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EX-32.1 - EXHIBIT 32.1 - Shire plca093016-ex321.htm
EX-31.2 - EXHIBIT 31.2 - Shire plca093016-ex312.htm
EX-31.1 - EXHIBIT 31.1 - Shire plca093016-ex311.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C. 20549 
FORM 10-Q 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended September 30, 2016 

Commission File Number: 0-29630
shirelogobluergba04.jpg
SHIRE PLC
(Exact name of registrant as specified in its charter)
Jersey (Channel Islands)
(State or other jurisdiction of incorporation or organization)
98-0601486
(I.R.S. Employer Identification No.)
 
 
5 Riverwalk, Citywest Business Campus, Dublin 24, Republic of Ireland
(Address of principal executive offices and zip code)
+353 1 429 7700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
Yes x    No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232,405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x    No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. 
Large accelerated filer x    Accelerated filer o    Non-accelerated filer o    Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o    No x
As of October 28, 2016 the number of outstanding ordinary shares of the Registrant was 903,175,914.


1


THE “SAFE HARBOR” STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 
Statements included herein that are not historical facts, including without limitation statements concerning future strategy, plans, objectives, expectations and intentions, the anticipated timing of clinical trials and approvals for, and the commercial potential of, inline or pipeline products are forward-looking statements. Such forward-looking statements involve a number of risks and uncertainties and are subject to change at any time. In the event such risks or uncertainties materialize, Shire’s results could be materially adversely affected. The risks and uncertainties include, but are not limited to, the following:
Shire’s products may not be a commercial success;
increased pricing pressures and limits on patient access as a result of governmental regulations and market developments may affect Shire’s future revenues, financial condition and results of operations;
Shire conducts its own manufacturing operations for certain of its products and is reliant on third party contract manufacturers to manufacture other products and to provide goods and services. Some of Shire’s products or ingredients are only available from a single approved source for manufacture. Any disruption to the supply chain for any of Shire’s products may result in Shire being unable to continue marketing or developing a product or may result in Shire being unable to do so on a commercially viable basis for some period of time;
the manufacture of Shire’s products is subject to extensive oversight by various regulatory agencies. Regulatory approvals or interventions associated with changes to manufacturing sites, ingredients or manufacturing processes could lead to significant delays, an increase in operating costs, lost product sales, an interruption of research activities or the delay of new product launches;
certain of Shire’s therapies involve lengthy and complex processes, which may prevent Shire from timely responding to market forces and effectively managing its production capacity;
Shire has a portfolio of products in various stages of research and development. The successful development of these products is highly uncertain and requires significant expenditures and time, and there is no guarantee that these products will receive regulatory approval;
the actions of certain customers could affect Shire’s ability to sell or market products profitably. Fluctuations in buying or distribution patterns by such customers can adversely affect Shire’s revenues, financial conditions or results of operations;
Shire’s products and product candidates face substantial competition in the product markets in which it operates, including competition from generics;
adverse outcomes in legal matters, tax audits and other disputes, including Shire’s ability to enforce and defend patents and other intellectual property rights required for its business, could have a material adverse effect on the combined company’s revenues, financial condition or results of operations;
inability to successfully compete for highly qualified personnel from other companies and organizations;
failure to achieve the strategic objectives with respect to Shire’s acquisition of NPS Pharmaceuticals Inc. (“NPS”), Dyax Corp. (“Dyax”) or Baxalta Incorporated (“Baxalta”) may adversely affect Shire’s financial condition and results of operations;
Shire’s growth strategy depends in part upon its ability to expand its product portfolio through external collaborations, which, if unsuccessful, may adversely affect the development and sale of its products;
a slowdown of global economic growth, or economic instability of countries in which Shire does business, as well as changes in foreign currency exchange rates and interest rates, that adversely impact the availability and cost of credit and customer purchasing and payment patterns, including the collectability of customer accounts receivable;

2


failure of a marketed product to work effectively or if such a product is the cause of adverse side effects could result in damage to Shire’s reputation, the withdrawal of the product and legal action against Shire;
investigations or enforcement action by regulatory authorities or law enforcement agencies relating to Shire’s activities in the highly regulated markets in which it operates may result in significant legal costs and the payment of substantial compensation or fines;
Shire is dependent on information technology and its systems and infrastructure face certain risks, including from service disruptions, the loss of sensitive or confidential information, cyber-attacks and other security breaches or data leakages that could have a material adverse effect on Shire’s revenues, financial condition or results of operations;
Shire incurred substantial additional indebtedness to finance the Baxalta acquisition, which may decrease its business flexibility and increase borrowing costs;
difficulties in integrating Dyax or Baxalta into Shire may lead to the combined company not being able to realize the expected operating efficiencies, cost savings, revenue enhancements, synergies or other benefits at the time anticipated or at all; and
other risks and uncertainties detailed from time to time in Shire’s filings with the Securities and Exchange Commission (“SEC”), including those risks outlined in “ITEM 1A: Risk Factors” in Shire's Quarterly Report on Form 10-Q for the quarter ended June 30, 2016.
All forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by this cautionary statement. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof. Except to the extent otherwise required by applicable law, we do not undertake any obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.
Trademarks
We own or have rights to trademarks, service marks or trade names that we use in connection with the operation of our business. In addition, our names, logos and website names and addresses are owned by us or licensed by us. We also own or have the rights to copyrights that protect the content of our solutions. Solely for convenience, the trademarks, service marks, trade names and copyrights referred to in this Quarterly Report on Form 10-Q are listed without the ©, ® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks, trade names and copyrights.
This quarterly report may include trademarks, service marks or trade names of other companies. Our use or display of other parties’ trademarks, service marks, trade names or products is not intended to, and does not imply a relationship with, or endorsement or sponsorship of us by, the trademark, service mark or trade name.


3


SHIRE PLC 
Form 10-Q for the Quarterly Period Ended September 30, 2016
Table of contents
 
Page
 


4


PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS

SHIRE PLC
CONSOLIDATED BALANCE SHEETS 
(unaudited, in millions except per share amounts)
 
September 30, 2016
 
December 31, 2015
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
728.6

 
$
135.5

Restricted cash
20.1

 
86.0

Accounts receivable, net
2,633.4

 
1,201.2

Inventories
4,857.1

 
635.4

Prepaid expenses and other current assets
665.3

 
197.4

Total current assets
8,904.5

 
2,255.5

Investments
191.8

 
50.8

Property, plant and equipment, net
6,527.7

 
828.1

Goodwill
14,850.6

 
4,147.8

Intangible assets, net
38,871.5

 
9,173.3

Deferred tax asset
109.0

 
121.0

Other non-current assets
296.2

 
33.3

Total assets
$
69,751.3

 
$
16,609.8

LIABILITIES AND EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued expenses
$
4,021.7

 
$
2,050.6

Short-term borrowings
2,737.1

 
1,511.5

Other current liabilities
352.1

 
144.0

Total current liabilities
7,110.9

 
3,706.1

Long-term borrowings
20,988.9

 
69.9

Deferred tax liability
9,326.5

 
2,205.9

Other non-current liabilities
2,539.3

 
798.8

Total liabilities
39,965.6

 
6,780.7

Commitments and contingencies


 


Equity:
 
 
 
Common stock of 5p par value; 1,000 million shares authorized; and 910.9 million shares issued and outstanding (2015: 1,000 million shares authorized; and 601.1 million shares issued and outstanding)
81.3

 
58.9

Additional paid-in capital
24,631.3

 
4,486.3

Treasury stock: 9.1 million shares (2015: 9.7 million shares)
(302.2
)
 
(320.6
)
Accumulated other comprehensive loss
(134.2
)
 
(183.8
)
Retained earnings
5,509.5

 
5,788.3

Total equity
29,785.7

 
9,829.1

Total liabilities and equity
$
69,751.3

 
$
16,609.8

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.


5


SHIRE PLC
CONSOLIDATED STATEMENTS OF OPERATIONS 
(unaudited, in millions except per share amounts)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Product sales
$
3,315.4

 
$
1,576.8

 
$
7,264.8

 
$
4,476.2

Royalties and other revenues  
136.7

 
78.2

 
325.7

 
224.8

Total revenues
3,452.1

 
1,655.0

 
7,590.5

 
4,701.0

Costs and expenses:
 

 
 

 
 

 
 

Cost of sales
1,736.2

 
262.7

 
2,762.9

 
718.5

Research and development
511.1

 
241.2

 
1,023.0

 
1,210.8

Selling, general and administrative
875.6

 
442.3

 
2,025.8

 
1,356.6

Amortization of acquired intangibles
354.9

 
132.7

 
702.5

 
352.3

Integration and acquisition costs
284.5

 
89.9

 
738.6

 
(46.8
)
Reorganization costs
101.4

 
31.1

 
115.7

 
59.6

Gain on sale of product rights
(5.7
)
 
(0.7
)
 
(12.2
)
 
(13.0
)
Total operating expenses
3,858.0

 
1,199.2

 
7,356.3

 
3,638.0

 
 
 
 
 
 
 
 
Operating (loss)/income from continuing operations
(405.9
)
 
455.8

 
234.2

 
1,063.0

 
 
 
 
 
 
 
 
Interest income
9.3

 
0.8

 
11.9

 
3.4

Interest expense
(186.9
)
 
(10.7
)
 
(318.8
)
 
(31.6
)
Other (expense)/income, net
(13.7
)
 
9.6

 
(16.2
)
 
11.9

Total other expense, net
(191.3
)
 
(0.3
)
 
(323.1
)
 
(16.3
)
 
 
 
 
 
 
 
 
(Loss)/income from continuing operations before income taxes and equity in losses of equity method investees  
(597.2
)
 
455.5

 
(88.9
)
 
1,046.7

Income tax benefit
229.6

 
22.3

 
218.4

 
9.0

Equity in losses of equity method investees, net of taxes
(0.9
)
 
(0.7
)
 
(1.9
)
 
(1.6
)
(Loss)/income from continuing operations, net of taxes
(368.5
)
 
477.1

 
127.6

 
1,054.1

Loss from discontinued operations, net of taxes
(18.3
)
 
(24.3
)
 
(257.5
)
 
(31.3
)
Net (loss)/income  
$
(386.8
)
 
$
452.8

 
$
(129.9
)
 
$
1,022.8


6


SHIRE PLC
CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
(unaudited, in millions except per share amounts)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
(Loss)/earnings per ordinary share - basic
 

 
 

 
 

 
 

(Loss)/earnings from continuing operations
$
(0.41
)
 
$
0.81

 
$
0.18

 
$
1.79

Loss from discontinued operations
(0.02
)
 
(0.04
)
 
(0.36
)
 
(0.06
)
(Loss)/earnings per ordinary share - basic
$
(0.43
)
 
$
0.77

 
$
(0.18
)
 
$
1.73

 
 
 
 
 
 
 
 
(Loss)/earnings per ordinary share - diluted
 

 
 

 
 

 
 

(Loss)/earnings from continuing operations
$
(0.41
)
 
$
0.80

 
$
0.18

 
$
1.78

Loss from discontinued operations
(0.02
)
 
(0.04
)
 
(0.36
)
 
(0.06
)
(Loss)/earnings per ordinary share - diluted
$
(0.43
)
 
$
0.76

 
$
(0.18
)
 
$
1.72

 
 
 
 
 
 
 
 
Cash dividends declared and paid per ordinary share
$

 
$

 
$
0.22

 
$
0.19

 
 
 
 
 
 
 
 
Weighted average number of ordinary shares:
 

 
 

 
 

 
 

Basic
900.2

 
590.9

 
725.5

 
590.2

Diluted
900.2

 
593.4

 
725.5

 
593.2

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.


