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, 2014
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.
A Delaware Corporation |
|
I.R.S. Employer Identification No. |
|
|
32-0375147 |
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 ¨ |
|
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, 2014, AbbVie Inc. had 1,593,265,381 shares of common stock at $0.01 par value outstanding.
AbbVie Inc. and Subsidiaries
|
Page | ||
|
|
|
|
|
3 | ||
Managements Discussion and Analysis of Financial Condition and Results of Operations |
|
24 | |
|
33 | ||
|
35 | ||
|
|
|
|
|
| ||
|
|
|
|
|
35 | ||
|
36 | ||
|
36 |
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AbbVie Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings (unaudited)
|
|
Three months ended |
|
Nine months ended |
| ||||
(in millions, except per share data) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
Net sales |
|
$5,019 |
|
$4,658 |
|
$14,508 |
|
$13,679 |
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold |
|
1,094 |
|
1,092 |
|
3,307 |
|
3,299 |
|
Selling, general and administrative |
|
1,595 |
|
1,261 |
|
4,383 |
|
3,904 |
|
Research and development |
|
812 |
|
714 |
|
2,418 |
|
2,057 |
|
Acquired in-process research and development |
|
308 |
|
220 |
|
324 |
|
290 |
|
Other expense |
|
250 |
|
|
|
250 |
|
|
|
Total operating costs and expenses |
|
4,059 |
|
3,287 |
|
10,682 |
|
9,550 |
|
Operating earnings |
|
960 |
|
1,371 |
|
3,826 |
|
4,129 |
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
128 |
|
69 |
|
262 |
|
210 |
|
Net foreign exchange loss |
|
174 |
|
11 |
|
182 |
|
40 |
|
Other (income) expense, net |
|
(29 |
) |
5 |
|
(24 |
) |
(14 |
) |
Earnings before income tax expense |
|
687 |
|
1,286 |
|
3,406 |
|
3,893 |
|
Income tax expense |
|
181 |
|
322 |
|
822 |
|
893 |
|
Net earnings |
|
$506 |
|
$964 |
|
$2,584 |
|
$3,000 |
|
|
|
|
|
|
|
|
|
|
|
Per share data |
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$0.32 |
|
$0.60 |
|
$1.61 |
|
$1.88 |
|
Diluted earnings per share |
|
$0.31 |
|
$0.60 |
|
$1.60 |
|
$1.86 |
|
Cash dividends declared per common share |
|
$0.42 |
|
$0.40 |
|
$1.26 |
|
$1.60 |
(a) |
|
|
|
|
|
|
|
|
|
|
Weighted-average basic shares outstanding |
|
1,595 |
|
1,590 |
|
1,595 |
|
1,588 |
|
Weighted-average diluted shares outstanding |
|
1,610 |
|
1,605 |
|
1,609 |
|
1,602 |
|
(a) On January 4, 2013, a cash dividend of $0.40 per share of common stock was declared from pre-separation earnings and was recorded as a reduction of additional paid-in capital. Refer to Note 10 for additional information regarding cash dividends declared during the nine months ended September 30, 2013.
The accompanying notes are an integral part of these condensed consolidated financial statements.
AbbVie Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (unaudited)
|
|
Three months ended |
|
Nine months ended |
| ||||
(in millions) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
Net earnings |
|
$506 |
|
$964 |
|
$2,584 |
|
$3,000 |
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments, net of tax (benefit) of $(76) and $ for the three months ended September 30, 2014 and 2013, respectively, and $(90) and $(2) for the nine months ended September 30, 2014 and 2013, respectively |
|
(647 |
) |
205 |
|
(714 |
) |
23 |
|
|
|
|
|
|
|
|
|
|
|
Pension and post-employment benefits, net of tax expense of $7 and $ for the three months ended September 30, 2014 and 2013, respectively, and $16 and $18 for the nine months ended September 30, 2014 and 2013, respectively |
|
20 |
|
42 |
|
43 |
|
77 |
|
|
|
|
|
|
|
|
|
|
|
Unrealized (losses) gains on marketable equity securities |
|
(1 |
) |
1 |
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Hedging activities, net of tax expense (benefit) of $6 and $(2) for the three months ended September 30, 2014 and 2013, respectively and $4 and $ for the nine months ended September 30, 2014 and 2013, respectively |
|
135 |
|
(60 |
) |
201 |
|
(49 |
) |
Other comprehensive (loss) income |
|
(493 |
) |
188 |
|
(471 |
) |
51 |
|
Comprehensive income |
|
$13 |
|
$1,152 |
|
$2,113 |
|
$3,051 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
AbbVie Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions, except share data) |
|
September 30, 2014 |
|
December 31, 2013 |
|
|
|
(unaudited) |
|
|
|
Assets |
|
|
|
|
|
Current assets |
|
|
|
|
|
Cash and equivalents |
|
$7,719 |
|
$9,595 |
|
Restricted cash |
|
2,595 |
|
|
|
Short-term investments |
|
9 |
|
300 |
|
Accounts and other receivables, net |
|
3,592 |
|
3,854 |
|
Inventories, net |
|
1,008 |
|
1,150 |
|
Income tax receivable |
|
403 |
|
949 |
|
Deferred income taxes |
|
524 |
|
766 |
|
Prepaid expenses and other |
|
1,705 |
|
1,234 |
|
Total current assets |
|
17,555 |
|
17,848 |
|
|
|
|
|
|
|
Investments |
|
124 |
|
118 |
|
Property and equipment, net |
|
2,432 |
|
2,298 |
|
Intangible assets, net of amortization |
|
1,540 |
|
1,890 |
|
Goodwill |
|
6,002 |
|
6,277 |
|
Other assets |
|
801 |
|
767 |
|
Total assets |
|
$28,454 |
|
$29,198 |
|
|
|
|
|
|
|
Liabilities and Equity |
|
|
|
|
|
Current liabilities |
|
|
|
|
|
Short-term borrowings |
|
$301 |
|
$413 |
|
Current portion of long-term debt and lease obligations |
|
22 |
|
18 |
|
Accounts payable and accrued liabilities |
|
6,312 |
|
6,448 |
|
Total current liabilities |
|
6,635 |
|
6,879 |
|
|
|
|
|
|
|
Long-term liabilities |
|
2,705 |
|
3,535 |
|
Long-term debt and lease obligations |
|
14,469 |
|
14,292 |
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
|
|
|
Common stock, $0.01 par value, authorized 4,000,000,000 shares, issued 1,606,892,812 and 1,594,260,996 shares as of September 30, 2014 and December 31, 2013, respectively |
|
16 |
|
16 |
|
Common stock held in treasury, at cost, 13,627,431 and 6,900,434 shares as of September 30, 2014 and December 31, 2013, respectively |
|
(672 |
) |
(320 |
) |
Additional paid-in-capital |
|
4,083 |
|
3,671 |
|
Retained earnings |
|
2,131 |
|
1,567 |
|
Accumulated other comprehensive loss |
|
(913 |
) |
(442 |
) |
Total stockholders equity |
|
4,645 |
|
4,492 |
|
|
|
|
|
|
|
Total liabilities and equity |
|
$28,454 |
|
$29,198 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
AbbVie Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
|
|
Nine months ended September 30, |
| ||
(in millions) (brackets denote cash outflows) |
|
2014 |
|
2013 |
|
Cash flows from operating activities |
|
|
|
|
|
Net earnings |
|
$2,584 |
|
$3,000 |
|
Adjustments to reconcile net earnings to net cash from operating activities: |
|
|
|
|
|
Depreciation |
|
286 |
|
289 |
|
Amortization of intangible assets |
|
307 |
|
408 |
|
Stock-based compensation |
|
198 |
|
175 |
|
Upfront costs related to collaborations |
|
574 |
|
290 |
|
Other, net |
|
324 |
|
28 |
|
Changes in operating assets and liabilities, net of acquisitions: |
|
|
|
|
|
Accounts and other receivables |
|
95 |
|
654 |
|
Inventories |
|
20 |
|
(86 |
) |
Prepaid expenses and other assets |
|
(260 |
) |
37 |
|
Accounts payable and other liabilities |
|
(1 |
) |
227 |
|
Cash flows from operating activities |
|
4,127 |
|
5,022 |
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
Acquisitions and investments, net of cash acquired |
|
(572 |
) |
(358 |
) |
Acquisitions of property and equipment |
|
(459 |
) |
(340 |
) |
Transfers to restricted cash |
|
(2,700 |
) |
|
|
Purchases of investment securities |
|
(1,169 |
) |
(631 |
) |
Sales and maturities of investment securities |
|
1,460 |
|
2,085 |
|
Cash flows from investing activities |
|
(3,440 |
) |
756 |
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
Net change in short-term borrowings |
|
(112 |
) |
(603 |
) |
Dividends paid |
|
(1,987 |
) |
(1,914 |
) |
Purchases of treasury stock |
|
(352 |
) |
(119 |
) |
Proceeds from the exercise of stock options |
|
164 |
|
244 |
|
Net transactions with Abbott Laboratories, excluding noncash items |
|
8 |
|
(227 |
) |
Other, net |
|
(132 |
) |
(76 |
) |
Cash flows from financing activities |
|
(2,411 |
) |
(2,695 |
) |
|
|
|
|
|
|
Effect of exchange rate changes on cash and equivalents |
|
(152 |
) |
(9 |
) |
|
|
|
|
|
|
Net (decrease) increase in cash and equivalents |
|
(1,876 |
) |
3,074 |
|
Cash and equivalents, beginning of period |
|
9,595 |
|
5,901 |
|
|
|
|
|
|
|
Cash and equivalents, end of period |
|
$7,719 |
|
$8,975 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
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 pharmaceutical products. Substantially all of AbbVies sales in the United States are to three wholesalers. Outside the United States, products are sold primarily to health care providers or through distributors, depending on the market served.
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 Abbotts shareholders (the separation). On January 1, 2013, Abbotts 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. AbbVies common stock began trading regular-way under the ticker symbol ABBV on the New York Stock Exchange on January 2, 2013.
