Note 6 – Intangible Assets and Goodwill

6.1 Cost and Accumulated Amortization and Impairment

Intangible assets include software purchased from third parties, related software implementation costs, as well as patents, trademarks, client relationships acquired and development costs. Their amortization is included in the line item «Administration and general overheads» of the consolidated income statement.

The Capsugel trade name acquired through the business combination in 2017 as well as the trademarks acquired through the acquistions of Arch Chemicals (2011) and Cambrex (2007) are considered to have indefinite useful lives. As a result, these intangible assets with a carrying amount of CHF 363 million as of 31 December 2018 (2017: CHF 630 million) are not systematically amortized.

Development costs as of 31 December 2018 predominantly include technologies acquired with the acquisitions of Capsugel, amounting to CHF 1,120 million (2017: CHF 1,243 million), Octane of CHF 123 million, and the Arch Chemical acquisition of CHF 34 million (2017: CHF 42 million). As part of the planned divestiture of the Water Care business, the related trade name of CHF 259 million and capitalized technologies of CHF 4 million have been reclassified to assets held for sale (see note 5.2).

Year ended 31 December 2018

million CHF

 

Goodwill

 

Capsugel trade name / Arch Chemicals and Cambrex trademarks

 

Patents, trademarks, client relationship

 

Computer software

 

Technologies /
Development cost

 

Construction in progress

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 1 January

 

4,002

 

631

 

2,025

 

155

 

1,388

 

2

 

8,203

Additions

 

0

 

0

 

22

 

15

 

10

 

0

 

47

Disposals

 

0

 

0

 

(2)

 

(8)

 

(4)

 

0

 

(14)

Acquisition of subsidiaries

 

24

 

0

 

0

 

0

 

132

 

0

 

156

Reclassification to assets held for sale

 

(184)

 

(260)

 

(63)

 

0

 

(7)

 

0

 

(514)

Currency translation differences

 

(94)

 

(8)

 

(27)

 

1

 

(48)

 

0

 

(176)

At 31 December

 

3,748

 

363

 

1,955

 

163

 

1,471

 

2

 

7,702

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated amortization and impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 1 January

 

0

 

(1)

 

(289)

 

(120)

 

(90)

 

0

 

(500)

Amortization

 

0

 

0

 

(80)

 

(19)

 

(94)

 

0

 

(193)

Disposals

 

0

 

0

 

2

 

8

 

1

 

0

 

11

Impairment losses

 

(85)

 

0

 

(1)

 

0

 

0

 

0

 

(86)

Reclassification to assets held for sale

 

85

 

1

 

30

 

1

 

3

 

0

 

120

Currency translation differences

 

0

 

0

 

3

 

0

 

3

 

0

 

6

At 31 December

 

0

 

0

 

(335)

 

(130)

 

(177)

 

0

 

(642)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net carrying amount 31 December

 

3,748

 

363

 

1,620

 

33

 

1,294

 

2

 

7,060

Year ended 31 December 2017

million CHF

 

Goodwill

 

Capsugel trade name / Arch Chemicals and Cambrex trademarks

 

Patents, trademarks, client relationship

 

Computer software

 

Technologies /
Development cost

 

Construction in progress

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 1 January

 

1,287

 

388

 

733

 

138

 

95

 

1

 

2,642

Additions

 

0

 

0

 

3

 

14

 

6

 

1

 

24

Disposals

 

0

 

0

 

(3)

 

(4)

 

0

 

0

 

(7)

Acquisition of subsidiaries

 

2,496

 

240

 

1,265

 

7

 

1,216

 

0

 

5,224

Currency translation differences

 

219

 

3

 

27

 

0

 

71

 

0

 

320

At 31 December

 

4,002

 

631

 

2,025

 

155

 

1,388

 

2

 

8,203

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated amortization and impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 1 January

 

0

 

(1)

 

(235)

 

(109)

 

(42)

 

0

 

(387)

Amortization

 

0

 

0

 

(60)

 

(16)

 

(50)

 

0

 

(126)

Disposals

 

0

 

0

 

3

 

4

 

0

 

0

 

7

Currency translation differences

 

0

 

0

 

3

 

1

 

2

 

0

 

6

At 31 December

 

0

 

(1)

 

(289)

 

(120)

 

(90)

 

0

 

(500)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net carrying amount 31 December

 

4,002

 

630

 

1,736

 

35

 

1,298

 

2

 

7,703

6.2 Impairment Tests for Cash-Generating Units Containing Goodwill and Intangible Assets with Indefinite Useful Lives

The Group has identified the following cash-generating units:

Pharma & Biotech

The various technologies (mammalian, chemical, etc.) applied within the segment are the cash-generating units used for the impairment testing of goodwill and intangibles assets with indefinite useful lives.

Specialty Ingredients

The segment’s business units are the cash-generating units used for the impairment testing of goodwill and intangible assets with indefinite useful lives, with the exception that the Wood Protection business continues to be considered as a separate cash-generating unit due to its independent cash flows.

