Acquisitions and Strategic Investments

3 Months Ended

Mar. 31, 2016

Business Combinations [Abstract]

ACQUISITIONS AND STRATEGIC INVESTMENTS

ACQUISITIONS AND STRATEGIC INVESTMENTS

We did not close any material acquisitions during the first quarter of 2016 and 2015.

Contingent Consideration

Certain of our acquisitions involve contingent consideration arrangements. Payment of additional consideration is generally contingent on the acquired company reaching certain performance milestones, including attaining specified revenue levels, achieving product development targets and/or obtaining regulatory approvals. In accordance with U.S. GAAP, we recognize a liability equal to the fair value of the contingent payments we expect to make as of the acquisition date. We re-measure this liability each reporting period and record changes in the fair value through a separate line item within our condensed consolidated statements of operations.

We recorded net expenses related to the changes in fair value of our contingent consideration liabilities of $4 million and $27 million during the first quarter of 2016 and the first quarter of 2015, respectively. We paid contingent consideration of $63 million during the first quarter of 2016 and $99 million during the first quarter of 2015.

Changes in the fair value of our contingent consideration liabilities were as follows (in millions):

Balance as of December 31, 2015	$	246
Other amounts recorded related to prior acquisitions	1
Fair value adjustments	4
Contingent payments related to prior period acquisitions	(63		)
Balance as of March 31, 2016	$	188

As of March 31, 2016, the maximum amount of future contingent consideration (undiscounted) that we could be required to pay was approximately $1.586 billion.

Contingent consideration liabilities are remeasured to fair value each reporting period using projected revenues, discount rates, probabilities of payment and projected payment dates. The recurring Level 3 fair value measurements of our contingent consideration liabilities include the following significant unobservable inputs:

Contingent Consideration Liabilities	Fair Value as of March 31, 2016	Valuation Technique	Unobservable Input	Range
R&D, regulatory and commercialization-based Milestones	$20 million	Discounted Cash Flow	Discount Rate	2.1% - 3.7%
			Probability of Payment	32% - 95%
			Projected Year of Payment	2017 - 2021
Revenue-based Payments	$62 million	Discounted Cash Flow	Discount Rate	11% - 15%
			Projected Year of Payment	2016 - 2022
	$106 million	Monte Carlo	Revenue Volatility	15%
			Risk Free Rate	LIBOR Term Structure
			Projected Year of Payment	2016 - 2018

Increases or decreases in the fair value of our contingent consideration liabilities can result from changes in discount periods and rates, as well as changes in the timing and amount of revenue estimates or in the timing or likelihood of achieving R&D, regulatory commercialization-based and revenue-based milestones. Projected contingent payment amounts related to certain R&D, regulatory and commercialization-based and certain revenue-based milestones are discounted back to the current period using a discounted cash flow (DCF) model. Other revenue-based payments are valued using a Monte Carlo valuation model, which simulates future revenues during the earn-out period using management's best estimates. Projected revenues are based on our most recent internal operational budgets and long-range strategic plans. Increases in projected revenues and probabilities of payment may result in higher fair value measurements. Increases in discount rates and the time to payment may result in lower fair value measurements. Increases or decreases in any of those inputs together, or in isolation, may result in a significantly lower or higher fair value measurement.

Strategic Investments

We did not close any material strategic investments during the first quarter of 2016 and 2015.

We account for certain of our strategic investments, as equity method investments, in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 323, Investments - Equity Method and Joint Ventures. The book value of investments that we accounted for under the equity method of accounting was $184 million as of March 31, 2016 and $173 million as of December 31, 2015. The aggregate value of our cost method investments was $46 million as of March 31, 2016 and $45 million as of December 31, 2015. In addition we had notes receivable from certain companies that we account for under the cost method of $32 million as of March 31, 2016 and $30 million as of December 31, 2015.

As of March 31, 2016, the book value of our equity method investments exceeded our share of the book value of the investees’ underlying net assets by approximately $100 million, which represents amortizable intangible assets and in-process research and development, corresponding deferred tax liabilities, and goodwill. During the three months ended March 31, 2016 and March 31, 2015, the net losses from our equity method adjustments, presented within the Other, net caption of our condensed consolidated statement of operations, were immaterial.