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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2013

OR

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.

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, 2013, AbbVie Inc. had 1,590,861,812 shares of common stock at $0.01 par value outstanding.

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AbbVie Inc. and Subsidiaries

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PART I.  Financial Information

Item 1.  Financial Statements and Supplementary Data

AbbVie Inc. and Subsidiaries

Condensed Consolidated Statements of Earnings (unaudited)

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

(a) On January 1, 2013, Abbott Laboratories distributed 1,577 million shares of AbbVie common stock.  The computation of basic and diluted earnings per common share for all periods through December 31, 2012 is calculated using the shares distributed on January 1, 2013.  Refer to Note 3 for information regarding the calculation of basic and diluted earnings per common share for the three and nine months ended September 30, 2013.

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

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

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

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

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AbbVie Inc. and Subsidiaries
Condensed Consolidated Balance Sheets

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

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AbbVie Inc. and Subsidiaries

Condensed Consolidated Statement of Equity

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

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AbbVie Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

Note 1

Background and Basis of Presentation

Background

The principal business of AbbVie Inc. (AbbVie or the company) is the discovery, development, manufacture and sale of a broad line of proprietary pharmaceutical products.  Substantially all of AbbVie’s sales in the United States (U.S.) are to three wholesalers.  Outside the U.S., products are sold primarily to health care providers or through distributors, depending on the market served.

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).  AbbVie was incorporated in Delaware on April 10, 2012.  Abbott’s Board of Directors approved the distribution of its shares of AbbVie on November 28, 2012.  AbbVie’s registration statement on Form 10 was declared effective by the U.S. Securities and Exchange Commission (SEC) on December 7, 2012.  On January 1, 2013, Abbott’s shareholders of record as of the close of business on December 12, 2012 received one share of AbbVie common stock for every one share of Abbott common stock held as of the record date.  AbbVie’s common stock began trading “regular-way” under the ticker symbol “ABBV” on the New York Stock Exchange on January 2, 2013.

During the nine months ended September 30, 2013, separation-related adjustments totaling $1.2 billion were recorded in stockholders’ equity.  Separation-related adjustments to additional paid-in capital principally reflected dividends to AbbVie shareholders that were declared from pre-separation earnings during the first quarter, the transfer of certain pension plan liabilities and assets from Abbott to AbbVie upon the legal split of those plans in the first quarter, and the subsequent correction of an error in the third quarter related to long-term deferred tax assets transferred to the company in connection with the separation of the pension plans.  The correction of this error, which did not impact the company’s Annual Report on Form 10-K for the year ended December 31, 2012 and prior years, resulted in a $582 million reduction to stockholders’ equity and long-term deferred tax assets, classified in other assets, in the company’s condensed consolidated balance sheet in the third quarter.  In addition, because the historical financial statements were derived from Abbott’s records, separation-related adjustments also included an adjustment to accumulated other comprehensive loss to reflect the appropriate opening balances associated with currency translation adjustments related to AbbVie’s legal entities at the separation date.  Additional separation-related adjustments to stockholders’ equity could be recorded in the future as the separation is finalized.  Refer to Note 9 for further information regarding the separation of the pension plans.

In connection with the separation, AbbVie and Abbott entered into transition services agreements covering certain corporate support and back office services that AbbVie has historically received from Abbott.  Such services include 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 facilitate the separation by allowing AbbVie to operate independently prior to establishing stand-alone back office systems across its organization.  Transition services may be provided for up to 24 months, with an option for a one-year extension.

During the three and nine months ended September 30, 2013,  AbbVie incurred $51 million and $151 million of separation-related expenses, including legal, information technology and regulatory fees, which were principally classified in selling, general and administrative expenses (SG&A).

Basis of Presentation

The unaudited interim condensed consolidated financial statements of AbbVie have been prepared pursuant to the rules and regulations of the SEC.  Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles (GAAP) in the United States have been omitted.  These unaudited interim condensed consolidated financial statements should be read in conjunction with the company’s audited combined financial statements and notes included in the company’s Annual Report on Form 10-K for the year ended December 31, 2012.

