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Acquisitions and Strategic Investments | 3 Months Ended
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Mar. 31, 2021
Business Combinations [Abstract] |
ACQUISITIONS AND STRATEGIC INVESTMENTS | NOTE B – ACQUISITIONS, DIVESTITURES AND STRATEGIC INVESTMENTS Our accompanying unaudited consolidated financial statements include the operating results for acquired entities from the respective dates of acquisition. We completed one acquisition and one divestiture in the first quarter of 2021 and did not complete any acquisitions or divestitures during the first quarter of 2020. We have not presented supplemental pro forma financial information for completed acquisitions or divestitures given their results are not material to our accompanying unaudited consolidated financial statements. Transaction costs for all acquisitions and divestitures completed during 2021 and 2020 were immaterial to our accompanying unaudited consolidated financial statements and were expensed as incurred. On March 3, 2021, we announced our entry into a definitive agreement to acquire the global surgical business of Lumenis LTD. (Lumenis), a privately-held company that develops and commercializes energy-based medical solutions, for an upfront cash payment of approximately $1.070 billion subject to closing adjustments. The global surgical business of Lumenis includes innovative laser systems, fibers, and accessories used for urology and otolaryngology procedures. The acquisition is expected to close during the second half of 2021, subject to customary closing conditions. Following the closing of the acquisition, we plan to integrate the Lumenis business into our Urology and Pelvic Health division. 2021 Acquisition On March 1, 2021, we completed the acquisition of Preventice Solutions, Inc. (Preventice), a privately-held company which offers a full portfolio of mobile cardiac health solutions and services, ranging from ambulatory cardiac monitors, to cardiac event monitors and mobile cardiac telemetry. The transaction consisted of an upfront cash payment of $925 million and up to an additional $300 million in a potential commercial milestone payment. We have been an investor in Preventice since 2015 and held an equity stake of approximately 22 percent immediately prior to the acquisition date. We remeasured the fair value of our previously-held investment based on the allocation of the purchase price according to priority of equity interests, which resulted in a $195 million gain recognized within Other, net in the first quarter of 2021. The transaction price for the remaining stake consisted of an upfront cash payment of $706 million, net of cash acquired, and up to approximately $230 million in an additional future revenue-based payment. The Preventice business is being managed by our Cardiac Rhythm Management division. Purchase Price Allocation 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. The final determination of the fair value of certain assets and liabilities will be completed within the measurement period in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 805, Business Combinations. As of March 31, 2021, 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 intangible assets and contingent consideration liability.
(in millions) |
Payment for acquisition, net of cash acquired | $ | 706 |
Fair value of contingent consideration | 219 |
Fair value of prior interest | 269 |
| $ | 1,194 |
The preliminary purchase price allocation was comprised of the following components:
(in millions) |
Goodwill | $ | 924 |
Amortizable intangible assets | 236 |
Other assets acquired | 66 |
Liabilities assumed | (32) |
| $ | 1,194 |
We allocated a portion of the preliminary purchase price to the specific intangible asset categories as follows:
| Amount Assigned (in millions) |  | Weighted Average Amortization Period (in years) |  | Risk-Adjusted Discount Rates used in Purchase Price Allocation
Amortizable intangible assets: |  |  |  |  |  |  |  |  |
Technology-related | $ | 214 |  |  | 9 |  | 10%
Other intangible assets | 22 |  |  | 8 |  |  |  | 10% |  |
| $ | 236 |  |  |  |  |  |  |  |  |
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 is not deductible for tax purposes. 2021 Divestiture On March 1, 2021, we completed the divestiture of the Specialty Pharmaceuticals business to Stark International Lux S.A.R.L., and SERB SAS, affiliates of SERB, a European specialty pharmaceutical group, for a purchase price of approximately $800 million, subject to certain adjustments including cash on hand at the closing of the transaction. The agreement included the transfer of five facilities and approximately 280 employees globally. We classified the assets and liabilities of the Specialty Pharmaceuticals business (disposal group) as held for sale within our consolidated balance sheet as of December 31, 2020 at their respective carrying values, which approximated fair value, less costs to sell. Assets within the disposal group are presented within Assets held for sale and liabilities are presented within Other current liabilities within our consolidated balance sheet as of December 31, 2020. Refer to Note C – Assets and Liabilities Held for Sale to our audited financial statements contained in Item 8 of our most recent Annual Report on Form 10-K for additional information. In the first quarter of 2021, we recognized a $6 million Gain on disposal of business associated with the transaction within our accompanying unaudited consolidated statements of operations. Contingent Consideration Changes in the fair value of our contingent consideration liability were as follows:
(in millions) |
Balance as of December 31, 2020 | $ | 196 |
Amount recorded related to current year acquisitions | 219 |
Contingent consideration net expense (benefit) | (6) |
Contingent consideration payments | (11) |
Balance as of March 31, 2021 | $ | 398 |
As of March 31, 2021, the maximum amount of future contingent consideration (undiscounted) that we could be required to pay associated with our completed acquisitions was $754 million, which includes amounts related to our acquisition of Preventice. Refer to Note B – Acquisitions and Strategic Investments to our audited financial statements contained in Item 8 of our most recent Annual Report on Form 10-K for additional information. The recurring Level 3 fair value measurements of our contingent consideration liability that we expect to be required to settle include the following significant unobservable inputs:
Contingent Consideration Liability | Fair Value as of March 31, 2021 | Valuation Technique | Unobservable Input | Range | Weighted Average(1)
R&D, Regulatory and Commercialization-based Milestones | $103 million | Discounted Cash Flow | Discount Rate | 2% | 2%
Probability of Payment | 90% | 90%
Projected Year of Payment | 2027 | 2027
Revenue-based Payments | $296 million | Discounted Cash Flow | Discount Rate | 4 | % | - | 14% | 7%
Probability of Payment | 80 | % | - | 100% | 100%
Projected Year of Payment | 2021 | - | 2024 | 2022
(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 research and development (R&D), commercialization-based and revenue-based milestones are discounted back to the current period, primarily 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 March 31, 2021. Strategic Investments The aggregate carrying amount of our strategic investments was comprised of the following:
| As of
(in millions) | March 31, 2021 |  | December 31, 2020
Equity method investments | $ | 246 |  |  | $ | 319 |
Measurement alternative investments(1) | 182 |  |  | 183 |
Publicly-held equity securities(2) | 213 |  |  | 414 |
Notes receivable | 2 |  |  | 2 |
| $ | 643 |  |  | $ | 918 |
(1) Measurement alternative investments are privately-held equity securities without readily determinable fair values that are measured at cost less impairment, if any, adjusted to fair value for any observable price changes in orderly transactions for the identical or a similar investment of the same issuer, recognized in Other, net within our accompanying unaudited consolidated statements of operations. (2) Publicly-held equity securities are measured at fair value with changes in fair value recognized in Other, net within our accompanying unaudited consolidated statements of operations. These investments are classified as Other long-term assets within our accompanying unaudited consolidated balance sheets, in accordance with U.S. GAAP and our accounting policies. In the first quarter of 2021, we recorded a $146 million net loss on our investment in Pulmonx Corporation presented in Other, net associated with the partial disposition of our ownership and remeasurement of our remaining investment to fair value based on observable market prices. In addition, on March 1, 2021, we completed our acquisition of Preventice, in which we previously held an equity interest. As of March 31, 2021, the cost of our aggregated equity method investments exceeded our share of the underlying equity in net assets by $286 million, which represents amortizable intangible assets, in-process research and development (IPR&D), goodwill and deferred tax liabilities.

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