ABBVIE INC. The following is a discussion and analysis of the financial condition ofAbbVie Inc. (AbbVie or the company) as ofDecember 31, 2019 and 2018 and results of operations for each of the three years in the period endedDecember 31, 2019 . This commentary should be read in conjunction with the consolidated financial statements and accompanying notes appearing in Item 8, "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). AbbVie uses its expertise, dedicated people and unique approach to innovation to develop and market advanced therapies that address some of the world's most complex and serious diseases. AbbVie's products are focused on treating conditions such as chronic autoimmune diseases in rheumatology, gastroenterology and dermatology; oncology, including blood cancers; virology, including hepatitis C virus (HCV) and human immunodeficiency virus (HIV); neurological disorders, such as Parkinson's disease; metabolic diseases, including thyroid disease and complications associated with cystic fibrosis; pain associated with endometriosis; as well as other serious health conditions. AbbVie also has a pipeline of promising new medicines in clinical development across such important medical specialties as immunology, oncology and neuroscience, with additional targeted investment in cystic fibrosis and women's health. AbbVie's products are generally sold worldwide directly to wholesalers, distributors, government agencies, health care facilities, specialty pharmacies and independent retailers from AbbVie-owned distribution centers and public warehouses. Inthe United States , AbbVie distributes pharmaceutical products principally through independent wholesale distributors, with some sales directly to pharmacies and patients. Outsidethe United States , AbbVie sells products primarily to customers or through distributors, depending on the market served. Certain products are co-marketed or co-promoted with other companies. AbbVie has approximately 30,000 employees. AbbVie operates in one business segment-pharmaceutical products. OnJune 25, 2019 , AbbVie announced that it entered into a definitive transaction agreement under which AbbVie will acquire Allergan plc (Allergan). See Note 5 to the Consolidated Financial Statements for additional information regarding the proposed acquisition. 2019 Financial Results AbbVie's strategy has focused on delivering strong financial results, advancing and investing in its pipeline and returning value to shareholders while ensuring a strong, sustainable growth business over the long term. The company's financial performance in 2019 included delivering worldwide net revenues of$33.3 billion , operating earnings of$13.0 billion , diluted earnings per share of$5.28 and cash flows from operations of$13.3 billion . Worldwide net revenues grew by 3% on a constant currency basis, primarily driven by revenue growth related to IMBRUVICA and VENCLEXTA as well as the continued strength of HUMIRA in theU.S. and newly launched immunology assets SKYRIZI and RINVOQ, offset by international HUMIRA biosimilar competition. Diluted earnings per share in 2019 was$5.28 and included the following after-tax costs: (i)$3.2 billion for the change in fair value of contingent consideration liabilities; (ii)$1.3 billion related to the amortization of intangible assets; (iii) a Stemcentrx-related impairment charge of$823 million net of the related fair value adjustment to contingent consideration liabilities; (iv)$364 million for acquired in-process research and development (IPR&D); and (v)$338 million of expenses related to the proposed Allergan acquisition. These costs were partially offset by the following after-tax benefits: (i)$414 million from litigation matters primarily due to the settlement of an intellectual property dispute with a third party; (ii)$400 million due to the favorable resolution of various tax positions; and (iii)$297 million from an amended and restated license agreement betweenAbbVie and Reata Pharmaceuticals, Inc. (Reata). Additionally, financial results reflected continued funding to support all stages of AbbVie's emerging pipeline assets and continued investment in AbbVie's on-market brands. InNovember 2019 , AbbVie's board of directors declared a quarterly cash dividend of$1.18 per share of common stock payable inFebruary 2020 . This reflects an increase of approximately 10.3% over the previous quarterly dividend of$1.07 per share of common stock.
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2020 Strategic Objectives AbbVie's mission is to be an innovation-driven, patient-focused specialty biopharmaceutical company capable of achieving top-tier financial performance through outstanding execution and a consistent stream of innovative new medicines. AbbVie intends to continue to advance its mission in a number of ways, including: (i) growing revenues by diversifying revenue streams, ensuring strong commercial execution of new product launches and driving late-stage pipeline assets to the market; (ii) continuing to invest and expand its pipeline in support of opportunities in immunology, oncology and neuroscience, with additional targeted investment in cystic fibrosis and women's health as well as continued investment in key on-market products; (iii) expanding operating margins; and (iv) returning cash to shareholders via a strong and growing dividend while also reducing incremental debt. In addition, AbbVie anticipates several regulatory submissions and key data readouts from key clinical trials in the next 12 months. AbbVie expects to achieve its strategic objectives through: • Completion and successful integration of the proposed Allergan acquisition.
• Hematologic oncology revenue growth from both IMBRUVICA and VENCLEXTA.
• Immunology revenue growth driven by successful commercial launches of
SKYRIZI and RINVOQ, as well as HUMIRA
• Effective management of HUMIRA international biosimilar erosion.
• The favorable impact of pipeline products and indications recently
approved or currently under regulatory review where approval is
expected in 2020. These products are described in greater detail in the
section labeled "Research and Development" included as part of this
Item 7.
AbbVie remains committed to driving continued expansion of operating margins and
expects to achieve this objective through continued leverage from revenue
growth, productivity initiatives in supply chain and ongoing efficiency programs
to optimize manufacturing, commercial infrastructure, administrative costs and
general corporate expenses.
The combination of AbbVie and Allergan will create a diverse entity with
leadership positions across immunology, hematologic oncology, aesthetics,
neuroscience, women's health, eye care and virology. AbbVie's existing product
portfolio and pipeline will be enhanced with numerous Allergan assets and
Allergan's product portfolio will benefit from AbbVie's commercial strength,
expertise and international infrastructure.
Research and Development
Research and innovation are the cornerstones of AbbVie's business as a global
biopharmaceutical company. AbbVie's 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.
AbbVie's pipeline currently includes approximately 60 compounds or indications
in clinical development individually or under collaboration or license
agreements and is focused on such important medical specialties as immunology,
oncology and neuroscience along with targeted investments in cystic fibrosis and
women's health. Of these programs, approximately 30 are in mid- and late-stage
development.
The following sections summarize transitions of significant programs from
Phase 2 development to Phase 3 development as well as developments in
significant Phase 3 and registration programs. AbbVie expects multiple Phase 2
programs to transition into Phase 3 programs in the next 12 months.
Significant Programs and Developments
Immunology
RINVOQ
• In February 2019 , the U.S. Food and Drug Administration (FDA) accepted
for priority review AbbVie's New Drug Application (NDA) for
upadacitinib, an investigational oral JAK1-selective inhibitor, for the
treatment of adult patients with moderate to severe rheumatoid
arthritis (RA).
