AbbVie
Annual Report 2018

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2018 Annual Report on Form 10-K 2019 Notice of Annual Meeting & Proxy Statement AbbVie 1 North Waukegan Road North Chicago, IL 60064 U.S.A. abbvie.com Copyright© 2019 AbbVie. All rights reserved. 2 0 1 8 A n n u a l R e p o r t o n F o r m 1 0 - K 2 0 1 9 N o t i c e o f A n n u a l M e e t i n g & P r o x y S t a t e m e n t Laura J. Schumacher Vice Chairman, External Affairs and Chief Legal Officer We live a culture of giving back. In 2018, we pledged an additional $350 million in charitable contributions to nonprofits based in the United States supporting long-term community strength. We focused our contributions in three areas that align with our priorities, and on nonprofits that are making a real impact in communities in need. Helping families thrive Supporting disaster relief Strengthening K-12 education • Ronald McDonald House Charities will add 600 new guest sleeping rooms and family-centered spaces in 32 locations • Habitat for Humanity expects to directly assist 13,000 hurricane-affected residents in Puerto Rico • Communities In Schools will increase reach to 143 schools and serve 100,000 more at-risk kids • St. Jude Children’s Research Hospital will serve 8,500 patients each year in the new Family Commons space and add 6.5 new acres of green space • Family Reach will expand and accelerate its programs and reach 25 new hospitals in 23 states • Direct Relief will support 60 community • City Year will expand in Chicago to reach health centers in Puerto Rico schools that serve 18,000 students • University of Chicago Education Lab will generate evidence to guide policy in Chicago and cities nationwide 1439_Cover.indd 1 3/18/19 5:46 PM #AbbVieGivesBack 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 also is listed on the Chicago Stock Exchange. Annual Meeting The Annual Meeting will be held on Friday, May 3, 2019, at 9 a.m. at the Fairmont Chicago, Millennium Park, 200 North Columbus Drive, Chicago, IL 60601. 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 EQ Shareowner Services P.O. Box 64874 St Paul, MN 55164-0874 www.shareowneronline.com 877.881.5970 651.450.4064 About AbbVie AbbVie is a global, research and development-based biopharmaceutical company committed to developing innovative advanced therapies for some of the world’s most complex and critical conditions. The company’s mission is to use its expertise, dedicated people and unique approach to innovation to markedly improve treatments across four primary therapeutic areas: immunology, oncology, virology and neuroscience. In more than 75 countries, AbbVie employees are working every day to advance health solutions for people around the world. For more information about AbbVie, please visit us at www.abbvie.com. AbbVie's Commitment to AbbVie’s commitment to corporate responsibility Corporate Responsibility We strive to make a remarkable impact on patients and drive sustainable growth by discovering and delivering a consistent stream of innovative medicines that address serious health problems. Creating real health improvement is not only our mission, but also how we stay competitive. To be a leading health care innovator, we must attract, retain and support a diverse workforce and invest in their efforts to develop medicines that bring value for patients. We recognize that health is of fundamental importance to all people. To participate over the long term in the provision of health care, we must earn and maintain the trust of patients, health care providers, regulators, policymakers, and the public. For any business to be successful, it must operate in strong, resilient and growing markets. We have the opportunity to use our unique resources to support well-being, resilience and growth in our current markets, and help lay the foundation for broader economic development. Commitment: Use our expertise to improve health Commitment: Steward our ethical and sustainable business Commitment: Support long-term community strength • Develop a diverse, inclusive workforce • Maintain high standards of ethics, quality • Advance public health and patient • Make innovative medicines that offer significant health benefit and safety well-being • Protect human rights and workplace safety • Support employee vitality • Address the health needs of the • Prioritize environmental sustainability • Support community resilience and underserved long-term economic growth 2018 Highlights Using our expertise to address the health needs of the underserved 39,945 pro-bono hours given by AbbVie scientists to research neglected diseases, malaria, and tuberculosis 90 + low- and middle-income countries covered by a royalty-free license to the Medicines Patent Pool for our pan-genotypic HCV medicine Developing a diverse and inclusive culture 47% of management positions are held by women globally 31% of our US workforce is made up of historically underrepresented populations Supporting long-term community strength Advancing sustainability and environmental stewardship 20% of our electricity was purchased from renewable sources in 2018 2018 was a significant year in our efforts to build long-term community strength. In addition to our ongoing support for education and community programs, independent medical and patient education, and employee vitality and volunteerism, in 2018 AbbVie made an additional $350 million in charitable contributions to support US non-profit organizations making long-term impact on community strength. For more details, please see back cover. For more on our corporate responsibility efforts, visit abbvie.com/responsibility. Printed on recycled paper 1439_Cover.indd 2 3/18/19 5:46 PM 13NOV201221365766 Dear AbbVie Shareholder, Our sixth year as AbbVie was filled with many successes and launched the next phase of our company’s evolution. Since our outset in 2013, AbbVie has been dedicated to driving a remarkable impact on patients and society by addressing some of the world’s most complex medical challenges. We have made substantial progress on this vision while simultaneously delivering consistent top-tier performance, and, in 2018, posted our fourth consecutive year of double-digit growth. Performance in 2018 was our strongest to-date across several metrics. Operational revenue grew 15 percent to $32.7 billion with nearly one quarter of our global sales generated from products launched since our inception in 2013. Together with Humira, these new products continue to advance the standard of care for patients and drove sustained long-term growth. On the strength of our business performance and amid continued healthy investment for the future, we raised our earnings forecast more than 20 percent over the course of 2018. We delivered adjusted earnings per share growth of 41 percent to $7.91, the highest level of growth in our peer group and the best performance in AbbVie’s history. We have demonstrated our strong commitment to our shareholders with quarterly dividend growth of 50 percent in 2018 and total growth of 168 percent since inception. We remain committed to investing in our business to sustain long-term growth and rewarding our shareholders with a strong return on capital. We continue to invest in our key therapeutic areas of Immunology, Oncology and Neuroscience as we strive to bring innovative new treatments to patients. Since our inception, we have launched more than 15 new therapies or indications across our key therapeutic areas. Over the coming months, we will see continued advancement of our mid- and late-stage pipeline as additional data from our clinical programs becomes available. As is true in our industry, bringing innovative new medicines that solve some of the most critical health conditions is a challenging and risky goal. However, when we are successful, we achieve our mission of changing people’s lives. Unfortunately, in 2018 we also received disappointing results from the clinical program for Rova-T in small cell lung cancer, one of the hardest-to-treat forms of cancer. Our research continues to focus on the most serious conditions with significant unmet medical need and although not all research endeavors will ultimately be successful, we remain relentless in our pursuit of leading-edge science to provide new hope to patients around the world. As expected, in 2018, the launch of biosimilar competition for Humira began in many areas around the world. We remain confident in our robust product portfolio and promising late-stage pipeline to continue to deliver growth. For example, in 2018, we launched Orilissa, the first new treatment for women suffering from endometriosis in more than a decade. In 2019, we expect to receive regulatory approval for two new Immunology therapies, risankizumab and upadacitinib, that have demonstrated superior efficacy in clinical studies and have the potential for market leadership. We remain focused on augmenting our pipeline through internal and external innovation to generate a steady cadence of new product launches well into the next decade. At AbbVie, we live a culture of giving back. That’s why, in 2018, we pledged an additional $350 million to support U.S. nonprofits creating long-term impact in communities in need, from North Chicago to Puerto Rico and other cities across America. We focused our contributions in three areas that align with our philanthropic priorities—helping families thrive, disaster relief and strengthening K-12 education—demonstrating the very best of AbbVie and our culture. AbbVie employees around the world are passionate and dedicated to driving a remarkable impact for patients through life-changing therapies. We are entering an exciting phase of AbbVie’s journey, one that will set the foundation for sustainable success and we thank you for your continued support of our company. Sincerely, 4DEC201212233206 Richard A. Gonzalez Chairman and Chief Executive Officer UNITED STATES SECURITIES AND EXCHANGE COMMISSION FORM 10-K WASHINGTON, D. C. 20549 (MARK ONE) (cid:2) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR (cid:3) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2018 Commission file number 001-35565 13NOV201221343408 AbbVie Inc. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 1 North Waukegan Road North Chicago, Illinois 60064-6400 (Address of principal executive offices) (Zip Code) Securities Registered Pursuant to Section 12(b) of the Act: Title of Each Class Common Stock, par value $0.01 per share 32-0375147 (I.R.S. employer identification number) (847) 932-7900 (Telephone number) 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:2) No (cid:3) 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:3) No (cid:2) 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:2) No (cid:3) Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes (cid:2) No (cid:3) 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:2) 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:2) Non-accelerated Filer (cid:3) Accelerated Filer (cid:3) Smaller Reporting Company (cid:3) Emerging Growth Company (cid:3) If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:3) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:3) No (cid:2) The aggregate market value of the 1,498,817,459 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, 2018), was $138,865,437,576. AbbVie has no non-voting common equity. Number of common shares outstanding as of February 8, 2019: 1,475,083,514 DOCUMENTS INCORPORATED BY REFERENCE Portions of the 2019 AbbVie Inc. Proxy Statement are incorporated by reference into Part III. The Definitive Proxy Statement will be filed on or about March 22, 2019. ABBVIE INC. FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2018 TABLE OF CONTENTS BUSINESS RISK FACTORS PART I Item 1. Item 1A. Item 1B. UNRESOLVED STAFF COMMENTS Item 2. Item 3. Item 4. PROPERTIES LEGAL PROCEEDINGS MINE SAFETY DISCLOSURES EXECUTIVE OFFICERS OF THE REGISTRANT PART II Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Item 6. Item 7. SELECTED FINANCIAL DATA MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Item 8. Item 9. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE CONTROLS AND PROCEDURES Item 9A. Item 9B. OTHER INFORMATION PART III Item 10. Item 11. Item 12. Item 13. Item 14. PART IV Item 15. Item 16. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE EXECUTIVE COMPENSATION SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE PRINCIPAL ACCOUNTING FEES AND SERVICES EXHIBITS, FINANCIAL STATEMENT SCHEDULES FORM 10-K SUMMARY SIGNATURES Page No. 1 13 24 24 24 24 25 27 29 30 49 51 105 105 108 109 109 109 110 110 111 115 116 PART I ITEM 1. BUSINESS ..................................................................................................................................................................................................................................................................................................................................................... Overview AbbVie(1) 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 in rheumatology, gastroenterology and dermatology; oncology, including blood cancers; virology, including hepatitis C virus (HCV) and human immunodeficiency virus (HIV); neurological disorders, such as Parkinson’s disease; metabolic diseases, including thyroid disease and complications associated with cystic fibrosis; pain associated with endometriosis; as well as other serious health conditions. AbbVie also has a pipeline of promising new medicines in clinical development across such important medical specialties as immunology, oncology and neuroscience, with additional targeted investment in cystic fibrosis and women’s health. AbbVie was incorporated in Delaware on April 10, 2012. On January 1, 2013, AbbVie became an independent, publicly-traded company as a result of the distribution by Abbott Laboratories (Abbott) of 100% of the outstanding common stock of AbbVie to Abbott’s shareholders. Segments AbbVie operates in one business segment—pharmaceutical products. See Note 15 to the Consolidated Financial Statements and the sales information related to HUMIRA, IMBRUVICA and MAVYRET included under Item 7, ‘‘Management’s Discussion and Analysis of Financial Condition and 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. HUMIRA. HUMIRA (adalimumab) 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 Adult Crohn’s disease (moderate to severe) Plaque psoriasis (moderate to severe chronic) Juvenile idiopathic arthritis (moderate to severe polyarticular) Ulcerative colitis (moderate to severe) Axial spondyloarthropathy Pediatric Crohn’s disease (moderate to severe) Hidradenitis Suppurativa (moderate to severe) Pediatric enthesitis-related arthritis Non-infectious intermediate, posterior and panuveitis 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 North America, European Union European Union North America, European Union North America, European Union European Union North America, European Union HUMIRA is also approved in Japan for the treatment of intestinal Beh¸cet’s disease. (1) As used throughout the text of this report on Form 10-K, the terms ‘‘AbbVie’’ or ‘‘the company’’ refer to AbbVie Inc., a Delaware corporation, or AbbVie Inc. and its consolidated subsidiaries, as the context requires. 1 2018 Form 10-K 13NOV201221352027 1 HUMIRA is sold in numerous other markets worldwide, including Japan, China, Brazil and Australia, and accounted for approximately 61% of AbbVie’s total net revenues in 2018. Oncology products. AbbVie’s oncology products target some of the most complex and difficult-to-treat cancers. These products are: IMBRUVICA. IMBRUVICA (ibrutinib) is an oral, once-daily therapy that inhibits a protein called Bruton’s tyrosine kinase (BTK). IMBRUVICA was one of the first medicines to receive a United States Food and Drug Administration (FDA) approval after being granted a Breakthrough Therapy Designation and is one of the few therapies to receive four separate designations. IMBRUVICA currently is approved for the treatment of adult patients with: • Chronic lymphocytic leukemia (CLL)/Small lymphocytic lymphoma (SLL) and CLL/SLL with 17p deletion; • Mantle cell lymphoma (MCL) who have received at least one prior therapy*; • Waldenstr¨om’s macroglobulinemia (WM); • Marginal zone lymphoma (MZL) who require systemic therapy and have received at least one prior anti-CD20-based therapy*; and • Chronic graft versus host disease (cGVHD) after failure of one or more lines of systemic therapy. * Accelerated approval was granted for this indication based on overall response rate. Continued approval for this indication may be contingent upon verification of clinical benefit in confirmatory trials. VENCLEXTA. VENCLEXTA (venetoclax) is a BCL-2 inhibitor used to treat adults with CLL or SLL, with or without 17p deletion, who have received at least one prior treatment. In addition, VENCLEXTA is used in combination with azacitidine, or decitabine, or low-dose cytarabine to treat adults with newly-diagnosed acute myeloid leukemia (AML) who are 75 years of age or older or have other medical conditions that prevent the use of standard chemotherapy. Virology Products. AbbVie’s virology products address unmet needs for patients living with HCV and HIV. HCV products. AbbVie’s HCV products are: MAVYRET/MAVIRET. MAVYRET (glecaprevir/pibrentasvir) is approved in the United States and European Union (MAVIRET) for the treatment of patients with chronic HCV genotype 1-6 infection without cirrhosis and with compensated cirrhosis (Child-Pugh A). It is also indicated for the treatment of adult patients with HCV genotype 1 infection, who previously have been treated with a regimen containing an HCV NS5A inhibitor or an NS3/4A protease inhibitor, but not both. It is an 8-week, pan-genotypic treatment for patients without cirrhosis and who are new to treatment. VIEKIRA PAK AND TECHNIVIE. VIEKIRA PAK (ombitasvir, paritaprevir and ritonavir tablets; dasabuvir tablets) is an all-oral, short-course, interferon-free therapy, with or without ribavirin, for the treatment of adult patients with genotype 1 chronic HCV, including those with compensated cirrhosis. In Europe, VIEKIRA PAK is marketed as VIEKIRAX + EXVIERA and is approved for use in patients with genotype 1 and genotype 4 HCV. AbbVie’s TECHNIVIE (ombitasvir, paritaprevir and ritonavir) is FDA-approved for use in combination with ribavirin for the treatment of adults with genotype 4 HCV infection in the United States. 2 13NOV201221352027 2018 Form 10-K 2 Additional Virology products. AbbVie’s additional virology products include: SYNAGIS. SYNAGIS (palivizumab) is a product marketed by AbbVie outside of the United States that protects at-risk infants from severe respiratory disease caused by respiratory syncytial virus (RSV). KALETRA. KALETRA (lopinavir/ritonavir), which is 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 as a treatment that maintains viral suppression 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. Metabolics/Hormones products. Metabolic and hormone products target a number of conditions, including testosterone deficiency due to certain underlying conditions, exocrine pancreatic insufficiency and hypothyroidism. These products include: CREON. CREON (pancrelipase) is a pancreatic enzyme therapy for exocrine pancreatic insufficiency, a condition that occurs in patients with cystic fibrosis, chronic pancreatitis and several other conditions. Synthroid. hypothyroidism. Synthroid (levothyroxine sodium tablets, USP) is used in the treatment of AndroGel. AndroGel (testosterone gel) is a testosterone replacement therapy for males diagnosed with symptomatic low testosterone due to certain underlying conditions. AbbVie has the rights to sell AndroGel, CREON and Synthroid only in the United States. Endocrinology products. Lupron (leuprolide acetate), which is 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. Other products. AbbVie’s other products include: ORILISSA. ORILISSA (elagolix) is the first and only orally-administered, nonpeptide small molecule gonadotropin-releasing hormone (GnRH) antagonist specifically developed for women with moderate to severe endometriosis pain. The FDA approved ORILISSA under priority review. It represents the first FDA-approved oral treatment for the management of moderate to severe pain associated with endometriosis in over a decade. ORILISSA inhibits endogenous GnRH signaling by binding competitively to GnRH receptors in the pituitary gland. Administration results in dose-dependent suppression of luteinizing hormone and follicle-stimulating hormone, leading to decreased blood concentrations of ovarian sex hormones, estradiol and progesterone. Duopa and Duodopa (carbidopa and levodopa). AbbVie’s levodopa-carbidopa intestinal gel for the treatment of advanced Parkinson’s disease is marketed as Duopa in the United States and as Duodopa outside of the United States. Sevoflurane. Sevoflurane (sold under the trademarks Ultane and Sevorane) is an anesthesia product that AbbVie sells worldwide for human use. 3 2018 Form 10-K 13NOV201221352027 3 Marketing, Sales and Distribution Capabilities AbbVie utilizes a combination of dedicated commercial resources, regional commercial resources and distributorships to market, sell and distribute its products worldwide. 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, payers, 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. Although AbbVie’s business does not have significant seasonality, AbbVie’s product revenues may be affected by end customer and retail buying patterns, fluctuations in wholesaler inventory levels and other factors. In the United States, AbbVie distributes pharmaceutical products principally through independent wholesale distributors, with some sales directly to pharmacies and patients. In 2018, 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 accounted for greater than 42% of AbbVie’s 2018 gross revenues in the United States. Outside the United States, products are sold primarily to customers or through distributors, depending on the market served. These wholesalers purchase product from AbbVie under standard terms and conditions of sale. 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. Orders are generally filled on a current basis and order backlog is not material to AbbVie’s business. 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 anti-TNF products and other competitive products intended to treat a number of disease states and AbbVie’s virology products compete with other available HCV treatment options. 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. New products or treatments brought to market by AbbVie’s competitors could cause revenues for AbbVie’s products to decrease due to price reductions and sales volume decreases. 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 treatment of many diseases, including some for which therapies were unavailable or inadequate. The cost of developing and producing biologic therapies is typically dramatically higher than for conventional (small molecule) medications, and many biologic medications are used for ongoing treatment of chronic diseases, such as 4 13NOV201221352027 2018 Form 10-K 4 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. HUMIRA is now facing direct biosimilar competition in Europe and other countries, which represent approximately 75% of AbbVie’s international HUMIRA business or approximately 25% of total global HUMIRA revenues. AbbVie will continue to face competitive pressure from these biologics and from orally administered products. In the United States, the FDA regulates biologics under the Federal Food, Drug and Cosmetic Act, the Public Health Service Act and implementing regulations. The enactment of federal health care reform legislation in March 2010 provided a pathway for approval of biosimilars under the Public Health Service Act, but the approval process for, and science behind, biosimilars is more complex than the approval process for, and science behind, generic or other follow-on versions of small molecule products. 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 may include analytical data, bioequivalence studies and studies to demonstrate chemical similarity, animal studies (including toxicity studies) and clinical studies. Furthermore, the law provides that only a biosimilar product that is determined to be ‘‘interchangeable’’ will be considered substitutable 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 law continues to be interpreted and implemented by the FDA. As a result, its ultimate impact, implementation and meaning remains subject to substantial uncertainty. Intellectual Property Protection and Regulatory Exclusivity Generally, upon approval, products may be entitled to certain kinds of exclusivity under applicable intellectual property and regulatory regimes. AbbVie’s intellectual property is materially valuable to the company, and 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 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 (NDA) 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. Biological products licensed under the Public Health Service Act are similarly eligible for terms of patent restoration. 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 vary both in the United States 5 2018 Form 10-K 13NOV201221352027 5 and in other jurisdictions. In the United States, if the FDA approves a drug product that contains an active ingredient not previously approved, the product is typically entitled to five years of non-patent regulatory exclusivity. Other products may be entitled to three years of exclusivity if approval was based on the FDA’s reliance on new clinical studies essential to approval 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 all existing exclusivities (patent and 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 scope of any exclusivity to which a 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 and scope of exclusivity to which it may become entitled until regulatory approval is obtained. However, given the length of time required to complete clinical development of a pharmaceutical product, the periods of exclusivity that might be achieved in any individual case would not be expected to exceed a minimum of three years and a maximum of 14 years. 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 may be 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 regulatory exclusivity for the innovator biologic and a potential additional 180 day-extension term for conducting pediatric studies. Biologics are also eligible for orphan drug exclusivity, as discussed above. The law also includes an extensive process for the innovator biologic and biosimilar manufacturer to litigate patent infringement, validity, and enforceability. 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 close regulatory scrutiny over, and more rigorous requirements for approval of, follow-on biosimilar products, which can reduce 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 2019 to the late 2030s, 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 expired in December 2016, and the equivalent European Union patent expired in October 2018 in the majority of European Union countries. In the United States, non-composition of matter patents covering adalimumab expire no earlier than 2022. In addition, the following patents, licenses, and trademarks are significant: those related to ibrutinib (which is sold under the trademark IMBRUVICA) and those related to glecaprevir and pibrentasvir (which are sold under the trademarks MAVYRET and MAVIRET). The United States composition of matter patent 6 13NOV201221352027 2018 Form 10-K 6 covering ibrutinib is expected to expire in 2027. The United States composition of matter patents covering glecaprevir and pibrentasvir are expected to expire in 2032. 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. Licensing and Other Arrangements In addition to its independent efforts to develop and market products, AbbVie enters into arrangements such as licensing arrangements, option-to-license arrangements, strategic alliances, co-promotion arrangements, co-development and co-marketing agreements, and joint ventures. These licensing and other arrangements typically include, among other terms and conditions, non-refundable upfront license fees, option fees and option exercise payments (if applicable), milestone payments and royalty and/or profit sharing obligations. See Note 5, ‘‘Licensing, Acquisitions and Other Arrangements—Other Licensing & Acquisitions Activity,’’ to the Consolidated Financial Statements included under Item 8, ‘‘Financial Statements and Supplementary Data.’’ Third Party Agreements AbbVie has agreements with third parties for process development, product distribution, 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. In addition, AbbVie has agreements with third parties for active pharmaceutical ingredient and product manufacturing, formulation and development services, fill, finish and packaging services, transportation 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. AbbVie is also party to certain collaborations and other arrangements, as discussed in Note 5, ‘‘Licensing, Acquisitions and Other Arrangements—Other Licensing & Acquisitions Activity,’’ to the Consolidated Financial Statements included under Item 8, ‘‘Financial Statements and Supplementary Data.’’ 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. In addition, certain medical devices and components necessary for the manufacture of AbbVie products are provided by unaffiliated third party suppliers. AbbVie has not experienced any recent significant availability problems or supply shortages that impacted fulfillment of product demand. Research and Development Activities AbbVie makes a significant investment in research and development and has numerous compounds in clinical development, including potential treatments for complex, life-threatening diseases. 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 7 2018 Form 10-K 13NOV201221352027 7 on the same compounds as a team. AbbVie also partners with third parties, such as biotechnology companies, other pharmaceutical companies and academic institutions to identify and prioritize promising new treatments that complement and enhance AbbVie’s existing portfolio. 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: • Phase 1—involves the first human tests in a small number of healthy volunteers or patients to assess safety, tolerability and potential dosing. • Phase 2—tests the drug’s efficacy against the disease in a relatively small group of patients. • Phase 3—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 an NDA, a Biological License Application (BLA) or other submission for regulatory approval to the FDA or similar government agencies outside the United States. 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 4 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. 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 submit protocols to the FDA before commencing clinical trials. Clinical trials are intended to establish the safety and efficacy of the pharmaceutical product and typically are conducted in 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 materials and activities. Also, quality control and manufacturing procedures must continue to conform to cGMP after approval, and certain changes to the manufacturing procedures and finished product must be included in the NDA or BLA and approved by the FDA prior to implementation. The FDA periodically inspects manufacturing facilities to assess compliance with cGMP, which imposes extensive procedural 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, which may require additional clinical trials, patient registries, observational data or additional work on 8 13NOV201221352027 2018 Form 10-K 8 chemistry, manufacturing and controls. 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 regulatory requirements outside the United States for approval and marketing of pharmaceutical products. 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 for each country can vary, and the time required to obtain approval may be longer or shorter than that required for FDA approval in the United States. 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 (EMA). 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 individual 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 non-Japanese 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 or Europe) 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 may be required (such as Risk Management Plans). 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 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 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 9 2018 Form 10-K 13NOV201221352027 9 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 oversight, 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 payers 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. Political and 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 pharmaceutical 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 pharmaceutical 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 (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 plus a certain percentage to account for physician administration costs, which have been reduced in the hospital outpatient setting. Medicare enters into contracts with private plans to negotiate prices for most patient-administered medicine delivered under Part D. Under the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (together, the Affordable Care Act), AbbVie pays a fee related to its pharmaceuticals sales to government programs. In addition, AbbVie provides a discount of 50% for branded prescription drugs sold to patients who fall into the Medicare Part D coverage gap, or ‘‘donut hole.’’ 10 13NOV201221352027 2018 Form 10-K 10 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 to record any transfers of value to physicians and teaching hospitals and to report this data 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 2019 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. 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. 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. Many governments are also following a similar path for biosimilar therapies. 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/biosimilar 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 11 2018 Form 10-K 13NOV201221352027 11 currency exchange rates, limitations on participation in local enterprises, expropriation, nationalization and other governmental action. 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 expenditures for pollution control in 2018 were approximately $20 million and operating expenditures were approximately $31 million. In 2019, capital expenditures for pollution control are estimated to be approximately $26 million and operating expenditures are estimated to be approximately $33 million. 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. Employees AbbVie employed approximately 30,000 persons as of January 31, 2019. 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 (SEC). 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). 12 13NOV201221352027 2018 Form 10-K 12 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, financial condition or cash flows. The risk factors generally have been separated into two groups: risks related to AbbVie’s business 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 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, results of operations, financial condition or cash flows. 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 earnings. 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 or biosimilar 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, biosimilars 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 or biosimilars. Any such proposals that are enacted into law could increase the impact 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 product and had worldwide net revenues of approximately $19.9 billion in 2018, expired in December 2016, and the equivalent European Union patent expired in the majority of European Union countries in October 2018. AbbVie’s major products could lose patent protection earlier than expected, which could adversely affect AbbVie’s future revenues and operating earnings. 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 with the 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. In addition, petitioners have filed, and may continue to file, challenges to the validity of AbbVie patents under the 2011 Leahy-Smith America Invents 13 2018 Form 10-K 13NOV201221352027 13 Act, which created inter partes review and post grant review procedures for challenging patent validity in administrative proceedings at the United States Patent and Trademark Office. 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. AbbVie normally responds to challenges by vigorously defending its patents, including by filing patent infringement lawsuits. Patent litigation, administrative proceedings 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 earnings 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 accounted for approximately 61% of AbbVie’s total net revenues in 2018. Any significant event that adversely affects HUMIRA’s revenues could have a material adverse impact on AbbVie’s results of operations and cash flows. These events could include loss of patent protection for HUMIRA, the commercialization 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 revenues 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 revenues 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. 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 14 13NOV201221352027 2018 Form 10-K 14 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 standards 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 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 of operations. 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 pharmaceutical and biotechnology companies for a portion of the products in its near-term pharmaceutical pipeline. 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, administrative proceedings 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 15 2018 Form 10-K 13NOV201221352027 15 synthetically. Failure to successfully discover, develop, manufacture and sell biologics—including HUMIRA—could adversely impact AbbVie’s business and results of operations. AbbVie’s biologic products are subject to competition from biosimilars. The Biologics Price Competition and Innovation Act creates 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 and do compete with AbbVie’s biologic products, including HUMIRA. As competitors 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 and administrative proceedings with respect to the validity and/or scope of patents relating to its biologic products. New products and technological advances by AbbVie’s competitors may negatively affect AbbVie’s results of operations. AbbVie competes with other research-based pharmaceutical and biotechnology companies that discover, manufacture, market, and sell proprietary pharmaceutical products and biologics. For example, HUMIRA competes with anti-TNF products and other competitive products intended to treat a number of disease states and AbbVie’s virology products compete with other available hepatitis C treatment options. These competitors may introduce new products or develop technological advances that compete with AbbVie’s products in therapeutic areas such as immunology, virology/liver disease, oncology 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. 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 13NOV201221352027 2018 Form 10-K 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 4 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 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, results of operations and reputation and on its ability to attract and retain customers. Consequences may also include additional costs, a decrease in market share for the product in question, lower income and exposure to other claims. Product liability losses are self-insured. 17 2018 Form 10-K 13NOV201221352027 17 AbbVie is subject to cost-containment efforts and pricing pressures that could cause a reduction in future revenues and operating earnings, and 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. 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 earnings 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. AbbVie is subject to increasing public and legislative pressure with respect to pharmaceutical pricing. 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. The potential for continuing 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 earnings. 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 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 18 13NOV201221352027 2018 Form 10-K 18 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. 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. 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. Net revenues outside of the United States make up approximately 34% of AbbVie’s total net revenues in 2018. The risks associated with AbbVie’s operations outside the United States include: • fluctuations in currency exchange rates; • changes in medical reimbursement policies and programs; • multiple legal and regulatory requirements that are subject to change and that could restrict AbbVie’s ability to manufacture, market and sell its products; • differing local product preferences and product requirements; • trade protection measures and import or export licensing requirements; • difficulty in establishing, staffing and managing operations; • differing labor regulations; • potentially negative consequences from changes in or interpretations of tax laws; • political and economic instability, including sovereign debt issues; • price and currency exchange controls, limitations on participation in local enterprises, expropriation, nationalization and other governmental action; • inflation, recession and fluctuations in interest rates; • potential deterioration in the economic position and credit quality of certain non-U.S. countries, including in Europe and Latin America; and • 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. 19 2018 Form 10-K 13NOV201221352027 19 If AbbVie does not effectively and profitably commercialize its products, AbbVie’s revenues and financial condition could be adversely affected. AbbVie must effectively and profitably commercialize its principal products by creating and meeting continued market demand; achieving market acceptance and generating product sales; ensuring that the active pharmaceutical ingredient(s) for a product and the finished product are manufactured in sufficient quantities and in compliance with requirements of the FDA and similar foreign regulatory agencies and with acceptable quality and pricing to meet commercial demand; and ensuring that the entire supply chain efficiently and consistently delivers AbbVie’s products to its customers. The commercialization of AbbVie products may not be successful due to, among other things, unexpected challenges from competitors, new safety issues or concerns being reported that may impact or narrow approved indications, the relative price of AbbVie’s product as compared to alternative treatment options and changes to a product’s label that further restrict its marketing. If the commercialization of AbbVie’s principal products is unsuccessful, AbbVie’s ability to generate revenue from product sales will be adversely affected. 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. 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 2018, three wholesale distributors (McKesson Corporation, Cardinal Health, Inc. and AmerisourceBergen 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. 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 AbbVie incurs additional indebtedness or interest rates increase, these risks could increase. In 20 13NOV201221352027 2018 Form 10-K 20 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. 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 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 software applications and complex information technology systems to operate its business. These systems are potentially vulnerable to malicious intrusion, random attack, loss of data privacy, disruption, degradation or breakdown. Data privacy or security breaches by employees or others may result in the failure of critical business operations or may cause sensitive data, including intellectual property, trade secrets or personal information belonging to AbbVie, its patients, customers or business partners, to be exposed to unauthorized persons or to the public. 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. Such adverse consequences could include loss of revenue, or the loss of critical or sensitive information from AbbVie’s or third-party providers’ databases or IT systems and could also result in legal, financial, reputational or business harm to AbbVie and potentially substantial remediation costs. Other factors can have a material adverse effect on AbbVie’s profitability and financial condition. Many other factors can affect AbbVie’s results of operations, cash flows and financial condition, including: • changes in or interpretations of laws and regulations, including changes in accounting standards, taxation requirements, product marketing application standards and environmental laws; • differences between the fair value measurement of assets and liabilities and their actual value, particularly for pension and post-employment benefits, stock-based compensation, intangibles and goodwill; and for contingent liabilities such as litigation and contingent consideration, the absence of a recorded amount, or an amount recorded at the minimum, compared to the actual amount; • 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; • changes in the creditworthiness of counterparties that transact business with or provide services to AbbVie or its employee benefit trusts; • changes in the ability of third parties that provide information technology, accounting, human resources, payroll and other outsourced services to AbbVie to meet their contractual obligations to AbbVie; and 21 2018 Form 10-K 13NOV201221352027 21 • 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 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 continue to pay a dividend in the future. An AbbVie stockholder’s percentage of ownership in AbbVie may be diluted in the future. In the future, a stockholder’s 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 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. 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: • the inability of AbbVie’s stockholders to call a special meeting; 22 13NOV201221352027 2018 Form 10-K 22 • the division of AbbVie’s board of directors into three classes of directors, with each class serving a staggered three-year term; • a provision that stockholders may only remove directors for cause; • the ability of AbbVie’s directors, and not stockholders, to fill vacancies on AbbVie’s board of directors; and • the requirement that the affirmative vote of stockholders holding at least 80% 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% 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% 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. 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. 23 2018 Form 10-K 13NOV201221352027 23 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 manufacturing facilities are in the following locations: United States Abbott Park, Illinois* Barceloneta, Puerto Rico Jayuya, Puerto Rico North Chicago, Illinois Worcester, Massachusetts* Wyandotte, Michigan* * Leased property. Outside the United States Campoverde di Aprilia, Italy Cork, Ireland Ludwigshafen, Germany Singapore* Sligo, Ireland In addition to the above, AbbVie has other manufacturing facilities worldwide. AbbVie believes its facilities are suitable and provide adequate production capacity. There are no material encumbrances on AbbVie’s owned properties. In the United States, including Puerto Rico, AbbVie has one distribution center. AbbVie also has research and development facilities in the United States located at: Abbott Park, Illinois; North Chicago, Illinois; Redwood City, California; South San Francisco, California; Sunnyvale, California; Cambridge, Massachusetts; and Worcester, Massachusetts. Outside the United States, AbbVie’s principal research and development facilities are located in Ludwigshafen, Germany. ITEM 3. LEGAL PROCEEDINGS ..................................................................................................................................................................................................................................................................................................................................................... Information pertaining to legal proceedings is provided in Note 14, ‘‘Legal Proceedings and Contingencies’’ to the 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. 24 13NOV201221352027 2018 Form 10-K 24 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, except as otherwise indicated: Name Age Position Richard A. Gonzalez Carlos Alban Laura J. Schumacher Michael E. Severino, M.D.* William J. Chase Henry O. Gosebruch* Timothy J. Richmond Azita Saleki-Gerhardt, Ph.D. Nicholas Donoghoe, M.D.* Robert A. Michael* Jeffrey R. Stewart* Brian L. Durkin* 65 56 55 53 51 46 52 55 38 48 50 58 Chairman of the Board and Chief Executive Officer Vice Chairman, Chief Commercial Officer Vice Chairman, External Affairs and Chief Legal Officer Vice Chairman and President Executive Vice President, Finance and Administration Executive Vice President and Chief Strategy Officer Executive Vice President, Chief Human Resources Officer Executive Vice President, Operations Senior Vice President, Enterprise Innovation Senior Vice President, Chief Financial Officer Senior Vice President, U.S. Commercial Operations Vice President, Controller * Dr. Severino was first appointed as a corporate officer in June 2014; Mr. Gosebruch was first appointed as a corporate officer in December 2015; Dr. Donoghoe was first appointed as a corporate officer in January 2019; Mr. Michael was first appointed as a corporate officer in December 2015; Mr. Stewart was first appointed as a corporate officer in December 2018; and Mr. Durkin was first appointed as a corporate officer in October 2018. 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. Mr. Alban is AbbVie’s Vice Chairman, Chief Commercial Officer, responsible for global commercial operations of the company, including the Pharmacyclics commercial functions. He previously served as Executive Vice President, Commercial Operations from 2013 to 2018. 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, Western Europe and Canada from 2007 to 2009, and as Vice President, European Operations from 2006 to 2007. Mr. Alban joined Abbott in 1986. Ms. Schumacher is AbbVie’s Vice Chairman, External Affairs and Chief Legal Officer, responsible for legal, ethics and compliance, corporate governance, corporate aviation, and all externally-facing functions including health economics outcomes research, government affairs, corporate responsibility, brand and communications. Prior to her current appointment in 2018, she served as AbbVie’s Executive Vice President, External Affairs, General Counsel and Corporate Secretary. Prior to AbbVie’s separation from Abbott, Ms. Schumacher served as Executive Vice President, General Counsel and Corporate Secretary from 2007 to 2012. Both at Abbott and AbbVie, Ms. Schumacher also led Licensing and Acquisition and Ventures and Early Stage Collaborations. At Abbott, Ms. Schumacher was also responsible for its Office of Ethics and Compliance. Ms. Schumacher joined Abbott in 1990. She serves on the board of General Dynamics Corporation. Dr. Severino is AbbVie’s Vice Chairman and President, responsible for research and development, human resources, operations, and the corporate strategy office. He served as Executive Vice President, 25 2018 Form 10-K 13NOV201221352027 25 Research and Development and Chief Scientific Officer from 2014 to 2018. Dr. Severino served at Amgen Inc. as Senior Vice President, Global Development and Corporate Chief Medical Officer from 2012 to 2014, as Vice President, Global Development from 2010 to 2012 and as Vice President, Therapeutic Area Head, General Medicine and Inflammation Global Clinical Development from 2007 to 2012. He joined AbbVie in 2014. Mr. Chase is AbbVie’s Executive Vice President, Finance and Administration, responsible for all financial and administrative functions of the company. He previously served as Executive Vice President, Chief Financial Officer from 2013 to 2018. 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. Gosebruch is AbbVie’s Executive Vice President and Chief Strategy Officer. He worked for more than 20 years in the Mergers & Acquisitions Group at J.P. Morgan Securities LLC, serving as Managing Director since 2007 and as Co-Head of M&A North America during 2015. Mr. Gosebruch joined AbbVie in 2015. Mr. Richmond is AbbVie’s Executive Vice President, Chief Human Resources Officer. He served as Senior Vice President, Human Resources from 2013 to 2018. Mr. Richmond 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 Executive Vice President, Operations. She served as Senior Vice President, Operations from 2013 to 2018. Dr. Saleki-Gerhardt served as Abbott’s Vice President, Pharmaceuticals Manufacturing and Supply from 2011 to 2012, and as Divisional Vice President, Quality Assurance, Global Pharmaceutical Operations from 2008 to 2011. Dr. Saleki-Gerhardt joined Abbott in 1993. She serves on the board of Entegris Inc. Dr. Donoghoe is AbbVie’s Senior Vice President, Enterprise Innovation. He previously served as a Partner at McKinsey & Company, leading the firm’s West Coast pharma and biotechnology practice. Dr. Donoghoe joined the firm in 2007 and supported multiple successful launches in therapeutic areas such as oncology, immunology, and primary care. He joined AbbVie in 2019. Mr. Michael is AbbVie’s Senior Vice President, Chief Financial Officer. Mr. Michael previously served as Vice President, Controller from March 2017 to October 2018. He became an AbbVie officer in 2015 and served as AbbVie’s Vice President, Treasurer from 2015 to 2016, as Vice President, Controller, Commercial Operations from 2013 to 2015 and Vice President, Financial Planning and Analysis from 2012 to 2013. At Abbott, Mr. Michael served as Division Controller, Nutrition Supply Chain from 2010 to 2012. Mr. Michael joined Abbott in 1993. Mr. Stewart is AbbVie’s Senior Vice President, U.S. Commercial Operations. Mr. Stewart previously served as AbbVie’s President, Commercial Operations from 2013 to 2018. Prior to AbbVie’s separation from Abbott, he served as Vice President, Abbott Proprietary Pharmaceutical Division, United States. Mr. Stewart joined Abbott in 1992. Mr. Durkin is AbbVie’s Vice President, Controller. Mr. Durkin previously served as Vice President, Internal Audit from 2016 to 2018. Prior to joining AbbVie, he served as Vice President of Finance and Division Controller for Abbott’s Vision Care business from 2009 to 2016 and Controller Pharmaceutical Research and Development from 2005 to 2009. Mr. Durkin joined Abbott in 1986. 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. 26 13NOV201221352027 2018 Form 10-K 26 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 (Symbol: ABBV). AbbVie’s common stock is also listed on the Chicago Stock Exchange and traded on various regional and electronic exchanges. Stockholders There were 48,516 stockholders of record of AbbVie common stock as of January 31, 2019. Dividends On November 2, 2018, AbbVie’s board of directors declared an increase in the quarterly cash dividend from $0.96 per share to $1.07 per share, payable on February 15, 2019 to stockholders of record as of January 15, 2019. 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. Performance Graph The following graph compares the cumulative total returns of AbbVie, the S&P 500 Index and the NYSE Arca Pharmaceuticals Index for the period from December 31, 2013 through December 31, 2018. This graph assumes $100 was invested in AbbVie common stock and each index on December 31, 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. 27 2018 Form 10-K 13NOV201221352027 27 COMPARISON OF CUMULATIVE TOTAL RETURN $250 $200 $150 $100 12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017 12/31/2018 AbbVie Inc. S&P 500 Index NYSE Arca Pharmaceutical Index 5MAR201910462832 This performance graph is furnished and shall not be deemed ‘‘filed’’ with the SEC or subject to Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any of AbbVie’s 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 4,246(1) $88.24(1) 17,119,956(1) $87.62(1) 8,546,698(1) $87.89(1) 25,670,900(1) $87.71(1) — 17,118,625 8,533,255 25,651,880 $1,500,000,050 $ 8,924 $4,250,016,122(2) $4,250,016,122(2) Period October 1, 2018 - October 31, 2018 November 1, 2018 - November 30, 2018 December 1, 2018 - December 31, 2018 Total 1. In addition to AbbVie shares repurchased on the open market under a publicly announced program, if any, these shares also included the shares purchased on the open market for the benefit of participants in the AbbVie Employee Stock Purchase Plan—4,246 in October; 1,331 in November; and 13,443 in December. These shares do not include the shares surrendered to AbbVie to satisfy minimum tax withholding obligations in connection with the vesting or exercise of stock-based awards. 2. On December 13, 2018, AbbVie’s board of directors authorized a $5.0 billion increase to the existing stock repurchase program. The company’s stock repurchase authorization permits purchases of AbbVie shares from time to time in open-market or private transactions at management’s discretion. The program has no time limit and can be discontinued at any time. 28 13NOV201221352027 2018 Form 10-K 28 ITEM 6. SELECTED FINANCIAL DATA ..................................................................................................................................................................................................................................................................................................................................................... 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) Statement of earnings data Net revenues Net earnings Basic earnings per share Diluted earnings per share Cash dividends declared per common share Weighted-average basic shares outstanding Weighted-average diluted shares outstanding Balance sheet data Total assets(a)(b) Long-term debt and lease obligations(a)(b)(c) 2018 2017 2016 2015 2014 $32,753 5,687 $ 3.67 $ 3.66 $ 3.95 1,541 1,546 $28,216 5,309 $ 3.31 $ 3.30 $ 2.63 1,596 1,603 $25,638 5,953 $ 3.65 $ 3.63 $ 2.35 1,622 1,631 $22,859 5,144 $ 3.15 $ 3.13 $ 2.10 1,625 1,637 $19,960 1,774 $ 1.11 $ 1.10 $ 1.75 1,595 1,610 $59,352 36,611 $70,786 36,968 $66,099 36,465 $53,050 31,265 $27,513 14,552 (a) (b) In May 2015, AbbVie acquired Pharmacyclics for approximately $20.8 billion, including cash consideration of $12.4 billion and equity consideration of approximately 128 million shares of AbbVie common stock valued at $8.4 billion. In connection with the acquisition, AbbVie issued $16.7 billion aggregate principal amount of unsecured senior notes, of which approximately $11.5 billion was used to finance the acquisition and approximately $5.0 billion was used to finance an accelerated share repurchase (ASR) program. In June 2016, AbbVie acquired Stemcentrx for approximately $6.4 billion, including cash consideration of $1.9 billion, equity consideration of approximately 62.4 million shares of AbbVie common stock valued at $3.9 billion and contingent consideration of approximately $620 million. In connection with the acquisition, AbbVie issued $7.8 billion aggregate principal amount of unsecured senior notes. Of the $7.7 billion net proceeds, approximately $1.9 billion was used to finance the acquisition, approximately $3.8 billion was used to finance an ASR and approximately $2.0 billion was used to repay the company’s outstanding term loan that was due to mature in November 2016. See Note 5 to the Consolidated Financial Statements for information regarding the acquisition of Stemcentrx, Note 9 for information on the senior notes and Note 12 for information on the ASR. (c) Includes current portion of both long-term debt and lease obligations. 29 2018 Form 10-K 13NOV201221352027 29 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) as of December 31, 2018 and 2017 and results of operations for each of the three years in the period ended December 31, 2018. This commentary should be read in conjunction with the consolidated financial statements and accompanying notes appearing in Item 8, ‘‘Financial Statements and Supplementary Data.’’ EXECUTIVE OVERVIEW Company Overview AbbVie is a global, research-based biopharmaceutical company formed in 2013 following separation from Abbott Laboratories (Abbott). AbbVie uses its expertise, dedicated people and unique approach to innovation to develop and market advanced therapies that address some of the world’s most complex and serious diseases. AbbVie’s products are focused on treating conditions such as chronic autoimmune diseases in rheumatology, gastroenterology and dermatology; oncology, including blood cancers; virology, including hepatitis C virus (HCV) and human immunodeficiency virus (HIV); neurological disorders, such as Parkinson’s disease; metabolic diseases, including thyroid disease and complications associated with cystic fibrosis; pain associated with endometriosis; as well as other serious health conditions. AbbVie also has a pipeline of promising new medicines in clinical development across such important medical specialties as immunology, oncology and neuroscience, with additional targeted investment in cystic fibrosis and women’s health. AbbVie’s products are generally sold worldwide directly to wholesalers, distributors, government agencies, health care facilities, specialty pharmacies and independent retailers from AbbVie-owned distribution centers and public warehouses. In the United States, AbbVie distributes pharmaceutical products principally through independent wholesale distributors, with some sales directly to pharmacies and patients. Outside the United States, products are sold primarily to customers or through distributors, depending on the market served. Certain products are co-marketed or co-promoted with other companies. AbbVie has approximately 30,000 employees. AbbVie operates in one business segment—pharmaceutical products. 2018 Financial Results AbbVie’s strategy has focused on delivering strong financial results, advancing and investing in its pipeline and returning value to shareholders while ensuring a strong, sustainable growth business over the long term. The company’s financial performance in 2018 included delivering worldwide net revenues of $32.8 billion, operating earnings of $6.4 billion, diluted earnings per share of $3.66 and cash flows from operations of $13.4 billion. Worldwide net revenues grew by 16%, or 15% on a constant currency basis, driven primarily by revenue growth related to MAVYRET, IMBRUVICA and VENCLEXTA, and the continued strength of HUMIRA. Diluted earnings per share in 2018 was $3.66 and included the following after-tax costs: (i) a Stemcentrx-related impairment charge of $4.1 billion net of the related fair value adjustment to contingent consideration liabilities; (ii) $1.1 billion of intangible asset amortization; (iii) $500 million as a result of a collaboration agreement extension with Calico Life Sciences LLC (Calico); (iv) $424 million for acquired in-process research and development (IPR&D); (v) $478 million for the change in fair value of contingent consideration liabilities excluding the fair value adjustment associated with the Stemcentrx-related impairment; (vi) litigation reserve charges of $282 million; (vii) charitable contributions of $271 million as part of AbbVie’s previously announced plan to make contributions to U.S. not-for-profit organizations in 2018; and (viii) milestone payments of $137 million. 2018 financial results were also impacted by U.S. tax reform and the timing of the new legislation’s phase in on certain subsidiaries. Additionally, financial results 30 13NOV201221352027 2018 Form 10-K 30 reflected continued added funding to support all stages of AbbVie’s emerging pipeline assets and continued investment in AbbVie’s growth brands. In November 2018, AbbVie’s board of directors declared a quarterly cash dividend of $1.07 per share of common stock payable in February 2019. This reflected an increase of approximately 11.5% over the previous quarterly dividend of $0.96 per share of common stock. 2019 Strategic Objectives AbbVie’s mission is to be an innovation-driven, patient-focused specialty biopharmaceutical company capable of achieving top-tier financial performance through outstanding execution and a consistent stream of innovative new medicines. AbbVie intends to continue to advance its mission in a number of ways, including: (i) growing revenues by diversifying revenue streams, driving late-stage pipeline assets to the market and ensuring strong commercial execution of new product launches; (ii) continued investment and expansion in its pipeline in support of opportunities in immunology, oncology and neuroscience, with additional targeted investment in cystic fibrosis and women’s health as well as continued investment in key on-market products; (iii) expanding operating margins; and (iv) returning cash to shareholders via dividends and share repurchases. In addition, AbbVie anticipates several regulatory submissions and key data readouts from key clinical trials in the next twelve months. AbbVie expects to achieve its strategic objectives through: • Hematologic oncology revenue growth from both IMBRUVICA and VENCLEXTA. • The strong execution of new product launches across multiple therapeutic areas. • HUMIRA U.S. sales growth by driving biologic penetration across disease categories and maintaining market leadership. • Effective management of HUMIRA international biosimilar erosion. • The favorable impact of pipeline products and indications recently approved or currently under regulatory review where approval is expected in 2019. These products are described in greater detail in the section labeled ‘‘Research and Development’’ included as part of this Item 7. AbbVie remains committed to driving continued expansion of operating margins and expects to achieve this objective through continued leverage from revenue growth, the reduction of HUMIRA royalty expense, productivity initiatives in supply chain and ongoing efficiency programs to optimize manufacturing, commercial infrastructure, administrative costs and general corporate expenses. Research and Development Research and innovation are the cornerstones of AbbVie’s business as a global biopharmaceutical company. AbbVie’s long-term success depends to a great extent on its ability to continue to discover and develop innovative pharmaceutical products and acquire or collaborate on compounds currently in development by other biotechnology or pharmaceutical companies. AbbVie’s pipeline currently includes more than 60 compounds or indications in clinical development individually or under collaboration or license agreements and is focused on such important medical specialties as immunology, oncology and neuroscience along with targeted investments in cystic fibrosis and women’s health. Of these programs, more than 30 are in mid- and late-stage development. The following sections summarize transitions of significant programs from Phase 2 development to Phase 3 development as well as developments in significant Phase 3 and registration programs. AbbVie expects multiple Phase 2 programs to transition into Phase 3 programs in the next twelve months. 31 2018 Form 10-K 13NOV201221352027 31 Significant Programs and Developments Immunology Upadacitinib • In January 2018, the U.S. Food and Drug Administration (FDA) granted breakthrough therapy designation for upadacitinib, an investigational oral JAK1-selective inhibitor, in adult patients with moderate to severe atopic dermatitis who are candidates for systemic therapy. • In April 2018, AbbVie announced that top-line results from the Phase 3 SELECT-COMPARE clinical trial evaluating upadacitinib met all primary and ranked secondary endpoints in patients with moderate to severe rheumatoid arthritis (RA) who are on a stable background of methotrexate and who have an inadequate response. The safety profile of upadacitinib was consistent with previously reported clinical trials and no new safety signals were detected. • In June 2018, AbbVie announced that top-line results from the Phase 3 SELECT-EARLY clinical trial evaluating upadacitinib versus methotrexate in adult patients with moderate to severe RA who were methotrexate-na¨ıve met all primary and ranked secondary endpoints. The safety profile of upadacitinib was consistent with previously reported clinical trials and no new safety signals were detected. • In July 2018, AbbVie initiated two Phase 3 clinical trials to evaluate the efficacy and safety of upadacitinib in subjects with moderate to severe atopic dermatitis. • In September 2018, AbbVie initiated a Phase 3 clinical trial to evaluate the efficacy and safety of upadacitinib in subjects with moderate to severe ulcerative colitis. • In December 2018, AbbVie submitted a New Drug Application (NDA) to the FDA and a marketing authorisation application (MAA) to the European Medicines Agency (EMA) for upadacitinib for the treatment of adult patients with moderate to severe RA. Risankizumab • In January 2018, AbbVie initiated two Phase 3 clinical trials to evaluate the efficacy and safety of risankizumab, an investigational interleukin-23 (IL-23) inhibitor, versus placebo during induction therapy in subjects with moderately to severely active Crohn’s disease. • In February 2018, AbbVie announced that top-line results from two Phase 3 clinical trials evaluating risankizumab with 12-week dosing compared to ustekinumab met ranked additional secondary endpoints for the treatment of patients with moderate to severe chronic plaque psoriasis. The initial results from these clinical trials were previously announced in October 2017. The safety profile was consistent with all previously reported studies, and there were no new safety signals detected across the two studies. • In April 2018, AbbVie submitted a Biologics License Application (BLA) to the FDA and an MAA to the EMA for risankizumab for the treatment of plaque psoriasis in adults. • In May 2018, AbbVie initiated a Phase 2b/3 clinical trial to evaluate the efficacy and safety of risankizumab versus placebo in subjects with moderately to severely active ulcerative colitis. Oncology IMBRUVICA • In April 2018, AbbVie initiated a Phase 3 clinical trial to evaluate the safety and efficacy of IMBRUVICA in combination with VENCLEXTA versus chlorambucil plus GAZYVA (obinutuzumab) for 32 13NOV201221352027 2018 Form 10-K 32 the first-line treatment of subjects with chronic lymphocytic leukemia (CLL)/small lymphocytic lymphoma (SLL). • In May 2018, AbbVie announced that results from the Phase 3 iLLUMINATE study evaluating IMBRUVICA in combination with GAZYVA in previously untreated CLL/SLL met its primary endpoint. In December 2018, AbbVie announced additional results from the Phase 3 iLLUMINATE study that demonstrated significantly prolonged progression-free survival (PFS). • In June 2018, AbbVie announced that results from an interim analysis of the Phase 3 iNNOVATE study evaluating IMBRUVICA plus Rituxan (rituximab) in previously untreated and relapsed/refractory (R/R) patients with Waldenstr¨om’s macroglobulinemia (WM) met its primary endpoint. • In July 2018, AbbVie announced that results from a Phase 3 study evaluating the addition of IMBRUVICA to a chemotherapy regimen consisting of five different agents used in combination did not meet its primary endpoint in a subset of untreated diffuse large B-cell lymphoma patients identified to have the non-germinal center B-cell or activated B-cell subtypes of this disease. • In August 2018, the FDA approved IMBRUVICA, in combination with Rituxan, for the treatment of adult patients with WM. • In December 2018, AbbVie announced that results from an interim analysis of the Phase 3 ECOG1912E study evaluating IMBRUVICA in combination with Rituxan versus the chemoimmunotherapy FCR (fludarabine, cyclophosphamide and rituximab) in previously untreated and younger CLL patients met its primary endpoint. • In January 2019, AbbVie announced an update on the Phase 3 RESOLVE study evaluating IMBRUVICA in combination with nab-paclitaxel and gemcitabine versus nab-paclitaxel and gemcitabine combination in patients with metastatic pancreatic adenocarcinoma. Results showed the study did not meet its primary endpoint of improving PFS or overall survival (OS) benefit among the study population. Safety data collected from the study were consistent with the existing safety information for the study therapies. • In January 2019, the FDA approved IMBRUVICA, in combination with GAZYVA, for adult patients with previously untreated CLL/SLL. VENCLEXTA • In January 2018, AbbVie submitted an sNDA to the FDA for VENCLEXTA monotherapy in patients with CLL who are refractory to or have relapsed B-cell receptor pathway inhibitors. • In June 2018, the FDA approved VENCLEXTA in combination with Rituxan for the treatment of patients with CLL/SLL, with or without 17p deletion, who have received at least one prior therapy. VENCLEXTA plus Rituxan is the first oral-based, chemotherapy-free combination in CLL that allows patients an option for fixed treatment duration. • In September 2018, the FDA expanded the label for VENCLEXTA in combination with Rituxan to include information about patients with previously-treated CLL who achieved minimal residual disease (MRD)-negativity in the Phase 3 MURANO trial. • In October 2018, the European Commission approved the type-II variation application for VENCLYXTO in combination with Rituxan for the treatment of patients with R/R CLL who have received at least one prior therapy. In November, AbbVie received notification from the European Commission that conditions of the original conditional marketing authorisation have been fulfilled, granting VENCLYXTO official receipt of approval. 33 2018 Form 10-K 13NOV201221352027 33 • In October 2018, AbbVie announced that the results from the Phase 3 CLL14 study comparing the efficacy and safety of VENCLEXTA plus obinutuzumab versus obinutuzumab plus chlorambucil in previously untreated patients with CLL and coexisting medical conditions met its primary endpoint. • In November 2018, the FDA granted accelerated approval for VENCLEXTA in combination with azacitidine, or decitabine, or low dose cytarabine (LDAC) for the treatment of newly-diagnosed acute myeloid leukemia (AML) in adults who are age 75 years or older, or who have comorbidities that preclude use of intensive induction chemotherapy. This indication is approved under accelerated approval based on response rates. Continued approval for this indication may be contingent upon verification and description of clinical benefit in confirmatory trials. Rova-T • In March 2018, AbbVie announced top-line results from the Phase 2 TRINITY study evaluating rovalpituzumab tesirine (Rova-T) for third-line R/R small cell lung cancer (SCLC). Although Rova-T demonstrated single agent responses in advanced SCLC patients, after consulting with the FDA, based on the magnitude of effect across multiple parameters in this single-arm study, the company will not seek accelerated approval for Rova-T in third-line R/R SCLC. • In December 2018, AbbVie announced the decision to stop enrollment for the TAHOE trial, a Phase 3 study evaluating Rova-T as a second-line therapy for advanced SCLC. An Independent Data Monitoring Committee recommended stopping enrollment in TAHOE due to shorter overall survival in the Rova-T arm compared with the topotecan control arm. AbbVie will continue its ongoing Phase 3 study of Rova-T in first-line SCLC. Other • In November 2018, Bristol-Myers Squibb Company (BMS) announced that the FDA expanded the label for Empliciti in combination with pomalidomide and dexamethasone for the treatment of adult patients with multiple myeloma who have received at least two prior therapies. BMS and AbbVie are co-developing Empliciti, with BMS solely responsible for commercial activities. Virology/Liver Disease • In November 2018, AbbVie presented EXPEDITION 8 data at the Annual Meeting of the American Association for the Study of Liver Diseases (AASLD), in which 8 weeks of MAVYRET in treatment na¨ıve, cirrhotic patients was safe and effective with no virologic failures reported. Neuroscience • In March 2018, Biogen and AbbVie announced the voluntary worldwide withdrawal of marketing authorizations for ZINBRYTA, a prescription medicine used to treat adults with relapsing forms of multiple sclerosis. Other • In February 2018, AbbVie announced that top-line results from the Phase 3 ELARIS UF-I study evaluating elagolix, an investigational, orally administered gonadotropin-releasing hormone (GnRH) antagonist, being investigated in combination with low-dose hormone (add-back) therapy for uterine fibroids met its primary efficacy endpoint and all ranked secondary endpoints. • In March 2018, AbbVie announced that top-line results from the Phase 3 ELARIS UF-II study evaluating elagolix in combination with low-dose hormone (add-back) therapy for uterine fibroids met its primary efficacy endpoint and all ranked secondary endpoints. 34 13NOV201221352027 2018 Form 10-K 34 • In July 2018, the FDA approved ORILISSA (elagolix) for the management of moderate to severe pain associated with endometriosis. • In August 2018, AbbVie announced that top-line results from the Phase 3 ELARIS UF-EXTEND study evaluating elagolix in combination with low-dose hormone (add-back) therapy for uterine fibroids were consistent with findings observed in the ELARIS UF-I and ELARIS UF-II Phase 3 studies. • In October 2018, AbbVie announced that it will assume full development and commercial responsibility for its collaboration with Galapagos to discover and develop new therapies to treat cystic fibrosis (CF). Under a revised agreement, AbbVie will assume full development and commercial responsibility over the investigational program comprising several clinical and pre-clinical compounds originally discovered and developed jointly by AbbVie and Galapagos. Galapagos will not pursue further research and development in CF, but is eligible for future milestones and royalties on commercialized programs. RESULTS OF OPERATIONS Net Revenues The comparisons presented at constant currency rates reflect comparative local currency net revenues at the prior year’s foreign exchange rates. This measure provides information on the change in net revenues assuming that foreign currency exchange rates had not changed between the prior and the current periods. AbbVie believes that the non-GAAP measure of change in net revenues at constant currency rates, when used in conjunction with the GAAP measure of change in net revenues at actual currency rates, may provide a more complete understanding of the company’s operations and can facilitate analysis of the company’s results of operations, particularly in evaluating performance from one period to another. for the years ended (dollars in millions) 2018 2017 2016 2018 2017 2018 2017 United States International Net revenues $21,524 11,229 $18,251 9,965 $15,947 9,691 17.9% 14.4% 17.9% 14.4% 12.8% 2.8% 10.4% 2.1% $32,753 $28,216 $25,638 16.1% 10.1% 15.2% 9.8% Percent change At actual currency rates At constant currency rates 35 2018 Form 10-K 13NOV201221352027 35 The following table details AbbVie’s worldwide net revenues: years ended December 31 (dollars in millions) 2018 2017 2016 2018 2017 2018 2017 Percent change At actual currency rates At constant currency rates Immunology HUMIRA United States International Total Hematologic Oncology IMBRUVICA United States Collaboration revenues Total VENCLEXTA United States International Total HCV MAVYRET United States International Total VIEKIRA United States International Total Other Key Products Creon United States Lupron United States International Total Synthroid United States Synagis International AndroGel United States Duodopa United States International Total Sevoflurane United States International Total Kaletra United States International Total All other Total net revenues n/m—Not meaningful $13,685 6,251 $12,361 6,066 $10,432 5,646 $19,936 $18,427 $16,078 $ 2,968 622 $ 2,144 429 $ 1,580 252 $ 3,590 $ 2,573 $ 1,832 10.7% 3.1% 8.2% 38.4% 45.0% 39.5% 18.5% 7.4% 14.6% 35.8% 70.0% 40.5% 10.7% 0.6% 7.4% 38.4% 45.0% 39.5% 18.5% 6.7% 14.4% 35.8% 70.0% 40.5% $ $ 247 97 344 $ 1,614 1,824 $ 3,438 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 3 175 178 928 726 166 892 776 726 469 80 350 430 74 317 391 55 281 336 319 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 89 33 122 277 213 490 61 723 784 831 669 160 829 781 738 577 61 294 355 78 332 410 71 352 423 876 $ $ $ $ $ 17 1 18 — — — 342 1,180 $ 1,522 $ $ $ $ $ $ $ $ $ $ $ $ 730 663 158 821 763 730 675 37 256 293 80 348 428 116 433 549 $ 1,199 $32,753 $28,216 $25,638 >100.0% >100.0% >100.0% >100.0% >100.0% >100.0% >100.0% >100.0% >100.0% >100.0% >100.0% >100.0% >100.0% >100.0% >100.0% n/m n/m n/m >100.0% >100.0% >100.0% n/m n/m n/m (96.7)% (75.6)% (77.2)% (82.8)% (38.7)% (48.6)% (96.7)% (74.8)% (76.5)% (82.8)% (38.6)% (48.5)% 11.7% 13.9% 11.7% 13.9% 8.6% 3.4% 7.6% 0.8% 1.4% 0.9% 8.6% 4.7% 7.9% 0.8% 0.5% 0.7% (0.6)% 2.3% (0.6)% 2.3% (1.6)% 1.2% (2.8)% 0.6% (18.8)% (14.5)% (18.8)% (14.5)% 31.4% 19.1% 21.2% (6.2)% (4.4)% (4.7)% (22.1)% (20.2)% (20.5)% (63.6)% 16.1% 66.1% 14.6% 21.1% (2.1)% (4.6)% (4.1)% (38.6)% (18.8)% (22.9)% (26.9)% 10.1% 31.4% 14.8% 17.7% (6.2)% (4.3)% (4.6)% (22.1)% (20.1)% (20.4)% (71.9)% 15.2% 66.1% 13.1% 19.8% (2.1)% (3.7)% (3.4)% (38.6)% (21.1)% (24.7)% (27.9)% 9.8% 36 13NOV201221352027 2018 Form 10-K 36 The following discussion and analysis of AbbVie’s net revenues by product is presented on a constant currency basis. Global HUMIRA sales increased 7% in 2018 and 14% in 2017. The sales increases in 2018 and 2017 were driven primarily by market growth across therapeutic categories and geographies as well as favorable pricing in certain geographies. In the United States, HUMIRA sales increased 11% in 2018 and 18% in 2017. The sales increase in 2018 and 2017 was driven by market growth across all indications and favorable pricing. Internationally, HUMIRA revenues increased 1% in 2018 and 7% in 2017. The sales increase in 2018 was driven primarily by market growth across indications partially offset by direct biosimilar competition in Europe following the expiration of the European Union composition of matter patent for adalimumab in October 2018. Due to the entry of biosimilar competition, AbbVie expects international HUMIRA net revenues to decline in 2019. Biosimilar competition for HUMIRA is not expected in the United States until 2023. AbbVie continues to pursue strategies intended to further differentiate HUMIRA from competing products and add to the sustainability of HUMIRA. Net revenues for IMBRUVICA represent product revenues in the United States and collaboration revenues outside of the United States related to AbbVie’s 50% share of IMBRUVICA profit. AbbVie’s global IMBRUVICA revenues increased 39% in 2018 and 40% in 2017 as a result of continued penetration of IMBRUVICA as a first-line treatment for patients with CLL as well as favorable pricing. Net revenues for VENCLEXTA increased by more than 100% in 2018 primarily due to market share gains following FDA and EMA approvals of VENCLEXTA in combination with Rituxan for certain patients with R/R CLL. Global MAVYRET sales increased by more than 100% in 2018 as a result of market share gains following the FDA and EMA approvals of MAVYRET in the second half of 2017 as well as further geographic expansion in 2018. Global VIEKIRA sales decreased by 76% in 2018 and 49% in 2017 primarily due to lower market share following the launch of MAVYRET. Net revenues for Creon increased 12% in 2018 and 14% in 2017, driven primarily by continued market growth, higher market share and favorable pricing. Creon maintains market leadership in the pancreatic enzyme market. AndroGel net revenues decreased 19% in 2018 and 14% in 2017 primarily due to market contraction and the entry of generic competition for the AndroGel 1.62% formulation in October 2018. AbbVie expects net revenues for AndroGel to continue to decline in 2019. Net revenues for Duodopa increased 18% in 2018 and 20% in 2017, primarily as a result of market penetration. Gross Margin years ended December 31 (dollars in millions) 2018 2017 2016 Gross margin as a percent of net revenues $25,035 $21,174 $19,806 76% 75% 77% Percent change 2018 18% 2017 7% Gross margin as a percentage of net revenues in 2018 increased from 2017 primarily due to the reduction of HUMIRA royalty expense and a 2017 intangible asset impairment charge of $354 million partially offset by the IMBRUVICA profit sharing arrangement. Gross margin as a percentage of net revenues in 2017 decreased from 2016 primarily due to an intangible asset impairment charge of $354 million in 2017, as well as the unfavorable impacts of higher intangible asset amortization and the IMBRUVICA profit sharing arrangement. These drivers were partially 37 2018 Form 10-K 13NOV201221352027 37 offset by lower amortization of the fair market value step-up of acquisition-date inventory of Pharmacyclics as well as favorable changes in product mix and operational efficiencies. Selling, General and Administrative Percent change years ended December 31 (dollars in millions) 2018 2017 2016 2018 Selling, general and administrative as a percent of net revenues $7,399 $6,295 $5,881 18% 23% 22% 23% 2017 7% Selling, general and administrative (SG&A) expenses as a percentage of net revenues in 2018 increased from 2017 primarily due to the unfavorable impacts of new product launch expenses and charitable contributions of $350 million to select U.S. not-for-profit organizations in 2018 as part of AbbVie’s previously announced plan partially offset by continued leverage from revenue growth. SG&A expense percentage in 2017 decreased from 2016. SG&A expense percentage in 2017 was favorably impacted by continued leverage from revenue growth partially offset by litigation reserves charges that increased by $370 million in 2017 compared to the prior year and new product launch expenses. Research and Development and Acquired In-Process Research and Development Percent change years ended December 31 (dollars in millions) 2018 2017 2016 2018 2017 Research and development as a percent of net revenues Acquired in-process research and development $10,329 $5,007 $4,385 >100% 14% 32% 18% 17% $ 424 $ 327 $ 200 30% 64% Research and Development (R&D) expenses in 2018 increased from 2017 principally due to a $5.1 billion intangible asset impairment charge related to IPR&D acquired as part of the 2016 Stemcentrx acquisition following the decision to stop enrollment in the TAHOE trial. The impairment was primarily due to lower probabilities of success of achieving regulatory approval across Rova-T and other early-stage assets obtained in the acquisition. The remaining increase reflected greater funding to support all stages of the company’s pipeline assets. See Note 7 to the Consolidated Financial Statements for additional information regarding the impairment charge. R&D expenses in 2017 increased from 2016 principally due to increased funding to support all stages of the company’s pipeline assets, the impact of the post-acquisition R&D expenses of Stemcentrx and Boehringer Ingelheim (BI) compounds and an increase in development milestones of $63 million. These factors were partially offset by a decrease in acquisition related costs of $135 million. Acquired IPR&D expenses reflect upfront payments related to various collaborations. There were no individually significant transactions or cash flows during 2018. Acquired IPR&D expense in 2017 included a charge of $205 million as a result of entering into a global strategic collaboration with Alector, Inc. (Alector) to develop and commercialize medicines to treat Alzheimer’s disease and other neurodegenerative disorders. There were no individually significant transactions or cash flows during 2016. See Note 5 to the Consolidated Financial Statements for additional information regarding the Alector agreement. Other Operating Expenses Other operating expenses in 2018 included a $500 million charge related to the extension of the previously announced Calico collaboration to discover, develop and bring to market new therapies for patients with age-related diseases, including neurodegeneration and cancer. 38 13NOV201221352027 2018 Form 10-K 38 Other Non-Operating Expenses years ended December 31 (in millions) Interest expense Interest income Interest expense, net Net foreign exchange loss Other expense, net 2018 2017 2016 $1,348 (204) $1,150 (146) $1,047 (82) $1,144 $1,004 $ 965 $ 24 18 $ 348 466 $ 303 188 Interest expense in 2018 increased compared to 2017 primarily due to the unfavorable impact of higher interest rates on the company’s debt obligations and a higher average outstanding debt balance during 2018. Interest expense in 2017 increased compared to 2016 due to a full year of expense associated with the May 2016 issuance of $7.8 billion aggregate principal amount of senior notes which were issued primarily to finance the acquisition of Stemcentrx and to repay an outstanding term loan. Interest income in 2018 increased compared to 2017 primarily due to higher interest rates. Interest income in 2017 increased compared to 2016 primarily due to growth in the company’s investment securities. Net foreign exchange loss in 2017 included $316 million of historical currency translation losses that were reclassified from accumulated other comprehensive income (AOCI) related to the liquidation of certain foreign entities following the enactment of U.S. tax reform. Net foreign exchange loss in 2016 included losses totaling $298 million related to the devaluation of AbbVie’s net monetary assets denominated in the Venezuelan bolivar. See Note 10 to the Consolidated Financial Statements for additional information regarding the Venezuelan devaluation. Other expense, net included charges related to the change in fair value of the BI and Stemcentrx contingent consideration liabilities of $49 million in 2018, $626 million in 2017 and $228 million in 2016. The fair value of contingent consideration liabilities is impacted by the passage of time and multiple other inputs, including the probability of success of achieving regulatory/commercial milestones, discount rates, the estimated amount of future sales of the acquired products still in development and other market-based factors. In 2018, the BI contingent consideration liability increased due to the passage of time and higher estimated future sales partially offset by the effect of rising interest rates. The increase in the BI contingent consideration liability was primarily offset by a $428 million decrease in the Stemcentrx contingent consideration liability recorded during the fourth quarter of 2018 due to a reduction in probabilities of success of achieving regulatory approval across Rova-T and other early-stage assets obtained in the acquisition. In 2017, the change in fair value represented mainly higher probabilities of success, the passage of time and declining interest rates. In 2016, the change in fair value represented mainly the passage of time, as increases to the BI contingent consideration liability due to higher probabilities of success were fully offset by the effects of rising interest rates and changes in other market-based assumptions. See Note 5 to the Consolidated Financial Statements for additional information regarding the acquisitions of Stemcentrx and BI compounds. Other expense, net for 2017 also included realized gains on available-for-sale investment securities of $90 million. Income Tax Expense The effective income tax rate was negative 9% in 2018, was 31% in 2017 and was 24% in 2016. The effective tax rate in each period differed from the statutory tax rate principally due to the allocation of the company’s taxable earnings among jurisdictions, the benefit from foreign operations which reflects the impact of lower income tax rates in locations outside the United States, tax incentives in Puerto Rico and other foreign tax jurisdictions, and business development activities. The effective tax rate for 2018 reflects the impact of the effective date of provisions of the Tax Cuts and Jobs Act (the Act) related to the earnings 39 2018 Form 10-K 13NOV201221352027 39 from certain foreign subsidiaries and the effects of Stemcentrx intangible impairment related expenses. Given these factors, the effective income tax rate may change significantly in future periods. The effective tax rate in 2017 included tax expense of $4.5 billion on the one-time mandatory repatriation of previously untaxed earnings of foreign subsidiaries, partially offset by a $3.6 billion net tax benefit for the remeasurement of deferred taxes related to the Act and foreign tax law changes. The Act significantly changed the U.S. corporate tax system. The Act reduced the U.S. federal corporate tax rate from 35% to 21% and created a territorial tax system that included new taxes on certain foreign sourced earnings. See Note 13 to the Consolidated Financial Statements for additional information regarding the Act. The effective tax rate in 2016 included additional expense of $187 million related to the recognition of the tax effect of regulations issued by the Internal Revenue Service on December 7, 2016 that changed the determination of the U.S. taxability of foreign currency gains and losses related to certain foreign operations. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES years ended December 31 (in millions) 2018 2017 2016 Cash flows from: Operating activities Investing activities Financing activities $ 13,427 (1,006) (14,396) $ 9,960 (274) (5,512) $ 7,041 (6,074) (3,928) Operating cash flows in 2018 increased from 2017 primarily due to improved results of operations from revenue growth and a decrease in income tax payments. Operating cash flows in 2017 increased from 2016 primarily due to improved results of operations resulting from revenue growth, an improvement in operating earnings and a decrease in income tax payments. Realized excess tax benefits associated with stock-based compensation totaled $78 million in 2018 and $71 million in 2017 and were presented within operating cash flows as a result of the adoption of a new accounting pronouncement. Prior to the adoption of the new accounting pronouncement, realized excess benefits of $55 million in 2016 were presented within cash flows from financing activities. Operating cash flows also reflected AbbVie’s contributions to its defined benefit plans of $873 million in 2018, $246 million in 2017 and $273 million in 2016. Investing cash flows in 2018 included payments made for other acquisitions and investments of $736 million and capital expenditures of $638 million, partially offset by net sales and maturities of investment securities totaling $368 million. Investing cash flows in 2017 included capital expenditures of $529 million and payments made for other acquisitions and investments of $308 million, partially offset by net sales and maturities of investment securities totaling $563 million. Investing cash flows in 2016 primarily included $1.9 billion of cash consideration paid to acquire Stemcentrx in June 2016, a $595 million upfront payment to acquire certain rights from BI in April 2016, net purchases of investment securities totaling $3.0 billion and capital expenditures of $479 million. In 2018, 2017 and 2016, the company issued and redeemed commercial paper. The balance of commercial paper outstanding was $699 million as of December 31, 2018 and $400 million as of December 31, 2017. AbbVie may issue additional commercial paper or retire commercial paper to meet liquidity requirements as needed. Financing cash flows in 2018 also included proceeds from the issuance of a $3.0 billion 364-day term loan credit agreement (term loan) entered into in May 2018. In June 2018, the company drew on this term loan and as of December 31, 2018, $3.0 billion was outstanding and was included in short-term borrowings on the consolidated balance sheet. Borrowings under the term loan bear interest at one month LIBOR plus applicable margin. The term loan may be prepaid without penalty upon prior notice and contains 40 13NOV201221352027 2018 Form 10-K 40 customary covenants, all of which the company was in compliance with as of December 31, 2018. In September 2018, the company issued $6.0 billion aggregate principal amount of unsecured senior notes. Of the $5.9 billion net proceeds, $2.0 billion was used to repay the company’s outstanding three-year term loan credit agreement in September 2018 and $1.0 billion was used to repay the aggregate principal amount of 2.00% senior notes at maturity in November 2018. The company intends to use the remaining proceeds to repay term loan obligations in 2019 as they become due. Financing cash flows in 2018 also included the May 2018 repayment of $3.0 billion aggregate principal amount of the company’s 1.80% senior notes at maturity. In November 2016, the company issued e3.6 billion aggregate principal amount of unsecured senior Euro notes. The company used the proceeds to redeem $4.0 billion aggregate principal amount of 1.75% senior notes that were due to mature in November 2017. In May 2016, the company issued $7.8 billion aggregate principal amount of senior notes. Approximately $2.0 billion of the net proceeds were used to repay an outstanding term loan that was due to mature in November 2016, approximately $1.9 billion of the net proceeds were used to finance the acquisition of Stemcentrx and approximately $3.8 billion of the net proceeds were used to finance an accelerated share repurchase (ASR). See Note 12 to the Consolidated Financial Statements for additional information on the 2016 ASR transaction. Cash dividend payments totaled $5.6 billion in 2018, $4.1 billion in 2017 and $3.7 billion in 2016. The increase in cash dividend payments was primarily driven by an increase in the dividend rate. On November 2, 2018, AbbVie announced that its board of directors declared an increase in the company’s quarterly cash dividend from $0.96 per share to $1.07 per share beginning with the dividend payable on February 15, 2019 to stockholders of record as of January 15, 2019. This reflects an increase of approximately 11.5% over the previous quarterly rate. The timing, declaration, amount of and payment of any dividends by AbbVie in the future is within the discretion of its board of directors and will depend upon many factors, including AbbVie’s financial condition, earnings, capital requirements of its operating subsidiaries, covenants associated with certain of AbbVie’s 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, 2018, AbbVie’s board of directors authorized a new $10.0 billion stock repurchase program, which superseded AbbVie’s previous stock repurchase program. On December 13, 2018, AbbVie’s board of directors authorized a $5.0 billion increase to the existing $10.0 billion stock repurchase program. The new stock repurchase authorization permits purchases of AbbVie shares from time to time in open-market or private transactions at management’s discretion. The program has no time limit and can be discontinued at any time. Under this authorization, AbbVie repurchased approximately 109 million shares for $10.7 billion in 2018. AbbVie cash-settled $201 million of its December 2018 open market purchases in January 2019. AbbVie’s remaining stock repurchase authorization was $4.3 billion as of December 31, 2018. Under previous stock repurchase programs, AbbVie made open market share repurchases of approximately 11 million shares for $1.3 billion in 2018, approximately 13 million shares for $1.0 billion in 2017 and approximately 34 million shares for $2.1 billion in 2016. AbbVie cash-settled $285 million of its December 2016 open market purchases in January 2017 and cash-settled $300 million of its December 2015 open market purchases in January 2016. In 2018, AbbVie paid $100 million of contingent consideration to BI related to BLA and MAA acceptance milestones. $78 million of these payments were included in financing cash flows and $22 million of the payments were included in operating cash flows. In 2017, AbbVie paid $305 million of contingent consideration to BI related to a Phase 3 enrollment milestone. $268 million of this milestone was included in financing cash flows and $37 million was included in operating cash flows. 41 2018 Form 10-K 13NOV201221352027 41 Cash and equivalents were impacted by net unfavorable exchange rate changes totaling $39 million in 2018, net favorable exchange rate changes totaling $29 million in 2017 and net unfavorable exchange rate changes totaling $338 million in 2016. The unfavorable exchange rate changes in 2018 were primarily due to the weakening of the Euro and other foreign currencies on the translation of the company’s Euro-denominated assets and cash denominated in foreign currencies. The favorable exchange rate changes in 2017 were primarily due to the strengthening of the Euro and other foreign currencies on the translation of the company’s Euro-denominated assets and cash denominated in foreign currencies. The unfavorable exchange rate changes in 2016 were primarily due to the devaluation of AbbVie’s net monetary assets denominated in the Venezuelan bolivar. Credit Risk AbbVie monitors economic conditions, the creditworthiness of customers and government regulations and funding, both domestically and abroad. AbbVie regularly communicates with its customers regarding the status of receivable balances, including their payment plans and obtains positive confirmation of the validity of the receivables. AbbVie establishes an allowance against accounts receivable when it is probable they will not be collected. Global economic conditions and customer-specific factors may require the company to periodically re-evaluate the collectability of its receivables and the company could potentially incur credit losses. AbbVie may also utilize factoring arrangements to mitigate credit risk, although the receivables included in such arrangements have historically not been a significant amount of total outstanding receivables. Credit Facility, Access to Capital and Credit Ratings Credit Facility In August 2018, AbbVie replaced its existing revolving credit facility with a new $3.0 billion five-year revolving credit facility. The revolving credit facility enables the company to borrow funds on an unsecured basis at variable interest rates and contains various covenants. At December 31, 2018, the company was in compliance with all its credit facility covenants. Commitment fees under the credit facility were insignificant. No amounts were outstanding under the credit facility as of December 31, 2018 and 2017. 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 There were no changes in the company’s credit ratings during 2018. Unfavorable changes to the ratings may have an adverse impact on future financing arrangements; however, they would not affect the company’s ability to draw on its credit facility and would not result in an acceleration of scheduled maturities of any of the company’s outstanding debt obligations. 42 13NOV201221352027 2018 Form 10-K 42 Contractual Obligations The following table summarizes AbbVie’s estimated contractual obligations as of December 31, 2018: (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)(d)(e)(f) Total (a) Total Less than one year One to three years Three to five years More than five years $ 3,699 $3,699 $ — $ — $ — 37,360 17,204 809 1,843 9,994 1,612 1,433 116 1,710 736 6,808 2,613 205 110 1,392 6,370 2,024 145 21 1,478 22,570 11,134 343 2 6,388 $70,909 $9,306 $11,128 $10,038 $40,437 Includes estimated future interest payments on long-term debt and capital lease obligations. Interest payments on debt are calculated for future periods using forecasted interest rates in effect at the end of 2018. Projected interest payments include the related effects of interest rate swap agreements. Certain of these projected interest payments may differ in the future based on changes in floating interest rates or other factors or events. The projected interest payments only pertain to obligations and agreements outstanding at December 31, 2018. See Note 9 to the Consolidated Financial Statements for additional information regarding the company’s debt instruments and Note 10 for additional information on the interest rate swap agreements outstanding at December 31, 2018. (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 $150 million that AbbVie made to its principal domestic defined benefit plan subsequent to December 31, 2018. Amounts otherwise exclude pension and other post-employment benefits and related deferred compensation cash outflows. Timing of future 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. See Note 8 to the Consolidated Financial Statements for additional information on restructuring and Note 11 for additional information on the pension and other post-employment benefit plans. (d) Excludes liabilities associated with the company’s unrecognized tax benefits as it is not possible to reliably estimate the timing of the future cash outflows related to these liabilities. See Note 13 to the Consolidated Financial Statements for additional information on these unrecognized tax benefits. (e) (f) Includes $4.5 billion of contingent consideration liabilities primarily related to the acquisition of BI compounds which are recorded at fair value on the consolidated balance sheet. Potential contingent consideration payments that exceed the fair value recorded on the consolidated balance sheet are not included in the table of contractual obligations. See Notes 5 and 10 to the Consolidated Financial Statements for additional information regarding these liabilities. Includes a one-time transition tax liability on a mandatory deemed repatriation of previously untaxed earnings of foreign subsidiaries resulting from U.S. tax reform enacted in 2017. The one-time transition tax is generally payable in eight annual installments. See Note 13 to the Consolidated Financial Statements for additional information regarding these tax liabilities. 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, 43 2018 Form 10-K 13NOV201221352027 43 or commercial milestones. Individually, these arrangements are insignificant in any one annual reporting period. However, if milestones for multiple products covered by these arrangements would happen to be reached in the same reporting period, the aggregate charge to expense could be material to the results of operations in that period. From a business perspective, the payments are viewed as positive because they signify that the product is successfully moving through development and is now generating or is more likely to generate future cash flows from product sales. It is not possible to predict with reasonable certainty whether these milestones will be achieved or the timing for achievement. As a result, these potential payments are not included in the table of contractual obligations. See Note 5 to the Consolidated Financial Statements for additional information on these collaboration arrangements. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles in the United States requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenue and expenses. A summary of the company’s significant accounting policies is included in Note 2 to the Consolidated Financial Statements. Certain of these policies are considered critical as these most significantly impact the company’s financial condition and results of operations and require the most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Actual results may vary from these estimates. Revenue Recognition AbbVie recognizes revenue when control of promised goods or services is transferred to the company’s customers, in an amount that reflects the consideration AbbVie expects to be entitled to in exchange for those goods or services. Sales, value add and other taxes collected concurrent with revenue-producing activities are excluded from revenue. AbbVie generates revenue primarily from product sales. For the majority of sales, the company transfers control, invoices the customer and recognizes revenue upon shipment to the customer. Rebates AbbVie provides rebates to pharmacy benefit managers, state government Medicaid programs, insurance companies that administer Medicare drug plans, wholesalers, group purchasing organizations and other government agencies and private entities. Rebate and chargeback accruals are accounted for as variable consideration and are recorded as a reduction to revenue in the period the related product is sold. Rebates and chargebacks totaled $16.4 billion in 2018, $12.9 billion in 2017 and $10.8 billion in 2016. Rebate amounts are typically based upon the volume of purchases using contractual or statutory prices, which may vary by product and by payer. For each type of rebate, the factors used in the calculations of the accrual for that rebate include the identification of the products subject to the rebate, the applicable price terms and the estimated lag time between sale and payment of the rebate, which can be significant. In order to establish its rebate and chargeback accruals, the company uses both internal and external data to estimate the level of inventory in the distribution channel and the rebate claims processing lag time for each type of rebate. To estimate the rebate percentage or net price, the company tracks sales by product and by customer or payer. The company evaluates inventory data reported by wholesalers, available prescription volume information, product pricing, historical experience and other factors in order to determine the adequacy of its reserves. AbbVie regularly monitors its reserves and records adjustments when rebate trends, rebate programs and contract terms, legislative changes, or other significant events indicate that a change in the reserve is appropriate. Historically, adjustments to rebate accruals have not been material to net earnings. 44 13NOV201221352027 2018 Form 10-K 44 The following table is an analysis of the three largest rebate accruals and chargeback allowances, which comprise approximately 91% of the total consolidated rebate and chargebacks recorded as reductions to revenues in 2018. Remaining rebate provisions charged against gross revenues are not significant in the determination of operating earnings. (in millions) Balance at December 31, 2015 Provisions Payments Balance at December 31, 2016 Provisions Payments Balance at December 31, 2017 Provisions Payments Balance at December 31, 2018 Cash Discounts and Product Returns Medicaid and Medicare Rebates $ 1,032 2,606 (2,471) 1,167 2,909 (2,736) 1,340 3,493 (3,188) Managed Care Rebates $ 920 3,146 (2,899) 1,167 3,990 (3,962) 1,195 4,729 (4,485) Wholesaler Chargebacks $ 363 3,987 (3,967) 383 5,026 (4,887) 522 6,659 (6,525) $ 1,645 $ 1,439 $ 656 Cash discounts and product returns, which totaled $1.6 billion in 2018, $1.3 billion in 2017 and $964 million in 2016, are accounted for as variable consideration and are recorded as a reduction to revenue in the same period the related product is sold. The reserve for cash discounts is readily determinable because the company’s experience of payment history is fairly consistent. Product returns can be reliably estimated based on the company’s historical return experience. Pension and Other Post-Employment Benefits AbbVie engages outside actuaries to assist in the determination of the obligations and costs under the pension and other post-employment benefit plans that are direct obligations of AbbVie. The valuation of the funded status and the net periodic benefit cost for these plans are calculated using actuarial assumptions. The significant assumptions, which are reviewed annually, include the discount rate, the expected long-term rate of return on plan assets and the health care cost trend rates, and are disclosed in Note 11 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 yield-curve approach reflects the plans’ specific cash flows (i.e. duration) in calculating the benefit obligations by applying the corresponding individual spot rates along the yield curve. Beginning in 2016, AbbVie also reflected the plans’ specific cash flows and applied them to the corresponding individual spot rates along the yield curve in calculating the service cost and interest cost portions of expense. For other countries, AbbVie reviews various indices such as corporate bond and government bond benchmarks to estimate the discount rate. AbbVie’s assumed discount rates have a significant effect on the amounts reported for defined benefit pension and other post-employment plans as of December 31, 2018. A 50 basis point change in the assumed discount rate 45 2018 Form 10-K 13NOV201221352027 45 would have had the following effects on AbbVie’s calculation of net periodic benefit costs in 2019 and projected benefit obligations as of December 31, 2018: (in millions) (brackets denote a reduction) Defined benefit plans Service and interest cost Projected benefit obligation Other post-employment plans Service and interest cost Projected benefit obligation 50 basis point Increase Decrease $ (54) (512) $ (2) (47) $ 64 578 $ 4 54 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 for each plan is supported by the historical performance of the trust’s actual and target asset allocation. AbbVie’s assumed expected long-term rate of return has a significant effect on the amounts reported for defined benefit pension plans as of December 31, 2018 and will be used in the calculation of net periodic benefit cost in 2019. A one percentage point change in assumed expected long-term rate of return on plan assets would increase or decrease the net period benefit cost of these plans in 2019 by $62 million. The health care cost trend rate is selected by reviewing historical trends and current views on projected future health care cost increases. The current health care cost trend rate is supported by the historical trend experience of each plan. Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans as of December 31, 2018 and will be used in the calculation of net periodic benefit cost in 2019. A one percentage point change in assumed health care cost trend rates would have the following effects on AbbVie’s calculation of net periodic benefit costs in 2019 and the projected benefit obligation as of December 31, 2018: (in millions) (brackets denote a reduction) Service and interest cost Projected benefit obligation Income Taxes One percentage point Increase Decrease $ 17 110 $ (9) (87) AbbVie accounts for income taxes under the asset and liability method. Provisions for federal, state and foreign income taxes are calculated on reported pretax earnings based on current tax laws. Deferred taxes are provided using enacted tax rates on the future tax consequences of temporary differences, which are the differences between the financial statement carrying amount of assets and liabilities and their respective tax bases and the tax benefits of carryforwards. A valuation allowance is established or maintained when, based on currently available information, it is more likely than not that all or a portion of a deferred tax asset will not be realized. Litigation The company is subject to contingencies, such as various claims, legal proceedings and investigations regarding product liability, intellectual property, commercial, securities and other matters that arise in the normal course of business. See Note 14 to the Consolidated Financial Statements for additional information. Loss contingency provisions are recorded for probable losses at management’s best estimate of a loss, or when a best estimate cannot be made, a minimum loss contingency amount within a probable range is 46 13NOV201221352027 2018 Form 10-K 46 recorded. Accordingly, AbbVie is often initially unable to develop a best estimate of loss and therefore, the minimum amount, which could be zero, is recorded. As information becomes known, either the minimum loss amount is increased, resulting in additional loss provisions, or a best estimate can be made, also resulting in additional loss provisions. Occasionally, a best estimate amount is changed to a lower amount when events result in an expectation of a more favorable outcome than previously expected. Valuation 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, or discontinuation, at which point the intangible asset will be written off. IPR&D acquired in transactions that are not business combinations is expensed immediately, unless deemed to have an alternative future use. Payments made to third parties subsequent to regulatory approval are capitalized and amortized over the remaining useful life. AbbVie reviews the recoverability of definite-lived intangible assets whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Goodwill and indefinite-lived intangible assets are reviewed for impairment annually or when an event occurs that could result in an impairment. See Note 2 to the Consolidated Financial Statements for further information. Annually, the company tests its goodwill for impairment by first assessing qualitative factors to determine whether it is more likely than not that the fair value is less than its carrying amount. Some of the factors considered in the assessment include general macro-economic conditions, conditions specific to the industry and market, cost factors, the overall financial performance and whether there have been sustained declines in the company’s share price. If the company concludes it is more likely than not that the fair value of the reporting unit is less than its carrying amount, a quantitative impairment test is performed. AbbVie tests indefinite-lived intangible assets for impairment by first assessing qualitative factors to determine whether it is more likely than not that the fair value is less than its carrying amount. If the company concludes it is more likely than not that the fair value is less than its carrying amount, a quantitative impairment test is performed. For its quantitative impairment tests, the company uses an estimated future cash flow approach that requires significant judgment with respect to future volume, revenue and expense growth rates, changes in working capital use, the selection of an appropriate discount rate, asset groupings and other assumptions and estimates. The estimates and assumptions used are consistent with the company’s business plans and a market participant’s views. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of the assets and could potentially impact the company’s results of operations. Actual results may differ from the company’s estimates. Contingent Consideration The fair value measurements of contingent consideration liabilities are determined as of the acquisition date based on significant unobservable inputs, including the discount rate, estimated probabilities and timing of achieving specified development, regulatory and commercial milestones and the estimated amount of future sales of the acquired products still in development. Contingent consideration liabilities are revalued to fair value at each subsequent reporting date until the related contingency is resolved. Changes to the fair value of the contingent consideration liabilities can result from changes to one or a number of 47 2018 Form 10-K 13NOV201221352027 47 inputs, including discount rates, the probabilities of achieving the milestones, the time required to achieve the milestones and estimated future sales. Significant judgment is employed in determining the appropriateness of these inputs. Changes to the inputs described above could have a material impact on the company’s financial position and results of operations in any given period. At December 31, 2018, a 50 basis point increase/decrease in the assumed discount rate would have decreased/increased the value of the contingent consideration liabilities by approximately $160 million. Additionally, at December 31, 2018, a five percentage point increase/decrease in the assumed probability of success across all potential indications would have increased/decreased the value of the contingent consideration liabilities by approximately $420 million. Recent Accounting Pronouncements See Note 2 to the Consolidated Financial Statements for additional information on recent accounting pronouncements. 48 13NOV201221352027 2018 Form 10-K 48 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. See Note 10 to the Consolidated Financial Statements for additional information regarding the company’s financial instruments and hedging strategies. Foreign Currency Risk AbbVie’s primary net foreign currency exposures are the Euro, Japanese yen and British pound. The following table reflects the total foreign currency forward exchange contracts outstanding at December 31, 2018 and 2017: (in millions) Receive primarily U.S. dollars in exchange for the following currencies: Euro Japanese yen British pound All other currencies Total 2018 Weighted average exchange rate Fair and carrying value receivable/ (payable) 1.157 111.5 1.328 n/a $ 68 (12) 21 29 $106 2017 Weighted average exchange rate Fair and carrying value receivable/ (payable) 1.175 112.4 1.310 n/a $ (88) 2 (22) (18) $(126) Contract amount $6,366 940 760 1,877 $9,943 Contract amount $ 6,660 1,076 499 1,776 $10,011 The company estimates that a 10% 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 $1.0 billion at December 31, 2018. If realized, this appreciation would negatively affect earnings over the remaining life of the contracts. However, 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. A 10% appreciation is believed to be a reasonably possible near-term change in foreign currencies. In November 2016, the company issued e3.6 billion aggregate principal amount of unsecured senior Euro notes, which are exposed to foreign currency risk. The company has designated these foreign currency denominated notes as hedges of its net investments in certain foreign subsidiaries and affiliates. As a result, any foreign currency translation gains or losses related to the Euro notes will be included in accumulated other comprehensive income. See Note 9 to the Consolidated Financial Statements for additional information related to the senior Euro note issuance and Note 10 to the Consolidated Financial Statements for additional information related to the net investment hedging program. Interest Rate Risk The company estimates that an increase in interest rates of 100 basis points would adversely impact the fair value of AbbVie’s interest rate swap contracts by approximately $403 million at December 31, 2018. 