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 June 30, 2015
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 001-35565
AbbVie Inc.
A Delaware Corporation |
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I.R.S. Employer Identification No. |
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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 |
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Non-Accelerated Filer o |
Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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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 June 30, 2015, AbbVie Inc. had 1,655,276,338 shares of common stock at $0.01 par value outstanding.
AbbVie Inc. and Subsidiaries
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3 | ||
Managements Discussion and Analysis of Financial Condition and Results of Operations |
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29 | |
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ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AbbVie Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings (unaudited)
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Three months ended |
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Six months ended |
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(in millions, except per share data) |
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2015 |
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2014 |
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2015 |
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2014 |
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Net revenues |
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$5,475 |
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$4,926 |
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$10,515 |
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$9,489 |
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Cost of products sold |
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916 |
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1,113 |
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1,858 |
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2,213 |
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Selling, general and administrative |
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1,703 |
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1,448 |
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3,176 |
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2,788 |
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Research and development |
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981 |
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834 |
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1,792 |
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1,606 |
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Acquired in-process research and development |
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23 |
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16 |
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150 |
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16 |
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Total operating costs and expenses |
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3,623 |
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3,411 |
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6,976 |
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6,623 |
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Operating earnings |
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1,852 |
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1,515 |
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3,539 |
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2,866 |
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Interest expense, net |
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164 |
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69 |
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290 |
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134 |
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Net foreign exchange loss |
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14 |
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5 |
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178 |
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8 |
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Other (income) expense, net |
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(4 |
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8 |
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(3 |
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5 |
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Earnings before income tax expense |
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1,678 |
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1,433 |
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3,074 |
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2,719 |
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Income tax expense |
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312 |
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335 |
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686 |
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641 |
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Net earnings |
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$1,366 |
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$1,098 |
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$2,388 |
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$2,078 |
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Per share data |
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Basic earnings per share |
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$0.84 |
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$0.69 |
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$1.48 |
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$1.30 |
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Diluted earnings per share |
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$0.83 |
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$0.68 |
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$1.47 |
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$1.29 |
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Cash dividends declared per common share |
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$0.51 |
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$0.42 |
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$1.02 |
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$0.84 |
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Weighted-average basic shares outstanding |
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1,620 |
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1,594 |
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1,608 |
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1,594 |
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Weighted-average diluted shares outstanding |
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1,633 |
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1,608 |
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1,621 |
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1,608 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
AbbVie Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (unaudited)
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Three months ended |
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Six months ended |
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(in millions) |
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2015 |
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2014 |
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2015 |
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2014 |
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Net earnings |
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$1,366 |
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$1,098 |
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$2,388 |
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$2,078 |
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Foreign currency translation adjustments, net of tax expense (benefit) of $21 and $(10) for the three months ended June 30, 2015 and 2014, respectively, and $(108) and $(13) for the six months ended June 30, 2015 and 2014, respectively |
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133 |
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(38 |
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(416 |
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(67 |
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Pension and post-employment benefits, net of tax expense of $8 and $5 for the three months ended June 30, 2015 and 2014, respectively, and $18 and $9 for the six months ended June 30, 2015 and 2014, respectively |
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13 |
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11 |
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68 |
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23 |
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Unrealized gains on marketable equity securities, net of tax expense of $1 and $1 for the three and six months ended June 30, 2015, respectively |
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8 |
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9 |
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Hedging activities, net of tax (benefit) expense of $(1) and $ for the three months ended June 30, 2015 and 2014, respectively, and $(2) and $2 for the six months ended June 30, 2015 and 2014, respectively |
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(61 |
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33 |
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(4 |
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66 |
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Other comprehensive income (loss) |
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93 |
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6 |
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(343 |
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22 |
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Comprehensive income |
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$1,459 |
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$1,104 |
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$2,045 |
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$2,100 |
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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) |
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June 30, |
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December 31, |
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(unaudited) |
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Assets |
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Current assets |
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Cash and equivalents |
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$7,400 |
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$8,348 |
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Short-term investments |
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879 |
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26 |
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Accounts and other receivables, net |
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4,367 |
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3,735 |
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Inventories, net |
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1,623 |
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1,124 |
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Deferred income taxes |
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1,227 |
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896 |
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Prepaid expenses and other |
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1,381 |
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1,952 |
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Total current assets |
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16,877 |
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16,081 |
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Investments |
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134 |
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92 |
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Property and equipment, net |
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2,517 |
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2,485 |
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Intangible assets, net of amortization |
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19,937 |
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1,513 |
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Goodwill |
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13,209 |
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5,862 |
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Other assets |
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1,181 |
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1,480 |
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Total assets |
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$53,855 |
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$27,513 |
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Liabilities and Equity |
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Current liabilities |
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Short-term borrowings |
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$ |
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$425 |
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Current portion of long-term debt and lease obligations |
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4,007 |
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4,014 |
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Accounts payable and accrued liabilities |
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7,251 |
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6,954 |
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Total current liabilities |
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11,258 |
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11,393 |
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Long-term debt and lease obligations |
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27,116 |
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10,538 |
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Deferred income taxes |
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6,059 |
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159 |
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Other long-term liabilities |
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3,918 |
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3,681 |
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Commitments and contingencies |
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Stockholders equity |
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Common stock, $0.01 par value, authorized 4,000,000,000 shares, issued 1,747,418,869 and 1,609,519,046 shares as of June 30, 2015 and December 31, 2014, respectively |
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17 |
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16 |
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Common stock held in treasury, at cost, 92,142,531 and 18,129,715 shares as of June 30, 2015 and December 31, 2014, respectively |
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(5,816 |
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(972 |
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Additional paid-in capital |
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12,421 |
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4,194 |
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Retained earnings |
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1,256 |
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535 |
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Accumulated other comprehensive loss |
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(2,374 |
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(2,031 |
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Total stockholders equity |
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5,504 |
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1,742 |
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Total liabilities and equity |
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$53,855 |
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$27,513 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
AbbVie Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
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Six months ended |
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(in millions) (brackets denote cash outflows) |
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2015 |
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2014 |
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Cash flows from operating activities |
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Net earnings |
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$2,388 |
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$2,078 |
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Adjustments to reconcile net earnings to net cash from operating activities: |
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Depreciation |
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194 |
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192 |
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Amortization of intangible assets |
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154 |
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209 |
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Stock-based compensation |
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174 |
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154 |
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Upfront costs related to collaborations |
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150 |
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16 |
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Other, net |
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395 |
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(60 |
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Changes in operating assets and liabilities, net of acquisitions: |
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Accounts and other receivables |
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(588 |
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120 |
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Inventories |
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(160 |
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97 |
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Prepaid expenses and other assets |
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301 |
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(248 |
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Accounts payable and other liabilities |
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409 |
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(217 |
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Cash flows from operating activities |
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3,417 |
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2,341 |
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Cash flows from investing activities |
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Acquisition of Pharmacyclics, Inc., net of cash acquired |
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(11,488 |
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Other acquisitions and investments |
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(794 |
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(17 |
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Acquisitions of property and equipment |
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(260 |
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(279 |
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Purchases of investment securities |
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(851 |
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(1,160 |
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Sales and maturities of investment securities |
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9 |
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300 |
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Cash flows from investing activities |
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(13,384 |
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(1,156 |
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Cash flows from financing activities |
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Net change in short-term borrowings |
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(425 |
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(162 |
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Proceeds from issuance of long-term debt |
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16,655 |
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Debt issuance cost |
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(179 |
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Dividends paid |
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(1,604 |
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(1,314 |
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Purchases of treasury stock |
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(5,344 |
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(353 |
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Proceeds from the exercise of stock options |
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101 |
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127 |
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Net transactions with Abbott Laboratories, excluding noncash items |
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53 |
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Other, net |
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35 |
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(43 |
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Cash flows from financing activities |
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9,239 |
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(1,692 |
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Effect of exchange rate changes on cash and equivalents |
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(220 |
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(2 |
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Net decrease in cash and equivalents |
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(948 |
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(509 |
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Cash and equivalents, beginning of period |
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8,348 |
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9,595 |
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Cash and equivalents, end of period |
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$7,400 |
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$9,086 |
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Supplemental Schedule of Non-Cash Investing and Financing Activities |
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Issuance of common stock associated with the acquisition of Pharmacyclics, Inc. |
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$8,405 |
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$ |
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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. AbbVies products are generally sold worldwide directly to wholesalers, distributors, government agencies, health care facilities, specialty pharmacies, and independent retailers from AbbVie-owned distribution centers and public warehouses. Substantially all of AbbVies net revenues in the United States are to three wholesalers. Outside the United States, products are sold primarily to customers or through distributors, depending on the market served.
AbbVie was incorporated in Delaware on April 10, 2012. On January 1, 2013, AbbVie became an independent, publicly-traded company as a result of the distribution by Abbott Laboratories (Abbott) of 100 percent of the outstanding common stock of AbbVie to Abbotts shareholders (the separation). In connection with the separation, AbbVie and Abbott entered into transition services agreements covering certain corporate support and back office services that AbbVie historically received from Abbott. Such services 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 facilitated the separation by allowing AbbVie to operate independently prior to establishing stand-alone back office functions across its organization. The majority of these transition service agreements expired without extension at December 31, 2014; however, some of these services continue to be provided to AbbVie on a temporary basis. The remaining transition services agreements are expected to terminate during 2015.
During the three and six months ended June 30, 2015 and 2014, AbbVie incurred certain separation-related expenses, which were principally classified in selling, general and administrative (SG&A) expenses in the condensed consolidated statements of earnings. Separation-related expenses for the three months ended June 30, 2015 and 2014 were $95 million and $110 million, respectively, and were $199 million and $190 million for the six months ended June 30, 2015 and 2014, respectively.
Basis of Historical Presentation
The unaudited interim condensed consolidated financial statements of AbbVie have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) have been omitted. These unaudited interim condensed consolidated financial statements should be read in conjunction with the companys audited consolidated financial statements and notes included in the companys Annual Report on Form 10-K for the year ended December 31, 2014.
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 revenues 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 June 30, 2015 and December 31, 2014 and for the three and six months ended June 30, 2015 and 2014. Substantially all of these operations have been transferred to AbbVie as of June 30, 2015.
