Acquisitions and Strategic Investments

6 Months Ended

Jun. 30, 2019

Business Combinations [Abstract]

ACQUISITIONS AND STRATEGIC INVESTMENTS

NOTE B – ACQUISITIONS AND STRATEGIC INVESTMENTS

Our unaudited condensed consolidated financial statements include the operating results for acquired entities from the respective date of acquisition. We have not presented pro forma financial information for acquisitions given their results are not material to our unaudited condensed consolidated financial statements. Transaction costs associated with these acquisitions were expensed as incurred and are not material for the second quarter and first six months of 2019 and 2018.

Proposed BTG Acquisition

On November 20, 2018, our board of directors and the board of directors of our wholly owned indirect subsidiary, Bravo Bidco Limited (Bidco), and BTG plc (BTG), a public company organized under the laws of England and Wales, issued an announcement (the Rule 2.7 Announcement) under Rule 2.7 of the United Kingdom City Code on Takeovers and Mergers, disclosing the terms of a recommended cash offer to be made by Bidco for the entire issued and to be issued ordinary share capital of BTG (the proposed BTG Acquisition). BTG develops and commercializes products used in minimally-invasive procedures targeting cancer and vascular diseases, as well as acute care pharmaceuticals. In connection with the proposed BTG Acquisition, (i) we entered into a co-operation agreement with Bidco and BTG, (ii) certain shareholders and each BTG director owning shares of BTG delivered deeds of irrevocable undertakings to Bidco and (iii) we entered into a bridge credit agreement (Bridge Facility) that we terminated in February 2019 upon the closing of our senior notes offering. Refer to Note E – Borrowings and Credit Arrangements for further details.

On January 24, 2019, Bidco made such offer on the terms and subject to the conditions of the scheme document published on the same date. On February 28, 2019, a majority in number of BTG shareholders approved the scheme document published on January 24, 2019 (Scheme).

On February 14, 2019, both the Company and BTG received a request for additional information and documentary material from the United States Federal Trade Commission in connection with the proposed BTG Acquisition. The request for additional information related to our drug-eluting and bland embolic microsphere portfolio.

On July 2, 2019, BTG and Boston Scientific issued an announcement disclosing that we signed an agreement for the sale of our existing drug-eluting and bland embolic microsphere portfolio to Varian Medical Systems, Inc. The sale is subject to the satisfaction or waiver of customary closing conditions, including consummation of the proposed BTG Acquisition, and is expected to close immediately after completion of the proposed BTG Acquisition.

Under the terms of the proposed BTG Acquisition, BTG shareholders will receive 840 pence in cash for each BTG share, which values the existing issued and to be issued ordinary share capital of BTG at approximately £3.311 billion (or approximately $4.204 billion based on the exchange rate of U.S. $1.27: £1.00 as of June 28, 2019). We intend to implement the proposed BTG Acquisition by way of a court-sanctioned scheme of arrangement under Part 26 of the United Kingdom Companies Act 2006, as amended. Subject to the satisfaction or waiver of all relevant conditions, we expect the proposed BTG Acquisition to be effective in August 2019.

2019 Acquisitions

Vertiflex, Inc.

On June 11, 2019, we announced the closing of our acquisition of Vertiflex, Inc. (Vertiflex), a privately-held company which has developed and commercialized the Superion™ Indirect Decompression System, a minimally-invasive device used to improve physical function and reduce pain in patients with lumbar spinal stenosis (LSS). The transaction price consists of an upfront cash payment of $465 million and contingent payments that are based on a percentage of Vertiflex sales growth in the first three years following the acquisition close. We estimate the sales-based contingent payments to be in a range of zero to $100 million; however, the payments are uncapped over the three year term. Vertiflex is part of our Neuromodulation business.

Millipede, Inc.

On January 29, 2019, we announced the closing of our acquisition of Millipede, Inc. (Millipede), a privately-held company that has developed the IRIS Transcatheter Annuloplasty Ring System for the treatment of severe mitral regurgitation. We have been an investor in Millipede since the first quarter of 2018 as part of an investment and acquisition option agreement, whereby we purchased a portion of the outstanding shares of Millipede, along with newly issued shares of the company, for an upfront cash payment of $90 million. In the fourth quarter of 2018, upon the recent successful completion of a first-in-human clinical study, we exercised our option to acquire the remaining shares of Millipede. We held an interest of approximately 20 percent immediately prior to the acquisition date. We remeasured the fair value of our previously-held investment based on the implied enterprise value and allocation of purchase price consideration according to priority of equity interests. The transaction price for the remaining stake consists of an upfront cash payment of $325 million and up to an additional $125 million payment upon achievement of a commercial milestone. Millipede is part of our Interventional Cardiology business.

Purchase Price Allocation

We accounted for our 2019 acquisitions as business combinations, and in accordance with FASB ASC Topic 805, Business Combinations, we recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition dates. The aggregate preliminary purchase prices were comprised of the following components:

(in millions)
Payment for acquisition, net of cash acquired	$	763
Fair value of contingent consideration	131
Fair value of prior interest	103
	$	997

The following summarizes the aggregate preliminary purchase price allocations for our 2019 acquisitions as of June 30, 2019:

(in millions)
Goodwill	$	540
Amortizable intangible assets	217
Indefinite-lived intangible assets	295
Other assets acquired	24
Liabilities assumed	(12		)
Net deferred tax liabilities	(68		)
	$	997

We allocated a portion of the aggregate preliminary purchase prices to the specific intangible asset categories as follows:

	Amount Assigned (in millions)		Amortization Period (in years)	Risk-Adjusted Discount Rates used in Purchase Price Allocation
Amortizable intangible assets:
Technology-related	$	207	12	15%
Other intangible assets	10		12	15%
Indefinite-lived intangible assets:
In-process research and development (IPR&D)	295		N/A	20%
	$	512

2018 Acquisitions

We did not record any material purchase price adjustments to the preliminary or final purchase price allocations of the 2018 acquisitions in the first six months of 2019.

