharmacyclics, Inc.		$8,405		$—

 

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

 

6

Table of Contents

 

AbbVie Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

Background

 

The principal business of AbbVie Inc. (AbbVie or the company) is the discovery, development, manufacture, and sale of a broad line of pharmaceutical products. AbbVie’s products are generally sold worldwide directly to wholesalers, distributors, government agencies, health care facilities, specialty pharmacies, and independent retailers from AbbVie-owned distribution centers and public warehouses. Substantially all of AbbVie’s net revenues in the United States are to three wholesalers. Outside the United States, products are sold primarily to customers or through distributors, depending on the market served.

 

AbbVie was incorporated in Delaware on April 10, 2012. On January 1, 2013, AbbVie became an independent, publicly-traded company as a result of the distribution by Abbott Laboratories (Abbott) of 100 percent of the outstanding common stock of AbbVie to Abbott’s shareholders (the separation). In connection with the separation, AbbVie and Abbott entered into transition services agreements covering certain corporate support and back office services that AbbVie historically received from Abbott. Such services included information technology, accounts payable, payroll, receivables collection, treasury, and other financial functions, as well as order entry, warehousing, engineering support, quality assurance support, and other administrative services. These agreements facilitated the separation by allowing AbbVie to operate independently prior to establishing stand-alone back office functions across its organization. The majority of these transition service agreements expired without extension at December 31, 2014; however, some of these services continue to be provided to AbbVie on a temporary basis. With certain limited exceptions, the remaining transition services agreements will terminate on or prior to December 31, 2015.

 

During the three and nine months ended September 30, 2015 and 2014, AbbVie incurred certain separation-related expenses, which were principally classified in selling, general and administrative (SG&A) expense in the condensed consolidated statements of earnings. Separation-related expenses for the three months ended September 30, 2015 and 2014 were $45 million and $109 million, respectively, and were $244 million and $299 million for the nine months ended September 30, 2015 and 2014, respectively.

 

Basis of Historical Presentation

 

The unaudited interim condensed consolidated financial statements of AbbVie 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, 2014.

 

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.

 

For a certain portion of AbbVie’s operations, the legal transfer of AbbVie’s assets (net of liabilities) did not occur with the separation of AbbVie on January 1, 2013 due to the time required to transfer marketing authorizations and satisfy other regulatory requirements in certain countries. Under the terms of the separation agreement with Abbott, AbbVie is responsible for the business activities conducted by Abbott on its behalf, and is subject to the risks and entitled to the benefits generated by these operations and assets. As a result, the related assets and liabilities and results of operations have been reported in AbbVie’s condensed consolidated financial statements as of September 30, 2015 and December 31, 2014 and for the three and nine months ended September 30, 2015 and 2014. Substantially all of these operations were transferred to AbbVie as of September 30, 2015.

 

7

Table of Contents

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 ASU 2014-09 supersede most current revenue recognition requirements. The core principal 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) retrospectively with the cumulative effect of initially applying the amendments recognized at the date of initial application. In July 2015, the FASB issued ASU No. 2015-4, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 by one year for all entities. Accordingly, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted only for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. AbbVie is currently assessing the timing of its adoption and the impact of adopting this guidance on its consolidated financial statements and the implementation approach to be used.

 

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted on a retrospective basis.

 

AbbVie elected to adopt ASU 2015-03 early, effective in the three months ended June 30, 2015. As a result, AbbVie reclassified approximately $7 million and $27 million of net deferred financing costs from prepaid expenses and other current assets and other long-term assets, respectively, to a reduction in the carrying amount of its long-term debt as of December 31, 2014. Total debt issuance costs classified as a reduction to long-term debt and lease obligations (current and non-current) were $118 million as of September 30, 2015.

 

In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. Entities are currently required to retrospectively apply adjustments made to provisional amounts recognized in a business combination. ASU 2015-16 is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The guidance is to be applied prospectively to measurement period adjustments that occur after the effective date of the guidance with earlier application permitted for financial statements that have not been issued. AbbVie elected to adopt ASU 2015-16 early, effective in the three months ended September 30, 2015.

 

 

Interest Expense, Net

 

		Three months ended September 30,				Nine months ended September 30,
(in millions)		2015		2014		2015		2014
Interest expense		$207		$148		$511		$290
Interest income		(10	)	(20	)	(24	)	(28	)
Interest expense, net		$197		$128		$487		$262

 

Interest expense, net included $86 million of financing-related costs incurred in connection with the acquisition of Pharmacyclics, Inc. (Pharmacyclics), which were incurred in the first half of 2015. Refer to Note 4 for additional information.

 

8

Table of Contents

 

Inventories

 

(in millions)		September 30, 2015		December 31, 2014
Finished goods		640		$341
Work-in-process		1,063		629
Raw materials		138		154
Inventories, net		$1,841		$1,124

 

Inventories, net as of September 30, 2015 included $416 million acquired through the acquisition of Pharmacyclics. Refer to Note 4 for additional information.

