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, 2023 and December 31, 2022 and the results of operations for the three and nine months ended September 30, 2023 and 2022. 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 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. 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. Financial Results The company's financial performance for the nine months ended September 30, 2023 included delivering worldwide net revenues of $40.0 billion, operating earnings of $9.6 billion, diluted earnings per share of $2.26 and cash flows from operations of $18.1 billion. Worldwide net revenues decreased 7% on a reported basis and 6% on a constant currency basis. Diluted earnings per share was $2.26 for the nine months ended September 30, 2023 and included the following after-tax costs: (i) $5.1 billion related to the amortization of intangible assets; (ii) $3.3 billion for the change in fair value of contingent consideration liabilities; and (iii) $2.3 billion related to intangible asset impairment. Additionally, financial results reflected continued funding to support all stages of AbbVie’s pipeline assets and continued investment in AbbVie’s on-market brands. 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 90 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, over 50 are in mid- and late-stage development. 2023 Form 10-Q | 25 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 Rinvoq • In March 2023, the European Commission (EC) issued their final decision on the European Medicines Agency’s (EMA) review of the benefit-risk of medicines in the JAK inhibitor class for the treatment of inflammatory diseases, including Rinvoq. Confirming the Committee for Medicinal Products for Human Use (CHMP) opinion, the previously approved Rinvoq indication statements were not changed and the dosage and special warnings for all JAK inhibitors were updated to include additional information about the risks associated with JAK inhibitors. • In April 2023, AbbVie announced that the EC approved Rinvoq for the treatment of adults with moderately to severely active Crohn’s disease who have had an inadequate response, lost response or were intolerant to either conventional therapy or a biologic agent. • In May 2023, AbbVie announced that the U.S. Food and Drug Administration (FDA) approved Rinvoq for the treatment of adults with moderately to severely active Crohn’s disease who have had an inadequate response or intolerance to one or more tumor necrosis factor (TNF) blockers. • In July 2023, AbbVie initiated its Phase 3 Step-Up HS study to evaluate efficacy and safety of Rinvoq in adults and adolescents with moderate to severe hidradenitis suppurativa (HS) who have failed anti-TNF therapy and/or one approved non-anti-TNF inhibitor therapy for HS. • In August 2023, AbbVie initiated its Phase 3 Select-SLE study to evaluate Rinvoq in moderate to severe systemic Lupus Erythematosus. • In October 2023, AbbVie announced that its Phase 2b study evaluating Rinvoq in adults with non-segmental Vitiligo met the primary endpoint. Based on these data, AbbVie is advancing the program to Phase 3. Skyrizi • In March 2023, AbbVie announced positive top-line results from its Phase 3 induction study, INSPIRE, for Skyrizi in patients with moderately to severely active ulcerative colitis met the primary and all secondary endpoints. • In June 2023, AbbVie announced positive top-line results from its Phase 3 maintenance study, COMMAND, for Skyrizi in patients with moderately to severely active ulcerative colitis met the primary and key secondary endpoints. • In July 2023, AbbVie announced results from the head-to-head Phase 4 IMMpulse study that evaluated the efficacy and safety of Skyrizi compared to Otezla among adult patients with moderate plaque psoriasis (PsO) eligible for systemic therapy. In the study, significantly more patients achieved co-primary endpoints with Skyrizi versus Otezla. Skyrizi was well-tolerated with no new safety signals identified. • In August 2023, AbbVie submitted regulatory applications to FDA and EMA for Skyrizi for the treatment of adults with moderately to severely active ulcerative colitis. • In September 2023, AbbVie announced results from the head-to-head Phase 3 SEQUENCE study that