Acquisitions, Goodwill and Intangible Assets

12 Months Ended

Jan. 02, 2022

Business Combination And Goodwill And Intangible Assets [Abstract]

Acquisitions, Goodwill and Intangible Assets


4. ACQUISITIONS, GOODWILL AND INTANGIBLE ASSETS

Acquisition of GRAIL, Inc.

On August 18, 2021, we completed our acquisition of GRAIL, a healthcare company focused on early detection of multiple cancers. The acquisition is expected to accelerate access and adoption of GRAIL’s blood test, Galleri, that detects various types of cancers before they are symptomatic. The acquisition is subject to ongoing legal proceedings and pending the European Commission’s ongoing merger review. Refer to note “8. Legal Proceedings” for further details. As a result of the acquisition, GRAIL stockholders received as consideration (i) cash, (ii) shares of Illumina common stock and (iii) at their election, either a contingent value right or additional shares of Illumina common stock. We issued 9.8 million common shares as part of the consideration.

GRAIL is a separate reportable segment. See note “11. Segment and Geographic Data” for more information. We have included the financial results of GRAIL in the consolidated financial statements from the date of acquisition.

During the fourth quarter of 2021, we recorded a measurement period adjustment related to the valuations of contingent consideration and our previously held investment in GRAIL that reduced the acquisition date fair value of each by $5 million and $1 million, respectively, and reduced the acquisition date fair value of goodwill by $6 million.

The total purchase price consisted of the following:


in millions	As Adjusted
Cash	$	2,862
Fair value of common stock issued	4,975
Fair value of contingent consideration	757


Fair value of previously held investment	1,149
Settlement of preexisting relationships	2
Total purchase price	$	9,745

The contingent consideration relates to the GRAIL stockholders who elected to receive contingent value rights as part of the acquisition (the Contingent Value Rights Agreement). The contingent value rights entitle the holders to receive future cash payments representing a pro rata portion of certain GRAIL-related revenues each year for a 12-year period starting at the acquisition date. This will reflect a 2.5% payment right to the first $1 billion of revenue each year for 12 years. Revenue above $1 billion each year will be subject to a 9% contingent payment right during this same period. The acquisition-date fair value of the contingent consideration was measured using a Monte Carlo simulation. Estimates and assumptions used in the fair value assessment included forecasted revenues for GRAIL, a revenue risk premium, a revenue volatility, an operational leverage ratio and a counterparty credit spread. As of January 2, 2022, the estimated fair value of the contingent consideration liability was $615 million, of which $614 million was included in other long-term liabilities, with the remaining balance included in accrued liabilities. We recorded a net loss of $3 million in selling, general and administrative expense in 2021 due to changes in the estimated fair value of the contingent consideration liability. In December 2021, we exchanged approximately 73 million contingent value rights, that were issued as part of the acquisition, for an aggregate cash payment of $57 million and the issuance of $2 million in shares of our common stock. As a result of the exchange, we recognized a gain of $86 million in other income, net in 2021, which represents the difference between the fair value of the contingent consideration liability for the contingent value rights exchanged of $145 million and the total consideration transferred of $59 million.

Prior to the acquisition, we owned a 12% interest in GRAIL. Authoritative guidance on accounting for business combinations requires that an acquirer remeasure its previously held equity investment in the acquiree at its acquisition-date fair value and recognize the resulting gain or loss in earnings. We remeasured our previously held equity investment to its fair value, as of the date of acquisition, based on the fair value of total consideration transferred and a discount for lack of control. Estimates and assumptions used in the remeasurement represent a Level 3 measurement because they are supported by little or no market activity and reflect our own assumptions in measuring the fair value. As a result of the remeasurement, we valued our previously held equity investment in GRAIL at $1.1 billion and recognized a gain of $899 million, included in other income, net, in 2021.

