(5) Acquisitions and divestments
ACCOUNTING AND MEASUREMENT POLICIES – BUSINESS COMBINATIONS
The balance sheet items intangible assets and deferred taxes are significantly influenced by purchase price allocations within the scope of business combinations. Because prices observable on the market are mostly not available for the acquired intangible assets, a valuation using inputs observable in the market is usually performed. For all material company acquisitions, the Group relies on the expertise of external professionals. The following overview shows the methods routinely used to measure intangible assets within the scope of purchase price allocations:3.79 KBEXCEL
|Measurement method for determining fair value|
|Customer relationships||Multi period excess earnings method|
|Technology||Relief from royalty method|
|Trademark||Relief from royalty method|
Results from foreign currency hedging of expected business combinations, if they meet the requirements for hedge accounting, are offset against the carrying value of the net assets acquired.
SIGNIFICANT DISCRETIONARY DECISIONS AND SOURCES OF ESTIMATION UNCERTAINTY – BUSINESS COMBINATIONS
The recognition and measurement of assets, liabilities, and contingent liabilities at fair value within the context of purchase price allocations are associated with significant estimation uncertainty.
In particular, estimation uncertainty and discretionary decisions exist regarding:
- the customer churn rate, which indicates how existing customer relationships will change in the future,
- the license rate for technologies, which estimates royalty savings on the basis of comparable transactions of similar technologies,
- the discount factor, which is applied for maturity- and risk-based discounting of expected cash inflows,
- the useful life and the degree of technical obsolescence which depend, among other things, on assumptions about technological trends.
The most important acquisition in fiscal 2019 was Versum Materials, Inc., United States, (Versum). Customer relationships represent the largest intangible asset in terms of value. For their measurement, assumptions, particularly concerning the customer attrition rate and thus their useful life, had to be made. If the customer retention period were one year longer, the fair value of customer relationships recognized as part of intangible assets would be € 44 million higher on the date of their acquisition. A shortening of the retention period by one year would reduce the fair value of customer relationships by € 46 million.
Acquisitions in 2019
Acquisition of Versum Materials, Inc., United States
On April 12, 2019, the Group announced the conclusion of a final agreement to acquire all issued and outstanding shares of Versum for US$53 per share in cash. The transaction closed on October 7, 2019. Its completion followed previous approvals issued by the relevant authorities, the approval of the shareholders of Versum and the fulfillment of other customary closing conditions.
Versum’s business activities
Versum is one of the world’s leading providers of process chemicals, gases, and equipment for semiconductor manufacturing. In fiscal 2018, the company generated annual sales of around € 1.2 billion in accordance with U.S. GAAP. Versum has around 2,300 employees and operates 14 production sites and seven research and development facilities in Asia and North America. The former Versum business will be integrated into the Semiconductor Solutions business unit, which is part of the Performance Materials business sector. The objective of the transaction is to create a leading player in the field of electronic materials specializing in the semiconductor and display industries.
Purchase price allocation
As control over Versum was obtained on October 7, 2019, and essential information for determining the purchase price allocation could only be obtained after that date for legal reasons, the purchase price allocation was only completed for some assets and liabilities such as cash and cash equivalents, trade payables, and financial debt as of December 31, 2019.
The purchase price for the acquisition of Versum was fully paid in cash. The payments were as follows:3.99 KBEXCEL
|Purchase price for 100% of the shares at the closing rate on October 7, 2019||5,279|
|Reclassification of income from hedging transactions from other comprehensive income to assets||-81|
|Purchase price in accordance with IFRS 3||5,198|
|Cash and cash equivalents acquired||270|
|Payments for 100% of shares less acquired cash and cash equivalents||4,928|
As part of the acquisition the parties did not agree on any contingent consideration to be provided by the Group in the future. The majority of the currency risk arising from payment of the purchase price for Versum in U.S. dollars was hedged as part of a hedging strategy using derivative financial instruments (forward exchange contracts and currency options) in accordance with the regulations for cash flow hedge accounting. The resulting income of € 81 million was taken into consideration in determining the purchase price in accordance with IFRS 3.
The preliminary fair values at the acquisition date are presented in the “Overview of preliminary fair values of acquisitions in 2019” section.
