NOTE 8. GOODWILL AND OTHER INTANGIBLES

Goodwill

Changes in the carrying amount of our goodwill for the six months ended June 30, 2017 were as follows (in thousands):



	Carrying Amount
	U.S. Generic Pharmaceuticals		U.S. Branded Pharmaceuticals			International Pharmaceuticals			Total
Goodwill as of December 31, 2016	$	3,531,301	$	1,009,248		$	188,846		$	4,729,395
Effect of currency translation on gross balance	—		—			26,646			26,646
Effect of currency translation on accumulated impairment	—		—			(19,983		)	(19,983		)
Goodwill impairment charges	—		(180,430		)	(108,314		)	(288,744		)
Goodwill as of June 30, 2017	$	3,531,301	$	828,818		$	87,195		$	4,447,314

The carrying amount of goodwill at June 30, 2017 and December 31, 2016 is net of the following accumulated impairments:



	Accumulated Impairment
	U.S. Generic Pharmaceuticals		U.S. Branded Pharmaceuticals		International Pharmaceuticals		Total
Accumulated impairment losses as of December 31, 2016	$	2,342,549	$	675,380	$	408,280	$	3,426,209
Accumulated impairment losses as of June 30, 2017	$	2,342,549	$	855,810	$	536,577	$	3,734,936

Other Intangible Assets

The following is a summary of other intangible assets held by the Company at June 30, 2017 and December 31, 2016 (in thousands):



Cost basis:	Balance as of December 31, 2016			Acquisitions			Impairments (1)			Other (1) (2)			Effect of Currency Translation (1)			Balance as of June 30, 2017
Indefinite-lived intangibles:
In-process research and development	$	1,123,581		$	—		$	(167,889	)	$	(177,200	)	$	209		$	778,701
Total indefinite-lived intangibles	$	1,123,581		$	—		$	(167,889	)	$	(177,200	)	$	209		$	778,701
Finite-lived intangibles:
Licenses (weighted average life of 12 years)	$	465,720		$	—		$	(8,179	)	$	—		$	—		$	457,541
Tradenames (weighted average life of 12 years)	7,345			—			(808		)	(262		)	134			6,409
Developed technology (weighted average life of 11 years)	6,223,004			—			(409,356		)	144,158			24,617			5,982,423
Total finite-lived intangibles (weighted average life of 11 years)	$	6,696,069		$	—		$	(418,343	)	$	143,896		$	24,751		$	6,446,373
Total other intangibles	$	7,819,650		$	—		$	(586,232	)	$	(33,304	)	$	24,960		$	7,225,074

Accumulated amortization:	Balance as of December 31, 2016			Amortization			Impairments			Other (2)			Effect of Currency Translation			Balance as of June 30, 2017
Finite-lived intangibles:
Licenses	$	(341,600	)	$	(14,586	)	$	—		$	—		$	—		$	(356,186	)
Tradenames	(6,599		)	(42		)	—			262			(30		)	(6,409		)
Developed technology	(1,612,154		)	(439,449		)	—			33,042			(7,831		)	(2,026,392		)
Total other intangibles	$	(1,960,353	)	$	(454,077	)	$	—		$	33,304		$	(7,861	)	$	(2,388,987	)
Net other intangibles	$	5,859,297														$	4,836,087

__________

(1)

Changes in the net carrying amount of our other intangible assets presented in the table above exclude changes related to businesses classified as held for sale, to the extent such changes occurred after the business was classified as held for sale. As such, asset impairment charges of $9.6 million and net increases resulting from currency translation of $1.6 million related to our Litha business are excluded from the table above.