evaluated the efficacy and safety of Skyrizi compared to Stelara among adult patients with moderately to severely active Crohn’s disease. In the study, Skyrizi met both primary endpoints at week 24 and achieved superiority of endoscopic remission at week 48 versus Stelara. In addition, all secondary endpoints achieved statistical significance for superiority versus Stelara. Skyrizi was well-tolerated with no new safety signals identified. Oncology Epkinly • In March 2023, AbbVie initiated a Phase 3 clinical trial to evaluate epcoritamab in combination with R-CHOP compared to R-CHOP in patients with newly diagnosed diffuse large B-cell lymphoma (DLBCL). 2023 Form 10-Q | 26 • In May 2023, AbbVie announced that the FDA approved Epkinly (epcoritamab) as the first and only bispecific antibody to treat adult patients with relapsed or refractory (R/R) DLBCL. • In September 2023, AbbVie announced that the EC approved Tepkinly (epcoritamab) for adults with R/R DLBCL after two or more lines of systemic therapy. Imbruvica • In May 2023, AbbVie voluntarily withdrew, in the U.S., accelerated Imbruvica approvals for patients with mantle cell lymphoma (MCL) who have received at least one prior therapy and with marginal zone lymphoma (MZL) who require systemic therapy and have received at least one prior anti-CD20-based therapy. This voluntary action is due to requirements rel ated to the accelerated approval status granted by the FDA for MCL and MZL. Other approved indications for Imbruvica in the U.S. are not affected. Navitoclax • In July 2023, AbbVie announced top-line results from the Phase 3 TRANSFORM-1 clinical trial evaluating the safety and efficacy of navitoclax, a BCL-XL/BCL-2 inhibitor, in combination with ruxolitinib in adult patients with primary or secondary myelofibrosis (MF). The combination of navitoclax and ruxolitinib met the study’s primary endpoint, demonstrating statistically significant improvement in the number of patients who achieved Spleen Volume Reduction of at least 35 percent at week 24 compared to treatment with ruxolitinib and a placebo. The study did not meet the first ranked secondary endpoint of improvement in patients’ Total Symptom Score from baseline to week 24. The company plans to wait for additional follow up data on the primary, secondary and other endpoints, expected in the fourth quarter of this year, before engaging with regulatory agencies regarding potential next steps. Venclexta • In September 2023, AbbVie announced top-line results from the Phase 3 CANOVA study evaluating the safety and efficacy of Venclexta plus dexamethasone (VenDex) for patients with t(11;14)-positive relapsed or refractory (R/R) multiple myeloma who have received two or more prior treatments. The data did not demonstrate that the treatment combination significantly improved progression-free survival (PFS), the primary endpoint of the trial. Patients receiving VenDex showed improvement in median PFS with the combination of study comparator pomalidomide and dexamethasone (PomDex); however, the results did not reach statistical significance. The company plans to discuss the data with health authorities in the near future to further understand the potential of Venclexta as a biomarker-driven therapy in multiple myeloma. Aesthetics Juvederm Collection • In May 2023, AbbVie announced that the FDA approved Skinvive by Juvederm to improve skin smoothness of the cheeks in adults over the age of 21. Botox Cosmetic • In September 2023, AbbVie announced positive top-line results from the second of three Phase 3 clinical studies evaluating Botox Cosmetic for the treatment of moderate to severe platysma prominence associated with platysma muscle activity. All primary and secondary endpoints were met in the second Phase 3 study and results were consistent with findings from the first Phase 3 study. A Phase 3 open-label extension study is ongoing, with results expected later this year. The company plans to include data from the full Phase 3 study program as part of an upcoming FDA regulatory submission expected near the end of the year. BoNT/E • In October 2023, AbbVie announced positive top-line results from two pivotal Phase 3 clinical studies evaluating trenibotulinumtoxinE ( BoNT/E) for the treatment of moderate to severe glabellar lines. All primary and secondary endpoints were met for both Phase 3 studies and results support BoNT/E as a novel botulinum neurotoxin serotype E characterized by a rapid onset of action as early as 8 hours after administration and short duration of effect within 2-3 weeks. 