Investments and Fair Value Measurements

9 Months Ended

Oct. 03, 2021


3. INVESTMENTS AND FAIR VALUE MEASUREMENTS

Debt Securities

Our short-term investments include available-for-sale debt securities that consisted of the following:


	October 3, 2021				January 3, 2021
In millions	Amortized Cost		Gross Unrealized Gains		Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Estimated Fair Value

Debt securities in government-sponsored entities	$	—	$	—	$	—	$	10	$	—	$	10
Corporate debt securities	—		—		—		445		—		445
U.S. Treasury securities	—		—		—		830		1		831
Total	$	—	$	—	$	—	$	1,285	$	1	$	1,286

During Q1 2021, we sold all of our available-for-sale debt securities in anticipation of funding the GRAIL acquisition. See note “4. B usiness Combinations” for further details. Realized gains and losses are determined based on the specific-identification method and are reported in interest income.

Strategic Investments

Marketable Equity Securities

As of October 3, 2021 and January 3, 2021, the fair value of our marketable equity securities, included in short-term investments, totaled $185 million and $376 million, respectively. Total net unrealized gains on our marketable equity securities, included in other income, net, were $45 million in Q3 2021 and total net unrealized losses were $16 million in YTD 2021. Total unrealized gains on our marketable equity securities were $59 million and $128 million in Q3 2020 and YTD 2020, respectively. Total net losses on marketable equity securities sold, included in other income, net, were $7 million in YTD 2021. There were no sales of our marketable equity securities in Q3 2021 or YTD 2020.

Non-Marketable Equity Securities

As of October 3, 2021 and January 3, 2021, the aggregate carrying amounts of our non-marketable equity securities without readily determinable fair values, included in other assets, were $61 million and $314 million, respectively. The decrease was due to our acquisition of GRAIL and the reclassification of several of our equity investments, that became marketable in Q3 2021, to short-term investments.

On August 18, 2021, we completed our acquisition of GRAIL. Prior to the acquisition, we held an investment in GRAIL for which we had concluded that GRAIL was a VIE for which we were not the primary beneficiary and, therefore, we did not consolidate GRAIL in our consolidated financial statements. The carrying value of our investment was $250 million as of January 3, 2021. See note “4. Business Combinations” for further details.

Revenue recognized from transactions with our strategic investees was $14 million and $47 million for Q3 2021 and YTD 2021, respectively, and $16 million and $39 million for Q3 2020 and YTD 2020, respectively.

Venture Funds

We invest in two venture capital investment funds (the Funds) with capital commitments of $100 million, callable through April 2026, and up to $150 million, callable through July 2029, respectively, of which $23 million and up to $122 million, respectively, remained callable as of October 3, 2021. Our investments in the Funds are accounted for as equity-method investments. The aggregate carrying amounts of the Funds, included in other assets, were $172 million and $104 million as of October 3, 2021 and January 3, 2021, respectively.

Helix Contingent Value Right

In conjunction with the deconsolidation of Helix Holdings I, LLC (Helix) in April 2019, we received a contingent value right with a 7-year term that entitles us to consideration dependent upon the outcome of Helix’s future financing and/or liquidity events. Changes in the fair value of the contingent value right resulted in unrealized gains of $12 million and $30 million in Q3 2021 and YTD 2021, respectively, and an unrealized gain of $5 million in YTD 2020, included in other income, net. There was no change in fair value in Q3 2020.

Derivative Assets Related to Terminated Acquisition

On November 1, 2018, we entered into an Agreement and Plan of Merger (the PacBio Merger Agreement) to acquire Pacific Biosciences of California, Inc. (PacBio) for an all-cash price of approximately $1.2 billion (or $8.00 per share). On January 2, 2020, we entered into an agreement to terminate the PacBio Merger Agreement (the Termination Agreement). Pursuant to the Termination Agreement, we made a cash payment to PacBio of $98 million on January 2, 2020, which represented the Reverse Termination Fee (as defined in the PacBio Merger Agreement). The Reverse Termination Fee was repayable, without interest, if PacBio entered into a definitive agreement providing for, or consummating, a Change of Control Transaction by September 30, 2020 (as defined in the Termination Agreement), and such transaction was consummated by the two-year anniversary of the execution of the definitive agreement for such Change of Control Transaction. PacBio did not enter into a definitive agreement that provided for, or consummated, a Change of Control Transaction by September 30, 2020 (as defined in the Termination Agreement); therefore, the Reverse Termination Fee is no longer repayable.

In addition, we made cash payments to PacBio of $18 million in Q4 2019, pursuant to Amendment No. 1 to the PacBio Merger Agreement, and $34 million in Q1 2020, pursuant to the Termination Agreement, collectively referred to as the Continuation Advances. Up to the $52 million of Continuation Advances was repayable, without interest, if, within two years of March 31, 2020, PacBio entered into a Change of Control Transaction or raised at least $100 million in equity or debt financing in a single transaction (with the amount repayable dependent on the amount raised by PacBio). In February 2021, PacBio entered into an investment agreement with SB Northstar LP for the issuance and sale of $900 million in aggregate principal amount of PacBio’s convertible notes. Pursuant to the PacBio Merger Agreement, PacBio repaid to us the $52 million of Continuation Advances and we recorded a gain of $26 million in Q1 2021, which was included in other income, net.