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 functions across its organization. Transition services may be provided for up to 24 months post-separation, with an option for a one-year extension.
During the three and nine months ended September 30, 2014 and 2013, AbbVie incurred certain separation-related expenses, including legal, information technology and regulatory fees, which were principally classified in selling, general and administrative expenses (SG&A). Separation-related expenses for the three months ended September 30, 2014 and 2013, respectively, were $109 million and $51 million, respectively, and were $299 million and $151 million for the nine months ended September 30, 2014 and 2013, respectively.
Basis of 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 companys audited consolidated financial statements and notes included in the companys Annual Report on Form 10-K for the year ended December 31, 2013.
It is managements opinion that these financial statements include all normal and recurring adjustments necessary for a fair presentation of the companys 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 AbbVies operations, the legal transfer of AbbVies 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 AbbVies condensed consolidated financial statements as of and for the three and nine months ended September 30, 2014. Net sales related to these operations for the three and nine months ended September 30, 2014 totaled approximately $65 million and $208 million, respectively. At September 30, 2014, the assets and liabilities consisted primarily of accounts receivable of $65 million, inventories of $65 million, other assets of $56 million, and accounts payable and other accrued liabilities of $147 million. At December 31, 2013, the assets and liabilities consisted primarily of accounts receivable of $62 million, inventories of $190 million, other assets of $93 million and accounts payable and other accrued liabilities of $212 million. The majority of these operations are expected to be transferred to AbbVie by the end of 2015.
As of September 30, 2014 and December 31, 2013, the aggregate amount due from Abbott totaled $528 million and $738 million, respectively, and was primarily classified in accounts and other receivables, net, in AbbVies condensed consolidated balance sheets. The aggregate amount due to Abbott totaled $578 million and $876 million as of September 30, 2014 and December 31, 2013, respectively, and was classified in accounts payable and accrued liabilities in AbbVies condensed consolidated balance sheets.
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 CostsContracts 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. This guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. 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. AbbVie is currently assessing the impact of adopting this guidance on its consolidated financial statements.
Note 2 Supplemental Financial Information
Interest Expense, Net
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
| ||||
(in millions) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
Interest expense |
|
$148 |
|
$75 |
|
$290 |
|
$225 |
|
Interest income |
|
(20 |
) |
(6 |
) |
(28 |
) |
(15 |
) |
Interest expense, net |
|
$128 |
|
$69 |
|
$262 |
|
$210 |
|
Inventories, Net
(in millions) |
|
September 30, 2014 |
|
December 31, 2013 |
|
Finished goods |
|
$280 |
|
$485 |
|
Work-in-process |
|
477 |
|
404 |
|
Raw materials |
|
251 |
|
261 |
|
Inventories, net |
|
$1,008 |
|
$1,150 |
|
Property and Equipment, Net
(in millions) |
|
September 30, 2014 |
|
December 31, 2013 |
|
Property and equipment, gross |
|
$7,055 |
|
$6,909 |
|
Less accumulated depreciation |
|
(4,623 |
) |
(4,611 |
) |
Property and equipment, net |
|
$2,432 |
|
$2,298 |
|
Depreciation expense for the three months ended September 30, 2014 and 2013 was $94 million and $97 million, respectively, and was $286 million and $289 million for the nine months ended September 30, 2014 and 2013, respectively.
Note 3 Earnings Per Share
AbbVie calculates earnings per share (EPS) using the more dilutive of the treasury stock or the two-class method. For the three and nine months ended September 30, 2014, the two-class method was more dilutive. As such, the dilutive effect of outstanding restricted stock units (RSUs) and restricted stock awards (RSAs) for both the three and nine months ended September 30, 2014 of approximately 4 million and 4 million shares, respectively, 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, was 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, 2014 was $3 million and $14 million, respectively.
For the three and nine months ended September 30, 2014, approximately 0.5 million and 0.6 million, respectively, 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.
For both the three and nine months ended September 30, 2013, AbbVie determined the two-class method was more dilutive. As a result, the dilutive effect of outstanding RSUs and RSAs of approximately 5 million shares were excluded from the denominator for the calculation of diluted EPS for both the three and nine months ended September 30, 2013. Additionally, earnings allocable to participating securities for the three and nine months ended September 30, 2013 was $6 million and $17 million, respectively, was excluded from the numerator for the calculation of basic and diluted earnings per share.
For both the three and nine months ended September 30, 2013, approximately 1 million common shares were excluded from the computation of earnings per common share assuming dilution because the effect would have been antidilutive.
Note 4 Termination of Proposed Combination with Shire
On July 18, 2014, AbbVie issued an announcement pursuant to Rule 2.7 of the United Kingdom City Code on Takeovers and Mergers disclosing that the boards of directors of AbbVie and Shire plc, a company incorporated in Jersey (Shire), had agreed on the terms of a proposed combination of Shire with AbbVie. On October 15, 2014, AbbVies board of directors withdrew its previous recommendation to AbbVie stockholders in favor of the proposed combination with Shire and recommended stockholders vote against the proposed combination. The companys decision was based upon its assessment of the September 22, 2014 notice issued by the U.S. Department of Treasury. On October 20, 2014, AbbVie and Shire mutually agreed to terminate the proposed combination.
During the third quarter, AbbVie entered into (i) a 364-Day Bridge Credit Agreement with an aggregate principal amount of £13.5 billion and (ii) a Term Loan Credit Agreement with an aggregate principal amount of up to £3.2 billion. The termination of the proposed combination automatically terminated these financing agreements. As part of the proposed combination, AbbVie was required to maintain cash in escrow, which was recorded as restricted cash on the condensed consolidated balance sheet at September 30, 2014. The funds held in escrow will be released due to the termination of the combination in the fourth quarter of 2014.
During the nine months ended September 30, 2014, the company incurred acquisition- and financing-related costs totaling $118 million, of which $43 million was recorded in SG&A expense and $75 million was recorded in interest expense. In addition, in the third quarter of 2014, the company recorded $165 million of net foreign exchange losses on undesignated forward contracts that were entered into to hedge anticipated foreign currency cash outflows associated with the proposed combination with Shire. Refer to Note 8 for further information regarding these forward contracts.
As a result of the termination, a break fee of $1.635 billion was paid by AbbVie to Shire in October 2014. The fee, which is expected to be tax deductible, will be recorded as SG&A expense in the fourth quarter of 2014. Also, capitalized financing-related costs of $70 million will be expensed in the fourth quarter of 2014 as a result of the termination of the proposed combination.
Note 5 Acquisitions, Collaborations and Other Arrangements
Nine months ended September 30, 2014
The company recorded acquired in-process research and development (IPR&D) charges of $308 million and $324 million for the three and nine months ended September 30, 2014, respectively, and other expenses of $250 million related to a collaboration for both three and nine months ended September 30, 2014. In the nine months ended September 30, 2014, cash outflows related to collaborations, acquisitions and other arrangements totaled $572 million.
Calico Life Sciences LLC
In September 2014, AbbVie and Calico Life Sciences LLC (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 will be responsible for research and early development during the first five years and 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. AbbVie expects to fund an additional $500 million in the fourth quarter of 2014, contingent on the satisfaction of certain conditions, which will be recorded in other expense in the companys consolidated statement of earnings.
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. Upon the achievement of certain development, regulatory and commercial milestones, AbbVie could make additional payments of up to $530 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 product sales.
Nine months ended September 30, 2013
In the nine months ended September 30, 2013, cash outflows related to collaborations, acquisitions and other arrangements totaled $358 million. The company recorded IPR&D charges of $220 million and $290 million for the three and nine months ended September 30, 2013, respectively, which included charges related to the global collaboration with Ablynx NV entered into in September 2013, a global collaboration with Galapagos NV entered into in September 2013 and a global collaboration with Alvine Pharmaceuticals, Inc. entered into in May 2013.
Note 6 Goodwill and Intangible Assets
Goodwill
The carrying amount of goodwill was $6.002 billion and $6.277 billion at September 30, 2014 and December 31, 2013, respectively. Changes in the goodwill balance during the nine months ended September 30, 2014 were primarily due to foreign currency translation. As of September 30, 2014, 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 AbbVies intangible assets.
|
|
September 30, 2014 |
|
December 31, 2013 |
| ||||||||
(in millions) |
|
Gross |
|
Accumulated |
|
Net |
|
Gross |
|
Accumulated |
|
Net |
|
Definite-lived intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed product rights |
|
$4,664 |
|
$(3,736 |
) |
$928 |
|
$4,744 |
|
$(3,503 |
) |
$1,241 |
|
License agreements |
|
1,017 |
|
(851 |
) |
166 |
|
994 |
|
(792 |
) |
202 |
|
Total definite-lived intangible assets |
|
5,681 |
|
(4,587 |
) |
1,094 |
|
5,738 |
|
(4,295 |
) |
1,443 |
|
Indefinite-lived research and development |
|
446 |
|
|
|
446 |
|
447 |
|
|
|
447 |
|
Total intangible assets, net |
|
$6,127 |
|
$(4,587 |
) |
$1,540 |
|
$6,185 |
|
$(4,295 |
) |
$1,890 |
|
Intangible assets with finite useful lives are amortized over their estimated useful lives. Amortization expense was $98 million and $137 million for the three months ended September 30, 2014 and 2013, respectively, and $307 million and $408 million for the nine months ended September 30, 2014 and 2013, respectively, and is included in cost of products sold in the condensed consolidated statements of earnings. In the third quarter of 2014, an impairment charge of $37 million was recorded related to certain on-market product rights in Japan due to increased generic competition. The charge was based on a discounted cash flow analysis and is included in cost of products sold.
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 2014. There were no impairment charges recorded in the nine months ended September 30, 2014 and 2013. Future impairment tests for indefinite-lived intangible assets will be performed annually in the third quarter, or earlier if indicators of impairment exist.
