AbbVie
Annual Report 2013

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2013 annual report on form 10-k 2014 notice of annual meeting AND proxy statement AbbVie 1 North Waukegan Road North Chicago, IL 60064 U.S.A. abbvie.com Copyright© 2014 AbbVie. All rights reserved. 9893_AbbVie.indd 1 2/4/14 8:38 PM about abbvie AbbVie is a global, research-based biopharmaceutical company formed in 2013 following separation from Abbott Laboratories. The company’s mission is to use 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 employs approximately 25,000 people worldwide and markets medicines in more than 170 countries. For further information on the company and its people, portfolio and commitments, please visit www.abbvie.com. 9893_AbbVie.indd 2 2/4/14 8:38 PM 13NOV201221365766 Dear AbbVie Stockholder: We had a highly successful inaugural year as an independent company, and we delivered strong results. Our goals for 2013 included delivering top-tier financial performance, maximizing our on-market product portfolio and advancing our late-stage pipeline, including our novel HCV therapy. We met or exceeded all of these commitments, while at the same time expanded our pipeline through both internal R&D efforts and external collaborations that position the company for continued future success. We delivered strong financial performance in 2013, with a total stockholder return in excess of 60 percent. Total revenue grew to $18.8 billion, driven by our flagship medicine Humira—which increased in worldwide sales by 15 percent—and the strong growth of our other on-market products. We made significant progress in advancing several of our late-stage compounds into Phase III studies and completed the Hepatitis C clinical program, keeping us on track to submit for regulatory approval in the second quarter of 2014. This therapy has been designated by the U.S. Food and Drug Administration as a ‘‘breakthrough therapy’’ and we expect a more rapid review and approval before the end of this year. Additionally, we completed studies of ABT-199, for chronic lymphocytic lymphoma, and veliparib, for triple-negative breast cancer, and began Phase III studies for these important oncology compounds. By all measures, we finished our first year successfully. As we begin our second year as a new company, AbbVie remains focused on execution and delivering breakthrough science with the potential to be transformational for our patients while continuing to meet our commitments to our stockholders and investors. On behalf of our management team and employees, I thank you for your support and confidence in our company in 2013. Best regards, 4DEC201212233206 Richard A. Gonzalez Chairman and Chief Executive Officer UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K (MARK ONE) (cid:1) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (cid:2) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR For the fiscal year ended December 31, 2013 Commission file number 001-35565 AbbVie Inc. Delaware (State or other jurisdiction of incorporation or organization) 1 North Waukegan Road North Chicago, Illinois 60064-6400 (Address of principal executive offices) 32-0375147 (I.R.S. employer identification number) (847) 932-7900 (telephone number) Securities Registered Pursuant to Section 12(b) of the Act: Title of Each Class Common Stock, par value $0.01 per share Name of Each Exchange on Which Registered New York Stock Exchange Chicago Stock Exchange Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:1) No (cid:2) Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes (cid:2) No (cid:1) 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 (cid:1) No (cid:2) 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes (cid:1) No (cid:2) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:1) 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 (cid:1) Accelerated Filer (cid:2) Smaller Reporting Company (cid:2) Non-accelerated Filer (cid:2) (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:2) No (cid:1) The aggregate market value of the 1,569,592,282 shares of voting stock held by non-affiliates of the registrant, computed by reference to the closing price as reported on the New York Stock Exchange, as of the last business day of AbbVie Inc.’s most recently completed second fiscal quarter (June 30, 2013), was $64,886,944,938. AbbVie has no non-voting common equity. Number of common shares outstanding as of January 31, 2014: 1,588,518,764 DOCUMENTS INCORPORATED BY REFERENCE Portions of the 2014 AbbVie Inc. Proxy Statement are incorporated by reference into Part III. The Proxy Statement will be filed on or about March 24, 2014. ITEM 1. BUSINESS Separation from Abbott Laboratories PART I On January 1, 2013, AbbVie(1) became an independent company as a result of the distribution by Abbott Laboratories (Abbott) of 100 percent of the outstanding common stock of AbbVie to Abbott’s shareholders. Each Abbott shareholder of record as of the close of business on December 12, 2012 (the Record Date) received one share of AbbVie common stock for each Abbott common share held as of the Record Date. AbbVie was incorporated in Delaware on April 10, 2012 to hold Abbott’s former research-based pharmaceuticals business. AbbVie’s common stock began trading ‘‘regular-way’’ under the ticker symbol ‘‘ABBV’’ on the New York Stock Exchange on January 2, 2013. Overview AbbVie is a global, research-based biopharmaceutical company. AbbVie develops and markets 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, including rheumatoid arthritis, psoriasis, and Crohn’s disease; low testosterone; HIV; endometriosis; thyroid disease; Parkinson’s disease; and complications associated with chronic kidney disease and cystic fibrosis, among other health conditions. AbbVie’s pipeline of promising new medicines includes more than 20 compounds or indications in Phase II or Phase III development across such important medical specialties as immunology, virology, oncology, renal disease, neurological diseases and women’s health. Segments AbbVie operates in one business segment—pharmaceutical products. Incorporated herein by reference is Note 14 entitled ‘‘Segment and Geographic Area Information’’ of the Notes to Consolidated Financial Statements included under Item 8, ‘‘Financial Statements and Supplementary Data’’ and the sales information related to HUMIRA included under ‘‘Results of Operations.’’ Products AbbVie’s portfolio of products includes a broad line of therapies that address some of the world’s most complex and serious diseases. (1) As used throughout the text of this report on Form 10-K, the term ‘‘AbbVie’’ refers to AbbVie Inc., a Delaware corporation, or AbbVie Inc. and its consolidated subsidiaries, as the context requires. 1 HUMIRA. HUMIRA is a biologic therapy administered as a subcutaneous injection. It is approved to treat the following autoimmune diseases in the United States, Canada, and Mexico (collectively, North America), and in the European Union: Condition Rheumatoid arthritis (moderate to severe) Psoriatic arthritis Ankylosing spondylitis Crohn’s disease (moderate to severe) Plaque psoriasis (moderate to severe) Juvenile idiopathic arthritis Ulcerative colitis (moderate to severe) Axial spondyloarthritis Pediatric Crohn’s disease (severe) Principal Markets North America, European Union North America, European Union North America, European Union North America, European Union North America, European Union North America, European Union United States, European Union European Union European Union HUMIRA is also approved in over 60 other markets, including Japan, Brazil, and Australia. HUMIRA was introduced to the market in January 2003. HUMIRA accounted for approximately 57 percent of AbbVie’s total sales in 2013. The United States composition of matter (that is, compound) patent covering adalimumab (which is sold under the trademark HUMIRA) is expected to expire in December 2016, and the equivalent European Union patent is expected to expire in the majority of European Union countries in April 2018. AbbVie continues to dedicate substantial research and development efforts to expanding indications for HUMIRA, including in the fields of rheumatology (pediatric enthesitis related arthritis), gastroenterology (pediatric Crohn’s disease and pediatric ulcerative colitis), dermatology (pediatric psoriasis and hidradenitis suppurativa), and ophthalmology (uveitis). Phase III trials are ongoing in preparation for regulatory applications for uveitis and hidradenitis suppurativa in the United States and the European Union. AbbVie continues to work on HUMIRA formulation and delivery enhancements to improve convenience and the overall patient experience. Metabolics/Hormones products. Metabolic and hormone products target a number of conditions, including hypothyroidism, testosterone deficiency, and exocrine pancreatic insufficiency. These products include: Synthroid. Synthroid is used in the treatment of hypothyroidism. AndroGel. AndroGel is a testosterone replacement therapy for males diagnosed with low testosterone that is available in two strengths: 1 percent and 1.62 percent. Creon. Creon is a pancreatic enzyme therapy for exocrine pancreatic insufficiency, a condition that occurs in patients with cystic fibrosis, chronic pancreatitis, and several other conditions. AbbVie has the rights to sell Synthroid, AndroGel, and Creon only in the United States. Virology products. AbbVie’s virology products include two products for the treatment of HIV infection, Kaletra and Norvir. Kaletra. Kaletra (also marketed as Aluvia in emerging markets) is a prescription anti-HIV-1 medicine that contains two protease inhibitors: lopinavir and ritonavir. Kaletra is used with other anti-HIV-1 medications to increase the chance of treatment response in people with HIV-1. Norvir. Norvir (ritonavir) is a protease inhibitor that is indicated in combination with other antiretroviral agents for the treatment of HIV-1 infection. 2 Endocrinology products. Lupron (also marketed as Lucrin and Lupron Depot) is a product for the palliative treatment of advanced prostate cancer, treatment of endometriosis and central precocious puberty, and for the preoperative treatment of patients with anemia caused by uterine fibroids. Lupron is approved for daily subcutaneous injection and one-month, three-month, four-month and six-month intramuscular injection. Dyslipidemia products. AbbVie’s dyslipidemia products address the range of metabolic conditions characterized by high cholesterol and/or high triglycerides. TriCor and TRILIPIX are fibric acid derivatives that are indicated as adjuncts to diet to reduce total cholesterol, LDL cholesterol, and triglyceride levels, and to increase HDL cholesterol levels. Niaspan is an extended release form of niacin that is indicated as an adjunct to diet to reduce total cholesterol, LDL cholesterol, and triglyceride levels, and to increase HDL cholesterol levels. These products are primarily marketed to primary care physicians. Generic competitors to these products entered the market in 2012 and 2013. Other products. AbbVie’s other products include the following: Synagis. Synagis is a product marketed by AbbVie outside of the United States that protects at-risk infants from severe respiratory disease, or respiratory syncytial virus (RSV). Anesthesia products. Sevoflurane (sold under the trademarks Ultane and Sevorane) is an anesthesia product that AbbVie sells worldwide for human use. Duodopa and Duopa. Duodopa is a levodopa-carbidopa intestinal gel (LCIG) marketed outside of the United States to treat advanced Parkinson’s disease. The LCIG therapy has completed Phase III development for the United States under the name Duopa, and AbbVie is pursuing regulatory approval in the United States. Zemplar. Zemplar is a product sold worldwide for the prevention and treatment of secondary hyperparathyroidism associated with Stage 3, 4, and 5 chronic kidney disease (CKD). Research and Development Activities AbbVie has numerous compounds in clinical development, including potential treatments for complex diseases. Over the past five years, AbbVie has more than doubled the number of compounds in its pipeline through a mix of internal development and external collaboration efforts. AbbVie’s ability to discover and develop new compounds is enhanced by the company’s use of integrated discovery and development project teams, which include chemists, biologists, physicians, and pharmacologists who work on the same compounds as a team. The research and development process generally begins with discovery research which focuses on the identification of a molecule that has a desired effect against a given disease. If preclinical testing of an identified compound proves successful, the compound moves into clinical development which generally includes the following phases: (cid:127) Phase I—involves the first human tests in a small number of healthy volunteers or patients to assess safety, tolerability and potential dosing. (cid:127) Phase II—tests the drug’s efficacy against the disease in a relatively small group of patients. (cid:127) Phase III—tests a drug that demonstrates favorable results in the earlier phases in a significantly larger patient population to further demonstrate efficacy and safety based on regulatory criteria. The clinical trials from all of the development phases provide the data required to prepare and submit a New Drug Application (NDA), a Biological License Application (BLA) or other submission for regulatory approval to the U.S. Food and Drug Administration (FDA) or similar government 3 agencies outside the U.S. The specific requirements (e.g., scope of clinical trials) for obtaining regulatory approval vary across different countries and geographic regions. The research and development process from discovery through a new drug launch typically takes 8 to 12 years and can be even longer. The research and development of new pharmaceutical products has a significant amount of inherent uncertainty. There is no guarantee when, or if, a molecule will receive the regulatory approval required to launch a new drug or indication. In addition to the development of new products and new formulations, research and development projects also may include Phase IV trials, sometimes called post-marketing studies. For such projects, clinical trials are designed and conducted to collect additional data regarding, among other parameters, the benefits and risks of an approved drug. AbbVie spent approximately $2.9 billion in 2013, $2.8 billion in 2012, and $2.6 billion in 2011 on research to discover and develop new products, indications and processes and to improve existing products and processes. These expenses consisted primarily of salaries and related expenses for personnel, license fees, consulting payments, contract research, manufacturing, the costs of laboratory equipment and facilities, and collaboration fees and expenses. Intellectual Property Protection and Regulatory Exclusivity Generally, upon approval, products in development may be entitled to exclusivity under applicable intellectual property and regulatory regimes. AbbVie seeks patent protection, where available, in all significant markets and/or countries for each product in development. In the United States, the expiration date for patents filed on or after June 8, 1995 is 20 years after the filing date. Given that patents relating to pharmaceutical products are often obtained early in the development process, and given the amount of time needed to complete clinical trials and other development activities required for regulatory approval, the length of time between product launch and patent expiration is significantly less than 20 years. The Drug Price Competition and Patent Term Restoration Act of 1984 (commonly known as the Hatch-Waxman Act) permits a patent holder to seek a patent extension, commonly called a ‘‘patent term restoration,’’ for patents on products (or processes for making the product) regulated by the Federal Food, Drug, and Cosmetic Act. The length of the patent extension is roughly based on 50 percent of the period of time from the filing of an Investigational New Drug Application for a compound to the submission of the NDA for such compound, plus 100 percent of the time period from NDA submission to regulatory approval. The extension, however, cannot exceed five years and the patent term remaining after regulatory approval cannot exceed 14 years. Pharmaceutical products may be entitled to other forms of legal or regulatory exclusivity upon approval. The scope, length, and requirements for each of these exclusivities varies both in the United States and in other jurisdictions. In the United States, if the FDA approves a product that does not contain a previously approved active ingredient, the product is typically entitled to five years of market exclusivity. Other products may be entitled to three years of market exclusivity if approval was based on the FDA’s reliance on new clinical studies submitted by the NDA applicant. If the NDA applicant studies the product for use by children, the FDA may grant pediatric exclusivity, which extends by 180 days the longest existing exclusivity (patent or regulatory) related to the product. For products that are either used to treat conditions that afflict a relatively small population or for which there is not a reasonable expectation that the research and development costs will be recovered, the FDA may designate the pharmaceutical as an orphan drug and grant it seven years of market exclusivity. Applicable laws and regulations dictate the market exclusivity to which the product is entitled upon its approval in any particular country. In certain instances, regulatory exclusivity may protect a product where patent protection is no longer available or for a period of time in excess of patent protection. It is not possible to estimate for each product in development the total period of exclusivity to which it may become entitled until regulatory approval is obtained. However, given the length of time required 4 to complete clinical development of a pharmaceutical product, the minimum and maximum periods of exclusivity that might be achieved in any individual case would not be expected to exceed three and 14 years, respectively. These estimates do not consider other factors, such as the difficulty of recreating the manufacturing process for a particular product or other proprietary knowledge that may delay the introduction of a generic or other follow-on product after the expiration of applicable patent and other regulatory exclusivity periods. Biologics such as HUMIRA are entitled to exclusivity under the Biologics Price Competition and Innovation Act, which was passed on March 23, 2010 as Title VII to the Patient Protection and Affordable Care Act. The law provides a pathway for approval of biosimilars following the expiration of 12 years of exclusivity for the innovator biologic and a potential additional 180 day-extension term for conducting pediatric studies. The law also includes an extensive process for the innovator biologic and biosimilar manufacturer to litigate patent infringement, validity, and enforceability prior to the approval of the biosimilar. The European Union has also created a pathway for approval of biosimilars and has published guidelines for approval of certain biosimilar products. The more complex nature of biologics and biosimilar products has led to greater regulatory scrutiny and more rigorous requirements for approval of follow-on biosimilar products than for small molecule generic pharmaceutical products, and it has also reduced the effect of biosimilars on sales of the innovator biologic as compared to the sales erosion caused by generic versions of small molecule pharmaceutical products. AbbVie owns or has licensed rights to a substantial number of patents and patent applications. AbbVie licenses or owns a patent portfolio of thousands of patent families, each of which includes United States patent applications and/or issued patents, and may also contain the non-United States counterparts to these patents and applications. These patents and applications, including various patents that expire during the period 2014 to 2031, in aggregate are believed to be of material importance in the operation of AbbVie’s business. However, AbbVie believes that no single patent, license, trademark (or related group of patents, licenses, or trademarks), except for those related to adalimumab (which is sold under the trademark HUMIRA), are material in relation to the company’s business as a whole. The United States composition of matter (that is, compound) patent covering adalimumab is expected to expire in December 2016, and the equivalent European Union patent is expected to expire in the majority of European Union countries in April 2018. In addition, the following patents, licenses, and trademarks are significant: those related to lopinavir/ritonavir (which is sold under the trademarks Kaletra and Aluvia), and those related to testosterone (which is sold under the trademark AndroGel). The United States composition of matter patent covering lopinavir is expected to expire in 2016. A principal United States non-composition of matter patent covering lopinavir/ritonavir is expected to expire in 2016. The principal United States non-composition of matter patent covering AndroGel 1 percent is expected to expire in 2021, including pediatric exclusivity. The principal United States non-composition of matter patents covering AndroGel 1.62 percent are expected to expire in 2020 and 2026. Agreements that may affect exclusivity are discussed in Item 7, ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations.’’ AbbVie may rely, in some circumstances, on trade secrets to protect its technology. However, trade secrets are difficult to protect. AbbVie seeks to protect its technology and product candidates, in part, by confidentiality agreements with its employees, consultants, advisors, contractors, and collaborators. These agreements may be breached and AbbVie may not have adequate remedies for any breach. In addition, AbbVie’s trade secrets may otherwise become known or be independently discovered by competitors. To the extent that AbbVie’s employees, consultants, advisors, contractors, and collaborators use intellectual property owned by others in their work for the company, disputes may arise as to the rights in related or resulting know-how and inventions. 5 Sales, Marketing, and Distribution Capabilities In 2013, AbbVie’s products were sold in over 170 countries. AbbVie utilizes a combination of dedicated commercial resources, regional commercial resources and distributorships to market, sell, and distribute its products worldwide. In the United States, AbbVie distributes pharmaceutical products principally through independent wholesale distributors, with some sales directly to pharmacies and patients. In 2013, three wholesale distributors (McKesson Corporation, Cardinal Health, Inc., and AmerisourceBergen Corporation) accounted for substantially all of AbbVie’s sales in the United States. No individual wholesaler accounts for greater than 40 percent of AbbVie’s 2013 gross sales in the United States. These wholesalers purchase product from AbbVie under standard terms and conditions of sale. AbbVie directs its primary marketing efforts toward securing the prescription, or recommendation, of its brand of products by physicians, key opinion leaders, and other health care providers. Managed care providers (for example, health maintenance organizations and pharmacy benefit managers), hospitals, and state and federal government agencies (for example, the United States Department of Veterans Affairs and the United States Department of Defense) are also important customers. AbbVie also markets directly to consumers themselves, although in the United States all of the company’s products must be sold pursuant to a prescription. Outside of the United States, AbbVie focuses its marketing efforts on key opinion leaders, payors, physicians, and country regulatory bodies. AbbVie also provides patient support programs closely related to its products. 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. Outside the United States, sales are made either directly to customers or through distributors, depending on the market served. Approximately 55-60 percent of sales outside the United States are made through wholesalers or distributors. No wholesaler or distributor outside the United States accounts for more than 3 percent of AbbVie’s sales. Certain products are co-marketed or co-promoted with other companies. AbbVie has no single customer that, if the customer were lost, would have a material adverse effect on the company’s business. No material portion of AbbVie’s business is subject to renegotiation of profits or termination of contracts at the election of the government. Third Party Agreements AbbVie has agreements with third parties for process development, analytical services, and manufacturing of certain products. AbbVie procures certain products and services from a limited number of suppliers and, in some cases, a single supply source. For example, the filling and packaging of HUMIRA syringes to be sold outside of the United States and Puerto Rico is performed by a single supplier at its two different facilities. AbbVie does not currently believe that this agreement is material because AbbVie’s business is not substantially dependent upon it. AbbVie maintains significant inventory of HUMIRA syringes to reduce the risk of any supply disruption and its own syringe-filling and packaging facility in the United States is now approved to supply syringes to primary markets outside of the United States and Puerto Rico. It was previously approved to provide product only to the United States and Puerto Rico. In addition, AbbVie has agreements with third parties for active pharmaceutical ingredient and product manufacturing, formulation and development services, fill, finish, and packaging services, and distribution and logistics services for certain products. AbbVie does not believe that these manufacturing related agreements are material because AbbVie’s business is not substantially dependent on any individual agreement. In most cases, AbbVie maintains alternate supply relationships that it can utilize without undue disruption of its manufacturing processes if a third party fails to perform its contractual obligations. AbbVie also maintains sufficient inventory of product to minimize the impact of any supply disruption. 6 AbbVie also has collaboration agreements, as discussed in Note 5, ‘‘Acquisitions, Collaborations and Other Arrangements,’’ of the Notes to Consolidated Financial Statements, and has certain agreements with Abbott. Sources and Availability of Raw Materials AbbVie purchases, in the ordinary course of business, raw materials and supplies essential to its operations from numerous suppliers around the world, including in the United States. In addition, certain medical devices and components necessary for the manufacture of our products are provided by unaffiliated third party suppliers. AbbVie has not experienced any recent significant availability problems or supply shortages. Orders Orders are generally filled on a current basis, and order backlog is not material to AbbVie’s business. Environmental Matters AbbVie believes that its operations comply in all material respects with applicable laws and regulations concerning environmental protection. Regulations under federal and state environmental laws impose stringent limitations on emissions and discharges to the environment from various manufacturing operations. AbbVie’s capital and operating expenditures for pollution control in 2013 were approximately $2 million and $20 million, respectively. Capital and operating expenditures for pollution control in 2014 are estimated to be approximately $2 million and $21 million, respectively. Abbott was identified as one of many potentially responsible parties in investigations and/or remediations at several locations in the United States, including Puerto Rico, under the Comprehensive Environmental Response, Compensation, and Liability Act, commonly known as Superfund. Some of these locations were transferred to AbbVie in connection with the separation and distribution, and AbbVie has become a party to these investigations and remediations. Abbott was also engaged in remediation at several other sites, some of which have been transferred to AbbVie in connection with the separation and distribution, in cooperation with the Environmental Protection Agency or similar agencies. While it is not feasible to predict with certainty the final costs related to those investigations and remediation activities, AbbVie believes that such costs, together with other expenditures to maintain compliance with applicable laws and regulations concerning environmental protection, should not have a material adverse effect on the company’s financial position, cash flows, or results of operations. Competition The markets for AbbVie’s products are highly competitive. AbbVie competes with other research- based pharmaceuticals and biotechnology companies that discover, manufacture, market, and sell proprietary pharmaceutical products and biologics. For example, HUMIRA competes with a number of anti-TNF and other products that are approved for a number of disease states and AbbVie’s virology products compete with protease inhibitors and other anti-HIV treatments. The search for technological innovations in pharmaceutical products is a significant aspect of competition. The introduction of new products by competitors and changes in medical practices and procedures can result in product obsolescence. Price is also a competitive factor. In addition, the substitution of generic pharmaceutical products for branded pharmaceutical products creates competitive pressures on AbbVie’s products that do not have patent protection. Biosimilars. Competition for AbbVie’s biologic products is affected by the approval of follow-on biologics, also known as ‘‘biosimilars.’’ Biologics have added major therapeutic options for the 7 treatment of many diseases, including some for which therapies were unavailable or inadequate. The advent of biologics has also raised complex regulatory issues and significant pharmacoeconomic concerns because the cost of developing and producing biologic therapies is typically dramatically higher than for conventional (small molecule) medications, and because many expensive biologic medications are used for ongoing treatment of chronic diseases, such as rheumatoid arthritis or inflammatory bowel disease, or for the treatment of previously untreatable cancer. Significant investments in biologics infrastructure and manufacturing are necessary to produce biologic products, as are significant investments in marketing, distribution, and sales organization activities, which may limit the number of biosimilar competitors. In the United States, the FDA regulates biologics under the Federal Food, Drug, and Cosmetic Act, the Public Health Service Act, and implementing regulations. While the enactment of federal health care reform legislation in March 2010 was meant to provide a pathway for approval of biosimilars under the Public Health Service Act, recent regulatory guidance suggests that the approval process for biosimilars will be far more extensive than the approval process for generic or other follow-on versions of small molecule products, in order to ensure that the safety and efficacy of biosimilars is highly similar to that of an original biologic, such as HUMIRA. Ultimate approval by the FDA is dependent upon many factors, including a showing that the biosimilar is ‘‘highly similar’’ to the original product and has no clinically meaningful differences from the original product in terms of safety, purity, and potency. The types of data that could ordinarily be required in an application to show similarity would include analytical data and studies to demonstrate chemical similarity, animal studies (including toxicity studies), and clinical studies. Applicable regulations also require that the biosimilar must be for the same indication as the original biologic and involve the same mechanism of action, and that the manufacturing facility meets the standards necessary to assure that the biosimilar is safe, pure, and potent. Furthermore, the new law provides that only a biosimilar product that is deemed to be ‘‘interchangeable’’ may be substituted for the original biologic product without the intervention of the health care provider who prescribed the original biologic product. To prove that a biosimilar product is interchangeable, the applicant must demonstrate that the product can be expected to produce the same clinical results as the original biologic product in any given patient, and if the product is administered more than once in a patient, that safety risks and potential for diminished efficacy of alternating or switching between the use of the interchangeable biosimilar biologic product and the original biologic product is no greater than the risk of using the original biologic product without switching. The new law is only beginning to be interpreted and implemented by the FDA. As a result, its ultimate impact, implementation, and meaning will likely be subject to substantial uncertainty for years to come. In the European Union, while a pathway for the approval of biosimilars has existed since 2005, the products that have come to market to date have had a mixed impact on the market share of incumbent products, with significant variation by product. Other Competitive Products. Although a number of competitive biologic branded products have been approved since HUMIRA was first introduced in 2003, most have gained only a modest share of the worldwide market. In addition, the first JAK inhibitor, part of a new class of orally administered products, was recently approved for use in rheumatoid arthritis in the U.S. AbbVie will continue to face competitive pressure from these biologics and orally administered products. Regulation—Discovery and Clinical Development United States. Securing approval to market a new pharmaceutical product in the United States requires substantial effort and financial resources and takes several years to complete. The applicant must complete preclinical tests, and obtain FDA approval before commencing clinical trials. Clinical trials are intended to establish the safety and efficacy of the pharmaceutical product and typically are 8 conducted in three sequential phases, although the phases may overlap or be combined. If the required clinical testing is successful, the results are submitted to the FDA in the form of an NDA or BLA requesting approval to market the product for one or more indications. The FDA reviews an NDA or BLA to determine whether a product is safe and effective for its intended use and whether its manufacturing is compliant with current Good Manufacturing Practices (cGMP). Even if an NDA or a BLA receives approval, the applicant must comply with post-approval requirements. For example, holders of an approval must report adverse reactions, provide updated safety and efficacy information, and comply with requirements concerning advertising and promotional labeling. Also, quality control and manufacturing procedures must continue to conform to cGMP after approval. The FDA periodically inspects manufacturing facilities to assess compliance with cGMP, which imposes extensive procedural, substantive, and record keeping requirements. In addition, as a condition of approval, the FDA may require post-marketing testing and surveillance to further assess and monitor the product’s safety or efficacy after commercialization. Any post-approval regulatory obligations, and the cost of complying with such obligations, could expand in the future. Outside the United States. AbbVie is subject to similar regulations outside the United States. AbbVie must obtain approval of a clinical trial application or product from the applicable regulatory authorities before it can commence clinical trials or marketing of the product. The approval requirements and process vary, and the time required to obtain approval may be longer or shorter than that required for FDA approval. For example, AbbVie may submit marketing authorizations in the European Union under either a centralized or decentralized procedure. The centralized procedure is mandatory for the approval of biotechnology products and many pharmaceutical products and provides for a single marketing authorization that is valid for all European Union member states. Under the centralized procedure, a single marketing authorization application is submitted to the European Medicines Agency. After the agency evaluates the application, it makes a recommendation to the European Commission, which then makes the final determination on whether to approve the application. The decentralized procedure provides for mutual recognition of national approval decisions and is available for products that are not subject to the centralized procedure. In Japan, applications for approval of a new product are made through the Pharmaceutical and Medical Devices Agency (PMDA). Bridging studies to demonstrate that the foreign clinical data applies to Japanese patients may be required. After completing a comprehensive review, the PMDA reports to the Ministry of Health, Labour and Welfare, which then approves or denies the application. The regulatory process in many emerging markets continues to evolve. Many emerging markets, including those in Asia, generally require regulatory approval to have been obtained in a large developed market (such as the United States) before the country will begin or complete its regulatory review process. Some countries also require that local clinical studies be conducted in order to obtain regulatory approval in the country. The requirements governing the conduct of clinical trials and product licensing also vary. In addition, post-approval regulatory obligations such as adverse event reporting and cGMP compliance generally apply and may vary by country. For example, after a marketing authorization has been granted in the European Union, periodic safety reports must be submitted and other pharmacovigilance measures must be implemented. Regulation—Commercialization, Distribution, and Manufacturing The manufacture, marketing, sale, promotion, and distribution of AbbVie’s products are subject to comprehensive government regulation. Government regulation by various national, regional, federal, state, and local agencies, both in the United States and other countries, addresses (among other matters) inspection of, and controls over, research and laboratory procedures, clinical investigations, product approvals and manufacturing, labeling, packaging, marketing and promotion, pricing and 9 reimbursement, sampling, distribution, quality control, post-marketing surveillance, record keeping, storage, and disposal practices. AbbVie’s operations are also affected by trade regulations in many countries that limit the import of raw materials and finished products and by laws and regulations that seek to prevent corruption and bribery in the marketplace (including the United States Foreign Corrupt Practices Act and the United Kingdom Bribery Act, which provide guidance on corporate interactions with government officials) and require safeguards for the protection of personal data. In addition, AbbVie is subject to laws and regulations pertaining to health care fraud and abuse, including state and federal anti-kickback and false claims laws in the United States. Prescription drug manufacturers such as AbbVie are also subject to taxes, as well as application, product, user, establishment, and other fees. Compliance with these laws and regulations is costly and materially affects AbbVie’s business. Among other effects, health care regulations substantially increase the time, difficulty, and costs incurred in obtaining and maintaining approval to market newly developed and existing products. AbbVie expects compliance with these regulations to continue to require significant technical expertise and capital investment to ensure compliance. Failure to comply can delay the release of a new product or result in regulatory and enforcement actions, the seizure or recall of a product, the suspension or revocation of the authority necessary for a product’s production and sale, and other civil or criminal sanctions, including fines and penalties. In addition to regulatory initiatives, AbbVie’s business can be affected by ongoing studies of the utilization, safety, efficacy, and outcomes of health care products and their components that are regularly conducted by industry participants, government agencies, and others. These studies can call into question the utilization, safety, and efficacy of previously marketed products. In some cases, these studies have resulted, and may in the future result, in the discontinuance of, or limitations on, marketing of such products domestically or worldwide, and may give rise to claims for damages from persons who believe they have been injured as a result of their use. Access to human health care products continues to be a subject of investigation and action by governmental agencies, legislative bodies, and private organizations in the United States and other countries. A major focus is cost containment. Efforts to reduce health care costs are also being made in the private sector, notably by health care payors and providers, which have instituted various cost reduction and containment measures. AbbVie expects insurers and providers to continue attempts to reduce the cost of health care products. Outside the United States, many countries control the price of health care products directly or indirectly, through reimbursement, payment, pricing, coverage limitations, or compulsory licensing. Budgetary pressures in the United States and in other countries may also heighten the scope and severity of pricing pressures on AbbVie’s products for the foreseeable future. United States. Specifically, U.S. federal laws require pharmaceuticals manufacturers to pay certain statutorily-prescribed rebates to state Medicaid programs on prescription drugs reimbursed under state Medicaid plans, and the efforts by states to seek additional rebates affect AbbVie’s business. Similarly, the Veterans Health Care Act of 1992, as a prerequisite to participation in Medicaid and other federal health care programs, requires that manufacturers extend additional discounts on pharmaceutical products to various federal agencies, including the United States Department of Veterans Affairs, Department of Defense, and Public Health Service entities and institutions. In addition, recent legislative changes would require similarly discounted prices to be offered to TRICARE program beneficiaries. The Veterans Health Care Act of 1992 also established the 340B drug discount program, which requires pharmaceuticals manufacturers to provide products at reduced prices to various designated health care entities and facilities. In the United States, most states also have generic substitution legislation requiring or permitting a dispensing pharmacist to substitute a different manufacturer’s generic version of a pharmaceutical product for the one prescribed. In addition, the federal government follows a diagnosis-related group 10 (DRG) payment system for certain institutional services provided under Medicare or Medicaid and has implemented a prospective payment system (PPS) for services delivered in hospital outpatient, nursing home, and home health settings. DRG and PPS entitle a health care facility to a fixed reimbursement based on the diagnosis and/or procedure rather than actual costs incurred in patient treatment, thereby increasing the incentive for the facility to limit or control expenditures for many health care products. Medicare reimburses Part B drugs based on average sales price (ASP) plus a certain percentage to account for physician administration costs, which have recently been reduced in the hospital outpatient setting. End stage renal disease treatment is covered through a bundled payment that likewise creates incentives for providers to demand lower pharmaceutical prices. Medicare enters into contracts with private plans to negotiate prices for most patient-administered medicine delivered under Part D. In March 2010, Congress enacted the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (together, the Affordable Care Act). Under the Affordable Care Act, AbbVie pays a fee related to its pharmaceuticals sales to government programs. Also in 2011, AbbVie began providing a discount of 50 percent for branded prescription drugs sold to patients who fall into the Medicare Part D coverage gap, or ‘‘donut hole.’’ The Affordable Care Act also includes provisions known as the Physician Payments Sunshine Act, which require manufacturers of drugs and biologics covered under Medicare and Medicaid starting in 2012 to record any transfers of value to physicians and teaching hospitals and to report this data beginning in 2013 to the Centers for Medicare and Medicaid Services for subsequent public disclosure. Similar reporting requirements have also been enacted on the state level in the United States, and an increasing number of countries worldwide either have adopted or are considering similar laws requiring disclosure of interactions with health care professionals. Failure to report appropriate data may result in civil or criminal fines and/or penalties. AbbVie expects debate to continue during 2014 at all government levels worldwide over the marketing, availability, method of delivery, and payment for health care products and services. AbbVie believes that future legislation and regulation in the markets it serves could affect access to health care products and services, increase rebates, reduce prices or the rate of price increases for health care products and services, change health care delivery systems, create new fees and obligations for the pharmaceuticals industry, or require additional reporting and disclosure. It is not possible to predict the extent to which AbbVie or the health care industry in general might be affected by the matters discussed above. AbbVie is subject to a Corporate Integrity Agreement (CIA) entered into by Abbott on May 7, 2012 that requires enhancements to AbbVie’s compliance program and contains reporting obligations, including disclosure of financial payments to doctors. If AbbVie fails to comply with the CIA, the Office of Inspector General for the United States Department of Health and Human Services may impose monetary penalties or exclude AbbVie from federal health care programs, including Medicare and Medicaid. European Union. The European Union has adopted directives and other legislation governing labeling, advertising, distribution, supply, pharmacovigilance, and marketing of pharmaceutical products. Such legislation provides mandatory standards throughout the European Union and permits member states to supplement these standards with additional regulations. European governments also regulate pharmaceutical product prices through their control of national health care systems that fund a large part of the cost of such products to consumers. As a result, patients are unlikely to use a pharmaceutical product that is not reimbursed by the government. In many European countries, the government either regulates the pricing of a new product at launch or subsequent to launch through direct price controls or reference pricing. In recent years, many countries have also imposed new or additional cost containment measures on pharmaceutical products. Differences between national pricing regimes create price differentials within the European Union that can lead to significant parallel trade in pharmaceutical products. 11 Most governments also promote generic substitution by mandating or permitting a pharmacist to substitute a different manufacturer’s generic version of a pharmaceutical product for the one prescribed and by permitting or mandating that health care professionals prescribe generic versions in certain circumstances. In addition, governments use reimbursement lists to limit the pharmaceutical products that are eligible for reimbursement by national health care systems. Japan. In Japan, the National Health Insurance system maintains a Drug Price List specifying which pharmaceutical products are eligible for reimbursement, and the Ministry of Health, Labour and Welfare sets the prices of the products on this list. The government generally introduces price cut rounds every other year and also mandates price decreases for specific products. New products judged innovative or useful, that are indicated for pediatric use, or that target orphan or small population diseases, however, may be eligible for a pricing premium. The government has also promoted the use of generics, where available. Emerging Markets. Many emerging markets take steps to reduce pharmaceutical product prices, in some cases through direct price controls and in others through the promotion of generic alternatives to branded pharmaceuticals. Since AbbVie markets its products worldwide, certain products of a local nature and variations of product lines must also meet other local regulatory requirements. Certain additional risks are inherent in conducting business outside the United States, including price and currency exchange controls, changes in currency exchange rates, limitations on participation in local enterprises, expropriation, nationalization, and other governmental action. Employees AbbVie employed approximately 25,000 persons as of January 31, 2014. Outside the United States, some of AbbVie’s employees are represented by unions or works councils. AbbVie believes that it has good relations with its employees. Internet Information Copies of AbbVie’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through AbbVie’s investor relations website (www.abbvieinvestor.com) as soon as reasonably practicable after AbbVie electronically files the material with, or furnishes it to, the Securities and Exchange Commission. AbbVie’s corporate governance guidelines, outline of directorship qualifications, code of business conduct and the charters of AbbVie’s audit committee, compensation committee, nominations and governance committee, and public policy committee are all available on AbbVie’s investor relations website (www.abbvieinvestor.com). ITEM 1A. RISK FACTORS You should carefully consider the following risks and other information in this Form 10-K in evaluating AbbVie and AbbVie’s common stock. Any of the following risks could materially and adversely affect AbbVie’s results of operations or financial condition. The risk factors generally have been separated into three groups: risks related to AbbVie’s business, risks related to AbbVie’s separation from Abbott and risks related to AbbVie’s common stock. Based on the information currently known to it, AbbVie believes that the following information identifies the most significant risk factors affecting it in each of these categories of risks. However, the risks and uncertainties AbbVie faces are not limited to those set forth in the risk factors described below and may not be in order of importance or probability of occurrence. Additional risks and uncertainties not presently known to AbbVie or that AbbVie currently believes to be immaterial may also 12 adversely affect its business. In addition, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods. If any of the following risks and uncertainties develops into actual events, these events could have a material adverse effect on AbbVie’s business, financial condition or results of operations. In such case, the trading price of AbbVie’s common stock could decline. Risks Related to AbbVie’s Business The expiration or loss of patent protection and licenses may adversely affect AbbVie’s future revenues and operating income. AbbVie relies on patent, trademark and other intellectual property protection in the discovery, development, manufacturing, and sale of its products. In particular, patent protection is, in the aggregate, important in AbbVie’s marketing of pharmaceutical products in the United States and most major markets outside of the United States. Patents covering AbbVie products normally provide market exclusivity, which is important for the profitability of many of AbbVie’s products. As patents for certain of its products expire, AbbVie will or could face competition from lower priced generic products. The expiration or loss of patent protection for a product typically is followed promptly by substitutes that may significantly reduce sales for that product in a short amount of time. If AbbVie’s competitive position is compromised because of generics or otherwise, it could have a material adverse effect on AbbVie’s business and results of operations. In addition, proposals emerge from time to time for legislation to further encourage the early and rapid approval of generic drugs. Any such proposals that are enacted into law could worsen the effect of generic competition. AbbVie’s principal patents and trademarks are described in greater detail in Item 1, ‘‘Business— Intellectual Property Protection and Regulatory Exclusivity’’ and Item 7, ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations,’’ and litigation regarding these patents is described in Item 3, ‘‘Legal Proceedings.’’ The United States composition of matter patent for HUMIRA, which is AbbVie’s largest selling product and had worldwide sales of approximately $10.7 billion in 2013, is expected to expire in December 2016, and the equivalent European Union patent is expected to expire in the majority of European Union countries in April 2018. Because HUMIRA is a biologic and biologics cannot be readily substituted, it is uncertain what impact the loss of patent protection would have on the sales of HUMIRA. AbbVie’s major products could lose patent protection earlier than expected, which could adversely affect AbbVie’s future revenues and operating income. Third parties or government authorities may challenge or seek to invalidate or circumvent AbbVie’s patents and patent applications. For example, manufacturers of generic pharmaceutical products file, and may continue to file, Abbreviated New Drug Applications (ANDAs) with the United States Food and Drug Administration (FDA) seeking to market generic forms of AbbVie’s products prior to the expiration of relevant patents owned or licensed by AbbVie by asserting that the patents are invalid, unenforceable and/or not infringed. Although most of the challenges to AbbVie’s intellectual property have come from other businesses, governments may also challenge intellectual property rights. For example, court decisions and potential legislation relating to patents, such as legislation regarding biosimilars, and other regulatory initiatives may result in further erosion of intellectual property protection. In addition, certain governments outside the United States have indicated that compulsory licenses to patents may be sought to further their domestic policies or on the basis of national emergencies, such as HIV/AIDS. If triggered, compulsory licenses could diminish or eliminate sales and profits from those jurisdictions and negatively affect AbbVie’s results of operations. 13 AbbVie normally responds to challenges by vigorously defending its patents, including by filing patent infringement lawsuits. Patent litigation and other challenges to AbbVie’s patents are costly and unpredictable and may deprive AbbVie of market exclusivity for a patented product. To the extent AbbVie’s intellectual property is successfully challenged or circumvented or to the extent such intellectual property does not allow AbbVie to compete effectively, AbbVie’s business will suffer. To the extent that countries do not enforce AbbVie’s intellectual property rights or require compulsory licensing of AbbVie’s intellectual property, AbbVie’s future revenues and operating income will be reduced. A third party’s intellectual property may prevent AbbVie from selling its products or have a material adverse effect on AbbVie’s future profitability and financial condition. Third parties may claim that an AbbVie product infringes upon their intellectual property. Resolving an intellectual property infringement claim can be costly and time consuming and may require AbbVie to enter into license agreements. AbbVie cannot guarantee that it would be able to obtain license agreements on commercially reasonable terms. A successful claim of patent or other intellectual property infringement could subject AbbVie to significant damages or an injunction preventing the manufacture, sale, or use of the affected AbbVie product or products. Any of these events could have a material adverse effect on AbbVie’s profitability and financial condition. Any significant event that adversely affects HUMIRA revenues could have a material and negative impact on AbbVie’s results of operations and cash flows. HUMIRA generates approximately 57 percent of AbbVie’s sales. Any significant event that adversely affects HUMIRA’s revenues could have a material adverse impact on AbbVie’s operations and cash flows. These events could include loss of patent protection for HUMIRA, the approval of biosimilars of HUMIRA, the discovery of previously unknown side effects or impaired efficacy, increased competition from the introduction of new, more effective or less expensive treatments, and discontinuation or removal from the market of HUMIRA for any reason. AbbVie’s research and development efforts may not succeed in developing and marketing commercially successful products and technologies, which may cause its revenue and profitability to decline. To remain competitive, AbbVie must continue to launch new products and new indications and/or brand extensions for existing products, and such launches must generate revenue sufficient both to cover its substantial research and development costs and to replace sales of profitable products that are lost to or displaced by competing products or therapies. Failure to do so would have a material adverse effect on AbbVie’s revenue and profitability. Accordingly, AbbVie commits substantial effort, funds, and other resources to research and development and must make ongoing substantial expenditures without any assurance that its efforts will be commercially successful. For example, in 2012 AbbVie discontinued the development of ABT-263, which was in Phase II development for the treatment of hematologic malignancies. A high rate of failure in the biopharmaceutical industry is inherent in the research and development of new products, and failure can occur at any point in the research and development process, including after significant funds have been invested. Products that appear promising in development may fail to reach the market for numerous reasons, including failure to demonstrate effectiveness, safety concerns, superior safety or efficacy of competing therapies, failure to achieve positive clinical or pre-clinical outcomes beyond the current standard of care, inability to obtain necessary regulatory approvals or delays in the approval of new products and new indications, limited scope of approved uses, excessive costs to manufacture, the failure to obtain or maintain intellectual property rights, or infringement of the intellectual property rights of others. Decisions about research studies made early in the development process of a pharmaceutical product candidate can affect the marketing strategy once such candidate receives approval. More 14 detailed studies may demonstrate additional benefits that can help in the marketing, but they also consume time and resources and may delay submitting the pharmaceutical product candidate for approval. AbbVie cannot guarantee that a proper balance of speed and testing will be made with respect to each pharmaceutical product candidate or that decisions in this area would not adversely affect AbbVie’s future results. Even if AbbVie successfully develops and markets new products or enhancements to its existing products, they may be quickly rendered obsolete by changing clinical preferences, changing industry standards, or competitors’ innovations. AbbVie’s innovations may not be accepted quickly in the marketplace because of existing clinical practices or uncertainty over third-party reimbursement. AbbVie cannot state with certainty when or whether any of its products under development will be launched, whether it will be able to develop, license, or otherwise acquire compounds or products, or whether any products will be commercially successful. Failure to launch successful new products or new indications for existing products may cause AbbVie’s products to become obsolete, causing AbbVie’s revenues and operating results to suffer. A portion of AbbVie’s near-term pharmaceutical pipeline relies on collaborations with third parties, which may adversely affect the development and sale of its products. AbbVie depends on alliances with pharmaceuticals and biotechnology companies for a portion of the products in its near-term pharmaceutical pipeline. For example, AbbVie is collaborating with Biogen Idec to develop a treatment for the relapsing remitting form of multiple sclerosis. It is also collaborating with Galapagos NV to discover, develop, and commercialize a next-generation, oral Janus Kinase 1 (JAK1) inhibitor in Phase II development with the potential to treat multiple autoimmune diseases. Failures by these parties to meet their contractual, regulatory, or other obligations to AbbVie, or any disruption in the relationships between AbbVie and these third parties, could have an adverse effect on AbbVie’s pharmaceutical pipeline and business. In addition, AbbVie’s collaborative relationships for research and development extend for many years and may give rise to disputes regarding the relative rights, obligations and revenues of AbbVie and its collaboration partners, including the ownership of intellectual property and associated rights and obligations. This could result in the loss of intellectual property rights or protection, delay the development and sale of potential pharmaceutical products, and lead to lengthy and expensive litigation or arbitration. Biologics carry unique risks and uncertainties, which could have a negative impact on future results of operations. The successful discovery, development, manufacturing and sale of biologics is a long, expensive and uncertain process. There are unique risks and uncertainties with biologics. For example, access to and supply of necessary biological materials, such as cell lines, may be limited, and governmental regulations restrict access to and regulate the transport and use of such materials. In addition, the development, manufacturing, and sale of biologics is subject to regulations that are often more complex and extensive than the regulations applicable to other pharmaceutical products. Manufacturing biologics, especially in large quantities, is often complex and may require the use of innovative technologies. Such manufacturing also requires facilities specifically designed and validated for this purpose and sophisticated quality assurance and quality control procedures. Biologics are also frequently costly to manufacture because production inputs are derived from living animal or plant material, and some biologics cannot be made synthetically. Failure to successfully discover, develop, manufacture and sell biologics—including HUMIRA—could adversely impact AbbVie’s business and results of operations. 