Note 4Licensing, Acquisitions and Other Arrangements

Acquisition of Pharmacyclics

On May 26, 2015, AbbVie acquired Pharmacyclics through a tender offer for approximately $20.8 billion, including cash consideration of $12.4 billion and equity consideration of $8.4 billion. Pharmacyclics is a biopharmaceutical company that develops and commercializes novel therapies for people impacted by cancer. Pharmacyclics markets IMBRUVICA® (ibrutinib), a Bruton’s tyrosine kinase (BTK) inhibitor, targeting B-cell malignancies. Each outstanding Pharmacyclics share was exchanged for (i) $152.25 in cash and $109.00 in fair market value of AbbVie common stock, (ii) $261.25 in cash, or (iii) $261.25 in fair market value of AbbVie common stock, at the election of each holder, subject to the election and proration of the consideration at 58 percent cash and 42 percent AbbVie common stock.

The total consideration for the acquisition of Pharmacyclics was approximately $20.8 billion, consisting of cash and approximately 128 million shares of AbbVie common stock, and is summarized as follows:

(in millions)
Fair value of AbbVie common stock issued to Pharmacyclics stockholders		$ 8,405
Cash consideration paid to Pharmacyclics stockholders		11,749
Cash consideration paid to Pharmacyclics equity award holders		616

Total consideration		$ 20,770

The acquisition of Pharmacyclics has been accounted for as a business combination using the acquisition method of accounting. This method requires, among other things, that assets acquired and liabilities assumed be recognized at fair value as of the acquisition date. The valuation of assets acquired and liabilities assumed in the acquisition has not yet been finalized as of September 30, 2015. As a result, AbbVie recorded preliminary estimates for the fair value of assets acquired and liabilities assumed as of the acquisition date. The company made immaterial measurement period adjustments to certain preliminary estimates of fair value during the three months ended September 30, 2015. The completion of the valuation will occur no later than one year from the acquisition date and may result in significant changes to the recognized assets and liabilities.

The following table summarizes preliminary fair values of assets acquired and liabilities assumed as of the May 26, 2015 acquisition date:

(in millions)
Assets acquired and liabilities assumed
Cash and equivalents	$ 877
Short-term investments	11
Accounts and other receivables	106
Inventories	492
Other assets	212
Intangible assets
Definite-lived developed product rights	4,590
Definite-lived license agreements	6,780
Indefinite-lived research and development	7,180
Accounts payable and accrued liabilities	(381	)
Deferred income taxes	(6,453	)
Other long-term liabilities	(254	)

Total identifiable net assets	13,160
Goodwill	7,610

Total assets acquired and liabilities assumed	$ 20,770

The fair market value step-up adjustment to inventories of $445 million is being amortized to cost of products sold when the inventory is sold to customers, which is expected to be a period of approximately 18 months.

Intangible assets relate to the IMBRUVICA developed product rights, acquired in-process research and development (IPR&D) in the United States related to additional indications for IMBRUVICA, and the contractual rights to IMBRUVICA profits and losses outside the United States as a result of the collaboration agreement with Janssen Biotech, Inc. and its affiliates (Janssen), one of the Janssen Pharmaceutical companies of Johnson & Johnson. Refer to Note 5 for additional information regarding the collaboration with Janssen. The acquired definite-lived intangible assets are being amortized over a weighted-average estimated useful life of 13 years using the estimated pattern of economic benefit. The estimated fair value of the IPR&D and identifiable intangible assets was determined using the “income approach,” which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the more significant assumptions inherent in the development of those asset valuations include the estimated net cash flows for each year for each asset or product (including net revenues, cost of sales, R&D costs, selling and marketing costs and working capital/contributory asset charges), the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, the potential regulatory and commercial success risks, competitive trends impacting the asset and each cash flow stream as well as other factors.

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from the other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recognized from the acquisition of Pharmacyclics includes expected synergies, including the ability to leverage the respective strengths of each business, expanding the combined company’s product portfolio, acceleration of clinical and commercial presence in oncology and establishment of a strong leadership position in hematological oncology. The goodwill is not deductible for tax purposes.

From the acquisition date through September 30, 2015, AbbVie’s condensed consolidated statements of earnings included net revenues of $431 million and an operating loss of $422 million associated with the acquisition. The operating loss included $294 million of acquisition-related compensation expense, $144 million of inventory step-up and intangible asset amortization, and $96 million of transaction and integration costs. Of these costs, $279 million was recorded within SG&A expense, $111 million within research and development (R&D) expense, and $144 million within cost of products sold.