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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 sales 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 and for the nine months ended September 30, 2013.  Net sales related to these operations for the three and nine months ended September 30, 2013 totaled approximately $192 million and $635 million, respectively.  At September 30, 2013, the assets and liabilities consisted primarily of inventories of $84 million, trade accounts receivable of $214 million, other assets of $100 million, and accounts payable and other accrued liabilities of $232 million.  The majority of these operations are expected to be transferred to AbbVie by the end of 2014.

Prior to the separation on January 1, 2013, the historical financial statements of AbbVie were prepared on a stand-alone basis and were derived from Abbott’s consolidated financial statements and accounting records as if the former research-based pharmaceutical business of Abbott had been part of AbbVie for all periods presented.  Accordingly, AbbVie’s financial statements for periods prior to January 1, 2013 are presented on a combined basis and reflect AbbVie’s financial position, results of operations and cash flows as its business was operated as part of Abbott prior to the separation, in conformity with U.S. GAAP.  The historical combined financial statements also reflect an allocation of expenses related to certain Abbott corporate functions, including senior management, legal, human resources, finance, information technology and quality assurance.  These expenses were allocated to AbbVie based on direct usage or benefit where identifiable, with the remainder allocated on a pro rata basis of revenues, headcount, square footage, number of transactions or other measures.  AbbVie considers the expense allocation methodology and results to be reasonable.  However, the allocations may not be indicative of the actual expenses that would have been incurred had AbbVie operated as an independent, publicly-traded company for the periods presented.  These allocations totaled $197 million and $599 million for the three and nine months ended September 30, 2012.

Note 2

Supplemental Financial Information

Inventories

Property and Equipment, Net

Depreciation expense was $97 million and $93 million for the three months ended September 30, 2013 and 2012, respectively, and $289 million and $352 million for the nine months ended September 30, 2013 and 2012, respectively.

Interest Expense (Income), Net

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Note 3

Earnings Per Share

AbbVie calculates basic earnings per share (EPS) pursuant to the two-class method.  The two-class method is an earnings allocation formula that determines earnings per share for common stock and participating securities according to dividends declared and participation rights in undistributed earnings.  Under this method, all earnings (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive dividends.  AbbVie’s restricted stock units (RSUs) and restricted stock awards (RSAs) participate in dividends on the same basis as common shares and such dividends are nonforfeitable to the holder once declared.  As a result, these RSUs and RSAs meet the definition of a participating security.

The dilutive effect of participating securities is calculated using the more dilutive of the treasury stock or the two-class method.  For the three and nine months ended September 30, 2013, the two-class method was more dilutive.  As such, the dilutive effect of outstanding RSUs and RSAs of approximately 5 million for both the three and nine months ended September 30, 2013 was excluded from the denominator for the calculation of diluted EPS.  Additionally, all earnings (distributed and undistributed) allocable to participating securities was excluded from the numerator for the calculation of basic and diluted earnings per share.  Earnings allocable to participating securities for the three and nine months ended September 30, 2013 were $6 million and $17 million, respectively.

For the three and nine months ended September 30, 2013, approximately 1 million of common shares issuable under stock-based compensation plans were excluded from the computation of earnings per common share assuming dilution because the effect would have been antidilutive.

Note 4

Acquisitions, Collaborations and Other Arrangements

In the first nine months of 2013 and 2012, cash outflows related to collaborations, the acquisition of product rights and other arrangements totaled $358 million and $780 million, respectively.  The company recorded acquired in-process research and development (IPR&D) charges of $220 million and $290 million for the three and nine months ended September 30, 2013, respectively.  IPR&D charges totaled $260 million for the nine months ended September 30, 2012 and were recorded during the first half of 2012.  Significant arrangements impacting the first nine months of 2013 and 2012 included the following.

