AbbVie Inc. 10-Q

ITEM 2. 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 September 30, 2022 and December 31, 2021 and the results of operations for the three and nine months ended September 30, 2022 and 2021. This commentary should be read in conjunction with the Condensed Consolidated Financial Statements and accompanying notes appearing in Item 1, “Financial Statements and Supplementary Data.” EXECUTIVE OVERVIEW Company Overview AbbVie is a global, diversified research-based biopharmaceutical company positioned for success with a comprehensive product portfolio that has leadership positions across immunology, oncology, aesthetics, neuroscience and eye care. 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 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. Certain products (including aesthetic products and devices) are also sold directly to physicians and other licensed healthcare providers. In the United States, AbbVie distributes pharmaceutical products principally through independent wholesale distributors, with some sales directly to retailers, pharmacies, patients or other customers. Outside the United States, AbbVie sells products primarily to customers or through distributors, depending on the market served. Certain products are co-marketed or co-promoted with other companies. AbbVie has approximately 50,000 employees. AbbVie operates as a single global business segment. 2022 Strategic Objectives AbbVie's mission is to discover and develop innovative medicines and products that solve serious health issues today and address the medical challenges of tomorrow while achieving top-tier financial performance through outstanding execution. AbbVie intends to continue to advance its mission in a number of ways, including: (i) maximizing the benefits of a diversified revenue base with multiple long-term growth drivers; (ii) growing revenues by leveraging AbbVie's commercial strength and international infrastructure across therapeutic areas and ensuring strong commercial execution of new product launches; (iii) continuing to invest in and expand its pipeline in support of opportunities in immunology, oncology, aesthetics, neuroscience and eye care as well as continued investment in key on-market products; (iv) expanding operating margins; and (v) returning cash to shareholders via a strong and growing dividend while also reducing debt. In addition, AbbVie anticipates several regulatory submissions and data readouts from key clinical trials in the next 12 months. Financial Results The company's financial performance for the nine months ended September 30, 2022 included delivering worldwide net revenues of $42.9 billion, operating earnings of $12.6 billion, diluted earnings per share of $5.24 and cash flows from operations of $17.5 billion. Worldwide net revenues grew by 4% on a reported basis and 6% on a constant currency basis, reflecting growth across its immunology, neuroscience and aesthetics portfolios. Diluted earnings per share was $5.24 for the nine months ended September 30, 2022 and included the following after-tax costs: (i) $4.8 billion related to the amortization of intangible assets; (ii) $2.0 billion for charges related to litigation matters; (iii) $657 million for the change in fair value of contingent consideration liabilities; (iv) $604 million related to intangible asset impairment; and (v) $567 million of acquisition and integration expenses. These costs were partially offset by an after-tax gain of $126 million related to the divestiture of Pylera. Additionally, financial results reflected continued funding to support all stages of AbbVie’s pipeline assets and continued investment in AbbVie’s on-market brands. Following the closing of the Allergan acquisition, AbbVie implemented an integration plan designed to reduce costs, integrate and optimize the combined organization. The integration plan is expected to realize approximately $2.5 billion of annual cost synergies in 2022. To achieve these integration objectives, AbbVie expects to incur total cumulative charges of approximately $2 billion through 2022. These costs consist of severance and employee benefit costs (cash severance, non-cash severance, including accelerated equity award compensation expense, retention and other termination benefits) and other integration expenses. 