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. As currently issued, 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. In July 2015, the FASB voted to amend ASU 2014-09 by approving a one-year deferral of the effective date as well as providing the option to early adopt the standard on the original effective date. Once this new effective date is codified, AbbVie may adopt the new guidance for annual and interim periods beginning on or after December 15, 2016 or 2017. AbbVie is currently assessing the timing of its adoption and the impact of adopting this guidance on its consolidated financial statements and the implementation approach to be used.
In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted on a retrospective basis.
AbbVie elected to adopt ASU 2015-03 early, effective in the quarter ended June 30, 2015. As a result, AbbVie reclassified approximately $7 million and $27 million of net deferred financing costs from prepaid expenses and other current assets and other long-term assets, respectively, to a reduction in the carrying amount of its long-term debt as of December 31, 2014. Total debt issuance costs classified as a reduction to long-term debt and lease obligations (current and non-current) were $122 million as of June 30, 2015.
Note 2 Supplemental Financial Information
Interest Expense, Net
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Three months ended |
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Six months ended |
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(in millions) |
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2015 |
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2014 |
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2015 |
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2014 |
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Interest expense |
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$172 |
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$73 |
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$304 |
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$143 |
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Interest income |
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(8 |
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(4 |
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(14 |
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(9 |
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Interest expense, net |
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$164 |
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$69 |
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$290 |
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$134 |
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Interest expense, net for the three and six months ended June 30, 2015 included $27 million and $86 million, respectively, of financing-related costs incurred in connection with the acquisition of Pharmacyclics, Inc. (Pharmacyclics). Refer to Note 4 for additional information.
Inventories
(in millions) |
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June 30, |
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December 31, |
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Finished goods |
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$478 |
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$341 |
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Work-in-process |
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1,019 |
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629 |
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Raw materials |
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126 |
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154 |
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Inventories, net |
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$1,623 |
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$1,124 |
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Inventories, net as of June 30, 2015 included $490 million acquired through the acquisition of Pharmacyclics. Refer to Note 4 for additional information.
Property and Equipment
(in millions) |
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June 30, |
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December 31, |
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Property and equipment, gross |
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$7,172 |
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$7,105 |
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Less accumulated depreciation |
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(4,655 |
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(4,620 |
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Property and equipment, net |
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$2,517 |
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$2,485 |
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Depreciation expense for the three months ended June 30, 2015 and 2014 was $104 million and $103 million, respectively, and was $194 million and $192 million for the six months ended June 30, 2015 and 2014, 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 both the three and six months ended June 30, 2015, 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 six months ended June 30, 2015 of approximately 3 million shares and 3 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, were excluded from the numerator for the calculation of basic and diluted earnings per share under the two-class method. Earnings allocable to participating securities for the three and six months ended June 30, 2015 were $7 million and $11 million, respectively.
As further described in Note 10, AbbVie entered into and executed a $5.0 billion accelerated share repurchase agreement (ASR) with Morgan Stanley & Co. LLC (Morgan Stanley) on May 26, 2015, pursuant to which AbbVie paid $5.0 billion for an initial delivery of 68 million shares of AbbVies common stock. The initial delivery of shares represented approximately 90% of the total shares expected to be delivered under the ASR, with final settlement expected to occur before the end of the fourth quarter of 2015. For purposes of calculating EPS, AbbVie reflected the ASR as a repurchase of AbbVie common stock and as a forward contract indexed to its own common stock. See Note 10 for additional information.
The number of common shares issuable under stock-based compensation plans and the ASR that were excluded from the computation of earnings per common share because the effect would have been antidilutive were not material for both the three and six months ended June 30, 2015.
For both the three and six months ended June 30, 2014, AbbVie determined the two-class method was more dilutive. As a result, the dilutive effect of outstanding RSUs and RSAs of approximately 3 million shares and 4 million shares, respectively, were excluded from the denominator for the calculation of diluted EPS for the three and six months ended June 30, 2014. Additionally, earnings allocable to participating securities for the three and six months ended June 30, 2014 was $7 million and $11 million, respectively. For both the three and six months ended June 30, 2014, the number of common shares issuable under stock-based compensation plans that were excluded from the computation of earnings per common share because the effect would have been antidilutive were not material.
Note 4 Licensing, Acquisitions and Other Arrangements
Acquisition of Pharmacyclics
On May 26, 2015, AbbVie acquired Pharmacyclics through a tender offer for approximately $20.8 billion, including cash consideration of $12.4 billion and equity consideration of $8.4 billion. Pharmacyclics is a biopharmaceutical company that develops and commercializes novel therapies for people impacted by cancer. Pharmacyclics markets IMBRUVICA® (ibrutinib), a Brutons tyrosine kinase (BTK) inhibitor, targeting B-cell malignancies. Each outstanding Pharmacyclics share was exchanged for (i) $152.25 in cash and $109.00 in fair market value of AbbVie common stock, (ii) $261.25 in cash, or (iii) $261.25 in fair market value of AbbVie common stock, at the election of each holder, subject to the election and proration of the consideration at 58 percent cash and 42 percent AbbVie common stock.
The total consideration for the acquisition of Pharmacyclics was approximately $20.8 billion, consisting of cash and approximately 128 million shares of AbbVie common stock, and is summarized as follows:
(in millions) |
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Fair value of AbbVie common stock issued to Pharmacyclics stockholders |
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$8,405 |
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Cash consideration paid to Pharmacyclics stockholders |
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11,749 |
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Cash consideration paid to Pharmacyclics equity award holders |
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616 |
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Total consideration |
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$20,770 |
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The acquisition of Pharmacyclics has been accounted for as a business combination using the acquisition method of accounting. This method requires, among other things, that assets acquired and liabilities assumed be recognized at fair value as of the acquisition date. The valuation of assets acquired and liabilities assumed in the acquisition has not yet been finalized as of June 30, 2015. As a result, AbbVie recorded preliminary estimates for the fair value of assets acquired and liabilities assumed as of the acquisition date. The completion of the valuation will occur no later than one year from the acquisition date and may result in significant changes to the recognized assets and liabilities.
The following table summarizes preliminary fair values of assets acquired and liabilities assumed as of the May 26, 2015 acquisition date:
(in millions) |
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Assets acquired and liabilities assumed |
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|
|
Cash and equivalents |
|
$877 |
|
Short-term investments |
|
11 |
|
Accounts and other receivables |
|
106 |
|
Inventories |
|
509 |
|
Other assets |
|
212 |
|
Intangible assets |
|
|
|
Definite-lived developed product rights |
|
4,590 |
|
Definite-lived license agreements |
|
6,780 |
|
Indefinite-lived research and development |
|
7,170 |
|
Accounts payable and accrued liabilities |
|
(381 |
) |
Deferred income taxes |
|
(6,452 |
) |
Other long-term liabilities |
|
(254 |
) |
Total identifiable net assets |
|
13,168 |
|
Goodwill |
|
7,602 |
|
Total assets acquired and liabilities assumed |
|
$20,770 |
|
The fair market value step-up adjustment to inventories of $462 million will be amortized to cost of products sold when the inventory is sold to customers, which is expected to be a period of approximately 18 months.
Intangible assets relate to the IMBRUVICA developed product rights, acquired in-process research and development (IPR&D) in the United States related to additional indications for IMBRUVICA, and the contractual rights to IMBRUVICA profits and losses outside the United States as a result of the collaboration agreement with Janssen Biotech, Inc. and its affiliates (Janssen), one of the Janssen Pharmaceutical companies of Johnson & Johnson. Refer to Note 5 for additional information regarding the collaboration with Janssen. The acquired definite-lived intangible assets are being amortized over a weighted-average estimated useful life of 13 years using the estimated pattern of economic benefit. The estimated fair value of the IPR&D and identifiable intangible assets was determined using the income approach, which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the more significant assumptions inherent in the development of those asset valuations include the estimated net cash flows for each year for each asset or product (including net revenues, cost of sales, R&D costs, selling and marketing costs and working capital/contributory asset charges), the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each assets life cycle, the potential regulatory and commercial success risks, competitive trends impacting the asset and each cash flow stream as well as other factors.
Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from the other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recognized from the acquisition of Pharmacyclics includes expected synergies, including the ability to leverage the respective strengths of each business, expanding the combined companys product portfolio, acceleration of clinical and commercial presence in oncology and establishment of a strong leadership position in hematological oncology. The goodwill is not deductible for tax purposes.
From the acquisition date through June 30, 2015, AbbVies condensed consolidated statements of earnings included net revenues of $107 million and an operating loss of $337 million associated with the acquisition. The operating loss included $226 million of acquisition-related compensation expense, $39 million of inventory step-up and intangible asset amortization, and $89 million of transaction and integration costs. Of these costs, $222 million was recorded within SG&A expense, $93 million within research and development (R&D) expense, and $39 million within cost of products sold.
Pro Forma Financial Information
The following table presents the unaudited pro forma combined results of operations of AbbVie and Pharmacyclics for the three and six months ended June 30, 2015 and 2014 as if the acquisition of Pharmacyclics had occurred on January 1, 2014:
|
|
Three months ended June 30, |
|
Six months ended June 30, |
| ||||
(in millions, except per share information) |
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
Net revenues |
|
$5,625 |
|
$5,039 |
|
$10,871 |
|
$9,721 |
|
Net earnings |
|
$1,567 |
|
$858 |
|
$2,448 |
|
$1,355 |
|
Basic earnings per share |
|
$0.92 |
|
$0.50 |
|
$1.43 |
|
$0.79 |
|
Diluted earnings per share |
|
$0.91 |
|
$0.49 |
|
$1.42 |
|
$0.78 |
|
The unaudited pro forma financial information was prepared using the acquisition method of accounting and was based on the historical financial information of AbbVie and Pharmacyclics. In order to reflect the occurrence of the acquisition on January 1, 2014 as required, the unaudited pro forma financial information includes adjustments to reflect the incremental amortization expense to be incurred based on the current preliminary fair values of the identifiable intangible assets acquired; the incremental cost of products sold related to the fair value adjustments associated with of acquisition-date inventory; the additional interest expense associated with the issuance of debt to finance the acquisition; and the reclassification of acquisition, integration and financing-related costs incurred during the three and six months ended June 30, 2015 to the three and six months ended June 30, 2014. The unaudited pro forma financial information is not necessarily indicative of what the consolidated results of operations would have been had the acquisition been completed on January 1, 2014. In addition, the unaudited pro forma financial information is not a projection of the future results of operations of the combined company nor does it reflect the expected realization of any cost savings or synergies associated with the acquisition.
