Medtronic 2010 Annual Report Download - page 71

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Medtronic, Inc.
with the Company. The breakdown of the purchase price of
Kyphon is as follows:
(in millions)
Cash acquisition of Kyphon outstanding common stock $ 3,300
Cash settlement of vested stock-based awards 218
Debt assumed and settled 570
Cash settlement of convertible debt warrants, net of proceeds
from convertible note hedges 87
Direct acquisition costs 28
Total purchase price $ 4,203
The purchase price allocation is based on estimates of the fair
value of assets acquired and liabilities assumed. The purchase
price has been allocated as follows:
(in millions)
Current assets $ 379
Property, plant and equipment 39
IPR&D 290
Other intangible assets 996
Goodwill 3,148
Other long-term assets 10
Total assets acquired 4,862
Current liabilities 344
Deferred tax liabilities 282
Other long-term liabilities 33
Total liabilities assumed 659
Net assets acquired $ 4,203
In connection with the acquisition, the Company acquired $996
million of intangible assets that had a weighted average useful
life of approximately 10.5 years. The intangible assets include
$887 million of technology-based assets and $109 million of
tradenames with weighted average lives of 10.5 years and 11
years, respectively. Also as part of the acquisition, the Company
recognized, in total, $290 million and $3.148 billion for IPR&D and
goodwill, respectively. The IPR&D was expensed on the date of
acquisition. Various factors contributed to the establishment of
goodwill, including: the benefit of adding existing products of the
Company to the portfolio of products already sold by Kyphon
sales representatives; the value of Kyphon’s highly trained
assembled workforce; and the expected revenue growth that is
attributable to expanded indications and increased market
penetration from future products and customers. The goodwill is
not deductible for tax purposes.
The $290 million IPR&D charge primarily relates to three
projects: 1) future launch of the balloon kyphoplasty (kyphoplasty)
procedure into the Japanese market, 2) future launch of the
Aperius product into the U.S. market and 3) the development of
the next generation kyphoplasty balloon technology. Kyphoplasty
is Kyphon’s minimally invasive approach to treat spinal fractures
including vertebral compression fractures due to osteoporosis
and cancer. Aperius is Kyphon’s internally developed interspinous
spacing device which provides a minimally invasive approach to
treat lumbar spinal stenosis. For purposes of valuing the acquired
IPR&D, the Company estimated total costs to complete of
approximately $19 million at the time of acquisition. The remaining
costs to complete was approximately $3 million at April 30, 2010.
As required, the Company recognized a $34 million fair value
adjustment related to inventory acquired from Kyphon. Inventory
fair value is defined as the estimated selling price less the sum of
(a) cost to complete (b) direct costs to sell and (c) a reasonable
profit allowance for the selling effort. The $34 million fair value
adjustment was fully expensed through cost of products sold
during the third quarter of fiscal year 2008, which reflects the
period over which the acquired inventory was sold to customers.
In connection with the acquisition, the Company began to
assess and formulate a plan for the elimination of duplicative
positions, employee relocations, the exit of certain facilities and
the termination of certain contractual obligations. The purchase
accounting liabilities recorded in connection with these activities
were approximately $68 million and included approximately $48
million for termination benefits and employee relocation and
approximately $20 million of estimated costs to cancel contractual
obligations. During the fourth quarter of fiscal year 2009, the
Company reversed $15 million of the purchase accounting liabilities
due to a favorable outcome in negotiating the termination of
contractual obligations. The reversal of these liabilities was
recorded as a reduction of goodwill. As of April 24, 2009, the
purchase accounting liabilities related to the activities noted
above have been fully utilized.
The Company’s consolidated financial statements include
Kyphon’s operating results from the date of acquisition, November
2, 2007. The following unaudited pro forma information sets forth
the combined results of Medtronic’s and Kyphon’s operations for
fiscal year 2008, as if the acquisition had occurred at the beginning
of the period presented. The unaudited pro forma results of
operations for the fiscal year ended April 25, 2008 is comprised of
(i) Kyphon’s historical financial information for the six months
ended September 30, 2007, (ii) Medtronic’s pre-Kyphon historical
financial information for the six months ended October 27, 2007
and (iii) Medtronic’s post-Kyphon historical financial information
for the six-month period that includes the three months ended
January 25, 2008 and the three months ended April 25, 2008.