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Acquisitions and Strategic Investments | Aug. 06, 2021
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Business Combinations [Abstract] |
ACQUISITIONS AND STRATEGIC INVESTMENTS | NOTE B – ACQUISITIONS AND STRATEGIC INVESTMENTS Our 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 consolidated financial statements. Further, transaction costs were immaterial to our 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 an upfront 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. We are working towards closing the acquisition during the second quarter of 2023, subject to customary regulatory approvals. The M.I. Tech stent portfolio complements our existing Endoscopy portfolio which will provide physicians with more treatment options to meet specific patient needs. On November 29, 2022, we announced our entry into a definitive agreement to acquire 100 percent of the outstanding equity of Apollo Endosurgery, Inc. (Apollo), a public company which offers a portfolio of devices used during endoluminal procedures to close gastrointestinal defects, manage gastrointestinal complications and aid in weight loss for patients suffering from obesity. The agreement provides for an upfront cash payment of $10.00 per share, approximately $615 million, and is expected to close during the first half of 2023, subject to customary closing conditions. The Apollo business will be integrated into our Endoscopy division. On February 20, 2023, we completed the acquisition of a majority stake in Acotec Scientific Holdings Limited (Acotec), a publicly traded Chinese manufacturer of drug-coated balloons used in the treatment of vascular and other diseases. We acquired approximately 65 percent of the outstanding shares of Acotec, for an upfront cash payment of HK$20.00 per share, or approximately $520 million at foreign currency exchange rates as of closing using cash on hand. The Acotec portfolio complements our existing Peripheral Interventions portfolio and will strengthen our presence in China. 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 final purchase price was comprised of the amount presented below:
(in millions) |  |  |  |  |  |
Payment for acquisition, net of cash acquired | $ | 1,463 |  |  |  |  |  |
| $ | 1,463 |  |  |  |  |  |
The final 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. 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
Amortizable intangible assets: |  |  |  |  |  |  |
Technology-related | $ | 622 |  |  | 11 |  | 11%
Other intangible assets | 36 |  |  | 11 |  | 11%
| $ | 657 |  |  |  |  |  |  |
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. 2021 Acquisitions On March 1, 2021, we completed our acquisition of Preventice Solutions, Inc. (Preventice), a privately-held company with 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 $196 million gain recognized within Other, net. 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. The transaction price for the remaining stake consisted of an upfront cash payment of $268 million, net of cash acquired, up to $92 million in additional clinical and regulatory milestone payments, as well as future revenue-based payments. We have made combined milestone and revenue based payments of $114 million to date. 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 has developed and commercialized 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 division. On November 8, 2021, we completed our acquisition of the remaining shares of Devoro Medical, Inc. (Devoro Medical), a privately-held company which has developed the WOLF Thrombectomy® Platform, a non-console and lytic-free platform designed to rapidly capture and extract blood clots in arterial, venous and pulmonary embolism procedures. The transaction consisted of an upfront cash payment of $320 million and up to $80 million upon achievement of certain clinical and regulatory milestones. We had been an investor in Devoro Medical since 2019 and held an equity stake of approximately 16 percent. 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 $57 million gain recognized within Other, net. The transaction price for the remaining stake consisted of an upfront cash payment of $251 million, net of cash acquired, and up to approximately $67 million in future milestone payments. The Devoro Medical business is being integrated into our Peripheral Interventions division. Purchase Price Allocation The final purchase price for the acquisitions completed during 2021 were comprised of the components presented below, which represents the determination of the fair value of identifiable assets acquired and liabilities assumed in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 805, Business Combinations.
