| Financial Instruments and Fair Value Measures | Financial Instruments and Fair Value MeasuresRisk Management Policy See Note 11 to the company’s Annual Report on Form 10-K for the year ended December 31, 2022 for a summary of AbbVie’s risk management policy and use of derivative instruments. Financial Instruments Various AbbVie foreign subsidiaries enter into foreign currency forward exchange contracts to manage exposures to changes in foreign exchange rates for anticipated intercompany transactions denominated in a currency other than the functional currency of the local entity. These contracts, with notional amounts totaling $1.7 billion at March 31, 2023 and December 31, 2022, are designated as cash flow hedges and are recorded at fair value. The durations of these forward exchange contracts were generally less than 18 months. Accumulated gains and losses as of March 31, 2023 are reclassified from accumulated other comprehensive income (loss) (AOCI) and included in cost of products sold at the time the products are sold, generally not exceeding six months from the date of settlement. In 2019, the company entered into treasury rate lock agreements with notional amounts totaling $10.0 billion to hedge exposure to variability in future cash flows resulting from changes in interest rates related to the issuance of long-term debt in connection with the acquisition of Allergan. The treasury rate lock agreements were designated as cash flow hedges and recorded at fair value. The agreements were net settled upon issuance of the senior notes in 2019 and the resulting net gain was recognized in other comprehensive loss. This gain is reclassified to interest expense, net over the term of the related debt. The company was a party to interest rate swap contracts designated as cash flow hedges that matured in November 2022. The effect of the hedge contracts was to change a floating-rate interest obligation to a fixed rate for that portion of the floating-rate debt. Realized and unrealized gains or losses were included in AOCI and are reclassified to interest expense, net over the lives of the floating-rate debt. The company also enters into foreign currency forward exchange contracts to manage its exposure to foreign currency denominated trade payables and receivables and intercompany loans. These contracts are not designated as hedges and are recorded at fair value. Resulting gains or losses are reflected in net foreign exchange gain or loss in the condensed consolidated statements of earnings and are generally offset by losses or gains on the foreign currency exposure being managed. These contracts had notional amounts totaling $7.8 billion at March 31, 2023 and $6.5 billion at December 31, 2022. The company also uses foreign currency forward exchange contracts or foreign currency denominated debt to hedge its net investments in certain foreign subsidiaries and affiliates. The company had an aggregate principal amount of senior Euro notes designated as net investment hedges of €5.9 billion at March 31, 2023 and December 31, 2022. In addition, the company had foreign currency forward exchange contracts designated as net investment hedges with notional amounts totaling €4.3 billion, SEK2.2 billion, CAD750 million and CHF70 million at March 31, 2023 and €4.3 billion, SEK2.0 billion, CAD750 million and CHF90 million at December 31, 2022. The company uses the spot method of assessing hedge effectiveness for derivative instruments designated as net investment hedges. Realized and unrealized gains and losses from these hedges are included in AOCI and the initial fair value of hedge components excluded from the assessment of effectiveness is recognized in interest expense, net over the life of the hedging instrument. The company is a party to interest rate swap contracts designated as fair value hedges with notional amounts totaling $6.0 billion at March 31, 2023 and $4.5 billion at December 31, 2022. The effect of the hedge contracts is to change a fixed-rate interest obligation to a floating rate for that portion of the debt. AbbVie records the contracts at fair value and adjusts the carrying amount of the fixed-rate debt by an offsetting amount. No amounts are excluded from the assessment of effectiveness for cash flow hedges or fair value hedges. The following table summarizes the amounts and location of AbbVie’s derivative instruments on the condensed consolidated balance sheets: Fair value – Fair value – (in millions) Balance sheet caption March 31, 2023 December 31, 2022 Balance sheet caption March 31, 2023 December 31, 2022 Foreign currency forward exchange contracts Designated as cash flow hedges Prepaid expenses and other $ 32 $ 49 Accounts payable and accrued liabilities $ 12 $ 8 Designated as cash flow hedges Other assets 1 1 Other long-term liabilities 1 — Designated as net investment hedges Prepaid expenses and other 3 6 Accounts payable and accrued liabilities 78 36 Designated as net investment hedges Other assets 37 74 Other long-term liabilities 57 47 Not designated as hedges Prepaid expenses and other 77 33 Accounts payable and accrued liabilities 28 41 Interest rate swap contracts Designated as fair value hedges Prepaid expenses and other — — Accounts payable and accrued liabilities 17 17 Designated as fair value hedges