Material contingent liabilities were not identified as part of the preliminary purchase price allocation. The following overview shows the intangible assets identified within the scope of the preliminary purchase price allocation and recognized at the acquisition date:
|€ million / years(preliminary) ||Fair value at the acquisition date ||Useful life|
|Technology (patented and unpatented)||476||5-15|
The preliminary positive difference of € 3,144 million was recognized as goodwill. It includes expected synergies resulting from the integration of Versum into the Group, expected revenues from technical innovations and developments that go beyond the current product, development, and customer portfolios, and unrecognized intangible assets such as the expertise of the workforce. The goodwill was allocated in full to the Performance Materials business sector. The goodwill is expected to be non-tax deductible. The change in goodwill valued in foreign currency between initial recognition and December 31, 2019 is broken down as follows:3.79 KBEXCEL
|€ million||Change in goodwill|
|Goodwill on October 7, 2019||3,144|
|Exchange rate effects||-64|
|Goodwill on December 31, 2019||3,080|
Financing the acquisition
To finance the purchase price, the Group issued a hybrid bond in two tranches on June 18, 2019, with a volume of € 1.5 billion and on July 1, 2019, bonds with a volume of € 2 billion. The hybrid bond comprises two tranches with maturities of 60 years each. Each tranche includes a redemption option for the Group after 5.5 and ten years.
Sales and earnings contribution from Versum
For the 86 calendar days to the end of the year 2019, the former Versum business contributed € 247 million to Group net sales and € –49 million to net income after taxes. This result reflects the higher cost of sales resulting from adjusting acquired inventories to their preliminary fair values and amortization of revalued assets.
Assuming that Versum had already been initially consolidated as of January 1, 2019, the Group would have generated € 17,040 million in net sales (compared to reported net sales of € 16,152 million) and net income after taxes of € 1,365 million (compared to reported net earnings of € 1,324 million) for the period of January 1 to December 31, 2019. When calculating these figures it was assumed that the adjustments to carrying amounts resulting from the purchase price allocation had been identical and would have been taken into account in accordance with their useful life in terms of their effects on the consolidated income statement. Furthermore, it was assumed that the financing of the acquisition had already taken place as of January 1, 2019. There were only immaterial business relationships between the Group and Versum in 2019 up to the acquisition date (sales volume of less than € 10 million). Costs of € 44 million associated with the company’s acquisition were recognized in other operating expenses.
Acquisition of Intermolecular, Inc., United States
The Group completed the acquisition of Intermolecular, Inc., United States, on September 20, 2019, for US$ 1.20 per share in cash (the equivalent of € 56 million for 100% of shares). The transaction followed the approval of the authorities and fulfillment of other customary closing conditions.
Intermolecular possesses application-specific materials expertise and platforms for accelerated learning and experimentation with a powerful analysis infrastructure that complements the Group’s business and technology portfolio in the semiconductor business, part of the Performance Materials business sector.
In fiscal 2018, Intermolecular generated sales of US$ 34 million and had around 90 employees.
To a predominant extent, the intangible assets identified within the scope of the purchase price allocation and recognized as of the initial consolidation date were attributable to intangible assets related to technology. The preliminary assets and liabilities recognized as of the acquisition date are presented in the section “Overview of preliminary fair values of acquisitions in 2019”. The purchase price allocation for Intermolecular was still incomplete as of December 31, 2019, in respect to the intangible assets and deferred taxes.
Since the company was included in September, the former Intermolecular business contributed € 3 million to Group net sales and € -4 million to net income after tax. The impact of a notional consolidation of Intermolecular as of January 1, 2019, on the Group’s net assets, financial position, and results of operations is immaterial. Costs of € 2 million associated with the company’s acquisition were recognized in other operating expenses.
Additional acquisitions in 2019
On June 17, 2019, the Group acquired the laboratory informatics provider BSSN Software GmbH, Darmstadt, (BSSN). BSSN develops and markets software for managing and integrating data, which unifies data from laboratory instruments and data systems and makes them available for analyzing, processing, and sharing. The business was integrated into the Life Science business sector. The purchase price amounted to € 16 million including milestone payments amounting to € 6 million for reaching technological development targets. As of December 31, 2019, the purchase price allocation had not yet been completed.
The closing of the acquisition of FloDesign Sonics, Inc., United States, (FloDesign) was announced on October 10, 2019. The company developed a platform for industrial manufacturing of cell and gene therapies that allows cells to be manipulated using ultrasonic waves. It forms part of the Life Science business sector.
The purchase price included fixed compensation of € 32 million. Future milestone payments of up to € 30 million for the achievement of technological development targets and a further, sales-independent milestone payment were agreed as further elements of the purchase price. Valuation of the contingent purchase price payments resulted in a purchase price of € 46 million in accordance with IFRS 3. The intangible assets identified within the scope of the preliminary purchase price allocation and recognized as of the initial consolidation date were attributable to technology-related intangible assets.
Costs of € 1 million associated with the acquisitions of BSSN and FloDesign were recognized in other operating expenses.
