Medtronic 2009 Annual Report Download - page 38

34 Medtronic, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
into negotiations with J&J in an attempt to settle some of
the additional litigation simultaneous with the payment of
this judgment. Ultimately, the agreement reached with Cordis
required a total cash payment of $472 million, which included the
settlement of several outstanding legal matters between the
parties. The charge of $229 million in the second quarter of fiscal
year 2009 is the net result of $472 million in cash payments, offset
by the existing reserves on the balance sheet including interest
accrued on the $243 million since the date established. As of April
24, 2009, the settlement amount of $472 million was paid.
The fourth charge recognized in fiscal year 2009 relates to
litigation that originated in May 2006 with Fastenetix LLC
(Fastenetix), a patent holding company. The agreement reached
with Fastenetix required a total cash payment of $125 million
for the settlement of ongoing litigation and the purchase of
patents. Of the $125 million, $37 million was assigned to past
damages in the case and the remaining $88 million was recorded
as purchased intellectual property that has an estimated useful
life of 7 years. As of April 24, 2009, the settlement amount of $125
million was paid.
During fiscal year 2008, we incurred certain litigation charges of
$366 million. Of that amount, $123 million related to the settlement
of certain lawsuits relating to the Marquis line of ICDs and CRT-Ds
that were subject to a field action announced on February 10,
2005. As discussed in detail above, the remainder of the charge,
$243 million, relates to an estimated reserve established for
litigation with Cordis. In May 2008, we paid substantially all of the
settlement for certain lawsuits relating to the Marquis line of ICDs
and CRT-Ds. See Note 16 to the consolidated financial statements
for additional information.
During fiscal year 2007, we recorded a certain litigation charge
of $40 million related to a settlement agreement with the U.S.
Department of Justice which requires the government to obtain
dismissal of two qui tam civil suits pending against us, and is
conditioned upon such dismissal being obtained. The two suits
were based upon allegations about certain sales and marketing
practices in the Spinal business. The settlement agreement
reflects our assertion that the Company and its current employees
have not engaged in any wrongdoing or illegal activity. The
settlement amount was paid in May 2009.
See Note 2 to the consolidated financial statements for further
discussion of these cases.
IPR&D Charges During fiscal year 2009, we recorded $621 million
of IPR&D charges of which $307 million related to the acquisition
of Ventor, $123 million related to the acquisition of CoreValve,
$97 million related to the acquisition of Ablation Frontiers, $72
million related to the acquisition of CryoCath and $22 million was
for the purchase of certain intellectual property for use in our
Spinal and Diabetes businesses. 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.
During fiscal year 2008, we recorded $390 million of IPR&D
charges of which $42 million related to the acquisition of NDI
Medical, Inc. (NDI), 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.
There were no IPR&D charges for fiscal year 2007.
See Note 4 to the consolidated financial statements 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 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