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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 March 31, 2017 

Commission File Number: 0-29630
shirelogobluergba12.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
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 April 21, 2017 the number of outstanding ordinary shares of the Registrant was 907,025,186.


1


SHIRE PLC 

Form 10-Q for the Quarterly Period Ended March 31, 2017

Table of Contents
 
Page


2


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, among other things, 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 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, including expected operating efficiencies, cost savings, revenue enhancements, synergies or other benefits at the time anticipated or at all with respect to Shire’s acquisitions, including 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;
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; and

a further list and description of risks, uncertainties and other matters can be found in Shire’s most recent Annual Report on Form 10-K and in Shire’s subsequent Quarterly Reports on Form 10-Q, in each case including those risks outlined

3


in “ITEM 1A: Risk Factors”, and in subsequent reports on Form 8-K and other Securities and Exchange Commission filings, all of which are available on Shire’s website.

All forward-looking statements attributable to the Company or any person acting on its 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, the Company does not undertake any obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.

Trademarks

The Company owns or has rights to trademarks, service marks or trade names that are used in connection with the operation of its business. In addition, its names, logos and website names and addresses are owned by the Company or licensed by the Company. The Company also owns or has the rights to copyrights that protect the content of its 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 the Company will assert, to the fullest extent under applicable law, its rights or the rights of the applicable licensors to these trademarks, service marks, trade names and copyrights.

This Quarterly Report on Form 10-Q may include trademarks, service marks or trade names of other companies. The Company's 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 the Company by, the trademark, service mark or trade name.


4


Part I: Financial Information
Item 1. Financial Statements

SHIRE PLC
CONSOLIDATED BALANCE SHEETS 
(Unaudited, in millions)
 
March 31, 2017
 
December 31, 2016
ASSETS
 
 
 

Current assets:
 

 
 

Cash and cash equivalents
$
369.0

 
$
528.8

Restricted cash
34.1

 
25.6

Accounts receivable, net
2,579.5

 
2,616.5

Inventories
3,345.8

 
3,562.3

Prepaid expenses and other current assets
787.2

 
806.3

Total current assets
7,115.6

 
7,539.5

Investments
226.2

 
191.6

Property, plant and equipment, net
6,496.1

 
6,469.6

Goodwill
19,149.1

 
17,888.2

Intangible assets, net
32,834.1

 
34,697.5

Deferred tax asset
125.5

 
96.7

Other non-current assets
213.5

 
152.3

Total assets
$
66,160.1

 
$
67,035.4

LIABILITIES AND EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued expenses
$
3,551.3

 
$
4,312.4

Short term borrowings and capital leases
3,049.5

 
3,068.0

Other current liabilities
409.6

 
362.9

Total current liabilities
7,010.4

 
7,743.3

Long term borrowings and capital leases
19,495.9

 
19,899.8

Deferred tax liability
7,752.6

 
8,322.7

Other non-current liabilities
2,169.3

 
2,121.6

Total liabilities
36,428.2

 
38,087.4

Commitments and contingencies


 


Equity:
 
 
 
Common stock of 5p par value; 1,500 shares authorized; and 914.1 shares issued and outstanding (2016: 1,500 shares authorized; and 912.2 shares issued and outstanding)
81.4

 
81.3

Additional paid-in capital
24,850.9

 
24,740.9

Treasury stock: 8.4 shares (2016: 9.1 shares)
(283.0
)
 
(301.9
)
Accumulated other comprehensive loss
(1,227.1
)
 
(1,497.6
)
Retained earnings
6,309.7

 
5,925.3

Total equity
29,731.9

 
28,948.0

Total liabilities and equity
$
66,160.1

 
$
67,035.4

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
March 31,
 
2017
 
2016
Revenues:
 
 
 
Product sales
$
3,412.3

 
$
1,627.3

Royalties and other revenues  
160.0

 
82.0

Total revenues
3,572.3

 
1,709.3

Costs and expenses:
 

 
 

Cost of sales
1,327.0

 
248.6

Research and development
379.3

 
217.1

Selling, general and administrative
888.9

 
474.9

Amortization of acquired intangible assets
364.0

 
134.6

Integration and acquisition costs
116.0

 
91.1

Reorganization costs
5.5

 
3.3

Gain on sale of product rights
(5.5
)
 
(4.2
)
Total operating expenses
3,075.2

 
1,165.4

 
 
 
 
Operating income from continuing operations
497.1

 
543.9

 
 
 
 
Interest income
3.1

 
1.0

Interest expense
(142.3
)
 
(44.7
)
Other income/(expense), net
4.5

 
(8.5
)
Total other expense, net
(134.7
)
 
(52.2
)
 
 
 
 
Income from continuing operations before income taxes and equity in losses of equity method investees
362.4

 
491.7

Income taxes
(6.8
)
 
(82.1
)
Equity in losses of equity method investees, net of taxes
(0.8
)
 
(0.1
)
Income from continuing operations, net of taxes
354.8

 
409.5

Gain from discontinued operations, net of taxes
20.2

 
9.5

Net income
$
375.0

 
$
419.0


6


SHIRE PLC
CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
(Unaudited, in millions, except per share amounts)
 
Three months ended
March 31,
 
2017
 
2016
Earnings per Ordinary Share – basic
 

 
 

Earnings from continuing operations  
$
0.39

 
$
0.69

Earnings from discontinued operations
0.02

 
0.02

Earnings per Ordinary Share – basic
$
0.41

 
$
0.71

 
 
 
 
Earnings per Ordinary Share – diluted
 

 
 

Earnings from continuing operations  
$
0.39

 
$
0.69

Earnings from discontinued operations
0.02

 
0.02

Earnings per Ordinary Share – diluted
$
0.41

 
$
0.71

 
 
 
 
Weighted average number of shares:
 

 
 

Basic  
904.1

 
591.7

Diluted
911.8

 
593.3

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


7


SHIRE PLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 
(Unaudited, in millions)
 
Three months ended
March 31,
 
2017
 
2016
Net income
$
375.0

 
$
419.0

Other comprehensive income:
 

 
 

Foreign currency translation adjustments
265.5

 
24.7

Pension and other employee benefits (net of tax benefit of $0.4 and $nil)
7.4

 

Unrealized gain/(loss) on available-for-sale securities (net of tax expense of $2.2 and $nil)
2.1