Note 7 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 (R&D) operations in order to reduce costs. In the second quarter of 2013, AbbVie management approved plans to restructure certain commercial operations in conjunction with the loss and expected loss of exclusivity of certain products.
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 goods sold in the condensed consolidated statements of earnings and primarily related to employee severance.
Restructuring charges for the three and nine months ended September 30, 2013 were $11 million and $75 million, respectively. These charges were primarily recorded in cost of goods sold and SG&A in the condensed consolidated statements of earnings, with the remainder recorded within R&D. 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 primarily consisted of employee severance and contractual obligations. In addition, cost of goods sold reflects a $23 million reversal of a previously recorded restructuring reserve due to the companys re-evaluation of a prior year decision to exit a manufacturing facility.
The following summarizes the cash activity in the restructuring reserve for the first nine months of 2014.
(in millions) |
|
|
|
Accrued balance at December 31, 2013 |
|
$191 |
|
2014 restructuring charges |
|
11 |
|
Payments and other adjustments |
|
(60 |
) |
Accrued balance at September 30, 2014 |
|
$142 |
|
Note 8 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 companys hedging policy attempts to manage these risks to an acceptable level based on the companys 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 companys 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 $1.9 billion and $1.5 billion at September 30, 2014 and December 31, 2013, respectively, are designated as cash flow hedges and are recorded at fair value. Accumulated gains and losses as of September 30, 2014 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, 2014 and December 31, 2013, AbbVie held notional amounts of $5.7 billion and $5.3 billion, respectively, of such foreign currency forward exchange contracts.
In the third quarter of 2014, the company entered into undesignated forward contracts with a total notional amount of $16.9 billion to hedge anticipated foreign currency cash outflows associated with the planned acquisition of Shire. The majority of these contracts mature in the first quarter of 2015. As discussed in Note 4, the company recorded losses of $165 million in net foreign exchange loss associated with the Shire-related forward contracts in the third quarter of 2014.
AbbVie is a party to interest rate hedge contracts, designated as fair value hedges, totaling $8 billion at both September 30, 2014 and December 31, 2013. 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 AbbVies derivative instruments as of September 30, 2014.
|
|
Derivatives in asset position |
|
Derivatives in liability position |
| ||||
(in millions) |
|
Fair value |
|
Balance sheet caption |
|
Fair value |
|
Balance sheet caption |
|
Interest rate swaps designated as fair value hedges |
|
$ |
|
n/a |
|
$269 |
|
Long-term liabilities |
|
Foreign currency forward exchange contracts |
|
|
|
|
|
|
|
|
|
Hedging instruments |
|
127 |
|
Prepaid expenses and other |
|
|
|
Accounts payable and accrued liabilities |
|
Others not designated as hedges |
|
86 |
|
Prepaid expenses and other |
|
239 |
|
Accounts payable and accrued liabilities |
|
Total |
|
$213 |
|
|
|
$508 |
|
|
|
The following table summarizes the amounts and location of AbbVies derivative instruments as of December 31, 2013.
|
|
Derivatives in asset position |
|
Derivatives in liability position |
| ||||
(in millions) |
|
Fair value |
|
Balance sheet caption |
|
Fair value |
|
Balance sheet caption |
|
Interest rate swaps designated as fair value hedges |
|
$ |
|
n/a |
|
$432 |
|
Long-term liabilities |
|
Foreign currency forward exchange contracts |
|
|
|
|
|
|
|
|
|
Hedging instruments |
|
|
|
Prepaid expenses and other |
|
61 |
|
Accounts payable and accrued liabilities |
|
Others not designated as hedges |
|
17 |
|
Prepaid expenses and other |
|
12 |
|
Accounts payable and accrued liabilities |
|
Total |
|
$17 |
|
|
|
$505 |
|
|
|
While certain derivatives are subject to netting arrangements with the companys 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 net earnings and for certain other derivative instruments for the three months ended September 30, 2014 and 2013, respectively. The amount of hedge ineffectiveness was not significant for the three months ended September 30, 2014 or 2013.
|
|
(Loss) gain |
|
Income (expense) |
|
|
| |||||
(in millions) |
|
2014 |
|
2013 |
|
|
2014 |
|
2013 |
|
Income statement caption |
|
Foreign currency forward exchange contracts |
|
|
|
|
|
|
|
|
|
|
| |
Designated as cash flow hedges |
|
$112 |
|
($62 |
) |
$(23 |
) |
$(2 |
) |
Cost of products sold |
| |
Not designated as hedges |
|
n/a |
|
n/a |
|
(215 |
) |
9 |
|
Net foreign exchange loss |
| |
Interest rate swaps designated as fair value hedges |
|
n/a |
|
n/a |
|
(9 |
) |
47 |
|
Interest expense, net |
| |
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 months ended September 30, 2014 and 2013.
The following table summarizes the activity for derivative instruments and the amounts and location of income (expense) and gain (loss) reclassified into net earnings and for certain other derivative instruments for the nine months ended September 30, 2014 and 2013, respectively. The amount of hedge ineffectiveness was not significant for the nine months ended September 30, 2014 or 2013.
|
|
(Loss) gain |
|
Income (expense) |
|
|
| ||||
(in millions) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
Income statement caption |
|
Foreign currency forward exchange contracts |
|
|
|
|
|
|
|
|
|
|
|
Designated as cash flow hedges |
|
$142 |
|
($53 |
) |
$(59 |
) |
$(4 |
) |
Cost of products sold |
|
Not designated as hedges |
|
n/a |
|
n/a |
|
(233 |
) |
49 |
|
Net foreign exchange loss |
|
Interest rate swaps designated as fair value hedges |
|
n/a |
|
n/a |
|
163 |
|
(268 |
) |
Interest expense, net |
|
The gain/(loss) related to fair value hedges is recognized in net interest expense and directly offsets the (loss)/gain on the underlying hedged item, the fixed-rate debt, resulting in no net impact to net interest expense for the nine months ended September 30, 2014 and 2013.
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 companys 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, 2014.
|
|
|
|
Basis of fair value measurement |
| ||||
(in millions) |
|
Balance at |
|
Quoted prices in |
|
Significant other |
|
Significant |
|
Assets |
|
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$7,719 |
|
$896 |
|
$6,823 |
|
$ |
|
Restricted cash |
|
2,595 |
|
2,595 |
|
|
|
|
|
Time deposits |
|
9 |
|
|
|
9 |
|
|
|
Equity securities |
|
11 |
|
11 |
|
|
|
|
|
Foreign currency contracts |
|
213 |
|
|
|
213 |
|
|
|
Total assets |
|
$10,547 |
|
$3,502 |
|
$7,045 |
|
$ |
|
Liabilities |
|
|
|
|
|
|
|
|
|
Interest rate hedges |
|
$269 |
|
$ |
|
$269 |
|
$ |
|
Foreign currency contracts |
|
239 |
|
|
|
239 |
|
|
|
Contingent consideration |
|
24 |
|
|
|
|
|
24 |
|
Total liabilities |
|
$532 |
|
$ |
|
$508 |
|
$24 |
|
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 balance sheet as of December 31, 2013.
|
|
|
|
Basis of fair value measurement |
| ||||
(in millions) |
|
Balance at |
|
Quoted prices in |
|
Significant other |
|
Significant |
|
Assets |
|
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$9,595 |
|
$684 |
|
$8,911 |
|
$ |
|
Time deposits |
|
300 |
|
|
|
300 |
|
|
|
Equity securities |
|
10 |
|
10 |
|
|
|
|
|
Foreign currency contracts |
|
17 |
|
|
|
17 |
|
|
|
Total assets |
|
$9,922 |
|
$694 |
|
$9,228 |
|
$ |
|
Liabilities |
|
|
|
|
|
|
|
|
|
Interest rate hedges |
|
$432 |
|
$ |
|
$432 |
|
$ |
|
Foreign currency contracts |
|
73 |
|
|
|
73 |
|
|
|
Contingent consideration |
|
165 |
|
|
|
|
|
165 |
|
Total liabilities |
|
$670 |
|
$ |
|
$505 |
|
$165 |
|
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 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 curves for interest rate hedges and publicized forward curves for foreign currency contracts. The contingent consideration is valued using a discounted cash flow technique that reflects managements expectations about probability of payment.
Cumulative net unrealized holding gains on available-for-sale equity securities totaled $2 million and $2 million at September 30, 2014 and December 31, 2013, 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 millions) |
|
|
|
Fair value as of December 31, 2013 |
|
$165 |
|
Payments |
|
(140 |
) |
Change in fair value recognized in net foreign exchange loss |
|
(1 |
) |
Fair value as of September 30, 2014 |
|
$24 |
|
The contingent payments were primarily in connection with the acquisition of Solvays U.S. pharmaceuticals business in 2010, the achievement of a certain sales milestone resulted in a payment of approximately $137 million in the first quarter of 2014 for which a liability was previously established.
