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Acquisitions and Strategic Investments | 12 Months Ended
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Dec. 31, 2019
Business Combinations [Abstract] |
ACQUISITIONS | NOTE B – ACQUISITIONS AND STRATEGIC INVESTMENTS Our consolidated financial statements include the operating results for acquired entities from the respective dates of acquisition. With the exception of the acquisition of BTG, which was completed on August 19, 2019, we have not presented supplemental pro forma financial information for acquisitions given their results are not material to our consolidated financial statements. Transaction costs for all acquisitions in 2019, 2018 and 2017 were immaterial to our consolidated financial statements and were expensed as incurred. In 2019, we recorded approximately $125 million of purchase price adjustments, of which $95 million related to BTG. 2019 Acquisitions BTG plc On August 19, 2019, we announced the closing of our acquisition of BTG, a public company organized under the laws of England and Wales. BTG had three key portfolios, the largest of which is its interventional medicine portfolio (Interventional Medicine) that encompasses interventional oncology therapeutic technologies for patients with liver and kidney cancers, as well as a vascular portfolio for treatment of deep vein thrombosis, pulmonary embolism, deep venous obstruction and superficial venous disease. Following the closing of the acquisition, we began to integrate BTG's Interventional Medicine business into our Peripheral Interventions division. In addition to the Interventional Medicine product lines, the BTG portfolio also included a specialty pharmaceutical business (Specialty Pharmaceuticals) comprised of acute care antidotes to treat overexposure to certain medications and toxins and a licensing portfolio (Licensing arrangements) that generates net royalties related to BTG intellectual property and product license agreements. In connection with the acquisition, we acquired rights to future royalties associated with the Zytiga™ drug used to treat certain forms of prostate cancer. In the fourth quarter of 2019, we sold our rights to these royalties for $256 million in cash, included in Proceeds from royalty rights transfer. Refer to Note D – Hedging Activities and Fair Value Measurements for additional information. The transaction price consisted of upfront cash in the aggregate amount of £3.312 billion (or $4.023 billion based on the exchange rate at closing on August 19, 2019) for the entire issued ordinary share capital of BTG, whereby BTG stockholders received 840 pence (or $10.20 based on the exchange rate at closing) in cash for each BTG share. The transaction price included $404 million of cash and cash equivalents acquired. We implemented our acquisition of BTG by way of a court-sanctioned scheme of arrangement under Part 26 of the United Kingdom Companies Act 2006, as amended. Purchase Price Allocation We accounted for our acquisition of BTG as a business combination, and in accordance with FASB ASC Topic 805, Business Combinations (FASB ASC Topic 805), we recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition date. The preliminary purchase price was comprised of the amounts presented below, which represent the preliminary determination of the fair value of identifiable assets acquired and liabilities assumed from the acquisition. The final determination of the fair value of certain assets and liabilities will be completed within the measurement period as required by FASB ASC Topic 805. As of December 31, 2019, the valuation studies necessary to determine the fair market value of the assets acquired and liabilities assumed are preliminary, including the projection of the underlying cash flows used to determine the fair value of the identified tangible, intangible and financial assets and liabilities. We accounted for BTG as a business combination, 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 date. The preliminary purchase price of BTG, was comprised of the following components as of December 31, 2019:
(in millions) |
Payment for acquisition, net of cash acquired | $ | 3,619 |
The following summarizes the preliminary purchase price allocation for our acquisition of BTG as of December 31, 2019:
(in millions) |
Goodwill | $ | 1,644 |
Trade accounts receivable, net | 108 |
Inventories | 232 |
Other current assets | 252 |
Other intangible assets, net | 1,785 |
Other long-term assets | 537 |
Accrued expenses and other current liabilities | (308 | )
Other long-term liabilities | (274 | )
Deferred tax liability | (358 | )
| $ | 3,619 |
As a result of our acquisition of BTG, we recognized goodwill of $1.644 billion, which is attributable to the synergies expected to arise from the acquisition and revenue and cash flow projections associated with future technologies. The goodwill is not deductible for tax purposes. As of December 31, 2019, we have allocated $1.406 billion to our Peripheral Interventions reporting unit and $238 million to the Specialty Pharmaceuticals reporting unit. We allocated a portion of the preliminary purchase price for our acquisition of BTG 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 | $ | 1,709 |  |  | 10 | - | 18 |  | 11 | % | - | 12%
Other intangible assets | 75 |  |  | 2 | - | 11 |  | 11%
| $ | 1,785 |  |  |  |  |  |  |  |  |