 
(0.3
)
Hedging activities (net of tax benefit of $2.7 and $nil)
(4.5
)
 

Comprehensive income
$
645.5

 
$
443.4


The components of Accumulated other comprehensive loss as of March 31, 2017 and December 31, 2016 are as follows:
 
March 31, 2017
 
December 31, 2016
Foreign currency translation adjustments
$
(1,239.9
)
 
$
(1,505.4
)
Pension and other employee benefits, net of taxes
2.2

 
(5.2
)
Unrealized holding gain on available-for-sale securities, net of taxes
8.7

 
6.6

Hedging activities, net of taxes
1.9

 
6.4

Accumulated other comprehensive loss
$
(1,227.1
)
 
$
(1,497.6
)
 

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, 2017
912.2

 
$
81.3

 
$
24,740.9

 
$
(301.9
)
 
$
(1,497.6
)
 
$
5,925.3

 
$
28,948.0

Net income

 

 

 

 

 
375.0

 
375.0

Other comprehensive income net of tax

 

 

 

 
270.5

 

 
270.5

Shares issued under employee benefit plans and other
1.9

 
0.1

 
46.6

 

 

 

 
46.7

Cumulative-effect adjustment from adoption of ASU 2016-09

 

 
10.7

 

 

 
28.3

 
39.0

Share-based compensation

 

 
52.7

 

 

 

 
52.7

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

 

 

 
18.9

 

 
(18.9
)
 

As of March 31, 2017
914.1

 
$
81.4

 
$
24,850.9

 
$
(283.0
)
 
$
(1,227.1
)
 
$
6,309.7

 
$
29,731.9

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


9


SHIRE PLC 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
 
Three months ended March 31,
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 

 
 

Net income
$
375.0

 
$
419.0

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
    Depreciation and amortization
486.9

 
168.9

    Share based compensation
52.7

 
18.3

    Amortization of deferred financing fees
3.2

 
20.0

    Expense related to the unwind of inventory fair value adjustments
480.4

 
12.8

    Change in deferred taxes
(135.5
)
 
(10.1
)
    Change in fair value of contingent consideration
(3.5
)
 
11.4

    Other, net
26.8

 
(14.5
)
Changes in operating assets and liabilities:
 
 
 
    Increase in accounts receivable
(35.3
)
 
(100.9
)
    Increase in sales deduction accrual
17.5

 
73.6

    Increase in inventory
(151.8
)
 
(32.2
)
    Decrease/(increase) in prepayments and other assets
14.2

 
(22.2
)
    Decrease in accounts payable and other liabilities
(671.5
)
 
(154.6
)
Net cash provided by operating activities
459.1

 
389.5


 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of PP&E and non-current investments
(212.5
)
 
(51.6
)
Purchases of businesses, net of cash acquired

 
(5,692.8
)
Movements in restricted cash
(8.5
)
 
64.8

Other, net
1.2

 
5.5

Net cash used in investing activities
(219.8
)
 
(5,674.1
)

10

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

 
Three months ended
March 31,
 
2017
 
2016
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Proceeds from revolving line of credit, long term and short term borrowings
1,401.9

 
6,305.0

Repayment of revolving line of credit, long term and short term borrowings
(1,825.7
)
 
(995.1
)
Debt issuance costs

 
(93.8
)
Proceeds from exercise of options
22.1

 
0.1

Other, net
(0.1
)
 
0.9

Net cash (used in)/provided by financing activities
(401.8
)
 
5,217.1

Effect of foreign exchange rate changes on cash and cash equivalents
2.7

 
1.0

Net decrease in cash and cash equivalents
(159.8
)
 
(66.5
)
Cash and cash equivalents at beginning of period
$
528.8

 
$
135.5

Cash and cash equivalents at end of period
$
369.0

 
$
69.0

 
 
 
 
Supplemental information:
 
 
 
 
Three months ended
March 31,
 
2017
 
2016
Interest paid
108.2

 
13.9

Income taxes paid, net
23.1

 
89.6


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 Consolidated Balance Sheet as of December 31, 2016 was derived from the audited Consolidated Financial Statements as of that date.

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, 2016, as filed with the SEC on February 22, 2017.

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, 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 the comparative period to conform to the current classification.
 
Use of Estimates

The preparation of Financial Statements, in conformity with U.S. GAAP and SEC regulations, requires management to make estimates, judgments and assumptions that affect the reported and disclosed amounts of assets, liabilities and equity at the date of the Unaudited Consolidated Financial Statements and reported amounts of revenues and expenses during the period. On an on-going basis, the Company evaluates its estimates, judgments and methodologies. Estimates are based on historical experience, current conditions and on various other assumptions that are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets, liabilities and equity and the amounts of revenues and expenses. Actual results may differ from these estimates under different assumptions or conditions.

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.


12


Adopted during the current period 

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. The Company adopted this standard as of January 1, 2017, which did not impact the Company's financial position or results of operations.

Share-Based Payment Accounting

In March 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The new standard 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 and allows a one-time accounting policy election to account for forfeitures as they occur. The new standard is effective starting January 1, 2017.

The Company adopted ASU 2016-09 in the first quarter of 2017. Before adoption, excess tax benefits or deficiencies from the Company's equity awards were recorded as Additional paid-in capital in its Consolidated Balance Sheets. Upon adoption, the Company recorded any excess tax benefits or deficiencies from its equity awards in its Consolidated Statements of Operations in the reporting periods in which vesting or settlement occurs.

Amendments related to accounting for excess tax benefits have been adopted prospectively, resulting in recognition of excess tax benefits against Income taxes rather than Additional paid-in capital of $11.5 million for the three months ended March 31, 2017.

As a result of the adoption, the Company recorded an adjustment to Retained earnings of $39.0 million to recognize net operating loss carryforwards attributable to excess tax benefits on stock compensation that had not been previously recognized to Additional paid-in capital.

Excess tax benefits for share-based payments are now included in Net cash provided by operating activities rather than Net cash provided by financing activities. The changes have been applied prospectively in accordance with the ASU and prior periods have not been adjusted.

Upon adoption of ASU 2016-09, the Company elected to account for forfeitures in relation to service conditions as they occur. The change was applied on a modified retrospective basis with a cumulative effect adjustment to Retained earnings of $10.7 million as of January 1, 2017.