2022 Form 10-Q | 25 Recent Global Events Russia/Ukraine In response to the military conflict between Russia and Ukraine, the United States and other North Atlantic Treaty Organization member states, as well as certain non-member states, announced targeted economic sanctions and export controls on Russia and Belarus. These include restrictions on the export and transfer of products containing certain toxins, including Botox, to Russia and Belarus. However, AbbVie is not prohibited to continue the sale of essential pharmaceutical products to help ensure patients receive an uninterrupted supply of their medicines. In March 2022, AbbVie announced the suspension of operations for all aesthetics products in Russia. In April 2022, AbbVie also announced that all profits from the sales of essential medicines in Russia will be donated to support direct humanitarian relief efforts in Ukraine. While the company’s operations in Russia, Belarus and Ukraine are not significant, if the conflict escalates and results in broader economic and political concerns, AbbVie’s business could be adversely impacted. Impact of the Coronavirus Disease 2019 (COVID-19) In response to the ongoing public health crisis posed by COVID-19, AbbVie continues to focus on ensuring the safety of employees. Throughout the pandemic, AbbVie has followed health and safety guidance from state and local health authorities and implemented safety measures for those employees who are returning to the workplace. AbbVie also continues to closely manage manufacturing and supply chain resources around the world to help ensure that patients continue to receive an uninterrupted supply of their medicines. Clinical trial sites are being monitored locally to protect the safety of study participants, staff and employees. While the impact of COVID-19 on AbbVie's operations to date has not been material, AbbVie continues to experience lower new patient starts in certain products and markets. AbbVie expects this matter could continue to negatively impact its results of operations throughout the duration of the pandemic. The extent to which COVID-19 may impact AbbVie's financial condition and results of operations remains uncertain and is dependent on numerous evolving factors, including the measures being taken by authorities to mitigate against the spread of COVID-19, the emergence of new variants and the effectiveness of vaccines and therapeutics. 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 products and acquire or collaborate on compounds currently in development by other biotechnology or pharmaceutical companies. AbbVie’s pipeline currently includes approximately 80 compounds, devices or indications in development individually or under collaboration or license agreements and is focused on such important specialties as immunology, oncology, aesthetics, neuroscience and eye care. Of these programs, more than 40 are in mid- and late-stage development. The following sections summarize transitions of significant programs from mid-stage development to late-stage development as well as developments in significant late-stage and registration programs. AbbVie expects multiple mid-stage programs to transition into late-stage programs in the next 12 months. Significant Programs and Developments Immunology Skyrizi • In January 2022, A bbVie announced that the U.S. Food and Drug Administration (FDA) approved Skyrizi for the treatment of adults with active psoriatic arthritis. • In June 2022, AbbVie announced that the FDA approved Skyrizi for the treatment of adults with moderately to severely active Crohn’s disease. • In September 2022, AbbVie announced that the European Medicines Agency’s (EMA) Committee for Medicinal Products for Human Use adopted a positive opinion recommending the approval of Skyrizi for the treatment of adults with moderately to severely active Crohn's disease who have had inadequate response, lost response or were intolerant to conventional or biologic therapy. 2022 Form 10-Q | 26 Rinvoq • In January 2022, Ab bVie announced that the FDA approved Rinvoq for the treatment of moderate to severe atopic dermatitis in adults and children 12 years of age and older whose disease did not respond to previous treatment and is not well controlled with other pills or injections, including biologic medicines, or when use of other pills or injections is not recommended. • In February 2022, AbbVie was notified that the European Commission (EC) is requesting the European Medicines Agency (EMA) to assess safety concerns associated with JAK inhibitor products authorized in inflammatory diseases and to evaluate the impact of these events on their benefit-risk balance. The assessment covers all JAK inhibitors approved for use in inflammatory diseases. • In February 2022, AbbVie announced top-line results from its second Phase 3 induction study, U-Excel, for Rinvoq in patients with moderate to severe Crohn’s disease who had an inadequate response or were intolerant to conventional or biologic therapy met the primary and most key secondary endpoints. • In March 2022, AbbVie announced that the FDA approved Rinvoq for the treatment of adults with moderately to severely active ulcerative colitis (UC) who have had an inadequate response or intolerance to one