15 New products and technological advances by AbbVie’s competitors may negatively affect AbbVie’s results of operations. AbbVie competes with other research-based pharmaceuticals and biotechnology companies that discover, manufacture, market, and sell proprietary pharmaceutical products and biologics. For example, HUMIRA competes with a number of anti-TNF products that are approved for a number of disease states and AbbVie’s virology products compete with protease inhibitors and other anti-HIV treatments. These competitors may introduce new products or develop technological advances that compete with AbbVie’s products in therapeutic areas such as immunology, virology, renal disease, dyslipidemia, and neuroscience. AbbVie cannot predict with certainty the timing or impact of the introduction by competitors of new products or technological advances. Such competing products may be safer, more effective, more effectively marketed or sold, or have lower prices or superior performance features than AbbVie’s products, and this could negatively impact AbbVie’s business and results of operations. AbbVie’s biologic products may become subject to competition from biosimilars. The Biologics Price Competition and Innovation Act was passed on March 23, 2010 as Title VII to the Patient Protection and Affordable Care Act. The law created a framework for the approval of biosimilars in the United States and could allow competitors to reference data from biologic products already approved. In Europe, the European Commission has granted marketing authorizations for several biosimilars pursuant to a set of general and product class-specific guidelines for biosimilar approvals issued over the past few years. In addition, companies are developing biosimilars in other countries that could compete with AbbVie’s biologic products. If competitors are able to obtain marketing approval for biosimilars referencing AbbVie’s biologic products, AbbVie’s products may become subject to competition from such biosimilars, with the attendant competitive pressure and consequences. Expiration or successful challenge of AbbVie’s applicable patent rights could also trigger competition from other products, assuming any relevant exclusivity period has expired. As a result, AbbVie could face more litigation with respect to the validity and/or scope of patents relating to its biologic products. The manufacture of many of AbbVie’s products is a highly exacting and complex process, and if AbbVie or one of its suppliers encounters problems manufacturing AbbVie’s products, AbbVie’s business could suffer. The manufacture of many of AbbVie’s products is a highly exacting and complex process, due in part to strict regulatory requirements. Problems may arise during manufacturing for a variety of reasons, including equipment malfunction, failure to follow specific protocols and procedures, problems with raw materials, delays related to the construction of new facilities or the expansion of existing facilities, including those intended to support future demand for AbbVie’s products, changes in manufacturing production sites and limits to manufacturing capacity due to regulatory requirements, changes in the types of products produced, physical limitations that could inhibit continuous supply, man-made or natural disasters, and environmental factors. If problems arise during the production of a batch of product, that batch of product may have to be discarded and AbbVie may experience product shortages or incur added expenses. This could, among other things, lead to increased costs, lost revenue, damage to customer relations, time and expense spent investigating the cause and, depending on the cause, similar losses with respect to other batches or products. If problems are not discovered before the product is released to the market, recall and product liability costs may also be incurred. 16 AbbVie uses a number of products in its pharmaceutical and biologic manufacturing processes that are sourced from single suppliers, and an interruption in the supply of those products could adversely affect AbbVie’s business and results of operations. AbbVie uses a number of products in its pharmaceutical and biologic manufacturing processes that are sourced from single suppliers. The failure of these single-source suppliers to fulfill their contractual obligations in a timely manner or as a result of regulatory noncompliance or physical disruption at a manufacturing site may impair AbbVie’s ability to deliver its products to customers on a timely and competitive basis, which could adversely affect AbbVie’s business and results of operations. Finding an alternative supplier could take a significant amount of time and involve significant expense due to the nature of the products and the need to obtain regulatory approvals. AbbVie cannot guarantee that it will be able to reach agreement with alternative providers or that regulatory authorities would approve AbbVie’s use of such alternatives. AbbVie does, however, carry business interruption insurance, which provides a degree of protection in the case of a failure by a single-source supplier. Significant safety or efficacy issues could arise for AbbVie’s products, which could have a material adverse effect on AbbVie’s revenues and financial condition. Pharmaceutical products receive regulatory approval based on data obtained in controlled clinical trials of limited duration. Following regulatory approval, these products will be used over longer periods of time in many patients. Investigators may also conduct additional, and perhaps more extensive, studies. If new safety or efficacy issues are reported or if new scientific information becomes available (including results of post-marketing Phase IV trials), or if governments change standards regarding safety, efficacy or labeling, AbbVie may be required to amend the conditions of use for a product. For example, AbbVie may voluntarily provide or be required to provide updated information on a product’s label or narrow its approved indication, either of which could reduce the product’s market acceptance. If serious safety or efficacy issues with an AbbVie product arise, sales of the product could be halted by AbbVie or by regulatory authorities. Safety or efficacy issues affecting suppliers’ or competitors’ products also may reduce the market acceptance of AbbVie’s products. New data about AbbVie’s products, or products similar to its products, could negatively impact demand for AbbVie’s products due to real or perceived safety issues or uncertainty regarding efficacy and, in some cases, could result in product withdrawal. Furthermore, new data and information, including information about product misuse, may lead government agencies, professional societies, practice management groups or organizations involved with various diseases to publish guidelines or recommendations related to the use of AbbVie’s products or the use of related therapies or place restrictions on sales. Such guidelines or recommendations may lead to lower sales of AbbVie’s products. AbbVie is subject to product liability claims and lawsuits that may adversely affect its business and results of operations. In the ordinary course of business, AbbVie is the subject of product liability claims and lawsuits alleging that AbbVie’s products or the products of other companies that it promotes have resulted or could result in an unsafe condition for or injury to patients. Product liability claims and lawsuits and safety alerts or product recalls, regardless of their ultimate outcome, may have a material adverse effect on AbbVie’s business and reputation and on its ability to attract and retain customers. Consequences may also include additional costs, a decrease in market share for the products, lower income and exposure to other claims. Product liability losses are self-insured. Product liability claims could have a material adverse effect on AbbVie’s business and results of operations. 17 AbbVie is subject to cost-containment efforts and pricing pressures that could cause a reduction in future revenues and operating income. Cost-containment efforts by governments and private organizations are described in greater detail in Item 1, ‘‘Business—Regulation—Commercialization, Distribution, and Manufacturing.’’ To the extent these cost containment efforts are not offset by greater demand, increased patient access to health care, or other factors, AbbVie’s future revenues and operating income will be reduced. In the United States, the European Union and other countries, AbbVie’s business has experienced downward pressure on product pricing, and this pressure could increase in the future. In the United States, practices of managed care groups and institutional and governmental purchasers and United States federal laws and regulations related to Medicare and Medicaid, including the Medicare Prescription Drug Improvement and Modernization Act of 2003 and the Patient Protection and Affordable Care Act, contribute to pricing pressures. Recently enacted changes to the health care system in the United States and the increased purchasing power of entities that negotiate on behalf of Medicare, Medicaid, and private sector beneficiaries could result in additional pricing pressures. In numerous major markets worldwide, the government plays a significant role in funding health care services and determining the pricing and reimbursement of pharmaceutical products. Consequently, in those markets, AbbVie is subject to government decision-making and budgetary actions with respect to its products. In particular, many European countries have ongoing government- mandated price reductions for many pharmaceutical products, and AbbVie anticipates continuing pricing pressures in Europe. Differences between countries in pricing regulations could lead to third- party cross-border trading in AbbVie’s products that results in a reduction in future revenues and operating income. AbbVie is subject to numerous governmental regulations, and it can be costly to comply with these regulations and to develop compliant products and processes. AbbVie’s products are subject to rigorous regulation by numerous international, supranational, federal, and state authorities, as described in Item 1, ‘‘Business—Regulation—Discovery and Clinical Development.’’ The process of obtaining regulatory approvals to market a pharmaceutical product can be costly and time consuming, and approvals might not be granted for future products, or additional indications or uses of existing products, on a timely basis, if at all. Delays in the receipt of, or failure to obtain approvals for, future products, or new indications and uses, could result in delayed realization of product revenues, reduction in revenues, and substantial additional costs. In addition, AbbVie cannot guarantee that it will remain compliant with applicable regulatory requirements once approval has been obtained for a product. These requirements include, among other things, regulations regarding manufacturing practices, product labeling, and advertising and post-marketing reporting, including adverse event reports and field alerts due to manufacturing quality concerns. AbbVie must incur expense and spend time and effort to ensure compliance with these complex regulations. Possible regulatory actions could result in substantial modifications to AbbVie’s business practices and operations; refunds, recalls, or seizures of AbbVie’s products; a total or partial shutdown of production in one or more of AbbVie’s or its suppliers’ facilities while AbbVie or its supplier remedies the alleged violation; the inability to obtain future approvals; and withdrawals or suspensions of current products from the market. Any of these events could disrupt AbbVie’s business and have a material adverse effect on its business and results of operations. 18 Laws and regulations affecting government benefit programs could impose new obligations on AbbVie, require it to change its business practices, and restrict its operations in the future. The health care industry is subject to various federal, state, and international laws and regulations pertaining to government benefit programs reimbursement, rebates, price reporting and regulation, and health care fraud and abuse. In the United States, these laws include anti-kickback and false claims laws, the Medicaid Rebate Statute, the Veterans Health Care Act, and individual state laws relating to pricing and sales and marketing practices. Violations of these laws may be punishable by criminal and/or civil sanctions, including, in some instances, substantial fines, imprisonment, and exclusion from participation in federal and state health care programs, including Medicare, Medicaid, and Veterans Administration health programs. These laws and regulations are broad in scope and they are subject to change and evolving interpretations, which could require AbbVie to incur substantial costs associated with compliance or to alter one or more of its sales or marketing practices. In addition, violations of these laws, or allegations of such violations, could disrupt AbbVie’s business and result in a material adverse effect on its business and results of operations. AbbVie could be subject to increased monetary penalties and/or other sanctions, including exclusion from federal health care programs, if it fails to comply with the terms of the May 7, 2012 resolution of the Department of Justice’s investigation into sales and marketing activities for Depakote. On May 7, 2012, Abbott settled United States federal and 49 state investigations into its sales and marketing activities for Depakote by pleading guilty to a misdemeanor violation of the Food Drug & Cosmetic Act (FDCA) and agreeing to pay approximately $700 million in criminal fines and forfeitures and approximately $900 million to resolve civil claims. Under the plea agreement, Abbott submitted to a term of probation that was initially set at 5 years, but was shortened to 3 years upon the separation of Abbott and AbbVie. The obligations of the plea agreement have transferred to and become fully binding on AbbVie. The conditions of probation include certain reporting requirements, maintenance of certain compliance measures, certifications of AbbVie’s CEO and board of directors, and other conditions. If AbbVie violates the terms of its probation, it may face additional monetary sanctions and other such remedies as the court deems appropriate. On October 2, 2012, the court accepted the guilty plea and imposed the agreed-upon sentence. In addition, Abbott entered into a five-year Corporate Integrity Agreement (CIA) with the Office of Inspector General for the United States Department of Health and Human Services (OIG). The effective date of the CIA is October 11, 2012. The obligations of the CIA have transferred to and become fully binding on AbbVie. The CIA requires enhancements to AbbVie’s compliance program, fulfillment of reporting and monitoring obligations, management certifications, and resolutions from AbbVie’s board of directors, among other requirements. Compliance with the requirements of the settlement will impose additional costs and burdens on AbbVie, including in the form of employee training, third party reviews, compliance monitoring, reporting obligations, and management attention. If AbbVie fails to comply with the CIA, the OIG may impose monetary penalties or exclude AbbVie from federal health care programs, including Medicare and Medicaid. AbbVie and Abbott may be subject to third party claims and shareholder lawsuits in connection with the settlement, and AbbVie may be required to indemnify all or a portion of Abbott’s costs. The international nature of AbbVie’s business subjects it to additional business risks that may cause its revenue and profitability to decline. AbbVie’s business is subject to risks associated with doing business internationally, including in emerging markets. Sales outside of the United States make up approximately 46 percent of AbbVie’s net sales. The risks associated with its operations outside the United States include: (cid:127) fluctuations in currency exchange rates; 19 (cid:127) changes in medical reimbursement policies and programs; (cid:127) multiple legal and regulatory requirements that are subject to change and that could restrict AbbVie’s ability to manufacture, market, and sell its products; (cid:127) differing local product preferences and product requirements; (cid:127) trade protection measures and import or export licensing requirements; (cid:127) difficulty in establishing, staffing, and managing operations; (cid:127) differing labor regulations; (cid:127) potentially negative consequences from changes in or interpretations of tax laws; (cid:127) political and economic instability, including sovereign debt issues; (cid:127) price and currency exchange controls, limitations on participation in local enterprises, expropriation, nationalization, and other governmental action; (cid:127) inflation, recession and fluctuations in interest rates; (cid:127) potential deterioration in the economic position and credit quality of certain non-U.S. countries, including in Europe; (cid:127) compulsory licensing or diminished protection of intellectual property; and (cid:127) potential penalties or other adverse consequences for violations of anti-corruption, anti-bribery and other similar laws and regulations, including the United States Foreign Corrupt Practices Act and the United Kingdom Bribery Act. Events contemplated by these risks may, individually or in the aggregate, have a material adverse effect on AbbVie’s revenues and profitability. AbbVie may acquire other businesses, license rights to technologies or products, form alliances, or dispose of assets, which could cause it to incur significant expenses and could negatively affect profitability. AbbVie may pursue acquisitions, technology licensing arrangements, and strategic alliances, or dispose of some of its assets, as part of its business strategy. AbbVie may not complete these transactions in a timely manner, on a cost-effective basis, or at all, and may not realize the expected benefits. If AbbVie is successful in making an acquisition, the products and technologies that are acquired may not be successful or may require significantly greater resources and investments than originally anticipated. AbbVie may not be able to integrate acquisitions successfully into its existing business and could incur or assume significant debt and unknown or contingent liabilities. AbbVie could also experience negative effects on its reported results of operations from acquisition or disposition-related charges, amortization of expenses related to intangibles and charges for impairment of long-term assets. These effects could cause a deterioration of AbbVie’s credit rating and result in increased borrowing costs and interest expense. Additionally, changes in AbbVie’s structure, operations, revenues, costs, or efficiency resulting from major transactions such as acquisitions, divestitures, mergers, alliances, restructurings or other strategic initiatives, may result in greater than expected costs, may take longer than expected to complete or encounter other difficulties, including the need for regulatory approval where appropriate. 20 AbbVie is dependent on wholesale distributors for distribution of its products in the United States and, accordingly, its results of operations could be adversely affected if they encounter financial difficulties. In 2013, three wholesale distributors—AmerisourceBergen Corporation, Cardinal Health, Inc. and McKesson Corporation—accounted for substantially all of AbbVie’s sales in the United States. If one of its significant wholesale distributors encounters financial or other difficulties, such distributor may decrease the amount of business that it does with AbbVie, and AbbVie may be unable to collect all the amounts that the distributor owes it on a timely basis or at all, which could negatively impact AbbVie’s business and results of operations. Changes in the terms of rebate and chargeback programs, which are common in the pharmaceuticals industry, could have a material adverse effect on AbbVie’s operations. Rebates related to government programs, such as fee-for-service Medicaid or Medicaid managed care programs, arise from laws and regulations. AbbVie cannot predict if additional government initiatives to contain health care costs or other factors could lead to new or modified regulatory requirements that include higher or incremental rebates or discounts. Other rebate and discount programs arise from contractual agreements with private payers. Various factors, including market factors and the ability of private payers to control patient access to products, may provide payers the leverage to negotiate higher or additional rebates or discounts that could have a material adverse effect on AbbVie’s operations. AbbVie has debt obligations that could adversely affect its business and its ability to meet its obligations. The amount of debt that AbbVie has incurred and intends to incur could have important consequences to AbbVie and its investors. These consequences include, among other things, requiring a portion of AbbVie’s cash flow from operations to make interest payments on this debt and reducing the cash flow available to fund capital expenditures and other corporate purposes and to grow AbbVie’s business. To the extent that AbbVie incurs additional indebtedness, these risks could increase. In addition, AbbVie’s cash flow from operations may not be sufficient to repay all of the outstanding debt as it becomes due, and AbbVie may not be able to borrow money, sell assets, or otherwise raise funds on acceptable terms, or at all, to refinance its debt. AbbVie may need additional financing in the future to meet its capital needs or to make opportunistic acquisitions, and such financing may not be available on favorable terms, if at all, and may be dilutive to existing stockholders. AbbVie may need to seek additional financing for its general corporate purposes. For example, it may need to increase its investment in research and development activities or need funds to make acquisitions. AbbVie may be unable to obtain any desired additional financing on terms favorable to it, if at all. If AbbVie loses its investment grade credit rating or adequate funds are not available on acceptable terms, AbbVie may be unable to fund its expansion, successfully develop or enhance products, or respond to competitive pressures, any of which could negatively affect AbbVie’s business. If AbbVie raises additional funds through the issuance of equity securities, its stockholders will experience dilution of their ownership interest. If AbbVie raises additional funds by issuing debt or entering into credit facilities, it may be subject to limitations on its operations due to restrictive covenants. Failure to comply with these covenants could adversely affect AbbVie’s business. AbbVie depends on information technology and a failure of those systems could adversely affect AbbVie’s business. AbbVie relies on sophisticated information technology systems to operate its business. These systems are potentially vulnerable to malicious intrusion, random attack, loss of data privacy, or 21 breakdown. Although AbbVie has invested in the protection of its data and information technology and also monitors its systems on an ongoing basis, there can be no assurance that these efforts will prevent breakdowns or breaches in AbbVie’s information technology systems that could adversely affect AbbVie’s business. Other factors can have a material adverse effect on AbbVie’s profitability and financial condition. Many other factors can affect AbbVie’s profitability and financial condition, including: (cid:127) changes in or interpretations of laws and regulations, including changes in accounting standards, taxation requirements, product marketing application standards, and environmental laws; (cid:127) differences between the fair value measurement of assets and liabilities and their actual value, particularly for pensions, retiree health care, stock compensation, intangibles, and goodwill; and for contingent liabilities such as litigation, the absence of a recorded amount, or an amount recorded at the minimum, compared to the actual amount; (cid:127) changes in the rate of inflation (including the cost of raw materials, commodities, and supplies), interest rates, market value of AbbVie’s equity investments, and the performance of investments held by it or its employee benefit trusts; (cid:127) changes in the commercial and credit environment that may adversely affect AbbVie’s ability to finance its business operations; (cid:127) changes in the creditworthiness of counterparties that transact business with or provide services to AbbVie or its employee benefit trusts; and (cid:127) changes in business, economic, and political conditions, including: war, political instability, terrorist attacks, the threat of future terrorist activity and related military action; natural disasters; the cost and availability of insurance due to any of the foregoing events; labor disputes, strikes, slow-downs, or other forms of labor or union activity; and pressure from third- party interest groups. Risks Related to AbbVie’s Separation from Abbott AbbVie’s historical financial information is not necessarily representative of the results that it would have achieved as a separate, publicly traded company and may not be a reliable indicator of its future results. AbbVie’s separation from Abbott was completed on January 1, 2013. Therefore, the historical information about AbbVie in this Annual Report on Form 10-K for the fiscal year ended December 31, 2012 and for the periods ending prior to December 31, 2012 refers to AbbVie’s business as operated by and integrated with Abbott. AbbVie’s historical financial information for these periods is derived from the consolidated financial statements and accounting records of Abbott. Accordingly, the financial information for these periods does not necessarily reflect the financial condition, results of operations or cash flows that AbbVie would have achieved as a separate, publicly traded company during the periods presented or those that AbbVie will achieve in the future primarily as a result of the factors described below: (cid:127) Prior to the separation, which occurred on January 1, 2013, AbbVie’s business was operated by Abbott as part of its broader corporate organization, rather than as an independent company. Abbott or one of its affiliates performed various corporate functions for AbbVie, such as accounting, information technology, and finance. Abbott currently provides some of these functions to AbbVie. AbbVie’s historical financial results reflect allocations of corporate expenses from Abbott for such functions and are likely to be less than the expenses AbbVie would have incurred had it operated as a separate publicly traded company. Following the separation and the date on which AbbVie ceases to receive services from Abbott pursuant to 22 transition services agreements, AbbVie may not be able to operate its business at comparable costs, and its profitability may decline; (cid:127) Prior to the separation, AbbVie was able to use Abbott’s size and purchasing power in procuring various goods and services and shared economies of scope and scale in costs, employees, vendor relationships and customer relationships. As a separate, independent company, AbbVie may be unable to obtain goods and services at the prices and terms obtained prior to the separation, which could decrease AbbVie’s overall profitability; (cid:127) Generally, AbbVie’s working capital requirements and capital for its general corporate purposes, including acquisitions, research and development and capital expenditures, were historically satisfied as part of the corporate-wide cash management policies of Abbott. As a result of the separation, AbbVie may need to obtain additional financing from banks, through public offerings or private placements of debt or equity securities, strategic relationships or other arrangements; and (cid:127) The cost of capital for AbbVie’s business may be higher than Abbott’s cost of capital prior to the separation. For additional information about the past financial performance of AbbVie’s business and the basis of presentation of the financial statements of AbbVie’s business, see Item 7, ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ and Item 8, ‘‘Financial Statements and Supplementary Data.’’ As AbbVie builds its information technology infrastructure and transitions its data to its own systems, AbbVie could incur substantial additional costs and experience temporary business interruptions. AbbVie expects to install and implement information technology infrastructure to support its critical business functions, including accounting and reporting, manufacturing process control, customer service, inventory control and distribution. AbbVie may incur temporary interruptions in business operations if it cannot transition effectively from Abbott’s existing transactional and operational systems, data centers and the transition services that support these functions as AbbVie replaces these systems. AbbVie may not be successful in implementing its new systems and transitioning its data, and it may incur substantially higher costs for implementation than currently anticipated. AbbVie’s failure to avoid operational interruptions as it implements the new systems and replaces Abbott’s information technology services, or its failure to implement the new systems and replace Abbott’s services successfully, could disrupt its business, adversely affect its ability to collect receivables from customers, and have a material adverse effect on its profitability. In addition, if AbbVie is unable to replicate or transition certain systems, its ability to comply with regulatory requirements could be impaired. Abbott may fail to perform under various transaction agreements that have been executed as part of the separation or AbbVie may fail to have necessary systems and services in place when certain of the transaction agreements expire. In connection with the separation, AbbVie and Abbott entered into a separation and distribution agreement and various other agreements, including transition services agreements, a tax sharing agreement, international commercial operations agreements, finished goods supply agreements, contract manufacturing agreements, an employee matters agreement, a special products master agreement, an information technology agreement, and a transitional trademark license agreement. Certain of these agreements provide for the performance of services by each company for the benefit of the other for a period of time after AbbVie’s separation from Abbott. AbbVie relies on Abbott to satisfy its performance and payment obligations under these agreements. If Abbott is unable to satisfy its obligations under these agreements, including its indemnification obligations, AbbVie could incur operational difficulties or losses. 23 In addition, AbbVie and Abbott entered into long-term arrangements under a special products master agreement relating to certain product rights and into an ex-U.S. transition services agreement for Abbott to provide AbbVie with back office functions and other services in certain markets outside the United States until AbbVie has established sufficient back office infrastructure to conduct operations in such markets. These arrangements could lead to disputes between Abbott and AbbVie over AbbVie’s rights to certain intellectual property and territorial commercialization rights and over the allocation of costs and revenues for AbbVie’s products and operations outside of the United States. If AbbVie does not have in place its own systems and services, or if AbbVie does not have agreements with other providers of these services when the transaction or long-term agreements terminate, AbbVie may not be able to operate its business effectively and its profitability may decline. AbbVie is in the process of creating its own, or engaging third parties to provide, systems and services to replace many of the systems and services Abbott currently provides to it. AbbVie may not be successful in effectively or efficiently implementing these systems and services or in transitioning data from Abbott’s systems to AbbVie’s. These systems and services may also be more expensive or less efficient than the systems and services Abbott is expected to provide during the transition period. AbbVie will be developing and implementing its own back office functions, administrative systems, personnel, and processes for markets outside the United States where Abbott will initially provide such functions. There can be no assurance that AbbVie will be able to implement such functions effectively and without disrupting its business in those markets. Potential indemnification liabilities to Abbott pursuant to the separation agreement could materially adversely affect AbbVie. The separation agreement with Abbott provides for, among other things, the principal corporate transactions required to effect the separation, certain conditions to the separation and provisions governing the relationship between AbbVie and Abbott with respect to and resulting from the separation. Among other things, the separation agreement provides for indemnification obligations designed to make AbbVie financially responsible for substantially all liabilities, except certain tax liabilities, that may exist relating to its business activities, whether incurred prior to or after AbbVie’s separation from Abbott, as well as those obligations of Abbott assumed by AbbVie pursuant to the separation agreement, including those relating to Depakote. If AbbVie is required to indemnify Abbott under the circumstances set forth in the separation agreement, AbbVie may be subject to substantial liabilities. AbbVie may not be able to engage in certain corporate transactions during the two-year period following the distribution. To preserve the tax-free treatment to Abbott of the separation and the distribution, under the tax sharing agreement that AbbVie entered into with Abbott, AbbVie is restricted from taking any action that prevents the distribution and related transactions from being tax-free for United States federal income tax purposes. Under the tax sharing agreement, for the two-year period following the distribution, AbbVie is prohibited, except in certain circumstances, from: (cid:127) entering into any transaction resulting in the acquisition of 25 percent or more of its stock or substantially all of its assets, whether by merger or otherwise; (cid:127) merging, consolidating, or liquidating; (cid:127) issuing equity securities beyond certain thresholds; (cid:127) repurchasing its capital stock; and (cid:127) ceasing to actively conduct its business. 24 These restrictions may limit AbbVie’s ability to pursue certain strategic transactions or other transactions that it may believe to be in the best interests of its stockholders or that might increase the value of its business. In addition, under the tax sharing agreement, AbbVie is required to indemnify Abbott against any such tax liabilities as a result of the acquisition of AbbVie’s stock or assets, even if it did not participate in or otherwise facilitate the acquisition. Certain of AbbVie’s executive officers and directors may have actual or potential conflicts of interest because of their previous or continuing positions at Abbott. Because of their former positions with Abbott, certain of these executive officers and directors own Abbott common shares, options to purchase Abbott common shares or other equity awards. Even though AbbVie’s board of directors consists of a majority of directors who are independent, and AbbVie’s executive officers who were formerly employees of Abbott ceased to be employees of Abbott, some AbbVie executive officers and directors continue to have a financial interest in Abbott common shares. In addition, four of AbbVie’s directors currently serve on the board of directors of Abbott. Continuing ownership of Abbott common shares and equity awards, or service as a director at both companies could create, or appear to create, potential conflicts of interest if AbbVie and Abbott pursue the same corporate opportunities or face decisions that could have different implications for AbbVie and Abbott. AbbVie may not achieve some or all of the expected benefits of the separation. AbbVie may not be able to achieve the full strategic and financial benefits expected to result from its separation from Abbott because, among other things: (a) AbbVie may be more susceptible to market fluctuations and other adverse events than if it were still a part of Abbott; and (b) AbbVie’s business is less diversified than Abbott’s business prior to the separation. If AbbVie fails to achieve some or all of the benefits expected to result from the separation, or if such benefits are delayed, the business, financial conditions, and results of operations of AbbVie could be adversely affected. Risks Related to AbbVie’s Common Stock AbbVie cannot guarantee the timing, amount, or payment of dividends on its common stock. Although AbbVie expects to pay regular cash dividends, the timing, declaration, amount and payment of future dividends to stockholders will fall within the discretion of AbbVie’s board of directors. The board’s decisions regarding the payment of dividends will depend on many factors, such as AbbVie’s financial condition, earnings, capital requirements, debt service obligations, industry practice, legal requirements, regulatory constraints, and other factors that the board deems relevant. For more information, see Item 5, ‘‘Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.’’ AbbVie’s ability to pay dividends will depend on its ongoing ability to generate cash from operations and access capital markets. AbbVie cannot guarantee that it will pay a dividend in the future or continue to pay any dividend if AbbVie commences paying dividends. Your percentage of ownership in AbbVie may be diluted in the future. In the future, your percentage ownership in AbbVie may be diluted because of equity issuances for capital market transactions, equity awards that AbbVie will be granting to AbbVie’s directors, officers and employees, acquisitions, or other purposes. AbbVie’s employees will have options to purchase shares of its common stock as a result of conversion of their Abbott stock options (in whole or in part) to AbbVie stock options. AbbVie anticipates its compensation committee will grant additional stock options or other stock-based awards to its employees. Such awards will have a dilutive effect on AbbVie’s earnings per share, which could adversely affect the market price of AbbVie’s common stock. 25 From time to time, AbbVie will issue additional options or other stock-based awards to its employees under AbbVie’s employee benefits plans. In addition, AbbVie’s amended and restated certificate of incorporation authorizes AbbVie to issue, without the approval of AbbVie’s stockholders, one or more classes or series of preferred stock having such designation, powers, preferences and relative, participating, optional and other special rights, including preferences over AbbVie’s common stock respecting dividends and distributions, as AbbVie’s board of directors generally may determine. The terms of one or more classes or series of preferred stock could dilute the voting power or reduce the value of AbbVie’s common stock. For example, AbbVie could grant the holders of preferred stock the right to elect some number of AbbVie’s directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences AbbVie could assign to holders of preferred stock could affect the residual value of the common stock. Certain provisions in AbbVie’s amended and restated certificate of incorporation and amended and restated by-laws, and of Delaware law, may prevent or delay an acquisition of AbbVie, which could decrease the trading price of AbbVie’s common stock. AbbVie’s amended and restated certificate of incorporation and amended and restated by-laws contain, and Delaware law contains, provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the bidder and to encourage prospective acquirors to negotiate with AbbVie’s board of directors rather than to attempt a hostile takeover. These provisions include, among others: (cid:127) the inability of AbbVie’s stockholders to call a special meeting; (cid:127) the division of AbbVie’s board of directors into three classes of directors, with each class serving a staggered three-year term; (cid:127) a provision that stockholders may only remove directors for cause; (cid:127) the ability of AbbVie’s directors, and not stockholders, to fill vacancies on AbbVie’s board of directors; and (cid:127) the requirement that the affirmative vote of stockholders holding at least 80 percent of AbbVie’s voting stock is required to amend certain provisions in AbbVie’s amended and restated certificate of incorporation and AbbVie’s amended and restated by-laws relating to the number, term and election of AbbVie’s directors, the filling of board vacancies, the calling of special meetings of stockholders and director and officer indemnification provisions. In addition, Section 203 of the Delaware General Corporation Law provides that, subject to limited exceptions, persons that acquire, or are affiliated with a person that acquires, more than 15 percent of the outstanding voting stock of a Delaware corporation shall not engage in any business combination with that corporation, including by merger, consolidation or acquisitions of additional shares, for a three-year period following the date on which that person or its affiliates becomes the holder of more than 15 percent of the corporation’s outstanding voting stock. AbbVie believes these provisions protect its stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirors to negotiate with AbbVie’s board of directors and by providing AbbVie’s board of directors with more time to assess any acquisition proposal. These provisions are not intended to make the company immune from takeovers. However, these provisions apply even if the offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that AbbVie’s board of directors determines is not in the best interests of AbbVie and AbbVie’s stockholders. These provisions may also prevent or discourage attempts to remove and replace incumbent directors. 26 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains certain forward looking statements regarding business strategies, market potential, future financial performance and other matters. The words ‘‘believe,’’ ‘‘expect,’’ ‘‘anticipate,’’ ‘‘project’’ and similar expressions, among others, generally identify ‘‘forward looking statements,’’ which speak only as of the date the statements were made. The matters discussed in these forward looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those projected, anticipated or implied in the forward looking statements. In particular, information included under Item 1, ‘‘Business,’’ Item 1A, ‘‘Risk Factors,’’ and Item 7, ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ contain forward looking statements. Where, in any forward looking statement, an expectation or belief as to future results or events is expressed, such expectation or belief is based on the current plans and expectations of AbbVie management and expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. Factors that could cause actual results or events to differ materially from those anticipated include the matters described under Item 1A, ‘‘Risk Factors’’ and Item 7, ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations.’’ AbbVie does not undertake any obligation to update the forward-looking statements included in this Annual Report on Form 10-K to reflect events or circumstances after the date hereof, unless AbbVie is required by applicable securities law to do so. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES AbbVie’s corporate offices are located at 1 North Waukegan Road, North Chicago, Illinois 60064-6400. AbbVie’s principal manufacturing plants are in the following locations: United States Abbott Park, Illinois* Barceloneta, Puerto Rico Jayuya, Puerto Rico North Chicago, Illinois Worcester, Massachusetts * Leased property. Outside the United States Campoverde di Aprilia, Italy Cork, Ireland Ludwigshafen, Germany Sligo, Ireland In addition to the above, AbbVie has other manufacturing facilities in the United States and worldwide. AbbVie believes its facilities are suitable and provide adequate production capacity. In the United States, including Puerto Rico, AbbVie has one distribution center. AbbVie also has four United States research and development facilities located at: Abbott Park, Illinois; North Chicago, Illinois; Redwood City, California; and Worcester, Massachusetts. Outside the United States, AbbVie’s principal research and development facilities are located in Shanghai, China and Ludwigshafen, Germany. Except as noted, the principal plants in the United States listed above are owned by AbbVie or subsidiaries of AbbVie. The remaining manufacturing plants and all other facilities are owned or leased by AbbVie or subsidiaries of AbbVie. 27 ITEM 3. LEGAL PROCEEDINGS Information pertaining to legal proceedings is provided in Note 13 entitled ‘‘Legal Proceedings and Contingencies’’ of the Notes to Consolidated Financial Statements included under Item 8, ‘‘Financial Statements and Supplementary Data,’’ and is incorporated by reference herein. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 28 EXECUTIVE OFFICERS OF THE REGISTRANT The following table lists AbbVie’s executive officers, each of whom was first appointed as an AbbVie corporate officer in December 2012. Name Age Position Richard A. Gonzalez Laura J. Schumacher 60 Chairman of the Board and Chief Executive Officer 50 Executive Vice President, Business Development, External William J. Chase Carlos Alban Timothy J. Richmond Azita Saleki-Gerhardt, Ph.D. Thomas A. Hurwich Affairs and General Counsel 46 Executive Vice President, Chief Financial Officer 51 Executive Vice President, Commercial Operations 47 50 53 Vice President, Controller Senior Vice President, Human Resources Senior Vice President, Operations Mr. Gonzalez is AbbVie’s Chairman of the Board and Chief Executive Officer. He served as Abbott’s Executive Vice President, Pharmaceutical Products Group from 2010 to 2012, and was responsible for Abbott’s worldwide pharmaceutical business, including commercial operations, research and development, and manufacturing. He has also served as President, Abbott Ventures Inc., Abbott’s medical technology investment arm, from 2009 to 2011. Mr. Gonzalez joined Abbott in 1977 and held various management positions before briefly retiring in 2007, including Abbott’s President and Chief Operating Officer, President, Chief Operating Officer of Abbott’s Medical Products Group, Senior Vice President and President of Abbott’s former Hospital Products Division (now Hospira, Inc.), Vice President and President of Abbott’s Health Systems Division, and Divisional Vice President and General Manager for Abbott’s Diagnostics Operations in the United States and Canada. Ms. Schumacher is AbbVie’s Executive Vice President, Business Development, External Affairs and General Counsel. She served as Abbott’s Executive Vice President, General Counsel, and Corporate Secretary from 2007 to 2012, and as Senior Vice President, Corporate Secretary, and General Counsel from 2005 to 2007. Ms. Schumacher was also responsible for Abbott’s licensing and acquisitions function and its Office of Ethics and Compliance. Prior to her appointment as General Counsel of Abbott, Ms. Schumacher headed Abbott’s litigation department. Ms. Schumacher joined Abbott in 1990. Mr. Chase is AbbVie’s Executive Vice President, Chief Financial Officer. He served as Abbott’s Vice President, Licensing and Acquisitions from 2010 to 2012, as Vice President, Treasurer from 2007 to 2010, and as Divisional Vice President, Controller of Abbott International from 2004 to 2007. Mr. Chase joined Abbott in 1989. Mr. Alban is AbbVie’s Executive Vice President, Commercial Operations. He served as Abbott’s Senior Vice President, Proprietary Pharmaceutical Products, Global Commercial Operations from 2011 to 2012, as Senior Vice President, International Pharmaceuticals from 2009 to 2011, as Vice President, Pharmaceuticals, Western Europe and Canada from 2008 to 2009, as Vice President, Western Europe and Canada from 2007 to 2008, and as Vice President, European Operations from 2006 to 2007. Mr. Alban joined Abbott in 1986. Mr. Richmond is AbbVie’s Senior Vice President, Human Resources. He served as Abbott’s Divisional Vice President of Compensation & Benefits from 2008 to 2012, as Group Vice President of Talent and Rewards from 2007 to 2008, and as Divisional Vice President of Talent Acquisition from 2006 to 2007. Mr. Richmond joined Abbott in 2006. Dr. Saleki-Gerhardt is AbbVie’s Senior Vice President, Operations. She served as Abbott’s Vice President, Pharmaceuticals Manufacturing and Supply from 2011 to 2012, and as Divisional Vice 29 President, Quality Assurance, Global Pharmaceutical Operations from 2008 to 2011. Dr. Saleki- Gerhardt joined Abbott in 1993. Mr. Hurwich is AbbVie’s Vice President, Controller. He served as Abbott’s Vice President, Internal Audit from 2009 to 2012, and as Divisional Vice President, Controller, Abbott Diagnostics Division from 2003 to 2009. Mr. Hurwich joined Abbott in 1983. The executive officers of AbbVie are elected annually by the board of directors. All other officers are elected by the board or appointed by the Chairman of the Board. All officers are either elected at the first meeting of the board of directors held after the annual stockholder meeting or appointed by the Chairman of the Board after that board meeting. Each officer holds office until a successor has been duly elected or appointed and qualified or until the officer’s death, resignation, or removal. There are no family relationships between any of the executive officers listed above. 30 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Principal Market The principal market for AbbVie’s common stock is the New York Stock Exchange (NYSE). A ‘‘when-issued’’ trading market for AbbVie’s common stock began on the NYSE on December 10, 2012, and ‘‘regular way’’ trading of AbbVie’s common stock began on January 2, 2013. Prior to December 10, 2012 there was no public market for AbbVie’s common stock. AbbVie’s common stock is also listed on the Chicago Stock Exchange and traded on various regional and electronic exchanges. Outside the United States, AbbVie’s common stock is listed on NYSE Euronext Paris and the SIX Swiss Exchange. First Quarter Second Quarter Third Quarter Fourth Quarter Stockholders 2013 high low $40.80 48.00 48.42 54.78 $33.33 39.96 41.07 44.32 There were 58,250 stockholders of record of AbbVie common stock as of January 31, 2014. Dividends A quarterly dividend of $0.40 per share was paid on common stock in 2013. On December 12, 2013, AbbVie’s board of directors declared a quarterly cash dividend of $0.40 per share payable February 14, 2014 to stockholders of record at the close of business on January 15, 2014. 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 debt service obligations, legal requirements, regulatory constraints, industry practice, ability to access capital markets, and other factors deemed relevant by its board of directors. Moreover, if AbbVie determines to pay any dividend in the future, there can be no assurance that it will continue to pay such dividends or the amount of such dividends. AbbVie Inc. is an Illinois High Impact Business (HIB) and is located in a federal Foreign Trade Sub-Zone (Sub-Zone 22S). Dividends may be eligible for a subtraction from base income for Illinois income tax purposes. If you have questions, please contact your tax advisor. Performance Graph The following graph compares the cumulative total returns of AbbVie Inc., the S&P 500 Index and the NYSE Arca Pharmaceuticals Index. This graph covers the period from January 2, 2013 (the first day our common stock began ‘‘regular-way’’ trading on the NYSE) through December 31, 2013. This graph assumes $100 was invested in the stock or the index on January 2, 2013 and also assumes the reinvestment of dividends. The stock price performance on the following graph is not necessarily indicative of future stock price performance. 31 $175 $150 $125 $100 1/2/2013 COMPARISON OF CUMULATIVE TOTAL RETURN 3/31/2013 6/30/2013 9/30/2013 12/31/2013 AbbVie Inc. S&P 500 Index NYSE Arca Pharmaceutical Index 14FEB201404102302 This performance graph is furnished and shall not be deemed ‘‘filed’’ with the SEC or subject to Section 18 of the Exchange Act, nor shall it be deemed incorporated by reference in any of our filings under the Securities Act of 1933, as amended. Issuer Purchases of Equity Securities (a) Total Number of Shares (or Units) Purchased (b) Average Price Paid per Share (or Unit) (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs 23,424(1) $48.16 27,503(1) $48.60 0 0 $1,478,178,553(2) $1,478,178,553(2) 3,860,352(1) 3,911,279(1) $52.83 $52.77 3,795,945 3,795,945 $1,277,633,716(2) $1,277,633,716(2) Period October 1, 2013 - October 31, 2013 November 1, 2013 - November 30, 2013 December 1, 2013 - December 31, 2013 Total (1) These shares represent: (i) the shares deemed surrendered to AbbVie to pay the exercise price in connection with the exercise of employee stock options—23,424 in October; 16,203 in November; and 51,107 in December; and (ii) the shares purchased on the open market for the benefit of participants in the AbbVie Employee Stock Purchase Plan—0 in October; 11,300 in November; and 13,300 in December. These shares do not include the shares surrendered to AbbVie to satisfy minimum tax withholding obligations in connection with the vesting of restricted stock or restricted stock units. (2) On February 15, 2013, AbbVie announced that its board of directors approved the purchase of up to $1.5 billion of its common stock, from time to time. 32 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth AbbVie’s selected financial information derived from its (i) audited consolidated financial statements as of and for the year ended December 31, 2013; (ii) audited combined financial statements for the years ended December 31, 2012, 2011, 2010 and 2009 and as of December 31, 2012, 2011 and 2010; and (iii) unaudited combined financial statements as of December 31, 2009. The historical financial statements for periods prior to January 1, 2013 were prepared on a stand-alone basis and were derived from Abbott’s consolidated financial statements and accounting records as if the former research-based pharmaceutical business of Abbott had been part of AbbVie for all periods presented. Accordingly, AbbVie’s financial statements for periods prior to January 1, 2013 are presented on a combined basis and reflect AbbVie’s financial position, results of operations and cash flows as its business was operated as part of Abbott prior to the separation, in conformity with generally accepted accounting principles (GAAP) in the United States. The historical financial statements for periods prior to January 1, 2013 also reflected an allocation of expenses related to certain Abbott corporate functions, including senior management, legal, human resources, finance, information technology and quality assurance. These expenses were allocated to AbbVie based on direct usage or benefit where identifiable, with the remainder allocated on a pro rata basis of revenues, headcount, square footage, number of transactions or other measures. AbbVie considers the expense allocation methodology and results to be reasonable. However, the allocations may not be indicative of the actual expenses that would have been incurred had AbbVie operated as an independent, stand- alone, publicly-traded company for the periods presented. Accordingly, the historical financial information presented for periods prior to January 1, 2013 may not be indicative of the results of operations or financial position that would have been achieved if AbbVie had been an independent, stand-alone, publicly-traded company during the periods shown or of AbbVie’s performance for periods subsequent to December 31, 2012. Refer to ‘‘Basis of Historical Presentation’’ and ‘‘Transition from Abbott and Cost to Operate as an Independent Company’’ included under Item 7, ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ for additional information. The selected financial information should be read in conjunction with the financial statements and accompanying notes included under Item 8, ‘‘Financial Statements and Supplementary Data’’ and Item 7, ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations.’’ as of and for the years ended December 31 (in millions, except per share data) 2013 2012 2011 2010 2009 Statement of earnings data Net sales Net earnings(a) Basic earnings per share(a) Diluted earnings per share(a) Cash dividends declared per share(b) Weighted-average basic shares outstanding(c) Weighted-average diluted shares outstanding(c) Balance sheet data $18,790 $ 4,128 2.58 $ 2.56 $ 2.00 $ 1,589 1,604 $18,380 $ 5,275 3.35 $ 3.35 $ n/a 1,577 1,577 $17,444 $ 3,433 2.18 $ 2.18 $ n/a 1,577 1,577 $15,638 $ 4,178 2.65 $ 2.65 $ n/a 1,577 1,577 $14,214 $ 4,636 2.94 $ 2.94 $ n/a 1,577 1,577 Total assets Long-term debt and lease obligations(d) $29,198 $14,310 $27,008 $14,652 $19,521 48 $ $21,135 52 $ $15,858 55 $ (a) Results for the year ended December 31, 2013 included higher expenses associated with operating as an independent, stand-alone publicly traded company than the historically derived financial statements. The increases include a full year of interest expense on debt issued in November 2012, a higher tax rate and other full year incremental costs of operating as an independent company. (b) On January 4, 2013, the board of directors declared a cash dividend of $0.40 per share of common stock. This dividend was declared from pre-separation earnings and was recorded as a reduction of 33 additional paid-in capital. In addition, AbbVie declared regular quarterly cash dividends in 2013 aggregating $1.60 per share of common stock. Refer to Note 11 to the audited consolidated financial statements included under Item 8, ‘‘Financial Statements and Supplementary Data’’ for information regarding cash dividends declared in 2013. (c) On January 1, 2013, Abbott Laboratories distributed 1,577 million shares of AbbVie common stock. For periods prior to the separation, the weighted-average basic and diluted shares outstanding was based on the number of shares of AbbVie common stock outstanding on the distribution date. Refer to Note 4 to the audited consolidated financial statements included under Item 8, ‘‘Financial Statements and Supplementary Data’’ for information regarding the calculation of basic and diluted earnings per common share for the year ended December 31, 2013. (d) Also includes current portion of long-term debt and lease obligations. 