Goodwill and Intangible Assets

9 Months Ended

Sep. 30, 2019

Goodwill and Intangible Assets Disclosure [Abstract]

The changes in the carrying amount of goodwill for the nine months ended September 30, 2019 are as follows:



(In millions)	North America Segment			Europe Segment			Rest of World Segment			Total
Balance at December 31, 2018:
Goodwill	$	3,892.9		$	4,657.4		$	1,582.5		$	10,132.8
Accumulated impairment losses	(385.0		)	—			—			(385.0		)
	3,507.9			4,657.4			1,582.5			9,747.8
Reclassifications⁽¹⁾	(165.7		)	25.2			140.5			—
Foreign currency translation	(59.6		)	(283.9		)	(17.2		)	(360.7		)
	$	3,282.6		$	4,398.7		$	1,705.8		$	9,387.1
Balance at September 30, 2019:
Goodwill	$	3,667.6		$	4,398.7		$	1,705.8		$	9,772.1
Accumulated impairment losses	(385.0		)	—			—			(385.0		)
	$	3,282.6		$	4,398.7		$	1,705.8		$	9,387.1

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⁽¹⁾	The reclassification between segments realigns certain prior period foreign currency translation amounts to conform to current year presentation.

Intangible assets consist of the following components at September 30, 2019 and December 31, 2018:



(In millions)	Weighted Average Life (Years)	Original Cost		Accumulated Amortization		Net Book Value
September 30, 2019
Product rights, licenses and other ⁽¹⁾	15	$	19,726.8	$	8,141.4	$	11,585.4
In-process research and development		238.9		—		238.9
		$	19,965.7	$	8,141.4	$	11,824.3
December 31, 2018
Product rights, licenses and other ⁽¹⁾	15	$	20,264.1	$	7,225.1	$	13,039.0
In-process research and development		625.6		—		625.6
		$	20,889.7	$	7,225.1	$	13,664.6

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⁽¹⁾	Represents amortizable intangible assets. Other intangible assets consists principally of customer lists and contractual rights.

In December 2011, the Company completed the acquisition of the exclusive worldwide rights to develop, manufacture and commercialize a generic equivalent to GlaxoSmithKline’s Advair® Diskus and Seretide® Diskus incorporating Pfizer Inc.’s proprietary dry powder inhaler delivery platform (the “respiratory delivery platform”). The Company accounted for this transaction as a purchase of a business and utilized the acquisition method of accounting. On January 30, 2019, the Company received FDA approval of the Wixela^TM Inhub^TM (fluticasone propionate and salmeterol inhalation powder, USP) and the commercial launch occurred in February 2019. The Company reclassified the IPR&D asset of $347.2 million to product rights during the nine months ended September 30, 2019 and is amortizing the asset over its estimated useful life.

As of September 30, 2019, the Company has a related contingent consideration liability of $240.0 million. During the nine months ended September 30, 2019, the Company made $79.0 million in milestone payments. The Company performed an analysis and valuation of the contingent consideration liability using a discounted cash flow model. The model contains certain key assumptions including: market share, the number of competitors, the timing of competition and a discount factor based on an industry specific weighted average cost of capital. Based on the analysis performed, the Company recorded fair value adjustments of $28.9 million during the nine months ended September 30, 2019 to reduce the contingent consideration liability.

There was no adjustment required in the three months ended September 30, 2019. The fair value of the contingent consideration liability was determined based upon detailed valuations employing the income approach which utilized Level 3 inputs, as defined in Note 12 Financial Instruments and Risk Management. Market conditions and other factors may result in significant future changes in the projections and assumptions utilized in the discounted cash flow model, which could lead to material adjustments to the amount recorded for contingent consideration.