Other Licensing & Acquisitions Activity
For the three and six months ended June 30, 2015, the company recorded IPR&D charges of $23 million and $150 million, respectively. Excluding the acquisition of Pharmacyclics, cash outflows related to other acquisitions and investments totaled $794 million for the six months ended June 30, 2015, and included a $500 million payment to Calico Life Sciences LLC (Calico) as a result of the satisfaction of certain conditions under the R&D collaboration with Calico for which a charge to IPR&D was recorded in 2014.
In March 2015, AbbVie entered into an exclusive worldwide license agreement with C2N Diagnostics to develop and commercialize anti-tau antibodies for the treatment of Alzheimers disease and other neurological disorders. As part of the agreement, AbbVie made an initial upfront payment of $100 million, which was expensed to IPR&D in the six months ended June 30, 2015. Upon the achievement of certain development, regulatory, and commercial milestones, AbbVie could make additional payments of up to $685 million, as well as royalties on net sales.
No material transactions or cash flows related to significant acquisitions and investments were recognized during the six months ended June 30, 2014.
Note 5 Collaboration with Janssen Biotech, Inc.
In December 2011, Pharmacyclics entered into a worldwide collaboration and license agreement with Janssen for the joint development and commercialization of IMBRUVICA, a novel, orally active, selective covalent inhibitor of BTK, and certain compounds structurally related to IMBRUVICA, for oncology and other indications, excluding all immune and inflammatory mediated diseases or conditions and all psychiatric or psychological diseases or conditions, in the United States and outside the United States.
The collaboration provides Janssen with an exclusive license to commercialize IMBRUVICA outside of the United States and co-exclusively with AbbVie in the United States. Both parties are responsible for the development, manufacturing and marketing of any products generated as a result of the collaboration. The collaboration has no set duration or specific expiration date and provides for potential future development, regulatory and approval milestone payments of up to $220 million to AbbVie.
The collaboration includes a cost sharing arrangement for associated collaboration activities. Except in certain cases, in general, Janssen is responsible for approximately 60% of collaboration development costs and AbbVie is responsible for the remaining 40% of collaboration development costs. AbbVie and Janssen share pre-tax profits and losses equally from the commercialization of products. Janssen is responsible for and has exclusive rights to commercialize IMBRUVICA outside the United States. While both parties have co-exclusive rights to commercialize the products in the United States, AbbVie is the principal in the end-customer product sales. Operating expenses for costs incurred under the collaboration are reported in their respective expense line items, net of any payments due or reimbursements due from Janssen. Revenues and profit share costs related to sales of IMBRUVICA in the United States are included in net revenues and cost of products sold, respectively. Amounts payable to AbbVie by Janssen for IMBRUVICA sales outside the United States are included in collaboration revenues.
Janssens share of the pre-tax U.S. profits under the collaboration was $45 million for the second quarter of 2015 and was recorded within cost of products sold in the condensed consolidated statements of earnings. AbbVies share of IMBRUVICA sales outside the United States and cost sharing expenses were not material for both the three and six months ended June 30, 2015. At June 30, 2015, AbbVies receivable from Janssen was $25 million and AbbVies payable to Janssen was $98 million, which were classified in accounts receivable and other and accounts payable and accrued liabilities, respectively, in AbbVies condensed consolidated balance sheet.
Note 6 Goodwill and Intangible Assets
Goodwill
The following table summarizes the changes in the carrying amount of AbbVies goodwill:
(in millions) |
|
|
|
Balance as of December 31, 2014 |
|
$5,862 |
|
Additions |
|
7,602 |
|
Foreign currency translation and other adjustments |
|
(255) |
|
Balance as of June 30, 2015 |
|
$13,209 |
|
Goodwill additions related to the acquisition of Pharmacyclics in the second quarter of 2015. Refer to Note 4 for additional information regarding this acquisition. As of June 30, 2015, there were no accumulated goodwill impairment losses. Future impairment tests for goodwill will be performed annually in the third quarter, or earlier if indicators of impairment exist.
Intangible Assets, Net
The following table summarizes AbbVies intangible assets:
|
|
June 30, 2015 |
|
December 31, 2014 |
| ||||||||
(in millions) |
|
Gross |
|
Accumulated |
|
Net |
|
Gross |
|
Accumulated |
|
Net |
|
Definite-lived intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed product rights |
|
$9,107 |
|
$(3,788 |
) |
$5,319 |
|
$4,546 |
|
$(3,706 |
) |
$840 |
|
License agreements |
|
7,953 |
|
(914 |
) |
7,039 |
|
1,097 |
|
(869 |
) |
228 |
|
Total definite-lived intangible assets |
|
17,060 |
|
(4,702 |
) |
12,358 |
|
5,643 |
|
(4,575 |
) |
1,068 |
|
Indefinite-lived research and development |
|
7,579 |
|
|
|
7,579 |
|
445 |
|
|
|
445 |
|
Total intangible assets, net |
|
$24,639 |
|
$(4,702 |
) |
$19,937 |
|
$6,088 |
|
$(4,575 |
) |
$1,513 |
|
Intangible assets with finite useful lives are amortized over their estimated useful lives. Amortization expense was $86 million and $99 million for the three months ended June 30, 2015 and 2014, respectively, and $154 million and $209 million for the six months ended June 30, 2015 and 2014, respectively, and is included in cost of products sold in the condensed consolidated statements of earnings. The anticipated annual amortization expense for intangible assets recorded as of June 30, 2015 is $387 million in 2015, $675 million in 2016, $950 million in 2017, $1.2 billion in 2018, and $1.4 billion in 2019.
The indefinite-lived intangible assets represent acquired IPR&D associated with products that have not yet received regulatory approval. The latest impairment assessment of intangible assets not subject to amortization was completed in the third quarter of 2014. No impairment charges were recorded in the six months ended June 30, 2015 and 2014. Future impairment tests for indefinite-lived intangible assets will be performed annually in the third quarter, or earlier if indicators of impairment exist.
The increase in intangible assets during 2015 was primarily due to the acquisition of Pharmacyclics in the second quarter of 2015. These intangible assets will be amortized using the estimated pattern of economic benefit. Refer to Note 4 for additional information regarding this acquisition.
Note 7 Restructuring Plans
Restructuring charges recorded for the three and six months ended June 30, 2015 were $19 million and $28 million, respectively, and were primarily recorded in R&D expense and cost of products sold in the condensed consolidated statements of earnings. For both the three and six months ended June 30, 2015, restructuring charges included asset impairments of $11 million. The remaining charges primarily related to employee severance.
Restructuring charges for the three and six months ended June 30, 2014 were $5 million and $9 million, respectively. These charges were primarily recorded in cost of products sold in the condensed consolidated statements of earnings and primarily related to employee severance.
The following summarizes the cash activity in the restructuring reserve for the six months ended June 30, 2015:
(in millions) |
|
|
|
Accrued balance at December 31, 2014 |
|
$122 |
|
2015 restructuring charges |
|
17 |
|
Payments and other adjustments |
|
(30 |
) |
Accrued balance at June 30, 2015 |
|
$109 |
|
The restructuring reserve balance as of June 30, 2015 primarily related to restructuring plans approved in years prior to 2013 to realign AbbVies worldwide manufacturing operations and selected commercial and R&D operations in the United States and internationally in order to reduce costs.
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 $427 million and $1.4 billion at June 30, 2015 and December 31, 2014, respectively, are designated as cash flow hedges and are recorded at fair value. Accumulated gains and losses as of June 30, 2015 will be included in cost of products sold at the time the products are sold, generally not exceeding twelve months.
The company enters into foreign currency forward exchange contracts to manage its exposure to foreign currency denominated trade payables and receivables and intercompany loans. The contracts are marked-to-market, and resulting gains or losses are reflected in income and are generally offset by losses or gains on the foreign currency exposure being managed. At June 30, 2015 and December 31, 2014, AbbVie held notional amounts of $5.5 billion and $6.8 billion, respectively, of such foreign currency forward exchange contracts.
AbbVie is a party to interest rate hedge contracts, designated as fair value hedges, totaling $11.0 billion and $8.0 billion at June 30, 2015 and December 31, 2014, respectively. The effect of the hedge is to change a fixed-rate interest obligation to a floating rate for that portion of the debt. AbbVie recorded the contracts at fair value and adjusted the carrying amount of the fixed-rate debt by an offsetting amount.
The following table summarizes the amounts and location of AbbVies derivative instruments as of June 30, 2015:
|
|
Fair value |
|
Fair value |
| ||||
(in millions) |
|
Balance sheet caption |
|
Amount |
|
Balance sheet caption |
|
Amount |
|
Foreign currency forward exchange contracts |
|
|
|
|
|
|
|
|
|
Hedging instruments |
|
Prepaid expenses and other |
|
$37 |
|
Accounts payable and accrued liabilities |
|
$ |
|
Others not designated as hedges |
|
Prepaid expenses and other |
|
24 |
|
Accounts payable and accrued liabilities |
|
29 |
|
Interest rate swaps designated as fair value hedges |
|
n/a |
|
|
|
Other long-term liabilities |
|
179 |
|
Total derivatives |
|
|
|
$61 |
|
|
|
$208 |
|
The following table summarizes the amounts and location of AbbVies derivative instruments as of December 31, 2014:
|
|
Fair value |
|
Fair value |
| ||||
(in millions) |
|
Balance sheet caption |
|
Amount |
|
Balance sheet caption |
|
Amount |
|
Foreign currency forward exchange contracts |
|
|
|
|
|
|
|
|
|
Hedging instruments |
|
Prepaid expenses and other |
|
$141 |
|
Accounts payable and accrued liabilities |
|
$ |
|
Others not designated as hedges |
|
Prepaid expenses and other |
|
70 |
|
Accounts payable and accrued liabilities |
|
63 |
|
Interest rate swaps designated as fair value hedges |
|
n/a |
|
|
|
Other long-term liabilities |
|
180 |
|
Total derivatives |
|
|
|
$211 |
|
|
|
$243 |
|
While certain derivatives are subject to netting arrangements with the companys counterparties, the company does not offset derivative assets and liabilities within the condensed consolidated balance sheets.
The unrealized gains/(losses) for the effective portions of the derivative instruments designated as cash flow hedges recognized in other comprehensive income were $(11) million and $9 million for the three months ended June 30, 2015 and 2014, respectively, and $76 million and $30 million, respectively, for the six months ended June 30, 2015 and 2014. The amount of hedge ineffectiveness was not significant for the three and six months ended June 30, 2015 or 2014.