Definition of a Business

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This new standard clarifies the definition of a business and provides guidance to determine when an integrated set of assets and activities is not a business. The Company adopted this standard prospectively on January 1, 2017.

To be adopted in future periods 

Simplifying the Test for Goodwill Impairment

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test of Goodwill Impairment. This new standard simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. This standard will be effective for the Company as of January 1, 2020, with early adoption permitted for annual goodwill impairment tests performed after January 1, 2017. The Company does not expect the adoption of this standard to have a material impact on its financial position and results of operations.


13


Revenue from Contracts with Customers

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which 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 ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which 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.

The FASB has subsequently issued five additional ASUs amending the guidance in Topic 606, each with the same effective date and transition date of January 1, 2018. This amended guidance has been considered in the Company’s overall assessment of the new standard.

Shire will adopt this standard on the effective date 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. The Company has identified two primary revenue streams from contracts with customers as part of its initial assessment: 1) product sales and 2) licensing arrangements. Shire is in the process of evaluating these contracts and is not yet able to estimate the anticipated impact to the Company’s financial statements from the application of the new standard.

Financial Instrument Accounting

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new standard 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 the results of operations. This 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 ASU No. 2016-02, Leases (Topic 842). The new accounting guidance 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 will be 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.

Statement of Cash Flows

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The new standard clarifies certain aspects of the statement of cash flows, and aims to reduce diversity in practice regarding how certain transactions are classified in the statement of cash flows. This standard will be 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.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The new guidance is intended to reduce diversity in the presentation of restricted cash and restricted cash equivalents in the statement.  The guidance requires that restricted cash and restricted cash equivalents be included as components of total cash and cash equivalents as presented on the statement of cash flows. This standard will be effective for the Company as of January 1, 2018. The adoption of this guidance is not expected to have a significant impact on the Company's Consolidated Statements of Cash Flows.


14


Income Taxes

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers Other than Inventory. This standard removes the current exception in U.S. GAAP prohibiting entities from recognizing current and deferred income tax expenses or benefits related to transfer of assets, other than inventory, within the consolidated entity. The current exception to defer the recognition of any tax impact on the transfer of inventory within the consolidated entity until it is sold to a third party remains unaffected. This standard will be effective for the Company as of January 1, 2018, with the early adoption permitted. 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.

Retirement Benefits Income Statement Presentation

In March 2017, the FASB issued ASU 2017-07 Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The standard amends the income statement presentation of the components of net periodic benefit cost for defined benefit pension and other postretirement plans. The standard requires entities to (1) disaggregate the current-service-cost component from the other components of net benefit cost (the “other components”) and present it with other current compensation costs for related employees in the income statement and (2) present the other components elsewhere in the income statement and outside of income from operations if such a subtotal is presented. The standard also requires entities to disclose the income statement lines that contain the other components if they are not presented on appropriately described separate lines.

This standard will be effective for the Company as of January 1, 2018. The Company does not expect the adoption of this standard to have a material impact on its financial position and results of operations.



15


2.    Business Combinations

Acquisition of 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, immunology and oncology.

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
508.8

Contingent consideration payable
165.0

Total Purchase Consideration
$
32,393.7


The acquisition of Baxalta was accounted for as a business combination using the acquisition method of accounting. 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, refer to Note 27, Share-based Compensation Plans, of Shire's 2016 Form 10-K. 

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.

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, is outlined below.
(In millions)
Preliminary value as of acquisition date (as previously reported as of December 31, 2016)
 
Measurement period adjustments
 
Preliminary values as of March 31, 2017
ASSETS
 
 
 
 
 

Current assets:
 
 
 
 
 

Cash and cash equivalents
$
583.2

 
$

 
$
583.2

Accounts receivable
1,069.7

 
(95.0
)
 
974.7

Inventories
3,893.4

 
97.8

 
3,991.2

Other current assets
576.0

 

 
576.0

Total current assets
6,122.3

 
2.8

 
6,125.1

Property, plant and equipment
5,452.7

 
(38.0
)
 
5,414.7

Investments
128.2

 

 
128.2

Goodwill
11,422.4

 
1,213.8

 
12,636.2

Intangible assets
 
 


 
 

Currently marketed products
21,995.0

 
(1,105.0
)
 
20,890.0

In-Process Research and Development ("IPR&D")
730.0

 
(580.0
)
 
150.0

Contract based arrangements
42.2

 

 
42.2

Other non-current assets
155.0

 
62.4

 
217.4

Total assets
$
46,047.8

 
$
(444.0
)
 
$
45,603.8

LIABILITIES
 
 


 
 

Current liabilities:
 
 


 
 

Accounts payable and accrued expenses
$
1,321.9

 
$
(15.5
)
 
$
1,306.4

Other current liabilities
354.4

 
7.5

 
361.9

Long-term borrowings
5,424.9

 

 
5,424.9

Deferred tax liability
5,445.3

 
(432.0
)
 
5,013.3

Other non-current liabilities
1,103.6

 

 
1,103.6

Total liabilities
$
13,650.1

 
$
(440.0
)
 
$
13,210.1

 
 
 


 
 

Preliminary fair value of identifiable assets acquired and liabilities assumed
$
32,397.7

 
$
(4.0
)
 
$
32,393.7

 
 
 


 
 
Consideration
 
 


 
 

Preliminary fair value of purchase consideration
$
32,397.7

 
$
(4.0
)
 
$
32,393.7


The measurement period adjustments for Intangible assets reflect changes in the estimated fair value of currently marketed products and IPR&D. Changes are mainly related to finalizing the unit of account judgments and other changes in estimates including Cost of sales allocation. The measurement period adjustments for Inventory primarily reflect refinements in the estimated selling price of inventory. The changes in the estimated fair values are primarily to more accurately 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.
As a result of measurement period adjustments related to the change in fair value of currently marketed products and inventory, a charge of $95.6 million was recognized in Cost of sales and a benefit of $27.8 million was recognized in Amortization of acquired intangible assets, respectively, in the Company's Unaudited Consolidated Statements of Operations for the three months ended March 31, 2017. These adjustments would have been recorded during the year ended December 31, 2016 if these adjustments had been recognized as of 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 March 31, 2017, certain items related to the measurement of PP&E, Inventory, Intangible assets and current and deferred taxes have not been finalized and may

17


be subject to change as additional information is received and certain tax returns are finalized. The finalization of these matters and any additional information received that existed as of acquisition date may result in changes to the underlying assets, liabilities 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 preliminary 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. The preliminary useful lives for currently marketed products were determined based upon the remaining useful economic lives of the assets that are expected to contribute to future cash flows.

