Business Combinations

9 Months Ended

Oct. 03, 2021

Business Combination and Asset Acquisition [Abstract]

Business Combinations

4. BUSINESS COMBINATIONS

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 more than 50 different 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 “10. Segment Information” for more information. We have included the financial results of GRAIL in the condensed consolidated financial statements from the date of acquisition.

The total purchase price consisted of the following:

in millions
Cash	$	2,862
Fair value of common stock issued	4,975
Fair value of contingent consideration	762
Fair value of previously held investment	1,150
Settlement of preexisting relationships	2
Total purchase price	$	9,751

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 liability was measured using a Monte Carlo simulation. Key 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 October 3, 2021, the estimated fair value of the contingent consideration liability was $754 million, of which $753 million was included in other long-term liabilities, with the remaining balance included in accrued liabilities. Accordingly, we recorded a gain of $8 million in selling, general and administrative expense in Q3 2021.

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. Significant 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 $1.2 billion and recognized a gain of $900 million, included in other income, net, in Q3 2021.

In connection with the acquisition of GRAIL, 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 Q3 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.

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.

The preliminary fair values of assets acquired and liabilities assumed as of the acquisition date were:

in millions
Cash and cash equivalents	$	571
Property and equipment	89
Operating lease right-of-use assets	121
Goodwill	6,082
Intangible assets	3,180
Other current and noncurrent assets	35
Deferred tax liability	(82)
Long-term lease liabilities	(97)
Other current and noncurrent liabilities	(148)
Total net assets acquired	$	9,751

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		Estimated Useful Life
Developed technology	$	2,470	18
Trade name	40		9
In-process research and development (IPR&D)	670		Indefinite
Total intangible assets	$	3,180

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. 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 October 3, 2021, the IPR&D project had not been completed or abandoned and was therefore not 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 $66 million and $156 million for Q3 2021 and YTD 2021, respectively. These transaction costs were expensed as incurred as selling, general and administrative expense in the respective periods.

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	Q3 2021		Q3 2020		YTD 2021		YTD 2020
Revenue	$	1,109	$	794	$	3,330	$	2,286
Net income	$	194	$	95	$	548	$	148

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 $35 million and $245 million in Q3 2021 and YTD 2021, respectively, which were recorded as selling, general and administrative expenses. Subsequent to the acquisition, we did not make any additional monthly payments.

Intangible Assets

The following is a summary of our identifiable intangible assets:

	October 3, 2021						January 3, 2021
In millions	Gross Carrying Amount		Accumulated Amortization		Intangible Assets, Net		Gross Carrying Amount		Accumulated Amortization		Intangible Assets, Net
Core technologies	$	2,850	$	(251)	$	2,599	$	352	$	(221)	$	131
Licensed technologies	95		(92)		3		95		(91)		4
Customer relationships	31		(28)		3		31		(27)		4
License agreements	14		(12)		2		14		(11)		3
Trade name	44		(5)		39		4		(4)		—
Total finite-lived intangible assets, net	3,034		(388)		2,646		496		(354)		142
In-process research and development (IPR&D)	705		—		705		—		—		—
Total intangible assets, net	$	3,739	$	(388)	$	3,351	$	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 October 3, 2021, the IPR&D project had not been completed or abandoned and was therefore not 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.

Total amortization expense recognized was $19 million and $34 million during Q3 2021 and YTD 2021, respectively.

The estimated annual amortization of finite-lived intangible assets for the next five years 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
2021 (balance of year)	$	42
2022	166
2023	165
2024	163
2025	163
Thereafter	1,947
Total	$	2,646

Goodwill

Changes to goodwill during YTD 2021 were as follows:

In millions	Goodwill
Balance as of January 3, 2021	$	897
Acquisitions	6,201
Balance as of October 3, 2021	$	7,098

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 Q2 2021, noting no impairment.