• In
the efficacy and safety of upadacitinib in subjects with giant cell
arteritis.
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• InAugust 2019 , the FDA approved RINVOQ (upadacitinib) for the treatment of adults with moderately to severely active RA who have had an inadequate response or intolerance to methotrexate.
• In
3 clinical trial of RINVOQ in adult patients with active psoriatic
arthritis (PsA). Results from the SELECT-PsA 2 study, which evaluated
RINVOQ versus placebo in patients who did not adequately respond to
treatment with one or more biologic DMARDs, showed that both doses of
RINVOQ (15 mg and 30 mg) met the primary and key secondary endpoints at
week 12. The safety profile was consistent with that of previous
studies across indications, with no new safety risks detected.
• In November 2019 , AbbVie announced data from the Phase 2/3
SELECT-AXIS 1 trial in which twice as many adult patients with
ankylosing spondylitis treated with RINVOQ achieved the primaryendpoint at week 14 versus placebo. The safety profile was consistent
with that of previous studies across indications, with no new safety
risks detected.
• In
the efficacy and safety of RINVOQ in adult patients with axial
spondyloarthritis.
• In
authorization for RINVOQ for the treatment of adult patients with
moderate to severe active rheumatoid arthritis who have had an
inadequate response or intolerance to one or more DMARDs.
• In
Phase 3 clinical trial of RINVOQ in adult patients with active PsA.
Results from the SELECT-PsA 1 study, which evaluated RINVOQ versus
placebo in patients who did not adequately respond to treatment with
one or more non-biologic DMARDs, showed that both doses of RINVOQ (15mg and 30 mg) met the primary and key secondary endpoints. The safety
profile was consistent with that of previous studies across
indications, with no new safety risks detected.
SKYRIZI
• In
the efficacy and safety of risankizumab, an investigational
interleukin-23 (IL-23) inhibitor, in subjects with psoriatic arthritis.
• InApril 2019 , the FDA approved SKYRIZI (risankizumab) for the treatment of moderate to severe plaque psoriasis in adults who are candidates for systemic therapy or phototherapy.
• In
the treatment of moderate to severe plaque psoriasis in adult patients
who are candidates for systemic therapy.
Oncology
IMBRUVICA
• In
(obinutuzumab), for adult patients with previously untreated chronic
lymphocytic leukemia (CLL)/small lymphocytic lymphoma (SLL).
• In June 2019 , AbbVie announced results from the Phase 3 CLL12 trial,
evaluating IMBRUVICA in patients with previously untreated CLL, which
demonstrated that IMBRUVICA significantly improved event- and
progression-free survival.
• In
(sNDA) to the FDA for IMBRUVICA in combination with rituximab for the
first-line treatment of younger patients with CLL or SLL.
VENCLEXTA
• In
hold on all clinical trials evaluating VENCLEXTA for the
investigational treatment of multiple myeloma (MM). The partial
clinical hold followed a review of data from the ongoing Phase 3
BELLINI trial, a study in relapsed/refractory MM, in which a higher
proportion of deaths was observed in the VENCLEXTA arm compared to the
control arm of the trial. In June 2019 , AbbVie announced that the FDA
lifted the partial clinical hold placed on the Phase 3 CANOVA trial,
evaluating VENCLEXTA for the investigational treatment of
relapsed/refractory MM positive for the translocation (11;14)
abnormality, based upon agreement on revisions to the CANOVA studyprotocol, including new risk mitigation measures, protocol-specified
guidelines and updated futility criteria. This action does not impact
any of the approved indications for VENCLEXTA, such as CLL or acute
myeloid leukemia (AML).
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• In
obinutuzumab, for adult patients with previously untreated CLL/SLL. The
approval was based on data from the Phase 3 CLL14 trial, evaluating the
efficacy and safety of VENCLEXTA plus obinutuzumab versus obinutuzumab
plus chlorambucil in previously untreated patients with CLL, which
demonstrated that VENCLEXTA plus obinutuzumab prolonged
progression-free survival and achieved higher rates of completeresponse and minimal residual disease-negativity compared to commonly
used standard of care obinutuzumab plus chlorambucil.
• In
Products for Human Use (CHMP) of the European Medicines Agency (EMA)
granted a positive opinion for VENCLYXTO in combination with
obinutuzumab for patients with previously untreated CLL.
Depatux-M
• In
INTELLANCE-1 study of depatuxizumab mafodotin (Depatux-M, previously
known as ABT-414) in patients with newly diagnosed glioblastoma, whose
tumors have EGFR (epidermal growth factor receptor) amplification, at
an interim analysis. An Independent Data Monitoring Committee
recommended stopping enrollment in INTELLANCE-1 due to lack of survival
benefit for patients receiving Depatux-M compared with placebo whenadded to the standard regimen of radiation and temozolomide. Enrollment
has been halted in all ongoing Depatux-M studies.
Veliparib
• In
BROCADE3 study evaluating veliparib, an investigational, oral poly
(adenosine diphosphate-ribose) polymerase (PARP) inhibitor, in
combination with carboplatin and paclitaxel met its primary endpoint of
progression-free survival in patients with HER2 negative germline
BRCA-mutated advanced breast cancer.
• In
VELIA study, conducted in collaboration with the
evaluating veliparib with carboplatin and paclitaxel followed by
veliparib maintenance therapy met its primary endpoint of
progression-free survival in patients with newly diagnosed ovarian
cancer, regardless of biomarker status.
Rova-T
• In
trial, a Phase 3 study evaluating rovalpituzumab tesirine (Rova-T) as a
first-line maintenance therapy for advanced small-cell lung cancer
(SCLC). An Independent Data Monitoring Committee recommended
terminating the study after results demonstrated no survival benefit at
a pre-planned interim analysis for patients receiving Rova-T as
compared with placebo. With the closing of the MERU trial, AbbVie
announced the termination of the Rova-T research and development
program.
Virology/Liver Disease
• In August 2019 , the EC granted marketing authorization for MAVIRET
(glecaprevir/pibrentasvir) to shorten the once-daily treatment duration
from 12 to 8 weeks in treatment-naïve, compensated cirrhotic, chronic
HCV patients with genotype (GT)1, 2, 4, 5 and 6 infection.
• In
to shorten the once-daily treatment duration from 12 to 8 weeks in
treatment-naïve, compensated cirrhotic, chronic HCV patients across all
genotypes (GT1-6).