7


SHIRE PLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) 
(unaudited, in millions)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Net (loss)/income
$
(386.8
)
 
$
452.8

 
$
(129.9
)
 
$
1,022.8

Other comprehensive (loss)/income:
 

 
 

 
 

 
 

Foreign currency translation adjustments
234.3

 
(41.6
)
 
38.8

 
(124.9
)
Unrealized gain/(loss) on available-for-sale securities (net of tax expense of $2.4 and $1.0 for the three and nine months ended September 30, 2016 and $nil for both the three and nine months ended September 30, 2015)
15.1

 
(2.0
)
 
10.4

 
1.3

Hedging activities, net of tax expense of $1.2 and tax benefit of $0.5 for the three and nine months ended September 30, 2016, respectively and $nil for both the three and nine months ended September 30, 2015
2.2

 

 
0.4

 

Comprehensive (loss)/income
$
(135.2
)
 
$
409.2

 
$
(80.3
)
 
$
899.2

The components of accumulated other comprehensive loss as of September 30, 2016 and December 31, 2015 are as follows:
 
September 30, 2016
 
December 31, 2015
Foreign currency translation adjustments
$
(143.3
)
 
$
(182.1
)
Unrealized holding gain/(loss) on available-for-sale securities, net of taxes
8.7

 
(1.7
)
Hedging activities, net of taxes
0.4

 

Accumulated other comprehensive loss
$
(134.2
)
 
$
(183.8
)
 
The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.


8


SHIRE PLC
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(unaudited, in millions)
 
Common stock number of shares
 
Common stock
 
Additional paid-in capital
 
Treasury stock
 
Accumulated other comprehensive loss
 
Retained earnings
 
Total equity
As of January 1, 2016
601.1

 
$
58.9

 
$
4,486.3

 
$
(320.6
)
 
$
(183.8
)
 
$
5,788.3

 
$
9,829.1

Net loss

 

 

 

 

 
(129.9
)
 
(129.9
)
Other comprehensive income net of tax

 

 

 

 
49.6

 

 
49.6

Options exercised
4.6

 
0.4

 
90.0

 

 

 

 
90.4

Share-based compensation

 

 
269.6

 

 

 

 
269.6

Tax benefit associated with exercise of stock options

 

 
7.8

 

 

 

 
7.8

Shares released by employee benefit trust to satisfy exercise of stock options

 

 

 
18.4

 

 
(18.7
)
 
(0.3
)
Shares issued for the acquisition of Baxalta
305.2

 
22.0

 
19,777.6

 

 

 

 
19,799.6

Dividends

 

 

 

 

 
(130.2
)
 
(130.2
)
As of September 30, 2016
910.9

 
$
81.3

 
$
24,631.3

 
$
(302.2
)
 
$
(134.2
)
 
$
5,509.5

 
$
29,785.7

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.


9


SHIRE PLC 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in millions)
 
Nine Months Ended
September 30,
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 

 
 

Net (loss)/income
$
(129.9
)
 
$
1,022.8

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
877.8

 
457.4

Share-based compensation
269.6

 
70.8

Amortization of deferred financing fees
121.7

 
8.0

Amortization of inventory fair value step-up
1,097.3

 
23.0

Changes in deferred taxes
(546.9
)
 
(178.3
)
Change in fair value of contingent consideration
(34.8
)
 
(196.5
)
Impairment of intangible assets
8.9

 
523.3

Impairment of property, plant and equipment
89.2

 

Other, net
35.3

 
(23.2
)
Changes in operating assets and liabilities
 

 
 

Increase in accounts receivable
(411.2
)
 
(288.1
)
Increase in sales deduction accruals
108.2

 
100.0

Increase in inventory
(228.0
)
 
(21.7
)
(Increase)/decrease in prepayments and other assets
(66.4
)
 
21.2

Increase in accounts payable and other liabilities
315.2

 
56.5

Net cash provided by operating activities  
1,506.0

 
1,575.2

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Purchases of property, plant and equipment and non-current investments
(402.5
)
 
(67.3
)
Purchases of businesses, net of cash acquired
(17,476.2
)
 
(5,553.4
)
Proceeds from short-term investments

 
67.0

Proceeds from disposal of non-current investments
0.6

 
18.5

Movements in restricted cash
68.3

 
(48.0
)
Proceeds from sale of product rights
7.8

 
14.5

Other, net
(9.3
)
 
2.7

Net cash used in investing activities  
(17,811.3
)
 
(5,566.0
)

10

SHIRE PLC 
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) 
(unaudited, in millions)

 
Nine Months Ended
September 30,
 
2016
 
2015
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Proceeds from revolving line of credit, long term and short term borrowings
31,742.3

 
3,650.8

Repayment of revolving line of credit, long term and short term borrowings
(14,632.9
)
 
(2,486.1
)
Payment of dividend
(130.2
)
 
(110.2
)
Debt issuance costs
(171.0
)
 
(3.3
)
Proceeds from exercise of options
98.9

 

Other, net
(6.5
)
 
3.7

Net cash provided by financing activities
16,900.6

 
1,054.9

Effect of foreign exchange rate changes on cash and cash equivalents
(2.2
)
 
(1.6
)
Net increase/(decrease) in cash and cash equivalents
593.1

 
(2,937.5
)
Cash and cash equivalents at beginning of period
135.5

 
2,982.4

Cash and cash equivalents at end of period
$
728.6

 
$
44.9

 
 
 
 
Supplemental information:
 
 
 
 
 
 
 
Interest paid
223.4

 
13.1

Income taxes paid, net
355.8

 
20.5

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.


11


SHIRE PLC
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
1.
Summary of Significant Accounting Policies
Basis of Presentation 
These interim financial statements of Shire plc and its subsidiaries (collectively “Shire” or the “Company”) are unaudited. They have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”).
The balance sheet as of December 31, 2015 was derived from audited financial statements.
These interim Unaudited Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the SEC on February 23, 2016, and as updated by a Current Report on Form 8-K filed with the SEC on September 2, 2016 (the “Shire 2015 Form 10-K”).
Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted from these interim financial statements. However, these interim financial statements include all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary to fairly state the results of the interim period and the Company believes that the disclosures are adequate to make the information presented not misleading. Interim results are not necessarily indicative of results to be expected for the full year.
On June 3, 2016, the Company completed its acquisition of Baxalta for $32.4 billion, representing the preliminary fair value of purchase consideration. The Company’s Unaudited Consolidated Financial Statements include the results of Baxalta from the date of acquisition. For further details regarding the acquisition, please refer to Note 2, Business Combinations, of these Unaudited Consolidated Financial Statements.
During the second quarter of 2016, due to the Baxalta acquisition, the Company concluded that it was appropriate to reclassify the Amortization of Acquired Intangibles from Selling, General and Administrative on the Unaudited Consolidated Statements of Operations.  Accordingly, the Company reclassified the Amortization of Acquired Intangibles from Selling, General and Administrative in comparative periods to conform to the current classification.  
Use of Estimates
The preparation of financial statements, in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenues and expenses, and related disclosure of contingent assets and liabilities. Estimates and assumptions are primarily made in relation to the valuation of intangible assets, sales deductions, income taxes (including provisions for uncertain tax positions and the realization of deferred tax assets), provisions for litigation and legal proceedings, measurement of pension and other post-employment plan obligations and net periodic benefit cost, contingent consideration receivable from product divestments and contingent consideration payable in respect of business combinations and asset purchases and valuation of other assets and liabilities acquired in business combinations. On an on-going basis the Company evaluates its estimates, judgments and methodologies. Actual results may differ from these estimates under different assumptions or conditions. 
Accounting Policy Updates 
The Company’s significant accounting policies are discussed in the Shire 2015 Form 10-K. The following significant accounting policies have been updated as a result of the Baxalta acquisition.
Financial instruments - derivatives 
The Company uses derivative financial instruments to manage its exposure to foreign exchange risk to earnings relating to forecasted transactions and recognized assets and liabilities. The Company has assumed derivatives related to the Baxalta acquisition and has elected to apply hedge accounting for certain derivatives.

12


For each derivative instrument that is designated and effective as a cash flow hedge, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income (“AOCI”) and then recognized in earnings consistent with the underlying hedged item. Cash flow hedges are classified in revenues and cost of sales and primarily relate to forecasted third-party sales denominated in foreign currencies and forecasted intercompany sales denominated in foreign currencies, respectively.
For each derivative instrument that is designated and effective as a fair value hedge, the gain or loss on the derivative is recognized immediately to earnings, and offsets the loss or gain on the underlying hedged item. Fair value hedges are classified in interest income and interest expense, as they hedge the interest rate risk associated with certain of the Company’s fixed-rate debt.
In its application of hedge accounting, the Company assesses, both at inception and on a prospective basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting the changes in cash flows or fair values of the hedged items. The Company also assesses hedge effectiveness on a retrospective basis every quarter with any hedge ineffectiveness recorded to the Consolidated Statement of Operations.
The Company uses forward contracts to hedge earnings from the effects of foreign exchange relating to certain of the Company’s intercompany and third-party receivables and payables denominated in a foreign currency. These derivative instruments generally are not formally designated as hedges and the terms of these instruments generally do not exceed three months. The fair values of these instruments are included on the balance sheet in current assets/liabilities, with changes in the fair value recognized in the Consolidated Statements of Operations. The cash flows relating to these instruments are presented within net cash provided by operating activities in the Consolidated Statement of Cash Flows, unless the derivative instruments are economically hedging specific investing or financing activities. 
New Accounting Pronouncements 
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies that the Company adopts as of the specified effective date. Unless otherwise discussed below, the Company does not believe that the impact of recently issued standards that are not yet effective will have a material impact on the Company’s financial position or results of operations upon adoption.
Adopted during the current period 
Reporting requirements for development stage entities 
In June 2014, the FASB simplified the existing guidance for development stage entities by removing all incremental financial reporting requirements and the exception available for development stage entities when determining whether the development stage entity is a variable interest entity. The elimination of the exception may change the consolidation analysis, consolidation decision, and disclosure requirements for a reporting entity that has an interest in an entity in the development stage. Shire adopted this guidance as of January 1, 2016 with prospective application. The adoption of this guidance did not impact the Company’s consolidated financial position, results of operations or cash flows. 
Debt Issuance Costs 
In April 2015, the FASB issued a new standard that requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued additional guidance which clarified that debt issuance costs related to line-of-credit arrangements can be presented in the balance sheet as an asset and amortized over the term of the line-of-credit arrangement. The recognition and measurement guidance for debt issuance costs were not affected by these amendments.
Shire adopted this guidance as of January 1, 2016 with retroactive application. The Short-term borrowings and Long-term borrowings line items in the Consolidated Balance Sheets and related footnote disclosures for all periods presented have been adjusted. The adoption of this guidance did not impact the Company’s results of operations or cash flows.
Cloud Computing Arrangement
In April 2015, the FASB issued guidance to simplify the accounting for fees paid in a cloud computing arrangement. Under the standard, if a cloud computing arrangement includes a software license, then the software license element

