NOTE 7—GOODWILL:

The changes in the carrying amount of goodwill for the years ended December 31, 2018 and 2017 were as follows:


	Generics			Specialty			Other			Total			North America			Europe			International Market			Other			Total
	(U.S. $ in millions)												(U.S. $ in millions)
Balance as of January 1, 2017 (1)		32,863			9,323			2,223			44,409			—			—			—			—			—
Changes during the year:
Goodwill adjustments (2)		1,480						(560	)		920			—			—			—			—			—
Goodwill disposal (3)		(7	)		(690	)					(697	)		—			—			—			—			—
Goodwill impairment (4)		(16,500	)					(600	)		(17,100	)		—			—			—			—			—
Goodwill reclassified as assets to held for sale (5)		—			(275	)					(275	)		—			—			—			—			—
Translation differences		1,028			106			23			1,157			—			—			—			—			—

Balance as of December 31, 2017 (1)	$	18,864		$	8,464		$	1,086		$	28,414		$	—		$	—		$	—		$	—		$	—
Relative fair value allocation		(18,864	)		(8,464	)		(1,086	)		(28,414	)		11,144			9,001			5,404			2,865			28,414

Balance as of January 1, 2018		—			—			—			—			11,144			9,001			5,404			2,865			28,414
Changes during the year:
Goodwill impairment (6)		—			—			—			—			—						(2,834	)		(193	)		(3,027	)
Goodwill disposal (7)		—			—			—			—			—			(65	)		(14	)		—			(79	)
Goodwill reclassified as assets to held for sale		—			—			—			—			—			(3	)		—			(17	)		(20	)
Translation differences and Other		—			—			—			—			(46	)		(280	)		(77	)		32			(371	)

Balance as of December 31, 2018 (1)	$	—		$	—		$	—		$	—		$	11,098		$	8,653		$	2,479		$	2,687		$	24,917

(1)	Accumulated goodwill impairment as of December 31, 2018, December 31, 2017 and as of January 1, 2017 was approximately $21.0 billion, $18.0 billion and $900 million, respectively.

(2)	Measurement period adjustments on goodwill acquired in 2016.

(3)	Goodwill on the divestiture of certain Teva generic products, as part of the Actavis Generics acquisition, and the U.S. women’s health business.

(4)	Goodwill impairment is mainly attributable to the U.S. generics reporting unit.

(5)	Represent amounts related to the anticipated divestitures of the non-U.S women’s health products.

(6)	Goodwill impairment mainly attributable to the International Markets, Mexico and Medis.

(7)	Mainly due to the divestment of the women’s health business, the sale of Actavis Brazil and other activities.

In November 2017, Teva announced a new organizational structure and leadership changes to enable strategic alignment across its portfolios, regions and functions. Teva now operates its business through three segments: North America, Europe and International Markets. The purpose of the new structure is to enable stronger alignment and integration between operations, commercial regions, R&D and Teva’s global marketing and portfolio function, in order to optimize its product lifecycle across the therapeutic areas. Teva began reporting its financial results under this structure in the first quarter of 2018.

In addition to these three segments, Teva has other sources of revenues, primarily the sale of APIs to third parties, certain contract manufacturing services and an out-licensing platform offering a portfolio of products to other pharmaceutical companies through its affiliate Medis. See note 20.

Following the announcement of its new organizational structure and leadership changes in November 2017, Teva conducted an analysis of its business segments, which led to changes in Teva’s identified reporting units, operating and reporting segments. As a result, on January 1, 2018, Teva reallocated its goodwill to the adjusted reporting units using a relative fair value allocation. In conjunction with the goodwill reallocation, Teva performed a goodwill impairment test for the balances in its adjusted reporting units, utilizing the same annual operating plan (“AOP”) and long range plan (“LRP”) model that were used in its 2017 annual impairment test; the Company concluded that the fair value of each reporting unit was in excess of its carrying value.

During the first quarter of 2018, Teva identified an increase in certain components of the weighted average cost of capital (“WACC”), such as an increase in the risk free interest rate and the unlevered beta of similar companies in the industry. The Company addressed these changes in rates as an indication for impairment and performed an additional impairment test as of March 31, 2018.

Based on its revised analysis, Teva recorded a goodwill impairment of $180 million related to its Rimsa reporting unit in the first quarter of 2018. The remaining goodwill allocated to this reporting unit was $706 million as of March 31, 2018. This impairment was driven by the change in fair value, as a result of the updated WACC noted above, and the change in allocated net assets to the reporting unit. See note 2.

In the second quarter of 2018, the Company completed its LRP process. The LRP is part of Teva’s internal financial planning and budgeting processes and is discussed and reviewed by Teva’s management and its board of directors. Certain events and changes in circumstances, reflected in the LRP, indicated that it was more likely than not that the carrying value of certain reporting units exceeded their fair value:

•

Historically, Rimsa had been carved out as a separate reporting unit due to the significant operational challenges. Teva wanted to ensure that any impairment related to Rimsa would be recorded, by separating it from the International Markets reporting unit. During the second quarter of 2018, Rimsa and Teva Mexico substantially completed the integration process and as a result Teva decided to utilize the combined Mexico reporting unit for goodwill impairment testing, as opposed to “Rimsa only” in prior periods.

•

Following the integration, and although the remediation plan is progressing in connection with resuming operations at the Rimsa facility, Teva estimates that the recovery time will be longer than initially planned, specifically in connection with the time to regain lost market share. As a result, the Company recorded an additional goodwill impairment charge of $120 million related to its Mexico reporting unit in the second quarter of 2018.