• In
recommended a change to the marketing authorization for MAVIRET to
shorten once-daily treatment duration from 12 to 8 weeks in
treatment-naïve, compensated cirrhotic, chronic HCV patients with GT 3
infection.
Neuroscience
• In
safety and tolerability of ABBV-951, a subcutaneous levodopa/carbidopa
delivery system, in subjects with Parkinson's disease.
• In July 2019 , AbbVie announced the decision to discontinue the Phase 2ARISE study evaluating ABBV-8E12, an investigational anti-tau antibody,
in patients with progressive supranuclear palsy, after an Independent
Data
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Monitoring Committee recommended stopping the trial for futility after the trial showed that ABBV-8E12 did not provide efficacy. Other • InJuly 2019 , AbbVie submitted an NDA to the FDA for elagolix in combination with estradiol/norethindrone acetate (E2/NETA) daily add-back therapy for the management of heavy menstrual bleeding associated with uterine fibroids. RESULTS OF OPERATIONSNet Revenues The comparisons presented at constant currency rates reflect comparative local currency net revenues at the prior year's 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 periods. 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 company's operations and can facilitate analysis of the company's results of operations, particularly in evaluating performance from one period to another. Percent change At actual currency rates At constant currency rates years ended (dollars in millions) 2019 2018 2017 2019 2018 2019 2018 United States$ 23,907 $ 21,524 $ 18,251 11.1 % 17.9 % 11.1 % 17.9 % International 9,359 11,229 9,965 (16.7 )% 12.8 % (13.6 )% 10.4 % Net revenues$ 33,266 $ 32,753 $ 28,216 1.6 % 16.1 % 2.6 % 15.2 %
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The following table details AbbVie's worldwide net revenues:
Percent change
At actual currency rates At constant currency rates
years ended December 31 (dollars
in millions) 2019 2018 2017 2019 2018 2019 2018
Immunology
HUMIRA United States $ 14,864 $ 13,685 $ 12,361 8.6 % 10.7 % 8.6 % 10.7 %
International 4,305 6,251 6,066 (31.1 )% 3.1 % (27.8 )% 0.6 %
Total $ 19,169 $ 19,936 $ 18,427 (3.9 )% 8.2 % (2.9 )% 7.4 %
SKYRIZI United States $ 311 $ - $ - n/m n/m n/m n/m
International 44 - - n/m n/m n/m n/m
Total $ 355 $ - $ - n/m n/m n/m n/m
RINVOQ United States $ 47 $ - $ - n/m n/m n/m n/m
International - - - n/m n/m n/m n/m
Total $ 47 $ - $ - n/m n/m n/m n/m
Hematologic Oncology
IMBRUVICA United States $ 3,830 $ 2,968 $ 2,144 29.1 % 38.4 % 29.1 % 38.4 %
Collaboration
revenues 844 622 429 35.8 % 45.0 % 35.8 % 45.0 %
Total $ 4,674 $ 3,590 $ 2,573 30.2 % 39.5 % 30.2 % 39.5 %
VENCLEXTA United States $ 521 $ 247 $ 89 >100.0% >100.0% >100.0% >100.0%
International 271 97 33 >100.0% >100.0% >100.0% >100.0%
Total $ 792 $ 344 $ 122 >100.0% >100.0% >100.0% >100.0%
HCV
MAVYRET United States $ 1,473 $ 1,614 $ 277 (8.8 )% >100.0% (8.8 )% >100.0%
International 1,420 1,824 213 (22.1 )% >100.0% (19.6 )% >100.0%
Total $ 2,893 $ 3,438 $ 490 (15.9 )% >100.0% (14.6 )% >100.0%
VIEKIRA United States $ - $ 3 $ 61 (100.0 )% (96.7 )% (100.0 )% (96.7 )%
International 36 175 723 (79.2 )% (75.6 )% (77.2 )% (74.8 )%
Total $ 36 $ 178 $ 784 (79.6 )% (77.2 )% (77.6 )% (76.5 )%
Other Key Products
Creon United States $ 1,041 $ 928 $ 831 12.2 % 11.7 % 12.2 % 11.7 %
Lupron United States $ 720 $ 726 $ 669 (0.8 )% 8.6 % (0.8 )% 8.6 %
International 167 166 160 0.8 % 3.4 % 6.0 % 4.7 %
Total $ 887 $ 892 $ 829 (0.5 )% 7.6 % 0.5 % 7.9 %
Synthroid United States $ 786 $ 776 $ 781 1.3 % (0.6 )% 1.3 % (0.6 )%
Synagis International $ 718 $ 726 $ 738 (1.2 )% (1.6 )% 0.9 % (2.8 )%
Duodopa United States $ 97 $ 80 $ 61 20.4 % 31.4 % 20.4 % 31.4 %
International 364 350 294 4.2 % 19.1 % 9.8 % 14.8 %
Total $ 461 $ 430 $ 355 7.2 % 21.2 % 11.7 % 17.7 %
Sevoflurane United States $ 74 $ 74 $ 78 2.0 % (6.2 )% 2.0 % (6.2 )%
International 274 317 332 (13.8 )% (4.4 )% (9.5 )% (4.3 )%
Total $ 348 $ 391 $ 410 (10.9 )% (4.7 )% (7.4 )% (4.6 )%
Kaletra United States $ 38 $ 55 $ 71 (31.0 )% (22.1 )% (31.0 )% (22.1 )%
International 245 281 352 (12.9 )% (20.2 )% (9.5 )% (20.1 )%
Total $ 283 $ 336 $ 423 (15.8 )% (20.5 )% (12.9 )% (20.4 )%
AndroGel United States $ 172 $ 469 $ 577 (63.3 )% (18.8 )% (63.3 )% (18.8 )%
ORILISSA United States $ 91 $ 11 $ - >100.0% n/m >100.0% n/m
International 2 - - n/m n/m n/m n/m
Total $ 93 $ 11 $ - >100.0% n/m >100.0% n/m
All other $ 511 $ 308 $ 876 66.1 % (64.9 )% 73.0 % (73.2 )%
Total net revenues $ 33,266 $ 32,753 $ 28,216 1.6 % 16.1 % 2.6 % 15.2 %
n/m - Not meaningful
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The following discussion and analysis of AbbVie's net revenues by product is presented on a constant currency basis. Global HUMIRA sales decreased 3% in 2019 and increased 7% in 2018. The sales decrease in 2019 was primarily driven by direct biosimilar competition in certain international markets, partially offset by market growth across therapeutic categories. The sales increase in 2018 was primarily driven by market growth across therapeutic categories and geographies as well as favorable pricing in certain geographies. Inthe United States , HUMIRA sales increased 9% in 2019 and 11% in 2018. The sales increases in 2019 and 2018 were primarily driven by market growth across all indications and favorable pricing. Internationally, HUMIRA revenues decreased 28% in 2019 and increased 1% in 2018. The sales decrease in 2019 was primarily driven by direct biosimilar competition inEurope following the expiration of theEuropean Union composition of matter patent for adalimumab inOctober 2018 . The sales increase in 2018 was primarily driven by market growth across indications partially offset by direct biosimilar competition. Biosimilar competition for HUMIRA is not expected inthe United States until 2023. AbbVie continues to pursue strategies intended to further differentiate HUMIRA from competing products and add to the sustainability of HUMIRA. Net revenues for SKYRIZI were$355 