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Acquisitions and Strategic Investments | 9 Months Ended
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Sep. 30, 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 three acquisitions and one divestiture in the first nine months of 2021 and did not complete any significant acquisitions or divestitures during the first nine months 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. Further, transaction costs were immaterial to our accompanying unaudited consolidated financial statements and were expensed as incurred. In addition, on September 21, 2021, we announced our entry into a definitive agreement to acquire Devoro Medical, Inc. (Devoro Medical), a privately-held company which has developed the WOLF Thrombectomy® Platform, designed to capture and extract blood clots in arterial, venous and pulmonary embolism procedures. We have been an investor in Devoro Medical since 2019 and hold an equity stake of approximately 16 percent. The transaction price consists of an upfront cash payment of $320 million, or approximately $269 million after adjustments for our current equity ownership, debt, and other closing adjustments; and up to $80 million upon achievement of certain clinical and regulatory milestones, or approximately $67 million after adjustments for current equity ownership. The acquisition is expected to close in the fourth quarter of 2021, subject to customary closing conditions. Following the closing of the acquisition, we plan to integrate the Devoro Medical business into our Peripheral Interventions division. Further, on October 6, 2021, we announced our entry into a definitive agreement to acquire Baylis Medical Company Inc. (Baylis Medical), a privately-held company which has developed the radiofrequcncy (RF) NRG™ and VersaCross™ Transseptal Platforms as well as a family of guidewires, sheaths and dilators used to support left heart access, which will expand our electrophysiology and structural heart product portfolios. The transaction consists of an upfront cash payment of $1.75 billion subject to closing adjustments. The acquisition is expected to close during the first quarter of 2022, subject to customary closing conditions. Following the closing of the acquisition, we plan to integrate the Baylis Medical business into our Electrophysiology division. 2021 Acquisitions 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 future milestone payments. The Preventice business is being managed by our Cardiac Rhythm Management division. On August 6, 2021, we completed our acquisition of the remaining shares of Farapulse, Inc. (Farapulse), a privately-held company that has developed a non-thermal ablation system for the treatment of atrial fibrillation (AF) and other cardiac arrhythmias. The transaction consisted of an upfront cash payment of $450 million, up to $125 million upon achievement of certain clinical and regulatory milestones and additional revenue-based payments over the next three years. We have been an investor in Farapulse since 2014 and held an equity stake of approximately 27 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 $222 million gain recognized within Other, net during the third quarter of 2021. The transaction price for the remaining stake consisted of an upfront cash payment of $268 million, net of cash acquired, and up to approximately $92 million in future milestone payments. The Farapulse business is being integrated into our Electrophysiology division. On September 1, 2021, we completed our acquisition of the global surgical business of Lumenis LTD. (Lumenis), a privately-held company that develops and commercializes energy-based medical solutions, including innovative laser systems, fibers and accessories used for urology and otolaryngology procedures. The transaction consisted of an upfront cash payment of $1.039 billion, net of cash acquired. The Lumenis business is being integrated into our Urology and Pelvic Health division. Purchase Price Allocation The preliminary purchase price for the acquisitions completed during the first nine months of 2021 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, in particular those associated with our acquisition of Lumenis, will be completed within the measurement period in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 805, Business Combinations. Due to the timing of the Lumenis acquisition, efforts to obtain information and complete the valuation studies necessary to determine the fair value of the various purchase price components are still ongoing.
