Acquisitions and Strategic Investments

3 Months Ended

Mar. 31, 2020

NOTE B – ACQUISITIONS AND STRATEGIC INVESTMENTS

Our unaudited condensed consolidated financial statements include the operating results for acquired entities from the respective date of acquisition. We did not complete any acquisitions during the first quarter of 2020. We have not presented supplemental pro forma financial information for prior acquisitions given their results are not material to our unaudited condensed consolidated financial statements. We recorded immaterial purchase price adjustments to the preliminary purchase price allocations of previous acquisitions during the measurement period in the first quarter of 2020. Transaction costs for all acquisitions completed in the first quarter of 2019 were immaterial to our unaudited condensed consolidated financial statements and were expensed as incurred.

Q1 2019 Acquisitions

Millipede, Inc.

On January 29, 2019, we announced the closing of our acquisition of Millipede, Inc. (Millipede), a privately-held company that has developed the IRIS Transcatheter Annuloplasty Ring System for the treatment of severe mitral regurgitation. We have been an investor in Millipede since the first quarter of 2018 as part of an investment and acquisition option agreement, whereby we purchased a portion of the outstanding shares of Millipede, along with newly issued shares of the company, for an upfront cash payment of $90 million. In the fourth quarter of 2018, upon the successful completion of a first-in-human clinical study, we exercised our option to acquire the remaining shares of Millipede. We held an interest of approximately 20 percent immediately prior to the acquisition date. We remeasured the fair value of our previously-held investment based on the implied enterprise value and allocation of purchase price consideration according to priority of equity interests. The transaction price for the remaining stake consisted of an upfront cash payment of $325 million and up to an additional $125 million payment upon achievement of a commercial milestone. Following the closing of the acquisition, we have integrated the Millipede business into our Interventional Cardiology division.

Purchase Price Allocation

We accounted for our 2019 acquisition of Millipede 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 dates. The final purchase price is comprised of the following components:



(in millions)
Payment for acquisition, net of cash acquired	$	321
Fair value of contingent consideration	83
Fair value of prior interests	102
	$	505

The purchase price allocation of our acquisition of Millipede was comprised of the following components as of March 31, 2020:



(in millions)
Goodwill	$	307
Amortizable intangible assets	—
Indefinite-lived intangible assets	240
Other assets acquired	2
Liabilities assumed	(1		)
Net deferred tax liabilities	(43		)
	$	505

We allocated a portion of the purchase price of our acquisition of Millipede to the specific intangible asset category as follows:

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. The goodwill recorded relating to our 2019 acquisitions is not deductible for tax purposes.

Contingent Consideration

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



(in millions)
Balance as of December 31, 2019	$	354
Contingent consideration expense (benefit)	(108		)
Contingent consideration payments	(28		)
Balance as of March 31, 2020	$	218

As of March 31, 2020, the maximum amount of future contingent consideration (undiscounted) that we could be required to pay was $658 million associated with our prior acquisitions. Refer to Note B – Acquisitions and Strategic Investments to our audited financial statements contained in Item 8 of our most recent Annual Report on Form 10-K for additional information.

The $108 million benefit recorded in the first quarter of 2020 related to a reduction in the contingent consideration liability for certain prior acquisitions for which we reduced the probability of achievement of associated revenue and/or regulatory milestones, or in the case of nVision for milestones that would not be achieved due to management's discontinuation of the R&D program.

The recurring Level 3 fair value measurements of our contingent consideration liability that we expect to be required to settle include the following significant unobservable inputs:



Contingent Consideration Liability	Fair Value as of March 31, 2020	Valuation Technique	Unobservable Input	Range				Weighted Average (1)
R&D, Regulatory and Commercialization-based Milestones	$96 million	Discounted Cash Flow	Discount Rate	3	%	-	3%	3%
			Probability of Payment	90%				90%
			Projected Year of Payment	2020		-	2027	2024
Revenue-based Payments	$121 million	Discounted Cash Flow	Discount Rate	11	%	-	14%	13%
			Probability of Payment	100%				100%
			Projected Year of Payment	2020		-	2024	2021


(1)	Unobservable inputs were weighted by the relative fair value of the contingent consideration liability. For projected year of payment, the amount represents the median of the inputs and is not a weighted average.

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. Significant increases or decreases in projected revenues, probabilities of payment, discount rates or the time until payment is made would have resulted in a significantly lower or higher fair value measurement as of March 31, 2020.

Strategic Investments

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



	As of
(in millions)	March 31, 2020		December 31, 2019
Equity method investments	$	253	$	264
Measurement alternative investments (1)	181		171
Publicly-held equity securities (2)	—		1
Notes receivable	2		23
	$	437	$	458


(1)	Measurement alternative investments are privately-held equity securities without readily determinable fair values that are measured at cost minus impairment, if any, adjusted to fair value for any observable price changes in orderly transactions for the identical or a similar investment of the same issuer.


(2)	Publicly-held equity securities are measured at fair value with changes in fair value recognized currently in Other, net on our accompanying unaudited condensed consolidated statements of operations.

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 March 31, 2020, the cost of our aggregated equity method investments exceeded our share of the underlying equity in net assets by $313 million, which represents amortizable intangible assets, IPR&D, goodwill and deferred tax liabilities.

Amount Assigned
(in millions)

Amortization Period
(in years)

Risk-Adjusted Discount
Rates used in Purchase Price Allocation

Indefinite-lived intangible assets:

In-process research and development (IPR&D)