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 $2.4 billion at December 31, 2018. A 100 basis point change is believed to be a reasonably possible near-term change in interest rates. 49 2018 Form 10-K 13NOV201221352027 49 Market Price Risk AbbVie’s debt securities investment portfolio (the portfolio) is its main exposure to market price risk. The portfolio is subject to changes in fair value as a result of interest rate fluctuations and other market factors. It is AbbVie’s policy to mitigate market price risk by maintaining a diversified portfolio that limits the amount of exposure to a particular issuer and security type while placing limits on the amount of time to maturity. AbbVie’s investment policy limits investments to investment grade credit ratings. The company estimates that an increase in interest rates of 100 basis points would decrease the fair value of the portfolio by approximately $16 million as of December 31, 2018. If the portfolio were to be liquidated, the fair value reduction would affect the statement of earnings in the period sold. 50 13NOV201221352027 2018 Form 10-K 50 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 Page 52 53 54 55 56 57 104 51 2018 Form 10-K 13NOV201221352027 51 AbbVie Inc. and Subsidiaries Consolidated Statements of Earnings years ended December 31 (in millions, except per share data) Net revenues Cost of products sold Selling, general and administrative Research and development Acquired in-process research and development Other expense Total operating costs and expenses Operating earnings Interest expense, net Net foreign exchange loss Other expense, net Earnings before income taxes Income tax expense (benefit) Net earnings Per share data Basic earnings per share Diluted earnings per share Weighted-average basic shares outstanding Weighted-average diluted shares outstanding 2018 2017 2016 $32,753 $28,216 $25,638 7,718 7,399 10,329 424 500 26,370 6,383 1,144 24 18 5,197 (490) 7,042 6,295 5,007 327 — 5,832 5,881 4,385 200 — 18,671 16,298 9,545 1,004 348 466 7,727 2,418 9,340 965 303 188 7,884 1,931 $ 5,687 $ 5,309 $ 5,953 $ 3.67 $ 3.66 $ 3.31 $ 3.30 $ 3.65 $ 3.63 1,541 1,546 1,596 1,603 1,622 1,631 The accompanying notes are an integral part of these consolidated financial statements. 52 13NOV201221352027 2018 Form 10-K 52 AbbVie Inc. and Subsidiaries Consolidated Statements of Comprehensive Income years ended December 31 (in millions) Net earnings Foreign currency translation adjustments, net of tax expense (benefit) of $(18) in 2018, $34 in 2017 and $(31) in 2016 Net investment hedging activities, net of tax expense (benefit) of $40 in 2018, $(194) in 2017 and $79 in 2016 Pension and post-employment benefits, net of tax expense (benefit) of $35 in 2018, $(94) in 2017 and $(75) in 2016 Marketable security activities, net of tax expense (benefit) of $— in 2018, $(8) in 2017 and $(11) in 2016 Cash flow hedging activities, net of tax expense (benefit) of $23 in 2018, $(26) in 2017 and $18 in 2016 Other comprehensive income (loss) Comprehensive income 2018 2017 2016 $5,687 $5,309 $5,953 (391) 996 (165) 138 197 (343) 140 (406) (135) (10) (46) (1) 313 247 (342) (141) 136 (25) $5,934 $5,168 $5,928 The accompanying notes are an integral part of these consolidated financial statements. 53 2018 Form 10-K 13NOV201221352027 53 AbbVie Inc. and Subsidiaries Consolidated Balance Sheets as of December 31 (in millions, except share data) 2018 2017 Assets Current assets Cash and equivalents Short-term investments Accounts receivable, net Inventories Prepaid expenses and other Total current assets Investments Property and equipment, net Intangible assets, net 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 debt and lease obligations Deferred income taxes Other long-term liabilities Commitments and contingencies Stockholders’ equity (deficit) Common stock, $0.01 par value, 4,000,000,000 shares authorized, 1,776,510,871 shares issued as of December 31, 2018 and 1,768,738,550 as of December 31, 2017 Common stock held in treasury, at cost, 297,686,473 shares as of December 31, 2018 and 176,607,525 as of December 31, 2017 Additional paid-in-capital Retained earnings Accumulated other comprehensive loss Total stockholders’ equity (deficit) Total liabilities and equity $ 7,289 772 5,384 1,605 1,895 $ 9,303 486 5,088 1,605 4,741 16,945 21,223 1,420 2,883 21,233 15,663 1,208 2,090 2,803 27,559 15,785 1,326 $ 59,352 $ 70,786 $ 3,699 1,609 11,931 17,239 35,002 1,067 14,490 $ 400 6,015 10,226 16,641 30,953 2,490 15,605 18 18 (24,108) 14,756 3,368 (2,480) (11,923) 14,270 5,459 (2,727) (8,446) 5,097 $ 59,352 $ 70,786 The accompanying notes are an integral part of these consolidated financial statements. 54 13NOV201221352027 2018 Form 10-K 54 AbbVie Inc. and Subsidiaries Consolidated Statements of Equity years ended December 31 (in millions) Balance at December 31, 2015 Net earnings Other comprehensive loss, net of tax Dividends declared Common shares issued to Stemcentrx stockholders Purchases of treasury stock Stock-based compensation plans and other Balance at December 31, 2016 Net earnings Other comprehensive loss, net of tax Dividends declared Purchases of treasury stock Stock-based compensation plans and other Balance at December 31, 2017 Adoption of new accounting standards(a) Net earnings Other comprehensive income, net of tax Dividends declared Purchases of treasury stock Stock-based compensation plans and other Balance at December 31, 2018 Common shares outstanding Common Treasury stock stock Additional paid-in capital Accumulated other Retained comprehensive earnings loss 1,610 — — — 63 (94) 14 1,593 — — — (15) 14 1,592 — — — — (121) 8 1,479 $17 — — — — — 1 18 — — — — — 18 — — — — — — $ (8,839) $13,080 — — — (35) — 633 — — — 3,958 (6,018) 47 (10,852) — — — (1,125) 54 (11,923) — — — — (12,215) 30 13,678 — — — — 592 14,270 — — — — — 486 $ 2,248 5,953 — (3,823) — — — 4,378 5,309 — (4,221) — (7) 5,459 (1,733) 5,687 — (6,045) — — $(2,561) — (25) — — — — (2,586) — (141) — — — (2,727) — — 247 — — — Total $ 3,945 5,953 (25) (3,823) 3,923 (6,018) 681 4,636 5,309 (141) (4,221) (1,125) 639 5,097 (1,733) 5,687 247 (6,045) (12,215) 516 $18 $(24,108) $14,756 $ 3,368 $(2,480) $ (8,446) (a) See Note 2 for additional information regarding the cumulative effect of the adoption of accounting standards in 2018. The accompanying notes are an integral part of these consolidated financial statements. 55 2018 Form 10-K 13NOV201221352027 55 AbbVie Inc. and Subsidiaries Consolidated Statements of Cash Flows years ended December 31 (in millions) (brackets denote cash outflows) 2018 2017 2016 Cash flows from operating activities Net earnings Adjustments to reconcile net earnings to net cash from operating activities: $ 5,687 $ 5,309 $ 5,953 Depreciation Amortization of intangible assets Change in fair value of contingent consideration liabilities Stock-based compensation Upfront costs and milestones related to collaborations Devaluation loss related to Venezuela Intangible asset impairment Impacts related to U.S. tax reform Other, net Changes in operating assets and liabilities, net of acquisitions: Accounts receivable Inventories Prepaid expenses and other assets Accounts payable and other liabilities Cash flows from operating activities Cash flows from investing activities Acquisition of businesses, net of cash acquired Other acquisitions and investments Acquisitions of property and equipment Purchases of investment securities Sales and maturities of investment securities Other Cash flows from investing activities Cash flows from financing activities Net change in commercial paper borrowings Proceeds from issuance of other short-term borrowings Proceeds from issuance of long-term debt Repayments of long-term debt and lease obligations Debt issuance costs Dividends paid Purchases of treasury stock Proceeds from the exercise of stock options Payments of contingent consideration liabilities Other, net Cash flows from financing activities Effect of exchange rate changes on cash and equivalents Net change in cash and equivalents Cash and equivalents, beginning of year Cash and equivalents, end of year 425 764 228 353 280 298 39 — 390 (71) (38) (393) (1,187) 7,041 (2,495) (262) (479) (5,315) 2,359 118 (6,074) 471 1,294 49 421 1,061 — 5,070 424 76 (591) (226) (499) 190 425 1,076 626 365 470 — 354 1,242 84 (391) 93 (118) 425 13,427 9,960 — (308) (529) (2,230) 2,793 — (274) — (736) (638) (1,792) 2,160 — (1,006) 299 3,002 5,963 (6,035) (40) (5,580) (12,014) 73 (78) 14 (23) 23 — — — 11,627 (6,010) (25) (69) — (3,717) (4,107) (6,033) (1,410) 268 254 — (268) 29 21 (14,396) (5,512) (3,928) (39) (2,014) 9,303 29 4,203 5,100 (338) (3,299) 8,399 $ 7,289 $ 9,303 $ 5,100 $ 1,215 (35) $ 1,099 1,696 $ 986 3,563 Other supplemental information Interest paid, net of portion capitalized Income taxes paid (received) Supplemental schedule of non-cash investing and financing activities Issuance of common shares associated with acquisitions of businesses — The accompanying notes are an integral part of these consolidated financial statements. — 3,923 56 13NOV201221352027 2018 Form 10-K 56 AbbVie Inc. and Subsidiaries Notes to Consolidated Financial Statements Note 1 Background ..................................................................................................................................................................................................................................................................................................................................................... Background The principal business of AbbVie Inc. (AbbVie or the company) is the discovery, development, manufacture and sale of a broad line of pharmaceutical products. 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. In the United States, AbbVie distributes pharmaceutical products principally through independent wholesale distributors, with some sales directly to pharmacies and patients. Outside the United States, products are sold primarily to customers or through distributors, depending on the market served. AbbVie was incorporated in Delaware on April 10, 2012. On January 1, 2013, AbbVie became an independent, publicly-traded company as a result of the distribution by Abbott Laboratories (Abbott) of 100% of the outstanding common stock of AbbVie to Abbott’s shareholders. Note 2 Summary of Significant Accounting Policies ..................................................................................................................................................................................................................................................................................................................................................... Use of Estimates The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and necessarily include amounts based on estimates and assumptions by management. Actual results could differ from those amounts. Significant estimates include amounts for rebates, pension and other post-employment benefits, income taxes, litigation, valuation of goodwill and intangible assets, contingent consideration liabilities, financial instruments and inventory and accounts receivable exposures. Basis of Consolidation The consolidated financial statements 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, where AbbVie is determined to be the primary beneficiary. 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 expense, net in the consolidated statements of earnings. Intercompany balances and transactions are eliminated. Certain reclassifications have been made to conform the prior period consolidated financial statements to the current period presentation. Revenue Recognition AbbVie recognizes revenue when control of promised goods or services is transferred to the company’s customers, in an amount that reflects the consideration AbbVie expects to be entitled to in exchange for those goods or services. Sales, value add and other taxes collected concurrent with revenue-producing activities are excluded from revenue. AbbVie generates revenue primarily from product sales. For the majority of sales, the company transfers control, invoices the customer and recognizes revenue upon shipment to the customer. The company recognizes shipping and handling costs as an expense in cost of products sold when the company transfers control to the customer. Payment terms vary depending on the type and location of the customer, are based on customary commercial terms and are generally less than 57 2018 Form 10-K 13NOV201221352027 57 one year. AbbVie does not adjust revenue for the effects of a significant financing component for contracts where AbbVie expects the period between the transfer of the good or service and collection to be one year or less. Discounts, rebates, sales incentives to customers, returns and certain other adjustments are accounted for as variable consideration. Provisions for variable consideration are based on current pricing, executed contracts, government pricing legislation and historical data and are provided for in the period the related revenues are recorded. Rebate amounts are typically based upon the volume of purchases using contractual or statutory prices, which may vary by product and by payer. For each type of rebate, factors used in the calculation of the accrual include the identification of the products subject to the rebate, the applicable price terms and the estimated lag time between sale and payment of the rebate, which can be significant. Sales incentives to customers are insignificant. In addition to revenue from contracts with customers, the company also recognizes certain collaboration revenues. See Note 6 for additional information related to the collaboration with Janssen Biotech, Inc. Additionally, see Note 15 for disaggregation of revenue by product and geography. Research and Development Expenses 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, prior to regulatory approval, the payment obligations are expensed when the milestone results are achieved. Payments made to third parties subsequent to regulatory approval are capitalized as intangible assets and amortized to cost of products sold over the remaining useful life of the related product. 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) expenses in the consolidated statements of earnings. Subsequent payments made to the partner for the achievement of milestones during the development stage are expensed to R&D expense in the consolidated statements of earnings 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. Royalties are expensed to cost of products sold in the consolidated statements of earnings when incurred. Advertising Costs associated with advertising are expensed as incurred and are included in selling, general and administrative (SG&A) expense in the consolidated statements of earnings. Advertising expenses were $1.1 billion in 2018, $846 million in 2017 and $764 million in 2016. Pension and Other Post-Employment Benefits AbbVie records annual expenses relating to its defined benefit pension and other post-employment benefit plans based on calculations which utilize various actuarial assumptions, including discount rates, rates of return on assets, 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 58 13NOV201221352027 2018 Form 10-K 58 current rates and trends. Actuarial gains and losses are deferred in accumulated other comprehensive loss (AOCI), net of tax and are amortized over the remaining service attribution periods of the employees under the corridor method. Differences between the expected long-term return on plan assets and the actual annual return are amortized to net periodic benefit cost over a five-year period. 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 taxes are provided using enacted tax rates on the future tax consequences of temporary differences, which are the differences between the financial statement carrying amounts 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. Cash and Equivalents Cash and equivalents include money market funds and time deposits with original maturities of three months or less. Investments Investments consist primarily of time deposits, marketable debt securities, held-to-maturity debt securities and equity securities. Investments in marketable debt 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 AOCI on the consolidated balance sheets until realized, at which time the gains or losses are recognized in earnings. Investments in equity securities that have readily determinable fair values are recorded at fair value. Investments in equity securities that do not have readily determinable fair values are recorded at cost and are remeasured to fair value based on certain observable price changes or impairment events as they occur. Held-to-maturity debt securities are recorded at cost. Gains or losses on investments are included in other expense, net in the consolidated statements of earnings. AbbVie periodically assesses its marketable debt securities for other-than-temporary impairment losses. This evaluation is based on a number of factors, including the length of time and the extent to which the fair value has been below the cost basis and adverse conditions related specifically to the security, including any changes to the credit rating of the security, intent to sell, or whether AbbVie will more likely than not be required to sell the security before recovery of its amortized cost basis. AbbVie also considers industry factors and general market trends. When AbbVie determines that an other-than-temporary decline has occurred, the cost basis of the investment is written down with a charge to other expense, net in the consolidated statements of earnings and an available-for-sale investment’s unrealized loss is reclassified from AOCI to other expense, net in the consolidated statements of earnings. Realized gains and losses on sales of investments are computed using the first-in, first-out method adjusted for any other-than-temporary declines in fair value that were recorded in net earnings. Accounts Receivable Accounts receivable are stated at their net realizable value. The allowance for doubtful accounts 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 for doubtful accounts was $51 million at December 31, 2018 and $58 million at December 31, 2017. 59 2018 Form 10-K 13NOV201221352027 59 Inventories Inventories are valued at the lower of cost (first-in, first-out basis) or market. Cost includes material and conversion costs. Inventories consisted of the following: as of December 31 (in millions) Finished goods Work-in-process Raw materials Inventories 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 2018 2017 $ 473 862 270 $ 610 822 173 $1,605 $1,605 2018 2017 $ 73 1,603 6,362 358 $ 48 1,428 5,991 604 8,396 (5,513) 8,071 (5,268) $ 2,883 $ 2,803 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. Buildings include leasehold improvements which are amortized over the life of the related facility lease (including any renewal periods, if appropriate) or the asset, whichever is shorter. The estimated useful life for equipment ranges from 2 to 25 years. Equipment includes certain computer software and software development costs incurred in connection with developing or obtaining software for internal use and is amortized over 3 to 10 years. Depreciation expense was $471 million in 2018, $425 million in 2017 and $425 million in 2016. Assets related to capital leases were insignificant at December 31, 2018 and 2017. Litigation and Contingencies Loss contingency provisions are recorded 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. AbbVie accrues for product liability claims on an undiscounted basis. The liabilities are evaluated quarterly and adjusted if necessary as additional information becomes available. Receivables for insurance recoveries for product liability claims, if any, are recorded as assets on an undiscounted basis when it is probable that a recovery will be realized. Business Combinations AbbVie utilizes the acquisition method of accounting for business combinations. This method requires, among other things, that results of operations of acquired companies are included in AbbVie’s results of operations beginning on the respective acquisition dates and that assets acquired and liabilities assumed are recognized at fair value as of the acquisition date. Any excess of the fair value of consideration transferred over the fair values of the net assets acquired is recognized as goodwill. Contingent consideration liabilities are recognized at the estimated fair value on the acquisition date. Subsequent changes to the fair value of contingent consideration liabilities are recognized in other expense, net in the consolidated statements of earnings. The fair value of assets acquired and liabilities assumed in certain 60 13NOV201221352027 2018 Form 10-K 60 cases may be subject to revision based on the final determination of fair value during a period of time not to exceed twelve months from the acquisition date. 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 using the estimated pattern of economic benefit. 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, the intangible asset is written down to 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 could occur if the carrying amount of a reporting unit exceeded the fair value of that reporting unit. An impairment of indefinite-lived intangible assets would occur if the fair value of the intangible asset is less than the carrying value. The company tests its goodwill for impairment by first assessing qualitative factors to determine whether it is more likely than not that the fair value is less than its carrying amount. If the company concludes it is more likely than not that the fair value of the reporting unit is less than its carrying amount, a quantitative impairment test is performed. AbbVie tests indefinite-lived intangible assets for impairment by first assessing qualitative factors to determine whether it is more likely than not that the fair value is less than its carrying amount. If the company concludes it is more likely than not that the fair value is less than its carrying amount, a quantitative impairment test is performed. For its quantitative impairment tests, the company uses an estimated future cash flow approach that requires significant judgment with respect to future volume, revenue and expense growth rates, changes in working capital use, the selection of an appropriate discount rate, asset groupings and other assumptions and estimates. The estimates and assumptions used are consistent with the company’s business plans and a market participant’s views. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of the assets and potentially result in different impacts to the company’s results of operations. Actual results may differ from the company’s estimates. Acquired In-Process Research and Development In an asset acquisition, the initial costs of rights to IPR&D projects acquired are expensed as IPR&D in the consolidated statements of earnings 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. In a business combination, the fair value of IPR&D projects acquired 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. R&D costs incurred after the acquisition are expensed as incurred. 61 2018 Form 10-K 13NOV201221352027 61 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 (loss) (OCI) in the consolidated statements of comprehensive income. 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 net foreign exchange loss in the consolidated statements of earnings. Derivatives All derivative instruments are recognized as either assets or liabilities at fair value on the consolidated balance sheets and are classified as current or long-term based on the scheduled maturity of the instrument. 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 hedged risk are recognized in earnings immediately. 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. If it is determined that a derivative is no longer highly effective as a hedge, the company discontinues hedge accounting prospectively. If a hedged forecasted transaction becomes probable of not occurring, any gains or losses are reclassified from AOCI to earnings. Derivatives that are not designated as hedges are adjusted to fair value through current earnings. The company also uses derivative instruments or foreign currency denominated debt to hedge its net investments in certain foreign subsidiaries and affiliates. Realized and unrealized gains and losses from these hedges are included in AOCI. Derivative cash flows, with the exception of net investment hedges, are principally classified in the operating section of the consolidated statements of cash flows, consistent with the underlying hedged item. Cash flows related to net investment hedges are classified in the investing section of the consolidated statements of cash flows. Recent Accounting Pronouncements Recently Adopted Accounting Pronouncements ASU No. 2014-09 In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Summary and Amendments That Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40). The amendments in this standard superseded most existing revenue recognition requirements. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. AbbVie adopted the standard in the first quarter of 2018 using the modified retrospective method. Results for reporting periods beginning after December 31, 2017 have been presented in accordance with the standard, while results for prior periods have not been adjusted and continue to be reported in accordance with AbbVie’s historical accounting. The cumulative effect of initially applying the new revenue standard was recognized as an adjustment to the opening balance of retained earnings as of January 1, 2018. 62 13NOV201221352027 2018 Form 10-K 62 There were no significant changes to the amounts or timing of revenue recognition for product sales, the company’s primary revenue stream. For certain licensing arrangements where revenue was previously deferred and recognized over time, revenue is now recognized at the point in time when the license is granted. Additionally, for certain contract manufacturing arrangements where revenue was previously recognized at a point in time at the end of the manufacturing process, revenue is now recognized over time throughout the manufacturing process. Under the new standard, on January 1, 2018, the company recognized a cumulative-effect adjustment to retained earnings primarily related to certain deferred license revenues that were originally expected to be recognized through early 2020. The adjustment to the consolidated balance sheet included: (i) a $42 million increase to prepaid expenses and other; (ii) a $39 million decrease to inventories; (iii) a $57 million decrease to accounts payable and accrued liabilities; (iv) a $75 million decrease to other long-term liabilities; (v) a $22 million increase to deferred income taxes; and (vi) a $124 million increase to retained earnings. Other cumulative-effect adjustments to the consolidated balance sheet were insignificant. The impact of adoption on the company’s consolidated statements of earnings in 2018 was as follows: year ended December 31, 2018 (in millions, except per share data) Net revenues Cost of products sold Income tax benefit Net earnings Diluted earnings per share As Reported $32,753 7,718 (490) 5,687 $ 3.66 Balances Without Adoption of ASU 2014-09 Effect of Change Higher/(Lower) $32,812 7,730 (487) 5,731 $ 3.69 $ (59) (12) (3) (44) $(0.03) As of December 31, 2018, due to the impact of the adoption of ASU 2014-09, prepaid expenses and other were $40 million higher, inventories were $27 million lower, accounts payable and accrued liabilities were $53 million lower, other long-term liabilities were $18 million lower, deferred income taxes were $11 million higher and retained earnings were $80 million higher on the company’s consolidated balance sheet than they would have been had ASU 2014-09 not been adopted. Other impacts to the consolidated balance sheet were insignificant. ASU No. 2016-01 In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The standard requires several targeted changes including that equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) be measured at fair value with changes in fair value recognized in net earnings. AbbVie adopted the standard in the first quarter of 2018. The adoption did not impact the accounting for AbbVie’s investments in debt securities and did not have a material impact on the company’s consolidated financial statements. ASU No. 2016-16 In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The standard requires entities to recognize the income tax consequences of an intercompany transfer of an asset other than inventory when the transfer occurs. Under previous U.S. GAAP, the income tax consequences of these intercompany asset transfers were deferred until the asset was sold to a third party or otherwise recovered through use. AbbVie adopted the standard in the first quarter of 2018 using the modified retrospective method. As a result, on January 1, 2018, the company recorded a cumulative-effect adjustment to its consolidated balance sheet that included a $1.9 billion decrease to retained earnings, a $1.4 billion decrease to prepaid expenses and other and a $0.5 billion decrease to other assets. 63 2018 Form 10-K 13NOV201221352027 63 ASU No. 2017-07 In March 2017, the FASB issued ASU No. 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The standard requires that an employer continue to report the service cost component of net periodic benefit cost in the same income statement line item or items as other employee compensation costs arising from services rendered during the period. The other components of net periodic benefit cost are required to be presented separately outside of income from operations and are not eligible for capitalization. AbbVie adopted the standard in the first quarter of 2018 and applied the income statement classification provisions of this standard retrospectively. As a result, the company reclassified income of $47 million from operating earnings to non-operating income in 2017 and $44 million in 2016. Additionally, the company recorded approximately $34 million of non-operating income in 2018 which would have been recorded in operating earnings under the previous guidance. ASU No. 2017-12 In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The standard simplifies the application of hedge accounting and more closely aligns the accounting with an entity’s risk management activities. AbbVie elected to early adopt the standard in the first quarter of 2018. The adoption did not have a material impact on the company’s consolidated financial statements. Recent Accounting Pronouncements Not Yet Adopted ASU No. 2016-02 In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The standard outlines a comprehensive lease accounting model that supersedes the current lease guidance and requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms greater than 12 months. The guidance also changes the definition of a lease and expands the disclosure requirements of lease arrangements. AbbVie has substantially completed its assessment of the new standard as of December 31, 2018. AbbVie will adopt the standard effective in the first quarter of 2019 and will not restate comparative periods upon adoption. AbbVie will elect a package of practical expedients for leases that commenced prior to January 1, 2019 and will not reassess: (i) whether any expired or existing contracts are or contain leases; (ii) lease classification for any expired or existing leases; and (iii) initial direct costs capitalization for any existing leases. AbbVie does not expect the adoption will have a material impact on its consolidated statement of earnings. However, the new standard will require AbbVie to establish liabilities and corresponding right-of-use assets on its consolidated balance sheet of approximately $0.3 billion to $0.5 billion for operating leases that exist as of the adoption date. ASU No. 2016-13 In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326). The standard changes how credit losses are measured for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other financial instruments, the standard requires the use of a new forward-looking ‘‘expected credit loss’’ model that generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, the standard now requires allowances to be recorded instead of reducing the amortized cost of the investment. Additionally, the standard requires new disclosures and will be effective for AbbVie starting with the first quarter of 2020. Early adoption beginning in the first quarter of 2019 is permitted. With certain exceptions, adjustments are to be applied using a modified-retrospective approach by reflecting adjustments through a cumulative-effect impact to retained earnings as of the beginning of the fiscal year 64 13NOV201221352027 2018 Form 10-K 64 of adoption. AbbVie is currently assessing the impact and timing of adopting this guidance on its consolidated financial statements. ASU No. 2018-02 In February 2018, the FASB issued ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from AOCI to retained earnings for stranded tax effects related to adjustments to deferred taxes resulting from the December 2017 enactment of the Tax Cuts and Jobs Act. The standard will be effective for AbbVie starting with the first quarter of 2019. AbbVie is currently assessing the impact of adopting this guidance on its consolidated financial statements. Note 3 Supplemental Financial Information ..................................................................................................................................................................................................................................................................................................................................................... Interest Expense, Net years ended December 31 (in millions) Interest expense Interest income Interest expense, net Accounts Payable and Accrued Liabilities as of December 31 (in millions) Sales rebates Dividends payable Accounts payable Salaries, wages and commissions Royalty and license arrangements Other Accounts payable and accrued liabilities Other Long-Term Liabilities as of December 31 (in millions) Income taxes payable Contingent consideration liabilities Liabilities for unrecognized tax benefits Pension and other post-employment benefits Other Other long-term liabilities 2018 2017 2016 $1,348 (204) $1,150 (146) $1,047 (82) $1,144 $1,004 $ 965 2018 2017 $ 3,939 1,607 1,546 787 304 3,748 $ 3,069 1,143 1,474 763 514 3,263 $11,931 $10,226 2018 2017 $ 4,311 4,306 2,726 1,840 1,307 $ 4,675 4,266 2,683 2,740 1,241 $14,490 $15,605 Note 4 Earnings Per Share ..................................................................................................................................................................................................................................................................................................................................................... AbbVie grants certain restricted stock awards (RSAs) and restricted stock units (RSUs) that are considered to be participating securities. Due to the presence of participating securities, AbbVie calculates earnings per share (EPS) using the more dilutive of the treasury stock or the two-class method. For all periods presented, the two-class method was more dilutive. 65 2018 Form 10-K 13NOV201221352027 65 The following table summarizes the impact of the two-class method: (in millions, except per share information) Basic EPS Net earnings Earnings allocated to participating securities Earnings available to common shareholders Weighted-average basic shares outstanding Basic earnings per share Diluted EPS Net earnings Earnings allocated to participating securities Earnings available to common shareholders Weighted-average shares of common stock outstanding Effect of dilutive securities Weighted-average diluted shares outstanding Diluted earnings per share Years ended December 31, 2018 2017 2016 $5,687 30 $5,309 26 $5,953 30 $5,657 $5,283 $5,923 1,541 1,596 1,622 $ 3.67 $ 3.31 $ 3.65 $5,687 30 $5,309 26 $5,953 30 $5,657 $5,283 $5,923 1,541 5 1,546 1,596 7 1,603 1,622 9 1,631 $ 3.66 $ 3.30 $ 3.63 As further described in Note 12, AbbVie entered into and executed an accelerated share repurchase agreement (ASR) with a third party financial institution in 2016. For purposes of calculating EPS, AbbVie reflected the ASR as a repurchase of AbbVie common stock. Certain shares issuable under stock-based compensation plans were excluded from the computation of EPS because the effect would have been antidilutive. The number of common shares excluded was insignificant for all periods presented. Note 5 Licensing, Acquisitions and Other Arrangements ..................................................................................................................................................................................................................................................................................................................................................... Acquisition of Stemcentrx On June 1, 2016, AbbVie acquired all of the outstanding equity interests in Stemcentrx, a privately-held biotechnology company. The transaction expanded AbbVie’s oncology pipeline by adding the late-stage asset rovalpituzumab tesirine (Rova-T), four additional early-stage clinical compounds in solid tumor indications and a significant portfolio of pre-clinical assets. Rova-T is currently in registrational trials for small cell lung cancer. The acquisition of Stemcentrx was accounted for as a business combination using the acquisition method of accounting. The aggregate upfront consideration for the acquisition of Stemcentrx consisted of approximately 62.4 million shares of AbbVie common stock, issued from common stock held in treasury, and cash. AbbVie may make certain contingent payments upon the achievement of defined development and regulatory milestones. As of the acquisition date, the maximum aggregate amount payable for development and regulatory milestones was $4.0 billion. The acquisition-date fair value of these milestones was $620 million and was estimated using a combination of probability-weighted discounted cash flow models and Monte Carlo simulation models. The estimate was determined based on significant inputs that are not observable in the market, referred to as Level 3 inputs, as described in more detail in Note 10. 66 13NOV201221352027 2018 Form 10-K 66 The following table summarizes total consideration: (in millions) Cash Fair value of AbbVie common stock Contingent consideration Total consideration $1,883 3,923 620 $6,426 The following table summarizes fair values of assets acquired and liabilities assumed as of the June 1, 2016 acquisition date: (in millions) Assets acquired and liabilities assumed Accounts receivable Prepaid expenses and other Property and equipment Intangible assets—Indefinite-lived research and development Accounts payable and accrued liabilities Deferred income taxes Other long-term liabilities Total identifiable net assets Goodwill Total assets acquired and liabilities assumed $ 1 7 17 6,100 (31) (1,933) (7) 4,154 2,272 $ 6,426 Intangible assets were related to IPR&D for Rova-T, four additional early-stage clinical compounds in solid tumor indications and several additional pre-clinical compounds. The estimated fair value of the acquired IPR&D was determined using the multi-period excess earnings model of the ‘‘income approach,’’ which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the more significant assumptions inherent in the development of those asset valuations include the estimated annual cash flows for each asset or product (including net revenues, cost of sales, R&D costs, selling and marketing costs and working capital/contributory asset charges), the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, the regulatory approval probabilities, commercial success risks, competitive landscape as well as other factors. See Note 7 for additional information on the 2018 partial impairment of Stemcentrx- related intangible assets. The goodwill recognized represented expected synergies, including the ability to: (i) leverage the respective strengths of each business; (ii) expand the combined company’s product portfolio; (iii) accelerate AbbVie’s clinical and commercial presence in oncology; and (iv) establish a strong leadership position in oncology. Goodwill was also impacted by the establishment of a deferred tax liability for the acquired identifiable intangible assets which have no tax basis. The goodwill is not deductible for tax purposes. Following the acquisition date, the operating results of Stemcentrx have been included in the company’s financial statements. AbbVie’s consolidated statement of earnings for the year ended December 31, 2016 included no net revenues and an operating loss of $165 million associated with Stemcentrx’s operations. This operating loss included $43 million of post-acquisition stock-based compensation expense for Stemcentrx options and excluded interest expense and certain acquisition costs. 67 2018 Form 10-K 13NOV201221352027 67 Pro Forma Financial Information The following table presents the unaudited pro forma combined results of operations of AbbVie and Stemcentrx for the year ended December 31, 2016 as if the acquisition of Stemcentrx had occurred on January 1, 2015: year ended December 31 (in millions, except per share information) Net revenues Net earnings Basic earnings per share Diluted earnings per share 2016 $25,641 5,907 $ 3.58 $ 3.56 The unaudited pro forma financial information was prepared using the acquisition method of accounting and was based on the historical financial information of AbbVie and Stemcentrx. In order to reflect the occurrence of the acquisition on January 1, 2015 as required, the unaudited pro forma financial information includes adjustments to reflect the additional interest expense associated with the issuance of debt to finance the acquisition and the reclassification of acquisition, integration and financing-related costs incurred during the year ended December 31, 2016 to the year ended December 31, 2015. The unaudited pro forma financial information is not necessarily indicative of what the consolidated results of operations would have been had the acquisition been completed on January 1, 2015. In addition, the unaudited pro forma financial information is not a projection of the future results of operations of the combined company nor does it reflect the expected realization of any cost savings or synergies associated with the acquisition. Acquisition of BI 655066 and BI 655064 from Boehringer Ingelheim On April 1, 2016, AbbVie acquired all rights to risankizumab (BI 655066), an anti-IL-23 monoclonal biologic antibody in Phase 3 development for psoriasis, from Boehringer Ingelheim (BI) pursuant to a global collaboration agreement. AbbVie is also evaluating the potential of this biologic therapy in other indications, including Crohn’s disease, psoriatic arthritis and ulcerative colitis. In addition to risankizumab, AbbVie also gained rights to an anti-CD40 antibody, BI 655064, currently in Phase 1 development. BI will retain responsibility for further development of BI 655064, and AbbVie may elect to advance the program after completion of certain clinical achievements. The acquired assets include all patents, data, know-how, third- party agreements, regulatory filings and manufacturing technology related to BI 655066 and BI 655064. The company concluded that the acquired assets met the definition of a business and accounted for the transaction as a business combination using the acquisition method of accounting. Under the terms of the agreement, AbbVie made an upfront payment of $595 million. Additionally, $18 million of payments to BI, pursuant to a contractual obligation to reimburse BI for certain development costs it incurred prior to the acquisition date, were initially deferred. AbbVie may make certain contingent payments upon the achievement of defined development, regulatory and commercial milestones, as well as royalty payments based on net revenues of licensed products. As of the acquisition date, the maximum aggregate amount payable for development and regulatory milestones was approximately $1.6 billion. The acquisition-date fair value of these milestones was $606 million. The acquisition-date fair value of contingent royalty payments was $2.8 billion. The potential contingent consideration payments were estimated by applying a probability- weighted expected payment model for contingent milestone payments and a Monte Carlo simulation model for contingent royalty payments, which were then discounted to present value. The fair value measurements were based on Level 3 inputs. 68 13NOV201221352027 2018 Form 10-K 68 The following table summarizes total consideration: (in millions) Cash Deferred consideration payable Contingent consideration Total consideration $ 595 18 3,365 $3,978 The following table summarizes fair values of assets acquired as of the April 1, 2016 acquisition date: (in millions) Assets acquired Identifiable intangible assets—Indefinite-lived research and development Goodwill Total assets acquired $3,890 88 $3,978 The estimated fair value of the acquired IPR&D was determined using the multi-period excess earnings model of the ‘‘income approach.’’ The goodwill recognized represented expected synergies, including an expansion of the company’s immunology product portfolio. Pro forma results of operations for this acquisition have not been presented because this acquisition was insignificant to AbbVie’s consolidated results of operations. Other Licensing & Acquisitions Activity Excluding the acquisitions above, cash outflows related to other acquisitions and investments totaled $736 million in 2018, $308 million in 2017 and $262 million in 2016. AbbVie recorded acquired IPR&D charges of $424 million in 2018, $327 million in 2017 and $200 million in 2016. Significant arrangements impacting 2018, 2017 and 2016, some of which require contingent milestone payments, are summarized below. Calico Life Sciences LLC In June 2018, AbbVie and Calico Life Sciences LLC (Calico) entered into an extension of a collaboration to discover, develop and bring to market new therapies for patients with age-related diseases, including neurodegeneration and cancer. Under the terms of the agreement, AbbVie and Calico will each contribute an additional $500 million to the collaboration and the term is extended for an additional 3 years. Calico will be responsible for research and early development until 2022 and will advance collaboration projects through Phase 2a through 2027. Following completion of Phase 2a, AbbVie will have the option to exclusively license collaboration compounds. AbbVie will support Calico in its early research and development efforts and, upon exercise, would be responsible for late-stage development and commercial activities. Collaboration costs and profits will be shared equally by both parties post option exercise. During 2018, AbbVie recorded $500 million in other expense in the consolidated statement of earnings related to its commitments under the agreement. Alector, Inc. In October 2017, AbbVie entered into a global strategic collaboration with Alector, Inc. (Alector) to develop and commercialize medicines to treat Alzheimer’s disease and other neurodegenerative disorders. AbbVie and Alector have agreed to research a portfolio of antibody targets and AbbVie has an option to global development and commercial rights to two targets. The terms of the arrangement included an initial upfront payment of $205 million, which was expensed to IPR&D in the fourth quarter of 2017. Alector will 69 2018 Form 10-K 13NOV201221352027 69 conduct exploratory research, drug discovery and development for lead programs up to the conclusion of the proof of concept studies. If the option is exercised, AbbVie will lead development and commercialization activities and could make additional payments to Alector of up to $986 million upon achievement of certain development and regulatory milestones. Alector and AbbVie will co-fund development and commercialization and will share global profits equally. Other Arrangements In addition to the significant arrangements described above, AbbVie entered into several other arrangements resulting in charges to IPR&D of $424 million in 2018, $122 million in 2017 and $200 million in 2016. In connection with the other individually insignificant early-stage arrangements entered into in 2018, AbbVie could make additional payments of up to $4.8 billion upon the achievement of certain development, regulatory and commercial milestones. Note 6 Collaboration with Janssen Biotech, Inc. ..................................................................................................................................................................................................................................................................................................................................................... In December 2011, Pharmacyclics, a wholly-owned subsidiary of AbbVie, entered into a worldwide collaboration and license agreement with Janssen Biotech, Inc. and its affiliates (Janssen), one of the Janssen Pharmaceutical companies of Johnson & Johnson, for the joint development and commercialization of IMBRUVICA, a novel, orally active, selective covalent inhibitor of Bruton’s tyrosine kinase (BTK) and certain compounds structurally related to IMBRUVICA, for oncology and other indications, excluding all immune and inflammatory mediated diseases or conditions and all psychiatric or psychological diseases or conditions, in the United States and outside the United States. The collaboration provides Janssen with an exclusive license to commercialize IMBRUVICA outside of the United States and co-exclusively with AbbVie in the United States. Both parties are responsible for the development, manufacturing and marketing of any products generated as a result of the collaboration. The collaboration has no set duration or specific expiration date and provides for potential future development, regulatory and approval milestone payments of up to $200 million to AbbVie. The collaboration also includes a cost sharing arrangement for associated collaboration activities. Except in certain cases, Janssen is responsible for approximately 60% of collaboration development costs and AbbVie is responsible for the remaining 40% of collaboration development costs. In the United States, both parties have co-exclusive rights to commercialize the products; however, AbbVie is the principal in the end-customer product sales. AbbVie and Janssen share pre-tax profits and losses equally from the commercialization of products. Sales of IMBRUVICA are included in AbbVie’s net revenues. Janssen’s share of profits is included in AbbVie’s cost of products sold. Other costs incurred under the collaboration are reported in their respective expense line items, net of Janssen’s share. Outside the United States, Janssen is responsible for and has exclusive rights to commercialize IMBRUVICA. AbbVie and Janssen share pre-tax profits and losses equally from the commercialization of products. AbbVie’s share of profits is included in AbbVie’s net revenues. Other costs incurred under the collaboration are reported in their respective expense line items, net of Janssen’s share. The following table shows the profit and cost sharing relationship between Janssen and AbbVie: years ended December 31 (in millions) United States—Janssen’s share of profits (included in cost of products sold) International—AbbVie’s share of profits (included in net revenues) Global—AbbVie’s share of other costs (included in respective line items) 2018 2017 2016 $1,372 622 326 $1,001 429 288 $735 252 262 AbbVie’s receivable from Janssen, included in accounts receivable, net, was $177 million at December 31, 2018 and $124 million at December 31, 2017. AbbVie’s payable to Janssen, included in accounts payable and accrued liabilities, was $376 million at December 31, 2018 and $253 million at December 31, 2017. 70 13NOV201221352027 2018 Form 10-K 70 Note 7 Goodwill and Intangible Assets ..................................................................................................................................................................................................................................................................................................................................................... Goodwill The following table summarizes the changes in the carrying amount of goodwill: (in millions) Balance as of December 31, 2016 Foreign currency translation Balance as of December 31, 2017 Foreign currency translation Balance as of December 31, 2018 $15,416 369 15,785 (122) $15,663 The latest impairment assessment of goodwill was completed in the third quarter of 2018. As of December 31, 2018, there were no accumulated goodwill impairment losses. Future impairment tests for goodwill will be performed annually in the third quarter, or earlier if impairment indicators exist. Intangible Assets, Net The following table summarizes intangible assets: as of December 31 (in millions) Definite-lived intangible assets Developed product rights License agreements Total definite-lived intangible assets Indefinite-lived research and 2018 2017 Gross carrying amount Accumulated amortization Net carrying amount Gross carrying amount Accumulated amortization Net carrying amount $15,872 7,865 $(5,614) (1,810) $10,258 6,055 $16,138 7,822 $(4,982) (1,409) $11,156 6,413 23,737 (7,424) 16,313 23,960 (6,391) 17,569 development 4,920 — 4,920 9,990 — 9,990 Total intangible assets, net $28,657 $(7,424) $21,233 $33,950 $(6,391) $27,559 Indefinite-Lived Intangible Assets Indefinite-lived intangible assets represent acquired IPR&D associated with products that have not yet received regulatory approval. Indefinite-lived intangible assets as of December 31, 2018 and 2017 related to the acquisitions of Stemcentrx and BI compounds. See Note 5 for additional information. The latest annual impairment assessment of indefinite-lived intangible assets was completed in the third quarter of 2018 which supported that no impairment existed at that time. During the fourth quarter of 2018, the company made a decision to stop enrollment for the TAHOE trial, a Phase 3 study evaluating Rova-T as a second-line therapy for advanced small cell lung cancer following a recommendation from an Independent Data Monitoring Committee. This decision lowered the probabilities of success of achieving regulatory approval across Rova-T and other early-stage assets and represented a triggering event which required the company to evaluate for impairment the IPR&D assets associated with the Stemcentrx acquisition. The company utilized multi-period excess earnings models of the ‘‘income approach’’ and determined that the current fair value was $1.0 billion as of December 31, 2018, which was lower than the carrying value of $6.1 billion and resulted in a pre-tax impairment charge of $5.1 billion ($4.5 billion after tax). The fair value measurements were based on Level 3 inputs. Some of the more significant assumptions inherent in the development of the models included the estimated annual cash flows for each asset (including net revenues, cost of sales, R&D costs, selling and marketing costs and 71 2018 Form 10-K 13NOV201221352027 71 working capital/contributory asset charges), the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, the regulatory approval probabilities, commercial success risks, competitive landscape as well as other factors. This impairment charge was recorded to R&D expense in the consolidated statement of earnings for the year ended December 31, 2018. AbbVie continues to evaluate information as it becomes available with respect to the Stemcentrx-related clinical development programs and will monitor the remaining IPR&D assets for further impairment. No indefinite-lived intangible asset impairment charges were recorded in 2017 and 2016. Future impairment tests for indefinite-lived intangible assets will be performed annually in the third quarter, or earlier if impairment indicators exist. Definite-Lived Intangible Assets Definite-lived intangible assets are amortized over their estimated useful lives, which range between 2 to 16 years with an average of 11 years for both developed product rights and license agreements. Amortization expense was $1.3 billion in 2018, $1.1 billion in 2017 and $764 million in 2016 and was included in cost of products sold in the consolidated statements of earnings. The anticipated annual amortization expense for definite-lived intangible assets recorded as of December 31, 2018 is as follows: (in billions) Anticipated annual amortization expense 2019 2020 2021 2022 2023 $1.5 $1.7 $1.9 $2.1 $2.2 No definite-lived intangible asset impairment charges were recorded in 2018. In 2017, an impairment charge of $354 million was recorded related to ZINBRYTA that reduced both the gross carrying amount and net carrying amount of the underlying intangible assets due to lower expected future cash flows for the product. In 2016, an impairment charge of $39 million was recorded related to certain developed product rights in the United States due to a decline in the market for the product. The 2017 and 2016 impairment charges were based on discounted cash flow analyses and were included in cost of products sold in the consolidated statements of earnings. Note 8 Restructuring Plans ..................................................................................................................................................................................................................................................................................................................................................... AbbVie continuously evaluates its operations to identify opportunities to optimize its manufacturing and R&D operations, commercial infrastructure and administrative costs and to respond to changes in its business environment. As a result, AbbVie management periodically approves individual restructuring plans to achieve these objectives. In 2018, 2017 and 2016, no such plans were individually significant. Restructuring charges recorded were $70 million in 2018, $86 million in 2017 and $52 million in 2016 and were primarily related to employee severance and contractual obligations. These charges were recorded in cost of products sold, R&D expense and SG&A expenses in the consolidated statements of earnings based on the classification of the affected employees or operations. 