or more tumor necrosis factor (TNF) blockers. • In April 2022, AbbVie announced that the FDA approved Rinvoq for the treatment of adults with active ankylosing spondylitis who have had an inadequate response or intolerance to one or more TNF blockers. • In May 2022, AbbVie announced positive top-line results from U-ENDURE, its Phase 3 maintenance study for Rinvoq in adult patients with moderate to severe Crohn's disease who had an inadequate response or were intolerant to a conventional or biologic therapy. The results showed that more patients treated with Rinvoq achieved the co-primary and secondary endpoints at one year compared to placebo. • In July 2022, AbbVie announced that the EC approved Rinvoq for the treatment of adults with moderately to severely active UC who have had an inadequate response, lost response or were intolerant to either conventional therapy or a biologic agent. • In July 2022, AbbVie announced its submission of a supplemental New Drug Application (sNDA) to the FDA and a marketing authorization application (MAA) to the EMA for Rinvoq for the treatment of adult patients with moderately to severely active Crohn’s disease. • In July 2022, AbbVie announced that the EC approved Rinvoq for the treatment of adult patients with active non-radiographic axial spondyloarthritis (nr-axSpA). • In October 2022, AbbVie announced that the FDA approved Rinvoq for the treatment of adults with active nr-axSpA with objective signs of inflammation who have had an inadequate response or intolerance to TNF blocker therapy. Oncology Teliso-V • In January 2022, AbbVie announced that the FDA granted Breakthrough Therapy Designation to investigational telisotuzumab vedotin (Teliso-V) for the treatment of patients with advanced/metastatic epidermal growth factor receptor wild type, nonsquamous non-small cell lung cancer with high levels of c-Met overexpression whose disease has progressed on or after platinum-based therapy. • In May 2022, AbbVie initiated a Phase 3 clinical trial to evaluate Teliso-V versus docetaxel for the treatment of patients with previously treated c-Met overexpressing, epidermal growth factor receptor wild type, advanced/metastatic non-squamous non-small cell lung cancer. Imbruvica • In August 2022, AbbVie announced that the FDA approved the use of Imbruvica for the treatment of pediatric patients one year and older with chronic graft versus host disease after failure of one or more lines of systemic therapy. • In August 2022, the National Comprehensive Cancer Network (NCCN) in the United States issued updated guidelines for the management of chronic lymphocytic leukemia (CLL) re-categorizing Imbruvica from “Preferred Regimen” to “Other Recommended Regimen”. 2022 Form 10-Q | 27 Epcoritamab • In March 2022, Genmab A/S (Genmab) announced that the FDA granted orphan-drug designation to the investigational medicine, epcoritamab (DuoBody-CD3xCD20), for the treatment of follicular lymphoma. Genmab and AbbVie are co-developing epcoritamab and will share commercial responsibilities in the U.S. and Japan, with AbbVie responsible for further global commercialization. • In June 2022, AbbVie and Genmab announced primary results from the large B-cell lymphoma expansion cohort in the EPCORE NHL-1 phase 2 clinical trial evaluating epcoritamab, an investigational subcutaneous bispecific antibody. In this study, epcoritamab demonstrated efficacy with durable responses in patients who had previously received at least two prior lines of anti-lymphoma therapy including chimeric antigen receptor T-cell therapy. • In September 2022, AbbVie and Genmab submitted a biological license application to the FDA for epcoritamab for the treatment of patients with relapsed/refractory large B-cell lymphoma. • In October 2022, AbbVie and Genmab submitted an MAA to the EMA for epcoritamab for the treatment of patients with relapsed/refractory diffuse large B-cell lymphoma. Aesthetics Juvederm Collection • In February 2022, AbbVie announced that the FDA approved Juvederm Volbella XC for improvement of infraorbital hollows in adults over the age of 21. • In August 2022, AbbVie announced the that the FDA approved Juvederm Volux XC for the improvement of jawline definition in adults over the age of 21 with moderate to severe loss of jawline definition. BoNTE • In March 2022, AbbVie initiated three Phase 3 clinical trials to evaluate the efficacy and safety of BoNTE (AGN-151586) for the treatment of glabellar lines. Neuroscience Vraylar • In February 2022, AbbVie submitted an sNDA to the FDA for Vraylar for the adjunctive treatment of major depressive disorder in patients who are receiving ongoing antidepressant therapy. Qulipta • In March 2022, AbbVie announced results from the Phase 3 PROGRESS trial for Qulipta in the preventive treatment of chronic