million in 2019 following theApril 2019 regulatory approvals for the treatment of moderate to severe plaque psoriasis. Net revenues for RINVOQ were$47 million in 2019 following theAugust 2019 FDA approval for the treatment of moderate to severe rheumatoid arthritis. Net revenues for IMBRUVICA represent product revenues inthe United States and collaboration revenues outside ofthe United States related to AbbVie's 50% share of IMBRUVICA profit. AbbVie's global IMBRUVICA revenues increased 30% in 2019 and 39% in 2018 as a result of continued penetration of IMBRUVICA for patients with CLL as well as favorable pricing. Net revenues for VENCLEXTA increased by more than 100% in 2019 and 2018 primarily due to market share gains following additional regulatory approvals of VENCLEXTA for the treatment of patients with relapsed/refractory CLL and first-line AML in 2018 and first-line CLL in 2019. Global MAVYRET sales decreased by 15% in 2019 primarily driven by lower patient volumes in certain international markets and competitive dynamics in theU.S. Global MAVYRET sales increased more than 100% in 2018 as a result of market share gains following the FDA and EMA approvals of MAVYRET in the second half of 2017 as well as further geographic expansion. Global VIEKIRA sales decreased by 78% in 2019 and 76% in 2018 primarily due to lower market share following the launch of MAVYRET. Net revenues for Creon increased 12% in 2019 and 12% in 2018, primarily driven by continued market growth and favorable pricing. Creon maintains market leadership in the pancreatic enzyme market. Net revenues for Duodopa increased 12% in 2019 and 18% in 2018, primarily driven by increased market penetration. Gross Margin Percent change years endedDecember 31 (dollars in millions) 2019 2018 2017 2019 2018 Gross margin$ 25,827 $ 25,035 $ 21,174 3 % 18 % as a percent of net revenues 78 % 76 % 75 % Gross margin as a percentage of net revenues in 2019 increased from 2018 primarily due to the full year effect of the expiration of HUMIRA royalties, partially offset by the IMBRUVICA profit sharing arrangement and unfavorable impact from higher intangible asset amortization. Gross margin as a percentage of net revenues in 2018 increased from 2017 primarily due to the expiration of HUMIRA royalties and a 2017 intangible asset impairment charge of$354 million partially offset by the IMBRUVICA profit sharing arrangement.
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Selling, General and Administrative
Percent change
years ended December 31 (dollars
in millions) 2019 2018 2017 2019 2018
Selling, general and
administrative $ 6,942 $ 7,399 $ 6,295 (6 )% 18 %
as a percent of net revenues 21 % 23 % 22 %
Selling, general and administrative (SG&A) expenses as a percentage of net
revenues in 2019 decreased from 2018 primarily due to the favorable impacts of
international HUMIRA expense reductions and lower litigation reserve charges
that decreased by $326 million . This favorability was partially offset by new
product launch expenses, higher restructuring charges and $103 million of
transaction expenses associated with the proposed Allergan transaction.
Additionally, SG&A expenses in 2018 included non-recurring philanthropic
contributions of $350 million to certain U.S. not-for-profit organizations.
SG&A expenses as a percentage of net revenues in 2018 increased from 2017
primarily due to new product launch expenses and non-recurring philanthropic
contributions to certain U.S. not-for-profit organizations partially offset by
continued leverage from revenue growth.
Research and Development and Acquired In-Process Research and Development
Percent change
years ended December 31 (dollars
in millions) 2019 2018 2017 2019 2018
Research and development $ 6,407 $ 10,329 $ 5,007 (38 )% >100%
as a percent of net revenues 19 % 32 % 18 %
Acquired in-process research and
development $ 385 $ 424 $ 327 (9 )% 30 %
Research and Development (R&D) expenses decreased in 2019 and increased in 2018 principally due to impairment charges related to IPR&D acquired as part of the 2016 Stemcentrx acquisition. In 2019, the company recorded a$1.0 billion intangible asset impairment charge which represented the remaining value of the IPR&D acquired following the decision to terminate the Rova-T R&D program. In 2018, the company recorded a$5.1 billion intangible asset impairment charge following the decision to stop enrollment in the TAHOE trial, which lowered the probabilities of success of achieving regulatory approval across Rova-T and other early-stage assets obtained in the acquisition. See Note 7 to the Consolidated Financial Statements for additional information regarding these impairment charges. Acquired IPR&D expenses reflect upfront payments related to various collaborations. There were no individually significant transactions or cash flows during 2019 or 2018. Acquired IPR&D expense in 2017 included a charge of$205 million as a result of entering into a global strategic collaboration with Alector, Inc. (Alector) to develop and commercialize medicines to treat Alzheimer's disease and other neurodegenerative disorders. See Note 5 to the Consolidated Financial Statements for additional information regarding the Alector agreement. Other Operating Expenses and Income Other operating income in 2019 included$550 million of income from a legal settlement related to an intellectual property dispute with a third party and$330 million of income related to an amended and restated license agreement between AbbVie and Reata. See Note 5 to the Consolidated Financial Statements for additional information on the Reata agreement. Other operating expenses in 2018 included a$500 million charge related to the extension of the previously announced Calico collaboration to discover, develop and bring to market new therapies for patients with age-related diseases, including neurodegeneration and cancer. See Note 5 to the Consolidated Financial Statements for additional information regarding the Calico agreement.