Overview of Preliminary Fair Values of Acquisitions in 20196.29 KBEXCEL
|Fair value at the acquisition date (preliminary)|
|€ million||Versum||Intermolecular||Other acquisitions||Total|
|Intangible assets (excluding goodwill)||2,848||20||26||2,895|
|Property, plant, and equipment||534||19||–||553|
|Other non-current assets||62||4||2||68|
|Trade receivables and other current receivables||155||2||–||157|
|Cash and cash equivalents||270||7||–||277|
|Other current assets||87||8||–||95|
|Non-current financial debt||938||11||–||949|
|Other non-current provisions and liabilities||81||–||–||81|
|Deferred tax liabilities||763||5||6||774|
|Trade payables and other liabilities||61||1||1||63|
|Income tax liabilities||122||–||–||122|
|Other current liabilities and provisions||161||4||–||166|
|Net assets acquired||2,054||39||22||2,115|
|Purchase price for acquiring the shares||5,198||56||62||5,316|
|Positive difference (goodwill)||3,144||17||40||3,201|
Divestitures in 2018
SIGNIFICANT DISCRETIONARY DECISIONS AND SOURCES OF ESTIMATION – DIVESTMENTS
The assessment as to when a non-current asset, disposal group, or discontinued operation meets the prerequisites of IFRS 5 for classification as “held for sale” is subject to discretionary judgment. Even in the case of an existing management decision to review a disposal, an uncertain assessment has to be made as to the probability of whether a corresponding disposal will occur during the year.
Divestment of the Consumer Health business
On April 19, 2018, the Group signed an agreement on the divestment of its global Consumer Health business to The Procter & Gamble Company, United States. The transaction was completed on December 1, 2018. The selling price was € 3.4 billion in cash and included purchase price adjustments for transferred operating assets, cash on hand, and borrowed capital, among other things. Final determination of these purchase price adjustments was made in the first half of 2019. In the process, the Group was able to collect an additional € 52 million. The income and costs connected with the sale came to € 28 million and were reported under profit after tax from discontinued operation. The payments from discontinued operations of € 129 million shown in the consolidated cash flow statement in net cash flows from investing activities were mainly attributable to tax payments related to the divestment of the Consumer Health business, and to the cash inflows for the purchase price adjustment.
In accordance with IFRS 5, the financial figures disclosed in these consolidated financial statements relate exclusively to continuing operations unless expressly stated otherwise. Earnings contributions from supplies and services provided by the Group after the conclusion of the sale transaction according to contractual agreements were presented in the profit from continuing operations both for 2018 and for 2019.
Divestment of the flow cytometry business
On October 18, 2018, the Group signed an agreement with Luminex Corporation, United States, concerning the divestment of the flow cytometry business. These business activities comprised the flow cytometry platforms Amnis® and Guava® as well as the associated reagents under these brands. The disposal proceeds amounted to € 66 million, of which € 61 million were paid in fiscal 2018. The remaining € 5 million were paid in fiscal 2019. The transaction was completed on December 31, 2018. This divestment generated a disposal gain of € 9 million which was recognized in other operating income in fiscal 2018. Adjustments to the disposal gain of € -8 million were recognized in 2019.
(6) Collaboration agreements
Accounting and measurement policies
Collaboration agreements in the Healthcare business sector
In addition to traditional agreements for buying or selling intellectual property, the Group enters into collaboration agreements in which the Group works with partners to develop pharmaceutical drug candidates and, if regulatory approval is granted, to commercialize them. Because the partner companies do not have customer characteristics, these collaboration agreements do not fall directly within the scope of IFRS 15 and the associated income from upfront payments, milestone payments, and royalties is shown under other operating income. Reimbursements of research and development costs made between the collaboration partners are recognized on a net basis in research and development costs. The two most significant collaborations are the agreements with Pfizer Inc., United States, (Pfizer) and with GlaxoSmithKline plc, United Kingdom, (GSK) in the field of immuno-oncology.
The Group recognizes the consideration received in the course of collaboration agreements for bundled obligations arising from granting rights to intellectual property as well as other goods and services promised as income over a period of time, in line with industry practice. Income is caught up cumulatively upon receipt of uncertain future milestone payments attributable to contractual obligations which have already been fulfilled. This refers especially to milestone payments subsequent to regulatory approval.
Furthermore, collaboration agreements in the Healthcare business sector typically allocate the sales generated in specific markets, or with specific products, to the respective collaboration partners in the event of a successful approval; in turn, specific income and expense items are carried by the collaboration partners according to predefined allocation ratios. Under these circumstances, the Group recognizes the sales from the commercialization of products to third-party customers, if the Group takes on the role of a principal within the meaning of IFRS 15. Expenses resulting from payments made to collaboration partners in connection with profit share agreements are recognized in other operating expenses.