During the three and nine months ended September 30, 2019, the Company recognized impairment charges of $1.9 million and $71.8 million, respectively, which have been recorded as a component of amortization expense. The impairment charges recognized during the nine months ended September 30, 2019 primarily relate to the impairment of certain finite-lived and IPR&D intangible assets acquired as part of the acquisition of the non-sterile, topicals-focused business of Renaissance Acquisition Holdings, LLC. The impairment charges resulted from the Company’s updated estimate of the fair value of certain assets, which were based upon revised forecasts and future development plans. The impairment testing involved calculating the fair value of the assets based upon detailed valuations employing the income approach which utilized Level 3 inputs, as defined in Note 12 Financial Instruments and Risk Management. These valuations reflect, among other things, the impact of changes to the development programs, the projected development and regulatory time frames and the current competitive environment. Changes in any of the Company’s assumptions may result in a further reduction to the estimated fair values of these assets and could result in additional future impairment charges.

The Company has performed its annual goodwill impairment test as of April 1, 2019 on a quantitative basis for its four reporting units, North America Generics, North America Brands, Europe and Rest of World. In estimating each reporting unit’s fair value, the Company performed an extensive valuation analysis, utilizing both income and market-based approaches, except for the North America Brands reporting unit where the fair value was estimated utilizing the income approach. The determination of the fair value of the reporting units requires the Company to make significant estimates and assumptions that affect the reporting unit’s expected future cash flows. These estimates and assumptions, utilizing Level 3 inputs, primarily include, but are not limited to, market multiples, control premiums, the discount rate, terminal growth rates, operating income before depreciation and amortization, and capital expenditures forecasts.

As of April 1, 2019, the date of our most recent annual impairment test, the allocation of the Company’s total goodwill was as follows: North America Generics $2.67 billion, North America Brands $0.65 billion, Europe $4.56 billion and Rest of World $1.72 billion.

As of April 1, 2019, the Company determined that the fair value of the North America Generics, North America Brands and Rest of World reporting units was substantially in excess of the respective unit’s carrying value. However, when compared to the prior year, the fair value of our overall business declined because of our recent operating results, future forecasts and the decline in our share price, including activity subsequent to April 1, 2019.

For the Europe reporting unit, the estimated fair value exceeded its carrying value by approximately $900.0 million or 7.0%. The excess fair value for the Europe reporting unit is consistent with the result of the Company’s 2018 annual impairment test. As it relates to the income approach for the Europe reporting unit at April 1, 2019, the Company forecasted cash flows for the next 5 years. During the forecast period, the revenue compound annual growth rate was approximately 6.5%. A terminal year value was calculated with a 2.0% revenue growth rate applied. The discount rate utilized was 10.5% and the estimated tax rate was 24.0%. Under the market-based approach, we utilized an estimated range of market multiples of 8.0 to 9.5 times EBITDA plus a control premium of 15.0%. If all other assumptions are held constant, a reduction in the terminal value growth rate by 2.0% or an increase in discount rate by 1.5% would result in an impairment charge for the Europe reporting unit.

Due to the inherent uncertainty involved in making these estimates, actual results could differ from those estimates. In addition, changes in underlying assumptions, especially as it relates to the key assumptions detailed, could have a significant impact on the fair value of the reporting units.

Amortization expense, which is classified primarily within cost of sales in the condensed consolidated statements of operations for the three and nine months ended September 30, 2019 and 2018 totaled:



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In millions)	2019		2018		2019		2018
Intangible asset amortization expense	$	405.6	$	412.2	$	1,210.3	$	1,191.9
IPR&D intangible asset impairment charges	—		15.5		29.5		87.5
Finite-lived intangible asset impairment charges	1.9		—		42.3		—
Total intangible asset amortization expense (including impairment charges)	$	407.5	$	427.7	$	1,282.1	$	1,279.4

Intangible asset amortization expense over the remainder of 2019 and for the years ended December 31, 2020 through 2023 is estimated to be as follows (excludes the potential impact of the Upjohn transaction):



(In millions)
2019	$	368
2020	1,410
2021	1,333
2022	1,265
2023	1,104