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Business Combinations | 6 Months Ended
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Jun. 30, 2018
Business Combinations [Abstract] |
Business Combinations | Note 3. Business Combinations Caisson Interventional, LLC On May 2, 2017, we acquired the remaining 51% equity interests in Caisson Interventional, LLC (“Caisson”) for a purchase price of up to $72.0 million, net of $6.3 million of debt forgiveness, consisting of $18.0 million paid at closing, $14.4 million paid during the second quarter of 2018, and contingent consideration of up to $39.6 million to be paid on a schedule driven primarily by regulatory approvals and a sales-based earnout. Caisson is focused on the design, development and clinical evaluation of a novel transcatheter mitral valve replacement (“TMVR”) implant device with a fully transvenous delivery system for the treatment of mitral valve regurgitation. The purchase price allocation was finalized during the second quarter of 2018 and there were no adjustments to the preliminary purchase price allocation during the measurement period. We performed a quantitative impairment assessment, as of April 1, 2018, for the goodwill and in-process research and development assets arising from the Caisson acquisition. Based upon the assessment performed, we determined that the goodwill and the in-process research and development assets were not impaired. The quantitative impairment assessment was performed using management’s current estimate of future cash flows which are based on the expected timing of future regulatory approvals. A delay in the anticipated timing of these regulatory approvals or a change in management’s estimates could result in a fair value of the in-process research and development that is below its carrying amount. We will continue to monitor any changes in circumstances for indicators of impairment. ImThera Medical, Inc. On January 16, 2018, we acquired the remaining 86% outstanding interest in ImThera Medical, Inc. (“ImThera”) for cash consideration of up to $225 million. Cash of $78.3 million was paid at closing with the balance to be paid based on achievement of a certain regulatory milestone and a sales-based earnout. Headquartered in San Diego, California, ImThera manufactures an implantable device for the treatment of obstructive sleep apnea that stimulates multiple tongue muscles via the hypoglossal nerve, which opens the airway while a patient is sleeping. ImThera has a commercial presence on the European market, and an FDA pivotal study is ongoing in the U.S. ImThera is highly aligned with our Neuromodulation Business Franchise. The following table presents the acquisition date fair value of the consideration transferred and the fair value of our interest in ImThera prior to the acquisition (in thousands):
Cash |  | $ | 78,332 |
Contingent consideration |  | 112,744 |
Fair value of our interest in ImThera prior to the acquisition (1) |  | 25,580 |
Fair value of consideration transferred |  | $ | 216,656 |
(1) | The fair value of our previously-held interest in ImThera was determined based on the fair value of total consideration transferred and application of a discount for lack of control. As a result, we recognized a gain of $11.5 million for the fair value in excess of our carrying value of $14.1 million. The gain is reflected as “Gain on acquisitions” on our condensed consolidated statement of income for the six months ended June 30, 2018.
The following table presents the preliminary purchase price allocation at fair value for the ImThera acquisition including certain measurement period adjustments (in thousands):
|  | Initial Purchase Price Allocation |  | Measurement Period Adjustments (1) |  | Adjusted Purchase Price Allocation
In-process research and development (2) |  | $ | 151,605 |  |  | $ | 10,677 |  |  | $ | 162,282 |
Developed technology |  | 5,661 |  |  | (5,661 | ) |  | — |
Goodwill |  | 87,063 |  |  | (4,467 | ) |  | 82,596 |
Deferred income tax liabilities, net (3) |  | (27,980 | ) |  | (1,278 | ) |  | (29,258 | )
Other assets and liabilities, net |  | 836 |  |  | 200 |  |  | 1,036 |
Net assets acquired |  | $ | 217,185 |  |  | $ | (529 | ) |  | $ | 216,656 |
(1) | During the second quarter of 2018, measurement period adjustments were recorded based upon new information obtained about facts and circumstances that existed as of the acquisition date.
(2) | The fair value of in-process research and development ("IPR&D") was determined using the income approach, which is a valuation technique that provides a fair value estimate based on the market participant expectations of cash flows the asset would generate. The cash flows were discounted commensurate with the level of risk associated with the asset. The discount rates were developed after assigning a probability of success to achieving the projected cash flows based on the current stage of development, inherent uncertainty in reaching certain regulatory milestones and risks associated with commercialization of the product. The IPR&D amount is included in “Intangible assets, net” in the condensed consolidated balance sheet at June 30, 2018.
(3) | The amount includes a provisional estimate for deferred tax assets acquired.