Joint arrangements in the Performance Materials business sector
The Group is a contract partner in two joint arrangements in the Performance Materials business sector. In both cases, the Group has joint control with the respective partner. Although they are legally separate from the partners, these joint operations are classified as joint activities in line with IFRS 11.B31. The Group and the contract partner ensure their contractually agreed access to the production outputs by preventing third party access. Assets, liabilities, income, and expenses from these joint arrangements allocated to the Group are accounted for in accordance with the IFRSs applicable to the respective assets, liabilities, income and expenses.
SIGNIFICANT DISCRETIONARY DECISIONS AND SOURCES OF ESTIMATION UNCERTAINTY
As part of the accounting treatment of collaboration agreements, significant discretionary decisions have to be made in the following areas:
- Identification of an appropriate type of income recognition,
- Determination of the appropriate timing of income recognition and
- Classification of joint arrangements as joint operations or joint ventures.
Estimates are to be made especially when it comes to determining the transaction price and progress on the performance obligation.
If the consideration received and deferred as a liability in the case of the collaboration agreement with Pfizer had been recognized in the income statement over a period extended by six months, in fiscal 2019 this would have reduced other operating income, and therefore also profit before income tax, by € 64 million (2018: € 38 million). If the percentage of completion of the collaboration agreement with GSK in 2019 had been 10% higher, this would have increased other operating income and profit before tax by € 30 million (reduction by € 30 million at 10% lower percentage of completion).
Agreement with GlaxoSmithKline plc, United Kingdom, to co-develop and co-commercialize active ingredients in immuno-oncology
On February 5, 2019, the Group entered into an agreement in the field of immuno-oncology with a subsidiary of GSK to co-develop and co-commercialize the drug candidate Bintrafusp alfa (formerly known as M7824). The bifunctional fusion protein, Bintrafusp alfa, is currently an investigational candidate for several types of cancer. The overriding objective of the strategic alliance is to share the risks of development and commercialization. The execution of the collaboration agreement is not structured through a separate vehicle.
After fulfilling the agreed conditions, the Group received an upfront payment of € 300 million, which was recognized as deferred income on the balance sheet and presented under other liabilities. The Group has a claim to further development milestone payments of up to € 500 million depending on clinical data. In addition, the Group can receive future payments of up to € 2.9 billion for achieving certain milestones related to approval and commercialization. The Group recognizes the upfront payment as income, as well as any developmental milestone payments potentially to be received in the future in accordance with the fulfillment of performance obligations existing on the basis of contractual agreements. A cost-based method is used to recognize these payments. Income can be caught up cumulatively when milestones are achieved.
The Group and GSK are jointly responsible for the development and potential commercialization further down the line. According to the collaboration agreement, during the development period each company bears one half of the development expenses. While the Group will realize the net sales in the United States and GSK in all other countries in the event of regulatory approval, the collaboration agreement provides for the partners to evenly split the net results of net sales less defined expense components. In fiscal 2019, the Group recognized € 92 million of the upfront payment collected within other operating income. The Group furthermore recognized research and development costs amounting to a double-digit million-euro figure.
Strategic alliance with Pfizer Inc., United States, to jointly co-develop and co-commercialize active ingredients in immuno-oncology
On November 17, 2014, the Group formed a global strategic alliance with Pfizer to co-develop and co-commerzialize the anti-PD-L1 antibody avelumab. Avelumab received its first regulatory approvals in 2017 under the trade name Bavencio®. This antibody is also being studied in multiple broad-based clinical trials as a potential treatment for further tumor types as a single agent as well as in combination with a wide array of approved or still investigational active ingredients. The overriding objective of the strategic alliance is to share the development risks and to expand the two companies’ presence in immuno-oncology.
According to the collaboration agreement, during the development period each company bears one half of the development expenses. In the commercialization phase, the Group realizes the majority of sales from the commercialization of Bavencio® while the Group and Pfizer evenly split the net amount of sales less defined expense components. The execution of the collaboration agreement is not being structured through a separate vehicle.
Upon entry into the agreement in 2014, Pfizer made an upfront cash payment of US$ 850 million (€ 678 million) to the Group. Pfizer also committed to making further payments of up to US$ 2 billion to the Group subject to the achievement of defined development and commercial milestones. Based on the collaboration agreement, the Group was also granted the right to co-promote Xalkori® (crizotinib) with Pfizer for multiple years. This is a kinase inhibitor indicated for the treatment of patients with metastatic non-small cell lung cancer (NSCLC) whose tumors are anaplastic lymphoma kinase (ALK)-positive or whose tumors are metastatic ROS1-positive. During the co-promotion of Xalkori®, the Group receives a profit share from Pfizer, which is reported in net sales. In 2019, this profit share income amounted to € 56 million (2018: € 58 million). The residual carrying amount of the co-promotion right recognized as an intangible asset amounted to € 45 million as of December 31, 2019 (December 31, 2018: € 68 million).