 

Property and Equipment

 

(in millions)		September 30, 2015		December 31, 2014
Property and equipment, gross		$7,281		$7,105
Less accumulated depreciation		(4,735	)	(4,620	)
Property and equipment, net		$2,546		$2,485

 

Depreciation expense for the three months ended September 30, 2015 and 2014 was $102 million and $94 million, respectively, and was $296 million and $286 million for the nine months ended September 30, 2015 and 2014, respectively.

 

 

AbbVie calculates earnings per share (EPS) using the more dilutive of the treasury stock or the two-class method. For both the three and nine months ended September 30, 2015, the two-class method was more dilutive. As such, the dilutive effect of unvested restricted stock units (RSUs) and restricted stock awards (RSAs) of approximately 3 million shares for both the three and nine months ended September 30, 2015 were excluded from the denominator for the calculation of diluted EPS. These awards otherwise would have been included in the calculation of EPS under the treasury stock method. Additionally, all earnings (distributed and undistributed) allocable to participating securities, including performance-based awards not otherwise included in the calculation of EPS under the treasury stock method, were excluded from the numerator for the calculation of basic and diluted earnings per share under the two-class method. Earnings allocable to participating securities for the three and nine months ended September 30, 2015 were $7 million and $18 million, respectively.

 

As further described in Note 10, AbbVie entered into and executed a $5.0 billion accelerated share repurchase agreement (ASR) with Morgan Stanley & Co. LLC (Morgan Stanley) on May 26, 2015, pursuant to which AbbVie paid $5.0 billion for an initial delivery of 68 million shares of AbbVie’s common stock. The initial delivery of shares represented approximately 90% of the total shares expected to be delivered under the ASR. In the three months ended September 30, 2015, Morgan Stanley delivered an additional 5 million shares of AbbVie’s common stock to AbbVie in final settlement of the ASR. For purposes of calculating EPS, AbbVie reflected the ASR as a repurchase of AbbVie common stock. See Note 10 for additional information.

 

The number of common shares issuable under stock-based compensation plans that were excluded from the computation of earnings per common share because the effect would have been antidilutive were not material for both the three and nine months ended September 30, 2015.

 

For both the three and nine months ended September 30, 2014, AbbVie determined the two-class method was more dilutive. As a result, the dilutive effect of unvested RSUs and RSAs of approximately 4 million shares for both the three and nine months ended September 30, 2014 were excluded from the denominator for the calculation of diluted EPS. Additionally, earnings allocable to participating securities for the three and nine months ended September 30, 2014 was $3 million and $14 million, respectively. For both the three and nine months ended September 30, 2014, the number of common shares issuable under stock-based compensation plans that were excluded from the computation of earnings per common share because the effect would have been antidilutive were not material.

 

9

Table of Contents

 

Acquisition of Pharmacyclics

 

On May 26, 2015, AbbVie acquired Pharmacyclics through a tender offer for approximately $20.8 billion, including cash consideration of $12.4 billion and equity consideration of $8.4 billion. Pharmacyclics is a biopharmaceutical company that develops and commercializes novel therapies for people impacted by cancer. Pharmacyclics markets IMBRUVICA® (ibrutinib), a Bruton’s tyrosine kinase (BTK) inhibitor, targeting B-cell malignancies. Each outstanding Pharmacyclics share was exchanged for (i) $152.25 in cash and $109.00 in fair market value of AbbVie common stock, (ii) $261.25 in cash, or (iii) $261.25 in fair market value of AbbVie common stock, at the election of each holder, subject to the election and proration of the consideration at 58 percent cash and 42 percent AbbVie common stock.

 

The total consideration for the acquisition of Pharmacyclics was approximately $20.8 billion, consisting of cash and approximately 128 million shares of AbbVie common stock, and is summarized as follows:

 

(in millions)
Fair value of AbbVie common stock issued to Pharmacyclics stockholders		$8,405
Cash consideration paid to Pharmacyclics stockholders		11,749
Cash consideration paid to Pharmacyclics equity award holders		616
Total consideration		$20,770

 

The acquisition of Pharmacyclics has been accounted for as a business combination using the acquisition method of accounting. This method requires, among other things, that assets acquired and liabilities assumed be recognized at fair value as of the acquisition date. The valuation of assets acquired and liabilities assumed in the acquisition has not yet been finalized as of September 30, 2015. As a result, AbbVie recorded preliminary estimates for the fair value of assets acquired and liabilities assumed as of the acquisition date. The company made immaterial measurement period adjustments to certain preliminary estimates of fair value during the three months ended September 30, 2015. The completion of the valuation will occur no later than one year from the acquisition date and may result in significant changes to the recognized assets and liabilities.

