Medtronic 2011 Annual Report Download - page 37

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Medtronic, Inc.
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 seven years. The settlement amount of
$125 million was paid in fiscal year 2009.
Acquisition-Related Items 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.
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. In accordance with authoritative
guidance, and as a result of the acquisition of Ardian, we
recognized an $85 million gain related to our previously-held
11.3 percent ownership position.
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.
During fiscal year 2009, we recorded $621 million of IPR&D
charges, of which $307 million related to the acquisition of Ventor
Technologies Ltd. (Ventor), $123 million related to the acquisition
of CoreValve, Inc. (CoreValve), $97 million related to the acquisition
of Ablation Frontiers, Inc. (Ablation Frontiers), $72 million related
to the acquisition of CryoCath Technologies, Inc. (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 had no future alternative use.
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 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, 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 2011, 2010, and 2009.
Certain Tax Adjustments We classify the material recognition
or derecognition of uncertain tax positions as certain tax
adjustments.
In fiscal years 2011 and 2010, there were no certain tax
adjustments. In fiscal year 2009, we recorded a $132 million
certain tax benefit associated with the reversal of excess tax
accruals in connection with the settlement of certain issues
reached with the U.S. Internal Revenue Service (IRS) involving the
review of our fiscal year 2005 and fiscal year 2006 domestic