Business Acquisition

9 Months Ended

Sep. 30, 2014

Business Combinations [Abstract]

Business Acquisition

Business Acquisition

On July 30, 2014, the Company purchased the stock of EndoDynamix, Inc., a developer of minimally invasive surgical instruments, for a cash purchase price of $1.3 million and accrued $13.9 million in contingent consideration. The fair value of this acquisition included assets of $9.5 million related to in-process research and development to be amortized over a ten year period and $7.8 million in goodwill, and liabilities of $13.9 million related to contingent consideration and $1.8 million in deferred income tax liabilities. Goodwill represents future cash flows expected from new products currently under development. The in-process research and development and goodwill associated with the acquisition are not deductible for income tax purposes. The allocation of purchase price is preliminary and therefore subject to adjustment in future periods.

As noted above, we recorded $13.9 million in contingent consideration based upon certain milestones being achieved totaling $10.3 million and future royalties to be incurred of $3.6 million. Contingent consideration was valued using a discounted cash flow method. We paid $3.7 million of the milestone payment on October 17, 2014 and we expect the remaining milestones to be achieved and paid by the end of 2015. The future royalties were discounted between 2% and 26% using an assumed probability of 75% to 100%. We expect the royalty payments to be made between 2015 and 2020.

Certain pro-forma and other disclosures are not included because the effects are not material.