34 ITEM 7. MANAGEMENT’S 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) and results of operations as of and for each of the three years in the period ended December 31, 2013. 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. AbbVie develops and markets advanced therapies that address some of the world’s most complex and serious diseases. AbbVie products are used to treat chronic autoimmune diseases, including rheumatoid arthritis, psoriasis, and Crohn’s disease; low testosterone; HIV; endometriosis; thyroid disease; Parkinson’s disease; and complications associated with chronic kidney disease (CKD) and cystic fibrosis, among other health conditions. AbbVie also has a pipeline of promising new medicines, including more than 20 compounds or indications in Phase II or Phase III development across such important medical specialties as immunology, virology, oncology, renal disease, neurological diseases and women’s health. In the United States, AbbVie’s products are generally sold directly to wholesalers, distributors, government agencies, health care facilities, specialty pharmacies, and independent retailers from distribution centers and public warehouses. Outside the United States, sales are made either directly to customers or through distributors, depending on the market served. Certain products are co-marketed or co-promoted with other companies. AbbVie has approximately 25,000 employees and its products are sold in over 170 countries. AbbVie operates in one business segment—pharmaceutical products. Financial Results In its first full year as an independent company, AbbVie achieved its key objectives, including strong sales growth of HUMIRA and other key products, operational efficiencies and progress in advancing its pipeline, particularly with its late-stage hepatitis C virus (HCV) program. Worldwide net sales in 2013 totaled $18.8 billion, an increase of 2 percent, despite the loss of exclusivity in the company’s lipid franchise during the year. Generic competition began in November 2012 for TriCor, July 2013 for TRILIPIX and September 2013 for Niaspan, resulting in the loss of $1.1 billion of revenue in 2013 over the prior year. The company’s financial performance also included delivering fully diluted earnings per share of $2.56, while accelerating its investment in research and development and increasing sales and marketing support for new and existing products. In 2013, the company generated cash flows from operations of $6.3 billion. These strong cash flows enabled the company to enhance its pipeline through licensing and collaboration activities and to pay cash dividends to shareholders of $2.6 billion in 2013. In 2014, AbbVie plans to continue to invest in key products, advance its pipeline and prepare for anticipated product launches that are expected to drive growth in 2015 and beyond. Strategic Objectives AbbVie’s long-term strategy is to maximize its existing portfolio of products through new indications, share gains, increased geographic expansion in underserved markets while also advancing its new product pipeline to meet unmet medical needs. To successfully execute its long-term strategy, AbbVie will focus on expanding HUMIRA sales, advancing the pipeline, expanding its presence in emerging markets and managing its product portfolio to maximize value. 35 AbbVie expects to continue to drive strong HUMIRA sales growth in several ways. AbbVie seeks to expand the HUMIRA patient base by applying for regulatory approval of new indications for HUMIRA, treating conditions such as uveitis, hidradenitis suppurativa and pediatric Crohn’s disease. AbbVie will also seek to drive HUMIRA sales growth by expanding its market share and its presence in underserved markets. Research and development (R&D) efforts will continue to focus a significant portion of expenditures on compounds for immunology, virology, oncology, renal disease, neurological diseases and women’s health. AbbVie’s 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. Current R&D projects are described in the ‘‘Research and Development’’ section below. AbbVie plans to continue making investments in key emerging markets, including Brazil, China, Mexico and Russia. Continued penetration of HUMIRA and other leading products is expected to help drive growth in these markets. AbbVie will continue its investment in products with durable sales, while making adjustments as necessary to increase the value of its product portfolio. AbbVie plans to achieve this objective in a variety of ways depending on product and circumstances by, for example, identifying supply chain efficiencies, pursuing additional indications, and optimizing residual value as products reach the end of exclusivity. AbbVie believes that its approach will allow the company to maintain a strong operating margin. Research and Development Research and innovation continues to be a key strategic priority for AbbVie. 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 at other biotechnology or pharmaceutical companies. AbbVie’s pipeline includes more than 20 compounds or indications in Phase II or III development individually or under collaboration or license agreements. Of these programs, approximately 10 are in Phase III development or in registration. AbbVie expects several Phase II programs to transition into Phase III programs during 2014. R&D is focused on therapeutic areas that include immunology, virology, oncology, renal disease, neurological diseases, and women’s health, among others. Immunology HUMIRA is currently approved for ten indications in major geographies, including nine indications in Europe and seven in the United States. AbbVie continues to dedicate R&D efforts to expanding indications for HUMIRA, including in the fields of gastroenterology, dermatology and ophthalmology. Registration submissions and regulatory approvals for HUMIRA in 2013 included approval for two new gastroenterology indications in Japan—intestinal Behcet’s and ulcerative colitis. Phase III trials are ongoing in preparation for regulatory applications of HUMIRA for uveitis and hidradenitis suppurativa in the United States and the European Union. The results of AbbVie’s two fully-enrolled Phase III clinical trials to evaluate the safety and efficacy of HUMIRA for patients with moderate to severe hidradenitis suppurativa in the United States are expected in 2014. The FDA issued a Complete Response Letter to the company’s registration submission for axial spondyloarthritis, which is currently under evaluation by the company. 36 AbbVie also has a number of next-generation programs underway to address immune-mediated conditions, including the following. (cid:127) AbbVie’s studies of dual variable domain immunoglobulin (DVD-Ig) technology, which represents an approach that can target multiple disease-causing antigens with a single biologic agent, continue to progress. This proprietary technology could lead to next-generation biologic treatments for complex conditions such as cancer or rheumatoid arthritis, where multiple pathways are involved in the disease. (cid:127) AbbVie is collaborating with Biotest AG on an anti-CD4 biologic known as tregalizumab. The compound is currently in Phase IIb clinical trials for rheumatoid arthritis and psoriasis. (cid:127) GLPG0634, a next-generation, oral Janus Kinase 1 (JAK1) inhibitor, is being developed with Galapagos NV (Galapagos) in a collaboration entered into during the first quarter of 2012. GLPG0634 is currently in Phase IIb development to treat rheumatoid arthritis and may be able to address other autoimmune diseases. In January 2014, a Phase II study to evaluate GLPG0634 to treat Crohn’s disease was initiated. (cid:127) In September 2013, AbbVie entered into a global collaboration with Ablynx NV (Ablynx) to develop and commercialize the anti-IL-6R Nanobody, ALX-0061, to treat inflammatory diseases including rheumatoid arthritis and systemic lupus erythematosus. ALX-0061 is currently in Phase II development for rheumatoid arthritis. (cid:127) In May 2013, AbbVie entered into a global collaboration with Alvine Pharmaceuticals, Inc. to develop ALV003, a novel oral treatment for patients with celiac disease. ALV003 is currently in Phase IIb development. Virology In October 2012, AbbVie initiated a comprehensive Phase III program for genotype 1 HCV that involves combinations of ABT-450, a protease inhibitor for HCV infection; ABT-333, a polymerase inhibitor; and ABT-267, a NS5A inhibitor. In December 2013 and January 2014, AbbVie disclosed top-line results from all six of these registrational studies. AbbVie expects to complete regulatory submissions in the United States and the European Union in the second quarter of 2014 and anticipates commercialization in the United States before the end of 2014. AbbVie also initiated Phase III development in Japan for HCV infection and expects to submit a regulatory application in Japan in 2015. AbbVie also recently initiated Phase II studies of its next-generation HCV program which includes ABT-493, a potent protease inhibitor, and ABT-530, AbbVie’s new NS5A inhibitor. Oncology AbbVie is focused on the development of targeted treatments that inhibit tumor growth and improve response to common cancer therapies. AbbVie’s later-stage oncology pipeline includes the following. (cid:127) Elotuzumab, an anti-CD37 antibody for the treatment of multiple myeloma under a collaboration with Bristol-Myers Squibb. Phase III development began in June 2011 for multiple myeloma. Two Phase III studies are ongoing with results expected in early 2015. (cid:127) Veliparib (ABT-888), a PARP-inhibitor. A Phase IIb study in BRCA-mutated breast cancer being treated with chemotherapy was initiated in 2011. Veliparib is also in Phase II evaluation for the treatment of a variety of other solid tumors, including brain metastases from non-small-cell lung cancer being treated with radiation therapy and non-small-cell lung cancer in combination with chemotherapy. In January 2014, a Phase III clinical trial was initiated to evaluate the safety and 37 efficacy of Veliparib when added to carboplatin, a chemotherapy, in women with early-stage, triple-negative breast cancer. (cid:127) ABT-199, a next-generation Bcl-2 inhibitor in development for chronic lymphocytic leukemia. In January 2014, a Phase III evaluation was initiated in collaboration with AbbVie’s development partner, Roche Holding AG. AbbVie anticipates results from this trial in early 2015. ABT-199 is also being explored for use across a number of different hematologic cancers including non-Hodgkin lymphoma, diffuse large b-cell lymphoma and acute myeloid leukemia. (cid:127) Other molecular targets are being explored with Antibody-Drug Conjugate approaches linking anti-target antibodies with potent cytotoxic agents. Renal Disease AbbVie’s renal care pipeline includes atrasentan, for the treatment of diabetic CKD. In 2013, a Phase III study was initiated to assess atrasentan, when added to standard of care, on progression of kidney disease in patients with stage 2 to 4 CKD and type 2 diabetes. This global registrational study is expected to be completed in 2017. Atrasentan will potentially be the first compound launched to treat diabetic nephropathy by specifically targeting albuminuria and slowing the progression of CKD. AbbVie is also investigating ABT-719, in Phase IIb development, for the treatment of acute kidney injury associated with major cardiac surgeries. Neurological Diseases AbbVie has clinical studies underway on multiple compounds that target receptors in the brain that help regulate mood, memory, and other neurological functions and conditions, including the following. (cid:127) AbbVie is collaborating with Biogen Idec to develop daclizumab for the treatment of the relapsing remitting form of multiple sclerosis (MS), which is the most common form, and affects nearly 85 percent of newly diagnosed MS patients. Daclizumab, an anti-CD25 monoclonal antibody, is currently in Phase III development. (cid:127) AbbVie recently completed two Phase IIb studies of ABT-126, an (cid:1)7-NNR modulator, in both Alzheimer’s disease and cognitive deficits of schizophrenia. Based on the results of these studies, AbbVie plans to focus its efforts on the schizophrenia indication. (cid:127) A levodopa-carbidopa intestinal gel for the treatment of Parkinson’s disease is under regulatory review in the United States and a decision is expected before the end of 2014. This product is sold under the name Duodopa outside the United States. Women’s Health AbbVie is developing a novel oral gonadotropin-releasing hormone (GnRH) antagonist, elagolix, under a collaboration with Neurocrine Biosciences for the treatment of endometriosis-related pain and uterine fibroids. A Phase III study in endometriosis began in mid-2012 and a Phase IIa study for uterine fibroids was initiated in November 2011. In 2013, AbbVie initiated a second Phase III trial for endometriosis and the study for uterine fibroids transitioned to Phase IIb. Other Given the numerous sources for potential future growth, no individual project is expected to be material to cash flows or results of operations over the next five years. Factors considered included R&D expenses projected to be incurred for the project over the next year relative to AbbVie’s total R&D expenses as well as qualitative factors, such as marketplace perceptions and impact of a new 38 product on AbbVie’s overall market position. There were no delays in AbbVie’s 2013 R&D activities that are expected to have a material impact on operations. While the aggregate cost to complete the numerous pharmaceutical projects currently in development is expected to be material, the total cost to complete will depend upon AbbVie’s ability to successfully complete each project, the rate at which each project advances, the nature and extent of cost-sharing arrangements, and the ultimate timing for completion. Given the potential for significant delays and the high rate of failure inherent in the research and development of new pharmaceutical products, it is not possible to accurately estimate the total cost to complete all projects currently in development. However, AbbVie plans to continue to manage its portfolio of projects to achieve R&D spend equal to approximately 16 percent of net sales each year. AbbVie does not regularly accumulate or make management decisions based on the total expenses incurred for a particular development phase in a given period. Separation from Abbott Laboratories On January 1, 2013, AbbVie became an independent, publicly-traded company as a result of the distribution by Abbott Laboratories (Abbott) of 100 percent of the outstanding common stock of AbbVie to Abbott’s shareholders (the separation). Each Abbott shareholder of record as of the close of business on December 12, 2012, received one share of AbbVie common stock for each Abbott common share held as of the record date. AbbVie was incorporated in Delaware on April 10, 2012 and is comprised of Abbott’s former research-based pharmaceuticals business. AbbVie’s common stock began trading ‘‘regular-way’’ under the ticker symbol ‘‘ABBV’’ on the New York Stock Exchange on January 2, 2013. Refer to the ‘‘Basis of Historical Presentation’’ section below for further information. Basis of Historical Presentation Prior to the separation, the historical financial statements were prepared on a stand-alone basis and were derived from Abbott’s consolidated financial statements and accounting records as if the former research-based pharmaceutical business of Abbott had been part of AbbVie for all periods presented. Accordingly, AbbVie’s financial statements for periods prior to January 1, 2013 are presented on a combined basis and reflect AbbVie’s financial position, results of operations and cash flows as its business was operated as part of Abbott prior to the separation, in conformity with GAAP in the United States. The combined financial statements principally represent the historical results of operations and assets and liabilities of Abbott’s Proprietary Pharmaceutical Products segment. The historical combined financial statements included the allocation of certain assets and liabilities that were historically held at the Abbott corporate level but were specifically identifiable or allocable to AbbVie. Prior to 2012, cash and equivalents, short-term investments and restricted funds held by Abbott were not allocated to AbbVie unless those assets were held by an entity that was transferred to AbbVie. As of December 31, 2012, AbbVie’s combined balance sheet reflected the direct holdings of AbbVie legal entities. Prior to 2012, long-term debt and short-term borrowings were not allocated to AbbVie as none of the debt recorded by Abbott was directly attributable to or guaranteed by AbbVie. In 2012, AbbVie issued $14.7 billion of long-term debt with maturities ranging from three to 30 years and $1.0 billion of commercial paper, which was reflected on AbbVie’s combined balance sheet as of December 31, 2012. Prior to 2012, all intercompany transactions between AbbVie and Abbott were considered to be effectively settled in the historical combined financial statements at the time the transactions were recorded. As a result, the total net effect of the settlement of these intercompany transactions was reflected in the combined statements of cash flows for the years ended December 31, 2012 and 2011 as a financing activity and in the combined balance sheet at December 31, 2012 as net parent company investment in AbbVie. As of December 31, 2012, outstanding transactions between AbbVie and Abbott 39 were reflected in the combined balance sheet outside of net parent company investment in AbbVie Inc. As of December 31, 2013 and 2012, the aggregate amount due from Abbott totaled $738 million and $696 million, respectively, and was classified in accounts and other receivables, net. The aggregate amount due to Abbott totaled $876 million and $923 million as of December 31, 2013 and 2012, respectively, and was classified in accounts payable and accrued liabilities. The historical combined financial statements also reflected an allocation of expenses related to certain Abbott corporate functions, including senior management, legal, human resources, finance, information technology and quality assurance. These expenses were allocated to AbbVie based on direct usage or benefit where identifiable, with the remainder allocated on a pro rata basis of revenues, headcount, square footage, number of transactions or other measures. AbbVie considers the expense allocation methodology and results to be reasonable. However, the allocations may not be indicative of the actual expenses that would have been incurred had AbbVie operated as an independent, stand-alone, publicly- traded company for the periods presented. RESULTS OF OPERATIONS Net Sales for the years ended (in millions) 2013 2012 2011 2013 2012 2013 2012 Percent change At actual currency rates At constant currency rates United States International Net sales $10,181 $10,435 $ 9,712 (2)% 8% (2)% 8% 8% 3% 10% 8% 8,609 7,732 7,945 $18,790 $18,380 $17,444 2% 5% 3% 8% The comparisons presented at constant currency rates reflect comparative local currency sales at the prior year’s foreign exchange rates. This measure provides information on the change in net sales assuming that foreign currency exchange rates had not changed between the prior and the current period. AbbVie believes that the non-GAAP measure of change in net sales at constant currency rates, when used in conjunction with the GAAP measure of change in net sales at actual currency rates, may provide a more complete understanding of the company’s operations and can facilitate analysis of the company’s results of operations, particularly in evaluating performance from one period to another. Sales growth in 2013 was driven by the continued strength of HUMIRA, both in the United States and internationally as well as sales of key products including Synthroid, Creon and Duodopa. Sales increased in 2013 despite unfavorable foreign exchange rate fluctuations and the loss of exclusivity for AbbVie’s consolidated lipid franchise. Generic competition began in November 2012 for TriCor, in July 2013 for TRILIPIX and in September of 2013 for Niaspan. The increase in sales in 2012 was primarily due to higher HUMIRA sales, partially offset by the impact of unfavorable foreign currency and the entry of generic competition for TriCor in November 2012. 40 The following table details the sales of key products. years ended December 31 (in millions) 2013 2012 2011 2013 2012 2013 2012 Percent change At actual currency rates At constant currency rates HUMIRA United States International Total AndroGel United States Kaletra United States International Total Synagis International Lupron United States International Total Synthroid United States Sevoflurane United States International Total Creon United States Duodopa International Dyslipidemia products United States Other Total $ 5,236 $ 4,377 $ 3,427 4,505 5,423 4,888 20% 28% 20% 28% 11% 8% 12% 15% $10,659 $ 9,265 $ 7,932 15% 17% 15% 21% $ 1,035 $ 1,152 $ 874 (10)% 32% (10)% 32% $ $ $ $ $ $ $ $ $ $ 244 $ 718 279 $ 734 326 (13)% (14)% (13)% (14)% (2)% (13)% (1)% (7)% 844 962 $ 1,013 $ 1,170 (5)% (13)% (4)% (9)% 827 $ 825 $ 775 — 6% 9% 9% 566 $ 219 569 $ 231 785 $ 800 $ 540 270 810 (1)% 5% (1)% 5% (5)% (14)% (3)% (11)% (2)% (1)% (1)% — 622 $ 551 $ 522 13% 6% 13% 6% 77 $ 491 82 $ 520 568 $ 602 $ 88 577 665 (5)% (7)% (5)% (7)% (6)% (10)% (4)% (5)% (6)% (10)% (4)% (5)% 412 $ 353 $ 332 17% 6% 17% 6% 178 $ 149 $ 125 20% 19% 16% 29% $ 1,076 $ 2,145 $ 2,504 (50)% (14)% (50)% (14)% $ 1,666 $ 1,525 $ 1,735 9% (12)% 10% (11)% $18,790 $18,380 $17,444 2% 5% 3% 8% On a constant currency basis, global HUMIRA sales increased 15 percent in 2013 and 21 percent in 2012 as a result of market expansion and higher market share across various countries, higher pricing in certain geographies and the global launch of the ulcerative colitis indication in 2012. HUMIRA sales continued to expand in the rheumatology, dermatology and gastroenterology categories. HUMIRA received approvals from the European Commission for the treatment of moderately to severely active ulcerative colitis in April 2012, the treatment of severe axial spondyloarthritis in July 2012, and the treatment of pediatric patients with severe active Crohn’s disease in November 2012. AbbVie is pursuing several new indications to help further differentiate from competitive products and add to the sustainability and future growth of HUMIRA. AndroGel sales for 2013 were impacted by rebates implemented during the second half of 2012, certain account losses in early 2013 and continued moderation of market growth. The increase in AndroGel 41 sales in 2012 reflected higher prices, market share gains, the launch of AndroGel 1.62% in the second quarter of 2011, and volume growth in the U.S. testosterone replacement market. AndroGel continues to hold the number one market share position in the U.S. testosterone replacement market, with approximately 60 percent of the market share. AndroGel 1% sales are expected to be impacted by generic competition in late 2014. Global sales of Kaletra declined in 2013 and 2012 primarily due to lower market share resulting from the impact of competition. Synthroid sales increased 13 percent and 6 percent in 2013 and 2012, respectively, due to strong brand loyalty and market leadership, and price. Sales of Sevoflurane were impacted in both years by generic competition. Sales of Creon in 2013 and 2012 grew by 17 percent and 6 percent, respectively. Creon maintains market leadership in the pancreatic enzyme market and continued to capture the vast majority of new prescription starts in 2013. In the first quarter of 2013, the FDA approved Creon in a 36,000 lipase-unit dose for patients with exocrine pancreatic insufficiency. Creon 36,000 is the highest dose of pancreatic therapy currently available. Sales of Duodopa, AbbVie’s therapy for advanced Parkinson’s disease currently approved in Europe and other international markets, increased 16 percent on a constant currency basis. Duodopa is currently under regulatory review in the United States and a regulatory decision is expected in 2014. Sales for AbbVie’s consolidated lipid franchise, which includes TriCor, TRILIPIX and Niaspan, declined 50 percent in 2013 and 14 percent in 2012 due to the introduction of generic versions of these products in the U.S. market and, in 2012, softness in the overall branded cholesterol market. Generic competition began in November 2012 for TriCor, in July 2013 for TRILIPIX, and in September 2013 for Niaspan. AbbVie expects the negative impact of generic competition on sales to continue in 2014. Gross Margin years ended December 31 (in millions) Gross margin as a % of net sales Percent change 2013 $14,209 2012 $13,872 2011 $12,805 2013 2% 2012 8% 76% 75% 73% The gross profit margin in 2013 reflected the favorable impact of product mix across the product portfolio, including HUMIRA, operational efficiencies, price increases and lower amortization expense for intangible assets, partially offset by the effect of unfavorable foreign exchange rates. The increase in the gross profit margin in 2012 was primarily due to product mix, improved efficiencies, higher prices in certain geographies, and the favorable impact of foreign currency, partially offset by pricing pressures in various other markets. The improvement also reflects lower amortization expense for intangible assets and the impact of restructuring programs implemented in 2011 to realign various manufacturing operations. Selling, General and Administrative years ended December 31 (in millions) Selling, general and administrative as a % of net sales Percent change 2013 $5,352 2012 $4,989 2011 $5,894 2013 2012 7% (15)% 28% 27% 34% 42 Selling, general and administrative (SG&A) expenses in 2013 and 2012 included $228 million and $213 million, respectively, of costs associated with the separation of AbbVie from Abbott. SG&A expenses in 2013 included restructuring charges aggregating $39 million which principally related to the restructuring of certain commercial operations in conjunction with the loss and expected loss of exclusivity of certain products. SG&A expenses in 2012 and 2011 included litigation charges of $100 million and $1.5 billion, respectively, related to the Depakote investigation. Refer to Note 13 for information on the Depakote charge. Excluding these items from all years, SG&A expenses increased 9 percent and 7 percent in 2013 and 2012, respectively. The increases in SG&A expenses over the three-year period were due primarily to increased selling and marketing support for new and existing products, including continued spending for HUMIRA, and in 2013, the full year incremental costs of becoming an independent company. Research and Development and Acquired In-Process Research and Development years ended December 31 (in millions) Research and development as a % of net sales Acquired in-process research and development 2013 $2,855 2012 $2,778 2011 $2,618 2013 2012 3% 6% 15% 15% 15% $ 338 $ 288 $ 673 17% (57)% Percent change R&D expense in 2013 reflects added funding to support the company’s emerging mid- and late-stage pipeline assets and the continued pursuit of additional HUMIRA indications. R&D expense in 2013 and 2012 reflected continued pipeline spending on programs in biologics, neuroscience and virology as well as a $50 million R&D milestone payment related to a product in development for the treatment of CKD in 2012. R&D expenses also included restructuring charges of $15 million in 2013, $183 million in 2012 and $72 million in 2011. Excluding restructuring charges and milestone payments, R&D expenses increased 11 percent in 2013 and less than 1 percent in 2012. Acquired in-process research and development (IPR&D) expense in 2013 principally included a charge of $175 million as a result of entering into a global license agreement with Ablynx NV to develop and commercialize ALX-0061, a charge of $70 million as a result of entering into a global collaboration with Alvine Pharmaceuticals, Inc. to develop ALV003, a charge of $45 million as a result of entering into a global collaboration with Galapagos NV for cystic fibrosis therapies and charges totaling $48 million as a result of entering into several other arrangements. IPR&D expense in 2012 included a charge of $110 million for the acquisition of ABT-719, a charge of $150 million as a result of entering into a global collaboration to develop and commercialize an oral, next-generation JAK1 inhibitor, and a charge of $28 million as a result of entering into a two-year collaboration agreement to research, develop and commercialize up to three compounds with Antibody-Drug Conjugate approaches. IPR&D expense in 2011 included a charge of $188 million for the achievement of a developmental milestone under a licensing agreement for bardoxolone methyl, and charges of $400 million and $85 million for entering into collaboration agreements for second-generation oral antioxidant inflammation modulators and an anti-CD4 biologic for the treatment of rheumatoid arthritis and psoriasis, respectively. Interest Expense Interest expense (income), net in 2013 was $278 million and was comprised primarily of interest expense on outstanding debt, partially offset by interest income of $21 million. In November 2012, AbbVie issued $14.7 billion of long-term debt with maturities ranging from three to 30 years and 43 entered into interest rate swaps with various financial institutions, which converted $8.0 billion of its fixed rate interest rate debt to floating interest rate debt. In addition, AbbVie issued $1.0 billion of commercial paper in the fourth quarter of 2012. The balance of commercial paper outstanding at December 31, 2013 was $400 million. Interest expense, net in 2012 of $84 million was comprised primarily of interest expense on outstanding debt and bridge facility fees related to the separation from Abbott, partially offset by interest income of $20 million. Other (Income) Expense Other (income) expense, net, included expenses of $11 million in 2013, $29 million in 2012 and $56 million in 2011 of fair value adjustments to the contingent consideration related to an acquisition of a business in 2010. Other (income) expense, net, for 2013, 2012 and 2011 also included ongoing contractual payments associated with the conclusion of a preexisting joint venture arrangement dissolved in 2008. Other (income) expense, net, in 2012 included income of $21 million from the resolution of a contractual agreement and a loss of $52 million for the impairment of an equity security. Income Tax Expense The income tax rates were 22.6 percent in 2013, 7.9 percent in 2012 and 6.4 percent in 2011. Income taxes in 2012 and 2011 included the recognition of tax benefits totaling approximately $195 million and $410 million, respectively, as a result of favorable resolutions of various tax positions pertaining to prior years. The increase in the effective tax rate in 2013 over 2012 is principally due to income tax expense related to certain 2013 earnings outside the United States that are not expected to be indefinitely reinvested and the absence of the $195 million of tax benefits recorded in 2012 as a result of the favorable resolution of various tax positions pertaining to a prior year. Income taxes in 2011 also reflected the non-deductibility of a litigation reserve. Transition from Abbott and Cost to Operate as an Independent Company AbbVie’s historical financial statements for periods prior to January 1, 2013 are presented on a combined basis and reflect AbbVie’s financial position, results of operations and cash flows as its business was operated as part of Abbott, rather than as an independent company. AbbVie has and will continue to incur additional ongoing operating expenses to operate as an independent company, including the cost of various corporate headquarters functions, incremental information technology- related costs, and incremental costs to operate a stand-alone back office infrastructure outside the United States. AbbVie’s transition services agreements with Abbott in the United States cover certain corporate support services that AbbVie has historically received from Abbott. Such services include information technology, accounts payable, payroll, and other financial functions, as well as engineering support for various facilities, quality assurance support, and other administrative services. The terms of the services under the agreements vary by activity. These agreements facilitate the separation by allowing AbbVie to operate independently prior to establishing stand-alone back office functions across its organization. As of the date of the separation, AbbVie did not have sufficient back office infrastructure to operate in markets outside the United States. As a result, AbbVie entered into transition services agreements with Abbott to provide services outside the United States, including back office services in certain countries, for up to two years after separation. The back office services provided include information technology, accounts payable, payroll, receivables collection, treasury and other financial functions, as well as order entry, warehousing, and other administrative services. These transition services agreements have allowed AbbVie to operate its international pharmaceuticals business independently prior to 44 establishing a stand-alone back office infrastructure for all countries. During the transition from Abbott, AbbVie has and will continue to incur non-recurring expenses to expand its international infrastructure. In addition, in certain international markets as of the date of the separation and as of December 31, 2013, certain marketing authorizations to sell AbbVie’s products continued to be held by Abbott until such authorizations could be transferred through the applicable regulatory channels. It is not practicable to estimate the costs that would have been incurred in each of the periods presented in the historical financial statements for the functions described above. Actual costs that would have been incurred if AbbVie operated as a stand-alone company during these periods would have depended on various factors, including organizational design, outsourcing and other strategic decisions related to corporate functions, information technology, and international back office infrastructure. Refer to Note 1 for further description of transactions between AbbVie and Abbott. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES years ended December 31 (in millions) Cash flows provided by/(used in): Operating activities Investing activities Financing activities 2013 2012 2011 $ 6,267 879 (3,442) $ 6,345 (2,418) 1,931 $ 6,247 553 (6,783) Strong cash flows from operating activities were driven by net earnings and focused working capital management. In 2013, cash flows from operating activities also reflected cash paid for taxes of $1.3 billion, cash paid for interest of $283 million and a voluntary contribution to its main domestic defined benefit pension plan of $145 million. In 2012, cash flows from operating activities reflected cash paid for interest of $61 million and a voluntary contribution to its sponsored pension plans of $46 million. In 2011, AbbVie recorded non-cash charges of $1.5 billion in accrued liabilities to establish a litigation reserve related to claims on AbbVie’s previous sales and marketing activities for Depakote. AbbVie made payments of $1.6 billion in 2012 to settle these claims. Cash flows from investing activities in 2013 and 2012 reflected capital expenditures, net sales (purchases) of short-term investments and payments related to certain collaboration, license and acquisition agreements. Refer to Note 5 to the audited consolidated financial statements included under Item 8, ‘‘Financial Statements and Supplementary Data’’ for information regarding significant collaboration, license and acquisition agreements. AbbVie issued senior notes of $14.7 billion in November 2012 and $1.0 billion of commercial paper in December 2012. Abbott’s guarantee of the senior notes terminated upon the distribution of AbbVie common stock to the shareholders of Abbott upon the separation on January 1, 2013. The senior notes, which have maturities ranging from three to 30 years, may be redeemed at any time, except the floating rate notes and some of the senior notes of each series, at a redemption price equal to the principal amount plus a make-whole premium. In 2013, the company issued and redeemed commercial paper. The balance of commercial paper outstanding at December 31, 2013 and 2012 was $400 million and $1.0 billion, respectively, at weighted-average interest rates of 0.2% and 0.4%, respectively, for each period. AbbVie may retire or issue additional commercial paper to meet liquidity requirements as needed. Historically, cash flows from financing activities represented cash transactions with Abbott. The company’s cash and equivalents and short-term investments increased from $8.0 billion at December 31, 2012 to $9.9 billion at December 31, 2013. During 2012, Abbott contributed approximately $4.4 billion of cash to newly formed AbbVie entities, and AbbVie distributed $13.2 billion in cash and debt securities to Abbott. Subsequent to the separation, effective January 1, 2013, AbbVie no longer participates in cash management and funding arrangements with Abbott. 45 While a significant portion of cash and equivalents at December 31, 2013 are considered reinvested indefinitely in foreign subsidiaries, AbbVie does not expect such reinvestment to affect its liquidity and capital resources. If these funds were needed for operations in the United States, AbbVie would be required to accrue and pay U.S. income taxes to repatriate these funds. AbbVie believes that it has sufficient sources of liquidity to support its assumption that the disclosed amount of undistributed earnings at December 31, 2013 has been reinvested indefinitely. A quarterly dividend of $0.40 per share was paid on common stock in 2013 resulting in total dividends paid of $2.56 billion for 2013. On December 12, 2013, the board of directors declared a quarterly cash dividend of $0.40 per share for stockholders of record on January 15, 2014, payable on February 14, 2014. AbbVie expects to pay a regular quarterly cash dividend; however, the timing, declaration, amount of, and payment of any dividends 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 debt service obligations, legal requirements, regulatory constraints, industry practice, ability to access capital markets, and other factors deemed relevant by its board of directors. On February 15, 2013, the company announced a $1.5 billion stock repurchase program, which was effective immediately. Purchases of AbbVie common stock may be made from time to time at management’s discretion. The plan has no time limit and can be discontinued at any time. During 2013, AbbVie repurchased approximately 4 million shares of common stock for $223 million in the open market. AbbVie’s remaining stock repurchase authorization is $1.3 billion as of December 31, 2013. Substantially all of AbbVie’s trade receivables in Greece, Portugal, Italy and Spain are with governmental health systems. Global economic conditions and liquidity issues in these countries have resulted, and may continue to result, in delays in the collection of receivables and credit losses. While the company continues to receive payments on these receivables, these conditions have resulted in an increase in the average length of time it takes to collect accounts receivable outstanding. Outstanding net governmental receivables in these countries at December 31 were as follows. (in millions) Greece Portugal Italy Spain Total Net receivables 2013 $ 37 59 245 440 $781 2012 $ 52 80 308 285 $725 Net receivables over one year past due 2013 2012 $ — $13 23 40 2 3 22 135 $160 $78 With the exception of Greece, AbbVie historically has collected almost all of the outstanding receivables in these countries. AbbVie continues to monitor the creditworthiness of customers located in these and other geographic areas and establishes an allowance against an accounts receivable when it is probable they will not be collected. In addition to closely monitoring economic conditions and budgetary and other fiscal developments in these countries, 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 also monitors the potential for and periodically has utilized factoring arrangements to mitigate credit risk although the receivables included in such arrangements have historically not been a material amount of total outstanding receivables. If government funding were to become unavailable in these countries or if significant adverse changes in their reimbursement practices were to occur, AbbVie may not be able to collect the entire balance. 46 Credit Facility, Access to Capital and Credit Ratings Credit Facility AbbVie currently has a $2.0 billion unsecured five-year revolving credit facility from a syndicate of lenders, entered into in July 2012, which also supports commercial paper borrowings. As of the date of separation, January 1, 2013, Abbott’s obligations under this facility were relieved and AbbVie became the sole obligor. The credit facility enables the company to borrow funds at floating interest rates. At December 31, 2013, the company was in compliance with all its credit facility covenants. Commitment fees under the new credit facility are not material. There were no amounts outstanding on the credit facility on December 31, 2013. 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. Credit Ratings Credit ratings of Baa1 and A assigned to AbbVie in 2012 by Moody’s Investor Service and Standard & Poor’s Corporate, respectively, have not changed as of December 31, 2013. 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 the scheduled maturities of any of the company’s outstanding debt. Contractual Obligations The following table summarizes AbbVie’s estimated contractual obligations as of December 31, 2013. (in millions) Short-term borrowings Long-term debt and capital lease obligations, including current portion Interest on long-term debt(a) Future minimum non-cancelable operating lease commitments Purchase obligations and other(b) Other long-term liabilities(c) Total Total Less than one year One to three years Three to More than five years five years $ 413 $ 413 $ — $ — $ — 14,798 4,882 875 26 1,258 18 281 87 26 390 4,023 633 5,014 621 150 — 182 108 — 306 5,743 3,347 530 — 380 $22,252 $1,215 $4,988 $6,049 $10,000 (a) Includes estimated future interest payments on long-term debt securities and capital lease obligations. Interest payments on debt are calculated for future periods using interest rates in effect at the end of 2013. 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 47 pertain to obligations and agreements outstanding at December 31, 2013. Refer to Notes 8 and 9 for further discussion regarding the company’s debt instruments and related interest rate agreements outstanding at December 31, 2013. Annual interest on capital lease obligations is not material. (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) Amounts less than one year includes a voluntary contribution of $370 million AbbVie made to its main domestic defined benefit plan subsequent to December 31, 2013. Amounts otherwise exclude pension and other post-employment benefits and related deferred compensation cash outflows. Timing of funding is uncertain and dependent on future movements in interest rates and investment returns, changes in laws and regulations, and other variables. Also included in this amount are components of other long-term liabilities including restructuring and an expected payment related to the contingent sales-based payment recognized as part of the acquisition of a business in 2013. Refer to Notes 7 and 9 for further information. 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 not material 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 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 obligations. Refer to Note 5 for further discussion of these collaboration arrangements. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements in accordance with U.S. generally accepted accounting principles 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. 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 persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectability of the sales price is reasonably assured. Revenue from product sales is recognized when title and risk of loss have passed to the customer. Rebates AbbVie provides rebates to pharmacy benefit management companies, state agencies that administer the federal Medicaid program, insurance companies that administer Medicare drug plans, wholesalers, group purchasing organizations, and other government agencies and private entities. Rebate amounts are usually based upon the volume of purchases using contractual or statutory prices for a product. For each type of rebate, the factors used in the calculations of the accrual for that rebate include the identification of which products have been sold subject to the rebate, which customer or government agency price terms apply for that rebate, and the estimated lag time between sale and payment of the 48 rebate. Using historical trends for that rebate, adjusted for current changes, AbbVie estimates the amount of the rebate that will be paid, and records the liability as a reduction of gross sales when AbbVie records its sale of the product. Settlement of the rebate generally occurs from two to eight months after sale. AbbVie regularly analyzes the historical rebate trends and makes adjustments to reserves for changes in trends and terms of rebate programs. Rebate and chargeback accruals are recorded in the same period as the related sales, and are reflected as a reduction of sales. Rebates and chargebacks in 2013, 2012 and 2011 totaled $4.9 billion, $4.3 billion and $3.7 billion, respectively, or 30 percent, 28 percent and 25 percent, respectively, of the gross sales subject to rebate. A one-percentage point increase in the percentage of rebates to related gross sales would decrease net sales by $160 million in 2013. AbbVie considers a one-percentage point increase to be a reasonably likely increase in the percentage of rebates to related gross sales. Other allowances for cash discounts and returns charged against gross sales were $748 million, $667 million and $617 million in 2013, 2012 and 2011, respectively. Management analyzes the adequacy of ending rebate accrual balances each quarter. In the United States, the most significant charges against gross sales are for Medicaid and Medicare rebates, managed care rebates and wholesaler chargebacks. Medicaid rebates relate to the Federal Medicaid program, which is administered by state agencies, whereby rebates are provided to participating state and local government entities under various laws and regulations and in some cases supplemental rebates are also provided to the states under contractual agreements. Medicare rebates are negotiated with managed care organizations that manage prescription drug plans covering the Medicare Part D drug benefit. Pharmacy benefit manager rebates arise from contractual agreements with private health care plans that seek to reduce costs by negotiating discounts with pharmaceuticals manufacturers. Under wholesaler chargeback programs, the wholesaler charges AbbVie back for the difference between the price paid by the wholesaler to AbbVie and the price paid by the end customer to the wholesaler under contractual discount agreements negotiated between AbbVie and the end customer. In order to evaluate the adequacy of the ending accrual balances, for each type of rebate, management uses both internal and external data to estimate the level of inventory in the distribution channel and the rebate claims processing lag time for that rebate. External data sources used to estimate the inventory in the distribution channel include inventory levels periodically reported by wholesalers. Management estimates the processing lag time based on periodic sampling of claims data. To estimate the rebate percentage or net price, systems and calculations are used to track sales by product and by customer or payer and to estimate the contractual or statutory rebate or net price. AbbVie believes systems and calculations are reliable. 49 The following table is an analysis of the three largest rebate accruals and chargeback allowances, which comprise approximately 88 percent of the combined rebate provisions charged against revenues in 2013. Remaining rebate provisions charged against gross sales are not significant in the determination of operating earnings. (in millions) Balance at December 31, 2010 Provisions Payments Balance at December 31, 2011 Provisions Payments Balance at December 31, 2012 Provisions Payments Balance at December 31, 2013 Medicaid and Medicare Rebates $ 634 985 (899) 720 1,077 (990) 807 1,028 (1,168) Managed Care Rebates $ 410 831 (735) 506 830 (840) 496 846 (883) Wholesaler Chargebacks $ 159 1,361 (1,349) 171 1,645 (1,592) 224 2,362 (2,374) $ 667 $ 459 $ 212 Historically, adjustments to prior years’ rebate accruals have not been material to net income. AbbVie employs various techniques to verify the accuracy of claims submitted to it, and where possible, works with the organizations submitting claims to gain insight into changes that might affect the rebate amounts. For Medicaid, Medicare and other government agency programs, the calculation of a rebate involves interpretations of relevant regulations, which are subject to challenge or change in interpretation. Cash Discounts and Returns Cash discounts can be reliably estimated. Product returns can be reliably estimated because AbbVie’s historical returns are low, and because sales return terms and other sales terms have remained relatively unchanged for several periods. Pension and Post-Employment Benefits AbbVie engages outside actuaries to assist in the determination of the obligations and costs under the 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. The significant assumptions used in determining these calculations are disclosed in Note 10 to the consolidated financial statements. The discount rate is selected based on current market rates on high-quality, fixed-income investments at December 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 discount rate is the single rate that equates the discounted cash flows to the rates utilizing the yield curve. As a result, the yield- curve approach reflects the specific cash flows for plans (i.e. duration) in calculating the discount rate. For other countries, AbbVie reviews various indices such as corporate bond and government bond benchmarks to estimate the discount rate. AbbVie’s assumed discount rate has a significant effect on the amounts reported for defined benefit pension and post-employment plans as of December 31, 2013 and will be used in the calculation of net periodic benefit cost in 2014. A 0.5% change in the assumed 50 discount rate would have had the following effects on AbbVie’s calculation of net periodic benefit costs in 2014 and projected benefit obligations as of December 31, 2013: (in millions) Defined benefit plans Service cost and interest cost Projected benefit obligation Other post-employment plans Service cost and interest cost Projected benefit obligation 50 basis point Increase Decrease $ (37) (329) $ (3) (30) $ 38 358 $ 4 34 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 current long-term rate of return on plan assets 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 of December 31, 2013 and will be used in the calculation of net periodic benefit cost in 2014. As of December 31, 2013, a 1% change in assumed expected long-term rate of return on plan assets would have increased or decreased the net period benefit cost of these plans in 2014 by $28 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 the plan. Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans as of December 31, 2013 and will be used in the calculation of net periodic benefit cost in 2014. A 1% change in assumed health care cost trend rates would have the following effects on AbbVie’s calculation of net periodic benefit costs in 2014 and projected benefit obligation as of December 31, 2013: (in millions) Service cost and interest cost Projected benefit obligation Income Taxes One percentage point Increase Decrease $13 71 $ (9) (56) 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 legal proceedings and claims that arise in the normal course of business. Refer to Note 13 for further 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 51 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. There were no significant litigation reserves at December 31, 2013. Valuation of Goodwill 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. 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, which relate to IPR&D, are reviewed for impairment annually or when an event that could result in an impairment occurs. Refer to Note 2 to the consolidated financial statements for further information. For its impairment reviews, 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, foreign currency exchange rates, 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 of a company and similar companies. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of the assets, and potentially result in different impacts to the company’s results of operations. Actual results may differ from the company’s estimates. At December 31, 2013 and 2012, goodwill and intangible assets, net of amortization totaled $8.2 billion and $8.5 billion, respectively, and amortization expense for intangible assets was $509 million, $625 million and $764 million in 2013, 2012 and 2011, respectively. There were no impairments of goodwill in 2013, 2012 or 2011 and the results of the last impairment test indicated that the fair value of AbbVie’s single reporting unit was substantially in excess of its carrying value. In 2012 and 2011, AbbVie recorded impairment charges of $13 million and $46 million, respectively, for certain projects under development. These charges are included in R&D expenses. CERTAIN REGULATORY MATTERS Legislative Issues In the first quarter of 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (collectively referred to herein as ‘‘health care reform legislation’’) were signed into law in the United States. Health care reform legislation included an increase in the basic Medicaid rebate rate from 15.1 percent to 23.1 percent and extended the rebate to drugs provided through Medicaid managed care organizations. Starting in 2011, additional rebates were incurred 52 related to the Medicare Part D coverage gap ‘‘donut hole.’’ These Medicare and Medicaid rebate changes will continue to have a negative effect on AbbVie’s gross profit margin in future years. In 2011, AbbVie began recording the annual fee imposed by health care reform legislation on companies that sell branded prescription drugs to specified government programs. The amount of the annual fee, which totaled approximately $110 million in 2013 and $100 million in both 2012 and 2011, is based on the ratio of certain of AbbVie’s sales as compared to the total such sales of all covered entities multiplied by a fixed dollar amount specified in the legislation by year. The fee is not tax deductible and is included in SG&A expenses. AbbVie’s markets are highly competitive and subject to substantial government regulations. AbbVie expects debate to continue over the availability, method of delivery, and payment for health care products and services. It is not possible to predict the extent to which AbbVie or the health care industry in general might be adversely affected by these factors in the future. A more complete discussion of these factors is contained in Item 1, ‘‘Business’’ and Item 1A, ‘‘Risk Factors.’’ 53 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company is exposed to risk that its earnings, cash flows and equity could be adversely impacted by changes in foreign exchange rates and interest rates. Certain derivative instruments are used when available on a cost-effective basis to hedge the company’s underlying economic exposures. Refer to Note 9 for further information regarding the company’s financial instruments and hedging strategies. Foreign Currency Risk AbbVie’s primary net foreign currency exposures are the Euro, British pound and Japanese yen. Various AbbVie foreign subsidiaries enter into foreign currency forward exchange contracts to manage exposures to changes in foreign exchange rates for anticipated transactions denominated in a currency other than the functional currency of the local entity. These contracts are designated as cash flow hedges of the variability of the cash flows due to changes in foreign currency exchange rates and are marked-to-market with the resulting gains or losses reflected in accumulated other comprehensive loss. Deferred gains or losses on these contracts are included in cost of products sold at the time the products are sold to a third party, generally within twelve months. At December 31, 2013 and 2012, AbbVie held $1.5 billion and $1.0 billion, respectively, in notional amounts of such contracts. AbbVie enters into foreign currency forward exchange contracts to manage its exposure to foreign currency denominated trade payables and receivables and intercompany loans. The contracts, which are not designated as hedges, are marked-to-market, and resulting gains or losses are reflected in net foreign exchange loss (gain) and are generally offset by losses or gains on the foreign currency exposure being managed. At December 31, 2013 and 2012, AbbVie held notional amounts of $5.3 billion and $4.3 billion, respectively, of such foreign currency forward exchange contracts. The following table reflects the total foreign currency forward contracts outstanding at December 31. (in millions) Receive primarily U.S. dollars in exchange for the following currencies: Euro British pound Japanese yen All other currencies Total 2013 Weighted average exchange rate Fair and carrying value receivable/ (payable) 1.359 1.638 103.2 N/A $(56) (3) 7 (4) $(56) Contract amount $3,649 91 323 1,199 $5,262 Contract amount $4,650 492 401 1,308 $6,851 2012 Weighted average exchange rate Fair and carrying value receivable/ (payable) 1.315 1.612 84.4 N/A $(10) — 5 (5) $(10) The company estimates that a 10 percent appreciation in the underlying currencies being hedged from their levels against the U.S. dollar, with all other variables held constant, would decrease the fair value of foreign exchange forward contracts by $692 million at December 31, 2013. If realized, this appreciation would negatively affect earnings over the remaining life of the contacts. A 10 percent appreciation is believed to be a reasonably possible near-term change in foreign currencies. Gains and losses on the hedging instruments offset losses and gains on the hedged transactions and reduce the earnings and stockholders’ equity volatility relating to foreign exchange. Currency restrictions enacted in Venezuela require AbbVie to obtain approval from the Venezuelan government to exchange Venezuelan bolivars for U.S. dollars and require such exchange to be made at the official exchange rate established by the government. Effective February 8, 2013, the Venezuelan government devalued the official exchange rate from 4.3 to 6.3, which resulted in a loss of $11 million 54 in the first quarter of 2013 recorded in net foreign exchange loss (gain) on the consolidated statement of earnings for 2013. Interest Rate Risk Interest rate swaps are used to manage the company’s exposure of changes in interest rates on the fair value of fixed-rate debt. The effect of these hedges is to change the fixed interest rate to a variable rate. AbbVie does not use derivative instruments, such as interest rate swaps, to manage its exposure to changes in interest rates for investment securities. At both December 31, 2013 and December 31, 2012, AbbVie had interest rate hedge contracts totaling $8.0 billion. The company estimates that an increase in the interest rates of 100-basis points would have decrease the fair value of our interest rate swap contracts by approximately $411 million at December 31, 2013. If realized, the fair value reduction would affect earnings over the remaining life of the contracts. The company estimates that an increase of 100-basis points in long-term interest rates would decrease the fair value of long-term debt by $848 million at December 31, 2013. A 100-basis point change is believed to be a reasonably possible near-term change in interest rates. Market Price Sensitive Investments AbbVie holds available-for-sale equity securities from strategic technology acquisitions. The fair value of these investments was approximately $49 million and $12 million as of December 31, 2013 and 2012, respectively. AbbVie monitors these investments for other than temporary declines in market value, and charges impairment losses to income when an other than temporary decline in value occurs. A hypothetical 20 percent decrease in the share prices of these investments would have had an immaterial decrease to their fair value at December 31, 2013. A 20 percent decrease is believed to be a reasonably possible near-term change in share prices. Non-Publicly Traded Equity Securities AbbVie holds equity securities from strategic technology acquisitions that are not traded on public stock exchanges. The carrying value of these investments was approximately $58 million and $72 million as of December 31, 2013 and 2012, respectively. AbbVie monitors these investments for other than temporary declines in market value, and charges impairment losses to income when an other than temporary decline in estimated value occurs. 