Share-based Compensation Plans

The following table shows the total share-based compensation expense (see below for types of share-based awards) included in the Consolidated Statements of Operations:



	For the years ended December 31,
(In millions)	2016			2015			2014
Cost of product sales	$	23.3		$	7.6		$	8.5
Research and development	46.9			28.6			22.2
Selling, general and administrative	67.1			37.4			35.9
Integration and acquisitions costs	181.2			—			—
Reorganization costs	—			26.7			30.4
Total	318.5			100.3			97.0
Less tax	(85.3		)	(28.4		)	(23.8		)
	$	233.2		$	71.9		$	73.2

As of December 31, 2016, the Company incurred total expense of $223.1 million (2015: $nil, 2014: $nil) related to replacement and other awards held by Baxalta employees as further described below. This includes integration related expenses of $171.0 million due to the acceleration of unrecognized expense associated with certain employees impacted by the integration.

There were no capitalized share-based compensation costs as of December 31, 2016, 2015 and 2014.

As of December 31, 2016, $244.2 million (2015: $115.3 million, 2014: $83.1 million) of total unrecognized compensation cost relating to non-vested awards is expected to be recognized over a period of three years.

Share-based compensation plans

Prior to February 28, 2015, the Company granted stock-settled share appreciation rights (“SARs”) and performance share awards (“PSAs”) over ordinary shares and ADSs to Executive Directors and employees under the Shire Portfolio Share Plan (“PSP”) (Parts A and B). The SARs and PSAs granted under the PSP (Parts A and B) to Executive Directors are exercisable subject to performance and service criteria. Substantially all SARs and PSAs granted to employees are exercisable subject only to service criteria.

The principal terms and conditions of SARs and PSAs under the PSP (Parts A and B) are as follows: (i) the contractual life of SARs is seven years, (ii) the vesting period of SARs and PSAs granted to employees below the level of Executive Vice President allows for graded vesting over three years, and (iii) awards granted to the level of Executive Director and Executive Vice President cliff vest after three years, of which awards to the level of Executive Director contain performance conditions based on growth in Non-GAAP adjusted return on invested capital (“Adjusted ROIC”) and Non-GAAP earnings before interest, taxation, depreciation and amortization (“Non-GAAP EBITDA”). In 2014, the Company granted PSAs under the PSP to employees at Executive Vice President level and to a select group of senior employees, which are exercisable subject to performance and service criteria. These PSAs cliff vest after three years and contain performance conditions as explained above.

Since February 28, 2015, the Company has granted awards under the Shire Long Term Incentive Plan 2015 (“LTIP”). Under the LTIP, the Company grants stock-settled share appreciation rights (“SARs”), restricted stock units (“RSUs”) and performance share units (“PSUs”) over ordinary shares and ADSs to Executive Directors and employees. The PSUs granted under the LTIP and SARs granted to Executive Directors are exercisable subject to performance and service criteria. RSUs granted under the LTIP and SARs granted to all other employees are exercisable subject only to service criteria.

The principal terms and conditions of SARs, RSUs and PSUs granted under the LTIP are as follows: (i) the contractual life of SARs is seven years, (ii) the vesting period of SARs and RSUs granted to employees below the level of Executive Vice President allows for graded vesting, and (iii) all SARs granted to Executive Directors and employees at Executive Vice President level and all PSUs granted cliff vest after three years and, with the exception of SARs granted to employees at Executive Vice President level, contain performance conditions based on Product sales and Non-GAAP EBITDA targets; a Non-GAAP Adjusted ROIC underpin is also used at the end of the three year performance period to assess the underlying performance of the Company before determining the final vesting levels for awards with performance conditions. In addition, a further two year holding period will apply to all awards granted to Executive Directors post vesting.

The Company also operates a Global Employee Stock Purchase Plan and UK/Irish Sharesave Plans.

Replacement Awards Issued to Baxalta Employees

In connection with the acquisition of Baxalta and pursuant to the merger agreement associated with the acquisition, outstanding Baxalta equity awards held by Baxalta employees or employees of Baxter were cancelled and exchanged for Shire equity awards. The outstanding Baxalta equity awards consisted primarily of stock options and RSUs and hence were replaced with Shire’s stock options and RSUs. The replacement Shire awards generally have the same terms and conditions (including vesting) as the former Baxalta awards for which they were exchanged.

The value of the replacement share-based awards granted was designed to generally preserve both the intrinsic value and the fair value of the award immediately prior to the acquisition. Following the acquisition, the Company records share-based compensation expense associated with the acquisition-date fair value of acquired Baxalta employees’ replacement options and RSUs that is attributable to post-acquisition service requirements, as well as share-based compensation expense for post-acquisition service requirements associated with certain remaining unvested Baxter share-based awards held by the acquired Baxalta employees. The portions of the acquisition-date fair values of the awards that are attributable to post-combination service are recognized over the remaining service period of the awards.