The following table summarizes the location in the condensed consolidated statements of earnings and the amount of gain/(loss) recognized into net earnings for derivative instruments, including the effective portions of the gain/(loss) reclassified out of accumulated other comprehensive loss into net earnings:
|
|
|
|
Three months ended |
|
Six months ended |
| ||||
(in millions) |
|
Income statement caption |
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
Foreign currency forward exchange contracts |
|
|
|
|
|
|
|
|
|
|
|
Designated as cash flow hedges |
|
Cost of products sold |
|
$51 |
|
$(24 |
) |
$82 |
|
$(36 |
) |
Not designated as hedges |
|
Net foreign exchange loss |
|
4 |
|
(18 |
) |
(165 |
) |
(19 |
) |
Interest rate swaps designated as fair value hedges |
|
Interest expense, net |
|
(121 |
) |
86 |
|
|
|
172 |
|
Total |
|
|
|
$(66 |
) |
$44 |
|
$(83 |
) |
$117 |
|
The gain/(loss) related to fair value hedges is recognized in interest expense, net and directly offsets the (loss)/gain on the underlying hedged item, the fixed-rate debt, resulting in no net impact to interest expense, net for the three and six months ended June 30, 2015 and 2014.
Fair Value Measures
The fair value hierarchy under the accounting standard for fair value measurements consists of the following three levels:
· Level 1 Valuations based on unadjusted quoted prices in active markets for identical assets that the company has the ability to access;
· Level 2 Valuations based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuations in which all significant inputs are observable in the market; and
· Level 3 Valuations using significant inputs that are unobservable in the market and include the use of judgment by the 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 June 30, 2015:
|
|
|
|
Basis of fair value measurement |
| ||||
(in millions) |
|
Balance at |
|
Quoted prices in active |
|
Significant |
|
Significant |
|
Assets |
|
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$7,400 |
|
$1,136 |
|
$6,264 |
|
$ |
|
Time deposits |
|
861 |
|
|
|
861 |
|
|
|
Equity securities |
|
52 |
|
52 |
|
|
|
|
|
Foreign currency contracts |
|
61 |
|
|
|
61 |
|
|
|
Total assets |
|
$8,374 |
|
$1,188 |
|
$7,186 |
|
$ |
|
Liabilities |
|
|
|
|
|
|
|
|
|
Interest rate hedges |
|
$179 |
|
$ |
|
$179 |
|
$ |
|
Foreign currency contracts |
|
29 |
|
|
|
29 |
|
|
|
Total liabilities |
|
$208 |
|
$ |
|
$208 |
|
$ |
|
The following table summarizes the bases used to measure certain assets and liabilities that are carried at fair value on a recurring basis in the condensed consolidated balance sheet as of December 31, 2014:
|
|
|
|
Basis of fair value measurement |
| ||||
(in millions) |
|
Balance at 2014 |
|
Quoted prices in active markets for identical |
|
Significant |
|
Significant |
|
Assets |
|
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$8,348 |
|
$1,214 |
|
$7,134 |
|
$ |
|
Time deposits |
|
9 |
|
|
|
9 |
|
|
|
Equity securities |
|
13 |
|
13 |
|
|
|
|
|
Foreign currency contracts |
|
211 |
|
|
|
211 |
|
|
|
Total assets |
|
$8,581 |
|
$1,227 |
|
$7,354 |
|
$ |
|
Liabilities |
|
|
|
|
|
|
|
|
|
Interest rate hedges |
|
$180 |
|
$ |
|
$180 |
|
$ |
|
Foreign currency contracts |
|
63 |
|
|
|
63 |
|
|
|
Total liabilities |
|
$243 |
|
$ |
|
$243 |
|
$ |
|
The fair values for time deposits included in cash and equivalents and short-term investments are determined based on a discounted cash flow analysis reflecting quoted market rates for the same or similar instruments. The fair values of time deposits approximate their amortized cost due to the short maturities of these instruments. Available-for-sale equity securities consists of investments for which the fair values are determined by using the published market price per unit multiplied by the number of units held, without consideration of transaction costs. The derivatives entered into by the company are valued using publicized spot curves for interest rate hedges and publicized forward curves for foreign currency contracts.
Cumulative net unrealized holding gains on available-for-sale equity securities totaled $12 million and $3 million at June 30, 2015 and December 31, 2014, respectively.
There have been no transfers of assets or liabilities between the fair value measurement levels.
In addition to the financial instruments that the company is required to recognize at fair value on the condensed consolidated balance sheets, the company has certain financial instruments that are recognized at historical cost or some basis other than fair value. The carrying values and fair values of certain financial instruments as of June 30, 2015 and December 31, 2014 are shown in the table below:
|
|
Book values |
|
Approximate fair values |
| ||||
(in millions) |
|
June 30, |
|
December 31, |
|
June 30, |
|
December 31, |
|
Assets |
|
|
|
|
|
|
|
|
|
Investments |
|
$100 |
|
$95 |
|
$151 |
|
$145 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
Short-term borrowings |
|
|
|
425 |
|
|
|
425 |
|
Current portion of long-term debt and lease obligations |
|
4,007 |
|
4,014 |
|
4,010 |
|
4,026 |
|
Long-term debt and lease obligations, excluding fair value hedges |
|
27,295 |
|
10,718 |
|
27,017 |
|
10,803 |
|
The following table summarizes the bases used to measure the approximate fair values of the financial instruments as of June 30, 2015:
|
|
|
|
Basis of fair value measurement |
| ||||
(in millions) |
|
Fair Value at |
|
Quoted prices in active |
|
Significant |
|
Significant |
|
Assets |
|
|
|
|
|
|
|
|
|
Investments |
|
$151 |
|
$64 |
|
$18 |
|
$69 |
|
Total assets |
|
$151 |
|
$64 |
|
$18 |
|
$69 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
Short-term borrowings |
|
$ |
|
$ |
|
$ |
|
$ |
|
Current portion of long-term debt and lease obligations |
|
4,010 |
|
3,987 |
|
23 |
|
|
|
Long-term debt and lease obligations, excluding fair value hedges |
|
27,017 |
|
26,924 |
|
93 |
|
|
|
Total liabilities |
|
$31,027 |
|
$30,911 |
|
$116 |
|
$ |
|
The following table summarizes the bases used to measure the approximate fair values of the financial instruments as of December 31, 2014:
|
|
|
|
Basis of fair value measurement |
| ||||
(in millions) |
|
Fair Value at 2014 |
|
Quoted prices in active markets for identical |
|
Significant |
|
Significant |
|
Assets |
|
|
|
|
|
|
|
|
|
Investments |
|
$145 |
|
$68 |
|
$13 |
|
$64 |
|
Total assets |
|
$145 |
|
$68 |
|
$13 |
|
$64 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
Short-term borrowings |
|
$425 |
|
$ |
|
$425 |
|
$ |
|
Current portion of long-term debt and lease obligations |
|
4,026 |
|
4,005 |
|
21 |
|
|
|
Long-term debt and lease obligations, excluding fair value hedges |
|
10,803 |
|
10,710 |
|
93 |
|
|
|
Total liabilities |
|
$15,254 |
|
$14,715 |
|
$539 |
|
$ |
|
Investments consist of cost method investments and held-to-maturity debt securities. Cost method investments include certain investments for which the fair value is determined by using the published market price per unit multiplied by the number of units held, without consideration of transaction costs. To determine the fair value of other cost method investments, the company takes into consideration recent transactions, as well as the financial information of the investee, which represents a Level 3 basis of fair value measurement. The fair values of held-to-maturity debt securities were estimated based upon the quoted market prices for the same or similar debt instruments. The fair values of short-term and current borrowings approximate the carrying values due to the short maturities of these instruments.
The fair values of long-term debt, excluding fair value hedges, were determined by using the published market price for the debt instruments, without consideration of transaction costs, which represents a Level 1 basis of fair value measurement. The counterparties to financial instruments consist of select major international financial institutions.
Concentrations of Risk
The company invests excess cash in time deposits, money market funds, and U.S. Treasury securities and diversifies the concentration of cash among different financial institutions. The company monitors concentrations of credit risk associated with deposits with financial institutions. Credit exposure limits have been established to limit a concentration with any single issuer or institution.
At June 30, 2015, AbbVie had approximately $260 million of net monetary assets denominated in the Venezuelan bolivar (converted at a rate of 6.3 VEF/USD) in its Venezuelan entity, which had net revenues of $51 million and $97 million for the three and six months ended June 30, 2015, respectively. If AbbVies net monetary assets denominated in the Venezuelan bolivar had been converted at a rate of 12.8 VEF/USD at June 30, 2015, it would have resulted in a devaluation loss of $132 million for both the three and six months ended June 30, 2015, respectively. The company cannot predict whether there will be further devaluations of the Venezuelan currency or whether the use of the official rate of 6.3 will continue to be supported by evolving facts and circumstances. If circumstances change such that the company concludes it would be appropriate to use a different rate, or if a devaluation of the official rate occurs, it could result in a significant change to AbbVies results of operations.
Three U.S. wholesalers accounted for 47 percent and 49 percent of total net accounts receivable as of June 30, 2015 and December 31, 2014, 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 $514 million at June 30, 2015 and $446 million at December 31, 2014.
HUMIRA® (adalimumab) is AbbVies single largest product and accounted for approximately 63 percent and 62 percent of AbbVies total net revenues in the six months ended June 30, 2015 and 2014, respectively.
Debt and Credit Facilities
In May 2015, the company issued $16.7 billion aggregate principal amount of unsecured senior notes, consisting of $3.0 billion aggregate principal amount of its 1.8% senior notes due 2018, $3.75 billion aggregate principal amount of its 2.5% senior notes due 2020, $1.0 billion aggregate principal amount of its 3.2% senior notes due 2022, $3.75 billion aggregate principal amount of its 3.6% senior notes due 2025, $2.5 billion aggregate principal amount of its 4.5% senior notes due 2035 and $2.7 billion aggregate principal amount of its 4.7% senior notes due 2045. These senior notes rank equally with all other unsecured and unsubordinated indebtedness of the company. AbbVie may redeem the senior notes prior to maturity at a redemption price equal to the principal amount of the senior notes redeemed plus a make-whole premium. Debt issuance costs incurred in connection with the offering totaled $93 million and are being amortized over the respective terms of the notes to interest expense, net in the condensed consolidated statements of earnings. The senior notes contain customary covenants, all of which the company remains in compliance with as of June 30, 2015.