55 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Financial Statements Consolidated Statements of Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 57 58 59 60 61 62 99 100 56 AbbVie Inc. and Subsidiaries Consolidated Statements of Earnings years ended December 31 (in millions, except per share data) Net sales Cost of products sold Selling, general and administrative Research and development Acquired in-process research and development Total operating costs and expenses Operating earnings Interest expense (income), net Net foreign exchange loss (gain) Other (income) expense, net Earnings before income tax expense Income tax expense Net earnings Per share data Basic earnings per share Diluted earnings per share Cash dividends declared per common share(a) Weighted-average basic shares outstanding(b) Weighted-average diluted shares outstanding(b) 2013 2012 2011 $18,790 $18,380 $17,444 4,581 5,352 2,855 338 4,508 4,989 2,778 288 4,639 5,894 2,618 673 13,126 12,563 13,824 5,664 5,817 3,620 278 55 (1) 84 17 (9) (20) (30) 2 5,332 1,204 5,725 450 3,668 235 $ 4,128 $ 5,275 $ 3,433 $ $ $ 2.58 2.56 2.00 1,589 1,604 $ $ 3.35 3.35 n/a 1,577 1,577 $ $ 2.18 2.18 n/a 1,577 1,577 (a) On January 4, 2013, the board of directors declared a cash dividend of $0.40 per share of common stock. This dividend was declared from pre-separation earnings and was recorded as a reduction of additional paid-in capital. In addition, AbbVie declared regular quarterly cash dividends in 2013 aggregating $1.60 per share of common stock. Refer to Note 11 for information regarding cash dividends declared in 2013. (b) On January 1, 2013, Abbott Laboratories distributed 1,577 million shares of AbbVie common stock. For periods prior to the separation, the weighted-average basic and diluted shares outstanding was based on the number of shares of AbbVie common stock outstanding on the distribution date. Refer to Note 4 for information regarding the calculation of basic and diluted earnings per common share for the year ended December 31, 2013. The accompanying notes are an integral part of these consolidated financial statements. 57 AbbVie Inc. and Subsidiaries Consolidated Statements of Comprehensive Income years ended December 31 (in millions) Net earnings Foreign currency translation gain (loss) adjustments, net of tax expense of $71 in 2013 Pension and post-employment benefits, net of tax expense (benefit) of $309 in 2013, $(24) in 2012 and $(12) in 2011 Unrealized gains (losses) on marketable equity securities, net of tax expense (benefit) of $—in 2013, $(15) in 2012 and $10 in 2011 Hedging activities, net of tax (benefit) of $—in 2013, $(8) in 2012 and $(8) in 2011 Other comprehensive income (loss) Comprehensive income 2013 2012 2011 $4,128 $5,275 $3,433 48 173 (295) 598 (150) 1 (77) 570 (25) (27) (29) (7) 17 (28) (313) $4,698 $5,246 $3,120 The accompanying notes are an integral part of these consolidated financial statements. 58 AbbVie Inc. and Subsidiaries Consolidated Balance Sheets as of December 31 (in millions, except share data) 2013 2012 Assets Current assets Cash and equivalents Short-term investments Accounts and other receivables, net Inventories, net Income tax receivable Deferred income taxes Prepaid expenses and other Total current assets Investments Property and equipment, net Intangible assets, net of amortization Goodwill Other assets Total assets Liabilities and Equity Current liabilities Short-term borrowings Current portion of long-term debt and lease obligations Accounts payable and accrued liabilities Total current liabilities Long-term liabilities Long-term debt and lease obligations Commitments and contingencies $ 9,595 300 3,854 1,150 949 766 1,234 $ 5,901 2,075 4,298 1,091 — 669 1,320 17,848 15,354 118 2,298 1,890 6,277 767 119 2,247 2,323 6,130 835 $29,198 $27,008 $ 413 18 6,448 6,879 $ 1,020 22 5,734 6,776 3,535 14,292 2,239 14,630 Equity Net parent company investment in AbbVie Inc., prior to separation — 3,713 Stockholders’ equity Common stock, $0.01 par value, authorized 4,000,000,000 shares, issued 1,594,260,996 shares in 2013 Common stock held in treasury, at cost, 6,900,434 shares in 2013 Additional paid-in-capital Retained earnings Accumulated other comprehensive loss Total stockholders’ equity Total equity Total liabilities and equity 16 (320) 3,671 1,567 (442) 4,492 — — — — (350) (350) 4,492 3,363 $29,198 $27,008 The accompanying notes are an integral part of these consolidated financial statements. 59 AbbVie Inc. and Subsidiaries Consolidated Statements of Equity years ended December 31 (in millions) Balance at December 31, 2010 Net earnings Net transactions with Abbott Laboratories Other comprehensive loss, net of tax Balance at December 31, 2011 Net earnings Net transactions with Abbott Laboratories Assumption of accumulated unrealized losses on pension and other post-employment benefits, net of tax benefit of $36 Other comprehensive loss, net of tax Balance at December 31, 2012 Separation-related adjustments Reclassification of parent company net investment in connection with separation Issuance of common stock at separation Net earnings Other comprehensive income, net of tax Dividends declared Share repurchases Stock-based compensation plans, net of tax benefits of $(38), and other Balance at December 31, 2013 Common shares outstanding — — — — — — — — — — — — 1,577 — — — (4) 14 1,587 Common Treasury stock $— — stock $ — — Additional paid-in capital $ — — Accumulated other comprehensive Retained earnings Income (loss) Net parent company investment Total $ 288 — $ — $ 15,415 3,433 — $ 15,703 $ 3,433 — — — — — — — — — — 16 — — — — — $16 — — — — — — — — — — — — — — (223) — — — — — — — — (1,316) 4,420 (16) — — — — (97) 583 — (313) (25) — — (296) (29) (350) (662) — — — 570 — — — — — — — — — — — — — — 4,128 — (2,561) — (6,891) $ (6,891) — $ (313) 11,957 5,275 $ 11,932 $ 5,275 (13,519) $(13,519) — $ (296) — $ (29) 3,713 707 $ 3,363 $ (1,271) (4,420) $ — — — $ — $ 4,128 — $ 570 — $ (2,561) (223) — $ — — $ 486 $(320) $ 3,671 $(442) $ 1,567 $ — $ 4,492 The accompanying notes are an integral part of these consolidated financial statements. 60 AbbVie Inc. and Subsidiaries Consolidated Statements of Cash Flows years ended December 31 (in millions) (brackets denote cash outflows) 2013 2012 2011 Cash flows from operating activities 6,267 6,345 Cash flows from operating activities Net earnings Adjustments to reconcile net earnings to net cash from operating activities: Depreciation Amortization of intangible assets Stock-based compensation Acquired in-process research and development Other, net Changes in operating assets and liabilities, net of acquisitions: Accounts and other receivables Inventories Prepaid expenses and other assets Accounts payable and other liabilities Cash flows from investing activities Acquisitions and investments, net of cash acquired Acquisitions of property and equipment Release of restricted funds Purchases of investment securities Sales and maturities of investment securities Cash flows from investing activities Cash flows from financing activities Net change in short-term borrowings Dividends paid Purchases of treasury stock Proceeds from the exercise of stock options Proceeds from issuance of long-term debt Net transactions with Abbott Laboratories, excluding noncash items Other, net Cash flows from financing activities Effect of exchange rate changes on cash and equivalents Net increase in cash and equivalents Cash and equivalents, beginning of year Cash and equivalents, end of year Other supplemental information Interest paid, net of portion capitalized Income taxes paid $ 4,128 $ 5,275 $ 3,433 388 509 212 338 34 681 (56) 459 (426) 525 625 187 288 66 223 (203) 90 (731) (405) (491) — (930) 2,705 879 (601) (2,555) (320) 347 — (247) (66) (3,442) (10) 3,694 5,901 (688) (333) — (2,550) 1,153 (2,418) 1,000 — — — 14,586 (13,504) (151) 16 5,874 27 $ 9,595 $ 5,901 $ 283 1,305 61 — 508 764 163 673 — (498) (87) (206) 1,497 6,247 (273) (356) 1,870 (1,943) 1,255 553 — — — — — (6,762) (21) — 17 10 27 — — 1,931 (6,783) The accompanying notes are an integral part of these consolidated financial statements. 61 AbbVie Inc. and Subsidiaries Notes to Consolidated Financial Statements Note 1 Background and Basis of Presentation Background The principal business of AbbVie Inc. (AbbVie or the company) is the discovery, development, manufacture and sale of a broad line of proprietary pharmaceutical products. Substantially all of AbbVie’s sales in the United States (U.S.) are to three wholesalers. Outside the U.S., products are sold primarily to health care providers or through distributors, depending on the market served. On January 1, 2013, AbbVie became an independent, publicly-traded company as a result of the distribution by Abbott Laboratories (Abbott) of 100 percent of the outstanding common stock of AbbVie to Abbott’s shareholders (the separation). AbbVie was incorporated in Delaware on April 10, 2012. Abbott’s Board of Directors approved the distribution of its shares of AbbVie on November 28, 2012. AbbVie’s registration statement on Form 10 was declared effective by the U.S. Securities and Exchange Commission on December 7, 2012. On January 1, 2013, Abbott’s shareholders of record as of the close of business on December 12, 2012, received one share of AbbVie common stock for every one share of Abbott common stock held as of the record date. AbbVie’s common stock began trading ‘‘regular-way’’ under the ticker symbol ‘‘ABBV’’ on the New York Stock Exchange on January 2, 2013. During the year ended December 31, 2013, separation-related adjustments totaling $1.3 billion were recorded in stockholders’ equity. Separation-related adjustments to additional paid-in capital principally reflected dividends to AbbVie shareholders that were declared from pre-separation earnings during the first quarter and the transfer of certain pension plan liabilities and assets from Abbott to AbbVie upon the legal split of those plans in 2013. In addition, because the historical financial statements were derived from Abbott’s records, separation-related adjustments also included an adjustment to accumulated other comprehensive loss to reflect the appropriate opening balances associated with currency translation adjustments related to AbbVie’s legal entities at the separation date. Refer to Note 10 for further information regarding the separation of the pension plans. In connection with the separation, AbbVie and Abbott entered into transition services agreements covering certain corporate support and back office services that AbbVie has historically received from Abbott. Such services include information technology, accounts payable, payroll, receivables collection, treasury and other financial functions, as well as order entry, warehousing, engineering support, quality assurance support and other administrative services. These agreements facilitate the separation by allowing AbbVie to operate independently prior to establishing stand-alone back office functions across its organization. Transition services may be provided for up to 24 months, with an option for a one-year extension. During the year ended December 31, 2013 and 2012, AbbVie incurred $254 million and $288 million, respectively, of separation-related expenses, including legal, information technology and regulatory fees, which were principally classified in selling, general and administrative expenses (SG&A). Basis of Historical Presentation For a certain portion of AbbVie’s operations, the legal transfer of AbbVie’s assets (net of liabilities) did not occur with the separation of AbbVie on January 1, 2013 due to the time required to transfer marketing authorizations and satisfy other regulatory requirements in certain countries. Under the terms of the separation agreement with Abbott, AbbVie is responsible for the business activities conducted by Abbott on its behalf, and is subject to the risks and entitled to the benefits generated by these operations and assets. As a result, the related assets and liabilities and results of operations have 62 been reported in AbbVie’s consolidated financial statements as of and for the year ended December 31, 2013. Net sales related to these operations for the year ended December 31, 2013 totaled approximately $738 million. At December 31, 2013, the assets and liabilities consisted primarily of accounts receivable of $62 million, inventories of $190 million, other assets of $93 million and accounts payable and other accrued liabilities of $212 million. The majority of these operations are expected to be transferred to AbbVie by the end of 2014. Prior to the separation on January 1, 2013, the historical financial statements of AbbVie were prepared on a stand-alone basis and were derived from Abbott’s consolidated financial statements and accounting records as if the former research-based pharmaceutical business of Abbott had been part of AbbVie for all periods presented. Accordingly, AbbVie’s financial statements for periods prior to January 1, 2013 are presented herein on a combined basis and reflect AbbVie’s financial position, results of operations and cash flows as its business was operated as part of Abbott prior to the separation, in conformity with U.S. generally accepted accounting principles (GAAP). The historical combined financial statements included the allocation of certain assets and liabilities that were historically held at the Abbott corporate level but which were specifically identifiable or allocable to AbbVie. Prior to 2012, cash and equivalents, short-term investments and restricted funds held by Abbott were not allocated to AbbVie unless those assets were held by an entity that was transferred to AbbVie. As of December 31, 2012, AbbVie’s combined balance sheet reflected the direct holdings of AbbVie legal entities. Prior to November 2012, long-term debt and short-term borrowings were not allocated to AbbVie as none of the debt recorded by Abbott was directly attributable to or guaranteed by AbbVie. In November 2012, AbbVie issued $14.7 billion of long-term debt with maturities ranging from three to 30 years and $1.0 billion of commercial paper, which was reflected on AbbVie’s combined balance sheet as of December 31, 2012. All AbbVie intracompany transactions and accounts were eliminated. Prior to 2012, all intercompany transactions between AbbVie and Abbott were considered to be effectively settled in the historical combined financial statements at the time the transactions were recorded. As a result, the total net effect of the settlement of these intercompany transactions was reflected in the combined statements of cash flows for the years ended December 31, 2012 and 2011 as a financing activity and in the combined balance sheet as of December 31, 2012 as net parent company investment in AbbVie. As of December 31, 2012, outstanding transactions between AbbVie and Abbott were reflected in the combined balance sheet outside of net parent company investment in AbbVie Inc. As of December 31, 2013 and 2012, the aggregate amount due from Abbott totaled $738 million and $696 million, respectively, and was classified in accounts and other receivables, net. The aggregate amount due to Abbott totaled $876 million and $923 million as of December 31, 2013 and 2012, respectively, and was classified in accounts payable and accrued liabilities. Prior to the separation on January 1, 2013, Abbott provided AbbVie certain services, which included administration of treasury, payroll, employee compensation and benefits, travel and meeting services, public and investor relations, real estate services, internal audit, telecommunications, information technology, corporate income tax and selected legal services. Some of these services continue to be provided to AbbVie on a temporary basis after the separation pursuant to certain transition services agreements. AbbVie’s historical combined financial statements reflect an allocation of expenses related to these services. These expenses were allocated to AbbVie based on direct usage or benefit where identifiable, with the remainder allocated on a pro rata basis of revenues, headcount, square footage, number of transactions or other measures. AbbVie considers the expense allocation methodology and results to be reasonable for all periods presented. However, the allocations may not be indicative of the actual expenses that would have been incurred had AbbVie operated as an independent, publicly-traded company for the periods presented. These allocations totaled $838 million and $801 million for the years ended December 31, 2012 and 2011. Prior to the separation on January 1, 2013, AbbVie employees participated in various benefits and stock-based compensation programs maintained by Abbott. A portion of the cost of those programs was 63 included in AbbVie’s historical combined financial statements. However, AbbVie’s historical combined balance sheet as of December 31, 2012 does not include any equity related to stock-based compensation plans. See Note 10 and Note 11 for a further description of the accounting for post-employment benefits and stock-based compensation, respectively. Note 2 Summary of Significant Accounting Policies Use of Estimates The financial statements have been prepared in accordance with U.S. GAAP and necessarily include amounts based on estimates and assumptions by management. Actual results could differ from those amounts. Significant estimates include amounts for sales rebates, pension and post-employment benefits, income taxes, litigation, valuation of intangible assets and goodwill, financial instruments, and inventory and accounts receivable exposures. Basis of Consolidation The consolidated financial statements as of and for the year ended December 31, 2013 include the accounts of AbbVie and all of its subsidiaries in which a controlling interest is maintained. Controlling interest is determined by majority ownership interest and the absence of substantive third-party participating rights or, in the case of variable interest entities, by majority exposure to expected losses, residual returns or both. Investments in companies over which AbbVie has a significant influence but not a controlling interest are accounted for using the equity method with AbbVie’s share of earnings or losses reported in other (income) expense, net. All other investments are generally accounted for using the cost method. Intercompany balances and transactions are eliminated. Certain reclassifications have been made to conform the prior period combined financial statements to the current period presentation. Revenue Recognition AbbVie recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability of the sales price is reasonably assured. Revenue from product sales is recognized when title and risk of loss have passed to the customer. Provisions for discounts, rebates and sales incentives to customers and returns and other adjustments are provided for in the period the related sales are recorded. Sales incentives to customers are not material. Historical data is readily available and reliable, and is used for estimating the amount of the reduction in gross sales. Revenue from the launch of a new product, from an improved version of an existing product, or for shipments in excess of a customer’s normal requirements are recorded when the conditions noted above are met. In those situations, management records a returns reserve for such revenue, if necessary. Sales of product rights for marketable products are recorded as revenue upon disposition of the rights. Research and Development Costs Internal research and development (R&D) costs are expensed as incurred. Clinical trial costs incurred by third parties are expensed as the contracted work is performed. Where contingent milestone payments are due to third parties under research and development collaborations for pre-commercialization milestones, the milestone payment obligations are expensed when the milestone results are achieved or are probable. Payments made to third parties subsequent to regulatory approval are capitalized and amortized over the remaining useful life of the related product. Amounts capitalized for such payments are included in intangible assets, net of accumulated amortization. 64 Collaborations and Other Arrangements The company enters into collaborative agreements with third parties to develop and commercialize drug candidates. Collaborative activities may include joint research and development and commercialization of new products. AbbVie generally receives certain licensing rights under these arrangements. These collaborations often require upfront payments and may include additional milestone, research and development cost sharing, royalty or profit share payments, contingent upon the occurrence of certain future events linked to the success of the asset in development and commercialization. Upfront payments associated with collaborative arrangements during the development stage are expensed to acquired in-process research and development (IPR&D). Subsequent payments made to the partner for the achievement of milestones during the development stage are expensed to R&D when the milestone is achieved. Milestone payments made to the partner subsequent to regulatory approval are capitalized as intangible assets and amortized to cost of products sold over the estimated useful life of the related asset. Royalty and sales based milestones are expensed as cost of products sold when incurred. Advertising Costs associated with advertising are expensed as incurred and are included in selling, general and administrative expenses (SG&A). Advertising expenses were $626 million, $506 million and $375 million in 2013, 2012 and 2011, respectively. Pension and Post-Employment Benefits AbbVie records annual expenses relating to its defined benefit pension and other post-employment plans based on calculations which include various actuarial assumptions, including discount rates, assumed asset rates of return, compensation increases, turnover rates and health care cost trend rates. AbbVie reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends. Actuarial losses and gains are amortized over the remaining service attribution periods of the employees under the corridor method, in accordance with the rules for accounting for post-employment benefits. Differences between the expected long-term return on plan assets and the actual annual return are amortized to net period benefit cost over a five-year period. Prior to separation, AbbVie employees participated in certain defined benefit pension and other post-employment plans sponsored by Abbott, which included participants of Abbott’s other businesses. Such plans were accounted for as multiemployer plans in AbbVie’s historical combined financial statements as of and for the years ended December 31, 2012 and 2011. As a result, no asset or liability was recorded by AbbVie in the historical combined balance sheets to recognize the funded status of these plans. In 2013, subsequent to the separation from Abbott, AbbVie’s portion of the defined benefit pension plans were separated from the Abbott defined benefit pension plans using a December 31, 2012 measurement date. As a result, the funded status for each plan is reflected in AbbVie’s consolidated balance sheet as of December 31, 2013. In addition to participation in defined benefit pension and other post-employment plans sponsored by Abbott, AbbVie is the sole sponsor for certain defined benefit pension and other post-employment plans. The funded status of these plans was recorded in AbbVie’s combined balance sheet at December 31, 2012 and the consolidated balance sheet at December 31, 2013. Refer to Note 10 for information regarding AbbVie’s pension and post-employment plans. Income Taxes Income taxes are accounted for 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 65 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. In AbbVie’s financial statements for periods prior to 2013, income tax expense and tax balances were calculated as if AbbVie was a separate taxpayer, although AbbVie’s operations were historically included in tax returns filed by Abbott. After separation, AbbVie’s income tax expense and income tax balances represent AbbVie’s federal, state and foreign income taxes as an independent company. As a result, its effective tax rate and income tax balances are not necessarily comparable to those for periods prior to the separation. Prior to the separation, AbbVie did not maintain an income taxes payable to/from account with Abbott. With the exception of certain entities outside the United States that transferred to AbbVie at separation, AbbVie is deemed to have settled current tax balances with the Abbott tax paying entities in the respective jurisdictions. These settlements were reflected as changes in net parent company investment. Cash and Equivalents Cash and equivalents include time deposits and money market funds with original maturities at the time of purchase of three months or less. Investments Short-term investments consist primarily of time deposits and U.S. Treasury securities. Investments in marketable equity securities are classified as available-for-sale and are recorded at fair value with any unrealized holding gains or losses, net of tax, included in accumulated other comprehensive income (loss). Investments in equity securities that are not traded on public stock exchanges and held-to-maturity debt securities are recorded at cost. AbbVie reviews the carrying value of investments each quarter to determine whether an other than temporary decline in fair value exists. AbbVie considers factors affecting the investee, factors affecting the industry the investee operates in and general equity market trends. The company considers the length of time an investment’s fair value has been below cost and the near-term prospects for recovery. When AbbVie determines that an other than temporary decline has occurred, the cost basis investment is written down with a charge to other (income) expense and the available-for-sale securities’ unrealized loss is recognized as a charge to income and removed from accumulated other comprehensive income (loss) (AOCI). Accounts Receivable Accounts receivable are stated at their net realizable value. The allowance against gross accounts receivable reflects the best estimate of probable losses inherent in the receivables portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other currently available information. Accounts receivable are written off after all reasonable means to collect the full amount (including litigation, where appropriate) have been exhausted. The allowance was $88 million at December 31, 2013 and $83 million at December 31, 2012. The increase in 2013 was due to a higher level of past due receivables. 66 Inventories Inventories are valued at the lower of cost (first-in, first-out basis) or market. Cost includes material and conversion costs. Inventories, net, consist of the following. as of December 31 (in millions) Finished goods Work-in-process Materials Inventories, net Property and Equipment as of December 31 (in millions) Land Buildings Equipment Construction in progress Property and equipment, gross Less accumulated depreciation Property and equipment, net 2013 $ 485 404 261 2012 $ 547 286 258 $1,150 $1,091 2013 2012 $ 50 1,263 5,214 382 $ 48 1,324 4,865 305 6,909 (4,611) 6,542 (4,295) $ 2,298 $ 2,247 Depreciation for property and equipment is recorded on a straight-line basis over the estimated useful lives of the assets. The estimated useful life for buildings ranges from 10 to 50 years and five to 20 years for equipment. Leasehold improvements are amortized over the life of the related facility lease (including any renewal periods, if appropriate) or the asset, whichever is shorter. Depreciation expense for the years ended December 31, 2013, 2012 and 2011 was $388 million, $525 million and $508 million, respectively. Equipment includes certain computer software and software development costs incurred in connection with developing or obtaining software for internal use. Assets under capital leases included in property and equipment in the consolidated balance sheets are not material. Litigation Loss contingency provisions are recorded for probable losses when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing information. When a best estimate cannot be made, the minimum loss contingency amount in a probable range is recorded. Legal fees are expensed as incurred. Product Liability AbbVie accrues for product liability claims, on an undiscounted basis, when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing information. The liabilities are adjusted quarterly as additional information becomes available. Receivables for insurance recoveries, if any, for product liability claims are recorded as assets, on an undiscounted basis, when it is probable that a recovery will be realized. Business Combinations Results of operations of acquired companies are included in AbbVie’s results of operations beginning on the respective acquisition dates. Assets acquired and liabilities assumed are recognized at the date of acquisition at their respective fair values. Any excess of the fair value consideration transferred over the estimated fair values of the net assets acquired is recognized as goodwill. Contingent consideration 67 is recognized at the estimated fair value on the acquisition date, which is determined by utilizing a probability weighted discounted cash flow model. Subsequent changes to the fair value of contingent payments are recognized in other (income) expense, net in the consolidated statements of earnings. The fair value of assets acquired and liabilities assumed in certain cases may be subject to revision based on the final determination of fair value. Legal costs, due diligence costs, business valuation costs and all other business acquisition costs are expensed when incurred. Goodwill and Intangible Assets Intangible assets acquired in a business combination are recorded at fair value using a discounted cash flow model. The discounted cash flow model requires assumptions about the timing and amount of future net cash flows, risk, the cost of capital, and terminal values of market participants. Definite-lived intangibles are amortized over their estimated useful lives. 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. AbbVie first compares the projected undiscounted cash flows to be generated by the asset to its carrying value. If the undiscounted cash flows of an intangible asset are less than the carrying value of an intangible asset, the intangible asset is written down to its fair value, which is usually the discounted cash flow amount and a loss is recorded equal to the excess of the asset’s net carrying value over its fair value. Where cash flows cannot be identified for an individual asset, the review is applied at the lowest level for which cash flows are largely independent of the cash flows of other assets and liabilities. Goodwill and indefinite-lived assets are not amortized but are subject to an impairment review annually and more frequently when indicators of impairment exist. An impairment of goodwill would occur if the carrying amount of a reporting unit exceeded the fair value of that reporting unit, calculated using a weighting of the income approach and the market approach. The fair value under the income approach is calculated as the present value of estimated cash flows discounted using a risk-free market rate adjusted for a market participant’s view of similar companies and perceived risks in cash flows. The fair value under the market approach is calculated using market multiples for peer groups applied to the operating results of the reporting unit to determine fair value. The implied fair value of goodwill is then determined by subtracting the fair value of all identifiable net assets other than goodwill from the fair value of the reporting unit, with an impairment charge recorded for the excess, if any, of the carrying amount of goodwill over the implied fair value. Based on the company’s most recent annual impairment test performed in the third quarter of 2013, the fair value of AbbVie’s single reporting unit was substantially in excess of its carrying value. Indefinite-lived intangible assets, which consist of capitalized IPR&D, are tested for impairment by comparing the fair value of each intangible asset with its carrying value. The fair value of indefinite- lived intangible assets is based on the present value of projected cash flows using an income approach. If the carrying value exceeds fair value, the intangible asset is considered impaired and is reduced to fair value. Acquired In-Process Research and Development The initial costs of rights to IPR&D projects acquired in an asset acquisition are expensed as IPR&D unless the project has an alternative future use. These costs include initial payments incurred prior to regulatory approval in connection with research and development collaboration agreements that provide rights to develop, manufacture, market and/or sell pharmaceutical products. The fair value of IPR&D projects acquired in a business combination are capitalized and accounted for as indefinite-lived intangible assets until the underlying project receives regulatory approval, at which point the intangible asset will be accounted for as a definite-lived intangible asset, or discontinuation, at which point the intangible asset will be written off. Development costs incurred after the acquisition are expensed as incurred. Indefinite- and definite-lived assets are subject to impairment reviews as discussed previously. 68 Foreign Currency Translation Foreign subsidiary earnings are translated into U.S. dollars using average exchange rates. The net assets of foreign subsidiaries are translated into U.S. dollars using period end exchange rates. The U.S. dollar effects that arise from translating the net assets of these subsidiaries at changing rates are recognized in other comprehensive income (OCI). The net assets of subsidiaries in highly inflationary economies are remeasured as if the functional currency were the reporting currency. The remeasurement is recognized in earnings and is immaterial for all years presented. Derivatives All derivative instruments are recognized as either assets or liabilities at fair value in AbbVie’s balance sheets and are classified as current or long-term based on the scheduled maturity of the instrument. The accounting for changes in the fair value of a derivative instrument depends on whether it has been formally designated and qualifies as part of a hedging relationship under the applicable accounting standards and, further, on the type of hedging relationship. For derivatives formally designated as hedges, the company assesses at inception and quarterly thereafter, whether the hedging derivatives are highly effective in offsetting changes in the fair value or cash flows of the hedged item. The changes in fair value of a derivative designated as a fair value hedge and of the hedged item attributable to the hedge risk are recognized in earnings immediately. Fair value hedges are used to hedge the interest rate risk associated with certain of the company’s fixed-rate debt. The effective portions of changes in the fair value of a derivative designated as a cash flow hedge are reported in AOCI and are subsequently recognized in earnings consistent with the underlying hedged item. Cash flow hedges are used to manage exposures from changes in foreign currency exchange rates. The derivatives that are not designated and do not qualify as hedges are adjusted to fair value through current earnings. If it is determined that a derivative is no longer highly effective as a hedge, the company discontinues hedge accounting prospectively. Gains or losses are immediately reclassified from AOCI to earnings relating to hedged forecasted transactions that are no longer probable of occurring. Gains or losses relating to terminations of effective cash flow hedges in which the forecasted transactions are still probable of occurring are deferred and recognized consistent with the income or loss recognition of the underlying hedged items. Terminations of a fair value hedge result in fair value adjustments to the hedged items until the date of termination with the new bases being accreted to par value on the date of maturity. Derivatives, including those that are not designated as a hedge, are principally classified in the operating section of the consolidated statements of cash flows, consistent with the underlying hedged item. Refer to Note 9 for information regarding AbbVie’s derivative and hedging activities. Note 3 Supplemental Financial Information Interest Expense (Income), Net years ended December 31 (in millions) Interest expense Interest and dividend income Interest expense (income), net 2013 2012 2011 $299 (21) $104 (20) $ — (20) $278 $ 84 $(20) 69 Other (Income) Expense, Net Other (income) expense, net, included expenses of $11 million in 2013, $29 million in 2012 and $56 million in 2011 of fair value adjustments to the contingent consideration related to an acquisition of a business in 2010. Other (income) expense, net, for 2013, 2012 and 2011 also included ongoing contractual payments associated with the conclusion of a preexisting joint venture arrangement dissolved in 2008. Other (income) expense, net, for 2012 included income of $21 million from the resolution of a contractual agreement and a loss of $52 million for the impairment of an equity security. Accounts Payable and Accrued Liabilities as of December 31 (in millions) Sales rebates Accounts payable Due to Abbott Laboratories Dividends payable Salaries, wages and commissions Royalty license arrangements Other Accounts payable and accrued liabilities Long-Term Liabilities as of December 31 (in millions) Deferred income taxes Pension and other post-employment benefits Other Long-term liabilities Note 4 Earnings Per Share 2013 2012 $1,401 933 876 643 621 443 1,531 $1,616 556 923 — 523 398 1,718 $6,448 $5,734 2013 2012 $ 570 1,628 1,337 $ 360 979 900 $3,535 $2,239 For periods subsequent to the separation, AbbVie calculated basic earnings per share (EPS) pursuant to the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for common stock and participating securities according to dividends declared and participation rights in undistributed earnings. Under this method, all earnings (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive dividends. In addition, participating securities may include certain performance-based awards that may otherwise have been excluded from the calculation of EPS under the treasury-stock method. AbbVie’s forfeitable restricted stock units (RSUs) and restricted stock awards (RSAs), including most performance-based awards, participate in dividends on the same basis as common shares and such dividends are nonforfeitable to the holder once declared. As a result, these forfeitable RSUs and RSAs meet the definition of a participating security. The dilutive effect of participating securities is calculated using the more dilutive of the treasury stock or the two-class method. For the year ended December 31, 2013, the two-class method was more dilutive. As such, the dilutive effect of outstanding RSUs and RSAs for the year ended December 31, 2013 of approximately 5 million was 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, 70 including performance-based awards not otherwise included in the calculation of EPS under the treasury-stock method, was excluded from the numerator for the calculation of basic and diluted earnings per share under the two-class method. Earnings allocable to participating securities for the year ended December 31, 2013 was $26 million. For the year ended December 31, 2013, approximately 1 million common shares issuable under stock- based compensation plans were excluded from the computation of earnings per common share assuming dilution because the effect would have been antidilutive. For periods prior to the separation, the numerator for both basic and diluted EPS was net earnings attributable to AbbVie. The denominator for basic and diluted EPS was calculated using the 1,577 million AbbVie common shares outstanding immediately following the separation. The same number of shares was used to calculate basic and diluted earnings per share since no AbbVie equity awards were outstanding prior to the separation. Note 5 Acquisitions, Collaborations and Other Arrangements In 2013, 2012 and 2011, cash outflows related to collaborations, the acquisition of product rights and other arrangements totaled $405 million, $688 million and $273 million, respectively. AbbVie recorded IPR&D charges of $338 million, $288 million and $673 million in 2013, 2012 and 2011, respectively. Significant arrangements impacting 2013, 2012 and 2011, some of which require contingent milestone payments, include the following: Collaborations and Other Arrangements Ablynx NV In September 2013, AbbVie entered into a global collaboration agreement with Ablynx NV to develop and commercialize the anti-IL-6R Nanobody, ALX-0061, to treat inflammatory diseases including rheumatoid arthritis and systemic lupus erythematosus, resulting in a charge to IPR&D of $175 million. Upon the achievement of certain development, regulatory and commercial milestones, AbbVie could make additional payments of up to $665 million, as well as royalties on net sales. Galapagos NV In September 2013, AbbVie recorded a charge to IPR&D of $45 million as a result of entering into a global collaboration with Galapagos NV (Galapagos) to discover, develop and commercialize cystic fibrosis therapies. Upon the achievement of certain development, regulatory and commercial milestones, AbbVie could make additional payments of up to $360 million, as well as royalties on net sales. In February 2012, AbbVie recorded a charge to IPR&D of $150 million as a result of entering into a global collaboration with Galapagos to develop and commercialize a next-generation, oral Janus Kinase 1 (JAK1) inhibitor in Phase II development with the potential to treat multiple autoimmune diseases. Additional payments of approximately $1.3 billion could be required for the achievement of certain development, regulatory and commercial milestones under this agreement. Alvine Pharmaceuticals, Inc. In May 2013, AbbVie entered into a global collaboration with Alvine Pharmaceuticals, Inc. to develop ALV003, a novel oral treatment for patients with celiac disease. As part of the agreement, AbbVie made an initial upfront payment of $70 million, which was expensed to IPR&D in the second quarter of 2013. AbbVie could make additional payments totaling up to $275 million pursuant to this arrangement. 71 In addition to the collaborations described above, in 2013, AbbVie entered several other arrangements resulting in charges to IPR&D of $48 million and upon the achievement of certain development, regulatory and commercial milestones, could make additional payments of up to $894 million. It is not possible to predict with reasonable certainty whether these milestones will be achieved or the timing for achievement. Action Pharma A/S In May 2012, AbbVie recorded a charge to IPR&D of $110 million as a result of the acquisition of ABT-719 (previously referred to as AP214), a drug under development for the prevention of acute kidney injury associated with major cardiac surgery in patients at increased risk. Reata Pharmaceuticals, Inc. In the fourth quarter of 2011, AbbVie entered into a collaboration with Reata Pharmaceuticals, Inc. (Reata) for the joint development and commercialization of second-generation oral antioxidant inflammation modulators resulting in a charge to IPR&D of $400 million, which was paid in the first quarter of 2012. Pursuant to a series of transactions with Reata in 2010, AbbVie acquired licensing rights outside the United States, excluding certain Asian markets, to bardoxolone methyl. In addition, AbbVie acquired equity interests in Reata of $62 million each in 2010 and 2011. The achievement of certain development milestones under the license agreement resulted in charges of $50 million in 2012 to R&D and $188 million in 2011 to IPR&D. On October 17, 2012, Reata informed AbbVie that it was discontinuing a Phase III clinical study for bardoxolone methyl for chronic kidney disease. As a result, AbbVie recorded an impairment charge of $52 million related to AbbVie’s equity investment in Reata. The charge was classified in in other (income) expense, net in the combined statement of earnings for 2012. Reata and AbbVie continue to evaluate the development of bardoxolone methyl in other indications. Biotest AG In June 2011, AbbVie entered into a global agreement with Biotest AG to develop and commercialize an anit-CD4, a treatment for rheumatoid arthritis and psoriasis, resulting in an $85 million charge to IPR&D. AbbVie could, in the future, be required to make additional payments totaling up to $395 million based on the achievement of certain development, regulatory and commercial milestones under this agreement. Note 6 Goodwill and Intangible Assets Goodwill The following table summarizes changes in the carrying amount of AbbVie’s goodwill. (in millions) Balance at December 31, 2011 Currency translation and other adjustments Balance at December 31, 2012 Additions Currency translation and other adjustments Balance at December 31, 2013 $6,100 30 6,130 25 122 $6,277 Goodwill additions in 2013 related to product rights acquired during the second quarter. As of December 31, 2013, there were no accumulated goodwill impairment losses. Future impairment tests for goodwill will be performed annually in the third quarter, or earlier if indicators of impairment exist. 72 Intangible Assets, Net The following table summarizes AbbVie’s intangible assets. (in millions) Definite-lived intangible assets Developed product rights License agreements Total definite-lived intangible assets Indefinite-lived research and development Total intangible assets December 31, 2013 December 31, 2012 Gross carrying Accumulated amortization amount Net carrying amount Gross carrying Accumulated amortization amount Net carrying amount $4,744 994 5,738 $(3,503) (792) $1,241 202 $4,699 969 $(3,031) (734) $1,668 235 (4,295) 1,443 5,668 (3,765) 1,903 447 — 447 420 — 420 $6,185 $(4,295) $1,890 $6,088 $(3,765) $2,323 Intangible assets with finite useful lives are amortized over their estimated useful lives, which range between 3 to 16 years with an average of 9 years for both developed product rights and license agreements. Additions related to the acquisition of amortizable intangible assets in the second quarter of 2013 with an average amortization period of 5 years. Amortization expense for 2013, 2012 and 2011 was $509 million, $625 million and $764 million, respectively, and is included in cost of products sold in the consolidated statements of earnings. At December 31, 2013, the anticipated annual amortization expense for intangible assets recorded as of December 31, 2013 was $352 million in 2014, $279 million in 2015, $137 million in 2016, $131 million in 2017 and $115 million in 2018. The indefinite-lived intangible assets as of December 31, 2012 relate to IPR&D acquired in a business combination. Additions related to the acquisition of IPR&D in the second quarter of 2013. In 2012 and 2011, AbbVie recorded impairment charges of $13 million and $46 million, respectively, for certain projects under development. These charges are included in R&D expenses. In 2013, no material impairment charges were recorded. Note 7 Restructuring Plans In 2013, AbbVie management approved plans to restructure certain commercial operations in conjunction with the loss and expected loss of exclusivity of certain products. Restructuring charges recorded in 2013 were $83 million and were primarily recorded in SG&A and cost of products sold in the consolidated statements of earnings with the remainder recorded in R&D. Included in the charges were cash costs of $76 million which mainly related to employee severance and contractual obligations. In 2012, AbbVie management approved plans to realign its worldwide manufacturing operations and selected domestic and international commercial and R&D operations in order to reduce costs. In 2012, AbbVie incurred restructuring charges of approximately $191 million for employee severance and contractual obligations, primarily related to the exit from an R&D facility with $183 million recorded within R&D and $8 million within SG&A expenses in the consolidated statements of earnings. In 2011, AbbVie recorded a charge of $163 million reflecting employee severance and other related charges, with $42 million classified as cost of products sold, $72 million as R&D and $49 million as SG&A expenses in the consolidated statements of earnings. 73 The following summarizes the cash activity in the restructuring reserve for the years ended December 31, 2013, 2012 and 2011. Restructuring reserves as of December 31, 2010 principally relates to a restructuring plan approved by AbbVie management in 2010. (in millions) Accrued balance at December 31, 2010 2011 restructuring charges Payments and other adjustments Accrued balance at December 31, 2011 2012 restructuring charges Payments and other adjustments Accrued balance at December 31, 2012 2013 restructuring charges Payments and other adjustments Accrued balance at December 31, 2013 $ 157 163 (171) 149 191 (107) 233 76 (118) $ 191 Payments and other adjustments for 2013 includes a $23 million reversal of a previously recorded restructuring reserve due to the company’s re-evaluation of a prior year decision to exit a manufacturing facility. In 2012 and 2011, AbbVie recorded additional restructuring charges of $69 million and $53 million, respectively, primarily for accelerated depreciation and, for 2011 only, asset impairments. Note 8 Debt, Credit Facilities, and Commitments and Contingencies The following is a summary of long-term debt as of December 31, 2013 and 2012. (in millions) Floating rate notes due 2015 1.2% notes due 2015 1.75% notes due 2017 2.0% notes due 2018 2.9% notes due 2022 4.4% notes due 2042 Other Fair value hedges Unamortized bond discounts Total long-term debt and lease obligations Current portion Noncurrent portion Effective interest rate in 2013(a) 1.14% 1.31% 1.86% 2.15% 2.97% 4.46% — — — Effective interest rate in 2012(a) 1.13% 1.24% 1.82% 2.12% 3.01% 4.50% — — — $ 2013 500 3,500 4,000 1,000 3,100 2,600 98 (432) (56) 14,310 18 $14,292 $ 2012 500 3,500 4,000 1,000 3,100 2,600 104 (81) (71) 14,652 22 $14,630 (a) Excludes the effect of any related interest rate swaps. In November 2012, AbbVie issued $14.7 billion aggregate principal amount of senior notes. Approximately $3.0 billion of these senior notes were issued to Abbott as partial consideration for the transfer of assets from Abbott to AbbVie. AbbVie used part of the net proceeds from the sale of senior notes (other than the senior notes issued to Abbott) to finance the payment made in November 2012 of a $10.2 billion distribution to Abbott, as provided by the terms of the separation agreement. The debt was guaranteed by Abbott until AbbVie separated from Abbott on January 1, 2013. 74 AbbVie may redeem all of the senior notes of each series, other than the floating notes due in 2015, at any time, and some of the senior notes of each series, other than the floating notes due in 2015, from time to time, at a redemption price equal to the principal amount of the senior notes redeemed plus a make-whole premium. AbbVie may not redeem the floating notes due in 2015 prior to maturity. At December 31, 2013, the company was in compliance with its senior note covenants. Short-Term Borrowings At December 31, 2013 and 2012, short-term borrowings included $400 million and $1.0 billion, respectively, of commercial paper borrowings. The weighted-average interest rate on short-term borrowings was 0.2% and 0.4% for 2013 and 2012, respectively. AbbVie has a $2.0 billion unsecured bank credit facility agreement, which backs the commercial paper program, and matures in July 2017. Abbott was relieved of its obligations under the credit facility upon separation of AbbVie from Abbott on January 1, 2013, and AbbVie became the sole obligor of this facility. The credit facility enables the company to borrow funds on an unsecured basis at floating interest rates. At December 31, 2013, the company was in compliance with its credit facility covenants. Compensating balances and commitment fees are not material. Maturities of Long-Term Debt and Capital Lease Obligations As part of the separation, AbbVie entered into agreements to lease certain facilities, including office, laboratory, and factory and warehouse space, under principally non-cancelable operating leases with Abbott. The leases generally include renewal options and provide for the company to pay taxes, maintenance, insurance and other operating costs of the leased property. AbbVie also leases office space on a short-term basis typically under cancelable operating leases. Lease expense for 2013 was $107 million and was not material for both 2012 and 2011. Capital lease obligations relate to automobiles and certain facilities. As of December 31, 2013, annual future minimum lease payments for capital lease obligations are not material. The following table summarizes AbbVie’s future minimum lease payments under non-cancelable operating leases, debt maturities and future minimum lease payments for capital lease obligations as of December 31, 2013. as of and for the years ended December 31 (in millions) 2014 2015 2016 2017 2018 Thereafter Total obligations and commitments Fair value hedges and unamortized bond discounts Total debt and lease obligations Contingencies and Guarantees Operating leases Debt maturities and capital leases $ 87 79 71 62 46 530 875 n/a $875 $ 18 4,012 11 4,008 1,006 5,743 14,798 (488) $14,310 In connection with the separation, AbbVie has indemnified Abbott for all liabilities resulting from the operation of AbbVie’s business other than income tax liabilities with respect to periods prior to the distribution date and other liabilities as agreed to by AbbVie and Abbott. AbbVie has no material exposures to off-balance sheet arrangements, no special-purpose entities and no activities that included non-exchange-traded contracts accounted for at fair value. In the ordinary course of business, AbbVie has periodically entered into third-party agreements, such as the assignment of product rights, which 75 have resulted in AbbVie becoming secondarily liable for obligations for which AbbVie had previously been primarily liable. Since AbbVie no longer maintains a business relationship with the other parties, AbbVie is unable to develop an estimate of the maximum potential amount of future payments, if any, under these obligations. Based upon past experience, the likelihood of payments under these agreements is remote. AbbVie periodically acquires a business or product rights in which AbbVie agrees to pay contingent consideration based on attaining certain thresholds or based on the occurrence of certain events. Note 9 Financial Instruments and Fair Value Measures Risk Management Policy The company is exposed to foreign currency exchange rate and interest rate risks related to its business operations. The company’s hedging policy attempts to manage these risks to an acceptable level based on the company’s judgment of the appropriate trade-off between risk, opportunity and costs. The company uses derivative instruments to reduce its exposure to foreign currency exchange rates. The company is also exposed to the risk that its earnings and cash flows could be adversely impacted by fluctuations in interest rates. The company periodically enters into interest rate swaps, based on judgment, to manage interest costs in which the company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional amount. Derivative instruments are not used for trading purposes or to manage exposure to changes in interest rates for investment securities, and none of the company’s outstanding derivative instruments contain credit risk related contingent features; collateral is generally not required. Financial Instruments Various AbbVie foreign subsidiaries enter into foreign currency forward exchange contracts to manage exposures to changes in foreign exchange rates for anticipated transactions denominated in a currency other than the functional currency of the local entity. These contracts, with notional amounts totaling $1.5 billion and $1.0 billion at December 31, 2013 and 2012, respectively, are designated as cash flow hedges and are recorded at fair value. Accumulated gains and losses as of December 31, 2013 will be included in cost of products sold at the time the products are sold, generally through the next twelve months. The company enters into foreign currency forward exchange contracts to manage its exposure to foreign currency denominated trade payables and receivables and intercompany loans. The contracts are marked-to-market, and resulting gains or losses are reflected in income and are generally offset by losses or gains on the foreign currency exposure being managed. At December 31, 2013 and 2012, AbbVie held notional amounts of $5.3 billion and $4.3 billion, respectively, of such foreign currency forward exchange contracts. AbbVie was a party to interest rate hedge contracts, designated as fair value hedges, totaling $8.0 billion at both December 31, 2013 and 2012. The effect of the hedge is to change a fixed-rate interest obligation to a floating rate for that portion of the debt. AbbVie recorded the contracts at fair value and adjusted the carrying amount of the fixed-rate debt by an offsetting amount. 76 The following table summarizes the amounts and location of AbbVie’s derivative instruments as of December 31. (in millions) 2013 2012 Balance sheet caption 2013 2012 Balance sheet caption Fair value—Derivatives in asset position Fair value—Derivatives in liability position $— $— n/a $432 $ 81 Long-term liabilities Interest rate swaps designated as fair value hedges Foreign currency forward exchange contracts— Hedging instruments Others not designated as hedges 17 14 Prepaid expenses and other — 1 Prepaid expenses and other 61 12 10 15 Accounts payable and accrued liabilities Accounts payable and accrued liabilities Total $17 $15 $505 $106 While certain derivatives are subject to netting arrangements with the company’s counterparties, the company does not offset derivative assets and liabilities within the consolidated balance sheets presented herein. The following table summarizes the activity for derivative instruments and the amounts and location of income (expense) and gain (loss) reclassified into income and for certain other derivative instruments for the years ended December 31. The amount of hedge ineffectiveness was not significant in 2013, 2012 and 2011. (in millions) 2013 2012 2011 2013 2012 2011 Income statement caption (Loss) gain recognized in other comprehensive (loss) income Income (expense) and gain (loss) reclassified into income Foreign currency forward exchange contracts— Designated as cash flow hedges Not designated as hedges Interest rate swaps designated as fair value hedges $(77) $(11) $ (2) $ — $ 24 $18 Cost of products sold (23) 30 Net foreign exchange loss (gain) 81 n/a n/a n/a n/a n/a n/a (351) (81) — Interest expense (income), net The losses of $351 million and $81 million related to fair value hedges recognized in net interest expense in 2013 and 2012, respectively, were offset equally by $351 million and $81 million, respectively, in gains on the underlying hedged item, the fixed-rate debt. Fair Value Measures The fair value hierarchy under the accounting standard for fair value measurements consists of the following three levels: (cid:127) Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets that the company has the ability to access; (cid:127) 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 (cid:127) 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. 