 

10

Table of Contents

 

The following table summarizes preliminary fair values of assets acquired and liabilities assumed as of the May 26, 2015 acquisition date:

 

(in millions)
Assets acquired and liabilities assumed
Cash and equivalents		$877
Short-term investments		11
Accounts and other receivables		106
Inventories		492
Other assets		212
Intangible assets
Definite-lived developed product rights		4,590
Definite-lived license agreements		6,780
Indefinite-lived research and development		7,180
Accounts payable and accrued liabilities		(381	)
Deferred income taxes		(6,453	)
Other long-term liabilities		(254	)
Total identifiable net assets		13,160
Goodwill		7,610
Total assets acquired and liabilities assumed		$20,770

 

The fair market value step-up adjustment to inventories of $445 million is being amortized to cost of products sold when the inventory is sold to customers, which is expected to be a period of approximately 18 months.

 

Intangible assets relate to the IMBRUVICA developed product rights, acquired in-process research and development (IPR&D) in the United States related to additional indications for IMBRUVICA, and the contractual rights to IMBRUVICA profits and losses outside the United States as a result of the collaboration agreement with Janssen Biotech, Inc. and its affiliates (Janssen), one of the Janssen Pharmaceutical companies of Johnson & Johnson. Refer to Note 5 for additional information regarding the collaboration with Janssen. The acquired definite-lived intangible assets are being amortized over a weighted-average estimated useful life of 13 years using the estimated pattern of economic benefit. The estimated fair value of the IPR&D and identifiable intangible assets was determined using the “income approach,” 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 net cash flows for each year for each asset or product (including net revenues, cost of sales, R&D costs, selling and marketing costs and working capital/contributory asset charges), the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, the potential regulatory and commercial success risks, competitive trends impacting the asset and each cash flow stream as well as other factors.

 

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from the other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recognized from the acquisition of Pharmacyclics includes expected synergies, including the ability to leverage the respective strengths of each business, expanding the combined company’s product portfolio, acceleration of clinical and commercial presence in oncology and establishment of a strong leadership position in hematological oncology. The goodwill is not deductible for tax purposes.

 

11

Table of Contents

 

From the acquisition date through September 30, 2015, AbbVie’s condensed consolidated statements of earnings included net revenues of $431 million and an operating loss of $422 million associated with the acquisition. The operating loss included $294 million of acquisition-related compensation expense, $144 million of inventory step-up and intangible asset amortization, and $96 million of transaction and integration costs. Of these costs, $279 million was recorded within SG&A expense, $111 million within research and development (R&D) expense, and $144 million within cost of products sold.

 

Pro Forma Financial Information

 

The following table presents the unaudited pro forma combined results of operations of AbbVie and Pharmacyclics for the three and nine months ended September 30, 2015 and 2014 as if the acquisition of Pharmacyclics had occurred on January 1, 2014:

 

		Three months ended September 30,				Nine months ended September 30,
(in millions, except per share information)		2015		2014		2015		2014
Net revenues		$5,944		$5,226		$16,815		$14,947
Net earnings		$1,332		$351		$3,780		$1,706
Basic earnings per share		$0.81		$0.20		$2.23		$0.99
Diluted earnings per share		$0.80		$0.20		$2.22		$0.98

 

The unaudited pro forma financial information was prepared using the acquisition method of accounting and was based on the historical financial information of AbbVie and Pharmacyclics. In order to reflect the occurrence of the acquisition on January 1, 2014 as required, the unaudited pro forma financial information includes adjustments to reflect the incremental amortization expense to be incurred based on the current preliminary fair values of the identifiable intangible assets acquired; the incremental cost of products sold related to the fair value adjustments associated with of acquisition-date inventory; the additional interest expense associated with the issuance of debt to finance the acquisition; and the reclassification of acquisition, integration and financing-related costs incurred during the three and nine months ended September 30, 2015 to the three and nine months ended September 30, 2014. The unaudited pro forma financial information is not necessarily indicative of what the consolidated results of operations would have been had the acquisition been completed on January 1, 2014. In addition, the unaudited pro forma financial information is not a projection of the future results of operations of the combined company nor does it reflect the expected realization of any cost savings or synergies associated with the acquisition.

 

Other Licensing & Acquisitions Activity

 

For the nine months ended September 30, 2015, the company recorded IPR&D charges of $150 million. There were no IPR&D charges incurred in the three months ended September 30, 2015. Excluding the acquisition of Pharmacyclics, cash outflows related to other acquisitions and investments totaled $794 million for the nine months ended September 30, 2015, and included a $500 million payment to Calico Life Sciences LLC (Calico) as a result of the satisfaction of certain conditions under the R&D collaboration with Calico for which a charge to IPR&D was recorded in 2014, as well as milestone payments to collaboration partners.

