AbbVie Inc. 10-K

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). This commentary should be read in conjunction with the Consolidated Financial Statements and accompanying notes appearing in Item 8, "Financial Statements and Supplementary Data." This section of Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021. 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 wholesalers or through distributors, and depending on the market works through largely centralized national payers system to agree on reimbursement terms. Certain products are co-marketed or co-promoted with other companies. AbbVie operates as a single global business segment and has approximately 50,000 employees. 2022 Financial Results AbbVie's strategy has focused on delivering strong financial results, maximizing the benefits of the Allergan acquisition, 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 2022 included delivering worldwide net revenues of $58.1 billion, operating earnings of $18.1 billion, diluted earnings per share of $6.63 and cash flows from operations of $24.9 billion. Worldwide net revenues increased by 3% on a reported basis and 5% on a constant currency basis, reflecting growth across its immunology, neuroscience and aesthetics portfolios. Diluted earnings per share in 2022 was $6.63 and included the following after-tax costs: (i) $6.4 billion related to the amortization of intangible assets; (ii) $2.8 billion for the change in fair value of contingent consideration liabilities; (iii) $2.0 billion for charges related to litigation matters; (iv) $766 million of acquisition and integration expenses; and (v) $604 million related to intangible asset impairment. These costs were partially offset by an after-tax gain of $126 million related to the divestiture of Pylera and a benefit of $26 million related to certain tax items. 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 in 2020, AbbVie implemented an integration plan designed to reduce costs, integrate and optimize the combined organization. As a result of the successful execution of the integration plan, AbbVie realized $2.5 billion of annual cost synergies in 2022. To achieve these integration objectives, AbbVie incurred total cumulative charges of $2.3 billion through 2022. These costs consisted 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-K | 32 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 COVID-19, AbbVie 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. 2023 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 execute its strategy and 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) 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) generating substantial operating cash flows to support investment in innovative research and development, and return 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. AbbVie expects to achieve its strategic objectives through: • Skyrizi and Rinvoq revenue growth driven by increasing market share and indication expansion. • Advancing our hematologic oncology portfolio by increasing Venclexta market share and new indications, strong commercial execution of new product launches and effectively managing market and competitive challenges impacting Imbruvica. • Continuing investment in the global expansion of aesthetics and increasing market penetration of Botox and Juvederm Collection. • Neuroscience revenue growth driven by Vraylar, Botox Therapeutic, Ubrelvy and Qulipta. • Maximizing AbbVie's existing eye care portfolio. • Effectively managing the impact of Humira biosimilar erosion. • The favorable impact of pipeline products and indications recently approved or currently under regulatory review where approval is expected in 2023. These products are described in greater detail in the section labeled "Research and Development" included as part of this Item 7. 33 | 2022 Form 10-K 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 over 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, approximately 50 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, AbbVie 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 November 2022, AbbVie announced that the European Commission (EC) approved 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. Rinvoq • In January 2022, AbbVie 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 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, a 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). 2022 Form 10-K | 34 • 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. • In November 2022, AbbVie announced that the EMA's Committee for Medical Products for Human Use (CHMP) adopted an opinion following a review of the benefit-risk of medicines within the JAK inhibitor class for the treatment of inflammatory diseases, including Rinvoq. Confirming the recommendation from the Pharmacovigilance Risk Assessment Committee (PRAC), the CHMP did not recommend changes to the current Rinvoq indication statements and recommended updates to dosage and special warnings for all JAK inhibitor products indicated for the treatment of inflammatory diseases. These recommendations will be forwarded to the EC, which is expected to issue a final decision. 