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Celgene Corp. (CELG)

Analysis of Goodwill and Intangible Assets

High level of difficulty

Accounting Policy on Goodwill and Intangible Assets

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 in-process research and development (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 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: 2019-02-26).

Goodwill and Intangible Assets Disclosure

Celgene Corp., balance sheet: goodwill and intangible assets

US$ in millions

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Acquired developed product rights 3,406  3,406  3,406  3,406  3,406 
Technology 1,743  483  483  566  334 
Licenses 66  66  67  67  67 
Other 54  43  43  44  43 
Amortizable intangible assets, gross carrying value 5,269  3,998  3,999  4,082  3,849 
Accumulated amortization (2,887) (2,413) (2,078) (1,695) (1,410)
Amortizable intangible assets, net 2,382  1,585  1,921  2,388  2,439 
Acquired IPR&D product rights 13,831  6,851  8,471  8,471  1,629 
Non-amortized intangible assets 13,831  6,851  8,471  8,471  1,629 
Intangible assets, net 16,213  8,436  10,392  10,858  4,068 
Goodwill 8,003  4,866  4,866  4,879  2,191 
Intangible assets and goodwill 24,216  13,302  15,258  15,737  6,259 

Based on: 10-K (filing date: 2019-02-26), 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).

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 2016 to 2017 but then increased from 2017 to 2018 exceeding 2016 level.
Goodwill Amount after accumulated impairment loss of an asset representing future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Celgene Corp.’s goodwill increased from 2016 to 2017 and from 2017 to 2018.
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 2016 to 2017 but then increased from 2017 to 2018 exceeding 2016 level.

Adjustments to Financial Statements: Removal of Goodwill

Celgene Corp., adjustments to financial statements

US$ in millions

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Adjustment to Total Assets
Total assets (as reported) 35,480  30,141  28,086  27,053  17,340 
Less: Goodwill 8,003  4,866  4,866  4,879  2,191 
Total assets (adjusted) 27,477  25,275  23,220  22,174  15,149 
Adjustment to Stockholders’ Equity
Stockholders’ equity (as reported) 6,161  6,921  6,599  5,919  6,525 
Less: Goodwill 8,003  4,866  4,866  4,879  2,191 
Stockholders’ equity (adjusted) (1,842) 2,055  1,734  1,040  4,334 

Based on: 10-K (filing date: 2019-02-26), 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).

Celgene Corp., Financial Data: Reported vs. Adjusted

Adjusted Financial Ratios: Removal of Goodwill (Summary)

Celgene Corp., adjusted financial ratios

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Total Asset Turnover
Reported total asset turnover 0.43 0.43 0.40 0.34 0.44
Adjusted total asset turnover 0.56 0.51 0.48 0.41 0.50
Financial Leverage
Reported financial leverage 5.76 4.36 4.26 4.57 2.66
Adjusted financial leverage — 12.30 13.39 21.32 3.50
Return on Equity (ROE)
Reported ROE 65.67% 42.48% 30.29% 27.07% 30.65%
Adjusted ROE — 143.07% 115.33% 154.04% 46.15%
Return on Assets (ROA)
Reported ROA 11.40% 9.75% 7.12% 5.92% 11.53%
Adjusted ROA 14.73% 11.63% 8.61% 7.22% 13.20%

Based on: 10-K (filing date: 2019-02-26), 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).

Financial 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 ratio improved from 2016 to 2017 and from 2017 to 2018.
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 ratio declined from 2016 to 2017 and from 2017 to 2018.
Adjusted ROE A profitability ratio calculated as net income divided by adjusted shareholders’ equity. Celgene Corp.’s adjusted ROE improved from 2016 to 2017 but then deteriorated significantly from 2017 to 2018.
Adjusted ROA A profitability ratio calculated as net income divided by adjusted total assets. Celgene Corp.’s adjusted ROA improved from 2016 to 2017 and from 2017 to 2018.