 

In the nine months ended September 30, 2014, cash outflows related to other acquisitions and investments totaled $572 million. The company recorded IPR&D charges of $308 million and $324 million for the three and nine months ended September 30, 2014, respectively, which included charges related to the global collaboration with Infinity entered into in September 2014. The company also recorded other operating expense of $250 million for both the three and nine months ended September 30, 2014 related to the collaboration with Calico entered into in September 2014.

 

12

Table of Contents

 

C2N Diagnostics

 

In March 2015, AbbVie entered into an exclusive worldwide license agreement with C2N Diagnostics to develop and commercialize anti-tau antibodies for the treatment of Alzheimer’s disease and other neurological disorders. As part of the agreement, AbbVie made an initial upfront payment of $100 million, which was expensed to IPR&D in the three months ended March 31, 2015. Upon the achievement of certain development, regulatory, and commercial milestones, AbbVie could make additional payments of up to $685 million, as well as royalties on net sales.

 

Calico Life Sciences LLC

 

In September 2014, AbbVie and Calico entered into a novel R&D collaboration agreement to discover, develop and commercialize new therapies for patients with age-related diseases, including neurodegeneration and cancer. As part of the agreement, AbbVie made an initial upfront payment of $250 million, which was recorded in other expense in the three months ended September 30, 2014. Calico is responsible for research and early development during the first five years and will continue to advance collaboration projects through Phase 2a for a ten year period. AbbVie will have the option to exclusively license collaboration compounds after completion of Phase 2a. AbbVie will support Calico in its early R&D efforts and, upon option exercise, would be responsible for all late-stage development and commercial activities. Collaboration costs and profits will be shared equally by both companies.

 

Infinity Pharmaceuticals, Inc.

 

In September 2014, AbbVie entered into a global collaboration agreement with Infinity Pharmaceuticals, Inc. (Infinity) to develop and commercialize duvelisib (IPI-145) for the treatment of patients with cancer. As part of the agreement, AbbVie made an initial upfront payment of $275 million, which was expensed to IPR&D in the three months ended September 30, 2014. In the three months ended September 30, 2015, AbbVie recorded a charge of $130 million in R&D expense due to the achievement of a development milestone under the collaboration agreement. This amount will be paid in the fourth quarter of 2015. Upon the achievement of certain development, regulatory and commercial milestones, AbbVie could make additional payments of up to $400 million. In the United States, the companies will jointly commercialize duvelisib and will share equally in any potential profits. Outside the United States, AbbVie will be responsible for the commercialization of duvelisib, and Infinity is eligible to receive tiered double-digit royalties on net sales.

 

Other Activity

 

United Therapeutics Corporation

 

In August 2015, AbbVie entered into an agreement to purchase a rare pediatric disease priority review voucher (PRV) from United Therapeutics Corporation. The PRV entitles AbbVie to receive an FDA priority review of a single New Drug Application or Biologics License Application, which reduces the target review time and could lead to an expedited approval. In exchange for the PRV, AbbVie made a payment of $350 million, which was recorded in R&D expense in the condensed consolidated statements of earnings and as an operating cash outflow in the condensed consolidated statement of cash flows for the three months ended September 30, 2015. AbbVie intends to use the PRV for an existing R&D project.

 

13

Table of Contents

 

 

In December 2011, Pharmacyclics entered into a worldwide collaboration and license agreement with Janssen for the joint development and commercialization of IMBRUVICA, a novel, orally active, selective covalent inhibitor of BTK, and certain compounds structurally related to IMBRUVICA, for oncology and other indications, excluding all immune and inflammatory mediated diseases or conditions and all psychiatric or psychological diseases or conditions, in the United States and outside the United States.

 

The collaboration provides Janssen with an exclusive license to commercialize IMBRUVICA outside of the United States and co-exclusively with AbbVie in the United States. Both parties are responsible for the development, manufacturing and marketing of any products generated as a result of the collaboration. The collaboration has no set duration or specific expiration date and provides for potential future development, regulatory and approval milestone payments of up to $200 million to AbbVie.

 

The collaboration includes a cost sharing arrangement for associated collaboration activities. Except in certain cases, in general, Janssen is responsible for approximately 60% of collaboration development costs and AbbVie is responsible for the remaining 40% of collaboration development costs. AbbVie and Janssen share pre-tax profits and losses equally from the commercialization of products. Janssen is responsible for and has exclusive rights to commercialize IMBRUVICA outside the United States. While both parties have co-exclusive rights to commercialize the products in the United States, AbbVie is the principal in the end-customer product sales. Operating expenses for costs incurred under the collaboration are reported in their respective expense line items, net of any payments due or reimbursements due from Janssen. Revenues and profit share costs related to sales of IMBRUVICA in the United States are included in net revenues and cost of products sold, respectively. Amounts payable to AbbVie by Janssen for IMBRUVICA sales outside the United States are included in collaboration revenues.