Additional information on the changes in the total gross carrying amount of our other intangible assets is presented below (in thousands):



	Gross Carrying Amount
December 31, 2016	$	7,819,650
Impairment of certain U.S. Branded Pharmaceuticals intangible assets	(52,096		)
Impairment of certain U.S. Generic Pharmaceuticals intangible assets	(398,423		)
Impairment of certain International Pharmaceuticals intangible assets	(135,713		)
Transfer of intangible assets to Assets held for sale (NOTE 3)	(33,304		)
Effect of currency translation	24,960
June 30, 2017	$	7,225,074


(2)	Includes reclassification adjustments of $177.2 million for certain developed technology intangible assets, previously classified as in-process research and development, that were placed in service during the six months ended June 30, 2017. The remaining amounts in this column relate to the transfer of Somar intangible assets to Assets held for sale.

Amortization expense for the three and six months ended June 30, 2017 totaled $191.0 million and $454.1 million, respectively. Amortization expense for the three and six months ended June 30, 2016 totaled $212.8 million and $424.5 million, respectively. Estimated amortization of intangibles for the five fiscal years subsequent to December 31, 2016 is as follows (in thousands):



2017	$	764,409
2018	$	544,485
2019	$	473,230
2020	$	442,265
2021	$	427,558

Impairments

As part of the Company’s goodwill and intangible asset impairment assessments, the Company estimates the fair values of its reporting units using an income approach that utilizes a discounted cash flow model, or, where appropriate, a market approach. The discounted cash flow models are dependent upon the Company’s estimates of future cash flows and other factors. These estimates of future cash flows involve assumptions concerning (i) future operating performance, including future sales, long-term growth rates, operating margins, variations in the amount and timing of cash flows and the probability of achieving the estimated cash flows and (ii) future economic conditions. These assumptions are based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy. The discount rates applied to the estimated cash flows are based on the overall risk associated with the particular assets and other market factors. The Company believes the discount rates and other inputs and assumptions are consistent with those that a market participant would use. Any impairment charges resulting from annual or interim goodwill and intangible asset impairment assessments are recorded to Asset impairments charges on the Company’s Condensed Consolidated Statements of Operations.

A summary of significant goodwill and other intangible asset impairment charges by reportable segment for the six months ended June 30, 2017 and 2016 is included below.

U.S. Generic Pharmaceuticals Segment

During the first and second quarters of 2017, the Company identified certain market conditions impacting the recoverability of certain indefinite and finite-lived intangible assets in its U.S. Generic Pharmaceuticals segment. Accordingly, the Company tested these assets for impairment and determined that their carrying amounts were no longer fully recoverable, resulting in pre-tax, non-cash asset impairment charges totaling $72.7 million and $268.2 million during the three months ended March 31, 2017 and June 30, 2017, respectively.

In addition, as further described in Note 4. Restructuring, the Company announced the 2017 U.S. Generic Pharmaceuticals restructuring initiative in July 2017, which includes the discontinuation of certain commercial products. As a result, the Company assessed the recoverability of the impacted products, resulting in pre-tax, non-cash intangible asset impairment charges of approximately $57.5 million during the second quarter of 2017. The Company also initiated an interim goodwill impairment analysis of its Generics reporting unit during the second quarter of 2017 as a result of the 2017 U.S. Generic Pharmaceuticals restructuring initiative and determined that the estimated fair value of the Generics reporting unit exceeded its carrying amount. Accordingly, no related goodwill impairment was recorded. The Company estimated the fair value of the Generics reporting unit using an income approach that utilizes a discounted cash flow model. The discount rate applied to the estimated cash flows for our Generics goodwill impairment test was 9.0%. The goodwill balance for the Company’s Generics reporting unit was approximately $3,531 million as of June 30, 2017.

During the first and second quarters of 2016, the Company identified certain market and regulatory conditions impacting the recoverability of certain indefinite and finite-lived intangible assets in our U.S. Generic Pharmaceuticals segment. Accordingly, we tested these assets for impairment and determined that the carrying amounts of certain of these assets was no longer fully recoverable, resulting in pre-tax, non-cash asset impairment charges of $29.3 million and $40.0 million during the first and second quarters of 2016, respectively. The Company also recognized pre-tax, non-cash asset impairment charges of $100.3 million during the first quarter of 2016 related to the 2016 U.S. Generic Pharmaceuticals restructuring initiative, which resulted from the discontinuation of certain commercial products and the abandonment of certain IPR&D projects. See Note 4. Restructuring for discussion of our material restructuring initiatives.