13


of the arrangement should be accounted for consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the arrangement should be accounted for as a service contract. Shire adopted this guidance as of January 1, 2016 with prospective application. The adoption of this guidance did not impact the Company’s consolidated financial position, results of operations or cash flows.
Measurement-Period Adjustments
In September 2015, the FASB issued guidance to simplify the accounting for adjustments related to business combinations arising within one year of the acquisition. The new standard requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined and record the effect on earnings of those changes as if the accounting had been completed at the acquisition date, and sets forth new disclosure requirements related to the adjustments. Shire adopted this guidance as of January 1, 2016 with prospective application. The adoption of this guidance impacted the recognition and disclosure of measurement period adjustments identified during the three months ended September 30, 2016 related to the Baxalta acquisition. Refer to Note 2, Business Combinations, of these Unaudited Consolidated Financial Statements for further information.
Financial Instrument Accounting
In March 2016, the FASB issued new guidance that clarifies the requirements for assessing whether contingent call and put options that can accelerate the payment of principal of debt instruments are clearly and closely related to their debt host. This guidance will be effective beginning on January 1, 2017, and modified retrospective application is required. Early adoption is permitted. This guidance was adopted in the third quarter of 2016 and had no impact on the Company's financial position or results of operations.
Pension Plans
In May 2015, the FASB issued new guidance which removes the disclosure requirement to categorize within the fair value hierarchy all investments that measure fair value using the net asset value per share as a practical expedient and certain disclosures associated with these types of investments. This guidance became effective beginning on January 1, 2016, and retrospective application is required. This guidance was adopted during the current period and impacted the disclosure of certain acquired pension plan assets in the fair value hierarchy in Note 15, Retirement and Other Benefit Programs, but did not impact the Company's financial position or results of operations.
To be adopted in future periods 
Revenue from Contracts with Customers
In May 2014, the FASB issued new accounting guidance for recognizing revenue from contracts with customers. This new standard supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. The new standard also requires additional qualitative and quantitative disclosures.
In August 2015, the FASB issued additional guidance that delayed the effective date of the new standard from January 1, 2017 to January 1, 2018. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date.
In March 2016, the FASB issued additional guidance on when and how much revenue to recognize when another party (an agent), along with the entity, is involved in providing a good or a service to a customer.
In April 2016, the FASB issued additional guidance on accounting for licenses of intellectual property and identifying performance obligations.
In May 2016, the FASB issued additional guidance on assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications.
In May 2016, the FASB rescinded several SEC Staff Announcements that are codified in ASC 605, including, among other items, guidance relating to accounting for shipping and handling fees and freight services.

14


The Company is currently evaluating the method of adoption and the potential impact on its financial position and results of operations of adopting this guidance.
Inventory
In July 2015, the FASB issued new guidance which requires an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This standard is effective for the Company as of January 1, 2017. Early adoption is permitted. The Company does not believe the adoption of this guidance will have a material impact on its financial position or results of operations.
Financial Instrument Accounting
In January 2016, the FASB issued a new standard that amends certain aspects of accounting and disclosure requirements of financial instruments, including the requirement that equity investments with readily determinable fair values be measured at fair value with changes in fair value recognized in our results of operations. The new standard does not apply to investments accounted for under the equity method of accounting or those that result in consolidation of the investee. Equity investments that do not have readily determinable fair values may be measured at fair value or at cost minus impairment adjusted for changes in observable prices. A financial liability that is measured at fair value in accordance with the fair value option is required to be presented separately in Other Comprehensive Income for the portion of the total change in the fair value resulting from change in the instrument-specific credit risk. In addition, a valuation allowance should be evaluated on deferred tax assets related to available-for-sale debt securities in combination with other deferred tax assets. The new standard will be effective for the Company as of January 1, 2018. The Company is currently evaluating the method of adoption and the potential impact on its financial position and results of operations of adopting this guidance.
Leases
In February 2016, the FASB issued new accounting guidance that will require the recognition of all lease assets and lease liabilities by lessees and sets forth new disclosure requirements for those lease assets and liabilities. The standard requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements. This standard is effective for the Company as of January 1, 2019. Early adoption is permitted. The Company is currently evaluating the potential impact on its financial position and results of operations of adopting this guidance.
Share-Based Payment Accounting
In March 2016, the FASB issued a new standard that requires recognition of the income tax effects of vested or settled awards in the income statement and involves several other aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The new standard will be effective for us on January 1, 2017. The Company is currently evaluating the method of adoption and potential impact on its financial position, results of operations and statement of cash flow of adopting this guidance.
Statement of Cash Flows
In August 2016, the FASB issued new accounting guidance to reduce diversity in practice regarding how certain transactions are classified in the statement of cash flows. This amendment is effective for the Company as of January 1, 2018. Early adoption is permitted. The adoption of this guidance is not expected to have a significant impact on the Company's Consolidated Statement of Cash Flows.



15


2.
Business Combinations
Combination with Baxalta
On June 3, 2016, Shire acquired all of the outstanding common stock of Baxalta for $18.00 per share in cash and 0.1482 Shire American Depository Shares (“ADSs”) per Baxalta share, or if a former Baxalta shareholder properly elected, 0.4446 Shire ordinary shares per Baxalta share. 
Baxalta was a global biopharmaceutical company that focused on developing, manufacturing and commercializing therapies for orphan diseases and underserved conditions in hematology, oncology and immunology. 
The preliminary fair value of the purchase price consideration consisted of the following: 
(in millions)
Estimated fair value
Cash paid to shareholders
$
12,366.7

Fair value of stock issued to shareholders
19,353.2

Fair value of partially vested stock options and RSUs assumed
497.6

Contingent consideration payable
161.0

Total Purchase Consideration
$
32,378.5

The acquisition of Baxalta was accounted for as a business combination using the acquisition method. Shire issued 305.2 million shares to former Baxalta shareholders at the date of the acquisition. For a more detailed description of the fair value of the partially vested stock options and RSUs assumed, please see Note 22, Share-based compensation plans, to these Unaudited Consolidated Financial Statements. 
The assets acquired and the liabilities assumed from Baxalta have been recorded at their preliminary fair value as of June 3, 2016, the date of acquisition. The Company’s Unaudited Consolidated Financial Statements included the results of Baxalta from the date of acquisition. The amount of Baxalta’s post-acquisition revenues included in the Company’s Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2016 is $1,586.4 million and $2,166.7 million, respectively. After the closing of the acquisition, the Company began integrating Baxalta and as such the combined business is now sharing various research and development and selling, general and administrative functions. As a result, computing a separate measure of Baxalta’s stand-alone profitability for periods after the acquisition date is not practical.

16


The Company's preliminary allocation of the purchase price to the assets acquired and liabilities assumed as of the acquisition date, including measurement period adjustments identified during the three months ended September 30, 2016, is outlined below.
(in millions)
Preliminary values as of June 30, 2016
Measurement period adjustments
Preliminary
values as of September 30, 2016
ASSETS
 
 
 

Current assets:
 
 
 

Cash and cash equivalents
$
583.2

$

$
583.2

Accounts receivable, net
1,382.8

17.0

1,399.8

Inventories
5,341.1

(276.4
)
5,064.7

Other current assets
362.2


362.2

Total current assets
7,669.3

(259.4
)
7,409.9

Property, plant and equipment, net
5,687.7

(118.4
)
5,569.3

Investments
128.2


128.2

Goodwill
6,106.4

1,894.6

8,001.0

Other intangible assets, net
 


 

Currently marketed products
24,550.0

(400.0
)
24,150.0

In-Process Research and Development ("IPR&D")
2,940.0

(1,460.0
)
1,480.0

Contract based arrangements
72.2

10.0

82.2

Other non-current assets
103.3


103.3

Total assets
$
47,257.1

$
(333.2
)
$
46,923.9

LIABILITIES
 


 

Current liabilities:
 


 

Accounts payable and accrued expenses
$
1,509.5

$
27.5

$
1,537.0

Other current liabilities
15.4

77.5

92.9

Long-term borrowings
5,424.9


5,424.9

Deferred tax liability
6,831.7

(446.4
)
6,385.3

Other non-current liabilities
1,092.1

13.2

1,105.3

Total liabilities
14,873.6

(328.2
)
14,545.4

 
 


 

Preliminary fair value of identifiable assets acquired and liabilities assumed
$
32,383.5

$
(5.0
)
$
32,378.5

 
 


 
Consideration
 


 

Preliminary fair value of purchase consideration
$
32,383.5

$
(5.0
)
$
32,378.5

The measurement period adjustments for Other intangible assets reflect changes in the estimated fair value of Currently marketed products and IPR&D. The measurement period adjustments for Property, plant and equipment ("PP&E") primarily reflect changes in the estimated fair value of acquired buildings, machinery and equipment. The changes in the estimated fair values for Other intangible assets and PP&E are primarily to better reflect market participant assumptions about facts and circumstances existing as of the acquisition date. The measurement period adjustments did not result from intervening events subsequent to the acquisition date.
The Company is currently completing its evaluation of information, assumptions and valuation methodologies it used in its preliminary fair value of the purchase price consideration. The purchase price allocation is preliminary pending final determination of the fair values of certain assets and liabilities. As of September 30, 2016, certain items related to the fair values of inventories, intangible assets, PP&E, other current and non-current liabilities and current and deferred taxes have not been finalized and may be subject to change as additional information is received and certain tax returns are finalized. The finalization of these matters may result in changes to the underlying assets, liabilities

