Allergan PLC (AGN)

Product Rights and Other Definite Lived Intangible Assets

Allergan’s product rights and other definite lived intangible assets are stated at cost, less accumulated amortization, and are amortized using the economic benefit model or the straight-line method, if results are materially aligned, over their estimated useful lives. Allergan determines amortization periods for product rights and other definite lived intangible assets based on the assessment of various factors impacting estimated cash flows. Such factors include the product’s position in its life cycle, the existence or absence of like products in the market, various other competitive and regulatory issues, and contractual terms. Significant changes to any of these factors may result in an impairment, a reduction in the intangibles useful life or an acceleration of related amortization expense, which could cause Allergan’s net results to decline.

Product rights and other definite lived intangible assets are tested periodically for impairment when events or changes in circumstances indicate that an asset’s carrying value may not be recoverable. The impairment testing involves comparing the carrying amount of the asset to the forecasted undiscounted pre-tax future cash flows over its useful life, including any salvage value. In the event the carrying value of the asset exceeds the undiscounted future cash flows, the carrying value is considered not recoverable and an impairment exists. An impairment loss is measured as the excess of the asset’s carrying value over its fair value, calculated using discounted future cash flows. The computed impairment loss is recognized in net (loss) / income in the period that the impairment occurs. Assets which are not impaired may require an adjustment to the remaining useful lives for which to amortize the asset. Allergan’s projections of discounted cash flows use a discount rate determined by the management to be commensurate with the risk inherent in the business model. Allergan’s estimates of future cash flows attributable to the other definite lived intangible assets require significant judgment based on the historical and anticipated results and are subject to many factors. Different assumptions and judgments could materially affect the calculation of the undiscounted cash flows of the other definite lived intangible assets which could trigger impairment.

Goodwill and Intangible Assets with Indefinite Lives

Allergan tests goodwill and intangible assets with indefinite lives for impairment annually in the second quarter. Additionally, Allergan may perform interim tests if an event occurs or circumstances change that could potentially reduce the fair value of a reporting unit or an indefinite lived intangible asset below its carrying amount such as those fourth quarter 2018 triggering events relating to Allergan’s General Medicine Reporting Unit as discussed in “NOTE 16 — Goodwill, Product Rights and Other Intangible Assets”. The carrying value of each reporting unit is determined by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units.

Allergan tests goodwill for impairment by either performing a qualitative evaluation or a quantitative test. The qualitative evaluation is an assessment of factors, including Reporting Unit specific operating results as well as industry, market and general economic conditions, to determine whether it is more likely than not that the fair values of a Reporting Unit is less than its carrying amount, including goodwill. Allergan may elect to bypass this qualitative assessment for some or all of its Reporting Units and perform a quantitative test as of the measurement date of the test.

Goodwill is considered impaired if the carrying amount of the net assets exceeds the fair value of the reporting unit. Impairment, if any, would be recorded in operating income / (loss) and this could result in a material impact to net income / (loss) and income / (loss) per share.

Prior to Allergan’s 2018 annual impairment test, Allergan adopted the new guidance under Accounting Standard Update No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment which eliminated step 2 of the goodwill impairment test, which required a hypothetical purchase price allocation to measure goodwill impairment loss as of January 1, 2018. A goodwill impairment loss under the new guidance is instead measured using a single step test based on the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill.

Acquired in-process research and development (“IPR&D”) intangible assets represent the value assigned to research and development projects acquired in a business combination that, as of the date acquired, represent the right to develop, use, sell and/or offer for sale a product or other intellectual property that has not been completed or approved. The IPR&D intangible assets are subject to impairment testing until completion or abandonment of each project. Upon abandonment, the assets are impaired if there is no future alternative use or ability to sell the asset. Impairment testing requires the development of significant estimates and assumptions involving the determination of estimated net cash flows for each year for each project or product (including net revenues, cost of sales, R&D costs, selling and marketing costs and other costs which may be allocated), determination of the appropriate discount rate in order to measure the risk inherent in each future cash flow stream, assessment of each asset’s life cycle, potential regulatory and commercial success risks, and competitive trends impacting the asset and each cash flow stream as well as other factors. The major risks and uncertainties associated with the timely and successful completion of IPR&D projects include legal risk, market risk and regulatory risk. Changes in Allergan’s assumptions could result in future impairment charges. No assurances can be given that the underlying assumptions used to prepare the discounted cash flow analysis will not change or the timely completion of each project and commercial success will occur. For these and other reasons, actual results may vary significantly from estimated results.

Upon successful completion of each project and approval of a product, Allergan will make a separate determination of the useful life of the intangible asset, transfer the amount to currently marketed products (“CMP”) and amortization expense will be recorded over the estimated useful life.

Source: 10-K (filing date: 2019-02-15).

