Acquisitions and Strategic Investments

3 Months Ended

Mar. 31, 2018

Business Combinations [Abstract]

ACQUISITIONS AND STRATEGIC INVESTMENTS

NOTE B – ACQUISITIONS AND STRATEGIC INVESTMENTS

We did not close any material acquisitions during the first quarter of 2018 or 2017.

On April 30, 2018, we announced the closing of our acquisition of NxThera, Inc. (NxThera), a privately-held company based in Maple Grove, Minnesota. NxThera developed the Rezûm^® System, a minimally invasive therapy in a growing category of treatment options for patients with benign prostatic hyperplasia (BPH). The transaction consists of an upfront cash payment of $306 million, and up to an additional $100 million in potential commercial milestone payments over the next four years. We have an existing minority investment in NxThera which is expected to result in a net upfront payment of approximately $240 million upon closing, and milestone payments of up to $85 million. NxThera will be integrated into our Urology and Pelvic Health business.

On April 16, 2018, we announced the closing of our acquisition of nVision Medical Corporation (nVision), a privately-held company focused on women’s health. nVision developed the first and only device cleared by the U.S. Food and Drug Administration (FDA) to collect cells from the fallopian tubes, offering a potential platform for earlier diagnosis of ovarian cancer. The transaction consists of an upfront cash payment of $150 million, and up to an additional $125 million in potential clinical and commercial milestones over four years. nVision will be integrated into our Urology and Pelvic Health business.

Contingent Consideration

We recorded a net expense related to the changes in fair value of our contingent consideration liabilities of $5 million during the first quarter of 2018 and a net benefit related to the changes in fair value of our contingent consideration liabilities of $50 million during the first quarter of 2017. We made $28 million of contingent payments during the first quarter of 2017.

Changes in the fair value of our contingent consideration liabilities were as follows (in millions):

Balance as of December 31, 2017	$	169
Amounts recorded related to prior acquisitions	(22		)
Fair value adjustment	5
Balance as of March 31, 2018	$	152

As of March 31, 2018, the maximum amount of future contingent consideration (undiscounted) that we could be required to pay was approximately $1.320 billion.

The recurring Level 3 fair value measurements of our contingent consideration liabilities include the following significant unobservable inputs:

Contingent Consideration Liabilities	Fair Value as of March 31, 2018	Valuation Technique	Unobservable Input	Range
R&D and Commercialization-based Milestones	$105 million	Discounted Cash Flow	Discount Rate	3%
			Probability of Payment	17% - 100%
			Projected Year of Payment	2018 - 2022
Revenue-based Payments	$48 million	Discounted Cash Flow	Discount Rate	11% - 15%
			Projected Year of Payment	2018 - 2026

Projected contingent payment amounts related to some of our R&D, commercialization-based and revenue-based milestones are discounted back to the current period using a discounted cash flow (DCF) model. Projected revenues are based on our most recent internal operational budgets and long-range strategic plans. Increases in projected revenues and probabilities of payment may result in higher fair value measurements. Increases in discount rates and the time to payment may result in lower fair value measurements. Increases or decreases in any of those inputs together, or in isolation, may result in a significantly lower or higher fair value measurement.

Strategic Investments

On January 24, 2018, we closed an investment and entered into an acquisition option agreement with Millipede, Inc. (Millipede), a privately-held company that has developed the IRIS Transcatheter Annuloplasty Ring System for the treatment of severe mitral regurgitation. Under the terms of the agreements, we have purchased a portion of the outstanding shares of Millipede along with newly issued shares of the company for a total consideration of $90 million. We also have the option to acquire the remaining shares of the company at any time prior to the completion of a first in human clinical study that meets certain parameters. Upon the completion of the clinical study, Millipede has the option to compel us to acquire the remaining shares of the company. Each company’s option period expires by the end of 2019. Completion of this acquisition would result in an additional $325 million payment by us at closing with a further $125 million becoming payable upon achievement of a commercial milestone.

The aggregate carrying amount of our strategic investments were comprised of the following categories:

	As of
(in millions)	March 31, 2018		December 31, 2017
Equity method investments	$	304	$	209
Measurement alternative investments	84		81
Publicly-held securities	12		15
Notes receivable	43		47
	$	442	$	353

These investments are classified as other long-term assets within our accompanying unaudited condensed consolidated balance sheets, in accordance with U.S. GAAP and our accounting policies.

As of March 31, 2018, the book value of our equity method investments exceeded our share of the book value of the investees’ underlying net assets by approximately $335 million, which represents amortizable intangible assets and in-process research and development, corresponding deferred tax liabilities and goodwill.