Approximately $11.5 billion of the net proceeds were used to finance the acquisition of Pharmacyclics and approximately $5.0 billion of the net proceeds were used to finance the accelerated share repurchase agreement with Morgan Stanley. Refer to Notes 4 and 10 for additional information related to the acquisition of Pharmacyclics and the ASR, respectively.
In March 2015, AbbVie entered into an $18 billion, 364-Day Bridge Term Loan Credit Agreement (the bridge loan) in support of the planned acquisition of Pharmacyclics. No amounts were drawn under the bridge loan, which was terminated in the second quarter of 2015 as a result of the companys May 2015 issuance of the senior notes. Interest expense, net for the three and six months ended June 30, 2015 included $27 million and $86 million, respectively, of costs related to the bridge loan.
Short-term borrowings include commercial paper borrowings of $416 million as of December 31, 2014. There were no short-term borrowings outstanding as of June 30, 2015. The weighted-average interest rate on outstanding commercial paper borrowings for the six months ended June 30, 2015 and 2014 was 0.3 percent and 0.2 percent, respectively.
As of June 30, 2015, AbbVie was in compliance with the financial covenants of its $3.0 billion unsecured credit facility. No amounts were outstanding under this facility as of June 30, 2015 and December 31, 2014.
Note 9 Post-Employment Benefits
The following is a summary of net periodic benefit costs relating to the companys defined benefit and other post-employment plans for the three months ended June 30, 2015 and 2014:
|
|
Defined |
|
Other post- |
| ||||
(in millions) |
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
Service cost |
|
$56 |
|
$44 |
|
$6 |
|
$5 |
|
Interest cost |
|
54 |
|
54 |
|
6 |
|
5 |
|
Expected return on plan assets |
|
(82 |
) |
(76 |
) |
|
|
|
|
Amortization of actuarial losses (gains) and prior service costs |
|
30 |
|
17 |
|
|
|
(1 |
) |
Net periodic benefit cost |
|
$58 |
|
$39 |
|
$12 |
|
$9 |
|
The following is a summary of net periodic benefit costs relating to the companys defined benefit and other post-employment plans for the six months ended June 30, 2015 and 2014:
|
|
Defined |
|
Other post- |
| ||||
(in millions) |
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
Service cost |
|
$114 |
|
$87 |
|
$12 |
|
$10 |
|
Interest cost |
|
110 |
|
109 |
|
12 |
|
11 |
|
Expected return on plan assets |
|
(163 |
) |
(151 |
) |
|
|
|
|
Amortization of actuarial losses (gains) and prior service costs |
|
64 |
|
34 |
|
1 |
|
(2 |
) |
Net periodic benefit cost |
|
$125 |
|
$79 |
|
$25 |
|
$19 |
|
AbbVie made voluntary contributions of $150 million and $370 million in the six months ended June 30, 2015 and 2014 to its main domestic defined benefit pension plan.
Note 10 Equity
Stock-Based Compensation
Stock-based compensation expense was $55 million and $49 million for the three months ended June 30, 2015 and 2014, respectively, and $174 million and $154 million for the six months ended June 30, 2015 and 2014, respectively, and is principally classified in SG&A expenses with the remainder classified in R&D expense and cost of products sold.
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
The exercise price for options granted is equal to at least 100 percent of the market value on the date of grant. Stock options typically have a contractual term of 10 years and generally vest in one-third increments over a three-year period.
The fair value of stock options is determined using the Black-Scholes model. The weighted-average grant-date fair values of the stock options granted during the six months ended June 30, 2015 and 2014 were $9.96 and $9.83, respectively. Stock-based compensation expense attributable to options during each of the periods presented was not material.
The following table summarizes AbbVie stock option activity for both AbbVie and Abbott employees for the six months ended June 30, 2015:
(options in thousands, aggregate intrinsic value in millions) |
|
Options |
|
Weighted- |
|
Weighted- |
|
Aggregate |
|
Outstanding at December 31, 2014 |
|
28,280 |
|
$28.53 |
|
3.3 |
|
$1,044 |
|
Granted |
|
1,205 |
|
58.88 |
|
|
|
|
|
Exercised |
|
(4,000 |
) |
26.77 |
|
|
|
|
|
Lapsed |
|
(42 |
) |
27.44 |
|
|
|
|
|
Outstanding at June 30, 2015 |
|
25,443 |
|
30.25 |
|
3.4 |
|
$940 |
|
Exercisable at June 30, 2015 |
|
22,965 |
|
$27.92 |
|
2.8 |
|
$902 |
|
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 six months ended June 30, 2015. The total intrinsic value of options exercised was $59 million and $39 million for the three months ended June 30, 2015 and 2014, respectively, and $143 million and $111 million for the six months ended June 30, 2015 and 2014, respectively.
As of June 30, 2015, $7 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 six months ended June 30, 2015:
(share units in thousands) |
|
Share units |
|
Weighted-average |
|
Outstanding at December 31, 2014 |
|
12,815 |
|
$40.98 |
|
Granted |
|
4,493 |
|
58.89 |
|
Vested |
|
(5,522 |
) |
37.25 |
|
Lapsed |
|
(297 |
) |
47.63 |
|
Outstanding at June 30, 2015 |
|
11,489 |
|
$49.60 |
|
The weighted-average grant date fair value per share 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 $14 million and $11 million for the three months ended June 30, 2015 and 2014, respectively, and $324 million and $325 million for the six months ended June 30, 2015 and 2014, respectively.
As of June 30, 2015, $264 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 June 18, 2015, the board of directors declared a quarterly cash dividend of $0.51 per share. The dividend is payable August 14, 2015 to stockholders of record at the close of business on July 15, 2015. Additionally, on February 13 and May 15, 2015, AbbVie paid quarterly cash dividends of $0.49 and $0.51 per share of common stock, respectively, which were declared by the board of directors on October 20, 2014 and February 19, 2015, respectively. The dividends declared on October 20, 2014 and February 19, 2015, represented an increase of nearly 17 percent and approximately 4 percent, respectively, over the previous quarterly rate of $0.42 per share and $0.49 per share, respectively.
On February 14, May 15, and August 15, 2014, AbbVie paid quarterly cash dividends of $0.40, $0.42, and $0.42 per share of common stock, respectively, which were declared by the board of directors on December 12, 2013, February 20, 2014, and June 19, 2014 respectively.
Stock Repurchase Program
On February 15, 2013, AbbVies board of directors authorized a $1.5 billion common stock repurchase program. On October 20, 2014, AbbVies board of directors authorized a new $5.0 billion stock repurchase program, which was effective immediately and superseded the previous authorization. This program is expected to be executed over the next several years. The stock repurchase authorization permits purchases of AbbVie shares from time to time in open market or private transactions at managements direction depending on the companys cash flows, net debt level, and market conditions. The program has no time limit and can be discontinued at any time.
In March 2015, the board of directors authorized a $5.0 billion increase to the existing stock repurchase program in anticipation of executing an accelerated share repurchase agreement in connection with the acquisition of Pharmacyclics. On May 26, 2015, AbbVie entered into and executed the $5.0 billion ASR with Morgan Stanley. Pursuant to the terms of ASR, Morgan Stanley made an initial delivery of approximately 68 million shares of AbbVies common stock on May 27, 2015, which represented approximately 90% of the total shares expected to be delivered under the ASR. AbbVie recorded the aggregate $5.0 billion purchase price as a reduction to stockholders equity, consisting of a $4.5 billion increase in common stock held in treasury and a $500 million reduction in additional paid-in capital in the condensed consolidated balance sheet as of June 30, 2015. At settlement of the ASR, Morgan Stanley may be required to deliver additional shares of AbbVies common stock to AbbVie, or AbbVie may be required to deliver shares of its common stock or may elect to make a cash payment to Morgan Stanley. The number of shares to be delivered or the amount of such payment shall be based on the difference between the daily volume-weighted average price of AbbVies common stock during the term of the ASR and the initial $5.0 billion paid. The final settlement of the ASR is expected to occur before the end of the fourth quarter of 2015 and may be accelerated at the option of Morgan Stanley.
In addition, AbbVie repurchased approximately 4 million shares for $250 million in the open market during the six months ended June 30, 2015 and approximately 5 million shares for $250 million in the open market during the six months ended June 30, 2014. Shares repurchased under these programs are recorded at acquisition cost, including related expenses, and are available for general corporate purposes. AbbVies remaining stock repurchase authorization was $4.4 billion as of June 30, 2015.
Accumulated Other Comprehensive Loss
The following table summarizes the changes in balances of each component of accumulated other comprehensive loss, net of tax for the six months ended June 30, 2015:
(in millions) (brackets denote losses) |
|
Foreign |
|
Pension and post- |
|
Unrealized securities |
|
Hedging |
|
Total |
|
Balance as of December 31, 2014 |
|
$(603 |
) |
$(1,608 |
) |
$3 |
|
$177 |
|
$(2,031 |
) |
Other comprehensive (loss) income before reclassifications |
|
(416 |
) |
21 |
|
9 |
|
76 |
|
(310 |
) |
Amounts reclassified from accumulated other comprehensive loss |
|
|
|
47 |
|
|
|
(80 |
) |
(33 |
) |
Net current-period other comprehensive (loss) income |
|
(416 |
) |
68 |
|
9 |
|
(4 |
) |
(343 |
) |
Balance as of June 30, 2015 |
|
$(1,019 |
) |
$(1,540) |
|
$12 |
|
$173 |
|
$(2,374 |
) |
Other comprehensive loss for the six months ended June 30, 2015 includes foreign currency translation adjustments totaling a loss of $416 million, which was principally driven by the impact of the continued weakening of the Euro in the six months ended June 30, 2015 on the translation of the companys Euro-denominated assets.