Currently marketed products totaling $20,890.0 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 6 to 23 years (weighted average 21 years), with amortization being recorded on a straight-line basis.

IPR&D intangible assets totaling $150.0 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 9.5% 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 $12,636.2 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.

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 preliminary fair value of the assumed contingent consideration to be $165.0 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. 

Inventory

The preliminary estimated fair value of work-in-process and finished goods inventory was determined utilizing the Net realizable value, based on the expected selling price of the inventory, adjusted for incremental costs to complete the manufacturing process and for direct selling efforts, as well as for a reasonable profit allowance. The preliminary

18


estimated fair value of raw material inventory was valued at replacement cost, which is equal to the value a market participant would pay to acquire the inventory.

The fair value adjustment related to inventory is expensed based on the expected product-specific inventory utilization, which is reviewed on a periodic basis and is recorded within Cost of sales in the Company's Unaudited Consolidated Statements of Operations.

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

Integration and acquisition costs

In the three months ended March 31, 2017, the Company expensed $118.5 million 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.

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 March 31,
(In millions, except per share amounts)
2016
Revenues
$
3,257.3

Net (loss)/income from continuing operations
305.1

Per share amounts:
 

Net (loss)/income from continuing operations per share - basic
$
0.52

Net (loss)/income from continuing operations per share - diluted
$
0.51

 

The unaudited pro forma financial information above reflects the following pro forma adjustments: 

(i)
an adjustment to increase net income for the three months ended March 31, 2016 by $39.5 million to eliminate integration and acquisition related costs incurred by Shire and Baxalta;
(ii)
an adjustment to decrease net income for the three months ended March 31, 2016 by $46.9 million to reflect the expense related to the unwind of inventory fair value adjustments as inventory is sold;
(iii)
an adjustment to increase amortization expense for the three months ended March 31, 2016 by $181.8 million related to the identifiable intangible assets acquired; and
(iv)
an adjustment to decrease net income for the three months ended March 31, 2016 by $60.3 million 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”).


19


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.

The acquisition of Dyax was accounted for as a business combination using the acquisition method. The acquisition-date fair value consideration was $6,330.0 million, comprising cash paid on closing of $5,934.0 million and the 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 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 purchase price allocation for the acquisition of Dyax was finalized in the first quarter of 2017. There were no adjustments made to the fair values during the period three months ended March 31, 2017. The allocation of the total purchase price is outlined below.
(In millions)
Fair value
ASSETS
 

Current assets:
 

Cash and cash equivalents
$
241.2

Accounts receivable
22.5

Inventories
20.2

Other current assets
8.1

Total current assets
292.0

Property, plant and equipment
5.8

Goodwill
2,702.1

Intangible assets
 

Currently marketed projects
135.0

IPR&D
4,100.0

Contract based royalty arrangements
425.0

Other non-current assets
28.6

Total assets
$
7,688.5

LIABILITIES
 

Current liabilities:
 

Accounts payable and accrued expenses
$
30.0

Other current liabilities
1.7

Deferred tax liability
1,325.4

Other non-current liabilities
1.4

Total liabilities
1,358.5

 
 

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

 
 
Consideration
 

Fair value of purchase consideration
$
6,330.0


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.

The estimated useful life of the KALBITOR intangible asset is 18 years, with amortization being recorded on a straight-line basis. 


20


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 intangible assets have been discounted at 9%

Royalty rights 

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 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 $2,702.1 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. 

Integration and acquisition costs

In the three months ended March 31, 2017, the Company had immaterial Integration and acquisition costs in relation to Dyax 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 March 31,
(In millions, except per share amounts)
2016
Revenues
$
1,715.2

Net income from continuing operations
401.6

Per share amounts:
 

Net income from continuing operations per share - basic
$
0.68

Net income from continuing operations per share - diluted
$
0.68



21


The unaudited pro forma financial information above reflects the following pro forma adjustments:

(i)
an adjustment to increase net income for the three months ended March 31, 2016 by $99.2 million to eliminate acquisition related costs incurred by Shire and Dyax and
(ii)
an adjustment to increase amortization expense for the three months ended March 31, 2016 by $1.3 million related to the identifiable intangible assets acquired.

The adjustments above are stated net of their tax effects, where applicable.

3.    Integration and Acquisition Costs

For the three months ended March 31, 2017, Shire recorded Integration and acquisition costs of $116.0 million primarily due to the acquisition and integration of Baxalta. These costs include $36.9 million of employee severance and acceleration of stock compensation, $35.2 million of third-party professional fees and $24.5 million of expenses associated with facility consolidations. The Company expects the majority of those expenses, except for certain costs related to facility consolidations, to be paid within the next 12 months.

As part of the Company’s activities to integrate Baxalta, it terminated certain employees and announced plans to close certain offices, which includes lease termination costs. The integration of Baxalta is estimated to be completed by mid to late 2019 and the Company is continuing to evaluate the total costs expected to be incurred.

The following table summarizes the type and amount of integration costs recorded as of March 31, 2017:
(In millions)
Severance and employee benefits
 
Lease terminations
 
Total
As of January 1,
$
74.0

 
$

 
$
74.0

Amount charged to integration costs
23.2

 
24.5

 
47.7

Paid/utilized
(30.9
)
 
(2.4
)
 
(33.3
)
As of March 31,
$
66.3

 
$
22.1

 
$
88.4


For the three months ended March 31, 2016, Shire recorded integration and acquisition costs of $91.1 million primarily related to the acquisition and integration of Dyax and the proposed acquisition of Baxalta. These costs primarily consist of $58.5 million acquisition costs including legal, investment banking and other transaction-related fees, as well as $11.0 million of employee severance and acceleration of stock compensation, $10.0 million of third-party professional fees and an $11.4 million change in fair value of contingent consideration. The Company did not have any reserve related to employee termination for the three months ended March 31, 2016.

4.    Results of Discontinued Operations

Following the divestment 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 months ended March 31, 2017, the Company recorded a gain of $20.2 million (net of tax expense of $11.6 million) primarily related to the release of escrow to Shire and legal contingencies related to the divested DERMAGRAFT business.