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, 2014 and December 31, 2013 are shown in the table below.
|
|
Book values |
|
Approximate fair values |
| ||||
(in millions) |
|
September 30, |
|
December 31, |
|
September 30, |
|
December 31, |
|
Assets |
|
|
|
|
|
|
|
|
|
Investments |
|
$113 |
|
$108 |
|
$151 |
|
$129 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
Short-term borrowings |
|
301 |
|
413 |
|
301 |
|
413 |
|
Current portion of long-term debt and lease obligations |
|
22 |
|
18 |
|
22 |
|
18 |
|
|
|
|
|
|
|
|
|
|
|
Long-term debt and lease obligations, excluding fair value hedges |
|
14,738 |
|
14,724 |
|
14,522 |
|
14,493 |
|
The following table summarizes the bases used to measure the approximate fair values of the financial instruments as of September 30, 2014.
|
|
|
|
Basis of fair value measurement |
| ||||
(in millions) |
|
Fair value at |
|
Quoted prices in active |
|
Significant |
|
Significant |
|
Assets |
|
|
|
|
|
|
|
|
|
Investments |
|
$151 |
|
$55 |
|
$32 |
|
$64 |
|
Total assets |
|
$151 |
|
$55 |
|
$32 |
|
$64 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
Short-term borrowings |
|
$301 |
|
$ |
|
$301 |
|
$ |
|
Current portion of long-term debt and lease obligations |
|
22 |
|
|
|
22 |
|
|
|
Long-term debt and lease obligations, excluding fair value hedges |
|
14,522 |
|
14,440 |
|
82 |
|
|
|
Total liabilities |
|
$14,845 |
|
$14,440 |
|
$405 |
|
$ |
|
The following table summarizes the bases used to measure the approximate fair values of the financial instruments as of December 31, 2013.
|
|
|
|
Basis of fair value measurement |
| ||||
(in millions) |
|
Fair value at |
|
Quoted prices in active |
|
Significant |
|
Significant |
|
Assets |
|
|
|
|
|
|
|
|
|
Investments |
|
$129 |
|
$39 |
|
$30 |
|
$60 |
|
Total assets |
|
$129 |
|
$39 |
|
$30 |
|
$60 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
Short-term borrowings |
|
$413 |
|
$ |
|
$413 |
|
$ |
|
Current portion of long-term debt and lease obligations |
|
18 |
|
|
|
18 |
|
|
|
Long-term debt and lease obligations, excluding fair value hedges |
|
14,493 |
|
14,413 |
|
80 |
|
|
|
Total liabilities |
|
$14,924 |
|
$14,413 |
|
$511 |
|
$ |
|
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 value of held-to-maturity debt securities was 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 value of long-term debt, excluding fair value hedges, was 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.
Concentrations of Risk
The company invests excess cash in time deposits, money market funds and U.S. and U.K. 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.
Three U.S. wholesalers accounted for 42 percent and 38 percent of total net accounts receivable as of September 30, 2014 and December 31, 2013, respectively, and substantially all of AbbVies sales in the United States are to these three wholesalers. In addition, net governmental receivables outstanding in Greece, Portugal, Italy and Spain totaled $541 million at September 30, 2014 and $781 million at December 31, 2013.
HUMIRA is AbbVies single largest product and accounted for approximately 63 percent and 56 percent of AbbVies total net sales in the first nine months ended September 30, 2014 and 2013, respectively.
Debt and Credit Facilities
Short-term borrowings include commercial paper borrowings of $300 million and $400 million as of September 30, 2014 and December 31, 2013, respectively. The weighted-average interest rate on outstanding commercial paper borrowings for the nine months ended September 30, 2014 and 2013 was 0.2 percent and 0.3 percent, respectively.
At September 30, 2014, AbbVie was in compliance with the financial covenants of its $2.0 billion unsecured credit facility. No amounts were outstanding under this facility as of September 30, 2014 or December 31, 2013. In October 2014, AbbVie replaced its existing facility with a new $3.0 billion five-year revolving credit facility. The new facility enables the company to borrow funds on an unsecured basis at variable interest rates and contains various covenants.
The following is the summary of net periodic benefit cost relating to the companys defined benefit and other post-employment plans.
|
|
Three months ended |
|
Nine months ended |
| ||||
(in millions) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
Defined benefit plans |
|
|
|
|
|
|
|
|
|
Service cost |
|
$44 |
|
$39 |
|
$131 |
|
$133 |
|
Interest cost |
|
55 |
|
46 |
|
164 |
|
142 |
|
Expected return on plan assets |
|
(75 |
) |
(63 |
) |
(226 |
) |
(195) |
|
Amortization of actuarial losses and prior service costs |
|
16 |
|
30 |
|
50 |
|
83 |
|
Net periodic benefit cost |
|
$40 |
|
$52 |
|
$119 |
|
$163 |
|
|
|
Three months ended |
|
Nine months ended |
| ||||
(in millions) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
Other post-employment plans |
|
|
|
|
|
|
|
|
|
Service cost |
|
$7 |
|
$5 |
|
$17 |
|
$17 |
|
Interest cost |
|
6 |
|
2 |
|
17 |
|
14 |
|
Expected return on plan assets |
|
|
|
|
|
|
|
|
|
Amortization of actuarial losses and prior service costs |
|
(1 |
) |
|
|
(3 |
) |
|
|
Net periodic benefit cost |
|
$12 |
|
$7 |
|
$31 |
|
$31 |
|
AbbVie made voluntary contributions of $370 million in the first quarter of 2014 and $145 million in the first quarter of 2013 to its main domestic defined benefit pension plan.
Note 10 Equity
Stock-Based Compensation
Stock-based compensation expense is principally classified in SG&A and was $44 million and $41 million for the three months ended September 30, 2014 and 2013, respectively and $198 million and $175 million for the nine months ended September 30, 2014 and 2013, respectively.
Prior to separation, AbbVie employees participated in Abbotts incentive stock program. The AbbVie 2013 Incentive Stock Program, adopted at the time of separation, facilitated the assumption of certain awards granted under Abbotts 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.
In connection with the separation, outstanding Abbott employee stock options, RSAs and RSUs previously issued under Abbotts incentive stock program were adjusted and converted into new Abbott and AbbVie stock-based awards using a formula designed to preserve the intrinsic value and fair value of the awards immediately prior to the separation. Upon the separation on January 1, 2013, holders of Abbott stock options, RSAs and RSUs generally received one AbbVie stock-based award for each Abbott stock-based award outstanding. These adjusted awards retained the vesting schedule and expiration date of the original awards. No awards have been granted to Abbott employees other than in connection with the separation.
Stock Options
AbbVie determines the fair value of stock options using the Black-Scholes model. The assumptions used in estimating the fair value of stock options granted during the nine months ended September 30, 2014 and 2013, along with the grant-date fair value, were as follows.
|
|
Nine months ended |
| ||
|
|
2014 |
|
2013 |
|
Risk-free interest rate |
|
1.91 |
% |
1.10 |
% |
Average life of options (years) |
|
6.0 |
|
6.0 |
|
Volatility |
|
27.01 |
% |
32.63 |
% |
Dividend yield |
|
3.19 |
% |
4.30 |
% |
Fair value per stock option |
|
$9.83 |
|
$6.87 |
|
The following table summarizes AbbVie stock option activity for both AbbVie and Abbott employees for the nine months ended September 30, 2014.
(options in thousands, aggregate intrinsic value in millions) |
|
Options |
|
Weighted- |
|
Weighted- |
|
Aggregate |
Outstanding at December 31, 2013 |
|
35,994 |
|
$27.48 |
|
|
|
|
Granted |
|
1,119 |
|
51.87 |
|
|
|
|
Exercised |
|
(6,055 |
) |
27.96 |
|
|
|
|
Lapsed |
|
(76 |
) |
25.84 |
|
|
|
|
Outstanding at September 30, 2014 |
|
30,982 |
|
28.27 |
|
3.4 |
|
$914 |
Exercisable at September 30, 2014 |
|
28,198 |
|
$27.03 |
|
2.9 |
|
$866 |
The aggregate intrinsic value in the table above represents the difference between the exercise price and the companys closing stock price on the last day of trading for the period ended September 30, 2014. The total intrinsic value of options exercised was $39 million and $41 million for the three months ended September 30, 2014 and 2013, respectively, and $150 million and $157 million, for the nine months ended September 30, 2014 and 2013, respectively.
As of September 30, 2014, $5 million of unrecognized compensation cost related to stock options is expected to be recognized as expense over approximately the next two years.
RSAs & RSUs
The following table summarizes AbbVie RSA and RSU activity (including performance-based awards) for both AbbVie and Abbott employees for the nine months ended September 30, 2014.
(share units in thousands) |
|
Share units |
|
Weighted-average |
Outstanding at December 31, 2013 |
|
14,910 |
|
$32.07 |
Granted |
|
5,022 |
|
51.45 |
Vested |
|
(6,544 |
) |
29.34 |
Lapsed |
|
(469 |
) |
38.13 |
Outstanding at September 30, 2014 |
|
12,919 |
|
$40.83 |
Unvested shares at September 30, 2014 |
|
12,743 |
|
$40.93 |
The weighted-average grant date fair value of RSAs and RSUs (including performance-based awards) is determined based on the number of shares granted and the quoted price of the companys common stock on the date of the grant. The fair market value of RSAs and RSUs vested was $7 million and $5 million for the three months ended September 30, 2014 and 2013, respectively, and $332 million and $282 million for the nine months ended September 30, 2014 and 2013, respectively.
As of September 30, 2014, $225 million of unrecognized compensation cost related to RSAs and RSUs is expected to be recognized as expense over approximately the next two years.
Cash Dividends
On September 19, 2014, the board of directors declared a quarterly cash dividend of $0.42 per share. The dividend is payable November 17, 2014 to stockholders of record at the close of business on October 15, 2014. On October 20, 2014, the board of directors declared a quarterly cash dividend of $0.49 per share, which represents an increase of approximately 17 percent over the previous quarterly rate of $0.42 per share. The dividend is payable February 13, 2015 to stockholders of record at the close of business on January 15, 2015.
Additionally, on February 20 and June 19, 2014, the board of directors declared quarterly cash dividends of $0.42 per share of common stock, which were paid on May 15 and August 15, 2014, respectively. The quarterly cash dividend declared by the board of directors on February 20, 2014 represented an increase of 5 percent over the previous quarterly rate of $0.40 per share. The quarterly cash dividend declared by the board of directors on December 12, 2013 of $0.40 per share of common stock was paid on February 14, 2014.
On January 4, February 15, June 20, and September 19, 2013, the board of directors declared quarterly cash dividends of $0.40 per share of common stock, which were paid on February 15, May 15, August 15, and November 15, 2013, respectively. The cash dividend of $0.40 per share of common stock declared on January 4, 2013 was declared from pre-separation earnings and was recorded as a reduction of additional paid-in capital.
