NOTE 9. GOODWILL AND OTHER INTANGIBLES

Goodwill

Changes in the carrying amount of our goodwill for the nine months ended September 30, 2018 were as follows (in thousands):



	U.S. Branded - Specialty & Established Pharmaceuticals		U.S. Branded - Sterile Injectables		U.S. Generic Pharmaceuticals			International Pharmaceuticals			Total
Goodwill as of December 31, 2017	$	828,818	$	—	$	3,531,301		$	89,963		$	4,450,082
Allocation to current segments (1)	—		2,731,193		(2,731,193		)	—			—
Effect of currency translation	—		—		—			(2,414		)	(2,414		)
Goodwill impairment charges	—		—		(391,000		)	—			(391,000		)
Goodwill as of September 30, 2018	$	828,818	$	2,731,193	$	409,108		$	87,549		$	4,056,668

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(1)	This allocation relates to the change in segments described in Note 6. Segment Results. The amount of goodwill initially attributed to the new U.S. Branded - Sterile Injectables and U.S. Generic Pharmaceuticals segments was determined using a relative fair value methodology in accordance with U.S. GAAP.

The carrying amounts of goodwill at September 30, 2018 and December 31, 2017 are net of the following accumulated impairments (in thousands):



	U.S. Branded - Specialty & Established Pharmaceuticals		U.S. Branded - Sterile Injectables		U.S. Generic Pharmaceuticals		International Pharmaceuticals		Total
Accumulated impairment losses as of December 31, 2017	$	855,810	$	—	$	2,342,549	$	463,545	$	3,661,904
Accumulated impairment losses as of September 30, 2018	$	855,810	$	—	$	2,733,549	$	451,209	$	4,040,568

Other Intangible Assets

Changes in the amount of other intangible assets for the nine months ended September 30, 2018 are set forth in the table below (in thousands).



Cost basis:	Balance as of December 31, 2017			Acquisitions			Impairments			Other (1)			Effect of Currency Translation			Balance as of September 30, 2018
Indefinite-lived intangibles:
In-process research and development	$	347,200		$	—		$	(87,900	)	$	(165,400	)	$	—		$	93,900
Total indefinite-lived intangibles	$	347,200		$	—		$	(87,900	)	$	(165,400	)	$	—		$	93,900
Finite-lived intangibles:
Licenses (weighted average life of 12 years)	$	457,402		$	—		$	—		$	—		$	—		$	457,402
Tradenames	6,409			—			—			—			—			6,409
Developed technology (weighted average life of 11 years)	6,187,764			—			(129,676		)	154,753			(7,447		)	6,205,394
Total finite-lived intangibles (weighted average life of 11 years)	$	6,651,575		$	—		$	(129,676	)	$	154,753		$	(7,447	)	$	6,669,205
Total other intangibles	$	6,998,775		$	—		$	(217,576	)	$	(10,647	)	$	(7,447	)	$	6,763,105

Accumulated amortization:	Balance as of December 31, 2017			Amortization			Impairments			Other (1)			Effect of Currency Translation			Balance as of September 30, 2018
Finite-lived intangibles:
Licenses	$	(370,221	)	$	(21,262	)	$	—		$	—		$	—		$	(391,483	)
Tradenames	(6,409		)	—			—			—			—			(6,409		)
Developed technology	(2,304,461		)	(450,400		)	—			10,647			3,217			(2,740,997		)
Total other intangibles	$	(2,681,091	)	$	(471,662	)	$	—		$	10,647		$	3,217		$	(3,138,889	)
Net other intangibles	$	4,317,684														$	3,624,216

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(1)	Other adjustments relate to reclassification adjustments of $165.4 million for certain developed technology intangible assets, previously classified as in-process research and development, that were placed in service during the nine months ended September 30, 2018 and the removal of certain fully amortized intangible assets.

Amortization expense for the three and nine months ended September 30, 2018 totaled $161.3 million and $471.7 million, respectively. Amortization expense for the three and nine months ended September 30, 2017 totaled $161.4 million and $615.5 million, respectively. Amortization expense is included in Cost of revenues in the Condensed Consolidated Statements of Operations. Estimated amortization of intangibles for the five fiscal years subsequent to December 31, 2017 is as follows (in thousands):



2018	$	622,384
2019	$	552,516
2020	$	481,300
2021	$	447,157
2022	$	420,786

Impairments

Endo tests goodwill and indefinite-lived intangible assets for impairment annually, or more frequently whenever events or changes in circumstances indicate that the asset might be impaired. Our annual assessment is performed as of October 1st.

As part of our goodwill and intangible asset impairment assessments, we estimate the fair values of our reporting units and our intangible assets using an income approach that utilizes a discounted cash flow model or, where appropriate, a market approach. The discounted cash flow models are dependent upon our estimates of future cash flows and other factors. These estimates of future cash flows involve assumptions concerning (i) future operating performance, including future sales, long-term growth rates, operating margins, tax rates, variations in the amount and timing of cash flows and the probability of achieving the estimated cash flows and (ii) future economic conditions. These assumptions are based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy. The discount rates applied to the estimated cash flows are based on the overall risk associated with the particular assets and other market factors. We believe the discount rates and other inputs and assumptions are consistent with those that a market participant would use. Any impairment charges resulting from annual or interim goodwill and intangible asset impairment assessments are recorded to Asset impairment charges in our Condensed Consolidated Statements of Operations.