In January 2017, Shire entered into a final settlement agreement with the Department of Justice ("DOJ") in the amount of $350.0 million, plus interest which was accrued in 2016. Shire paid $345.5 million of the settlement amount during three months ended March 31, 2017 and anticipates the remaining payment will be made in the second quarter of 2017.

After the civil settlement with the DOJ had been finalized, Shire and ABH’s equity holders entered into a settlement agreement and ABH’s equity holders released the $37.5 million escrow to Shire. Shire released the claims against ABH equity holders upon receiving the entire amount held in escrow.

For a more detailed description of the DERMAGRAFT legal proceedings, refer to Note 25, Legal and Other Proceedings, of Shire's 2016 Form 10-K.

22



For the three months ended March 31, 2016, the Company recorded a gain of $9.5 million (net of tax expense of $5.5 million) related to costs associated with the divestment.
 
5.    Accounts Receivable, Net

Accounts receivable as of March 31, 2017 of $2,579.5 million (December 31, 2016: $2,616.5 million), are stated at the invoiced amount and net of reserve for discounts and doubtful accounts of $160.3 million (December 31, 2016: $169.6 million).

Reserve for discounts and doubtful accounts:
(In millions)
2017
 
2016
As of January 1,
$
169.6

 
$
55.8

Provision charged to operations
295.2

 
149.4

Payments/credits
(304.5
)
 
(123.3
)
As of March 31,
$
160.3

 
$
81.9

 

As of March 31, 2017, accounts receivable included $89.4 million (December 31, 2016: $102.2 million) related to royalty receivable.

6.    Inventories

Inventories are stated at the lower of cost and net realizable value. Inventories comprise:
(In millions)
March 31, 2017
 
December 31, 2016
Finished goods
$
1,093.0

 
$
1,380.0

Work-in-progress
1,541.7

 
1,491.0

Raw materials
711.1

 
691.3

 
$
3,345.8

 
$
3,562.3

 
For a more detailed description of inventories acquired, refer to Note 2, Business Combinations, to these Unaudited Consolidated Financial Statements.

7.    Property, Plant and Equipment, Net

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)
March 31, 2017
 
December 31, 2016
Land
$
339.2

 
$
337.9

Buildings and leasehold improvements
1,943.0

 
1,915.4

Machinery, equipment and other
2,642.6

 
2,547.2

Assets under construction
2,642.8

 
2,632.5

   Total property, plant and equipment at cost
7,567.6

 
7,433.0

Less: Accumulated depreciation
(1,071.5
)
 
(963.4
)
   Property, plant and equipment, net
$
6,496.1

 
$
6,469.6


Depreciation expense for the three months ended March 31, 2017 was $122.9 million and for the three months ended March 31, 2016 was $34.3 million.

23


8.    Intangible Assets

The following table summarizes the Company's intangible assets:
(In millions)
Currently marketed products
 
IPR&D
 
Other
intangible
assets
 
Total
March 31, 2017
 

 
 

 
 

 
 

Gross acquired intangible assets
$
30,337.5

 
$
5,127.2

 
$
842.2

 
$
36,306.9

Accumulated amortization
(3,242.8
)
 

 
(230.0
)
 
(3,472.8
)
Intangible assets, net
$
27,094.7


$
5,127.2


$
612.2


$
32,834.1

 
 
 
 
 
 
 
 
December 31, 2016
 

 
 

 
 

 
 

Gross acquired intangible assets
$
31,217.5

 
$
5,746.6

 
$
842.2

 
$
37,806.3

Accumulated amortization
(2,908.6
)
 

 
(200.2
)
 
(3,108.8
)
Intangible assets, net
$
28,308.9


$
5,746.6


$
642.0


$
34,697.5


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 three months ended March 31, 2017 and 2016 is shown in the table below: 
(In millions)
2017
 
2016
As of January 1,
$
34,697.5

 
$
9,173.3

Acquisitions
(1,685.0
)
 
4,660.9

Amortization charged
(364.0
)
 
(134.6
)
Foreign currency translation
185.6

 
16.0

As of March 31,
$
32,834.1

 
$
13,715.6

 

The decrease in Intangible assets during the three months ended March 31, 2017 relates to the measurement period adjustments of the acquisition of Baxalta. For a more detailed description of measurement period adjustments, refer to Note 2, Business Combinations, to these Unaudited Consolidated Financial Statements.

In connection with the acquisition of Baxalta, the Company acquired IP rights related to currently marketed products of $20,890.0 million, IPR&D assets of $150.0 million and other contract rights of $42.2 million. For a more detailed description of this acquisition, refer to 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, refer to 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.


24


9.    Goodwill

The following table provides a roll-forward of the goodwill balance:
(In millions)
2017
 
2016
As of January 1,
$
17,888.2

 
$
4,147.8

Acquisitions
1,213.8

 
2,729.5

Foreign currency translation
47.1

 
4.6

As of March 31,
$
19,149.1

 
$
6,881.9


The increase in goodwill during the three months ended March 31, 2017 related to the measurement period adjustments of the acquisition of Baxalta. For a more detailed description of measurement period adjustments, refer to Note 2, Business Combinations, to these Unaudited Consolidated Financial Statements.

10.    Fair Value Measurement

Assets and liabilities that are measured at fair value on a recurring basis

As of March 31, 2017 and December 31, 2016, 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
As of March 31, 2017
 

 
 

 
 

 
 

Financial assets:
 

 
 

 
 

 
 

Marketable equity securities
$
70.8

 
$
70.8

 
$

 
$

Marketable debt securities
15.5

 
3.5

 
12.0

 

Contingent consideration receivable  
16.5

 

 

 
16.5

Derivative instruments
9.9

 

 
9.9

 

Total assets
$
112.7

 
$
74.3

 
$
21.9

 
$
16.5

 


 
 
 
 
 
 
Financial liabilities:


 
 

 
 

 
 

Joint venture net written option
$
25.0

 
$

 
$

 
$
25.0

Derivative instruments
9.9

 

 
9.9

 

Contingent consideration payable
1,051.2

 

 

 
1,051.2

Total liabilities
$
1,086.1

 
$

 
$
9.9

 
$
1,076.2

(In millions)
Total
 
Level 1
 
Level 2
 
Level 3
As of December 31, 2016
 

 
 

 
 

 
 

Financial assets:
 

 
 

 
 

 
 