Both the upfront payment as well as the value of the right to co-promote Xalkori® were recognized as income on a pro rata basis over the period during which the major part of the initially decided clinical development programs was conducted. Moreover, in 2019, the Group recognized income from reaching three approval milestones and, in 2018, income amounting to a mid double-digit million-euro figure in return for waiving rights to Pfizer’s anti-PD-1 antibody. This had previously been included in the collaboration agreement. For further information, please refer to Note (15) “Other operating income”. As in 2018, the Group recognized research and development costs in a low three-digit million euro amount in 2019.
Restructuring the agreement with Intrexon Corporation, United States, to co-develop and co-commercialize of CAR-T cancer therapies in 2018
In March 2015, the Group and Intrexon Corporation, United States, (Intrexon) entered into a strategic collaboration and license agreement to develop and commercialize chimeric antigen receptor T-cell (CAR-T) cancer therapies. The agreement provided the Group with exclusive access to Intrexon’s proprietary and complementary suite of technologies to engineer T-cells with optimized and inducible gene expression.
Effective December 28, 2018, the Group transferred the above-mentioned exclusive rights back to Intrexon on the basis of a contractual agreement. At the time the contract was signed, the Group was entitled to receive Intrexon common stock worth US$ 150 million in return for the assignment of rights. Furthermore, the agreement contained another investment by the Group, amounting to US$ 25 million, in Intrexon’s subsidiary Precigen, Inc., United States, (Precigen) which is involved in the development of T-cell cancer therapies. In return, the Group received a convertible note in the amount of US$ 25 million, with the option, under certain conditions, to acquire shares in either Intrexon or Precigen. The transaction led to the disposal of the intangible asset in the amount of € 104 million in 2018 and to the recognition of a disposal gain, which was reported under other operating income. As of December 31, 2019, the carrying amount of the equity interest amounted to € 101 million (December 31, 2018: € 118 million).
Agreement with Avillion LLP, United Kingdom, to develop AN anti-IL-17-A/F Nanobody®
On March 30, 2017, the Group announced an agreement with a subsidiary of Avillion LLP, United Kingdom, (Avillion) to develop the anti-IL-17-A/F Nanobody® M1095. As part of this collaboration, Avillion will be responsible for developing the anti-IL-17-A/F Nanobody® in plaque psoriasis. Avillion will also finance the clinical program. During the development phase, the Group recognizes a financial liability for potential repayment obligations to Avillion and records the corresponding expense as research and development costs and as finance costs. Research and development costs in the double-digit million euro range were recorded in fiscal 2019 (2018: low single-digit million-euro range).
Restructuring of the collaboration with F-star Delta Ltd., United Kingdom, in the field of immuno-oncology
In June of 2017, the Group announced a strategic collaboration with F-star Delta Ltd, United Kingdom, (F-star) for the development and commercialization of bispecific immuno-oncology antibodies. In 2019, the existing licensing and collaboration agreement with F-star was realigned due to the reprioritization of resources and programs. Based on this, all rights to FS118 reverted to F-star. The option to acquire F-star Delta Ltd. was terminated. In the course of the realignment, the Group in-licensed an innovative bispecific antibody and, in addition, holds an option to in-license a further bispecific antibody from F-star’s antibody platform. Both bispecific antibodies were handled under the previous collaboration.
As a result of the abovementioned changes, impairment losses totaling € 72 million were recognized in fiscal 2019 for an intangible asset and the reverted option, which were shown in other operating expenses and finance costs.
Arrangements in the Performance Materials business sector
Upon acquiring Versum Materials, Inc., United States, (Versum), the Group became an equal 50% partner in Hydrochlor, LLC, United States, (Hydrochlor) under a joint arrangement with Linde plc. Hydrochlor was founded with the aim of supplying hydrogen chloride exclusively to the two partner companies. Also upon acquiring Versum, the Group became a partner under an agreement with Showa Denko K.K., Japan. The aim of the agreement is to manufacture a supplier product to supply to the two partner companies exclusively.
Even though both agreements are legally separate from the respective partner companies, each agreement was classified as a joint operation since each contract partner is legally obligated to purchase the entire production result and each agreement is the sole source of funding for settling liabilities.