Investments and Fair Value Measurements

9 Months Ended

Oct. 02, 2022


3. INVESTMENTS AND FAIR VALUE MEASUREMENTS

Strategic Investments

Marketable Equity Securities

Our short-term investments consist of marketable equity securities. As of October 2, 2022 and January 2, 2022, the fair value of our marketable equity securities totaled $41 million and $107 million, respectively.

Net gains (losses) recognized in other (expense) income, net on our marketable equity securities were as follows:


In millions	Q3 2022		Q3 2021		YTD 2022		YTD 2021
Net gains (losses) recognized during the period on marketable equity securities	$	3	$	45	$	(66)	$	(23)
Less: Net losses recognized during the period on marketable equity securities sold during the period	—		—		—		(7)
Net unrealized gains (losses) recognized during the period on marketable equity securities still held at the reporting date	$	3	$	45	$	(66)	$	(16)

Non-Marketable Equity Securities

As of October 2, 2022 and January 2, 2022, the aggregate carrying amounts of our non-marketable equity securities without readily determinable fair values, included in other assets, were $42 million and $40 million, respectively.

Revenue recognized from transactions with our strategic investees was $27 million and $83 million for Q3 2022 and YTD 2022, respectively, and $14 million and $47 million for Q3 2021 and YTD 2021, 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 $11 million and up to $101 million, respectively, remained callable as of October 2, 2022. Our investments in the Funds are accounted for as equity-method investments. The aggregate carrying amounts of the Funds, included in other assets, were $184 million and $173 million as of October 2, 2022 and January 2, 2022, respectively. We

recorded unrealized losses of $5 million and $11 million in Q3 2022 and YTD 2022, respectively, and unrealized gains of $23 million in Q3 2021 and $54 million in YTD 2021, in other (expense) income, net.

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 losses of $5 million and $8 million in Q3 2022 and YTD 2022, respectively, and unrealized gains of $12 million and $30 million in Q3 2021 and YTD 2021, respectively, which were included in other (expense) income, net.

Derivative Assets Related to Terminated Acquisition

Pursuant to the Agreement and Plan of Merger (the PacBio Merger Agreement) to acquire Pacific Biosciences of California, Inc. (PacBio) entered into in November 2018 and amended in September 2019 (Amendment No. 1 to the PacBio Merger Agreement) and the subsequent agreement to terminate the PacBio Merger Agreement (the Termination Agreement) entered into in January 2020, we made cash payments to PacBio of $18 million in Q4 2019 and $34 million in Q1 2020, respectively, 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 (expense) income, net.

Fair Value Measurements

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


	October 2, 2022								January 2, 2022
In millions	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Money market funds (cash equivalents)	$	551	$	—	$	—	$	551	$	688	$	—	$	—	$	688



Marketable equity securities	41		—		—		41		107		—		—		107
Helix contingent value right	—		—		57		57		—		—		65		65

Deferred compensation plan assets	—		49		—		49		—		60		—		60
Total assets measured at fair value	$	592	$	49	$	57	$	698	$	795	$	60	$	65	$	920
Liabilities:
Contingent consideration liabilities	$	—	$	—	$	387	$	387	$	—	$	—	$	615	$	615
Deferred compensation plan liability	—		46		—		46		—		56		—		56
Total liabilities measured at fair value	$	—	$	46	$	387	$	433	$	—	$	56	$	615	$	671

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 such contingent value right, included in other assets, is derived using a Monte Carlo simulation. Estimates and assumptions used in the Monte Carlo simulation include probabilities related to the timing and outcome of future financing and/or liquidity events, assumptions regarding collectibility and volatility, and an estimated equity value of Helix. 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 related to acquisitions on a quarterly basis. The contingent value rights issued as part of the GRAIL acquisition entitle the holders to receive future cash payments on a quarterly basis (Covered Revenue Payments) representing a pro rata portion of certain GRAIL-related revenues (Covered Revenues) each year for a 12-year period. As defined in the Contingent Value Rights Agreement, 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. Covered Revenues for Q4 2021, Q1 2022, and Q2 2022 were $32 million in aggregate, driven primarily by sales of GRAIL’s Galleri test. Corresponding Covered Revenue Payments in YTD 2022 were approximately $297,000; however, pursuant to the Contingent Value Rights Agreement, a portion of the Covered Revenue Payments were applied to reimburse us for certain expenses. We use a Monte Carlo simulation to estimate the fair value of contingent consideration related to the GRAIL acquisition. Estimates and assumptions used in the Monte Carlo simulation include forecasted revenues for GRAIL, a revenue risk premium, a revenue volatility estimate, an operational leverage ratio and a counterparty credit spread. 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 contingent consideration subsequent to the acquisition date are recognized in selling, general and administrative expense in our condensed consolidated statements of operations. The fair value of our contingent consideration liability related to the GRAIL acquisition was $387 million and $615 million as of October 2, 2022 and January 2, 2022, respectively, of which $386 million and $614 million, respectively, was included in other long-term liabilities, with the remaining balances included in accrued liabilities.

Changes in the estimated fair value of our contingent consideration liabilities during YTD 2022 were as follows:


In millions
Balance as of January 2, 2022	$	615

Acquisition	2

Change in estimated fair value	(230)

Balance as of October 2, 2022	$	387

- 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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