17


and goodwill. These changes may be material. The final determination of these fair values will be completed as soon as possible but no later than one year from the acquisition date.
Intangible Assets
The fair value of the identifiable intangible assets has been estimated using an income approach, which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the incremental after tax cash flows an asset would generate over its remaining useful life.
Currently marketed products totaling $24,150.0 million relate to intellectual property (“IP”) rights acquired for Baxalta’s currently marketed products. The estimated useful life of the intangible assets related to currently marketed products range from 11 to 38 years (weighted average 30 years), with amortization being recorded on a straight line basis.
IPR&D intangible assets totaling $1,480.0 million represent the value assigned to research and development ("R&D") projects acquired. The IPR&D intangible assets are capitalized and accounted for as indefinite-lived intangible assets and will be subject to impairment testing until completion or abandonment of the projects. Upon successful completion of each project, the Company will make a separate determination of the estimated useful life of the IPR&D intangible asset and the related amortization will be recorded as an expense over the estimated useful life. 
Some of the more significant assumptions inherent in the development of those asset valuations include the estimated net cash flows for each year for each asset or product (including net revenues, cost of sales, R&D costs, selling and marketing costs, working capital/asset contributory asset charges and other cash flow assumptions), the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, the potential regulatory and commercial success risks, competitive trends impacting the asset and each cash flow stream as well as other factors.
The discount rate used to arrive at the present value at the acquisition date of the IPR&D intangible assets was 10.0% to reflect the internal rate of return and incremental commercial uncertainty in the cash flow projections. No assurances can be given that the underlying assumptions used to prepare the discounted cash flow analysis will not change. For these and other reasons, actual results may vary significantly from estimated results.
Goodwill
Goodwill of $8,001.0 million, which is not deductible for tax purposes, includes the expected synergies that will result from combining the operations of Baxalta with Shire; intangible assets that do not qualify for separate recognition at the time of the acquisition; the value of the assembled workforce; and impacted by establishing a deferred tax liability for the acquired identifiable intangible assets which have no tax basis.
In the three and nine months ended September 30, 2016, the Company expensed $254.1 million and $696.4 million, respectively, relating to the acquisition and integration of Baxalta, which have been recorded within Integration and Acquisition costs in the Company’s Unaudited Consolidated Statements of Operations.
Contingent Consideration
The Company acquired certain contingent obligations classified as contingent consideration related to Baxalta’s historical business combinations. Additional consideration is conditionally due upon the achievement of certain milestones related to the development, regulatory, first commercial sale and other sales milestones, which could total up to approximately $1.5 billion. The Company may also pay royalties based on certain product sales. The Company estimated the fair value of the assumed contingent consideration to be $161.0 million using a probability weighting approach that considered the possible outcomes based on assumptions related to the timing and probability of the product launch date, discount rates matched to the timing of first payment, and probability of success rates and discount adjustments on the related cash flows. 
Retirement plans 
The Company assumed pension plans as part of the acquisition of Baxalta, including defined benefit and post-retirement benefit plans in the United States and foreign jurisdictions which had a net liability balance of $610.4 million. As of June 3, 2016, the Baxalta defined benefit pension plans had assets with a fair value of $358.5 million

18


Supplemental disclosure of pro forma information 
The following unaudited pro forma financial information presents the combined results of the operations of Shire and Baxalta as if the acquisition of Baxalta had occurred as of January 1, 2015. The unaudited pro forma financial information is not necessarily indicative of what the consolidated results of operations actually would have been had the respective acquisitions been completed on January 1, 2015. In addition, the unaudited pro forma financial information does not purport to project the future results of operations of the combined Company.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in millions)
2015
 
2016
 
2015
Revenues
$
3,250.0

 
$
10,193.5

 
$
9,086.0

Net (loss)/income from continuing operations
(52.0
)
 
1,406.6

 
(1,152.1
)
Per share amounts:
 

 
 

 
 

Net (loss)/income from continuing operations per share - basic
$
(0.06
)
 
$
1.94

 
$
(1.29
)
Net (loss)/income from continuing operations per share - diluted
$
(0.06
)
 
$
1.92

 
$
(1.29
)
 
The unaudited pro forma financial information above reflects the following pro forma adjustments: 
(i)
an adjustment to increase net income for the nine months ended September 30, 2016 by $562.6 million to eliminate integration and acquisition related costs incurred by Shire and Baxalta and a corresponding decrease in net income for the nine months ended September 30, 2015 by $562.6 million to give effect to the integration and acquisition of Baxalta as if it had occurred on January 1, 2015;
(ii)
an adjustment to increase net income for the nine months ended September 30, 2016 by $873.6 million and a corresponding decrease in the three and nine months ended September 30, 2015 by $592.5 million and $1,777.5 million, respectively, to reflect amortization of the fair value adjustments for inventory as inventory is sold;
(iii)
an adjustment to increase amortization expense for the nine months ended September 30, 2016 by $198.8 million and for the three and nine months ended to September 30, 2015 by $153.6 million and $478.0 million, respectively, related to the identifiable intangible assets acquired; and
(iv)
an adjustment to decrease net income for the nine months ended September 30, 2016 by $97.2 million and for the three and nine months ended September 30, 2015 by $64.0 million and $215.1 million, respectively, primarily related to the additional interest expense associated with the debt incurred to partially fund the acquisition of Baxalta and the amortization of related deferred debt issuance costs.
The adjustments above are stated net of their tax effects, where applicable. 
Acquisition of Dyax
On January 22, 2016, Shire acquired all of the outstanding common stock of Dyax for $37.30 per share in cash. Under the terms of the merger agreement, former Dyax shareholders may receive additional value through a non-tradable contingent value right worth $4.00 per share, payable upon U.S. Food and Drug Administration (“FDA”) approval of SHP643 (formerly DX-2930) in Hereditary Angioedema (“HAE”).
Dyax was a publicly-traded, Massachusetts-based rare disease biopharmaceutical company primarily focused on the development of plasma kallikrein (“pKal”) inhibitors for the treatment of HAE. Dyax’s most advanced clinical program was SHP643, a Phase 3 program with the potential for improved efficacy and convenience for HAE patients. SHP643 has received Fast Track, Breakthrough Therapy, and Orphan Drug Designations by the FDA and has also received Orphan Drug status in the EU. Dyax’s sole marketed product, KALBITOR, is a pKal inhibitor for the treatment of acute attacks of HAE in patients 12 years of age and older.

19


The acquisition of Dyax was accounted for as a business combination using the acquisition method. The preliminary acquisition-date fair value consideration was $6,330.0 million, comprising cash paid on closing of $5,934.0 million and the preliminary fair value of the contingent value right of $396.0 million (maximum payable $646.0 million). The assets acquired and the liabilities assumed from Dyax have been recorded at their preliminary fair value as of January 22, 2016, the date of acquisition. The Company’s Unaudited Consolidated Financial Statements include the results of Dyax as of January 22, 2016. The amount of Dyax’s post-acquisition revenues included in the Company’s Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2016 is $16.7 million and $51.3 million, respectively. After the closing of the acquisition, the Company began integrating Dyax and as such the combined business is now sharing various research and development and selling, general and administrative functions. As a result, computing a separate measure of Dyax's stand-alone profitability for periods after the acquisition date is not practical.
In the third quarter of 2016, the Company adjusted its preliminary valuation and allocation of purchase price consideration. The adjustment, which was not material, decreased goodwill and deferred tax liabilities. The revised preliminary allocation of the total purchase price is as follows:
(in millions)
Fair value
ASSETS
 

Current assets:
 

Cash and cash equivalents
$
241.2

Accounts receivable, net
22.5

Inventories
20.2

Other current assets
8.1

Total current assets
292.0

Property, plant and equipment, net
5.8

Goodwill
2,688.8

Other intangible assets, net
 

Currently marketed projects
135.0

IPR&D
4,100.0

Contract based royalty arrangements
425.0

Other non-current assets
28.6

Total assets
$
7,675.2

LIABILITIES
 

Current liabilities:
 

Accounts payable and accrued expenses
$
30.0

Other current liabilities
1.7

Deferred tax liability
1,312.1

Other non-current liabilities
1.4

Total liabilities
1,345.2

 
 

Preliminary fair value of identifiable assets acquired and liabilities assumed
$
6,330.0

 
 
Consideration
 

Preliminary fair value of purchase consideration
$
6,330.0

The purchase price allocation is preliminary pending final determination of the fair values of certain assets and liabilities. In particular, intangible assets and current and deferred taxes are preliminary pending receipt of the final valuations for those items. The final determination of these fair values will be completed as soon as possible, but no later than one year from the acquisition date.
Currently marketed products
Currently marketed products totaling $135.0 million relate to intellectual property rights acquired for KALBITOR. The fair value of the currently marketed product has been estimated using an income approach, based on the present value of incremental after tax cash flows attributable to KALBITOR.

20


The estimated useful life of the KALBITOR intangible asset is 18 years, with amortization being recorded on a straight-line basis. 
IPR&D 
The IPR&D asset of $4,100.0 million relates to Dyax’s clinical program SHP643, a Phase 3 program with the potential for improved efficacy and convenience for HAE patients. The IPR&D intangible asset is capitalized and accounted for as indefinite-lived intangible assets and will be subject to impairment testing until completion or abandonment of the projects. The fair value of this IPR&D asset was estimated based on an income approach, using the present value of incremental after tax cash flows expected to be generated by this development project. The estimated cash flows have been probability adjusted to take into account the development stage of completion and the remaining risks and uncertainties surrounding the future development and commercialization. 
The estimated probability adjusted after tax cash flows used to estimate the fair value of other intangible assets have been discounted at 9%
Royalty rights 
Other intangible assets totaling $425.0 million relate to royalty rights arising from licensing agreements of a portfolio of product candidates. This portfolio includes two approved products, marketed by Eli Lilly & Company, and various development-stage products. Multiple product candidates with other pharmaceutical companies are in various stages of clinical development for which the Company is eligible to receive future royalties and/or milestone payments. 
The fair value of these royalty rights is preliminary and has been estimated using an income approach, based on the present value of incremental after-tax cash flows attributable to each royalty right.  
The estimated useful lives of these royalty rights range from seven to nine years (weighted average eight years), with amortization being recorded on a straight-line basis.
Goodwill
Goodwill of $2,688.8 million, which is not deductible for tax purposes, includes the expected synergies that will result from combining the operations of Dyax with Shire; intangible assets that do not qualify for separate recognition at the time of the acquisition; the value of the assembled workforce; and impacted by establishing a deferred tax liability for the acquired identifiable intangible assets which have no tax basis. 
For the three and nine months ended September 30, 2016, the Company expensed $11.3 million and $65.0 million, respectively, relating to the acquisition and integration of Dyax, which have been recorded within Integration and Acquisition costs in the Company’s Unaudited Consolidated Statements of Operations.
Supplemental disclosure of pro forma information 
The following unaudited pro forma financial information presents the combined results of the operations of Shire and Dyax as if the acquisitions of Dyax had occurred as of January 1, 2015. The unaudited pro forma financial information is not necessarily indicative of what the consolidated results of operations actually would have been had the respective acquisitions been completed at the date indicated. In addition, the unaudited pro forma financial information does not purport to project the future results of operations of the combined Company.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in millions)
2015
 
2016
 
2015
Revenues
$
1,679.7

 
$
7,596.4

 
$
4,772.5

Net income from continuing operations
438.0

 
25.9

 
837.1

Per share amounts:
 

 
 

 
 

