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Goodwill
 12 Months Ended
Dec. 31, 2019
Goodwill
NOTE 7—Goodwill:
 
The changes in the carrying amount of goodwill for the years ended December 31, 2019 and 2018 were as follows
:
                                         
 
North
America
 
  
Europe
 
  
International
Market
 
  
Other
 
  
Total
 
 
(U.S. $ in millions)
 
Balance as of January 1, 201
8
(1)
   
11,144
     
9,001
     
5,404
     
2,865
     
28,414
 
Changes during the year:
   
     
     
     
     
 
Goodwill
impairment
 (2)
   
—  
      
—  
      
(2,834
)
    
(193
)
    
(3,027
)
Goodwill disposal (3)
   
—  
      
(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, 201
8
 (1)
 
$
11,098
 
 
$
8,653
 
 
$
2,479
 
 
$
2,687
 
 
$
24,917
 
 
Changes during the year:
   
     
     
     
     
 
Goodwill disposal
    
(23
)
    
(5
 )    
—
 
 
      
—
 
 
      
(28
 )
Translation differences and Other
   
16
      
(112
 )    
53
      
—
 
 
      
(43
 )
Balance as of December 31, 201
9
 (1)
  $
11,091
    $
8,536
    $
2,532
    $
2,687
    $
24,846
 
                                         
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Accumulated goodwill impairment as of December 31, 2019, December 31, 2018 and January 1, 2018 was approximately
$21.0 billion, $21.0 billion and $18.0 
b
illion, respectively.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(2)
Goodwill impairment mainly attributable to the International Markets
 segment
, Mexico and Medis.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(
3
)		 Mainly due to the divestment of the women’s health business, the sale of Actavis Brazil and other activities.
 
 
 
 
 
 
 
 
 
 
 
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. Each of these business segments is a reporting unit. Additional reporting units include the Teva’s production and sale of APIs to third parties (“Teva API”) and an
 
out-licensing
 
platform offering a portfolio of products to other pharmaceutical companies through its affiliate Medis. The Teva API and Medis reporting units are included in Other above. See note
1
9
.
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 weighted average cost of capital (“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 may record an impairment of goodwill allocated to these reporting units in the future.
During the first quarter of 2019, management assessed developments
that occurred in
the quarter and concluded that it was not more likely than not that the fair value of any of its reporting units was below their carrying amount as of March 31, 2019 and, therefore, no quantitative assessments were performed.
 
In the second quarter of 2019, Teva completed its long-range planning (“LRP”) process, which is part of Teva’s internal financial planning and budgeting process, and includes discussion and review by Teva’s management and board of directors. Certain events and changes in circumstances reflected in the LRP indicated
that it was more likely than not that the carrying amount of the North America and International Markets reporting units may exceed their fair value. Consequently, management conducted a quantitative analysis for these reporting units, which resulted in no impairment charge. Teva determined that it was not more likely than not that the fair value of its remaining reporting units was less than their carrying amount. In connection with its goodwill impairment test during the second quarter of 2019
, management noted that the Company’s market capitalization, including a reasonable control premium, was significantly below management’s assessment of the aggregate fair value of its reporting units. Management analyzed the difference and the underlying factors, mainly in connection with sales projections of AJOVY in the Europe and International Markets reporting units, sales projections of AUSTEDO in the North America reporting unit and market concerns regarding the volatility and uncertainty of certain litigation risks, namely from the opioid and price fixing litigations, and concern surrounding the Company’s cash flow and overall liquidity. After considering these factors management concluded that the fair value of Teva’s reporting units exceeded their carrying amount and therefore did not record an impairment charge in the second quarter of 2019
related thereto.
During the third quarter of 2019, management assessed developments that occurred in the quarter and concluded that it was not more likely than not that the fair value of any of its reporting units was below their carrying amount as of September 30, 2019 and, therefore, no quantitative assessments were performed.
Pursuant to Company policy, Teva conducted the annual goodwill impairment test for all reporting units during the fourth quarter of 2019. Management considered all information available, including information gathered from the 2020 Annual Operating Plan (“AOP”), and how it would affect the LRP prepared in the second quarter of 2019. Teva conducted its annual impairment test with the assistance of an independent valuation expert.
No goodwill impairment charge was recorded during the fourth quarter of 2019.
North America
During 2019, management noted a decrease in the fair value of the North America reporting unit, mainly due to lower projections for sales of
AJOVY
and due to changes to certain discount rate parameters and the selected Terminal Growth Rate (“TGR”), partially offset by net increase of projections of other products.
The estimated fair value exceeds its carrying amount for the North America reporting unit by 26%.
The Company used a terminal growth rate of 1.61% and a discount rate of 10.22%. If Teva holds all other assumptions constant, a reduction in the terminal growth rate
of
 0.50% 
to 1.11%
,
or an increase in discount rate of 0.50%
to 10.72%
,
would result in
a reduction of the excess of fair value over carrying amount with respect to Teva’s
North America reporting unit
 to 21% and 18%, respectively
.
Europe
During 2019, management noted a decrease in the fair value of the Europe reporting unit, mainly due to projected currency translation effect.
The estimated fair value exceeds the estimated carrying amount for the Europe reporting unit by 12%.
The Company used a terminal growth rate of 1.36% and a discount rate of 9.52%. If Teva holds all other assumptions constant, a reduction in the terminal growth rate of 0.50%
 