2023 Form 10-Q | 27 Neuroscience ABBV-951 • In March 2023, AbbVie announced that the FDA issued a Complete Response Letter (CRL) for the New Drug Application (NDA) for ABBV-951 (foscarbidopa/foslevodopa) for the treatment of motor fluctuations in adults with advanced Parkinson’s disease. In its letter, the FDA requested additional information about the device (pump) as part of the NDA review. The CRL did not request that AbbVie conduct additional efficacy and safety trials related to the drug. Qulipta • In April 2023, A bbVie announced that the FDA approved Qulipta for the preventive treatment of chronic migraine in adults. • In August 2023, AbbVie announced that the EC approved Aquipta (Qulipta) for the preventive treatment of migraine in adults who have four or more migraine days per month. 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, 2022. 2023 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) 2023 2022 2023 2022 United States $ 10,852 $ 11,763 (7.7) % (7.7) % $ 30,773 $ 33,521 (8.2) % (8.2) % International 3,075 3,049 0.8 % 1.4 % 9,244 9,412 (1.8) % 1.6 % Net revenues $ 13,927 $ 14,812 (6.0) % (5.8) % $ 40,017 $ 42,933 (6.8) % (6.0) % 2023 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) 2023 2022 2023 2022 Immunology Humira United States $ 3,020 $ 4,956 (39.1) % (39.1) % $ 9,420 $ 13,613 (30.8) % (30.8) % International 527 603 (12.6) % (12.2) % 1,680 2,045 (17.9) % (14.8) % Total $ 3,547 $ 5,559 (36.2) % (36.2) % $ 11,100 $ 15,658 (29.1) % (28.7) % Skyrizi United States $ 1,875 $ 1,221 53.5 % 53.5 % $ 4,648 $ 3,081 50.9 % 50.9 % International 251 176 42.5 % 40.7 % 721 508 41.8 % 45.5 % Total $ 2,126 $ 1,397 52.1 % 51.9 % $ 5,369 $ 3,589 49.6 % 50.1 % Rinvoq United States $ 801 $ 505 59.0 % 59.0 % $ 1,895 $ 1,228 54.4 % 54.4 % International 309 190 61.8 % 61.2 % 819 524 56.1 % 61.0 % Total $ 1,110 $ 695 59.8 % 59.6 % $ 2,714 $ 1,752 54.9 % 56.4 % Oncology Imbruvica United States $ 678 $ 849 (20.2) % (20.2) % $ 1,982 $ 2,585 (23.4) % (23.4) % Collaboration revenues 230 286 (19.6) % (19.6) % 711 868 (18.0) % (18.0) % Total $ 908 $ 1,135 (20.0) % (20.0) % $ 2,693 $ 3,453 (22.0) % (22.0) % Venclexta United States $ 281 $ 259 8.1 % 8.1 % $ 811 $ 740 9.4 % 9.4 % International 309 256 21.1 % 19.9 % 888 753 18.1 % 21.4 % Total $ 590 $ 515 14.6 % 14.0 % $ 1,699 $ 1,493 13.8 % 15.5 % Epkinly Collaboration revenues $ 14 $ — n/m n/m $ 14 $ — n/m n/m Aesthetics Botox Cosmetic United States $ 388 $ 370 5.0 % 5.0 % $ 1,217 $ 1,232 (1.1) % (1.1) % International 232 267 (13.3) % (10.9) % 747 741 0.7 % 6.0 % Total $ 620 $ 637 (2.7) % (1.7) % $ 1,964 $ 1,973 (0.4) % 1.6 % Juvederm Collection United States $ 116 $ 125 (6.4) % (6.4) % $ 363 $ 420 (13.3) % (13.3) % International 205 227 (9.8) % (8.7) % 681 686 (0.8) % 4.5 % Total $ 321 $ 352 (8.6) % (7.9) % $ 1,044 $ 1,106 (5.6) % (2.3) % Other Aesthetics United States $ 255 $ 265 (4.0) % (4.0) % $ 785 $ 837 (6.3) % (6.3) % International 43 47 (8.1) % (7.0) % 130 130 0.5 % 5.4 % Total $ 298 $ 312 (4.6) % (4.4) % $ 915 $ 967 (5.4) % (4.7) % Neuroscience Botox Therapeutic United States $ 626 $ 584 7.2 % 7.2 % $ 1,827 $ 1,641 11.3 % 11.3 % International 122 115 6.5 % 8.6 % 388 350 10.9 % 16.6 % Total $ 748 $ 699 7.1 % 7.4 % $ 2,215 $ 1,991 11.3 % 12.3 % Vraylar United States $ 750 $ 554 35.2 % 35.2 % $ 1,967 $ 1,473 33.6 % 33.6 % International 1 — >100.0 % >100.0 % 3 — >100.0 % >100.0 % Total $ 751 $ 554 35.4 % 35.4 % $ 1,970 $ 1,473 33.7 % 33.7 % Duodopa United States $ 25 $ 22 10.6 % 10.6 % $ 74 $ 72 2.8 % 2.8 % International 93 88 6.6 % 2.3 % 279 279 — % 1.1 % Total $ 118 $ 110 7.4 % 4.0 % $ 353 $ 351 0.6 % 1.5 % Ubrelvy United States $ 230 $ 160 43.7 % 43.7 % $ 574 $ 483 18.8 % 18.8 % International 3 — >100.0 % >100.0 % 7 — >100.0 % >100.0 % Total $ 233 $ 160 45.6 % 45.6 % $ 581 $ 483 20.3 % 20.3 % Qulipta United States $ 131 $ 62 >100.0 % >100.0 % $ 292 $ 106 >100.0 % >100.0 % International 1 — n/m n/m 2 — n/m n/m Total $ 132 $ 62 >100.0 % >100.0 % $ 294 $ 106 >100.0 % >100.0 % 2023 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) 