Other assets 11 — Other long-term liabilities 351 375 Total derivatives $ 161 $ 163 $ 544 $ 524 While certain derivatives are subject to netting arrangements with the company’s counterparties, the company does not offset derivative assets and liabilities within the condensed consolidated balance sheets. The following table presents the pre-tax amounts of gains (losses) from derivative instruments recognized in other comprehensive loss: Three months ended (in millions) 2023 2022 Foreign currency forward exchange contracts Designated as cash flow hedges $ (9) $ (6) Designated as net investment hedges (94) 82 Interest rate swap contracts designated as cash flow hedges — 4 Assuming market rates remain constant through contract maturities, the company expects to reclassify pre-tax gains of $46 million into cost of products sold for foreign currency cash flow hedges and pre-tax gains of $24 million into interest expense, net for treasury rate lock agreement cash flow hedges during the next 12 months. Related to AbbVie’s non-derivative, foreign currency denominated debt designated as net investment hedges, the company recognized in other comprehensive loss pre-tax losses of $162 million for the three months ended March 31, 2023 and pre-tax gains of $99 million for the three months ended March 31, 2022. The following table summarizes the pre-tax amounts and location of derivative instrument net gains (losses) recognized in the condensed consolidated statements of earnings, including the net gains (losses) reclassified out of AOCI into net earnings. See Note 10 for the amount of net gains (losses) reclassified out of AOCI. Three months ended (in millions) Statement of earnings caption 2023 2022 Foreign currency forward exchange contracts Designated as cash flow hedges Cost of products sold $ 30 $ 8 Designated as net investment hedges Interest expense, net 28 14 Not designated as hedges Net foreign exchange loss 30 (41) Treasury rate lock agreements designated as cash flow hedges Interest expense, net 6 6 Interest rate swap contracts Designated as cash flow hedges Interest expense, net — (2) Designated as fair value hedges Interest expense, net 35 (184) Debt designated as hedged item in fair value hedges Interest expense, net (35) 184 Fair Value Measures The fair value hierarchy consists of the following three levels: • Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets that the company has the ability to access; • Level 2 – Valuations based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuations in which all significant inputs are observable in the market; and • Level 3 – Valuations using significant inputs that are unobservable in the market and include the use of judgment by the company’s management about the assumptions market participants would use in pricing the asset or liability. The following table summarizes the bases used to measure certain assets and liabilities carried at fair value on a recurring basis on the condensed consolidated balance sheet as of March 31, 2023: Basis of fair value measurement (in millions) Total Quoted prices in active markets for identical assets Significant other observable Significant unobservable inputs Assets Cash and equivalents $ 6,711 $ 3,297 $ 3,414 $ — Money market funds and time deposits 10 — 10 — Debt securities 33 — 33 — Equity securities 110 80 30 — Interest rate swap contracts 11 — 11 — Foreign currency contracts 150 — 150 — Total assets $ 7,025 $ 3,377 $ 3,648 $ — Liabilities Interest rate swap contracts $ 368 $ — $ 368 $ — Foreign currency contracts 176 — 176 — Contingent consideration 17,931 — — 17,931 Total liabilities $ 18,475 $ — $ 544 $ 17,931 The following table summarizes the bases used to measure certain assets and liabilities carried at fair value on a recurring basis on the condensed consolidated balance sheet as of December 31, 2022: Basis of fair value measurement (in millions) Total Quoted prices in active markets for identical assets Significant other observable Significant unobservable inputs Assets Cash and equivalents $ 9,201 $ 4,201 $ 5,000 $ — Money market funds and time deposits 21 — 21 — Debt securities 28 — 28 — Equity securities 91 59 32 — Foreign currency contracts 163 — 163 — Total assets $ 9,504 $ 4,260 $ 5,244 $ — Liabilities Interest rate swap contracts $ 392 $ — $ 392 $ — Foreign currency contracts 132 — 132 — Contingent consideration 16,384 — — 16,384 Total liabilities $ 16,908 $ — $ 524 $ 16,384 Money market funds and time deposits are valued using relevant observable market inputs including quoted prices for similar assets and interest rate curves. Equity securities primarily consist of investments for which the fair values were determined by using the published market prices per unit multiplied by the number of units held, without consideration of transaction costs. The derivatives entered into by the company were valued using observable market inputs including published interest rate curves and both forward and spot prices for foreign currencies. The fair value measurements of the contingent consideration liabilities were determined 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. 