Acquisitions and Strategic Investments

9 Months Ended

Sep. 30, 2017

Business Combinations [Abstract]

ACQUISITIONS AND STRATEGIC INVESTMENTS

NOTE B – ACQUISITIONS AND STRATEGIC INVESTMENTS

2017 Acquisitions

Apama Medical Inc.

On October 10, 2017, we completed the acquisition of Apama Medical Inc. (Apama), a privately-held company developing the Apama™ Radiofrequency single-shot Balloon Catheter System for the treatment of atrial fibrillation. Total consideration was comprised of $175 million cash up-front and a maximum of $125 millionin contingent payments based on the achievement of clinical and regulatory milestones. Apama will be integrated into our Rhythm Management segment.

Symetis SA

On May 16, 2017, we completed the acquisition of Symetis SA (Symetis), a privately-held Swiss structural heart company focused on minimally-invasive transcatheter aortic valve replacement devices, for approximately $430 millionin cash. We are in the process of integrating Symetis into our Interventional Cardiology business and expect the integration to be substantially complete by the end of 2018.

Purchase Price Allocation

We accounted for the acquisition of Symetis as a business combination and, in accordance with FASB ASC Topic 805, Business Combinations, we recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition date. The components of the aggregate preliminary purchase price are as follows (in millions):

Payment for acquisition, net of cash acquired $ 392

The following summarizes the preliminary purchase price allocation for the Symetis acquisition as of September 30, 2017

(in millions):

Goodwill	$	191
Amortizable intangible assets	278
Other assets acquired	26
Liabilities assumed	(103		)
	$	392

We allocated a portion of the purchase price to specific intangible asset categories as follows:

	Amount Assigned (in millions)		Amortization Period (in years)	Risk-Adjusted Discount Rates used in Purchase Price Allocation
Amortizable intangible assets:
Technology-related	$	268	13	24%
Other intangible assets	10		2-13	24%
	$	278

Our technology-related intangible assets consist of technical processes, intellectual property, and institutional understanding with respect to products and processes that we will leverage in future products or processes and will carry forward from one product generation to the next. We used the multi-period excess earnings method, a form of the income approach, to derive the fair value of the technology-related intangible assets, and are amortizing them on a straight-line basis over their assigned estimated useful lives.

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 for products in development at the date of the acquisition. 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 unaudited condensed consolidated statements of operations. We paid contingent consideration of $45 million during the first nine months of2017 and $77 million during the first nine months of2016.

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

Balance as of December 31, 2016	$	204
Fair value adjustments	(78		)
Contingent payments related to prior period acquisitions	(45		)
Balance as of September 30, 2017	$	81

As of September 30, 2017, the maximum amount of future contingent consideration (undiscounted) that we could be required to pay was approximately $1.261 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 September 30, 2017	Valuation Technique	Unobservable Input	Range
R&D and Commercialization-based Milestones	$31 million	Discounted Cash Flow	Discount Rate	2%
			Projected Year of Payment	2018 - 2021
Revenue-based Payments	$50 million	Discounted Cash Flow	Discount Rate	11% - 15%
			Projected Year of Payment	2017 - 2026

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, commercialization-based, and revenue-based milestones. Projected contingent payment amounts related to some of our R&D, commercialization-based, and revenue-based milestones are discounted back to the current period using a discounted cash flow model. 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

On November 1, 2017, we entered into a definitive agreement with an investee company where we may be obligated to pay $145 million in cash up-front and a maximum of $130 million in contingent payments to acquire the investee. The agreement contains a provision, expiring October 31, 2019, allowing the investee company to sell the remaining equity interests of the investee company to us upon achievement of a regulatory milestone, and an option allowing us to acquire the remaining equity interests.

We account for certain of our strategic investments as equity method investments, in accordance with FASB ASC Topic 323, Investments - Equity Method and Joint Ventures.

The aggregate carrying amount of our strategic investments were comprised of the following categories:

	As of
(in millions)	September 30, 2017		December 31, 2016
Equity method investments	$	204	$	265
Cost method investments	69		20
Available-for-sale securities	32		20
Notes receivable	44		42
	$	349	$	347

These investments are classified as other long-term assets within our accompanying unaudited condensed consolidated balance sheets, in accordance with U.S. GAAP and our accounting policies.

During the second quarter of 2017, we recorded a charge of $53 million for an other-than-temporary impairment loss equal to the difference between the carrying value of one of our investments and its fair value. The charge was recorded within the Other, net caption of our unaudited condensed consolidated statements of operations.