Goodwill and Intangible Assets

6 Months Ended

Jun. 30, 2013

Goodwill And Intangible Assets Disclosure [Abstract]

NOTE 5 – GOODWILL AND INTANGIBLE ASSETS

Goodwill consisted of the following (in millions):


	June 30,		December 31,
	2013		2012
			(Revised)
Actavis Pharma segment	$	3,606.1	$	4,293.2
Actavis Specialty Brands segment		500.1		474.7
Anda Distribution segment		86.3		86.3

Total goodwill	$	4,192.5	$	4,854.2

We test goodwill for impairment annually at the end of the second quarter and when events occur that could potentially reduce the fair value of a reporting unit below its carrying amount. Goodwill is considered impaired if the carrying amount of the reporting unit’s net assets exceeds the fair value of the reporting unit. The carrying value of each reporting unit is determined by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units. The Company determines the fair value of its reporting units using the income approach, which is based on estimated future cash flows. The aggregate fair value for all reporting units is reconciled to the Company’s market capitalization. If the carrying value of the reporting unit’s net assets including goodwill exceeds the fair value of the reporting unit, then the Company performs step two of the impairment test, which allocates the fair value of the reporting unit’s assets and liabilities in a manner similar to a purchase price allocation, with any residual fair value being allocated to goodwill. If the carrying value of a reporting unit’s goodwill exceeds the implied goodwill, then an impairment of goodwill has occurred for such difference.

During the 2013 integration of the Actavis Group with the Legacy Watson business, the Company reorganized its organizational structure and management performance reporting. Consequently, the reporting units within the Actavis Pharma operating segment were organized as follows: Americas; Europe; MEAAP; and, Third-Party Business. These reporting units combine the legacy Watson and Actavis Group businesses. Previously, goodwill for the legacy Watson’s Global Generics operating segment was tested as one unit.

During the second quarter of 2013, concurrent with the availability of discrete financial information for the Company’s new reporting units, the Company completed an extensive review of its operating businesses, including exploring options for addressing overall profitability of seven Western European commercial operations. This process is expected to continue during the third quarter of this year and may include restructuring our Western European operations, refocusing their activities on specific sub-markets as well as potential divestitures to other third parties. The potential impact of these conditions were considered in our projections and the indicated fair value of our reporting units for the impairment test performed during the second quarter of this year. The Company completed step one of the impairment analysis and concluded the fair value of the Actavis Pharma – Europe reporting unit was below its carrying value including goodwill. This was primarily related to the integration of our legacy Arrow Group with the newly acquired Actavis Group in Europe. The fair value of the Company’s reporting units is estimated based on a discounted cash flow model using management’s business plans and projections as the basis for expected future cash flows for approximately five years and residual growth rates ranging from 2% to 4% thereafter. Management believes the assumptions used for the impairment test are consistent with those utilized by a market participant in performing similar valuations of our reporting units. A separate discount rate was utilized for each reporting unit derived from published sources, and, on a weighted average basis, the discount rate of 8% used was estimated using weighted average cost of capital, which considered the overall inherent risk of the reporting unit and the rate of return a market participant would expect. Step two of the impairment was initiated but, due to the time necessary to complete the analysis, has not been completed. The Company recorded, on a preliminary basis, an estimate of the impairment to be $647.5 million, representing primarily all the goodwill allocated to this reporting unit The Company expects to finalize the step two analysis in the third quarter of 2013. Any material adjustments to the impairment charge will be recorded in our Condensed Consolidated Statement of Operations in that period.

During the second quarter the Company has also tested its other reporting units for impairment for which all others, except Actavis Pharma – Europe, did not yield impairment in step one. The Company will continue to monitor the carrying value of goodwill, particularly with respect to our Actavis Pharma – MEAAP and Actavis Pharma – Third Party reporting units. Actavis Pharma – Third Party has $125 million of goodwill and Actavis Pharma – MEAAP has $178 million of goodwill as of June 30, 2013. As of the second quarter, these two reporting units had fair values that exceeded carrying values by at least 23%. However, because some of the inherent assumptions and estimates used in determining fair value of these reporting units are outside the control of management, including interest rates, the cost of capital, and tax rates, changes in these underlying assumptions can also adversely impact the business units’ fair value. The amount of any impairment is dependent on all these factors, which cannot be predicted with certainty, and may result in impairment for a portion or all of the goodwill amounts noted previously. Holding all other assumptions constant at the test date, a 100 basis point increase in the discount rate would reduce the fair values that exceeded carrying values from the 23% to as low as 6%. If economic and market conditions deteriorate or do not perform as forecasted in these reporting units, this could increase the likelihood of future non-cash impairment charges related to our goodwill. The Company also reconciled the fair value of its aggregated reporting units to its market capitalization as of June 30, 2013 with a reasonable implied control premium.

Intangible assets consisted of the following (in millions):


	June 30,			December 31,
	2013			2012
				(Revised)
Intangibles with finite lives:
Product rights and other related intangibles	$	5,270.0		$	5,117.6
Core technology		91.6			92.2
Customer relationships		166.4			169.0

		5,528.0			5,378.8
Less: accumulated amortization		(2,367.6	)		(2,055.3	)


		3,160.4			3,323.5


Intangibles with indefinite lives:
IPR&D		620.0			384.6
Trade name		76.2			76.2


		696.2			460.8


Total intangible assets, net	$	3,856.6		$	3,784.3

The increase in IPR&D in 2013 is primarily due to IPR&D of $250.0 million acquired as part of the Uteron acquisition and $190.4 million acquired as part of the Medicines360 acquisition partially offset by IPR&D transfers to currently marketed products (“CMP”) of $185.3 million, an IPR&D impairment loss of $4.4 million and foreign currency translation losses.

- 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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