U.S. Branded Pharmaceuticals Segment

In March 2017, we announced that the Food and Drug Administration’s (FDA) Drug Safety and Risk Management and Anesthetic and Analgesic Drug Products Advisory Committees voted that the benefits of reformulated OPANA^®ER (oxymorphone hydrochloride extended release) no longer outweigh its risks. In June 2017, we became aware of the FDA’s request that we voluntarily withdraw OPANA^®ER from the market, and in July 2017, after careful consideration and consultation with the FDA, we decided to voluntarily remove OPANA^®ER from the market. As a result of our decision, the Company determined that the carrying amount of its OPANA^® ER intangible asset was no longer recoverable, resulting in a pre-tax, non-cash impairment charge of $20.6 million in the second quarter of 2017, representing the remaining carrying amount. In addition, during the second quarter of 2017, the Company identified certain market conditions impacting the recoverability of certain other finite-lived intangible assets in its U.S. Branded Pharmaceuticals segment. Accordingly, the Company tested these assets for impairment and determined that their carrying amounts were no longer fully recoverable, resulting in pre-tax, non-cash asset impairment charges totaling $31.5 million during the three months ended June 30, 2017.

In addition, as a result of the withdrawal of OPANA^® ER from the market and the continued erosion of its U.S. Branded Pharmaceuticals segment’s Established Products portfolio, the Company initiated an interim goodwill impairment analysis of its Branded reporting unit during the second quarter of 2017. Based on the provisions of ASU 2017-04, which the Company adopted as of January 1, 2017, the Company recorded a pre-tax, non-cash asset impairment charge of $180.4 million during the three months ended June 30, 2017 for the amount by which the carrying amount exceeded the reporting unit’s fair value. The Company estimated the fair value of the Branded reporting unit using an income approach that utilizes a discounted cash flow model. The discount rate applied to the estimated cash flows for our Branded goodwill impairment test was 9.5%. The remaining goodwill for the Company’s Branded reporting unit was approximately $829 million as of June 30, 2017.

International Pharmaceuticals Segment

Pursuant to an existing agreement with a wholly owned subsidiary of Novartis AG (Novartis), Paladin licensed the Canadian rights to commercialize serelaxin, an investigational drug for the treatment of acute heart failure (AHF). In March 2017, Novartis announced that a Phase III study of serelaxin in patients with AHF failed to meet its primary endpoints. As a result, Endo has concluded that the full carrying amount of its serelaxin in-process research and development intangible asset is impaired, resulting in a $45.5 million pre-tax non-cash impairment charge for the three months ended March 31, 2017.

In addition and as a result of the serelaxin impairment, the Company assessed the recoverability of its Paladin goodwill balance and determined that the estimated fair value of the Paladin reporting unit was below its carrying amount. The Company recorded a pre-tax, non-cash asset impairment charge of $82.6 million during the three months ended March 31, 2017 for the amount by which the carrying amount exceeded the reporting unit’s fair value. The Company estimated the fair value of the Paladin reporting unit using an income approach that utilizes a discounted cash flow model. The discount rate applied to the estimated cash flows for our Paladin goodwill impairment test was 10.0%. The remaining goodwill for the Company’s Paladin reporting unit was approximately $87 million as of June 30, 2017.

As further discussed in Note 3. Discontinued Operations and Assets and Liabilities Held for Sale, the Company entered into a definitive agreement to sell Somar on June 30, 2017, which resulted in Somar’s assets and liabilities being classified as held for sale. The initiation of held-for-sale accounting, together with the agreed upon sale price, triggered an impairment review. Accordingly, the Company performed an impairment analysis using a market approach and determined that impairment charges were required. The Company recorded pre-tax non-cash impairment charges of $25.7 million and $89.5 million related to Somar’s goodwill and other intangible assets, respectively, during the second quarter of 2017, each of which represented the remaining carrying amounts of the corresponding assets.