Net income from continuing operations per share - basic
$
0.74

 
$
0.04

 
$
1.42

Net income from continuing operations per share - diluted
$
0.74

 
$
0.04

 
$
1.41


21


The unaudited pro forma financial information above reflects the following pro forma adjustments:
(i)
an adjustment to increase net income for the nine months ended September 30, 2016 by $108.4 million to eliminate acquisition related costs incurred by Shire and Dyax and a corresponding decrease in net income for the nine months ended September 30, 2015 by $108.4 million to give effect to the acquisition of Dyax as if it had occurred on January 1, 2015;
(ii)
an adjustment to decrease net income for the three and nine months ended September 30, 2015 by $1.6 million and $3.9 million, respectively, to reflect amortization of the fair value adjustments for inventory as inventory is sold;
(iii)
an adjustment to increase amortization expense for the nine months ended September 30, 2016 by $1.3 million and a corresponding adjustment to decrease net income for the three and nine months ended September 30, 2015 by $5.4 million and $16.2 million, respectively, related to the identifiable intangible assets acquired; and
(iv)
an adjustment to record interest expense for the three and nine months ended September 30, 2015 of $20.4 million and $61.2 million, respectively associated with the debt incurred to partially fund the acquisition of Dyax and the amortization of related deferred debt issuance costs.
The adjustments above are stated net of their tax effects, where applicable.
Acquisition of NPS
On February 21, 2015, Shire completed its acquisition of all of the outstanding common stock of NPS. As of the acquisition date, fair value of the cash consideration paid on closing was $5,219.6 million.
The acquisition of NPS added GATTEX/REVESTIVE and NATPARA/NATPAR to Shire’s portfolio of currently marketed products. GATTEX/REVESTIVE is approved in the U.S. and EU for the treatment of adults with short bowel syndrome (“SBS”) who are dependent on parenteral support, a rare and potentially fatal gastrointestinal disorder. NATPARA/NATPAR is approved in the U.S. and indicated as an adjunct to calcium and vitamin D to control hypocalcemia in patients with hypoparathyroidism (“HPT”), a rare endocrine disease.
The acquisition of NPS was accounted for as a business combination using the acquisition method. The assets acquired and the liabilities assumed from NPS have been recorded at their fair values at the date of acquisition, February 21, 2015. The Company’s Unaudited Consolidated Financial Statements include the results of NPS from February 21, 2015.

22


The purchase price allocation for the acquisition of NPS was finalized in the fourth quarter of 2015. The Company’s allocation of the purchase price to the fair value of assets acquired and liabilities assumed is outlined below:
(in millions)
Fair value
ASSETS
 

Current assets:
 

Cash and cash equivalents
$
41.6

Short-term investments
67.0

Accounts receivable
33.4

Inventories
89.4

Other current assets
11.1

Total current assets
242.5

Property, plant and equipment, net
4.8

Goodwill
1,551.0

Other intangible assets
 

Currently marketed products
4,640.0

Royalty rights (categorized as "Other amortized intangible assets")
353.0

Total assets
$
6,791.3

LIABILITIES
 

Current liabilities:
 

Accounts payable and other current liabilities
$
75.7

Short-term debt
27.4

Long-term debt, less current portion
78.9

Deferred tax liabilities
1,385.2

Other non-current liabilities
4.5

Total liabilities
1,571.7

 
 

Fair value of identifiable assets acquired and liabilities assumed
$
5,219.6

 
 

Consideration


Cash consideration paid
$
5,219.6

Currently marketed products
Currently marketed products totaling $4,640.0 million relate to intellectual property rights of NATPARA/NATPAR and GATTEX/REVESTIVE. The fair value of the currently marketed products has been estimated using an income approach, based on the present value of incremental after tax cash flows attributable to each separately identifiable intangible asset.
The estimated useful lives of the NATPARA/NATPAR and GATTEX/REVESTIVE intangible assets are 24 years, with amortization being recorded on a straight-line basis.
Royalty rights
Other intangible assets totaling $353.0 million relate to the royalty rights arising from the collaboration agreements with Amgen Inc (“Amgen”), Janssen Pharmaceutica N.V. (“Janssen”) and Kyowa Hakko Kirin Co. Ltd (“Kyowa Hakko Kirin”). Amgen markets cinacalcet HCl as Sensipar in the U.S. and as Mimpara in the EU; Janssen markets tapentadol as Nucynta in the U.S.; and Kyowa Hakko Kirin markets cinacalcet HCI as Regpara in Japan, Hong Kong, Malaysia, Macau, Singapore, and Taiwan. From the acquisition of NPS, the Company is entitled to royalties from the net sales of these products.
The fair value of these royalty rights has been estimated using an income approach, based on the present value of incremental after tax cash flows attributable to each royalty right.

23


The estimated useful lives of these royalty rights range from four to five years (weighted average four years) with amortization being recorded on a straight-line basis.
Goodwill
Goodwill of $1,551.0 million, which is not deductible for tax purposes, includes the expected synergies that will result from combining the operations of NPS with the operations of Shire; intangible assets that do not qualify for separate recognition at the time of the acquisition; the value of the assembled workforce; and impacted by establishing a deferred tax liability for the acquired identifiable intangible assets which have no tax basis.
Supplemental disclosure of pro forma information
The following unaudited pro forma financial information presents the combined results of the operations of Shire and NPS as if the acquisitions of NPS had occurred as of January 1, 2014. The unaudited pro forma financial information is not necessarily indicative of what the consolidated results of operations actually would have been had the respective acquisitions been completed on January 1, 2014. In addition, the unaudited pro forma financial information does not purport to project the future results of operations of the combined Company.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in millions)
2015
 
2015
Revenues
$
1,655.0

 
$
4,730.9

Net income from continuing operations
479.1

 
1,005.6

Per share amounts:
 

 
 

Net income from continuing operations per share - basic
$
0.81

 
$
1.70

Net income from continuing operations per share - diluted
$
0.81

 
$
1.69

The unaudited pro forma financial information above reflects the following pro forma adjustments:
(i)
an adjustment to increase net income for the three and nine months ended September 30, 2015 by $2.0 million and $105.2 million, respectively, to eliminate acquisition related costs incurred by Shire and NPS;
(ii)
an adjustment to increase net income by $4.2 million and $13.4 million for the three and nine months ended September 30, 2015 respectively, to reflect charges on the unwind of inventory fair value adjustments as acquisition date inventory is sold; and
(iii)
an adjustment to increase amortization expense for the three and nine months ended September 30, 2015 by $nil and $21.2 million, respectively, related to the identifiable intangible assets acquired.
The adjustments above are stated net of their tax effects, where applicable.
3.
Collaborative and other licensing arrangements
The Company is party to certain collaborative or licensing arrangements. In some of these arrangements, Shire and the licensee are both actively involved in the development and commercialization of the licensed product and have exposure to risks and rewards dependent on its commercial success.
Out-licensing arrangements
The Company has entered into various collaborative and licensing arrangements where it has licensed certain product or intellectual property rights for consideration such as up-front payments, development milestones, sales milestones and/or royalty payments. Under the terms of these collaborative and licensing arrangements, the Company may receive development milestone payments up to an aggregate amount of $17.3 million and sales milestones up to an aggregate amount of $17.7 million. The receipt of these substantive milestones is uncertain and contingent on the achievement of certain development milestones or the achievement of a specified level of annual net sales by the licensee. In the

24


three and nine months ended September 30, 2016, the Company received cash related to up-front and milestone payments of $3.0 million and $3.5 million, respectively, compared to $nil and $12.6 million, respectively, in the three and nine months ended September 30, 2015. In the three and nine months ended September 30, 2016, the Company recognized milestone income of $1.7 million and $4.0 million, respectively (2015: $0.5 million and $1.5 million, respectively), in other revenues, and $16.4 million and $47.7 million, respectively (2015: $13.8 million and $37.2 million, respectively), in product sales for shipment of product to the relevant licensee.
Collaboration and in-licensing arrangements
The Company is party to various collaborative and in-licensing arrangements, many of which were acquired through the acquisition of Baxalta. The Company also entered into a new collaboration agreement during the nine months ended September 30, 2016. These agreements generally provide for commercialization rights to a product or products being developed by the counterparty, and in exchange often resulted in an upfront payment upon execution of the agreement and an obligation that the Company make future development, regulatory approval or commercial milestone payments as well as royalty payments. The following is a description of the Company's significant collaboration agreements acquired by the Company through the acquisition of Baxalta or entered into by the Company during the nine months ended September 30, 2016. The acquisition-date fair value of the collaboration agreements acquired from Baxalta was included in the IPR&D.
Precision BioSciences
In June 2016, the Company acquired a strategic immuno-oncology collaboration with Precision BioSciences (“Precision”), a private biopharmaceutical company based in the United States, specializing in genome editing technology. The Company acquired the collaboration through the acquisition of Baxalta, which previously entered into the agreement in February 2016. Together, Shire and Precision will develop chimeric antigen receptor (“CAR”) T cell therapies for up to six unique targets, with the first program expected to enter clinical studies in late 2017. On a product-by-product basis, following successful completion of early-stage research activities up to Phase 2, Shire will have exclusive option rights to complete late-stage development and worldwide commercialization. Precision is responsible for development costs for each target prior to option exercise. Precision also has the right to participate in the development and commercialization of any licensed products resulting from the collaboration through a 50/50 co-development and co-promotion option in the United States. As of the date the agreement was acquired, June 3, 2016, and as of the balance sheet date, the Company had the potential to make future payments related to option fees and development, regulatory and commercial milestones totaling up to $1.6 billion, in addition to future royalty payments on worldwide sales.
Symphogen
In June 2016, the Company acquired a research, option and commercial agreement with Symphogen, a private biopharmaceutical company headquartered in Denmark that is developing recombinant antibodies and antibody mixtures. The Company acquired the agreement through the acquisition of Baxalta, which previously entered into the agreement in December 2015. Under the terms of the agreement, the Company has options to obtain exclusive licensing rights for four specified proteins in development for the treatment of immune-oncology diseases as well as two additional proteins that may be selected at a later date. Each option is exercisable for a period of 90 days when each protein is ready for Phase 2 clinical trials. Symphogen is responsible for development costs for each protein until option exercise, at which point Shire would become responsible for development costs.
Each option exercise fee is variable depending on when it is exercised, with a maximum exercise price of up to €20 million for each protein. As of the date the agreement was acquired, June 3, 2016 and as of the balance sheet date, the Company had the potential to make additional future payments of up to approximately €1.2 billion related to development, regulatory and commercial milestones achieved after option exercise for all six proteins, in addition to future royalty payments.
Merrimack Pharmaceuticals, Inc.
In June 2016, the Company acquired an exclusive license agreement with Merrimack Pharmaceuticals, Inc. (“Merrimack”) relating to the development and commercialization of ONIVYDE (nanoliposomal irinotecan injection), also known as “nal-IRI” or MM-398. The Company acquired the agreement through the acquisition of Baxalta, which previously entered into the agreement in September 2014. The arrangement includes all potential indications for nal-IRI across all markets with the exception of the United States and Taiwan. The first indication being pursued is for the