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Other Non-Operating Expenses years ended December 31 (in millions) 2019 2018 2017 Interest expense$ 1,784 $ 1,348 $ 1,150 Interest income (275 ) (204 ) (146 ) Interest expense, net$ 1,509 $ 1,144 $ 1,004 Net foreign exchange loss$ 42 $ 24 $ 348 Other expense, net 3,006 18 466 Interest expense in 2019 increased compared to 2018 primarily due to$363 million of incremental interest and debt issuance costs associated with financing the proposed acquisition of Allergan, as well as the unfavorable impact of higher interest rates on the company's debt obligations. Interest expense in 2018 increased compared to 2017 primarily due to the unfavorable impact of higher interest rates on the company's debt obligations and a higher average outstanding debt balance during 2018. Interest income in 2019 increased compared to 2018 primarily due to a higher average cash and cash equivalents balance during 2019, partially offset by decreased investments in debt securities. Interest income in 2018 increased compared to 2017 primarily due to higher interest rates. Net foreign exchange loss in 2017 included$316 million of historical currency translation losses that were reclassified from accumulated other comprehensive income (AOCI) related to the liquidation of certain foreign entities following the enactment ofU.S. tax reform. Other expense, net included charges related to the change in fair value of the contingent consideration liabilities of$3.1 billion in 2019,$49 million in 2018 and$626 million in 2017. The fair value of contingent consideration liabilities is impacted by the passage of time and multiple other inputs, including the probability of success of achieving regulatory/commercial milestones, discount rates, the estimated amount of future sales of the acquired products still in development and other market-based factors. In 2019, the Boehringer Ingelheim (BI) contingent consideration liability increased due to higher probabilities of success, higher estimated future sales, declining interest rates and passage of time. The higher probabilities of success primarily resulted from theApril 2019 regulatory approvals of SKYRIZI for the treatment of moderate to severe plaque psoriasis. These changes were partially offset by a$91 million decrease in the Stemcentrx contingent consideration liability due to the termination of the Rova-T R&D program during the third quarter of 2019. In 2018, the BI contingent consideration liability increased due to the passage of time and higher estimated future sales partially offset by the effect of rising interest rates. This increase in the BI contingent consideration liability was primarily offset by a$428 million decrease in the Stemcentrx contingent consideration liability recorded during the fourth quarter of 2018 due to a reduction in probabilities of success of achieving regulatory approval across Rova-T and other early-stage Stemcentrx assets. In 2017, the change in fair value represented mainly higher probabilities of success, the passage of time and declining interest rates. Other expense, net for 2017 also included realized gains on available-for-sale investment securities of$90 million . Income Tax Expense The effective income tax rate was 6% in 2019, negative 9% in 2018 and 31% in 2017. The effective tax rate in each period differed from the statutory tax rate principally due to the allocation of the company's taxable earnings among jurisdictions, the benefit from foreign operations which reflects the impact of lower income tax rates in locations outsidethe United States , tax incentives inPuerto Rico and other foreign tax jurisdictions and business development activities. The increase in the effective tax rate for 2019 over the prior year was principally due to the timing of provisions of the Tax Cuts and Jobs Act (the Act) related to the earnings from certain foreign subsidiaries. The increase is also attributable to changes in the jurisdictional mix of earnings, including a change in fair value of contingent consideration liabilities. These increases were partially offset by the favorable resolution of various tax positions in the current year. The effective tax rate for 2018 also included the effects of Stemcentrx intangible impairment related expenses. The effective tax rate in 2017 included tax expense of$4.5 billion on the one-time mandatory repatriation of previously untaxed earnings of foreign subsidiaries, partially offset by a$3.6 billion net tax benefit for the remeasurement of deferred taxes related to the Act and foreign tax law changes.
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The Act significantly changed theU.S. corporate tax system. The Act reduced theU.S. federal corporate tax rate from 35% to 21% and created a territorial tax system that included new taxes on certain foreign sourced earnings. See Note 14 to the Consolidated Financial Statements for additional information regarding the Act. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES years ended December 31 (in millions) 2019 2018 2017 Cash flows from: Operating activities$ 13,324 $ 13,427 $ 9,960 Investing activities 596 (1,006 ) (274 ) Financing activities 18,708 (14,396 ) (5,512 ) Operating cash flows in 2019 decreased slightly from 2018 primarily due to higher payments for income taxes offset by improved results of operations resulting from an increase in operating earnings. Operating cash flows in 2018 increased from 2017 primarily due to improved results of operations from revenue growth and a decrease in income tax payments. Operating cash flows also reflected AbbVie's contributions to its defined benefit plans of$727 million in 2019,$873 million in 2018 and$246 million in 2017. Investing cash flows in 2019 included net sales and maturities of investments totaling$2.1 billion resulting from the sale of substantially all of the company's investments in debt securities, payments made for other acquisitions and investments of$1.1 billion and capital expenditures of$552 million . Investing cash flows in 2018 included payments made for other acquisitions and investments of$736 million and capital expenditures of$638 million , partially offset by net sales and maturities of investment securities totaling$368 million . Investing cash flows in 2017 included capital expenditures of$529 million and payments made for other acquisitions and investments of$308 million , partially offset by net sales and maturities of investment securities totaling$563 million . Financing cash flows in 2019 included the issuance of$30.0 billion aggregate principal amount of floating rate and fixed rate unsecured senior notes at maturities ranging from 18 months to 30 years. AbbVie expects to use the net proceeds of$29.8 billion to fund a portion of the aggregate cash consideration due to Allergan shareholders in connection with the proposed acquisition and to pay related fees and expenses. Pending the consummation of the proposed Allergan acquisition, the net proceeds from the offering are permitted to be invested temporarily in short-term investments. All of the notes are subject to special mandatory redemption at a redemption price equal to 101% of the aggregate principal amount of the notes plus accrued and unpaid interest if the proposed acquisition of Allergan is not completed byJanuary 30, 2021 or the company notifies the trustee in respect of the notes that it will not pursue the consummation of the proposed Allergan acquisition. Additionally, financing cash flows in 2019 included the issuance of €1.4 billion aggregate principal amount of unsecured senior Euro notes which the company used to redeem €1.4 billion aggregate principal amount of 0.38% senior Euro notes that were due to mature inNovember 2019 , as well as the repayment of a$3.0 billion 364-day term loan credit agreement that was scheduled to mature inJune 2019 . Financing cash flows in 2018 included proceeds from the issuance of$3.0 billion drawn under the term loan inJune 2018 . InSeptember 2018 , the company issued$6.0 billion aggregate principal amount of unsecured senior notes. Of the$5.9 billion net proceeds,$2.0 billion was used to repay the company's outstanding three-year term loan credit agreement inSeptember 2018 and$1.0 billion was used to repay the aggregate principal amount of 2.00% senior notes at maturity inNovember 2018 . Financing cash flows in 2018 also included theMay 2018 repayment of$3.0 billion aggregate principal amount of the company's 1.80% senior notes at maturity. In 2019, 2018 and 2017, the company issued and redeemed commercial paper. There were no commercial paper borrowings outstanding as ofDecember 31, 2019 and there was$699 million outstanding as ofDecember 31, 2018 . AbbVie may issue additional commercial paper or retire commercial paper to meet liquidity requirements as needed. Cash dividend payments totaled$6.4 billion in 2019,$5.6 billion in 2018 and$4.1 billion in 2017. The increase in cash dividend payments was primarily driven by an increase in the dividend rate. OnNovember 1, 2019 , AbbVie announced that its board of directors declared an increase in the quarterly cash dividend from$1.07 per share to$1.18 per share beginning with the dividend payable onFebruary 14, 2020 to stockholders of record as ofJanuary 15, 2020 . This reflects an increase of approximately 10.3% over the previous quarterly rate. The timing, declaration, amount of and payment of any dividends by AbbVie in the future is within the discretion of its board of directors and will depend upon many factors, including AbbVie's financial condition, earnings, capital requirements of its operating subsidiaries, covenants associated with certain of AbbVie's