72 13NOV201221352027 2018 Form 10-K 72 The following table summarizes the cash activity in the restructuring reserve for 2018, 2017 and 2016: (in millions) Accrued balance as of December 31, 2015 2016 restructuring charges Payments and other adjustments Accrued balance as of December 31, 2016 2017 restructuring charges Payments and other adjustments Accrued balance as of December 31, 2017 2018 restructuring charges Payments and other adjustments Accrued balance as of December 31, 2018 $ 148 52 (113) 87 86 (87) 86 59 (46) $ 99 73 2018 Form 10-K 13NOV201221352027 73 Note 9 Debt, Credit Facilities and Commitments and Contingencies ..................................................................................................................................................................................................................................................................................................................................................... The following table summarizes long-term debt: as of December 31 (dollars in millions) Senior notes issued in 2012 2.00% notes due 2018 2.90% notes due 2022 4.40% notes due 2042 Senior notes issued in 2015 1.80% notes due 2018 2.50% notes due 2020 3.20% notes due 2022 3.60% notes due 2025 4.50% notes due 2035 4.70% notes due 2045 Senior notes issued in 2016 2.30% notes due 2021 2.85% notes due 2023 3.20% notes due 2026 4.30% notes due 2036 4.45% notes due 2046 Senior Euro notes issued in 2016 0.38% notes due 2019 (e1,400 principal) 1.38% notes due 2024 (e1,450 principal) 2.13% notes due 2028 (e750 principal) Senior notes issued in 2018 3.375% notes due 2021 3.75% notes due 2023 4.25% notes due 2028 4.875% notes due 2048 Term loan facilities Floating rate notes due 2018 Other Fair value hedges Unamortized bond discounts Unamortized deferred financing costs Total long-term debt and lease obligations Current portion Noncurrent portion Effective interest rate in 2018(a) 2.15% 2.97% 4.46% 1.92% 2.65% 3.28% 3.66% 4.58% 4.73% 2.40% 2.91% 3.28% 4.37% 4.50% 0.55% 1.46% 2.18% 3.51% 3.84% 4.38% 4.94% 3.06% Effective interest rate in 2017(a) 2.15% 2.97% 4.46% 1.92% 2.65% 3.28% 3.66% 4.58% 4.73% 2.40% 2.91% 3.28% 4.37% 4.50% 0.55% 1.46% 2.18% —% —% —% —% 2.26% 2018 $ — 3,100 2,600 — 3,750 1,000 3,750 2,500 2,700 1,800 1,000 2,000 1,000 2,000 1,604 1,661 859 1,250 1,250 1,750 1,750 — 36 (466) (120) (163) 36,611 1,609 $35,002 2017 $ 1,000 3,100 2,600 3,000 3,750 1,000 3,750 2,500 2,700 1,800 1,000 2,000 1,000 2,000 1,673 1,733 896 — — — — 2,000 110 (401) (97) (146) 36,968 6,015 $30,953 (a) Excludes the effect of any related interest rate swaps. In September 2018, the company issued $6.0 billion aggregate principal amount of unsecured senior notes, consisting of $1.25 billion aggregate principal amount of 3.375% senior notes due 2021, $1.25 billion aggregate principal amount of 3.75% senior notes due 2023, $1.75 billion aggregate principal amount of 4.25% senior notes due 2028 and $1.75 billion aggregate principal amount of 4.875% senior notes due 2048. These senior notes rank equally with all other unsecured and unsubordinated indebtedness of the company. AbbVie may redeem the senior notes prior to maturity at a redemption price equal to the principal amount of the senior notes redeemed plus a make-whole premium, and except for the 3.375% 74 13NOV201221352027 2018 Form 10-K 74 notes due 2021, AbbVie may redeem the senior notes at par between one and six months prior to maturity. In connection with the offering, debt issuance costs incurred totaled $37 million and debt discounts totaled $37 million and are being amortized over the respective terms of the senior notes to interest expense, net in the consolidated statements of earnings. Of the $5.9 billion net proceeds, $2.0 billion was used to repay the company’s outstanding three-year term loan credit agreement in September 2018 and $1.0 billion was used to repay the aggregate principal amount of 2.00% senior notes at maturity in November 2018. The company intends to use the remaining proceeds to repay term loan obligations in 2019 as they become due. In May 2018, the company also repaid $3.0 billion aggregate principal amount of 1.80% senior notes at maturity. In November 2016, the company issued e3.6 billion aggregate principal amount of unsecured senior Euro notes. These senior notes rank equally with all other unsecured and unsubordinated indebtedness of the company. AbbVie may redeem the senior notes prior to maturity at a redemption price equal to the principal amount of the senior notes redeemed plus a make-whole premium. AbbVie may redeem the senior notes at par between one and three months prior to maturity. In connection with the offering, debt issuance costs incurred totaled $17 million and debt discounts totaled $9 million and are being amortized over the respective terms of the senior notes to interest expense, net in the consolidated statements of earnings. The company used the proceeds to redeem $4.0 billion aggregate principal amount of 1.75% senior notes that were due to mature in November 2017. As a result of this redemption, the company incurred a charge of $39 million ($25 million after tax) related to the make-whole premium, write-off of unamortized debt issuance costs and other expenses. The charge was recorded in interest expense, net in the consolidated statement of earnings. In May 2016, the company issued $7.8 billion aggregate principal amount of unsecured senior notes. These senior notes rank equally with all other unsecured and unsubordinated indebtedness of the company. AbbVie may redeem the senior notes prior to maturity at a redemption price equal to the principal amount of the senior notes redeemed plus a make-whole premium. AbbVie may redeem the senior notes at par between one and six months prior to maturity. In connection with the offering, debt issuance costs incurred totaled $52 million and debt discounts totaled $29 million and are being amortized over the respective terms of the senior notes to interest expense, net in the consolidated statements of earnings. Of the $7.7 billion net proceeds, $2.0 billion was used to repay the company’s outstanding term loan that was due to mature in November 2016, approximately $1.9 billion was used to finance the acquisition of Stemcentrx and approximately $3.8 billion was used to finance an ASR with a third party financial institution. See Note 5 for additional information related to the acquisition of Stemcentrx and Note 12 for additional information related to the ASR. In connection with the May 2016 unsecured senior notes issuance, AbbVie repaid a $2.0 billion 364-day term loan credit agreement. AbbVie has outstanding $13.7 billion aggregate principal amount of unsecured senior notes which were issued in 2015. AbbVie may redeem the senior notes, at any time, prior to maturity at a redemption price equal to the principal amount of the senior notes redeemed plus a make-whole premium and AbbVie may redeem the senior notes at par between one and six months prior to maturity. AbbVie has outstanding $5.7 billion aggregate principal amount of unsecured senior notes which were issued in 2012. AbbVie may redeem all of the senior notes of each series, at any time, or some of the senior notes of each series, from time to time, at a redemption price equal to the principal amount of the senior notes redeemed plus a make-whole premium. At December 31, 2018, the company was in compliance with its senior note covenants and term loan covenants. 75 2018 Form 10-K 13NOV201221352027 75 Short-Term Borrowings Short-term borrowings included commercial paper borrowings of $699 million at December 31, 2018 and $400 million at December 31, 2017. The weighted-average interest rate on commercial paper borrowings was 2.0% in 2018, 1.3% in 2017 and 0.6% in 2016. In August 2018, AbbVie replaced its existing revolving credit facility with a new $3.0 billion five-year revolving credit facility that matures in August 2023. The new facility enables the company to borrow funds on an unsecured basis at variable interest rates and contains various covenants. At December 31, 2018, the company was in compliance with all its credit facility covenants. Commitment fees under AbbVie’s revolving credit facilities were insignificant in 2018, 2017 and 2016. No amounts were outstanding under the credit facility as of December 31, 2018 and December 31, 2017. In May 2018, AbbVie entered into a $3.0 billion 364-day term loan credit agreement (term loan). In June 2018, the company drew on this term loan and as of December 31, 2018, $3.0 billion was outstanding and was included in short-term borrowings on the consolidated balance sheet. Borrowings under the term loan bear interest at one month LIBOR plus applicable margin. The term loan may be prepaid without penalty upon prior notice and contains customary covenants, all of which the company was in compliance with as of December 31, 2018. Maturities of Long-Term Debt and Capital Lease Obligations 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, 2018: as of and for the years ending December 31 (in millions) 2019 2020 2021 2022 2023 Thereafter Total obligations and commitments Fair value hedges, unamortized bond discounts and deferred financing costs Operating leases Debt maturities and capital leases $116 105 100 81 64 343 809 $ 1,612 3,755 3,053 4,120 2,250 22,570 37,360 (749) Total long-term debt and lease obligations $809 $36,611 Lease expense was $161 million in 2018, $169 million in 2017 and $159 million in 2016. AbbVie’s operating leases generally include renewal options and provide for the company to pay taxes, maintenance, insurance and other operating costs of the leased property. As of December 31, 2018, annual future minimum lease payments for capital lease obligations were insignificant. Contingencies and Guarantees 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 and no special-purpose entities. In the ordinary course of business, AbbVie has periodically entered into third-party agreements, such as the assignment of product rights, which have resulted in AbbVie becoming secondarily liable for obligations for which AbbVie had previously been primarily liable. Based upon past experience, the likelihood of payments under these agreements is remote. 76 13NOV201221352027 2018 Form 10-K 76 Note 10 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. AbbVie’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 and nonderivative instruments to reduce its exposure to foreign currency exchange rates. AbbVie also periodically enters into interest rate swaps 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 intercompany transactions denominated in a currency other than the functional currency of the local entity. These contracts, with notional amounts totaling $1.4 billion at December 31, 2018 and $2.2 billion at December 31, 2017, are designated as cash flow hedges and are recorded at fair value. The durations of these forward exchange contracts were generally less than eighteen months. Accumulated gains and losses as of December 31, 2018 will be reclassified from AOCI and included in cost of products sold at the time the products are sold, generally not exceeding six months from the date of settlement. The company also enters into foreign currency forward exchange contracts to manage its exposure to foreign currency denominated trade payables and receivables and intercompany loans. These contracts are not designated as hedges and are recorded at fair value. Resulting gains or losses are reflected in net foreign exchange loss in the consolidated statements of earnings and are generally offset by losses or gains on the foreign currency exposure being managed. These contracts had notional amounts totaling $8.6 billion at December 31, 2018 and $7.7 billion at December 31, 2017. The company also uses foreign currency forward exchange contracts or foreign currency denominated debt to hedge its net investments in certain foreign subsidiaries and affiliates. In the fourth quarter of 2016, the company issued e3.6 billion aggregate principal amount of senior Euro notes and designated the principal amounts of this foreign denominated debt as net investment hedges. Concurrently, the company settled foreign currency forward exchange contracts with aggregate notional amounts of e3.5 billion that were designated as net investment hedges. AbbVie is a party to interest rate hedge contracts designated as fair value hedges with notional amounts totaling $10.8 billion at December 31, 2018 and $11.8 billion at December 31, 2017. The effect of the hedge contracts is to change a fixed-rate interest obligation to a floating rate for that portion of the debt. AbbVie records the contracts at fair value and adjusts the carrying amount of the fixed-rate debt by an offsetting amount. No amounts are excluded from the assessment of effectiveness for cash flow hedges, net investment hedges or fair value hedges. 77 2018 Form 10-K 13NOV201221352027 77 The following table summarizes the amounts and location of AbbVie’s derivative instruments on the consolidated balance sheets: as of December 31 (in millions) Balance sheet caption 2018 2017 Balance sheet caption 2018 2017 Foreign currency forward exchange contracts Designated as cash flow hedges Prepaid expenses and other $113 $ 1 Accounts payable and $ — $120 Fair value - Derivatives in asset position Fair value - Derivatives in liability position Not designated as hedges Prepaid expenses and other 19 accrued liabilities 22 Accounts payable and accrued liabilities 26 29 Interest rate swaps designated as fair value hedges Prepaid expenses and other — — Accounts payable and — 8 Interest rate swaps designated as fair value hedges Other assets — — accrued liabilities Other long-term 466 393 liabilities Total derivatives $132 $23 $492 $550 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. The following table presents the pre-tax amounts of gains (losses) from derivative instruments recognized in other comprehensive income (loss): years ended December 31 (in millions) Cash Flow Investment Cash Flow Investment Cash Flow Investment Hedges Hedges Total Hedges Hedges Total Hedges Hedges Total 2018 Net 2017 Net 2016 Net Foreign currency forward exchange contracts $175 $— $175 $(250) $— $(250) $174 $118 $292 Assuming market rates remain constant through contract maturities, the company expects to transfer pre-tax gains of $159 million into cost of products sold for foreign currency cash flow hedges during the next 12 months. The company recognized, in other comprehensive loss, pre-tax gains of $178 million in 2018, pre-tax losses of $537 million in 2017 and pre-tax gains of $101 million in 2016 related to non-derivative, foreign currency denominated debt designated as net investment hedges. The following table summarizes the pre-tax amounts and location of derivative instrument net gains (losses) recognized in the consolidated statements of earnings, including the net gains (losses) reclassified out of AOCI into net earnings. See Note 12 for the amount of net gains (losses) reclassified out of AOCI. years ended December 31 (in millions) Statement of earnings caption 2018 2017 2016 Foreign currency forward exchange contracts Designated as cash flow hedges Not designated as hedges Non-designated treasury rate lock agreements Interest rate swaps designated as fair value hedges Debt designated as hedged item in fair value hedges Cost of products sold Net foreign exchange loss Other expense, net Interest expense, net Interest expense, net $(161) $118 (96) — (63) 63 83 — (71) 71 $ 20 6 (12) (266) 266 78 13NOV201221352027 2018 Form 10-K 78 Fair Value Measures The fair value hierarchy consists of the following three levels: • Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets that the company has the ability to access; • Level 2—Valuations based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuations in which all significant inputs are observable in the market; and • Level 3—Valuations using significant inputs that are unobservable in the market and include the use of judgment by the company’s management about the assumptions market participants would use in pricing the asset or liability. The following table summarizes the bases used to measure certain assets and liabilities carried at fair value on a recurring basis on the consolidated balance sheet as of December 31, 2018: (in millions) Assets Cash and equivalents Time deposits Debt 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) $1,209 — — 4 — $1,213 $ — — — $ — $6,080 568 1,536 — 132 $8,316 $ 466 26 — $ 492 $ — — — — — $ — $ — — 4,483 $4,483 Total $7,289 568 1,536 4 132 $9,529 $ 466 26 4,483 $4,975 79 2018 Form 10-K 13NOV201221352027 79 The following table summarizes the bases used to measure certain assets and liabilities carried at fair value on a recurring basis on the consolidated balance sheet as of December 31, 2017: (in millions) Assets Cash and equivalents Debt 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) $849 — 4 — $853 $ — — — $ — $ 8,454 2,524 — 23 $11,001 $ $ 401 149 — 550 $ — — — — $ — $ — — 4,534 $4,534 Total $ 9,303 2,524 4 23 $11,854 $ 401 149 4,534 $ 5,084 The fair values of time deposits approximate their amortized cost due to the short maturities of these instruments. The fair values of available-for-sale debt securities were determined based on prices obtained from commercial pricing services. The derivatives entered into by the company were valued using published spot curves for interest rate hedges and published forward curves for foreign currency contracts. The fair value measurements of the contingent consideration liabilities were determined based on significant unobservable inputs, including the discount rate, estimated probabilities and timing of achieving specified development, regulatory and commercial milestones and the estimated amount of future sales of the acquired products still in development. Changes to the fair value of the contingent consideration liabilities can result from changes to one or a number of inputs, including discount rates, the probabilities of achieving the milestones, the time required to achieve the milestones and estimated future sales. Significant judgment is employed in determining the appropriateness of these inputs. Changes to the inputs described above could have a material impact on the company’s financial position and results of operations in any given period. At December 31, 2018, a 50 basis point increase/decrease in the assumed discount rate would have decreased/increased the value of the contingent consideration liabilities by approximately $160 million. Additionally, at December 31, 2018, a five percentage point increase/decrease in the assumed probability of success across all potential indications would have increased/decreased the value of the contingent consideration liabilities by approximately $420 million. There have been no transfers of assets or liabilities between the fair value measurement levels. The following table presents the changes in fair value of contingent consideration liabilities which are measured using Level 3 inputs: years ended December 31 (in millions) Beginning balance Additions (See Note 5) Change in fair value recognized in net earnings Milestone payments Ending balance 80 13NOV201221352027 2018 Form 10-K 80 2018 2017 2016 $4,534 — 49 (100) $4,213 $ — — 3,985 228 — 626 (305) $4,483 $4,534 $4,213 The change in fair value recognized in net earnings is recorded in other expense, net in the consolidated statements of earnings. During the fourth quarter of 2018, the company recorded a $428 million decrease in the Stemcentrx contingent consideration liability due to a reduction in probabilities of success of achieving regulatory approval. Certain financial instruments are carried at historical cost or some basis other than fair value. The book values, approximate fair values and bases used to measure the approximate fair values of certain financial instruments as of December 31, 2018 are shown in the table below: (in millions) Liabilities Short-term borrowings Current portion of long-term debt and lease obligations, excluding fair value hedges Long-term debt and lease obligations, 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) Book value Approximate fair values $ 3,699 $ 3,693 $ — $3,693 1,609 1,617 1,609 8 28 $— — — $— excluding fair value hedges 35,468 34,052 34,024 Total liabilities $40,776 $39,362 $35,633 $3,729 AbbVie also holds investments in equity securities that do not have readily determinable fair values. The company records these investments at cost and remeasures them to fair value based on certain observable price changes or impairment events as they occur. The carrying amount of these investments was $84 million as of December 31, 2018. No significant cumulative upward or downward adjustments have been recorded for these investments as of December 31, 2018. Prior to the adoption of ASU No. 2016-01 discussed in Note 2, these investments were accounted for under the cost method and disclosed in the table below as of December 31, 2017. The book values, approximate fair values and bases used to measure the approximate fair values of certain financial instruments as of December 31, 2017 are shown in the table below: 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) Book value Approximate fair values (in millions) Assets Investments Total assets Liabilities Short-term borrowings Current portion of long-term debt and lease obligations, excluding fair value hedges Long-term debt and lease obligations, $ $ $ 48 48 400 $ $ $ 48 48 400 $ $ $ — — — $ — $ — $ 400 6,023 6,034 4,004 2,030 excluding fair value hedges 31,346 32,846 32,763 83 Total liabilities $37,769 $39,280 $36,767 $2,513 $48 $48 $ — — — $ — 81 2018 Form 10-K 13NOV201221352027 81 Available-for-sale Securities Substantially all of the company’s investments in debt securities were classified as available-for-sale with changes in fair value recognized in other comprehensive income. Debt securities classified as short-term were $204 million as of December 31, 2018 and $482 million as of December 31, 2017. Long-term debt securities mature primarily within five years. Estimated fair values of available-for-sale debt securities were based on prices obtained from commercial pricing services. The following table summarizes available-for-sale securities by type as of December 31, 2018: (in millions) Asset backed securities Corporate debt securities Other debt securities Total Gross unrealized Amortized cost Gains Losses Fair value $ 423 1,042 81 $1,546 $— $ (2) (9) — 1 — $ 421 1,034 81 $ 1 $(11) $1,536 The following table summarizes available-for-sale securities by type as of December 31, 2017: (in millions) Asset backed securities Corporate debt securities Other debt securities Equity securities Total Gross unrealized Amortized cost Gains Losses Fair value $ 930 1,451 144 4 $2,529 $ 1 4 — 2 $ 7 $(3) (2) (1) (2) $(8) $ 928 1,453 143 4 $2,528 AbbVie had no other-than-temporary impairments as of December 31, 2018. Net realized gains and losses were insignificant in 2018 and 2016. Net realized gains in 2017 were $90 million. Concentrations of Risk The company invests excess cash in time deposits, money market funds and debt securities to diversify the concentration of cash among different financial institutions. The company has established credit exposure limits and monitors concentrations of credit risk associated with financial institution deposits. The functional currency of the company’s Venezuela operations is the U.S. dollar due to the hyperinflationary status of the Venezuelan economy. During the first quarter of 2016, in consideration of declining economic conditions in Venezuela and a decline in transactions settled at the official rate, AbbVie determined that its net monetary assets denominated in the Venezuelan bolivar (VEF) were no longer expected to be settled at the official rate of 10 VEF per U.S. dollar, but rather at the Divisa Complementaria (DICOM) rate. Therefore, during the first quarter of 2016, AbbVie recorded a charge of $298 million to net foreign exchange loss to revalue its bolivar-denominated net monetary assets using the DICOM rate then in effect of approximately 270 VEF per U.S. dollar. As of December 31, 2018 and 2017, AbbVie’s net monetary assets in Venezuela were insignificant. Of total net accounts receivable, three U.S. wholesalers accounted for 63% as of December 31, 2018 and 56% as of December 31, 2017, and substantially all of AbbVie’s net revenues in the United States were to these three wholesalers. HUMIRA (adalimumab) is AbbVie’s single largest product and accounted for approximately 61% of AbbVie’s total net revenues in 2018, 65% in 2017 and 63% in 2016. 82 13NOV201221352027 2018 Form 10-K 82 Note 11 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 retirees in the United States and Puerto Rico, through other post-retirement benefit plans. Net obligations for these plans have been reflected on the consolidated balance sheets as of December 31, 2018 and 2017. The following table summarizes benefit plan information for the global AbbVie-sponsored defined benefit and other post-employment plans: as of and for the years ended December 31 (in millions) 2018 2017 2018 2017 Defined benefit plans Other post-employment plans Projected benefit obligations Beginning of period Service cost Interest cost Employee contributions Actuarial (gain) loss Benefits paid Other, primarily foreign currency translation adjustments End of period Fair value of plan assets Beginning of period Actual return on plan assets Company contributions Employee contributions Benefits paid Other, primarily foreign currency translation adjustments End of period Funded status, end of period Amounts recognized on the consolidated balance sheets Other assets Accounts payable and accrued liabilities Other long-term liabilities Net obligation Actuarial loss, net Prior service cost (credit) Accumulated other comprehensive loss $ 6,985 285 227 2 (614) (191) (76) $ 5,829 236 204 2 714 (173) 173 $ 813 26 25 — (287) (16) — $ 627 26 24 — 149 (15) 2 6,618 6,985 561 813 5,399 (384) 873 2 (191) (62) 5,637 4,572 684 246 2 (173) 68 5,399 — — 16 — (16) — — — — 15 — (15) — — $ (981) $(1,586) $(561) $(813) $ 321 (8) (1,294) $ 388 (32) (1,942) $ — (15) (546) $ — (15) (798) $ (981) $(1,586) $(561) $(813) $ 2,516 11 $ 2,471 12 $ 25 (22) $ 320 (29) $ 2,527 $ 2,483 $ 3 $ 291 The projected benefit obligations (PBO) in the table above included $1.9 billion at December 31, 2018 and $2.0 billion at December 31, 2017, related to international defined benefit plans. For plans reflected in the table above, the accumulated benefit obligations (ABO) were $6.0 billion at December 31, 2018 and $6.3 billion at December 31, 2017. For those plans reflected in the table above in which the ABO exceeded plan assets at December 31, 2018, the ABO was $4.0 billion, the PBO was $4.5 billion and aggregate plan assets were $3.3 billion. 83 2018 Form 10-K 13NOV201221352027 83 Subsequent to December 31, 2018, the company made a voluntary contribution of $150 million to its principal domestic defined benefit plan, the AbbVie Pension Plan. Amounts Recognized in Other Comprehensive Income (Loss) The following table summarizes the pre-tax gains and losses included in other comprehensive income (loss): years ended December 31 (in millions) Defined benefit plans Actuarial loss Amortization of actuarial loss and prior service cost Foreign exchange gain (loss) and other Total Other post-employment plans Actuarial loss (gain) Amortization of actuarial loss and prior service credit Total 2018 2017 2016 $ 209 (140) (13) $ 412 (107) 46 $284 (85) (22) $ 56 $ 351 $177 $(287) $ 149 — (1) $ 33 — $(288) $ 149 $ 33 The pre-tax amounts included in AOCI at December 31, 2018 expected to be recognized in net periodic benefit cost in 2019 consisted of $103 million of expense related to actuarial losses and prior service costs for defined benefit plans and $5 million of income related to actuarial losses and prior service credits 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 loss and prior service cost Net periodic benefit cost Other post-employment plans Service cost Interest cost Amortization of actuarial loss and prior service credit Net periodic benefit cost 2018 2017 2016 $ 285 227 (439) 140 $ 236 204 (382) 107 $ 210 201 (354) 85 $ 213 $ 165 $ 142 $ 26 25 1 $ 26 24 — $ 25 24 — $ 52 $ 50 $ 49 Weighted-Average Assumptions Used in Determining Benefit Obligations at the Measurement Date as of December 31 Defined benefit plans Discount rate Rate of compensation increases Other post-employment plans Discount rate 2018 2017 4.0% 3.4% 4.6% 4.5% 4.6% 3.9% 84 13NOV201221352027 2018 Form 10-K 84 The assumptions used in calculating the December 31, 2018 measurement date benefit obligations will be used in the calculation of net periodic benefit cost in 2019. Weighted-Average Assumptions Used in Determining Net Periodic Benefit Cost years ended December 31 Defined benefit plans Discount rate for determining service cost Discount rate for determining interest cost Expected long-term rate of return on plan assets Expected rate of change in compensation Other post-employment plans Discount rate for determining service cost Discount rate for determining interest cost 2018 2017 2016 3.4% 3.1% 7.7% 4.4% 4.0% 3.7% 3.9% 3.7% 7.8% 4.4% 4.9% 4.1% 4.4% 4.0% 7.9% 4.4% 5.1% 4.3% For the December 31, 2018 post-retirement health care obligations remeasurement, the company assumed a 6.6% pre-65 (7.3% post-65) annual rate of increase in the per capita cost of covered health care benefits. The rate was assumed to decrease gradually to 4.5% in 2050 and remain at that level thereafter. For purposes of measuring the 2018 post-retirement health care costs, the company assumed a 7.7% pre-65 (9.5% post-65) annual rate of increase in the per capita cost of covered health care benefits. The rate was assumed to decrease gradually to 4.5% for 2050 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, 2018, a one percentage point change in assumed health care cost trend rates would have the following effects: year ended December 31, 2018 (in millions) (brackets denote a reduction) Service cost and interest cost Projected benefit obligation One percentage point Increase Decrease $ 13 110 $(10) (87) 85 2018 Form 10-K 13NOV201221352027 85 Defined Benefit Pension Plan Assets as of December 31 (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(d) Non-U.S. government securities(d) Other(d) Absolute return funds(e) Real assets Other(f) Total Total assets measured at NAV Fair value of plan assets as of December 31 (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(d) Non-U.S. government securities(d) Other(d) Absolute return funds(e) Real assets Other(f) Total Total assets measured at NAV Fair value of plan assets 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) $ 719 67 226 21 123 48 225 3 7 147 $ — — — 119 262 127 7 258 — — $— — — — — — — — — — $1,586 $773 $— 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) $ 597 74 63 6 132 25 260 4 7 40 $ — — — 104 106 34 5 258 — — $— — — — — — — — — — $1,208 $507 $— 2018 $ 719 67 226 140 385 175 232 261 7 147 $2,359 3,278 $5,637 2017 $ 597 74 63 110 238 59 265 262 7 40 $1,715 3,684 $5,399 (a) A mix of index funds and actively managed equity accounts that are benchmarked to various large cap indices. (b) A mix of index funds and actively managed equity accounts that are benchmarked to various mid cap indices. 86 13NOV201221352027 2018 Form 10-K 86 (c) A mix of index funds and actively managed equity accounts that are benchmarked to various non-U.S. equity indices in both developed and emerging markets. (d) Securities held by actively managed accounts, index funds and mutual funds. (e) Primarily 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. (f) Investments in cash and cash equivalents. Equities and registered investment companies having quoted prices are valued at the published market prices. Fixed income securities that are valued using significant other observable inputs are quoted at prices obtained from independent financial service industry-recognized vendors. Investments held in pooled investment funds, common collective trusts or limited partnerships are valued at the net asset value (NAV) practical expedient to estimate fair value. The NAV is provided by the fund administrator and is based on the value of the underlying assets owned by the fund minus its liabilities. 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 35% in equity securities, 20% in fixed income securities and 45% 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 of any other plans. The expected return on plan assets assumption for each plan is based on management’s expectations of long-term average rates of return to be achieved by the underlying investment portfolio. 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 Benefit Payments The following table summarizes total benefit payments expected to be paid to plan participants including payments funded from both plan and company assets: years ending December 31 (in millions) 2019 2020 2021 2022 2023 2024 to 2028 Defined Contribution Plan Defined benefit plans Other post-employment plans $ 209 221 235 249 265 1,589 $ 16 19 21 21 22 135 AbbVie’s principal defined contribution plan is the AbbVie Savings Plan. AbbVie recorded expense of $89 million in 2018, $82 million in 2017 and $75 million in 2016 related to this plan. AbbVie provides certain other post-employment benefits, primarily salary continuation arrangements, to qualifying employees and accrues for the related cost over the service lives of the employees. 87 2018 Form 10-K 13NOV201221352027 87 Note 12 Equity ..................................................................................................................................................................................................................................................................................................................................................... Stock-Based Compensation AbbVie grants stock-based awards to eligible employees pursuant to the AbbVie 2013 Incentive Stock Program (2013 ISP), which provides for several different forms of benefits, including nonqualified stock options, RSAs, RSUs and various performance-based awards. Under the 2013 ISP, 100 million shares of AbbVie common stock were reserved for issuance as awards to AbbVie employees. The 2013 ISP also facilitated the assumption of certain awards granted under Abbott’s incentive stock program, which were adjusted and converted into Abbott and AbbVie stock-based awards as a result of AbbVie’s separation from Abbott. AbbVie measures compensation expense for stock-based awards based on the grant date fair value of the awards and the estimated number of awards that are expected to vest. Forfeitures are estimated based on historical experience at the time of grant and are revised in subsequent periods if actual forfeitures differ from those estimates. Compensation cost for stock-based awards is amortized over the service period, which could be shorter than the vesting period if an employee is retirement eligible. Retirement eligible employees generally are those who are age 55 or older and have at least ten years of service. Stock-based compensation expense is principally related to awards issued pursuant to the 2013 ISP and is summarized as follows: (in millions) Cost of products sold Research and development Selling, general and administrative Pre-tax compensation expense Tax benefit After-tax compensation expense Years ended December 31, 2018 2017 2016 $ 27 169 225 421 73 $ 23 159 183 365 73 $ 22 193 181 396 104 $348 $292 $292 Realized excess tax benefits associated with stock-based compensation totaled $78 million in 2018, $71 million in 2017 and $55 million in 2016. Since 2017, all excess tax benefits associated with stock-based awards have been recognized in the statement of earnings when the awards vest or settle, rather than in stockholders’ equity as a result of the adoption of a new accounting pronouncement. Stock Options Stock options awarded to employees typically have a contractual term of 10 years and generally vest in one-third increments over a three-year period. The exercise price is equal to at least 100% of the market value on the date of grant. The fair value is determined using the Black-Scholes model. The weighted- average grant-date fair values of stock options granted were $21.63 in 2018, $9.80 in 2017 and $9.29 in 2016. 88 13NOV201221352027 2018 Form 10-K 88 The following table summarizes AbbVie stock option activity in 2018: (options in thousands, aggregate intrinsic value in millions) Outstanding at December 31, 2017 Granted Exercised Lapsed Outstanding at December 31, 2018 Exercisable at December 31, 2018 Weighted- average exercise price Weighted- average remaining life (in years) Aggregate intrinsic value $ 41.69 114.36 28.75 17.03 $ 55.05 $ 45.23 5.1 $458 6.2 5.3 $242 $202 Options 8,316 634 (2,781) (26) 6,143 4,293 The total intrinsic value of options exercised was $215 million in 2018, $371 million in 2017 and $325 million in 2016. The total fair value of options vested during 2018 was $22 million. As of December 31, 2018, $6 million of unrecognized compensation cost related to stock options is expected to be recognized as expense over approximately the next two years. RSAs, RSUs and Performance Shares RSUs awarded to employees other than senior executives and other key employees generally vest in one-third increments over a three year period. Recipients of these RSUs are entitled to receive dividend equivalents as dividends are declared and paid during the RSU vesting period. The majority of the equity awards AbbVie grants to its senior executives and other key employees are performance-based. Such awards granted before 2016 consisted of RSAs or RSUs for which vesting was contingent upon AbbVie achieving a minimum annual return on equity (ROE). Since 2016, equity awards granted to senior executives and other key employees consist of a combination of performance-vested RSUs and performance shares as well as non-qualified stock options described above. The performance-vested RSUs have the potential to vest in one-third increments during a three-year performance period based on AbbVie’s ROE relative to a defined peer group of pharmaceutical, biotech and life sciences companies. The recipient may receive one share of AbbVie common stock for each vested award. The performance shares have the potential to vest over a three-year performance period and may be earned based on AbbVie’s EPS achievement and AbbVie’s total stockholder return (TSR) (a market condition) relative to a defined peer group of pharmaceutical, biotech and life sciences companies. Dividend equivalents on performance-vested RSUs and performance shares accrue during the performance period and are payable at vesting only to the extent that shares are earned. The weighted-average grant-date fair value of RSAs, RSUs and performance shares generally is determined based on the number of shares/units granted and the quoted price of AbbVie’s common stock on the date of grant. The weighted-average grant-date fair values of performance shares with a TSR market condition are determined using the Monte Carlo simulation model. The following table summarizes AbbVie RSA, RSU and performance share activity for 2018: (share units in thousands) Outstanding at December 31, 2017 Granted Vested Forfeited Outstanding at December 31, 2018 Share units Weighted-average grant date fair value 10,682 4,771 (5,073) (512) 9,868 $ 59.47 103.31 59.41 73.45 $ 79.90 89 2018 Form 10-K 13NOV201221352027 89 The fair market value of RSAs, RSUs and performance shares (as applicable) vested was $583 million in 2018, $348 million in 2017 and $362 million in 2016. As of December 31, 2018, $307 million of unrecognized compensation cost related to RSAs, RSUs and performance shares is expected to be recognized as expense over approximately the next two years. Cash Dividends Cash dividends declared per common share totaled $3.95 in 2018, $2.63 in 2017 and $2.35 in 2016. The following table summarizes quarterly cash dividends declared during 2018, 2017 and 2016: Date Declared 11/02/18 09/07/18 06/14/18 02/15/18 2018 Payment Date 02/15/19 11/15/18 08/15/18 05/15/18 Dividend Per Share Date Declared $1.07 $0.96 $0.96 $0.96 10/27/17 09/08/17 06/22/17 02/16/17 2017 Payment Date 02/15/18 11/15/17 08/15/17 05/15/17 Dividend Per Share Date Declared $0.71 $0.64 $0.64 $0.64 10/28/16 09/09/16 06/16/16 02/18/16 2016 Payment Date 02/15/17 11/15/16 08/15/16 05/16/16 Dividend Per Share $0.64 $0.57 $0.57 $0.57 Stock Repurchase Program The company’s stock repurchase authorization permits purchases of AbbVie shares from time to time in open-market or private transactions at management’s discretion. The program has no time limit and can be discontinued at any time. Shares repurchased under these programs are recorded at acquisition cost, including related expenses and are available for general corporate purposes. On February 15, 2018, AbbVie’s board of directors authorized a new $10.0 billion stock repurchase program, which superseded AbbVie’s previous stock repurchase program. On December 13, 2018, AbbVie’s board of directors authorized a $5.0 billion increase to the existing $10.0 billion stock repurchase program. Under this authorization, AbbVie repurchased approximately 109 million shares for $10.7 billion in 2018. AbbVie’s remaining share repurchase authorization was $4.3 billion as of December 31, 2018. Under previous stock repurchase programs, AbbVie made open-market share repurchases of approximately 11 million shares for $1.3 billion in 2018, approximately 13 million shares for $1.0 billion in 2017 and approximately 34 million shares for $2.1 billion in 2016. Additionally, in 2016, AbbVie executed an ASR in connection with the Stemcentrx acquisition and repurchased approximately 60 million shares for $3.8 billion. 90 13NOV201221352027 2018 Form 10-K 90 Accumulated Other Comprehensive Loss The following table summarizes the changes in each component of accumulated other comprehensive loss, net of tax, for 2018, 2017 and 2016: (in millions) (brackets denote losses) Foreign currency translation adjustments Net investment hedging activities Pension and post- employment benefits Marketable security activities Cash flow hedging activities Total Balance as of December 31, 2015 $(1,270) $ — $(1,378) $ 47 $ 40 $(2,561) Other comprehensive income (loss) before reclassifications Net losses (gains) reclassified from accumulated other comprehensive loss Net current-period other comprehensive income (loss) Balance as of December 31, 2016 Other comprehensive income (loss) before reclassifications Net losses (gains) reclassified from accumulated other comprehensive loss Net current-period other comprehensive income (loss) Balance as of December 31, 2017 Other comprehensive income (loss) before reclassifications Net losses reclassified from accumulated other comprehensive loss Net current-period other comprehensive income (loss) (165) 140 (194) 7 160 (52) — (165) (1,435) — 140 140 59 (135) (1,513) 680 (343) (480) (8) (1) 46 29 (24) 27 136 176 (25) (2,586) (230) (344) 316 — 74 (75) (112) 203 996 (439) (343) (203) (406) (1,919) (391) 138 — — (391) 138 84 113 197 (46) — (14) 4 (10) $(10) (342) (166) (141) (2,727) 156 (27) 157 313 274 247 $ 147 $(2,480) Balance as of December 31, 2018 $ (830) $ (65) $(1,722) Other comprehensive loss in 2018 included foreign currency translation adjustments totaling a loss of $391 million, which was principally due to the impact of the weakening of the Euro on the translation of the company’s Euro-denominated assets. In 2017, AbbVie reclassified $316 million of historical currency translation losses from AOCI related to the liquidation of certain foreign entities following the enactment of U.S. tax reform. These losses were included in net foreign exchange loss in the consolidated statement of earnings and had no related income tax impacts. Other comprehensive loss in 2017 also included foreign currency translation adjustments totaling a gain of $680 million, which was principally due to the impact of the strengthening of the Euro on the translation of the company’s Euro-denominated assets. Other comprehensive loss in 2016 included foreign currency translation adjustments totaling a loss of $165 million, which was principally due to the impact of the weakening of the Euro on the translation of the company’s Euro-denominated assets. 91 2018 Form 10-K 13NOV201221352027 91 The table below presents the impact on AbbVie’s consolidated statements of earnings for significant amounts reclassified out of each component of accumulated other comprehensive loss: years ended December 31 (in millions) (brackets denote gains) 2018 2017 2016 Pension and post-employment benefits Amortization of actuarial losses and other(a) Tax benefit Total reclassifications, net of tax Cash flow hedging activities Losses (gains) on designated cash flow hedges(b) Tax expense (benefit) Total reclassifications, net of tax $141 (28) $ 107 (33) $ 85 (26) $113 $ 74 $ 59 $161 (4) $(118) $(20) (4) 6 $157 $(112) $(24) (a) Amounts are included in the computation of net periodic benefit cost (see Note 11). (b) Amounts are included in cost of products sold (see Note 10). Other In addition to common stock, AbbVie’s authorized capital includes 200 million shares of preferred stock, par value $0.01. As of December 31, 2018, no shares of preferred stock were issued or outstanding. Note 13 Income Taxes ..................................................................................................................................................................................................................................................................................................................................................... Earnings Before Income Tax Expense years ended December 31 (in millions) Domestic Foreign Total earnings before income tax expense Income Tax Expense 2018 2017 2016 $(4,274) $ (2,678) $(1,651) 9,535 10,405 9,471 $ 5,197 $ 7,727 $ 7,884 years ended December 31 (in millions) 2018 2017 2016 Current Domestic Foreign Total current taxes Deferred Domestic Foreign Total deferred taxes Total income tax expense (benefit) Impacts Related to U.S. Tax Reform $ 593 434 $ 6,204 376 $2,229 498 $ 1,027 $ 6,580 $2,727 $(1,497) $(4,898) $ (792) (4) (20) 736 $(1,517) $(4,162) $ (796) $ (490) $ 2,418 $1,931 The Tax Cuts and Jobs Act (the Act) was signed into law in December 2017, resulting in significant changes to the U.S. corporate tax system. The Act reduced the U.S. federal corporate tax rate from 35% to 21% and required companies to pay a one-time transition tax on a mandatory deemed repatriation of 92 13NOV201221352027 2018 Form 10-K 92 earnings of certain foreign subsidiaries that were previously untaxed. These changes were generally effective for tax years beginning in 2018. The Act also created a minimum tax on certain foreign sourced earnings. The taxability of the foreign earnings and the applicable tax rates are dependent on future events. The company’s accounting policy for the minimum tax on foreign sourced earnings is to report the tax effects on the basis that the minimum tax will be recognized in tax expense in the year it is incurred as a period expense. Additionally, the Act significantly changed the timing and manner in which earnings of foreign subsidiaries are subject to U.S. tax. Therefore, unremitted foreign earnings previously considered indefinitely reinvested that were subject to the Act’s transition tax are no longer considered indefinitely reinvested. Post-2017 earnings subject to the U.S. minimum tax on foreign sourced earnings and the 100 percent foreign dividends received deduction are also not considered indefinitely reinvested earnings. As such, the company records foreign withholding tax liabilities related to the future cash repatriation of such earnings. However, the company considers instances of outside basis differences in foreign subsidiaries that would incur additional U.S. tax upon reversal (e.g., capital gain distribution) to be permanent in duration. The unrecognized tax liability is not practicable to determine. Prior to the enactment of the Act, the company did not provide deferred income taxes on undistributed earnings of foreign subsidiaries that were indefinitely reinvested for continued use in foreign operations. Due to the provision of the Act that required a one-time deemed repatriation of earnings of foreign subsidiaries, in 2017, the company recorded a transition tax expense of $4.5 billion. The company also recognized income tax expense of $338 million related to transition tax on income from the sale of inventory in 2018. The transition tax is generally payable in eight annual installments. Additionally, in 2017, the company remeasured certain deferred tax assets and liabilities based on tax rates at which they were expected to reverse in the future. In 2017, the net tax benefit of U.S. tax reform from the remeasurement of deferred taxes related to the Act and foreign tax law changes was $3.6 billion. Given the complexity of the Act and anticipated guidance from the U.S. Treasury about implementing the Act, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118) which allowed companies to record provisional amounts during a measurement period not extending beyond one year from the enactment date of the Act. As a result, in 2017, the company’s analysis and accounting for the tax effects of the Act was preliminary. In 2017, as a direct result of the Act, the company recorded $4.5 billion of transition tax expense, as well as $4.1 billion of net tax benefit for deferred tax remeasurement. Both of these amounts were provisional estimates, as the company had not fully completed its analysis and calculation of foreign earnings subject to the transition tax or its analysis of certain other aspects of the Act that impacted the remeasurement of deferred tax balances. In 2018, the company finalized its provisional estimates and recognized income tax expense related to the Act of $86 million, which primarily related to the transition tax expense on the one-time mandatory repatriation of previously untaxed earnings of foreign subsidiaries. 93 2018 Form 10-K 13NOV201221352027 93 Effective Tax Rate Reconciliation years ended December 31 Statutory tax rate Effect of foreign operations U.S. tax credits Impacts related to U.S. tax reform Tax law change related to foreign currency Stock-based compensation excess tax benefit Tax audit settlements All other, net Effective tax rate 2018 2017 2016 21.0% 35.0% 35.0% (10.3) (12.2) (28.7) (4.4) (4.0) (7.3) — 12.0 8.2 2.4 — — — (0.9) (1.5) — (1.2) (2.5) 1.8 2.6 1.4 (9.4)% 31.3% 24.5% The effective income tax rate fluctuates year to year due to the allocation of the company’s taxable earnings among jurisdictions, as well as certain discrete factors and events in each year, including changes in tax law, acquisitions and collaborations. The effective income tax rates in 2018, 2017 and 2016 differed from the statutory tax rate principally due to changes in enacted tax rates and laws, the benefit from foreign operations which reflects the impact of lower income tax rates in locations outside the United States, tax incentives in Puerto Rico and other foreign tax jurisdictions, business development activities, the cost of repatriation decisions and Stemcentrx impairment related expenses. The effective tax rates for these periods also reflected the benefit from U.S. tax credits principally related to research and development credits, the orphan drug tax credit and Puerto Rico excise tax credits. The Puerto Rico excise tax credits relate to legislation enacted by Puerto Rico that assesses an excise tax 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. The effective income tax rate in 2018 and 2017 included impacts related to U.S. tax reform. Specific to 2018, there was a favorable impact of the effective date of provisions of the Act related to the earnings from certain foreign subsidiaries. The 2018 effective income tax rate also reflects the effects of Stemcentrx impairment related expenses. In addition, the company recognized a net tax benefit of $131 million in 2018 and $91 million in 2017 related to the resolution of various tax positions pertaining to prior years. The effective income tax rate in 2016 included additional expense of $187 million related to the recognition of the tax effect of regulations issued by the Internal Revenue Service on December 7, 2016 that changed the determination of the U.S. taxability of foreign currency gains and losses related to certain foreign operations. 94 13NOV201221352027 2018 Form 10-K 94 Deferred Tax Assets and Liabilities as of December 31 (in millions) Deferred tax assets Compensation and employee benefits Accruals and reserves Chargebacks and rebates Advance payments Net operating losses and other credit carryforwards Other Total deferred tax assets Valuation allowances Total net deferred tax assets Deferred tax liabilities Excess of book basis over tax basis of intangible assets Excess of book basis over tax basis in investments Other Total deferred tax liabilities Net deferred tax liabilities 2018 2017 $ 529 371 417 867 228 353 $ 556 315 305 219 208 429 2,765 (103) 2,662 2,032 (108) 1,924 (2,940) (211) (250) (3,762) (181) (203) (3,401) (4,146) $ (739) $(2,222) As of December 31, 2018, gross state net operating losses were $717 million and tax credit carryforwards were $210 million. The state tax carryforwards expire between 2019 and 2038. As of December 31, 2018, foreign net operating loss carryforwards were $427 million. Foreign net operating loss carryforwards of $350 million expire between 2020 and 2028 and the remaining do not have an expiration period. The company had valuation allowances of $103 million as of December 31, 2018 and $108 million as of December 31, 2017. These were principally related to state net operating losses and credit carryforwards that are not expected to be realized. Current income taxes receivable were $488 million as of December 31, 2018 and $2.1 billion as of December 31, 2017 and were included in prepaid expenses and other on the consolidated balance sheets. Unrecognized Tax Benefits years ended December 31 (in millions) Beginning balance Increase due to current year tax positions Increase due to prior year tax positions Decrease due to prior year tax positions Settlements Lapse of statutes of limitations Ending balance 2018 2017 2016 $2,701 163 110 (36) (79) (7) $1,168 1,768 16 (2) (233) (16) $ 954 118 111 (7) — (8) $2,852 $2,701 $1,168 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. 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. 95 2018 Form 10-K 13NOV201221352027 95 If recognized, the net amount of potential tax benefits that would impact the company’s effective tax rate is $2.7 billion in 2018 and $2.6 billion in 2017. Of the unrecognized tax benefits recorded in the table above as of December 31, 2018, AbbVie would be indemnified for approximately $84 million. The ‘‘Increase due to current year tax positions’’ in the table above includes amounts related to federal, state and international tax items. The ‘‘Increase due to prior year tax positions’’ in the table above includes amounts relating to federal, state and international items as well as prior positions acquired through business development activities during the year. AbbVie recognizes interest and penalties related to income tax matters in income tax expense in the consolidated statements of earnings. AbbVie recognized gross income tax expense of $73 million in 2018, $24 million in 2017 and $35 million in 2016, for interest and penalties related to income tax matters. AbbVie had an accrual for the payment of gross interest and penalties of $190 million at December 31, 2018, $120 million at December 31, 2017 and $112 million at December 31, 2016. The company is routinely audited by the tax authorities in significant 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 $486 million. All significant federal, state, local and international matters have been concluded for years through 2010. The company believes adequate provision has been made for all income tax uncertainties. Note 14 Legal Proceedings and Contingencies ..................................................................................................................................................................................................................................................................................................................................................... AbbVie is subject to contingencies, such as various claims, legal proceedings and investigations regarding product liability, intellectual property, commercial, securities and other matters that arise in the normal course of business. Loss contingency provisions are recorded for probable losses at 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. The recorded accrual balance for litigation was approximately $350 million as of December 31, 2018 and approximately $445 million as of December 31, 2017. Initiation of new legal proceedings or a change in the status of existing proceedings may result in a change in the estimated loss accrued by AbbVie. While it is not feasible to predict the outcome of all proceedings and exposures with certainty, management believes that their ultimate disposition should not have a material adverse effect on AbbVie’s consolidated financial position, results of operations or cash flows. Subject to certain exceptions specified in the separation agreement by and between Abbott and AbbVie, AbbVie assumed the liability for, and control of, all pending and threatened legal matters related to its business, including liabilities for any claims or legal proceedings related to products that had been part of its business, but were discontinued prior to the distribution, as well as assumed or retained liabilities, and will indemnify Abbott for any liability arising out of or resulting from such assumed legal matters. Several pending lawsuits filed against Unimed Pharmaceuticals, Inc., Solvay Pharmaceuticals, Inc. (a company Abbott acquired in February 2010 and now known as AbbVie Products LLC) and others are consolidated for pre-trial purposes in the United States District Court for the Northern District of Georgia under the Multi-District Litigation (MDL) Rules as In re: AndroGel Antitrust Litigation, MDL No. 2084. These cases, brought by private plaintiffs and the Federal Trade Commission (FTC), generally allege Solvay’s patent litigation involving AndroGel was sham litigation and the 2006 patent litigation settlement agreements and related agreements with three generic companies violate federal antitrust laws. Plaintiffs generally seek monetary damages and/or injunctive relief and attorneys’ fees. These cases include: (a) four individual plaintiff lawsuits; (b) three purported class actions; and (c) Federal Trade Commission v. Actavis, Inc. et al. Following the district court’s dismissal of all plaintiffs’ claims, appellate proceedings led to the reinstatement of the claims regarding the patent litigation settlements, which are proceeding in the district court. In July 2018, the court denied the private plaintiffs’ motion for class certification. 