Stock Repurchase Program
On February 15, 2013, AbbVies board of directors authorized a $1.5 billion stock repurchase program. Purchases of AbbVie shares may be made from time to time at managements discretion depending on the companys cash flows, net debt level and market conditions. The plan has no time limit and can be discontinued at any time. During the nine months ended September 30, 2014, AbbVie repurchased approximately 5 million shares for $250 million in the open market. AbbVie also repurchased approximately 0.5 million shares for $22 million in the open market during the nine months ended September 30, 2013. Shares repurchased under this program are recorded at acquisition cost, including related expenses, and are available for general corporate purposes. AbbVies remaining share repurchase authorization was $1.0 billion as of September 30, 2014.
On October 20, 2014, AbbVies board of directors authorized a new $5 billion stock repurchase program, which was effective immediately and supersedes the previous authorization, and is expected to be executed over the next several years. The stock repurchase authorization permits shares to be repurchased in open market or private transactions, has no time limit and may be discontinued at any time.
Accumulated Other Comprehensive Loss
The following table summarizes the changes in balances of each component of accumulated other comprehensive loss, net of tax for as of September 30, 2014.
(in millions) (brackets denote losses) |
|
Foreign |
|
Pension and |
|
Unrealized |
|
Gains (losses) |
|
Total |
|
Balance as of December 31, 2013 |
|
$470 |
|
$(827 |
) |
$2 |
|
$(87 |
) |
$(442 |
) |
Other comprehensive (loss) income before reclassifications |
|
(714 |
) |
|
|
(1 |
) |
142 |
|
(573 |
) |
Amounts reclassified from accumulated other comprehensive loss |
|
|
|
43 |
|
|
|
59 |
|
102 |
|
Net current-period other comprehensive (loss) income |
|
(714 |
) |
43 |
|
(1 |
) |
201 |
|
(471 |
) |
Balance as of September 30, 2014 |
|
(244 |
) |
(784 |
) |
1 |
|
114 |
|
(913 |
) |
The table below presents the significant amounts reclassified out of each component of accumulated other comprehensive loss for the three and nine months ended September 30, 2014.
|
|
Three months ended September 30, 2014 |
|
Nine months ended September 30, 2014 |
| ||||
Type of reclassification |
|
Amount reclassified |
|
Affected line item in the |
|
Amount reclassified |
|
Affected line item in the |
|
Pension and post-employment benefits |
|
|
|
|
|
|
|
|
|
Amortization of actuarial losses and other |
|
$27 |
|
(a) |
|
$59 |
|
(a) |
|
Less tax expense |
|
7 |
|
|
|
16 |
|
|
|
Total reclassification for the three and nine months ended September 30, 2014, net of tax |
|
$20 |
|
|
|
$43 |
|
|
|
(a) Amounts are included in the computation of net periodic benefit cost (see Note 9 for details).
Note 11 Income Taxes |
The effective income tax rates were 26.3 percent and 24.1 percent for the three and nine months ended September 30, 2014, respectively, and 25.0 percent and 22.9 percent for the three and nine months ended September 30, 2013, respectively. The effective tax rates in each period were less than the statutory federal income tax rate of 35 percent primarily due to the benefit of lower income tax rates in locations outside the United States and tax exemptions and incentives in Puerto Rico and other foreign tax jurisdictions. The increase in the effective tax rate in the three and nine months ended September 30, 2014 over the prior year was principally due to changes in the jurisdictional mix of earnings.
It is reasonably possible during the next twelve months that uncertain tax positions may be settled, and the gross unrecognized tax benefits balance may change up to $22 million. AbbVie and Abbott entered into a tax sharing agreement effective on the date of separation. For tax contingencies prior to the separation, 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
Subject to certain exceptions specified in the separation agreement, 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. AbbVie is involved in various claims, legal proceedings and investigations, including those described below. The recorded accrual balance for litigation at September 30, 2014 was not significant. Within the next year, other legal proceedings may occur that may result in a change in the estimated loss accrued by AbbVie. While it is not feasible to predict the outcome of all other proceedings and exposures with certainty, management believes that their ultimate disposition should not have a material adverse effect on AbbVies consolidated financial position, cash flows, or results of operations.
Lawsuits have been filed against AbbVie and others generally alleging that the 2005 patent litigation settlement involving Niaspan® entered into between Kos Pharmaceuticals, Inc. (a company acquired by Abbott Laboratories in 2006 and presently a subsidiary of AbbVie) and a generic company violates federal and state antitrust laws and state unfair and deceptive trade practices and unjust enrichment laws. Plaintiffs generally seek monetary damages and/or injunctive relief and attorneys fees. In September 2013, all of these pending putative class action lawsuits were centralized for consolidated or coordinated pre-trial proceedings in the United States District Court for the Eastern District of Pennsylvania under the Multi-District Litigation Rules as In re Niaspan Antitrust Litigation, MDL No. 2460.
In August 2013, a putative class action lawsuit, Sidney Hillman Health Center of Rochester, et al. v. AbbVie Inc., et al., was filed against AbbVie in the United States District Court for the Northern District of Illinois by three healthcare benefit providers alleging violations of federal RICO statutes and state deceptive business practice and unjust enrichment laws in connection with reimbursements for certain uses of Depakote from 1998 to 2012. Plaintiffs seek monetary damages and/or equitable relief and attorneys fees. On August 14, 2014, the district court dismissed all of the plaintiffs claims with prejudice. Plaintiffs have appealed the district courts decision to the United States Court of Appeals for the Seventh Circuit, where the matter is currently pending.
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 were consolidated for pre-trial purposes in the United States District Court for the Northern District of Georgia under the Multi District Litigation Rules as In re AndroGel Antitrust Litigation, MDL No. 2084. These cases, brought by private plaintiffs and the Federal Trade Commission (FTC), generally allege Solvays 2006 patent litigation involving AndroGel was sham litigation and the patent litigation settlement agreement and related agreements with three generic companies violate federal and state antitrust laws and state consumer protection and unjust enrichment laws. Plaintiffs generally seek monetary damages and/or injunctive relief and attorneys fees. MDL 2084 includes: (a) three individual plaintiff lawsuits; (b) seven purported class actions; and (c) Federal Trade Commission v. Watson Pharmaceuticals, Inc. et al. , filed in May 2009 in the United States District Court for the Northern District of Georgia. Following the district courts dismissal of all plaintiffs claims, the FTCs appeal led to its claim regarding the patent litigation settlement being reinstated. In February 2014, the United States Court of Appeals for the Eleventh Circuit remanded the private plaintiffs claims regarding the patent litigation settlement, which are proceeding with the FTCs in discovery in the district court.
In September 2014, the Federal Trade Commission (FTC) filed suit in the United States District Court for the Eastern District of Pennsylvania against AbbVie and others, alleging that 2011 patent litigation with two generic companies regarding AndroGel was sham litigation and the patent litigation settlement with one of those generic companies violates federal antitrust laws. The FTCs complaint seeks monetary damages and injunctive relief.
AbbVie is seeking to enforce its patent rights relating to testosterone gel (a drug AbbVie sells under the trademark AndroGel® 1.62%). In a case filed in the United States District Court for the District of Delaware in February 2013, AbbVie alleges that Perrigo Companys and Perrigo Israel Pharmaceutical Ltd.s proposed generic product infringes AbbVie patents and seeks declaratory and injunctive relief. In a second case filed in the United States District Court for the District of Delaware in March 2013, AbbVie alleges that Watson Laboratories Inc.s and Actavis Inc.s proposed generic product infringes AbbVies patents and seeks declaratory and injunctive relief.
AbbVie is seeking to enforce its patent rights relating to ritonavir/lopinavir tablets (a drug AbbVie sells under the trademark Kaletra®). In a case filed in the United States District Court for the Northern District of Illinois in March 2009, AbbVie alleges that Matrix Laboratories, Inc.s, Matrix Laboratories, Ltd.s, and Mylan, Inc.s proposed generic products infringe AbbVies patents and seeks declaratory and injunctive relief. Upon Matrixs motion in November 2009, the court granted a five-year stay of the litigation unless good cause to lift the stay is shown. On July 1, 2014, the stay was lifted pursuant to the original terms of the court order entered in 2009.
AbbVie is seeking to enforce its patent rights relating to ritonavir tablets (a drug AbbVie sells under the trademark Norvir®). In a case pending in the United States District Court for the Southern District of Ohio since April 2012, AbbVie alleges that Roxane Laboratories, Inc.s (Roxane) proposed generic product infringes AbbVies patents and seeks declaratory and injunctive relief. In another case filed in the United States District Court for the Southern District of Ohio in July 2013, AbbVie alleges that Roxanes proposed generic ritonavir product infringes additional AbbVie patents and seeks declaratory and injunctive relief on these additional patents. In September 2014, AbbVie and Roxane entered into a settlement and license agreement, the date of which license is confidential. The parties entered into a stipulation to dismiss the Ohio litigation. In a separate case filed in the United States District Court for the District of Delaware in May 2013, AbbVie alleges that Hetero USA Inc.s and Hetero Labs Limiteds proposed generic ritonavir tablets product infringes AbbVies patents and seeks declaratory and injunctive relief. In a separate case filed in the United States District Court for the District of Delaware in July, 2014, AbbVie alleges that Aurobindo Pharma Limited and Aurobindo Pharma USA Inc.s proposed generic ritonavir tablets product infringes AbbVies patents and seeks declaratory and injunctive relief.
AbbVie is seeking to enforce certain patent rights that cover the use of fully human anti-TNF alpha antibodies with methotrexate to treat rheumatoid arthritis. In a case filed in the United States District Court for the District of Massachusetts in May 2009, AbbVie alleges Centocor Ortho Biotech, Inc.s (now Janssen Biotech, Inc.s) product Simponi® infringes AbbVies patents and seeks damages and injunctive relief.