(in millions) | Preventice |  | Lumenis |  | All Other | Total
Payment for acquisition, net of cash acquired | $ | 706 |  |  | $ | 1,032 |  |  | $ | 519 |  | $ | 2,258 |
Fair value of contingent consideration | 221 |  |  | — |  |  | 218 |  | 440 |
Fair value of prior interest | 269 |  |  | — |  |  | 287 |  | 556 |
| $ | 1,197 |  |  | $ | 1,032 |  |  | $ | 1,025 |  | $ | 3,254 |
The final purchase price allocation for these acquisitions was comprised of the following components:
(in millions) | Preventice |  | Lumenis |  | All Other | Total |
Goodwill | $ | 926 |  |  | $ | 534 |  |  | $ | 594 |  | $ | 2,053 |  |
Amortizable intangible assets | 237 |  |  | 423 |  |  | 465 |  | 1,125 |  |
Indefinite-lived intangible assets | — |  |  | 69 |  |  | 43 |  | 112 |  |
Other assets acquired | 65 |  |  | 297 |  |  | 9 |  | 372 |  |
Liabilities assumed | (32) |  |  | (282) |  |  | (11) |  | (325) |  |
Net deferred tax liabilities | — |  |  | (9) |  |  | (75) |  | (84) |  |
| $ | 1,197 |  |  | $ | 1,032 |  |  | $ | 1,025 |  | $ | 3,254 |  |
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. In 2022, we recorded certain measurement period adjustments primarily 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 consolidated balance sheet of $183 million related to uncertain tax positions assumed in connection with the acquisition. We expect to be indemnified for the majority of such tax obligations and we recognized a corresponding indemnification asset of $177 million within Other non-current assets within our consolidated balance sheets. 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 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 Note G – Supplemental Balance Sheet Information for further details regarding our indemnification asset. 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: |  |  |  |  |  |  |
IPR&D | 69 |  |  | N/A |  | 12%
| $ | 492 |  |  |  |  |  |  |
All Other: |  |  |  |  |  |  |
Amortizable intangible assets: |  |  |  |  |  |  |
Technology-related | $ | 465 |  |  | 12 |  | 16% | - | 17%
Indefinite-lived intangible assets: |  |  |  |  |  |  |
IPR&D | 43 |  |  | N/A |  | 17%
| $ | 508 |  |  |  |  |  |  |
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. In 2020, we recorded Goodwill impairment charges of $73 million related to our Specialty Pharmaceuticals business and classified the remaining assets and liabilities as held for sale as of December 31, 2020. 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 | 440 |
Contingent consideration net expense (benefit) | (136) |
Contingent consideration payments | (15) |
Balance as of December 31, 2021 | $ | 486 |
Contingent consideration net expense (benefit) | 35 |
Contingent consideration payments | (371) |
Balance as of December 31, 2022 | $ | 149 |
The payments made during 2022 were primarily related to our 2021 acquisitions of Farapulse and Preventice. As of December 31, 2022, the maximum amount of future contingent consideration (undiscounted) that we could be required to pay associated with our completed acquisitions was approximately $417 million. The net expense of $35 million recorded in 2022 related to an increase in expected revenue-based payments as a result of over-achievement of net sales performance, primarily related to Farapulse. The net benefit of $136 million recorded in 2021 related to a reduction in the contingent consideration liability for certain prior acquisitions for which we reduced the probability of achievement of associated revenue and/or regulatory milestones upon which payment is conditioned, or, for milestones that would not be achieved due to management's discontinuation of the associated R&D program. Refer to Note C – Goodwill and Other Intangible Assets for further details. 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 December 31, 2022 | Valuation Technique | Unobservable Input | Range | Weighted Average(1)
R&D, Regulatory and Commercialization-based Milestones | $13 million | Discounted Cash Flow | Discount Rate | 1% | - | 2% | 2%
Probability of Payment | 10% | - | 25% | 22%
Projected Year of Payment | 2023 | - | 2025 | 2024
Revenue-based Payments | $136 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 our 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 December 31, 2022. Strategic Investments The aggregate carrying amount of our strategic investments was comprised of the following:
| As of December 31,
(in millions) | 2022 |  | 2021
Equity method investments | $ | 188 |  |  | $ | 259 |
Measurement alternative investments(1) | 216 |  |  | 142 |
Publicly-held securities(2) | 2 |  |  | 10 |
Notes receivable | 1 |  |  | — |
| $ | 407 |  |  | $ | 412 |
(1) Measurement alternative investments are privately-held equity securities or agreements for future equity 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 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 consolidated statements of operations. These investments are classified as Other long-term assets within our consolidated balance sheets, in accordance with U.S. GAAP and our accounting policies. In 2021, we recorded a $178 million loss 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. As of December 31, 2022, the cost of our aggregated equity method investments exceeded our share of the underlying equity in net assets by $232 million, which represents amortizable intangible assets, IPR&D, goodwill and deferred tax liabilities.

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