Medtronic 2013 Annual Report Download - page 60

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Table of Contents
$45 million of charges related to the change in fair value of contingent milestone payments associated with acquisitions subsequent
to April 29, 2009.
During fiscal year 2011, we recorded net charges from acquisition-related items of $14 million. 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 Structural Heart 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.
See Note 4 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 2013, 2012, and 2011.
Amortization of Intangible Assets Amortization of intangible assets includes the amortization expense of our definite-lived
intangible assets consisting of patents, trademarks, tradenames, purchased technology, and other intangible assets. In fiscal year
2013, amortization expense was $331 million as compared to $335 million in fiscal year 2012. The $4 million decrease in
amortization expense for fiscal year 2013 was primarily due to certain intangible assets that became fully amortized and life
extension of certain patents, thereby reducing ongoing amortization expense, partially offset by amortization expense related to
the third quarter fiscal year 2013 acquisition of Kanghui and the second quarter fiscal year 2012 acquisitions of Salient and PEAK.
In fiscal year 2012, amortization expense was $335 million, a decrease of $4 million from $339 million in fiscal year 2011. The
decrease was primarily due to certain intangible assets that became fully amortized, thereby reducing ongoing amortization expense,
partially offset by the fiscal year 2011 acquisitions of ATS Medical, Osteotech, and Ardian and the second quarter fiscal year 2012
acquisitions of Salient and PEAK.
Other Expense, Net Other expense, net includes royalty income and expense, realized equity security gains and losses, realized
foreign currency transaction and derivative gains and losses, impairment charges on equity securities, the Puerto Rico excise tax,
and the U.S. medical device excise tax. In fiscal year 2013, other expense, net was $108 million, a decrease of $256 million from
$364 million in the prior fiscal year. The decrease was primarily due to the impact of foreign currency gains and losses. Total
foreign currency gains recorded in fiscal year 2013 were $27 million compared to losses of $195 million in the prior fiscal year.
In addition, the realized gains on certain available-for-sale marketable equity securities increased compared to the prior fiscal year,
which were substantially offset by the U.S. medical device excise tax of $21 million that went into effect January 1, 2013. We
currently estimate that our annual U.S. medical device excise tax could be within the range of $100 to $150 million pre-tax.
In fiscal year 2012, other expense, net was $364 million, an increase of $254 million from $110 million in the prior fiscal year.
The increase was primarily due to the impact of foreign currency gains and losses. Total foreign currency losses recorded in fiscal
year 2012 were $195 million compared to gains of $61 million in the prior fiscal year. The increase in hedging losses was partially
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