In November 2007, GlaxoSmithKline filed a lawsuit against Abbott Laboratories in the United States District Court for the Northern District of California alleging that Abbott violated antitrust laws in connection with the 2003 Norvir re-pricing. In March 2011, a jury found that Abbott did not violate antitrust laws, but breached its license agreement with the plaintiff. In January 2014, a 3-judge panel of the United States Court of Appeals for the Ninth Circuit reversed this verdict and remanded the case for a new trial due to the alleged improper exclusion of a potential juror. The case has been returned to the trial court for further proceedings. AbbVie assumed the liability for and control of this proceeding in connection with its separation from Abbott.
Note 13 Segment Information |
AbbVie operates in one business segmentpharmaceutical products. Substantially all of AbbVies sales in the United States are to three wholesalers. Outside the United States, products are sold primarily to health care providers or through distributors, depending on the market served. Worldwide net sales of key products were as follows.
|
|
Three months ended |
|
Nine months ended | |||||
(in millions) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
HUMIRA |
|
$3,255 |
|
$2,770 |
|
$9,180 |
|
$7,620 |
|
AndroGel |
|
232 |
|
248 |
|
704 |
|
746 |
|
Kaletra |
|
256 |
|
237 |
|
667 |
|
734 |
|
Lupron |
|
196 |
|
196 |
|
571 |
|
576 |
|
Synagis |
|
109 |
|
98 |
|
537 |
|
513 |
|
Synthroid |
|
200 |
|
161 |
|
523 |
|
433 |
|
Sevoflurane |
|
134 |
|
138 |
|
430 |
|
412 |
|
Creon |
|
148 |
|
101 |
|
365 |
|
297 |
|
Duodopa |
|
56 |
|
46 |
|
164 |
|
129 |
|
Dyslipidemia products |
|
63 |
|
270 |
|
224 |
|
985 |
|
All other |
|
370 |
|
393 |
|
1,143 |
|
1, 234 |
|
Net sales |
|
$5,019 |
|
$4,658 |
|
$14,508 |
|
$13,679 |
|
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of the financial condition of AbbVie Inc. (AbbVie or the company) as of September 30, 2014 and December 31, 2013 and the results of operations for the three and nine months ended September 30, 2014 and 2013. This commentary should be read in conjunction with the condensed consolidated financial statements and accompanying notes appearing in Item 1. Financial Statements and Supplementary Data.
EXECUTIVE OVERVIEW
Company Overview
AbbVie is a global, research-based biopharmaceutical company. AbbVie develops and markets advanced therapies that address some of the worlds most complex and serious diseases. AbbVie products are used to treat chronic autoimmune diseases, including rheumatoid arthritis, psoriasis, and Crohns disease; HIV; endometriosis; thyroid disease; Parkinsons disease; complications associated with chronic kidney disease and cystic fibrosis; and other health conditions such as low testosterone. AbbVie also has a pipeline of promising new medicines, including more than 20 compounds or indications in Phase 2 or Phase 3 development across such important medical specialties as immunology, virology/liver disease, oncology, renal disease, neurological diseases and womens health.
In the United States, AbbVies products are generally sold directly to wholesalers, distributors, government agencies, health care facilities, specialty pharmacies, and independent retailers from distribution centers and public warehouses. Outside the United States, sales are made either directly to customers or through distributors, depending on the market served. Certain products are co-marketed or co-promoted with other companies. AbbVie has approximately 25,000 employees and its products are sold in over 170 countries. AbbVie operates in one business segmentpharmaceutical products.
AbbVies long-term strategy is to maximize its existing portfolio of products through new indications, share gains, increased geographic expansion in underserved markets while also advancing its new product pipeline to meet unmet medical needs. To successfully execute its long-term strategy, AbbVie will focus on expanding HUMIRA sales, advancing the pipeline, expanding its presence in emerging markets and managing its product portfolio to maximize value.
Financial Results
Worldwide net sales for the nine months ended September 30, 2014 totaled $14.508 billion, an increase of 6 percent, driven primarily by the continued strength of HUMIRA and double-digit sales growth from key products including Creon and Duodopa. Growth in these key products was partially offset by the continuing impact of the loss of exclusivity in the companys lipid franchise in 2013. Generic competition began in November 2012 for TriCor, July 2013 for Trilipix and September 2013 for Niaspan, resulting in the loss of $761 million of revenue in the nine months ended September 30, 2014 over the prior year. The companys financial performance also included delivering fully diluted earnings per share of $1.60, while increasing funding in support of AbbVies emerging mid-and late-stage pipeline assets and the continued support of additional HUMIRA indications. In the nine months ended September 30, 2014, the company generated cash flows from operations of $4.127 billion.
On July 18, 2014, AbbVie issued an announcement pursuant to Rule 2.7 of the United Kingdom City Code on Takeovers and Mergers disclosing that the boards of directors of AbbVie and Shire plc, a company incorporated in Jersey (Shire), had agreed on the terms of a proposed combination of Shire with AbbVie. On October 15, 2014, AbbVies board of directors withdrew its previous recommendation to AbbVie stockholders in favor of the proposed combination with Shire and recommended stockholders vote against the proposed combination. On October 20, 2014, AbbVie and Shire mutually agreed to terminate the proposed combination. As a result of the termination, a break fee of $1.635 billion was paid by AbbVie to Shire in October 2014. The fee, which is expected to be tax deductible, will be recorded as selling, general and administrative (SG&A) expense in the fourth quarter of 2014. Refer to Note 4 entitled Termination of Proposed Combination With Shire of the Notes to Condensed Consolidated Financial Statements included under Part I, Item 1, Financial Statements and Supplementary Data for further information regarding the termination of the companys proposed combination with Shire.
Research and Development
Research and innovation continue to be key strategic priorities for AbbVie. AbbVies long-term success depends to a great extent on its ability to continue to discover and develop innovative pharmaceutical products and acquire or collaborate on compounds currently in development by other biotechnology or pharmaceutical companies.
AbbVies pipeline includes more than 20 compounds or indications in Phase 2 or 3 development individually or under collaboration or license agreements. Of these programs, approximately 12 are in Phase 3 development or undergoing registrational review. AbbVie expects several Phase II programs to transition into Phase 3 programs during the 2014-2015 timeframe. Research and development (R&D) is focused on therapeutic areas that include immunology, virology/liver disease, oncology, renal disease, neurological diseases, and womens health, among others.
During the nine months of 2014, AbbVie continued to execute on its long-term strategy of advancing its new product pipeline and maximizing its existing portfolio through new indications and formulations. Significant recent developments in R&D included the following:
· AbbVie submitted its U.S. and European Union (EU) regulatory applications for its interferon-free combination therapy for patients with genotype 1 hepatitis C virus (HCV) in April and May, respectively. AbbVies regulatory application in the United States was granted priority review by the U.S. Food and Drug Administration (FDA). In addition, its regulatory applications in the EU were validated and are under accelerated assessment by the European Medicines Agency (EMA). The company expects U.S. regulatory approval in 2014 and European regulatory approval in early 2015. AbbVie also expects to submit its regulatory application for HCV in Japan in early 2015.
· AbbVie announced the initiation of four separate Phase 3 clinical trials evaluating the safety and efficacy of its investigational compound, veliparib (ABT-888), in combination with chemotherapy in patients with previously untreated locally advanced or metastatic squamous non-small cell lung cancer (NSCLC) and a separate study in patients with nonsquamous NSCLC, as a neoadjuvant therapy, when added to carboplatin, prior to surgery in women with early-stage, triple negative breast cancer and in patients with human epidermal growth factor receptor 2-(HER2) negative metastatic or locally-advanced breast cancer, containing BRCA1 and/or BRCA2 gene mutations, when added to carboplatin and paclitaxel.
· AbbVie initiated a Phase 3 evaluation for its next generation Bcl-2 inhibitor, ABT-199, for patients with relapsed/refactory chronic lymphocytic leukemia in collaboration with AbbVies development partner, Roche Holding AG.
· AbbVie and Bristol-Myers Squibb announced that the FDA has granted elotuzumab, an investigational humanized monoclonal antibody, Breakthrough Therapy Designation for use in combination with lenalidomide and dexamethasone for the treatment of multiple myeloma in patients who have received one or more prior therapies. Phase 3 studies are ongoing.
· The company received a complete response letter from the FDA with respect to the companys levodopa-carbidopa intestinal gel for the treatment of Parkinsons disease sold under the name Duodopa outside the United States. The new drug application was subsequently resubmitted to the FDA. An FDA action date expected in early 2015.
· AbbVie announced the completion of AbbVie and Biogen Idecs Phase 3 DECIDE study for daclizumab in relapsing/remitting multiple sclerosis. AbbVie is in the process of working with Biogen Idec to complete its global regulatory applications.
· The EMA and the FDA granted orphan drug designation to AbbVies investigational compound ABT-414, an anti-epidermal growth factor receptor antibody drug conjugate, which is being evaluated for safety and efficacy in patients with glioblastoma multiforme, the most common and most aggressive type of malignant primary brain tumor.
· AbbVie announced positive results from a Phase 3 pivotal study demonstrating that HUMIRA is effective in reducing common clinical signs and symptoms in moderate-to-severe hidradenitis suppurativa (HS), specifically the number of abscesses and inflammatory nodules. AbbVie also recently announced positive results from a second pivotal HS study that were consistent with the initial trial. The results of these studies will contribute to worldwide regulatory filings for an expanded use of HUMIRA, which the company expects to submit in late 2014.
· AbbVie completed its Phase 2 study for the use of ABT-719 for the treatment of acute kidney injury associated with major cardiac and vascular surgeries. Based on these results, AbbVie decided not to continue development of ABT-719.
For a more comprehensive discussion of AbbVies products and pipeline, refer to the companys Annual Report on Form 10-K for the year ended December 31, 2013. See also Note 5 entitled Acquisitions, Collaborations and Other Arrangements of the Notes to Condensed Consolidated Financial Statements included under Part I, Item 1, Financial Statements and Supplementary Data, for further information relating to the collaborations with Calico Life Sciences LLC (Calico) and Infinity Pharmaceuticals, Inc. (Infinity).