25


treatment of patients with metastatic pancreatic cancer who were previously treated with gemcitabine-based therapy. As of the date the agreement was acquired, June 3, 2016 and as of the balance sheet date, the Company had the potential to make future payments of up to approximately $678 million related to the achievement of development, regulatory and commercial milestones, in addition to future royalty payments.
Coherus Biosciences, Inc.
In June 2016, the Company acquired a license agreement with Coherus Biosciences, Inc. (“Coherus”) to develop and commercialize a biosimilar to ENBREL® (etanercept). The Company acquired the agreement through the acquisition of Baxalta, which previously entered into the agreement in August 2013. The Company also obtained the right of first refusal to certain other biosimilars in the collaboration. Under the terms of the agreement, Coherus was responsible for the development plan, preparation of regulatory filings, and manufacture of the product, subject to certain cost reimbursement by the Company. In September 2016, the Company terminated the licensing agreement with Coherus in accordance with its terms.
Momenta Pharmaceuticals, Inc.
In June 2016, the Company acquired an exclusive license agreement with Momenta Pharmaceuticals, Inc. (“Momenta”) to develop and commercialize biosimilars, including adalimumab (BAX 2923), a biosimilar product candidate for HUMIRA® (adalimumab). The agreement was acquired through the acquisition of Baxalta, which initially entered into the agreement in February 2012. The arrangement includes specified funding by the Company, as well as other responsibilities, relating to development and commercialization activities. In September 2016, the Company exercised its right to terminate its license agreement with Momenta. The effective date of the termination is twelve months from the date that Momenta received the Company’s written notice of termination. Prior to the effective date of the termination, the Company and Momenta are required to satisfy certain ongoing obligations.
Pfizer Inc.
In July 2016, the Company licensed the global rights to all indications for SHP647 from Pfizer Inc. SHP647 is an investigational biologic being evaluated for the treatment of moderate-to-severe inflammatory bowel disease. Under the terms of the agreement, Pfizer received an upfront payment of $90 million, and is eligible to receive between $75 million to $460 million in milestone payments based on clinical, regulatory and commercialization milestones and low double-digit royalties on any potential sales if the product is approved.
Other arrangements
SFJ Pharmaceuticals Group
In June 2015, Baxalta entered into a co-development agreement with SFJ Pharmaceuticals IX, L.P., a SFJ Pharmaceuticals Group company (“SFJ”) relating to BAX 2923, whereby SFJ would fund specified development costs related to the BAX 2923 program, in exchange for payments in the event the product obtains regulatory approval in the United States and Europe. There were certain termination provisions that could have triggered payment of the contingent success payments prior to regulatory approval.
The preliminary fair value of the assumed contingency was recorded as a long-term liability at June 3, 2016 and as of the balance sheet date, as part of Company’s purchase accounting for the Baxalta acquisition. The fair value of the assumed contingency on the date of acquisition was $288.6 million.
This co-development agreement was terminated by mutual agreement of the Company and SFJ in September 2016 and the Company made a one-time $288.0 million payment to SFJ in connection with the termination, in full satisfaction of the Company’s financial obligations under the agreement.
4.
Integration and Acquisition Costs
For the three and nine months ended September 30, 2016, Shire recorded integration and acquisition costs of $284.5 million and $738.6 million, respectively, primarily due to the acquisition and integration of Baxalta and Dyax and related contract termination costs. The Baxalta integration is estimated to be completed by mid to late 2019 and the integration of Dyax is substantially complete as of September 30, 2016.

26


As part of the Company’s activities to integrate Baxalta, it terminated certain employees and announced plans to close certain offices. For the three and nine months ended September 30, 2016, the Company incurred costs relating to employee termination benefits of $120.0 million and $373.1 million, respectively, including severance and acceleration of stock compensation. The Baxalta integration activities are ongoing and the Company is continuing to evaluate the total costs expected to be incurred and the time-frame.
The following table summarizes the employee termination related reserve as of September 30, 2016 :
(in millions)
Severance and Employee Benefits
As of January 1, 2016
$

Amount charged to integration costs
202.3

Paid/utilized
(128.1
)
As of September 30, 2016
$
74.2

For the three months ended September 30, 2015, Shire recorded integration and acquisition costs of $89.9 million of which $30.7 million related to the acquisition and integration of NPS, Viropharma and charges related to the acquisition of Baxalta. Additionally, Shire recorded $59.2 million in charges related to the change in the fair value of contingent consideration liabilities in relation to the acquisition of Lumena Pharmaceuticals, Inc. (“Lumena”), following the agreement to settle all future contingent milestones payable to former Lumena shareholders through a one-time $90 million payment.
For the nine months ended September 30, 2015, Shire recorded a net credit to integration and acquisition costs of $46.8 million. The net credit principally comprises costs related to the acquisition and integration of NPS, Viropharma and preliminary work on the proposed combination with Baxalta totaling $149.7 million offset by a net credit relating to the change in the fair value of contingent consideration liabilities of $196.5 million. The change in fair value of contingent consideration liabilities relates to the acquisition of Lumena and Lotus Tissue Repair Inc. The Lumena contingent consideration decreased as the probability of success for the SHP625 asset (for the treatment of cholestatic liver diseases) decreased following the receipt of data from certain Phase 2 studies and the agreement in the third quarter of 2015 to settle all future contingent milestones payable to former Lumena shareholders. The contingent consideration from the Lotus Tissue Repair acquisition decreased as the probability of success for the SHP608 asset (for the treatment of Dystrophic Epidermolysis Bullosa (“DEB”)) decreased upon receiving certain preclinical toxicity findings.
5.
Reorganization Costs

The Company incurred reorganization costs totaling $101.4 million and $115.7 million during the three and nine months ended September 30, 2016, respectively. The charge during the three months and nine months ended September 30, 2016 primarily relates to the planned closure of certain manufacturing facilities and associated asset impairments of $77.4 million and employee termination and other costs of $18.4 million. As of September 30, 2016, there were no cash payments associated with these costs. Other restructuring charges recorded, which were not significant, during the nine months ended September 30, 2016 relate to the closure of other offices and the employee relocation.

The Company incurred reorganization costs totaling $31.1 million and $59.6 million during the three and nine months ended September 30, 2015, respectively, primarily related to the Company's One Shire business reorganization.

6.
Discontinued Operations
Following the sale of the Company’s DERMAGRAFT business in January 2014, the operating results associated with the DERMAGRAFT business have been classified as discontinued operations in the Company’s Unaudited Consolidated Statements of Operations for all periods presented. For the three and nine months ended September 30, 2016, the Company recorded a loss of $18.3 million (net of tax benefit of $5.7 million) and $257.5 million (net of tax benefit of $101.1 million), respectively, primarily related to legal contingencies related to the divested DERMAGRAFT business. For details of the legal provision see Note 21, Legal and other proceedings, to these Unaudited Consolidated Financial Statements.

27


For the three and nine months ended September 30, 2015, the Company recorded a loss of $24.3 million (net of tax benefit of $14.0 million) and $31.3 million (net of tax benefit of $18.0 million), respectively, related to costs associated with the divestment.
 
7.
Accounts Receivable
Accounts receivable at September 30, 2016 of $2,633.4 million (December 31, 2015: $1,201.2 million), are net of reserve for discounts and allowances of $127.4 million (December 31, 2015: $55.8 million).
Reserve for discounts and allowances:
(in millions)
2016
 
2015
As of January 1,
$
55.8

 
$
48.5

Provision charged to operations
569.9

 
293.8

Payments/credits related to sales
(498.3
)
 
(286.6
)
As of September 30,
$
127.4

 
$
55.7

 
As of September 30, 2016, accounts receivable included $89.9 million (December 31, 2015: $79.0 million) related to royalty income.

8.
Inventories
Inventories are stated at the lower of cost or market. Inventories comprise:
(in millions)
September 30, 2016
 
December 31, 2015
Finished goods
$
1,597.6

 
$
184.9

Work-in-progress
2,431.3

 
302.0

Raw materials
828.2

 
148.5

 
$
4,857.1

 
$
635.4

For a more detailed description of the inventories acquired with Baxalta and Dyax, please see Note 2, Business Combinations, to these Unaudited Consolidated Financial Statements.

9.
Property, plant and equipment

Property, plant and equipment are recorded at historical cost, net of accumulated depreciation. Components of property, plant and equipment, net are summarized as follows:
(in millions)
September 30, 2016
 
December 31, 2015
Land
$
356.3

 
$
96.7

Buildings and leasehold improvements
1,999.5

 
606.4

Machinery, equipment and other
2,440.5

 
827.4

Assets under construction
2,647.0

 
93.7

 
7,443.3

 
1,624.2

Less: Accumulated depreciation
(915.6
)
 
(796.1
)
 
$
6,527.7

 
$
828.1

Depreciation expense for the three and nine months ended September 30, 2016 was $93.1 million and $175.3 million, respectively, and for the three and nine months ended September 30, 2015 was $32.9 million and $105.1 million, respectively.

28


10.
Intangible Assets
The following table summarizes the Company's intangible assets:
(in millions)
Currently marketed products
 
IPR&D
 
Other
intangible
assets
 
Total
September 30, 2016
 

 
 

 
 

 
 

Gross acquired intangible assets
$
34,104.6

 
$
6,522.8

 
$
882.2

 
$
41,509.6

Accumulated amortization
(2,467.7
)
 

 
(170.4
)
 
(2,638.1
)
Other intangible assets, net
$
31,636.9


$
6,522.8


$
711.8


$
38,871.5

 
 
 
 
 
 
 
 
December 31, 2015
 

 
 

 
 

 
 

Gross acquired intangible assets
$
9,371.9

 
$
1,362.0

 
$
375.0

 
$
11,108.9

Accumulated amortization
(1,852.1
)
 

 
(83.5
)
 
(1,935.6
)
Other intangible assets, net
$
7,519.8


$
1,362.0


$
291.5


$
9,173.3

Other intangible assets are comprised primarily of royalty rights and other contract rights associated with Baxalta, Dyax and NPS. 
The change in the net book value of intangible assets for the nine months ended September 30, 2016 and 2015 is shown in the table below: 
(in millions)
2016
 
2015
As of January 1,
$
9,173.3

 
$
4,934.4

Acquisitions
30,377.7

 
5,473.7

Amortization charged
(702.5
)
 
(352.3
)
Impairment charges
(8.9
)
 
(523.3
)
Foreign currency translation
31.9

 
(81.9
)
As of September 30,
$
38,871.5

 
$
9,450.6

 
In connection with the acquisition of Baxalta on June 3, 2016, the Company acquired IP rights related to currently marketed products of $24,150.0 million, IPR&D assets of $1,480.0 million and other contract rights of $82.2 million. For a more detailed description of this acquisition, please see Note 2, Business Combinations, to these Unaudited Consolidated Financial Statements.
In connection with the acquisition of Dyax on January 22, 2016, the Company acquired IP rights related to currently marketed products of $135.0 million, IPR&D assets of $4,100.0 million and royalty rights of $425.0 million. For a more detailed description of this acquisition, please see Note 2, Business Combinations, to these Unaudited Consolidated Financial Statements.
The Company reviews its amortized intangible assets for impairment whenever events or circumstances suggest that their carrying value may not be recoverable. Unamortized intangible assets are reviewed for impairment annually or whenever events or circumstances suggest that their carrying value may not be recoverable.
The estimated future amortization of acquired intangible assets for the next five years is expected to be as follows:

29


(in millions)
Anticipated
future amortization
2016 (remaining three months)
$
358.1

2017
1,429.9

2018
1,424.2

2019
1,344.8

2020
1,340.9

2021
1,336.5


11.
Goodwill
The following table provides a roll-forward of the goodwill balance:
(in millions)
2016
 
2015
As of January 1,
$
4,147.8

 
$
2,474.9

Acquisitions
10,689.8

 
1,837.0

Foreign currency translation
13.0

 
(22.3
)
As of September 30,
$
14,850.6

 
$
4,289.6

The increase in goodwill during the nine months ended September 30, 2016 relates to our acquisitions of Baxalta and Dyax. For a more detailed description of these transactions, please see Note 2, Business Combinations, to these Unaudited Consolidated Financial Statements.
12.
Fair Value Measurement
Assets and liabilities that are measured at fair value on a recurring basis
As of September 30, 2016 and December 31, 2015, the following financial assets and liabilities are measured at fair value on a recurring basis using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3).
 
