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Goodwill and Other Intangibles

12 Months Ended

Dec. 31, 2017

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill and Other Intangibles

Goodwill and Other Intangibles

The following table summarizes goodwill activity by segment:

	Pharmaceutical				All Other				Total
Balance January 1, 2016	$	15,862			$	1,861			$	17,723
Acquisitions	207				275				482
Impairments	—				(47		)		(47		)
Other (1)	6				(2		)		4
Balance December 31, 2016 (2)	16,075				2,087				18,162
Acquisitions	—				177				177
Impairments	—				(38		)		(38		)
Other (1)	(9		)		(8		)		(17		)
Balance December 31, 2017 (2)	$	16,066			$	2,218			$	18,284

⁽¹⁾ Other includes cumulative translation adjustments on goodwill balances and certain other adjustments.

⁽²⁾ Accumulated goodwill impairment losses at December 31, 2017 and 2016 were $225 million and $187 million, respectively.

In 2016, the additions to goodwill in the Pharmaceutical segment resulted primarily from the acquisitions of Afferent and IOmet (see Note 3). The additions to goodwill within other non-reportable segments in 2017 primarily relate to the acquisition of Vallée, which is part of the Animal Health segment (see Note 3), and in 2016 relate to the acquisition of StayWell, which is part of the Healthcare Services segment (see Note 3). The impairments of goodwill within other non-reportable segments in 2017 and 2016 relate to certain businesses within the Healthcare Services segment.

Other intangibles at December 31 consisted of:

	2017												2016
	Gross Carrying Amount				Accumulated Amortization				Net				Gross Carrying Amount				Accumulated Amortization				Net
Products and product rights	$	46,693			$	34,950			$	11,743			$	46,269			$	31,919			$	14,350
IPR&D	1,194				—				1,194				1,653				—				1,653
Tradenames	209				97				112				215				89				126
Other	2,035				901				1,134				1,947				771				1,176
	$	50,131			$	35,948			$	14,183			$	50,084			$	32,779			$	17,305

Acquired intangibles include products and product rights, tradenames and patents, which are initially recorded at fair value, assigned an estimated useful life, and are amortized primarily on a straight-line basis over their estimated useful lives. Some of the Company’s more significant acquired intangibles related to marketed products (included in product and product rights above) at December 31, 2017 include Zerbaxa, $3.0 billion; Sivextro, $879 million; Zetia, $756 million; Implanon/Nexplanon $529 million; Dificid, $478 million; Gardasil/Gardasil 9, $468 million; Vytorin, $375 million; Bridion, $320 million; and Simponi, $226 million. The Company recognized an intangible asset related to Adempas as a result of a collaboration with Bayer (see Note 4) that had a carrying value of $894 million at December 31, 2017 reflected in “Other” in the table above.

During 2017, 2016 and 2015, the Company recorded impairment charges related to marketed products and other intangibles of $58 million, $347 million and $45 million, respectively, within Material and production costs. During 2017, the Company recorded an intangible asset impairment charge of $47 million related to Intron A, a treatment for certain types of cancers. Sales of Intron A are being adversely affected by the availability of new therapeutic options. In 2017, sales of Intron A in the United States eroded more rapidly than previously anticipated by the Company, which led to changes in the cash flow assumptions for Intron A. These revisions to cash flows indicated that the Intron A intangible asset value was not fully recoverable on an undiscounted cash flows basis. The Company utilized market participant assumptions to determine its best estimate of the fair value of the intangible asset related to Intron A that, when compared with its related carrying value, resulted in the impairment charge noted above. The intangible asset value for Intron A at December 31, 2017 was $13 million. The remaining charges in 2017 relate to the impairment of customer relationship, tradename and developed technology intangibles for certain businesses in the Healthcare Services segment. In 2016, the Company lowered its cash flow projections for Zontivity, a product for the reduction of thrombotic cardiovascular events in patients with a history of myocardial infarction or with peripheral arterial disease, following several business decisions that reduced sales expectations for Zontivity in the United States and Europe. The Company utilized market participant assumptions and considered several different scenarios to determine the fair value of the intangible asset related to Zontivity that, when compared with its related carrying value, resulted in an impairment charge of $252 million. Also during 2016, the Company wrote-off $95 million that had been capitalized in connection with in-licensed products Grastek and Ragwitek, allergy immunotherapy tablets that, for business reasons, the Company returned to the licensor. The charges in 2015 primarily relate to the impairment of customer relationship and tradename intangibles for certain businesses within in the Healthcare Services segment.

