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Acquisitions, Divestitures and Strategic Investments | 9 Months Ended
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Sep. 30, 2022
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 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. On June 15, 2022, we announced our entry into a definitive agreement with Synergy Innovation Co, Ltd, to purchase its majority stake of M.I. Tech Co., Ltd., (M.I. Tech), a publicly traded Korean manufacturer and distributor of medical devices for endoscopic and urological procedures. The agreement, whereby we will purchase approximately 64 percent of the outstanding shares of M.I. Tech, consists of a purchase price of KRW 291.2 billion or approximately $230 million at foreign currency exchange rates locked into at the time of the agreement via forward currency contracts. The acquisition is expected to close during the fourth quarter of 2022, subject to customary closing conditions. The M.I. Tech stent portfolio complements our existing Endoscopy portfolio which will provide physicians with more treatment options to meet specific patient needs. 2022 Acquisition On February 14, 2022, we completed our acquisition of Baylis Medical Company Inc. (Baylis Medical), a privately-held company which has developed the radiofrequency (RF) NRG™ and VersaCross™ Transseptal Platforms as well as a family of guidewires, sheaths and dilators used to support left heart access, which expands our electrophysiology and structural heart product portfolios. The transaction consisted of an upfront cash payment of $1.463 billion, net of cash acquired, subject to closing adjustments. We are integrating the Baylis Medical business into our Cardiology 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 (FASB ASC Topic 805).
(in millions) |
Payment for acquisition, net of cash acquired | $ | 1,463 |
| $ | 1,463 |
The preliminary purchase price allocation was comprised of the following components:
(in millions) |  |
Goodwill | $ | 988 |  |
Amortizable intangible assets | 657 |  |
Other assets acquired | 112 |  |
Liabilities assumed | (287) |  |
Net deferred tax liabilities | (7) |  |
| $ | 1,463 |  |
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
Amortizable intangible assets: |  |  |  |  |
Technology-related | $ | 622 |  |  | 11 |  | 11%
Other intangible assets | 36 |  |  | 11 |  | 11%
| $ | 657 |  |  |  |  |
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 had 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 during 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 an additional revenue-based milestone payment of $216 million made during the second quarter of 2022. The Preventice business is being managed by our Cardiology division. On August 6, 2021, we completed our acquisition of the remaining shares of Farapulse, Inc. (Farapulse), a privately-held company that 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 had 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, $114 million of milestone and revenue-based payments made to date, as well as approximately $120 million in future revenue-based milestone payments. The Farapulse business is being integrated into our Cardiology 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 $1.032 billion, net of cash acquired. The Lumenis business is being integrated into our Urology and Pelvic Health 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 date. The final purchase prices were comprised of the following components:
(in millions) | Preventice | Lumenis | Farapulse | Total
Payment for acquisition, net of cash acquired | $ | 706 |  | $ | 1,032 |  | $ | 268 |  | $ | 2,007 |
Fair value of contingent consideration | 221 |  | — |  | 162 |  | 384 |
Fair value of prior interest | 269 |  | — |  | 222 |  | 491 |
| $ | 1,197 |  | $ | 1,032 |  | $ | 653 |  | $ | 2,882 |
(in millions) | Preventice | Lumenis | Farapulse | Total
Goodwill | $ | 926 |  | $ | 534 |  | $ | 384 |  | $ | 1,843 |
Amortizable intangible assets | 237 |  | 423 |  | 267 |  | 928 |
Indefinite-lived intangible assets | — |  | 69 |  | 43 |  | 112 |
Other assets acquired | 65 |  | 297 |  | 9 |  | 372 |
Liabilities assumed | (32) |  | (282) |  | (10) |  | (323) |
Net deferred tax liabilities | — |  | (9) |  | (40) |  | (49) |
| $ | 1,197 |  | $ | 1,032 |  | $ | 653 |  | $ | 2,882 |
We allocated a portion of the 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 | $ | 388 |  |  | 12 |  | 11%
Other intangible assets | 35 |  |  | 11 |  | 11%
Indefinite-lived intangible assets: |  |  |  |  |
In-process research and development (IPR&D) | 69 |  |  | N/A |  | 12%
| $ | 492 |  |  |  |  |
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 |  |  |  |  |
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. During the first nine months of 2022, we recorded certain measurement period adjustments related to our prior year acquisition of the surgical business of Lumenis. We recorded an accrued income tax liability within Other non-current liabilities within our accompanying unaudited consolidated balance sheets of $183 million related to uncertain tax positions assumed in connection with the acquisition. We were indemnified by the sellers for the majority of such tax obligations and recognized a corresponding indemnification asset of $177 million at the acquisition date within Other non-current assets within our accompanying unaudited consolidated balance sheets. Subsequent to the acquisition date, interest and penalties accrued on the tax liability are being recorded within Income tax expense (benefit) and corresponding adjustments to the indemnification asset are being recorded in Other, net within our accompanying unaudited consolidated statements of operations. The outcome of these matters is subject to uncertainty and ultimately, the amount of tax due and the related indemnification reimbursement we receive will be dependent on the outcome of tax return examinations by relevant authorities. Refer to Note F – Supplemental Balance Sheet Information for further details regarding our indemnification asset. 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. During the third quarter and first nine months of 2021, we recognized a Gain on disposal of businesses and assets associated with the transaction within our accompanying unaudited consolidated statements of operations. 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. Contingent Consideration Changes in the fair value of our contingent consideration liability during the first nine months of 2022 were as follows:
(in millions) |
Balance as of December 31, 2021 | $ | 486 |
Contingent consideration net expense (benefit) | 68 |
Contingent consideration payments | (371) |
Balance as of September 30, 2022 | $ | 182 |
The payments made during the first nine months of 2022 were primarily related to our prior year acquisitions of Farapulse and Preventice. As of September 30, 2022, the maximum amount of future contingent consideration (undiscounted) that we could be required to pay associated with our completed acquisitions was approximately $400 million. 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, 2022 | Valuation Technique | Unobservable Input | Range | Weighted Average(1) |  |
R&D, Regulatory and Commercialization-based Milestones | $48 million | Discounted Cash Flow | Discount Rate | 1% | - | 2% | 1% |  |
Probability of Payment | 70% | - | 80% | 74% |  |
Projected Year of Payment | 2023 | - | 2025 | 2024 |  |
Revenue-based Payments | $134 million | Discounted Cash Flow | Discount Rate | 6% | - | 14% | 7% |  |
Probability of Payment | 100% | 100% |  |
Projected Year of Payment | 2023 | - | 2024 | 2023 |  |
(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 milestones and revenue-based payments 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, 2022. Strategic Investments The aggregate carrying amount of our strategic investments was comprised of the following:
| As of
(in millions) | September 30, 2022 |  | December 31, 2021
Equity method investments | $ | 207 |  |  | $ | 259 |
Measurement alternative investments(1) | 171 |  |  | 142 |
Publicly-held securities(2) | 3 |  |  | 10 |
Notes receivable | 8 |  |  | — |
| $ | 389 |  |  | $ | 412 |
(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 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. As of September 30, 2022, the cost of our aggregated equity method investments exceeded our share of the underlying equity in net assets by $242 million, which represents amortizable intangible assets, in-process research and development (IPR&D), goodwill and deferred tax liabilities.

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