Fair value
(in millions)
Total
 
Level 1
 
Level 2
 
Level 3
At September 30, 2016
 

 
 

 
 

 
 

Financial assets:
 

 
 

 
 

 
 

Marketable equity securities
$
69.7

 
$
69.7

 
$

 
$

Marketable debt securities
16.5

 
3.7

 
12.8

 

Contingent consideration receivable  
15.7

 

 

 
15.7

Derivative instruments
50.6

 

 
50.6

 

Total assets
152.5

 
73.4

 
63.4

 
15.7

 


 
 
 
 
 
 
Financial liabilities:


 
 

 
 

 
 

Derivative instruments
13.3

 

 
13.3

 

Contingent consideration payable
996.7

 

 

 
996.7

Total liabilities
$
1,010.0

 
$

 
$
13.3

 
$
996.7


30


(in millions)
Total
 
Level 1
 
Level 2
 
Level 3
At December 31, 2015
 

 
 

 
 

 
 

Financial assets:
 

 
 

 
 

 
 

Marketable equity securities
$
17.2

 
$
17.2

 
$

 
$

Contingent consideration receivable  
13.8

 

 

 
13.8

Derivative contracts
1.9

 

 
1.9

 

Total assets
32.9

 
17.2

 
1.9

 
13.8

 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 

 
 

 
 

Derivative contracts
11.5

 

 
11.5

 

Contingent consideration payable
475.9

 

 

 
475.9

Total liabilities
$
487.4

 
$

 
$
11.5

 
$
475.9

Marketable equity securities are included within Investments in the Unaudited Consolidated Balance Sheets. Contingent consideration receivable is included within Prepaid expenses and Other current assets and Other non-current assets in the Unaudited Consolidated Balance Sheets. Contingent consideration payable is included within Other current liabilities and Other non-current liabilities in the Unaudited Consolidated Balance Sheets. For a discussion of the Company's derivative arrangements, see Note 13, Financial Instruments, to these Unaudited Consolidated Financial Statements.
Certain estimates and judgments were required to develop the fair value amounts. The estimated fair value amounts shown above are not necessarily indicative of the amounts that the Company would realize upon disposition, nor do they indicate the Company’s intent or ability to dispose of the financial instrument. 
The following methods and assumptions were used to estimate the fair value of each material class of financial instrument:
Marketable equity securities: the fair values of marketable equity securities are estimated based on quoted market prices for those investments.
Marketable debt securities: the fair values of debt securities are obtained from pricing services or broker/dealers who either use quoted prices in an active market or proprietary pricing applications, which include observable market information for like or same securities.
Contingent consideration receivable: the fair value of the contingent consideration receivable has been estimated using the income approach (using a probability weighted discounted cash flow method).
Derivative contracts: the fair values of the swap and forward foreign exchange contracts have been determined using the month-end interest rate and foreign exchange rates, respectively.
Contingent consideration payable: the fair value of the contingent consideration payable has been estimated using the income approach (using a probability weighted discounted cash flow method).
Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
The following table provides a roll forward of the fair values of our contingent consideration receivable and payables which include Level 3 measurements:
Contingent consideration receivable  
 

 
 

(in millions)  
2016
 
2015
Balance at January 1,
$
13.8

 
$
15.9

Change in fair value included in earnings
3.6

 
9.8

Other
(1.7
)
 
(10.8
)
Balance at September 30,
$
15.7

 
$
14.9


31


Contingent consideration payable  
 

 
 

(in millions)
2016
 
2015
Balance at January 1,
$
475.9

 
$
629.9

Additions
557.0

 
92.8

Change in fair value included in earnings
(34.8
)
 
(196.5
)
Other
(1.4
)
 
(5.6
)
Balance at September 30,
$
996.7

 
$
520.6

The increase in contingent consideration payable is primarily related to the Company’s acquisition of Dyax as well as contingent consideration payable assumed in the acquisition of Baxalta. Other primarily includes foreign currency adjustments. 
Of the $996.7 million of contingent consideration payable as of September 30, 2016, $48.0 million is recorded within Other current liabilities and $948.7 million is recorded within Other non-current liabilities in the Company’s Unaudited Consolidated Balance Sheets.

32


Quantitative Information about Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3) 
Quantitative information about the Company’s recurring Level 3 fair value measurements is as follows:
Financial assets:
Fair Value at the Measurement Date
At September 30, 2016
 
 
 
 
 
 
 
(in millions, except percentages)
Fair value
 
Valuation
 technique
 
Significant unobservable inputs
 
Range
Contingent consideration receivable
$
15.7

 
Income approach (probability weighted discounted cash flow)
 
• Probability weightings applied to different sales scenarios
 
• 10 to 90%
 
 

 
 
 
• Future forecast consideration receivable based on contractual terms with purchaser
 
• $0 to $23
million
 
 

 
 
 
• Assumed market participant discount rate
 
• 8.4%
Financial liabilities:
Fair Value at the Measurement Date
At September 30, 2016
 
 
 
 
 
 
 
(in millions, except percentages)  
Fair value 
 
Valuation
 technique
 
Significant unobservable inputs
 
Range
Contingent consideration payable
$
996.7

 
Income approach (probability weighted discounted cash flow)
 
• Cumulative probability of milestones being achieved
 
• 4 to 90%
 
 

 
 
 
• Assumed market participant discount rate
 
• 1.2 to 10.5%
 
 

 
 
 
• Periods in which milestones are expected to be achieved
 
• 2016 to 2030
 
 

 
 
 
• Forecast quarterly royalties payable on net sales of relevant products
 
• $3.5 to $7.1
million
Contingent consideration payable represents future milestones and royalties the Company may be required to pay in conjunction with various business combinations and license agreements. 
The fair value of the Company’s contingent consideration receivable and payable could significantly increase or decrease due to changes in certain assumptions which underpin the fair value measurements. Each set of assumptions is specific to the individual contingent consideration receivable or payable.
Financial assets and liabilities that are not measured at fair value on a recurring basis
The carrying amounts and estimated fair values as of September 30, 2016 and December 31, 2015 of the Company’s financial assets and liabilities that are not measured at fair value on a recurring basis are as follows: 

33


 
September 30, 2016
 
December 31, 2015
(in millions)
Carrying amount
 
Fair value
 
Carrying amount
 
Fair value
Financial liabilities:
 

 
 

 
 

 
 

Senior notes
$
12,037.0

 
$
12,080.9

 
$

 
$

Baxalta notes
5,104.4

 
5,467.7

 

 

Capital lease obligation
348.6

 
348.6

 
13.4

 
13.4

The estimated fair values of long-term debt were based upon recent observable market prices and are considered level 2 in the fair value hierarchy. The estimated fair value of capital lease obligations is based on Level 2 inputs. 
The carrying amounts of other financial assets and liabilities approximate their estimated fair value due to their short-term nature, such as liquidity and maturity of these amounts, or because there have been no significant changes since the asset or liability was last re-measured to fair value on a non-recurring basis.
13.
Financial Instruments
Foreign Currency Contracts
Due to the global nature of our operations, portions of the Company’s revenues and operating expenses are recorded in currencies other than the U.S. dollar. The value of revenues and operating expenses measured in U.S. dollars is therefore subject to changes in foreign currency exchange rates. In order to mitigate these changes, the Company uses foreign currency forward contracts to lock in exchange rates associated with a portion of its forecasted international revenues and operating expenses. The main trading currencies of the Company are the U.S. dollar, Euro, Pounds Sterling, Swiss Franc, Canadian dollar and Japanese Yen.
Transactional exposure arises where transactions occur in currencies different to the functional currency of the relevant subsidiary. It is the Company’s policy that these exposures are minimized to the extent practicable by denominating transactions in the subsidiary’s functional currency. Where significant exposures remain, the Company uses foreign exchange contracts (spot, forward and swap contracts) to manage the exposure for balance sheet assets and liabilities that are denominated in currencies different to the functional currency of the relevant subsidiary.
The Company has master netting agreements with a number of counterparties to these foreign exchange contracts and on the occurrence of specified events, the Company has the ability to terminate contracts and settle them with a net payment by one party to the other. The Company has elected to present derivative assets and derivative liabilities on a gross basis in the Unaudited Consolidated Balance Sheet. The Company does not have credit risk related contingent features or collateral linked to the derivatives.
Designated Derivative Instruments
In connection with the acquisition of Baxalta, the Company assumed foreign currency forward contracts and elected to apply hedge accounting. These contracts have been designated as cash flow hedges and accordingly, to the extent effective, any unrealized gains or losses on these foreign currency forward contracts are reported in AOCI. Realized gains and losses for the effective portion of such contracts are recognized in revenue or cost of sales when the sale of product in the currency being hedged is recognized. To the extent ineffective, hedge transaction gains and losses are reported in Other income/(expense), net. The amount of ineffectiveness for the three and nine months ended September 30, 2016 was immaterial.
As of September 30, 2016, the foreign currency forward contracts had a total notional value of $350.0 million with a maximum duration of nine months. The Company did not have any designated forward contracts as of December 31, 2015. As of September 30, 2016, the fair value of these contracts was a net liability of $3.3 million (2015: nil) presented within accounts payable and accrued expenses. The portion of the fair value of these foreign currency forward contracts that was included in AOCI in total equity reflected net losses of $0.1 million as of September 30, 2016. The Company expects all contracts to be settled over the next nine months and any amounts in AOCI to be reported as an adjustment to revenue or cost of sales. The Company considers the impact of its and its counterparties’ credit risk on the fair value of the contracts as well as the ability of each party to execute its contractual obligations. As of September 30, 2016, credit risk did not change the fair value of the Company’s foreign currency forward contracts.