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. 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 (BLA) 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. • In October 2022, AbbVie initiated a Phase 3 clinical trial to evaluate epcoritamab in combination with rituximab and lenalidomide compared to rituximab and lenalidomide in patients with relapsed or refractory follicular lymphoma. • In November 2022, AbbVie announced that the FDA has accepted for priority review the BLA for epcoritamab for the treatment of relapsed/refractory large B-cell lymphoma. 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”. 35 | 2022 Form 10-K 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 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 December 2022, AbbVie announced that the FDA approved Vraylar as an adjunctive therapy to antidepressants for the treatment of major depressive disorder in adults. 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. 2022 Form 10-K | 36 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. Percent change At actual currency rates At constant currency rates years ended (dollars in millions) 2022 2021 2020 2022 2021 2022 2021 United States $ 45,713 $ 43,510 $ 34,879 5.1 % 24.7 % 5.1 % 24.7 % International 12,341 12,687 10,925 (2.7) % 16.1 % 5.5 % 12.6 % Net revenues $ 58,054 $ 56,197 $ 45,804 3.3 % 22.7 % 5.1 % 21.9 % 37 | 2022 Form 10-K The following table details AbbVie's worldwide net revenues: Percent change At actual currency rates At constant currency rates years ended December 31 (dollars in millions) 2022 2021 2020 2022 2021 2022 2021 Immunology Humira United States $ 18,619 $ 17,330 $ 16,112 7.4 % 7.6 % 7.4 % 7.6 % International 2,618 3,364 3,720 (22.2) % (9.6) % (14.9) % (12.8) % Total $ 21,237 $ 20,694 $ 19,832 2.6 % 4.3 % 3.8 % 3.7 % Skyrizi United States $ 4,484 $ 2,486 $ 1,385 80.4 % 79.6 % 80.4 % 79.6 % International 681 453 205 50.4 % >100.0 % 67.1 % >100.0 % Total $ 5,165 $ 2,939 $ 1,590 75.7 % 84.9 % 78.3 % 84.0 % Rinvoq United States $ 1,794 $ 1,271 $ 653 41.2 % 94.8 % 41.2 % 94.8 % International 728 380 78 91.4 % >100.0 % >100.0 % >100.0 % Total $ 2,522 $ 1,651 $ 731 52.8 % >100.0 % 58.1 % >100.0 % Hematologic Oncology Imbruvica United States $ 3,426 $ 4,321 $ 4,305 (20.7) % 0.4 % (20.7) % 0.4 % Collaboration revenues 1,142 1,087 1,009 5.1 % 7.7 % 5.1 % 7.7 % Total $ 4,568 $ 5,408 $ 5,314 (15.5) % 1.8 % (15.5) % 1.8 % Venclexta United States $ 1,009 $ 934 $ 804 8.0 % 16.1 % 8.0 % 16.1 % International 1,000 886 533 12.9 % 66.2 % 24.6 % 60.9 % Total $ 2,009 $ 1,820 $ 1,337 10.4 % 36.1 % 16.1 % 34.0 % Aesthetics Botox Cosmetic (a) United States $ 1,654 $ 1,424 $ 687 16.2 % >100.0 % 16.2 % >100.0 % International 961 808 425 18.9 % 90.0 % 28.8 % 83.9 % Total $ 2,615 $ 2,232 $ 1,112 17.2 % >100.0 % 20.8 % 98.4 % Juvederm Collection (a) United States $ 548 $ 658 $ 318 (16.7) % >100.0 % (16.7) % >100.0 % International 880 877 400 0.3 % >100.0 % 8.9 % >100.0 % Total $ 1,428 $ 1,535 $ 718 (7.0) % >100.0 % (2.1) % >100.0 % Other Aesthetics (a) United States $ 1,122 $ 1,268 $ 666 (11.5) % 90.2 % (11.5) % 90.2 % International 168 198 94 (14.9) % >100.0 % (8.3) % >100.0 % Total $ 1,290 $ 1,466 $ 760 (12.0) % 93.0 % (11.1) % 91.9 % Neuroscience Botox Therapeutic (a) United States $ 2,255 $ 2,012 $ 1,155 12.1 % 74.3 % 12.1 % 74.3 % International 464 439 232 5.6 % 89.0 % 15.3 % 78.8 % Total $ 2,719 $ 2,451 $ 1,387 10.9 % 76.7 % 12.6 % 75.0 % Vraylar (a) United States $ 2,037 $ 1,728 $ 951 17.9 % 81.7 % 17.9 % 81.7 % International 1 — — n/m n/m n/m n/m Total $ 2,038 $ 1,728 $ 951 17.9 % 81.7 % 17.9 % 81.7 % Duodopa United States $ 95 $ 102 $ 103 (6.7) % (1.0) % (6.7) % (1.0) % International 363 409 391 (11.3) % 4.6 % (0.8) % (0.1) % Total $ 458 $ 511 $ 494 (10.4) % 3.4 % (2.0) % (0.3) % Ubrelvy (a) United States $ 680 $ 552 $ 125 23.2 % >100.0 % 23.2 % >100.0 % Qulipta United States $ 158 $ — $ — >100.0 % n/m >100.0 % n/m Other Neuroscience (a) United States $ 456 $ 667 $ 528 (30.5) % 26.3 % (30.5) % 26.3 % International 19 18 11 4.8 % 77.4 % 9.0 % 64.7 % Total $ 475 $ 685 $ 539 (29.6) % 27.2 % (29.5) % 27.0 % 2022 Form 10-K | 38 Percent change At actual currency rates At constant currency rates years ended December 31 (dollars in millions) 2022 2021 2020 2022 2021 2022 2021 Eye Care Lumigan/Ganfort (a) United States $ 242 $ 273 $ 165 (11.0) % 64.7 % (11.0) % 64.7 % International 272 306 213 (11.3) % 44.1 % (3.0) % 38.1 % Total $ 514 $ 579 $ 378 (11.2) % 53.1 % (6.8) % 49.7 % Alphagan/Combigan (a) United States $ 202 $ 373 $ 223 (45.8) % 66.5 % (45.8) % 66.5 % International 144 156 103 (7.9) % 52.5 % 2.5 % 50.6 % Total $ 346 $ 529 $ 326 (34.6) % 62.1 % (31.5) % 61.5 % Restasis (a) United States $ 621 $ 1,234 $ 755 (49.6) % 63.3 % (49.6) % 63.3 % International 45 56 32 (20.2) % 75.3 % (13.8) % 80.1 % Total $ 666 $ 1,290 $ 787 (48.3) % 63.8 % (48.0) % 64.0 % Other Eye Care (a) United States $ 538 $ 523 $ 305 2.3 % 72.7 % 2.3 % 72.7 % International 637 646 388 (1.2) % 66.1 % 8.7 % 61.0 % Total $ 1,175 $ 1,169 $ 693 0.4 % 69.0 % 5.9 % 66.1 % Other Key Products Mavyret United States $ 755 $ 754 $ 785 0.2 % (4.0) % 0.2 % (4.0) % International 786 956 1,045 (17.8) % (8.5) % (8.5) % (10.8) % Total $ 1,541 $ 1,710 $ 1,830 (9.9) % (6.5) % (4.7) % (7.8) % Creon United States $ 1,278 $ 1,191 $ 1,114 7.3 % 6.9 % 7.3 % 6.9 % Linzess/Constella (a) United States $ 1,003 $ 1,006 $ 649 (0.4) % 55.1 % (0.4) % 55.1 % International 32 32 18 0.3 % 77.3 % 7.6 % 66.4 % Total $ 1,035 $ 1,038 $ 667 (0.3) % 55.7 % (0.1) % 55.4 % All other $ 4,137 $ 5,019 $ 5,119 (17.6) % (2.0) % (16.3) % (2.8) % Total net revenues $ 58,054 $ 56,197 $ 45,804 3.3 % 22.7 % 5.1 % 21.9 % n/m – Not meaningful (a) Net revenues include Allergan product revenues after the acquisition closing date of May 8, 2020. The following discussion and analysis of AbbVie's net revenues by product is presented on a constant currency basis. Global Humira sales increased 4% in 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 7% in 2022 primarily driven by market growth across all indications and favorable pricing. This increase was partially offset by a lower market share following the corresponding market share gains of Skyrizi and Rinvoq. Internationally, Humira revenues decreased 15% in 2022 primarily driven by direct biosimilar competition. On January 31, 2023, Humira lost exclusivity in the United States. Following this loss of exclusivity, AbbVie expects direct biosimilar competition and Humira net revenues to decline in the United States. AbbVie continues to pursue strategies to maintain broad formulary access of Humira and manage the impact of biosimilar erosion. Net revenues for Skyrizi increased 78% in 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 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 58% in 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 were also favorably impacted by recent regulatory approvals and expansion of Rinvoq for the treatment of psoriatic arthritis, atopic dermatitis, ankylosing spondylitis, ulcerative colitis and non-radiographic axial spondyloarthritis. 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 16% in 2022 as a result of decreased market demand and lower market share in the United States. The decrease in net revenues was also partially offset by increased collaboration revenues. Net revenues for Venclexta increased 16% in 2022 primarily due to continued expansion of Venclexta for the treatment of patients with CLL and acute myeloid leukemia. 39 | 2022 Form 10-K Net revenues for Botox Cosmetic increased 21% in 2022 due to sustained consumer demand in the United States, which was moderated in the second half of the year by economic pressures impacting consumer discretionary spending, and increased investment in key international markets. Net revenues for Juvederm Collection decreased 2% in 2022 due to economic pressures impacting consumer discretionary spending and increased pricing promotions to support the market. International net revenues increased by 9% due to increased investment in key markets, partially offset by the suspension of aesthetic operations in Russia and the impact of COVID-19 in China. Net revenues for Botox Therapeutic increased 13% in 2022 due to market growth. Net revenues for Vraylar increased 18% in 2022 due to higher market share and market growth. Net revenues for Ubrelvy increased 23% in 2022 primarily due to increased market share uptake since launch, partially offset by unfavorable pricing. Net revenues for Qulipta increased greater than 100% in 2022 due to strong volume and market share uptake since launch for the preventative treatment of episodic migraine in adults. Net revenues for Mavyret decreased 5% in 2022 due to the continued disruption of global hepatitis C virus markets due to the COVID-19 pandemic. Gross Margin Percent change years ended December 31 (dollars in millions) 2022 2021 2020 2022 2021 Gross margin $ 40,640 $ 38,751 $ 30,417 5 % 27 % as a percent of net revenues 70 % 69 % 66 % Gross margin as a percentage of net revenues in 2022 increased compared to 2021. Gross margin percentage for 2022 was favorably impacted by changes in product mix, partially offset by an intangible asset impairment charge of $770 million. Selling, General and Administrative Percent change years ended December 31 (dollars in millions) 2022 2021 2020 2022 2021 Selling, general and administrative $ 15,260 $ 12,349 $ 11,299 24 % 9 % as a percent of net revenues 26 % 22 % 25 % Selling, general and administrative (SG&A) expenses as a percentage of net revenues increased in 2022 compared to the prior year primarily due to the unfavorable impact of litigation reserve charges of $2.5 billion, partially offset by leverage from revenue growth and increased synergies realized. Research and Development and Acquired IPR&D and Milestones Percent change years ended December 31 (dollars in millions) 2022 2021 2020 2022 2021 Research and development $ 6,510 $ 6,922 $ 6,379 (6) % 9 % as a percent of net revenues 11 % 12 % 14 % Acquired IPR&D and milestones $ 697 $ 1,124 $ 1,376 (38) % (18) % R&D expenses as a percentage of net revenues decreased in 2022 compared to 2021. R&D expense percentage for 2022 was favorably impacted by increased scale of the combined company and synergies realized, the purchase of priority review vouchers from third parties in the prior year as well as lower integration costs related to the acquisition of Allergan. 