Goodwill arising from the ImThera acquisition, which is not deductible for tax purposes, primarily represents the synergies anticipated between ImThera and our existing neuromodulation business. The assets acquired, including goodwill, are recognized in our Neuromodulation segment. During the second quarter of 2018, we determined that developments in the ImThera clinical trial will result in a minimum 12-month delay of regulatory approval. This delay constituted a triggering event that required evaluation of the in-process research and development asset for impairment. Based on the quantitative impairment evaluation, the in-process research and development asset was not impaired; however, a further delay or a change in management’s estimates could result in a fair value that is below the carrying amount for such an asset. We will continue to monitor any changes in circumstances for indicators of impairment. The results of the ImThera acquisition added $0.1 million and $0.2 million in revenue and $2.6 million and $3.6 million in operating losses during the three and six months ended June 30, 2018, respectively. Additionally, we recognized ImThera acquisition-related expenses of approximately $0.2 million and $0.3 million for legal and valuation expenses during the three and six months ended June 30, 2018, respectively. These expenses are included within “Selling, general and administrative” expenses in the condensed consolidated statement of income. Pro forma financial information assuming the ImThera acquisition had occurred as of the beginning of the calendar year prior to the year of acquisition was not material for disclosure purposes. The ImThera business combination involved contingent consideration arrangements composed of potential cash payments upon the achievement of a certain regulatory milestone and a sales-based earnout associated with sales of products covered by the purchase agreement. The sales-based earnout was valued using projected sales from our internal strategic plan. Both arrangements are Level 3 fair value measurements and include the following significant unobservable inputs (in thousands):
ImThera Acquisition |  | Fair value at January 16, 2018 |  | Valuation Technique |  | Unobservable Input |  | Ranges
Regulatory milestone-based payment |  | $ | 50,429 |  |  | Discounted cash flow |  | Discount rate |  | 4.3% - 4.7%
|  |  |  |  |  | Probability of payment |  | 85% - 95%
|  |  |  |  |  | Projected payment years |  | 2020 - 2021
Sales-based earnout |  | 62,315 |  |  | Monte Carlo simulation |  | Risk-adjusted discount rate |  | 11.5%
|  |  |  |  |  | Credit risk discount rate |  | 4.7% - 5.8%
|  |  |  |  |  | Revenue volatility |  | 29.3%
|  |  |  |  |  | Probability of payment |  | 85% - 95%
|  |  |  |  |  | Projected years of earnout |  | 2020 - 2025
|  | $ | 112,744 |  |  |  |  |  |  |
TandemLife On April 4, 2018, we acquired CardiacAssist, Inc., doing business as TandemLife (“TandemLife”) for cash consideration of up to $250 million. Cash of $204 million was paid at closing with up to $50 million in contingent consideration based on achieving regulatory milestones. TandemLife, headquartered in Pittsburgh, Pennsylvania, is focused on the delivery of leading-edge temporary life support systems, including cardiopulmonary and respiratory support solutions. TandemLife complements our Cardiac Surgery portfolio, and expands our existing line of cardiopulmonary products. The following table presents the acquisition date fair value of the consideration transferred (in thousands):
Cash |  | $ | 203,671 |
Contingent consideration |  | 40,190 |
Fair value of consideration transferred |  | $ | 243,861 |
The following table presents the preliminary purchase price allocation at fair value for the TandemLife acquisition (in thousands):
In-process research and development (1) (2) (3) |  | $ | 110,977 |
Trade names (1) |  | 11,539 |
Developed technology (1) |  | 6,387 |
Goodwill |  | 118,917 |
Inventory |  | 10,296 |
Other assets and liabilities, net |  | 3,632 |
Deferred income tax liabilities, net (3) |  | (17,887 | )
Net assets acquired |  | $ | 243,861 |
(1) | The amounts above are included in “Intangible assets, net” in the condensed consolidated balance sheet at June 30, 2018. Trade names and developed technology are amortized over remaining useful lives of 15 and 2 years, respectively.
(2) | The fair value of in-process research and development ("IPR&D") was determined using the income approach, which is a valuation technique that provides a fair value estimate based on the market participant expectations of cash flows the asset would generate. The cash flows were discounted commensurate with the level of risk associated with the asset. The discount rates were developed after assigning a probability of success to achieving the projected cash flows based on the current stage of development, inherent uncertainty in reaching certain regulatory milestones and risks associated with commercialization of the product.
(3) | The amounts include provisional estimates based on the information available as of the acquisition date. The Company is gathering additional information necessary to finalize the estimated fair values for deferred tax assets acquired and IPR&D.
Goodwill arising from the TandemLife acquisition, which is not deductible for tax purposes, primarily represents the synergies anticipated between TandemLife and our existing cardiac surgery business. The assets acquired, including goodwill, are recognized in our Cardiac Surgery segment. The results of the TandemLife acquisition added $6.0 million in revenue and $6.1 million in operating losses during each of the three and six months ended June 30, 2018. Additionally, we recognized TandemLife acquisition-related expenses of approximately $1.6 million and $1.9 million for legal and valuation expenses during the three and six months ended June 30, 2018, respectively. These expenses are included within “Selling, general and administrative” expenses in the condensed consolidated statement of income. Pro forma financial information assuming the TandemLife acquisition had occurred as of the beginning of the calendar year prior to the year of acquisition was not material for disclosure purposes. The TandemLife business combination involved a contingent consideration arrangement composed of potential cash payments upon the achievement of certain regulatory milestones. The arrangement is a Level 3 fair value measurement and includes the following significant unobservable inputs (in thousands):
TandemLife Acquisition |  | Fair value at April 4, 2018 |  | Valuation Technique |  | Unobservable Input |  | Ranges
Regulatory milestone-based payments |  | $ | 40,190 |  |  | Discounted cash flow |  | Discount rate |  | 4.2% - 4.8%
|  |  |  |  |  | Probability of payments |  | 75% - 95%
|  |  |  |  |  | Projected payment years |  | 2019 - 2020

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