The potential repayments of the Continuation Advances and Reverse Termination Fee met the definition of derivative assets and were recorded at fair value. The $92 million difference between the $132 million in cash paid during Q1 2020 for the Continuation Advances and Reverse Termination Fee and the $40 million fair value of these derivative assets on the payment dates was recorded as selling, general and administrative expense in Q1 2020. Changes in the fair value of the derivative assets were included in other income, net. Unrealized losses of $10 million and $25 million were recorded in Q3 2020 and YTD 2020, respectively.

Fair Value Measurements

The following table presents the hierarchy for assets and liabilities measured at fair value on a recurring basis:


	October 3, 2021								January 3, 2021
In millions	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Money market funds (cash equivalents)	$	623	$	—	$	—	$	623	$	1,512	$	—	$	—	$	1,512
Debt securities in government-sponsored entities	—		—		—		—		—		10		—		10
Corporate debt securities	—		—		—		—		—		445		—		445
U.S. Treasury securities	—		—		—		—		831		—		—		831
Marketable equity securities	185		—		—		185		376		—		—		376
Helix contingent value right	—		—		65		65		—		—		35		35
Derivative assets related to terminated acquisition	—		—		—		—		—		—		26		26
Deferred compensation plan assets	—		59		—		59		—		55		—		55
Total assets measured at fair value	$	808	$	59	$	65	$	932	$	2,719	$	510	$	61	$	3,290
Liabilities:
Contingent consideration liabilities	$	—	$	—	$	769	$	769	$	—	$	—	$	—	$	—
Deferred compensation plan liability	—		55		—		55		—		51		—		51
Total liabilities measured at fair value	$	—	$	55	$	769	$	824	$	—	$	51	$	—	$	51

We consider information provided by our investment accounting and reporting service provider in the measurement of fair value of our debt securities. The investment service provider provides valuation information from an industry-recognized valuation service. Such valuations may be based on trade prices in active markets for identical assets or liabilities (Level 1 inputs) or valuation models using inputs that are observable either directly or indirectly (Level 2 inputs), such as quoted prices for similar assets or liabilities, yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments or debt, broker and dealer quotes, as well as other relevant economic measures. Our marketable equity securities are measured at fair value based on quoted trade prices in active markets. Our deferred compensation plan assets consist primarily of investments in life insurance contracts carried at cash surrender value, which reflects the net asset value of the underlying publicly traded mutual funds. We perform control procedures to corroborate the fair value of our holdings, including comparing valuations obtained from our investment service provider to valuations reported by our asset custodians, validating pricing sources and models, and reviewing key model inputs, if necessary. We elected the fair value option to measure the contingent value right received from Helix. The fair value of our contingent value right, included in other assets, is derived using a Monte Carlo simulation. The derivative assets related to the terminated acquisition of PacBio were financial instruments measured at fair value, included in other assets. Significant estimates and assumptions required for these valuations include, but are not limited to, probabilities related to the timing and outcome of future financing and/or liquidity events and an assumption regarding collectibility. These unobservable inputs represent a Level 3 measurement because they are supported by little or no market activity and reflect our own assumptions in measuring fair value.

We reassess the fair value of contingent consideration to be settled in cash related to acquisitions on a quarterly basis. We use a Monte Carlo simulation to estimate the fair value of contingent consideration related to the GRAIL acquisition and an income approach to estimate the fair value of contingent consideration related to our other acquisition. See note “4. Business Combinations” for details regarding the contingent consideration arrangement related to the GRAIL acquisition. Significant assumptions used in the Monte Carlo simulation include forecasted revenues for GRAIL, a revenue risk premium, a revenue volatility, an operational leverage ratio and a counterparty credit spread. Significant assumptions used in the income approach include the probability of achieving certain milestones and a discount rate. These unobservable inputs represent a Level 3 measurement because they are supported by little or no market activity and reflect our own assumptions in measuring fair value. Changes in the fair value of the contingent consideration liabilities are recognized in selling, general and administrative expense.

Changes in the estimated fair value of contingent consideration liabilities during YTD 2021 were as follows:


In millions	Contingent Consideration Liability (Level 3 Measurement)
Balance as of January 3, 2021	$	—
Acquisition of GRAIL	762
Other acquisition	14
Change in estimated fair value	(7)

Balance as of October 3, 2021	$	769

We recorded a contingent consideration liability of $14 million as a result of an acquisition completed in Q2 2021. The acquisition-date fair value of the contingent consideration liability was derived using the income approach. Assumptions used to estimate the liability included the probability of achieving certain milestones and a discount rate. As of October 3, 2021, the estimated fair value of the contingent consideration liability was $15 million, which is included in accrued liabilities. We recorded an expense of $1 million in selling, general and administrative expense in Q3 2021 and YTD 2021 due to the change in estimated fair value of the contingent consideration liability.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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