RESULTS OF OPERATIONS
Net Sales
|
|
|
|
|
|
Percent change |
|
|
|
|
|
Percent change | |||||
|
|
Three months ended |
|
At actual |
|
At constant |
|
Nine months ended |
|
At actual |
|
At constant |
| ||||
(in millions) |
|
2014 |
|
2013 |
|
2014 |
|
2014 |
|
2014 |
|
2013 |
|
2014 |
|
2014 |
|
United States |
|
$2,809 |
|
$2,616 |
|
7 |
% |
7% |
|
$7,681 |
|
$7,363 |
|
4 |
% |
4% |
|
International |
|
2,210 |
|
2,042 |
|
8 |
% |
10% |
|
6,827 |
|
6,316 |
|
8 |
% |
9% |
|
Net sales |
|
$5,019 |
|
$4,658 |
|
8 |
% |
8% |
|
$14,508 |
|
$13,679 |
|
6 |
% |
7% |
|
The comparisons presented at constant currency rates reflect comparative local currency sales at the prior years foreign exchange rates. This measure provides information on the change in net sales assuming that foreign currency exchange rates had not changed between the prior and the current period. AbbVie believes that the non-GAAP measure of change in net sales at constant currency rates, when used in conjunction with the GAAP measure of change in net sales at actual currency rates, may provide a more complete understanding of the companys operations and can facilitate analysis of the companys results of operations, particularly in evaluating performance from one period to another.
Sales growth in the third quarter and first nine months of 2014 was driven by the continued strength of HUMIRA, both in the United States and internationally, as well as sales growth in key products including Synagis, Creon and Duodopa. Sales increased in the third quarter and first nine months of 2014 despite the continued decline in AbbVies lipid franchise due to the loss of exclusivity and unfavorable foreign exchange rate fluctuations.
The following table details the sales of key products.
|
|
|
|
|
|
Percent change |
|
|
|
|
|
Percent change | |||||
|
|
Three months ended |
|
At actual |
|
At constant |
|
Nine months ended |
|
At actual |
|
At constant |
| ||||
(in millions) |
|
2014 |
|
2013 |
|
2014 |
|
2014 |
|
2014 |
|
2013 |
|
2014 |
|
2014 |
|
HUMIRA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$1,739 |
|
$1,389 |
|
25 |
% |
25 |
% |
$4,592 |
|
$3,569 |
|
29 |
% |
29 |
% |
International |
|
1,516 |
|
1,381 |
|
10 |
% |
10 |
% |
4,588 |
|
$4,051 |
|
13 |
% |
13 |
% |
Total |
|
$3,255 |
|
$2,770 |
|
18 |
% |
18 |
% |
$9,180 |
|
$7,620 |
|
21 |
% |
21 |
% |
AndroGel |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$232 |
|
$248 |
|
(7) |
% |
(7) |
% |
$704 |
|
$746 |
|
(6) |
% |
(6) |
% |
Kaletra |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$53 |
|
$63 |
|
(14) |
% |
(14) |
% |
$163 |
|
$181 |
|
(10) |
% |
(10) |
% |
International |
|
203 |
|
174 |
|
17 |
% |
20 |
% |
504 |
|
553 |
|
(9) |
% |
(7) |
% |
Total |
|
$256 |
|
$237 |
|
8 |
% |
11 |
% |
$667 |
|
$734 |
|
(9) |
% |
(7) |
% |
Lupron |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$147 |
|
$141 |
|
4 |
% |
4 |
% |
$420 |
|
$410 |
|
3 |
% |
3 |
% |
International |
|
49 |
|
55 |
|
(10) |
% |
(8) |
% |
151 |
|
166 |
|
(9) |
% |
(6) |
% |
Total |
|
$196 |
|
$196 |
|
0 |
% |
0 |
% |
$571 |
|
$576 |
|
(1) |
% |
0 |
% |
Synagis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International |
|
$109 |
|
$98 |
|
12 |
% |
18 |
% |
$537 |
|
$513 |
|
5 |
% |
12 |
% |
Synthroid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$200 |
|
$161 |
|
24 |
% |
24 |
% |
$523 |
|
$433 |
|
21 |
% |
21 |
% |
Sevoflurane |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$20 |
|
$19 |
|
1 |
% |
1 |
% |
$61 |
|
$54 |
|
12 |
% |
12 |
% |
International |
|
114 |
|
119 |
|
(3) |
% |
(1) |
% |
369 |
|
358 |
|
3 |
% |
6 |
% |
Total |
|
$134 |
|
$138 |
|
(3) |
% |
(1) |
% |
$430 |
|
$412 |
|
4 |
% |
7 |
% |
Creon |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$148 |
|
$101 |
|
48 |
% |
48 |
% |
$365 |
|
$297 |
|
23 |
% |
23 |
% |
Duodopa |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International |
|
$56 |
|
$46 |
|
20 |
% |
21 |
% |
$164 |
|
$129 |
|
27 |
% |
25 |
% |
Dyslipidemia products |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$63 |
|
$270 |
|
(77) |
% |
(77) |
% |
$224 |
|
$985 |
|
(77) |
% |
(77) |
% |
Other |
|
370 |
|
393 |
|
(6) |
% |
(6) |
% |
1,143 |
|
1,234 |
|
(8) |
% |
(7) |
% |
Total |
|
$5,019 |
|
$4,658 |
|
8 |
% |
8 |
% |
$14,508 |
|
$13,679 |
|
6 |
% |
7 |
% |
On a constant currency basis, global HUMIRA sales increased 18 percent and 21 percent during the third quarter and first nine months of 2014, respectively, primarily as a result of continued market growth across therapeutic categories and geographies, higher market share and higher pricing in certain geographies. In addition, growth continues to be driven by the approval of new indications, including the approval of the indication for pediatric Crohns disease in the United States in the third quarter of 2014. AbbVie is pursuing several new indications to help further differentiate from competitive products and add to the sustainability and future growth of HUMIRA.
AndroGel sales for the third quarter and first nine months of 2014 decreased 7 percent and 6 percent, respectively, primarily due to a decline in the overall U.S. testosterone replacement market. The company expects this market trend will continue. These declines were partially offset by market share gains and favorable pricing trends. AndroGel 1% sales are expected to be impacted by generic competition in early 2015.
Global sales of Kaletra declined in the first nine months of 2014 primarily due to lower market share resulting from the impact of increasing competition in the HIV marketplace.
Sales for Synagis increased 18 percent and 12 percent during the third quarter and first nine months of 2014, respectively, primarily due to increased product uptake compared to the prior year. Synagis is a seasonal product with the majority of sales occurring in the first and fourth quarters.
Sales of Creon continued to grow in the third quarter and first nine months of 2014 driven primarily by continued market growth and higher market share. Sales for the third quarter of 2014 also benefitted from a favorable comparison to the prior year quarter. Creon maintains market leadership in the pancreatic enzyme market and continues to capture the vast majority of new prescription starts.
Sales of Duodopa, AbbVies therapy for advanced Parkinsons disease currently approved in Europe and other international markets, increased 21 percent and 25 percent during the third quarter and first nine months of 2014, respectively, on a constant currency basis. Duodopa is currently under regulatory review in the United States and a regulatory decision is expected in early 2015.
Sales for AbbVies consolidated lipid franchise, which includes TriCor, Trilipix, Niaspan, Simcor and Advicor, declined 77 percent in both the third quarter and first nine months of 2014 due to the introduction of generic versions of these products in the U.S. market. Generic competition began in November 2012 for TriCor, in July 2013 for Trilipix, and in September 2013 for Niaspan.
Gross Margin
|
|
Three months ended |
|
Percent |
|
Nine months ended |
|
Percent |
| ||||
(in millions) |
|
2014 |
|
2013 |
|
2014 |
|
2014 |
|
2013 |
|
2014 |
|
Gross margin |
|
$3,925 |
|
$3,566 |
|
10 |
% |
$11,201 |
|
$10,380 |
|
8 |
% |
as a % of net sales |
|
78 |
% |
77 |
% |
|
|
77 |
% |
76 |
% |
|
|
Gross profit margin in the third quarter and first nine months of 2014 reflected the favorable impact of product mix across the product portfolio, including HUMIRA, operational efficiencies and lower amortization expense for intangible assets, partially offset by the effect of unfavorable foreign exchange rates, a $37 million impairment charge for an intangible asset and loss of exclusivity for the lipid franchise.
Selling, General and Administrative
|
|
Three months ended |
|
Percent |
|
Nine months ended |
|
Percent |
| ||||
(in millions) |
|
2014 |
|
2013 |
|
2014 |
|
2014 |
|
2013 |
|
2014 |
|
Selling, general and administrative |
|
$1,595 |
|
$1,261 |
|
27 |
% |
$4,383 |
|
$3,904 |
|
12 |
% |
as a % of net sales |
|
32 |
% |
27 |
% |
|
|
30 |
% |
29 |
% |
|
|
SG&A expenses in the third quarter and first nine months of 2014 included $104 million and $286 million, respectively, of costs associated with the separation of AbbVie from Abbott Laboratories (Abbott). Separation related costs were $46 million and $135 million in the three and nine months ended September 30, 2013, respectively.
SG&A expenses in the third quarter and first nine months of 2014 also included a $129 million charge due to additional expenses related to the Branded Prescription Drug Fee. On July 28, 2014, the Internal Revenue Service issued final rules and regulations for the Branded Prescription Drug Fee, an annual non-tax-deductible fee payable to the federal government under the Affordable Care Act based on an allocation of a companys market share for branded prescription drugs sold to certain government programs in the prior year. The final rules accelerated the expense recognition criteria for the fee obligation from the year in which the fee is paid, to the year in which the market share used to allocate the fee is determined. This change will require AbbVie and other industry participants to recognize an additional year of expense in 2014. As a result, an additional expense of $129 million was recognized during the three and nine months ended September 30, 2014. The final rules and regulations will not change the amount or timing of annual fees to be paid.