Allergan PLC, balance sheet: goodwill and intangible assets

US$ in thousands

		Dec 31, 2018		Dec 31, 2017		Dec 31, 2016		Dec 31, 2015		Dec 31, 2014
	Product rights and other intangibles
	Trade name
	Customer relationships
	Definite lived intangible assets, cost basis
	Accumulated amortization
	Definite lived intangible assets, net
	IPR&D
	Trade name
	Indefinite lived intangible assets
	Net product rights and other intangibles
	Goodwill
	Goodwill, product rights and other intangible assets

Based on: 10-K (filing date: 2019-02-15), 10-K (filing date: 2018-02-16), 10-K (filing date: 2017-02-24), 10-K (filing date: 2016-02-26), 10-K (filing date: 2015-02-18).

Allergan PLC, adjustments to financial data

US$ in thousands

		Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014
	Adjustment to Total Assets
	Total assets (as reported)
	Less: Goodwill
	Total assets (adjusted)
	Adjustment to Shareholders’ Equity
	Shareholders’ equity (as reported)
	Less: Goodwill
	Shareholders’ equity (adjusted)
	Adjustment to Net Income (loss) Attributable To Shareholders
	Net income (loss) attributable to shareholders (as reported)
	Add: Goodwill impairments
	Net income (loss) attributable to shareholders (adjusted)

Based on: 10-K (filing date: 2019-02-15), 10-K (filing date: 2018-02-16), 10-K (filing date: 2017-02-24), 10-K (filing date: 2016-02-26), 10-K (filing date: 2015-02-18).

Allergan PLC, Financial Data: Reported vs. Adjusted

Allergan PLC, adjusted ratios

		Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014
	Net Profit Margin
	Reported net profit margin
	Adjusted net profit margin
	Total Asset Turnover
	Reported total asset turnover
	Adjusted total asset turnover
	Financial Leverage
	Reported financial leverage
	Adjusted financial leverage
	Return on Equity (ROE)
	Reported ROE
	Adjusted ROE
	Return on Assets (ROA)
	Reported ROA
	Adjusted ROA

Based on: 10-K (filing date: 2019-02-15), 10-K (filing date: 2018-02-16), 10-K (filing date: 2017-02-24), 10-K (filing date: 2016-02-26), 10-K (filing date: 2015-02-18).

Allergan PLC, Ratios: Reported vs. Adjusted

		Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014
	As Reported
	Selected Financial Data (US$ in thousands)
	Net income (loss) attributable to shareholders
	Net revenues
	Ratio
	Net profit margin1
	Adjusted for Goodwill
	Selected Financial Data (US$ in thousands)
	Adjusted net income (loss) attributable to shareholders
	Net revenues
	Ratio
	Adjusted net profit margin2

Based on: 10-K (filing date: 2019-02-15), 10-K (filing date: 2018-02-16), 10-K (filing date: 2017-02-24), 10-K (filing date: 2016-02-26), 10-K (filing date: 2015-02-18).

2018 Calculations

		Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014
	As Reported
	Selected Financial Data (US$ in thousands)
	Net revenues
	Total assets
	Ratio
	Total asset turnover1
	Adjusted for Goodwill
	Selected Financial Data (US$ in thousands)
	Net revenues
	Adjusted total assets
	Ratio
	Adjusted total asset turnover2

Based on: 10-K (filing date: 2019-02-15), 10-K (filing date: 2018-02-16), 10-K (filing date: 2017-02-24), 10-K (filing date: 2016-02-26), 10-K (filing date: 2015-02-18).

2018 Calculations

		Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014
	As Reported
	Selected Financial Data (US$ in thousands)
	Total assets
	Shareholders’ equity
	Ratio
	Financial leverage1
	Adjusted for Goodwill
	Selected Financial Data (US$ in thousands)
	Adjusted total assets
	Adjusted shareholders’ equity
	Ratio
	Adjusted financial leverage2

Based on: 10-K (filing date: 2019-02-15), 10-K (filing date: 2018-02-16), 10-K (filing date: 2017-02-24), 10-K (filing date: 2016-02-26), 10-K (filing date: 2015-02-18).

2018 Calculations

		Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014
	As Reported
	Selected Financial Data (US$ in thousands)
	Net income (loss) attributable to shareholders
	Shareholders’ equity
	Ratio
	ROE1
	Adjusted for Goodwill
	Selected Financial Data (US$ in thousands)
	Adjusted net income (loss) attributable to shareholders
	Adjusted shareholders’ equity
	Ratio
	Adjusted ROE2

Based on: 10-K (filing date: 2019-02-15), 10-K (filing date: 2018-02-16), 10-K (filing date: 2017-02-24), 10-K (filing date: 2016-02-26), 10-K (filing date: 2015-02-18).

2018 Calculations

		Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014
	As Reported
	Selected Financial Data (US$ in thousands)
	Net income (loss) attributable to shareholders
	Total assets
	Ratio
	ROA1
	Adjusted for Goodwill
	Selected Financial Data (US$ in thousands)
	Adjusted net income (loss) attributable to shareholders
	Adjusted total assets
	Ratio
	Adjusted ROA2

Based on: 10-K (filing date: 2019-02-15), 10-K (filing date: 2018-02-16), 10-K (filing date: 2017-02-24), 10-K (filing date: 2016-02-26), 10-K (filing date: 2015-02-18).

2018 Calculations