NOTE B – ACQUISITIONS AND STRATEGIC INVESTMENTS

Our consolidated financial statements include the operating results for each acquired entity from its respective date of acquisition. We do not present pro forma financial information for these acquisitions given their results are not material to our consolidated financial statements. Transaction costs associated with these acquisitions were expensed as incurred and are not material for the years ended December 31, 2017, 2016 and 2015.

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 approximately $175 million cash up-front and a maximum of $125 million in contingent payments based on the achievement of clinical and regulatory milestones. We began the process of integrating Apama into our Rhythm Management segment in the fourth quarter of 2017 and expect the integration to be substantially complete by the end of 2019.

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 million in 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 these acquisitions 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 acquisitions, net of cash acquired	$	561
Fair value of contingent consideration	94
	$	655

The following summarizes the preliminary purchase price allocation for our 2017 acquisitions as of December 31, 2017

(in millions):



Goodwill	$	308
Amortizable intangible assets	278
Indefinite-lived intangible assets	186
Other assets acquired	45
Liabilities assumed	(58		)
Deferred tax liabilities	(104		)
	$	655

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%
Indefinite-lived intangible assets:
Purchased research and development	$	186	N/A	15%
	$	464

2016 Acquisitions

EndoChoice Holdings, Inc.

On November 22, 2016, we completed our acquisition of EndoChoice Holdings, Inc. (EndoChoice) for $8.00 per share or approximately $213 million. In addition, total consideration for the acquisition also included repayment of EndoChoice's existing senior term loan facility totaling $43 million and related acquisition fees and expenses. EndoChoice is an Alpharetta, Georgia based company focused on the development and commercialization of infection control products, pathology services and single-use devices for specialists treating a wide range of gastrointestinal (GI) conditions. In 2017, we substantially completed the process of integrating EndoChoice into our Endoscopy business.

In addition, we completed other individually immaterial acquisitions during 2016 for total consideration of $189 million in cash at closing plus aggregate contingent consideration of up to $125 million.

Purchase Price Allocation

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



Payment for acquisitions, net of cash acquired	$	365
Fair value of contingent consideration	50
Fair value of debt repaid	43
	$	458

The following summarizes the purchase price allocation for our 2016 acquisitions as of December 31, 2016 (in millions):



Goodwill	$	204
Amortizable intangible assets	228
Other assets acquired	83
Liabilities assumed	(57		)
	$	458

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



	Amount Assigned (in millions)		Weighted Average Amortization Period (in years)	Range of Risk- Adjusted Discount Rates used in Purchase Price Allocation
Amortizable intangible assets:
Technology-related	$	176	9-13	11% - 20%
Customer relationships	51		9-13	11% - 12%
Other intangible assets	1		4	11%
	$	228

2015 Acquisitions

Interventional Radiology Business of CeloNova Biosciences

On December 31, 2015, we completed the acquisition of the interventional radiology business of CeloNova Biosciences (CeloNova), for an upfront payment of $70 million and additional payments contingent on regulatory and sales milestones. The acquisition included drug-eluting microspheres designed to be loaded with chemotherapy drugs for delivery to cancerous tumors and spherical embolic products used to treat uterine fibroids and other conditions. In 2017, we completed the integration of CeloNova into our Peripheral Interventions business.

AMS Portfolio Acquisition

On August 3, 2015, we completed the acquisition of the American Medical Systems male urology portfolio (AMS Portfolio Acquisition), which includes the men's health and prostate health businesses, from Endo International plc. Total consideration was comprised of $1.616 billion in up-front cash plus related fees and expenses and a potential additional $50 million in consideration based on 2016 sales. The AMS male urology portfolio was integrated into our formerly named Urology and Women's Health business and the joint businesses became Urology and Pelvic Health. We substantially completed the integration in 2016. In addition, as part of the acquisition agreement, we made a $60 million Series B non-voting preferred stock investment in the women's health business of Endo Health Solutions, a wholly owned subsidiary of Endo International, plc., representing the remaining Women's Health business of the American Medical Systems Portfolio. This investment was subsequently repaid in the fourth quarter of 2015.

In addition, we completed other individually immaterial acquisitions during 2015 for total consideration of $69 million in cash at closing plus aggregate contingent consideration of up to $14 million.

Purchase Price Allocation

We accounted for these acquisitions as business combinations and, in accordance with FASB ASC Topic 805, we have recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition dates. The components of the aggregate purchase prices are as follows (in millions):



Payment for acquisitions, net of cash acquired	$	1,735
Fair value of contingent consideration	63
	$	1,798

The following summarizes the aggregate purchase price allocation for the 2015 acquisitions as of December 31, 2015 (in millions):



Goodwill	$	573
Amortizable intangible assets	1,074
Indefinite-lived intangible assets	6
Inventory	103
Other assets acquired	165
Liabilities assumed	(123		)
	$	1,798

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



	Amount Assigned (in millions)		Weighted Average Amortization Period (in years)	Range of Risk- Adjusted Discount Rates used in Purchase Price Allocation
Amortizable intangible assets:
Technology-related	$	431	11-13	14% - 23%
Customer relationships	625		12-13	14% - 15%
Other intangible assets	18		13	14%
Indefinite-lived intangible assets:
In-process research & development	6		N/A	17%
	$	1,080

For our 2017, 2016 and 2015 acquisitions, 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 variation of the income approach and relief from royalty 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.