migraine in adults met the primary endpoint and resulted in significant improvements in all secondary endpoints after adjustment for multiple comparisons. • In June 2022, AbbVie submitted an sNDA to the FDA for Qulipta for the preventative treatment of chronic migraine in adults. • In July 2022, AbbVie submitted an MAA to the EMA for Qulipta for the prophylactic treatment of migraine in adult patients who have at least four migraine days per month. ABBV-951 • In May 2022, AbbVie submitted a New Drug Application to the FDA for ABBV-951 (foscarbidopa/foslevodopa) for the treatment of motor fluctuations in patients with advanced Parkinson's disease. For a more comprehensive discussion of AbbVie’s products and pipeline, see the company’s Annual Report on Form 10-K for the year ended December 31, 2021. 2022 Form 10-Q | 28 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 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. Three months ended September 30, Percent change Nine months ended September 30, Percent change At actual currency rates At constant currency rates At actual currency rates At constant currency rates (dollars in millions) 2022 2021 2022 2021 United States $ 11,763 $ 11,279 4.3 % 4.3 % $ 33,521 $ 31,833 5.3 % 5.3 % International 3,049 3,063 (0.4) % 9.6 % 9,412 9,478 (0.7) % 6.7 % Net revenues $ 14,812 $ 14,342 3.3 % 5.4 % $ 42,933 $ 41,311 3.9 % 5.6 % 2022 Form 10-Q | 29 The following table details AbbVie’s worldwide net revenues: Three months ended September 30, Percent change Nine months ended September 30, Percent change At actual currency rates At constant currency rates At actual currency rates At constant currency rates (dollars in millions) 2022 2021 2022 2021 Immunology Humira United States $ 4,956 $ 4,613 7.4 % 7.4 % $ 13,613 $ 12,777 6.5 % 6.5 % International 603 812 (25.9) % (16.8) % 2,045 2,583 (20.9) % (14.3) % Total $ 5,559 $ 5,425 2.5 % 3.9 % $ 15,658 $ 15,360 1.9 % 3.0 % Skyrizi United States $ 1,221 $ 679 79.8 % 79.8 % $ 3,081 $ 1,725 78.6 % 78.6 % International 176 117 50.1 % 70.0 % 508 319 59.3 % 75.1 % Total $ 1,397 $ 796 75.4 % 78.3 % $ 3,589 $ 2,044 75.6 % 78.1 % Rinvoq United States $ 505 $ 348 44.7 % 44.7 % $ 1,228 $ 889 38.0 % 38.0 % International 190 105 82.9 % >100.0 % 524 245 >100.0 % >100.0 % Total $ 695 $ 453 53.5 % 59.3 % $ 1,752 $ 1,134 54.5 % 59.3 % Hematologic Oncology Imbruvica United States $ 849 $ 1,109 (23.5) % (23.5) % $ 2,585 $ 3,207 (19.4) % (19.4) % Collaboration revenues 286 265 7.6 % 7.6 % 868 816 6.3 % 6.3 % Total $ 1,135 $ 1,374 (17.4) % (17.4) % $ 3,453 $ 4,023 (14.2) % (14.2) % Venclexta United States $ 259 $ 237 9.2 % 9.2 % $ 740 $ 685 8.1 % 8.1 % International 256 255 0.1 % 13.2 % 753 647 16.2 % 27.3 % Total $ 515 $ 492 4.5 % 11.3 % $ 1,493 $ 1,332 12.1 % 17.5 % Aesthetics Botox Cosmetic United States $ 370 $ 356 4.1 % 4.1 % $ 1,232 $ 1,027 20.0 % 20.0 % International 267 189 41.0 % 54.5 % 741 579 27.9 % 36.8 % Total $ 637 $ 545 16.9 % 21.6 % $ 1,973 $ 1,606 22.8 % 26.0 % Juvederm Collection United States $ 125 $ 159 (21.9) % (21.9) % $ 420 $ 478 (12.3) % (12.3) % International 227 195 16.9 % 27.7 % 686 625 9.9 % 17.6 % Total $ 352 $ 354 (0.6) % 5.3 % $ 1,106 $ 1,103 0.3 % 4.6 % Other Aesthetics United States $ 265 $ 305 (13.1) % (13.1) % $ 837 $ 968 (13.4) % (13.4) % International 47 47 (0.8) % 8.3 % 130 149 (12.8) % (7.2) % Total $ 312 $ 352 (11.4) % (10.2) % $ 967 $ 1,117 (13.4) % (12.7) % Neuroscience Botox Therapeutic United States $ 584 $ 534 9.2 % 9.2 % $ 1,641 $ 1,451 13.1 % 13.1 % International 115 111 3.6 % 14.2 % 350 329 6.5 % 15.0 % Total $ 699 $ 645 8.2 % 10.0 % $ 1,991 $ 1,780 11.9 % 13.5 % Vraylar United States $ 554 $ 461 20.1 % 20.1 % $ 1,473 $ 1,239 18.9 % 18.9 % Duodopa United States $ 22 $ 23 (4.9) % (4.9) % $ 72 $ 73 (2.4) % (2.4) % International 88 104 (15.0) % (2.6) % 279 310 (9.8) % — % Total $ 110 $ 127 (13.1) % (3.0) % $ 351 $ 383 (8.4) % (0.5) % Ubrelvy United States $ 160 $ 162 (1.4) % (1.4) % $ 483 $ 369 31.0 % 31.0 % Qulipta United States $ 62 $ — n/m n/m $ 106 $ — n/m n/m Other Neuroscience United States $ 82 $ 166 (50.5) % (50.5) % $ 400 $ 489 (18.3) % (18.3) % International 5 5 10.2 % 14.1 % 14 13 10.3 % 13.1 % Total $ 87 $ 171 (49.0) % (48.9) % $ 414 $ 502 (17.6) % (17.5) % 2022 Form 10-Q | 30 Three months ended September 30, Percent change Nine months ended September 30, Percent change At actual currency rates At constant currency rates At actual currency rates At constant currency rates (dollars in millions) 2022 2021 2022 2021 Eye Care Lumigan/Ganfort United States $ 59 $ 63 (4.4) % (4.4) % $ 186 $ 201 (7.1) % (7.1) % International 62 75 (18.7) % (8.7) % 205 229 (10.8) % (2.9) % Total $ 121 $ 138 (12.2) % (6.7) % $ 391 $ 430 (9.0) % (4.8) % Alphagan/Combigan United States $ 37 $ 89 (58.2) % (58.2) % $ 161 $ 271 (40.8) % (40.8) % International 36 39 (8.9) % 2.9 % 111 117 (5.1) % 4.9 % Total $ 73 $ 128 (43.0) % (39.4) % $ 272 $ 388 (30.0) % (27.0) % Restasis United States $ 132 $ 305 (56.7) % (56.7) % $ 518 $ 884 (41.3) % (41.3) % International 10 14 (30.7) % (37.7) % 38 42 (10.1) % (2.8) % Total $ 142 $ 319 (55.6) % (55.9) % $ 556 $ 926 (39.9) % (39.6) % Other Eye Care United States $ 134 $ 128 3.7 % 3.7 % $ 400 $ 375 6.3 % 6.3 % International 153 158 (2.7) % 9.1 % 492 488 0.9 % 10.1 % Total $ 287 $ 286 0.1 % 6.6 % $ 892 $ 863 3.3 % 8.5 % Other Key Products Mavyret United States $ 190 $ 183 3.5 % 3.5 % $ 562 $ 557 0.9 % 0.9 % International 193 243 (20.6) % (10.3) % 599 726 (17.5) % (9.1) % Total $ 383 $ 426 (10.2) % (4.4) % $ 1,161 $ 1,283 (9.5) % (4.7) % Creon United States $ 336 $ 310 8.5 % 8.5 % $ 941 $ 864 9.0 % 9.0 % Linzess/Constella United States $ 262 $ 253 3.4 % 3.4 % $ 742 $ 728 2.0 % 2.0 % International 9 8 16.0 % 25.8 % 24 23 3.2 % 9.6 % Total $ 271 $ 261 3.8 % 4.1 % $ 766 $ 751 2.0 % 2.2 % All other $ 925 $ 1,117 (16.8) % (15.3) % $ 3,145 $ 3,814 (17.5) % (16.3) % Total net revenues $ 14,812 $ 14,342 3.3 % 5.4 % $ 42,933 $ 41,311 3.9 % 5.6 % n/m – Not meaningful The following discussion and analysis of AbbVie’s net revenues by product is presented on a constant currency basis. Global Humira sales increased by 4% for the three months and 3% for the nine months ended September 30, 2022 primarily driven by market growth across therapeutic categories, partially offset by direct biosimilar competition in international markets. In the United States, Humira sales increased by 7% for the three and nine months ended September 30, 2022 primarily driven by market growth across all indications and favorable pricing. This increase was partially offset by lower market share following corresponding market share gains of Skyrizi and Rinvoq. Internationally, Humira revenues decreased by 17% for the three months and 14% for the nine months ended September 30, 2022 primarily driven by direct biosimilar competition in international markets. Net revenues for Skyrizi increased by 78% for the three and nine months ended September 30, 2022 primarily driven by continued strong volume and market share uptake since launch as a treatment for plaque psoriasis as well as market growth. Net revenues for the three and nine months ended September 30, 2022 were also favorably impacted by recent regulatory approvals and expansion of Skyrizi for the treatment of psoriatic arthritis and Crohn’s disease. Net revenues for Rinvoq increased by 59% for the three and nine months ended September 30, 2022 primarily driven by continued strong volume and market share uptake since launch for the treatment of moderate to severe rheumatoid arthritis as well as market growth. Net revenues for the three and nine months ended September 30, 2022 were also favorably impacted by recent regulatory approvals and expansion of Rinvoq for the treatment of psoriatic arthritis, atopic dermatitis, ankylosing spondylitis and ulcerative colitis. 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 decreased by 17% for the three months and 14% for the nine months ended September 30, 2022 as a result of decreased market demand and lower market share in the United States. The decrease in net revenues for the three and nine months ended September 30, 2022 was also partially offset by increased collaboration revenues. Net revenues for Venclexta increased by 11% for the three months and 18% for the nine months ended September 30, 2022 primarily due to continued expansion of Venclexta for the treatment of patients with CLL and acute myeloid leukemia. 2022 Form 10-Q | 31 Net revenues for Botox Cosmetic increased by 22% for the three months and 26% for the nine months ended September 30, 2022 due to increased consumer demand driven by investment in key international markets and moderated market growth in the United States reflecting increased economic pressures impacting consumer discretionary spending. Net revenues for Juvederm Collection increased by 5% for the three and nine months ended September 30, 2022. In the United States, net revenues decreased by 22% for the three months and 12% for the nine months ended September 30, 2022 due to increased economic pressures impacting consumer discretionary spending and increased pricing promotions. International net revenues increased by 28% for the three months and 18% for the nine months ended September 30, 2022 due to increased consumer demand driven by investment in key markets and recovery from the COVID-19 pandemic, partially offset by the suspension of aesthetic operations in Russia. Net revenues for Botox Therapeutic increased by 10% for the three months and 13% for the nine months ended September 30, 2022 due to market growth. Net revenues for Vraylar