The following cash-generating units maintain carrying amounts of goodwill as presented below (at year-end exchange rates):

million CHF

 

2018

 

2017

1

Water Care-related goodwill of CHF 184 million was transferred to assets held for sale (see note 5.2)

2

Amount reflects goodwill acquired in connection with the acquisition of Octane (see note 5.1)

 

 

 

 

 

Capsugel (representing a group of cash-generating units)

 

0

 

2,679

Chemical – Development and Manufacturing (representing a group of cash-generating units)

 

1,563

 

38

Consumer Health & Nutrition

 

1,270

 

208

Specialty Ingredients (representing a group of cash-generating units)

 

1534

 

712

Bioscience Solutions / Cell Therapy / Viral Therapeutics (representing a group of cash-generating units)

 

319

 

324

Mammalian – Operations and Development Services

 

24

 

25

Cell Therapy / Viral Therapeutics (representing a group of cash-generating units)

 

223

 

0

Agro Ingredients

 

7

 

12

Consumer Product Ingredients

 

4

 

0

Wood Protection

 

4

 

4

Total carrying amounts of goodwill

 

3,748

 

4,002

The following cash-generating units maintain carrying amounts of intangible assets with indefinite useful lives as presented below (at year-end exchange rates):

million CHF

 

2018

 

2017

1

Water Care-related trademarks of CHF 259 million were transferred to assets held for sale (see note 5.2)

 

 

 

 

 

Capsugel (representing a group of cash-generating units)

 

0

 

256

Chemical – Development and Manufacturing (representing a group of cash-generating units)

 

148

 

0

Consumer Health & Nutrition

 

99

 

0

Specialty Ingredients (representing a group of cash-generating units)

 

189

 

348

Bioscience Solutions / Cell Therapy / Viral Therapeutics (representing a group of cash-generating units)

 

27

 

26

Total carrying amounts of intangible assets with indefinite useful life

 

363

 

630

The recoverable amount of the above cash-generating units is based on the value-in-use calculation. The supporting cash flow projections for 2019 to 2023 are based on the Lonza business strategy review and exclude any future cash inflows and outflows expected to arise from the growth potential of future capital expenditures.

The cash flow projections beyond the five-year period, as stated in the respective paragraphs of the cash-generating units below, are based on the concept of perpetual growth rates, which do not necessarily reflect the Group’s strategic objective targets for the future growth potential of the underlying businesses. The key assumptions and the approach to determining the value in use of the significant cash-generating units are based on the following:

The Chemical Development and Manufacturing business includes the cash-generating units of development and manufacturing of drug substances as well as development and manufacturing of drug products. This business includes Capsugel’s Pharma sector and Micro-Macinazione (both acquired in 2017) as well as Lonza’s legacy chemical development and manufacturing business. The cash flow projections for 2019–2023 are based on an 8.6% average sales growth with growing EBIT margins. The cash flow projections beyond the five-year period are based on a 1.5% growth rate. A pre-tax discount rate of 7.0% has been used in discounting the projected cash flows. Management believes that any reasonably possible change in the key assumptions on which the recoverable amount is based would not cause the carrying amount to exceed its recoverable amount.

The goodwill arising from the acquisitions of Capsugel in 2017 and InterHealth Nutraceuticals, acquired in 2016, is allocated to the Consumer Health & Nutrition cash-generating unit. The cash flow projections for 2019–2023 are based on a 6.9% average sales growth with increasing EBIT margins. The cash flow projections beyond the five-year period are based on 2.0% growth rate. A pre-tax discount rate of 7.9% has been used in discounting the projected cash flows. Management believes that any reasonably possible change in the key assumptions on which the recoverable amount is based would not cause the carrying amount to exceed its recoverable amount.

The Specialty Ingredients business includes the cash-generating units of Consumer Health & Nutrition, Consumer Product Ingredients, Agro Ingredients, Materials & Performance Protection and Wood Protection. These cash-generating units are the combination of the activities acquired through the Arch Chemicals acquisition in 2011, the former Life Science Ingredients activities from Lonza and the InterHealth Nutraceuticals acquisition in 2016. The cash flow projections for 2019–2023 are based on a 4.4% (2017: 4.8%) average sales growth. The cash flow projections beyond the five-year period are based on a 1.3% (2017: 1%) growth rate. A pre-tax discount rate of 7.6% (2017: 8.8%) has been used in discounting the projected cash flows. Management believes that any reasonably possible change in the key assumptions on which the recoverable amount is based would not cause the carrying amount to exceed its recoverable amount.

The Bioscience Solutions/Cell Therapy/Viral Therapeutics businesses include the Cambrex Corporation, acquired in 2007, the amaxa business, acquired in 2008, MODA Technology Partners and Vivante cGMP Solutions, acquired in 2010, Triangle Research Labs, acquired in 2016, as well as PharmaCell, acquired in 2017. The cash flow projections for 2019–2023 are based on an 8.3% (2017: 14.3%) average sales growth. The cash flow projections beyond the five-year period are extrapolated using a 0.5% (2017: 0.5%) growth rate. A pre-tax discount rate of 8.6% (2017: 8.1%) has been used in discounting the projected cash flows. Management believes that any reasonably possible change in the key assumptions on which the recoverable amount is based would not cause the carrying amount to exceed its recoverable amount.

In addition, the following table summarizes the assumptions applied for the other cash-generating units:

in %

 

2018

 

2017

 

 

 

 

 

Mammalian CGU

 

 

 

 

Pre-tax discount rate

 

8.2

 

7.6

Sales growth rate during forecast period

 

5.1

 

1.4

Sales growth rate after forecast period

 

0.0

 

0.0

 

 

 

 

 

Consumer Product Ingredients

 

 

 

 

Pre-tax discount rate

 

6.3

 

n.a.

Sales growth rate during forecast period

 

4.0

 

n.a.

Sales growth rate after forecast period

 

1.0

 

n.a.

 

 

 

 

 

Agro Ingredients CGU

 

 

 

 

Pre-tax discount rate

 

5.5

 

7.8

Sales growth rate during forecast period

 

1.7

 

2.6

Sales growth rate after forecast period

 

1.0

 

1.0

 

 

 

 

 

Wood Protection CGU

 

 

 

 

Pre-tax discount rate

 

10.1

 

10.3

Sales growth rate during forecast period

 

3.0

 

4.9

Sales growth rate after forecast period

 

1.0

 

1.0

Management believes that any reasonably possible change in the key assumptions on which the recoverable amount is based would not cause the carrying amount to exceed its recoverable amount.