XML 25 R15.htm IDEA: XBRL DOCUMENT v3.19.2
Goodwill
 6 Months Ended
Jun. 30, 2019
Goodwill
NOTE 7 – Goodwill:
The changes in the carrying amount of goodwill for the period ended June 30, 2019 were as follows:
    
  
North

America
   
Europe
   
International

Markets
   
Other
   
Total
 
  
(U.S. $ in millions)
   
   
Balance as of January 1, 2019 
(1)
 
$
11,098
   
$
8,653
   
$
2,479
   
$
2,687
   
$
24,917
 
                                         
Changes during the period:
   
     
     
     
     
 
Goodwill disposal
    
(23
)
    
(5
)
    
—
     
—
     
(28
)
Goodwill adjustments
 
 
(13
)
 
 
—
 
 
 
—
 
 
 
—
 
 
 
(13
)
Translation differences
   
16
     
(32
)
    
53
     
—
     
37
  
                                         
Balance as of June 30, 2019 
(1)
 
$
11,078
   
$
8,616
   
$
2,532
   
$
2,687
   
$
24,913
 
                                         
 
(1)
Accumulated goodwill impairment as of June 30, 2019 and January 1, 2019 was approximately $21.0 billion.
Teva operates its business through three segments: North America, Europe and International Markets. 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
17
.
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 used is the discounted cash flow method. Teva starts 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 applies 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.
During the first quarter of 2019, management assessed developments during the quarter to determine if it was more likely than not that the fair value of any of its reporting units was below its carrying amount. This includes the International Markets, Medis and Europe reporting units, which had headroom
 
of 6% or less as of December 31, 2018.
As part of this assessment, the Company also considered the sensitivity of its conclusions as they relate to changes in the estimates and assumptions used in the latest forecast available for each period. In addition, Teva analyzed the aggregate fair value of its reporting units, calculated as part of the annual goodwill impairment test performed in the fourth quarter of 2018, compared to its market capitalization. Despite the decrease in share price during the first quarter of 2019 compared to the average share price used to assess the reasonableness of the results of the cash flow projections used for the goodwill impairment analysis in the fourth quarter of 2018, management believed that its fair value assessment was reasonably supported by Teva’s market capitalization. Based on this assessment, management concluded that it was not more likely than not that the fair value of any of the reporting units was below its carrying value as of March 31, 2019 and, therefore, no quantitative assessments were performed.
 
In the second quarter of 2019, the Company completed its long-range planning (“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 may exceed their fair value. The following analysis was performed based upon the June 30, 2019 assessment:
International Markets
Management noted a further decrease in the profitability projections in the Japanese market related to new price regulation and further generic competition. Consequently, management conducted a quantitative​​​​​​​ analysis to its International Markets reporting unit, which resulted in no impairment.
The percentage difference between estimated fair value and estimated carrying value for the International Markets reporting unit is 4%.
The Company used a terminal growth rate of 2.3% and a discount rate of 10.74%. If Teva holds all other assumptions constant, a reduction in the terminal value growth rate of 0.4% or an increase in discount rate of 0.3% would result in an impairment related to its International Markets reporting unit.
North America
Management believes that the sharp decline in the Company’s share price, which commenced
May 2019
, was mainly a result of events related to increased publicity surrounding certain litigations in the United States. Management considered the sharp decline in share price as an indication that it was more likely than not that the carrying value of its North America reporting unit exceeded its fair value.
Consequently, management conducted a quantitative analysis to its North America reporting unit, which resulted in no impairment.
The percentage difference between estimated fair value and estimated carrying value for the North America reporting unit is 9%.
The Company used a terminal growth rate of 2.0% and a discount rate of 10.0
%.
If Teva holds all other assumptions constant, a reduction in the terminal value growth rate
of
0.9% or an increase in discount rate
of
0.6% would result in an impairment related to its North America reporting unit.
 
Remaining reporting units
After assessing the totality of relevant events and circumstances, Teva determined that it is not more likely than not that the fair value of its remaining reporting units is less than their carrying amount.
The percentage difference between estimated fair value and estimated carrying value for the Europe, Medis and TAPI reporting units is 22%, 45% and 15%, 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.
During the second quarter of 2019, Teva noted its market capitalization was significantly below management’s assessment of the aggregate fair value of its reporting units. Management analyzed the difference and the underlying factors:
  • Based on research analysts’ reports reviewed by management and responses from certain analysts to Teva’s inquiries, management noted a gap in the sales projections of AJOVY in the Europe and International Markets reporting units. Management concluded that the majority of analysts do not focus on these markets in preparing their financial models and, as a result, have not attributed value to the launch potential in these reporting units. Management believes that its fair value assessment relies on more accurate information and therefore no adjustment was incorporated to the fair value.
  • Management also noted a difference with regard to sales projections of AUSTEDO in North America resulting in higher fair value as analyzed by management compared to Teva’s market capitalization. Management believes that it has more accurate information based on its knowledge of the market and its growth through the remainder of 2019 and therefore no adjustment was incorporated to the fair value.
  • Management believes that the remaining difference in fair value is attributable to market concerns regarding certain litigation risks, namely from the opioid and price fixing litigations, and concern surrounding the company’s cash flow and overall liquidity. Management believes that these concerns led to an acute reaction, which resulted in further decline in the share price. Although ultimately the outcome of the relevant cases will not be known in the near term, developments in these cases, likely to occur through the end of 2019, are expected to clarify the outlook with regards to the opioid litigation, which may result in a share price recovery. Consequently, management believes that this disparity results from a market value not reflective of the underlying fair value of its reporting units and therefore it would be inappropriate to record an impairment charge in the second quarter of 2019 related thereto.
 
Management will continue to monitor business conditions and potential events or circumstances that could have a negative effect on the estimated fair value of the Company.
Based on assumptions in place at this time, if Teva’s share price does not recover in the near term, this may lead to a goodwill impairment charge of up to an aggregated amount of approximately $5,000 million in its North America and International Markets​​​​​​​ reporting units. Future impairment charges, if any, reflecting conditions at that time may be materially different.