During the three and nine months ended September 30, 2018 and 2017, the Company incurred the following goodwill and other intangible asset impairment charges:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Goodwill impairment charges	$	—	$	—	$	391,000	$	288,745
Other intangible asset impairment charges	$	140,609	$	78,300	$	217,576	$	674,177

A summary of significant goodwill and other intangible asset impairment tests and related charges is included below. Other intangible asset impairment charges that are not included in the below narrative totaled $140.6 million and $78.3 million during the three months ended September 30, 2018 and 2017, respectively, and $217.6 million and $461.1 million during the nine months ended September 30, 2018 and 2017, respectively. These charges relate primarily to certain in-process research and development and/or developed technology intangible assets that were tested for impairment following changes in market conditions and certain other factors impacting recoverability.

Our first quarter 2018 change in segments described in Note 6. Segment Results resulted in changes to our reporting units for goodwill impairment testing purposes, including the creation of a new U.S. Branded - Sterile Injectables reporting unit, which was previously part of our Generics reporting unit. As a result of these changes, under U.S. GAAP, we tested the goodwill of the former Generics reporting unit immediately before the segment realignment and the goodwill of both the new U.S. Branded - Sterile Injectables and U.S. Generic Pharmaceuticals reporting units immediately after the segment realignment. These goodwill tests were performed using an income approach that utilizes a discounted cash flow model. The results of these goodwill impairment tests were as follows:


•	The former Generics reporting unit’s estimated fair value (determined using a discount rate of 9.5%) exceeded its carrying amount, resulting in no related goodwill impairment charge.


•	The new U.S. Branded - Sterile Injectables reporting unit’s estimated fair value (determined using a discount rate of 9.5%) exceeded its carrying amount, resulting in no related goodwill impairment charge.


•	The new U.S. Generic Pharmaceuticals reporting unit’s carrying amount exceeded its estimated fair value (determined using a discount rate of 9.5%), resulting in a pre-tax non-cash goodwill impairment charge of $391.0 million.

In March 2017, we announced that the Food and Drug Administration’s (FDA) Drug Safety and Risk Management and Anesthetic and Analgesic Drug Products Advisory Committees voted that the benefits of reformulated OPANA^®ER (oxymorphone hydrochloride extended release) no longer outweigh its risks. In June 2017, we became aware of the FDA’s request that we voluntarily withdraw OPANA^®ER from the market, and in July 2017, after careful consideration and consultation with the FDA, we decided to voluntarily remove OPANA^®ER from the market. As a result of our decision, the Company determined that the carrying amount of its OPANA^® ER intangible asset was no longer recoverable, resulting in a pre-tax, non-cash impairment charge of $20.6 million in the second quarter of 2017, representing the remaining carrying amount.

As a result of the withdrawal of OPANA^® ER from the market and the continued erosion of our U.S. Branded Pharmaceuticals segment’s Established Products portfolio, we initiated an interim goodwill impairment analysis of our Branded reporting unit during the second quarter of 2017. We recorded a pre-tax, non-cash goodwill impairment charge of $180.4 million during the three months ended June 30, 2017 for the amount by which the carrying amount exceeded the reporting unit’s fair value. We estimated the fair value of the Branded reporting unit using an income approach that utilized a discounted cash flow model. The discount rate applied to the estimated cash flows for our Branded goodwill impairment test was 9.5%.

As further described in Note 4. Restructuring, the Company announced the 2017 U.S. Generic Pharmaceuticals Restructuring Initiative in July 2017, which includes the discontinuation of certain commercial products. As a result, the Company assessed the recoverability of the impacted products, resulting in pre-tax, non-cash intangible asset impairment charges of approximately $57.5 million during the second quarter of 2017. The Company also initiated an interim goodwill impairment analysis of its Generics reporting unit during the second quarter of 2017 as a result of the 2017 U.S. Generic Pharmaceuticals Restructuring Initiative and determined that the estimated fair value of the Generics reporting unit exceeded its carrying amount. Accordingly, no related goodwill impairment was recorded. The Company estimated the fair value of the Generics reporting unit using an income approach that utilized a discounted cash flow model. The discount rate applied to the estimated cash flows for our Generics goodwill impairment test was 9.0%.

Pursuant to an existing agreement with a wholly owned subsidiary of Novartis AG (Novartis), Paladin licensed the Canadian rights to commercialize serelaxin, an investigational drug for the treatment of acute heart failure (AHF). In March 2017, Novartis announced that a Phase 3 study of serelaxin in patients with AHF failed to meet its primary endpoints. As a result, we concluded that the full carrying amount of our serelaxin in-process research and development intangible asset was impaired, resulting in a $45.5 million pre-tax non-cash impairment charge for the three months ended March 31, 2017. In addition and as a result of the serelaxin impairment, we assessed the recoverability of our Paladin goodwill balance and determined that the estimated fair value of the Paladin reporting unit was below its carrying amount. We recorded a pre-tax, non-cash goodwill impairment charge of $82.6 million during the three months ended March 31, 2017 for the amount by which the carrying amount exceeded the reporting unit’s fair value. We estimated the fair value of the Paladin reporting unit using an income approach that utilized a discounted cash flow model. The discount rate applied to the estimated cash flows for our Paladin goodwill impairment test was 10.0%.

As further discussed in Note 3. Discontinued Operations and Divestitures, we entered into a definitive agreement to sell Somar on June 30, 2017, which resulted in Somar’s assets and liabilities being classified as held for sale. The initiation of held-for-sale accounting, together with the agreed upon sale price, triggered an impairment review. Accordingly, we performed an impairment analysis using a market approach and determined that impairment charges were required. We recorded pre-tax, non-cash impairment charges of $25.7 million and $89.5 million related to Somar’s goodwill and other intangible assets, respectively, during the second quarter of 2017, each of which represented the remaining carrying amounts of the corresponding assets.