Medtronic 2008 Annual Report Download - page 37

and its current employees have not engaged in any wrongdoing or
illegal activity.
There were no certain litigation charges in fiscal year 2006.
IPR&D Charges During fiscal year 2008, we recorded $390 million of
IPR&D charges of which $42 million related to the acquisition of NDI
Medical, Inc., a development stage company, $290 million related to a
technology acquired through the purchase of Kyphon, $20 million
related to the purchase of intellectual property from Setagon, Inc.,
$25 million related to a milestone payment under the existing terms of
a royalty bearing, non-exclusive patent cross-licensing agreement with
NeuroPace, Inc. and $13 million was for unrelated purchases of certain
intellectual property. These payments were expensed as IPR&D since
technological feasibility of the underlying projects had not yet been
reached and such technology has no future alternative use. See Note 4
to the consolidated financial statements for further discussion.
There were no IPR&D charges for fiscal year 2007.
During fiscal year 2006, we recorded $364 million of IPR&D charges
of which $169 million related to the acquisition of TNI, $175 million
related to the acquisition of substantially all of the spine-related
intellectual property and related contracts, rights and tangible materials
owned by Gary Michelson, M.D. and Karlin Technology, Inc. (Michelson)
and $20 million related to a royalty bearing, non-exclusive patent
cross-licensing agreement with NeuroPace, Inc. See Note 4 to the
consolidated financial statements for further discussion.
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 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 and
patent 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
2008 and 2007.
Certain Tax Adjustments We classify the material recognition or
derecognition of uncertain tax positions as certain tax adjustments.
There were no certain tax adjustments in fiscal year 2008.
In fiscal year 2007, we recorded a $129 million tax benefit associated
with the reversal of excess tax accruals in connection with the settlement
reached with the U.S. Internal Revenue Service (IRS) with respect to their
review of our fiscal years 2003 and 2004 domestic income tax returns
and the resolution of competent authority issues for fiscal years 1992
through 2000. The $129 million tax benefit was recorded in the provision
for income taxes in the consolidated statement of earnings for fiscal
y ea r 20 07.
In fiscal year 2006, we reversed excess tax accruals of $225 million
associated with favorable agreements reached with the IRS involving
the review of our fiscal years 1997 through 2002 domestic income tax
returns. The $225 million tax benefit was recorded in the provision
for income taxes in the consolidated statement of earnings for fiscal
year 2006.
See the “Income Taxes” section of this management’s discussion and
analysis for further discussion of the certain tax adjustments.
Other Expense, Net Other expense, net includes intellectual property
amortization expense, royalty income and expense, realized equity
security gains and losses, realized foreign currency transaction and
derivative gains and losses and impairment charges on equity securities.
In fiscal year 2008, net other expense was $436 million, an increase of
$224 million from $212 million in fiscal year 2007. This change is primarily
due to currency hedges, which resulted in losses in fiscal year 2008 of
$147 million versus gains in fiscal year 2007 of $20 million, and $46 million
of amortization on intangible assets resulting from the Kyphon
acquisition. Additionally, prior year other expense was offset by
$55 million due to the accelerated amortization of deferred income in
connection with a product supply agreement in the CardioVascular
business, where the other party elected not to exercise its option to
extend the agreement.
In fiscal year 2007, net other expense was $212 million, an increase of
$45 million from $167 million in fiscal year 2006. This change was
partially due to currency hedges, which resulted in gains in fiscal year
33Medtronic, Inc.