Ablynx NV

In September 2013, AbbVie entered into a global collaboration agreement with Ablynx NV to develop and commercialize the anti-IL-6R Nanobody, ALX-0061, to treat inflammatory diseases including rheumatoid arthritis and systemic lupus erythematosus, resulting in a charge to IPR&D of $175 million.  Upon the achievement of certain development, regulatory and commercial milestones, AbbVie could make additional payments of up to $665 million, as well as royalties on net sales.

Galapagos NV

In September 2013, AbbVie recorded a charge to IPR&D of $45 million as a result of entering into a global collaboration with Galapagos NV (Galapagos) to discover, develop and commercialize cystic fibrosis therapies.  Upon the achievement of certain development, regulatory and commercial milestones, AbbVie could make additional payments of up to $360 million, as well as royalties on net sales.

In February 2012, AbbVie recorded a charge to IPR&D of $150 million as a result of entering into a global collaboration with Galapagos to develop and commercialize a next-generation, oral Janus Kinase 1 (JAK1) inhibitor in Phase II development with the potential to treat multiple autoimmune diseases.  Additional payments of approximately $1.3 billion could be required for the achievement of certain development, regulatory and commercial milestones under this agreement.

Alvine Pharmaceuticals, Inc.

In May 2013, AbbVie entered into a global collaboration with Alvine Pharmaceuticals, Inc. (Alvine) to develop ALV003, a novel oral treatment for patients with celiac disease.  As part of the agreement, AbbVie made an initial upfront payment of $70 million, which

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was expensed to IPR&D in the second quarter of 2013.  AbbVie could make additional payments totaling up to $275 million pursuant to this arrangement.

Action Pharma A/S

In May 2012, AbbVie recorded a charge to IPR&D of $110 million as a result of the acquisition of ABT-719 (previously referred to as AP214), a drug under development for the prevention of acute kidney injury associated with major cardiac surgery in patients at increased risk.

Reata Pharmaceuticals, Inc.

In the fourth quarter of 2011, AbbVie entered into a collaboration with Reata Pharmaceuticals (Reata) for the joint development and commercialization of second-generation oral antioxidant inflammation modulators resulting in a charge to IPR&D of $400 million, which was paid in the first quarter of 2012.

Note 5

Goodwill and Intangible Assets

Goodwill

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

Goodwill additions for the nine months ended September 30, 2013, related to product rights acquired during the second quarter.  The latest impairment assessment of goodwill was completed in the third quarter of 2013.  As of September 30, 2013, 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.

Other Intangible Assets, Net

The following table summarizes AbbVie’s intangible assets.

Intangible assets with finite useful lives are amortized on a straight-line basis over their estimated useful lives.  Amortization expense was $137 million and $134 million for the three months ended September 30, 2013 and 2012, respectively, and $408 million and $489 million for the nine months ended September 30, 2013 and 2012, respectively.  Additions related to the acquisition of amortizable intangible assets in the second quarter of 2013 with an average amortization period of 5 years.

The indefinite-lived intangible assets as of December 31, 2012 relate to IPR&D acquired in a business combination.  Additions related to the acquisition of IPR&D in the second quarter of 2013.  The latest impairment assessment of intangible assets not subject to amortization was completed in the third quarter of 2013.  There were no impairment charges recorded in the nine months ended September 30, 2013 and 2012.  Future impairment tests for indefinite-lived intangible assets will be performed annually in the third quarter, or earlier if indicators of impairment exist.

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Note 6

Restructuring Plans

In 2013 and prior years, AbbVie management approved plans to realign its worldwide manufacturing operations and selected domestic and international commercial and research and development operations in order to reduce costs.  In the second quarter of 2013, the company approved plans to restructure certain commercial operations in conjunction with the loss and expected loss of exclusivity of certain products.

Restructuring charges were $11 million and $75 million for the three and nine months ended September 30, 2013, respectively, and were primarily recorded within SG&A in the condensed consolidated statements of earnings, with the remainder recorded within research and development and cost of products sold.  Included in the charges were cash costs of $8 million and $68 million for the three and nine months ended September 30, 2013, respectively, which mainly related to employee severance and contractual obligations.