 

Janssen’s share of the pre-tax U.S. profits under the collaboration was $124 million and $169 million for the three and nine months ended September 30, 2015, respectively, and was recorded within cost of products sold in the condensed consolidated statements of earnings. AbbVie’s share of pre-tax profits outside the United States under the collaboration were $37 million and $47 million for the three and nine months ended September 30, 2015, respectively. AbbVie’s share of the cost sharing expenses under the collaboration was $65 million and $87 million for the three and nine months ended September 30, 2015, respectively.

 

At September 30, 2015, AbbVie’s receivable from Janssen was $39 million and AbbVie’s payable to Janssen was $111 million, which were classified in accounts and other receivables, net and accounts payable and accrued liabilities, respectively, in AbbVie’s condensed consolidated balance sheet.

 

14

Table of Contents

 

 

Goodwill

 

The following table summarizes the changes in the carrying amount of AbbVie’s goodwill:

 

(in millions)
Balance as of December 31, 2014		$5,862
Additions		7,610
Foreign currency translation and other adjustments		(229	)
Balance as of September 30, 2015		$13,243

 

Goodwill additions related to the acquisition of Pharmacyclics in the second quarter of 2015. Refer to Note 4 for additional information regarding this acquisition. The latest impairment assessment of goodwill was completed in the third quarter of 2015. As of September 30, 2015, there were no accumulated goodwill impairment losses. Future impairment tests for goodwill will be performed annually in the third quarter, or earlier if indicators of impairment exist.

 

Intangible Assets, Net

 

The following table summarizes AbbVie’s intangible assets:

 

		September 30, 2015						December 31, 2014
(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		$9,107		$(3,875	)	$5,232		$4,546		$(3,706	)	$840
License agreements		7,953		(952	)	7,001		1,097		(869	)	228
Total definite-lived intangible assets		17,060		(4,827	)	12,233		5,643		(4,575	)	1,068
Indefinite-lived research and development		7,589		—		7,589		445		—		445
Total intangible assets, net		$24,649		$(4,827	)	$19,822		$6,088		$(4,575	)	$1,513

 

Intangible assets with finite useful lives are amortized over their estimated useful lives. Amortization expense was $125 million and $98 million for the three months ended September 30, 2015 and 2014, respectively, and $279 million and $307 million for the nine months ended September 30, 2015 and 2014, respectively, and is included in cost of products sold in the condensed consolidated statements of earnings. The anticipated annual amortization expense for definite-lived intangible assets recorded as of September 30, 2015 is $389 million in 2015, $588 million in 2016, $666 million in 2017, $809 million in 2018, and $934 million in 2019.

 

The indefinite-lived intangible assets represent acquired IPR&D associated with products that have not yet received regulatory approval. The latest impairment assessment of intangible assets not subject to amortization was completed in the third quarter of 2015. No impairment charges were recorded in the nine months ended September 30, 2015 and 2014. Future impairment tests for indefinite-lived intangible assets will be performed annually in the third quarter, or earlier if indicators of impairment exist.

 

The increase in intangible assets during 2015 was primarily due to the acquisition of Pharmacyclics in the second quarter of 2015. These intangible assets will be amortized using the estimated pattern of economic benefit. Refer to Note 4 for additional information regarding this acquisition.

 

15

Table of Contents

 

 

Restructuring charges recorded for the three and nine months ended September 30, 2015 were $22 million and $50 million, respectively, and were primarily recorded in SG&A expense, R&D expense, and cost of products sold in the condensed consolidated statements of earnings. For the nine months ended September 30, 2015, restructuring charges included asset impairments of $11 million. The remaining charges primarily related to employee severance.

 

Restructuring charges for the three and nine months ended September 30, 2014 were $7 million and $16 million, respectively. These charges were primarily recorded in cost of products sold in the condensed consolidated statements of earnings and primarily related to employee severance.

 

The following summarizes the cash activity in the restructuring reserve for the nine months ended September 30, 2015:

 

(in millions)
Accrued balance at December 31, 2014		$122
2015 restructuring charges		39
Payments and other adjustments		(53	)
Accrued balance at September 30, 2015		$108

 

The restructuring reserve balance as of September 30, 2015 primarily related to restructuring plans approved in years prior to 2013 to realign AbbVie’s worldwide manufacturing operations and selected commercial and R&D operations in the United States and internationally in order to reduce costs.

 

 

Risk Management Policy

 

The company is exposed to foreign currency exchange rate and interest rate risks related to its business operations. The company’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 instruments to reduce its exposure to foreign currency exchange rates. The company is also exposed to the risk that its earnings and cash flows could be adversely impacted by fluctuations in interest rates. The company periodically enters into interest rate swaps, based on judgment, to manage interest costs 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 $98 million and $1.4 billion at September 30, 2015 and December 31, 2014, respectively, are designated as cash flow hedges and are recorded at fair value. Accumulated gains and losses as of September 30, 2015 will be included in cost of products sold at the time the products are sold, generally not exceeding twelve months.