2023 2022 2023 2022 Other Neuroscience United States $ 55 $ 82 (31.9) % (31.9) % $ 195 $ 400 (51.3) % (51.3) % International 6 5 6.2 % 9.6 % 15 14 6.4 % 11.8 % Total $ 61 $ 87 (29.9) % (29.7) % $ 210 $ 414 (49.3) % (49.1) % Eye Care Ozurdex United States $ 34 $ 35 (4.5) % (4.5) % $ 107 $ 104 2.6 % 2.6 % International 86 71 22.3 % 21.7 % 247 219 13.1 % 16.1 % Total $ 120 $ 106 13.2 % 12.8 % $ 354 $ 323 9.7 % 11.7 % Lumigan/Ganfort United States $ 28 $ 59 (53.0) % (53.0) % $ 142 $ 186 (23.6) % (23.6) % International 63 62 2.7 % 1.4 % 198 205 (3.1) % (0.9) % Total $ 91 $ 121 (24.8) % (25.5) % $ 340 $ 391 (12.9) % (11.8) % Alphagan/Combigan United States $ 30 $ 37 (16.0) % (16.0) % $ 90 $ 161 (43.5) % (43.5) % International 40 36 10.1 % 17.3 % 116 111 4.2 % 10.6 % Total $ 70 $ 73 (3.1) % 0.4 % $ 206 $ 272 (24.0) % (21.4) % Restasis United States $ 104 $ 132 (20.7) % (20.7) % $ 265 $ 518 (48.8) % (48.8) % International 13 10 35.0 % 42.1 % 43 38 14.2 % 20.1 % Total $ 117 $ 142 (17.0) % (16.5) % $ 308 $ 556 (44.5) % (44.1) % Other Eye Care United States $ 114 $ 99 16.3 % 16.3 % $ 334 $ 296 13.0 % 13.0 % International 93 82 11.9 % 12.0 % 288 273 5.1 % 8.6 % Total $ 207 $ 181 14.2 % 14.2 % $ 622 $ 569 9.2 % 10.9 % Other Key Products Mavyret United States $ 167 $ 190 (12.3) % (12.3) % $ 531 $ 562 (5.6) % (5.6) % International 203 193 5.2 % 5.8 % 590 599 (1.5) % 1.8 % Total $ 370 $ 383 (3.5) % (3.2) % $ 1,121 $ 1,161 (3.5) % (1.8) % Creon United States $ 305 $ 336 (9.1) % (9.1) % $ 892 $ 941 (5.2) % (5.2) % Linzess/Constella United States $ 279 $ 262 6.8 % 6.8 % $ 799 $ 742 7.7 % 7.7 % International 9 9 (11.1) % (13.0) % 26 24 7.0 % 9.3 % Total $ 288 $ 271 6.2 % 6.1 % $ 825 $ 766 7.7 % 7.8 % All other $ 782 $ 925 (15.5) % (14.1) % $ 2,214 $ 3,145 (29.6) % (28.5) % Total net revenues $ 13,927 $ 14,812 (6.0) % (5.8) % $ 40,017 $ 42,933 (6.8) % (6.0) % 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 decreased 36% for the three months and 29% for the nine months ended September 30, 2023. In the United States, Humira sales decreased 39% for the three months and 31% for the nine months ended September 30, 2023 primarily driven by direct biosimilar competition following the loss of exclusivity on January 31, 2023. Internationally, Humira revenues decreased 12% for the three months and 15% for the nine months ended September 30, 2023 primarily driven by the continued impact of direct biosimilar competition. AbbVie continues to pursue strategies to maintain broad formulary access of Humira and manage the impact of biosimilar erosion. Net revenues for Skyrizi increased 52% for the three months and 50% for the nine months ended September 30, 2023 primarily driven by continued strong volume and market share uptake as well as market growth across all indications, partially offset by unfavorable pricing. Net revenues for Rinvoq increased 60% for the three months and 56% for the nine months ended September 30, 2023 primarily driven by continued strong volume and market share uptake as well as market growth across all indications, partially offset by unfavorable pricing. 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 20% for the three months and 22% for the nine months ended September 30, 2023 primarily driven by decreased demand and lower market share in the United States as well as decreased collaboration revenues. 2023 Form 10-Q | 31 Net revenues for Venclexta increased 14% for the three months and 15% for the nine months ended September 30, 2023. In the United States, net revenues increased 8% for the three months and 9% for the nine months ended September 30, 2023 primarily driven by market growth across all indications and favorable pricing. Internationally, net revenues increased 20% for the three months and 21% for the nine months ended September 30, 2023 primarily driven by market growth across all indications as well as continued market share uptake. Net revenues for Botox Cosmetic decreased 2% for the three months and increased 2% for the nine months ended September 30, 2023. In the United States, Botox Cosmetic net revenues increased 5% for the three months ended September 30, 2023 primarily driven by increased consumer demand due to a recovery in the toxin market. Internationally, Botox Cosmetic net revenues