to 0.86%
or an increase in discount rate of 0.50%
to 10.02%
,
would result in
a reduction of the excess of fair value over carrying amount with respect to Teva’s
Europe reporting unit
 to 8% and 6%, respectively
.
International Markets
During 2019, management noted an increase in the fair value of the International Markets reporting unit mainly due to higher projections of certain products and changes to certain discount rate parameters and the selected TGR, partially offset by decrease in the profitability projections in the Japanese market related to new price regulation and further generic competition.
The estimated fair value exceeds the estimated carrying amount for the International Markets reporting unit by 16%.
The Company used a terminal growth rate of 2.03% and a discount rate of 9.80%. If Teva holds all other assumptions constant, a reduction in the terminal growth rate of 0.50%
 to 1.53%
or an increase in discount rate of 0.50%
 to 10.3%
,
would result in
a reduction of the excess of fair value over carrying amount with respect to Teva’s
International Markets reporting unit
 to 11% and 9%, respectively
.
Remaining reporting units
The percentage difference between estimated fair value and estimated carrying amount for the Medis and Teva API reporting units is 72% and 23%, respectively.
Market Capitalization
Teva analyzed the aggregate fair value of its reporting units compared to its market capitalization as part of its annual goodwill impairment test, in order to assess the reasonableness of the results of its cash flow projections used for its goodwill impairment analysis.
Teva noted its market capitalization was below management’s assessment of the aggregate fair value of the Company’s reporting units. However, as of December 31, 2019, the Company’s market capitalization plus a reasonable control premium exceeded its book value.
In further consideration of the market capitalization analysis at year end, management analyzed the differences and the underlying factors addressed during the Company’s second quarter market reconciliation analysis and noted the following changes:
 
•
In the second quarter of 2019, management noted a difference with regard to sales projections of AJOVY and AUSTEDO in the International Markets reporting unit. Management continues to believe that the majority of analysts do not focus on this market in preparing their financial models and, as a result, have not attributed value to the launch potential in this reporting unit. Accordingly, management’s projections exceed those it believes are being used by analysts, particularly in International Markets. However, if management were to conform to analyst expectations, the International Markets reporting unit’s fair value would approximate its book value. Future impairment charges, if any, reflecting conditions at that time may be materially different.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
•
In the second quarter of 2019, management also noted a difference with regard to sales projections of AUSTEDO in the North America reporting unit, resulting in higher fair value as analyzed by management compared to Teva’s market capitalization. Management continues to believe that it has more accurate information based on its knowledge of the market and its growth and therefore no adjustment was incorporated to the fair value.
 
 
 
 
 
However, even if management was to reduce its AUSTEDO projections to those it believes are being used by analysts, the estimated fair value of the North America reporting unit would still exceed its carrying amount.
 
•
Management continues to believe market concerns regarding the volatility and uncertainty of certain litigation risks, namely from the opioid and price fixing litigations, are impacting its market capitalization. Management believes that these concerns led to an acute reaction, which resulted in a decline in Teva’s share price in the second quarter of 2019, and will continue to impact the Company’s stock price into 2020. However, developments in these cases are expected to clarify the outlook with regards to the opioid litigation, assuming the proposed settlement framework is finalized in 2020. Based upon Teva’s current estimates of fair value, even if management was to adjust the fair value of the North America reporting unit for this uncertainty, the estimated fair value would still exceed its carrying amount.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
If management were to conform to the market’s expectations in the North America reporting unit in connection with both AUSTEDO projections and the volatility and uncertainty of certain litigation risks, the Company would record a goodwill impairment charge of $1,230 million. Future impairment charges, if any, reflecting conditions at that time may be materially different.
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.