Pro Forma Financial Information

The following table presents the unaudited pro forma combined results of operations of AbbVie and Pharmacyclics for the three and nine months ended September 30, 2015 and 2014 as if the acquisition of Pharmacyclics had occurred on January 1, 2014:

	Three months ended September 30,		Nine months ended September 30,
(in millions, except per share information)	2015	2014	2015	2014
Net revenues	$ 5,944	$ 5,226	$ 16,815	$ 14,947
Net earnings	$ 1,332	$ 351	$ 3,780	$ 1,706
Basic earnings per share	$ 0.81	$ 0.20	$ 2.23	$ 0.99
Diluted earnings per share	$ 0.80	$ 0.20	$ 2.22	$ 0.98

The unaudited pro forma financial information was prepared using the acquisition method of accounting and was based on the historical financial information of AbbVie and Pharmacyclics. In order to reflect the occurrence of the acquisition on January 1, 2014 as required, the unaudited pro forma financial information includes adjustments to reflect the incremental amortization expense to be incurred based on the current preliminary fair values of the identifiable intangible assets acquired; the incremental cost of products sold related to the fair value adjustments associated with of acquisition-date inventory; the additional interest expense associated with the issuance of debt to finance the acquisition; and the reclassification of acquisition, integration and financing-related costs incurred during the three and nine months ended September 30, 2015 to the three and nine months ended September 30, 2014. The unaudited pro forma financial information is not necessarily indicative of what the consolidated results of operations would have been had the acquisition been completed on January 1, 2014. In addition, the unaudited pro forma financial information is not a projection of the future results of operations of the combined company nor does it reflect the expected realization of any cost savings or synergies associated with the acquisition.

Other Licensing & Acquisitions Activity

For the nine months ended September 30, 2015, the company recorded IPR&D charges of $150 million. There were no IPR&D charges incurred in the three months ended September 30, 2015. Excluding the acquisition of Pharmacyclics, cash outflows related to other acquisitions and investments totaled $794 million for the nine months ended September 30, 2015, and included a $500 million payment to Calico Life Sciences LLC (Calico) as a result of the satisfaction of certain conditions under the R&D collaboration with Calico for which a charge to IPR&D was recorded in 2014, as well as milestone payments to collaboration partners.

In the nine months ended September 30, 2014, cash outflows related to other acquisitions and investments totaled $572 million. The company recorded IPR&D charges of $308 million and $324 million for the three and nine months ended September 30, 2014, respectively, which included charges related to the global collaboration with Infinity entered into in September 2014. The company also recorded other operating expense of $250 million for both the three and nine months ended September 30, 2014 related to the collaboration with Calico entered into in September 2014.

C2N Diagnostics

In March 2015, AbbVie entered into an exclusive worldwide license agreement with C2N Diagnostics to develop and commercialize anti-tau antibodies for the treatment of Alzheimer’s disease and other neurological disorders. As part of the agreement, AbbVie made an initial upfront payment of $100 million, which was expensed to IPR&D in the three months ended March 31, 2015. Upon the achievement of certain development, regulatory, and commercial milestones, AbbVie could make additional payments of up to $685 million, as well as royalties on net sales.

Calico Life Sciences LLC

In September 2014, AbbVie and Calico entered into a novel R&D collaboration agreement to discover, develop and commercialize new therapies for patients with age-related diseases, including neurodegeneration and cancer. As part of the agreement, AbbVie made an initial upfront payment of $250 million, which was recorded in other expense in the three months ended September 30, 2014. Calico is responsible for research and early development during the first five years and will continue to advance collaboration projects through Phase 2a for a ten year period. AbbVie will have the option to exclusively license collaboration compounds after completion of Phase 2a. AbbVie will support Calico in its early R&D efforts and, upon option exercise, would be responsible for all late-stage development and commercial activities. Collaboration costs and profits will be shared equally by both companies.

Infinity Pharmaceuticals, Inc.

In September 2014, AbbVie entered into a global collaboration agreement with Infinity Pharmaceuticals, Inc. (Infinity) to develop and commercialize duvelisib (IPI-145) for the treatment of patients with cancer. As part of the agreement, AbbVie made an initial upfront payment of $275 million, which was expensed to IPR&D in the three months ended September 30, 2014. In the three months ended September 30, 2015, AbbVie recorded a charge of $130 million in R&D expense due to the achievement of a development milestone under the collaboration agreement. This amount will be paid in the fourth quarter of 2015. Upon the achievement of certain development, regulatory and commercial milestones, AbbVie could make additional payments of up to $400 million. In the United States, the companies will jointly commercialize duvelisib and will share equally in any potential profits. Outside the United States, AbbVie will be responsible for the commercialization of duvelisib, and Infinity is eligible to receive tiered double-digit royalties on net sales.

Other Activity

United Therapeutics Corporation

In August 2015, AbbVie entered into an agreement to purchase a rare pediatric disease priority review voucher (PRV) from United Therapeutics Corporation. The PRV entitles AbbVie to receive an FDA priority review of a single New Drug Application or Biologics License Application, which reduces the target review time and could lead to an expedited approval. In exchange for the PRV, AbbVie made a payment of $350 million, which was recorded in R&D expense in the condensed consolidated statements of earnings and as an operating cash outflow in the condensed consolidated statement of cash flows for the three months ended September 30, 2015. AbbVie intends to use the PRV for an existing R&D project.