decreased 11% for the three months ended September 30, 2023 primarily driven by decreased consumer demand due to economic weakening and the timing of shipments in the prior year. International net revenues increased 6% for the nine months ended September 30, 2023 primarily driven by recovery from COVID-19 in China, partially offset by economic weakening during the third quarter and the timing of shipments in the prior year. Net revenues for Juvederm Collection decreased 8% for the three months ended September 30, 2023 and 2% for the nine months ended September 30, 2023. In the United States, Juvederm Collection net revenues decreased 6% for the three months and 13% for the nine months ended September 30, 2023 primarily driven by decreased consumer demand due to economic pressures, partially offset by new product launches. Internationally, Juvederm Collection net revenues decreased 9% for the three months ended September 30, 2023 primarily driven by decreased consumer demand due to economic weakening and the timing of shipments in the prior year. International net revenues increased 5% for the nine months ended September 30, 2023 primarily driven by recovery from COVID-19 in China, partially offset by economic weakening in the third quarter and the timing of shipments in the prior year. Net revenues for Botox Therapeutic increased 7% for the three months and 12% for the nine months ended September 30, 2023 primarily driven by market growth as well as market share uptake. Net revenues for Vraylar increased 35% for the three months and 34% for the nine months ended September 30, 2023 primarily driven by continued volume and market share uptake as well as market growth. Net revenues for the nine months ended September 30, 2023 were also favorably impacted by the regulatory approval of Vraylar as an adjunctive therapy to antidepressants for the treatment of major depressive disorder in adults. Net revenues for Ubrelvy increased 46% for the three months and 20% for the nine months ended September 30, 2023 primarily driven by continued volume and market share uptake as well as market growth. Net revenues for Qulipta increased greater than 100% for the three and nine months ended September 30, 2023 primarily driven by continued strong volume and market share uptake as well as market growth. Net revenues for the three months ended September 30, 2023 were also favorably impacted by the recent regulatory approval of Qulipta for the preventative treatment of chronic migraine in adults. Gross Margin Three months ended September 30, Nine months ended September 30, (dollars in millions) 2023 2022 % change 2023 2022 % change Gross margin $ 7,442 $ 9,790 (24) % $ 25,306 $ 29,689 (15) % as a % of net revenues 53 % 66 % 63 % 69 % Gross margin as a percentage of net revenues decreased for the three and nine months ended September 30, 2023 compared to the prior year. Gross margin percentage for the three and nine months ended September 30, 2023 was unfavorably impacted by an intangible asset impairment charge of $2.1 billion related to Imbruvica, higher amortization of intangibles and changes in product mix, partially offset by the favorable impact of tax law changes in Puerto Rico. Selling, General and Administrative Three months ended September 30, Nine months ended September 30, (dollars in millions) 2023 2022 % change 2023 2022 % change Selling, general and administrative $ 3,372 $ 3,304 2 % $ 9,679 $ 11,843 (18) % as a % of net revenues 24 % 22 % 24 % 28 % SG&A expenses as a percentage of net revenues increased for the three months and decreased for the nine months ended September 30, 2023 compared to the prior year. SG&A expense percentage for the three months ended September 30, 2023 was 2023 Form 10-Q | 32 unfavorably impacted by increased brand investments and lower net revenues primarily driven by the Humira loss of exclusivity in the United States. SG&A expense percentage for the nine months ended September 30, 2023 was favorably impacted by lower litigation reserve charges, partially offset by lower net revenues primarily driven by the Humira loss of exclusivity in the United States. Litigation reserve charges were $2.5 billion for the nine months ended September 30, 2022. Research and Development Three months ended September 30, Nine