NxThera, Inc.

On April 30, 2018, we announced the closing of our acquisition of NxThera, Inc. (NxThera), a privately-held company that developed the Rezūm™ System, a minimally invasive therapy in a growing category of treatment options for patients with benign prostatic hyperplasia (BPH). We held a minority interest immediately prior to the acquisition date. The transaction price to acquire the remaining stake consists of an upfront cash payment of approximately $240 million and up to approximately $85 million in payments contingent upon commercial milestones over the next four years. NxThera is part of our Urology and Pelvic Health business.

nVision Medical Corporation

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 price consists of an upfront cash payment of $150 million and up to an additional $125 million in payments contingent upon clinical and commercial milestones over the next four years. nVision is part of our Urology and Pelvic Health business.

In addition, we completed other individually immaterial acquisitions in the first six months of 2018 for total consideration of $50 million in cash at closing plus aggregate contingent consideration of up to $10 million.

Purchase Price Allocation

We accounted for our 2018 acquisitions as business combinations, and in accordance with FASB ASC Topic 805, we recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition dates. The components of the aggregate purchase prices are as follows:

(in millions)
Payments for acquisitions, net of cash acquired	$	419
Fair value of contingent consideration	140
Fair value of prior interests	82
	$	641

The following summarizes the aggregate purchase price allocations for our 2018 acquisitions as of June 30, 2019:

(in millions)
Goodwill	$	272
Amortizable intangible assets	418
Other assets acquired	11
Liabilities assumed	(5		)
Net deferred tax liabilities	(55		)
	$	641

We allocated a portion of the aggregate purchase prices to specific intangible asset categories as follows:

	Amount Assigned (in millions)		Amortization Period (in years)			Risk-Adjusted Discount Rates used in Purchase Price Allocation
Amortizable intangible assets:
Technology-related	$	411	10	-	13	17	%	-	23%
Other intangible assets	7		6	-	13	13	%	-	15%
	$	418

Our technology-related intangible assets consist of technical processes, intellectual property and institutional understanding with respect to products and processes that we will leverage in future products or processes and will carry forward from one product generation to the next. We used the multi-period excess earnings method, a form of the income approach, to derive the fair value of the technology-related intangible assets and are amortizing them on a straight-line basis over their assigned estimated useful lives.

Goodwill was primarily established due to synergies expected to be gained from leveraging our existing operations as well as revenue and cash flow projections associated with future technologies and has been allocated to our reportable segments based on the relative expected benefit. Based on preliminary estimates updated for applicable regulatory changes, the goodwill recorded relating to our 2019 and 2018 acquisitions is not deductible for tax purposes.

Contingent Consideration

Changes in the fair value of our contingent consideration liability were as follows:

(in millions)
Balance as of December 31, 2018	$	347
Amount recorded related to current year acquisition	131
Contingent consideration expense (benefit)	(18		)
Contingent consideration payments	(67		)
Balance as of June 30, 2019	$	394

As of June 30, 2019, the maximum amount of future contingent consideration (undiscounted) that we could be required to pay was approximately $959 million, which includes our estimate of maximum contingent payments of $100 million associated with the Vertiflex acquisition described above.

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

Contingent Consideration Liability	Fair Value as of June 30, 2019	Valuation Technique	Unobservable Input	Range				Weighted Average (1)
R&D, Regulatory and Commercialization-based Milestones	$232 million	Discounted Cash Flow	Discount Rate	3%				3%
			Probability of Payment	17	%	-	90%	82%
			Projected Year of Payment	2019		-	2027	2021
Revenue-based Payments	$162 million	Discounted Cash Flow	Discount Rate	11	%	-	15%	13%
			Probability of Payment	60	%	-	100%	99%
			Projected Year of Payment	2019		-	2026	2021

(1) Unobservable inputs were weighted by the relative fair value of the contingent consideration liability. For projected year of payment, the amount represents the median of the inputs and is not a weighted average.

Projected contingent payment amounts related to some of our research and development (R&D), commercialization-based and revenue-based milestones are discounted back to the current period using a discounted cash flow model. Significant increases or decreases in projected revenues, probabilities of payment, discount rates or the time until payment is made would have resulted in a significantly lower or higher fair value measurement as of June 30, 2019.

Strategic Investments

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

	As of
(in millions)	June 30, 2019		December 31, 2018
Equity method investments	$	243	$	303
Measurement alternative investments (1)	169		94
Publicly-held equity securities (2)	1		—
Notes receivable	3		26
	$	415	$	424

(1) Measurement alternative investments are privately-held equity securities without readily determinable fair values that are measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

(2) Publicly-held equity securities are measured at fair value with changes in fair value recognized currently in Net income (loss).

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 June 30, 2019, the cost of our aggregated equity method investments exceeded our share of the underlying equity in net assets by approximately $278 million, which represents amortizable intangible assets, IPR&D, goodwill and deferred tax liabilities.