In connection with the acquisition, we accelerated the vesting of certain outstanding and unvested equity awards of GRAIL employees. Approximately $69 million was included in the purchase price related to the fair value of accelerated equity awards attributable to the pre-combination period, with the fair value attributable to the post-combination period of $615 million included in share-based compensation expense in 2021. In addition, we issued Illumina equity awards to GRAIL employees in exchange for any of their remaining outstanding and unvested GRAIL equity awards (the “replacement awards”) at acquisition. The replacement awards consist of restricted stock units and performance stock options. The terms of the replacement awards are substantially similar to the former GRAIL equity awards for which they were exchanged. The fair value of the replacement awards was $48 million, all of which is attributable to post-combination service, and will be recognized as share-based compensation expense over the remaining vesting period subsequent to the acquisition. The weighted-average acquisition-date fair value of the replacement performance stock options was determined using the Black-Scholes option pricing model with the

following assumptions: (i) market price of $510.61 per share, which was the closing price of Illumina’s common stock on the acquisition date; (ii) weighted average expected term ranging from 1.6 years to 2.2 years; (iii) weighted-average risk-free interest rate ranging from 0.17% to 0.28%; (iv) weighted average annualized volatility ranging from 40% to 43%; and (v) no dividend yield. The weighted-average acquisition-date fair value per share of the replaced performance stock options was $424.39. Refer to note “6. Stockholders’ Equity” for more information.

The preliminary fair values of assets acquired and liabilities assumed were:


in millions	As Initially Reported		Measurement Period Adjustments		As Adjusted
Cash and cash equivalents	$	571	$	—	$	571



Property and equipment	89		—		89
Operating lease right-of-use assets	121		—		121

Goodwill	6,082		15		6,097
Intangible assets	3,180		(60)		3,120
Other current and noncurrent assets	35		—		35



Deferred tax liability	(82)		40		(42)
Long-term lease liabilities	(97)		—		(97)
Other current and noncurrent liabilities	(148)		(1)		(149)
Total net assets acquired	$	9,751	$	(6)	$	9,745

We recorded measurement period adjustments in Q4 2021 to decrease intangible assets, specifically, developed technology, as a result of revised future cash flow estimates and to decrease deferred tax liability as a result of changes in net operating loss estimates from the initial purchase price allocation. These measurement period adjustments were made to reflect facts and circumstances that existed as of the acquisition date. The measurement period adjustment related to the developed technology intangible asset would have resulted in an insignificant decrease in amortization expense previously recorded in Q3 2021. The measurement period adjustments have been recorded in our consolidated financial statements as of and for the year ended 2021.

We are still finalizing the allocation of the purchase price, therefore, the fair value estimates assigned to intangible assets, goodwill and the related tax impacts of the acquisition, among other items, are subject to change as additional information is received to complete our analysis and certain tax returns are finalized. We expect to finalize the valuation as soon as practicable, but no later than one year after the acquisition date.

Goodwill is primarily attributable to assembled workforce, expanded market opportunities, and expected synergies to be achieved. The goodwill recognized was assigned to the GRAIL segment and is not deductible for tax purposes.

The preliminary fair values assigned to identifiable intangible assets acquired were as follows:


in millions, except years	Fair Value (as adjusted)		Estimated Useful Life
Developed technology	$	2,410	18
Trade name	40		9
In-process research and development (IPR&D)	670		Indefinite
Total intangible assets	$	3,120

The fair values of the developed technology, trade name and IPR&D were estimated using an income approach. Under the income approach, an intangible asset’s fair value is equal to the present value of future economic benefits to be derived from ownership of the asset. The estimated fair values were developed by discounting future net cash flows to their present value at market-based rates of return and inclusive of an assumption for technology obsolescence. The useful lives of the intangible assets for amortization purposes were determined by considering the period of expected cash flows used to measure the fair values of the intangible assets adjusted as appropriate for entity-specific factors including legal, regulatory, contractual, competitive, economic and other factors that may limit the useful life. The developed technology and trade name assets are amortized on a straight-line basis over their estimated useful lives. As of January 2, 2022, the research and development project had not been completed or abandoned and, therefore, the IPR&D intangible asset is not currently subject to amortization.

