Goodwill and Other Intangible Assets

9 Months Ended

Oct. 02, 2011

Note 11. Goodwill and Other Intangible Assets

A. Goodwill

The changes in the carrying amount of goodwill for the nine months ended October 2, 2011, follow:

(millions of dollars)	Primary Care	Specialty Care and Oncology	Established Products and Emerging Markets	Animal Health and Consumer Healthcare		Nutrition		To be allocated(a)			Total
	$									$
Balance, December 31, 2010				$	2,449	$	496	$	40,983	$	43,928
Additions(b)					—		—		825		825
Other(c)					15		11		630		656
Balance, October 2, 2011	$			$	2,464	$	507	$	42,438	$	45,409

(a)

The amount to be allocated includes the former Biopharmaceutical goodwill (see below), as well as newly acquired goodwill, substantially all from our acquisition of King, for which the allocation to reporting units is pending (see Note 3. Acquisition of King Pharmaceuticals, Inc. for additional information).

(b)

Substantially all of the amount relates to our acquisition of King and is subject to change until we complete the recording of the assets acquired and liabilities assumed from King (see Note 3. Acquisition of King Pharmaceuticals, Inc.). The allocation of King goodwill among our reporting units has not yet been completed, but will be completed within one year of the acquisition date.

(c)	Primarily reflects the impact of foreign exchange.

Our company was previously managed through two operating segments (Biopharmaceutical and Diversified), and is now managed through five operating segments (see Note 15. Segment, Product and Geographic Area Information for further information). As a result of this change, the goodwill previously associated with our Biopharmaceutical operating segment is required to be allocated among the Primary Care, Specialty Care and Oncology, and Established Products and Emerging Markets operating segments. The allocation of goodwill is a complex process that requires, among other things, that we determine the fair value of each reporting unit. Therefore, we have not yet completed the allocation, but we expect that it will be completed in the current year. While all reporting units can confront events and circumstances that can lead to impairments (such as, among other things, unanticipated competition, an adverse action or assessment by a regulator, a significant adverse change in legal matters or in the business climate and/or a failure to replace the contributions of products that lose exclusivity), in general, the increased number of Biopharmaceutical reporting units significantly increases our risk of goodwill impairment charges as smaller reporting units are inherently less able to absorb negative developments that might affect certain operating assets but not others.

B. Other Intangible Assets

The components of identifiable intangible assets follow:

	Oct. 2, 2011							December 31, 2010
(millions of dollars)	Gross Carrying Amount		Accumulated Amortization			Identifiable Intangible Assets, less Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization			Identifiable Intangible Assets, less Accumulated Amortization

Finite-lived intangible assets:
Developed technology rights	$	71,288	$	(30,932	)	$	40,356	$	68,432	$	(26,223	)	$	42,209
Brands		1,693		(569	)		1,124		1,626		(607	)		1,019
License agreements		589		(284	)		305		637		(248	)		389
Trademarks and other		558		(441	)		117		533		(324	)		209
Total amortized finite-lived intangible assets		74,128		(32,226	)		41,902		71,228		(27,402	)		43,826
Indefinite-lived intangible assets:
Brands		10,291		—			10,291		10,219		—			10,219
In-process research and development		3,332		—			3,332		3,438		—			3,438
Trademarks		72		—			72		72		—			72
Total indefinite-lived intangible assets		13,695		—			13,695		13,729		—			13,729
Total identifiable intangible assets(a)	$	87,823	$	(32,226	)	$	55,597	$	84,957	$	(27,402	)	$	57,555

(a)	The decrease is primarily related to amortization as well as impairment charges (see Note 6. Other (Income)/Deductions—Net), partially offset by the assets acquired as part of the acquisition of King (see Note 3. Acquisition of King Pharmaceuticals, Inc.) and the impact of foreign exchange.

At October 2, 2011, our identifiable intangible assets are associated with the following, as a percentage of identifiable intangible assets, less accumulated amortization:

·	Developed Technology Rights: Specialty Care (62%); Established Products (18%); Primary Care (16%); Animal Health (2%); Oncology (1%); and Nutrition (1%)

·	Finite-Lived Brands: Consumer Healthcare (57%); Established Products (29%); and Animal Health (14%)

·	Indefinite-Lived Brands: Consumer Healthcare (50%); Established Products (28%); and Nutrition (22%)

·	IPR&D: Specialty Care (75%); Worldwide Research and Development (13%); Primary Care (6%); Established Products (3%); Oncology (2%); and Animal Health (1%)

For IPR&D assets, the risk of failure is significant and there can be no certainty that these assets ultimately will yield a successful product. The nature of the biopharmaceutical business is high-risk and requires that we invest in a large number of projects in an effort to achieve a successful portfolio of approved products. As such, we expect that many of these IPR&D assets will become impaired and be written off at some time in the future.

On October 25, 2011, the European Commission approved the Company’s pneumococcal conjugate vaccine, Prevenar 13 Adult, for active immunization for the prevention of vaccine-type invasive disease caused by Streptococcus pneumoniae in adults age 50 years and older. As a result of this fourth-quarter 2011 approval in a major market, as of the approval date, the associated asset, with a net book value of $1.8 billion as of October 2, 2011, will be reclassified from IPR&D to Developed Technology Rights and will begin to be amortized.

Amortization expense related to acquired intangible assets that contribute to our ability to sell, manufacture, research, market and distribute products, compounds and intellectual property is included in Amortization of intangible assets as it benefits multiple business functions. Amortization expense related to acquired intangible assets that are associated with a single function is included in Cost of sales, Selling, informational and administrative expenses and Research and development expenses, as appropriate. Total amortization expense for finite-lived intangible assets was $1.4 billion for the third quarter of 2011, $1.2 billion for the third quarter of 2010, $4.3 billion for the first nine months of 2011 and $4.1 billion for the first nine months of 2010.

- Definition

The entire disclosure for the aggregate amount of goodwill and a description of intangible assets, which may include (a) for amortizable intangible assets (also referred to as finite-lived intangible assets), the carrying amount, the amount of any significant residual value, and the weighted-average amortization period, (b) for intangible assets not subject to amortization (also referred to as indefinite-lived intangible assets), the carrying amount, and (c) the amount of research and development assets acquired and written off in the period, including the line item in the income statement in which the amounts written off are aggregated, if not readily apparent from the income statement. Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subject to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain (loss) on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each goodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss.

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