NOTE B – ACQUISITIONS AND STRATEGIC INVESTMENTS

2018 Acquisitions

Claret Medical, Inc.

On July 20, 2018, we announced the signing of our agreement to acquire Claret Medical, Inc. (Claret Medical), a privately-held company that has developed and commercialized the Sentinel™ Cerebral Embolic Protection System. The device is used to protect the brain during certain interventional procedures, predominately in patients undergoing transcatheter aortic valve replacement (TAVR). The transaction price consists of an upfront cash payment of $220 million, as well as a potential reimbursement-based milestone payment of up to $50 million. The acquisition is projected to close during the third quarter of 2018, subject to customary closing conditions. Upon closing, Claret Medical will be integrated into our Interventional Cardiology business.

Cryterion Medical, Inc.

On July 5, 2018, we announced the closing of our acquisition of Cryterion Medical, Inc. (Cryterion), a privately-held company developing a single-shot cryoablation platform for the treatment of atrial fibrillation. We have been an investor in Cryterion since its inception in 2016 and the transaction price to acquire the approximately 65 percent we did not already own was an upfront cash payment of $202 million. We are in the process of integrating Cryterion into our Electrophysiology business.

NxThera, Inc.

On April 30, 2018, we announced the closing of our acquisition of NxThera, Inc. (NxThera), a privately-held company that developed the Rezûm™ System, a minimally invasive therapy in a growing category of treatment options for patients with benign prostatic hyperplasia (BPH). The transaction consists of an upfront cash payment of $306 million, and up to an additional $100 million in potential commercial milestone payments over the next four years. We had an existing minority investment in NxThera, which resulted in a net upfront cash payment of approximately $240 million upon closing and a potential additional milestone payment of up to approximately $85 million. We are in the process of integrating NxThera into our Urology and Pelvic Health business.

nVision Medical Corporation

On April 16, 2018, we announced the closing of our acquisition of nVision Medical Corporation (nVision), a privately-held company focused on women’s health. nVision developed the first and only device cleared by the U.S. Food and Drug Administration (FDA) to collect cells from the fallopian tubes, offering a potential platform for earlier diagnosis of ovarian cancer. The transaction consists of an upfront cash payment of $150 million, and up to an additional $125 million in potential clinical and commercial milestones over four years. We are in the process of integrating nVision into our Urology and Pelvic Health business.

In addition, we completed other individually immaterial acquisitions during the first six months of 2018 for total consideration of $50 million in cash at closing plus aggregate contingent consideration of up to $10 million.

Purchase Price Allocation

We accounted for these acquisitions as business combinations, 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 dates. The components of the aggregate preliminary purchase prices are as follows:



(in millions)
Payments for acquisitions, net of cash acquired	$	419
Fair value of contingent consideration	140
Fair value of prior interests	81
	$	639

The following summarizes the preliminary purchase price allocations for the acquisitions as of June 30, 2018:



(in millions)
Goodwill	$	273
Amortizable intangible assets	418
Other assets acquired	53
Liabilities assumed	(5		)
Deferred tax liabilities	(99		)
	$	639

We allocated a portion of the preliminary purchase prices 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	$	410	10 - 13	17% - 23%
Other intangible assets	7		6 - 13	13% - 15%
	$	418

2017 Acquisitions

Symetis SA

On May 16, 2017, we announced the closing of our 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.

Purchase Price Allocation

We accounted for the acquisition of Symetis 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 purchase price was comprised of the following component:



(in millions)
Payment for acquisition, net of cash acquired	$	391

The following summarizes the purchase price allocation for the Symetis acquisition as of June 30, 2018:



(in millions)
Goodwill	$	183
Amortizable intangible assets	278
Other assets acquired	25
Liabilities assumed	(95		)
	$	391

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.

Goodwill was primarily established due 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 updated for applicable regulatory changes, the goodwill recorded relating to our 2018 and 2017 acquisitions is not deductible for tax purposes.

Contingent Consideration

Within the Contingent consideration expense (benefit) caption of our accompanying unaudited condensed consolidated statements of operations, we recorded a net benefit of $4 million during the second quarter of 2018, a net benefit of $24 million during the second quarter of 2017, a net expense of $1 million during the first six months of 2018 and a net benefit of $74 million during the first six months of 2017 related to the changes in fair value of our contingent consideration liability. We made contingent consideration payments of $9 million during the first six months of 2018 and $28 million during the first six months of 2017.

Changes in the fair value of our contingent consideration liability were as follows:



(in millions)
Balance as of December 31, 2017	$	169
Amounts recorded related to new acquisitions	140
Purchase price adjustments related to prior acquisitions	(22		)
Contingent consideration expense (benefit)	1
Contingent consideration payments	(9		)
Balance as of June 30, 2018	$	279

As of June 30, 2018, the maximum amount of future contingent consideration (undiscounted) that we could be required to pay was approximately $1.532 billion.

The recurring Level 3 fair value measurements of our contingent consideration liability include the following significant unobservable inputs:



Contingent Consideration Liability	Fair Value as of June 30, 2018	Valuation Technique	Unobservable Input	Range
R&D and Commercialization-based Milestones	$159 million	Discounted Cash Flow	Discount Rate	3	%	-	4%
R&D and Commercialization-based Milestones	$159 million	Discounted Cash Flow	Projected Year of Payment	2018		-	2022
Revenue-based Payments	$120 million	Discounted Cash Flow	Discount Rate	11	%	-	15%
Revenue-based Payments	$120 million	Discounted Cash Flow	Projected Year of Payment	2018		-	2026

Projected contingent payment amounts related to some of our research and development (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 strategic plans. Increases or decreases in projected revenues, probabilities of payment, discount rates or the time until payment is made may result in significantly lower or higher fair value measurements.

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 could have been obligated to pay $145 million in cash up-front and a maximum of $130 million in contingent payments to acquire the investee. The agreement contained 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 sent a notice of termination to the investee company in the second quarter of 2018.

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



	As of
(in millions)	June 30, 2018		December 31, 2017
Equity method investments	$	281	$	209
Measurement alternative investments	82		81
Publicly-held securities	1		15
Notes receivable	18		47
	$	382	$	353

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.

As of June 30, 2018, the book value of our equity method investments exceeded our share of the book value of the investees’ underlying net assets by approximately $328 million, which represents amortizable intangible assets, in-process research and development, deferred tax liabilities and goodwill.