 

The company enters into foreign currency forward exchange contracts to manage its exposure to foreign currency denominated trade payables and receivables and intercompany loans. The contracts are marked-to-market, and resulting gains or losses are reflected in income and are generally offset by losses or gains on the foreign currency exposure being managed. At September 30, 2015 and December 31, 2014, AbbVie held notional amounts of $6.2 billion and $6.8 billion, respectively, of such foreign currency forward exchange contracts.

 

16

Table of Contents

 

AbbVie is a party to interest rate hedge contracts, designated as fair value hedges, totaling $11 billion and $8.0 billion at September 30, 2015 and December 31, 2014, respectively. The effect of the hedge is to change a fixed-rate interest obligation to a floating rate for that portion of the debt. AbbVie recorded the contracts at fair value and adjusted the carrying amount of the fixed-rate debt by an offsetting amount.

 

The following table summarizes the amounts and location of AbbVie’s derivative instruments as of September 30, 2015:

 

		Fair value – Derivatives in asset position				Fair value – Derivatives in liability position
(in millions)		Balance sheet caption		Amount		Balance sheet caption		Amount
Foreign currency forward exchange contracts —
Hedging instruments		Prepaid expenses and other		$7		Accounts payable and accrued liabilities		$—
Others not designated as hedges		Prepaid expenses and other		23		Accounts payable and accrued liabilities		17
Interest rate swaps designated as fair value hedges		Prepaid expenses and other		62		Other long-term liabilities		6
Total derivatives				$92				$23

 

The following table summarizes the amounts and location of AbbVie’s derivative instruments as of December 31, 2014:

 

		Fair value – Derivatives in asset position				Fair value – Derivatives in liability position
(in millions)		Balance sheet caption		Amount		Balance sheet caption		Amount
Foreign currency forward exchange contracts —
Hedging instruments		Prepaid expenses and other		$141		Accounts payable and accrued liabilities		$—
Others not designated as hedges		Prepaid expenses and other		70		Accounts payable and accrued liabilities		63
Interest rate swaps designated as fair value hedges		n/a		—		Other long-term liabilities		180
Total derivatives				$211				$243

 

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 unrealized gains/(losses) for the effective portions of the derivative instruments designated as cash flow hedges recognized in other comprehensive income were $2 million and $112 million for the three months ended September 30, 2015 and 2014, respectively, and $78 million and $142 million, respectively, for the nine months ended September 30, 2015 and 2014. The amount of hedge ineffectiveness was not significant for the three and nine months ended September 30, 2015 or 2014.

 

The following table summarizes the location in the condensed consolidated statements of earnings and the amount of gain/(loss) recognized into net earnings for derivative instruments, including the effective portions of the gain/(loss) reclassified out of accumulated other comprehensive loss into net earnings:

 

				Three months ended September 30,				Nine months ended September 30,
(in millions)		Income statement caption		2015		2014		2015		2014
Foreign currency forward exchange contracts —
Designated as cash flow hedges		Cost of products sold		$89		$(23	)	$171		$(59	)
Not designated as hedges		Net foreign exchange loss		(5	)	(215	)	(170	)	(233	)
Interest rate swaps designated as fair value hedges		Interest expense, net		235		(9	)	236		163
Total				$319		$(247	)	$237		$(129	)

 

17

Table of Contents

 

The gain/(loss) related to 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 the three and nine months ended September 30, 2015 and 2014.

 

Fair Value Measures

 

The fair value hierarchy under the accounting standard for fair value measurements consists of the following three levels:

 

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

 

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

 

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

 

The following table summarizes the bases used to measure certain assets and liabilities that are carried at fair value on a recurring basis in the condensed consolidated balance sheet as of September 30, 2015:

 

				Basis of fair value measurement
(in millions)		Balance at September 30, 2015		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Cash and equivalents		$9,223		$910		$8,313		$—
Time deposits		8		—		8		—
Equity securities		33		33		—		—
Interest rate hedges		62		—		62		—
Foreign currency contracts		30		—		30		—
Total assets		$9,356		$943		$8,413		$—
Liabilities
Interest rate hedges		$6		$—		$6		$—
Foreign currency contracts		17		—		17		—
Total liabilities		$23		$—		$23		$—

 

18

Table of Contents

 

The following table summarizes the bases used to measure certain assets and liabilities that are carried at fair value on a recurring basis in the condensed consolidated balance sheet as of December 31, 2014:

 

				Basis of fair value measurement
(in millions)		Balance at December 31, 2014		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		$8,348		$1,214		$7,134		$—
Time deposits		9		—		9		—
Equity securities		13		13		—		—
Foreign currency contracts		211		—		211		—
Total assets		$8,581		$1,227		$7,354		$—
Liabilities
Interest rate hedges		$180		$—		$180		$—
Foreign currency contracts		63		—		63		—
Total liabilities		$243		$—		$243		$—

 

The fair values for time deposits included in cash and equivalents and short-term investments are determined based on a discounted cash flow analysis reflecting quoted market rates for the same or similar instruments. The fair values of time deposits approximate their amortized cost due to the short maturities of these instruments. Available-for-sale equity securities consists of investments for which the fair values are 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 are valued using publicized spot curves for interest rate hedges and publicized forward curves for foreign currency contracts.