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. The fair value of the company's contingent consideration liabilities was calculated using the following significant unobservable inputs: March 31, 2023 December 31, 2022 (in millions) Range Weighted average (a) Range Weighted average (a) Discount rate 4.2% - 5.4% 4.5% 4.7%- 5.1% 4.8% Probability of payment for unachieved milestones 100% - 100% 100% 100% - 100% 100% Probability of payment for royalties by indication (b) 89% - 100% 100% 56% - 100% 99% Projected year of payments 2023 - 2034 2028 2023 - 2034 2028 (a) Unobservable inputs were weighted by the relative fair value of the contingent consideration liabilities. (b) Excluding approved indications, the estimated probability of payment was 89% at March 31, 2023 and 56% at December 31, 2022. There have been no transfers of assets or liabilities into or out of Level 3 of the fair value hierarchy. The following table presents the changes in fair value of total contingent consideration liabilities which are measured using Level 3 inputs: Three months ended (in millions) 2023 2022 Beginning balance $ 16,384 $ 14,887 Change in fair value recognized in net earnings 1,872 (748) Payments (325) (321) Ending balance $ 17,931 $ 13,818 The change in fair value recognized in net earnings is recorded in other expense (income), net in the condensed consolidated statements of earnings. Certain financial instruments are carried at historical cost or some basis other than fair value. The book values, approximate fair values and bases used to measure the approximate fair values of certain financial instruments as of March 31, 2023 are shown in the table below: Basis of fair value measurement (in millions) Book value Approximate fair value Quoted prices in active markets for identical assets Significant other Significant unobservable inputs Liabilities Short-term borrowings $ 1 $ 1 $ — $ 1 $ — Current portion of long-term debt and finance lease obligations, excluding fair value hedges 2,816 2,793 2,703 90 — Long-term debt and finance lease obligations, excluding fair value hedges 59,590 55,784 55,058 726 — Total liabilities $ 62,407 $ 58,578 $ 57,761 $ 817 $ — The book values, approximate fair values and bases used to measure the approximate fair values of certain financial instruments as of December 31, 2022 are shown in the table below: Basis of fair value measurement (in millions) Book value Approximate fair value Quoted prices in active markets for identical assets Significant other Significant unobservable inputs Liabilities Short-term borrowings $ 1 $ 1 $ — $ 1 $ — Current portion of long-term debt and finance lease obligations, excluding fair value hedges 4,152 4,121 3,930 191 — Long-term debt and finance lease obligations, excluding fair value hedges 59,463 54,073 53,365 708 — Total liabilities $ 63,616 $ 58,195 $ 57,295 $ 900 $ — AbbVie also holds investments in equity securities that do not have readily determinable fair values. The company records these investments at cost and remeasures them to fair value based on certain observable price changes or impairment events as they occur. The carrying amount of these investments was $115 million as of March 31, 2023 and $129 million as of December 31, 2022. No significant cumulative upward or downward adjustments have been recorded for these investments as of March 31, 2023. Concentrations of Risk Of total net accounts receivable, three U.S. wholesalers accounted for 77% as of March 31, 2023 and 82% as of December 31, 2022, and substantially all of AbbVie’s pharmaceutical product net revenues in the United States were to these three wholesalers. Humira (adalimumab) is AbbVie’s single largest product and accounted for approximately 29% of AbbVie’s total net revenues for the three months ended March 31, 2023 and 35% for the three months ended March 31, 2022. Debt and Credit Facilities Long-Term Debt In January 2023, the company repaid a $1.0 billion floating rate three-year term loan that was scheduled to mature in May 2023. In March 2023, the company repaid a $350 million aggregate principal amount of 2.80% senior notes at maturity. In January 2022, the company repaid $2.9 billion aggregate principal amount of 3.45% senior notes that were scheduled to mature in March 2022. This repayment was made by exercising, under the terms of the notes, 60-day early redemption at 100% of the principal amount. In February 2022, the company refinanced its $2.0 billion floating rate five-year term loan. As part of the refinancing, the company repaid the existing $2.0 billion term loan due May 2025 and borrowed $2.0 billion under a new term loan at a lower floating rate. All other significant terms of the loan, including the maturity date, remained unchanged after the refinancing. Short-Term Borrowings In March 2023, AbbVie entered into an amended and restated five-year revolving credit facility. The amendment increased the unsecured revolving credit facility commitments from $4.0 billion to $5.0 billion and extended the maturity date of the facility from August 2023 to March 2028. This amended facility enables the company to borrow funds on an unsecured basis at variable interest rates and contains various covenants. At March 31, 2023, the company was in compliance with all covenants, and commitment fees under the credit facility were insignificant. No amounts were outstanding under the company's credit facilities as of March 31, 2023 and December 31, 2022. |
