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Analysis of Goodwill and Intangible Assets

Difficulty: Advanced


Goodwill and Intangible Assets Accounting Policy

Other Intangible Assets

Intangible assets with definite useful lives are amortized to their estimated residual values over their estimated useful lives and reviewed for impairment if certain events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Amortization is initiated for IPR&D intangible assets when their useful lives have been determined. IPR&D intangible assets which are determined to have had a drop in their fair value are adjusted downward and an expense recognized in Research and development in the Consolidated Statements of Income. These in-process research and development (IPR&D) intangible assets are tested at least annually or when a triggering event occurs that could indicate a potential impairment.

Goodwill

Goodwill represents the excess of purchase price over fair value of net assets acquired in a business combination accounted for by the acquisition method of accounting and is not amortized, but is subject to impairment testing. Celgene tests the goodwill for impairment at least annually or when a triggering event occurs that could indicate a potential impairment by assessing qualitative factors or performing a quantitative analysis in determining whether it is more likely than not that the fair value of net assets are below their carrying amounts.

Source: 10-K (filing date: 2018-02-07).


Goodwill and Intangible Assets Disclosure

Celgene Corp., Statement of Financial Position, Goodwill and Intangible Assets

USD $ in millions

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Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Acquired developed product rights 3,406  3,406  3,406  3,406  3,406 
Technology 483  483  566  334  334 
Licenses 66  67  67  67  66 
Other 43  43  44  43  43 
Amortizable intangible assets, gross carrying value 3,998  3,999  4,082  3,849  3,848 
Accumulated amortization (2,413) (2,078) (1,695) (1,410) (1,147)
Amortizable intangible assets, net 1,585  1,921  2,388  2,439  2,702 
Acquired IPR&D product rights 6,851  8,471  8,471  1,629  138 
Non-amortized intangible assets 6,851  8,471  8,471  1,629  138 
Intangible assets, net 8,436  10,392  10,858  4,068  2,840 
Goodwill 4,866  4,866  4,879  2,191  2,041 
Intangible assets and goodwill 13,302  15,258  15,737  6,259  4,881 

Based on: 10-K (filing date: 2018-02-07), 10-K (filing date: 2017-02-10), 10-K (filing date: 2016-02-11), 10-K (filing date: 2015-02-20), 10-K (filing date: 2014-02-13).

Item Description The company
Intangible assets, net Sum of the carrying amounts of all intangible assets, excluding goodwill, as of the balance sheet date, net of accumulated amortization and impairment charges. Celgene Corp.'s intangible assets, net declined from 2015 to 2016 and from 2016 to 2017.
Goodwill Carrying amount as of the balance sheet date, which is the cumulative amount paid and (if applicable) the fair value of any noncontrolling interest in the acquiree, adjusted for any amortization recognized prior to the adoption of any changes in generally accepted accounting principles (as applicable) and for any impairment charges, in excess of the fair value of net assets acquired in one or more business combination transactions. Celgene Corp.'s goodwill declined from 2015 to 2016 but then slightly increased from 2016 to 2017.
Intangible assets and goodwill Sum of the carrying amounts of all intangible assets, including goodwill, as of the balance sheet date, net of accumulated amortization and impairment charges. Celgene Corp.'s intangible assets and goodwill declined from 2015 to 2016 and from 2016 to 2017.

Analyst Adjustments: Removal of Goodwill

Celgene Corp., adjustments to financial data

USD $ in millions

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Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Adjustment to Total Assets
Total assets (as reported) 30,141  28,086  27,053  17,340  13,378 
Less: Goodwill 4,866  4,866  4,879  2,191  2,041 
Total assets (adjusted) 25,275  23,220  22,174  15,149  11,337 
Adjustment to Stockholders' Equity
Stockholders' equity (as reported) 6,921  6,599  5,919  6,525  5,590 
Less: Goodwill 4,866  4,866  4,879  2,191  2,041 
Stockholders' equity (adjusted) 2,055  1,734  1,040  4,334  3,549 

Based on: 10-K (filing date: 2018-02-07), 10-K (filing date: 2017-02-10), 10-K (filing date: 2016-02-11), 10-K (filing date: 2015-02-20), 10-K (filing date: 2014-02-13).


Adjusted Ratios: Removal of Goodwill (Summary)

Celgene Corp., adjusted ratios

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Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Total Asset Turnover
Reported total asset turnover 0.43 0.40 0.34 0.44 0.48
Adjusted total asset turnover 0.51 0.48 0.41 0.50 0.56
Financial Leverage
Reported financial leverage 4.36 4.26 4.57 2.66 2.39
Adjusted financial leverage 12.30 13.39 21.32 3.50 3.19
Return on Equity (ROE)
Reported ROE 42.48% 30.29% 27.07% 30.65% 25.94%
Adjusted ROE 143.07% 115.33% 154.04% 46.15% 40.86%
Return on Assets (ROA)
Reported ROA 9.75% 7.12% 5.92% 11.53% 10.84%
Adjusted ROA 11.63% 8.61% 7.22% 13.20% 12.79%

Based on: 10-K (filing date: 2018-02-07), 10-K (filing date: 2017-02-10), 10-K (filing date: 2016-02-11), 10-K (filing date: 2015-02-20), 10-K (filing date: 2014-02-13).

Ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Celgene Corp.'s adjusted total asset turnover improved from 2015 to 2016 and from 2016 to 2017.
Adjusted financial leverage A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity.
Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income.
Celgene Corp.'s adjusted financial leverage declined from 2015 to 2016 and from 2016 to 2017.
Adjusted ROE A profitability ratio calculated as net income divided by adjusted shareholders' equity. Celgene Corp.'s adjusted ROE deteriorated from 2015 to 2016 but then improved from 2016 to 2017 not reaching 2015 level.
Adjusted ROA A profitability ratio calculated as net income divided by adjusted total assets. Celgene Corp.'s adjusted ROA improved from 2015 to 2016 and from 2016 to 2017.

Adjusted Total Asset Turnover

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Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Net product sales (USD $ in millions) 12,973  11,185  9,161  7,564  6,362 
Total assets (USD $ in millions) 30,141  28,086  27,053  17,340  13,378 
Total asset turnover1 0.43 0.40 0.34 0.44 0.48
Adjusted for Goodwill
Net product sales (USD $ in millions) 12,973  11,185  9,161  7,564  6,362 
Adjusted total assets (USD $ in millions) 25,275  23,220  22,174  15,149  11,337 
Adjusted total asset turnover2 0.51 0.48 0.41 0.50 0.56

Based on: 10-K (filing date: 2018-02-07), 10-K (filing date: 2017-02-10), 10-K (filing date: 2016-02-11), 10-K (filing date: 2015-02-20), 10-K (filing date: 2014-02-13).

2017 Calculations

1 Total asset turnover = Net product sales ÷ Total assets
= 12,973 ÷ 30,141 = 0.43

2 Adjusted total asset turnover = Net product sales ÷ Adjusted total assets
= 12,973 ÷ 25,275 = 0.51

Ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Celgene Corp.'s adjusted total asset turnover improved from 2015 to 2016 and from 2016 to 2017.

Adjusted Financial Leverage

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Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Total assets (USD $ in millions) 30,141  28,086  27,053  17,340  13,378 
Stockholders' equity (USD $ in millions) 6,921  6,599  5,919  6,525  5,590 
Financial leverage1 4.36 4.26 4.57 2.66 2.39
Adjusted for Goodwill
Adjusted total assets (USD $ in millions) 25,275  23,220  22,174  15,149  11,337 
Adjusted stockholders' equity (USD $ in millions) 2,055  1,734  1,040  4,334  3,549 
Adjusted financial leverage2 12.30 13.39 21.32 3.50 3.19

Based on: 10-K (filing date: 2018-02-07), 10-K (filing date: 2017-02-10), 10-K (filing date: 2016-02-11), 10-K (filing date: 2015-02-20), 10-K (filing date: 2014-02-13).

2017 Calculations

1 Financial leverage = Total assets ÷ Stockholders' equity
= 30,141 ÷ 6,921 = 4.36

2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted stockholders' equity
= 25,275 ÷ 2,055 = 12.30

Ratio Description The company
Adjusted financial leverage A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity.
Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income.
Celgene Corp.'s adjusted financial leverage declined from 2015 to 2016 and from 2016 to 2017.

Adjusted Return on Equity (ROE)

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Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Net income (USD $ in millions) 2,940  1,999  1,602  2,000  1,450 
Stockholders' equity (USD $ in millions) 6,921  6,599  5,919  6,525  5,590 
ROE1 42.48% 30.29% 27.07% 30.65% 25.94%
Adjusted for Goodwill
Net income (USD $ in millions) 2,940  1,999  1,602  2,000  1,450 
Adjusted stockholders' equity (USD $ in millions) 2,055  1,734  1,040  4,334  3,549 
Adjusted ROE2 143.07% 115.33% 154.04% 46.15% 40.86%

Based on: 10-K (filing date: 2018-02-07), 10-K (filing date: 2017-02-10), 10-K (filing date: 2016-02-11), 10-K (filing date: 2015-02-20), 10-K (filing date: 2014-02-13).

2017 Calculations

1 ROE = 100 × Net income ÷ Stockholders' equity
= 100 × 2,940 ÷ 6,921 = 42.48%

2 Adjusted ROE = 100 × Net income ÷ Adjusted stockholders' equity
= 100 × 2,940 ÷ 2,055 = 143.07%

Ratio Description The company
Adjusted ROE A profitability ratio calculated as net income divided by adjusted shareholders' equity. Celgene Corp.'s adjusted ROE deteriorated from 2015 to 2016 but then improved from 2016 to 2017 not reaching 2015 level.

Adjusted Return on Assets (ROA)

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Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Net income (USD $ in millions) 2,940  1,999  1,602  2,000  1,450 
Total assets (USD $ in millions) 30,141  28,086  27,053  17,340  13,378 
ROA1 9.75% 7.12% 5.92% 11.53% 10.84%
Adjusted for Goodwill
Net income (USD $ in millions) 2,940  1,999  1,602  2,000  1,450 
Adjusted total assets (USD $ in millions) 25,275  23,220  22,174  15,149  11,337 
Adjusted ROA2 11.63% 8.61% 7.22% 13.20% 12.79%

Based on: 10-K (filing date: 2018-02-07), 10-K (filing date: 2017-02-10), 10-K (filing date: 2016-02-11), 10-K (filing date: 2015-02-20), 10-K (filing date: 2014-02-13).

2017 Calculations

1 ROA = 100 × Net income ÷ Total assets
= 100 × 2,940 ÷ 30,141 = 9.75%

2 Adjusted ROA = 100 × Net income ÷ Adjusted total assets
= 100 × 2,940 ÷ 25,275 = 11.63%

Ratio Description The company
Adjusted ROA A profitability ratio calculated as net income divided by adjusted total assets. Celgene Corp.'s adjusted ROA improved from 2015 to 2016 and from 2016 to 2017.