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 2022 included a charge of $130 million related to acquiring Syndesi Therapeutics SA, charges related to other upfront payments totaling $315 million and development milestones of $252 million. Acquired IPR&D and milestones expense in 2021 included a charge of $400 million related to exercising the company's exclusive right to acquire TeneoOne, a charge of $370 million related to a collaboration 2022 Form 10-K | 40 agreement with REGENXBIO Inc, charges related to other upfront payments totaling $192 million and development milestones of $162 million. See Note 5 to the Consolidated Financial Statements for additional information. Other Operating Expense, Net Other operating expense, net in 2022 included a one-time charge of $229 million related to an asset divested as part of the Allergan acquisition, partially offset by $172 million of income related to the sale of worldwide commercial rights of a mature brand Pylera. Other operating expense, net in 2021 included a $500 million charge related to the extension of the Calico Life Sciences LLC collaboration. See Note 5 to the Consolidated Financial Statements for additional information. Other Non-Operating Expenses years ended December 31 (in millions) 2022 2021 2020 Interest expense $ 2,230 $ 2,423 $ 2,454 Interest income (186) (39) (174) Interest expense, net $ 2,044 $ 2,384 $ 2,280 Net foreign exchange loss $ 148 $ 51 $ 71 Other expense, net 2,448 2,500 5,614 Interest expense in 2022 decreased compared to 2021 primarily due to a lower average debt balance as a result of deleveraging, partially offset by the impact of higher interest rates. Interest income in 2022 increased compared to 2021 primarily due to the impact of higher interest rates. Other expense, net included charges related to changes in fair value of contingent consideration liabilities of $2.8 billion in 2022 and $2.7 billion in 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. In 2022, the change in fair value reflected higher estimated Skyrizi sales driven by stronger market share uptake and the passage of time, partially offset by higher discount rates. In 2021, the change in fair value reflected higher estimated Skyrizi sales driven by stronger market share uptake, favorable clinical trial results and the passage of time, partially offset by higher discount rates. Income Tax Expense The effective income tax rate was 12% in 2022, 11% in 2021 and negative 36% in 2020. The effective income tax rates 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 changes in fair value of contingent consideration. 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 tax credits relate to 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. In 2022, Puerto Rico enacted Act 52-2002 (the “Puerto Rico Act”) allowing for a transition from a Puerto Rico excise tax levied on gross inventory purchases to an income-based tax beginning in 2023. The company completed the transition requirements of the Puerto Rico Act in 2022, resulting in the remeasurement of certain deferred tax assets and liabilities based on income tax rates at which they are expected to reverse in the future. The net tax benefit from the remeasurement of deferred taxes related to the Puerto Rico Act was $323 million. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES years ended December 31 (in millions) 2022 2021 2020 Cash flows provided by (used in) Operating activities $ 24,943 $ 22,777 $ 17,588 Investing activities (623) (2,344) (37,557) Financing activities (24,803) (19,039) (11,501) Operating cash flows in 2022 increased from 2021 primarily due to improved results of operations resulting from revenue growth and lower income tax payments, partially offset by the timing of working capital. Operating cash flows also reflected AbbVie’s contributions to its defined benefit plans of $357 million in 2022 and $376 million in 2021. 