increased by 20% for the three months and 19% for the nine months ended September 30, 2022 due to higher market share and market growth. Net revenues for Ubrelvy decreased by 1% for the three months ended September 30, 2022 due to the timing of patient access program allowances, partially offset by market share uptake since launch and market growth. Net revenues increased by 31% for the nine months ended September 30, 2022 primarily due to increased market share uptake since launch, partially offset by the timing of patient access program allowances. Net revenues for Mavyret decreased by 4% for the three months and 5% for the nine months ended September 30, 2022 due to the continued disruption of global hepatitis C virus markets due to the COVID-19 pandemic. Gross Margin Three months ended September 30, Nine months ended September 30, (dollars in millions) 2022 2021 % change 2022 2021 % change Gross margin $ 9,790 $ 9,952 (2) % $ 29,689 $ 28,185 5 % as a % of net revenues 66 % 69 % 69 % 68 % Gross margin as a percentage of net revenues decreased for the three months and increased for the nine months ended September 30, 2022 compared to the prior year. Gross margin percentage for the three months ended September 30, 2022 was unfavorably impacted by an intangible asset impairment charge of $770 million and higher amortization of intangible assets, partially offset by changes in product mix. Gross margin percentage for the nine months ended September 30, 2022 was favorably impacted by changes in product mix and lower amortization of intangible assets, partially offset by an intangible asset impairment charge of $770 million. Selling, General and Administrative Three months ended September 30, Nine months ended September 30, (dollars in millions) 2022 2021 % change 2022 2021 % change Selling, general and administrative $ 3,304 $ 3,083 7 % $ 11,843 $ 9,089 30 % as a % of net revenues 22 % 21 % 28 % 22 % Selling, general and administrative (SG&A) expenses as a percentage of net revenues increased for the three and nine months ended September 30, 2022 compared to the prior year. SG&A expense percentage for the three months ended September 30, 2022 was unfavorably impacted by increased product launch expenses partially offset by leverage from revenue growth and increased synergies realized. SG&A expense percentage was unfavorably impacted by litigation reserve charges of $2.5 billion for the nine months ended September 30, 2022. 2022 Form 10-Q | 32 Research and Development and Acquired IPR&D and Milestones Three months ended September 30, Nine months ended September 30, (dollars in millions) 2022 2021 % change 2022 2021 % change Research and development $ 1,614 $ 1,661 (3) % $ 4,720 $ 5,095 (7) % as a % of net revenues 11 % 12 % 11 % 12 % Acquired IPR&D and milestones $ 40 $ 402 (90) % $ 454 $ 719 (37) % Research and development (R&D) expenses as a percentage of net revenues decreased for the three and nine months ended September 30, 2022 compared to the prior year. R&D expense percentage for the three and nine months ended September 30, 2022 was favorably impacted by increased scale of the combined company and synergies realized as well as lower integration costs related to the acquisition of Allergan. R&D expense percentage for the nine months ended September 30, 2022 was also favorably impacted by the purchase of priority review vouchers from third parties in the prior year. Acquired IPR&D and milestones expense represents upfront and subsequent development milestone payments incurred prior to regulatory approval to acquire rights to in-process R&D projects through R&D collaborations, licensing arrangements or other asset acquisitions. Acquired IPR&D and milestones expense in the nine months ended September 30, 2022 included a charge of $130 million as a result of acquiring Syndesi Therapeutics SA and its portfolio of novel modulators of the synaptic vesicle protein 2A, including its lead molecule SDI-118, which is being evaluated to target nerve terminals to enhance synaptic efficiency. There were no individually significant transactions during the three months ended September 30, 2022. Acquired IPR&D and milestones expense in the three and nine months ended September 30, 2021 included a charge of $400 million as a result of exercising the company’s exclusive right to acquire TeneoOne, an affiliate of Teneobio, Inc., and TNB-383B, a BCMA-targeting immunotherapeutic for the potential treatment of relapsed or refractory multiple myeloma (R/R MM). Other Operating Expense, Net Other operating expense, net for the three and nine months ended September 30, 2022 included a one-time charge of $229 million related to an asset divested as part of the Allergan acquisition. Other operating expense, net for the nine months ended September 30, 2022 