20 Goodwill

 

 

 

€ million

2018

2017

Net book value at 1 January

4 838

5 178

Acquisition

22

9

Effect of movements in exchange rates

110

-349

Net book value at 31 December

4 970

4 838

 

 

 

The Group tests goodwill for impairment annually or more frequently if there are indications that goodwill might be impaired. For the purpose of the impairment testing, the Group operates as one segment, Biopharmaceuticals, and has one single cash generating unit (CGU), which represents the lowest level at which the goodwill is monitored.

The recoverable amount of the CGU is determined based on the value-in-use calculations and the methodology applied for performing the impairment testing has not been modified compared to 2017.

Key assumptions

The calculations performed are based on the cash flow projections as derived from the financials underlying the 10-year strategic plan approved by management and Board of Directors. Given the nature of the industry, the long-term projections are used to fully model the appropriate product lifecycles based on the patent expiry and therapeutic area. These long-term projections, which are based on past performance and management’s expectations of market developments, are adjusted for specific risks and include:

  • the revenue growth rates of newly launched products;
  • the probability of reaching commercial stage for new products and or indications;
  • the probability of success of future product launches and the expected dates thereof;
  • the post-patent expiry erosion.

There were no significant changes to these key assumptions when comparing to 2017 except for the assumptions relating to launch probabilities, which were adapted taking into account latest developments.

Cash flows beyond the projected forecasted period (terminal value) are extrapolated using an estimated growth rate of 3% (2017: 3%). The growth rate does not exceed the long-term average growth rate for the relevant territories in which the CGU operates.

The Group has most of its revenue and expenses in EUR and USD based countries. The following important exchange rates were used in preparing the future cash flows:

 

 

 

 

10 years projection

2017

USD

1.23 – 1.32

1.10 – 1.25

GBP

0.90 – 1.02

0.87 – 0.90

JPY

130 – 133

120

CHF

1.12 – 1.16

1.00 – 1.06

 

 

 

Starting from risk-free short-term LIBOR EUR 6 months and long-term EU generic government bonds 20 years (2017: 20 years), the discount rates applied are determined based on the weighted average cost of capital for DCF models, including the 20 year (2017: 20 year) benchmark cost of debt and equity, adjusted to reflect the specific asset and country risks associated with the CGU. Given the industry, the Group used a discount rate for marketed products of 6.41% (2017: 6.62%) and for pipeline products 13.0% (2017: 13.0%). Marketed products are products that are sold in the market as per year-end, these comprise our products Cimzia®, Vimpat®, Neupro®,Keppra®, Briviact® and other products (Zyrtec®, Xyzal® and others). Pipeline products are products that are not sold yet in the market as per year-end (e.g. Evenity™). A different discount rate is used for pipeline products as the risks related to these products are higher than for the products that are already in the market. The discount rates are reviewed at least annually.

Since after-tax cash flows are incorporated into the calculation of the value-in-use of the CGU, a post-tax discount rate is used in order to remain consistent.

The use of the post-tax discount rate approximates the result of using a pre-tax rate applied to pre-tax cash flows. A tax rate between 1% and 25% was used (2017: 12%–25%).

Sensitivity analysis

Based on the above, management assessed that no reasonable change in any of the key assumptions for the determination of the recoverable amount would cause the carrying value of the CGU to materially exceed its recoverable amount. For information purposes, the sensitivity analysis using a 0% perpetual growth rate combined with an overall discount rate below 12.3% would not result in an impairment of the goodwill.