Pro Forma Financial Information (unaudited) BTG contributed $226 million to our Net sales and had an immaterial impact to our Net income (loss) for the period post acquisition through December 31, 2019. The unaudited estimated pro forma results presented below include the effects of our acquisition of BTG as if it was consummated on January 1, 2018. In 2019, we incurred nonrecurring charges that we attributed to our acquisition of BTG, which are presented in our consolidated statements of operations for this period. These charges include acquisition-related costs, stock-based compensation expenses as a result of the change in control and retention bonuses and severance payments, adjusted for the related tax effects. We have reflected these nonrecurring charges as adjustments to the pro forma earnings presented below for 2019 and 2018. Additionally, these pro forma amounts have been calculated after applying our accounting policies and adjusting the results of BTG to reflect the additional costs associated with fair value adjustments relating to inventories, property, plant, and equipment, and intangible assets as if the acquisition had occurred on January 1, 2018, with the consequential tax effects. Additionally, the pro forma amounts have been adjusted to reflect the amortization of deferred financing costs and interest expense associated with additional financing entered into as part of the acquisition. The pro forma results exclude BTG’s historical licensing revenue and related cost of sales, as these arrangements are accounted for as part of the acquisition as a financial asset and liability and are not accounted for within the scope of FASB ASC Topic 606. The supplemental pro forma information presented below is for informational purposes only and should be read in conjunction with our historical financial statements. The pro forma results do not include any anticipated synergies or other expected benefits of the acquisition. Accordingly, the unaudited estimated pro forma financial information below is not necessarily indicative of what the actual results of operations of the combined companies would have been had the acquisition of BTG occurred as of January 1, 2018, nor are they indicative of future results of operations. We believe that the pro forma assumptions and adjustments are reasonable and appropriate under the circumstances and are factually supported based on information currently available.
| Year Ended December 31,
(in millions, except per share data) (Unaudited) | 2019 |  | 2018
Net sales | $ | 11,142 |  |  | $ | 10,429 |
Net income (loss) | $ | 4,585 |  |  | $ | 1,244 |
Net income (loss) per common share — basic | $ | 3.30 |  |  | $ | 0.90 |
Net income (loss) per common share — assuming dilution | $ | 3.25 |  |  | $ | 0.89 |
Transaction with Varian Medical Systems, Inc. On August 21, 2019, we completed the sale of our drug-eluting and bland embolic microsphere portfolio to Varian Medical Systems, Inc. (Varian) in connection with our acquisition of BTG. The transaction price consisted of an upfront cash payment of $90 million, a portion of which is allocated to the fair value of the services to be rendered under the Transition Services Agreement and Transition Manufacturing Agreement entered into with Varian as part of this transaction. Additionally, we transferred certain contingent consideration arrangements arising from our initial acquisition of the portfolio to Varian and agreed to indemnify Varian for any payments ultimately arising under the terms of the contingent consideration arrangement. Accordingly, as part of the disposal, we recorded a liability of $16 million to recognize the fair value of this guarantee based on our potential obligation resulting from the indemnifications. The maximum amount payable under this guarantee is $200 million in accordance with FASB ASC Topic 460, Guarantees, which is consistent with the contingent consideration arrangement executed with our initial acquisition of the portfolio in accordance with FASB ASC Topic 805. 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 consisted 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 earn-out period. Following the closing of the acquisition, we have integrated the Vertiflex business into our Neuromodulation division. 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 had previously 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 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 consisted of an upfront cash payment of $325 million and up to an additional $125 million of future payments upon achievement of a commercial milestone. Following the closing of the acquisition, we have integrated the Millipede business into our Interventional Cardiology division. Purchase Price Allocation We accounted for our 2019 acquisitions of Vertiflex and Millipede 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 preliminary purchase prices of our acquisitions of Vertiflex and Millipede, presented in aggregate, were comprised of the following components as of December 31, 2019:
(in millions) |
Payments for acquisitions, net of cash acquired | $ | 763 |
Fair value of contingent consideration | 127 |
Fair value of prior interests | 102 |
| $ | 992 |
The preliminary purchase price allocations of our acquisitions of Vertiflex and Millipede, presented in aggregate, were comprised of the following components as of December 31, 2019:
(in millions) |
Goodwill | $ | 575 |
Amortizable intangible assets | 220 |
Indefinite-lived intangible assets | 240 |
Other assets acquired | 24 |
Liabilities assumed | (12 | )
Net deferred tax liabilities | (56 | )
| $ | 992 |
We allocated a portion of the preliminary purchase prices of our acquisitions of Vertiflex and Millipede, presented in aggregate, 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 | $ | 210 |  |  | 12 |  | 15%
Other intangible assets | 10 |  |  | 12 |  | 15%
Indefinite-lived intangible assets: |  |  |  |  |
In-process research and development | 240 |  |  | n/a |  | 19%
| $ | 461 |  |  |  |  |
2018 Acquisitions Augmenix, Inc. On October 16, 2018, we announced the closing of our acquisition of Augmenix, Inc. (Augmenix), a privately-held company that developed and commercialized the SpaceOAR™ Hydrogel System to help reduce common and debilitating side effects that men may experience after receiving radiotherapy to treat prostate cancer. The transaction price consisted of an upfront cash payment of $500 million and up to $100 million in payments contingent upon achieving certain revenue-based milestones. Following the closing of the acquisition, we have integrated the Augmenix business into our Urology and Pelvic Health division. Claret Medical, Inc. On August 2, 2018, we announced the closing of our acquisition of Claret Medical, Inc. (Claret), a privately-held company that has developed and commercialized the Sentinel™ Cerebral Embolic Protection System. The device is used to protect the brain during certain interventional procedures, predominately in patients undergoing transcatheter aortic valve replacement (TAVR). The transaction price consisted of an upfront cash payment of $220 million and an additional $50 million payment for achieving a reimbursement-based milestone that was achieved in the third quarter of 2018. Following the closing of the acquisition, we have integrated the Claret business into our Interventional Cardiology division. Cryterion Medical, Inc. On July 5, 2018, we announced the closing of our acquisition of Cryterion Medical, Inc. (Cryterion), a privately-held company developing a single-shot cryoablation platform for the treatment of atrial fibrillation. We had been an investor in Cryterion since 2016 and held an interest of approximately 35 percent immediately prior to the acquisition date. The transaction price to acquire the remaining stake consisted of an upfront cash payment of $202 million. Following the closing of the acquisition, we have integrated the Cryterion business into our Electrophysiology division. 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 consisted of an upfront cash payment of approximately $240 million and up to approximately $85 million in future potential payments contingent upon achieving commercial milestones over the four years following the date of acquisition. Following the closing of the acquisition, we have integrated the NxThera business into our Urology and Pelvic Health division. 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 consisted of an upfront cash payment of $150 million and up to an additional $125 million in future potential payments contingent upon achieving certain clinical and commercial milestones over the four years following the date of acquisition. Following the closing of the acquisition, we have integrated the nVision business into our Urology and Pelvic Health division. Other Acquisitions In addition, we completed other individually immaterial acquisitions in 2018 for total consideration of $158 million in cash at closing plus aggregate future potential contingent consideration of up to $62 million. We recorded gains of $184 million in 2018 within Other, net on our consolidated statements of operations based on the difference between the book values and the fair values of our previously-held investments immediately prior to the acquisition dates. The aggregate fair value of our previously-held investments immediately prior to the acquisition dates was $251 million. We remeasured the fair value of each previously-held investment based on the implied enterprise value and allocation of purchase price consideration according to priority of equity interests. Purchase Price Allocation We accounted for these 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 for our 2018 acquisitions as of December 31, 2019:
(in millions) |
Payments for acquisitions, net of cash acquired | $ | 1,449 |
Fair value of contingent consideration | 248 |
Fair value of prior interests | 251 |
| $ | 1,948 |
The following summarizes the purchase price allocations for our 2018 acquisitions as of December 31, 2019:
(in millions) |
Goodwill | $ | 939 |
Amortizable intangible assets | 939 |
In-process research and development | 213 |
Other assets acquired | 38 |
Liabilities assumed | (19 | )
Net deferred tax liabilities | (162 | )
| $ | 1,948 |
We allocated a portion of the 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 | $ | 908 |  |  | 6 | - | 14 |  | 14 | % | - | 23%
Other intangible assets | 31 |  |  | 6 | - | 13 |  | 13 | % | - | 15%
Indefinite-lived intangible assets |  |  |  |  |  |  |  |  |
In-process research and development | 213 |  |  | n/a |  | 15%
| $ | 1,153 |  |  |  |  |  |  |  |  |