The transaction costs associated with the acquisition of GRAIL, excluding any Continuation Payments paid to GRAIL prior to the close of the acquisition, consisted primarily of legal, regulatory and financial advisory fees of approximately $156 million, which were expensed as incurred as selling, general and administrative expense in 2021.

Unaudited Pro Forma Financial Information

The following unaudited pro forma financial information summarizes the combined results of operations of Illumina and GRAIL as if the companies had been combined as of the beginning of our fiscal year 2020.


in millions	2021		2020
Revenue	$	4,528	$	3,239
Net income	$	661	$	351

The unaudited pro forma financial information is presented for information purposes only and is not indicative of the results of operations that would have been achieved had the acquisition been completed at the beginning of our fiscal year 2020. In addition, the unaudited pro forma financial information is not a projection of future results of operations of the combined company nor does it reflect the expected realization of any synergies or cost savings associated with the acquisition. The unaudited pro forma financial information includes adjustments to reflect the elimination of intercompany transactions, incremental amortization and depreciation expense of the identifiable intangible assets and property and equipment acquired, respectively, the additional interest expense associated with the issuance of debt to finance the acquisition, and share-based compensation expense.

Prior to the acquisition, we were required to make monthly cash payments to GRAIL of $35 million (the Continuation Payments) through the earlier of the consummation of the acquisition or termination of the GRAIL Merger Agreement, subject to certain exceptions. We made Continuation Payments to GRAIL totaling $245 million and $35 million in 2021 and 2020, respectively, which were recorded as selling, general and administrative expense. Subsequent to the acquisition, we did not make any additional monthly payments.

Goodwill


In millions	Goodwill
Balance as of December 29, 2019	$	824
Acquisitions	73
Balance as of January 3, 2021	897
Acquisitions	6,201
Measurement period adjustments	15
Balance as of January 2, 2022	$	7,113

Goodwill is reviewed for impairment at least annually during the second quarter, or more frequently if an event occurs indicating the potential for impairment. We performed our annual assessment for goodwill impairment in the second quarter of 2021, noting no impairment.

Intangible Assets


	January 2, 2022						January 3, 2021
In millions	Gross Carrying Amount		Accumulated Amortization		Intangible Assets, Net		Gross Carrying Amount		Accumulated Amortization		Intangible Assets, Net
Developed technologies	$	2,790	$	(291)	$	2,499	$	352	$	(221)	$	131
Licensed technologies	95		(92)		3		95		(91)		4
Trade name	44		(6)		38		4		(4)		—
Customer relationships	31		(28)		3		31		(27)		4
License agreements	14		(12)		2		14		(11)		3
Total finite-lived intangible assets, net	2,974		(429)		2,545		496		(354)		142
In-process research and development (IPR&D)	705		—		705		—		—		—
Total intangible assets, net	$	3,679	$	(429)	$	3,250	$	496	$	(354)	$	142

As a result of an acquisition completed in Q2 2021, we recorded an IPR&D intangible asset of $35 million, with an indefinite useful life. As of January 2, 2022, the research and development project had not been completed or abandoned and, therefore, the IPR&D intangible asset is not currently subject to amortization. Additionally, as a result of another acquisition completed in Q3 2021, we recorded a developed technology intangible asset of $28 million, with a useful life of 10 years. As a result of an acquisition completed in 2020, we recorded a developed technology intangible asset of $26 million, with a useful life of 10 years.

The estimated future annual amortization of finite-lived intangible assets is shown in the following table. Actual amortization expense to be reported in future periods could differ from these estimates as a result of acquisitions, divestitures, and asset impairments, among other factors.


In millions	Estimated Annual Amortization
2022	$	165
2023	164
2024	162
2025	162
2026	151
Thereafter	1,741
Total	$	2,545