 

Cumulative net unrealized holding (losses) gains on available-for-sale equity securities totaled $(1) million and $3 million at September 30, 2015 and December 31, 2014, respectively.

 

There have been no transfers of assets or liabilities between the fair value measurement levels.

 

In addition to the financial instruments that the company is required to recognize at fair value on the condensed consolidated balance sheets, the company has certain financial instruments that are recognized at historical cost or some basis other than fair value. The carrying values and fair values of certain financial instruments as of September 30, 2015 and December 31, 2014 are shown in the table below:

 

		Book values				Approximate fair values
(in millions)		September 30, 2015		December 31, 2014		September 30, 2015		December 31, 2014
Assets
Investments		$58		$95		$96		$145
Liabilities
Short-term borrowings		760		425		760		425
Current portion of long-term debt and lease obligations		8		4,014		24		4,026
Long-term debt and lease obligations, excluding fair value hedges		31,303		10,718		31,023		10,803

 

19

Table of Contents

 

The following table summarizes the bases used to measure the approximate fair values of the financial instruments as of September 30, 2015:

 

				Basis of fair value measurement
(in millions)		Fair Value at September 30, 2015		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Investments		$96		$51		$17		$28
Total assets		$96		$51		$17		$28
Liabilities
Short-term borrowings		$760		$—		$760		$—
Current portion of long-term debt and lease obligations		24		—		24		—
Long-term debt and lease obligations, excluding fair value hedges		31,023		30,929		94		—
Total liabilities		$31,807		$30,929		$878		$—

 

The following table summarizes the bases used to measure the approximate fair values of the financial instruments as of December 31, 2014:

 

				Basis of fair value measurement
(in millions)		Fair Value at December 31, 2014		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Investments		$145		$68		$13		$64
Total assets		$145		$68		$13		$64
Liabilities
Short-term borrowings		$425		$—		$425		$—
Current portion of long-term debt and lease obligations		4,026		4,005		21		—
Long-term debt and lease obligations, excluding fair value hedges		10,803		10,710		93		—
Total liabilities		$15,254		$14,715		$539		$—

 

Investments consist of cost method investments and held-to-maturity debt securities. Cost method investments include certain investments for which the fair value is determined by using the published market price per unit multiplied by the number of units held, without consideration of transaction costs. To determine the fair value of other cost method investments, the company takes into consideration recent transactions, as well as the financial information of the investee, which represents a Level 3 basis of fair value measurement. The fair values of held-to-maturity debt securities were estimated based upon the quoted market prices for the same or similar debt instruments. The fair values of short-term and current borrowings approximate the carrying values due to the short maturities of these instruments.

 

The fair values of long-term debt, excluding fair value hedges, 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 counterparties to financial instruments consist of select major international financial institutions.

 

20

Table of Contents

 

Concentrations of Risk

 

The company invests excess cash in time deposits, money market funds, and U.S. Treasury securities and diversifies the concentration of cash among different financial institutions. The company monitors concentrations of credit risk associated with deposits with financial institutions. Credit exposure limits have been established to limit a concentration with any single issuer or institution.

 

At September 30, 2015, AbbVie had approximately $306 million of net monetary assets denominated in the Venezuelan bolivar (converted at a rate of 6.3 VEF/USD) in its Venezuelan entity, which had net revenues of $52 million and $149 million for the three and nine months ended September 30, 2015, respectively. If AbbVie’s net monetary assets denominated in the Venezuelan bolivar had been converted at a rate of 13.5 VEF/USD at September 30, 2015, it would have resulted in a devaluation loss of $163 million for both the three and nine months ended September 30, 2015, respectively. The company cannot predict whether there will be devaluations of the Venezuelan currency or whether the use of the official rate of 6.3 will continue to be supported by evolving facts and circumstances. If circumstances change such that the company concludes it would be appropriate to use a different exchange rate, or if a devaluation of the official rate occurs, it could result in a significant change to AbbVie’s results of operations.

 

Three U.S. wholesalers accounted for 50 percent and 49 percent of total net accounts receivable as of September 30, 2015 and December 31, 2014, respectively, and substantially all of AbbVie’s sales in the United States are to these three wholesalers. In addition, net governmental receivables outstanding in Greece, Portugal, Italy, and Spain totaled $607 million at September 30, 2015 and $446 million at December 31, 2014.