Marketable equity securities
$
65.8

 
$
65.8

 
$

 
$

Marketable debt securities
15.5

 
3.6

 
11.9

 

Contingent consideration receivable  
15.6

 

 

 
15.6

Derivative contracts
18.0

 

 
18.0

 

Total assets
$
114.9

 
$
69.4

 
$
29.9

 
$
15.6

 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 

 
 

 
 

Derivative contracts
$
8.3

 
$

 
$
8.3

 
$

Contingent consideration payable
1,058.0

 

 

 
1,058.0

Total liabilities
$
1,066.3

 
$

 
$
8.3

 
$
1,058.0


Marketable equity and debt 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-

25


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 information regarding the Company's derivative arrangements, refer to Note 11, 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 the Company's contingent consideration receivable and payables which include Level 3 measurements:
Contingent consideration receivable  
 

 
 

(In millions)  
2017
 
2016
Balance as of January 1,
$
15.6

 
$
13.8

Change in fair value included in earnings
2.3

 
4.2

Other
(1.4
)
 
(2.7
)
Balance as of March 31,
$
16.5

 
$
15.3

Contingent consideration payable  
 

 
 

(In millions)
2017
 
2016
Balance as of January 1,
$
1,058.0

 
$
475.9

Acquisitions
(4.0
)
 
396.4

Change in fair value included in earnings
(3.5
)
 
11.4

Other
0.7

 
(1.2
)
Balance as of March 31,
$
1,051.2

 
$
882.5


In 2016, the increase in contingent consideration payable was related to the Company’s acquisition of Dyax and Baxalta. Other primarily relates to foreign currency adjustments. 

Of the $1,051.2 million of contingent consideration payable as of March 31, 2017, $105.4 million is recorded within Other current liabilities and $945.8 million is recorded within Other non-current liabilities in the Company’s Unaudited Consolidated Balance Sheets.

Joint venture net written option

During the three months ended March 31, 2017, Shire executed option agreements related to a joint venture that provides Shire with a call option on the partner’s investment in joint venture equity and the partner with a put option on its investment in joint venture equity.  The company has recorded a liability of $25.0 million for the net written option based on the estimated fair value of these options as of March 31, 2017 and in the future will re-measure the instrument to fair value through the Consolidated Statements of Operations.  

26



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
As of March 31, 2017
 
 
 
 
 
 
 
(In millions, except %)
Fair value
 
Valuation
 technique
 
Significant unobservable inputs
 
Range
Contingent consideration receivable
$
16.5

 
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 $19.9
million
 
 

 
 
 
• Assumed market participant discount rate
 
• 8.0%
Financial liabilities:
Fair value at the measurement date
As of March 31, 2017
 
 
 
 
 
 
 
(in millions, except %)  
Fair value 
 
Valuation
 technique
 
Significant unobservable inputs
 
Range
Contingent consideration payable
$
1,051.2

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

 
 
 
• Assumed market participant discount rate
 
• 1.8 to 10.5%
 
 

 
 
 
• Periods in which milestones are expected to be achieved
 
• 2017 to 2040
 
 

 
 
 
• Forecast quarterly royalties payable on net sales of relevant products
 
• $0.1 to $7.5
million


27


Financial liabilities:
Fair value at the measurement date
As of March 31, 2017
 
 
 
 
 
 
 
(in millions, except %)  
Fair value 
 
Valuation
 technique
 
Significant unobservable inputs
 
Range
Joint venture net written option
$
25.0

 
Income approach (probability weighted discounted cash flow)
 
• Cash flow scenario probability weighting
 
• 0 to 65%
 
 

 
 
 
• Assumed market participant discount rate
 
• 16%

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 disclosed at fair value

The carrying amounts and estimated fair values as of March 31, 2017 and December 31, 2016 of the Company’s financial assets and liabilities that are not measured at fair value on a recurring basis are as follows: 
 
March 31, 2017
 
December 31, 2016
(In millions)
Carrying amount
 
Fair value
 
Carrying amount
 
Fair value
Financial liabilities:
 

 
 

 
 

 
 

Senior notes
$
12,042.1

 
$
11,802.0

 
$
12,039.2

 
$
11,633.8

Baxalta notes
5,061.4

 
5,155.8

 
5,063.6

 
5,066.5

Capital lease obligation
351.9

 
351.9

 
353.6

 
353.6


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.

11.    Financial Instruments

Foreign Currency Contracts

Due to the global nature of its 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, British pound 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.


28


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 Foreign Currency Derivatives

Certain foreign currency forward 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 table below presents the notional amount, maximum duration and fair value for the designated foreign currency derivatives:
(In millions, except duration)
March 31, 2017
 
December 31, 2016
Notional amount
$
8.9

 
$
78.7

Maximum duration (in months)
3 months

 
6 months

Fair value - net asset
$
0.4

 
$
4.2


The amount of ineffectiveness for the three months ended March 31, 2017 was immaterial. Shire did not have any foreign currency derivatives designated as hedging relationships in the three months ended March 31, 2016.

As of March 31, 2017, the Company expects all contracts to be settled over the next 3 months and $2.0 million of deferred gains 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 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 March 31, 2017, credit risk did not change the fair value of the Company’s foreign currency contracts.

Undesignated Foreign Currency Derivatives

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 table below presents the notional amount, maximum duration and fair value for the undesignated foreign currency derivatives:
(In millions, except duration)
March 31, 2017
 
December 31, 2016
Notional amount
$
1,284.8

 
$
1,309.1

Maximum duration (in months)
3 months

 
3 months

Fair value - net asset
$
3.4

 
$
6.7



29


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 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, refer to Note 12, Borrowings and Capital Leases, to these Unaudited Consolidated Financial Statements.

Designated Interest Rate Derivatives

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 Interest expense. 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.

The table below presents the notional amount, maturity and fair value for the designated interest rate derivatives:
(In millions, except maturity)
March 31, 2017
 
December 31, 2016
Notional amount
$
1,000.0

 
$
1,000.0

Maturity
June 2020 and June 2025

 
June 2020 and June 2025

Fair value - net liability
$
(3.8
)
 
$
(1.2
)

For the three months ended March 31, 2017, the Company recognized losses of $1.2 million as ineffectiveness related to these contracts as a component of Interest expense. Shire did not have any interest rate derivatives designated as hedging relationships in the three months ended March 31, 2016.

