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, 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	508.8
Contingent consideration payable	169.0
Total Purchase Consideration	$	32,397.7

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, please see Note 27, Share-based Compensation Plans, to the Consolidated Financial Statements set forth in this Annual Report on 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 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 Consolidated Statements of Operations for the year ended December 31, 2016 was $4,011.6 million. 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.

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 year ended December 31, 2016, is outlined below.



(In millions)	Preliminary fair values as of June 3, 2016		Measurement period adjustments			Preliminary fair values as of December 31, 2016
ASSETS
Current assets:
Cash and cash equivalents	$	583.2	$	—		$	583.2
Accounts receivable	1,071.7		(2.0		)	1,069.7
Inventories	5,341.1		(1,447.7		)	3,893.4
Other current assets	673.3		(97.3		)	576.0
Total current assets	7,669.3		(1,547.0		)	6,122.3
Property, plant and equipment	5,687.7		(235.0		)	5,452.7
Investments	128.2		—			128.2
Goodwill	6,106.4		5,316.0			11,422.4
Intangible assets
Currently marketed products	24,550.0		(2,555.0		)	21,995.0
In-Process Research and Development ("IPR&D")	2,940.0		(2,210.0		)	730.0
Contract based arrangements	72.2		(30.0		)	42.2
Other non-current assets	103.3		51.7			155.0
Total assets	$	47,257.1	$	(1,209.3	)	$	46,047.8
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses	$	1,283.9	$	38.0		$	1,321.9
Other current liabilities	241.0		113.4			354.4
Long-term borrowings and capital lease obligations	5,424.9		—			5,424.9
Deferred tax liability	6,831.7		(1,386.4		)	5,445.3
Other non-current liabilities	1,092.1		11.5			1,103.6
Total liabilities	$	14,873.6	$	(1,223.5	)	$	13,650.1

Preliminary fair value of identifiable assets acquired and liabilities assumed	$	32,383.5	$	14.2		$	32,397.7

Consideration
Preliminary fair value of purchase consideration	$	32,383.5	$	14.2		$	32,397.7

The purchase price allocation is preliminary pending final determination of the fair values of certain assets and liabilities. As of December 31, 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 and any additional information received that was 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 $21,995.0 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 8 to 23 years (weighted average 21 years), with amortization being recorded on a straight line basis.

IPR&D intangible assets totaling $730.0 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.

The measurement period adjustments for Intangible assets reflect changes in the estimated fair value of Currently marketed products and IPR&D. The changes in the estimated fair values for Intangible assets 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.

Goodwill

Preliminary goodwill of $11,422.4 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.

For the year ended December 31, 2016, the Company expensed $791.4 million relating to the acquisition and integration of Baxalta, which have been recorded within Integration and Acquisition costs in the Company’s 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 preliminary fair value of the assumed contingent consideration to be $169.0 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 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 changes in the estimated fair values for Inventory are primarily to better reflect the expected selling price of the inventory based on market participant assumptions existing as of the acquisition date. The measurement period adjustments did not result from intervening events subsequent to the acquisition date.

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 preliminary fair value of $358.5 million.

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.



	December 31,
(In millions)	2016		2015
Revenues	$	13,999.6	$	12,564.7
Net income/(loss) from continuing operations	2,235.9		(1,014.2		)
Per share amounts:
Net income/(loss) from continuing operations per share - basic	$	2.90	$	(1.72	)
Net income/(loss) from continuing operations per share - diluted	$	2.88	$	(1.72	)

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


(i)	an adjustment to increase net income for the year ended December 31, 2016 by $678.9 million to eliminate integration and acquisition related costs incurred by Shire and Baxalta and a corresponding decrease in net income for the year ended December 31, 2015 by $678.9 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 year ended December 31, 2016 by $897.1 million and a corresponding decrease for the year ended December 31, 2015 by $1,428.2 million, respectively, to reflect amortization of the fair value adjustments for inventory as inventory is sold. As acquired inventory turns within 12 months of the acquisition, there has been no expense included in net income for the year ended December 31, 2016;


(iii)	an adjustment to increase amortization expense by $330.9 million and $815.0 million for the year ended December 31, 2016 and December 31, 2015, respectively, related to the identifiable intangible assets acquired; and

(iv)

an adjustment to decrease net income for the year ended December 31, 2016 by $42.5 million and for the year ended December 31, 2015 by $357.6 million, respectively, primarily related to the additional interest expense and deferred debt issuance costs associated with the debt incurred to partially fund the acquisition of Baxalta and the bonds issued to replace the debt incurred for the acquisition.

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.

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 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 Consolidated Statements of Operations for the year ended December 31, 2016 is $77.1 million. 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.

Since the acquisition date, the Company adjusted its valuation and allocation of purchase price consideration. The adjustment, which was not material, decreased goodwill and deferred tax liabilities. The revised allocation of the total purchase price is as follows:



(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

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

Consideration
Preliminary 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.

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.

For the year ended December 31, 2016, the Company expensed $67.7 million relating to the acquisition and integration of Dyax, which has been recorded within Integration and Acquisition costs in the Company’s 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.



	December 31,
(In millions)	2016		2015
Revenues	$	11,402.5	$	6,503.8
Net income from continuing operations	792.2		1,056.6
Per share amounts:
Net income from continuing operations per share - basic	$	1.03	$	1.79
Net income from continuing operations per share - diluted	$	1.02	$	1.78

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


(i)	an adjustment to increase net income for the year ended December 31, 2016 by $111.1 million to eliminate acquisition related costs incurred by Shire and Dyax and a corresponding decrease in net income for the year ended December 31, 2015 by $111.1 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 year ended December 31, 2015 by $5.4 million, to reflect amortization of the fair value adjustments for inventory as inventory is sold;


(iii)	an adjustment to increase amortization expense for the year ended December 31, 2016 by $1.3 million and a corresponding adjustment to decrease net income for the year ended December 31, 2015 by $21.6 million, related to the identifiable intangible assets acquired; and


(iv)	an adjustment to record interest expense for the year ended December 31, 2015 of $81.6 million 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 Consolidated Financial Statements include the results of NPS from February 21, 2015.

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	4.8
Goodwill	1,551.0
Intangible assets
Currently marketed products	4,640.0
Royalty rights (categorized as "Other intangible assets")	353.0
Total assets	$	6,791.3
LIABILITIES
Current liabilities:
Accounts payable and other current liabilities	$	75.7
Short-term borrowings and capital lease obligations	27.4
Long-term borrowings and capital lease obligations	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

Intangible assets totaling $353.0 million relate to the royalty rights arising from the collaboration agreements with Amgen Inc (“Amgen”), Depomed, Inc. (“Depomed”) 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; Depomed 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.

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.



	December 31,
(In millions)	2015
Revenues	$	6,446.6
Net income from continuing operations	1,293.6
Per share amounts:
Net income from continuing operations per share - basic	$	2.19
Net income from continuing operations per share - diluted	$	2.18

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


(i)	an adjustment to increase net income for the year ended December 31, 2015 by $105.3 million, to eliminate acquisition related costs incurred by Shire and NPS;


(ii)	an adjustment to increase net income by $18.8 million for the year ended December 31, 2015, 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 year ended December 31, 2015 by $22.2 million, related to the identifiable intangible assets acquired.

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