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Acquisition-Related Items During fiscal year 2012, we recorded $12 million of acquisition-related
items. In connection with the acquisitions of Salient and PEAK, we recognized gains of $32 million and
$6 million, respectively, on our previously-held investments. In connection with these acquisitions, we began
to assess and formulate a plan for the elimination of duplicative positions and the termination of certain
contractual obligations. As a result, we incurred approximately $5 million of certain acquisition-related
costs, which included legal fees, severance costs, change in control costs, and contract termination costs.
Additionally, we recorded $45 million of charges related to the change in fair value of contingent milestone
payments associated with acquisitions subsequent to April 29, 2009. These amounts are included within
acquisition-related items in the consolidated statement of earnings in “Item 8. Financial Statements and
Supplementary Data” in this Annual Report on Form 10-K.
During fiscal year 2012, we reclassified $12 million of Physio-Control divestiture-related costs
previously recorded in acquisition-related items within continuing operations on the consolidated statements
of earnings in the first and second quarters of fiscal year 2012 to discontinued operations.
During fiscal year 2011, we recorded $14 million of acquisition-related items. This amount includes
$99 million of costs, of which $55 million related to certain acquisition-related costs that were incurred
related to the acquisitions of ATS Medical, Osteotech, and Ardian, $30 million related to IPR&D charges,
and $14 million related to the change in fair value of contingent milestone payments associated with
acquisitions subsequent to April 24, 2009. These costs were partially offset by an $85 million gain recognized
on the acquisition of Ardian related to our previously-held 11.3 percent ownership position. IPR&D charges
of $15 million related to asset purchases in the CardioVascular and Surgical Technologies businesses and
$15 million of IPR&D charges related to a milestone payment under the existing terms of a royalty-bearing,
non-exclusive patent cross-licensing agreement with NeuroPace, Inc. Since product commercialization of
these assets had not yet been achieved, in accordance with authoritative guidance, the payments were
immediately expensed as IPR&D since technological feasibility had not yet been reached and such
technology had no future alternative use. The acquisition-related costs included legal fees, severance costs,
change in control costs, banker fees, contract termination costs, and other professional services fees that
were expensed in the period.
During fiscal year 2010, we recorded $23 million of acquisition-related items, of which $11 million
related to the Arbor Surgical Technologies, Inc. IPR&D asset purchase and $12 million related to
acquisition-related costs associated with the acquisition of Invatec. In the above IPR&D charge, the payment
was expensed as IPR&D since technological feasibility of the underlying project had not yet been reached
and such technology had no future alternative use.
See Note 5 to the consolidated financial statements in “Item 8. Financial Statements and Supplementary
Data” in this Annual Report on Form 10-K for further discussion on IPR&D charges.
We are responsible for the valuation of IPR&D charges. The values assigned to IPR&D are based on
valuations that have been prepared using methodologies and valuation techniques consistent with those
used by independent appraisers. All values were determined by identifying research projects in areas for
which technological feasibility had not been established. Additionally, the values were determined by
estimating the revenue and expenses associated with a project’s sales cycle and the amount of after-tax cash
flows attributable to these projects. The future cash flows were discounted to present value utilizing an
appropriate risk-adjusted rate of return. The rate of return included a factor that takes into account the
uncertainty surrounding the successful development of the IPR&D.
At the time of acquisition, we expect that all acquired IPR&D will reach technological feasibility, but
there can be no assurance that the commercial viability of these products will actually be achieved. The
nature of the efforts to develop the acquired technologies into commercially viable products consists
principally of planning, designing, and conducting clinical trials necessary to obtain regulatory approvals. The
risks associated with achieving commercialization include, but are not limited to, delay or failure to obtain
regulatory approvals to conduct clinical trials, delay or failure to obtain required market clearances, or
delays or issues with patent issuance, or validity and litigation. If commercial viability were not achieved, we
would likely look to other alternatives to provide these therapies.
See the “Acquisitions” section of this management’s discussion and analysis for detailed discussion of
each material acquisition in fiscal years 2012, 2011, and 2010.
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