2017 Acquisitions Apama Medical Inc. On October 11, 2017, we announced the closing of our acquisition of Apama Medical Inc. (Apama), a privately-held company developing the Apama™ Radiofrequency single-shot Balloon Catheter System for the treatment of atrial fibrillation. The transaction price consisted of an upfront cash payment of approximately $175 million and up to approximately $125 million in future potential payments contingent upon achieving certain clinical and regulatory milestones. Following the closing of the acquisition, we have integrated the Apama business into our Electrophysiology division. Symetis SA On May 16, 2017, we announced the closing of our acquisition of Symetis SA (Symetis), a privately-held Swiss structural heart company focused on minimally-invasive TAVR devices, having developed the ACURATE neo™ Aortic Valve. The transaction price consisted of an upfront cash payment of approximately $430 million. Following the closing of the acquisition, we have integrated the Symetis business into our Interventional Cardiology division. Purchase Price Allocation We accounted for these 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 were as follows for our 2017 acquisitions:
(in millions) |
Payment for acquisitions, net of cash acquired | $ | 560 |
Fair value of contingent consideration | 72 |
| $ | 632 |
The following summarizes the aggregate purchase price allocations for our 2017 acquisitions:
(in millions) |
Goodwill | $ | 287 |
Amortizable intangible assets | 278 |
Indefinite-lived intangible assets | 186 |
Other assets acquired | 44 |
Liabilities assumed | (61 | )
Deferred tax liabilities | (102 | )
| $ | 632 |
We allocated a portion of the 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 | $ | 268 |  |  | 13 |  | 24%
Other intangible assets | 10 |  |  | 2 | - | 13 |  | 24%
Indefinite-lived intangible assets |  |  |  |  |  |  |
In-process research and development | $ | 186 |  |  | n/a |  | 15%
| $ | 464 |  |  |  |  |  |  |
Our technology-related intangible assets consist of technical processes, intellectual property and institutional understanding with respect to products and processes that we intend to 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, 2018 and 2017 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, 2017 | $ | 169 |
Amounts recorded related to current year acquisitions | 248 |
Purchase price adjustments related to prior year acquisitions | (22 | )
Contingent consideration expense (benefit) | (21 | )
Contingent consideration payments | (28 | )
Balance as of December 31, 2018 | $ | 347 |
Amounts recorded related to current year acquisitions | 127 |
Contingent consideration arrangements transferred to Varian | (16 | )
Contingent consideration expense (benefit) | (35 | )
Contingent consideration payments | (68 | )
Balance as of December 31, 2019 | $ | 354 |
As of December 31, 2019, the maximum amount of future contingent consideration (undiscounted) that we could be required to pay was $697 million, which includes our estimate of maximum contingent payments of $100 million associated with the Vertiflex acquisition described above. The maximum decreased $176 million compared to the amount as of December 31, 2018 due to the contingent consideration arrangement which is now accounted for as a guarantee in connection with our transaction with Varian as discussed in the BTG section above. In addition, the aggregated maximum decreased as a result of the expiration or full payment of certain contingent consideration arrangements in 2019, partially offset by the Millipede and Vertiflex arrangements entered into in 2019. 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 December 31, 2019 | Valuation Technique | Unobservable Input | Range | Weighted Average (1)
R&D, Regulatory and Commercialization-based Milestones | $198 million | Discounted Cash Flow | Discount Rate | 2 | % | - | 3% | 3%
Probability of Payment | 40 | % | - | 90% | 82%
Projected Year of Payment | 2020 |  | - | 2027 | 2021
Revenue-based Payments | $156 million | Discounted Cash Flow | Discount Rate | 11 | % | - | 15% | 13%
Probability of Payment | 60 | % | - | 100% | 99%
Projected Year of Payment | 2020 |  | - | 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 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 December 31, 2019. Strategic Investments The aggregate carrying amount of our strategic investments was comprised of the following:
| As of December 31,
(in millions) | 2019 |  | 2018
Equity method investments | $ | 264 |  |  | $ | 303 |
Measurement alternative investments(1) | 171 |  |  | 94 |
Publicly-held securities(2) | 1 |  |  | — |
Notes receivable | 23 |  |  | 26 |
| $ | 458 |  |  | $ | 424 |
(1) | Measurement alternative investments are privately-held equity securities without readily determinable fair values that are measured at cost less 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 Other, net on our accompanying consolidated statements of operations.
These investments are classified as Other long-term assets within our accompanying consolidated balance sheets, in accordance with U.S. GAAP and our accounting policies. As of December 31, 2019, the cost of our aggregated equity method investments exceeded our share of the underlying equity in net assets by $314 million, which represents amortizable intangible assets, IPR&D, goodwill and deferred tax liabilities.

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