The following table summarizes the changes in balances of each component of accumulated other comprehensive loss, net of tax for the six months ended June 30, 2014:
(in millions) (brackets denote losses) |
|
Foreign |
|
Pension and post- |
|
Unrealized securities |
|
Hedging |
|
Total |
|
Balance as of December 31, 2013 |
|
$470 |
|
$(827 |
) |
$2 |
|
$(87 |
) |
$(442 |
) |
Other comprehensive (loss) income before reclassifications |
|
(67 |
) |
|
|
|
|
30 |
|
(37 |
) |
Amounts reclassified from accumulated other comprehensive loss |
|
|
|
23 |
|
|
|
36 |
|
59 |
|
Net current-period other comprehensive (loss) income |
|
(67 |
) |
23 |
|
|
|
66 |
|
22 |
|
Balance as of June 30, 2014 |
|
$403 |
|
$(804 |
) |
$2 |
|
$(21 |
) |
$(420 |
) |
The table below presents the significant amounts reclassified out of each component of accumulated other comprehensive loss for the three and six months ended June 30, 2015 and 2014:
|
|
Three months ended |
|
Six months ended |
| ||||||||
(in millions) (brackets denote losses) |
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
| |||
Pension and post-employment benefits |
|
|
|
|
|
|
|
|
|
| |||
Amortization of actuarial losses and other (a) |
|
$30 |
|
$16 |
|
$65 |
|
$32 |
|
| |||
Less tax benefit |
|
(8 |
) |
(5 |
) |
(18 |
) |
(9 |
) |
| |||
Total reclassification, net of tax |
|
$22 |
|
$11 |
|
$47 |
|
$23 |
|
| |||
Hedging activities |
|
|
|
|
|
|
|
|
|
| |||
(Gains) losses on designated cash flow hedges (b) |
|
$(51 |
) |
$24 |
|
$(82 |
) |
$36 |
|
| |||
Less tax expense |
|
1 |
|
|
|
2 |
|
|
|
| |||
Total reclassification, net of tax |
|
$(50 |
) |
$24 |
|
$(80 |
) |
$36 |
|
| |||
(a) Amounts are included in the computation of net periodic benefit cost (see Note 9).
(b) Amounts are included in cost of products sold (see Note 8).
Note 11 Income Taxes
The effective tax rate was 19 percent and 22 percent for the three and six months ended June 30, 2015, respectively, and 23 percent and 24 percent for the three and six months ended June 30, 2014, respectively. The effective tax rate in each period differs from the statutory tax rate of 35 percent primarily due to the benefit from foreign operations, which reflects the impact of lower statutory tax rates in locations outside the United States, tax exemptions and incentives in Puerto Rico and other foreign tax jurisdictions, and business development activities together with the cost of repatriation decisions. The decrease in the effective tax rate for the three and six months ended June 30, 2015 over the prior year was principally due to changes in the jurisdictional mix of earnings, as well as certain discrete factors and events, including the reversal of previously recognized state valuation allowances of $103 million recorded in connection with the acquisition of Pharmacyclics.
Due to the potential for resolution of federal, state, and foreign examinations, and the expiration of various statutes of limitations, it is reasonably possible that the companys gross unrecognized tax benefits balance may change within the next twelve months up to $22 million. AbbVie and Abbott entered into a tax sharing agreement effective on the date of separation, which provides that Abbott is liable for and has indemnified AbbVie against all income tax liabilities for periods prior to the separation. Accordingly, Abbott will indemnify and hold AbbVie harmless if the tax positions are settled for amounts in excess of recorded liabilities, and AbbVie will not benefit if prior tax positions are resolved more favorably than recorded amounts.
Note 12 Legal Proceedings and Contingencies
AbbVie is subject to contingencies, such as various claims, legal proceedings and investigations regarding product liability, intellectual property, commercial, securities and other matters that arise in the normal course of business. Loss contingency provisions are recorded for probable losses at managements best estimate of a loss, or when a best estimate cannot be made, a minimum loss contingency amount within a probable range is recorded. The recorded accrual balance for litigation at June 30, 2015 and December 31, 2014 was not significant. Within the next year, initiation of new legal proceedings or a change in the status of existing proceedings may result in a change in the estimated loss accrued by AbbVie. While it is not feasible to predict the outcome of all proceedings and exposures with certainty, management believes that their ultimate disposition should not have a material adverse effect on AbbVies consolidated financial position, results of operations or cash flows.
Subject to certain exceptions specified in the separation agreement by and between Abbott Laboratories (Abbott) and AbbVie, AbbVie assumed the liability for, and control of, all pending and threatened legal matters related to its business, including liabilities for any claims or legal proceedings related to products that had been part of its business but were discontinued prior to the distribution, as well as assumed or retained liabilities, and will indemnify Abbott for any liability arising out of or resulting from such assumed legal matters.
Several pending lawsuits filed against Unimed Pharmaceuticals, Inc., Solvay Pharmaceuticals, Inc. (a company Abbott acquired in February 2010 and now known as AbbVie Products LLC) and others are consolidated for pre-trial purposes in the United States District Court for the Northern District of Georgia under the Multi-District Litigation (MDL) Rules as In re: AndroGel Antitrust Litigation, MDL No. 2084. These cases, brought by private plaintiffs and the Federal Trade Commission (FTC), generally allege 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 No. 2084 includes: (a) four individual plaintiff lawsuits; (b) six purported class actions; and (c) Federal Trade Commission v. Watson Pharmaceuticals, Inc. et al. Following the district courts dismissal of all plaintiffs claims, appellate proceedings led to the reinstatement of the claims regarding the patent litigation settlement, which are proceeding in discovery in the district court. The Attorney General of the State of Alaska has served AbbVie with a Civil Investigative Demand, primarily seeking documents that AbbVie produced in these lawsuits.
In November 2007, GlaxoSmithKline plc (GSK) filed a lawsuit against Abbott in the United States District Court for the Northern District of California alleging that Abbott violated federal antitrust and various state 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 GSK. In January 2014, 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 was returned to the district court in California, but after GSK dismissed its federal antitrust claims, the case was transferred in April 2015 to the United States District Court for the Middle District of North Carolina, where pre-trial proceedings are pending. AbbVie assumed the liability for and control of this proceeding in connection with its separation from Abbott.
Lawsuits are pending against AbbVie and others generally alleging that the 2005 patent litigation settlement involving Niaspan® entered into between Kos Pharmaceuticals, Inc. (a company acquired by Abbott in 2006 and presently a subsidiary of AbbVie) and a generic company violates federal and state antitrust laws and state unfair and deceptive trade practices and unjust enrichment laws. Plaintiffs generally seek monetary damages and/or injunctive relief and attorneys fees. Two individual plaintiff lawsuits and 17 purported class actions are consolidated for pre-trial proceedings in the United States District Court for the Eastern District of Pennsylvania under the MDL Rules as In re: Niaspan Antitrust Litigation, MDL No. 2460. The office of the Attorney General of the State of Alaska has served AbbVie with a Civil Investigative Demand, primarily seeking documents that AbbVie produced in this lawsuit.
In September 2014, the FTC filed suit in the United States District Court for the Eastern District of Pennsylvania against AbbVie and others, alleging that the 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. In May 2015, the court dismissed the FTCs claim regarding the patent litigation settlement and the FTC is seeking reconsideration of that dismissal. The office of the Attorney General of the State of Alaska has served AbbVie with a Civil Investigative Demand, primarily seeking documents that AbbVie produced in this lawsuit.
In March 2015, the State of Louisiana filed a lawsuit, State of Louisiana v. Fournier Industrie et Sante, et al., against AbbVie, Abbott and affiliated Abbott entities in Louisiana state court. Plaintiff alleges that patent applications and patent litigation filed and other alleged conduct from the early 2000s and before related to the drug TriCor® violated Louisiana state antitrust and unfair trade practices laws. The lawsuit seeks monetary damages and attorneys fees.
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 Racketeer Influenced and Corrupt Organizations (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. In April 2015, the United States Court of Appeals for the Seventh Circuit reversed the district courts decision to dismiss all of the plaintiffs claims with prejudice on statute of limitations grounds. The case has been returned to the district court for further proceedings.
In November 2014, a putative class action lawsuit, Medical Mutual of Ohio v. AbbVie Inc., et al., was filed against several manufacturers of testosterone replacement therapies (TRTs), including AbbVie, in the United States District Court for the Northern District of Illinois on behalf of all insurance companies, health benefit providers, and other third-party payors who paid for TRTs, including AndroGel®. The claims asserted include violations of the federal RICO Act and state consumer fraud and deceptive trade practices laws. The complaint seeks monetary damages and injunctive relief.
Product liability cases are pending in which plaintiffs generally allege that AbbVie and other manufacturers of TRTs did not adequately warn about risks of certain injuries, primarily heart attacks, strokes and blood clots. Approximately 1250 cases are consolidated for pre-trial purposes in the United States District Court for the Northern District of Illinois under the Multi-District Litigation Rules as In re: Testosterone Replacement Therapy Products Liability Litigation, MDL No. 2545. Approximately 50 cases are pending in various state courts. Plaintiffs seek compensatory and punitive damages.
Product liability cases are pending in which plaintiffs generally allege that AbbVie did not adequately warn about risk of certain injuries, primarily various birth defects, arising from use of Depakote®. Over ninety percent of the approximately 700 claims are pending in the United States District Court for the Southern District of Illinois, and the rest are pending in various other federal and state courts. Plaintiffs seek compensatory and punitive damages.
In November 2014, five individuals filed a putative class action lawsuit on behalf of purchasers and sellers of certain Shire plc securities between June 20 and October 14, 2014, against AbbVie and its chief executive officer in the United States District Court for the Northern District of Illinois alleging that the defendants made and/or are responsible for material misstatements in violation of federal securities laws in connection with AbbVies proposed transaction with Shire. The complaint seeks monetary damages and injunctive relief.
In December 2014, a shareholder derivative lawsuit, Plumbers & Steamfitters Local 60 Pension Plans v. J.P. Morgan Securities LLC, et al., was filed in Delaware Chancery Court, alleging that AbbVies directors breached their fiduciary duties in connection with the Shire transaction approval and termination. The lawsuit seeks monetary damages for AbbVie, among other 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. In February 2015, in a related case filed in the United States District Court for the Northern District of Illinois, AbbVie alleges that Mylan Pharmaceuticals Inc.s, Mylan Laboratories, Ltd.s and Mylan Laboratories, Inc.s proposed generic lopinavir/ritonavir products infringe additional AbbVie patents and seeks declaratory and injunctive relief.
AbbVie is seeking to enforce its patent rights relating to ritonavir tablets (a drug AbbVie sells under the trademark Norvir®). In a case filed in the United States District Court for the District of Delaware in October 2014, AbbVie alleges that Mylan Pharmaceutical Inc.s proposed generic ritonavir tablets product infringes AbbVies patents and seeks declaratory and injunctive relief.