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debt service obligations, legal requirements, regulatory constraints, industry practice, ability to access capital markets and other factors deemed relevant by its board of directors. OnFebruary 15, 2018 , AbbVie's board of directors authorized a new$10.0 billion stock repurchase program, which superseded AbbVie's previous stock repurchase program. OnDecember 13, 2018 , AbbVie's board of directors authorized a$5.0 billion increase to the existing$10.0 billion stock repurchase program. The company's stock repurchase authorization permits purchases of AbbVie shares from time to time in open-market or private transactions at management's discretion. The program has no time limit and can be discontinued at any time. Under this authorization, AbbVie repurchased 4 million shares for$300 million in 2019 and 109 million shares for$10.7 billion in 2018. AbbVie cash-settled$201 million of itsDecember 2018 open market purchases inJanuary 2019 . AbbVie's remaining stock repurchase authorization was$4.0 billion as ofDecember 31, 2019 . Under previous stock repurchase programs, AbbVie made open market share repurchases of 11 million shares for$1.3 billion in 2018 and 13 million shares for$1.0 billion in 2017. AbbVie cash-settled$285 million of itsDecember 2016 open market purchases inJanuary 2017 . In 2019, AbbVie made contingent consideration milestone and royalty payments to BI totaling$234 million following the commercial launch of SKYRIZI in certain geographies.$163 million of these payments were included in financing cash flows and$71 million of the payments were included in operating cash flows. In 2018, AbbVie paid$100 million of contingent consideration to BI related to BLA and MAA acceptance milestones.$78 million of these payments were included in financing cash flows and$22 million of the payments were included in operating cash flows. In 2017, AbbVie paid$305 million of contingent consideration to BI related to a Phase 3 enrollment milestone.$268 million of this milestone was included in financing cash flows and$37 million was included in operating cash flows. In connection with the proposed acquisition of Allergan, onJune 25, 2019 , AbbVie entered into a$38.0 billion 364-day bridge credit agreement and onJuly 12, 2019 , AbbVie entered into a$6.0 billion term loan credit agreement. The company incurred a total of$242 million of debt issuance costs related to the two agreements. OnOctober 25, 2019 , AbbVie commenced offers to exchange any and all outstanding notes of certain series issued by Allergan for up to$15.5 billion aggregate principal amount and €3.7 billion aggregate principal amount of new notes to be issued by AbbVie and cash, subject to conditions including the closing of the proposed acquisition. See Note 10 to the Consolidated Financial Statements for additional information. InFebruary 2020 , the remaining commitments under the bridge credit agreement were reduced to$0 as a result of cash on hand at AbbVie. AbbVie subsequently terminated the bridge credit agreement in its entirety as permitted under its terms. Credit Risk AbbVie monitors economic conditions, the creditworthiness of customers and government regulations and funding, both domestically and abroad. AbbVie regularly communicates with its customers regarding the status of receivable balances, including their payment plans and obtains positive confirmation of the validity of the receivables. AbbVie establishes an allowance against accounts receivable when it is probable they will not be collected. AbbVie may also utilize factoring arrangements to mitigate credit risk, although the receivables included in such arrangements have historically not been a significant amount of total outstanding receivables. Credit Facility, Access to Capital and Credit Ratings Credit Facility InAugust 2019 , AbbVie entered into an amended and restated$4.0 billion five-year revolving credit facility that matures inAugust 2024 . This amended facility enables the company to borrow funds on an unsecured basis at variable interest rates and contains various covenants. AtDecember 31, 2019 , the company was in compliance with all its credit facility covenants. Commitment fees under the credit facility were insignificant. No amounts were outstanding under the company's credit facilities as ofDecember 31, 2019 and 2018. Access to Capital The company intends to fund short-term and long-term financial obligations as they mature through cash on hand, future cash flows from operations, or by issuing additional debt. The company's ability to generate cash flows from operations, issue debt or enter into financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for the company's products or in the solvency of its customers or suppliers, deterioration in the company's key financial ratios or credit ratings, or other material unfavorable changes in business conditions. At the current time, the company believes it has sufficient financial flexibility to issue debt, enter into other financing arrangements and attract long-term capital on acceptable terms to support the company's growth objectives.
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Credit Ratings Following the announcement of the proposed acquisition of Allergan and the$30.0 billion senior notes issuance, Moody's Investor Service affirmed its Baa2 senior unsecured long-term rating and Prime-2 short-term rating with a stable outlook. S&P Global Ratings revised its ratings outlook to negative from stable and expects to lower the issuer credit rating by one notch to BBB+ from A- and the short-term rating to A-2 from A-1 when the acquisition is complete. Unfavorable changes to the ratings may have an adverse impact on future financing arrangements; however, they would not affect the company's ability to draw on its credit facility and would not result in an acceleration of scheduled maturities of any of the company's outstanding debt. Contractual Obligations The following table summarizes AbbVie's estimated contractual obligations as ofDecember 31, 2019 : Less than One to Three to More than (in millions) Total one year three years five years five years Long-term debt, including current portion$ 67,233 $ 3,750 $ 14,150 $ 7,625 $ 41,708 Interest on long-term debt(a) 30,494 2,146 4,087 3,479 20,782 Non-cancelable operating and finance lease payments(f) 774 129 224 125 296 Purchase obligations and other(b) 3,532 3,295 186 45 6 Other long-term liabilities (c) (d) (e) 11,544 166 1,395 2,123 7,860 Total$ 113,577 $ 9,486 $ 20,042 $ 13,397 $ 70,652
(a) Includes estimated future interest payments on long-term debt. Interest
payments on debt are calculated for future periods using forecasted interest
rates in effect at the end of 2019. Projected interest payments include the
related effects of interest rate swap agreements. Certain of these projected
interest payments may differ in the future based on changes in floating
interest rates or other factors or events. The projected interest payments
only pertain to obligations and agreements outstanding at
See Note 10 to the Consolidated Financial Statements for additional
information regarding the company's debt instruments and Note 11 for
additional information on the interest rate swap agreements outstanding at
(b) Includes the company's significant unconditional purchase obligations. These
commitments do not exceed the company's projected requirements and are made
in the normal course of business.