The remaining increases in SG&A expenses in the third quarter and first nine months of 2014 were due primarily to increased selling and marketing support for new products, including preparations for the expected launch of AbbVies interferon-free HCV combination, as well as spending relating to new indications and geographic expansion for HUMIRA. These increases were partially offset by restructuring charges incurred in the first six months of 2013 not recurring at the same level in 2014 as well as favorable foreign exchange rate fluctuations in the third quarter and first nine months of 2014.
Research and Development and Acquired In-Process Research and Development
|
|
Three months ended |
|
Percent |
|
Nine months ended |
|
Percent |
| ||||
(in millions) |
|
2014 |
|
2013 |
|
2014 |
|
2014 |
|
2013 |
|
2014 |
|
Research and development |
|
$812 |
|
$714 |
|
14 |
% |
$2,418 |
|
$2,057 |
|
18 |
% |
as a % of net sales |
|
16 |
% |
15 |
% |
|
|
17 |
% |
15 |
% |
|
|
Acquired in-process research and development |
|
$308 |
|
$220 |
|
40 |
% |
$324 |
|
$290 |
|
12 |
% |
R&D expense in the third quarter and first nine months of 2014 reflects added funding to support the companys emerging mid- and late-stage pipeline assets and the continued pursuit of additional HUMIRA indications. R&D expense for the nine months ended September 30, 2014 also included regulatory milestone payments to a third party aggregating $40 million related to the companys HCV program.
Acquired in-process research and development (IPR&D) expense for the three and nine months ended September 30, 2014 included a charge of $275 million as a result of entering into a global collaboration with Infinity to develop and commercialize duvelisib, a treatment of patients with cancer. During the nine months ended September 30, 2014, AbbVie also entered into agreements to license preclinical compounds from various third parties and recorded charges to IPR&D of $33 million and $49 million for the three and nine months ended September 30, 2014.
IPR&D expense for the three months ended September 30, 2013 included a charge of $45 million as a result of entering into a global collaboration with Galapagos NV for cystic fibrosis therapies and a charge of $175 million as a result of entering into a global license agreement with Ablynx NV to develop and commercialize ALX-0061. IPR&D expense for the nine months ended September 30, 2013 also included the second quarter charge of $70 million as a result of entering into a global collaboration with Alvine Pharmaceuticals (Alvine).
Other Expense
Other expense for the three and nine months ended September 30, 2014 included a $250 million charge related to an R&D collaboration agreement entered into in September 2014 with Calico to discover, develop and commercialize new therapies for patients with age-related diseases.
Interest Expense, Net
Interest expense, net of $128 million and $262 million for the three and nine months ended September 30, 2014, respectively, included $75 million of financing related fees incurred in connection with the proposed combination with Shire, with the reminder consisting of primarily of interest expense on outstanding debt, partially offset by interest income. Interest expense, net was $69 million and $210 million for the three and nine months ended September 30, 2013, respectively.
Income Tax Expense
The effective income tax rates were 26.3 percent and 24.1 percent for the three and nine months ended September 30, 2014 and 25.0 percent and 22.9 percent for the three and nine months ended September 30, 2013, respectively. The effective tax rates in each period were less than the statutory federal income tax rate of 35 percent principally due to the benefit of lower statutory tax rates and tax exemptions in certain foreign jurisdictions. The increase in the effective tax rate in 2014 over the prior year was primarily due to changes in the jurisdictional mix of earnings.
Transition from Abbott and Cost to Operate as an Independent Company
On January 1, 2013, AbbVie became an independent, publicly-traded company as a result of the distribution by Abbott of 100 percent of the outstanding common stock of AbbVie to Abbotts shareholders (the separation). Prior to the separation, Abbott provided AbbVie certain services, which included administration of treasury, payroll, employee compensation and benefits, travel and meeting services, public and investor relations, real estate services, internal audit, telecommunications, information technology, corporate income tax and selected legal services. Some of these services continue to be provided to AbbVie on a temporary basis after the separation pursuant to certain transition services agreements with Abbott. As a result, AbbVie has and will continue to incur additional ongoing operating expenses to operate as an independent company, including the cost of various corporate headquarters functions, incremental information technology-related costs, and incremental costs to operate a stand-alone back office infrastructure outside the United States.
AbbVies transition services agreements with Abbott in the United States cover certain corporate support services that AbbVie has historically received from Abbott. Such services include information technology, accounts payable, payroll, and other financial functions, as well as engineering support for various facilities, quality assurance support, and other administrative services. The terms of the services under the agreements vary by activity. These agreements facilitate the separation by allowing AbbVie to operate independently prior to establishing stand-alone back office functions across its organization.
As of the date of the separation, AbbVie did not have sufficient back office infrastructure to operate in markets outside the United States. As a result, AbbVie entered into transition services agreements with Abbott to provide services outside the United States, including back office services in certain countries, for up to two years after separation. The back office services provided include information technology, accounts payable, payroll, receivables collection, treasury and other financial functions, as well as order entry, warehousing, and other administrative services. These transition services agreements have allowed AbbVie to operate its international pharmaceuticals business independently prior to establishing a stand-alone back office infrastructure for all countries. During the transition from Abbott, AbbVie has and will continue to incur non-recurring expenses to expand its international infrastructure. In addition, in certain international markets as of the date of the separation and as of September 30, 2014, certain marketing authorizations to sell AbbVies products continued to be held by Abbott until such authorizations could be transferred through the applicable regulatory channels.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
|
|
Nine months ended |
| ||
|
|
|
|
|
|
(in millions) |
|
2014 |
|
2013 |
|
Cash flows provided by/(used in): |
|
|
|
|
|
Operating activities |
|
$4,127 |
|
$5,022 |
|
Investing activities |
|
(3,440 |
) |
756 |
|
Financing activities |
|
(2,411 |
) |
(2,695 |
) |
Cash flows provided by operations for the nine months ended September 30, 2014 was $4.127 billion compared to $5.022 billion for the nine months ended September 30, 2013. The decrease was primarily due to the timing of U.S. wholesaler collections, an increase in AbbVies voluntary contribution to its main domestic defined benefit pension plan and an investment in inventory in preparation for the launch of AbbVies interferon-free HCV combination. The company made a voluntary contribution to its main domestic defined benefit pension plan of $370 million in the nine months ended September 30, 2014, and $145 million in the nine months ended September 30, 2013.
In the nine months ended September 30, 2014, cash outflows related to collaborations, acquisitions and other arrangements totaled $572 million, including $275 million paid to Infinity related to a global collaboration to develop duvelisib (IPI-145) and $250 million to fund a novel R&D collaboration with Calico. AbbVie expects to fund an additional $500 million in the fourth quarter of 2014, contingent on the satisfaction of certain conditions. In the nine months ended September 30, 2013, cash outflows related to collaborations, acquisitions and other arrangements totaled $358 million, including $175 million related to the global collaboration with Ablynx NV and $70 million related to a global collaboration with Alvine. Cash flows from investing activities for the nine months ended September 30, 2014 and 2013 also reflected capital expenditures and net sales (purchases) of short-term investments.
As part of the proposed combination with Shire, AbbVie was required to maintain cash in escrow. Accordingly, AbbVie transferred $2.7 billion of cash into escrow, which was recorded as restricted cash. The funds held in escrow will be released due to the termination of the combination in the fourth quarter of 2014.
The companys cash and equivalents, short-term investments and restricted cash increased from $9.895 billion at December 31, 2013 to $10.323 billion at September 30, 2014. While a significant portion of cash and equivalents at September 30, 2014 are considered reinvested indefinitely in foreign subsidiaries, AbbVie does not expect such reinvestment to affect its liquidity and capital resources. If these funds were needed for operations in the United States, AbbVie would be required to accrue and pay U.S. income taxes to repatriate these funds. AbbVie believes that it has sufficient sources of liquidity to support its assumption that the disclosed amount of undistributed earnings at September 30, 2014 has been reinvested indefinitely. In October 2014, AbbVie paid $1.635 billion to Shire as a break fee to terminate the proposed combination.
During the nine months ended September 30, 2014 and 2013 the company issued and redeemed commercial paper. The balance of commercial paper outstanding was $300 million and $400 million at September 30, 2014 and December 31, 2013, respectively. AbbVie may issue additional commercial paper or retire commercial paper to meet liquidity requirements as needed.
Cash dividend payments totaled $1.987 billion in the nine months ended September 30, 2014. On September 19, 2014, the board of directors declared a quarterly cash dividend of $0.42 per share for stockholders of record at the close of business on October 15, 2014, payable on November 17, 2014. On October 20, 2014, the board of directors declared a quarterly cash dividend of $0.49 per share for stockholders of record at the close of business on January 15, 2015, payable on February 13, 2015. The timing, declaration, amount of, and payment of any dividends is within the discretion of AbbVies board of directors and will depend upon many factors, including AbbVies financial condition, earnings, capital requirements of its operating subsidiaries, covenants associated with certain of AbbVies debt service obligations, legal requirements, regulatory constraints, industry practice, ability to access capital markets, and other factors deemed relevant by its board of directors. Cash dividends paid in the nine months ended September 30, 2013 were $1.914 billion.
In February 2013, AbbVies board of directors authorized a $1.5 billion common stock repurchase program, which was effective immediately. During the nine months ended September 30, 2014, the company repurchased approximately 5 million shares for $250 million in the open market. AbbVie repurchased approximately 0.5 million shares for $22 million in the open market during the nine months ended September 30, 2013. In October 2014, AbbVies board of directors authorized a new $5 billion stock repurchase program, which was effective immediately and supersedes the prior authorization. Under the new authorization, purchases of AbbVie shares may be made from time to time at managements discretion. The plan has no time limit and can be discontinued at any time.
Substantially all of AbbVies trade receivables in Greece, Portugal, Italy and Spain are with governmental health systems. AbbVie continues to monitor the economic health of the economy in Southern Europe, as heightened economic concerns still exist. Outstanding net governmental receivables in these countries at September 30, 2014 and December 31, 2013 were as follows.
|