•

Additionally, the Company identified further developments with respect to legislation proposed by the Russian Ministry of Health. The draft legislation includes, among other items, amendments in the mechanism of regulating prices for vital and essential medicines. The suggested amendments triggered a public discussion between authorities and pharmaceutical companies, which ended in the second quarter of 2018, followed by an internal discussion by the relevant authorities. The estimated impact of developments and uncertainties with respect to the final legislation in Russia were reflected in the LRP and triggered an impairment test for the International Markets reporting unit and related intangible assets, significantly decreasing the difference between the estimated fair value and estimated carrying value of the reporting unit, from 6% to 2%; however no impairment was recorded.

•

After assessing the totality of relevant events and circumstances, Teva determined that, as of the second quarter of 2018, it is not more likely than not that the fair value of its remaining reporting units is less than their carrying amount.

In light of the integration and the progress toward operational remediation in Rimsa as discussed above, Teva concluded that commencing July 1, 2018, it would no longer view Mexico separately from the International Markets reporting unit and accordingly will no longer perform impairment testing on Mexico as a separate reporting unit.

During the third quarter of 2018, Teva identified an increase in the risk free interest rate, which was the main cause of an increase in the WACC. In addition, certain currencies in countries included in Teva’s International Markets reporting unit experienced significant devaluations. Teva addressed these events as an indication for impairment and performed an additional impairment test for the International Markets and Europe reporting units as of September 30, 2018. Teva assumed that the currency devaluations would cause price increases of its imported goods to those countries which would not be completely offset by corresponding price adjustments to the selling price of Teva’s goods. These changes decreased the difference between the estimated fair value and estimated carrying value of the International Markets reporting unit from 2% to 1% and of the Europe reporting unit from 6% to 4%, however, no impairment charge was recorded for either reporting unit.

Pursuant to the Company’s policy, Teva conducted its annual goodwill impairment test during the fourth quarter of 2018, in conjunction with the update of its 2019 AOP. The updated AOP was used as a base for an update of the 2019-2023 LRP, incorporating the 2019 changes for future years in the fair value model. Teva conducted its annual impairment test with the assistance of an independent valuation expert.

Teva recorded a goodwill impairment of $2,530 million in the fourth quarter of 2018 attributable to goodwill associated with its International Markets reporting unit and $170 million attributable to goodwill associated with its Medis reporting unit, which is reported under other activities.

Teva determines the fair value of its reporting units using the income approach. The income approach is a forward-looking approach for estimating fair value. Within the income approach, the method that was used is the discounted cash flow method. Teva started with a forecast of all the expected net cash flows associated with the reporting unit, which includes the application of a terminal value, and then applied a discount rate to arrive at a net present value amount. Cash flow projections are based on Teva’s estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used is based on the WACC, adjusted for the relevant risk associated with country-specific and business-specific characteristics. If any of these expectations were to vary materially from Teva’s assumptions, Teva could face impairment of goodwill allocated to these reporting units in the future.

Impaired Reporting Units

International Markets

In the fourth quarter of 2018, Teva noted a decrease in the fair value of its International Markets reporting unit, mainly due to changes to certain discount rate parameters and the selected Terminal Growth Rate (“TGR”), negative effect of currency fluctuations and decreased projections in its Japanese market, partially offset by lower tax expense.

Decreased projections in the Japanese market were mainly due to price reductions caused by price regulation and generic competition to off-patented products, which are expected to continue to negatively affect the Company’s sales in Japan.

Due to the above factors, Teva recorded a goodwill impairment of $2,530 million related to its International Markets reporting unit in the fourth quarter of 2018.

If Teva holds all other assumptions constant, a reduction in the terminal value growth rate of 0.1% or an increase in discount rate of 0.1% would result in an additional impairment of approximately $48 million and $68 million related to its International Markets reporting unit, respectively.

Medis

Teva’s other activities include its Medis business. In the fourth quarter of 2018, Teva noted a decrease in the fair value of its Medis reporting unit, mainly due to updated projections as a result of a revised strategy for the business. Consequently, Teva recorded a goodwill impairment of $170 million related to its Medis reporting unit.

If Teva holds all other assumptions constant, a reduction in the terminal value growth rate of 0.1% or an increase in discount rate of 0.1% would, in both cases, result in an additional immaterial impairment related to its Medis reporting unit. The remaining goodwill balance assigned to the Medis reporting unit is approximately $300 million.

Non-Impaired Reporting Units

Europe

Teva noted a decrease in its Europe reporting unit profit projections mainly due to projected currency translation effect and increased generics competition to COPAXONE.

The percentage difference between estimated fair value and estimated carrying value for the Europe reporting unit is 6%.

If Teva holds all other assumptions constant, a reduction in the terminal value growth rate of 0.1% or an increase in discount rate of 0.1% would result in a reduction in fair value of approximately $121 million and $171 million related to its Europe reporting unit, respectively.

North America and TAPI

The percentage difference between estimated fair value and estimated carrying value for the North America and TAPI reporting units is 28% and 47%, respectively.

Market Capitalization

Teva analyzed the aggregate fair value of its reporting units as compared to its market capitalization in order to assess the reasonableness of the results of its cash flow projections used for its goodwill impairment analysis. In light of the volatility in the stock markets during the month of December 2018 and the subsequent positive correction, Teva used an average share price, as it believes that it is more indicative of the fair value than the December 31, 2018 share price. Management believes that its fair value assessment is reasonably supported by the market capitalization.

Management will continue to monitor business conditions and will also consider future developments in its market capitalization when assessing whether additional goodwill impairment is required in future periods.