(c) Excludes liabilities associated with the company's unrecognized tax benefits
as it is not possible to reliably estimate the timing of the future cash
outflows related to these liabilities. See Note 14 to the Consolidated
Financial Statements for additional information on these unrecognized tax
benefits.
(d) Includes
recorded at fair value on the consolidated balance sheet. Potential
contingent consideration payments that exceed the fair value recorded on the
consolidated balance sheet are not included in the table of contractual
obligations. See Note 11 to the Consolidated Financial Statements for
additional information regarding these liabilities.
(e) Includes a one-time transition tax liability on a mandatory deemed
repatriation of previously untaxed earnings of foreign subsidiaries resulting
from
generally payable in eight annual installments. See Note 14 to the
Consolidated Financial Statements for additional information regarding these
tax liabilities.
(f) Lease payments include approximately
lease payments for leases executed but not yet commenced. These leases will
commence in 2020 with lease terms of approximately 11 years.
AbbVie enters into R&D collaboration arrangements with third parties that may require future milestone payments to third parties contingent upon the achievement of certain development, regulatory, or commercial milestones. Individually, these arrangements are insignificant in any one annual reporting period. However, if milestones for multiple products covered by these arrangements would happen to be reached in the same reporting period, the aggregate charge to expense could be material to the results of operations in that period. From a business perspective, the payments are viewed as positive because they signify that the product is successfully moving through development and is now generating or is more likely to generate future cash flows from product sales. It is not possible to predict with reasonable certainty whether these milestones will be achieved or the timing for achievement. As a result, these potential payments are not included in the table of contractual
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obligations. See Note 5 to the Consolidated Financial Statements for additional information on these collaboration arrangements. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles inthe United States requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenue and expenses. A summary of the company's significant accounting policies is included in Note 2 to the Consolidated Financial Statements. Certain of these policies are considered critical as these most significantly impact the company's financial condition and results of operations and require the most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Actual results may vary from these estimates. Revenue Recognition AbbVie recognizes revenue when control of promised goods or services is transferred to the company's customers, in an amount that reflects the consideration AbbVie expects to be entitled to in exchange for those goods or services. Sales, value add and other taxes collected concurrent with revenue-producing activities are excluded from revenue. AbbVie generates revenue primarily from product sales. For the majority of sales, the company transfers control, invoices the customer and recognizes revenue upon shipment to the customer. Rebates AbbVie provides rebates to pharmacy benefit managers, state government Medicaid programs, insurance companies that administer Medicare drug plans, wholesalers, group purchasing organizations and other government agencies and private entities. Rebate and chargeback accruals are accounted for as variable consideration and are recorded as a reduction to revenue in the period the related product is sold. Rebates and chargebacks totaled$18.8 billion in 2019,$16.4 billion in 2018 and$12.9 billion in 2017. Rebate amounts are typically based upon the volume of purchases using contractual or statutory prices, which may vary by product and by payer. For each type of rebate, the factors used in the calculations of the accrual for that rebate include the identification of the products subject to the rebate, the applicable price terms and the estimated lag time between sale and payment of the rebate, which can be significant. In order to establish its rebate and chargeback accruals, the company uses both internal and external data to estimate the level of inventory in the distribution channel and the rebate claims processing lag time for each type of rebate. To estimate the rebate percentage or net price, the company tracks sales by product and by customer or payer. The company evaluates inventory data reported by wholesalers, available prescription volume information, product pricing, historical experience and other factors in order to determine the adequacy of its reserves. AbbVie regularly monitors its reserves and records adjustments when rebate trends, rebate programs and contract terms, legislative changes, or other significant events indicate that a change in the reserve is appropriate. Historically, adjustments to rebate accruals have not been material to net earnings.
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The following table is an analysis of the three largest rebate accruals and
chargeback allowances, which comprise approximately 94% of the total
consolidated rebate and chargebacks recorded as reductions to revenues in 2019.
Remaining rebate provisions charged against gross revenues are not significant
in the determination of operating earnings.
Medicaid
and Managed
Medicare Care Wholesaler
(in millions) Rebates Rebates Chargebacks
Balance at
2,909 3,990 5,026
Payments (2,736 ) (3,962 ) (4,887 )
Balance at December 31, 2017 1,340 1,195 522
Provisions 3,493 4,729 6,659
Payments (3,188 ) (4,485 ) (6,525 )
Balance at December 31, 2018 1,645 1,439 656
Provisions 4,035 5,772 7,947
Payments (3,915 ) (5,275 ) (7,917 )
Balance at
Cash Discounts and Product Returns Cash discounts and product returns, which totaled$1.6 billion in 2019,$1.6 billion in 2018 and$1.3 billion in 2017, are accounted for as variable consideration and are recorded as a reduction to revenue in the same period the related product is sold. The reserve for cash discounts is readily determinable because the company's experience of payment history is fairly consistent. Product returns can be reliably estimated based on the company's historical return experience. Pension and Other Post-Employment Benefits AbbVie engages outside actuaries to assist in the determination of the obligations and costs under the pension and other post-employment benefit plans that are direct obligations of AbbVie. The valuation of the funded status and the net periodic benefit cost for these plans are calculated using actuarial assumptions. The significant assumptions, which are reviewed annually, include the discount rate, the expected long-term rate of return on plan assets and the health care cost trend rates, and are disclosed in Note 12 to the Consolidated Financial Statements. The discount rate is selected based on current market rates on high-quality, fixed-income investments atDecember 31 each year. AbbVie employs a yield-curve approach for countries where a robust bond market exists. The yield curve is developed using high-quality bonds. The yield-curve approach reflects the plans' specific cash flows (i.e. duration) in calculating the benefit obligations by applying the corresponding individual spot rates along the yield curve. AbbVie reflects the plans' specific cash flows and applies them to the corresponding individual spot rates along the yield curve in calculating the service cost and interest cost portions of expense. For other countries, AbbVie reviews various indices such as corporate bond and government bond benchmarks to estimate the discount rate. AbbVie's assumed discount rates have a significant effect on the amounts reported for defined benefit pension and other post-employment plans as ofDecember 31, 2019 . A 50 basis point change in the assumed discount rate would have had the following effects on AbbVie's calculation of net periodic benefit costs in 2020 and projected benefit obligations as ofDecember 31, 2019 : 50 basis point (in millions) (brackets denote a reduction) Increase Decrease Defined benefit plans Service and interest cost$ (76 ) $ 92 Projected benefit obligation (723 ) 825 Other post-employment plans Service and interest cost$ (11 ) $ 14 Projected benefit obligation (101 ) 117