96 13NOV201221352027 2018 Form 10-K 96 Lawsuits are pending against AbbVie and others generally alleging that the 2005 patent litigation settlement involving Niaspan entered into between Kos Pharmaceuticals, Inc. (a company acquired by Abbott in 2006 and presently a subsidiary of AbbVie) and a generic company violates federal and state antitrust laws and state unfair and deceptive trade practices and unjust enrichment laws. Plaintiffs generally seek monetary damages and/or injunctive relief and attorneys’ fees. The lawsuits consist of four individual plaintiff lawsuits and two consolidated purported class actions: one brought by three named direct purchasers of Niaspan and the other brought by ten named end-payer purchasers of Niaspan. The cases are consolidated for pre-trial proceedings in the United States District Court for the Eastern District of Pennsylvania under the MDL Rules as In re: Niaspan Antitrust Litigation, MDL No. 2460. In October 2016, the Orange County, California District Attorney’s Office filed a lawsuit on behalf of the State of California regarding the Niaspan patent litigation settlement in Orange County Superior Court, asserting a claim under the unfair competition provision of the California Business and Professions Code seeking injunctive relief, restitution, civil penalties and attorneys’ fees. In May 2018, the California Court of Appeals ruled that the District Attorney’s Office may not bring monetary claims beyond the scope of Orange County. In September 2014, the FTC filed a lawsuit against AbbVie and others in the United States District Court for the Eastern District of Pennsylvania, alleging that the 2011 patent litigation with two generic companies regarding AndroGel was sham litigation and the settlements of that litigation violated federal antitrust law. In May 2015, the court dismissed the FTC’s settlement-related claim. In June 2018, following a bench trial, the court found for the FTC on its sham litigation claim and ordered a disgorgement remedy of $448 million, plus prejudgment interest. The court denied the FTC’s request for injunctive relief. AbbVie is appealing the court’s liability and disgorgement rulings and, based on an assessment of the merits of that appeal, no liability has been accrued for this matter. The FTC is also appealing aspects of the court’s trial ruling and the dismissal of its settlement-related claim. In July and August 2018, several direct AndroGel purchasers brought two individual and one class action cases in the United States District Court for the Eastern District of Pennsylvania alleging sham litigation based on the court’s trial ruling in the FTC’s case. Those cases are stayed pending the appeals in the FTC’s case. In March 2015, the State of Louisiana filed a lawsuit, State of Louisiana v. Fournier Industrie et Sante, et al., against AbbVie, Abbott and affiliated Abbott entities in Louisiana state court. Plaintiff alleges that patent applications and patent litigation filed and other alleged conduct from the early 2000’s and before related to the drug TriCor violated Louisiana State antitrust and unfair trade practices laws. The lawsuit seeks monetary damages and attorneys’ fees. Plaintiff has filed a writ of certiorari with the Louisiana Supreme Court seeking to appeal the August 2018 dismissal of this lawsuit by the Louisiana Court of Appeal. In November 2014, a putative class action lawsuit, Medical Mutual of Ohio v. AbbVie Inc., et al., was filed against several manufacturers of testosterone replacement therapies (TRTs), including AbbVie, in the United States District Court for the Northern District of Illinois on behalf of all insurance companies, health benefit providers, and other third party payers who paid for TRTs, including AndroGel. The claims asserted include violations of the federal RICO Act and state consumer fraud and deceptive trade practices laws. The complaint seeks monetary damages and injunctive relief. In July 2018, the court denied the plaintiff’s motion for class certification. Product liability cases are pending in which plaintiffs generally allege that AbbVie and other manufacturers of TRTs did not adequately warn about risks of certain injuries, primarily heart attacks, strokes and blood clots. Approximately 4,000 claims are consolidated for pre-trial purposes in the United States District Court for the Northern District of Illinois under the MDL Rules as In re: Testosterone Replacement Therapy Products Liability Litigation, MDL No. 2545. Approximately 200 claims against AbbVie are pending in various state courts. Plaintiffs generally seek compensatory and punitive damages. Six cases have gone to trial. Four of those have resulted in complete verdicts for AbbVie: three by juries in the United States District Court for the Northern District of Illinois in January, May, and June 2018, and one by a jury in the Cook County, Illinois Circuit Court in August 2017. Another case in the United States District 97 2018 Form 10-K 13NOV201221352027 97 Court for the Northern District of Illinois resulted in a March 2018 jury verdict for AbbVie on strict liability and fraud and for the plaintiff on negligence and awarded $200,000 in compensatory damages and $3 million in punitive damages, which is the subject of post-trial proceedings. Another case in the United States District Court for the Northern District of Illinois resulted in a jury verdict for AbbVie on strict liability and for the plaintiff on remaining claims and an award of $140,000 in compensatory damages and $140 million in punitive damages in August 2017. In July 2018, the court vacated that verdict and ordered a new trial. In November 2018, AbbVie entered into a Master Settlement Agreement with the Plaintiffs’ Steering Committee in the MDL encompassing all existing claims in all courts. All proceedings in pending cases are effectively stayed, including post-trial proceedings in cases that had been tried to verdict with appellate rights preserved. Product liability cases are pending in which plaintiffs generally allege that AbbVie did not adequately warn about risk of certain injuries, primarily various birth defects, arising from use of Depakote. Approximately 404 cases are pending in the United States District Court for the Southern District of Illinois, and approximately six others are pending in various other federal and state courts. Plaintiffs generally seek compensatory and punitive damages. Over ninety percent of these pending cases, plus other unfiled claims, are subject to confidential settlement agreements and are expected to be dismissed with prejudice. To date, approximately 185 cases have been dismissed with prejudice. In November 2014, five individuals filed a putative class action lawsuit, Rubinstein, et al. v Gonzalez, et al., on behalf of purchasers and sellers of certain Shire plc (Shire) securities between June 20 and October 14, 2014, against AbbVie and its chief executive officer in the United States District Court for the Northern District of Illinois alleging that the defendants made and/or are responsible for material misstatements in violation of federal securities laws in connection with AbbVie’s proposed transaction with Shire. In June 2016, a lawsuit, Elliott Associates, L.P., et al. v. AbbVie Inc., was filed by five investment funds against AbbVie in the Cook County, Illinois Circuit Court alleging that AbbVie made misrepresentations and omissions in connection with its proposed transaction with Shire. Similar lawsuits were filed between July 2017 and October 2018 against AbbVie and in some instances its chief executive officer in the same court by additional investment funds. Plaintiffs seek compensatory and punitive damages. In May 2017, a shareholder derivative lawsuit, Ellis v. Gonzalez, et al., was filed in Delaware Chancery Court, alleging that AbbVie’s directors breached their fiduciary duties in connection with statements made regarding the Shire transaction. The lawsuit sought unspecified compensatory damages for AbbVie, among other relief. In July 2018, the court dismissed this case with prejudice. In August 2018, plaintiff appealed that dismissal to the Delaware Supreme Court. In September 2018, the Commissioner of the California Department of Insurance intervened in a qui tam lawsuit, State of California and Lazaro Suarez v. AbbVie Inc., et al., brought under the California Insurance Frauds Prevention Act, in California Superior Court for Alameda County. The Department of Insurance’s complaint alleges that, through patient and reimbursement support services and other services and items of value provided in connection with HUMIRA, AbbVie caused the submission of fraudulent commercial insurance claims for HUMIRA in violation of the California statute. The complaint seeks injunctive relief, an assessment of up to three times the amount of the claims at issue, and civil penalties. In addition, two federal securities lawsuits were filed in September (Pippins v. AbbVie Inc., et al., in the United States District Court for the Central District of California) and October (Holwill v. AbbVie Inc., et al., in the United States District Court for the Northern District of Illinois) against AbbVie, its chief executive officer and then-chief financial officer, alleging that reasons stated for HUMIRA sales growth in financial filings between 2013 and 2017 were misleading because they omitted the conduct alleged in the Department of Insurance’s complaint. In November 2018, the Pippins case was voluntarily dismissed. Beginning in May 2016, the Patent Trial & Appeal Board of the U.S. Patent & Trademark Office (PTO) instituted five inter partes review proceedings brought by Coherus Biosciences and Boehringer Ingelheim 98 13NOV201221352027 2018 Form 10-K 98 related to three AbbVie patents covering methods of treatment of rheumatoid arthritis using adalimumab. In these proceedings, the PTO reviewed the validity of the patents and issued decisions of invalidity in May, June and July of 2017. AbbVie’s appeal of the decisions is pending in the Court of Appeals for the Federal Circuit. In March 2017, AbbVie filed a lawsuit, AbbVie Inc. v. Novartis Vaccines and Diagnostics, Inc. and Grifols Worldwide Operations Ltd., in the United States District Court for the Northern District of California against Novartis Vaccines and Grifols Worldwide seeking a declaratory judgment that eleven HCV-related patents licensed to AbbVie in 2002 are invalid. AbbVie is seeking to enforce certain patent rights related to adalimumab (a drug AbbVie sells under the trademark HUMIRA(cid:4)). In a case filed in United States District Court for the District of Delaware in August 2017, AbbVie alleges that Boehringer Ingelheim International GmbH’s, Boehringer Ingelheim Pharmaceutical, Inc.’s, and Boehringer Ingelheim Fremont, Inc.’s proposed biosimilar adalimumab product infringes certain AbbVie patents. AbbVie seeks declaratory and injunctive relief. Pharmacyclics LLC, a wholly owned subsidiary of AbbVie, is seeking to enforce its patent rights relating to ibrutinib capsules (a drug Pharmacyclics sells under the trademark IMBRUVICA(cid:4)). In February 2018, four separate cases were filed in the United States District Court for the District of Delaware against the following defendants: Fresenius Kabi USA, LLC, Fresenius Kabi USA, Inc., and Fresenius Kabi Oncology Limited; Shilpa Medicare Limited, Sun Pharma Global FZE and Sun Pharmaceutical Industries Ltd.; Cipla Limited and Cipla USA Inc.; and Zydus Worldwide DMCC, Cadila Healthcare Limited, Teva Pharmaceuticals USA, Inc., Teva Pharmaceutical Industries Ltd., Sandoz Inc., and Lek Pharmaceuticals D.D. In November 2018, Pharmacyclics filed a fifth suit in the United States District Court for the District of Delaware against Hetero USA Inc., Hetero Labs Limited and Hetero Labs Limited Unit-I and Unit-V. In each case, Pharmacyclics alleges the defendant’s proposed generic ibrutinib product infringes certain Pharmacyclics patents and seeks declaratory and injunctive relief. Janssen Biotech, Inc. which is in a global collaboration with Pharmacyclics concerning the development and marketing of IMBRUVICA, is the co-plaintiff in these suits. Note 15 Segment and Geographic Area Information ..................................................................................................................................................................................................................................................................................................................................................... AbbVie operates in one business segment—pharmaceutical products. Substantially all of AbbVie’s net revenues in the United States are to three wholesalers. Outside the United States, products are sold 99 2018 Form 10-K 13NOV201221352027 99 primarily to health care providers or through distributors, depending on the market served. The following tables detail AbbVie’s worldwide net revenues: years ended December 31 (in millions) 2018 2017 2016 Immunology HUMIRA United States International Total Hematologic Oncology IMBRUVICA United States Collaboration revenues Total VENCLEXTA United States International Total HCV MAVYRET United States International Total VIEKIRA United States International Total Other Key Products Creon United States Lupron United States International Total Synthroid United States Synagis International AndroGel United States Duodopa United States International Total Sevoflurane United States International Total Kaletra United States International Total All other $13,685 6,251 $12,361 6,066 $10,432 5,646 $19,936 $18,427 $16,078 $ 2,968 622 $ 2,144 429 $ 1,580 252 $ 3,590 $ 2,573 $ 1,832 $ $ 247 97 344 $ 1,614 1,824 $ 3,438 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 3 175 178 928 726 166 892 776 726 469 80 350 430 74 317 391 55 281 336 319 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 89 33 122 277 213 490 61 723 784 831 669 160 829 781 738 577 61 294 355 78 332 410 71 352 423 876 $ $ $ $ $ 17 1 18 — — — 342 1,180 $ 1,522 $ $ $ $ $ $ $ $ $ $ $ $ 730 663 158 821 763 730 675 37 256 293 80 348 428 116 433 549 $ 1,199 Total net revenues $32,753 $28,216 $25,638 100 13NOV201221352027 2018 Form 10-K 100 Net revenues to external customers by geographic area, based on product shipment destination, were as follows: years ended December 31 (in millions) United States Japan Germany United Kingdom France Canada Italy Spain The Netherlands Brazil All other countries Total net revenues 2018 2017 2016 $21,524 1,591 1,292 855 783 730 652 611 352 350 4,013 $18,251 764 1,157 807 730 659 475 521 362 410 4,080 $15,947 770 1,104 776 713 624 523 589 352 355 3,885 $32,753 $28,216 $25,638 Long-lived assets, primarily net property and equipment, by geographic area were as follows: as of December 31 (in millions) United States and Puerto Rico Europe All other Total long-lived assets 2018 2017 $1,993 599 291 $1,862 621 320 $2,883 $2,803 101 2018 Form 10-K 13NOV201221352027 101 Note 16 Quarterly Financial Data (unaudited) ..................................................................................................................................................................................................................................................................................................................................................... (in millions except per share data) First Quarter Net revenues Gross margin Net earnings(a) Basic earnings per share Diluted earnings per share Cash dividends declared per common share Second Quarter Net revenues Gross margin Net earnings(b) Basic earnings per share Diluted earnings per share Cash dividends declared per common share Third Quarter Net revenues Gross margin Net earnings(c) Basic earnings per share Diluted earnings per share Cash dividends declared per common share Fourth Quarter Net revenues Gross margin Net earnings (loss)(d) Basic earnings (loss) per share Diluted earnings (loss) per share Cash dividends declared per common share 2018 2017 $ 7,934 6,007 2,783 $ 1.74 $ 1.74 $ 0.96 $ 8,278 6,344 1,983 $ 1.26 $ 1.26 $ 0.96 $ 8,236 6,401 2,747 $ 1.81 $ 1.81 $ 0.96 $6,538 4,922 1,711 $ 1.07 $ 1.06 $ 0.64 $6,944 5,415 1,915 $ 1.20 $ 1.19 $ 0.64 $6,995 5,379 1,631 $ 1.02 $ 1.01 $ 0.64 $ 8,305 6,283 (1,826) $7,739 5,458 52 $ (1.23) $ 0.03 $ (1.23) $ 0.03 $ 0.71 $ 1.07 (a) First quarter results in 2018 included an after-tax benefit of $148 million related to the change in fair value of contingent consideration liabilities partially offset by after-tax litigation reserves charges of $100 million. First quarter results in 2017 included after-tax costs of $84 million related to the change in fair value of contingent consideration liabilities. (b) Second quarter results in 2018 included after-tax charges of $500 million as a result of a collaboration agreement extension with Calico and $485 million related to the change in fair value of contingent consideration liabilities. Second quarter results in 2017 included an after-tax charge of $62 million to increase litigation reserves and after-tax costs of $61 million related to the change in fair value of contingent consideration liabilities. (c) Third quarter results in 2018 included after-tax litigation reserves charges of $176 million and $95 million related to the change in fair value of contingent consideration liabilities. Third quarter results in 2017 included after-tax costs of $401 million related to the change in fair value of contingent consideration liabilities. (d) Fourth quarter results in 2018 included an after-tax intangible asset impairment charge of $4.5 billion partially offset by an after-tax benefit of $375 million related to the change in fair value of contingent consideration liabilities. Fourth quarter results in 2017 were impacted by net charges related to the 102 13NOV201221352027 2018 Form 10-K 102 December 2017 enactment of the Tax Cuts and Jobs Act, including an after-tax charge of $4.5 billion related to the one-time mandatory repatriation of previously untaxed earnings of foreign subsidiaries, partially offset by after-tax benefits of $3.3 billion due to remeasurement of net deferred tax liabilities and other related impacts. Additional after-tax costs that impacted fourth quarter results in 2017 included $244 million for an intangible asset impairment charge, $221 million for a charge to increase litigation reserves, $205 million as a result of entering into a global strategic collaboration with Alector and $79 million related to the change in fair value of contingent consideration liabilities. 103 2018 Form 10-K 13NOV201221352027 103 Report Of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of AbbVie Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of AbbVie Inc. and subsidiaries (the Company) as of December 31, 2018 and 2017, and the related consolidated statements of earnings, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the ‘‘financial statements’’). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, 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) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 27, 2019 expressed an unqualified opinion thereon. Adoption of ASU No. 2016-16 As discussed in Note 2 to the financial statements, the Company changed its method of accounting for the income tax consequences of intercompany transfers of assets other than inventory in 2018 due to the adoption of Accounting Standards Update (ASU) No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2013. Chicago, Illinois February 27, 2019 104 13NOV201221352027 2018 Form 10-K 104 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ..................................................................................................................................................................................................................................................................................................................................................... None. ITEM 9A. CONTROLS AND PROCEDURES ..................................................................................................................................................................................................................................................................................................................................................... Disclosure Controls and Procedures; Internal Control Over Financial Reporting Evaluation of disclosure controls and procedures. The Chief Executive Officer, Richard A. Gonzalez, and the Chief Financial Officer, Robert A. Michael, 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 Securities Exchange Act of 1934 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. Changes in internal control over financial reporting. There were no changes in AbbVie’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that have materially affected, or are reasonably likely to materially affect, AbbVie’s internal control over financial reporting during the quarter ended December 31, 2018. 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. Management’s annual 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. 105 2018 Form 10-K 13NOV201221352027 105 Management assessed the effectiveness of AbbVie’s internal control over financial reporting as of December 31, 2018. 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 (2013 framework). Based on that assessment, management concluded that AbbVie maintained effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria. The effectiveness of AbbVie’s internal control over financial reporting as of December 31, 2018 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their attestation report below, which expresses an unqualified opinion on the effectiveness of AbbVie’s internal control over financial reporting as of December 31, 2018. Report of independent registered public accounting firm. 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 below. 106 13NOV201221352027 2018 Form 10-K 106 Report Of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of AbbVie Inc. Opinion on Internal Control over Financial Reporting We have audited AbbVie Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, AbbVie Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of AbbVie Inc. and subsidiaries as of December 31, 2018 and 2017, and the related consolidated statements of earnings, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and our report dated February 27, 2019 expressed an unqualified opinion thereon. Basis for Opinion The Company’s 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 Annual 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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. 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. Definition and Limitations on Internal Control Over Financial Reporting 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. /s/ Ernst & Young LLP Chicago, Illinois February 27, 2019 107 2018 Form 10-K 13NOV201221352027 107 ITEM 9B. OTHER INFORMATION ..................................................................................................................................................................................................................................................................................................................................................... None. 108 13NOV201221352027 2018 Form 10-K 108 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 2019 AbbVie Inc. Proxy Statement. The 2019 Definitive Proxy Statement will be filed on or about March 22, 2019. Also incorporated herein by reference is the text found in this Form 10-K under the caption, ‘‘Executive Officers of the Registrant.’’ AbbVie’s code of business conduct requires all its business activities to be conducted in compliance with all applicable 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 Vice Chairman, External Affairs and Chief Legal 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 2019 AbbVie Inc. Proxy Statement under the headings ‘‘Director Compensation,’’ ‘‘Executive Compensation,’’ and ‘‘Compensation Committee Report’’ is incorporated herein by reference. The 2019 Definitive Proxy Statement will be filed on or about March 22, 2019. 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, 2018 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) 16,004,640 — 16,004,640 (b) Weighted- average exercise price of outstanding options, warrants and rights(2) $55.05 — $55.05 (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))(3) 68,259,802 — 68,259,802 109 2018 Form 10-K 13NOV201221352027 109 (1) Includes 1,005,389 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, restricted stock awards and performance shares that have no exercise price. (3) Excludes shares issuable upon the exercise of stock options and pursuant to other rights granted under the Stemcentrx 2011 Equity Incentive Plan, which was assumed by AbbVie upon the consummation of its acquisition of Stemcentrx, Inc. As of December 31, 2018, 286,634 options remained outstanding under this plan. The options have a weighted-average exercise price of $14.52. No further awards will be granted under this plan. (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 2019 AbbVie Inc. Proxy Statement. The 2019 Definitive Proxy Statement will be filed on or about March 22, 2019. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR ..................................................................................................................................................................................................................................................................................................................................................... INDEPENDENCE The material to be included in the 2019 AbbVie Inc. 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 2019 Definitive Proxy Statement will be filed on or about March 22, 2019. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES ..................................................................................................................................................................................................................................................................................................................................................... The material to be included in the 2019 AbbVie Inc. Proxy Statement under the headings ‘‘Audit Fees and Non-Audit Fees’’ and ‘‘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 2019 Definitive Proxy Statement will be filed on or about March 22, 2019. 110 13NOV201221352027 2018 Form 10-K 110 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES ..................................................................................................................................................................................................................................................................................................................................................... (a) Documents filed as part of this Form 10-K. (1) Financial Statements: See Item 8, ‘‘Financial Statements and Supplementary Data,’’ on page 51 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 set forth in Item 15(b) below. (b) Exhibits: Exhibit Number 2.1 2.2 2.3 2.4 3.1 3.2 4.1 4.2 4.3 Exhibit Description *Agreement and Plan of Merger, dated as of April 25, 2016, by and among Stemcentrx, Inc., AbbVie Inc., Sirius Sonoma Corporation, AbbVie Stemcentrx LLC (formerly Sirius Sonoma LLC) and, solely for the purposes set forth therein, Fertile Valley LLC (incorporated by reference to Exhibit 2.1 of AbbVie’s Current Report on Form 8-K/A filed on May 6, 2016). *Amendment No. 1, dated as of May 28, 2016, to the Agreement and Plan of Merger, dated as of April 25, 2016, by and among Stemcentrx, Inc., AbbVie Inc., Sirius Sonoma Corporation, AbbVie Stemcentrx LLC (formerly Sirius Sonoma LLC) and, solely for the purposes set forth therein, Fertile Valley LLC (incorporated by reference to Exhibit 2.2 of AbbVie’s Current Report on Form 8-K filed on June 1, 2016). *Agreement and Plan of Reorganization by and among AbbVie Inc., Oxford Amherst Corporation, Oxford Amherst LLC and Pharmacyclics, Inc. dated as of March 4, 2015 (incorporated by reference to Exhibit 2.1 of the company’s Current Report on Form 8-K filed on March 6, 2015). *Amendment No. 1 to Agreement and Plan of Reorganization by and among AbbVie Inc., Oxford Amherst Corporation, Oxford Amherst LLC and Pharmacyclics, Inc. dated as of March 22, 2015 (incorporated by reference to Exhibit 2.1 of the company’s Current Report on Form 8-K filed on March 23, 2015). *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 3.1 of the company’s Current Report on Form 8-K filed on February 22, 2016). *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, including forms of notes (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). *Supplemental Indenture No. 2 dated May 14, 2015, between AbbVie Inc. and U.S. Bank National Association, as trustee, including forms of notes (incorporated by reference to Exhibit 4.1 of the company’s Current Report on Form 8-K filed on May 14, 2015). 111 2018 Form 10-K 13NOV201221352027 111 Exhibit Number 4.4 4.5 4.6 4.7 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 Exhibit Description *Supplemental Indenture No. 3 dated May 12, 2016, between AbbVie Inc. and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 of AbbVie’s Current Report on Form 8-K filed on May 12, 2016). *Supplemental Indenture No. 4, dated as of November 17, 2016, among AbbVie Inc., U.S. Bank National Association, as trustee, Elavon Financial Services DAC, U.K. Branch, as paying agent and Elavon Financial Services DAC, as transfer agent and registrar (incorporated by reference to Exhibit 4.1 of the company’s Current Report on Form 8-K filed on November 17, 2016). *Supplemental Indenture No. 5, dated September 18, 2018, between AbbVie Inc. and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.2 of the company’s Current Report on Form 8-K filed on September 18, 2018). *Agency Agreement, dated as of November 17, 2016, among AbbVie Inc., U.S. Bank National Association, as trustee, Elavon Financial Services DAC, U.K. Branch, as paying agent and Elavon Financial Services DAC, as transfer agent and registrar (incorporated by reference to Exhibit 4.2 of the company’s Current Report on Form 8-K filed on November 17, 2016). *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 Performance Incentive Plan, as amended and restated (incorporated by reference to Exhibit 10.4 of the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015).** *AbbVie Deferred Compensation Plan, as amended and restated (incorporated by reference to Exhibit 10.5 of the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016).** *AbbVie Non-Employee Directors’ Fee Plan, as amended and restated (incorporated by reference to Exhibit 10.6 of the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015).** *AbbVie Supplemental Pension Plan (incorporated by reference to Exhibit 10.7 of the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016).** *AbbVie Supplemental Savings Plan, as amended and restated (incorporated by reference to Exhibit 10.8 of the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015).** *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. 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).** 10.10 *Form of AbbVie Inc. Non-Employee Director Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.1 of the company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016).** 112 13NOV201221352027 2018 Form 10-K 112 Exhibit Number 10.11 10.12 10.13 10.14 10.15 10.16 10.17 10.18 10.19 10.20 10.21 10.22 10.23 Exhibit Description *Form of AbbVie Inc. Non-Qualified Stock Option 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, 2016).** *Form of AbbVie Inc. Retention Restricted Stock Unit Agreement—Cliff Vesting (incorporated by reference to Exhibit 10.3 of the company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016).** *Form of AbbVie Inc. Retention Restricted Stock Unit Agreement—Ratable Vesting (incorporated by reference to Exhibit 10.4 of the company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016).** *Form of AbbVie Inc. Retention Restricted Stock Agreement—Cliff Vesting (incorporated by reference to Exhibit 10.5 of the company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016).** *Form of AbbVie Inc. Retention Restricted Stock Agreement—Ratable Vesting (incorporated by reference to Exhibit 10.6 of the company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016).** *Form of AbbVie Inc. Performance Share Award 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, 2016).** *Form of AbbVie Inc. Performance-Vested Restricted Stock Unit 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, 2016).** *Form of AbbVie Inc. Non-Employee Director Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.1 of the company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2017).** *Form of AbbVie Inc. Non-Qualified Stock Option 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, 2017).** *Form of AbbVie Inc. Performance Share Award 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, 2017).** *Form of AbbVie Inc. Performance-Vested Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.4 of the company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2017).** *Form of AbbVie Inc. Performance Share Award Agreement (incorporated by reference to Exhibit 10.25 of the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017).** *AbbVie Non-Employee Directors’ Fee Plan, as amended and restated (incorporated by reference to Exhibit 10.26 of the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017).** 10.24 *Stemcentrx 2011 Equity Incentive Plan (incorporated by reference to Exhibit 4.3 of the Company’s Registration Statement on Form S-8 filed on June 16, 2016).** 113 2018 Form 10-K 13NOV201221352027 113 Exhibit Number 10.25 10.26 10.27 10.28 10.29 10.30 10.31 10.32 10.33 10.34 10.35 10.36 Exhibit Description *Form of AbbVie Inc. Performance-Vested Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.1 of the company’s Quarterly Report on Form 10-Q filed on May 4, 2018).** *Form of AbbVie Inc. Performance Share Award Agreement (incorporated by reference to Exhibit 10.2 of the company’s Quarterly Report on Form 10-Q filed on May 4, 2018).** *Form of AbbVie Inc. Non-Employee Director RSU Agreement (US) (incorporated by reference to Exhibit 10.3 of the company’s Quarterly Report on Form 10-Q filed on May 4, 2018).** *Form of AbbVie Inc. Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.4 of the company’s Quarterly Report on Form 10-Q filed on May 4, 2018).** *Form of AbbVie Inc. Non-Employee Director Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.5 of the company’s Quarterly Report on Form 10-Q filed on May 4, 2018).** *Pharmacyclics, Inc. 2014 Equity Incentive Award Plan (incorporated by reference to Exhibit 4.1 of the company’s Registration Statement on Form S-8 filed on May 27, 2015).** *Revolving Credit Agreement, dated as of August 31, 2018, among AbbVie, the lenders and other parties party thereto, and JPMorgan Chase Bank, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 of the company’s Current Report on Form 8-K filed on September 6, 2018). *364-Day Term Loan Credit Agreement, dated as of May 17, 2018, among AbbVie, the lenders and other parties party thereto, and Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 of the company’s Current Report on Form 8-K filed on May 18, 2018). *First Amendment to 364-Day Term Loan Credit Agreement, dated as of August 31, 2018, among AbbVie, the lenders and other parties party thereto, and Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 10.2 of the company’s Current Report on Form 8-K filed on September 6, 2018). *Underwriting Agreement, dated as of May 5, 2015, by and among AbbVie Inc. and Morgan Stanley & Co. LLC, Barclays Capital Inc., Deutsche Bank Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representatives of the several other underwriters named therein (incorporated by reference to Exhibit 1.1 of the company’s Current Report on Form 8-K filed on May 7, 2015). *Underwriting Agreement, dated as of May 9, 2016, by and among AbbVie Inc., and Barclays Capital Inc., Deutsche Bank Securities Inc., J.P. Morgan Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representatives of the several underwriters named in Schedule II thereto (incorporated by reference to Exhibit 1.1 of AbbVie’s Current Report on Form 8-K filed on May 12, 2016). *Underwriting Agreement, dated as of November 14, 2016, by and among AbbVie Inc., and Barclays Bank PLC, Deutsche Bank AG, London Branch, J.P. Morgan Securities plc, Merrill Lynch International and Morgan Stanley & Co. International plc, as representatives of the several other underwriters named therein (incorporated by reference to Exhibit 1.1 of the company’s Current Report on Form 8-K filed on November 17, 2016). 114 13NOV201221352027 2018 Form 10-K 114 Exhibit Number 10.37 21 23 31.1 31.2 32.1 32.2 101 Exhibit Description *Underwriting Agreement, dated September 13, 2018, by and among AbbVie Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities LLC, Morgan Stanley & Co. LLC and BNP Paribas Securities Corp. (acting for themselves and as representatives of the several underwriters named therein) (incorporated by reference to Exhibit 1.1 of the company’s Current Report on Form 8-K filed on September 18, 2018). Subsidiaries of AbbVie Inc. 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, 2018 filed on February 27, 2019, formatted in XBRL: (i) Consolidated Statements of Earnings; (ii) Consolidated Statements of Comprehensive Income; (iii) Consolidated Balance Sheets; (iv) Consolidated Statements of Equity; (v) Consolidated Statements of Cash Flows; and (vi) the Notes to Consolidated Financial Statements. The AbbVie Inc. 2019 Definitive Proxy Statement will be filed with the Securities and Exchange Commission under separate cover on or about March 22, 2019. * 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. Exhibits 32.1 and 32.2, above, are furnished herewith and should not be deemed to be ‘‘filed’’ under the Securities Exchange Act of 1934. 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. ITEM 16. FORM 10-K SUMMARY ..................................................................................................................................................................................................................................................................................................................................................... None. 115 2018 Form 10-K 13NOV201221352027 115 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 27, 2019 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 27, 2019 in the capacities indicated below. /s/ RICHARD A. GONZALEZ Richard A. Gonzalez Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ BRIAN L. DURKIN Brian L. Durkin 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 M. LIDDY Edward M. Liddy 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/ ROBERT A. MICHAEL Robert A. Michael Senior Vice President, Chief Financial Officer (Principal Financial Officer) /s/ ROXANNE S. AUSTIN Roxanne S. Austin Director of AbbVie Inc. /s/ BRETT J. HART Brett J. Hart Director of AbbVie Inc. /s/ MELODY B. MEYER Melody B. Meyer Director of AbbVie Inc. /s/ REBECCA B. ROBERTS Rebecca B. Roberts Director of AbbVie Inc. /s/ FREDERICK H. WADDELL Frederick H. Waddell Director of AbbVie Inc. 116 13NOV201221352027 2018 Form 10-K 116 13NOV201221352027 NOTICE OF ANNUAL MEETING OF STOCKHOLDERS 27FEB201905175455 Important Notice Regarding the Availability of Proxy Materials for the Stockholder Meeting to Be Held on May 3, 2019 The Annual Meeting of the Stockholders of AbbVie Inc. will be held at the Fairmont Chicago, Millennium Park, 200 North Columbus Drive, Chicago, Illinois 60601, on Friday, May 3, 2019, at 9:00 a.m. CT for the following purposes: • • • • • To elect three directors to hold office until the 2022 Annual Meeting or until their successors are elected (Item 1), To ratify the appointment of Ernst & Young LLP as AbbVie’s independent registered public accounting firm for 2019 (Item 2), To vote on an advisory vote on the approval of executive compensation (Item 3), To vote on a management proposal to eliminate supermajority voting (Item 4), and To transact such other business as may properly come before the meeting, including consideration of three stockholder proposals, if presented at the meeting (Items 5, 6, and 7). 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 of the proxy card. The board of directors recommends that you vote FOR Items 1, 2, 3, and 4 on the proxy card. The board of directors recommends that you vote AGAINST Items 5, 6, and 7 on the proxy card. The close of business on March 8, 2019, 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 2019 Proxy Statement and 2018 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: • • Going to the following website: www.proxyvote.com, entering the information requested on your computer screen and following the simple instructions, or 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 April 26, 2019. 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 22, 2019 13NOV201221352027 PROXY STATEMENT 1MAR201923121518 Table of Contents Proxy Statement Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Information Concerning Director Nominees (Item 1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Board of Directors and its Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Communicating with the Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Director Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation Committee Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation Risk Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary Compensation Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2018 Grants of Plan-Based Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2018 Outstanding Equity Awards at Fiscal Year End . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2018 Option Exercises and Stock Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pension Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-qualified 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) . . . . . . . . . Audit Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Audit Fees and Non-Audit Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of the Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Audit Committee Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Say on Pay—Advisory Vote on the Approval of Executive Compensation (Item 3) . . . . . . . . . . . . . . . . . . . . . . . . Management Proposal to Eliminate Supermajority Voting (Item 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholder Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholder Proposal on Lobbying Report (Item 5) Stockholder Proposal on Compensation Committee Drug Pricing Report (Item 6) . . . . . . . . . . . . . . . . . . . . . . . . . Stockholder Proposal on Independent Chair (Item 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 9 9 9 9 9 9 10 10 10 10 10 11 16 21 22 24 26 26 44 44 46 49 51 55 55 59 59 63 64 64 64 65 66 67 68 68 71 73 75 13NOV201221352027 PROXY STATEMENT SUMMARY 1MAR201923121649 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 3, 2019, at the Fairmont Chicago, Millennium Park, 200 North Columbus Drive, Chicago, Illinois 60601. This summary highlights selected information in the proxy statement. Please review the entire proxy statement and the AbbVie 2018 Annual Report before voting. 2019 Annual Meeting of Stockholders ................................................................................................................................................................................................................................................................................................................................. Date and Time: May 3, 2019 9:00 a.m. CT Location: Fairmont Chicago, Millennium Park, 200 North Columbus Drive, Chicago, Illinois 60601 Record Date: March 8, 2019 How to Vote: Stockholders as of the record date are entitled to vote via the Internet at www.proxyvote.com; by telephone at 1-800-690-6903; by returning a completed proxy card; or in person at the Annual Meeting of Stockholders. Voting Items and Board Recommendations ................................................................................................................................................................................................................................................................................................................................. Election of Directors Ratification of Independent Auditor Say on Pay—Advisory Vote on the Approval of Executive Compensation Item 1 Item 2 Item 3 Item 4 Management Proposal to Eliminate Supermajority Voting Item 5 Item 6 Item 7 Stockholder Proposal on Lobbying Report Stockholder Proposal on Compensation Committee Drug Pricing Report Stockholder Proposal on Independent Chair Board Recommendations FOR All Nominees FOR FOR FOR AGAINST AGAINST AGAINST Business Overview and Performance Highlights ................................................................................................................................................................................................................................................................................................................................. Business Overview Since becoming a public company in 2013, AbbVie’s mission has been to create an innovation-driven, patient- focused specialty biopharmaceutical company capable of achieving sustainable top-tier performance through outstanding execution and a consistent stream of innovative new medicines. AbbVie’s adjusted revenue and adjusted earnings per share growth in 2018 ranks the company at the very top of its peer group and reflects the continued strength of its execution across business priorities. Collectively, the new medicines that AbbVie has introduced since inception— including new therapies in hematologic oncology and hepatitis C virus—represented nearly a quarter of AbbVie’s total sales in 2018 and will be important contributors in 2019 and beyond. With the launch of several new products in 2019, combined with a robust mid- and late-stage pipeline, AbbVie remains well-positioned to deliver on its long-term vision for the company, including sustainable, top-tier performance along with increasing returns to stockholders. 28FEB201906030953 1 2019 Proxy Statement 13NOV201221352027 1 PROXY STATEMENT SUMMARY AbbVie’s products are focused on treating conditions such as chronic autoimmune diseases in rheumatology, gastroenterology and dermatology; oncology, including blood cancers; virology, including hepatitis C virus and human immunodeficiency virus; neurological disorders, such as Parkinson’s disease; metabolic diseases, including thyroid disease and complications associated with cystic fibrosis; pain associated with endometriosis; as well as other serious health conditions. AbbVie’s pipeline includes more than 60 compounds or indications in development across important medical specialties such as immunology, oncology and neuroscience, with additional targeted investments in cystic fibrosis and women’s health. Business Performance Highlights AbbVie has Delivered Robust Financial Results since Inception Performance from 2013 Inception to 2018 Year End 11.7% Adjusted net revenues - compound annual growth rate* 20.3% Adjusted diluted earnings per share - compound annual growth rate* 830 Basis points Operating margin expansion, adjusted* 235.2% 6-year total stockholder return ~$82BN Increase in market capitalization Added significant stockholder value 168% Increase in quarterly dividend Raised quarterly dividend to $1.07 per share from $0.40 per share at inception 60+ Active clinical development programs More than 30 new products or indications in mid- and late-stage development or under regulatory review 27FEB201905175734 The measures set forth above were calculated as of December 31, 2018. * Net revenues, diluted earnings per share and operating margin are adjusted to exclude certain specified items and are non-GAAP measures, which are reconciled in Appendix B. AbbVie has delivered a strong compound annual growth rate (CAGR) since inception on adjusted net revenues and adjusted diluted earnings per share (EPS), placing AbbVie in the top quartile of its Health Care Peer Group. Additionally, AbbVie is committed to a robust return of capital to stockholders with an increase of 168% in its quarterly dividend since 2013 as part of a balanced and disciplined capital allocation program. AbbVie’s total stockholder return 28FEB201906030953 2 13NOV201221352027 2019 Proxy Statement 2 (TSR) since inception of 235.2% also places AbbVie at the top of its Health Care Peer Group, and more than 136 percentage points above the Standard & Poor’s 500 Index and more than 152 percentage points above the NYSE Arca Pharmaceutical Index over the same time period. AbbVie has Significantly Grown Revenue and EPS Since 2013 PROXY STATEMENT SUMMARY Adjusted Net Revenues* Adjusted EPS* CAGR = 11.7% CAGR = 20.3% $22.8 $18.8 $19.9 ) N B $ ( $32.7 $28.2 $25.6 $7.91 $5.60 $4.82 $4.29 $3.14 $3.32 2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018 27FEB201905174692 *Net revenues and diluted earnings per share are adjusted for specified items and are non-GAAP measures, which are reconciled in Appendix B. AbbVie has Delivered Outstanding Results, Ranking First or Second on Nearly Each of the Below Financial Metrics % Revenue Growth ABBV Rank vs. Peer Group (1) % Adjusted EPS Growth ABBV Rank vs. Peer Group (1) Total Shareholder Return ABBV Rank vs. Peer Group (1) Period 2018 3 Years ('16,'17,'18) 5 Years ('14,'15,'16,'17,'18) Rank Period Rank Period #1 of 10 2018 #1 of 10 2018 #1 of 10 #2 of 10 3 Years ('16,'17,'18) 5 Years ('14,'15,'16,'17,'18) #2 of 10 #2 of 10 3 Years ('16,'17,'18) 5 Years ('14,'15,'16,'17,'18) Rank #7 of 10 #1 of 10 #2 of 10 27FEB201905174538 (1) AbbVie’s peer group above includes: Amgen, Inc., Bristol-Myers Squibb Company, Eli Lilly and Company, Gilead Sciences, Inc., GlaxoSmithKline plc, Johnson & Johnson, Merck & Company, Inc., Novartis AG and Pfizer Inc. AbbVie also Delivered Strong Business Performance in 2018 AbbVie has built a strong foundation for its business and 2018 was an exceptional year, as evidenced by a number of business highlights: • Net Revenues: AbbVie reported full-year net revenues of $32.8 billion on a GAAP basis and adjusted net revenues of $32.7 billion, an increase of 15.2% over 2017, excluding the impact of foreign exchange. This places AbbVie at the top of its Health Care Peer Group. 28FEB201906030953 3 2019 Proxy Statement 13NOV201221352027 3 PROXY STATEMENT SUMMARY • • • • • • HUMIRA: AbbVie delivered global HUMIRA sales of $19.9 billion, an increase of 8.2% on a reported basis, or 7.4% excluding the impact of foreign exchange. HUMIRA’S performance was driven by continued biologic penetration across therapeutic categories and geographies. IMBRUVICA: Global IMBRUVICA net revenue was $3.6 billion, an increase of 39.5%, driven by market share growth in front-line chronic lymphocytic leukemia (CLL) and other approved indications. Gross and Operating Margins: In 2018, AbbVie reported a gross margin of 76.4% on a GAAP basis or 80.6% of net revenues on an adjusted basis. AbbVie’s operating margin was 19.5% on a GAAP basis or 44.6% of net revenues on an adjusted basis. Earnings Per Share: AbbVie reported full-year diluted EPS of $3.66 on a GAAP basis and adjusted diluted EPS of $7.91, up 41.3%. This reflects growth in the very top tier of AbbVie’s Health Care Peer Group. For 2019, AbbVie provided a diluted EPS guidance range of $7.39 to $7.49 on a GAAP basis and $8.65 to $8.75 on an adjusted basis. The midpoint of the adjusted guidance represents growth of 10% over 2018, reflecting strong operating dynamics in the underlying business. Regulatory Milestones: AbbVie also achieved a number of regulatory milestones in markets worldwide for several key products, including regulatory approvals for VENCLEXTA in combination with RITUXAN (rituximab) in relapsed/refractory chronic lymphocytic leukemia (CLL); conditional approval for VENCLEXTA in combination with azacitidine or decitabine or low-dose cytarabine in newly diagnosed acute myeloid leukemia patients ineligible for intensive chemotherapy; IMBRUVICA in combination with rituximab as the first chemotherapy-free combination treatment for Waldenstrom macroglobulinemia; and ORILISSA for the management of moderate to severe pain associated with endometriosis. Pipeline Development: With more than 30 programs in mid- and late-stage development, AbbVie made significant pipeline advancements in 2018. AbbVie announced data from nearly a dozen pivotal trials, initiated a number of important phase transitions across our key development programs and made multiple regulatory submissions. AbbVie completed registrational studies and submitted regulatory applications for the company’s next-generation immunology assets, upadacitinib and risankizumab, in rheumatoid arthritis and psoriasis, respectively. In addition, the company initiated several Phase 3 programs for these assets including studies for upadacitinib in atopic dermatitis and ulcerative colitis, as well as risankizumab in Crohn’s disease. AbbVie reported positive data from Phase 3 studies in other areas of the pipeline including ELAGOLIX in uterine fibroids, VENCLEXTA in front-line CLL, and results from several trials evaluating IMBRUVICA in front-line CLL. Corporate Governance Highlights ................................................................................................................................................................................................................................................................................................................................. Our board of directors is committed to strong corporate governance tailored to meet the needs of AbbVie and its stockholders to enhance stockholder value. In connection with our ongoing, proactive engagement with stockholders (as described in greater detail on pages 34-35), AbbVie’s board of directors: • • approved a management proposal to eliminate supermajority voting in this proxy statement (Item 4) to seek stockholder approval to amend the company’s Amended and Restated Certificate of Incorporation to provide for a simple majority of shares outstanding for all provisions previously subject to a supermajority provision, as described in Item 4 and previously submitted a declassification management proposal to a stockholder vote in 2018, 2017, and 2016; approved and implemented in 2016 a proxy access by-law provision to permit a stockholder, or a group of up to 20 stockholders, owning at least 3% of the company’s outstanding common stock continuously for at least 3 years to nominate and include in the company’s proxy materials director nominees constituting up to 25% of the board of directors, as further detailed in the company’s By-Laws; 28FEB201906030953 4 13NOV201221352027 2019 Proxy Statement 4 PROXY STATEMENT SUMMARY • • • shared our board skills matrix beginning in 2016, which contains the skills considered by the nominations and governance committee to be the most relevant to the board’s oversight role with respect to AbbVie’s business and affairs and to drive our culture of innovation and responsibility; incorporated an overview of AbbVie’s corporate responsibility approach and initiatives in the proxy statement beginning in 2018; and reviewed detailed feedback from AbbVie’s investor engagement program, which reaches out to stockholders holding approximately 45% of the company’s outstanding shares. Highlights of our governance practices include: Governance Practice For more information Independent lead director with robust responsibilities is selected by the board Ten of AbbVie’s eleven directors are independent and regularly meet in executive session All members of the audit, compensation, nominations and governance and public policy committees are independent Adopted a proxy access By-Law provision for 3%/3 years Policy prohibiting hedging and pledging Robust stock ownership guidelines Disclosure of our corporate political contributions and our trade association dues and oversight process Broad clawback authority to recover incentive plan awards For inclusion on the board, the nominations and governance committee considers diversity of ethnicity, gender, and geography Related person transaction policy to ensure appropriate oversight We do not have a stockholder rights plan or ‘‘poison pill’’ Our directors are elected by a majority vote of our stockholders for uncontested elections and we have a resignation policy if the director fails to receive a majority of the votes cast We hold an annual say-on-pay advisory vote on executive compensation Our governance guidelines restrict the number of boards our directors may serve on to prevent overboarding Annual board and committee self-assessments and annual succession planning We are guided by strong ethics programs and supplier guidelines p. 16 p. 16 p. 19 p. 77 p. 44 p. 43 http://www.abbvie.com/responsibility/ transparency-policies/corporate-political- participation.html p. 44 p. 19 p. 75 Certificate of Incorporation and By-Laws p. 10 p. 66 Corporate Governance Guidelines Corporate Governance Guidelines http://www.abbvie.com/responsibility/ home.html Corporate Responsibility 2018 Highlights ................................................................................................................................................................................................................................................................................................................................. At AbbVie, we strive to make a remarkable impact on patients and drive sustainable growth by discovering and delivering a consistent stream of innovative medicines that address serious health problems. Our corporate responsibility commitments guide the ways in which we advance that vision. 28FEB201906030953 5 2019 Proxy Statement 13NOV201221352027 5 PROXY STATEMENT SUMMARY Commitment: Use our expertise to improve health ................................................................................................................................................................................................................................................................................................................................. Creating real health improvement is our mission. To be a leading healthcare innovator, we must attract, retain and support a diverse workforce and invest in their collaborative efforts to develop medicines that bring value for patients. Key 2018 advancements include: Equality, diversity and inclusion: • We were again widely recognized for our leading diversity practices. In the United States, we were named a top 10 member of the Working Mother 100 Best Companies list and further recognized by DiversityInc and Fortune 100 Best Companies to Work For. AbbVie also received a perfect score on the Human Rights Campaign Corporate Equality Index. Globally, we were named to over 40 Great Place to Work and top employer lists. • We further enhanced our commitment to equality, diversity and inclusion by creating a dedicated vice president role to lead our efforts. 47% of our management positions globally are held by women, and a new global Women’s Leadership Program will help women in management build the skills and perspectives needed to advance even further in the company. In the United States, 31% of our workforce is made up of historically underrepresented populations. • Each organization within AbbVie established new equality, diversity and inclusion plans to address identified areas of opportunity through talent attraction, acquisition, engagement, development and retention. Innovative medicines that offer significant health benefit: • In 2018, we advanced the treatment of blood cancers with approval of our chemotherapy-free, fixed- duration treatment for relapsed and refractory chronic lymphocytic leukemia. • We also introduced the first FDA-approved oral treatment in over a decade for the management of moderate to severe pain associated with endometriosis, a condition impacting an estimated one in 10 women of reproductive age. • We provided over 80,000 U.S. patients free access to these and other AbbVie medicines through our patient assistance programs. Addressing the health needs of the underserved: • In 2018, over 400 AbbVie scientists gave nearly 40,000 pro bono hours to conduct preclinical and clinical research on potential treatments for diseases that disproportionately affect developing countries, including onchocerciasis (river blindness), tuberculosis, and malaria. • We also announced a royalty-free licensing agreement with the Medicines Patent Pool (MPP) for our pan-genotypic hepatitis C virus (HCV) medicine, covering more than 90 low- and middle-income countries and territories. Through this agreement, AbbVie will grant licenses to World Health Organization prequalified generic manufacturers to manufacture and supply generic versions of the medicine, while maintaining the highest quality and production standards. AbbVie has a long history of working together with the community to ensure broad and long-term access to care for our virology medicines worldwide. 