IPR&D that the Company acquires through business combinations represents the fair value assigned to incomplete research projects which, at the time of acquisition, have not reached technological feasibility. Amounts capitalized as IPR&D are accounted for as indefinite-lived intangible assets, subject to impairment testing until completion or abandonment of the projects. Upon successful completion of each project, the Company will make a separate determination as to the then useful life of the asset and begin amortization. During 2017, 2016 and 2015, $14 million, $8 million and $280 million, respectively, of IPR&D was reclassified to products and product rights upon receipt of marketing approval in a major market.

In 2017, the Company recorded $483 million of IPR&D impairment charges within Research and development expenses. Of this amount, $240 million resulted from a strategic decision to discontinue the development of the investigational combination regimens MK-3682B (grazoprevir/ruzasvir/uprifosbuvir) and MK-3682C (ruzasvir/uprifosbuvir) for the treatment of chronic hepatitis C virus (HCV) infection. This decision was made based on a review of available Phase 2 efficacy data and in consideration of the evolving marketplace and the growing number of treatment options available for patients with chronic HCV infection, including Zepatier, which is currently marketed by the Company for the treatment of adult patients with chronic HCV infection. As a result of this decision, the Company recorded an IPR&D impairment charge to write-off the remaining intangible asset related to uprifosbuvir. The Company had previously recorded an impairment charge for uprifosbuvir in 2016 as described below. The IPR&D impairment charges in 2017 also include a charge of $226 million to write-off the intangible asset related to verubecestat, an investigational small molecule inhibitor of the beta-site amyloid precursor protein cleaving enzyme 1 (BACE1), resulting from a decision in February 2018 to stop a Phase 3 study evaluating verubecestat in people with prodromal Alzheimer’s disease. The decision to stop the study followed a recommendation by the external Data Monitoring Committee (eDMC), which assessed overall benefit/risk during an interim safety analysis. The eDMC concluded that it was unlikely that positive benefit/risk could be established if the trial continued.

During 2016, the Company recorded $3.6 billion of IPR&D impairment charges. Of this amount, $2.9 billion relates to the clinical development program for uprifosbuvir, a nucleotide prodrug that was being evaluated for the treatment of HCV. The Company determined that changes to the product profile, as well as changes to Merck’s expectations for pricing and the market opportunity, taken together constituted a triggering event that required the Company to evaluate the uprifosbuvir intangible asset for impairment. Utilizing market participant assumptions, and considering different scenarios, the Company concluded that its best estimate of the fair value of the intangible asset related to uprifosbuvir was $240 million, resulting in the recognition of the pretax impairment charge noted above. The IPR&D impairment charges in 2016 also include charges of $180 million and $143 million related to the discontinuation of programs obtained in connection with the acquisitions of cCAM and OncoEthix, respectively, resulting from unfavorable efficacy data. An additional $72 million relates to programs obtained in connection with the SmartCells acquisition following a decision to terminate the lead compound due to a lack of efficacy and to pursue a back-up compound which reduced projected future cash flows. The IPR&D impairment charges in 2016 also include $112 million related to an in-licensed program for house dust mite allergies that, for business reasons, was returned to the licensor. The remaining IPR&D impairment charges in 2016 primarily relate to deprioritized pipeline programs that were deemed to have no alternative use during the period, including a $79 million impairment charge for an investigational candidate for contraception. The discontinuation or delay of certain of these clinical development programs resulted in a reduction of the related liabilities for contingent consideration (see Note 6).

During 2015, the Company recorded $63 million of IPR&D impairment charges, of which $50 million related to the surotomycin clinical development program. In 2015, the Company received unfavorable efficacy data from a clinical trial for surotomycin. The evaluation of this data, combined with an assessment of the commercial opportunity for surotomycin, resulted in the discontinuation of the program and the IPR&D impairment charge noted above.

All of the IPR&D projects that remain in development are subject to the inherent risks and uncertainties in drug development and it is possible that the Company will not be able to successfully develop and complete the IPR&D programs and profitably commercialize the underlying product candidates.

The Company may recognize additional non-cash impairment charges in the future related to other marketed products or pipeline programs and such charges could be material.

Aggregate amortization expense primarily recorded within Materials and production costs was $3.2 billion in 2017, $3.8 billion in 2016 and $4.8 billion in 2015. The estimated aggregate amortization expense for each of the next five years is as follows: 2018, $2.8 billion; 2019, $1.5 billion; 2020, $1.2 billion; 2021, $1.1 billion; 2022, $1.1 billion.

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- 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.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 350
-URI http://asc.fasb.org/topic&trid=2144416

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