77 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 consolidated balance sheet as of December 31, 2013. (in millions) Assets Cash and equivalents Time deposits Equity securities Foreign currency contracts Total assets Liabilities Interest rate hedges Foreign currency contracts Contingent consideration Total liabilities Basis of fair value measurement Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Significant unobservable Inputs (Level 3) Balance at December 31, 2013 $9,595 300 10 17 $9,922 $ 432 73 165 $ 670 $684 — 10 — $694 $ — — — $ — $8,911 300 — 17 $9,228 $ 432 73 — $ 505 $ — — — — $ — $ — — 165 $165 The following table summarizes the bases used to measure certain assets and liabilities that are carried at fair value on a recurring basis in the combined balance sheet as of December 31, 2012. (in millions) Assets Cash and equivalents Time deposits U.S. Treasury securities Equity securities Foreign currency contracts Total assets Liabilities Interest rate hedges Foreign currency contracts Contingent consideration Total liabilities Basis of fair value measurement Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Significant unobservable Inputs (Level 3) Balance at December 31, 2012 $5,901 1,775 300 12 15 $8,003 $ 81 25 251 $ 357 $675 — 300 12 — $987 $ — — — $ — $5,226 1,775 — — 15 $7,016 $ 81 25 — $ 106 $ — — — — — $ — $ — — 251 $251 The fair value for time deposits included in cash and equivalents and short-term investments is 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 consist of investments for which the fair value is determined by using the published market price per unit multiplied by the number of units held, without consideration of transaction costs. The derivatives entered into by the company are valued using publicized spot and forward prices for foreign currency hedges and publicized swap curves for interest rate hedges. The contingent payments are valued using a discounted cash flow technique that reflects management’s expectations about probability of payment. 78 Cumulative unrealized holding gains on available-for-sale equity securities totaled $2 million and $1 million at December 31, 2013 and 2012, respectively. There have been no transfers of assets or liabilities between the fair value measurement levels. The following table is a reconciliation of the fair value measurements that use significant unobservable inputs (Level 3), which consist of contingent payments related to acquisitions and investments. (in millions) Fair value as of December 31, 2011 Payments Other Change in fair value recognized in earnings Fair value as of December 31, 2012 Payments Additions Change in fair value recognized in earnings Fair value as of December 31, 2013 349 (134) 7 29 251 (131) 28 17 $165 In connection with an acquisition of a business in 2010, the achievement of a certain sales milestone resulted in a payment of approximately $131 million in 2013 and $134 million in 2012 for which a liability was previously established. Additions of $28 million related to the acquisition of product rights during the second quarter of 2013. The change in fair value recognized in earnings for both years was recognized in net foreign exchange loss (gain) and other (income) expense, net in the consolidated statements of earnings. In addition to the financial instruments that the company is required to recognize at fair value on the 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 December 31 are shown in the table below. (in millions) Assets Investments Liabilities Short-term borrowings Current portion of long-term debt and lease obligations Long-term debt and lease obligations, excluding fair value hedges Book values Approximate fair values 2013 2012 2013 2012 $ 108 $ 107 $ 129 $ 104 413 18 1,020 22 413 18 1,020 22 14,724 14,711 14,493 15,066 79 The following table summarizes the bases used to measure the approximate fair values of the financial instruments as of December 31, 2013. (in millions) Assets Investments Total assets Liabilities Short-term borrowings Current portion of long-term debt and lease obligations Long-term debt and lease obligations, excluding fair value hedges Total liabilities Basis of fair value measurement Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Fair value at December 31, 2013 $ $ $ 129 129 413 18 14,493 $14,924 $ $ 39 39 $ 30 $ 30 $ — $413 — 14,413 $14,413 18 80 $511 $60 $60 $— — — $— The following table summarizes the bases used to measure the approximate fair values of the financial instruments as of December 31, 2012. (in millions) Assets Investments Total assets Liabilities Short-term borrowings Current portion of long-term debt and lease obligations Long-term debt and lease obligations, excluding fair value hedges Total liabilities Basis of fair value measurement Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Fair value at December 31, 2012 $ $ 104 104 $ 1,020 22 15,066 $16,108 $— $— $— — — $— $ $ 32 32 $ 1,020 22 15,066 $16,108 $72 $72 $— — — $— Investments consist of cost method investments and held-to-maturity debt securities. Cost method investments include certain investments for which the fair value is determined by using the published market price per unit multiplied by the number of units held, without consideration of transaction costs. To determine the fair value of other cost method investments, the company takes into consideration recent transactions, as well as the financial information of the investee, which represents a Level 3 basis of fair value measurement. The fair value of held-to-maturity debt securities was estimated based upon the quoted market prices for the same or similar debt instruments. The fair values of short-term and current borrowings approximate the carrying values due to the short maturities of these instruments. For 2013, the fair value of long-term debt, excluding fair value hedges, was determined by using the published market price for the debt instruments, without consideration of 80 transaction costs, which represents a Level 1 basis of fair value measurement. For 2012, the fair value of long-term debt, excluding fair value hedges, was estimated based upon the quoted market prices for the same or similar debt instruments. For 2013 and 2012, the fair value of other debt and lease obligations was estimated based on a discounted cash flow analysis reflecting quoted market prices for the same or similar debt instruments. There were no material adjustments to fair value during the years ended December 31, 2013 and 2012 of assets and liabilities that are not measured at fair value on a recurring basis, except as discussed in Note 5 regarding the impairment of the company’s investment in Reata. 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. Three U.S. wholesalers accounted for 38 percent and 48 percent of total net accounts receivables as of December 31, 2013 and 2012, respectively, and substantially all of AbbVie’s U.S. sales are to these three wholesalers. In addition, substantially all of AbbVie’s trade receivables in Greece, Portugal, Italy and Spain are with governmental health systems. Global economic conditions and liquidity issues in these countries have resulted, and may continue to result, in delays in the collection of receivables and credit losses. While the company continues to receive payments on these receivables, these conditions have resulted in an increase in the average length of time it takes to collect accounts receivable outstanding. Net governmental receivables outstanding in Greece, Portugal, Italy and Spain totaled $781 million and $725 million as of December 31, 2013 and 2012, respectively. HUMIRA is AbbVie’s single largest product and accounted for approximately 57 percent, 50 percent and 45 percent of AbbVie’s total sales in 2013, 2012 and 2011, respectively. Any significant event that adversely affects HUMIRA’s revenues could have a material adverse impact on AbbVie’s results of operations, financial position and cash flows. Because HUMIRA is a biologic and biologics cannot be readily substituted, it is uncertain what impact the loss of patent protection would have on the sales of HUMIRA. Note 10 Post-Employment Benefits AbbVie sponsors various pension and other post-employment benefit plans, including defined benefit, defined contribution and termination indemnity plans, which cover most employees worldwide. In addition, AbbVie provides medical benefits, primarily to eligible U.S. retirees, through other post-retirement benefit plans. Abbott Sponsored Plans Prior to separation, AbbVie employees participated in certain U.S. and international defined benefit pension and other post-employment (OPEB) plans sponsored by Abbott. These plans included participants of Abbott’s other businesses and were accounted for as multiemployer benefit plans in AbbVie’s combined financial statements as of and for the years ended December 31, 2012 and 2011. As a result, no asset or liability was recorded by AbbVie in the historical combined balance sheets through December 31, 2012 to recognize the funded status of these plans. Effective January 1, 2013, in connection with the separation of AbbVie from Abbott, these plans were separated and AbbVie assumed net benefit plan obligations that were previously provided by Abbott. For Abbott-sponsored defined benefit and post-employment benefit plans, AbbVie recorded expenses of $200 million in 2012 and $150 million in 2011. Abbott made voluntary contributions to its defined benefit pension plans that AbbVie accounted for as multiemployer benefit plans totaling $310 million and $289 million in 2012 and 2011, respectively. The multiemployer benefit pension plans were approximately 94 percent funded as of December 31, 2012. 81 AbbVie Sponsored Plans AbbVie is the sole sponsor of certain other defined benefit pension and other post-employment plans, which have been reflected in the consolidated balance sheet as of December 31, 2013 and the combined balance sheet as of December 31, 2012. During 2012, in preparation for the separation from Abbott, certain defined benefit pension and other post-employment benefit plans were assumed by AbbVie and were reflected in the December 31, 2012 combined balance sheet. AbbVie made voluntary contributions to the AbbVie sponsored pension plans of $46 million and $64 million in 2012 and 2011, respectively. Prior to the separation, AbbVie employees participated in the Abbott Laboratories Annuity Retirement Plan, which was Abbott’s principal domestic defined benefit pension plan. In connection with the separation, AbbVie established the AbbVie Pension Plan, which is AbbVie’s principal domestic defined benefit pension plan, with substantially the same terms as the Abbott Laboratories Annuity Retirement Plan. AbbVie employees who were eligible to participate in the Abbott Laboratories Annuity Retirement Plan on December 31, 2012 automatically became eligible for the AbbVie Pension Plan. During the first quarter of 2013, the AbbVie Pension Plan assumed the obligations and related assets for its employees from the Abbott Laboratories Annuity Retirement Plan. In the first quarter of 2013, AbbVie made a voluntary contribution of $145 million this plan. AbbVie also made a voluntary contribution of $370 million to this plan subsequent to December 31, 2013. 82 The benefit plan information in the table below pertains to the global AbbVie-sponsored defined benefit pension and other post-employment plans. as of and for the years ended December 31 (in millions) Projected benefit obligations Beginning of period Service cost Interest cost Employee contributions Plan amendments Assumption of plan liabilities Removal of plans Actuarial (gain) loss Benefits paid Other, primarily foreign currency translation loss End of period Fair value of plan assets Beginning of period Actual return on plan assets Company contributions Employee contributions Assumption of plan assets Benefits paid Other, primarily foreign currency translation gain End of period Defined benefit plans Other post-employment plans 2013 2012 2013 2012 $ 1,669 184 196 1 (1) 3,009 — (455) (146) 27 $ 649 21 38 — — 797 — 182 (40) 22 $ 231 23 19 — — 209 (12) (55) (12) — $ — — — — — 231 — — — — $ 4,484 $1,669 $ 403 $ 231 $ 898 491 198 1 2,221 (146) 3 $ 230 42 46 — 620 (40) — $ — $ — — — — — — — — 12 — — (12) — $ 3,666 $ 898 — — Funded status at December 31 $ (818) $ (771) $(403) $(231) Amounts recognized in consolidated balance sheets Other assets Current liabilities Long-term liabilities Net liability at December 31 Actuarial losses, net Prior service cost AOCI at December 31 $ 442 (27) (1,233) $ 11 (27) (755) $ — $ — (7) (224) (8) (395) $ (818) $ (771) $(403) $(231) $ 1,194 22 $ 526 10 $ 74 (47) $ 69 (1) $ 1,216 $ 536 $ 27 $ 68 The projected benefit obligations (PBO) in the table above included $1.2 billion and $1.1 billion at December 31, 2013 and 2012, respectively, related to international defined benefit pension plans, a number of which generally are not funded, in accordance with local regulations. Benefit payments under those plans are funded from company assets. For plans reflected in the table above, the accumulated benefit obligations (ABO) were $3.9 billion and $1.5 billion at December 31, 2013 and 2012, respectively. For those plans reflected in the table above in which the ABO exceeded plan assets at December 31, 2013, the ABO, PBO and aggregate plan assets were $1.8 billion, $2.4 billion and $1.1 billion, respectively. 83 Amounts Recognized in AOCI and OCI The defined benefit pension and other post-employment plans’ actuarial gains or losses and prior service costs or credits not yet recognized in net periodic benefit cost are recognized on a net-of-tax basis in AOCI and will be amortized to net periodic benefit cost in the future. The following is a summary of the pretax gains and losses included in OCI. years ended December 31 (in millions) 2013 2012 2011 Defined benefit plans Actuarial (gain) loss Prior service cost Amortization of actuarial losses and prior service costs Foreign exchange loss Total pretax (gain) loss recognized in OCI Other post-employment plans Actuarial (gain) loss Prior service cost Total pretax (gain) loss recognized in OCI $(715) $ 98 15 (114) 2 19 9 — (2) (7) 2 5 $(812) $105 $19 $ (42) $ 69 $— (53) — — $ (95) $ 69 $— The pretax amount of actuarial (gain) loss and prior service cost included in AOCI at December 31, 2013 that is expected to be recognized in the net periodic benefit cost in 2014 is $69 million for defined benefit plans and $(4) million for other post-employment plans. Net Periodic Benefit Cost years ended December 31 (in millions) Defined benefit plans Service cost Interest cost Expected return on plan assets Amortization of actuarial losses and prior service costs Net periodic pension benefit cost Other post-employment plans Service cost Interest cost Amortization of actuarial gain and prior service costs Net periodic OPEB cost 2013 2012 2011 $ 184 196 (259) 114 $ 21 38 (29) 7 $ 18 32 (21) 2 $ 235 $ 37 $ 31 — $ 23 19 — (1) — — — — $ 41 $ — $ — Weighted-Average Assumptions Used in Determining Benefit Obligations at the Measurement Date Defined benefit plans Discount rate Rate of compensation increases Other post-employment plans Discount rate Rate of compensation increases 84 2013 2012 4.9% 4.0% 5.0% 3.9% 5.3% 4.3% 6.0% 3.5% The assumptions above, which were used in calculating the December 31, 2013 measurement date benefit obligations, will be used in the calculation of net periodic benefit cost in 2014. Weighted-Average Assumptions Used in Determining Net Periodic Benefit Cost Defined benefit plans Discount rate Expected long-term rate of return on plan assets Expected rate of change in compensation Other post-employment plans Discount rate 2013 2012 2011 4.3% 5.1% 5.0% 8.2% 8.5% 8.5% 5.0% 4.2% 4.1% 4.5% N/A N/A For purposes of measuring post-retirement health care obligations as of the measurement date, the Company assumed a 7.9% pre-65 (7.6% post-65) annual rate of increase in the per capita cost of covered health care benefits. The rate was assumed to decrease gradually to 5% in 2051 and remain at that level thereafter. For purposes of measuring post-retirement health care costs for 2013, the company assumed a 7.9% pre-65 (7.6% post-65) annual rate of increase in the per capita cost of covered health care benefits. The rate was assumed to decrease gradually to 5% for 2051 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. As of December 31, 2013, a 1% change in assumed health care cost trend rates would have the following effects: year ended December 31, 2013 (in millions) Service cost and interest cost Projected benefit obligation Defined Benefit Pension Plan Assets (in millions) Equities U.S. large cap(a) U.S. mid cap(b) International(c) Fixed income securities U.S. government securities(d) Corporate debt instruments(e) Government Securities International Other Absolute return funds(f) Real assets Other(g) Fair value of plan assets One percentage point Increase Decrease $ 8 71 $ (6) (56) Basis of fair value measurement Balance at December 31, 2013 Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) $1,197 244 614 $ 576 62 225 292 212 216 52 704 70 65 35 57 159 45 3 8 62 $ 621 182 389 257 155 57 7 290 62 3 $ — — — — — — — 411 — — $3,666 $1,232 $2,023 $411 85 (in millions) Equities U.S. large cap(a) U.S. mid cap(b) International(c) Fixed income securities U.S. government securities(d) Corporate debt instruments(e) Government Securities International Other Absolute return funds(f) Real assets Other(g) Fair value of plan assets Basis of fair value measurement Balance at December 31, 2012 Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) $232 45 276 73 109 26 2 90 18 27 $232 31 234 24 93 26 1 22 9 27 $ — 14 42 49 16 — 1 37 7 — $— — — — — — — 31 2 — $898 $699 $166 $33 (a) A mix of pooled index funds and actively managed equity accounts that are benchmarked to various large cap indices. (b) A mix of pooled index funds and actively managed equity accounts that are benchmarked to various mid cap indices. (c) A mix of pooled index funds and actively managed equity accounts that are benchmarked to various non-US equity indices in both developed and emerging markets. (d) Securities held by pooled index funds and mutual funds. (e) Securities held by actively managed accounts, pooled index funds, and mutual funds. (f) Funds having global mandates with the flexibility to allocate capital broadly across a wide range of asset classes and strategies, including but not limited to equities, fixed income, commodities, financial futures, currencies, and other securities, with objectives to outperform agreed upon benchmarks of specific return and volatility targets. (g) Investments in cash and cash equivalents. Equities that are valued using quoted prices are valued at the published market prices. Equities in a common collective trust or a registered investment company that are valued using significant other observable inputs are valued at the net asset value (NAV) provided by the fund administrator. The NAV is based on the value of the underlying assets owned by the fund minus its liabilities. Fixed income securities that are valued using significant other observable inputs are valued at prices obtained from independent financial service industry-recognized vendors. Absolute return funds and commodities are valued at the NAV provided by the fund administrator. 86 The following table summarizes the change in the value of plan assets that are measured using significant unobservable inputs (Level 3). (in millions) Balance as of January 1 Transfers in from other categories Actual return on plan assets on hand at year end Assumption of level 3 assets Purchases, sales and settlements, net Balance as of December 31 2013 2012 $ 33 $27 — — 3 372 — 3 2 4 $411 $33 The investment mix of equity securities, fixed income and other asset allocation strategies is based upon achieving a desired return, balancing higher return, more volatile equity securities, and lower return, less volatile fixed income securities. Investment allocations are established for each plan and are generally made across a range of markets, industry sectors, capitalization sizes, and in the case of fixed income securities, maturities and credit quality. The target investment allocations for the AbbVie Pension Plan is 50% in equity securities, 20% in fixed income securities and 30% in asset allocation strategies and other holdings. There are no known significant concentrations of risk in the plan assets of the AbbVie Pension Plan or any other plans’ assets. The plans’ expected return on assets, as shown above, is based on management’s expectations of long-term average rates of return to be achieved by the underlying investment portfolios. In establishing this assumption, management considers historical and expected returns for the asset classes in which the plans are invested, as well as current economic and capital market conditions. Expected Pension and Other Post-Employment Payments (in millions) 2014 2015 2016 2017 2018 2019 to 2023 Defined benefit plans Other post-employment plans $ 154 162 170 180 192 1,164 $ 9 11 13 15 18 129 The above table reflects total benefit payments expected to be paid to participants, which includes payments funded from company assets as well as paid from the plans. Other Prior to the separation, AbbVie employees also participated in the Abbott Laboratories Stock Retirement Plan, which was Abbott’s principal defined contribution plan. AbbVie recorded expense of $67 million and $68 million in 2012 and 2011, respectively, related to this plan. In connection with the separation, AbbVie established the AbbVie Savings Plan, which is AbbVie’s principal defined contribution plan, with substantially the same terms as the Abbott Laboratories Stock Retirement Plan. AbbVie employees who were eligible to participate in the Abbott Laboratories Stock Retirement Plan on January 1, 2013 automatically became eligible for the AbbVie Savings Plan. AbbVie recorded expense of $62 million in 2013 related to this plan. AbbVie provides certain other post-employment benefits, primarily salary continuation plans, to qualifying employees and accrues for the related cost over the service lives of the employees. 87 Note 11 Equity Stock-Based Compensation Stock-based compensation expense was $212 million, $187 million and $163 million in 2013, 2012 and 2011, respectively. The related tax benefit recognized was $68 million, $56 million and $48 million in 2013, 2012 and 2011, respectively. In 2013, realized excess tax benefits associated with stock-based compensation totaled $38 million and was presented in the consolidated statements of cash flows as an outflow within the operating section and an inflow within the financing section. For 2013, $134 million of stock-compensation expense was classified in SG&A, $58 million in R&D and $20 million in cost of products sold. Stock-based compensation expense for both 2012 and 2011 was allocated to AbbVie based on the portion of Abbott’s incentive stock program in which AbbVie employees participated. For both 2012 and 2011, more than half of stock-based compensation expense was classified in SG&A, with the remainder classified in R&D and cost of products sold. Compensation cost capitalized as part of inventory at December 31, 2013 and 2012 was not significant. Compensation expense for stock-based awards is measured based on the fair value of the awards, as of the date the stock-based awards are granted and adjusted to the estimated number of awards that are expected to vest. Forfeitures are estimated based on historical experience at the time of grant and revised in subsequent periods if actual forfeitures differ from those estimates. Compensation cost for stock-based awards are amortized over their service period, which could be shorter than the vesting period if an employee is retirement eligible, with a charge to compensation expense. For stock-based awards granted to retirement-eligible employees, compensation expense is recognized immediately at the grant date because the employee is able to retain the award without continuing to provide service. Prior to separation, AbbVie employees participated in Abbott’s incentive stock program. The AbbVie 2013 Incentive Stock Program, adopted at the time of separation, facilitated the assumption of certain awards granted under Abbott’s 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. Under the AbbVie 2013 Incentive Stock Program, 100 million shares of common stock were reserved for issuance with respect to post-separation awards for participants. In connection with the separation, outstanding Abbott employee stock options, RSAs and RSUs previously issued under Abbott’s 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 at least equal to 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 except for stock options with a replacement feature. Pre-2005 options were granted with a replacement option feature. The terms and conditions of the replacement option are the same in all material respects as those applicable to the original grant. When the exercise price of an option with a replacement option feature is paid with common shares held by the employee, a replacement option is granted for the number of shares used to make that payment. The closing price of the common share on the business day before the exercise is used to determine the number of shares required to exercise the related option and the exercise price of the replacement option. The replacement option is exercisable in full six months after the date of grant, and has a term expiring on the expiration date of the original option. 88 The fair value of stock options is determined using the Black-Scholes model. The weighted-average assumptions used in estimating the fair value of stock options granted during each year, along with weighted-average grant-date fair values, were as follows. years ended December 31 Risk-free interest rate Average life of options (years) Volatility Dividend yield Fair value per stock option 2013 2012 2011 6.0 1.10% 1.20% 2.70% 6.0 32.63% 21.00% 21.00% 4.30% 3.60% 4.10% 6.0 $ 6.87 $ 6.80 $ 6.23 The risk-free interest rate is based on the rates available at the time of the grant for zero-coupon U.S. government issues with a remaining term equal to the option’s expected life. The average life of an option for 2013 is based on the simplified method. Prior to 2013, the average life of an option was based on both historical and projected exercise and lapsing data. For 2013, the expected volatility is based on an average peer historical volatility over the expected life of the option. Prior to 2013, the expected volatility was based on the historical volatility of Abbott’s stock over the expected life of the option. Dividend yield is based on the option’s exercise price and annual dividend rate at the time of grant. The following table summarizes AbbVie stock option activity for both AbbVie and Abbott employees for the year ended December 31, 2013. (options in thousands, aggregate intrinsic value in millions) Outstanding at December 31, 2012 Options converted on January 1, 2013 Granted Exercised Lapsed Outstanding at December 31, 2013 Exercisable at December 31, 2013 Weighted- average exercise price Weighted- Average remaining life (in years) Options Aggregate intrinsic value — $ — 27.00 37.91 28.14 28.21 47,718 3,128 (14,620) (232) 35,994 27.48 32,564 $27.04 3.6 3.1 $912 $840 The aggregate intrinsic value in the table above represents the difference between the exercise price and the company’s closing stock price on the last day of trading for the year ended December 31, 2013. The total intrinsic value of options exercised in 2013 was $229 million. For options issued under Abbott’s incentive stock programs to AbbVie employees prior to the separation, the total intrinsic value of options exercises in 2012 and 2011 was $170 million and $31 million, respectively. The total fair value of options vested during 2013 was $17 million. The tax benefit realized from option exercises totaled $21 million for 2013. As of December 31, 2013, $2 million of unrecognized compensation cost related to stock options is expected to be recognized as expense over approximately the next two years. RSAs & RSUs RSAs generally vest over three and five years. For RSAs that vest over five years, no more than one-third of the award vests in any one year. RSUs vest over three years and, upon vesting, the recipient receives one share of common stock for each vested RSU. In addition, AbbVie grants selected executives and other key employees performance-based RSAs and RSUs with vesting contingent upon meeting various departmental and company-wide performance goals, including AbbVie achieving a 89 minimum return on equity. The fair value of RSAs and RSUs (including performance-based awards) is determined based on the number of shares granted and the quoted price of the common stock on the date of grant. AbbVie assumes that the performance goals will be achieved. If such goals are not met, no compensation cost is recognized and any previously recognized compensation cost is reversed. The following table summarizes AbbVie RSA and RSU activity (including performance-based awards) for both AbbVie and Abbott employees for the year ended December 31, 2013. (share units in thousands) Outstanding at December 31, 2012 Awards converted on January 1, 2013 Granted Vested Lapsed Outstanding at December 31, 2013 Unvested shares at December 31, 2013 Share units Weighted-average grant date fair value — 15,394 7,615 (7,553) (546) 14,910 14,804 $ — 27.55 36.39 27.33 30.65 $32.07 $32.08 The fair market value of RSAs and RSUs vested in 2013 was $285 million. For RSAs and RSUs issued under Abbott’s incentive stock programs prior to the separation, the fair market value of RSAs and RSUs vested in 2012 and 2011 was $123 million and $74 million, respectively. The weighted-average grant-date fair value per share of RSAs and RSUs granted during 2012 and 2011 was $56.07 and $46.85, respectively. Such amounts have not been adjusted to reflect the separation from Abbott. As of December 31, 2013, $177 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 January 4, February 15, June 20, and September 19, 2013, the board of directors declared quarterly cash dividends of $0.40 per share of common stock, which were paid on February 15, May 15, August 15 and November 15, 2013, respectively. Additionally, on December 12, 2013, the board of directors declared a quarterly cash dividend of $0.40 per share of common stock for stockholders of record on January 15, 2014, which was paid on February 14, 2014. The cash dividend of $0.40 per share of common stock declared on January 4, 2013 was declared from pre-separation earnings and was recorded as a reduction of additional paid-in capital. Stock Repurchase Program On February 15, 2013, AbbVie’s board of directors authorized a $1.5 billion stock repurchase program. Purchases of AbbVie shares may be made from time to time at management’s discretion depending on the company’s cash flows, net debt level and market conditions. The plan has no time limit and can be discontinued at any time. During 2013, AbbVie repurchased approximately 4 million shares for $223 million in the open market. Shares repurchased under this program are recorded at acquisition cost, including related expenses, and are available for general corporate purposes. AbbVie’s remaining share repurchase authorization is $1.3 billion as of December 31, 2013. 90 Accumulated Other Comprehensive Loss The following table summarizes the changes in balances of each component of AOCI, net of tax for the three year period ended December 31, 2013. (in millions) (brackets denote losses) Foreign currency translation adjustments Pension and post- employment benefits Unrealized gains (losses) on marketable equity securities Gains (losses) on hedging activities Balance as of December 31, 2010 $ 303 $ (58) $ 9 $ 34 Total $ 288 Other comprehensive income before reclassifications Amounts reclassified from accumulated other comprehensive income Net current-period other comprehensive income Balance as of December 31, 2011 Other comprehensive income before reclassifications Amounts reclassified from accumulated other comprehensive income Net current-period other comprehensive income Separation-related adjustments (295) — (295) $ 8 173 — 173 — (8) 1 (7) 17 — 17 $ (65) $ 26 (157) 7 (150) (296) (25) — (25) — Balance as of December 31, 2012 $ 181 $(511) $ 1 $(21) Other comprehensive income before reclassifications Amounts reclassified from accumulated other comprehensive income Net current-period other comprehensive income Separation-related adjustments Balance as of December 31, 2013 48 — 48 519 79 598 241 $ 470 (914) $(827) 1 — 1 — $ 2 $(87) (14) $(300) (14) (28) $ 6 $ (13) $(313) $ (25) (9) $ (18) (18) (27) — — (77) 11 $ (11) $ (29) $(296) $(350) $ 79 $ 570 $(662) $(442) (77) $ 491 The table below presents the significant amounts reclassified out of each component of accumulated other comprehensive loss for the three year period ended December 31, 2013. Years ended December 31 (in millions) Pension and post-employee benefits Amortization of actuarial losses and other Less tax expense Total reclassification, net of tax Other 2013 2012 2011 $114 (35) $ 7 (—) $ 2 (1) $ 79 $ 7 $ 1 In addition to common stock, AbbVie’s authorized capital includes 200 million shares of preferred stock, par value $0.01. As of December 31, 2013, no shares of preferred stock were issued or outstanding. 91 Note 12 Income Taxes Earnings Before Income Taxes years ended December 31 (in millions) Domestic Foreign Total earnings before income taxes Income Taxes years ended December 31 (in millions) Current Domestic Foreign Total current taxes Deferred Domestic Foreign Total deferred taxes Total income taxes Effective Tax Rate Reconciliation years ended December 31 (in millions) Statutory tax rate Effect of foreign operations Resolution of uncertain tax positions Non-deductible litigation loss Puerto Rico excise tax credit State taxes, net of federal benefit All other, net Effective tax rate 2013 2012 2011 $ (581) $ 625 5,100 5,913 $ 626 3,042 $5,332 $5,725 $3,668 2013 2012 2011 $ 226 354 $ 94 252 $ 177 390 $ 580 $346 $ 567 $ 678 (54) $ 89 15 $(198) (134) 624 104 (332) $1,204 $450 $ 235 2013 2012 2011 35.0% 35.0% 35.0% (23.5) (11.5) (3.4) — 0.6 — (1.2) (1.9) 0.1 0.4 0.3 0.6 (25.4) (11.2) 12.9 (3.2) 0.3 (2.0) 22.6% 7.9% 6.4% The benefit from foreign operations reflected the impact of lower income tax rates in locations outside the United States, tax exemptions and incentives in Puerto Rico and other foreign tax jurisdictions, together with the cost of repatriation decisions. As further discussed in the ‘‘Deferred Tax Assets and Liabilities’’ section following, income tax expense in 2013 included income tax expense relating to 2013 earnings outside the United States that are not deemed indefinitely reinvested. Income taxes in 2012 and 2011 included the recognition of tax benefits totaling approximately $195 million and $410 million, respectively, as a result of favorable resolutions of various tax positions pertaining to prior years. Income taxes in 2011 also reflected the non-deductibility of a litigation reserve. Puerto Rico enacted legislation that assesses an excise tax beginning in 2011 on certain products manufactured in Puerto Rico. The tax is levied on gross inventory purchases from entities in Puerto Rico and is included in cost of products sold in the consolidated statements of earnings. The majority of the tax is creditable for U.S. income tax purposes. 92 Deferred Tax Assets and Liabilities as of December 31 (in millions) Deferred tax assets Compensation and employee benefits Accruals and reserves Chargebacks and rebates Deferred revenue Depreciation State income taxes Other Net operating losses and other credit carryforwards Total deferred tax assets Valuation allowances Total net deferred tax assets Deferred tax liabilities Excess of book basis over tax basis of intangible assets Repatriation of foreign earnings Total deferred tax liabilities Net deferred tax asset 2013 2012 $ 279 252 333 348 64 67 122 115 $ 190 173 403 283 42 87 274 92 1,580 (43) 1,544 (7) $ 1,537 $1,537 $ (508) $ (500) — (606) $(1,114) $ (500) $ 423 $1,037 In 2013, certain prior period amounts were reclassified to conform with the current period presentation, primarily in connection with reclassifying prepaid taxes of $777 million associated with deferred intercompany profit in inventory from current deferred income taxes to prepaid expenses and other in the combined balance sheet as of December 31, 2012. As of December 31, 2013 and 2012, the company has loss carryforwards for U.S. tax purposes totaling approximately $585 million and $419 million, respectively, which are available for use by the company between 2014 and 2033. As of December 31, 2013, the company has state tax credit carryforwards of $53 million. As of December 31, 2013 and 2012, the company has loss carryforwards for foreign tax purposes totaling approximately $95 million and $114 million, respectively. The majority of the foreign loss carryforwards do not have an expiration period. As of December 31, 2013 and 2012, the company has recorded valuation allowances of $43 million and $7 million, respectively, related to certain state net operating losses and credit carryforwards that are not expected to be realized. Deferred income taxes have not been provided on approximately $21 billion of the undistributed earnings of foreign subsidiaries as these earnings have been indefinitely reinvested for continued use in foreign operations. It is not practicable to determine the tax effect of a distribution of these earnings. Unrecognized Tax Benefits years ended December 31 (in millions) Balance as of January 1 Increase due to current year tax positions Increase due to prior year tax positions Decrease due to current year tax positions Decrease due to prior year tax positions Settlements Separation-related adjustments Balance as of December 31 93 2013 2012 2011 $ 1,140 195 — — — — (1,088) $1,039 370 1 — (220) (50) — $1,645 294 149 (15) (604) (430) — $ 247 $1,140 $1,039 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 if the tax positions are settled for amounts in excess of recorded liabilities. AbbVie will not benefit if prior tax positions are resolved more favorably than recorded amounts. As a result, no liability for uncertain tax positions was recorded in the combined financial statements as of December 31, 2012 and 2011. The table above reflects a reduction of $1.1 billion relating to tax periods prior to the separation for which Abbott is the primary obligor. However, under U.S. Treasury Regulations, each member of a consolidated group is severally liable for the U.S. federal income tax liability of each other member of the consolidated group. Accordingly, with respect to periods in which AbbVie was included in Abbott’s consolidated group, AbbVie could be liable to the U.S. government for any U.S. federal income tax liability incurred by the consolidated group, to the extent not discharged by any other member. However, if any such liability were imposed, AbbVie would be entitled to be indemnified by Abbott pursuant to the tax sharing agreement. AbbVie will be responsible for unrecognized tax benefits and related interest and penalties for periods after separation or in instances where an existing entity was transferred to AbbVie upon separation. As a result, AbbVie has continued to account for these tax uncertainties. To the extent that these obligations relate to periods prior to the separation, a reimbursement receivable of approximately $41 million has been recorded within other assets at December 31, 2013. If recognized, the net amount of potential tax benefits that would impact the company’s effective tax rate is $218 million. The company is routinely audited by the tax authorities in these jurisdictions, and a number of audits are currently underway. It is reasonably possible during the next twelve months that uncertain tax positions may be settled, which could result in a decrease in the gross amount of unrecognized tax benefits. Due to the potential for resolution of federal, state, and foreign examinations, and the expiration of various statutes of limitation, the company’s gross unrecognized tax benefits balance may change within the next twelve months up to $22 million. All significant federal, state, local, and international matters have been concluded for years through 2005. The company believes adequate provision has been made for all income tax uncertainties. AbbVie recognizes accrued interest and penalties related to uncertain tax positions in income tax expense. The amounts expensed and the liabilities accrued are immaterial as of and for the years ended December 31, 2013, 2012 and 2011. Uncertain tax positions are included as a long-term liability on the balance sheet. Note 13 Legal Proceedings and Contingencies Subject to certain exceptions specified in the separation agreement, AbbVie assumed the liability for, and control of, all pending and threatened legal matters related to its business, including liabilities for any claims or legal proceedings related to products that had been part of its business but were discontinued prior to the distribution, as well as assumed or retained liabilities, and will indemnify Abbott for any liability arising out of or resulting from such assumed legal matters. AbbVie is involved in various claims, legal proceedings and investigations, including those described below. The recorded accrual balance for litigation at December 31, 2013 was not significant. Within the next year, other legal proceedings may occur that may result in a change in the estimated loss accrued by AbbVie. While it is not feasible to predict the outcome of all other proceedings and exposures with certainty, management believes that their ultimate disposition should not have a material adverse effect on AbbVie’s consolidated financial position, cash flows, or results of operations, except as described below. The U.S. Department of Justice, through the U.S. Attorney for the Western District of Virginia, and various state Attorneys General investigated AbbVie’s sales and marketing activities for Depakote. The government sought to determine whether any of these activities violated civil and/or criminal laws, 94 including the Federal False Claims Act, the Food, Drug and Cosmetic Act, and the Anti-Kickback Statute in connection with Medicare and/or Medicaid reimbursement to third parties. The state Attorneys General offices sought to determine whether any of these activities violated various state laws, including state consumer fraud/protection statutes. AbbVie recorded charges of $1.5 billion in the third quarter of 2011 and $100 million in the first quarter of 2012 related to civil and criminal claims arising from this matter. In May 2012, AbbVie reached resolution of all Depakote-related federal claims, Medicaid-related claims with 49 states and the District of Columbia, and consumer protection claims with 45 states and the District of Columbia. In 2012, AbbVie paid approximately $1.6 billion for the settlement. The payments were material to AbbVie’s combined statement of cash flows for the year ended December 31, 2012. Two cases are pending in state courts against AbbVie that generally allege Abbott and numerous other pharmaceutical companies reported false pricing information in connection with certain drugs that are reimbursable under Medicare and Medicaid. These cases, State of Wisconsin, filed in June 2004 in the Circuit Court of Dane County, Wisconsin, and State of Illinois, filed in February 2005 in the Circuit Court of Cook County, Illinois, were brought by state Attorneys General and generally seek monetary damages and/or injunctive relief and attorney’s fees. This litigation is no longer material to AbbVie and AbbVie will no longer report on such cases. All other previously-reported cases that were pending against AbbVie in state courts have been settled. Lawsuits have been filed against AbbVie and others generally alleging that the 2005 patent litigation settlement involving Niaspan(cid:3) entered into between Kos Pharmaceuticals, Inc. (a company acquired by Abbott Laboratories in 2006 and presently a subsidiary of AbbVie) and a generic company violates federal and state antitrust laws and state unfair and deceptive trade practices and unjust enrichment laws. Plaintiffs generally seek monetary damages and/or injunctive relief and attorneys’ fees. In September 2013, all of these pending putative class action lawsuits were centralized for consolidated or coordinated pre-trial proceedings in the United States District Court for the Eastern District of Pennsylvania under the Multi-District Litigation Rules as In re Niaspan Antitrust Litigation, MDL No. 2460. In August 2013, a putative class action lawsuit, Sidney Hillman Health Center of Rochester, et al. v. AbbVie Inc., et al., was filed against AbbVie in the United States District Court for the Northern District of Illinois by three healthcare benefit providers alleging violations of federal RICO statutes and state deceptive business practice and unjust enrichment laws in connection with reimbursements for certain uses of Depakote from 1998 to 2012. Plaintiffs seek monetary damages and/or equitable relief and attorneys’ fees. Several pending lawsuits filed against Unimed Pharmaceuticals, Inc., Solvay Pharmaceuticals, Inc. (a company Abbott acquired in February 2010) and others were consolidated for pre-trial purposes in the United States District Court for the Northern District of Georgia under the Multi District Litigation Rules as In re AndroGel Antitrust Litigation, MDL No. 2084. These cases, brought by private plaintiffs and the Federal Trade Commission (FTC), generally allege Solvay’s 2006 patent litigation involving AndroGel was sham litigation and the patent litigation settlement agreement and related agreements with three generic companies violate federal and state antitrust laws and state consumer protection and unjust enrichment laws. Plaintiffs generally seek monetary damages and/or injunctive relief and attorneys’ fees. MDL 2084 includes: (a) three individual plaintiff lawsuits; (b) seven purported class actions; and (c) Federal Trade Commission v. Watson Pharmaceuticals, Inc. et al., filed in May 2009 in the United States District Court for the Northern District of Georgia. In February 2010, Solvay’s motion to dismiss the cases was partially granted and all of the FTC’s claims and all of the plaintiffs’ claims except those alleging sham litigation were dismissed. The FTC appealed and in May 2012 the district court’s decision was affirmed by the United States Court of Appeals for the Eleventh Circuit. In June 2013, the United States Supreme Court reversed the Eleventh Circuit’s decision affirming dismissal of the FTC’s claims and remanded the case brought by the FTC, ruling that the patent 95 litigation settlement agreement with three generic companies should be examined under a ‘‘rule of reason’’ analysis. In September 2012, the district court dismissed the remaining sham litigation claims and the plaintiffs’ appeal of that dismissal is pending in the Eleventh Circuit. AbbVie is seeking to enforce its patent rights relating to testosterone gel (a drug AbbVie sells under the trademark AndroGel(cid:3) 1.62%). In a case filed in the United States District Court for the District of Delaware in February 2013, AbbVie alleges that Perrigo Company’s and Perrigo Israel Pharmaceutical Ltd.’s proposed generic product infringes an AbbVie patent and seeks declaratory and injunctive relief. In a second case filed in the United States District Court for the District of Delaware in March 2013, AbbVie alleges that Watson Laboratories Inc.’s and Actavis Inc.’s proposed generic product infringes AbbVie’s patent and seeks declaratory and injunctive relief. AbbVie is seeking to enforce its patent rights relating to ritonavir/lopinavir tablets (a drug AbbVie sells under the trademark Kaletra(cid:3)). 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 AbbVie’s patents and seeks declaratory and injunctive relief. Upon Matrix’s motion in November 2009, the court granted a five-year stay of the litigation unless good cause to lift the stay is shown. AbbVie is seeking to enforce its patent rights relating to ritonavir tablets (a drug AbbVie sells under the trademark Norvir(cid:3)). In a case pending in the United States District Court for the Southern District of Ohio since April 2012, AbbVie alleges that Roxane Laboratories, Inc.’s (Roxane) proposed generic product infringes AbbVie’s patents and seeks declaratory and injunctive relief. In another case filed in the United States District Court for the Southern District of Ohio in July 2013, AbbVie alleges that Roxane’s proposed generic ritonavir product infringes additional AbbVie patents and seeks declaratory and injunctive relief on these additional patents. In a separate case filed in the United States District Court for the District of Delaware in May 2013, AbbVie alleges that Hetero USA Inc.’s and Hetero Labs Limited’s proposed generic ritonavir tablets product infringes AbbVie’s patents and seeks declaratory and injunctive relief. AbbVie is seeking to enforce certain patent rights that cover the use of fully human anti-TNF alpha antibodies with methotrexate to treat rheumatoid arthritis. In a case filed in the United States District Court for the District of Massachusetts in May 2009, AbbVie alleges Centocor Ortho Biotech, Inc.’s (now Janssen Biotech, Inc.’s) product Simponi(cid:3) infringes AbbVie’s patents and seeks damages and injunctive relief. AbbVie previously reported that it was seeking to enforce its patent rights relating to fenofibric acid capsules (a drug AbbVie sells in the U.S. under the trademark TRILIPIX(cid:3)). In a case filed in the United States District Court for the District of New Jersey in March 2011, AbbVie and its subsidiary Fournier Laboratories Ireland Ltd. alleged that Sandoz Inc. ‘s proposed generic product infringes AbbVie’s patent and seek injunctive relief. In January 2014, the parties settled this case and it was dismissed without prejudice. 96 Note 14 Segment and Geographic Area Information AbbVie operates in one business segment—pharmaceutical products. Substantially all of AbbVie’s U.S. sales are to three wholesalers. Outside the United States, products are sold primarily to health care providers or through distributors, depending on the market served. Worldwide net sales of key products were as follows. years ended December 31 (in millions) HUMIRA AndroGel Kaletra Synagis Lupron Synthroid Sevoflurane Creon Duodopa Dyslipidemia products All other Net sales 2013 2012 2011 $10,659 1,035 962 827 785 622 568 412 178 1,076 1,666 $ 9,265 1,152 1,013 825 800 551 602 353 149 2,145 1,525 $ 7,932 874 1,170 775 810 522 665 332 125 2,504 1,735 $18,790 $18,380 $17,444 Net sales to external customers, based on the country that sold the product, were as follows. years ended December 31 (in millions) United States Germany The Netherlands Japan United Kingdom Spain France Canada Brazil Italy All other countries Net sales 2013 2012 2011 $10,181 911 858 625 606 543 540 538 439 404 3,145 $10,435 756 776 718 552 525 500 500 434 408 2,776 $ 9,712 701 904 616 496 569 516 446 382 428 2,674 $18,790 $18,380 $17,444 Long-lived assets include net property and equipment of $2.3 billion and $2.2 billion as of December 31, 2013 and 2012, of which $1.6 billion and $1.6 billion, respectively, was located in the United States and Puerto Rico and $591 million and $536 million, respectively, was located in Europe. 97 Note 15 Quarterly Financial Data (unaudited) (in millions except per share data) First Quarter Net sales Gross margin Net earnings Basic earnings per share Diluted earnings per share Cash dividends declared per common share(a) Second Quarter Net sales Gross margin Net earnings Basic earnings per share Diluted earnings per share Cash dividends declared per common share Third Quarter Net sales Gross margin Net earnings Basic earnings per share Diluted earnings per share Cash dividends declared per common share Fourth Quarter Net sales Gross margin Net earnings Basic earnings per share Diluted earnings per share Cash dividends declared per common share 2013 2012 $4,329 3,176 968 0.61 0.60 0.80 $4,692 3,638 1,068 0.67 0.66 0.40 $4,658 3,566 964 0.60 0.60 0.40 $5,111 3,829 1,128 0.70 0.70 0.40 $4,173 3,017 883 0.56 0.56 — $4,493 3,420 1,267 0.80 0.80 — $4,508 3,494 1,585 1.01 1.01 — $5,206 3,941 1,540 0.98 0.98 — (a) On January 4, 2013, the board of directors declared a cash dividend of $0.40 per share of common stock. This dividend was declared from pre-separation earnings and was recorded as a reduction of additional paid-in capital. In addition, AbbVie declared regular quarterly cash dividends in 2013 aggregating $1.60 per share of common stock. Refer to Note 11 for information regarding cash dividends declared in 2013. For periods prior to the separation, the weighted-average basic and diluted shares outstanding was based on the number of shares of AbbVie common stock outstanding on the distribution date. Refer to Note 4 for information regarding the calculation of basic and diluted earnings per common share for the year ended December 31, 2013. 98 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders of AbbVie Inc. We have audited the accompanying consolidated balance sheet of AbbVie Inc. and subsidiaries as of December 31, 2013, and the related consolidated statements of earnings, comprehensive income, equity and cash flows for the year ended December 31, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of AbbVie Inc. and subsidiaries at December 31, 2013, and the consolidated results of their operations and their cash flows for the year ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), AbbVie Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated February 21, 2014 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Chicago, Illinois February 21, 2014 99 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of AbbVie Inc.: We have audited the accompanying combined balance sheet of AbbVie Inc. and subsidiaries (the ‘‘Company’’) as of December 31, 2012 and the related combined statements of earnings, comprehensive income, equity and cash flows for each of the two years in the period ended December 31, 2012. These combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such combined financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2012 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America. As described in Note 1, the accompanying combined financial statements have been derived from the consolidated financial statements and accounting records of Abbott Laboratories. The combined financial statements also include expense allocations for certain corporate functions historically provided by Abbott Laboratories. These allocations may not be reflective of the actual expense which would have been incurred had the Company operated as a separate entity apart from Abbott Laboratories. /s/ Deloitte & Touche LLP Chicago, Illinois March 15, 2013 100 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Disclosure Controls and Procedures Evaluation of disclosure controls and procedures. The Chief Executive Officer, Richard A. Gonzalez, and the Chief Financial Officer, William J. Chase, evaluated the effectiveness of AbbVie’s disclosure controls and procedures as of the end of the period covered by this report, and concluded that AbbVie’s disclosure controls and procedures were effective to ensure that information AbbVie is required to disclose in the reports that it files or submits with the Securities and Exchange Commission under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and to ensure that information required to be disclosed by AbbVie in the reports that it files or submits under the Exchange Act is accumulated and communicated to AbbVie’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Internal Control Over Financial Reporting Management’s annual report on internal control over financial reporting. Management’s report on internal control over financial reporting is included on page 102 hereof. The report of AbbVie’s independent registered public accounting firm related to its assessment of the effectiveness of internal control over financial reporting is included on page 103 hereof. Changes in internal control over financial reporting. During the quarter ended December 31, 2013, there were no changes in AbbVie’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, AbbVie’s internal control over financial reporting. Inherent Limitations on Effectiveness of Controls. AbbVie’s management, including its Chief Executive Officer and its Chief Financial Officer, do not expect that AbbVie’s disclosure controls or internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. ITEM 9B. OTHER INFORMATION None. 101 Management’s Report on Internal Control over Financial Reporting Management of AbbVie is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. AbbVie’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States. However, all internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and reporting. Management assessed the effectiveness of AbbVie’s internal control over financial reporting as of December 31, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control- Integrated Framework (1992 framework). Based on that assessment, management concluded that AbbVie maintained effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria. The effectiveness of AbbVie’s internal control over financial reporting as of December 31, 2013 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their attestation report appearing on page 103 hereof, which expresses an unqualified opinion on the effectiveness of AbbVie’s internal control over financial reporting as of December 31, 2013. 102 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders of AbbVie Inc. We have audited AbbVie Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). AbbVie Inc. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, AbbVie Inc. and subsidiaries’ maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2013, and the related consolidated statements of earnings, comprehensive income, equity and cash flows for the year ended December 31, 2013 of AbbVie Inc. and subsidiaries and our report dated February 21, 2014 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Chicago, Illinois February 21, 2014 103 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Incorporated herein by reference are ‘‘Information Concerning Director Nominees,’’ ‘‘The Board of Directors and its Committees—Committees of the Board of Directors,’’ ‘‘Section 16(a) Beneficial Ownership Reporting Compliance,’’ and ‘‘Procedure for Recommendation and Nomination of Directors and Transaction of Business at Annual Meeting’’ to be included in the 2014 AbbVie Inc. Proxy Statement. The 2014 Proxy Statement will be filed on or about March 24, 2014. Also incorporated herein by reference is the text found under the caption, ‘‘Executive Officers of the Registrant’’ on pages 29 and 30 hereof. AbbVie’s code of business conduct requires all its business activities to be conducted in compliance with laws, regulations, and ethical principles and values. All directors, officers, and employees of AbbVie are required to read, understand, and abide by the requirements of the code of business conduct applicable to them. AbbVie’s code of business conduct is available in the corporate governance section of AbbVie’s investor relations website at www.abbvieinvestor.com. Any waiver of the code of business conduct for directors or executive officers may be made only by AbbVie’s audit committee. AbbVie will disclose any amendment to, or waiver from, a provision of the code of conduct for the principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, on its website within four business days following the date of the amendment or waiver. In addition, AbbVie will disclose any waiver from the code of business conduct for the other executive officers and for directors on the website. AbbVie has a chief ethics and compliance officer who reports to the chief executive officer and to the public policy committee. The chief ethics and compliance officer is responsible for overseeing, administering, and monitoring AbbVie’s compliance program. ITEM 11. EXECUTIVE COMPENSATION The material to be included in the 2014 Proxy Statement under the headings ‘‘Director Compensation,’’ ‘‘Executive Compensation,’’ and ‘‘Compensation Committee Report’’ is incorporated herein by reference. The 2014 Proxy Statement will be filed on or about March 24, 2014. 104 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS (a) Equity Compensation Plan Information. The following table presents information as of December 31, 2013 about AbbVie’s equity compensation plans under which AbbVie common stock has been authorized for issuance. Plan Category Equity compensation plans approved by security holders Equity compensation plans not approved by security holders Total (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights(1) (b) Weighted- average exercise price of outstanding options, warrants and rights(2) (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) 48,862,326 $27.48 99,307,279 — 48,862,326 $ — $27.48 — 99,307,279 (1) Includes 40,024,559 shares issuable under AbbVie’s Incentive Stock Program pursuant to awards granted by Abbott and adjusted into AbbVie awards in connection with AbbVie’s separation from Abbott. (2) The weighted-average exercise price does not include outstanding restricted stock units that have no exercise price. (b) Information Concerning Security Ownership. Incorporated herein by reference is the material under the heading ‘‘Securities Ownership—Securities Ownership of Executive Officers and Directors’’ in the 2014 Proxy Statement. The 2014 Proxy Statement will be filed on or about March 24, 2014. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The material to be included in the 2014 Proxy Statement under the headings ‘‘The Board of Directors and its Committees,’’ ‘‘Corporate Governance Materials,’’ and ‘‘Procedures for Approval of Related Person Transactions’’ is incorporated herein by reference. The 2014 Proxy Statement will be filed on or about March 24, 2014. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The material to be included in the 2014 Proxy Statement under the headings ‘‘Audit Information— Audit Fees and Non-Audit Fees’’ and ‘‘Audit Information—Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of the Independent Registered Public Accounting Firm’’ is incorporated herein by reference. The 2014 Proxy Statement will be filed on or about March 24, 2014. 105 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) Documents filed as part of this Form 10-K. PART IV (1) Financial Statements: See Item 8, ‘‘Financial Statements and Supplementary Data,’’ on page 56 hereof, for a list of financial statements. (2) Financial Statement Schedules: All schedules omitted are inapplicable or the information required is shown in the consolidated financial statements or notes thereto. (3) Exhibits Required by Item 601 of Regulation S-K: The information called for by this paragraph is incorporated herein by reference to the Exhibit Index on pages 108 through 110 of this Form 10-K. (b) Exhibits filed (see Exhibit Index on pages 108 through 110). (c) Financial Statement Schedules: None applicable. 106 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, AbbVie Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES AbbVie Inc. By: /s/ RICHARD A. GONZALEZ Name: Richard A. Gonzalez Title: Chairman of the Board and Chief Executive Officer Date: February 21, 2014 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of AbbVie Inc. on February 21, 2014 in the capacities indicated below. /s/ RICHARD A. GONZALEZ Richard A. Gonzalez Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ THOMAS A. HURWICH Thomas A. Hurwich Vice President, Controller (Principal Accounting Officer) /s/ ROBERT J. ALPERN, M.D. Robert J. Alpern, M.D. Director of AbbVie Inc. /s/ WILLIAM H.L. BURNSIDE William H.L. Burnside Director of AbbVie Inc. /s/ EDWARD J. RAPP Edward J. Rapp Director of AbbVie Inc. /s/ GLENN F. TILTON Glenn F. Tilton Director of AbbVie Inc. /s/ WILLIAM J. CHASE William J. Chase Executive Vice President, Chief Financial Officer (Principal Financial Officer) /s/ ROXANNE S. AUSTIN Roxanne S. Austin Director of AbbVie Inc. /s/ EDWARD M. LIDDY Edward M. Liddy Director of AbbVie Inc. /s/ ROY S. ROBERTS Roy S. Roberts Director of AbbVie Inc. /s/ FREDERICK H. WADDELL Frederick H. Waddell Director of AbbVie Inc. 107 EXHIBIT INDEX ABBVIE INC. ANNUAL REPORT FORM 10-K 2013 Exhibits 32.1 and 32.2 are furnished herewith and should not be deemed to be ‘‘filed under the Securities Exchange Act of 1934.’’ Exhibit Number 2.1 3.1 3.2 4.1 4.2 10.1 10.2 10.3 10.4 10.5 10.6 Exhibit Description *Separation and Distribution Agreement dated as of November 28, 2012 by and between Abbott Laboratories and AbbVie Inc. (incorporated by reference to Exhibit 2.1 of Amendment No. 6 to the Company’s Registration Statement on Form 10 filed on November 30, 2012). *Amended and Restated Certificate of Incorporation of AbbVie Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on January 2, 2013). *Amended and Restated By-Laws of AbbVie Inc. (incorporated by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K filed on January 2, 2013). *Indenture dated as of November 8, 2012 between AbbVie Inc. and U.S. Bank National Association (incorporated by reference to Exhibit 4.1 of Amendment No. 5 to the Company’s Registration Statement on Form 10 filed on November 16, 2012). *Supplemental Indenture No. 1 dated as of November 8, 2012 among AbbVie Inc. and U.S. Bank National Association (incorporated by reference to Exhibit 4.2 of Amendment No. 5 to the Company’s Registration Statement on Form 10 filed on November 16, 2012). *U.S. Transition Services Agreement dated as of December 31, 2012 by and between Abbott Laboratories and AbbVie Inc. (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on January 2, 2013). *Ex-U.S. Transition Services Agreement dated as of December 31, 2012 by and between Abbott Laboratories and AbbVie Inc. (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on January 2, 2013). *Tax Sharing Agreement entered into as of December 31, 2012 by and between Abbott Laboratories and AbbVie Inc. (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed on January 2, 2013). *Special Products Master Agreement dated as of December 31, 2012 by and between Abbott Laboratories and AbbVie Inc. (incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed on January 2, 2013). *Employee Matters Agreement dated as of December 31, 2012 by and between Abbott Laboratories and AbbVie Inc. (incorporated by reference to Exhibit 10.5 of the Company’s Current Report on Form 8-K filed on January 2, 2013). *International Commercial Operations Agreement dated as of December 31, 2012 by and between Abbott Laboratories and AbbVie Inc. (incorporated by reference to Exhibit 10.6 of the Company’s Current Report on Form 8-K filed on January 2, 2013). 10.7 First Amendment to International Commercial Operations Agreement effective as of December 31, 2012 by and between Abbott Laboratories and AbbVie Inc. 108 Exhibit Number 10.8 10.9 10.10 10.11 10.12 10.13 10.14 10.15 10.16 10.17 10.18 10.19 10.20 10.21 10.22 Exhibit Description *Luxembourg International Commercial Operations Agreement dated as of December 31, 2012 by and between Abbott Investments Luxembourg S.`ar.l. and AbbVie Investments S.`ar.l. (incorporated by reference to Exhibit 10.7 of the Company’s Current Report on Form 8-K filed on January 2, 2013). First Amendment to Luxembourg International Commercial Operations Agreement effective as of December 31, 2012 by and between Abbott Investments Luxembourg S.`ar.l. and AbbVie Investments S.`ar.l. *Information Technology Agreement dated as of December 31, 2012 by and between Abbott Laboratories and AbbVie Inc. (incorporated by reference to Exhibit 10.8 of the Company’s Current Report on Form 8-K filed on January 2, 2013). *Transitional Trademark License Agreement dated as of December 31, 2012 by and between Abbott Laboratories and AbbVie Inc. (incorporated by reference to Exhibit 10.9 of the Company’s Current Report on Form 8-K filed on January 2, 2013). *Form of Finished Goods Supply Agreements by and between Abbott Laboratories and AbbVie Inc. (incorporated by reference to Exhibit 10.11 of Amendment No. 2 to the Company’s Registration Statement on Form 10 filed on September 4, 2012). *Form of Contract Manufacturing Agreements by and between Abbott Laboratories and AbbVie Inc. (incorporated by reference to Exhibit 10.12 of Amendment No. 2 to the Company’s Registration Statement on Form 10 filed on September 4, 2012). *Form of Agreement Regarding Change in Control by and between AbbVie Inc. and its named executive officers (incorporated by reference to Exhibit 10.13 of Amendment No. 5 to the Company’s Registration Statement on Form 10 filed on November 16, 2012).** *AbbVie 2013 Incentive Stock Program (incorporated by reference to Exhibit A to the AbbVie Inc. Definitive Proxy Statement on Schedule 14A dated March 15, 2013).** *AbbVie 2013 Management Incentive Plan (incorporated by reference to Exhibit 10.14 of the Company’s Annual Report on Form 10-K filed on March 15, 2013).** *AbbVie 2013 Performance Incentive Plan (incorporated by reference to Exhibit 10.15 of the Company’s Annual Report on Form 10-K filed on March 15, 2013).** *AbbVie Deferred Compensation Plan (incorporated by reference to Exhibit 10.16 of the Company’s Annual Report on Form 10-K filed on March 15, 2013).** *AbbVie Non-Employee Directors’ Fee Plan (incorporated by reference to Exhibit 10.17 of the Company’s Annual Report on Form 10-K filed on March 15, 2013).** *AbbVie Supplemental Pension Plan (incorporated by reference to Exhibit 10.18 of the Company’s Annual Report on Form 10-K filed on March 15, 2013).** *AbbVie Supplemental Savings Plan (incorporated by reference to Exhibit 10.19 of the Company’s Annual Report on Form 10-K filed on March 15, 2013).** *Purchase Agreement dated November 5, 2012 between AbbVie Inc., Abbott Laboratories, as guarantor, and Morgan Stanley & Co. LLC, Barclays Capital Inc., J.P. Morgan Securities LLC, and Merrill Lynch, Pierce, Fenner & Smith Incorporated (incorporated by reference to Exhibit 10.21 of Amendment No. 6 to the Company’s Registration Statement on Form 10 filed on November 30, 2012). 10.23 *Form of AbbVie Inc. Non-Employee Director Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013).** 109 Exhibit Number 10.24 10.25 10.26 10.27 10.28 10.29 12 21 23.1 23.2 31.1 31.2 32.1 32.2 101 Exhibit Description *Form of AbbVie Inc. Non-Employee Director Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013).** *Form of AbbVie Inc. Performance Restricted Stock Agreement (CEO/Chairman) (incorporated by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013).** *Form of AbbVie Inc. Performance Restricted Stock Agreement (Annual) (incorporated by reference to Exhibit 10.5 of the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013).** *Form of AbbVie Inc. Performance Restricted Stock Agreement (Interim) (incorporated by reference to Exhibit 10.6 of the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013).** *Form of AbbVie Inc. Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.7 of the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013).** *Form of AbbVie Inc. Non-Qualified Replacement Stock Option Agreement (incorporated by reference to Exhibit 10.8 of the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013).** Computation of Ratio of Earnings to Fixed Charges Subsidiaries of AbbVie Inc. Consent of Independent Registered Public Accounting Firm. Consent of Independent Registered Public Accounting Firm. Certification of Chief Executive Officer Required by Rule 13a-14(a) (17 CFR 240.13a-14(a)). Certification of Chief Financial Officer Required by Rule 13a-14(a) (17 CFR 240.13a-14(a)). Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. The following financial statements and notes from the AbbVie Inc. Annual Report on Form 10-K for the year ended December 31, 2013 filed on February 21, 2014, formatted in XBRL: (i) Consolidated Statements of Earnings; (ii) Consolidated Statements of Cash Flows; (iii) Consolidated Balance Sheets; and (iv) the notes to the consolidated financial statements. The AbbVie Inc. 2014 Proxy Statement will be filed with the Securities and Exchange Commission under separate cover on or about March 24, 2014. * Incorporated herein by reference. Commission file number 001-35565. ** Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit hereto. AbbVie will furnish copies of any of the above exhibits to a stockholder upon written request to the Secretary, AbbVie Inc., 1 North Waukegan Road, North Chicago, Illinois 60064. 110 RATIO OF EARNINGS TO FIXED CHARGES The following table sets forth AbbVie’s historical ratios of earnings to fixed charges for the periods indicated. This information should be read in conjunction with the financial statements and accompanying notes included under Item 8, ‘‘Financial Statements and Supplementary Data’’ and Item 7, ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations.’’ Exhibit 12 Ratio of Earnings to Fixed Charges Fiscal Year Ended December 31, 2013 2012 2011 2010 2009 16.6 41.3 132.0 180.1 248.9 Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the following Registration Statements: (1) Registration Statement (Form S-8 No. 333-185561) pertaining to AbbVie 2013 Incentive Stock Program, (2) Registration Statement (Form S-8 No. 333-185562) pertaining to AbbVie 2013 Employee Stock Purchase Plan for Non-U.S. Employees, (3) Registration Statement (Form S-8 No. 333-185563) pertaining to AbbVie Deferred Compensation Plan, and (4) Registration Statement (Form S-8 No. 333-185564) pertaining to AbbVie Savings Program; of our reports dated February 21, 2014, with respect to the consolidated financial statements of AbbVie Inc. and subsidiaries and the effectiveness of internal control over financial reporting of AbbVie Inc. and subsidiaries included in this Annual Report (Form 10-K) of AbbVie Inc. and subsidiaries for the year ended December 31, 2013. /s/ Ernst & Young LLP Chicago, Illinois February 21, 2014 Exhibit 23.2 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statement No. 333-185564 on Form S-8 for the AbbVie Savings Program; Registration Statement No. 333-185563 on Form S-8 for the AbbVie Deferred Compensation Plan; Registration Statement No. 333-185562 on Form S-8 for the AbbVie 2013 Employee Stock Purchase Plan for Non-U.S. Employees; and Registration Statement No. 333-185561 on Form S-8 for the AbbVie 2013 Incentive Stock Program of our report dated March 15, 2013, relating to the combined financial statements of AbbVie Inc. as of and for the two years ended December 31, 2012 (which reports an unqualified opinion and includes an emphasis of matter paragraph regarding the fact that the Company’s financial statements have been derived from the accounting records of Abbott Laboratories and include expense allocations for certain corporate functions historically provided by Abbott Laboratories) appearing in this Annual Report on Form 10-K of AbbVie Inc. for the year ended December 31, 2013. /s/ Deloitte & Touche LLP Chicago, Illinois February 21, 2014 Exhibit 31.1 Certification of Chief Executive Officer Required by Rule 13a-14(a) (17 CFR 240.13a-14(a)) I, Richard A. Gonzalez, certify that: 1. I have reviewed this annual report on Form 10-K of AbbVie Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of AbbVie as of, and for, the periods presented in this report; 4. AbbVie’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for AbbVie and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to AbbVie, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of AbbVie’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in AbbVie’s internal control over financial reporting that occurred during AbbVie’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, AbbVie’s internal control over financial reporting; and 5. AbbVie’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to AbbVie’s auditors and the audit committee of AbbVie’s board of directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect AbbVie’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in AbbVie’s internal control over financial reporting. Date: February 21, 2014 /s/ RICHARD A. GONZALEZ Richard A. Gonzalez, Chairman of the Board and Chief Executive Officer Exhibit 31.2 Certification of Chief Financial Officer Required by Rule 13a-14(a) (17 CFR 240.13a-14(a)) I, William J. Chase, certify that: 1. I have reviewed this annual report on Form 10-K of AbbVie Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of AbbVie as of, and for, the periods presented in this report; 4. AbbVie’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for AbbVie and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to AbbVie, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of AbbVie’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in AbbVie’s internal control over financial reporting that occurred during AbbVie’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, AbbVie’s internal control over financial reporting; and 5. AbbVie’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to AbbVie’s auditors and the audit committee of AbbVie’s board of directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect AbbVie’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in AbbVie’s internal control over financial reporting. Date: February 21, 2014 /s/ WILLIAM J. CHASE William J. Chase, Executive Vice President, Chief Financial Officer Exhibit 32.1 Certification Pursuant To 18 U.S.C. Section 1350 As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Annual Report of AbbVie Inc. (the ‘‘Company’’) on Form 10-K for the period ended December 31, 2013 as filed with the Securities and Exchange Commission (the ‘‘Report’’), I, Richard A. Gonzalez, Chairman of the Board and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ RICHARD A. GONZALEZ Richard A. Gonzalez Chairman of the Board and Chief Executive Officer February 21, 2014 A signed original of this written statement required by Section 906 has been provided to AbbVie Inc. and will be retained by AbbVie Inc. and furnished to the Securities and Exchange Commission or its staff upon request. Exhibit 32.2 Certification Pursuant To 18 U.S.C. Section 1350 As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Annual Report of AbbVie Inc. (the ‘‘Company’’) on Form 10-K for the period ended December 31, 2013 as filed with the Securities and Exchange Commission (the ‘‘Report’’), I, William J. Chase, Executive Vice President, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ WILLIAM J. CHASE William J. Chase Executive Vice President, Chief Financial Officer February 21, 2014 A signed original of this written statement required by Section 906 has been provided to AbbVie Inc. and will be retained by AbbVie Inc. and furnished to the Securities and Exchange Commission or its staff upon request. NOTICE OF ANNUAL MEETING OF STOCKHOLDERS 13NOV201221365766 Important Notice Regarding the Availability of Proxy Materials for the Stockholder Meeting to Be Held on May 9, 2014 The Annual Meeting of the Stockholders of AbbVie Inc. will be held at the Rosewood, 2825 Sand Hill Road, Menlo Park, California 94025, on Friday, May 9, 2014, at 9:00 a.m. for the following purposes: (cid:127) To elect 3 directors to hold office until the next Annual Meeting or until their successors are elected (Item 1 on the proxy card), (cid:127) To ratify the appointment of Ernst & Young LLP as AbbVie’s independent registered public accounting firm for 2014 (Item 2 on the proxy card), (cid:127) To vote on an advisory vote on the approval of executive compensation (Item 3 on the proxy card), and (cid:127) To transact such other business as may properly come before the meeting. Your Vote Is Important Please promptly vote your shares by telephone, using the Internet, or by signing and returning your proxy in the enclosed envelope if you received a printed version. The board of directors recommends that you vote FOR Items 1, 2, and 3 on the proxy card. The close of business on March 12, 2014, has been fixed as the record date for determining the stockholders entitled to receive notice of and to vote at the Annual Meeting. AbbVie’s 2014 Proxy Statement and 2013 Annual Report on Form 10-K are available at www.abbvieinvestor.com. If you are a registered stockholder, you may access your proxy card by either: (cid:127) Going to the following website: www.proxyvote.com, entering the information requested on your computer screen and following the simple instructions, or (cid:127) Calling (in the United States, U.S. territories, and Canada) toll free 1-800-690-6903 on a touch-tone telephone and following the simple instructions provided by the recorded message. Admission to the meeting will be by admission card only. If you plan to attend, please complete and return the reservation form in the back of these materials and an admission card will be sent to you. Due to space limitations, reservation forms must be received before May 2, 2014. Each admission card, along with photo identification, admits one person. A stockholder may request two admission cards, but a guest must be accompanied by a stockholder. By order of the board of directors. Laura J. Schumacher Secretary March 24, 2014 13NOV201221365766 PROXY STATEMENT Table of Contents Solicitation of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Information about the Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Who Can Vote . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notice and Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Voting by Proxy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revoking a Proxy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Discretionary Voting Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Quorum and Vote Required to Approve Each Item on the Proxy . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of Broker Non-Votes and Abstentions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inspectors of Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of Soliciting Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AbbVie Savings Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Separation of AbbVie from Abbott Laboratories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate Governance Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Information Concerning Director Nominees (Item 1 on Proxy Card) . . . . . . . . . . . . . . . . . . . . . . The Board of Directors and its Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Communicating with the Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Director Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock Ownership Guidelines and Anti-Hedging and Anti-Pledging Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation Committee Report Compensation Risk Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary Compensation Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013 Grants of Plan-Based Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013 Outstanding Equity Awards at Fiscal Year-End . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013 Option Exercises and Stock Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pension Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013 Nonqualified Deferred Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Potential Payments upon Termination or Change in Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ratification of Ernst & Young LLP as AbbVie’s Independent Registered Public Accounting Firm (Item 2 on Proxy Card) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Audit Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Audit Committee Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Say on Pay—An Advisory Vote on the Approval of Executive Compensation (Item 3 on Proxy Card) . . Procedures for Approval of Related Person Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1 1 1 1 1 1 2 2 2 2 2 3 3 4 9 11 12 14 16 16 26 26 26 28 31 33 36 36 40 40 43 44 46 46 47 47 i 13NOV201221365766 PROXY STATEMENT SOLICITATION OF PROXIES The accompanying proxy is solicited on behalf of the board of directors for use at the Annual Meeting of Stockholders. The meeting will be held on May 9, 2014, at the Rosewood, 2825 Sand Hill Road, Menlo Park, California 94025. INFORMATION ABOUT THE ANNUAL MEETING Who Can Vote Stockholders of record at the close of business on March 12, 2014 will be entitled to notice of and to vote at the Annual Meeting. As of March 12, 2014, AbbVie had 1,596,050,177 outstanding shares of common stock, which are AbbVie’s only outstanding voting securities. Each stockholder has one vote per share. Stockholders do not have the right to vote cumulatively in electing directors. Notice and Access In accordance with the Securities and Exchange Commission’s e-proxy rules, AbbVie mailed a Notice of Internet Availability of Proxy Materials (the ‘‘Notice’’) to stockholders in March 2014. The Notice describes the matters to be considered at the Annual Meeting and how stockholders can access the proxy materials online. It also provides instructions on how stockholders can vote their shares. If you received the Notice, you will not receive a printed version of the proxy materials unless you request one. If you would like to receive a printed version of the proxy materials, free of charge, please follow the instructions on the Notice. Voting by Proxy AbbVie’s stockholders may vote their shares by telephone, the Internet, or at the Annual Meeting. If you vote by telephone or the Internet, you do not need to return your proxy card. The instructions for voting can be found on the Notice, on the website listed in the Notice, and, if you received one, on your proxy card. If you requested a printed version of the proxy card, you may also vote by mail. Revoking a Proxy You may revoke your proxy by voting in person at the Annual Meeting or, at any time prior to the meeting: (cid:127) by delivering a written notice to the secretary of AbbVie, (cid:127) by delivering an authorized proxy with a later date, or (cid:127) by voting by telephone or the Internet after you have given your proxy. Discretionary Voting Authority Unless authority is withheld in accordance with the instructions on the proxy, the persons named in the proxy will vote the shares of AbbVie common stock covered by proxies they receive to elect the 3 nominees named in Item 1 on the proxy card. Should a nominee become unavailable to serve, the shares will be voted for a substitute designated by the board of directors, or for fewer than 3 nominees if, in the judgment of the proxy holders, such action is necessary or desirable. Where a stockholder has specified a choice for or against the ratification of the appointment of Ernst & Young LLP as AbbVie’s independent registered public accounting firm or the advisory vote on the approval of executive compensation, the shares of AbbVie common stock represented by the proxy will be voted (or not voted) as specified. Where no choice has been specified, the proxy will be voted FOR the ratification of Ernst & Young LLP as auditors and FOR the approval of executive compensation. The board of directors is not aware of any other issue which may properly be brought before the meeting. If other matters are properly brought before the meeting, the accompanying proxy will be voted in accordance with the judgment of the proxy holders. Quorum and Vote Required to Approve Each Item on the Proxy A majority of the outstanding shares entitled to vote generally in the election of directors, represented in person or by proxy, constitutes a quorum. The affirmative vote of a majority of the shares represented at the meeting and entitled to vote on a matter shall be the act of the stockholders with respect to that matter. Effect of Broker Non-Votes and Abstentions A proxy submitted by an institution such as a broker or bank that holds shares for the account of a beneficial owner may indicate that all or a portion of the shares represented by that proxy are not being voted with respect to a particular matter. This could occur, for example, when the broker or bank is not permitted to vote those shares in the absence of instructions from the beneficial owner of the stock. These ‘‘non-voted shares’’ will be considered shares not present and, therefore, not entitled to vote on those matters, although these shares may be considered present and entitled to vote for other purposes. Brokers and banks have discretionary authority to vote shares in the absence of instructions on matters the New York Stock Exchange considers ‘‘routine,’’ such as the ratification of the appointment of the auditors. They do not have discretionary authority to vote shares in absence of instructions on ‘‘non-routine’’ matters. The election of directors and the advisory vote on the approval of executive compensation are considered ‘‘non-routine’’ matters. Non-voted shares will not affect the determination of the outcome of the vote on any matter to be decided at the meeting. Shares represented by proxies that are present and entitled to vote on a matter but which have elected to abstain from voting on that matter, other than the election of directors, will have the effect of votes against that matter. Inspectors of Election The inspectors of election and the tabulators of all proxies, ballots, and voting tabulations that identify stockholders are independent and are not AbbVie employees. Cost of Soliciting Proxies AbbVie will bear the cost of making solicitations from its stockholders and will reimburse banks and brokerage firms for out-of-pocket expenses incurred in connection with this solicitation. Proxies may be solicited by mail, telephone, Internet, or in person by directors, officers, or employees of AbbVie and its subsidiaries. AbbVie has retained Georgeson Inc. to aid in the solicitation of proxies, at an estimated cost of $19,500 plus reimbursement for reasonable out-of-pocket expenses. AbbVie Savings Plan Participants in the AbbVie Savings Plan will receive a voting instruction card for their shares of AbbVie common stock held in the AbbVie Savings Plan Trust. The Trust is administered by both a trustee and an investment committee. The trustee is Mercer Trust Company. The members of the investment committee are Amarendra Duvvur, William H.S. Preece and Michael J. Thomas, employees of AbbVie. The voting power with respect to the shares is held by and shared between the investment 2 committee and the participants. The investment committee must solicit voting instructions from the participants and follow the voting instructions it receives. The investment committee may use its own discretion with respect to those shares of AbbVie common stock for which no voting instructions are received. SEPARATION OF ABBVIE FROM ABBOTT LABORATORIES On January 1, 2013, AbbVie became an independent company as a result of the distribution by Abbott Laboratories (‘‘Abbott’’) of 100% of the outstanding common stock of AbbVie to Abbott’s shareholders (the ‘‘Separation’’). Each Abbott shareholder of record as of the close of business on December 12, 2012 (the ‘‘Record Date’’) received one share of AbbVie common stock for each Abbott common share held as of the Record Date. AbbVie was incorporated in Delaware on April 10, 2012 and is comprised of Abbott’s former research-based pharmaceuticals business. AbbVie’s Registration Statement on Form 10 was declared effective by the U.S. Securities and Exchange Commission (‘‘SEC’’ or the ‘‘Securities and Exchange Commission’’) on December 7, 2012. AbbVie’s common stock began trading ‘‘regular-way’’ under the ticker symbol ‘‘ABBV’’ on the New York Stock Exchange on January 2, 2013. For additional information, please see AbbVie’s Information Statement, which is attached as Exhibit 99.1 to AbbVie’s Current Report on Form 8-K filed with the SEC on January 2, 2013. CORPORATE GOVERNANCE MATERIALS AbbVie’s corporate governance guidelines with the outline of directorship qualifications; director independence guidelines; code of business conduct; and audit committee, compensation committee, nominations and governance committee, and public policy committee charters are all available in the corporate governance section of AbbVie’s investor relations website at www.abbvieinvestor.com. 3 INFORMATION CONCERNING DIRECTOR NOMINEES (ITEM 1 ON PROXY CARD) The board of directors consists of three classes with each class currently comprised of three directors. Directors of one class are elected each year for a term of three years. The Class II directors are presented for re-election to hold office until the expiration of their term at the 2017 annual meeting of stockholders and until their successors are elected and qualified or until their earlier death or resignation. Directors are elected by stockholders if a majority of the votes cast are ‘‘for’’ a director’s reelection at the Annual Meeting, excluding abstentions and broker non-votes. For more information on the director majority vote standard, see AbbVie’s By-Laws as listed as an exhibit to AbbVie’s 2013 Annual Report on SEC Form 10-K. Class II—Directors Whose Terms Expire in 2014 17JAN201314181230 Robert J. Alpern, M.D. Age 63 Ensign Professor of Medicine, Professor of Internal Medicine, and Dean of Yale School of Medicine Dr. Alpern has served as the Ensign Professor of Medicine, Professor of Internal Medicine, and Dean of Yale School of Medicine since June 2004. From July 1998 to June 2004, Dr. Alpern was the Dean of The University of Texas Southwestern Medical Center. Dr. Alpern also serves as a director of Abbott Laboratories and as a director on the Board of Yale—New Haven Hospital. As the Ensign Professor of Medicine, Professor of Internal Medicine, and Dean of Yale School of Medicine, Dean of The University of Texas Southwestern Medical Center, and as a director on the Board of Yale—New Haven Hospital, Dr. Alpern contributes valuable insights to the board through his medical and scientific expertise and his knowledge of the health care environment and the scientific nature of AbbVie’s key research and development initiatives. 4 17JAN201314191789 17JAN201314192826 Edward M. Liddy Age 68 Partner, Clayton, Dubilier & Rice, LLC Mr. Liddy has been a partner in the private equity investment firm Clayton, Dubilier & Rice, LLC since January 2010, having also been a partner at such firm from April to September 2008. From September 2008 to August 2009, Mr. Liddy was the interim chairman and chief executive officer of American International Group, Inc. (AIG). He served at AIG at the request of the U.S. Department of the Treasury. From January 1999 to April 2008, Mr. Liddy served as chairman of the board of the Allstate Corporation. He served as chief executive officer of Allstate from January 1999 to December 2006, President from January 1995 to May 2005, and chief operating officer from August 1994 to January 1999. Mr. Liddy currently serves on the board of directors of Abbott Laboratories, 3M Company, and The Boeing Company. In addition, Mr. Liddy formerly served on the board of The Boeing Company from 2007 to 2008. As the chairman and chief executive officer of Allstate Corporation and American International Group, Inc., Mr. Liddy brings valuable insights from the perspective of the insurance industry into AbbVie’s business. As a partner of Clayton, Dubilier & Rice, LLC, Mr. Liddy gained significant knowledge and understanding of finance and capital markets matters as well as global and domestic strategic advisory experience. Frederick H. Waddell Age 60 Chairman of the Board and Chief Executive Officer of Northern Trust Corporation and The Northern Trust Company Mr. Waddell has served as the chief executive officer of Northern Trust Corporation and The Northern Trust Company since January 2008 and as chairman of the board since November 2009. He served as president from February 2006 through September 2011, and as chief operating officer from February 2006 to January 2008. He is currently a board member at the Federal Reserve Bank of Chicago and served as a board member of Northern Trust from February 2006 to November 2009 prior to becoming the chairman of the board. As chairman and chief executive officer of Northern Trust Corporation and The Northern Trust Company, Mr. Waddell possesses broad financial services experience with a strong record of leadership in a highly regulated industry. 5 Class III—Directors Whose Terms Expire in 2015 17JAN201314185859 15MAR201411192791 Roxanne S. Austin Age 53 President, Austin Investment Advisors Ms. Austin is president of Austin Investment Advisors, a private investment and consulting firm, a position she has held since 2004. From July 2009 through July 2010, Ms. Austin also served as the president and chief executive officer of Move Networks, Inc., a provider of Internet television services. Ms. Austin served as president and chief operating officer of DIRECTV, Inc. from June 2001 to December 2003. Ms. Austin also previously served as executive vice president and chief financial officer of Hughes Electronics Corporation and as a partner of Deloitte & Touche LLP. Ms. Austin is also a director of Abbott Laboratories, Target Corporation, Teledyne Technologies, Inc. and Telefonaktiebolaget LM Ericsson. Through her extensive management and operating roles, including her financial roles, Ms. Austin contributes significant oversight and leadership experience, including financial expertise and knowledge of financial statements, corporate finance and accounting matters. Richard A. Gonzalez Age 60 Chairman of the Board and Chief Executive Officer, AbbVie Inc. Mr. Gonzalez is the chairman and chief executive officer of AbbVie. He served as Abbott’s executive vice president of the pharmaceutical products group from July 2010 to December 2012, and was responsible for Abbott’s worldwide pharmaceutical business, including commercial operations, research and development, and manufacturing. He also served as president, Abbott Ventures Inc., Abbott’s medical technology investment arm, from 2009 to 2011. Mr. Gonzalez joined Abbott in 1977 and held various management positions before briefly retiring in 2007, including: Abbott’s president and chief operating officer; president, chief operating officer of Abbott’s Medical Products Group; senior vice president and president of Abbott’s former Hospital Products Division (now Hospira, Inc.); vice president and president of Abbott’s Health Systems Division; and divisional vice president and general manager for Abbott’s Diagnostics Operations in the United States and Canada. As a result of his service as Abbott’s executive vice president, Pharmaceutical Products Group since July 2010, his previous service as Abbott’s president and chief operating officer and his more than 30-year career at Abbott, Mr. Gonzalez has developed valuable business, management and leadership experience, as well as extensive knowledge of AbbVie and its global operations. Mr. Gonzalez’s experience and knowledge enable him to contribute to AbbVie’s board key insights into strategic, management, and operational matters. 6 17JAN201314185103 Glenn F. Tilton Age 65 Chairman of the Midwest, JPMorgan Chase & Co. Mr. Tilton has served as chairman of the Midwest for JPMorgan Chase & Co. since 2011. From October 2010 to December 2012, Mr. Tilton also served as the non-executive chairman of the board of United Continental Holdings, Inc. From September 2002 to October 2010, he served as chairman, president and chief executive officer of UAL Corporation, and chairman and chief executive officer of United Air Lines, Inc., its wholly owned subsidiary. Mr. Tilton is also a director of Abbott Laboratories and Phillips 66. Mr. Tilton also served on the board of directors of Lincoln National Corporation from 2002 to 2007, of TXU Corporation from 2005 to 2007, of Corning Incorporated from 2010 to 2012, and of United Continental Holdings, Inc. from 2010 to 2012. As chairman of the Midwest for JPMorgan Chase & Co. and having previously served as non-executive chairman of the board of United Continental Holdings, Inc., and chairman, president, and chief executive officer of UAL Corporation and United Air Lines, vice chairman of Chevron Texaco and as interim chairman of Dynegy, Inc., Mr. Tilton acquired strong management experience overseeing complex multinational businesses operating in highly regulated industries, as well as expertise in finance and capital markets matters. Class I—Directors Whose Terms Expire in 2016 17JAN201314190611 William H.L. Burnside Age 62 Retired Senior Vice President and Director at The Boston Consulting Group Mr. Burnside is a retired senior vice president and director at The Boston Consulting Group (BCG), where he currently serves as an advisor. Prior to becoming managing partner of BCG’s Los Angeles office in 1987, he worked in BCG’s London and Chicago offices, servicing clients in telecommunications, media, defense, financial services, and manufacturing. Mr. Burnside is a director at Executive Service Corps of Southern California and Audubon California. Through his experience with The Boston Consulting Group, Mr. Burnside acquired knowledge and understanding of corporate finance and capital markets matters, as well as global and domestic strategic advisory experience across a broad base of industries. 7 17JAN201314183678 17JAN201314194544 Edward J. Rapp Age 56 Group President for Construction Industries of Caterpillar Inc. Mr. Rapp was appointed in early 2013 as the Caterpillar Inc. group president for construction industries based in Singapore. Mr. Rapp served as the chief financial officer of Caterpillar from 2010 to 2013 and was named a group president of Caterpillar in 2007. Mr. Rapp is presently a board member for FM Global and Junior Achievement USA. He is currently a member of the University of Missouri College of Business Strategic Development Board and a board member of the U.S.-China Business Council. As a result of his tenure as group president and chief financial officer at Caterpillar Inc., Mr. Rapp has acquired management, operational, and financial expertise with extensive global experience and provides the board with an informed perspective on financial and operational matters faced by a complex international company. Roy S. Roberts Age 74 Retired Group Vice President for North American Vehicle Sales, Service and Marketing of General Motors Corporation Mr. Roberts was the emergency financial manager for Detroit Public Schools from 2011 until his retirement in 2013. Previously, he served as managing director of Reliant Equity Investors from 2000 to 2011. Mr. Roberts retired from General Motors in April 2000. At the time of his retirement, he was group vice president for North American Vehicle Sales, Service and Marketing of General Motors Corporation, having been elected to that position in October 1998. Mr. Roberts has served as director on the following boards: Thermon Manufacturing Company 2007-2010, Enova Systems, Inc., 2008-2011, Burlington Northern Santa Fe, 1991-2010, and Abbott Laboratories, 1998-2011. As a former executive of a major international corporation, Mr. Roberts has a strong record of valuable business, leadership, operational, and management experience which he brings to the board. 8 THE BOARD OF DIRECTORS AND ITS COMMITTEES The Board of Directors The board of directors held eleven meetings in 2013. The average attendance of all incumbent directors at board and committee meetings in 2013 was ninety-eight percent and each director attended at least seventy-five percent of the total number of board meetings and meetings of the committees on which he or she served. AbbVie encourages its board members to attend the annual stockholder meeting. All of AbbVie’s directors attended the 2013 annual stockholder meeting. The board has determined that each of the following directors is independent in accordance with the New York Stock Exchange listing standards: Dr. Alpern, Ms. Austin, Mr. Burnside, Mr. Liddy, Mr. Rapp, Mr. Roberts, Mr. Tilton, and Mr. Waddell. To determine independence, the board applied the AbbVie Inc. director independence guidelines. The board also considered whether a director has any other material relationships with AbbVie or its subsidiaries and concluded that none of these directors had a relationship that impaired the director’s independence. This included consideration of the fact that some of the directors are officers or serve on boards of companies or entities to which AbbVie sold products or made contributions or from which AbbVie purchased products and services during the year. This also included consideration of the fact that some of the directors serve on the board of Abbott, AbbVie’s former parent. In making its determination, the board relied on both information provided by the directors and information developed internally by AbbVie. The board has risk oversight responsibility for AbbVie and administers this responsibility both directly and with assistance from its committees. The board has determined that the current leadership structure, in which the offices of chairman of the board and chief executive officer are held by one individual and the chair of the nominations and governance committee is appointed to be the lead director, ensures the appropriate level of oversight, independence, and responsibility is applied to all board decisions, including risk oversight, and is in the best interests of AbbVie and its stockholders. The lead director facilitates communication with the board and presides over regularly conducted executive sessions of the independent directors or sessions where the chairman of the board is not present. It is the role of the lead director to review and approve matters, such as agenda items, schedule sufficiency, and, where appropriate, information provided to other board members. The lead director is chosen by and from the independent members of the board of directors, and serves as the liaison between the chairman of the board and the independent directors; however, all directors are encouraged to, and in fact do, consult with the chairman on each of the above topics, as well. The lead director, and each of the other directors, communicates regularly with the chairman of the board and chief executive officer regarding appropriate agenda topics and other board related matters. The lead director also has the authority to call meetings of the independent directors and, if requested by major stockholders, ensures that he or she is available for consultation and direct communication. AbbVie directors have backgrounds that when combined provide a portfolio of experience and knowledge that serve AbbVie’s governance and strategic needs. Director nominees are considered on the basis of a range of criteria including broad-based business knowledge and relationships, prominence and excellent reputations in their primary fields of endeavor, as well as a global business perspective and commitment to good corporate citizenship. They must have demonstrated experience and ability that is relevant to the board’s oversight role with respect to AbbVie’s business and affairs. Each director’s biography includes the particular experience and qualifications that led the board to conclude that the director should serve on the board. The directors’ biographies are in the section of this proxy statement captioned ‘‘Information Concerning Director Nominees.’’ 9 Committees of the Board of Directors The board of directors has five committees established in AbbVie’s By-Laws: the executive committee, audit committee, compensation committee, nominations and governance committee, and public policy committee. Each of the members of the audit committee, compensation committee, nominations and governance committee, and public policy committee is independent. The executive committee members are Mr. Gonzalez, chair, Ms. Austin, Mr. Liddy, Mr. Roberts, and Mr. Tilton. This committee may exercise all the authority of the board in the management of AbbVie, except for matters expressly reserved by law for board action. The audit committee members are Ms. Austin, chair, Mr. Burnside, Mr. Rapp, and Mr. Waddell. The committee is governed by a written charter. This committee assists the board of directors in fulfilling its oversight responsibility with respect to AbbVie’s accounting and financial reporting practices and the audit process, the quality and integrity of AbbVie’s financial statements, the independent auditors’ qualifications, independence, and performance, the performance of AbbVie’s internal audit function and internal auditors, certain areas of legal and regulatory compliance, and enterprise risk management. Each of the members of the audit committee is financially literate, as required of audit committee members by the New York Stock Exchange, and the independence requirements set forth in Section 10A(m)(3) of the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’). The board of directors has determined that Ms. Austin, the committee’s chair, is an ‘‘audit committee financial expert.’’ The compensation committee members are Mr. Liddy, chair, Ms. Austin, Mr. Tilton, and Mr. Waddell. The committee is governed by a written charter. This committee assists the board of directors in carrying out the board’s responsibilities relating to the compensation of AbbVie’s executive officers and directors. The compensation committee annually reviews the compensation paid to the directors and gives its recommendations to the full board regarding both the amount of director compensation that should be paid and the allocation of that compensation between equity-based awards and cash. In recommending director compensation, the compensation committee takes comparable director fees into account and reviews any arrangement that could be viewed as indirect director compensation. The processes and procedures used for the consideration and determination of executive compensation are described in the section of this proxy statement captioned ‘‘Compensation Discussion and Analysis.’’ This committee also reviews, approves, and administers the incentive compensation plans in which any executive officer of AbbVie participates and all of AbbVie’s equity-based plans. It may delegate the responsibility to administer and make grants under these plans to management, except to the extent that such delegation would be inconsistent with applicable law or regulations or with the listing rules of the New York Stock Exchange. The compensation committee has the sole authority, under its charter, to select, retain and/or terminate independent compensation advisors. The compensation committee reviews and discusses with management and its independent compensation advisor potential risks associated with AbbVie’s compensation policies and practices as discussed in the section captioned ‘‘Compensation Risk Assessment.’’ Each member of the committee qualifies as a ‘‘non-employee director’’ for purposes of Rule 16b-3 under the Exchange Act and as an ‘‘outside director’’ for purposes of Internal Revenue Code Section 162(m). The committee has an engagement with Aon Hewitt to provide counsel and advice on executive and non-employee director compensation matters. Aon Hewitt, and its principal, report directly to the chair of the committee. The principal meets regularly, and as needed, with the committee in executive sessions, has direct access to the chair during and between meetings, and performs no other services for AbbVie or its senior executives. The committee determines what variables it will instruct Aon Hewitt to consider, and they include: peer groups against which performance and pay should be examined, financial metrics to be used to assess AbbVie’s relative performance, competitive long-term incentive practices in the marketplace, and compensation levels relative to market practice. The committee 10 negotiates and approves any fees paid to Aon Hewitt for these services. In 2013, the compensation committee of AbbVie’s board authorized payment of approximately $300,000 to Aon Hewitt for services rendered to the compensation committee relating to executive compensation. Separately, AbbVie management engaged Aon Hewitt to perform and paid approximately $1.8 million for unrelated services, including actuarial work, pension design and administration, insurance, and general consulting. The AbbVie compensation committee was informed about these services, but its formal approval was not requested. Based on an assessment of internally developed information and information provided by Aon Hewitt, the compensation committee has determined that the committee’s independent compensation advisor does not have a conflict of interest. A copy of the compensation committee report is included in the section of this proxy statement captioned ‘‘Compensation Committee Report.’’ The nominations and governance committee members are Mr. Tilton, chair, Dr. Alpern, Mr. Burnside, and Mr. Roberts. The committee is governed by a written charter. This committee assists the board of directors in identifying individuals qualified to become board members and recommends to the board the nominees for election as directors at the next annual meeting of stockholders, recommends to the board the persons to be elected as executive officers of AbbVie, recommends to the board the corporate governance guidelines applicable to AbbVie, oversees the evaluation of the board and management, and serves in an advisory capacity to the board and the chairman of the board on matters of organization, management succession plans, major changes in the organizational structure of AbbVie, and the conduct of board activities. The process used by this committee to identify a nominee to serve as a member of the board of directors depends on the qualities being sought. From time to time, AbbVie engages an executive search firm to assist the committee in identifying individuals qualified to be board members. Board members should have backgrounds that when combined provide a portfolio of experience and knowledge that will serve AbbVie’s governance and strategic needs. In the process of identifying nominees to serve as a member of the board of directors, the nominations and governance committee considers the board’s diversity of ethnicity, gender, and geography and assesses the effectiveness of the process in achieving that diversity. Board candidates will be considered on the basis of a range of criteria, including broad-based business knowledge and relationships, prominence and excellent reputations in their primary fields of endeavor, as well as a global business perspective, commitment to good corporate citizenship, and ability to commit sufficient time and attention to the activities of the board. Directors should have demonstrated experience and ability that is relevant to the board of directors’ oversight role with respect to AbbVie’s business and affairs. The public policy committee members are Mr. Roberts, chair, Dr. Alpern, Mr. Liddy, and Mr. Rapp. The committee is governed by a written charter. This committee assists the board of directors in fulfilling its oversight responsibility with respect to AbbVie’s public policy, certain areas of legal and regulatory compliance, and governmental affairs and health care compliance issues that affect AbbVie by discharging the responsibilities set forth in its charter. COMMUNICATING WITH THE BOARD OF DIRECTORS Stockholders and other interested parties may communicate with the board of directors by writing a letter to the chairman of the board, to the lead director, or to the independent directors c/o AbbVie Inc., 1 North Waukegan Road, AP34, North Chicago, Illinois 60064, Attention: corporate secretary. The corporate secretary regularly forwards to the addressee all letters other than mass mailings, advertisements, and other materials not relevant to AbbVie’s business. In addition, directors regularly receive a log of all correspondence received by the company that is addressed to a member of the board and may request any correspondence on that log. 11 DIRECTOR COMPENSATION AbbVie employees are not compensated for serving on the board or board committees. AbbVie’s non-employee directors are compensated for their service under the AbbVie Non-Employee Directors’ Fee Plan and the AbbVie 2013 Incentive Stock Program. The following table sets forth the non-employee directors’ 2013 compensation. Fees Earned or Paid in Cash ($)(1) $126,000 144,000 132,000 138,000 132,000 138,000 138,000 132,000 Stock Awards ($)(2) Option Awards ($)(3) $112,960 112,960 112,960 112,960 112,960 112,960 112,960 112,960 $0 0 0 0 0 0 0 0 Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)(4) $535 0 0 0 0 0 0 0 All Other Compensation ($)(5) $0 0 12,500 0 25,000 25,000 25,000 26,438 Total ($) $239,495 256,960 257,460 250,960 269,960 275,960 275,960 271,398 Name R. Alpern . . . . . . . . . . . . . . . . . R. Austin . . . . . . . . . . . . . . . . . W. Burnside . . . . . . . . . . . . . . . E. Liddy . . . . . . . . . . . . . . . . . . E. Rapp . . . . . . . . . . . . . . . . . . R. Roberts . . . . . . . . . . . . . . . . G. Tilton . . . . . . . . . . . . . . . . . . F. Waddell . . . . . . . . . . . . . . . . . (1) Under the AbbVie Non-Employee Directors’ Fee Plan, non-employee directors earn $10,500 for each month of service as a director and $1,000 for each month of service as a chair of a board committee, other than the chair of the audit committee. The chair of the audit committee receives $1,500 for each month of service as a chair of that committee and the other members of the audit committee receive $500 for each month of service as a committee member. Fees earned under the AbbVie Non-Employee Directors’ Fee Plan are paid in cash to the director, paid in the form of vested non-qualified stock options (based on an independent appraisal of their fair value), deferred (as an unfunded AbbVie obligation), or paid currently into an individual grantor trust established by the director. The distribution of deferred fees and amounts held in a director’s grantor trust generally commences at the later of when the director reaches age 65 or upon retirement from the board of directors. The director may elect to have deferred fees and fees deposited in a trust and credited to a stock equivalent account that earns the same return as if the fees were invested in AbbVie stock or to a guaranteed interest account. If necessary, AbbVie contributes funds to a director’s trust so that as of year-end the stock equivalent account balance (net of taxes) is not less than seventy-five percent of the market value of the related AbbVie common stock at year-end. (2) The amounts in this column represent the aggregate grant date fair value of the awards in accordance with Financial Accounting Standards Board ASC Topic 718. AbbVie determines the grant date fair value of stock unit awards by multiplying the number of restricted stock units granted by the average of the high and low market prices of one share of AbbVie common stock on the award grant date. In addition to the fees described in footnote (1), each non-employee director elected to or serving on the board of directors at the annual stockholder meeting receives under the AbbVie 2013 Incentive Stock Program vested restricted stock units with a value of $113,000 (rounded down) (effective as of the 2014 annual meeting, this will increase to $143,000 (rounded down)). In 2013, this was 2,535 units. The non-employee directors receive cash payments equal to the dividends paid on the shares covered by the units at the same rate as other stockholders. Upon termination or retirement from the board, death, or a change in control of the company, a non-employee director 12 will receive one common share for each restricted stock unit outstanding under the Incentive Stock Program. The following AbbVie restricted stock units were outstanding as of December 31, 2013: R. Alpern, 11,094; R. Austin, 18,757; W. Burnside, 2,535; E. Liddy, 6,521; E. Rapp, 2,535; R. Roberts, 2,535; G. Tilton, 14,741; F. Waddell, 2,535. These numbers include, where applicable, AbbVie restricted stock units issued when AbbVie separated from Abbott Laboratories on January 1, 2013. The AbbVie awards resulted from an anti-dilution adjustment in accordance with terms of the Abbott awards designed to preserve the value of the Abbott awards, so the January 1, 2013 awards are not included in the Director Compensation table. When AbbVie separated from Abbott, the directors and other holders of Abbott restricted stock units generally retained those awards and received restricted stock units of AbbVie in an amount that reflected the distribution to Abbott shareholders. Such awards are subject to substantially the same terms, vesting conditions and other restrictions that applied to the original Abbott awards immediately before the distribution. (3) No AbbVie stock options were outstanding as of December 31, 2013. (4) The totals in this column include reportable interest credited under the AbbVie Non-Employee Directors’ Fee Plan during 2013. (5) Charitable contributions made by AbbVie’s non-employee directors are eligible for a matching contribution (up to $25,000 annually). During 2013, AbbVie made charitable matching contributions on behalf of the following AbbVie directors: W. Burnside, $12,500; E. Rapp, $25,000; R. Roberts, $25,000; G. Tilton, $25,000; F. Waddell, $25,000. This column also includes reimbursement for certain taxes. 13 SECURITIES OWNERSHIP Securities Ownership of Executive Officers and Directors The table below reflects the number of shares of AbbVie common stock beneficially owned as of January 31, 2014, by each director, the chief executive officer, the chief financial officer, and the three other most highly paid executive officers (the ‘‘named executive officers’’), and by all directors and executive officers of AbbVie as a group. It also reflects the number of stock equivalent units and restricted stock units held by non-employee directors under the AbbVie Non-Employee Directors’ Fee Plan. Name Shares Beneficially Owned(1)(2)(3) Stock Options Exercisable within 60 days of January 31, 2014 Stock Equivalent Units R. Gonzalez . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . R. Alpern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . R. Austin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . W. Burnside . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Liddy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Rapp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . R. Roberts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G. Tilton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F. Waddell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . L. Schumacher . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . W. Chase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Alban . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . T. Richmond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . All directors and executive officers as a group(4) . . . . . . . . . . . 284,053 11,094 25,601 2,535 7,656 5,035 22,535 22,091 4,535 247,296 140,620 216,521 90,165 1,147,419 283,743 0 0 0 0 0 0 0 0 296,738 137,472 116,477 29,014 907,617 0 718 0 0 0 3,011 0 3,148 0 0 0 0 0 6,877 (1) The table includes shares held in the executive officers’ accounts in the AbbVie Savings Plan as follows: all executive officers as a group, 16,937. Each executive officer has shared voting power and sole investment power with respect to the shares held in his or her account. (2) The table includes 14,833 restricted stock units held by the executive officers as a group. The executive officers do not have sole voting and investment power until the restrictions lapse. The table also includes restricted stock units held by the non-employee directors. The directors’ units are payable in stock as described in footnote (2) to the Director Compensation table. (3) The table includes shared voting and/or investment power over shares as follows: G. Tilton, 350; W. Chase, 501; C. Alban, 40,442; and all directors and executive officers as a group, 42,485. (4) The directors and executive officers as a group together own less than one percent of the outstanding shares of AbbVie. 14 Securities Ownership of Principal Stockholders The table below reports the number of shares of AbbVie common stock beneficially owned as of December 31, 2013 by BlackRock, Inc., Capital Research Global Investors and The Vanguard Group (directly or through subsidiaries), respectively, the only persons known to AbbVie to own beneficially more than 5% of AbbVie’s outstanding common stock. It is based on information contained in Schedules 13G filed with the Securities and Exchange Commission by BlackRock, Inc. on January 28, 2014, by Capital Research Global Investors on February 13, 2014, and by The Vanguard Group on February 10, 2014. BlackRock, Inc. reported that it had sole voting power with respect to 86,849,803 shares and sole dispositive power with respect to 105,532,577 shares. Capital Research Global Investors reported that it had sole voting and sole dispositive power with respect to 99,962,125 shares. The Vanguard Group reported that it had sole voting power with respect to 2,597,850 shares, sole dispositive power with respect to 79,851,440 shares and shared dispositive power with respect to 2,424,785 shares. Name and Address of Beneficial Owner Shares Beneficially Owned Percent of Class BlackRock, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105,532,577 6.6% 40 East 52nd Street New York, NY 10022 Capital Research Global Investors . . . . . . . . . . . . . . . . . . . . 99,962,125 6.3% 333 South Hope Street 55th Floor Los Angeles, CA 90071 The Vanguard Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,276,225 5.17% 100 Vanguard Boulevard Malvern, PA 19355 15 EXECUTIVE COMPENSATION Compensation Discussion and Analysis Executive Summary The Compensation Committee (‘‘Committee’’) believes performance must always be evaluated compared to the goals of the business and assessed in the context of market and business conditions. 2013 was a very successful year for AbbVie financially, operationally and in its pipeline development efforts. AbbVie’s stock price performance in 2013 contributed to a 60.7 percent annual total stockholder return, compared to 29.7 percent for the Dow Jones Industrial Average and 32.4 percent for the Standard & Poor’s 500 Index over the same time period. AbbVie achieved sales of $18.8 billion in 2013, up nearly 3 percent globally, excluding roughly 1 percent negative impact from foreign exchange. Sales growth was driven by double-digit growth from HUMIRA, Synthroid, Creon and Duodopa, and was achieved despite the loss of exclusivity and generic competition in the lipid franchise. AbbVie exceeded its original EPS guidance range, demonstrating the strength of the company’s business. In addition to achieving its financial goals, AbbVie completed a successful transition to operating as an independent company, and delivered operational efficiencies and improvements in gross margin. Further, AbbVie continued to execute on its commercial, regulatory and clinical objectives, including completion of its Phase III interferon-free HCV program for genotype one patients. AbbVie also made significant additional progress in advancing its pipeline, including: initiation of a large, global Phase III registrational study of Atrasentan for the treatment of diabetic kidney disease; initiation of a second registrational study of Elagolix for the treatment of endometriosis; and initiation of a large, Phase II, potentially registrational trial of ABT-199 in relapsed/refractory chronic lymphocytic leukemia patients with the 17P deletion. AbbVie also expanded its pipeline through partnering activities, adding two new assets to its mid-stage immunology pipeline, expanding an existing partnership to include an additional indication and entering into a global alliance to discover and develop novel therapies for cystic fibrosis. 1‐Year Total Stockholder Return 60.7% 29.7% 32.4% 70% 60% 50% 40% 30% 20% 10% 0% AbbVie 2013 DJIA 2013 S&P 500 2013 12MAR201400051337 16 This Compensation Discussion and Analysis (‘‘CD&A’’) describes the pay philosophy established for the company’s named executive officers, the design of our compensation programs, the process used to examine performance in the context of executive pay decisions, and the performance goals and results for each named executive officer: Name Title Richard A. Gonzalez . . . . Chairman of the Board and Chief Executive Officer Laura J. Schumacher . . . . Executive Vice President, Business Development, External Affairs and General Counsel William J. Chase . . . . . . . . Executive Vice President, Chief Financial Officer Carlos Alban . . . . . . . . . . Executive Vice President, Commercial Operations Timothy J. Richmond . . . . Senior Vice President, Human Resources Although we describe our programs in the context of the named executive officers, it is important to note that our programs generally have broad eligibility and therefore in most cases apply to employee populations outside the named executive officer group as well. Compensation Philosophy and Components of Pay AbbVie has established a compensation philosophy that aligns named executive officers’ interests with both short- and long-term profitable growth and stockholder returns, and is designed to attract and retain named executive officers whose talent and contributions sustain this growth. The intent of this philosophy is to directly support achievement of the company’s primary business strategies and goals, while also aligning named executive officers’ performance and rewards with stockholders’ interests. Consequently, the Committee believes the vast majority of named executive officer compensation at AbbVie should be, and by definition is, performance-based. AbbVie and the Committee will continue to consider and develop AbbVie’s compensation structure, design, practices and procedures to effectively meet the company’s business needs and goals. Four primary pay components make up AbbVie’s executive pay program: base pay, short-term incentives, long-term incentives and benefits. Each component serves complementary, but different and specific, purposes. Base Pay Setting appropriate levels of base pay ensures AbbVie can attract and retain a leadership team that will continue to meet our commitments to customers and patients and sustain profitable growth for our stockholders. Adjustments to base pay may be made from time to time by the Committee to reflect factors such as performance, level of responsibility and market data for similar positions at comparable peer companies. Talented executives have choices of where they work, and our base pay rates therefore need to be competitive in the context of total compensation. Short-Term Incentives AbbVie’s short-term incentive structure is intended to align named executive officers’ interests directly with AbbVie’s annual operating strategies, financial goals and leadership behaviors. It provides a direct link between named executive officers’ short-term incentives and the company’s annual performance results through both measurable financial and operational performance and subjective assessments of strategic progress and leadership behaviors. Some goals, strategies and leadership behaviors may apply to all named executive officers and, as such, may be corporate priorities that are 17 shared by all named executive officers in any given year. Measurable goals apply to all named executive officers, reflecting their specific areas of responsibility. Most named executive officers also carry strategic and leadership-oriented goals, which require qualitative, subjective assessment of their progress during the year. Finally, the process allows for Committee discretion, since many goals, especially for certain positions, cannot be reduced to formulaic, numerical targets, or anticipated in advance. By definition, therefore, short-term incentives directly tie named executive officers’ pay to both Company and individual results, allowing for Committee discretion to address unforeseen developments. In the aggregate, short-term incentives should be paid roughly at target when results substantially meet expectations, below target if results do not substantially meet expectations, and above target if results substantially exceed expectations. Long-Term Incentives AbbVie’s long-term incentives serve two primary purposes: first, they directly align the largest component of named executive officer pay with stockholders’ interests; and second, they help ensure successful long-term performance through effective focus and retention of executive talent. Named executive officers’ interests are directly aligned with those of stockholders in two ways. First, through direct stock ownership, named executive officers benefit from the results they create for other stockholders. Second, the levels of awards named executive officers receive vary, by plan design and each named executive officer’s individual performance, as reviewed by the Committee. The Committee considers various measures it believes align with an increase in stockholder returns, or with operating and strategic results that help drive stockholder value creation. Awards are further differentiated based on each named executive officer’s leadership and specific contribution to long-term strategic results. Accordingly, there is a compelling and direct link between named executive officers’ long-term incentives and Company results and stockholder return. Effective focus and retention of executive talent are a result of the emphasis placed on long-term incentives within the broader rewards framework. In 2013, long-term incentives comprised roughly two-thirds of total compensation for AbbVie’s named executive officers. For awards in 2013, AbbVie granted non-qualified stock options and performance-vesting restricted shares to named executive officers. All awards were granted under the AbbVie 2013 Incentive Stock Program. Benefits As with all AbbVie employees, named executive officers are provided certain employment and post-employment benefits. Benefits are an important part of retention and capital preservation for all employees, helping to protect against the impact of unexpected catastrophic loss of health and/or earnings potential, as well as providing a means to save and accumulate for retirement or other post-employment needs. Say-on-Pay and Say-on-Frequency Vote The Committee annually evaluates the Company’s compensation policies and programs to ensure alignment with short- and long-term interests of our stockholders, evolving market practices and other relevant factors. The Committee considers whether the performance criteria and corresponding objectives appropriately balance objective performance and the quality of that performance, the relationship between performance and incentive plan payouts, the mix of short- and long-term incentives, and whether the overall structure and application of the incentive plans encourages appropriate behavior. 18 The Committee also considers the perspectives of stockholders through the Say-on-Pay advisory vote. In May 2013, stockholders expressed support for AbbVie’s Say-on-Pay proposal with 95.7% of votes cast in favor of the compensation paid to the named executive officers. We consider this vote a positive endorsement of our executive compensation practices and decisions. Despite this positive result, the Committee, its independent compensation consultant and management continue to examine our compensation practices in light of competitive practices and will make changes the Committee believes are appropriate. In addition, we routinely engage with our investors to understand their perspectives on their investment in AbbVie, including our executive compensation practices. All of these factors are important in determining whether the company’s compensation programs are appropriately balanced between defining and incentivizing performance, encouraging appropriate behavior, and retaining executive talent. In the aggregate, they strongly align our compensation policies and programs with our stockholders’ best interests. The Committee also recommended, and the board of directors adopted, an annual advisory vote of stockholders on executive compensation, which reflects the preference expressed by stockholders in 2013 with respect to the frequency of the Say-on-Pay vote. How Executive Pay Decisions Are Made The vast majority of pay decisions at AbbVie are performance-based. Specific goals and targets are the foundation of our pay-for-performance process and this section describes how they apply to each pay component. It is important to note, however, that while our pay process is based on a comprehensive, multi-level review, it is not entirely formulaic. Some goals can be measured objectively against pre-determined financial results. Others take the form of the Committee’s subjective assessment of success and progress against strategic objectives or leadership behaviors, which cannot be scored by numeric or formulaic application of measurable criteria. Consequently, while final pay decisions are guided by some specific, objective measures, the Committee, in consultation with its independent compensation consultant, also considers, at both the company and individual levels, a combination of objective and subjective measures in the overall assessment of performance and the pay decisions that result from that assessment. Discussion of the decision-making criteria for each pay component follows. Peer Group To provide the appropriate context for executive pay decisions for 2013, the Committee, in consultation with its independent compensation consultant, assessed market practices and pay levels of two designated groups of comparable companies. In addition to competing for executive talent, the peer companies also operate complex business operations with significant global reach. The comparison groups for setting targets for compensation for 2013 were as follows: Health Care Companies High-Performing Companies Amgen, Inc. Bristol-Myers Squibb Company Eli Lilly and Company GlaxoSmithKline plc Johnson & Johnson Merck & Company, Inc. Novartis AG Pfizer Inc. 3M Company Bristol-Myers Squibb Company Caterpillar Inc. The Coca-Cola Company Colgate-Palmolive Company General Dynamics Corporation General Mills, Inc. H.J. Heinz Company Kellogg Company Kimberly-Clark McDonald’s Corporation Merck & Company, Inc. PepsiCo Inc. The Procter & Gamble Company 19 Constituents of the Health Care Companies group generally are AbbVie’s competitors for business and executive talent, and are companies the Committee believes represent our competitive market. Generally, constituents of the High-Performing Companies group have a five-year average return on equity of 18% or higher and are similar to AbbVie in terms of size, performance and/or scope of global operations. While the Committee expects to review these groups over time, it believes the peer groups described above are currently appropriate for making executive pay comparisons. Base Pay Base pay must be competitive with the market from which our talent is obtained. Generally, base pay is established in a manner that references the median of the Health Care Companies group as an initial benchmark, but may be adjusted upon secondary reference to the High-Performing Companies group. Specific pay rates, however, are based on a named executive officer’s profile, performance, experience, unique skills and internal equity with others at AbbVie. Once the rate of pay is set in this manner either at hire or upon promotion or transfer, subsequent changes in pay, including salary increases, when appropriate, are based on the named executive officer’s performance, the job he or she is performing, internal equity and the company’s operating budget. In this sense, base pay is performance-based as well as aligned with the individual’s relative skills, experience and contributions. Short-Term Incentives In 2013, AbbVie’s named executive officers participated in the AbbVie 2013 Performance Incentive Plan (‘‘PIP’’). The PIP is intended to comply with the requirements of Internal Revenue Code Section 162(m) for performance-based compensation. Each year, the Committee establishes maximum award allocations for PIP participants as a percentage of consolidated net earnings. For 2013, the maximum award was .0015 of fiscal year-end adjusted consolidated net earnings for the Chief Executive Officer and .00075 of fiscal year-end adjusted consolidated net earnings for all of the other named executive officers. In 2013, the Committee exercised its discretion to deliver PIP awards that were below the maximum awards that are authorized in the plan. Assessments of performance against financial results consider the impact of specified adjustments or events, and the appropriateness of these adjustments is reviewed annually. In 2013, specified adjustments consisted of intangible asset amortization, separation costs, acquired in process research and development, and costs related to restructuring activities, as described in Exhibit 99.1 to AbbVie’s Form 8-K filed on January 31, 2014. In making its determination regarding the actual award to all participants, the Committee considered pre-determined financial goals, individual goals and other strategic or leadership goals whose subjective assessment was not solely dictated by numeric or formulaic applications of measurable criteria. Moreover, while each participant had predetermined goals, the Committee also considered relative achievements or developments (in the company, marketplace and the global economy) that could not have been foreseen when individual goals were established. Goals specific to each named executive officer are described below. Long-Term Incentives Long-term incentive targets are driven by two primary factors: first, the performance of each named executive officer and his or her relative contribution to the company’s long-term success; and second, the company’s short- and long-term returns to stockholders, as well as relative performance against financial and/or operating measures that drive stockholder returns, and performance against strategic objectives. Starting with the independent compensation consultant’s recommendations 20 regarding target or reference levels of appropriate long-term incentives by individual, the Committee determines grants for each named executive officer based on its objective and subjective assessment of performance, and progress against strategic milestones, as well as external factors which may have affected the individual’s and/or company’s performance. It is important to note that while the Committee may target pay levels for a group of named executive officers or a specific named executive officer at, higher than, or below a certain performance percentile that the independent compensation consultant may forecast, the actual awards are made without knowledge of the actual long-term incentive awards of competitors for the current performance period because some elements of competitors’ actual performance and their actual compensation awards for the current performance period are unknown at the time of award. The independent compensation consultant’s long-term incentive information always reflects prior performance periods, so it is impossible at the time of the award determination to predict precisely where actual pay decisions will place AbbVie’s named executive officers relative to others. Awards for 2013 were based on the goals of AbbVie’s long-term incentive program, the Committee’s assessment of business performance, each individual’s relative performance against his or her pre-determined goals, current outstanding awards held by the named executive officers and the recommendation of the independent compensation consultant to the Committee. After contemplating these factors, the Committee delivered long-term incentive awards to the named executive officers that were intended, in the aggregate, to reward for performance between the median and the 75th percentile of the Health Care Companies group. Applying these standards, the Committee determined the equity award value for each named executive officer and made the awards reported in the ‘‘Summary Compensation Table’’ and the ‘‘2013 Grants of Plan-Based Awards’’ table. Further, AbbVie determined in 2013, based on market practice, advice from the Committee’s independent compensation consultant and recommendations of institutional stockholders, that the long-term incentive awards for named executive officers should be in the form of 25 percent stock options and 75 percent performance-vesting shares. AbbVie’s policy with respect to its annual equity award for all eligible employees, including the named executive officers, is to grant the award and set the grant price at the same time each year, at the Committee’s regularly scheduled February meeting. These meeting dates generally are the third Thursday of February and are scheduled two years in advance. AbbVie’s 2013 annual grant was dated and the grant price set on February 14, 2013. AbbVie’s practice for setting the grant price is the average of the highest and lowest trading prices of a common share on the date of the grant (rounded up to the next even penny). The grant price for the 2013 annual grant was set at $35.88. The high, low and closing prices of an AbbVie common share on February 14, 2013 were $36.73, $35.01 and $36.57, respectively. In establishing criteria for performance-vesting shares, the Committee considers the recommendation of its independent compensation consultant, and the fact that the secondary comparison of the High-Performing Companies group is generally defined by five-year average return on equity of 18 percent or greater. Accordingly, performance-vesting shares granted in 2013 may vest over a period of up to five years, with not more than one-third of the award vesting in any one year, dependent upon the company achieving an annual return on equity threshold of 18 percent from continuing operations adjusted for specified items as described in the quarterly earnings releases. If the thresholds are met in three of the five years, 100 percent of the performance-vesting shares will vest. If the thresholds are missed in all five years, 100 percent of the performance-vesting shares will be forfeited. Outstanding restricted shares receive dividends at the same rate as all other stockholders. 21 Discussion of Performance Goals and Results for Each Named Executive Officer 2013 Financial Goals Name Goal and Expected Result Results Achieved Richard A. Gonzalez . . A. Adjusted Diluted EPS of A. Achieved—$3.14 $3.03 - $3.13 B. AbbVie Sales of $18,529MM C. Adjusted Income Before Taxes B. Achieved—$18,790MM C. Achieved—$6,515MM of $6,300MM D. Adjusted Return on Assets of D. Achieved—24.3% 17% E. Adjusted Return on Equity of E. Achieved—115.2% 40% Laura J. Schumacher . . A. Adjusted Diluted EPS of A. Achieved—$3.14 $3.03 - $3.13 B. AbbVie Sales of $18,529MM B. Achieved—$18,790MM William J. Chase . . . . . . A. Adjusted Diluted EPS of A. Achieved—$3.14 $3.03 - $3.13 B. AbbVie Sales of $18,529MM B. Achieved—$18,790MM Carlos Alban . . . . . . . . A. Adjusted Diluted EPS of A. Achieved—$3.14 $3.03 - $3.13 B. AbbVie Sales of $18,529MM C. Achieve AbbVie Humira Sales B. Achieved—$18,790MM C. Achieved—$10,659MM of $10,288MM Timothy J. Richmond . . A. Adjusted Diluted EPS of A. Achieved—$3.14 $3.03 - $3.13 B. AbbVie Sales of $18,529MM B. Achieved—$18,790MM Other 2013 Goals Richard A. Gonzalez Goals: Build investor confidence in the company and management; Drive exceptional business performance despite the loss of exclusivity of the lipid franchise; Successfully advance mid- and late- stage pipeline; Build the AbbVie brand identity with key stakeholders; Effect a successful transition from Abbott; Develop a strategic roadmap to drive top tier, sustainable long-term performance; Establish a strong, competent and engaged leadership team; Start the transformation of AbbVie’s culture to a biopharmaceutical model; Transform/build a world class research and development organization; Drive strong employee engagement and motivation around the AbbVie mission and future prospects. Results: Mr. Gonzalez achieved the above goals in all material aspects. Laura J. Schumacher Goals: Successfully continue to develop and implement strategies to effectively resolve key litigation matters; Achieve proprietary pharmaceutical pipeline enhancement objectives; Execute biologics strategic development initiatives; Support research and development initiatives per company strategy. 22 Results: Ms. Schumacher achieved the above goals in all material aspects. William J. Chase Goals: Achieve proprietary pharmaceutical pipeline enhancement objectives; Execute biologics strategic development initiatives; Support research and development initiatives per company strategy. Results: Mr. Chase achieved the above goals in all material aspects. Carlos Alban Goals: Achieve key product milestones; Secure pipeline assets for sourced innovation by the end of 2013; Advance existing pipeline assets by achieving key milestones; Achieve key milestones addressing strategic response to changing healthcare environment; Achieve commercial excellence by developing and executing global research plans that enhance market, customer and competitor insights. Results: Mr. Alban achieved the above goals in all material aspects. Timothy J. Richmond Goals: Support research and development initiatives per company strategy; Secure key strategic pipeline assets for sourced innovation; Support the creation of AbbVie’s culture; Build AbbVie’s human resources services strategy. Results: Mr. Richmond achieved the above goals in all material aspects. 2013 Goal Performance and Executive Pay Decisions The individual goals described above were determined at the beginning of 2013 as part of AbbVie’s annual performance and compensation planning process. The Committee considered, at both company and individual levels, achievement with respect to these goals, as well as the performance of the individual overall with respect to all matters not specifically defined in the pre-determined goals, including leadership behaviors and other individual contributions to AbbVie’s performance on a qualitative basis. Additionally, the Committee may also consider unforeseen circumstances or developments in the company, the marketplace and/or the global economy that may have affected performance. For each named executive officer, a target bonus amount is set as follows: Base Salary * Target Bonus Percentage = Target Bonus Amount To determine each individual’s annual bonus, the Committee considered the named executive officer’s target bonus amount and made its final determination of the appropriate award at, above or below the target bonus amount, considering all of the factors as described above, and in consultation with its independent compensation consultant. While the review is comprehensive, it is not solely formulaic. In each individual named executive officer’s case there were multiple levels of review of the proposed 2013 bonus award. For the Chief Executive Officer, the Committee and its independent compensation consultant reviewed the proposed bonus award. For the other named executive officers, AbbVie’s Chief Executive Officer, the Committee and its independent compensation consultant reviewed the proposed awards. Actual bonuses generally were above the target based on a comprehensive review of individual and corporate performance by the Committee and its independent compensation consultant. 23 Richard A. Gonzalez Effective February 20, 2014, Mr. Gonzalez was awarded a 2013 annual bonus of $3,300,000, which was above his target bonus of 200 percent of base pay. Effective February 14, 2013, he received long-term incentives, including a 526,430 share stock option grant and a 257,720 share performance- vesting restricted stock award. Laura J. Schumacher Effective February 20, 2014, Ms. Schumacher was awarded a 2013 annual bonus of $1,290,000, which was above her target bonus of 110 percent of base pay. Effective February 14, 2013, she received long-term incentives, including a 145,510 share stock option grant and a 71,230 share performance- vesting restricted stock award. William J. Chase Effective February 20, 2014, Mr. Chase was awarded a 2013 annual bonus of $1,100,000, which was above his target bonus of 105 percent of base pay. Effective February 14, 2013, he received long-term incentives, including a 115,830 share stock option grant and a 56,700 share performance-vesting restricted stock award. Carlos Alban Effective February 20, 2014, Mr. Alban was awarded a 2013 annual bonus of $1,030,000, which was above his target bonus of 105 percent of base pay. Effective February 14, 2013, he received long-term incentives, including a 115,830 share stock option grant and a 56,700 share performance-vesting restricted stock award. Timothy J. Richmond Effective February 20, 2014, Mr. Richmond was awarded a 2013 annual bonus of $525,000, which was above his target bonus of 90 percent of base pay. Effective February 14, 2013, he received long-term incentives, including a 87,040 share stock option grant and an 42,610 share performance- vesting restricted stock award. Post-Termination and Other Benefits Each of the benefits described below supports the company’s objective of providing a market competitive total rewards program. Individual benefits do not directly affect decisions regarding other benefits or pay components, except to the extent that all benefits and pay components must, in aggregate, be competitive, as previously discussed. Retirement Benefits In 2013, the named executive officers participated in the AbbVie Pension Plan and the AbbVie Supplemental Pension Plan. These plans are described in greater detail in the section of this proxy statement captioned ‘‘Pension Benefits.’’ Since Supplemental Pension Plan benefits cannot be secured in a manner similar to qualified plan benefits, which are held in trust, named executive officers receive an annual cash payment equal to the increase in the present value of their Supplemental Pension Plan benefit. Named executive officers have the option of depositing these annual payments into an individually established grantor trust, net of tax withholdings. Deposited amounts may be credited with the difference between the named executive officer’s actual annual trust earnings and the rate used to calculate trust funding (currently 8 percent). Amounts deposited in the individual trusts are not tax deferred. Further, named executive 24 officers do not receive tax gross-ups on their grantor trusts. The manner in which the grantor trust will be distributed to a named executive officer upon retirement from the company generally follows the manner elected by the named executive officer under the AbbVie Pension Plan. If a named executive officer (or the named executive officer’s spouse, depending upon the pension distribution method elected by the named executive officer under the AbbVie Pension Plan) lives beyond the actuarial life expectancy age used to determine the Supplemental Pension Plan benefit, and therefore exhausts the trust balance, the Supplemental Pension Plan benefit will be paid to the named executive officer (or his or her spouse) by AbbVie. Deferred Compensation Named executive officers of the company, like all U.S. employees, are eligible to defer a portion of their annual base salary to the AbbVie Savings Plan, the company’s qualified savings plan, up to the IRS contribution limits. Named executive officers are also eligible to defer up to 18 percent of their base salary, less contributions to the AbbVie Savings Plan, to a non-qualified deferred compensation plan. Up to 100 percent of annual bonus awards earned by the named executive officers are also eligible for deferral to the non-qualified deferred compensation plan. Named executive officers may defer these amounts to unfunded book accounts or choose to have the amounts paid in cash on a current basis and deposited into individually established grantor trusts, net of tax withholdings. These amounts are credited annually with earnings. Named executive officers do not receive tax gross-ups on their grantor trusts. Named executive officers elect the manner in which the assets held in their grantor trusts will be distributed to them upon retirement or other separation from the company. These arrangements are described in greater detail in this proxy statement beginning with the section captioned ‘‘Summary Compensation Table.’’ Change in Control Arrangements AbbVie’s named executive officers have change in control agreements, the purpose of which is to aid in retention and recruitment, encourage continued attention and dedication to assigned duties during periods involving a possible change in control of the company, and to protect the earned benefits of the named executive officers against adverse changes resulting from a change in control. The level of payments provided under the agreements is established to be consistent with market practices as confirmed by data provided to the Committee by its independent compensation consultant. These arrangements are described in greater detail in the section of this proxy statement captioned ‘‘Potential Payments upon Termination or Change in Control.’’ Financial Planning Named executive officers are eligible for up to $10,000 of annual costs associated with estate planning advice, tax preparation and general financial planning fees. If a named executive officer chooses to utilize this benefit, fees for services received up to the annual allocation amount are paid by the company and are treated as imputed income to the named executive officer, who then is responsible for payment of all taxes due on the fees paid by the company. Company-Provided Transportation Named executive officers are eligible for transportation perquisites that are designed to improve the effectiveness and efficiency of their work, including the use of a company-leased vehicle and access to company-provided air travel. In some cases, these benefits may be used for personal use, which would then be considered part of the named executive officer’s total compensation and treated as taxable income under applicable tax laws. 25 Disability Benefit In addition to AbbVie’s standard disability benefits, the named executive officers are eligible for a monthly long-term disability benefit, which is described in greater detail in the section of this proxy statement captioned ‘‘Potential Payments upon Termination or Change in Control.’’ Stock Ownership Guidelines and Anti-Hedging and Anti-Pledging Policies AbbVie’s stock ownership guidelines are designed to further promote sustained stockholder return and to ensure the company’s senior executives remain focused on both short- and long-term objectives. Each senior executive has five years from the date of election or appointment to his or her position to achieve the ownership level associated with the position. The minimum stock ownership guidelines are AbbVie stock valued at six times base salary for the Chairman and Chief Executive Officer and three times base salary for Executive and Senior Vice Presidents. AbbVie directors are required to own AbbVie stock valued at four times the annual fee for service as a director under the AbbVie Non-Employee Directors’ Fee Plan within five years of joining the board or as soon as practicable thereafter. As provided in the Incentive Stock Program, no award may be assigned, alienated, sold or transferred other than by will or by the laws of descent and distribution, pursuant to a qualified domestic relations order or as permitted by the Committee for estate planning purposes, and no award and no right under any award may be pledged, alienated, attached or otherwise encumbered. All members of senior management, including the company’s named executive officers and certain other employees, are required to clear any transaction involving company stock with the General Counsel prior to entering into such transaction. In 2013, AbbVie reiterated its position with respect to such transactions, instituting a formal policy prohibiting directors and officers subject to Section 16 of the Exchange Act, including all of the named executive officers, from entering into or engaging in the purchase or sale of financial instruments that are designed to hedge or offset any decrease in the market value of AbbVie equity securities they hold. AbbVie also instituted a formal policy prohibiting directors and officers subject to Section 16 of the Exchange Act, including all of the named executive officers, from pledging AbbVie common stock as collateral for a loan. Compensation Committee Report The compensation committee of the board of directors is primarily responsible for reviewing, approving and overseeing AbbVie’s compensation plans and practices, and works with management and the Committee’s independent compensation consultant to establish AbbVie’s executive compensation philosophy and programs. The Committee reviewed and discussed the Compensation Discussion and Analysis with management and recommended to the board of directors that the Compensation Discussion and Analysis be included in this proxy statement. Compensation Committee E. Liddy, Chairman, R. Austin, G. Tilton, and F. Waddell Compensation Risk Assessment During 2013, AbbVie conducted a risk assessment of its compensation policies and practices, including those related to its executive compensation programs for its named executive officers. AbbVie’s risk assessment included a qualitative and quantitative analysis of its executive compensation and benefit programs. AbbVie also considered how these programs compare, from a design perspective, to programs maintained by other companies. Based on this assessment, AbbVie determined that its 26 executive compensation and benefit programs appropriately incentivize employees and any risks arising from its compensation policies and practices are not reasonably likely to have a material adverse effect on AbbVie. The following factors were among those considered in making this determination: (cid:127) AbbVie’s compensation structure contributes to a corporate culture that encourages our named executive officers to regard AbbVie as a career employer. For example, AbbVie sponsors a defined benefit pension plan. Equity awards (discussed in more detail below) also vest over multi-year periods. Both programs encourage AbbVie’s named executive officers to consider the long-term impact of their decisions and align their interests with those of AbbVie’s stockholders. (cid:127) AbbVie’s annual incentive program places an appropriate weighting on earnings achievement by balancing it with other factors. Since earnings are a key component of stock price performance, this aspect of AbbVie’s compensation plan also promotes alignment with stockholder interests. (cid:127) AbbVie’s long-term incentive program focuses named executive officers on longer-term operating performance and stockholder returns. In 2013, AbbVie’s named executive officers received roughly two-thirds of their total compensation in the form of long-term equity incentives (25% of which are stock options that vest over a multi-year period, and 75% of which are performance awards that vest over a period of up to five years with not more than one-third of the award vesting in any one year). AbbVie’s named executive officers do not receive any of their long-term incentive compensation in cash. (cid:127) AbbVie makes equity awards and sets grant prices at the same time each year, at the compensation committee’s regularly scheduled meeting in February. In addition, AbbVie does not award discounted stock options or immediately vesting equity awards. (cid:127) AbbVie has robust stock ownership guidelines for its senior executives, which promotes alignment with stockholder interests. (cid:127) AbbVie’s compensation committee has the ability to exercise downward discretion in determining annual incentive plan payouts. In 2013, the compensation committee exercised its discretion to deliver annual incentive plan awards below the maximum amounts allowable according to the plan formula. (cid:127) AbbVie requires mandatory training on its code of conduct and policies and procedures to educate its employees on appropriate behaviors and the consequences of taking inappropriate actions. (cid:127) AbbVie does not include certain pay design features that may have the potential to encourage excessive risk-taking, such as: over-weighting toward annual incentives, highly leveraged payout curves, unreasonable thresholds or dramatic changes in payout opportunity at certain performance levels that may encourage inappropriate short-term business decisions to meet payout thresholds. This assessment was discussed with the compensation committee and its independent compensation consultant. 27 Summary Compensation Table This section contains compensation information for AbbVie’s named executive officers for the fiscal year ended December 31, 2013. Because each of AbbVie’s named executive officers was employed by Abbott Laboratories (‘‘Abbott’’) prior to AbbVie’s separation from Abbott on January 1, 2013, the information provided for periods prior to January 1, 2013 reflects compensation earned at Abbott and the design and objectives of Abbott executive compensation programs. All references in the following tables to stock options, restricted stock and restricted stock units granted prior to January 1, 2013 relate to awards granted by Abbott in respect of Abbott common shares. Pursuant to the Employee Matters Agreement dated December 31, 2012 by and between AbbVie and Abbott, these equity awards, other than performance-based restricted shares granted to named executive officers on December 1, 2012, were converted into awards in respect of AbbVie common stock and awards in respect of Abbott common shares reflecting the respective post-Separation values of AbbVie and Abbott. The performance-based restricted shares granted to named executive officers on December 1, 2012 were converted entirely into performance-based awards of restricted AbbVie common stock. The following table summarizes compensation awarded to, earned by, or paid to AbbVie’s named executive officers in connection with their service to AbbVie during 2013 and, as applicable, to Abbott before 2013. Mr. Richmond was not a named executive officer before 2013. The section of this proxy statement captioned ‘‘Compensation Discussion and Analysis—How Executive Pay Decisions Are Made’’ describes in greater detail the information reported in this table. Name and Principal Position Year Salary ($) Bonus ($) Stock Awards ($)(1) Option Awards ($)(2)(3) Change in Pension Value and Non-qualified Deferred Compensation Earnings ($)(5) Non-Equity Incentive Plan Compensation ($)(4) Richard A. Gonzalez . . Chairman of the Board and Chief Executive Officer . . . . . 2013 $1,500,000 863,942 825,000 2012 2011 $0 $9,246,994 $3,616,574 729,640 0 343,273 0 3,341,844 1,826,132 $3,300,000 2,500,000 1,230,000 . . . . Laura J. Schumacher . Executive Vice President, Business Development, External Affairs and General Counsel . 2013 2012 2011 900,000 2,555,732 831,682 1,100,000(7) 4,486,690 1,905,327 827,500 0 0 William J. Chase . . Executive Vice President, Chief Financial Officer . . . . . Carlos Alban . . Executive Vice President, Commercial Operations . . . . . . . . . . 2013 2012 2011 . 2013 2012 2011 790,000 398,942 375,000 710,000 615,769 602,471 0 2,034,396 500,000(7) 2,113,216 628,898 0 0 2,034,396 300,000(7) 2,702,141 1,514,013 0 1,035,626 576,809 358,225 1,290,000 1,270,000 1,180,000 795,752 162,079 118,370 795,752 331,473 285,334 1,100,000 500,000 330,000 1,030,000 675,000 610,000 $41,612 64,503 882,988 944,548 1,771,306 1,138,123 315,787 498,991 316,489 416,924 1,801,009 774,355 All Other Compensation ($)(6) Total ($) $471,614 449,288 445,446 270,392 156,261 158,318 $18,176,794 7,949,217 5,552,839 6,996,298 10,192,748 5,567,493 76,788 45,689 50,734 148,097 104,278 106,162 5,112,723 4,218,917 1,819,491 5,135,169 6,529,670 3,892,335 Timothy J. Richmond . Senior Vice President, Human Resources . . . . . 2013 545,000 0 1,528,847 597,965 525,000 53,866 51,841 3,302,519 (1) In accordance with Securities and Exchange Commission rules, the amounts in this column represent the aggregate grant date fair value of the awards in accordance with Financial Accounting Standards Board ASC Topic 718. AbbVie determines the grant date fair value of stock awards by multiplying the number of shares granted by the average of the high and low market prices of one share of AbbVie common stock on the award grant date. (2) In accordance with Securities and Exchange Commission rules, the amounts in this column represent the aggregate grant date fair value of the awards in accordance with Financial Accounting Standards Board ASC Topic 718. These amounts include the grant date fair values of $28,837 and $7,135 attributable to AbbVie and Abbott replacement stock options issued in 2013 to 28 L. Schumacher with respect to original option grants made before 2005. Except for outstanding options that have a replacement option feature, options granted to the named executive officers after 2004 do not include a replacement option feature. Additional information about replacement options is included in the footnotes to the 2013 Grants of Plan-Based Awards table. (3) These amounts were determined as of the option grant date using a Black-Scholes stock option valuation model (except for replacement options, which are determined using a lattice model). These amounts are being reported solely for the purpose of comparative disclosure in accordance with the Securities and Exchange Commission rules. There is no certainty that the amount determined using a Black-Scholes stock option valuation model would be the value at which employee stock options would be traded for cash. For options, other than the replacement options, the assumptions used to determine the grant date fair value are those described in Note 11, ‘‘Equity,’’ of AbbVie’s Notes to Consolidated Financial Statements included under Item 8, ‘‘Financial Statements and Supplementary Data,’’ in AbbVie’s 2013 Annual Report on SEC Form 10-K. For AbbVie replacement options, the valuation model used the following assumptions: expected volatility of 29.57%, dividend yield of 3.64%, risk-free interest of 0.7%, and an option life equal to 0.51 years. For Abbott replacement options, the valuation model used the following assumptions: expected volatility of 14%, dividend yield of 1.6%, risk-free interest of 0.2%, and an option life equal to 0.5 years. (4) The compensation reported in this column for 2013 was earned as a performance-based incentive bonus pursuant to the AbbVie 2013 Performance Incentive Plan. Additional information regarding the plan can be found in the section of this proxy statement captioned ‘‘Compensation Discussion and Analysis—How Executive Pay Decisions Are Made—Short-Term Incentives.’’ (5) Except as provided below, the plan amounts shown below are reported in this column. The amounts shown beside each named executive officer’s name are for 2013, 2012, and 2011, respectively, as applicable. Negative amounts under the AbbVie Pension Plan and the AbbVie Supplemental Pension Plan are excluded from this column in accordance with SEC rules. AbbVie Pension Plan R. Gonzalez: $3,002 / $(426,732) / $33,248; L. Schumacher: $33,119 / $129,541 / $85,875; W. Chase: $(43,043) / $96,217 / $77,342; C. Alban: $(42,843) / $204,199 / $101,829; and T. Richmond: $(375). AbbVie Supplemental Pension Plan R. Gonzalez: $(717,929) / $(4,420,361) / $743,082; L. Schumacher: $783,337 / $1,464,372 / $939,737; W. Chase: $336,946 / $378,802 / $226,766; C. Alban: $401,517 / $1,521,110 / $628,531; and T. Richmond: $53,630. The changes in pension value result primarily from the following factors: (i) the effect of changes in the actuarial assumptions AbbVie uses to calculate plan liability for financial reporting purposes, primarily the change in discount rate; (ii) additional pension benefit accrual under the Pension Plan and the Supplemental Pension Plan; and (iii) the impact of the time value of money on the pension value. Non-Qualified Defined Contribution Plan Earnings The totals in this column include reportable interest credited under the AbbVie 2013 Performance Incentive Plan and the AbbVie Supplemental Savings Plan. 29 R. Gonzalez: $41,612 / $64,503 / $106,658; L. Schumacher: $128,092 / $177,393 / $112,511; W. Chase: $21,884 / $23,972 / $12,381; C. Alban: $58,250 / $75,700 / $43,995; and T. Richmond: $611. (6) The amounts shown below are reported in this column. The amounts shown beside each named executive officer’s name are for 2013, 2012, and 2011, respectively, as applicable. Earnings and Pre-2013 Tax Payments for Non-Qualified Defined Benefit and Non-Qualified Defined Contribution Plans (net of the reportable interest included in footnote (5)). R. Gonzalez: $73,532 / $154,681 / $72,623; L. Schumacher: $188,374 / $97,801 / $88,141; W. Chase: $22,474 / $13,526 / $12,458; C. Alban: $79,626 / $42,667 / $33,977; and T. Richmond: $0. Each of the named executive officers’ awards under the AbbVie 2013 Performance Incentive Plan is paid in cash to the named executive officer on a current basis and may be deposited into a grantor trust established by the named executive officer, net of maximum tax withholdings. Each of the named executive officers has also established grantor trusts in connection with the AbbVie Supplemental Pension Plan and the AbbVie Supplemental Savings Plan. These amounts include the earnings (net of the reportable interest included in footnote (5)) and (for years before 2013) fees and tax payments paid in connection with these grantor trusts. Employer Contributions to Defined Contribution Plans R. Gonzalez: $75,000 / $0 / $0; L. Schumacher: $45,000 / $41,584 / $41,375; W. Chase: $39,500 / $19,947 / $18,750; C. Alban: $35,500 / $30,788 / $30,124; and T. Richmond: $27,250. These amounts include AbbVie contributions to the AbbVie Savings Plan and the AbbVie Supplemental Savings Plan. The AbbVie Supplemental Savings Plan permits the named executive officers to contribute amounts in excess of the annual limit set by the Internal Revenue Code for employee contributions to 401(k) plans up to the excess of (i) 18 percent of their base salary over (ii) the amount contributed to AbbVie’s tax-qualified 401(k) plan. AbbVie matches participant contributions at the rate of 250 percent of the first 2 percent of compensation contributed to the plan. The named executive officers have these amounts paid to them in cash on a current basis and deposited into a grantor trust established by the officer, net of maximum tax withholdings. Other 2013 Compensation The totals shown in the table include the cost of providing a corporate automobile less the amount reimbursed by the named executive officer: R. Gonzalez: $18,240; L. Schumacher: $17,685; W. Chase: $14,370; C. Alban: $17,149; and T. Richmond: $14,591. The totals shown in the table include the following costs associated with financial planning: R. Gonzalez: $7,500; L. Schumacher: $10,000; W. Chase: $444; C. Alban: $10,000; and T. Richmond: $10,000. The totals shown in the table include the following costs for non-business-related air travel: R. Gonzalez: $297,342; L. Schumacher: $9,333. AbbVie determines the incremental cost for flights based on the direct cost to AbbVie, including fuel costs, parking, handling and landing fees, catering, travel fees, and other miscellaneous direct costs. AbbVie also imputes income to the named executive officer for these costs and the executive pays taxes on that income in accordance with tax regulations. For Mr. Alban, the total includes $5,822 for relocation costs. 30 The named executive officers also are eligible to participate in an executive disability benefit described in the section of this proxy statement captioned ‘‘Potential Payments upon Termination— Generally.’’ (7) Bonus paid in recognition of performance related to the business Separation. 2013 Grants of Plan-Based Awards The following table summarizes the AbbVie equity awards granted under the AbbVie 2013 Incentive Stock Program to the named executive officers during 2013.(1) Estimated Future Payouts Under Non-Equity Incentive Plan Awards(2) Grant Date Target ($) Maximum ($) Estimated Future Payouts Under Equity Incentive Plan Awards Target (#)(3)(4) All Other Option Awards: Numbers of Securities Underlying Options (#) Exercise or Base Closing Price of Market Options Price on Awards ($/Sh.) Grant Date 02/14/13 02/14/13 02/14/13 02/14/13 08/16/13(8) 02/14/13 02/14/13 02/14/13 02/14/13 02/14/13 02/14/13 257,720 71,230 56,700 56,700 42,610 526,430(6) $35.88 $36.57 145,510(6) 8,928 35.88 43.21 36.57 43.00 115,830(6) 35.88 36.57 115,830(6) 35.88 36.57 87,040(6) 35.88 36.57 Grant Date Fair Value of Stock and Option Awards $9,246,994(5) 3,616,574(7) 2,555,732(5) 999,654(7) 28,837 2,034,396(5) 795,752(7) 2,034,396(5) 795,752(7) 1,528,847(5) 597,965(7) Name R. Gonzalez . . . . L. Schumacher . . W. Chase . . . . . . C. Alban . . . . . . T. Richmond . . . . (1) When AbbVie separated from Abbott Laboratories on January 1, 2013, holders of outstanding Abbott equity awards generally received (except to the extent prohibited by local law or required by award agreement terms) an identical number of AbbVie equity awards to preserve the value of the outstanding Abbott awards. The AbbVie awards resulted from an anti-dilution adjustment in accordance with terms of the Abbott awards designed to preserve the value of the Abbott awards, so these January 1, 2013 awards are not included in this table. Additional information about the conversion of the Abbott equity awards in connection with the Separation is included in footnote (1) to the 2013 Outstanding Equity Awards at Fiscal Year-End table. (2) During 2013, each of the named executive officers participated in the AbbVie 2013 Performance Incentive Plan. The annual cash incentive award earned by the named executive officer in 2013 under the plan is shown in the Summary Compensation Table in the column captioned ‘‘Non-Equity Incentive Plan Compensation.’’ No future pay-outs will be made with respect to the 2013 awards under the plan. The plan is described in greater detail in the section of this proxy statement captioned ‘‘Compensation Discussion and Analysis—How Executive Pay Decisions Are Made—Short-Term Incentives.’’ (3) These are performance-based restricted stock awards that have a five-year term and vest upon AbbVie achieving a minimum return on equity target, with no more than one-third of the award vesting in any one year. In 2013, AbbVie reached its minimum return on equity target and one-third of each of the awards granted on February 14, 2013 vested on February 28, 2014. The return on equity targets are described in the section of this proxy statement captioned 31 ‘‘Compensation Discussion and Analysis—How Executive Pay Decisions Are Made—Long-Term Incentives.’’ (4) Shares of outstanding restricted stock receive dividends at the same rate as all other stockholders. In the event of a grantee’s death or disability, these awards are deemed fully earned. Upon a change in control, the treatment of these awards is determined as described in the section of this proxy statement captioned ‘‘Potential Payments upon Termination or Change in Control—Equity Awards.’’ (5) The grant date fair value of stock awards is determined by multiplying the number of shares granted by the average of the high and low market prices of one share of AbbVie common stock on the award grant date. (6) One-third of the shares of common stock covered by these options are exercisable after one year, two-thirds after two years, and all after three years. The options vest in the event of the grantee’s death or disability. Upon a change in control, the treatment of these awards is determined as described in the section of this proxy statement captioned ‘‘Potential Payments upon Termination or Change in Control—Equity Awards.’’ Under the AbbVie 2013 Incentive Stock Program, these options have an exercise price equal to the average of the high and low market prices (rounded up to the next even penny) of one share of AbbVie common stock on the date of grant. These options do not contain a replacement option feature. (7) The grant date fair value of option awards is determined as of the option grant date using a Black- Scholes stock option valuation model. The assumptions used to determine the grant date fair value are described in Note 11, ‘‘Equity,’’ of AbbVie’s Notes to Consolidated Financial Statements included under Item 8, ‘‘Financial Statements and Supplementary Data,’’ in AbbVie’s 2013 Annual Report on SEC Form 10-K. The assumptions used to determine the grant date fair value for replacement options are described in footnote (3) to the Summary Compensation Table. (8) This was an AbbVie replacement option. On August 16, 2013, Ms. Schumacher also received an Abbott replacement option upon the exercise of pre-Separation Abbott stock options that contained a replacement feature. The Abbott replacement option covered 5,671 Abbott common shares, bore an exercise price of $35.03 per share, and expired on February 19, 2014. None of the remaining AbbVie or Abbott stock options held by any of the named executive officers contain a replacement feature. When it was in effect, the replacement feature provided that when the exercise price (or withholding tax) for an option with the feature was paid with company common stock held by the named executive officer, a replacement option could be granted for the number of shares of common stock used to make that payment. 32 2013 Outstanding Equity Awards at Fiscal Year-End The following table summarizes the outstanding AbbVie equity awards held by the named executive officers at year-end. Option Awards(1)(2) Stock Awards(1) Name R. Gonzalez . . . . . L. Schumacher . . . . W. Chase . . . . . . . C. Alban . . . . . . . Number of Securities Underlying Unexercised Options (#) Exercisable Number of Securities Underlying Unexercised Options (#) Unexercisable 18,366 35,767 66,300 38,940 42,533 19,166 26,600 8,495 6,600 25,500 12,800 13,400 12,667 6,534 30,533 16,034 18,367(3) 71,533(3) 526,430(3) 19,167(3) 53,200(3) 145,510(3) 8,928(3) 6,333(3) 13,066(3) 115,830(3) 15,267(3) 32,066(3) 115,830(3) Option Exercise Price ($) 24.2082 29.2265 35.8800 28.8628 28.1251 28.3122 24.2082 29.2265 35.8800 43.2100 24.0731 27.2940 28.8628 28.1251 28.3122 24.2082 29.2265 35.8800 24.2082 29.2265 35.8800 Option Expiration Date 02/17/2021 02/16/2022 02/13/2023 02/14/2018 02/19/2019 02/18/2020 02/17/2021 02/16/2022 02/13/2023 02/19/2014 02/17/2015 02/15/2017 02/14/2018 02/19/2019 02/18/2020 02/17/2021 02/16/2022 02/13/2023 02/17/2021 02/16/2022 02/13/2023 Number of Shares or Units of Stock That Have Not Vested (#) Market Value of Shares or Units of Stock That Have Not Vested ($) Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) 13,067(3) 39,600(3) 257,720(3) 13,633(3) 29,466(3) Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) $690,068 2,091,276 13,610,193 719,959 1,556,099 59,202(3) $3,126,458 71,230(3) 3,761,656 44,401(3) 2,344,817 4,500(3) 7,266(3) 237,645 383,717 56,700(3) 2,994,327 35,521(3) 1,875,864 10,833(3) 17,800(3) 572,091 940,018 56,700(3) 2,994,327 1,533(3)(4) 3,300(3)(5) 80,958 174,273 42,610(3) 2,250,234 T. Richmond . . . . . 