6 13NOV201221352027 2019 Proxy Statement 6 28FEB201906030953 PROXY STATEMENT SUMMARY Commitment: Steward our ethical and sustainable business ................................................................................................................................................................................................................................................................................................................................. To participate over the long-term in the provision of healthcare, we must earn and maintain the trust of patients, healthcare providers, regulators, policymakers and the public. Key 2018 advancements include: Human rights and workplace safety: • In 2018, AbbVie was the Dow Jones Sustainability Index (DJSI) leader in occupational health and safety across the biotechnology and pharmaceutical industries. Overall, the Index ranked AbbVie #2 in the biotechnology sector, and once again named the company to the DJSI World and North America indices. Environmental sustainability: • We made progress against our aggressive environmental targets in 2018, including expanding the proportion of our energy purchased from renewable sources. Robust ethics and compliance program: • Each year, all of AbbVie’s employees must read and certify adherence to our extensive AbbVie Code of Business Conduct, which sets forth our core guidelines and requirements for ethical behavior. Commitment: Support long-term community strength ................................................................................................................................................................................................................................................................................................................................. We support well-being, resilience and growth in our current markets and help lay the foundation for broader economic development using our unique resources. In addition to our ongoing support for education and community programs, independent medical and patient education, and employee vitality and volunteerism, in 2018 AbbVie made an additional $350 million in charitable contributions to support U.S. non-profit organizations making long-term impact on community strength. Community resilience and economic growth: • • For example, as a committed employer in Puerto Rico for nearly 50 years, AbbVie is supporting long-term efforts that will move the community from recovery to resilience in the wake of Hurricane Maria. With AbbVie donations of $50 million each, Direct Relief will rebuild and strengthen the primary healthcare system, while Habitat for Humanity will repair and rebuild homes, making them better able to withstand future hurricanes. As a technology innovator, we want to help narrow the educational gap for children in underserved areas. Our gifts of $30 million to Communities In Schools, $10 million to City Year and $15 million to the University of Chicago Education Lab will grow programs focused on improving graduation rates, reducing dropout rates and increasing college and career readiness for children in kindergarten through grade 12— with an emphasis on those in high-poverty neighborhoods. Public health and well-being: • Sick children and their families often experience emotional and financial burdens. We are working with leading organizations that help alleviate those burdens so that families can focus on healing. Our donations totaling $155 million: $100 million to Ronald McDonald House Charities, $50 million to St. Jude Children’s Research Hospital and $5 million to Family Reach, will help them expand services and create physical spaces that will improve health and well-being in a holistic way. 28FEB201906030953 7 2019 Proxy Statement 13NOV201221352027 7 PROXY STATEMENT SUMMARY • We are partners in the global movement toward the elimination of HCV and actively support a wide range of efforts to help elevate HCV elimination on the global agenda. In 2018, we launched micro-elimination pilot projects in several countries, with the goal of demonstrating the impact of elimination among targeted geographies and populations, and identifying scalable elimination strategies. The commitments discussed above are also aligned with global priorities as defined by the United Nations’ Sustainable Development Goals (SDGs). We focus on the key aspects of these SDGs that relate most closely to our activities: Securing Good Health & Well-Being (SDG 3), Quality Education (SDG 4), Gender Equality (SDG 5), Decent Work & Economic Growth (SDG 8), Responsible Production and Consumption (SDG 12), and Climate Action (SDG 13). For more information about our corporate responsibility efforts, please visit abbvie.com/responsibility. Executive Compensation Highlights ................................................................................................................................................................................................................................................................................................................................. AbbVie’s board of directors believes a well-designed compensation program should align executive interests with the drivers of stockholder returns and profitable growth, support achievement of the company’s primary business goals, and attract and retain world-class executives whose talents and contributions sustain the growth in long-term stockholder value. Consequently, the compensation committee of the board has designed and implemented an executive compensation program in which a substantial majority of named executive officer (NEO) compensation at AbbVie is performance-based. When determining NEO compensation, the committee first considers the median of the competitive marketplace (as derived primarily from the Health Care Peer Group approved by the committee) as an initial benchmark for assessing compensation. The committee then takes into account the company’s overall performance against the financial, operating and strategic objectives that were established at the start of the performance period. Finally, specific pay determinations are made for each NEO based on his or her individual performance against goals and contributions to the short- and long-term performance of the company. Three primary components make up AbbVie’s executive pay program: base salary, short-term incentives and long-term incentives. The structure of each component is tailored to serve a specific function and purpose. The following is a summary of the key components of our compensation program. Designed to be competitive with market and industry norms, and to reflect individual performance Base Salary Individual salaries are established relative to market median based on each NEO’s individual performance, skills, experience, and internal equity, as well as the company’s annual operating budget Short-Term Incentives Long-Term Incentives Plan utilizes non-GAAP financial goals as well as an assessment of individual performance against strategic objectives: — Net revenues — Income before taxes — Operating margin — HUMIRA sales — Return on assets — Strategic and leadership goals Long-term incentive annual awards are granted in the form of: — Performance shares and performance- vested restricted stock units (80% of NEO’s LTI award) — Non-qualified stock options (20% of NEO’s LTI award) Level of awards NEOs receive varies according to plan design and individual performance as reviewed by our compensation committee Targets are based on expected business, market and regulatory conditions, including expectations for our pipeline Compensation committee establishes maximum award allocations for plan participants each year as a percentage of consolidated net earnings, and the plan imposes a maximum of 200% of target Compensation committee uses a payout matrix based on financial performance to define and cap the range of awards at or below the plan maximum when making its final determinations Awards are based on LTI program goals and company business performance, as well as individual factors Compensation committee determines grants for each NEO based on its assessment of performance and progress against strategic milestones Annual award design incorporates multi-year performance periods and multiple performance metrics, including relative total stockholder return 1MAR201916331085 28FEB201906030953 8 13NOV201221352027 2019 Proxy Statement 8 INFORMATION ABOUT THE ANNUAL MEETING 27FEB201905174821 Who Can Vote Stockholders of record at the close of business on March 8, 2019 will be entitled to notice of and to vote at the Annual Meeting. As of March 8, 2019, AbbVie had 1,478,164,719 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 (SEC) e-proxy rules, AbbVie mailed a Notice of Internet Availability of Proxy Materials (the ‘‘Notice’’) to stockholders in March 2019. 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: • • • by delivering a written notice to the secretary of AbbVie, by delivering an authorized proxy with a later date, or by voting by telephone or the Internet after you have given your proxy. Discretionary Voting Authority Unless otherwise specified 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 three nominees named in Item 1 on the proxy card. If a nominee becomes unavailable to serve, the shares will be voted for a substitute designated by the board of directors or for fewer than three 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 proposals to be presented at the Annual Meeting or if the stockholder has chosen to abstain, 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, FOR the approval of executive compensation, FOR the management proposal to eliminate supermajority voting, and AGAINST each of the stockholder proposals. 9 2019 Proxy Statement 13NOV201221352027 9 INFORMATION ABOUT THE ANNUAL MEETING The board of directors is not aware of any other issue that 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. Directors are elected by stockholders in an uncontested election if a majority of the votes cast are ‘‘for’’ a director’s re-election at the Annual Meeting, excluding abstentions and broker non-votes. For other matters, the affirmative vote of a majority of the shares represented, in person or by proxy, at the meeting and entitled to vote on a matter shall be the act of the stockholders with respect to that matter; except for the management proposal to eliminate supermajority voting, which requires the affirmative vote of shares representing not less than eighty percent (80%) of the outstanding shares of capital stock of AbbVie entitled to vote generally in the election of directors pursuant to Article XI of AbbVie’s Amended and Restated Certificate of Incorporation. 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, the advisory vote on the approval of executive compensation, the management proposal to eliminate supermajority voting, and the stockholder proposals 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 that 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 Alliance Advisors LLC to aid in the solicitation of proxies, at an estimated cost of $15,000 plus reimbursement for reasonable out-of-pocket expenses. AbbVie Savings Plan Participants in the AbbVie Savings Plan will receive voting instructions 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 The Northern Trust Company. The members of the investment committee are William H.S. Preece, Tabetha A. Skarbek and Michael J. Thomas, employees of AbbVie. The voting power with respect to the shares is held by and shared between the investment 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. 10 13NOV201221352027 2019 Proxy Statement 10 INFORMATION CONCERNING DIRECTOR NOMINEES (ITEM 1) 27FEB201905174956 The board of directors consists of three classes currently comprised of three directors in Class I and four directors in Classes II and III. Directors of one class are elected each year for a term of three years. The Class I directors are presented for re-election to hold office until the expiration of their term at the 2022 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 re-election 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 2018 Annual Report on Form 10-K. All of the nominees are currently serving as directors. Class I—Directors Whose Terms Expire in 2019 ................................................................................................................................................................................................................................................................................................................................. William H.L. Burnside 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. 28FEB201906525124 Committees: Audit Nominations & Governance Key Contributions to the Board: Through his experience with The Boston Consulting Group, Mr. Burnside contributes knowledge and understanding of corporate finance and capital markets matters to the board, as well as global and domestic strategic advisory experience across a broad base of industries. Director since: 2013 Age: 67 Brett J. Hart 8MAR201622161098 Committees: Nominations & Governance Public Policy Director since: 2016 Age: 49 Executive Vice President and Chief Administrative Officer, United Continental Holdings, Inc. Mr. Hart is the executive vice president and chief administrative officer of United Continental Holdings, Inc. (UAL) and United Airlines, Inc. He served as executive vice president, chief administrative officer and general counsel between May 2017 and March 2019 and as executive vice president and general counsel between February 2012 and May 2017. Mr. Hart also served as acting chief executive officer of UAL and United Airlines, Inc. from October 2015 to March 2016. From December 2010 to February 2012, he served as senior vice president, general counsel and secretary of UAL, United and Continental. From June 2009 to December 2010, Mr. Hart served as executive vice president, general counsel and corporate secretary at Sara Lee Corporation. Key Contributions to the Board: As an executive vice president and general counsel for two large public companies with international operations and having served as an acting CEO, Mr. Hart contributes operational and strategic acumen with expertise in risk management, legal strategic matters, government and regulatory affairs, customer and external facing matters, corporate governance, and compliance. 11 2019 Proxy Statement 13NOV201221352027 11 INFORMATION CONCERNING DIRECTOR NOMINEES Edward J. Rapp Retired Group President for Resource Industries of Caterpillar Inc. Mr. Rapp served as the Caterpillar Inc. group president for resource industries from 2014 until his retirement in mid-2016. He previously served at Caterpillar as group president based in Singapore in 2013 and 2014 and as the chief financial officer from 2010 to 2013, and he was named a group president in 2007. He is currently a member of the University of Missouri College of Business Strategic Development Board. Mr. Rapp previously served as a director of FM Global. Key Contributions to the Board: 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. 17JAN201314183678 Committees: Audit Public Policy Director since: 2013 Age: 61 Class II—Directors Whose Terms Expire in 2020 ................................................................................................................................................................................................................................................................................................................................. Robert J. Alpern, M.D. 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, Tricida, Inc. and Yale-New Haven Hospital. Key Contributions to the Board: 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. 17JAN201314181230 Committees: Nominations & Governance Public Policy Director since: 2013 Age: 68 17JAN201314191789 Committees: Compensation Public Policy Director since: 2013 Age: 73 Edward M. Liddy Retired Chairman & CEO, The Allstate Corporation Mr. Liddy served as a partner in the private equity investment firm Clayton, Dubilier & Rice, LLC from January 2010 to December 2015. At the request of the Secretary of the U.S. Department of the Treasury, Mr. Liddy served as interim chairman and chief executive officer of American International Group, Inc. (AIG), a global insurance and financial services holding company, from September 2008 to August 2009. From January 1999 to April 2008, Mr. Liddy served as chairman of the board of The Allstate Corporation (insurance). 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. Key Contributions to the Board: Mr. Liddy’s executive leadership at Allstate and AIG and his board service at several Fortune 100 companies enable him to provide our board with valuable insights on corporate strategy, risk management, corporate governance and other issues facing large, global enterprises. Additionally, as a former chief financial officer, audit committee chair at Goldman Sachs and 3M, and a private equity firm partner, Mr. Liddy provides our board with significant knowledge and understanding of corporate finance, capital markets, financial reporting and accounting matters. 12 13NOV201221352027 2019 Proxy Statement 12 INFORMATION CONCERNING DIRECTOR NOMINEES Melody B. Meyer 26FEB201816111894 Committees: Audit Public Policy Director since: 2017 Age: 61 President of Melody Meyer Energy, LLC Ms. Meyer is president of Melody Meyer Energy, LLC, a private consulting firm, a position she has held since June 2016. From March 2011 to April 2016, Ms. Meyer served as the president of Chevron Asia Pacific Exploration and Production Company. She previously served as president of Chevron Energy Technology Company from 2008 to 2011, in addition to various other roles over her thirty-seven year career at Chevron. Ms. Meyer is also a director at BP p.I.c. and National Oilwell Varco, Inc. Key Contributions to the Board: As a result of her tenure at Chevron, Ms. Meyer has acquired operational, management, strategic planning, and financial expertise with extensive global experience and provides an informed perspective to the board on financial and operational matters faced by a complex international company. Frederick H. Waddell Former Chairman of the Board and Chief Executive Officer of Northern Trust Corporation and The Northern Trust Company Mr. Waddell served as chairman of the board of Northern Trust Corporation and The Northern Trust Company from November 2009 until his retirement in January 2019. He previously served as chief executive officer from 2008 through 2017, as president from 2006 to 2011 and again from October to December 2016, and chief operating officer from 2006 to 2008. Mr. Waddell is also a director of International Business Machines Corporation. Key Contributions to the Board: As former chairman and chief executive officer of Northern Trust Corporation and The Northern Trust Company, Mr. Waddell contributes broad financial services experience with a strong record of leadership in a highly regulated industry. 17JAN201314192826 Committees: Audit Compensation Director since: 2013 Age: 65 Class III—Directors Whose Terms Expire in 2021 ................................................................................................................................................................................................................................................................................................................................. Roxanne S. Austin 17JAN201314185859 Committees: Audit Compensation Director since: 2013 Age: 58 President, Austin Investment Advisors Ms. Austin is president of Austin Investment Advisors, a private investment and consulting firm, and chairs the U.S. Mid-market Investment Advisory Committee of EQT Partners. Previously, 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. Ms. Austin also 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, and Teledyne Technologies, Inc. Ms. Austin also served as a director of Telefonaktiebolaget LM Ericsson from 2008 to 2016. Key Contributions to the Board: Through her extensive management and operating roles, including her financial roles, Ms. Austin contributes significant oversight and leadership experience to the board, including financial expertise and knowledge of financial statements, corporate finance and accounting matters. 13 2019 Proxy Statement 13NOV201221352027 13 INFORMATION CONCERNING DIRECTOR NOMINEES Richard A. Gonzalez 2MAR201807275172 Director since: 2013 Age: 65 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; 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. Key Contributions to the Board: As a result of his service as Abbott’s executive vice president, Pharmaceutical Products Group, 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. Rebecca B. Roberts Retired President of Chevron Pipe Line Company Ms. Roberts served as president of Chevron Pipe Line Company from 2006 until her retirement in 2011. She previously served as the president of Chevron Global Power Generation from 2003 to 2006, in addition to various technical and management positions during her thirty-six year career with Chevron. Ms. Roberts began her career as a chemist and research scientist. Ms. Roberts currently serves on the board of directors at Black Hills Corporation and MSA Safety Incorporated. Ms. Roberts served as a director of Enbridge, Inc. from 2015 to 2018. Key Contributions to the Board: Ms. Roberts brings management, operational, safety, and strategy development expertise with a scientific background and extensive global experience at Chevron. She provides an informed perspective to the board on regulatory and operational matters faced by a complex international company. 25FEB201801543127 Committees: Nominations & Governance Public Policy Director since: 2018 Age: 66 14 13NOV201221352027 2019 Proxy Statement 14 INFORMATION CONCERNING DIRECTOR NOMINEES Glenn F. Tilton Retired Chairman and Chief Executive Officer of the UAL Corporation Mr. Tilton was chairman of the Midwest for JPMorgan Chase & Co. from 2011 until his retirement in 2014. 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. Prior to becoming the vice chairman of Chevron Texaco following the merger of Texaco Inc. and Chevron Corp., Mr. Tilton enjoyed a 30-year multi-disciplinary career with Texaco Inc., culminating in his election as chairman and chief executive officer. 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. Key Contributions to the Board: 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. His experience as non-executive chairman of the board of United Continental Holdings, Inc. also enhances his contributions as AbbVie’s lead independent director. 17JAN201314185103 Committees: Compensation Nominations & Governance Lead Independent Director Director since: 2013 Age: 70 15 2019 Proxy Statement 13NOV201221352027 15 THE BOARD OF DIRECTORS AND ITS COMMITTEES 27FEB201905180481 The Board of Directors ................................................................................................................................................................................................................................................................................................................................. The board of directors held nine meetings in 2018. All directors attended one-hundred percent of the board and committee meetings in 2018. AbbVie encourages its board members to attend the annual stockholder meeting. All of AbbVie’s directors attended the 2018 annual stockholder meeting. The board has determined that each of the following individuals is independent in accordance with the New York Stock Exchange (NYSE) listing standards: Dr. Alpern, Ms. Austin, Mr. Burnside, Mr. Hart, Mr. Liddy, Ms. Meyer, Mr. Rapp, Ms. 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 Laboratories (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 reviews enterprise risks and discusses them with our senior management on a regular basis. AbbVie’s risk management program focuses on issues relevant to AbbVie’s business, reputation, and strategy, including but not limited to pipeline advancement, healthcare industry dynamics such as pricing and patient access, manufacturing, regulatory and compliance matters, and others. For more details about committee responsibilities and oversight, please see the committee discussion on pages 19-21. The board also oversees AbbVie’s culture, employee engagement, and overall management of human capital. This oversight ensures that AbbVie is attracting, developing, and retaining best-in-class employees dedicated to making a remarkable impact on patients’ lives around the world. 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 with a board appointed lead independent 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 independent director is chosen by and from the independent members of the board of directors. 16 13NOV201221352027 2019 Proxy Statement 16 THE BOARD OF DIRECTORS AND ITS COMMITTEES The lead independent director responsibilities include: 1. 2. 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; reviews and approves matters, such as agenda items, schedule sufficiency, and, where appropriate, information provided to other board members; 3. serves as the liaison between the chairman of the board and the independent directors; 4. has the authority to call meetings of the independent directors; 5. leads the board’s evaluation of the CEO; 6. 7. 8. leads the annual board and committee evaluation process, including discussing evaluations with each director individually; encourages effective director participation by fostering an environment of open dialogue and constructive feedback among independent directors; if requested by major stockholders, ensures that he or she is available for consultation and direct communication as needed; 9 if required, represents independent board members externally; and 10. performs such other duties as the board may determine from time to time. 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. 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 based on 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, and ability to commit sufficient time and attention to the activities of the board. They must have demonstrated experience and ability that is relevant to the board’s oversight role with respect to AbbVie’s business and affairs. They must also be able and willing to represent the stockholders’ economic interests and satisfy their fiduciary duties to stockholders without conflicts of interest. For more details on director qualifications, please see Exhibit A to AbbVie’s Governance Guidelines. Each year, the board and its committees conduct self-evaluations to determine whether they are functioning effectively. The full board, led by the lead independent director, discusses the evaluation reports to determine what, if any, action should be undertaken to improve the board and its committees. 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.’’ The following table highlights our directors’ skills and experience. The skills identified below are considered by the nominations and governance committee to be the most relevant to the board’s oversight role with respect to AbbVie’s business and affairs and to drive our culture of innovation and responsibility. The specific importance of each skill also is noted. 17 2019 Proxy Statement 13NOV201221352027 17 THE BOARD OF DIRECTORS AND ITS COMMITTEES Such skills include, among others: • • • • • • Healthcare Industry—Relevant to an industry understanding and review of our business and strategy for continued innovation. Leadership—For a board that can successfully advise and oversee the company’s business performance and represent stockholders’ interests. Global Business and Strategy—For oversight of a complex global organization like AbbVie to successfully advise and oversee the strategic development and direction of the company. Corporate Governance and Public Company Board—Ensuring directors have background and knowledge to perform oversight and governance roles. Finance or Accounting—Enabling our directors to analyze our financial statements, oversee our capital structure, and consider financial transactions. Government Relations and Regulatory—For an understanding of the complex regulatory and governmental environment in which our business operates. Director Skills, Knowledge and Experience Matrix Healthcare Industry (cid:5) (cid:5) (cid:5) (cid:5) (cid:5) Leadership (cid:5) (cid:5) (cid:5) (cid:5) (cid:5) (cid:5) (cid:5) (cid:5) (cid:5) (cid:5) (cid:5) Global Business and Strategy (cid:5) (cid:5) (cid:5) (cid:5) (cid:5) (cid:5) (cid:5) (cid:5) (cid:5) (cid:5) (cid:5) Corporate Governance and Public Company Board (cid:5) (cid:5) (cid:5) (cid:5) (cid:5) (cid:5) (cid:5) (cid:5) (cid:5) Finance or Accounting (cid:5) (cid:5) (cid:5) (cid:5) (cid:5) (cid:5) (cid:5) (cid:5) Government Relations and Regulatory (cid:5) (cid:5) (cid:5) (cid:5) (cid:5) (cid:5) (cid:5) (cid:5) (cid:5) (cid:5) (cid:5) Dr. Alpern Ms. Austin Mr. Gonzalez Mr. Burnside Mr. Hart Mr. Liddy Ms. Meyer Mr. Rapp Ms. Roberts Mr. Tilton Mr. Waddell 18 13NOV201221352027 2019 Proxy Statement 18 THE BOARD OF DIRECTORS AND ITS COMMITTEES Board Diversity ................................................................................................................................................................................................................................................................................................................................. AbbVie is committed to diversity in its workforce and on its board of directors. 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, age, and geography and assesses the effectiveness of the process in achieving that diversity. More details about our workforce diversity are available in the ‘‘Corporate Responsibility Highlights’’ section of this proxy statement. 45% Members of AbbVie’s board who are women or ethnically diverse individuals 4MAR201915432341 Committees of the Board of Directors ................................................................................................................................................................................................................................................................................................................................. The board of directors has five committees established in AbbVie’s By-Laws: the audit committee, compensation committee, nominations and governance committee, public policy committee, and executive committee. Each of the members of the audit committee, compensation committee, nominations and governance committee, and public policy committee is independent. Mr. Tilton serves as AbbVie’s lead independent director. Audit Committee Compensation Committee Nominations and Governance Committee Public Policy Committee 27FEB201905175323 27FEB201905175323 R. Alpern 27FEB201905174382 R. Austin W. Burnside B. Hart E. Liddy M. Meyer E. Rapp R. Roberts 27FEB201905175083 G. Tilton F. Waddell 27FEB201905174016 27FEB201905175323 27FEB201905175323 27FEB201905175323 27FEB201905175323 Number of meetings 6 27FEB201905175323 27FEB201905174016 27FEB201905175323 27FEB201905175323 4 27FEB201905175323 27FEB201905175323 27FEB201905175323 27FEB201905174016 27FEB201905175323 27FEB201905175323 27FEB201905175323 27FEB201905174016 27FEB201905175323 4 4 27FEB201905175083 27FEB201905174016 27FEB201905175323 27FEB201905174382 Lead Director Chairperson Member Financial Expert Audit Committee The audit committee is governed by a written charter. The charter sets forth the purposes of the audit committee, identifies qualifications required for the audit committee members, and describes the committee’s authority and responsibilities. The audit 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, including a review of significant accounting policies, 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 19 2019 Proxy Statement 13NOV201221352027 19 THE BOARD OF DIRECTORS AND ITS COMMITTEES financially literate, as required of audit committee members by the NYSE, 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 chairperson, is an ‘‘audit committee financial expert.’’ Compensation Committee The compensation 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 into account director fees paid by companies in AbbVie’s Health Care Peer Group 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 ‘‘Compensation Discussion and Analysis’’ section of this proxy statement. The committee also reviews, approves, and administers the incentive compensation plans in which the AbbVie executive officers participate 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 advisors who may assist the committee in carrying out its responsibilities. 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 ‘‘Compensation Risk Assessment’’ section of this proxy statement. 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 engaged Compensation Advisory Partners (CAP) as its independent compensation consultant. The independent compensation consultant provides counsel and advice to the committee on executive and non-employee director compensation matters. CAP, and its principal, report directly to the chair of the committee. The principal meets regularly, and as needed, with the committee in executive sessions, and has direct access to the committee chair during and between meetings. The committee determines what variables it will instruct CAP to consider, including: peer groups against which performance and pay should be examined, metrics to be used in incentive plans to assess AbbVie’s performance, competitive short- and long-term incentive practices in the marketplace, and compensation levels relative to market benchmarks. The committee negotiates and approves all fees paid to CAP for these services. AbbVie did not engage CAP to perform any other services during 2018. Based on an assessment of internally developed information and information provided by CAP, the committee has determined that its independent compensation advisor does not have a conflict of interest. A copy of the compensation committee report is included in the ‘‘Compensation Committee Report’’ section of this proxy statement. Nominations and Governance Committee The nominations and governance 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, as described on pages 16-17. From time to time, AbbVie engages an executive search firm to assist the committee in identifying individuals qualified to be board members. 20 13NOV201221352027 2019 Proxy Statement 20 THE BOARD OF DIRECTORS AND ITS COMMITTEES Public Policy Committee The public policy 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, governmental affairs, healthcare compliance, and social responsibility and environmental matters that affect or could affect AbbVie. Other topics within the committee’s purview include but are not limited to ethics and compliance matters, government and regulatory trends relevant to AbbVie’s business, political contributions, and corporate philanthropy. Executive Committee The executive committee members are Mr. Gonzalez, chair, Ms. Austin, Mr. Liddy, Mr. Rapp, and Mr. Tilton. This committee may exercise all of the authority of the board in the management of AbbVie, except for matters expressly reserved by law for board action. 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. 21 2019 Proxy Statement 13NOV201221352027 21 DIRECTOR COMPENSATION 27FEB201905174140 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. As described in ‘‘Committees of the Board of Directors—Compensation Committee,’’ director compensation is reviewed annually by the compensation committee with the independent compensation consultant, including a review of director compensation against AbbVie’s Health Care Peer Group, and a recommendation is then provided to the full board. The following table sets forth the non-employee directors’ 2018 compensation. Fees Earned or Paid in Cash ($)(1) Restricted Stock Unit Awards ($)(2) Option Awards ($)(3) Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)(4) All Other Compensation ($)(5) Total ($) $107,917 $189,947 $0 $27,741 $25,000 $350,605 132,917 113,917 107,917 127,917 113,917 133,917 64,167 152,917 113,917 189,947 189,947 189,947 189,947 189,947 189,947 189,947 189,947 189,947 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 5,565 328,429 25,000 25,000 328,864 322,864 0 317,864 25,000 25,000 25,000 26,463 25,000 328,864 348,864 279,114 369,327 328,864 Name R. Alpern R. Austin W. Burnside B. Hart E. Liddy M. Meyer E. Rapp R. Roberts G. Tilton F. Waddell (1) Under the Non-Employee Directors’ Fee Plan as in effect until the 2018 annual meeting of stockholders, non-employee directors earned $105,000 per year for service as a director and $20,000 per year for service as a chair of a board committee, other than the chair of the audit committee. The chair of the audit committee received $25,000 per year for service as chair of that committee and the other members of the audit committee received $500 for each month of service as a committee member. The lead director received $25,000 per year for service in that role. The Non-Employee Directors’ Fee Plan was amended, effective as of the 2018 annual meeting of stockholders, to change the annual non-employee director fee to $110,000 based on the recommendation of the compensation committee’s independent compensation consultant following review of AbbVie’s Health Care Peer Group market practices and trends. The non-employee director and committee fees are earned monthly for each calendar month or portion thereof that the director holds the position, excluding the month in which the director is first elected to the position. Fees earned under the AbbVie Non-Employee Directors’ Fee Plan are, at the director’s election, paid in cash, delivered in the form of vested non-qualified stock options (based on an independent appraisal of their fair value), deferred until retirement (as an unfunded AbbVie obligation), or paid currently into an individual grantor trust established by an eligible director. The distribution of deferred fees and amounts held in a director’s grantor trust 22 13NOV201221352027 2019 Proxy Statement 22 DIRECTOR COMPENSATION generally commences at the later of when the director reaches age 65 or upon retirement from the board of directors. Fees deposited in a trust may be 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 restricted stock unit awards granted during 2018, determined in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 718. AbbVie determines the grant date fair value of the awards by multiplying the number of 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 2018 annual stockholder meeting received under the AbbVie 2013 Incentive Stock Program vested restricted stock units with a target grant date value of $190,000. In 2018, this equated to 1,899 restricted stock units (after rounding the award down to the nearest whole unit), with a reportable value of $189,947. 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, but do not otherwise have access to the restricted stock units during their board service. Upon termination or retirement from the board, death, or a change in control of the company, a non-employee director 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, 2018: R. Alpern, 23,688; R. Austin, 31,351; W. Burnside, 15,129; B. Hart, 7,643; E. Liddy, 19,115; M. Meyer, 4,669; E. Rapp, 15,129; R. Roberts, 1,899; G. Tilton, 27,335; and F. Waddell, 15,129. These numbers include, where applicable, AbbVie restricted stock units issued with respect to Abbott Laboratories restricted stock units outstanding when AbbVie separated from Abbott on January 1, 2013. (3) No AbbVie stock options were outstanding as of December 31, 2018. (4) The totals in this column include reportable interest credited under the AbbVie Non-Employee Directors’ Fee Plan during 2018. (5) Charitable contributions made by AbbVie’s non-employee directors are eligible for a matching contribution (up to $25,000 annually). For 2018 contributions, the AbbVie Foundation made charitable matching contributions on behalf of the following AbbVie directors: R. Alpern, $25,000; W. Burnside, $25,000; B. Hart, $25,000; M. Meyer, $25,000; E. Rapp, $25,000; R. Roberts, $25,000; G. Tilton, $25,000; and F. Waddell, $25,000. This column also includes reimbursement for certain taxes. 23 2019 Proxy Statement 13NOV201221352027 23 SECURITIES OWNERSHIP 27FEB201905180232 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, 2019, by each director, the chief executive officer, the chief financial officer, and the other executive officers listed in the Summary Compensation Table, 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 R. Gonzalez R. Alpern R. Austin W. Burnside B. Hart E. Liddy M. Meyer E. Rapp R. Roberts G. Tilton F. Waddell W. Chase R. Michael L. Schumacher C. Alban M. Severino Shares Beneficially Owned(1)(2)(3) 290,854 Stock Options Exercisable within 60 days of January 31, 2019 580,904 23,688 38,195 15,129 7,643 20,250 4,669 20,743 1,899 40,085 17,129 105,364 6,876 134,322 137,994 82,281 0 0 0 0 0 0 0 0 0 0 516,353 20,430 263,683 457,803 352,952 Stock Equivalent Units 0 6,222 0 0 0 21,768 0 14,296 0 30,293 0 0 0 0 0 0 All directors and executive officers as a group(4) 1,116,294 2,908,161 72,579 (1) The table includes shares held in the executive officers’ accounts in the AbbVie Savings Plan as follows: all executive officers as a group, 3,942. 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 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: R. Gonzalez, 7,615; G. Tilton, 350; W. Chase, 501; C. Alban, 40,442; and all directors and executive officers as a group, 53,034. (4) The directors and executive officers as a group own less than one percent of the outstanding shares of AbbVie. 24 13NOV201221352027 2019 Proxy Statement 24 SECURITIES OWNERSHIP Securities Ownership of Principal Stockholders ................................................................................................................................................................................................................................................................................................................................. The table below reports the number of shares of AbbVie common stock beneficially owned as of December 31, 2018 by Capital Research Global Investors, BlackRock, Inc. 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 Capital Research Global Investors and The Vanguard Group on February 14, 2019 and by BlackRock, Inc. on February 4, 2019. Capital Research Global Investors reported that it had sole voting power with respect to 173,568,243 shares, shared voting power with respect to 0 shares, sole dispositive power with respect to 173,568,243 shares and shared dispositive power with respect to 0 shares. The Vanguard Group reported that it had sole voting power with respect to 1,864,360 shares, shared voting power with respect to 346,076 shares, sole dispositive power with respect to 118,412,949 shares and shared dispositive power with respect to 2,170,476 shares. BlackRock, Inc. reported that it had sole voting power with respect to 82,367,981 shares, shared voting power with respect to 0 shares, sole dispositive power with respect to 95,788,899 shares and shared dispositive power with respect to 0 shares. Name and Address of Beneficial Owner Shares Beneficially Owned Percent of Class Capital Research Global Investors 333 South Hope Street Los Angeles, CA 90071 The Vanguard Group 100 Vanguard Boulevard Malvern, PA 19355 BlackRock, Inc. 55 East 52nd Street New York, NY 10055 173,568,243 11.5% 120,583,425 8.0% 95,788,899 6.4% 25 2019 Proxy Statement 13NOV201221352027 25 EXECUTIVE COMPENSATION 27FEB201905174260 Compensation Discussion and Analysis ................................................................................................................................................................................................................................................................................................................................. This Compensation Discussion and Analysis (CD&A) describes the pay philosophy established for AbbVie’s named executive officers (NEOs), 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 NEO: Richard A. Gonzalez Chairman of the Board and Chief Executive Officer William J. Chase Executive Vice President, Finance and Administration Robert A. Michael Senior Vice President, Chief Financial Officer Laura J. Schumacher Vice Chairman, External Affairs and Chief Legal Officer Carlos Alban Vice Chairman, Chief Commercial Officer Michael E. Severino Vice Chairman and President Although we describe our programs in the context of the NEOs, it is important to note that our programs generally have broad eligibility and therefore in most cases apply to employee populations outside the NEO group as well. CD&A Table of Contents The CD&A is organized as follows: I. Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation Philosophy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Business Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Business Performance Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Components of our Compensation Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2018 Performance Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholder Engagement Compensation Program Governance Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Executive Compensation Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commitment to Performance-Based Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Committee Process for Setting Total Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation Benchmarking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Role of the Compensation Consultant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation Risk Oversight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Compensation Plan Elements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Base Salary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-Term Incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-Term Incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Excise Tax Gross-Ups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in Control Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock Ownership Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Clawback Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Anti-Hedging and Anti-Pledging Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 27 27 28 33 33 34 35 35 35 36 36 36 36 37 37 37 40 42 43 43 43 43 43 44 44 26 13NOV201221352027 2019 Proxy Statement 26 EXECUTIVE COMPENSATION I. Executive Summary Compensation Philosophy At AbbVie, the board of directors and management believe a well-designed compensation program should align executive interests with the drivers of stockholder returns and profitable growth, support achievement of the company’s primary business goals to have a remarkable impact on patients’ lives, and attract and retain world-class executives whose talents and contributions sustain the growth in long-term stockholder value. The board believes it has implemented a compensation program that appropriately balances short- and long-term strategic objectives and directly links compensation to stockholder value with more than three-fourths of the total direct compensation paid to NEOs tied to performance. Business Overview AbbVie’s products are focused on treating conditions such as chronic autoimmune diseases in rheumatology, gastroenterology and dermatology; oncology, including blood cancers; virology, including hepatitis C virus and human immunodeficiency virus; neurological disorders, such as Parkinson’s disease; metabolic diseases, including thyroid disease and complications associated with cystic fibrosis; pain associated with endometriosis; as well as other serious health conditions. AbbVie’s pipeline includes more than 60 compounds or indications in development across important medical specialties such as immunology, oncology and neuroscience, with additional targeted investment in cystic fibrosis and women’s health. 27 2019 Proxy Statement 13NOV201221352027 27 EXECUTIVE COMPENSATION Business Performance Highlights AbbVie has Delivered Robust Financial Results since Inception Performance from 2013 Inception to 2018 Year End 11.7% Adjusted net revenues - compound annual growth rate* 20.3% Adjusted diluted earnings per share - compound annual growth rate* 830 Basis points Operating margin expansion, adjusted* 235.2% 6-year total stockholder return ~$82BN Increase in market capitalization Added significant stockholder value 168% Increase in quarterly dividend Raised quarterly dividend to $1.07 per share from $0.40 per share at inception 60+ Active clinical development programs More than 30 new products or indications in mid- and late-stage development or under regulatory review 27FEB201905175734 The measures set forth above were calculated as of December 31, 2018. * Net revenues, diluted earnings per share and operating margin are adjusted to exclude certain specified items and are non-GAAP measures, which are reconciled in Appendix B. AbbVie has delivered a strong compound annual growth rate (CAGR) since inception on adjusted net revenues and adjusted diluted earnings per share (EPS), placing AbbVie in the top quartile of its Health Care Peer Group. Additionally, AbbVie is committed to a robust return of capital to stockholders with an increase of 168% in its quarterly dividend since 2013 as part of a balanced and disciplined capital allocation program. AbbVie’s total stockholder return (TSR) since inception of 235.2% also places AbbVie at the top of its Health Care Peer Group, and more than 136 percentage points above the Standard & Poor’s 500 Index and more than 152 percentage points above the NYSE Arca Pharmaceutical Index over the same time period. 28 13NOV201221352027 2019 Proxy Statement 28 AbbVie also Delivered Strong Business Performance in 2018 AbbVie has built a strong foundation for its business and 2018 was an exceptional year, as evidenced by a number of business highlights: EXECUTIVE COMPENSATION • Net Revenues: AbbVie reported full-year net revenues of $32.8 billion on a GAAP basis and adjusted net revenues of $32.7 billion, an increase of 15.2% over 2017, excluding the impact of foreign exchange. This places AbbVie at the top of its Health Care Peer Group. • • • • • • HUMIRA: AbbVie delivered global HUMIRA sales of $19.9 billion, an increase of 8.2% on a reported basis, or 7.4% excluding the impact of foreign exchange. HUMIRA’S performance was driven by continued market penetration across therapeutic categories and geographies. IMBRUVICA: Global IMBRUVICA net revenue was $3.6 billion, an increase of 39.5%, driven by market share growth in front-line chronic lymphocytic leukemia (CLL) and other approved indications. Gross and Operating Margins: In 2018, AbbVie reported a gross margin of 76.4% on a GAAP basis or 80.6% of net revenues on an adjusted basis. AbbVie’s operating margin was 19.5% on a GAAP basis or 44.6% of net revenues on an adjusted basis. Earnings Per Share: AbbVie reported full-year diluted EPS of $3.66 on a GAAP basis and adjusted diluted EPS of $7.91, up 41.3%. This reflects growth in the very top tier of AbbVie’s Health Care Peer Group. For 2019, AbbVie provided a diluted EPS guidance range of $7.39 to $7.49 on a GAAP basis and $8.65 to $8.75 on an adjusted basis. The midpoint of the adjusted guidance represents growth of 10% over 2018, reflecting strong operating dynamics in the underlying business. Regulatory Milestones: AbbVie also achieved a number of regulatory milestones in markets worldwide for several key products, including regulatory approvals for VENCLEXTA in combination with RITUXAN (rituximab) in relapsed/refractory chronic lymphocytic leukemia (CLL); conditional approval for VENCLEXTA in combination with azacitidine or decitabine or low-dose cytarabine in newly diagnosed acute myeloid leukemia patients ineligible for intensive chemotherapy; IMBRUVICA in combination with rituximab as the first chemotherapy-free combination treatment for Waldenstrom macroglobulinemia; and ORILISSA for the management of moderate to severe pain associated with endometriosis. Pipeline Development: With more than 30 programs in mid- and late-stage development, AbbVie made significant pipeline advancements in 2018. AbbVie announced data from nearly a dozen pivotal trials, initiated a number of important phase transitions across our key development programs and made multiple regulatory submissions. AbbVie completed registrational studies and submitted regulatory applications for the company’s next-generation immunology assets, upadacitinib and risankizumab, in rheumatoid arthritis and psoriasis, respectively. In addition, the company initiated several Phase 3 programs for these assets including studies for upadacitinib in atopic dermatitis and ulcerative colitis, as well as risankizumab in Crohn’s disease. AbbVie reported positive data from Phase 3 studies in other areas of the pipeline including ELAGOLIX in uterine fibroids, VENCLEXTA in front-line CLL, and results from several trials evaluating IMBRUVICA in front-line CLL. 29 2019 Proxy Statement 13NOV201221352027 29 EXECUTIVE COMPENSATION The graphs below illustrate AbbVie’s growth of net revenue and diluted EPS in 2018 versus 2017. Adjusted Net Revenues* $32.7 $28.2 Adjusted EPS* $7.91 $5.60 ) N B $ ( 2017 2018 2017 2018 28FEB201910051741 * Net revenues and diluted earnings per share are adjusted for specified items and are non-GAAP measures, which are reconciled in Appendix B. Performance Relative to Peer Group AbbVie is in the top tier of its peers on several financial measures. The chart below outlines AbbVie’s performance relative to its Health Care Peer Group in 2018. Metric GAAP Sales Growth Adjusted Operating Income Growth Adjusted EPS Growth GAAP Operating Cash Flow Growth Adjusted Return on Equity AbbVie Percentile Rank − 2018 0th 25th 50th 75th 100th 100% 100% 86% 88% 100% 28FEB201906084965 30 13NOV201221352027 2019 Proxy Statement 30 In addition, AbbVie has delivered industry-leading performance over the longer term, as demonstrated in the chart below reflecting the company’s five-year performance relative to its Health Care Peer Group. AbbVie Percentile Rank – 2013-2018 EXECUTIVE COMPENSATION 0th 25th 50th 75th Metric GAAP Sales Growth Adjusted Operating Income Growth Adjusted EPS Growth GAAP Operating Cash Flow Growth Adjusted Return on Equity 100th 95% 97% 91% 92% 100% 28FEB201906084820 31 2019 Proxy Statement 13NOV201221352027 31 EXECUTIVE COMPENSATION Total Stockholder Return (TSR) Performance Since becoming a public company in 2013, AbbVie has delivered a total stockholder return of 235.2%, which places AbbVie at the top of its Health Care Peers and surpasses the cumulative total returns of the Standard & Poor’s 500 Index and the NYSE Arca Pharmaceutical Index, as shown in the graph below. The graph covers the period from January 2, 2013 (the first day AbbVie’s common stock began ‘‘regular-way’’ trading on the NYSE) through December 31, 2018. The graph assumes $100 was invested in AbbVie common stock and each index on January 2, 2013 and also assumes the reinvestment of dividends. The stock price performance in the following graph is not necessarily indicative of future stock price performance. Comparison of Cumulative Total Return since AbbVie’s Launch $350 $300 $250 $200 $150 $100 1/2/2013 12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017 12/31/2018 Period Ending AbbVie Inc. S&P 500 Index NYSE Arca Pharmaceutical Index 28FEB201910051899 AbbVie’s TSR for calendar year 2018 was (cid:6)1.0%, which did not reflect the company’s top tier operational and financial performance. As the chart above indicates, despite this 1-year result AbbVie’s returns since launch significantly exceed industry comparisons. 32 13NOV201221352027 2019 Proxy Statement 32 EXECUTIVE COMPENSATION Components of our Compensation Program The compensation committee of the board oversees our executive compensation program, which includes several compensation elements that have each been tailored to incentivize and reward specific aspects of company performance the board believes are central to delivering long-term stockholder value. Key components of our compensation program are listed below. Base Salary Designed to be compe(cid:2)(cid:2)ve with market and industry norms, and to reflect individual performance Individual salaries are established rela(cid:2)ve to market median based on each NEO's individual performance, skills, and experience, and internal equity, as well as the company's annual opera(cid:2)ng budget Short-Term Incen(cid:2)ves Performance Incen(cid:2)ve Plan (PIP) Based on non-GAAP performance measures such as: — Net revenues — Income before taxes — Opera(cid:2)ng margin — HUMIRA sales — Return on assets — Strategic and leadership goals Long-Term Incen(cid:2)ves 80% Performance shares and performance-vested restricted stock units 20% Non-qualified stock op(cid:2)ons 1MAR201916330806 The committee is dedicated to ensuring that a substantial portion of executive compensation is ‘‘at-risk’’ and variable. Generally, more than three-fourths of our NEOs’ total direct compensation is variable and directly affected by both the company’s and the NEO’s performance. 2018 Performance Results The performance targets established under our annual and long-term incentive plans are rigorous and calibrated to a range of potential outcomes, with above target payouts for strong performance and below target payouts (including no payout) for below target performance. Targets are based on expected business, market and regulatory conditions, including expectations for our pipeline. The financial goals shown in the following table were carried by all of the NEOs as part of their 2018 performance goals. The specific weightings for each NEO are established at the start of each performance year based on the NEO’s role and anticipated contributions to the company’s annual objectives. Financial goals are set rigorously; achievement of these targets has resulted in top-tier industry performance. 33 2019 Proxy Statement 13NOV201221352027 33 EXECUTIVE COMPENSATION Financial Goals Goal and Expected Result(1) 2017 Actual 2018 Target 2018 Target vs. 2017 Actual 2018 Actual 2018 Actual vs. 2018 Target A. Non-GAAP Net Revenues A. $28.1BN(2) $31.5BN 112% $32.3BN(2) B. Non-GAAP Income Before Taxes C. Adjusted Return on Assets D. Non-GAAP Operating Margin E. HUMIRA Sales B. C. D. E. $11.2BN(2) $13.0BN 17.0% 20.9% $12.1BN(2) $14.0BN $18.3BN(2) $20.1BN 116% $13.3BN(2) 123% 23.9% 116% $14.4BN(2) 110% $19.7BN(2) 103% 102% 114% 103% 98% (1) Results achieved reflect certain specified items, which are reconciled in Appendix B. (2) Evaluated on a constant currency basis. In addition to the financial goals set forth above, each of our NEOs also has individual performance goals that the committee reviews and ensures are appropriately rigorous and in line with the long-term success of the company. Each NEO achieved or exceeded his or her 2018 goals, which are listed below: • Richard A. Gonzalez: Drive top-tier business performance; execute key strategic initiatives to drive sustainable long-term business performance; deliver value to our stockholders, building investor confidence and credibility; successfully advance mid- and late-stage pipeline assets; continue to drive employee engagement and motivation around AbbVie’s mission and future prospects; and advance our transformation to a biopharmaceutical culture. • William J. Chase: Achieve proprietary pharmaceutical pipeline enhancement objectives; and provide support on corporate strategic initiatives and build shareholder value through investor activities. • • • Robert A. Michael: Implement key financing and cash flow improvement initiatives; achieve financial planning and month end close optimization and standardization; develop and assess future state Finance Services operating models (goals reflect Vice President, Controller position). Laura J. Schumacher: Successfully continue to develop and implement strategies to effectively resolve key litigation matters; achieve proprietary pharmaceutical pipeline enhancement objectives; execute biologics strategic development initiatives; and support research and development initiatives per company strategy. Carlos Alban: Achieve key product milestones; and successfully adapt and execute market strategies relative to external considerations. • Michael E. Severino: Achieve key research and development milestones per company strategy; and achieve proprietary pipeline enhancement objectives. Stockholder Engagement 2018 Say on Pay Results At our 2018 Annual Meeting, the say on pay proposal received support from 95% of our stockholders. The board and compensation committee are encouraged by the continued, consistent stockholder support for our executive compensation program. 34 13NOV201221352027 2019 Proxy Statement 34 EXECUTIVE COMPENSATION AbbVie is committed to regular, ongoing engagement with stockholders to ensure that we continue to understand stockholder feedback about our compensation program and incorporate that feedback into the compensation decision-making process. To that end, in 2018 AbbVie approached and engaged stockholders holding approximately 45% of the company’s outstanding shares. In these discussions, the aggregate feedback acknowledged the alignment of our executives’ pay with AbbVie’s performance and expressed support of our compensation program, consistent with the level of stockholder support for our say on pay proposals since inception. The feedback informs the compensation committee’s continuous assessment of the program design and ongoing discussions with stockholders, which contribute to the evolution of the program. Compensation Program Governance Summary In addition to strong alignment of pay with the performance of the company and our NEOs, we maintain and are committed to good governance practices, including the following: (cid:5) Long-term incentive design emphasizing multiple, relative performance metrics and multi-year performance periods — Uses a multi-factor model for performance metrics — Incorporates relative total stockholder return — Dividends on outstanding equity awards are paid only at vesting and only on earned shares (cid:5) Majority of NEO compensation tied to long-term performance (cid:5) Short- and long-term incentive programs closely align pay with performance (cid:5) Annual incentive payout matrix used to define and cap the range for the committee’s determinations (at or below the plan maximum of 200% of target) (cid:5) Robust stock ownership guidelines of 6x salary for CEO and 3x salary for NEOs (cid:5) Robust stock ownership guideline of 5x annual fees for non-employee directors (cid:5) NEOs must hold and not sell equity until the minimum stock ownership requirement is satisfied (cid:5) Double-trigger requirements for equity acceleration and other benefits in the event of a change in control (cid:5) No tax gross-ups in executive compensation program (cid:5) No duplication of performance metrics in short-and long-term incentives (cid:5) No repricing of stock options without express stockholder approval (cid:5) No employment contracts (cid:5) No guaranteed short-term incentives or equity awards (cid:5) Equitable pay across genders and ethnicities (cid:5) Anti-hedging and anti-pledging policies (cid:5) Independent compensation consultant that performs no other work for the company (cid:5) Committee has broad discretion to claw back incentive awards in the unlikely event of a restatement of earnings or material breach of the AbbVie Code of Business Conduct (cid:5) Proactive stockholder engagement process II. Executive Compensation Process Commitment to Performance-Based Awards The majority of AbbVie’s NEO pay is 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. Though quantitative metrics such as financial and operational results are a central part of our performance assessment, some goals such as leadership and progress against strategic and long-term objectives are difficult to measure using numeric or formulaic criteria. As such, the compensation committee also conducts a qualitative assessment of individual performance to ensure the overall assessment of performance and pay decisions are aligned with the company’s true performance over a period of time. The elimination of the performance-based compensation deduction under Code Section 162(m) has not altered the commitment of the company and the compensation committee to performance-based compensation principles. A discussion of the decision-making criteria for each pay component follows. 35 2019 Proxy Statement 13NOV201221352027 35 EXECUTIVE COMPENSATION Committee Process for Setting Total Compensation Each February, the committee, with the assistance of its independent compensation consultant and AbbVie’s management team, determines pay levels for NEOs. The process starts with a consideration of compensation levels and the mix of compensation for comparable executives at companies in AbbVie’s Health Care Peer Group, which are listed below in the section captioned ‘‘Compensation Benchmarking.’’ After this benchmark review, the committee establishes NEO compensation—base salary adjustments, annual incentive awards, and long-term incentive awards—relative to the peer median in each instance. Awards can be differentiated from the peer compensation levels based on each NEO’s individual performance, leadership, and contributions to AbbVie’s business and strategic performance. Compensation Benchmarking To provide the appropriate context for executive pay decisions, the committee, in consultation with its independent compensation consultant, assesses the compensation practices and pay levels of AbbVie’s Health Care Peer Group. The committee chooses to focus on the Health Care Peer Group because its constituents share important characteristics with AbbVie, particularly the global emphasis on research-based pharmaceuticals and biopharmaceutical therapies and the regulatory environment within which they operate. Members of the Health Care Peer Group are AbbVie’s primary competitors for executive talent and are companies the committee believes chiefly represent our competitive market: Health Care Peer Group Amgen, Inc. Bristol-Myers Squibb Company Eli Lilly and Company Gilead Sciences, Inc. GlaxoSmithKline plc Johnson & Johnson Merck & Company, Inc. Novartis AG Pfizer Inc. Role of the Compensation Consultant The compensation committee has engaged Compensation Advisory Partners as its independent compensation consultant. The committee’s independent consultant reports directly to the chair of the committee. The consultant 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 its consultant to consider, which include: peer groups against which performance and pay should be examined, metrics to be used to assess AbbVie’s performance, competitive incentive practices in the marketplace, and compensation levels relative to market benchmarks. Compensation Risk Oversight The company has established, and the compensation committee endorses, several controls to address and mitigate compensation-related risk, such as employing a diverse set of performance metrics, maintaining robust stock ownership guidelines for its executives and non-employee directors, and retaining broad discretion to recover incentive awards in the unlikely event that incentive plan award decisions are based on earnings that are subsequently restated. The committee, in collaboration with its independent compensation consultant, identified no material risks in AbbVie’s compensation programs in 2018. 36 13NOV201221352027 2019 Proxy Statement 36 III. Compensation Plan Elements Three primary components make up AbbVie’s executive pay program: (1) base salary, (2) short-term incentives and (3) long-term incentives. The structure of each component is tailored to serve a specific function and purpose. CEO Pay Mix All Other NEO Average Pay Mix EXECUTIVE COMPENSATION 8% Base Salary 20% Short-term Incen(cid:2)ves 58% Long-term Incen(cid:2)ves 15% Base Salary 27% Short-term Incen(cid:2)ves 27FEB201905201213 27FEB201905201758 72% Long-term Incen(cid:2)ves Base Salary The compensation committee sets appropriate levels of base salary to ensure that AbbVie can attract and retain a leadership team that will continue to meet our commitments to customers and patients and sustain long-term profitable growth for our stockholders. Generally, the committee considers the median of the Health Care Peer Group as an initial benchmark, but also references additional information as needed. Specific pay rates are then established for each NEO relative to his or her market benchmark based on the NEO’s performance, experience, unique skills, internal equity with others at AbbVie, and the company’s operating budget. Short-Term Incentives Performance Incentive Plan Annual cash incentives are paid to NEOs through AbbVie’s Performance Incentive Plan (PIP), which rewards executives for achieving key financial and non-financial goals measured at the company and individual levels. AbbVie’s PIP structure is designed to align NEOs’ interests directly with AbbVie’s annual operating strategies to advance our mission, financial goals, and leadership behaviors. In doing so, it provides a direct link between the NEOs’ short-term incentives and the company’s and the NEOs’ annual performance results through measurable financial and operational performance followed by qualitative assessments of clearly defined strategic progress and leadership behaviors. NEO target incentive amounts are set as a percentage of base salary. Mr. Gonzalez’s target is 150% of base salary. For the 2018 performance year, the target for the other NEOs (besides Mr. Michael) was 110% of base salary, based on the positions they held at the time their performance goals were established. Mr. Michael’s target was set at 100% when he was appointed Senior Vice President, Chief Financial Officer. The maximum potential payout under the PIP is capped at 200% of target for all participants. Determining actual incentive amounts is a multi-step process. First, an initial performance score is calculated for each NEO based on performance against weighted financial and strategic/leadership goals. This performance score results in a preliminary award amount of up to 100% of target only. Final awards are determined by the compensation committee based on a qualitative assessment of holistic performance. A formal payout matrix based on net revenues and 37 2019 Proxy Statement 13NOV201221352027 37 EXECUTIVE COMPENSATION operating margin guides the committee by capping the range of final awards at or below the plan maximum of 200% of target. This process is more fully described below: Illustration of 2018 Incentive Calculation Target Award x Performance Score = Preliminary Award Final Committee Decision = Final Award Plan Governance: Maximum 100% of Target per plan design 2018 Performance results: Capped at 175% of Target per payout matrix (below 200% plan maximum) 28FEB201905372867 Initial Performance Score Initial performance scores are calculated for each NEO based on performance against weighted financial and strategic/leadership goals. The goals and their respective weightings are summarized in the chart below. The specific goals and weightings for each NEO (including the CEO) are established at the start of each performance year based on the NEO’s role and anticipated contributions to the company’s annual objectives. Richard A. Gonzalez William J. Chase Robert A. Michael Laura J. Schumacher Carlos Alban Michael E. Severino Net Revenues, Income Operating Margin, Before HUMIRA Sales and Return on Assets Taxes R&D/ Business Innovation Development Other 20% 20% 40% 20% 20% 20% 60% 60% 20% 20% 50% 20% 20% 30% 50% 10% 10% 10% 10% 40% 20% 30% Assessments of performance against financial results consider the effect of specified adjustments and/or unusual or unpredictable events, and the appropriateness of these adjustments is reviewed annually by the committee. In 2018, specified adjustments consisted of intangible asset amortization, milestones and other research and development expenses, acquired in process research and development, acquisition-related impairment, charitable contributions, change in fair value of contingent consideration, litigation reserves, tax-related items, and other items, as described in Exhibit 99.1 to AbbVie’s Form 8-K filed on January 25, 2019. Annual Incentive Payout Matrix and Final Committee Decisions The annual incentive payout matrix establishes a potential range of final incentive outcomes based on net revenues and operating margin performance. For 2018, actual net revenue performance was 103% compared to target, 38 13NOV201221352027 2019 Proxy Statement 38 EXECUTIVE COMPENSATION while actual income before taxes was 102% compared to target. As a result of this performance, the annual incentive payout matrix capped the annual incentives at 175% of target, below the plan maximum of 200% of target. Annual Incentive Payout Matrix 2017 Actual 2018 Target 2018 Target vs. 2017 Actual 2018 Actual 2018 Actual vs. 2018 Target Net Revenues Income Before Taxes $28.1BN $11.2BN $31.5BN $13.0BN 112% 116% $32.3BN $13.3BN 103% 102% 2018 Payout Matrix Result Capped at 175% of target (below 200% plan maximum) Final awards are determined by the compensation committee based on a qualitative assessment of holistic performance. While the committee relies heavily on objective, quantitative metrics to determine PIP awards, this qualitative element ensures the review is comprehensive and includes all individual, strategic, and leadership goals for which assessment is not dictated solely by numeric or formulaic applications. Moreover, while each participant has predetermined goals, the committee also considers relative achievements and/or developments in the company, the marketplace, and the global economy that could not have been foreseen when individual goals were established. Richard A. Gonzalez William J. Chase Robert A. Michael Laura J. Schumacher Carlos Alban Michael E. Severino Target Award Actual Award Paid Actual Award as a % of Target $2,475,000 1,150,380 850,000 1,150,380 1,130,800 1,226,500 $3,898,125 1,954,549 950,000 1,954,549 1,836,219 1,818,200 158% 170% 112% 170% 162% 148% 39 2019 Proxy Statement 13NOV201221352027 39 EXECUTIVE COMPENSATION Long-Term Incentives The LTI program design aligns AbbVie’s long-term incentive compensation with key operational and financial initiatives, including sustained EPS growth and generation of superior investment returns relative to peers. In 2018, NEOs received annual grant LTI awards with the following characteristics: Long-Term Incentive Program Award Type 40% Performance Shares 40% Performance-Vested Restricted Stock 20% Non-Qualified Stock Options Metric Performance Period EPS 3-Year Relative TSR Modifier Relative Return on Equity Stock Price Appreciation 3 Years 3 Years 10-year term • • Performance Shares (40% of total LTI award)—These awards have the potential to vest at 0% to 250% of target after a three-year performance period and are earned based on company performance in earnings per share (EPS) and relative total stockholder return (TSR). TSR performance is measured relative to a group made up of companies that are constituents in either the S&P Pharmaceutical, Biotech, and Life Science Index or the NYSE Arca Pharmaceutical Index. Dividends on performance shares accrue during the performance period and are paid at vesting only to the extent that shares are earned. Performance-Vested Restricted Stock (40% of total LTI award)—These awards have the potential to vest at 0% to 150% of target in one-third increments during a three-year performance period based on AbbVie’s return on equity articulated as pre-set goals and measured relative to a group made up of companies that are constituents in either the S&P Pharmaceutical, Biotech, and Life Science Index or the NYSE Arca Pharmaceutical Index. Dividends accrue during the performance period and are paid at vesting only to the extent that shares are earned. • Non-Qualified Stock Options (20% of total LTI award)—These awards have the potential to vest in one-third increments on each of the first three annual anniversaries of the grant date, subject to continued employment with the company. The option exercise price is set at or above fair market value on the grant date. To the extent that the options vest, the award expires ten years after the grant date. Performance Share and Performance-Vested Restricted Stock Performance Targets and Results Performance targets and results associated with the 2018 annual grant awards of performance shares and performance-vested restricted stock are shown below. Total shareholder return results are in progress; these results and their impact on final payout will be disclosed following the completion of the three-year performance period. Performance Objective Adjusted Diluted EPS Relative TSR Relative ROE Threshold $7.33 Target $7.38 Maximum $7.53 Result $7.91 Impact on Payout 200% Relative TSR is measured over a 3-year performance period and used as a modifier 50th - 75th percentile 75th - 90th percentile >90th percentile >90th percentile 150% AbbVie’s policy with respect to its annual equity award for all eligible employees, including the NEOs, is to grant the award and set the grant price at the compensation committee’s regularly scheduled February meeting each year. These meeting dates generally are the third Thursday of February and are scheduled two years in advance. 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 2018 annual grant was $114.36. The high, low and closing prices of an 40 13NOV201221352027 2019 Proxy Statement 40 EXECUTIVE COMPENSATION AbbVie common share on the grant date (February 15, 2018) were $116.33, $112.38, and $114.90 respectively. All LTI awards are subject to a minimum vesting period of 12 months. AbbVie granted performance shares in 2016 that were subject to a 3-year performance cycle that ended December 31, 2018. The table below describes the performance objectives, outcomes, and shares earned. Performance Objective Threshold Target Maximum Actual Relative TSR 15 pts below index Equal to index performance 15 pts above index 60.3 pts above index Performance Modifier 125% See the 2018 Option Exercises and Stock Vested table for the shares earned as a result of the performance described above. 2019 Compensation Decisions The compensation committee’s typical practice is to make decisions related to NEO pay at its February meeting, including adjustments to base salary, an annual incentive payment for the prior year’s performance, and establishment of a long-term incentive award value. In making its decisions, the committee considers the performance achieved compared to previously established goals as well as changes in industry practice reflected in compensation benchmarking data. The committee made the following decisions about the compensation for Mr. Gonzalez in February 2019: (i) his base salary is unchanged compared to 2018; (ii) his annual incentive payment for 2018 performance was $3,898,125; and (iii) his 2019 long-term incentive award grant value was $11,500,000. The resulting changes in total direct compensation from 2018 to 2019 are shown in the following chart: Change in CEO Total Direct Compensation 2018 - 2019 Total Direct Compensation $20,251,104 LTI Award Grant Value $14,269,854 Annual Incentive* $4,331,250 Base Salary $1,650,000 2018 Total Direct Compensation $17,048,125 LTI Award Grant Value $11,500,000 Annual Incentive* $3,898,125 Base Salary $1,650,000 2019 4MAR201917334931 * The annual incentives shown in the table above are included in the year such awards were paid for the prior year’s performance. 41 2019 Proxy Statement 13NOV201221352027 41 EXECUTIVE COMPENSATION 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. 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 All eligible U.S. employees, including NEOs, participate in the AbbVie Pension Plan, the company’s principal qualified defined benefit plan. NEOs and certain other employees also participate in the AbbVie Supplemental Pension Plan. These plans are described in greater detail in the section of this proxy statement captioned ‘‘Pension Benefits.’’ The Supplemental Pension Plan is a non-qualified defined benefit plan that cannot be secured in a manner similar to a qualified plan, for which assets are held in trust, so eligible NEOs receive an annual cash payment equal to the increase in the present value of their Supplemental Pension Plan benefit. Eligible NEOs have the option of depositing the annual payment into an individually established grantor trust, net of tax withholdings. Deposited amounts may be credited with the difference between the NEO’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 and the NEOs personally pay the taxes on those amounts without gross-ups. The manner in which the grantor trust assets are to be distributed to an NEO upon retirement from the company generally follows the distribution method elected by the NEO under the AbbVie Pension Plan. If an NEO (or the NEO’s surviving spouse, depending on the pension distribution method elected by the NEO 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 NEO (or his or her surviving spouse) by AbbVie. Savings Plans All U.S. employees, including NEOs, are eligible to defer a portion of their annual base salary under the AbbVie Savings Plan, the company’s principal qualified defined contribution plan, up to the IRS contribution limits. Eligible NEOs also may defer up to 18 percent of their base salary, less contributions to the AbbVie Savings Plan, to the AbbVie Supplemental Savings Plan, which is a non-qualified defined contribution plan. Eligible NEOs 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. Amounts deposited in the individual trusts are not tax-deferred and the NEOs personally pay the taxes on those amounts without gross-ups. NEOs 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.’’ Financial Planning NEOs are paid an annual stipend of $10,000 for estate planning advice, tax preparation and general financial planning fees. The stipend is income to the NEO, who is responsible for payment of all resulting taxes without gross-ups. 42 13NOV201221352027 2019 Proxy Statement 42 EXECUTIVE COMPENSATION Company-Provided Transportation NEOs 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, as appropriate. In some circumstances, these benefits may be used for personal travel, which would then be considered part of the NEO’s total compensation and treated as taxable income to them under applicable tax laws. The NEOs pay the taxes on such income without gross-ups. Disability Benefits In addition to AbbVie’s standard disability benefits, NEOs are eligible for a monthly long-term disability benefit, which is described on page 60 of this proxy statement. Employment Agreements AbbVie does not have employment agreements with any of its NEOs. Excise Tax Gross-ups AbbVie does not provide excise tax gross-ups on NEO compensation. Change in Control Agreements AbbVie has entered into change in control agreements with its NEOs 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 NEOs against potential adverse changes resulting from a change in control. The change in control agreements contain a double-trigger feature, meaning that if the NEO’s employment is terminated other than for cause or permanent disability, or if the NEO elects to terminate employment for good reason, within two years following a change in control, he or she is entitled to receive certain pay and benefits as described in the section of this proxy statement captioned ‘‘Potential Payments upon Termination or Change in Control.’’ IV. Other Matters Stock Ownership Guidelines 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 his or her position. NEOs are not allowed to sell stock, except for tax withholding at vesting or exercise, if they do not satisfy the minimum stock ownership requirement. The minimum stock ownership guidelines for the CEO and other NEOs are as follows: Executive Richard A. Gonzalez William J. Chase Robert A. Michael Laura J. Schumacher Carlos Alban Michael E. Severino Stock Ownership Requirement Requirement Met? 6x Base Salary 3x Base Salary 3x Base Salary 3x Base Salary 3x Base Salary 3x Base Salary Yes Yes Yes Yes Yes Yes 43 2019 Proxy Statement 13NOV201221352027 43 EXECUTIVE COMPENSATION In addition, AbbVie’s non-employee directors are required to own AbbVie stock valued at five times (5x) 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. Clawback Policy The 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 or circumstances where an executive officer engages in misconduct that would constitute a material breach of the AbbVie Code of Business Conduct. Nevertheless, the committee, in evaluating such circumstances, has broad discretion to take all actions necessary to protect the interests of stockholders, up to and including actions to recover incentive awards. Further, the company is committed to disclosing in its annual proxy statement the occurrence of any recoupment regarding an executive officer when the underlying violation has already been publicly disclosed in company filings with the SEC. For more details, AbbVie’s Code of Business Conduct is available in the corporate governance section of AbbVie’s investor relations website at www.abbvieinvestor.com. Anti-Hedging and Anti-Pledging Policies AbbVie has a formal policy that prohibits directors and officers subject to Section 16 of the Exchange Act, including all of the NEOs, 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 has a formal policy that prohibits directors and officers subject to Section 16 of the Exchange Act, including all of the NEOs, from pledging AbbVie common stock as collateral for a loan. In addition, the AbbVie Incentive Stock Program provides that no long-term incentive award may be assigned, alienated, sold or transferred other than by will or by the laws of descent and distribution or as permitted by the compensation 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 NEOs and certain other employees, are required to clear any transaction involving company stock with the Legal department prior to entering into such transaction. 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 2018, in collaboration with the compensation committee’s independent compensation consultant, AbbVie conducted an in-depth risk assessment of its compensation policies and practices, including those related to executive compensation programs for NEOs. The risk assessment included a quantitative and qualitative analysis of AbbVie’s executive compensation programs and broader employee incentive compensation plans. AbbVie also considered how these programs compare, from a design perspective, to programs maintained by other companies. Based on this assessment, it was determined that AbbVie’s executive compensation programs are balanced and appropriately incent 44 13NOV201221352027 2019 Proxy Statement 44 employees, and any risks arising from the 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: EXECUTIVE COMPENSATION • • • • • • • • • • In 2018, AbbVie completed a review that found salaries to be equitable across genders and ethnicities among U.S. employees. AbbVie’s compensation structure contributes to a corporate culture that encourages our NEOs to regard AbbVie as a long-term employer. For example, equity awards vest over multi-year periods, which encourages NEOs to consider the long-term impact of their decisions and align their interests with those of AbbVie’s stockholders. AbbVie’s annual incentive program is based on multiple performance measures, balancing earnings achievement 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. 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. In addition, a limit of 200% of target applies to any awards made under the NEO short-term incentive plan. AbbVie’s long-term incentive program focuses NEOs on longer-term operating performance and aligns NEOs with stockholder interests through the use of multi-year performance periods and multiple performance measures, including relative total stockholder return. In 2018, AbbVie’s NEOs received roughly two-thirds of their total direct compensation in the form of long-term incentives (20% of which are stock options that may vest over a three-year period and 80% of which are performance-based awards that may vest over a three-year performance period). 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. AbbVie has robust stock ownership guidelines for its senior executives, which promotes alignment with stockholder interests, and other good governance equity practices such as anti-hedging and anti-pledging policies. AbbVie’s compensation committee has the ability to exercise downward discretion in determining annual incentive plan payouts. AbbVie’s compensation committee has broad discretion to claw back incentive compensation that was awarded based on financials that were later restated or based on a material breach of the AbbVie Code of Business Conduct. 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. The risk assessment results were presented to the compensation committee by its independent compensation consultant. 45 2019 Proxy Statement 13NOV201221352027 45 EXECUTIVE COMPENSATION Summary Compensation Table ................................................................................................................................................................................................................................................................................................................................. This section contains compensation information for AbbVie’s NEOs for the fiscal year ended December 31, 2018. The following table summarizes compensation awarded to, earned by and/or paid to AbbVie’s NEOs in connection with their service to AbbVie during 2018, 2017 and 2016, as applicable. Mr. Michael was not an NEO before 2018. The section of this proxy statement captioned ‘‘Compensation Plan Elements’’ describes in greater detail the information reported in this table. Name and Principal Position Richard A. Gonzalez Chairman of the Board and Chief Executive Officer William J. Chase Executive Vice President, Finance and Administration(7) Robert A. Michael Senior Vice President, Chief Financial Officer(7) Laura J. Schumacher Vice Chairman, External Affairs and Chief Legal Officer Carlos Alban Vice Chairman, Chief Commercial Officer Michael E. Severino Vice Chairman and President Salary ($) Bonus ($) Stock Awards ($)(1) Option Awards ($)(2) $1,650,000 1,638,462 1,600,000 1,038,773 1,008,526 979,369 553,654 1,043,582 1,008,526 979,369 1,016,526 947,469 920,077 1,100,605 1,004,460 960,969 $0 0 0 $11,509,090 9,606,360 9,318,854 $2,760,764 2,559,270 2,360,323 0 0 0 0 0 0 0 0 0 0 0 0 0 4,134,594 3,681,906 3,483,919 724,041 4,134,594 7,681,631 2,864,483 4,005,388 3,522,250 2,916,922 4,176,037 3,681,906 3,359,376 991,720 980,980 882,450 173,724 991,720 980,980 725,663 961,216 938,350 738,798 1,002,105 980,980 850,908 Year 2018 2017 2016 2018 2017 2016 2018 2018 2017 2016 2018 2017 2016 2018 2017 2016 Change in Pension Value and Non-qualified Deferred Compensation Earnings ($)(4)(5) $463,205 3,496,704 3,232,531 309,063 4,223,300 1,697,232 679,532 2,739,969 2,957,506 1,627,686 821,930 4,832,949 1,884,312 359,057 653,582 375,080 Non-Equity Incentive Plan Compensation ($)(3) $3,898,125 4,331,250 3,600,000 1,954,549 1,954,549 1,626,000 950,000 1,954,549 1,954,549 1,626,000 1,836,219 1,836,219 1,510,000 1,818,200 1,955,069 1,596,000 All Other Compensation ($)(6) Total ($) $990,685 993,197 859,216 $21,271,869 22,625,243 20,970,924 296,087 195,332 162,406 37,937 8,724,786 12,044,593 8,831,376 3,118,888 518,745 396,164 394,498 341,800 257,751 246,809 151,355 119,279 101,530 11,383,159 14,979,356 8,217,699 8,983,079 12,334,988 8,216,918 8,607,359 8,395,276 7,243,863 (1) (2) In accordance with Securities and Exchange Commission (SEC) rules, the amounts in this column represent the aggregate grant date fair value of the awards determined in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 718. AbbVie generally 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. The grant date fair value of performance shares with a TSR market condition are determined using the Monte Carlo simulation model. In accordance with SEC rules, the amounts in this column represent the aggregate grant date fair value of the awards determined in accordance with FASB ASC Topic 718. These amounts were determined as of the option grant date using a Black-Scholes stock option valuation model. These amounts are being reported solely for the purpose of comparative disclosure in accordance with the SEC 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. The weighted-average assumptions used to estimate the grant date fair value of options granted in 2018, along with the weighted-average grant date fair value, are shown below: Assumption Risk-free interest rate Average life of options (years) Volatility Dividend yield Fair value per stock option 2.67% 5.4 27.79% 3.74% $21.63 46 13NOV201221352027 2019 Proxy Statement 46 EXECUTIVE COMPENSATION (3) The compensation reported in this column for 2018 was earned as a performance-based incentive award pursuant to the AbbVie Performance Incentive Plan. Additional information regarding the plan can be found in the Compensation Plan Elements section of this proxy statement. (4) The plan amounts shown below are reported in this column, except as described in this paragraph. The amounts shown beside each NEO’s name are for 2018, 2017 and 2016, 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: $(111,651) / $(38,501) / $(70,521); W. Chase: $(48,439) / $234,110 / $74,428; R. Michael: $(46,048); L. Schumacher: $72,009 / $170,782 / $86,510; C. Alban: $(33,817) / $296,728 / $98,476; and M. Severino: $11,833 / $37,394 / $22,663. AbbVie Supplemental Pension Plan R. Gonzalez: $(1,790,327) / $3,157,627 / $3,016,444; W. Chase: $(65,476) / $3,759,943 / $1,463,791; R. Michael: $725,580; L. Schumacher: $2,027,233 / $2,244,142 / $1,093,415; C. Alban: $432,490 / $4,195,321 / $1,520,208; and M. Severino: $210,855 / $535,907 / $306,868. 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; (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 Performance Incentive Plan and the AbbVie Supplemental Savings Plan. R. Gonzalez: $463,205 / $377,578 / $286,608; W. Chase: $309,063 / $229,247 / $159,013; L. Schumacher: $640,727 / $542,582 / $447,761; C. Alban: $423,257 / $340,900 / $265,628; and M. Severino: $136,369 / $80,281 / $45,549. (5) The amounts shown in this column include the change in pension value during the applicable year, which is attributable to changes in actuarial assumptions (primarily discount rate and mortality tables) and other factors based on plan design (primarily pay, service and age). The present value of a pension benefit is determined, in part, by the discount rate used for accounting purposes. The discount rate is determined by reference to the prevailing market rate of interest. In 2018, interest rates increased and the discount rates used for the Pension Plan and the Supplemental Pension Plan were increased to reflect that change. An increase in the discount rate decreases the present value of participants’ pension benefits while actual payments to be made to participants are not changed. The discount rate used for 2018 was 4.62% for the Pension Plan and 4.58% for the Supplemental Pension Plan. The discount rate used for 2017 was 3.91% for the Pension Plan and 3.87% for the Supplemental Pension Plan, while the discount rate used for 2016 was 4.67% for the Pension Plan and 4.59% for the Supplemental Pension Plan. The mortality assumptions that apply for actuarial purposes also affect pension values. In addition to the effect of the changes in actuarial assumptions, other factors built into the plans contributed to the change in pension value. The change in pension value numbers reflect the application of the benefit formulas under the Pension Plan and the Supplemental Pension Plan, which are described in the section of this proxy statement captioned ‘‘Pension Benefits.’’ As participants’ pay changes, the formulas yield revised pension values. Furthermore, as a participant ages and service credit accumulates year over year (before the participant is eligible for unreduced pension benefits), the present value of his or her pension benefits increases, even without changes in pay or actuarial assumptions. (6) The amounts shown below are reported in this column for 2018, 2017, and 2016, respectively, as applicable. Earnings for Non-Qualified Defined Benefit and Non-Qualified Defined Contribution Plans R. Gonzalez: $246,041 / $159,056 / $149,512; W. Chase: $180,182 / $109,261 / $84,680; L. Schumacher: $420,337 / $304,784 / $310,138; C. Alban: $266,141 / $182,139 / $173,948; and M. Severino: $66,157 / $34,853 / $20,104. 47 2019 Proxy Statement 13NOV201221352027 47 EXECUTIVE COMPENSATION Each of the NEOs’ awards under the AbbVie Performance Incentive Plan is paid in cash to the NEO on a current basis and, for eligible NEOs, may be deposited into a grantor trust established by the NEO, net of maximum tax withholdings. Each of the eligible NEOs has also established grantor trusts in connection with the AbbVie Supplemental Pension Plan and the AbbVie Supplemental Savings Plan. These amounts include earnings net of the reportable interest included in footnote (4). Employer Contributions to Defined Contribution Plans R. Gonzalez: $82,500 / $81,923 / $80,000; W. Chase: $51,939 / $50,426 / $48,968; R. Michael: $13,750; L. Schumacher: $52,179 / $50,426 / $48,968; C. Alban: $50,826 / $47,373 / $46,004; and M. Severino: $55,030 / $50,223 / $48,048. These amounts include AbbVie contributions to the AbbVie Savings Plan and the AbbVie Supplemental Savings Plan, as applicable. The Supplemental Savings Plan permits eligible NEOs 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 eligible NEOs have these amounts paid to them in cash on a current basis and deposited into a grantor trust established by the NEO, net of maximum tax withholdings. Other 2018 Compensation The totals shown in the table include the cost of providing a corporate automobile less the amount reimbursed by the NEO: R. Gonzalez: $21,030; W. Chase: $22,022; R. Michael: $17,687; L. Schumacher: $19,803; C. Alban: $14,833; and M. Severino: $20,167. AbbVie imputes income to the NEO, if required, and the NEO pays taxes in accordance with tax regulations without gross-ups. The totals shown in the table include a $10,000 financial planning services allowance for each NEO other than Mr. Michael, whose 2018 allowance was $6,500. AbbVie imputes income to the NEO, if required, and the NEO pays taxes in accordance with tax regulations without gross-ups. The totals shown in the table include the following costs for non-business-related air travel: R. Gonzalez: $598,447; W. Chase: $31,945; and L. Schumacher: $16,426. 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 imputes income to the NEO, if required, and the NEO pays taxes in accordance with tax regulations without gross-ups. For Mr. Gonzalez, the total includes $32,666 for costs associated with security, determined based on AbbVie’s actual costs for such services. The security was provided on the recommendation of an independent security study and in accordance with the AbbVie security program. AbbVie imputes income to Mr. Gonzalez, if required, and he pays taxes in accordance with tax regulations without gross-ups. The NEOs also are eligible to participate in an executive disability benefit, which is described on page 60 of this proxy statement. (7) Mr. Chase was appointed Executive Vice President, Finance and Administration, and Mr. Michael was appointed Senior Vice President, Chief Financial Officer, effective October 19, 2018. Mr. Chase served as Executive Vice President, Chief Financial Officer before assuming his current role. Mr. Michael served as Vice President, Controller before assuming his current role. Required Pay Ratio Disclosure As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 402(u) of Regulation S-K, we are providing the following information about the relationship of the annual total compensation of our employees and the annual total compensation of our CEO, Richard Gonzalez. The pay ratio included in this information is a reasonable estimate calculated in a manner consistent with Regulation S-K Item 402(u). The ratio of Mr. Gonzalez’s annual total compensation for 2018, as reported in the Summary Compensation Table in this proxy statement, to the median employee annual total compensation determined on the same basis was 143:1. For 2018, the annual total compensation of our median employee (other than Mr. Gonzalez) was $148,823. To identify the median employee, we prepared a list of all active AbbVie employees throughout the world as of December 28, 2018. The consistently applied compensation measure used to identify the median employee was annual base pay and target 48 13NOV201221352027 2019 Proxy Statement 48 EXECUTIVE COMPENSATION bonus, using hours worked during 2018 for hourly employees and base salary for the remaining employees. This process resulted in a median group consisting of several employees and a representative employee was selected in accordance with SEC guidance, taking into account demographic characteristics that best represent a typical AbbVie employee, including tenure, location, employment status and applicable compensation and benefit programs. 2018 Grants of Plan-Based Awards ................................................................................................................................................................................................................................................................................................................................. The following table summarizes the equity awards granted under the AbbVie 2013 Incentive Stock Program to the NEOs during 2018. Estimated Future Payouts Under Non-Equity Incentive Plan Awards(1) Grant Date Target Maximum ($) ($) Estimated Future Payouts Under Equity Incentive Plan Awards Target (#) All Other Option Awards: Numbers of Securities Underlying Options (#) Exercise or Base Price of Option Awards ($/Sh) Closing Market Price on Grant Date 2/15/2018 2/15/2018 2/15/2018 2/15/2018 2/15/2018 2/15/2018 2/15/2018 2/15/2018 2/15/2018 2/15/2018 2/15/2018 2/15/2018 2/15/2018 2/15/2018 2/15/2018 2/15/2018 2/15/2018 2/15/2018 47,210(2) 47,210(3) 16,960(2) 16,960(3) 2,970(2) 2,970(3) 16,960(2) 16,960(3) 16,430(2) 16,430(3) 17,130(2) 17,130(3) 127,610(5) $114.36 $114.90 45,840(5) 114.36 114.90 8,030(5) 114.36 114.90 45,840(5) 114.36 114.90 44,430(5) 114.36 114.90 46,320(5) 114.36 114.90 Grant Date Fair Value of Stock and Option Awards $6,110,390(4) 5,398,700(4) 2,760,764(6) 2,195,133(4) 1,939,461(4) 991,720(6) 384,407(4) 339,634(4) 173,724(6) 2,195,133(4) 1,939,461(4) 991,720(6) 2,126,535(4) 1,878,853(4) 961,216(6) 2,217,136(4) 1,958,901(4) 1,002,105(6) Name R. Gonzalez W. Chase R. Michael L. Schumacher C. Alban M. Severino (1) During 2018, each of the NEOs participated in the AbbVie Performance Incentive Plan. The annual cash incentive award earned by the NEO in 2018 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 2018 awards under the plan. The plan is described in greater detail in the section of this proxy statement captioned ‘‘Compensation Discussion and Analysis—Compensation Plan Elements—Short-Term Incentives.’’ (2) This is a performance share award that has the potential to vest at 0% to 250% of target during a three-year performance period based on company performance in earnings per share (EPS) and relative total stockholder return (TSR). TSR performance is measured relative to a group made up of companies that are constituents in either the S&P Pharmaceutical, Biotech, and Life Science Index or the NYSE Arca Pharmaceutical Index. Dividends accrue during the performance period and are paid in cash at vesting only to the extent that shares are earned. In 2018, AbbVie’s EPS performance resulted in the banking of the award on February 28, 2019 at 200% of target, with vesting to be determined based on the company’s relative TSR performance following the three-year performance period that ends December 31, 2020. The performance metrics are described in the section of this proxy statement captioned ‘‘Compensation Discussion and Analysis—Compensation Plan Elements—Long-Term Incentives.’’ (3) This is a performance-vested restricted stock unit award that has the potential to vest at 0% to 150% of target, in one-third increments, during a three-year performance period based on AbbVie’s return on equity (ROE) articulated 49 2019 Proxy Statement 13NOV201221352027 49 EXECUTIVE COMPENSATION as pre-set goals and measured relative to a group made up of companies that are constituents in either the S&P Pharmaceutical, Biotech, and Life Science Index or the NYSE Arca Pharmaceutical Index. Dividends accrue during the performance period and are paid in cash at vesting only to the extent that shares are earned. In 2018, AbbVie’s relative ROE performance resulted in the vesting on February 28, 2019 of one-third of the award at 150% of target. The performance metrics are described in the section of this proxy statement captioned ‘‘Compensation Discussion and Analysis—Compensation Plan Elements—Long-Term Incentives.’’ (4) The grant date fair value of stock awards is generally determined by multiplying the number of shares or units granted by the average of the high and low market prices of one share of AbbVie common stock on the award grant date. The grant date fair value of performance shares with a TSR market condition is determined using the Monte Carlo simulation model. In the event of a grantee’s death or disability, these awards will be deemed earned either based on actual performance through the date of death or disability or at target, depending on the timing of the death or disability, as set forth in the award agreement. 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) 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, subject to satisfaction of the service requirements set forth in the award agreements. 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. (6) 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 footnote (2) to the Summary Compensation Table. 50 13NOV201221352027 2019 Proxy Statement 50 2018 Outstanding Equity Awards at Fiscal Year End ................................................................................................................................................................................................................................................................................................................................. The following table summarizes the outstanding AbbVie equity awards held by the NEOs at year end. Option Awards(1)(2) Stock Awards EXECUTIVE COMPENSATION Name R. Gonzalez W. Chase R. Michael L. Schumacher C. Alban M. Severino Number of Securities Underlying Unexercised Options (#) Exercisable Number of Securities Underlying Unexercised Options (#) Unexercisable Number of Shares of Stock That Have Not Vested (#) Market Value of Shares of Stock That Have Not Vested ($) Option Exercise Price ($) Option Expiration Date 109,097 170,113 87,050 — 19,600 115,830 92,740 110,770 63,600 33,367 — 6,760 3,807 — 103,220 52,300 33,367 — 115,830 81,500 101,960 53,247 31,917 — 74,309 104,480 61,327 33,367 — — 85,057(3) 174,100(3) 127,610(3) — — — — 31,800(3) 66,733(3) 45,840(3) 3,380(3) 7,613(3) 8,030(3) — 26,150(3) 66,733(3) 45,840(3) — — — 26,623(3) 63,833(3) 44,430(3) — — 30,663(3) 66,733(3) 46,320(3) $58.8800 54.8600 61.3600 114.3600 29.2265 35.8800 51.4200 58.8800 54.8600 61.3600 114.3600 54.8600 61.3600 114.3600 58.8800 54.8600 61.3600 114.3600 35.8800 51.4200 58.8800 54.8600 61.3600 114.3600 54.4400 58.8800 54.8600 61.3600 114.3600 2/18/2025 2/17/2026 2/15/2027 2/14/2028 2/16/2022 2/13/2023 2/19/2024 2/18/2025 2/17/2026 2/15/2027 2/14/2028 2/17/2026 2/15/2027 2/14/2028 2/18/2025 2/17/2026 2/15/2027 2/14/2028 2/13/2023 2/19/2024 2/18/2025 2/17/2026 2/15/2027 2/14/2028 6/1/2024 2/18/2025 2/17/2026 2/15/2027 2/14/2028 Equity Incentive Plan Awards: Number of Unearned Shares or Other Rights That Have Not Vested (#) Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares or Other Rights That Have Not Vested ($) 75,830(3) 142,515(3) 94,420(3) $6,990,768 13,138,458 8,704,580 28,350(3) 54,621(3) 33,920(3) 2,613,587 5,035,510 3,127,085 3,013(3) 6,231(3) 5,940(3) 23,309(3) 54,621(3) 33,920(3) 23,736(3) 52,254(3) 32,860(3) 277,768 574,436 547,609 2,148,857 5,035,510 3,127,085 2,188,222 4,817,296 3,029,363 27,336(3) 54,621(3) 34,260(3) 2,520,106 5,035,510 3,158,429 (1) Five of AbbVie’s NEOs were employed by Abbott Laboratories (Abbott) prior to AbbVie’s separation from Abbott on January 1, 2013 (the ‘‘Separation’’). When AbbVie separated from Abbott, 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). Such awards are subject to substantially the same terms, vesting conditions and other restrictions that applied to the original Abbott awards immediately before the Separation. 51 2019 Proxy Statement 13NOV201221352027 51 EXECUTIVE COMPENSATION 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 Separation. Each such adjusted Abbott stock option and AbbVie stock option is subject to substantially the same terms, vesting conditions, post-termination exercise rules and other restrictions that applied to the original Abbott stock option immediately before the Separation. As a result of the Separation, one NEO held the following Abbott equity awards as of December 31, 2018: • C. Alban: Vested options to purchase 16,033 Abbott common shares with an exercise price of $27.03 per share. (2) Except as noted, the stock options are fully vested. 52 13NOV201221352027 2019 Proxy Statement 52 (3) The vesting dates of AbbVie unexercisable stock options and unvested performance share and restricted stock/unit awards outstanding at December 31, 2018 are as follows: EXECUTIVE COMPENSATION Option Awards Number of Unexercised Shares Remaining from Original Grant Number of Option Shares Vesting— Date Vested 2019 Number of Option Shares Vesting— Date Vested 2020 Number of Option Shares Vesting— Date Vested 2021 Number of Shares of Restricted Stock or Units Stock or Unit Awards Number of Shares of Restricted Stock or Units Vesting— Date Vested 2019 Number of Shares of Restricted Stock or Units Vesting— Date Vested 2020 Number of Shares of Restricted Stock or Units Vesting— Date Vested 2021 Name R. Gonzalez W. Chase R. Michael 85,057 174,100 127,610 85,057—2/18 87,050—2/16 42,537—2/15 87,050—2/16 42,536—2/15 42,537—2/15 31,800 66,733 45,840 31,800—2/18 33,366—2/16 15,280—2/15 33,367—2/16 15,280—2/15 15,280—2/15 3,380 7,613 8,030 3,380—2/18 3,806—2/16 2,677—2/15 3,807—2/16 2,676—2/15 2,677—2/15 L. Schumacher 26,150 66,733 45,840 26,150—2/18 33,366—2/16 15,280—2/15 33,367—2/16 15,280—2/15 15,280—2/15 C. Alban M. Severino 26,623 63,833 44,430 26,623—2/18 31,916—2/16 14,810—2/15 31,917—2/16 14,810—2/15 14,810—2/15 30,663 66,733 46,320 30,663—2/18 33,366—2/16 15,440—2/15 33,367—2/16 15,440—2/15 15,440—2/15 47,397 28,433 90,369 52,146 47,210 47,210 17,720 10,630 34,635 19,986 16,960 16,960 1,883 1,130 3,951 2,280 2,970 2,970 14,569 8,740 34,635 19,986 16,960 16,960 14,836 8,900 33,134 19,120 16,430 16,430 17,086 10,250 34,635 19,986 17,130 17,130 (a) (b) (c) (d) (e) (f) (a) (b) (c) (d) (e) (f) (a) (b) (c) (d) (e) (f) (a) (b) (c) (d) (e) (f) (a) (b) (c) (d) (e) (f) (a) (b) (c) (d) (e) (f) (a) These are performance shares that remained outstanding and unvested on December 31, 2018 from an award made on February 18, 2016. The award had the potential to vest at 0% to 250% of target during a 3-year performance period and is earned based on company performance in earnings per share (EPS) and relative total stockholder return (TSR). TSR performance is measured relative to a group made up of companies that are constituents in either the S&P Pharmaceutical, Biotech, and Life Science Index or the NYSE Arca Pharmaceutical Index. Dividends accrue during the performance period and are paid at vesting only to the extent that shares are earned. In 2016, in connection with the phase-in of the redesigned long-term incentive program, AbbVie’s EPS performance resulted in the vesting on February 28, 2017 of two-thirds of the award at 166.7% of target. The remaining one-third of the EPS adjusted award vested on February 28, 2019 after a 125% adjustment based on the company’s relative TSR performance during the 3-year performance period that 53 2019 Proxy Statement 13NOV201221352027 53 EXECUTIVE COMPENSATION ended December 31, 2018. In aggregate, this award vested at 180.6% of target (out of a maximum of 250% of target) based on the application of all performance adjustments. (b) These are performance-vested restricted stock units that remained outstanding and unvested on December 31, 2018, from an award made on February 18, 2016. The award has the potential to vest at 0% to 150% of target, in one-third increments, during a 3-year performance period based on AbbVie’s return on equity (ROE) articulated as pre-set goals and measured relative to a group made up of companies that are constituents in either the S&P Pharmaceutical, Biotech, and Life Science Index or the NYSE Arca Pharmaceutical Index. Dividends accrue during the performance period and are paid at vesting only to the extent that shares are earned. In 2018, AbbVie’s relative ROE performance resulted in the vesting on February 28, 2019 of one-third of the award at 150% of target. (c) These are performance shares that remained outstanding and unvested on December 31, 2018 from an award made on February 16, 2017. The award has the potential to vest at 0% to 250% of target during a 3-year performance period based on company performance in earnings per share (EPS) and relative total stockholder return (TSR). TSR performance is measured relative to a group made up of companies that are constituents in either the S&P Pharmaceutical, Biotech, and Life Science Index or the NYSE Arca Pharmaceutical Index. Dividends accrue during the performance period and are paid at vesting only to the extent that shares are earned. In 2017, in connection with the phase-in of the redesigned long-term incentive program, AbbVie’s EPS performance resulted in the vesting on February 28, 2018 of one-third of the award at 173.3% of target, and the remainder of the award has been banked for vesting to be determined based on the company’s relative TSR performance during the 3-year performance period that ends December 31, 2019. (d) These are performance-vested restricted stock units that remained outstanding and unvested on December 31, 2018, from an award made on February 16, 2017. The award has the potential to vest at 0% to 150% of target, in one-third increments, during a 3-year performance period based on AbbVie’s return on equity (ROE) articulated as pre-set goals and measured relative to a group made up of companies that are constituents in either the S&P Pharmaceutical, Biotech, and Life Science Index or the NYSE Arca Pharmaceutical Index. Dividends accrue during the performance period and are paid at vesting only to the extent that shares are earned. In 2018, AbbVie’s relative ROE performance resulted in the vesting on February 28, 2019 of one-third of the award at 150% of target. (e) These are performance shares that remained outstanding and unvested on December 31, 2018 from an award made on February 15, 2018. The award has the potential to vest at 0% to 250% of target during a 3-year performance period based on company performance in earnings per share (EPS) and relative total stockholder return (TSR). TSR performance is measured relative to a group made up of companies that are constituents in either the S&P Pharmaceutical, Biotech, and Life Science Index or the NYSE Arca Pharmaceutical Index. Dividends accrue during the performance period and are paid at vesting only to the extent that shares are earned. In 2018, AbbVie’s EPS performance resulted in the banking of the award at 200% of target, with vesting to be determined based on the company’s relative TSR performance during the 3-year performance period that ends December 31, 2020. (f) These are performance-vested restricted stock units that remained outstanding and unvested on December 31, 2018, from an award made on February 15, 2018. The award has the potential to vest at 0% to 150% of target, in one-third increments, during a 3-year performance period based on AbbVie’s return on equity (ROE) articulated as pre-set goals and measured relative to a group made up of companies that are constituents in either the S&P Pharmaceutical, Biotech, and Life Science Index or the NYSE Arca Pharmaceutical Index. Dividends accrue during the performance period and are paid at vesting only to the extent that shares are earned. In 2018, AbbVie’s relative ROE performance resulted in the vesting on February 28, 2019 of one-third of the award at 150% of target. 54 13NOV201221352027 2019 Proxy Statement 54 2018 Option Exercises and Stock Vested ................................................................................................................................................................................................................................................................................................................................. The following table summarizes for each NEO 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 2018: EXECUTIVE COMPENSATION Name R. Gonzalez W. Chase R. Michael L. Schumacher C. Alban M. Severino Pension Benefits Option Awards Stock Awards Number of Shares Acquired On Exercise (#) Value Number of Shares Realized On Acquired On Vesting (#) Exercise ($) Value Realized On Vesting ($) — $ — 182,143 $21,540,231 32,400 2,870,347 66,935 7,915,733 — 94,140 48,100 — — 9,040 853,277 3,968,873 4,088,134 — 175,357 17,400,079 61,450 65,305 7,267,077 7,722,969 During 2018, the NEOs 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 NEOs is the compensation shown in the ‘‘Salary’’ and ‘‘Non-Equity Incentive Plan Compensation’’ columns of the Summary Compensation Table. Pension Plan The Pension Plan is a broad-based plan that 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. 55 2019 Proxy Statement 13NOV201221352027 55 EXECUTIVE COMPENSATION 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, Mr. Chase, 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. 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: • • 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. 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. 56 13NOV201221352027 2019 Proxy Statement 56 Supplemental Pension Plan The provisions of the Supplemental Pension Plan (which covers AbbVie employees in the United States whose compensation exceeds certain limits under the Internal Revenue Code) are substantially the same as those of the Pension Plan, with the following exceptions: EXECUTIVE COMPENSATION • • • • • 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. 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. In addition to the benefits outlined above for the Pension Plan, the NEOs 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. The Supplemental Pension Plan provides early retirement benefits similar to those provided under the Pension Plan. The benefits provided to NEOs 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, Mr. Chase, Ms. Schumacher and Mr. Alban are eligible for early retirement benefits under the plan. Vested benefits accrued under the Supplemental Pension Plan may be funded through a grantor trust established by an eligible NEO. Consistent with the distribution requirements of Internal Revenue Code Section 409A and its regulations, an eligible NEO who became an officer prior to 2009 may have the entire amount of his or her vested plan benefits funded through a grantor trust. An eligible NEO 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. 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 an eligible NEO’s Supplemental Pension Plan grantor trust to fund plan benefits are actuarially determined. The plan is designed to result in AbbVie paying the eligible NEO’s Supplemental Pension Plan benefits to the extent assets held in his or her trust are insufficient. 57 2019 Proxy Statement 13NOV201221352027 57 EXECUTIVE COMPENSATION Pension Benefits Table Name R. Gonzalez W. Chase R. Michael L. Schumacher C. Alban M. Severino Plan Name AbbVie Pension Plan AbbVie Supplemental Pension Plan AbbVie Pension Plan AbbVie Supplemental Pension Plan AbbVie Pension Plan AbbVie Supplemental Pension Plan AbbVie Pension Plan AbbVie Supplemental Pension Plan AbbVie Pension Plan AbbVie Supplemental Pension Plan AbbVie Pension Plan AbbVie Supplemental Pension Plan Number of Present Value of Years Accumulated Benefit ($)(1) Credited Service (#) Payments During Last Fiscal Year ($) 35 35 30 30 26 26 28 28 32 32 5 5 $280,981 17,049,866 $0 1,469,580(2) 712,679 8,629,366 0 3,722,402(2) 493,154 1,678,316 957,305 12,955,752 0 0 0 822,706(2) 1,089,415 12,166,774 0 2,332,873(2) 106,372 1,419,828 0 0 (1) AbbVie calculated these present values using: (i) a discount rate of 4.62% for the Pension Plan and a discount rate of 4.58% for the Supplemental Pension Plan, the same discount rates it uses for Financial Accounting Standards Board (FASB) Accounting Standards Codification (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 age 65 under both plans for other participants. The present values shown in the table reflect postretirement mortality, based on the FASB ASC Topic 715 assumption (the RP2006 Healthy Annuitant table projected fully generationally with MP2018 mortality improvement scale), but do not include a factor for preretirement termination, mortality, or disability. (2) During 2018, the amounts shown, less applicable tax withholdings, were distributed and deposited into the individual grantor trusts established by the eligible NEOs and included in the NEOs’ income, as applicable. 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, are distributed to the eligible participants’ individual grantor trusts and included in their income. Amounts held in an eligible NEO’s individual trust are expected to offset AbbVie’s obligations to him or her under the plan. Grantor trusts are described in greater detail in the section of this proxy statement captioned ‘‘Compensation Plan Elements—Benefits—Retirement Benefits.’’ 58 13NOV201221352027 2019 Proxy Statement 58 EXECUTIVE COMPENSATION Non-qualified Deferred Compensation ................................................................................................................................................................................................................................................................................................................................. The following table summarizes Mr. Chase’s and Ms. Schumacher’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 Mr. Chase and Ms. Schumacher, respectively, became officers and ceased to be eligible to contribute to the plan. None of the other NEOs has any non-qualified deferred compensation under the plan. Name Plan Name(1)(2) W. Chase L. Schumacher Deferred Compensation Plan Deferred Compensation Plan Executive contributions in last FY ($) Registrant contributions in last FY ($) Aggregate Aggregate earnings withdrawals/ distributions in last FY ($) ($)(3) $0 0 $0 0 $(3,575) (30,960) $0 0 Aggregate balance at last FYE ($)(4) $87,090 473,817 (1) Mr. Chase’s and Ms. Schumacher’s contributions to the Deferred Compensation Plan ceased in 2007 and 2002, respectively. (2) The plan permits participants to defer up to 75% of their base salary and up to 75% 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 2018, the weighted average rate of return credited to the accounts was (3.9)% for Mr. Chase and (6.1)% for Ms. Schumacher. 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 an NEO. Potential Payments upon Termination or Change in Control ................................................................................................................................................................................................................................................................................................................................. Potential Payments upon Termination—Generally AbbVie does not have employment agreements with its NEOs. The following summarizes the payments that the NEOs would have received if their employment had terminated on December 31, 2018. Earnings would have continued to be paid for the NEO’s Performance Incentive Plan and Supplemental Savings Plan grantor trusts, as applicable, until the trust assets were fully distributed. The amount of these payments would depend on the trust earnings and fees and the period over which the trust assets were distributed. Based on current earnings rates, if the trust assets were distributed over a 10-year period, the NEOs would receive the following average annual earnings payments over such 10-year period: Mr. Gonzalez, $755,093; Mr. Chase, $547,998; Ms. Schumacher, $1,040,072; Mr. Alban, $712,236; and Dr. Severino, $286,411. In addition, the following one-time deposits would have been made under the AbbVie Supplemental Pension Plan for each of the following NEOs, respectively: Mr. Gonzalez, $0; Mr. Chase, $1,072,191; Ms. Schumacher, $2,903,787; and Mr. Alban, $1,612,223. As of December 31, 2018, Mr. Gonzalez, Mr. Chase, Ms. Schumacher and Mr. Alban were eligible to retire, and therefore were eligible to receive the pension benefits previously described. 59 2019 Proxy Statement 13NOV201221352027 59 EXECUTIVE COMPENSATION If the termination of employment had been due to disability, then the respective NEO also would have received, in addition to AbbVie’s standard disability benefits, a monthly long-term disability benefit in the following amount: Mr. Gonzalez: $194,906; Mr. Chase: $97,727; Mr. Michael, $47,500; Ms. Schumacher: $97,727; Mr. Alban: $91,811; and Dr. Severino: $90,910. This long-term disability benefit would continue for up to 24 months following termination of employment. It ends if the NEO retires, recovers, dies or ceases to meet eligibility criteria. If the NEO’s employment had terminated due to death or disability, his or her unvested stock options, restricted stock or unit awards and performance shares would have vested on December 31, 2018 with values as set forth below in the subsection of this proxy statement captioned ‘‘Equity Awards.’’ Potential Payments upon Change in Control AbbVie has entered into change in control agreements with its NEOs. Each change in control agreement continues in effect until December 31, 2020, 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 two 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. 