Fair Value Measurement

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

As of December 31, 2016 and December 31, 2015, the following financial assets and liabilities are measured at fair value on a recurring basis using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3).



(In millions)	Carrying value and fair value
As of December 31, 2016	Total		Level 1		Level 2		Level 3
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	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	$	1,066.3	$	—	$	8.3	$	1,058.0



(In millions)	Carrying value and fair value
As of December 31, 2015	Total		Level 1		Level 2		Level 3
Financial assets:
Marketable equity securities	$	17.2	$	17.2	$	—	$	—
Contingent consideration receivable	13.8		—		—		13.8
Derivative contracts	1.9		—		1.9		—
Total	32.9		17.2		1.9		13.8

Financial liabilities:
Derivative contracts	11.5		—		11.5		—
Contingent consideration payable	475.9		—		—		475.9
Total	$	487.4	$	—	$	11.5	$	475.9

Marketable equity and debt securities are included within Investments in the Consolidated Balance Sheets. Shire's strategic investment portfolio includes investments in equity securities of certain biotechnology companies and in venture capital funds where the underlying investments are in equity securities of biotechnology companies. Contingent consideration receivable is included within Prepaid expenses and other current assets and Other non-current assets in the Consolidated Balance Sheets. Contingent consideration payable is included within Other current liabilities and Other non-current liabilities in the Consolidated Balance Sheets. For a more detailed description of the Company's derivative contracts, refer to Note 15, Financial Instruments, to the Consolidated Financial Statements set forth in this Annual Report on Form 10-K.

Certain estimates and judgments were required to develop the fair value amounts. The estimated fair value amounts shown above are not necessarily indicative of the amounts that the Company would realize upon disposition, nor do they indicate the Company’s intent or ability to dispose of the financial instrument.

The following methods and assumptions were used to estimate the fair value of each material class of financial instrument:


•	Marketable equity securities: the fair values of marketable equity securities are estimated based on quoted market prices for those investments.


•	Marketable debt securities: the fair values of debt securities are obtained from pricing services or broker/dealers who either use quoted prices in an active market or proprietary pricing applications, which include observable market information for like or same securities.


•	Contingent consideration receivable: the fair value of the contingent consideration receivable has been estimated using the income approach (using a probability weighted discounted cash flow method).


•	Derivative contracts: the fair values of the swap and forward foreign exchange contracts have been determined using the month-end interest rate and foreign exchange rates, respectively.


•	Contingent consideration payable: the fair value of the contingent consideration payable has been estimated using the income approach (using a probability weighted discounted cash flow method).

Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)

The following table provides a roll forward of the fair values of our contingent consideration receivable and payables which include Level 3 measurements:



Contingent consideration receivable
(In millions)	2016		2015
Balance at January 1,	$	13.8	$	15.9
Change in fair value included in earnings	1.6		13.6
Other	0.2		(15.7		)
Balance at December 31,	$	15.6	$	13.8



Contingent consideration payable
(In millions)	2016		2015
Balance at January 1,	$	475.9	$	629.9
Additions	565.4		92.8
Change in fair value included in earnings	11.1		(149.9		)
Other	5.6		(96.9		)
Balance at December 31,	$	1,058.0	$	475.9

The increase in contingent consideration payable is primarily related to the Company’s acquisition of Dyax as well as contingent consideration payable assumed in the acquisition of Baxalta. Other primarily includes foreign currency adjustments.

Of the $1,058.0 million of contingent consideration payable as of December 31, 2016, $65.1 million is recorded within Other current liabilities and $992.9 million is recorded within Other non-current liabilities in the Company’s Consolidated Balance Sheets.

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 included below:



Financial assets:	Fair value at the measurement date
As of December 31, 2016
(In millions, except %)	Fair value		Valuation technique	Significant unobservable inputs	Range
Contingent consideration receivable ("CCR")	$	15.6	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 $21 million
				Assumed market participant discount rate	8%



Financial liabilities:	Fair value at the measurement Date
As of December 31, 2016
(In millions, except %)	Fair value		Valuation technique	Significant unobservable inputs	Range
Contingent consideration payable	$	1,058.0	Income approach (probability weighted discounted cash flow)	Cumulative probability of milestones being achieved	6 to 90%
				Assumed market participant discount rate	1.2 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

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 of the Company’s financial assets and liabilities are as follows:



	December 31, 2016				December 31, 2015
(In millions)	Carrying amount		Fair value		Carrying amount		Fair value
Financial liabilities:
Senior Notes	$	12,039.2	$	11,633.8	$	—	$	—
Baxalta Notes	5,063.6		5,066.5		—		—
Capital lease obligation	353.6		353.6		13.4		13.4

The estimated fair values of Senior Notes and Baxalta Notes were based upon recent observable market prices and are considered level 2 in the fair value hierarchy. The estimated fair value of the 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.