87,040(3) 35.8800 02/13/2023 10,000(3) 528,100 29,600(3) 1,563,176 (1) When AbbVie separated from Abbott on January 1, 2013, outstanding Abbott equity awards generally converted into adjusted awards based on Abbott common shares and AbbVie common stock (except to the extent prohibited by local law or with respect to certain awards described below). Holders of Abbott restricted shares or restricted stock units generally retained those awards and received restricted stock or restricted stock units of AbbVie in an amount that reflected the distribution to Abbott shareholders, except for Abbott restricted stock awards granted on December 1, 2012 that converted in full into AbbVie restricted stock awards as of the Separation, as described in note (d) to footnote (3) below. Such awards are subject to substantially the same terms, vesting conditions and other restrictions that applied to the original Abbott awards immediately before the distribution. Each Abbott stock option was converted into an adjusted Abbott stock option and an AbbVie stock option, with adjustments to the stock option exercise prices that were intended to preserve the value of the original Abbott award as measured immediately before and immediately after the distribution. Each such adjusted Abbott stock option and AbbVie stock option is subject to substantially the same terms, 33 vesting conditions, post-termination exercise rules and other restrictions that applied to the original Abbott stock option immediately before the distribution. As a result of the Separation, the named executive officers held the following Abbott equity awards as of December 31, 2013: (cid:127) R. Gonzalez: Options to purchase 116,967 Abbott common shares with exercise prices ranging from $22.39 to $27.03 per share, which are partially vested and scheduled to become fully vested on February 17, 2015; performance restricted stock awards covering 52,667 Abbott common shares with a market value of $2,018,726 as of December 31, 2013, which are partially vested and scheduled to continue to vest through February 27, 2015 (or 2016 or 2017 depending on achievement of the performance goals in 2015 or 2016). (cid:127) L. Schumacher: Options to purchase 271,577 Abbott common shares (including the replacement option described in footnote (8) to the 2013 Grants of Plan-Based Awards table) with exercise prices ranging from $22.39 to $35.03 per share, which are partially vested and scheduled to become fully vested on February 17, 2015; performance restricted stock awards covering 43,099 Abbott common shares with a market value of $1,651,985 as of December 31, 2013, which are partially vested and scheduled to continue to vest through February 27, 2015 (or 2016 or 2017 depending on achievement of the performance goals in 2015 or 2016). (cid:127) W. Chase: Options to purchase 19,399 Abbott common shares with exercise prices ranging from $22.39 to $27.03 per share, which are partially vested and scheduled to become fully vested on February 17, 2015; performance restricted stock awards covering 11,766 Abbott common shares with a market value of $450,991 as of December 31, 2013, which are partially vested and scheduled to continue to vest through February 27, 2015 (or 2016 or 2017 depending on achievement of the performance goals in 2015 or 2016). (cid:127) C. Alban: Options to purchase 93,900 Abbott common shares with exercise prices ranging from $22.39 to $27.03 per share, which are partially vested and scheduled to become fully vested on February 17, 2015; performance restricted stock awards covering 28,633 Abbott common shares with a market value of $1,097,503 as of December 31, 2013, which are partially vested and scheduled to continue to vest through February 27, 2015 (or 2016 or 2017 depending on achievement of the performance goals in 2015 or 2016). (cid:127) T. Richmond: Restricted stock units covering 14,833 Abbott common shares with a market value of $568,549 as of December 31, 2013, which are scheduled to continue to vest through February 17, 2015. (2) Except as noted, the stock options are fully vested. (3) The vesting dates of AbbVie unexercisable stock options and unvested restricted stock/unit awards outstanding at December 31, 2013 are as follows: Option Awards Stock Awards Name R. Gonzalez . . . . L. Schumacher . . . Number of Unexercised Shares Remaining from Original Grant 18,367 71,533 526,430 19,167 53,200 145,510 8,928 Number of Option Shares Vesting— Date Vested 2014 18,367—2/18 35,766—2/17 175,477—2/14 19,167—2/18 26,600—2/17 48,504—2/14 8,928—2/17 Number of Option Shares Vesting— Date Vested 2015 Number of Option Shares Vesting— Date Vested 2016 Number of Shares of Restricted Stock/ Units Number of Shares of Restricted Stock/ Units Vesting— Date Vested 2014 Number of Shares of Restricted Stock/ Units Vesting— Date Number of Shares of Restricted Stock/ Units Vesting— Date Vested 2015 Vested 2016 35,767—2/17 175,476—2/14 175,477—2/14 26,600—2/17 48,503—2/14 48,503—2/14 13,067 39,600 257,720 13,633 29,466 71,230 59,202 (a) (b) (c) (a) (b) (c) (d) 34 Option Awards Stock Awards Number of Option Shares Vesting— Date Vested 2015 Number of Option Shares Vesting— Date Vested 2016 Number of Shares of Restricted Stock/ Units Number of Shares of Restricted Stock/ Units Vesting— Date Vested 2014 Number of Shares of Restricted Stock/ Units Vesting— Date Number of Shares of Restricted Stock/ Units Vesting— Date Vested 2015 Vested 2016 Number of Unexercised Shares Remaining from Original Grant 6,333 13,066 115,830 15,267 32,066 115,830 Number of Option Shares Vesting— Date Vested 2014 6,333—2/18 6,533—2/17 38,610—2/14 15,267—2/18 16,033—2/17 38,610—2/14 Name W. Chase . . . . . . C. Alban . . . . . . 6,533—2/17 38,610—2/14 38,610—2/14 16,033—2/17 38,610—2/14 38,610—2/14 T. Richmond . . . . 87,040 29,014—2/14 29,013—2/14 29,013—2/14 4,500 7,266 56,700 44,401 10,833 17,800 56,700 35,521 10,000 1,533 3,300 42,610 29,600 (a) (b) (c) (d) (a) (b) (c) (d) 10,000—2/01 1,533—2/18 1,650—2/17 (c) (d) 1,650—2/17 (a) These are the shares of restricted stock that remained outstanding and unvested on December 31, 2013, from an award made on February 18, 2011. The award has a 5-year term, with no more than one-third of the original award vesting in any one year upon AbbVie achieving a minimum return on equity target, measured at the end of the relevant year. In 2013, AbbVie reached its minimum return on equity target and these shares vested on February 28, 2014. (b) These are the shares of restricted stock that remained outstanding and unvested on December 31, 2013, from an award made on February 17, 2012. The award has a 5-year term, with no more than one-third of the original award vesting in any one year upon AbbVie achieving a minimum return on equity target, measured at the end of the relevant year. In 2013, AbbVie reached its minimum return on equity target and one half of the unvested shares vested on February 28, 2014. (c) These are the shares of restricted stock that remained outstanding and unvested on December 31, 2013, from an award made on February 14, 2013. The award has a 5-year term, with no more than one-third of the original award vesting in any one year upon AbbVie achieving a minimum return on equity target, measured at the end of the relevant year. In 2013, AbbVie reached its minimum return on equity target and one third of the unvested shares vested on February 28, 2014. (d) These are the shares of restricted stock that remained outstanding and unvested on December 31, 2013, from an award made on December 1, 2012. These shares will vest after January 1, 2016 subject to continued employment with AbbVie through the vesting date and AbbVie achieving a minimum return on equity target for the period 2013 through 2015. (4) These are restricted stock units that remained outstanding and unvested on December 31, 2013, from an award made on February 18, 2011. The award has a 3-year term, with one-third of the original award vesting on each of the first three anniversaries of the grant date. (5) These are restricted stock units that remained outstanding and unvested on December 31, 2013, from an award made on February 17, 2012. The award has a 3-year term, with one-third of the original award vesting on each of the first three anniversaries of the grant date. 35 2013 Option Exercises and Stock Vested The following table summarizes for each named executive officer the number of shares acquired on the exercise of AbbVie stock options and the number of shares acquired on the vesting of AbbVie stock awards in 2013: Name R. Gonzalez . . . . . . . . . . . . . . . . . . . . . . . . . . . . . L. Schumacher . . . . . . . . . . . . . . . . . . . . . . . . . . . W. Chase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Alban . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . T. Richmond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pension Benefits Option Awards Stock Awards Number of Shares Acquired On Exercise (#) 0 20,659 12,179 145,382 0 Value Realized On Exercise ($) $0 226,374 172,475 2,552,665 0 Number of Shares Acquired On Vesting (#) 46,199 73,567 20,201 48,600 4,616 Value Realized On Vesting ($) $1,708,222 2,729,316 749,633 1,802,928 173,469 During 2013, the named executive officers participated in two AbbVie-sponsored defined benefit pension plans: the AbbVie Pension Plan, a tax-qualified pension plan; and the AbbVie Supplemental Pension Plan, a non-qualified supplemental pension plan. The Supplemental Pension Plan also includes a benefit feature AbbVie uses to attract senior executives who are mid-career hires, which provides an additional benefit to such participants that is less valuable to participants who have spent most of their career at the company. Except as provided in AbbVie’s change in control agreements, AbbVie does not have a policy granting extra years of credited service under the plans. The change in control agreements are described in the section of this proxy statement captioned ‘‘Potential Payments upon Termination or Change in Control.’’ The compensation considered in determining the pensions payable to the named executive officers is the compensation shown in the ‘‘Salary’’ and ‘‘Non-Equity Incentive Plan Compensation’’ columns of the Summary Compensation Table. 36 Pension Plan The Pension Plan covers most AbbVie employees in the United States, age 21 or older, and provides participants with a life annuity benefit at normal retirement equal to A plus the greater of B or C below. A. 1.10% of 5-year final average earnings multiplied by years of benefit service after 2003. B. 1.65% of 5-year final average earnings multiplied by years of benefit service prior to 2004 (up to 20); plus 1.50% of 5-year final average earnings multiplied by years of benefit service prior to 2004 in excess of 20 (but no more than 15 additional years); less 0.50% of the lesser of 3-year final average earnings (but not more than the social security wage base in any year) or the social security covered compensation level multiplied by years of benefit service. C. 1.10% of 5-year final average earnings multiplied by years of benefit service prior to 2004. The benefit for service prior to 2004 (B or C above) is reduced for the cost of preretirement surviving spouse benefit protection. The reduction is calculated using formulas based on age and employment status during the period in which coverage was in effect. Final average earnings are the average of the employee’s 60 highest-paid consecutive calendar months of compensation (salary and non-equity incentive plan compensation). The Pension Plan covers earnings up to the limit imposed by Internal Revenue Code Section 401(a)(17) and provides for a maximum of 35 years of benefit service. Participants become fully vested in their pension benefit upon the completion of five years of service. The benefit is payable on an unreduced basis at age 65. Employees hired after 2003 who terminate employment prior to age 55 with at least 10 years of service may choose to commence their benefits on an actuarially reduced basis as early as age 55. Employees hired before 2004 who terminate employment prior to age 50 with at least 10 years of service may choose to commence their benefits on an actuarially reduced basis as early as age 50. Employees hired before 2004 who terminate employment prior to age 50 with fewer than 10 years of service may choose to commence their benefits on an actuarially reduced basis as early as age 55. The Pension Plan offers several optional forms of payment, including certain and life annuities, joint and survivor annuities, and level income annuities. The benefit paid under any of these options is actuarially equivalent to the life annuity benefit produced by the formula described above. Employees who retire from AbbVie prior to their normal retirement age may receive subsidized early retirement benefits. Employees hired after 2003 are eligible for early retirement at age 55 with 10 years of service. Employees hired before 2004 are eligible for early retirement at age 50 with 10 years of service or age 55 if the employee’s age plus years of benefit service total 70 or more. Mr. Gonzalez, Ms. Schumacher, and Mr. Alban are eligible for early retirement benefits under the plan. The subsidized early retirement reductions applied to the benefit payable for service after 2003 (A above) depend upon the participant’s age at retirement. If the participant retires after reaching age 55, the benefit is reduced 5 percent per year for each year that payments are made before age 62. If the participant retires after reaching age 50 but prior to reaching age 55, the benefit is actuarially reduced from age 65. 37 The early retirement reductions applied to the benefit payable for service prior to 2004 (B and C above) depend upon age and service at retirement: (cid:127) In general, the 5-year final average earnings portions of the benefit are reduced 3 percent per year for each year that payments are made before age 62 and the 3-year final average earnings portion of the benefit is reduced 5 percent per year for each year that payments are made before age 62. (cid:127) Employees who participated in the plan before age 36 may elect ‘‘Special Retirement’’ on the last day of any month after reaching age 55 with age plus Seniority Service points of at least 94 or ‘‘Early Special Retirement’’ on the last day of any month after reaching age 55, provided their age plus Seniority Service points would reach at least 94 before age 65. Seniority Service includes periods of employment prior to attaining the minimum age required to participate in the plan. If Special Retirement or Early Special Retirement applies, Seniority Service is used in place of benefit service in the formulas. The 5-year final average earnings portions of the benefit in B above are reduced 12⁄3 percent for each year between ages 59 and 62 plus 21⁄2 percent for each year between ages 55 and 59. The 3-year final average earnings portion of the benefit is reduced 5 percent per year for each year that payments are made before age 62. Benefit C is payable on an unreduced basis at Special Retirement and is reduced 3 percent per year for each year that payments are made before age 62, if Early Special Retirement applies. Supplemental Pension Plan With the following exceptions, the provisions of the Supplemental Pension Plan are substantially the same as those of the Pension Plan: (cid:127) Participants’ 5-year final average earnings are calculated using the average of the 5 highest years of base earnings and the 5 highest years of payments under AbbVie’s non-equity incentive plans. (cid:127) The Pension Plan does not include amounts deferred or payments received under the AbbVie Deferred Compensation Plan in its calculation of a participant’s final average earnings. To preserve the pension benefits of Deferred Compensation Plan participants, the Supplemental Pension Plan includes amounts deferred by a participant under the Deferred Compensation Plan in its calculation of final average earnings. Beginning in the year following their election or appointment as an officer, AbbVie officers are no longer eligible to defer compensation under the Deferred Compensation Plan. (cid:127) In addition to the benefits outlined above for the Pension Plan, the named executive officers are eligible for an additional Supplemental Pension Plan benefit equal to 0.6% of 5-year final average earnings for each year of service for each of the first 20 years of service occurring after the participant attains age 35. The benefit is further limited by the maximum percentage allowed under the Pension Plan under that plan’s benefit formulas (A, B and C above). The portion of this additional benefit attributable to service before 2004 is reduced 3 percent per year for each year that payments are made before age 60. The portion attributable to service after 2003 is reduced 5 percent per year for each year that payments are made before age 60 if the participant is at least age 55 at early retirement. If the participant is under age 55 at retirement, the portion attributable to service after 2003 is actuarially reduced from age 65. (cid:127) The Supplemental Pension Plan provides early retirement benefits similar to those provided under the Pension Plan. The benefits provided to named executive officers under the Supplemental Pension Plan are not, however, reduced for the period between age 60 and age 62, unless the benefit is being actuarially reduced from age 65. Mr. Gonzalez, Ms. Schumacher, and Mr. Alban are eligible for early retirement benefits under the plan. 38 (cid:127) Vested benefits accrued under the Supplemental Pension Plan may be funded through a grantor trust established by the named executive officer. Consistent with the distribution requirements of Internal Revenue Code Section 409A and its regulations, those named executive officers who became officers prior to 2009 may have the entire amount of their vested plan benefits funded through a grantor trust. Any named executive officer who became an officer after 2008 may have only the vested benefits that accrue following the calendar year in which he or she is first elected as an officer funded through a grantor trust. Vested benefits accrued through December 31, 2008, to the extent not previously funded, were distributed to the participants’ individual trusts and included in the participants’ income. Benefits payable under the Supplemental Pension Plan are offset by the benefits payable from the Pension Plan, calculated as if benefits under the plans commenced at the same time. The amounts paid to a named executive officer’s Supplemental Pension Plan grantor trust to fund plan benefits are actuarially determined. The plan is designed to result in AbbVie paying the named executive officer’s Supplemental Pension Plan benefits to the extent assets held in his or her trust are insufficient. Pension Benefits Table Name Plan Name R. Gonzalez . . . . . . . . . . . . . . . AbbVie Pension Plan AbbVie Supplemental Pension Plan L. Schumacher . . . . . . . . . . . . . . AbbVie Pension Plan AbbVie Supplemental Pension Plan W. Chase . . . . . . . . . . . . . . . . . . AbbVie Pension Plan AbbVie Supplemental Pension Plan C. Alban . . . . . . . . . . . . . . . . . . AbbVie Pension Plan AbbVie Supplemental Pension Plan T. Richmond . . . . . . . . . . . . . . . AbbVie Pension Plan AbbVie Supplemental Pension Plan Number of Years Credited Service (#) Present Value of Accumulated Benefit ($)(1) Payments During Last Fiscal Year ($) 33 33 23 23 25 25 27 27 7 7 $313,917 5,641,059 472,749 5,300,458 324,200 1,294,021 549,416 3,485,171 91,966 302,341 $0 0 0 249,954(2) 0 77,905(2) 0 1,542,137(2) 0 0 (1) AbbVie calculates these present values using: (i) a 5.36% discount rate, the same discount rate it uses for Financial Accounting Standards Board ASC Topic 715 calculations for financial reporting purposes; and (ii) each plan’s unreduced retirement age, which is age 62 under the AbbVie Pension Plan and age 60 under the AbbVie Supplemental Pension Plan for those participants who are eligible for early retirement benefits and which is age 65 under both plans for other participants. The present values shown in the table reflect postretirement mortality, based on the Financial Accounting Standards Board ASC Topic 715 assumption (the RP2000 Combined Healthy table), but do not include a factor for preretirement termination, mortality, or disability. (2) Consistent with the distribution requirements of Internal Revenue Code Section 409A and its regulations, vested Supplemental Pension Plan benefits, to the extent not previously funded, were distributed to the participants’ individual grantor trusts and included in the participants’ income. Amounts held in the named executive officer’s individual trust are expected to offset AbbVie’s obligations to him or her under the plan. During 2013, the amounts shown, less applicable tax withholdings, were deposited in such individual trusts established by the named executive officers. Grantor trusts are described in greater detail in the section of this proxy statement captioned ‘‘Compensation Discussion and Analysis—2013 Goal Performance and Executive Pay Decisions.’’ 39 2013 Nonqualified Deferred Compensation The following table summarizes Ms. Schumacher’s, Mr. Chase’s and Mr. Richmond’s non-qualified deferred compensation under the AbbVie Deferred Compensation Plan. No additional contributions have been made to their accounts under the plan since such time as Ms. Schumacher, Mr. Chase and Mr. Richmond, respectively, became officers and ceased to be eligible to contribute to the plan. None of the other named executive officers has any non-qualified deferred compensation. Name Plan Name Executive Registrant Aggregate Aggregate Aggregate contributions contributions earnings withdrawals/ balance at in last FY in last FY distributions last FYE ($) ($)(3) ($) ($)(4) in last FY ($) L. Schumacher . . . Deferred Compensation Plan(1)(2) W. Chase . . . . . . . Deferred Compensation Plan(1)(2) T. Richmond . . . . Deferred Compensation Plan(1)(2) 0 0 0 0 0 0 $80,850 12,163 979 0 0 0 $355,683 66,795 47,491 (1) Ms. Schumacher’s, Mr. Chase’s, and Mr. Richmond’s contributions to the Deferred Compensation Plan ceased in 2002, 2007, and 2010, respectively. (2) The plan permits participants to defer up to 75 percent of their base salary and up to 100 percent of their annual cash incentives and credits a participant’s account with an amount equal to the employer matching contributions that otherwise would have been made for the participant under AbbVie’s tax-qualified defined contribution plan. Participants may direct the investment of their deferral accounts into one or more of several funds chosen by the administrator, and the deferral account is credited with investment returns based on the performance of the fund(s) selected. During 2013, the weighted average rate of return credited to accounts was 29.4 percent for Ms. Schumacher, 22.1 percent for Mr. Chase, and 2.1 percent for Mr. Richmond. The plan provides for cash distributions in either a lump sum or installments after separation from service and permits in-service withdrawals in accordance with specific procedures. Participants make distribution elections each year that apply to the deferrals to be made in the following calendar year, in accordance with the requirements of Internal Revenue Code Section 409A. Participants may request withdrawals due to financial hardship; if a hardship withdrawal is approved, it is limited to the amount needed to address the hardship. (3) The amounts reported in this column are not included in the Summary Compensation Table of this proxy statement. (4) The amounts reported in this column have not been previously reported as compensation in AbbVie’s Summary Compensation Tables because they relate to contributions made before the applicable individual became a named executive officer. Potential Payments upon Termination or Change in Control Potential Payments upon Termination—Generally AbbVie does not have employment agreements with its named executive officers. The following summarizes the payments that the named executive officers would have received if their employment had terminated on December 31, 2013. Earnings would have continued to be paid for the named executive officer’s Performance Incentive Plan and Supplemental Savings Plan grantor trusts until the trust assets were fully distributed. The amount of these payments would depend on the period over which the trust assets were distributed and the trust earnings and fees. If the trust assets were distributed over a ten-year period and based on current earnings, the named executive officers would receive the following average annual payments over such ten-year period: Mr. Gonzalez, $431,289; Ms. Schumacher, $427,746; Mr. Chase, $296,191; Mr. Alban, $299,627; and Mr. Richmond, $64,659. In addition, the following one-time deposits would have been made under the AbbVie Supplemental Pension Plan for each of the following named executive officers, respectively: Mr. Gonzalez, $0; Ms. Schumacher, $3,311,908; Mr. Chase, $326,981; Mr. Alban, $1,160,177; and Mr. Richmond, $48,118. As of December 31, 2013, Mr. Gonzalez, Ms. Schumacher, and Mr. Alban were eligible to retire, and therefore were eligible to receive the pension benefits described above. 40 If the termination of employment had been due to disability, then the named executive officers also would have received, in addition to AbbVie’s standard disability benefits, a monthly long-term disability benefit in the amount of $137,500 for Mr. Gonzalez; $53,750 for Ms. Schumacher; $45,833 for Mr. Chase; $42,917 for Mr. Alban; and $21,875 for Mr. Richmond. This long-term disability benefit would continue for up to 18 months following termination of employment. It ends if the named executive officer retires, recovers, dies or ceases to meet eligibility criteria. In addition, if the named executive officer’s employment had terminated due to death or disability, his or her unvested stock options and restricted stock or unit awards would have vested on December 31, 2013 with values as set forth below in the subsection of this proxy statement captioned ‘‘Equity Awards.’’ Potential Payments upon Change in Control In connection with the Separation from Abbott, AbbVie assumed the change in control agreements between Abbott and the officers transferring to AbbVie. The agreements with Mr. Gonzalez, Ms. Schumacher, and Messrs. Chase, Alban and Richmond are described below. Each change in control agreement continues in effect until December 31, 2014, and can be renewed for successive two-year terms upon notice prior to the expiration date. If notice of non-renewal is given, the agreement will expire on the later of the scheduled expiration date and the one-year anniversary of the date of such notice. If no notice is given, the agreement will expire on the one-year anniversary of the scheduled expiration date. Each agreement also automatically extends for two years following any change in control (see below) that occurs while the agreement is in effect. The agreements provide that if the employee is terminated other than for cause or permanent disability or if the employee elects to terminate employment for good reason (see below) within two years following a change in control, he or she is entitled to receive a lump sum payment equal to three times his or her annual salary and annual incentive (‘‘bonus’’) award (assuming for this purpose that all target performance goals have been achieved or, if higher, based on the average bonus for the last three years), plus any unpaid bonus owing for any completed performance period and the pro rata bonus for any current bonus period (based on the highest of the bonus assuming achievement of target performance, the average bonus for the past three years or, in the case of the unpaid bonus for any completed performance period, the actual bonus earned). If the employee is terminated other than for cause or permanent disability or if the employee elects to terminate employment for good reason during a potential change in control (see below), he or she is entitled to receive a lump sum payment of the annual salary and bonus payments described above, except that the amount of the bonus to which the employee is entitled will be based on the actual achievement of the applicable performance goals. If the potential change in control becomes a ‘‘change in control event’’ (within the meaning of Internal Revenue Code Section 409A), the employee will be entitled to receive the difference between the bonus amounts the officer received upon termination during the potential change in control and the bonus amounts that would have been received had such amounts instead been based on the higher of the employee’s target bonus or the average bonus paid to the employee in the preceding three years. Bonus payments include payments made under the Performance Incentive Plan. The employee also will receive up to three years of additional employee benefits (including welfare benefits, outplacement services and tax and financial counseling, and the value of three more years of pension accruals). If change in control-related payments and benefits become subject to the excise tax imposed under Internal Revenue Code Section 4999, payments under the agreement will be reduced to prevent application of the excise tax if such a reduction would leave the employee in a better after-tax position than if the payments were not reduced and the tax applied. The agreements also limit the conduct for which awards under AbbVie’s incentive stock programs can be terminated and generally permit options to remain exercisable for the remainder of their term. The compensation committee’s independent compensation consultant has confirmed that the level of payments provided under the agreements is consistent with current market practice. 41 For purposes of the agreements, the term ‘‘change in control’’ includes the following events: any person becoming the beneficial owner of AbbVie securities representing 20 percent or more of the outstanding voting power (not including an acquisition directly from AbbVie and its affiliates); a change in the majority of the members of the board of directors whose appointment was approved by a vote of at least two-thirds of the incumbent directors; and the consummation of certain mergers or similar corporate transactions involving AbbVie. A ‘‘potential change in control’’ under the agreements includes, among other things, AbbVie’s entry into an agreement that would result in a change in control. Finally, the term ‘‘good reason’’ includes: a significant adverse change in the employee’s position, duties, or authority; the company’s failure to pay the employee’s compensation or a reduction in the employee’s base pay or benefits; or the relocation of the company’s principal executive offices to a location that is more than 35 miles from the location of the offices at the time of the change in control. If a change in control had occurred on December 31, 2013, immediately followed by one of the covered circumstances described above, Mr. Gonzalez, Ms. Schumacher, and Messrs. Chase, Alban and Richmond would have been entitled to receive the following payments and benefits under the change in control agreements: (cid:127) Mr. Gonzalez: Cash termination payments—$13,500,000; Additional Supplemental Pension Plan benefits—$9,675,893; Welfare and fringe benefits—$37,131. (cid:127) Ms. Schumacher: Cash termination payments—$4,232,414; Additional Supplemental Pension Plan benefits—$1,118,022; Welfare and fringe benefits—$53,668. (cid:127) Mr. Chase: Cash termination payments—$4,858,500; Additional Supplemental Pension Plan benefits—$753,488; Welfare and fringe benefits—$59,982. (cid:127) Mr. Alban: Cash termination payments—$4,366,500; Additional Supplemental Pension Plan benefits—$2,066,620; Welfare and fringe benefits—$64,980. (cid:127) Mr. Richmond: Cash termination payments—$3,106,500; Additional Supplemental Pension Plan benefits—$198,184; Welfare and fringe benefits—$64,385. The amounts shown for Ms. Schumacher’s cash termination payments and additional supplemental pension plan benefits reflect reductions that would have applied under cutback provisions in the agreement as described above. Equity Awards Under the AbbVie 2013 Incentive Stock Program, any outstanding unvested stock options and restricted stock or unit awards granted prior to February 2013 (including awards converted into adjusted awards based on Abbott common shares and AbbVie common stock in connection with the Separation) vest upon a change in control, including performance-based restricted shares, which are deemed earned in full. This program, which was approved by AbbVie’s stockholders, covers approximately 6,500 participants, including a broad group of management and professional staff. In addition, unvested equity awards converted into adjusted awards based on Abbott common shares in connection with the Separation would vest in full upon a change in control of Abbott. Beginning with awards granted in February 2013, upon a change in control the surviving company may assume, convert or replace the awards on an equivalent basis. If the surviving company does not do so, the vesting of the awards is accelerated. If the surviving company does assume, convert or replace the awards on an equivalent basis, then accelerated vesting of the awards is limited to circumstances in which, during the period from six months before through two years after a change in control, the grantee’s employment is terminated without cause or the grantee resigns for good reason. The terms ‘‘cause’’ and ‘‘good reason’’ have the same definitions as in the change in control agreements. 42 If a change in control had occurred on December 31, 2013 and the surviving company did not assume, convert or replace any of the awards granted after January 2013, then the unvested equity awards of the named executive officers would have vested as follows: (cid:127) Mr. Gonzalez would have vested in (1) 616,330 unvested AbbVie stock options with a value of $11,124,505 and 89,900 unvested Abbott stock options with a value of $1,100,800, and (2) 310,387 shares of AbbVie restricted stock with a value of $16,391,537 and 52,667 Abbott restricted shares with a value of $2,018,726. (cid:127) Ms. Schumacher would have vested in (1) 226,805 unvested AbbVie stock options with a value of $4,352,047 and 78,038 unvested Abbott stock options with a value of $925,168, and (2) 173,531 shares of AbbVie restricted stock with a value of $9,164,172 and 43,099 Abbott restricted shares with a value of $1,651,985. (cid:127) Mr. Chase would have vested in (1) 135,229 unvested AbbVie stock options with a value of $2,450,221 and 19,399 unvested Abbott stock options with a value of $248,534, and (2) 112,867 shares of AbbVie restricted stock with a value of $5,960,506 and 11,766 Abbott restricted shares with a value of $450,991. (cid:127) Mr. Alban would have vested in (1) 163,163 unvested AbbVie stock options with a value of $3,153,753 and 47,333 unvested Abbott stock options with a value of $605,557, and (2) 120,854 shares of AbbVie restricted stock with a value of $6,382,300 and 28,633 Abbott restricted shares with a value of $1,097,503. (cid:127) Mr. Richmond would have vested in (1) 87,040 unvested AbbVie stock options with a value of $1,473,587, (2) 72,210 shares of AbbVie restricted stock with a value of $3,813,410, and (3) 14,833 AbbVie restricted stock units with a value of $783,331 and 14,833 Abbott restricted stock units with a value of $568,549. The value of stock options shown is based on the excess of the closing price of one share of common stock on December 31, 2013 over the exercise price of such options, multiplied by the number of unvested stock options held by the named executive officer. The value of restricted stock shown is determined by multiplying the number of restricted shares that would vest as of December 31, 2013 and the closing price of one share of common stock on December 31, 2013. The value of restricted stock units shown is determined by multiplying the number of restricted stock units that would vest as of December 31, 2013 and the closing price of one share of common stock on December 31, 2013. RATIFICATION OF ERNST & YOUNG LLP AS ABBVIE’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (ITEM 2 ON PROXY CARD) AbbVie’s audit committee charter provides that the audit committee shall appoint annually AbbVie’s independent registered public accounting firm. In October 2013, the audit committee appointed Ernst & Young LLP to act as AbbVie’s independent registered public accounting firm for 2014. Although the audit committee has sole authority to appoint the independent registered public accounting firm, it would like to know the opinion of the stockholders regarding its appointment of Ernst & Young LLP for 2014. For this reason, stockholders are being asked to ratify this appointment. If the stockholders do not ratify the appointment of Ernst & Young LLP for 2014, the audit committee will take that fact into consideration, but may, nevertheless, continue to retain Ernst & Young LLP. Representatives of Ernst & Young LLP are expected to be present at the Annual Meeting and will be given the opportunity to make a statement if they desire to do so. They will also be available to respond to appropriate questions. The board of directors recommends a vote FOR ratification of the appointment of Ernst & Young LLP as AbbVie’s independent registered public accounting firm for 2014. 43 AUDIT INFORMATION Dismissal of Deloitte & Touche LLP The combined balance sheet of AbbVie as of December 31, 2012 and the related combined financial statements for each of the two years in the period ended December 31, 2012 were audited by Deloitte & Touche LLP (‘‘Deloitte’’). On December 14, 2012, AbbVie’s audit committee approved the dismissal of Deloitte as AbbVie’s independent registered public accountant, effective as of the date of Deloitte’s completion of the audit services for the fiscal year ending December 31, 2012 and the filing of the company’s 2012 Annual Report on Securities and Exchange Commission Form 10-K. Deloitte completed the audit services for such fiscal year and the filing of AbbVie’s 2012 Annual Report was completed on March 15, 2013, and, therefore, the effective date of Deloitte’s dismissal was March 15, 2013. The report of Deloitte on the combined financial statements of AbbVie for the fiscal years ended December 31, 2012 and 2011 did not contain any adverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principle, and included an explanatory paragraph relating to the preparation of the company’s financial statements from the separate financial statements and accounting records of Abbott. As it relates to the fiscal years ended December 31, 2012 and 2011, and through March 15, 2013, the effective date of Deloitte’s dismissal, (i) there were no disagreements (as that term is defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) between the company and Deloitte on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of Deloitte would have caused Deloitte to make reference to the subject matter of the disagreement in connection with its report, and (ii) there were no ‘‘reportable events’’ (as that term is defined in Item 304(a)(1)(v) of Regulation S-K). In connection with filing a Current Report on Securities and Exchange Commission Form 8-K/A, the company provided Deloitte with a copy of the disclosures in such Current Report and requested that Deloitte provide the company with a letter addressed to the Securities and Exchange Commission stating whether or not Deloitte agreed with the disclosures therein. A copy of Deloitte’s letter, dated March 19, 2013, is attached as Exhibit 16.1 to AbbVie’s Current Report on Securities and Exchange Commission Form 8-K/A filed on March 19, 2013. Appointment of Independent Registered Public Accounting Firm Ernst & Young LLP On December 14, 2012, AbbVie’s audit committee approved the appointment of Ernst & Young LLP as the company’s independent registered public accounting firm to perform independent audit services beginning with the fiscal year ending December 31, 2013. On October 9, 2013, AbbVie’s audit committee approved the appointment of Ernst & Young LLP to perform independent audit services for the fiscal year ending December 31, 2014. Through December 14, 2012, neither the company, nor anyone on its behalf, consulted Ernst & Young regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered with respect to the combined financial statements of Abbott’s research- based pharmaceuticals business or the consolidated financial statements of the company, in any case where a written report or oral advice was provided to the company by Ernst & Young that Ernst & Young concluded was an important factor considered by the company in reaching a decision as to any accounting, auditing or financial reporting issue; or (ii) any matter that was the subject of a disagreement (as that term is defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) or a ‘‘reportable event’’ (as that term is defined in Item 304(a)(1)(v) of Regulation S-K). 44 Audit Fees and Non-Audit Fees The following table presents fees for professional audit services rendered to AbbVie by Ernst & Young LLP for the year ended December 31, 2013, and fees billed for other services rendered to AbbVie by Ernst & Young LLP for that period. The table also presents fees for professional audit services rendered to Abbott by Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu, Limited, and their respective affiliates (the ‘‘Deloitte Entities’’) for the year ended December 31, 2012, and fees billed for other services rendered to Abbott by the Deloitte Entities, for that period. Prior to the separation of AbbVie from Abbott, Abbott paid any audit, audit-related, tax and other fees of the Deloitte Entities. 2013 (millions) 2012 (millions) Audit fees:(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Audit related fees:(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax fees:(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . All other fees:(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8.1 0.0 4.9 0.8 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13.8 $18.0 9.1 0.2 1.2 $28.5 (1) In 2013, Ernst & Young billed or will bill AbbVie for professional services rendered for the audit of AbbVie’s annual financial statements, the audits of AbbVie’s internal control over financial reporting, statutory and subsidiary audits, the review of documents filed with the Securities and Exchange Commission, and certain accounting consultations in connection with the audits. In 2012, the Deloitte Entities billed Abbott for professional services rendered for the audit of Abbott’s annual financial statements, the audits of Abbott’s internal control over financial reporting, statutory and subsidiary audits, the review of documents filed with the Securities and Exchange Commission, and certain accounting consultations in connection with the audits. (2) Audit related fees include: accounting consultations and audits in connection with proposed acquisitions and divestitures, audits of certain employee benefit plans’ financial statements, and, in 2012, audits and audit related services in connection with the separation of AbbVie from Abbott, including associated filings with the Securities and Exchange Commission. (3) Tax fees consist principally of professional services for tax compliance and tax planning and advice including assistance with tax audits and appeals, and tax advice related to mergers and acquisitions. In 2013, tax fees also include expatriate tax return services provided by Ernst & Young. (4) In 2013, all other fees represent Independent Review Organization services provided by Ernst & Young. In 2012, all other fees primarily represent consulting services for an information technology project engagement Abbott entered with a firm before that firm’s acquisition by a Deloitte Entity in 2011. Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of the Independent Registered Public Accounting Firm The audit committee has established policies and procedures to pre-approve all audit and permissible non-audit services performed by the independent registered public accounting firm and its related affiliates. Prior to engagement of the independent registered public accounting firm for the next year’s audit, management will submit a schedule of all proposed services expected to be rendered during that year for each of four categories of services to the audit committee for approval. 45 Prior to engagement, the audit committee pre-approves these services by category of service. The fees are budgeted and the audit committee requires the independent registered public accounting firm and management to report actual fees versus the budget periodically by category of service. During the year, circumstances may arise when it may become necessary to engage the independent registered public accounting firm for additional services not contemplated in the original pre-approval. In those instances, the audit committee requires specific pre-approval before engaging the independent registered public accounting firm. The audit committee may delegate pre-approval authority to one or more of its members. The member to whom such authority is delegated must report any pre-approval decisions to the audit committee at its next scheduled meeting. AUDIT COMMITTEE REPORT Management is responsible for the preparation and integrity of AbbVie’s consolidated financial statements. The independent registered public accounting firm is responsible for performing an audit of the consolidated financial statements and expressing an opinion on the conformity of those financial statements with accounting principles generally accepted in the United States of America. The audit committee reviews these processes on behalf of the board of directors. In this context, the audit committee has reviewed and discussed the audited financial statements contained in the 2013 Annual Report on Form 10-K with AbbVie’s management and its independent registered public accounting firm. The audit committee has discussed with the independent registered public accounting firm the matters required to be discussed pursuant to Auditing Standards Section AU 380 (Communication with Audit Committees), as amended, as adopted by the Public Company Accounting Oversight Board. The audit committee has received the written disclosures and the letter from the independent registered public accounting firm required by the applicable requirements of the Public Company Accounting Oversight Board regarding the independent registered public accounting firm’s communications with the audit committee concerning independence, and has discussed with the independent registered public accounting firm the firm’s independence. The audit committee has also considered whether the provision of non-audit services is compatible with maintaining the independence of the independent registered public accounting firm. Based on the review and discussions referred to above, the audit committee recommended to the board of directors that the audited financial statements be included in AbbVie’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission. Audit Committee R. Austin, Chair, W. Burnside, E. Rapp, and F. Waddell SAY ON PAY—AN ADVISORY VOTE ON THE APPROVAL OF EXECUTIVE COMPENSATION (ITEM 3 ON PROXY CARD) Stockholders are being asked to approve the compensation of AbbVie’s named executive officers, as disclosed under Securities and Exchange Commission rules, including the Compensation Discussion and Analysis, the compensation tables and related material included in this proxy statement. The independent compensation committee of the board of directors, with the counsel of its independent compensation consultant, has thoroughly examined AbbVie’s programs, the company’s performance related to our industry and high-performing peer group, and market factors. The committee has determined that the specific pay decisions for the named executive officers are appropriate given the company’s performance, the executives’ contributions, and our stockholders’ interests. 46 While this vote is advisory and non-binding, the board of directors and the compensation committee value the opinion of the stockholders and will review the voting results and take them into account when future compensation decisions are made. Accordingly, the board of directors recommends that you vote FOR the approval of the named executive officers’ compensation. PROCEDURES FOR APPROVAL OF RELATED PERSON TRANSACTIONS It is AbbVie’s policy that the nominations and governance committee review, approve, ratify or disapprove of all transactions in which AbbVie participates and in which any related person has a direct or indirect material interest if such transaction involves or is expected to involve payments of $120,000 or more in the aggregate per fiscal year. Related person transactions requiring review by the nominations and governance committee pursuant to this policy are identified in: (cid:127) questionnaires annually distributed to AbbVie’s directors and executive officers; (cid:127) certifications submitted annually by AbbVie executive officers related to their compliance with AbbVie’s Code of Business Conduct; or (cid:127) communications made directly by the related person to the chief financial officer or general counsel. In determining whether to approve or ratify a related person transaction, the nominations and governance committee will consider the following items, among others: (cid:127) the related person’s relationship to AbbVie and interest in the transaction; (cid:127) the material facts of the transaction, including the aggregate value of such transaction or, in the case of indebtedness, the amount of principal involved; (cid:127) the benefits to AbbVie of the transaction; (cid:127) if applicable, the availability of other sources of comparable products or services; (cid:127) an assessment of whether the transaction is on terms that are comparable to the terms available to an unrelated third party or to employees generally; (cid:127) whether a transaction has the potential to impair director independence; and (cid:127) whether the transaction constitutes a conflict of interest. This process is included in the nominations and governance committee’s written charter, which is available on the corporate governance section of AbbVie’s investor relations website at www.abbvieinvestor.com. ADDITIONAL INFORMATION Section 16(a) Beneficial Ownership Reporting Compliance AbbVie believes that during 2013 its executive officers and directors timely complied with all filing requirements under Section 16(a) of the Securities Exchange Act of 1934. Performance-Based Compensation Arrangements The Performance Incentive Plan and the Incentive Stock Program, which are described above, are intended to comply with Internal Revenue Code Section 162(m) to ensure deductibility of performance- based compensation. 47 The compensation committee reserves the flexibility to take actions that may be based on considerations in addition to tax deductibility. The committee believes that stockholder interests are best served by not restricting the committee’s discretion and flexibility in crafting compensation programs, even if such programs may result in certain non-deductible compensation expenses. Accordingly, the committee may from time to time approve components of compensation for certain executive officers that are not deductible. While the compensation committee does not anticipate there would ever be circumstances where a restatement of earnings upon which any incentive plan award decisions were based would occur, the committee, in evaluating such circumstances, has discretion to take all actions necessary to protect the interests of stockholders up to and including actions to recover such incentive awards. Exclusive Forum AbbVie is incorporated in the state of Delaware and Delaware law governs the relationship among its directors, officers, and stockholders (also known as the internal affairs doctrine). To provide for the orderly, efficient and cost-effective resolution of Delaware-law issues affecting AbbVie, the company’s Certificate of Incorporation provides that unless the board of directors otherwise determines, Delaware courts are the exclusive forum for cases involving the internal affairs doctrine, derivative actions brought on behalf of the company, claims for breach of fiduciary duty, and other matters concerning Delaware statutory and common law. The provision does not apply to any other cases brought against AbbVie. Other Matters The board of directors knows of no other business to be transacted at the 2014 Annual Meeting of Stockholders, but if any other matters do come before the meeting, it is the intention of the persons named in the accompanying proxy to vote or act with respect to them in accordance with their best judgment. Date for Receipt of Stockholder Proposals for the 2015 Annual Meeting Proxy Statement Stockholder proposals for presentation at the 2015 Annual Meeting must be received by AbbVie no later than November 15, 2014 and must otherwise comply with the applicable requirements of the Securities and Exchange Commission to be considered for inclusion in the proxy statement and proxy for the 2015 meeting. Procedure for Recommendation and Nomination of Directors and Transaction of Business at Annual Meeting A stockholder may recommend persons as potential nominees for director by submitting the names of such persons in writing to the secretary of AbbVie. Recommendations must be accompanied by certain information about both the nominee and the stockholder making the nomination, as set forth in AbbVie’s Amended and Restated By-Laws. A nominee who is recommended by a stockholder following these procedures will receive the same consideration as other comparably qualified nominees. A stockholder entitled to vote for the election of directors at an Annual Meeting and who is a stockholder of record on: (cid:127) the record date for that Annual Meeting, (cid:127) the date of this proxy statement, and (cid:127) the date of the Annual Meeting, 48 may nominate persons for director, or make proposals of other business to be brought before the Annual Meeting, by providing proper timely written notice to the secretary of AbbVie. That notice must include certain information required by Article II of AbbVie’s Amended and Restated By-Laws, including information about the stockholder, any beneficial owner on whose behalf the nomination or proposal is being made, their respective affiliates or associates or others acting on concert with them, and any proposed director nominee. For each matter the stockholder proposes to bring before the Annual Meeting, the notice must also include a brief description of the business to be discussed, the reasons for conducting such business at the Annual Meeting, any material interest of the stockholder in such business and certain other information specified in the By-Laws. In addition, in the case of a director nomination, the notice must include a completed and signed questionnaire, representation and agreement of the nominee addressing matters specified in the By-Laws. To be timely, written notice either to directly nominate persons for director or to bring business properly before the Annual Meeting must be received at AbbVie’s principal executive offices not less than ninety days and not more than one hundred twenty days prior to the anniversary date of the preceding Annual Meeting. If the Annual Meeting is called for a date that is more than thirty days before or sixty days after such anniversary date, notice by the stockholder must be received not less than ninety days and not more than one hundred twenty days prior to the date of such Annual Meeting and not later than the close of business on the later of ninety days prior to the date of such Annual Meeting, or, if the first public announcement of the date of such Annual Meeting is less than one hundred days prior to the date of such Annual Meeting, the tenth day following the day on which public announcement of the date of such meeting is first made by AbbVie. To be timely for the 2015 Annual Meeting, this written notice must be received by AbbVie no later than February 5, 2015. In addition, the notice must be updated and supplemented, if necessary, so that the information provided or required to be provided is true and correct as of the record date for the Annual Meeting and as of the date that is ten business days prior to the meeting. Any such update or supplement must be delivered to the secretary of AbbVie at AbbVie’s principal executive offices not more than five business days after the record date for the Annual Meeting, and not less than eight business days before the date of the Annual Meeting in the case of any update or supplement required to be made as of ten business days prior to the Annual Meeting. Householding of Proxy Materials The Securities and Exchange Commission has adopted rules that permit companies and intermediaries (such as brokers or banks) to satisfy the delivery requirements for proxy statements with respect to two or more security holders sharing the same address by delivering a single Notice or proxy statement addressed to those security holders. This process, which is commonly referred to as ‘‘householding,’’ potentially provides extra convenience for security holders and cost savings for companies. Several brokers and banks with accountholders who are AbbVie stockholders will be ‘‘householding’’ our proxy materials. As indicated in the notice provided by these brokers to AbbVie stockholders, a single proxy statement will be delivered to multiple stockholders sharing an address unless contrary instructions have been received from an affected stockholder. Once you have received notice from your broker that it will be ‘‘householding’’ communications to your address, ‘‘householding’’ will continue until you are notified otherwise or until you revoke your consent. If, at any time, you no longer wish to participate in ‘‘householding’’ and you prefer to receive a separate proxy statement, please notify your broker or contact Broadridge Financial Solutions 1-800-542-1061, email: sendmaterials@proxyvote.com, or write us at Investor Relations, AbbVie Inc., 1 North Waukegan Road, North Chicago, Illinois 60064. Stockholders who currently receive multiple copies of the proxy 49 statement at their address and would like to request ‘‘householding’’ of their communications should contact their broker or bank. General It is important that proxies be returned promptly. Stockholders are urged to vote, regardless of the number of shares of AbbVie common stock owned. Stockholders may vote by telephone, the Internet, or by mail if a printed version of the proxy card was received or requested. Stockholders who vote by telephone or the Internet do not need to return a proxy card. The Annual Meeting will be held at the Rosewood, 2825 Sand Hill Road, Menlo Park, California 94025. Admission to the meeting will be by admission card only. A stockholder planning to attend the meeting should promptly complete and return the reservation form. Reservation forms must be received before May 2, 2014. An admission card admits only one person. A stockholder may request two admission cards, but a guest must be accompanied by a stockholder. By order of the board of directors. LAURA J. SCHUMACHER SECRETARY 50 13NOV201221365766 AbbVie Inc. 1 North Waukegan Road North Chicago, Illinois 60064 U.S.A. Notice of Annual Meeting of Stockholders and Proxy Statement Meeting Date May 9, 2014 YOUR VOTE IS IMPORTANT! Please sign and promptly return your proxy in the enclosed envelope or vote your shares by telephone or using the Internet. Reservation Form for Annual Meeting I am a stockholder of AbbVie Inc. and I plan to attend the Annual Meeting to be held at the Rosewood, 2825 Sand Hill Road, Menlo Park, California 94025 at 9:00 a.m. on May 9, 2014. Please send me an admission card for each of the following persons. Name Address City State Zip Code Name Address City State Zip Code Phone Number ( ) Phone Number ( ) If you plan to attend the meeting, please complete the Reservation Form and send it to AbbVie Inc., Annual Meeting Ticket Requests, AP34, 1 North Waukegan Road, North Chicago, Illinois 60064. Due to space limitations, Reservation Forms must be received before May 2, 2014. An admission card, along with a form of photo identification, admits one person. A stockholder may request two admission cards, but a guest must be accompanied by a stockholder. To prevent a delay in the receipt of your admission card, do not return this form with your proxy card or mail it in the enclosed business envelope. Printed on Recyclable Paper Dividend Reinvestment Plan The AbbVie Dividend Reinvestment Plan offers registered stockholders an opportunity to purchase additional shares, commission-free, through automatic dividend reinvestment and/or optional cash investments. Interested persons may contact the transfer agent. Transfer Agent Computershare 250 Royall Street Canton, MA 02021 877.881.5970 www.computershare.com stockholder information AbbVie Inc. Corporate Headquarters 1 North Waukegan Road North Chicago, IL 60064 847.932.7900 abbvie.com Investor Relations Dept. ZZ05, AP34 Corporate Secretary Dept. V364, AP34 Stock Listing The ticker for AbbVie’s common stock is ABBV. The principal market for AbbVie common stock is the NYSE. AbbVie common stock is also listed on the Chicago Stock Exchange, the NYSE Euronext Paris, and the SIX Swiss Exchange. Annual Meeting The Annual Meeting will be held on Friday, May 9, 2014, at 9 a.m. at the Rosewood, 2825 Sand Hill Road, Menlo Park, CA 94025. 9893_AbbVie.indd 2 2/4/14 8:38 PM AbbVie 1 North Waukegan Road North Chicago, IL 60064 U.S.A. abbvie.com Copyright© 2014 AbbVie. All rights reserved. 9893_AbbVie.indd 1 2/4/14 8:38 PM

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