41 | 2022 Form 10-K Investing cash flows in 2022 included payments made for capital expenditures of $695 million, other acquisitions and investments of $539 million, $255 million cash consideration paid to acquire DJS Antibodies Ltd offset by cash acquired and net sales and maturities of investments securities totaling $92 million. Investment cash flows in 2021 included $535 million cash consideration paid to acquire Soliton, Inc. offset by cash acquired, payments made for other acquisitions and investments of $1.4 billion, capital expenditures of $787 million and net purchases of investment securities totaling $21 million. Financing cash flows in 2022 included repayment of $3.1 billion aggregate principal amount of the company's 2.9% senior notes, $3.0 billion aggregate principal amount of the company's 2.3% senior notes, $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, $1.0 billion aggregate principal amount of the company’s 3.2% senior notes and $750 million aggregate principal amount of the company's floating rate senior notes. Additionally financing cash flows included repayment of a $2.0 billion floating 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. Subsequent to December 31, 2022, the company repaid a $1.0 billion floating rate three-year term loan that was scheduled to mature in May 2023. Financing cash flows in 2021 included early repayments of $1.8 billion aggregate principal amount of the company's 2.3% principal notes, $1.2 billion aggregate principal amount of the company's 5.0% senior notes and €750 million aggregate principal amount of the company's 0.5% senior Euro notes. Financing cash flows also included repayment of $750 million aggregate principal amount of floating rate senior notes, $1.3 billion aggregate principal amount of 3.375% senior notes, $1.8 billion aggregate principal amount of 2.15% senior notes and $750 million aggregate principal amount of floating rate senior notes at maturity. Additionally, financing cash flows 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 $10.0 billion in 2022 and $9.3 billion in 2021. The increase in cash dividend payments was primarily driven by an increase of the dividend rate. 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 8 million shares for $1.1 billion in 2022 and 6 million shares for $670 million in 2021. AbbVie's remaining stock repurchase authorization was $1.4 billion as of December 31, 2022. On February 16, 2023, AbbVie's board of directors authorized a $5.0 billion increase to the existing stock repurchase authorization. No commercial paper borrowings were issued during 2022 or 2021 and there were no commercial paper borrowings outstanding as of December 31, 2022 or December 31, 2021. AbbVie may issue additional commercial paper or retire commercial paper to meet liquidity requirements as needed. 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 December 31, 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 December 31, 2022 and December 31, 2021. 2022 Form 10-K | 42 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 2022, Moody’s Investors Service upgraded AbbVie's senior unsecured long-term credit rating to Baa1 from Baa2, affirmed its Prime-2 short-term credit rating and revised its outlook to positive from stable. In addition, Standard and Poor's Global Ratings revised its outlook to positive from stable and affirmed its long-term issuer credit rating of BBB+. 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. Future Cash Requirements Contractual Obligations The following table summarizes AbbVie's estimated material contractual obligations as of December 31, 2022: (in millions) Total Current Long-term Long-term debt, including current portion $ 63,128 $ 4,132 $ 58,996 Interest on long-term debt (a) 28,445 2,363 26,082 Contingent consideration liabilities (b) 16,384 1,469 14,915 (a) Includes estimated future interest payments on long-term debt. Interest payments on debt are calculated for future periods using forecasted interest rates in effect at the end of 2022. 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, 2022. See Note 10 to the Consolidated Financial Statements for additional information regarding the company's debt instruments and Note 11 for additional information on the interest rate swap agreements outstanding at December 31, 2022. (b) Includes contingent consideration liabilities 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 Note 11 to the Consolidated Financial Statements for additional information regarding these liabilities. AbbVie enters into certain unconditional purchase obligations and other commitments in the normal course of business. There have been no changes to these commitments that would have a material impact on the company’s ability to meet either short-term or long-term future cash requirements. Income Taxes Future income tax cash requirements include 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 liability was $3.4 billion as of December 31, 2022 and is payable in four future annual installments. Liabilities for unrecognized tax benefits totaled $6.5 billion as of December 31, 2022. It is not possible to reliably estimate the timing of the future cash outflows related to these liabilities. See Note 14 to the Consolidated Financial Statements for additional information on these unrecognized tax benefits. Quarterly Cash Dividend On October 28, 2022, AbbVie announced that its board of directors declared an increase in the 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, 43 | 2022 Form 10-K 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. Collaborations, Licensing and Other Arrangements AbbVie enters into collaborative, licensing and other arrangements with third parties that may require future milestone payments to third parties contingent upon the achievement of certain development, regulatory, or commercial milestones. Individually, these arrangements are insignificant in any one annual reporting period. However, if milestones for multiple products covered by these arrangements 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. 