months ended September 30, (dollars in millions) 2023 2022 % change 2023 2022 % change Research and development $ 1,723 $ 1,614 7 % $ 5,748 $ 4,720 22 % as a % of net revenues 12 % 11 % 14 % 11 % Research and development (R&D) expenses as a percentage of net revenues increased for the three and nine months ended September 30, 2023 compared to the prior year. R&D expense percentage for the three and nine months ended September 30, 2023 was unfavorably impacted by increased funding to support all stages of the company’s pipeline assets and lower net revenues primarily driven by the Humira loss of exclusivity in the United States. R&D expense percentage for the nine months ended September 30, 2023 was also unfavorably impacted by an intangible asset impairment charge of $630 million. Acquired IPR&D and Milestones Three months ended September 30, Nine months ended September 30, (dollars in millions) 2023 2022 2023 2022 Upfront charges $ 44 $ 40 $ 396 $ 392 Development milestones 22 — 100 62 Acquired IPR&D and milestones $ 66 $ 40 $ 496 $ 454 Acquired IPR&D and milestones expense for the nine months ended September 30, 2022 included a charge related to the upfront payment of $130 million to acquire Syndesi Therapeutics SA. See Note 4 to the Condensed Consolidated Financial Statements for additional information. Other Operating Expense (Income) Other operating expense (income), net included a gain of $169 million for the nine months ended September 30, 2023 and a charge of $229 million for the three and nine months ended September 30, 2022 related to a development liability associated with an asset divested as part of the Allergan acquisition. Ot her 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 Helicobactor pylori. See Note 4 to the Condensed Consolidated Financial Statements for additional information. Other Non-Operating Expenses (Income) Three months ended September 30, Nine months ended September 30, (in millions) 2023 2022 2023 2022 Interest expense $ 555 $ 560 $ 1,660 $ 1,664 Interest income (157) (63) (354) (96) Interest expense, net $ 398 $ 497 $ 1,306 $ 1,568 Net foreign exchange loss $ 25 $ 36 $ 97 $ 108 Other expense (income), net (95) (330) 3,121 427 Interest expense remained flat for the three and nine months ended September 30, 2023 compared to the prior year primarily driven by the impact of higher interest rates, offset by lower average debt balances as a result of deleveraging. Interest income increased for the three and nine months ended September 30, 2023 compared to the prior year primarily due to the impact of higher interest rates. 2023 Form 10-Q | 33 Other expense (income), net included charges related to changes in fair value of contingent consideration liabilities of $8 million for the three months and $3.4 billion for the nine months ended September 30, 2023. 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. 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, 2023, the change in fair value reflected the passage of time offset by higher discount rates. For the nine months ended September 30, 2023, the change in fair value reflected higher Skyrizi sales driven by stronger market share uptake and the passage of time, partially offset by higher discount rates. For the three months ended September 30, 2022, the change in fair value reflected higher discount rates partially offset by the passage of time. For the nine months ended September 30, 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. Income Tax Expense The effective tax rate was 9% for the three months and 20% for the nine months ended September 30, 2023 compared to 10% for the three months and 11% for the nine months ended September 30, 2022. 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 and business development activities. The effective tax rate for the nine months ended September 30, 2023 and September 30, 2022 and the three months ended September 30, 2022 were also impacted by changes in fair value of contingent consideration. The increase in the effective tax rate for the nine months ended September 30, 2023 over the prior year was primarily due to changes in fair value of contingent consideration. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES Nine months ended September 30, (in millions) 2023 2022 Cash flows provided by (used in): Operating activities $ 18,086 $ 17,515 Investing activities (1,209) (175) Financing activities (12,773) (15,169) Operating cash flows for the nine months ended September 30, 2023 increased compared to the prior year due to the timing of working capital partially offset by decreased results of operations primarily driven by lower net revenues as well as higher payments for income taxes. Investing cash flows for the nine months ended September 30, 2023 included payments made for acquisitions and investments of $670 million and capital expenditures of $572 million. 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. Financing cash flows for the nine months ended September 30, 2023 included repayments of $1.0 billion floating rate term loan, $1.0 billion aggregate principal amount of 2.85% senior notes and $350 million aggregate principal amount of the company’s 2.80% senior notes. 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 $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 also included cash dividend payments of $7.9 billion for the nine months ended September 30, 2023 and $7.5 billion for the nine months ended September 30, 2022. The increase in cash dividend payments was primarily driven by the increase in the quarterly dividend rate. 2023 Form 10-Q | 34 On September 8, 2023, the board of directors declared a quarterly cash dividend of $1.48 per share for stockholders of record at the close of business on October 13, 2023, payable on November 15, 2023. On October 26, 2023, the board of directors declared an increase in the company’s quarterly dividend from $1.48 per share to $1.55 per share beginning with the dividend payable on February 15, 2024 to stockholders of record as of January 16, 2024. This reflects an increase of approximately 4.7% 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. On February 16, 2023, AbbVie’s board of directors authorized a $5.0 billion increase to the existing stock repurchase authorization. AbbVie repurchased 10 million shares for $1.6 billion during the nine months ended September 30, 2023 and 8 million shares for $1.1 billion during the nine months ended September 30, 2022. 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 In March 2023, AbbVie entered into an amended and restated five-year revolving credit facility. The amendment increased the unsecured revolving credit facility commitments from $4.0 billion to $5.0 billion and extended the maturity date of the facility from August 2023 to March 2028. This credit facility enables the company to borrow funds on an unsecured basis at variable interest rates and contains various covenants. At September 30, 2023, 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, 2023 and December 31, 2022. 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 August 2023, Moody’s Investors Service upgraded AbbVie’s senior unsecured long-term credit rating to A3 with a stable outlook from Baa1 with a positive outlook and affirmed AbbVie’s Prime-2 short-term credit rating. 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, 2022. There have been no significant changes in the company’s application of its critical accounting policies during the nine months ended September 30, 2023. 2023 Form 10-Q | 35 FORWARD-LOOKING STATEMENTS Some statements in this quarterly report on Form 10-Q are, or may be considered, forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. The words “believe,” “expect,” “anticipate,” “project,” and similar expressions and use of future or conditional verbs, 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 expressed or implied in the forward-looking statements. Such risks and uncertainties include, but are not limited to challenges to intellectual property, competition from other products, difficulties inherent in the research and development process, adverse litigation or government action, and changes to laws and regulations applicable to our industry. 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, 2022, 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, and specifically declines, to release publicly any revisions to forward-looking statements as a result of subsequent events or developments, except as required by law. 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, 2022.