 

HUMIRA® (adalimumab) is AbbVie’s single largest product and accounted for approximately 63 percent of AbbVie’s total net revenues for both the nine months ended September 30, 2015 and 2014, respectively.

 

Debt and Credit Facilities

 

On September 25, 2015, AbbVie entered into a $2 billion three-year term loan credit agreement and a $2 billion 364 - day term loan credit agreement. As of September 30, 2015, AbbVie had not drawn on these facilities. In November 2015, AbbVie drew on these term facilities and used the proceeds to refinance its $4 billion of senior notes maturing in 2015. As a result of this refinancing, the $4 billion of senior notes maturing in 2015 were classified as long-term debt in the condensed consolidated balance sheet as of September 30, 2015. The margin with respect to the borrowings under the term loan facilities will be based on AbbVie’s public debt rating. The term loan facilities contains customary covenants, all of which the company remains in compliance with as of September 30, 2015.

 

In May 2015, the company issued $16.7 billion aggregate principal amount of unsecured senior notes, consisting of $3.0 billion aggregate principal amount of its 1.8% senior notes due 2018, $3.75 billion aggregate principal amount of its 2.5% senior notes due 2020, $1.0 billion aggregate principal amount of its 3.2% senior notes due 2022, $3.75 billion aggregate principal amount of its 3.6% senior notes due 2025, $2.5 billion aggregate principal amount of its 4.5% senior notes due 2035 and $2.7 billion aggregate principal amount of its 4.7% senior notes due 2045. 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. Debt issuance costs incurred in connection with the offering totaled $93 million and are being amortized over the respective terms of the notes to interest expense, net in the condensed consolidated statements of earnings. The senior notes contain customary covenants, all of which the company remains in compliance with as of September 30, 2015.

 

Approximately $11.5 billion of the net proceeds were used to finance the acquisition of Pharmacyclics and approximately $5.0 billion of the net proceeds were used to finance the accelerated share repurchase agreement with Morgan Stanley. Refer to Notes 4 and 10 for additional information related to the acquisition of Pharmacyclics and the ASR, respectively.

 

In March 2015, AbbVie entered into an $18 billion, 364-Day Bridge Term Loan Credit Agreement (the bridge loan) in support of the planned acquisition of Pharmacyclics. No amounts were drawn under the bridge loan, which was terminated in the second quarter of 2015 as a result of the company’s May 2015 issuance of the senior notes. Interest expense, net includes $86 million of costs related to the bridge loan, which were incurred in the first half of 2015.

 

21

Table of Contents

 

Short-term borrowings include commercial paper borrowings of $760 million and $416 million as of September 30, 2015 and December 31, 2014, respectively. The weighted-average interest rate on outstanding commercial paper borrowings for the nine months ended September 30, 2015 and 2014 was 0.2 percent and 0.2 percent, respectively.

 

As of September 30, 2015, AbbVie was in compliance with the financial covenants of its $3 billion unsecured credit facility. No amounts were outstanding under this facility as of September 30, 2015 and December 31, 2014.

 

 

The following is a summary of net periodic benefit costs relating to the company’s defined benefit and other post-employment plans for the three months ended September 30, 2015 and 2014:

 

		Defined benefit plans				Other post- employment plans
(in millions)		2015		2014		2015		2014
Service cost		$57		$44		$7		$7
Interest cost		54		55		6		6
Expected return on plan assets		(81	)	(75	)	—		—
Amortization of actuarial losses (gains) and prior service costs		31		16		—		(1	)
Net periodic benefit cost		$61		$40		$13		$12

 

The following is a summary of net periodic benefit costs relating to the company’s defined benefit and other post-employment plans for the nine months ended September 30, 2015 and 2014:

 

		Defined benefit plans				Other post- employment plans
(in millions)		2015		2014		2015		2014
Service cost		$171		$131		$19		$17
Interest cost		164		164		18		17
Expected return on plan assets		(244	)	(226	)	—		—
Amortization of actuarial losses (gains) and prior service costs		95		50		1		(3	)
Net periodic benefit cost		$186		$119		$38		$31

 

AbbVie made voluntary contributions of $150 million and $370 million in the nine months ended September 30, 2015 and 2014 to its main domestic defined benefit pension plan.

 

 

Stock-Based Compensation

 

Stock-based compensation expense was $55 million and $44 million for the three months ended September 30, 2015 and 2014, respectively, and $229 million and $198 million for the nine months ended September 30, 2015 and 2014, respectively, and is principally classified in SG&A expense with the remainder classified in R&D expense and cost of products sold.

 

Prior to separation, AbbVie employees participated in Abbott’s incentive stock program. The AbbVie 2013 Incentive Stock Program, adopted at the time of separation, facilitated the assumption of certain awards granted under Abbott’s incentive stock program and authorizes the post-separation grant of several different forms of benefits, including nonqualified stock options, RSAs, RSUs, and performance-based RSAs and RSUs.

 

22