For the three and nine months ended September 30, 2012, AbbVie incurred restructuring charges of $176 million and $206 million, respectively.  The charge recorded in the third quarter of 2012 included cash costs of approximately $150 million for employee severance and contractual obligations, primarily related to the exit from a research and development facility, of which approximately $142 million was recorded within research and development and approximately $8 million within SG&A in the condensed consolidated statements of earnings.  The charge for the nine months ended September 30, 2012 also included $56 million of additional charges, primarily for accelerated depreciation, asset impairments and product transfer costs, of which $26 million was recorded in the third quarter of 2012.

The following summarizes the cash activity in the restructuring reserves for the nine months ended September 30, 2013.

Included in payments and other adjustments for the nine months ended September 30, 2013 was a $23 million reversal in the first quarter of a previously recorded restructuring reserve due to the company’s re-evaluation of a prior year decision to exit a manufacturing facility.

Note 7

Financial Instruments and Fair Value Measures

Risk Management Policy

The company is exposed to foreign currency exchange rate and interest rate risks related to its business operations.  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 $1.7 billion and $1.0 billion at September 30, 2013 and December 31, 2012, respectively, are designated as cash flow hedges and are recorded at fair value.  Accumulated gains and losses

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as of September 30, 2013 will be included in cost of products sold at the time the products are sold, generally through the next 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, 2013 and December 31, 2012, AbbVie held notional amounts of $4.2 billion and $4.3 billion, respectively, of such foreign currency forward exchange contracts.

AbbVie was a party to interest rate hedge contracts, designated as fair value hedges, totaling $8.0 billion at both September 30, 2013 and December 31, 2012.  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, 2013.

The following table summarizes the amounts and location of AbbVie’s derivative instruments as of December 31, 2012.

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 summarizes the activity for derivative instruments and the amounts and location of income (expense) and gain (loss) reclassified into income and for certain other derivative instruments for the three months ended September 30, 2013 and 2012, respectively.  The amount of hedge ineffectiveness was not significant for the three months ended September 30, 2013 or 2012.

The gain of $47 million related to fair value hedges recognized in net interest expense for the three months ended September 30, 2013 was offset by $47 million in losses on the underlying hedged item, the fixed-rate debt.

The following table summarizes the activity for derivative instruments and the amounts and location of income (expense) and gain (loss) reclassified into income and for certain other derivative instruments for the nine months ended September 30, 2013 and 2012, respectively.  The amount of hedge ineffectiveness was not significant for the nine months ended September 30, 2013 or 2012.

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The loss of $268 million related to fair value hedges recognized in net interest expense for the first nine months of 2013 was offset by $268 million in gains on the underlying hedged item, the fixed-rate debt.

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 sheets as of September 30, 2013.

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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 combined balance sheet as of December 31, 2012.

Available-for-sale equity securities consist of 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.  The derivatives entered into by the company are valued using publicized spot and forward prices for foreign currency hedges and publicized swap curves for interest rate hedges.  The contingent payments are valued using a discounted cash flow technique that reflects management’s expectations about probability and timing of payment.

Gross unrealized holding gains on available-for-sale equity securities totaled $2 million and $1 million at September 30, 2013 and December 31, 2012, respectively.

There have been no transfers of assets or liabilities between the fair value measurement levels.  The following table is a reconciliation of the fair value measurements that use significant unobservable inputs (Level 3), which consist of contingent payments related to acquisitions and investments.

In connection with the acquisition of Solvay’s U.S. pharmaceuticals business in 2010, the achievement of a certain sales milestone resulted in a payment of approximately $131 million in the first quarter of 2013 for which a liability was previously established.  Additions of $28 million related to the acquisition of product rights during the second quarter.

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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, 2013 and December 31, 2012 are shown in the table below.

The following table summarizes the bases used to measure the approximate fair values of the financial instruments as of September 30, 2013.