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 60 13NOV201221352027 2019 Proxy Statement 60 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, 2018, immediately followed by one of the covered circumstances described above, Mr. Gonzalez, Mr. Chase, Mr. Michael, Ms. Schumacher, Mr. Alban, and Dr. Severino would have been entitled to receive the following payments and benefits under the change in control agreements: EXECUTIVE COMPENSATION • Mr. Gonzalez: cash termination payments—$15,857,250; additional Supplemental Pension Plan benefits— $1,770,732; welfare and fringe benefits—$78,140. • Mr. Chase: cash termination payments—$4,761,486; additional Supplemental Pension Plan benefits— $1,364,162; welfare and fringe benefits—$79,890. • Mr. Michael: cash termination payments—$4,210,962; additional Supplemental Pension Plan benefits— $763,429; welfare and fringe benefits—$79,136. • Ms. Schumacher: cash termination payments—$8,069,547; additional Supplemental Pension Plan benefits— $3,278,470; welfare and fringe benefits—$65,446. • Mr. Alban: cash termination payments—$7,595,778; additional Supplemental Pension Plan benefits— $3,171,654; welfare and fringe benefits—$61,231. • Dr. Severino: cash termination payments—$8,176,814; additional Supplemental Pension Plan benefits— $1,316,087; welfare and fringe benefits—$80,794. The amounts shown for Mr. Chase’s cash termination payments and additional supplemental pension plan benefits reflect reductions of $3,293,633 and $943,623, respectively, which would have applied under cutback provisions in the agreements as described above. Equity Awards The AbbVie 2013 Incentive Stock Program was approved by AbbVie’s stockholders and covers approximately 9,000 participants, including a broad group of management and professional staff. The AbbVie 2013 Incentive Stock Program provides that any unvested equity awards granted in or after January 2013 may be assumed, converted or replaced on an equivalent basis by the surviving company upon a change in control. 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. If a change in control had occurred on December 31, 2018 and the surviving company did not assume, convert or replace any of the awards granted in or after January 2013, or the NEO’s employment had terminated without cause or he or she had resigned for good reason, as described above, then the unvested equity awards of the NEOs would have vested as follows: • Mr. Gonzalez would have vested in (i) 386,767 unvested AbbVie stock options with a value of $8,542,682, (ii) 162,911 AbbVie restricted stock units with a value of $15,018,719, and (iii) 252,468 AbbVie performance shares with a value of $23,274,997. 61 2019 Proxy Statement 13NOV201221352027 61 EXECUTIVE COMPENSATION • Mr. Chase would have vested in (i) 144,373 unvested AbbVie stock options with a value of $3,244,473, (ii) 60,715 AbbVie restricted stock units with a value of $5,597,270, and (iii) 94,279 AbbVie performance shares with a value of $8,691,590. • Mr. Michael would have vested in (i) 19,023 unvested AbbVie stock options with a value of $360,884, (ii) 8,010 AbbVie restricted stock units with a value of $738,442, and (iii) 12,343 AbbVie performance shares with a value of $1,137,872. • Ms. Schumacher would have vested in (i) 138,723 unvested AbbVie stock options with a value of $3,033,559, (ii) 57,880 AbbVie restricted stock units with a value of $5,335,911, and (iii) 90,341 AbbVie performance shares with a value of $8,328,520. • Mr. Alban would have vested in (i) 134,886 unvested AbbVie stock options with a value of $2,961,808, (ii) 56,419 AbbVie restricted stock units with a value of $5,201,222, and (iii) 87,895 AbbVie performance shares with a value of $8,103,047. • Dr. Severino would have vested in (i) 143,716 unvested AbbVie stock options with a value of $3,202,029, (ii) 60,343 AbbVie restricted stock units with a value of $5,562,975, and (iii) 93,776 AbbVie performance shares with a value of $8,645,235. The value of stock options shown is based on the excess of the closing price of one share of common stock on December 31, 2018 over the exercise price of such options, multiplied by the number of unvested stock options held by the NEO. The value of restricted stock units and performance shares shown is determined by multiplying the number of units or shares that would vest as of December 31, 2018 in accordance with the applicable equity award agreement terms and the closing price of one share of common stock on December 31, 2018. 62 13NOV201221352027 2019 Proxy Statement 62 RATIFICATION OF ERNST & YOUNG LLP AS ABBVIE’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (ITEM 2) 27FEB201905175994 The audit committee of the board of directors is directly responsible for the appointment, compensation, retention and oversight of the independent registered public accounting firm retained to audit the company’s financial statements. On October 11, 2018, the audit committee appointed Ernst & Young LLP (the independent auditor) to perform independent audit services for the fiscal year ending December 31, 2019. Ernst & Young LLP has served as our independent auditor since 2013. In conjunction with the periodic mandated rotation of the audit firm’s lead engagement partner, the chair of the audit committee would be involved in the selection of a new lead engagement partner. Further, the audit committee will periodically consider whether there should be a regular rotation of the independent auditor. Although the audit committee has sole authority to appoint the independent auditor, it would like to know the opinion of the stockholders regarding its appointment of Ernst & Young LLP for 2019. For this reason, stockholders are being asked to ratify this appointment. If the stockholders do not ratify the appointment of Ernst & Young LLP for 2019, the audit committee will take that fact into consideration, but may, nevertheless, continue to retain Ernst & Young LLP. The audit committee and the board believe that the continued retention of Ernst & Young LLP to serve as the company’s independent auditor is in the best interests of the company and its stockholders. 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 that you vote FOR ratification of the appointment of Ernst & Young LLP as AbbVie’s independent registered public accounting firm for 2019. 63 2019 Proxy Statement 13NOV201221352027 63 AUDIT INFORMATION 27FEB201905173890 Audit Fees and Non-Audit Fees ................................................................................................................................................................................................................................................................................................................................. The following table presents fees for professional audit services rendered to AbbVie by Ernst & Young LLP for the years ended December 31, 2018 and December 31, 2017, and fees for other services rendered to AbbVie by Ernst & Young LLP for those periods. Audit fees:(1) Audit related fees:(2) Tax fees:(3) All other fees:(4) Total 2018 (millions) 2017 (millions) $10.3 0.7 2.3 — $13.3 $11.0 0.3 2.0 0.6 $13.9 (1) Ernst & Young LLP billed or will bill AbbVie for professional services rendered for the audit of AbbVie’s annual financial statements, the review of AbbVie’s financial statements included in AbbVie’s quarterly reports, 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, comfort letters, consents and certain accounting consultations in connection with the audits. (2) Audit related fees include audits of certain employee benefit plan financial statements and other agreed upon procedures. (3) Tax fees consist principally of professional services for corporate tax compliance and tax advisory services. (4) Other fees in 2017 represent Independent Review Organization services. 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 (the independent auditor) and its related affiliates. Prior to engagement of the independent auditor for the next year’s audit, management will submit a schedule of all proposed permissible services expected to be rendered during that year for each of four categories of services to the audit committee for approval. 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 auditor 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 auditor for additional services not contemplated in the original pre-approval. In those instances, the audit committee requires specific pre-approval before engaging the independent auditor. 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. 64 13NOV201221352027 2019 Proxy Statement 64 AUDIT INFORMATION Audit Committee Report ................................................................................................................................................................................................................................................................................................................................. The audit committee is comprised of five non-employee members of the board of directors. Each audit committee member meets the independence requirements of the New York Stock Exchange and Rule 10A-3 of the Exchange Act. The committee operates under a written charter adopted by the board of directors. Consistent with the responsibilities set forth in its charter, the audit committee assists the board of directors in its oversight of AbbVie’s accounting, auditing and financial reporting practices. The audit committee has reviewed and discussed the audited financial statements contained in the 2018 Annual Report on Form 10-K with AbbVie’s management and its independent registered public accounting firm (the independent auditor). Management is responsible for the preparation and integrity of AbbVie’s consolidated financial statements. The independent auditor 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. Periodically, during the year, the audit committee reviewed and discussed with AbbVie’s management, internal auditors, and independent auditor the effectiveness of AbbVie’s internal control over financial reporting and the overall quality of AbbVie’s financial reporting. The audit committee has discussed with the independent auditor the matters required to be discussed pursuant to the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 1301, Communication with Audit Committees. In addition, the audit committee has received the written disclosures and the letter from the independent auditor regarding its independence required by PCAOB Ethics and Independence Rule 3526, Communications with Audit Committees Concerning Independence, and has discussed with the independent auditor 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 auditor and concluded the independent auditor’s independence has not been impaired. 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, 2018 filed with the Securities and Exchange Commission. Audit Committee R. Austin, Chair, W. Burnside, M. Meyer, E. Rapp, and F. Waddell 65 2019 Proxy Statement 13NOV201221352027 65 SAY ON PAY—ADVISORY VOTE ON THE APPROVAL OF EXECUTIVE COMPENSATION (ITEM 3) 27FEB201905180113 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 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. 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. 66 13NOV201221352027 2019 Proxy Statement 66 MANAGEMENT PROPOSAL TO ELIMINATE SUPERMAJORITY VOTING (cid:3)ITEM 4(cid:4) 27FEB201918171589 Currently, AbbVie’s Amended and Restated Certificate of Incorporation (the ‘‘Certificate of Incorporation’’) provides that certain amendments to the Certificate of Incorporation or AbbVie’s Amended and Restated By-Laws (the ‘‘By-Laws’’) require the affirmative vote of shares representing no less than 80 percent of AbbVie’s outstanding shares of stock entitled to vote generally in the election of directors. We refer to these provisions listed below as the ‘‘Supermajority Voting Requirement.’’ Specifically, Article VIII of the Certificate of Incorporation provides that any stockholder-approved alteration, amendment, or repeal of any of the By-Law provisions listed below, or the adoption of any stockholder-approved By-Law provision inconsistent with those By-Law provisions, must be approved pursuant to the Supermajority Voting Requirement. The By-Law provisions covered by the Supermajority Voting Requirement are in regards to: • • • • special meetings of stockholders and written consents by stockholders (Article II, Sections 2.2 and 2.12, respectively); board size and tenure, classes of directors, board vacancies, and director removal (Article III, Sections 3.2, 3.3, 3.10 and 3.11, respectively); indemnification of directors and officers (Article VII); and amendments to the By-Laws (Article X). Article XI of the Certificate of Incorporation provides that any alteration, amendment, or repeal of any of the provisions of the Certificate of Incorporation listed below, or the adoption of any provision inconsistent with those provisions, must be approved pursuant to the Supermajority Voting Requirement. The provisions covered by the Supermajority Voting Requirement are in regards to: • board size, classes of directors, board vacancies, and director removal (Article VI, Sections 1, 2, 3 and 4, respectively); and • written consents by stockholders and special meetings of stockholders (Article VII, Sections 1 and 2, respectively). After reviewing the advantages and disadvantages of the Supermajority Voting Requirement at this time, the board approved, and recommends that stockholders approve, the amendment and restatement of Articles VIII and XI of the Certificate of Incorporation to remove the Supermajority Voting Requirement contained therein. If approved, future stockholder-approved amendments to the By-Law and Certificate of Incorporation provisions listed above will not be subject to the Supermajority Voting Requirement and will instead require the affirmative vote of a majority of AbbVie’s outstanding shares of stock entitled to vote generally in the election of directors. The proposed Certificate of Amendment to the Certificate of Incorporation is attached to this proxy statement as Appendix A, which the company would file promptly following the 2019 Annual Meeting if our stockholders approve the amendment. The affirmative vote of the holders of 80 percent of the outstanding shares of stock entitled to vote generally in the election of directors on the Record Date is required to approve this proposal pursuant to the Certificate of Incorporation. The board has approved certain conforming changes to the company’s By-Laws, contingent on the effectiveness of the proposed amendment to the Certificate of Incorporation. The board of directors recommends that you vote FOR the management proposal to amend and restate the Certificate of Incorporation to eliminate supermajority voting. 67 2019 Proxy Statement 13NOV201221352027 67 STOCKHOLDER PROPOSALS 27FEB201905180359 Three stockholder proposals will be voted upon at the Annual Meeting if properly presented by or on behalf of the proponent. The address of each of the proponents is available upon request. The proposed resolutions and the statements made in support thereof, as well as the board of directors’ statements in opposition to these proposals, are presented on the following pages. The proposal may contain assertions about AbbVie or other statements that we believe are incorrect. The board of directors recommends that you vote AGAINST the proposals for the reasons set forth following the proposals. Stockholder Proposal on Lobbying Report (Item 5 on Proxy Card) ................................................................................................................................................................................................................................................................................................................................. Zevin Asset Management, on behalf of William Creighton, and co-filers Congregation of Sisters of St. Agnes, First Affirmative Financial Network, LLC, Friends Fiduciary Corporation, and Sisters of Charity of the Blessed Virgin Mary have notified AbbVie that it intends to present the following proposal at the Annual Meeting and that they collectively own at least 19,269 AbbVie shares. Whereas, we believe in full disclosure of AbbVie’s direct and indirect lobbying activities and expenditures to assess whether AbbVie’ s lobbying is consistent with its expressed goals and in the best interests of stockholders. Resolved, the stockholders of AbbVie request the preparation of a report, updated annually, disclosing: 1. 2. 3. 4. Company policy and procedures governing lobbying, both direct and indirect, and grassroots lobbying communications. Payments by AbbVie used for (a) direct or indirect lobbying or (b) grassroots lobbying communications, in each case including the amount of the payment and the recipient. AbbVie’s membership in and payments to any tax-exempt organization that writes and endorses model legislation. Description of management’s decision making process and the Board’s oversight for making payments described in section 2 above. For purposes of this proposal, a ‘‘grassroots lobbying communication’’ is a communication directed to the general public that (a) refers to specific legislation or regulation, (b) reflects a view on the legislation or regulation and (c) encourages the recipient of the communication to take action with respect to the legislation or regulation. ‘‘Indirect lobbying’’ is lobbying engaged in by a trade association or other organization of which AbbVie is a member. Both ‘‘direct and indirect lobbying’’ and ‘‘grassroots lobbying communications’’ include efforts at the local, state and federal levels. The report shall be presented to the Public Policy Committee and posted on AbbVie’ s website. Supporting Statement Investors urge transparency and accountability in the use of corporate funds to influence legislation and regulation, both directly and indirectly. AbbVie spent $26.23 million from 2013 - 2017 on federal lobbying (opensecrets.org). This figure does not include lobbying expenditures to influence legislation in states, where AbbVie also lobbies but disclosure is uneven or absent. For example, AbbVie had at least 79 lobbyists in 19 states in 2017 68 13NOV201221352027 2019 Proxy Statement 68 STOCKHOLDER PROPOSALS (followthemoney.org) and spent $1,935,362 on lobbying in California from 2013 - 2017. AbbVie’s lobbying on Humira has attracted media scrutiny (‘‘Humira Deaths Put AbbVie on FDA’s Radar,’’ Drugwatch, May 10, 2018). Investors are concerned that AbbVie does not publish total state and federal lobbying expenditures. AbbVie is a member of the Chamber of Commerce, which has spent over $1.4 billion on lobbying since 1998, and sits on the board of the Pharmaceutical Research and Manufacturers of America (PhRMA), which spends millions lobbying against drug pricing measures (‘‘PhRMA Spends Record Amount on Lobbying Amid Drug Pricing Fights,’’ The Hill, April 20, 2018). AbbVie does not disclose the portions of its payments to trade associations that are used for lobbying. AbbVie’s membership in PhRMA and the Chamber could present significant reputational risk when the groups’ lobbying activities contradict AbbVie’s public positions. For example, AbbVie believes patients need access to affordable medicines, yet it helps fund PhRMA’s opposition to lower drug price initiatives. And AbbVie supports smoking cessation, yet the Chamber has worked to block global antismoking laws. As shareholders, we believe that companies should ensure alignment between their own positions and their lobbying, including through trade associations. Board of Directors Statement in Opposition to the Stockholder Proposal on Lobbying Report (Item 5 on Proxy Card) ................................................................................................................................................................................................................................................................................................................................. The board of directors recommends that stockholders vote AGAINST this proposal. This proposal is unnecessary, because AbbVie already makes extensive disclosures regarding our lobbying and political activities as required by law and we voluntarily disclose additional related information on our website, as outlined below. AbbVie has already demonstrated transparency with respect to lobbying activities and strong risk mitigation procedures governing such activities. The preparation and maintenance of an additional report, as proposed, is neither a good use of resources, nor would it increase stockholder value. The board, through its public policy committee, exercises oversight of AbbVie’s political and lobbying activities. • The board of directors public policy committee exercises oversight of AbbVie’s political expenditures and lobbying activities, as specifically enumerated in the committee’s charter, and which are further governed by the Committee’s approved policy on political contributions. The public policy committee and AbbVie’s senior management review these activities and expenditures on a regular basis. • Our Vice Chairman, External Affairs and Chief Legal Officer, who reports directly to the CEO, and our Vice President, Government Affairs, each review and approve AbbVie’s lobbying strategy and all plans for corporate political contributions at the recommendation of AbbVie’s Government Affairs function to ensure that these activities are consistent with the company’s guidelines and comply with applicable laws. • We believe this approach, as explained on our website, minimizes risk and reflects our guiding commitment to transparency, stewardship of corporate and stockholder funds, sound corporate practice, and high standards of ethical conduct. AbbVie already makes extensive disclosures regarding lobbying and political activities and has been recognized as a leader in this area. • • Since our launch as a new public company in 2013, AbbVie has provided robust transparency through the disclosures described below. AbbVie’s website describes our oversight process and our guiding principles for lobbying and political activities. We pursue activities that shape policies to benefit patients, with a focus on improving patient access to new medical advances. In part due to the extensive disclosures described below, AbbVie has been recognized as a leader in providing the highest level of political transparency and accountability. In 2018, AbbVie was recognized as a ‘‘trendsetter’’ in this area by the CPA-Zicklin Index, the highest ranking a company can receive. This index, 69 2019 Proxy Statement 13NOV201221352027 69 STOCKHOLDER PROPOSALS which is produced by the non-profit Center for Political Accountability in conjunction with the Zicklin Center for Business Ethics Research at The Wharton School at the University of Pennsylvania, benchmarks the political disclosure and accountability policies and practices of leading U.S. public companies. AbbVie was also ranked in the top tier of companies in 2017, 2016, 2015, and 2014. AbbVie files quarterly reports that include (i) total federal lobbying expenditures, (ii) the name of the legislation or subject matter covered, (iii) individuals who lobbied on behalf of AbbVie, and (iv) identification of the legislative body or executive branch that was contacted, in compliance with the Lobbying Disclosure Act. These reports include expenses associated with lobbying the federal government and the portion of trade association dues associated with federal lobbying. AbbVie provides links to these reports on our website at http://www.abbvie.com/responsibility/transparency-policies/home.html#cpc. We file similar publicly-available lobbying reports with state and local agencies as required by law. In 2016, we enhanced our website with a comprehensive list of our state lobbying reports with direct links to our state filings or the relevant database. AbbVie also provides a listing of corporate contributions to political candidates, political parties, political committees, ballot measure committees, and organizations operating under Section 527 of the Internal Revenue Code. These reports are updated every six months and are archived for reference on our website identified above. AbbVie does not currently make direct expenditures toward U.S. federal or state grassroots lobbying communications to the general public and does not currently contribute funds intended for use in elections to tax-exempt organizations under Section 501(c)(4) of the Internal Revenue Code, as disclosed on our website. If such a contribution were made, it would be enumerated in AbbVie’s reports on other corporate political contributions. AbbVie discloses trade associations to which AbbVie provides $50,000 or more in annual membership, which are reviewed by the Public Policy Committee. This threshold was lowered in 2016 from $100,000. AbbVie also posts a list of global trade associations in which an AbbVie employee serves on the organization’s board of directors. Both of these lists are available on our website. AbbVie chooses to participate as a member of various associations based on our commitment to voice our concerns as appropriate through our colleagues who serve on the boards and committees of these groups. Such participation does not imply that we always agree with the positions of the larger organization and/or other members. AbbVie also provides a link to the Federal Election Commission reports of the AbbVie Political Action Committee (‘‘PAC’’), which detail the PAC’s political contributions and expenditures. Attempting to quantify indirect lobbying would be difficult to estimate and potentially misleading to stockholders as AbbVie is not directing the lobbying activities of trade, civic or patient groups. Further, it would be difficult for us to determine which third parties may endorse model legislation and whether such activities fall within the proposal’s request. • • • • • • • In summary, our robust oversight mechanisms and extensive disclosures address the concerns underlying the proposal, but without the unnecessary business risks and additional resources the proposal would introduce if implemented. The board of directors recommends that you vote AGAINST the proposal. 70 13NOV201221352027 2019 Proxy Statement 70 STOCKHOLDER PROPOSALS Stockholder Proposal on Compensation Committee Drug Pricing Report (Item 6 on Proxy Card) ................................................................................................................................................................................................................................................................................................................................. United Church Funds, and co-filers, including Bon Secours Mercy Health, Sisters of Charity of Saint Elizabeth, Sisters of Providence, Mother Joseph Province, and Trinity Health have notified AbbVie that they intend to present the following proposal at the Annual Meeting and that they collectively own 86,219 AbbVie shares. RESOLVED, that shareholders of AbbVie Inc. (‘‘AbbVie’’) urge the Compensation Committee (the ‘‘Committee’’) to report annually to shareholders on the extent to which risks related to public concern over drug pricing strategies are integrated into AbbVie’s incentive compensation policies, plans and programs (together, ‘‘arrangements’’) for senior executives. The report should include, but need not be limited to, discussion of whether (i) incentive compensation arrangements reward, or not penalize, senior executives for adopting pricing strategies, or making and honoring commitments about pricing, that incorporate public concern regarding the level or rate of increase in prescription drug prices; and (ii) such concern is considered when setting financial targets for incentive compensation arrangements. Supporting Statement: As long-term investors, we believe that senior executive incentive compensation arrangements should reward the creation of sustainable long-term value. To that end, it is important that those arrangements align with company strategy and encourage responsible risk management. A key risk facing pharmaceutical companies is potential backlash against high drug prices. Societal anger over exorbitant prices and pressure over limited patients’ access due to unaffordability may force price rollbacks and harm corporate reputation. We applaud AbbVie for committing not to increase prices by more than 10% for 2018, yet we are unaware of a like commitment for 2019 or beyond. Moreover, we are concerned that the incentive compensation arrangements applicable to AbbVie’s senior executives may undermine any such commitment. AbbVie uses net revenue, income before taxes and Humira sales as metrics for the annual bonus and earnings per share (EPS) as a metric for certain long-term incentive awards to senior executives. (2018 Proxy Statement, at 31) A 2017 Credit Suisse analyst report stated that ‘‘US drug price rises contributed 100% of industry EPS growth in 2016’’ and characterized that fact as ‘‘the most important issue for a Pharma investor today.’’ The report identified AbbVie as a company where price increases accounted for at least 100% of EPS growth in 2016. (Global Pharma and Biotech Sector Review: Exploring Future US Pricing Pressure, Apr. 18, 2017, at 1.) It has been noted that the company’s 2018 9.7% price increase for Humira could add $1.2 billion to the U.S. healthcare system (https://www.fiercepharma.com/pharma/drug- price-hikes-a-few-bad-actors-or-widespread-pharma?mkt_tok=eyJpIjoiWWpZeFltRTBOM1ZoTkRJNSIsInQiOiJhckk2U0NgNXBx N0x2UCtvdVdIdzZVZXRIUHlrS0xZOVRBNXdTVlF0eVNBSDMxb3NWUGJsRWtNcFROZmlPYmM5d2hXd3VuV0kldG1CelBTYmk2). In our view, excessive dependence on drug price increases is a risky and unsustainable strategy, especially when price hikes drive large senior executive payouts. We believe that the company’s strategy to use ‘‘nursing support,’’ which the California Department of Insurance claims in its suit against the company to be largely a kickback scheme to boost Humira sales, may have been better managed by leadership if Humira sales were not an explicit part of the payment incentive plan (https://www.law360.com/articles/1084008). The disclosure we request would allow shareholders to better assess the extent to which compensation arrangements encourage senior executives to responsibly manage risks relating to drug pricing and contribute to long-term value creation. We urge shareholders to vote for this Proposal. 71 2019 Proxy Statement 13NOV201221352027 71 STOCKHOLDER PROPOSALS Board of Directors Statement in Opposition to the Stockholder Proposal on Compensation Committee Drug Pricing Report (Item 6 on Proxy Card) ................................................................................................................................................................................................................................................................................................................................. The board of directors recommends that stockholders vote AGAINST this proposal. AbbVie has demonstrated a commitment to both balanced, appropriate executive compensation programs and to responsible drug pricing. The preparation and maintenance of the proposed report would not provide meaningful information to stockholders, would not be a good use of AbbVie’s resources, and is unnecessary. AbbVie’s compensation programs effectively account for responsible risk management. In collaboration with the compensation committee’s independent compensation consultant, AbbVie conducts an annual in-depth compensation risk assessment with respect to its compensation policies and practices. The results of this assessment, including the major factors used to arrive at the results, are already published in this proxy statement. This comprehensive risk assessment appropriately evaluates AbbVie’s compensation risk exposure and its potential impact on compensation outcomes, resulting in compensation decisions that are aligned with creating stockholder value and improving company performance without undue risk-taking. A report specifically focused only on drug pricing risk would be redundant to, and much less meaningful than, the broader compensation risk assessment already conducted by AbbVie. Executive officers are evaluated based on quantitative financial metrics and qualitative factors, such as individual, strategic and leadership achievements, as well as relative accomplishments and/or developments in the company and the marketplace. The use of both quantitative and qualitative metrics effectively mitigates the impact of a single risk, such as dependence on drug pricing, on overall compensation. In addition, AbbVie’s compensation programs use both short-term and long-term metrics, which mitigates the potential risks of over-reliance on short-term actions, such as excessive increases in prices, and encourages strategies that result in long-term value creation. Further, AbbVie’s current compensation policies and practices provide the compensation committee, comprised entirely of independent directors, with the authority to exercise discretion to substantially adjust incentive payments, if needed. AbbVie is committed to responsible drug pricing. AbbVie evaluates specific pricing decisions on an annual basis with careful consideration of a variety of factors. In 2019, as in 2017 and 2018, AbbVie has publicly committed to taking no more than one, single-digit price increase, as part of our ongoing commitment to acting responsibly with regard to drug pricing. Indeed, the proponents acknowledge and ‘‘applaud’’ AbbVie’s commitment. This commitment is factored into our long-range plan and executive performance metrics are set in advance. Therefore, AbbVie already limits the risk of extreme price increases being used to inappropriately meet performance goals. AbbVie’s strategy is to address some of the world’s toughest health challenges by developing innovative therapies that have a meaningful impact on patients’ lives. Our strategy does not rely on price increases. Since the company’s inception, AbbVie has launched more than 15 new products or indications across key therapeutic areas, including in indications for which there was previously substantial unmet medical need. AbbVie has also developed one of the strongest late-stage pipelines in the industry with several programs positioned for market leadership. In summary, given our responsible compensation program design, existing compensation risk assessment, responsible drug pricing and other practices, the proposal would not provide meaningful information to stockholders, would not be a good use of AbbVie resources, and is unnecessary. The board of directors recommends that you vote AGAINST this proposal. 72 13NOV201221352027 2019 Proxy Statement 72 STOCKHOLDER PROPOSALS Stockholder Proposal on Independent Chair (Item 7 on Proxy Card) ................................................................................................................................................................................................................................................................................................................................. The Employees’ Retirement System of Rhode Island and co-filer Vermont Pension Investment Committee have notified AbbVie that they intend to present the following proposal at the Annual Meeting and that they collectively own 125,458 AbbVie shares. RESOLVED: Shareholders request the Board of Directors adopt as policy, and amend the bylaws as necessary, to require henceforth that the Chair of the Board of Directors, whenever possible, be an independent member of the Board. This independence policy shall apply prospectively so as not to violate any contractual obligations. If the Board determines that a Chair who was independent when selected is no longer independent, the Board shall select a new Chair who satisfies the requirements of the policy within a reasonable amount of time. Compliance with this policy is waived if no independent director is available and willing to serve as Chair. This policy would be phased in for the next CEO transition. Supporting Statement We believe: • • • The role of the CEO and management is to run the company. The role of the Board of Directors is to provide independent oversight of management and the CEO. There is a potential conflict of interest for a CEO to have an inside director act as Chair. In our view, shareholders are best served by an independent Board Chair who can provide a balance of power between the CEO and the Board. We believe that AbbVie’s Board should adopt best practice governance policies, including having an independent board chair. Taking this step is in the long-term interests of shareholders and will promote effective oversight of management. As of October 2018, 50% of the S&P 500 have separated the role of Chair and CEO. Furthermore, 31% of S&P 500 firms have an independent chair. In order to ensure that our Board can provide rigorous oversight for our Company with greater independence and accountability, we urge a vote FOR this resolution. Board of Directors Statement in Opposition to the Stockholder Proposal on Independent Chair (Item 7 on Proxy Card) ................................................................................................................................................................................................................................................................................................................................. The board of directors recommends that stockholders vote AGAINST this proposal. Our board of directors believes that our stockholders are best served by preserving the flexibility to determine the appropriate leadership structure for the company in light of the circumstances at the time. We believe the proposal would unnecessarily restrict the board’s ability to exercise its fiduciary duty to determine the board leadership structure most appropriate for the company given the specific circumstances and leadership needs at any particular point in time. The company’s robust governance framework ensures that board leadership is balanced with independent participation given the extensive involvement of the lead director and his oversight. Therefore, adopting a proposal that would limit the board’s ability to exercise decision making on the appropriate leadership is not in stockholders’ best interests. 73 2019 Proxy Statement 13NOV201221352027 73 STOCKHOLDER PROPOSALS AbbVie’s existing leadership structure and corporate governance practices provide strong independent oversight. Since its inception in 2013, AbbVie has had a robust lead independent director role. The lead independent director has significant authority and responsibilities and works directly with the Chairman and CEO, as well as the independent directors, to ensure meaningful oversight of the board. Among other duties, our lead independent 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; reviews and approves matters, such as agenda items, schedule sufficiency, and, where appropriate, information provided to other board members; serves as the liaison between the chairman of the board and the independent directors; has the authority to call meetings of the independent directors; leads the board’s evaluation of the CEO; leads the annual board and committee evaluation process, including discussing evaluations with each director individually; encourages effective director participation by fostering an environment of open dialogue and constructive feedback among independent directors; if requested by major stockholders, ensures that he or she is available for consultation and direct communication as needed; if required, represents independent board members externally; and performs such other duties as the board may determine from time to time. All directors, other than the CEO, are independent. All key committees and committee chairs are comprised completely of independent directors. Our independent directors meet regularly in executive session, which is presided over by the lead director. Our directors are also subject to majority voting as set forth in our By-Laws. The board periodically considers AbbVie’s leadership structure and has determined that its needs are best met through the existing structure. In light of the lead independent director authority and responsibilities and other corporate governance practices, which are highlighted in our Governance Guidelines (available at www.abbvieinvestor.com), the board has determined that its current leadership structure, in which the offices of Chairman and Chief Executive Officer are held by one individual, along with a strong and independent Lead Director, ensures the appropriate level of oversight, independence, and responsibility is applied to all board decisions and is in the best interests of AbbVie and its stockholders. The board of directors recommends that you vote AGAINST the proposal. 74 13NOV201221352027 2019 Proxy Statement 74 ADDITIONAL INFORMATION 27FEB201905173760 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. 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: • • • questionnaires annually distributed to AbbVie’s directors and executive officers; certifications submitted annually by AbbVie executive officers related to their compliance with AbbVie’s Code of Business Conduct; or 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: • • • • • the related person’s relationship to AbbVie and interest in the transaction; the material facts of the transaction, including the aggregate value of such transaction or, in the case of indebtedness, the amount of principal involved; the benefits to AbbVie of the transaction; if applicable, the availability of other sources of comparable products or services; 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; • whether a transaction has the potential to impair director independence; and • 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. 75 2019 Proxy Statement 13NOV201221352027 75 ADDITIONAL INFORMATION Section 16(a) Beneficial Ownership Reporting Compliance ................................................................................................................................................................................................................................................................................................................................. AbbVie believes that during 2018 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 are intended to comply with Internal Revenue Code Section 162(m) to permit deductibility of performance-based compensation with respect to awards granted before November 2017. In connection with such awards, the compensation committee expects to take appropriate steps to preserve deductibility, but has 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 approve components of compensation for certain executive officers that are not deductible. As described in other sections of this proxy statement, the company’s compensation programs are designed to align executive officer pay with the performance of the company and the executive officers. The elimination of the performance-based compensation deduction under Code Section 162(m) has not altered the commitment of the company and the compensation committee to performance-based compensation principles. 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 2019 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 2020 Annual Meeting Proxy Statement ................................................................................................................................................................................................................................................................................................................................. Stockholder proposals for presentation at the 2020 Annual Meeting must be received by AbbVie no later than November 19, 2019 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 2020 meeting. 76 13NOV201221352027 2019 Proxy Statement 76 ADDITIONAL INFORMATION 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: • • • the record date for that Annual Meeting, the date of this proxy statement, and the date of the Annual Meeting 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 in 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 2020 Annual Meeting, this written notice must be received by AbbVie no later than February 3, 2020. 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. Procedure for Stockholder Nominations to be Included in AbbVie’s Proxy Materials ................................................................................................................................................................................................................................................................................................................................. AbbVie recently adopted a proxy access By-Law provision to permit a stockholder, or a group of up to 20 stockholders, continuously owning shares of our company for at least 3 years and representing an aggregate of at least 3% of the outstanding shares of common stock, to nominate and include in our proxy materials director nominee(s) 77 2019 Proxy Statement 13NOV201221352027 77 ADDITIONAL INFORMATION constituting up to 25% of the total number of the directors in office, provided that the stockholder(s) and the nominee(s) satisfy the requirements in our By-Laws. Notice must include certain information required by Article II of AbbVie’s Amended and Restated By-Laws. To be timely, written notice must be received at AbbVie’s principal executive offices not earlier than 150 days and not later than 120 days before the anniversary of the date that the company mailed its proxy statement for the prior year’s annual meeting of stockholders. To be timely for the 2020 Annual Meeting, this written notice must be received by AbbVie no later than November 19, 2019 and must include the specific information required by, and otherwise comply with the requirements of, our By-Laws. 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 at 1-866-540-7095, or write to us at Investor Relations, AbbVie Inc., 1 North Waukegan Road, North Chicago, Illinois 60064. Stockholders who currently receive multiple copies of the proxy statement at their address and would like to request ‘‘householding’’ of their communications should contact their broker or bank. Cautionary Statement Regarding Forward-Looking Statements ................................................................................................................................................................................................................................................................................................................................. This proxy statement 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 may cause actual results to differ materially from those projected, anticipated or implied in the 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 in AbbVie’s Annual Report on Form 10-K for the year ended December 31, 2018 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 proxy statement to reflect events or circumstances after the date hereof, unless AbbVie is required by applicable securities law to do so. 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, by 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. 78 13NOV201221352027 2019 Proxy Statement 78 The Annual Meeting will be held at the Fairmont Chicago, Millennium Park, 200 North Columbus Drive, Chicago, Illinois 60601. 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 April 26, 2019. An admission card admits only one person. A stockholder may request two admission cards, but a guest must be accompanied by a stockholder. ADDITIONAL INFORMATION By order of the board of directors. LAURA J. SCHUMACHER SECRETARY 79 2019 Proxy Statement 13NOV201221352027 79 Appendix A Proposed Certificate of Amendment to the Amended and Restated Certificate of Incorporation of AbbVie Inc. The text of the proposed amendment is marked to reflect the proposed changes. AbbVie Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the ‘‘Corporation’’), does hereby certify: 1. Articles VIII and XI of AbbVie’s Amended and Restated Certificate of Incorporation are amended to read as follows: ARTICLE VIII AMENDMENTS TO BY-LAWS In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the By-laws of the Corporation (the ‘‘By-laws’’) may be altered, amended or repealed, in whole or in part, and new By-laws may be adopted, (i) by the affirmative vote of shares representing a majority of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors; provided, however, that any proposed alteration, amendment or repeal of, or the adoption of any By-law inconsistent with, Sections 2.2, 2.12, 3.2, 3.3, 3.10 or 3.11, Article VII or Article X of the By-laws (in each case, as in effect on the date hereof), or the alteration, amendment or repeal of, or the adoption of any provision inconsistent with this sentence, may only be made by the affirmative vote of shares representing not less than eighty percent (80%) of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors; and provided further, however, that in the case of any such stockholder action at a meeting of stockholders, notice of the proposed alteration, amendment, repeal or adoption of the new By-law or By-laws must be contained in the notice of such meeting, or (ii) by action of the Board of Directors of the Corporation; provided, however, that the case of any such action at a meeting of the Board of Directors, notice of the proposed alteration, amendment, repeal or adoption of the new By-law or By-laws must be given not less than two days prior to the meeting. * * * ARTICLE XI AMENDMENTS The Corporation reserves the right to amend, alter or repeal any provision contained in this Amended and Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are subject to this reservation. In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware as they presently exist or may hereafter be amended, subject to any limitations contained elsewhere in this Amended and Restated Certificate of Incorporation, the Corporation may from time to time adopt, amend or repeal any provisions of this Amended and Restated Certificate of Incorporation; provided, however, that any proposed alteration, amendment or repeal of, or the adoption of any provision inconsistent with, Article VI and Article VII of this Amended and Restated Certificate of Incorporation (in each case, as in effect on the date hereof), or the alteration, amendment or repeal of, or the adoption of any provision inconsistent with this sentence, may only be made by the affirmative vote of shares representing not less than eighty percent (80%) of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors. The foregoing amendment to the Amended and Restated Certificate of Incorporation of the Corporation was duly 2. adopted in accordance with the provisions of Section 242 of the Delaware General Corporation Law. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to the Amended and Restated day of Certificate of Incorporation to be executed by the undersigned officer, duly authorized, as of the 2019. AbbVie Inc. By: Name: Title: A-1 2019 Proxy Statement 13NOV201221352027 A-1 Appendix B AbbVie Inc. Reconciliation of GAAP Reported to Non-GAAP Adjusted Information Year Ended December 31, 2018 (Unaudited) (In millions, except per share data) Non-GAAP Financial Results Financial results are presented on both a reported and a non-GAAP basis. Reported results were prepared in accordance with GAAP and include all revenues and expenses recognized during the period. Non-GAAP results adjust for certain non-cash items and for factors that are unusual or unpredictable, and exclude those costs, expenses, and other specified items. AbbVie’s management believes non-GAAP financial measures provide useful information to investors regarding AbbVie’s results of operations and assist management, analysts, and investors in evaluating the performance of the business. Non-GAAP financial measures should be considered in addition to, and not as a substitute for, measures of financial performance prepared in accordance with GAAP. Business Performance Highlights Reconciliations 1. Net Revenues since 2013 Inception and Compound Annual Growth Rate As reported (GAAP) Adjusted for specified items: As adjusted (non-GAAP) 2018 2017 2016 2015 2014 2013 $32,753 (20) $28,216 — $25,638 (78) $22,859 (40) $19,960 (81) $18,790 — 2018-2013 CAGR 11.7% $32,733 $28,216 $25,560 $22,819 $19,879 $18,790 11.7% The 2018 specified revenue item represents a milestone payment received under a previously announced collaboration. The 2016 specified revenue items included milestone revenue under previously announced collaborations and prior period royalty revenue related to a patent lawsuit settlement. The 2015 net revenue specified item represents a milestone payment received under a previously announced collaboration. The 2014 net revenue specified item reflects royalty income from prior periods recognized in the fourth quarter of 2014 as a result of the settlement of a licensing arrangement. 2. Diluted Earnings Per Share Compound Annual Growth Rate and Operating Margin Expansion since 2013 Inception Earnings Per Share Operating Margin Expansion As reported (GAAP) Adjusted for specified items: As adjusted (non-GAAP) 2018 2013 $3.66 4.25 $2.56 0.58 2018-2013 CAGR 2018 2013 2018-2013 Expansion 7.4% 19.5% 30.1% (1,060) bps 1,890 bps 25.1% 6.2% $7.91 $3.14 20.3% 44.6% 36.3% 830 bps 3. Net Revenues Increase and HUMIRA Sales Growth over 2017 As reported (GAAP) Adjusted for specified and other items: Adjusted for foreign exchange: As adjusted (non-GAAP) Net Revenues HUMIRA Sales 16.1% (0.1)% (0.8)% 15.2% 8.2% —% (0.8)% 7.4% B-1 2019 Proxy Statement 13NOV201221352027 B-1 Appendix B 4. Diluted Earnings Per Share since 2013 Inception As reported (GAAP) Adjusted for specified items: Intangible asset amortization Separation costs Milestones and other R&D expenses Acquired IPR&D Calico collaboration Stemcentrx-related impairment Charitable contribution Acquisition related costs Shire transaction and termination costs Change in fair value of contingent consideration Litigation reserves Intangible asset impairment Venezuela devaluation loss Revaluation due to Section 987 tax law change Impacts related to tax law changes Other 2018 2017 2016 2015 2014 2013 $ 3.66 $ 3.30 $3.63 $3.13 $1.10 $2.56 0.69 — 0.09 0.27 0.32 2.66 0.18 — — 0.31 0.18 — — — (0.49) 0.04 0.38 0.51 — 0.09 0.20 — — — 0.03 — 0.39 0.18 0.15 0.05 0.12 — — — 0.16 0.20 — 0.13 0.26 0.09 — — — 0.25 — 0.10 — — 0.08 — — — — 0.18 — — 0.12 — — 0.05 0.04 0.71 0.04 0.14 0.18 0.24 0.48 0.15 — — — — 1.12 — — — — — — 0.05 0.23 0.10 — 0.21 — — — — — — — — — — — 0.04 As adjusted (non-GAAP) $ 7.91 $ 5.60 $4.82 $4.29 $3.32 $3.14 2018 Performance Results for Financial Goals Reconciliations As reported (GAAP) Adjusted for specified items: Adjusted for foreign exchange: As adjusted (non-GAAP) Net Revenues Income Before Taxes Operating Margin HUMIRA Sales $32,753 (20) (444) $32,289 $ 5,197 8,260 (156) $13,301 $ 6,383 8,210 (150) $14,443 $19,936 — (265) $19,671 The calculation of Adjusted Return on Assets reflects Adjusted Net Earnings and Adjusted Net Assets. B-2 13NOV201221352027 2019 Proxy Statement B-2 26FEB201718350529 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 3, 2019 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 Fairmont Chicago, Millennium Park, 200 North Columbus Drive, Chicago, Illinois 60601 at 9:00 a.m. CT on May 3, 2019. 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 April 26, 2019. 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. 28FEB201710025299 Printed on Recyclable Paper 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 also is listed on the Chicago Stock Exchange. Annual Meeting The Annual Meeting will be held on Friday, May 3, 2019, at 9 a.m. at the Fairmont Chicago, Millennium Park, 200 North Columbus Drive, Chicago, IL 60601. 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 EQ Shareowner Services P.O. Box 64874 St Paul, MN 55164-0874 www.shareowneronline.com 877.881.5970 651.450.4064 About AbbVie AbbVie is a global, research and development-based biopharmaceutical company committed to developing innovative advanced therapies for some of the world’s most complex and critical conditions. The company’s mission is to use its expertise, dedicated people and unique approach to innovation to markedly improve treatments across four primary therapeutic areas: immunology, oncology, virology and neuroscience. In more than 75 countries, AbbVie employees are working every day to advance health solutions for people around the world. For more information about AbbVie, please visit us at www.abbvie.com. AbbVie's Commitment to AbbVie’s commitment to corporate responsibility Corporate Responsibility We strive to make a remarkable impact on patients and drive sustainable growth by discovering and delivering a consistent stream of innovative medicines that address serious health problems. Creating real health improvement is not only our mission, but also how we stay competitive. To be a leading health care innovator, we must attract, retain and support a diverse workforce and invest in their efforts to develop medicines that bring value for patients. We recognize that health is of fundamental importance to all people. To participate over the long term in the provision of health care, we must earn and maintain the trust of patients, health care providers, regulators, policymakers, and the public. For any business to be successful, it must operate in strong, resilient and growing markets. We have the opportunity to use our unique resources to support well-being, resilience and growth in our current markets, and help lay the foundation for broader economic development. Commitment: Use our expertise to improve health Commitment: Steward our ethical and sustainable business Commitment: Support long-term community strength • Develop a diverse, inclusive workforce • Maintain high standards of ethics, quality • Advance public health and patient • Make innovative medicines that offer significant health benefit and safety well-being • Protect human rights and workplace safety • Support employee vitality • Address the health needs of the • Prioritize environmental sustainability • Support community resilience and underserved long-term economic growth 2018 Highlights Using our expertise to address the health needs of the underserved 39,945 pro-bono hours given by AbbVie scientists to research neglected diseases, malaria, and tuberculosis 90 + low- and middle-income countries covered by a royalty-free license to the Medicines Patent Pool for our pan-genotypic HCV medicine Developing a diverse and inclusive culture 47% of management positions are held by women globally 31% of our US workforce is made up of historically underrepresented populations Supporting long-term community strength Advancing sustainability and environmental stewardship 20% of our electricity was purchased from renewable sources in 2018 2018 was a significant year in our efforts to build long-term community strength. In addition to our ongoing support for education and community programs, independent medical and patient education, and employee vitality and volunteerism, in 2018 AbbVie made an additional $350 million in charitable contributions to support US non-profit organizations making long-term impact on community strength. For more details, please see back cover. For more on our corporate responsibility efforts, visit abbvie.com/responsibility. Printed on recycled paper 1439_Cover.indd 2 3/18/19 5:46 PM 2018 Annual Report on Form 10-K 2019 Notice of Annual Meeting & Proxy Statement AbbVie 1 North Waukegan Road North Chicago, IL 60064 U.S.A. abbvie.com Copyright© 2019 AbbVie. All rights reserved. 2 0 1 8 A n n u a l R e p o r t o n F o r m 1 0 - K 2 0 1 9 N o t i c e o f A n n u a l M e e t i n g & P r o x y S t a t e m e n t Laura J. Schumacher Vice Chairman, External Affairs and Chief Legal Officer We live a culture of giving back. In 2018, we pledged an additional $350 million in charitable contributions to nonprofits based in the United States supporting long-term community strength. We focused our contributions in three areas that align with our priorities, and on nonprofits that are making a real impact in communities in need. Helping families thrive Supporting disaster relief Strengthening K-12 education • Ronald McDonald House Charities will add 600 new guest sleeping rooms and family-centered spaces in 32 locations • Habitat for Humanity expects to directly assist 13,000 hurricane-affected residents in Puerto Rico • Communities In Schools will increase reach to 143 schools and serve 100,000 more at-risk kids • St. Jude Children’s Research Hospital will serve 8,500 patients each year in the new Family Commons space and add 6.5 new acres of green space • Family Reach will expand and accelerate its programs and reach 25 new hospitals in 23 states • Direct Relief will support 60 community • City Year will expand in Chicago to reach health centers in Puerto Rico schools that serve 18,000 students • University of Chicago Education Lab will generate evidence to guide policy in Chicago and cities nationwide 1439_Cover.indd 1 3/18/19 5:46 PM #AbbVieGivesBack

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