Business Combinations (Tables)

6 Months Ended

Jun. 30, 2018

Schedule of Business Acquisitions, by Acquisition

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 acquisition date fair value of the consideration transferred (in thousands):



Cash	$	203,671
Contingent consideration	40,190
Fair value of consideration transferred	$	243,861

Schedule of Recognized Identified Assets Acquired and Liabilities Assumed

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.

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)


(3)	The amount includes a provisional estimate for deferred tax assets acquired.

Schedule of Business Acquisitions by Acquisition, Contingent Consideration

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

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