As previously disclosed, AbbVie sought 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 alleged that Perrigo Companys and Perrigo Israel Pharmaceutical Ltd.s proposed generic product infringed AbbVies patents and sought declaratory and injunctive relief. On April 28, 2015, AbbVie and Perrigo entered into a settlement and license agreement, the terms of which are confidential. The litigation was dismissed by stipulation of the parties.
Note 13 Segment Information
AbbVie operates in one business segmentpharmaceutical products. Substantially all of AbbVies net revenues in the United States are to three wholesalers. Outside the United States, products are sold primarily to health care providers or through distributors, depending on the market served. The following table details AbbVies worldwide net revenues:
|
|
Three months ended |
|
Six months ended |
| ||||
(in millions) |
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
HUMIRA |
|
$3,537 |
|
$3,288 |
|
$6,648 |
|
$5,925 |
|
IMBRUVICA |
|
107 |
|
|
|
107 |
|
|
|
VIEKIRA |
|
385 |
|
|
|
616 |
|
|
|
Creon |
|
159 |
|
110 |
|
286 |
|
217 |
|
Synagis |
|
46 |
|
74 |
|
381 |
|
428 |
|
Lupron |
|
198 |
|
186 |
|
390 |
|
375 |
|
Synthroid |
|
187 |
|
166 |
|
373 |
|
323 |
|
Kaletra |
|
167 |
|
216 |
|
347 |
|
411 |
|
AndroGel |
|
170 |
|
218 |
|
323 |
|
472 |
|
Sevoflurane |
|
118 |
|
154 |
|
244 |
|
296 |
|
Duodopa |
|
55 |
|
56 |
|
108 |
|
108 |
|
Dyslipidemia products |
|
38 |
|
65 |
|
81 |
|
161 |
|
All other |
|
308 |
|
393 |
|
611 |
|
773 |
|
Total net revenues |
|
$5,475 |
|
$4,926 |
|
$10,515 |
|
$9,489 |
|
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 June 30, 2015 and December 31, 2014 and the results of operations for the three and six months ended June 30, 2015 and 2014. 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 formed in 2013 following separation from Abbott Laboratories (Abbott). AbbVies mission is to use its expertise, dedicated people and unique approach to innovation to develop and market 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; hepatitis C (HCV); human immunodeficiency virus (HIV); oncology; endometriosis; thyroid disease; Parkinsons disease; complications associated with chronic kidney disease (CKD) and cystic fibrosis; and other health conditions such as low testosterone. AbbVie also has a pipeline of promising new medicines across such important medical specialties as immunology, virology/liver disease, oncology, renal disease, neurological diseases, cystic fibrosis, and womens health.
AbbVies products are generally sold worldwide directly to wholesalers, distributors, government agencies, health care facilities, specialty pharmacies, and independent retailers from AbbVie-owned distribution centers and public warehouses. In the United States, AbbVie distributes pharmaceutical products principally through independent wholesale distributors, with some sales directly to pharmacies and patients. Outside the United States, 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 employs more than 28,000 people worldwide and markets medicines in more than 170 countries. AbbVie operates in one business segmentpharmaceutical products.
AbbVie owns or has license rights to a substantial number of patents and patent applications, which in aggregate are believed to be of material importance in the operation of AbbVies business. In addition to the intellectual property protection disclosed in AbbVies Annual Report on Form 10-K for the year ended December 31, 2014, AbbVie has non-composition of matter patents, such as manufacturing patents, formulation patents, patents covering HUMIRAs approved indications, and other patents, covering HUMIRA. The earliest of these patents expires in 2022.
For the remainder of 2015, AbbVie expects revenue performance to be driven by continued strong growth from HUMIRA, the global launch of AbbVies interferon-free HCV treatment, and revenue growth in certain key products including Creon and Duodopa, partially offset by a decline in several products due to generic competition, including AndroGel 1% and the remainder of the lipid franchise. IMBRUVICA, acquired through the acquisition of Pharmacyclics, Inc. (Pharmacyclics) in May 2015 as further discussed below, will also be a significant contributor to revenue growth in 2015. In addition, AbbVie expects to achieve operating margin improvements while continuing to invest in its pipeline in support of opportunities in oncology, HCV, and immunology, as well as continued investment in key products. AbbVie expects to grow operating cash flows in 2015, which will enable the company to continue to augment its pipeline through concerted focus on strategic licensing, acquisition and partnering activity and returning cash to shareholders via dividends and share repurchases.
On May 26, 2015, AbbVie completed its acquisition of Pharmacyclics, a biopharmaceutical company that develops and commercializes novel therapies for people impacted by cancer, and its flagship asset IMBRUVICA® (ibrutinib), a highly effective treatment for hematologic malignancies. The acquisition will accelerate AbbVies clinical and commercial presence in oncology, strengthening its pipeline, and establishing a leadership position in hematological oncology. In addition, the acquisition will also accelerate AbbVies revenue and earnings growth and further diversify its revenue base. AbbVie expects the acquisition to be accretive to earnings beginning in 2017. Refer to Note 4 entitled Licensing, Acquisitions and Other Arrangements and Note 10 entitled Equity of the Notes to Condensed Consolidated Financial Statements included under Part 1, Item 1, Financial Statements and Supplementary Data for further information regarding the acquisition of Pharmacyclics and the accelerated repurchase program, respectively.
Research and development (R&D) efforts for the remainder of 2015 will continue to focus a significant portion of expenditures on compounds for immunology, virology/liver disease, oncology, renal disease, neurological diseases, cystic fibrosis, and womens health. AbbVies scientists work to advance a pipeline of specialty molecules that demonstrate strong clinical performance for patients and economic value for patients and their healthcare systems. Additional information about AbbVies pipeline is set forth in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, in AbbVies Annual Report on Form 10-K for the year ended December 31, 2014. See the Research and Development section below for significant updates to AbbVies pipeline.
Financial Results
The companys financial performance for the six months ended June 30, 2015 included delivering worldwide net revenues of $10.5 billion, improved gross margin, and fully diluted earnings per share of $1.47. For the six months ended June 30, 2015, AbbVies worldwide net revenues grew by 19 percent on a constant currency basis, driven primarily by the continued strength of HUMIRA, the global launch of AbbVies interferon-free HCV treatment, revenue growth from other key products including Synthroid, Creon, and Duodopa, and post-acquisition revenues related to IMBRUVICA. AbbVies financial performance for the six months ended June 30, 2015 also reflected an improvement in gross margin to 82 percent of net revenues, primarily due to favorable product mix across the product portfolio, operational efficiencies, and the impact of foreign exchange rates. Financial results for the six months ended June 30, 2015 also reflected continued funding in support of AbbVies emerging mid-and late-stage pipeline assets, continued investment in AbbVies growth brands, and the global launch of AbbVies interferon-free HCV treatment. AbbVie also recorded acquired in-process research and development (IPR&D) charges of $150 million for the six months ended June 30, 2015.
For the six months ended June 30, 2015, the company generated cash flows from operations of $3.4 billion. These strong cash flows enabled the company to continue to enhance its pipeline through licensing and collaboration activities, pay cash dividends to shareholders of $1.6 billion, and repurchase approximately 4 million shares of common stock for $250 million in the open market (excluding the shares repurchased under an accelerated share repurchase agreement). In addition, the board of directors declared a quarterly cash dividend of $0.51 per share of common stock payable in August 2015.
In addition to these financial results, AbbVie continued to advance and augment its pipeline in the six months ended June 30, 2015 as further described below under the heading Research and Development.
Research and Development
Research and innovation continues to be a key strategic priority 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 currently includes more than 40 compounds or indications in clinical development individually or under collaboration or license agreements across such important medical specialties as immunology, virology/liver disease, oncology, renal disease, neurological diseases, cystic fibrosis, and womens health. Of these programs, more than 30 are in mid- and late-stage development. AbbVie continues to expect multiple Phase 2 programs to transition into Phase 3 programs during 2015.
Transitions of significant programs from Phase 2 development to Phase 3 development or recent developments in significant programs in Phase 3 or registration included the following:
· In January 2015, AbbVie announced that the European Commission (EC) granted marketing authorizations for its all-oral, short-course, interferon-free treatment VIEKIRAX (ombitasvir/paritaprevir/ritonavir tablets) + EXVIERA (dasabuvir tablets). The treatment was approved with or without ribavirin (RBV) for patients with genotype 1 (GT1) chronic HCV infection, including those with compensated liver cirrhosis, HIV-1 co-infection, patients on opioid substitution therapy and liver transplant recipients. Additionally, VIEKIRAX was approved for use with RBV in genotype 4 chronic HCV patients.
· AbbVie also announced in January 2015 that the U.S. Food and Drug Administration (FDA) approved Duopa, (carbidopa and levodopa) enteral suspension for the treatment of motor fluctuations for people with advanced Parkinsons disease. Duopa is administered using a small, portable infusion pump that delivers levodopa and carbidopa directly into the small intestine for 16 continuous hours via a procedurally-placed tube. This product is sold under the name Duodopa outside the United States.
· In February 2015, AbbVie announced that it submitted its regulatory application in Japan seeking approval for the companys investigational, all-oral, RBV and interferon-free, 12-week, two direct-acting antiviral treatment of ombitasvir/paritaprevir/ritonavir (OBV/PTV/r), dosed once daily. The submission, which has been granted priority review, is for the treatment of patients with GT1 chronic HCV infection.
· In February 2015, the FDA filed the supplemental Biologic License Application (BLA) for a new formulation of HUMIRA, which was submitted in December 2014. AbbVie recently received approval from the European Medicines Agency (EMA) for this new HUMIRA formulation specifically designed to reduce injection pain and reduce injection volume. This new formulation is currently under review by the FDA.
· In February 2015, the registration submission for ZINBRYTA® (daclizumab) was made in the United States followed by the European Union (EU) submission in March 2015. In March, AbbVie and Biogen Idec (Biogen) announced that the EMA had validated the companies marketing authorization application for ZINBRYTA® (daclizumab) for the treatment of relapsing forms of multiple sclerosis in the EU. Validation confirms that the submission is complete and signifies the initiation of the review process by the EMAs Committee for Medicinal Products for Human Use (CHMP). In April 2015, AbbVie and Biogen announced that the FDA accepted for review the registration submission in the United States.
· In April 2015, AbbVie announced that the EC granted marketing authorization for HUMIRA for the treatment of severe chronic plaque psoriasis in children and adolescence from four years of age who have had an inadequate response to or are inappropriate candidates for topical therapy and phototherapies. With the EC decision, HUMIRA now has approval for use in this indication in all member states of the EU, representing the twelfth indication for HUMIRA in major geographies around the world.