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. Provisions for rebates and chargebacks totaled $41.4 billion in 2022, $33.9 billion in 2021 and $27.0 billion in 2020. 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. 2022 Form 10-K | 44 The following table is an analysis of the three largest accruals for rebates and chargebacks, which comprise approximately 94% of the total consolidated rebate and chargebacks recorded as reductions to revenues in 2022. Remaining rebate provisions charged against gross revenues are not significant in the determination of operating earnings. (in millions) Medicaid and Medicare Rebates Managed Care Rebates Wholesaler Chargebacks Balance at December 31, 2019 $ 1,765 $ 1,936 $ 686 Additions (a) 1,266 649 71 Provisions 6,715 8,656 8,677 Payments (6,801) (8,334) (8,693) Balance at December 31, 2020 2,945 2,907 741 Provisions 9,622 11,306 11,286 Payments (8,751) (11,116) (11,125) Balance at December 31, 2021 3,816 3,097 902 Provisions 11,713 14,119 13,070 Payments (10,331) (12,974) (12,829) Balance at December 31, 2022 $ 5,198 $ 4,242 $ 1,143 (a) Represents rebate accruals and chargeback allowances assumed in the Allergan acquisition. Other Allowances Other allowances include cash discounts, product returns, sales incentives, and other adjustments, which are accounted for as variable consideration and are recorded as a reduction to revenue in the same period the related product is sold. Reserves for cash discounts and sales incentives are 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. Cash discounts totaled $1.8 billion in 2022, $1.6 billion in 2021 and $1.2 billion in 2020. Allowances other than cash discounts are not significant. 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 12 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. AbbVie reflects the plans' specific cash flows and applies 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. 45 | 2022 Form 10-K 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, 2022. A 50 basis point change in the assumed discount rate would have had the following effects on AbbVie's calculation of net periodic benefit costs in 2023 and projected benefit obligations as of December 31, 2022: 50 basis point (in millions) (brackets denote a reduction) Increase Decrease Defined benefit plans Net periodic benefit cost $ (34) $ 57 Projected benefit obligation (612) 687 Other post-employment plans Net periodic benefit cost $ (5) $ 6 Projected benefit obligation (44) 49 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, 2022 and will be used in the calculation of net periodic benefit cost in 2023. 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 2023 by $98 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, 2022 and will be used in the calculation of net periodic benefit cost in 2023. Income Taxes AbbVie accounts for income taxes under the asset and liability method. Provisions for federal, state and foreign income taxes are calculated on reported pre-tax 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 15 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 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 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. In-process research and development (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 2022 Form 10-K | 46 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 additional 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 projected cash flows and the estimated fair value of the related intangible assets. Future changes to these estimates and assumptions could have a material impact on 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. Contingent consideration liabilities are revalued to fair value at each subsequent reporting date until the related contingency is resolved. The potential contingent consideration payments are estimated by applying a probability-weighted expected payment model for contingent milestone payments and a Monte Carlo simulation model for contingent royalty payments, which are then discounted to present value. Changes to the fair value of the contingent consideration liabilities can result from changes to one or a number of inputs, including discount rates, the probabilities of achieving the milestones, the time required to achieve the milestones and estimated future sales. Significant judgment is employed in determining the appropriateness of certain of these inputs, which are disclosed in Note 11 to the Consolidated Financial Statements. 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. 47 | 2022 Form 10-K