Undesignated Interest Rate Derivatives

As of March 31, 2017 and December 31, 2016, the Company did not have any outstanding undesignated interest rate derivate instruments.

Summary of Derivatives

The following tables summarize the income statement locations and gains and losses on the Company’s designated and undesignated derivative instruments:

30


(In millions)
Gain (loss) recognized in OCI
 
Income Statement location
 
Gain (loss) reclassified from AOCI into income
Three months ended
March 31,
2017
 
2016
 
 
 
2017
 
2016
Designated derivative instruments
 

 
 

 
 
 
 

 
 

Cash flow hedges
 

 
 

 
 
 
 

 
 

Foreign exchange contracts
$
(0.6
)
 
$

 
Cost of sales
 
$
6.6

 
$

(In millions)
Income Statement location
 
Gain (loss) recognized in income
Three months ended
March 31,
 
 
2017
 
2016
Fair value hedges
 
 
 

 
 

Interest rate contracts
Interest expense
 
$
(1.2
)
 
$

Undesignated derivative instruments
 
 
 

 
 

Foreign exchange contracts
Other income/(expense), net
 
(15.3
)
 
(24.1
)
Interest rate swap contracts
Interest expense
 

 
(2.0
)

Summary of Derivatives

The following table presents the classification and estimated fair value of derivative instruments:
 
Asset position
 
Liability position
(In millions)
 
 
Fair value
 
 
 
Fair value
 
Balance Sheet location
 
March 31, 2017
December 31, 2016
 
Balance Sheet location
 
March 31, 2017
December 31, 2016
Designated derivative Instruments
 
 
 

 
 
 
 
 

 
Foreign exchange contracts
Prepaid expenses and other current assets
 
$
0.4

$
4.3

 
Accounts payable and accrued expenses
 
$

$
0.1

Interest rate contracts
Long term borrowings
 

0.1

 
Long term borrowings
 
3.8

1.3

 
 
 
$
0.4

$
4.4

 
 
 
$
3.8

$
1.4

Undesignated derivative instruments
 
 
 

 
 
 
 
 

 
Foreign exchange forward contracts
Prepaid expenses and other current assets
 
$
9.5

$
13.6

 
Accounts payable and accrued expenses
 
$
6.1

$
6.9

Total derivative fair value
 
 
$
9.9

$
18.0

 
 
 
$
9.9

$
8.3

Potential effect of rights to offset
 
 
(4.5
)
(1.7
)
 
 
 
(4.5
)
(1.7
)
Net derivative
 
 
$
5.4

$
16.3

 
 
 
$
5.4

$
6.6



31


12.    Borrowings and Capital Leases

(In millions)
March 31, 2017
 
December 31, 2016
Short term borrowings:
 

 
 

Borrowings under the Revolving Credit Facilities Agreement
$
1,030.0

 
$
450.0

Borrowings under the November 2015 Facilities Agreement
1,995.1

 
2,594.8

Other borrowings and capital leases (short term portion)
24.4

 
23.2

 
$
3,049.5

 
$
3,068.0

 
 
 
 
Long term borrowings:
 
 
 
Senior notes
$
12,042.1

 
$
12,039.2

Baxalta notes
5,061.4

 
5,063.6

Borrowings under the November 2015 Facilities Agreement
1,994.1

 
2,391.8

Capital leases (long term portion)
345.3

 
347.2

Other borrowings
53.0

 
58.0

 
$
19,495.9

 
$
19,899.8

 
 
 
 
Total borrowings and capital leases
$
22,545.4

 
$
22,967.8


For a more detailed description of the Company's financing agreements, refer below and to Note 17, Borrowings and Capital Lease Obligations, of Shire's 2016 Form 10-K.
 
Senior Notes

On September 23, 2016, Shire Acquisitions Investments Ireland Designated Activity Company ("SAIIDAC"), a wholly owned subsidiary of Shire plc, issued unsecured senior notes with a total aggregate principal value of $12.1 billion (“SAIIDAC Notes”), guaranteed by Shire plc and, as of December 1, 2016, by Baxalta. Below is a summary of the SAIIDAC Notes as of March 31, 2017:
(In millions, except %)
Aggregate amount
 
Coupon rate
 
Effective interest rate in 2017
 
Carrying amount as of March 31, 2017
Fixed-rate notes due 2019
$
3,300.0

 
1.900
%
 
2.05
%
 
3,288.6

Fixed-rate notes due 2021
3,300.0

 
2.400
%
 
2.53
%
 
3,283.8

Fixed-rate notes due 2023
2,500.0

 
2.875
%
 
2.97
%
 
2,488.4

Fixed-rate notes due 2026
3,000.0

 
3.200
%
 
3.30
%
 
2,981.3

 
$
12,100.0

 
 
 
 
 
$
12,042.1


As of March 31, 2017, there was $57.9 million of debt issuance costs and discount recorded as a reduction of the carrying amount of debt. These costs will be amortized as additional interest expense using the effective interest rate method over the period from issuance through maturity. For further details on the SAIIDAC Notes, refer to Note 17, Borrowings and Capital Lease Obligations, of Shire's 2016 Form 10-K.


32


Baxalta Notes

Shire plc guaranteed senior notes issued by Baxalta with a total aggregate principal amount of $5.0 billion in connection with the acquisition of Baxalta (“Baxalta Notes”). Below is a summary of the Baxalta Notes as of March 31, 2017:
(In millions, except %)
Aggregate principal
 
Coupon rate
 
Effective interest rate in 2017
 
Carrying amount as of March 31, 2017
Variable-rate notes due 2018
$
375.0

 
LIBOR plus 0.78%

 
2.40
%
 
$
372.2

Fixed-rate notes due 2018
375.0

 
2.000
%
 
2.10
%
 
374.8

Fixed-rate notes due 2020
1,000.0

 
2.875
%
 
2.90
%
 
1,003.5

Fixed-rate notes due 2022
500.0

 
3.600
%
 
3.30
%
 
508.0

Fixed-rate notes due 2025
1,750.0

 
4.000
%
 
4.10
%
 
1,771.4

Fixed-rate notes due 2045
1,000.0

 
5.250
%
 
5.20
%
 
1,031.5

Total assumed Senior Notes
$
5,000.0

 
 

 
 

 
$
5,061.4

 

The effective interest rates above exclude the effect of any related interest rate swaps. The book values above include any premiums and adjustments related to hedging instruments. For further details related to the interest rate derivative contracts, please see Note 11, Financial Instruments, to these Unaudited Consolidated Financial Statements.