The expected long-term rate of return is based on the asset allocation, historical performance and the current view of expected future returns. AbbVie considers these inputs with a long-term focus to avoid short-term market influences. The
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current long-term rate of return on plan assets for each plan is supported by the historical performance of the trust's actual and target asset allocation. AbbVie's assumed expected long-term rate of return has a significant effect on the amounts reported for defined benefit pension plans as ofDecember 31, 2019 and will be used in the calculation of net periodic benefit cost in 2020. A one percentage point change in assumed expected long-term rate of return on plan assets would increase or decrease the net period benefit cost of these plans in 2020 by$71 million . The health care cost trend rate is selected by reviewing historical trends and current views on projected future health care cost increases. The current health care cost trend rate is supported by the historical trend experience of each plan. Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans as ofDecember 31, 2019 and will be used in the calculation of net periodic benefit cost in 2020. A one percentage point change in assumed health care cost trend rates would have the following effects on AbbVie's calculation of net periodic benefit costs in 2020 and the projected benefit obligation as ofDecember 31, 2019 : One percentage point (in millions) (brackets denote a reduction) Increase Decrease Service and interest cost$ 40 $ (28 ) Projected benefit obligation 244 (186 ) Income Taxes AbbVie accounts for income taxes under the asset and liability method. Provisions for federal, state and foreign income taxes are calculated on reported pretax earnings based on current tax laws. Deferred taxes are provided using enacted tax rates on the future tax consequences of temporary differences, which are the differences between the financial statement carrying amount of assets and liabilities and their respective tax bases and the tax benefits of carryforwards. A valuation allowance is established or maintained when, based on currently available information, it is more likely than not that all or a portion of a deferred tax asset will not be realized. Litigation The company 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. See Note 15 to the Consolidated Financial Statements for additional information. Loss contingency provisions are recorded for probable losses at management's best estimate of a loss, or when a best estimate cannot be made, a minimum loss contingency amount within a probable range is recorded. Accordingly, AbbVie is often initially unable to develop a best estimate of loss and therefore, the minimum amount, which could be zero, is recorded. As information becomes known, either the minimum loss amount is increased, resulting in additional loss provisions, or a best estimate can be made, also resulting in additional loss provisions. Occasionally, a best estimate amount is changed to a lower amount when events result in an expectation of a more favorable outcome than previously expected. Valuation ofGoodwill and Intangible Assets AbbVie has acquired and may continue to acquire significant intangible assets in connection with business combinations that AbbVie records at fair value. Transactions involving the purchase or sale of intangible assets occur with some frequency between companies in the pharmaceuticals industry and valuations are usually based on a discounted cash flow analysis incorporating the stage of completion. The discounted cash flow model requires assumptions about the timing and amount of future net cash flows, risk, cost of capital, terminal values and market participants. Each of these factors can significantly affect the value of the intangible asset. IPR&D acquired in a business combination is capitalized as an indefinite-lived intangible asset until regulatory approval is obtained, at which time it is accounted for as a definite-lived asset and amortized over its estimated useful life, or discontinuation, at which point the intangible asset will be written off. IPR&D acquired in transactions that are not business combinations is expensed immediately, unless deemed to have an alternative future use. Payments made to third parties subsequent to regulatory approval are capitalized and amortized over the remaining useful life. AbbVie reviews the recoverability of definite-lived intangible assets whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable.Goodwill and indefinite-lived intangible assets are reviewed for impairment annually or when an event occurs that could result in an impairment. See Note 2 to the Consolidated Financial Statements for further information. Annually, the company tests its goodwill for impairment by first assessing qualitative factors to determine whether it is more likely than not that the fair value is less than its carrying amount. Some of the factors considered in the assessment include general macro-economic conditions, conditions specific to the industry and market, cost factors, the overall financial
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performance and whether there have been sustained declines in the company's share price. If the company concludes it is more likely than not that the fair value of the reporting unit is less than its carrying amount, a quantitative impairment test is performed. AbbVie tests indefinite-lived intangible assets for impairment by first assessing qualitative factors to determine whether it is more likely than not that the fair value is less than its carrying amount. If the company concludes it is more likely than not that the fair value is less than its carrying amount, a quantitative impairment test is performed. For its quantitative impairment tests, the company uses an estimated future cash flow approach that requires significant judgment with respect to future volume, revenue and expense growth rates, changes in working capital use, the selection of an appropriate discount rate, asset groupings and other assumptions and estimates. The estimates and assumptions used are consistent with the company's business plans and a market participant's views. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of the assets and could potentially impact the company's results of operations. Actual results may differ from the company's estimates. Contingent Consideration The fair value measurements of contingent consideration liabilities are determined as of the acquisition date based on significant unobservable inputs, including the discount rate, estimated probabilities and timing of achieving specified development, regulatory and commercial milestones and the estimated amount of future sales of the acquired products. Contingent consideration liabilities are revalued to fair value at each subsequent reporting date until the related contingency is resolved. The potential contingent consideration payments are estimated by applying a probability-weighted expected payment model for contingent milestone payments and a Monte Carlo simulation model for contingent royalty payments, which are then discounted to present value. Changes to the fair value of the contingent consideration liabilities can result from changes to one or a number of inputs, including discount rates, the probabilities of achieving the milestones, the time required to achieve the milestones and estimated future sales. Significant judgment is employed in determining the appropriateness of certain of these inputs. Changes to the inputs described above could have a material impact on the company's financial position and results of operations in any given period. AtDecember 31, 2019 , a 50 basis point increase/decrease in the assumed discount rate would have decreased/increased the value of the contingent consideration liabilities by approximately$280 million . Additionally, atDecember 31, 2019 , a five percentage point increase/decrease in the assumed probability of success across all potential indications would have increased/decreased the value of the contingent consideration liabilities by approximately$150 million . Recent Accounting Pronouncements See Note 2 to the Consolidated Financial Statements for additional information on recent accounting pronouncements.
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