34


Undesignated Derivative Instruments
The Company uses forward contracts to mitigate the foreign currency risk related to certain balance sheet positions, including intercompany and third-party receivables and payables. The Company has not elected hedge accounting for these derivative instruments as the duration of these contracts is typically three months or less. The changes in fair value of these derivatives are reported in earnings. The notional amount of undesignated derivative instruments was $508.8 million and $639.6 million as of September 30, 2016 and 2015, respectively.
The Company also has option contracts assumed from Baxalta that were previously designated as cash flow hedges. The notional amount of these option contracts totaled $26.1 million as of September 30, 2016. Upon acquisition, the Company did not elect to redesignate these option contracts as cash flow hedges. In addition, the company also assumed undesignated forward contracts from Baxalta. The notional amount of these undesignated forward contracts totaled $659.3 million as of September 30, 2016.
As of September 30, 2016, the fair value of these contracts was a net liability of $2.0 million (2015: nil) presented within accounts payable and accrued expenses.
Interest Rate Contracts
The Company is exposed to the risk that its earnings and cash flows could be adversely impacted by fluctuations in benchmark interest rates relating to its debt obligations on which interest is set at floating rates. The Company’s policy is to manage this risk to an acceptable level. The Company is principally exposed to interest rate risk on any borrowings under the Company’s various debt facilities and on part of the senior notes assumed in connection with the acquisition of Baxalta. Interest on each of these debt obligations is set at fixed and/or floating rates, to the extent utilized. Shire’s exposure under these facilities is to changes in U.S. dollar interest rates. For further details related to interest rates on the Company’s various debt facilities, see Note 14, Borrowings and capital lease obligations, to these Unaudited Consolidated Financial Statements.
Designated Derivative Instruments
In connection with the acquisition of Baxalta, the Company assumed interest rate swap contracts on certain borrowing transactions. These interest rate swap contracts were related to the issuance of Baxalta’s Senior Notes with an aggregate notional amount of $1.0 billion, mature in June 2020 and June 2025. Subsequent to the acquisition of Baxalta, the Company redesignated these interest rate swap contracts as fair value hedges, based on their contractual terms, economic conditions, historic operating or accounting policies, and other conditions that existed at the acquisition date. The effective portion of the changes in the fair value of interest rate swap contracts are recorded as a component of the senior notes assumed in connection with the acquisition of Baxalta with the ineffective portion recorded in income. Any net interest payments made or received on the interest rate swap contracts are recognized as a component of interest expense in the Unaudited Consolidated Statements of Operations. For further details related to Baxalta’s Senior Notes, please see Note 14, Borrowings and capital lease obligations, to these Unaudited Consolidated Financial Statements. As of September 30, 2016, the fair value of these contracts was $43.7 million (2015: $nil) presented within other non-current assets. For the nine months ended September 30, 2016, the Company recognized $2.1 million (2015: $nil) of gain related to these contracts, which was recognized as a component of interest expense.
Undesignated Derivative Instruments
During the nine months ended September 30, 2016, the Company entered into interest rate swap contracts with a total notional amount of $5.1 billion related to the November 2015 Facilities Agreement.  The Company has not elected hedge accounting for these contracts. As of September 30, 2016, the fair value of these contracts was $1.1 million (2015: $nil), which is presented within other current liabilities.  For the nine months ended September 30, 2016, the Company recognized $1.1 million (2015: $nil) loss related to these contracts, which was recognized as a component of interest expense.
The following tables summarize the income statement locations and gains and losses on the Company’s designated and undesignated derivative instruments for the nine months ended September 30, 2016. There were no designated derivatives for the nine months ended September 30, 2015.
As of September 30, 2016, the Company had in total 270 swaps and forward foreign exchange contracts.

35


(in millions)
Gain (loss) recognized in OCI
 
Income Statement location
 
Gain (loss) reclassified from AOCI into income
Nine months ended September 30,
2016
 
2015
 
 
 
2016
 
2015
Designated Derivative Instruments
 

 
 

 
 
 
 

 
 

Cash flow hedges
 

 
 

 
 
 
 

 
 

Foreign exchange contracts
$
(0.1
)
 
$

 
Cost of sales
 
$

 
$

(in millions)
Location of gain (loss) in Income Statement
 
 
 
Gain (loss) recognized in income
Nine months ended September 30,
 
 
 
 
2016
 
2015
Fair value hedges
 
 
 
 
 
 
 

 
 

Interest rate contracts
Interest expense
 
 
 
$
2.1

 
$

Undesignated Derivative Instruments
 
 
 
 
 
 
 

 
 

Foreign exchange contracts
Other (expense)/income, net
 
 
 
(50.0
)
 
12.0

Interest rate swap contracts
Interest expense
 
 
 
(1.1
)
 

As of September 30, 2016, $5.0 million of deferred, net after-tax gains on derivative instruments included in AOCI are expected to be recognized in earnings during the next 12 months, coinciding with when the hedged items are expected to impact earnings.
The following table presents the classification and estimated fair value of the Company’s derivative instruments as of September 30, 2016:
 
Derivatives in asset positions
 
Derivatives in liability positions
(in millions)
Balance Sheet location
 
Fair Value
 
Balance Sheet location
 
Fair Value
Designated Derivative Instruments
 
 
 

 
 
 
 

Foreign exchange contracts
Prepaid expenses and other current assets
 
$
2.8

 
Accounts payable and accrued expenses
 
$
6.1

Interest rate contracts
Long term borrowings
 
43.7

 
 
 

 
 
 
$
46.5

 
 
 
$
6.1

Undesignated Derivative Instruments
 
 
 

 
 
 
 

Foreign exchange forward contracts
Prepaid expenses and other current assets
 
$
4.1

 
Accounts payable and accrued expenses
 
$
6.1

Interest rate swap contracts
Prepaid expenses and other current assets
 

 
Accounts payable and accrued expenses
 
1.1

 
 
 
$
50.6

 
 
 
$
13.3


36


As of September 30, 2016, the potential effect of rights to offset associated with the Interest rate swap and foreign exchange forward contracts would be an offset to both assets and liabilities of $7.9 million, resulting in net derivative assets and derivative liabilities of $42.7 million and $5.4 million, respectively.
14.
Borrowings and Capital Lease Obligations
(in millions)
September 30, 2016
 
December 31, 2015
Short term borrowings:
 

 
 

Borrowings under the Revolving Credit Facilities Agreement
$
920.0

 
$
750.0

Borrowings under the November 2015 Facilities Agreement
1,796.3

 

Borrowings under the January 2015 Facilities Agreement

 
750.0

Other borrowings
20.8

 
11.5

 
$
2,737.1

 
$
1,511.5

 
 
 
 
Long term borrowings:
 
 
 
Senior notes
$
12,037.0

 
$

Baxalta notes
5,104.4

 

Borrowings under the November 2015 Facilities Agreement
3,788.3

 

Other borrowings
59.2

 
69.9

Capital lease obligations (long term portion)
348.6

 

 
$
24,074.6

 
$
1,581.4

Capital lease obligations are recorded within other non-current liabilities.
The future payments on debt maturities and capital lease obligations as of September 30, 2016 are as follows:
(in millions)
 

2016 (remaining three months)
$
605.7

2017
2,626.7

2018
3,184.1

2019
3,344.1

2020
1,960.1

2021
3,318.7

Thereafter
9,110.7

Total obligations
24,150.1

Fair value hedges, unamortized bond premium and deferred financing costs
(75.5
)
Total debt and capital lease obligations
$
24,074.6

For a more detailed description of the Company's financing agreements, please see below, as well as Note 15, Borrowings, of the Shire 2015 Form 10-K. 
Senior Notes Issuance
On September 23, 2016, Shire Acquisitions Investments Ireland Designated Activity Company ("SAIIDAC"), a wholly owned subsidiary of the Company, issued senior notes pursuant to a public offering with a total aggregate principal value of $12.1 billion (“SAIIDAC Notes”), guaranteed by Shire plc. SAIIDAC used the net proceeds to fully repay amounts outstanding under the January 2016 Facilities Agreement (discussed below), which was used to finance the cash consideration payable related to the Company’s acquisition of Baxalta. Below is a summary of the SAIIDAC Notes as of September 30, 2016:


37


(in millions, except for percentage information)
Aggregate Amount
 
Coupon Rate
 
Effective interest rate in 2016
 
Carrying amount at September 30, 2016
Fixed-rate notes due 2019
$
3,300.0

 
1.900
%
 
2.05
%
 
3,286.5

Fixed-rate notes due 2021
3,300.0

 
2.400
%
 
2.53
%
 
3,282.4

Fixed-rate notes due 2023
2,500.0

 
2.875
%
 
2.97
%
 
2,487.8

Fixed-rate notes due 2026
3,000.0

 
3.200
%
 
3.30
%
 
2,980.3

 
$
12,100.0

 
 
 
 
 
$
12,037.0


The SAIIDAC Notes are senior unsecured obligations and may be redeemed at the Company's option at the greater of (1) 100% of the principal amount plus accrued and unpaid interest or (2) the sum of the present values of the remaining scheduled payments of interest and principal discounted to the date of redemption on a semi-annual basis at the applicable treasury rate (as defined) plus an incremental margin, plus, in either case, accrued and unpaid interest. The SAIIDAC Notes also contain a change of control provision that may require that the Company offer to purchase the SAIIDAC Notes at a price equal to 101% of the principal amount plus accrued and unpaid interest to the date of purchase under certain circumstances.

The costs associated with this offering of approximately $62.7 million have been recorded as a reduction to the carrying amount of the debt on the Unaudited Consolidated Balance Sheets. These costs will be amortized as additional interest expense using the effective interest rate method over the period from issuance through maturity. The discounts will be amortized as additional interest expense over the period from issuance through maturity using the effective interest rate method. Interest on the SAIIDAC Notes is payable March 23 and September 23 of each year, beginning on March 23, 2017.
Baxalta Senior Notes Guaranteed by Shire
Shire plc guaranteed senior notes issued by Baxalta with a total aggregate principal amount of $5 billion in connection with the Baxalta acquisition (“Baxalta Notes”). Below is a summary of the Baxalta Notes as of September 30, 2016:
(in millions, except for percentage information)
Aggregate Principal
 
Coupon Rate
 
Effective interest rate in 2016
 
Carrying amount at September 30, 2016
Variable-rate notes due 2018
$
375.0

 
LIBOR plus 0.78%

 
1.65
%
 
$
370.9

Fixed-rate notes due 2018
375.0

 
2.000
%
 
2.20
%
 
374.8

Fixed-rate notes due 2020
1,000.0

 
2.875
%
 
2.80
%
 
1,014.8

Fixed-rate notes due 2022
500.0

 
3.600
%
 
3.30
%
 
508.8

Fixed-rate notes due 2025
1,750.0

 
4.000
%
 
3.90
%
 
1,803.0

Fixed-rate notes due 2045
1,000.0

 
5.250
%
 
5.20
%
 
1,032.1

Total assumed Senior Notes
$
5,000.0