(in millions) | Preventice |  | Lumenis |  | Farapulse | Total
Payment for acquisition, net of cash acquired | $ | 706 |  |  | $ | 1,039 |  |  | $ | 268 |  | $ | 2,014 |
Fair value of contingent consideration | 221 |  |  | — |  |  | 162 |  | 384 |
Fair value of prior interest | 269 |  |  | — |  |  | 222 |  | 491 |
| $ | 1,197 |  |  | $ | 1,039 |  |  | $ | 653 |  | $ | 2,889 |
The preliminary purchase price allocation for these acquisitions was comprised of the following components:
(in millions) | Preventice |  | Lumenis |  | Farapulse | Total |
Goodwill | $ | 926 |  |  | $ | 582 |  |  | $ | 386 |  | $ | 1,894 |  |
Amortizable intangible assets | 237 |  |  | 459 |  |  | 267 |  | 964 |  |
Indefinite-lived intangible assets | — |  |  | — |  |  | 43 |  | 43 |  |
Other assets acquired | 65 |  |  | 115 |  |  | 9 |  | 190 |  |
Liabilities assumed | (32) |  |  | (86) |  |  | (10) |  | (127) |  |
Net deferred tax liabilities | — |  |  | (32) |  |  | (43) |  | (74) |  |
| $ | 1,197 |  |  | $ | 1,039 |  |  | $ | 653 |  | $ | 2,889 |  |
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. 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
Preventice: |  |  |  |  |
Amortizable intangible assets: |  |  |  |  |
Technology-related | $ | 215 |  |  | 9 |  | 10%
Other intangible assets | 22 |  |  | 8 |  | 10%
| $ | 237 |  |  |  |  |
Lumenis: |  |  |  |  |
Amortizable intangible assets: |  |  |  |  |
Technology-related | $ | 417 |  |  | 14 |  | 11%
Other intangible assets | 42 |  |  | 13 |  | 11%
| $ | 459 |  |  |  |  |
Farapulse: |  |  |  |  |
Amortizable intangible assets: |  |  |  |  |
Technology-related | $ | 267 |  |  | 12 |  | 16%
Indefinite-lived intangible assets: |  |  |  |  |
In-process research and development (IPR&D) | 43 |  |  | N/A |  | 17%
| $ | 310 |  |  |  |  |
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, which was 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 nine months of 2021, we recognized a Gain on disposal of businesses and assets associated with the transaction of $9 million within our accompanying unaudited consolidated statements of operations. Contingent Consideration Changes in the fair value of our contingent consideration liability during the first nine months of 2021 were as follows:
(in millions) |
Balance as of December 31, 2020 | $ | 196 |
Amount recorded related to current year acquisitions | 384 |
Contingent consideration net expense (benefit) | (117) |
Contingent consideration payments | (14) |
Balance as of September 30, 2021 | $ | 448 |
As of September 30, 2021, the maximum amount of future contingent consideration (undiscounted) that we could be required to pay associated with our completed acquisitions was $919 million, which includes amounts related to our recent acquisitions of Preventice and Farapulse. 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 September 30, 2021 | Valuation Technique | Unobservable Input | Range | Weighted Average(1) |  |
R&D, Regulatory and Commercialization-based Milestones | $109 million | Discounted Cash Flow | Discount Rate | 1% | - | 2% | 1% |  |
Probability of Payment | 20% | - | 95% | 79% |  |
Projected Year of Payment | 2023 | - | 2027 | 2023 |  |
Revenue-based Payments | $340 million | Discounted Cash Flow | Discount Rate | 4% | - | 14% | 6% |  |
Probability of Payment | 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), regulatory and 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 September 30, 2021. Strategic Investments The aggregate carrying amount of our strategic investments was comprised of the following:
| As of
(in millions) | September 30, 2021 |  | December 31, 2020
Equity method investments | $ | 266 |  |  | $ | 319 |
Measurement alternative investments(1) | 164 |  |  | 183 |
Publicly-held equity securities(2) | 4 |  |  | 414 |
Notes receivable | — |  |  | 2 |
| $ | 434 |  |  | $ | 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 third quarter and first nine months of 2021, we recorded losses of $24 million and $178 million, respectively, on our investment in Pulmonx Corporation presented in Other, net associated with the remeasurement of our investment during the period to fair value based on observable market prices, as well as the disposition of our remaining ownership. On March 1, 2021, we completed our acquisition of Preventice, in which we previously held an equity interest of approximately 22 percent and on August 6, 2021, we completed the acquisition of the remaining shares of Farapulse, in which we previously held an equity stake of approximately 27 percent. As of September 30, 2021, the cost of our aggregated equity method investments exceeded our share of the underlying equity in net assets by $289 million, which represents amortizable intangible assets, in-process research and development (IPR&D), goodwill and deferred tax liabilities.

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