Goodwill and Other Intangibles
The following table summarizes goodwill activity by segment:
|
| | | | | | | | | | | |
| Pharmaceutical |
| | All Other |
| | Total |
|
Goodwill balance January 1, 2012 | $ | 10,107 |
| | $ | 2,048 |
| | $ | 12,155 |
|
Other (1) | (21 | ) | | — |
| | (21 | ) |
Goodwill balance December 31, 2012 | 10,086 |
| | 2,048 |
| | 12,134 |
|
Acquisitions | 103 |
| | 188 |
| | 291 |
|
Divestitures | (45 | ) | | — |
| | (45 | ) |
Other (1) | (79 | ) | | — |
| | (79 | ) |
Goodwill balance December 31, 2013 | $ | 10,065 |
| | $ | 2,236 |
| | $ | 12,301 |
|
(1) Other includes cumulative translation adjustments on goodwill balances and certain other adjustments.
The additions to Pharmaceutical segment goodwill in 2013 resulted from the formation of the Supera joint venture (see Note 4) and the reductions resulted from the divestiture of the Company’s API manufacturing business and related branded products (see Note 3).
In July 2013, the Company acquired the remaining shares of Physicians Interactive, a provider of on-line and mobile clinical resources and solutions for health care professionals in which Merck had an existing 24% ownership interest, for $97 million. In November 2013, Merck acquired Health Management Resources Corporation, a leader in medical weight management, for $87 million. These transactions collectively resulted in the addition of approximately $175 million of goodwill during 2013 included in other segments. Pro forma financial information has not been included for these transactions because the historical financial results are not significant when compared with the Company’s financial results.
Other intangibles at December 31 consisted of:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 2013 | | 2012 |
| Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net |
Products and product rights | $ | 41,691 |
| | $ | 21,216 |
| | $ | 20,475 |
| | $ | 41,932 |
| | $ | 16,678 |
| | $ | 25,254 |
|
In-process research and development | 1,856 |
| | — |
| | 1,856 |
| | 2,393 |
| | — |
| | 2,393 |
|
Tradenames | 1,632 |
| | 310 |
| | 1,322 |
| | 1,521 |
| | 236 |
| | 1,285 |
|
Other | 958 |
| | 810 |
| | 148 |
| | 896 |
| | 745 |
| | 151 |
|
| $ | 46,137 |
| | $ | 22,336 |
| | $ | 23,801 |
| | $ | 46,742 |
| | $ | 17,659 |
| | $ | 29,083 |
|
Acquired intangibles include products and product rights, tradenames and patents, which are 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 at December 31, 2013 include Zetia, $4.7 billion; Vytorin, $2.6 billion; Nasonex, $1.3 billion, Claritin, $1.5 billion, NuvaRing, $867 million, as well as $1.3 billion in the aggregate related to several products marketed for the treatment of chronic hepatitis C (Victrelis, PegIntron and Rebetol).
During 2013 and 2011, the Company recorded impairment charges related to marketed products of $486 million and $118 million, respectively, within Material and production costs. Of the amount recorded in 2013, $330 million resulted from lower cash flow projections for Saphris/Sycrest, due to reduced expectations in international markets and in the United States. These revisions to cash flows indicated that the Saphris/Sycrest intangible asset value was not recoverable on an undiscounted cash flows basis. The Company utilized market participant assumptions and considered several different scenarios to determine its best estimate of the fair value of the intangible asset related to Saphris/Sycrest that, when compared with its related carrying value, resulted in the impairment charge noted above. The remaining $156 million of impairment charges in 2013 resulted from lower cash flow projections for Rebetol due to reduced expectations in Japan and Europe. These revisions to cash flows indicated that the Rebetol intangible asset value was not 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 Rebetol that, when compared with its related carrying value, resulted in the impairment charge noted above.
IPR&D represents the fair value assigned to incomplete research projects that the Company acquires through business combinations 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 assets and begin amortization. During 2013, 2012 and 2011, $346 million, $78 million and $666 million, respectively, of IPR&D was reclassified to products and product rights upon receipt of marketing approval in a major market.
During 2013, the Company recorded $279 million of IPR&D impairment charges within Research and development expenses. Of this amount, $181 million related to the write-off of the intangible asset associated with preladenant as a result of the discontinuation of the clinical development program for this compound. In addition, the Company recorded impairment charges resulting from changes in cash flow assumptions for certain compounds, as well as for pipeline programs that had previously been deprioritized and were subsequently deemed to have no alternative use in the period. During 2012, the Company recorded $200 million of IPR&D impairment charges primarily for pipeline programs that had previously been deprioritized and were subsequently deemed to have no alternative use during the period. During 2011, the Company recorded $587 million of IPR&D impairment charges primarily for pipeline programs that were abandoned and determined to have no alternative use, as well as for expected delays in the launch timing or changes in the cash flow assumptions for certain compounds. In addition, the impairment charges in 2011 related to pipeline programs that had previously been deprioritized and were either deemed to have no alternative use during the period or were out-licensed to a third party for consideration that was less than the related asset’s carrying value.
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 $4.8 billion in 2013, $5.0 billion in 2012 and $5.1 billion in 2011. The estimated aggregate amortization expense for each of the next five years is as follows: 2014, $4.3 billion; 2015, $4.1 billion; 2016, $3.4 billion; 2017, $3.1 billion; 2018, $1.6 billion.