also included $172 million of income related to the sale of worldwide commercial rights of a mature brand Pylera, which is used for the treatment of peptic ulcers with an infection by the bacterium Helicobacter pylori. Other operating expense, net for the three and nine months ended September 30, 2021 included a $500 million charge related to the extension of the Calico Life Sciences LLC collaboration to discover, develop and bring to market new therapies for patients with age-related diseases, including neurodegeneration and cancer. Other Non-Operating Expenses (Income) Three months ended September 30, Nine months ended September 30, (in millions) 2022 2021 2022 2021 Interest expense $ 560 $ 596 $ 1,664 $ 1,843 Interest income (63) (11) (96) (30) Interest expense, net $ 497 $ 585 $ 1,568 $ 1,813 Net foreign exchange loss $ 36 $ 12 $ 108 $ 35 Other expense (income), net (330) 21 427 2,284 Interest expense decreased for the three and nine months ended September 30, 2022 compared to the prior year primarily due to a lower average debt balance as a result of deleveraging, partially offset by the impact of higher interest rates. Interest income increased for the three and nine months ended September 30, 2022 compared to the prior year primarily due to the impact of higher interest rates. Other expense (income), net included a benefit related to changes in fair value of contingent consideration liabilities of $214 million for the three months and a charge of $647 million for the nine months ended September 30, 2022 and charges of $98 million for the three months and $2.4 billion for the nine months ended September 30, 2021. 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 and other market-based factors. For the three months ended September 30, 2022, the change in fair value represented higher discount rates partially offset by the passage of time. For the nine months ended September 30, 2022, the change in fair value represented higher estimated Skyrizi sales driven 2022 Form 10-Q | 33 by stronger market share uptake and the passage of time, partially offset by higher discount rates. For the three months ended September 30, 2021, the change in fair value represented the passage of time partially offset by higher discount rates. For the nine months ended September 30, 2021, the change in fair value represented higher estimated Skyrizi sales driven by stronger market share uptake, favorable Skyrizi clinical results and the passage of time. Income Tax Expense The effective tax rate was 10% for the three months and 11% for the nine months ended September 30, 2022 compared to 14% for the three and nine months ended September 30, 2021. The effective tax rate in each period differed from the U.S. statutory tax rate of 21% principally due to the impact of 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 and accretion on contingent consideration. The decrease in the effective tax rate for the three and nine months ended September 30, 2022 over the prior year was primarily due to differences in the company’s jurisdictional mix of earnings, accretion on contingent consideration, and acquired IPR&D and milestones. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES Nine months ended September 30, (in millions) 2022 2021 Cash flows provided by (used in): Operating activities $ 17,515 $ 17,702 Investing activities (175) (1,199) Financing activities (15,169) (12,701) Operating cash flows for the nine months ended September 30, 2022 decreased compared to the prior year primarily due to the timing of working capital cash flows and higher income tax payments, partially offset by improved results of operations resulting from revenue growth. Investing cash flows for the nine months ended September 30, 2022 included payments made for acquisitions and investments of $494 million, capital expenditures of $482 million and net sales and maturities of investment securities totaling $32 million. Investing cash flows for the nine months ended September 30, 2021 included payments made for acquisitions and investments of $837 million, capital expenditures of $600 million and net sales and maturities of investment securities totaling $15 million. Financing cash flows for the nine months ended September 30, 2022 included repayment of $2.9 billion aggregate principal amount of the company’s 3.45% senior notes, $1.7 billion aggregate principal amount of the company’s 3.25% senior notes and $1.0 billion aggregate principal amount of the company’s 3.2% senior notes. Additionally, financing cash flows included repayment of a $2.0 billion floating rate term loan due May 2025 and issuance of a new $2.0 billion floating rate term loan as part of the term loan refinancing in February 2022. Financing cash flows for the nine months ended September 30, 2021 included