Other intangible assets primarily include acquired customer relationships and tradenames. Customer relationships represent the estimated fair value of non-contractual customer, payor and distributor relationships. Customer relationships are direct relationships with physicians and hospitals performing procedures with the acquired products, payor relationships are contracts and relationships with healthcare payors relating to reimbursement of services and distributor relationships are relationships with third parties used to sell the acquired products, all as of the acquisition date. These relationships were valued separately from goodwill because there is a history and pattern of conducting business with customers and distributors. We used the income approach or the replacement cost and lost profits methodology to derive the fair value of the customer relationships. The customer relationships intangible assets are amortized on a straight-line basis over their assigned estimated useful lives. Tradenames include brand names that we expect to continue using in our product portfolio and related marketing materials. The tradenames are valued using a relief from royalty methodology and are amortized on a straight-line basis over their assigned estimated useful lives.

We believe that the estimated intangible asset values represent the fair value at the date of acquisition and do not exceed the amount a third party would pay for the assets. These fair value measurements are based on significant unobservable inputs, including management estimates and assumptions and, accordingly, are classified as Level 3 within the fair value hierarchy prescribed by FASB ASC Topic 820, Fair Value Measurements and Disclosures.

Goodwill was established due primarily to synergies expected to be gained from leveraging our existing operations as well as revenue and cash flow projections associated with future technologies and has been allocated to our reportable segments based on the relative expected benefit. Based on preliminary estimates, the goodwill recorded related to our 2017 acquisitions is not deductible for tax purposes. Of the goodwill recorded related to our 2016 acquisitions, $116 million is deductible for tax purposes. Refer to Note C - Goodwill and Other Intangible Assets for more information related to goodwill allocated to our reportable segments.

Contingent Consideration

We recorded a net benefit related to the changes in fair value of our contingent consideration liabilities of $80 million during 2017, a net expense related to the changes in fair value of our contingent consideration liabilities of $29 million during 2016 and a net expense related to the change in fair value of our contingent consideration liabilities of $123 million during 2015. We made contingent consideration payments of $48 million in 2017, $122 million in 2016 and $213 million in 2015.

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



Balance as of December 31, 2015	$	246
Amounts recorded related to new acquisitions	50
Other amounts recorded related to prior acquisitions	1
Fair value adjustment	29
Contingent payments related to prior period acquisition	(122		)
Balance as of December 31, 2016	$	204
Amounts recorded related to new acquisitions	94
Fair value adjustment	(80		)
Contingent payments related to prior period acquisition	(48		)
Balance as of December 31, 2017	$	169

As of December 31, 2017, the maximum amount of future contingent consideration (undiscounted) that we could be required to pay was approximately $1.320 billion.

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 December 31, 2017	Valuation Technique	Unobservable Input	Range
R&D and Commercialization-based Milestone	$125 million	Discounted Cash Flow	Discount Rate	2% - 3%
			Probability of Payment	17% - 100%
			Projected Year of Payment	2018 - 2022
Revenue-based Payments	$44 million	Discounted Cash Flow	Discount Rate	11% - 15%
Revenue-based Payments	$44 million	Discounted Cash Flow	Projected Year of Payment	2018 - 2026

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 (DCF) 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 January 24, 2018, we closed an investment and entered into an acquisition option agreement with Millipede, Inc. (Millipede), a privately-held company that has developed the IRIS Transcatheter Annuloplasty Ring System for the treatment of severe mitral regurgitation. Under the terms of the agreements, we have purchased a portion of the outstanding shares of Millipede along with newly issued shares of the company for a total consideration of $90 million. We also have the option to acquire the remaining shares of the company at any time prior to the completion of a first in human clinical study that meets certain parameters. Upon the completion of the clinical study, Millipede has the option to compel us to acquire the remaining shares of the company. Each company’s option period expires by the end of 2019. Completion of this acquisition would result in an additional $325 million payment by us at closing with a further $125 million becoming payable upon achievement of a commercial milestone.

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.

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



	As of
(in millions)	December 31, 2017		December 31, 2016
Equity method investments	$	209	$	265
Cost method investments	81		20
Available-for-sale securities	15		20
Notes receivable	47		42
	$	353	$	347

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

In 2017, we recorded charges of $72 million for other-than-temporary impairment losses equal to the difference between the carrying value of our investments and their fair value. These charges were recorded within the Other, net caption of our consolidated statements of operations.

As of December 31, 2017, the book value of our equity method investments exceeded our share of the book value of the investees’ underlying net assets by approximately $212 million, which represents amortizable intangible assets and IPR&D, corresponding deferred tax liabilities and goodwill.