· The FDA approved AbbVies regulatory application for TECHNIVIE (OBV/PTV/r tablets) in combination with RBV for the treatment of adults with genotype 4 (GT4) chronic HCV infection who do not have cirrhosis. TECHNIVIE is the first and only all-oral, interferon-free, direct-acting antiviral treatment approved in the United States for adult patients with GT4 chronic HCV infection.
· AbbVie recently received a decision by the EC regarding compliance with its pediatric investigation plan for HUMIRA, which ensures that necessary data are obtained through studies in children. As a result of this positive decision, the company will now seek an extension from each EU member state where a supplementary protection certificate is held. Once approved, this will extend the HUMIRA composition of matter patent in the EU by six months from April 2018 to October 2018.
· In May 2015, AbbVie announced its investigational medicine venetoclax, an inhibitor of the B-cell lymphoma-2 (BCL-2) protein that is being developed in partnership with Genentech and Roche, has been granted Breakthrough Therapy Designation by the FDA for the treatment of chronic lymphocytic leukemia (CLL) in previously treated (relapsed/refractory) patients with the 17p deletion mutation. AbbVie expects to submit regulatory applications in the United States and EU for this indication by the end of 2015.
· In May 2015, AbbVie announced that the FDA granted HUMIRA orphan drug designation for the treatment of moderate-to-severe hidradenitis suppurativa (HS), a painful, chronic inflammatory skin disease. AbbVies BLA is currently under review with the FDA. In July 2015, AbbVie announced that its marketing authorization for HUMIRA for the treatment of active moderate-to-severe HS was approved in the EU.
· Registration submissions were submitted to the FDA and the EC for elotuzumab, an investigational Signaling Lymphocyte Activation Molecule (SLAMF7)-directed immunostimulatory antibody (proposed tradename Empliciti) which is being developed in partnership with Bristol Myers Squibb for front line and relapsed/refractory multiple myeloma. In July 2015, the EMA validated for review the Marketing Authorization Application for elotuzumab for the treatment of multiple myeloma as combination therapy in adult patients who have received one or more prior therapies. The application was granted accelerated assessment by the CHMP.
In addition to the above, on May 26, 2015, AbbVie completed its acquisition of Pharmacyclics, Inc. and its flagship asset IMBRUVICA, a novel, orally active, selective covalent inhibitor of Brutons Tyrosine Kinase (BTK). As part of a worldwide collaboration and license agreement with Janssen Biotech, Inc., one of the Janssen Pharmaceutical companies of Johnson & Johnson (Janssen), IMBRUVICA currently is approved for use in the United States, Canada, and the EU as well as other countries worldwide. Effective May 26, 2015, AbbVie assumed Pharmacyclics obligations under the collaboration. AbbVie will market IMBRUVICA in the United States for four FDA-approved indications: (i) for patients with mantle cell lymphoma (MCL) who have received at least one prior therapy; (ii) for the treatment of patients with chronic lymphocytic leukemia (CLL) who have received at least one prior therapy; (iii) for the treatment of CLL patients with deletion of the short arm chromosome 17 (del 17p CLL); and (iv) for the treatment of patients with Waldenstroms macroglobulinemia (WM).
IMBRUVICA is in mid- and late-stage development for additional hematological oncology indications, with more than 60 clinical trials underway, including 13 in Phase 3 development. IMBRUVICA is also in early-stage development for solid tumors. Significant developments subsequent to the acquisition date included:
· In July 2015, AbbVie announced that the EC granted marketing authorization for IMBRUVICA as the first treatment option specifically approved for treatment of adult patients with WM, a rare, slow growing blood cancer. Pharmacyclics received FDA approval for IMBRUVICA in January 2015. The EC approval triggers a $20 million milestone payment from Janssen.
For the first six months ended June 30, 2015, AbbVie also augmented its pipeline through strategic licensing and partnering activities including in-licensing anti-tau antibodies for the treatment of Alzheimers disease and other neurological disorders from C2N Diagnostics (C2N), a privately held protein diagnostic and therapeutic discovery company.
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, 2014. See also Note 4 entitled Licensing, Acquisitions 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 acquisition of Pharmacyclics and the license agreement with C2N. Refer also to Note 5 entitled Collaboration with Janssen Biotech, Inc. of the Notes to Condensed Consolidated Financial Statements for further information regarding the collaboration with Janssen.
RESULTS OF OPERATIONS
Net Revenues
The comparisons presented at constant currency rates reflect comparative local currency net revenues at the prior years foreign exchange rates. This measure provides information on the change in net revenues 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 revenues at constant currency rates, when used in conjunction with the GAAP measure of change in net revenues 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.
|
|
|
|
|
|
Percent change |
|
|
|
|
|
Percent change |
| ||||
|
|
Three months ended |
|
At actual |
|
At constant |
|
Six months ended |
|
At actual |
|
At constant |
| ||||
(in millions) |
|
2015 |
|
2014 |
|
2015 |
|
2015 |
|
2015 |
|
2014 |
|
2015 |
|
2015 |
|
United States |
|
$3,370 |
|
$2,646 |
|
27 |
% |
27 |
% |
$6,020 |
|
$4,872 |
|
24 |
% |
24 |
% |
International |
|
2,105 |
|
2,280 |
|
(8 |
)% |
10 |
% |
4,495 |
|
4,617 |
|
(3 |
)% |
13 |
% |
Net revenues |
|
$5,475 |
|
$4,926 |
|
11 |
% |
19 |
% |
$10,515 |
|
$9,489 |
|
11 |
% |
19 |
% |
On a constant currency basis, revenue growth in the three and six months ended June 30, 2015 was driven primarily by the continued strength of HUMIRA, both in the United States and internationally, the global launch of AbbVies interferon-free HCV treatment, and revenue growth in other key products including Synthroid, Creon, and Duodopa. Net revenues for both the three and six months ended June 30, 2015 also reflect $107 million of net revenues recorded subsequent to the acquisition of Pharmacyclics on May 26, 2015 which related to IMBRUVICA. These increases were partially offset by a decline in net revenues of AndroGel, principally due to continued market declines and the entry of generic competition for the AndroGel 1% formulation, the continued decline of the companys lipid franchise, and the unfavorable impact of foreign exchange rates.
The following table details AbbVies worldwide net revenues:
|
|
|
|
|
|
Percent change |
|
|
|
|
|
Percent change |
| ||||
|
|
Three months ended |
|
At actual |
|
At constant |
|
Six months ended |
|
At actual |
|
At constant |
| ||||
(in millions) |
|
2015 |
|
2014 |
|
2015 |
|
2015 |
|
2015 |
|
2014 |
|
2015 |
|
2015 |
|
HUMIRA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$2,141 |
|
$1,661 |
|
29 |
% |
29 |
% |
$3,805 |
|
$2,853 |
|
33 |
% |
33 |
% |
International |
|
1,396 |
|
1,627 |
|
(14 |
)% |
4 |
% |
2,843 |
|
3,072 |
|
(7 |
)% |
9 |
% |
Total |
|
$3,537 |
|
$3,288 |
|
8 |
% |
16 |
% |
$6,648 |
|
$5,925 |
|
12 |
% |
21 |
% |
IMBRUVICA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$97 |
|
|
|
n/m |
|
n/m |
|
$97 |
|
|
|
n/m |
|
n/m |
|
Collaboration revenues |
|
10 |
|
|
|
n/m |
|
n/m |
|
10 |
|
|
|
n/m |
|
n/m |
|
Total |
|
$107 |
|
|
|
n/m |
|
n/m |
|
$107 |
|
|
|
n/m |
|
n/m |
|
VIEKIRA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$227 |
|
|
|
n/m |
|
n/m |
|
$365 |
|
|
|
n/m |
|
n/m |
|
International |
|
158 |
|
|
|
n/m |
|
n/m |
|
251 |
|
|
|
n/m |
|
n/m |
|
Total |
|
$385 |
|
|
|
n/m |
|
n/m |
|
$616 |
|
|
|
n/m |
|
n/m |
|
Creon |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$159 |
|
$110 |
|
45 |
% |
45 |
% |
$286 |
|
$217 |
|
32 |
% |
32 |
% |
Synagis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International |
|
$46 |
|
$74 |
|
(37 |
)% |
(26 |
)% |
$381 |
|
$428 |
|
(11 |
)% |
2 |
% |
Lupron |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$156 |
|
$133 |
|
17 |
% |
17 |
% |
$306 |
|
$273 |
|
12 |
% |
12 |
% |
International |
|
42 |
|
53 |
|
(20 |
)% |
(9 |
)% |
84 |
|
102 |
|
(17 |
)% |
(7 |
)% |
Total |
|
$198 |
|
$186 |
|
6 |
% |
10 |
% |
$390 |
|
$375 |
|
4 |
% |
7 |
% |
Synthroid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$187 |
|
$166 |
|
12 |
% |
12 |
% |
$373 |
|
$323 |
|
15 |
% |
15 |
% |
Kaletra |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$43 |
|
$56 |
|
(22 |
)% |
(22 |
)% |
$84 |
|
$110 |
|
(23 |
)% |
(23 |
)% |
International |
|
124 |
|
160 |
|
(23 |
)% |
(14 |
)% |
263 |
|
301 |
|
(13 |
)% |
(1 |
)% |
Total |
|
$167 |
|
$216 |
|
(23 |
)% |
(16 |
)% |
$347 |
|
$411 |
|
(16 |
)% |
(7 |
)% |
AndroGel |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$170 |
|
$218 |
|
(22 |
)% |
(22 |
)% |
$323 |
|
$472 |
|
(32 |
)% |
(32 |
)% |
Sevoflurane |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$20 |
|
$22 |
|
(13 |
)% |
(13 |
)% |
$38 |
|
$41 |
|
(8 |
)% |
(8 |
)% |
International |
|
98 |
|
132 |
|
(25 |
)% |
(13 |
)% |
206 |
|
255 |
|
(19 |
)% |
(8 |
)% |
Total |
|
$118 |
|
$154 |
|
(24 |
)% |
(13 |
)% |
$244 |
|
$296 |
|
(17 |
)% |
(8 |
)% |
Duodopa |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$3 |
|
$ |
|
n/m |
|
n/m |
|
$3 |
|
$ |
|
n/m |
|
n/m |
|
International |
|
52 |
|
56 |