repayment of $1.8 billion aggregate principal amount of the company’s 2.3% senior notes, $1.2 billion aggregate principal amount of the company’s 5.0% senior notes, €750 million aggregate principal amount of the company’s 0.5% senior euro notes and $750 million aggregate principal amount of floating rate senior notes. Financing cash flows also included repayment of a $1.0 billion floating rate term loan due May 2023 and issuance of a new $1.0 billion floating rate term loan as part of the term loan refinancing in September 2021. Financing cash flows also included cash dividend payments of $7.5 billion for the nine months ended September 30, 2022 and $6.9 billion for the nine months ended September 30, 2021. The increase in cash dividend payments was primarily driven by the increase in the quarterly dividend rate. On September 9, 2022, the company announced that its board of directors declared a quarterly cash dividend of $1.41 per share for stockholders of record at the close of business on October 14, 2022, payable on November 15, 2022. On October 28, 2022, the company announced that its board of directors declared an increase in the company’s quarterly cash dividend from $1.41 per share to $1.48 per share beginning with the dividend payable on February 15, 2023 to stockholders of record as of January 13, 2023. This reflects an increase of approximately 5.0% 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. 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. AbbVie repurchased 2022 Form 10-Q | 34 8 million shares for $1.1 billion during the nine months ended September 30, 2022 and 5 million shares for $550 million during the nine months ended September 30, 2021. 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 for credit losses equal to the estimate of future losses over the contractual life of outstanding accounts receivable. 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 AbbVie currently has a $4.0 billion five-year revolving credit facility that matures in August 2024. This credit facility enables the company to borrow funds on an unsecured basis at variable interest rates and contains various covenants. At September 30, 2022, the company was in compliance with all covenants, and commitment fees under the credit facility were insignificant. No amounts were outstanding under the company's credit facility as of September 30, 2022 and December 31, 2021. 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 has the ability to issue 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 In March 2022, Moody’s Investors Service (Moody’s) affirmed its Baa2 senior unsecured long-term rating and the Prime-2 short-term rating. At the same time, Moody’s revised the outlook to positive from stable. 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. CRITICAL ACCOUNTING POLICIES A summary of the company’s significant accounting policies is included in Note 2, “Summary of Significant Accounting Policies” in AbbVie's Annual Report on Form 10-K for the year ended December 31, 2021. There have been no significant changes in the company’s application of its critical accounting policies during the nine months ended September 30, 2022. FORWARD-LOOKING STATEMENTS Some statements in this quarterly report on Form 10-Q may be forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. The words “believe,” “expect,” “anticipate,” “project,” and similar expressions, among others, generally identify forward-looking statements. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Such risks and uncertainties include, but are not limited to, failure to realize the expected benefits from AbbVie's acquisition of Allergan, failure to promptly and effectively integrate Allergan's businesses, challenges to intellectual property, competition from other products, difficulties inherent in the research and development process, adverse litigation or government action, changes to laws and regulations applicable to our industry and the impact of public health outbreaks, epidemics or pandemics, such as COVID-19. Additional information about the economic, competitive, governmental, technological and other factors that may affect AbbVie’s operations is set forth in Item 1A, “Risk Factors,” in AbbVie’s Annual Report on Form 10-K for the year ended December 31, 2021, which has been filed with the Securities and Exchange Commission. AbbVie notes these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. AbbVie undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments, except as required by law. 2022 Form 10-Q | 35 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For a discussion of the company's market risk, see Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" in AbbVie's Annual Report on Form 10-K for the year ended December 31, 2021.