Celgene Corp., Financial Ratios: Reported vs. Adjusted

Adjusted Total Asset Turnover

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
As Reported
Selected Financial Data (US$ in millions)
Net product sales 15,265  12,973  11,185  9,161  7,564 
Total assets 35,480  30,141  28,086  27,053  17,340 
Activity Ratio
Total asset turnover1 0.43 0.43 0.40 0.34 0.44
Adjusted for Goodwill
Selected Financial Data (US$ in millions)
Net product sales 15,265  12,973  11,185  9,161  7,564 
Adjusted total assets 27,477  25,275  23,220  22,174  15,149 
Activity Ratio
Adjusted total asset turnover2 0.56 0.51 0.48 0.41 0.50

Based on: 10-K (filing date: 2019-02-26), 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).

2018 Calculations

1 Total asset turnover = Net product sales ÷ Total assets
= 15,265 ÷ 35,480 = 0.43

2 Adjusted total asset turnover = Net product sales ÷ Adjusted total assets
= 15,265 ÷ 27,477 = 0.56

Activity 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 ratio improved from 2016 to 2017 and from 2017 to 2018.

Adjusted Financial Leverage

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
As Reported
Selected Financial Data (US$ in millions)
Total assets 35,480  30,141  28,086  27,053  17,340 
Stockholders’ equity 6,161  6,921  6,599  5,919  6,525 
Solvency Ratio
Financial leverage1 5.76 4.36 4.26 4.57 2.66
Adjusted for Goodwill
Selected Financial Data (US$ in millions)
Adjusted total assets 27,477  25,275  23,220  22,174  15,149 
Adjusted stockholders’ equity (1,842) 2,055  1,734  1,040  4,334 
Solvency Ratio
Adjusted financial leverage2 — 12.30 13.39 21.32 3.50

Based on: 10-K (filing date: 2019-02-26), 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).

2018 Calculations

1 Financial leverage = Total assets ÷ Stockholders’ equity
= 35,480 ÷ 6,161 = 5.76

2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted stockholders’ equity
= 27,477 ÷ -1,842 = —

Solvency 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 ratio declined from 2016 to 2017 and from 2017 to 2018.

Adjusted Return on Equity (ROE)

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
As Reported
Selected Financial Data (US$ in millions)
Net income 4,046  2,940  1,999  1,602  2,000 
Stockholders’ equity 6,161  6,921  6,599  5,919  6,525 
Profitability Ratio
ROE1 65.67% 42.48% 30.29% 27.07% 30.65%
Adjusted for Goodwill
Selected Financial Data (US$ in millions)
Net income 4,046  2,940  1,999  1,602  2,000 
Adjusted stockholders’ equity (1,842) 2,055  1,734  1,040  4,334 
Profitability Ratio
Adjusted ROE2 — 143.07% 115.33% 154.04% 46.15%

Based on: 10-K (filing date: 2019-02-26), 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).

2018 Calculations

1 ROE = 100 × Net income ÷ Stockholders’ equity
= 100 × 4,046 ÷ 6,161 = 65.67%

2 Adjusted ROE = 100 × Net income ÷ Adjusted stockholders’ equity
= 100 × 4,046 ÷ -1,842 = —

Profitability ratio Description The company
Adjusted ROE A profitability ratio calculated as net income divided by adjusted shareholders’ equity. Celgene Corp.’s adjusted ROE improved from 2016 to 2017 but then deteriorated significantly from 2017 to 2018.

Adjusted Return on Assets (ROA)

Microsoft Excel LibreOffice Calc
Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
As Reported
Selected Financial Data (US$ in millions)
Net income 4,046  2,940  1,999  1,602  2,000 
Total assets 35,480  30,141  28,086  27,053  17,340 
Profitability Ratio
ROA1 11.40% 9.75% 7.12% 5.92% 11.53%
Adjusted for Goodwill
Selected Financial Data (US$ in millions)
Net income 4,046  2,940  1,999  1,602  2,000 
Adjusted total assets 27,477  25,275  23,220  22,174  15,149 
Profitability Ratio
Adjusted ROA2 14.73% 11.63% 8.61% 7.22% 13.20%

Based on: 10-K (filing date: 2019-02-26), 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).

2018 Calculations

1 ROA = 100 × Net income ÷ Total assets
= 100 × 4,046 ÷ 35,480 = 11.40%

2 Adjusted ROA = 100 × Net income ÷ Adjusted total assets
= 100 × 4,046 ÷ 27,477 = 14.73%

Profitability 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 2016 to 2017 and from 2017 to 2018.