Revolving Credit Facilities Agreement

On December 12, 2014, Shire entered into a $2.1 billion revolving credit facilities agreement (the “RCF”) with a number of financial institutions. As of March 31, 2017, the Company utilized $1,030.0 million of the RCF. The RCF, which terminates on December 12, 2021, may be used for financing the general corporate purposes of Shire. The RCF incorporates a $250.0 million U.S. dollar and Euro swingline facility operating as a sub-limit thereof.

Term Loan Facilities Agreements

November 2015 Facilities Agreement

On November 2, 2015, Shire entered into a $5.6 billion facilities agreement (the “November 2015 Facilities Agreement”), which is comprised of three amortizing credit facilities with the following amounts outstanding as of March 31, 2017, and their respective maturity dates:
(In millions)
Amount outstanding
 
Maturity
November 2015 Facility A
$
400.0

 
November 2, 2017
November 2015 Facility B
1,200.0

 
November 2, 2017
November 2015 Facility C
2,400.0

 
November 2, 2018
Total November 2015 Facilities
$
4,000.0

 
 

During the first quarter of 2017, the Company made $1.0 billion of scheduled and advance repayments under the November 2015 Facility B; consequently, $4.0 billion is outstanding as of March 31, 2017.

Short-term uncommitted lines of credit (“Credit lines”) 

Shire has access to various Credit lines from a number of banks which are available to be utilized from time to time to provide short-term cash management flexibility. These Credit lines can be withdrawn by the banks at any time. The Credit lines are not relied upon for core liquidity. As of March 31, 2017, these Credit lines were not utilized.


33


Capital Lease Obligations

The capital leases are primarily related to office and manufacturing facilities. As of March 31, 2017, the total capital lease obligations, including current portions, were $351.9 million.


34


13.    Retirement and Other Benefit Programs

The Company sponsors various pension and other post-employment benefit (“OPEB”) plans in the United States and other countries. Net periodic benefit cost associated with these plans for the three months ended March 31, 2017 is presented below.

 
Three months ended March 31, 2017
(In millions)
U.S. pensions
 
International pensions
 
OPEB (U.S.)
Net periodic benefit cost
 

 
 

 
 

Service cost
$
3.7

 
$
9.4

 
$
0.3

Interest cost
3.9

 
1.2

 
0.3

Expected return on plan assets
(4.0
)
 
(1.8
)
 

Net periodic benefit cost
$
3.6

 
$
8.8

 
$
0.6


The majority of the Company's pension and OPEB plans were assumed with the acquisition of Baxalta on June 3, 2016 and the Company did not report net periodic benefit cost associated with these plans during the three months ended March 31, 2016.

14.    Accumulated Other Comprehensive Loss

The changes in accumulated other comprehensive loss ("AOCL"), net of their related tax effects, for the three months ended March 31, 2017 and 2016 are included below:
(In millions)
Foreign currency translation adjustment
 
Pension and other employee benefits
 
Unrealized
holding gain on available-for-sale securities
 
Hedging activities
 
Accumulated other comprehensive loss
As of January 1, 2017
$
(1,505.4
)
 
$
(5.2
)
 
$
6.6

 
$
6.4

 
$
(1,497.6
)
Other comprehensive income (loss) before reclassifications
265.5

 
7.4

 
2.1

 
(0.3
)
 
274.7

Amounts reclassified from AOCL

 

 

 
(4.2
)
 
(4.2
)
Net current period other comprehensive income / (loss)
265.5

 
7.4

 
2.1

 
(4.5
)
 
270.5

As of March 31, 2017
$
(1,239.9
)
 
$
2.2

 
$
8.7

 
$
1.9

 
$
(1,227.1
)
(In millions)
Foreign currency translation adjustment
 
Pension and other employee benefits
 
Unrealized holding (loss)/gain on available-for-sale securities
 
Hedging activities
 
Accumulated other comprehensive loss
As of January 1, 2016
$
(182.1
)
 
$

 
$
(1.7
)
 
$

 
$
(183.8
)
Net current period other comprehensive income (loss)
24.7

 

 
(0.3
)
 

 
24.4

As of March 31, 2016
$
(157.4
)
 
$

 
$
(2.0
)
 
$

 
$
(159.4
)


35


The following is a summary of the amounts reclassified from AOCL to net income during the three months ended March 31, 2017 and 2016:
 
Three months ended March 31,
 
 
(In millions)
2017
 
2016
 
Location of impact in Statements of Operations
Gains (losses) on hedging activities
 
 
 
 
 
Foreign exchange contracts
$
6.6

 

 
Cost of sales
 
6.6

 

 
Total before tax
 
(2.4
)
 

 
Tax expense
 
$
4.2

 

 
Total net of tax


36


15.    Taxation 

For the three months ended March 31, 2017, the effective tax rate on income from continuing operations was 2% (2016: 17%).

The effective tax rate for the three months ended March 31, 2017 is affected by the combined impact of the relative quantum of the profit before tax by jurisdiction for the period with significant integration costs incurred in higher tax territories.  Additionally, discrete events in the first quarter of 2017, including the tax benefit from employee exercises of stock compensation, which is now required to be recorded as a discrete item in the quarter in which it occurs, contributed to the low rate.

The effective tax rate for the three months ended March 31, 2016 was impacted primarily by the adverse impact of a one-time re-measurement of deferred tax as a result of the acquisition of Dyax.

16.    Earnings Per Share

The following table reconciles net income and loss and the weighted average ordinary shares outstanding for basic and diluted earnings per share ("EPS") for the periods presented:
 
Three months ended
March 31,
(In millions)
2017
 
2016
Income from continuing operations, net of taxes
$
354.8

 
$
409.5

Gain from discontinued operations, net of taxes
20.2

 
9.5

Numerator for basic and diluted earnings per share
$
375.0


$
419.0

 
 
 
 
Weighted average number of shares:
 
 
 
Basic  
904.1

 
591.7

Effect of dilutive shares:
 

 
 

Share-based awards to employees  
7.7

 
1.6

Diluted
911.8

 
593.3


Weighted average number of basic shares excludes shares purchased by the Employee Benefit Trust and those under the shares buy-back program, which are both presented by Shire as treas