The following awards were outstanding as of December 31, 2016:



	Compensation type	Number of awards	Expiration period from date of issue	Vesting period
Stock-settled SARs	SARs	10,646,207	7 years	3 years graded vesting and/or 3 years cliff vesting subject to performance criteria for Executive Directors only
UK/Irish Sharesave Plans	Stock options	119,300	6 months after vesting	3 or 5 years
Global Employee Stock Purchase Plan	Stock options	411,900	On vesting date	1 to 5 years
Baxalta Replacement Options	Stock options	10,692,426	10 years	3 years graded vesting
Stock-settled SARs and stock options		21,869,833
RSUs, PSUs and PSAs	RSUs, PSUs and PSAs	2,346,511	3 years	3 years graded vesting, 3 years cliff vesting subject to performance criteria for Executive Directors and certain senior employees only
Baxalta Replacement RSUs	RSU	1,630,146	3 years	3 years graded vesting
RSUs/PSUs and PSAs		3,976,657

Stock-settled SARs and stock options

SARs under LTIP and PSP (Part A)

Stock-settled share appreciation rights ("SARs"), granted to Executive Directors, are exercisable subject to service and performance criteria.

In respect of any award made to Executive Directors under the LTIP, performance criteria are based on Product sales and Non-GAAP EBITDA targets, with a Non-GAAP Adjusted ROIC underpin. In respect of any award made to Executive Directors under the PSP (Part A), performance criteria are based on growth in Non-GAAP Adjusted ROIC and Non-GAAP EBITDA. These performance measures are an important measure of the Company’s ability to meet the strategic objective to grow value for all of its stakeholders.

Awards granted to employees below Executive Director level are not subject to performance conditions and are only subject to service conditions.

Once awards have vested, participants will have until the seventh anniversary of the date of grant to exercise their awards.

UK/Irish Sharesave Plans ("Sharesave Plans")

Options granted under the Sharesave Plans are granted with an exercise price equal to 80% and 75% of the mid-market price on the day before invitations are issued to UK and Ireland employees, respectively. Employees may enter into three or five year savings contracts. No performance conditions apply.

Shire Global Employee Stock Purchase Plan ("Stock Purchase Plan")

Under the Stock Purchase Plan, options are granted with an exercise price equal to 85% of the fair market value of a share on the enrollment date (the first day of the offering period) or the exercise date (the last day of the offering period), whichever is the lower. Employees agree to save for a period up to 12 months. No performance conditions apply.

Baxalta Replacement Options

The replacement stock options were issued consistent with the vesting conditions of the replaced award (as explained above). Replacement stock options had contractual terms of 10 years from the initial grant date. The majority of stock options outstanding vested in one-third increments over a three year period, although certain awards cliff vest or have longer or shorter service periods. The fair value on the acquisition date attributable to post-combination service, adjusted for estimated forfeitures, is recognized as expense on a straight-line basis over the remaining vesting period.

A summary of the status of the Company’s SARs and stock options including replacement awards as of December 31, 2016 and of the related activity during the period then ended is presented below:



Year ended December 31, 2016	Weighted average exercise price	Number of shares		Intrinsic value (In millions)
	£			£
Outstanding as of beginning of period	52.02	7,796,496
Granted	42.37	6,506,762
Exercised	39.83	(4,717,106	)
Baxalta Replacement Options	34.30	13,328,592
Forfeited	48.49	(1,044,911	)
Outstanding as of end of period	38.98	21,869,833		76.6
Exercisable as of end of period	34.55	11,035,437		66.0

Excluded from the table above are replacement stock options issued to Baxter employees as part of the acquisition of Baxalta. The Company issued 8.8 million stock options to Baxter employees on June 3, 2016, out of which 7.7 million and 6.9 million were outstanding and exercisable, respectively, as of December 31, 2016.

The weighted average grant date fair value of SARs and stock options granted in the year ended December 31, 2016 was £8.25 (2015: £10.36; 2014: £6.19).

SARs and stock options including Baxalta Replacement Options, outstanding as of December 31, 2016 have the following characteristics:



Number of awards outstanding	Exercise prices	Weighted Average remaining contractual term (Years)	Weighted average exercise price of awards outstanding	Number of awards exercisable	Weighted average exercise price of awards exercisable
	£		£		£
3,433,225	14.59-28.00	3.0	25.37	3,422,480	25.38
10,704,846	28.01-40.00	7.3	35.56	6,161,513	34.91
7,731,762	40.01-70.48	5.7	49.77	1,451,444	54.67
21,869,833				11,035,437

RSUs, PSUs and PSAs

RSUs and PSUs under LTIP and PSAs under PSP (Part B)

PSUs and PSAs granted to Executive Directors and PSUs granted to certain senior employees are exercisable subject to certain performance and service criteria.

RSUs and PSAs granted to employees below Executive Director are not subject to performance criteria and are only subject to service conditions.

The performance criteria for PSUs granted under the LTIP is based on Product sales and Non-GAAP EBITDA targets, typically with a Non-GAAP Adjusted ROIC underpin. The performance criteria for PSAs under the PSP (Part B) is based on growth in Non-GAAP Adjusted ROIC and Non-GAAP EBITDA.

Baxalta Replacement RSUs

The replacement RSUs were issued consistent with the vesting conditions of the replaced award (as explained above) and generally continue to vest in one-third increments over a three-year period. The fair value on the acquisition date attributable to post-combination service, adjusted for estimated forfeitures, is recognized as expense on a straight-line basis over the remaining vesting period.

A summary of the status of the Company’s RSUs, PSUs and PSAs as of December 31, 2016 and of the related activity during the period then ended is presented below:



RSUs, PSUs and PSAs	Number of shares		Weighted average grant date fair value	Weighted average remaining life
			£
Outstanding as of beginning of period	1,791,930		40.06
Granted	1,663,070		42.28
Exercised	(2,470,179	)	37.52
Baxalta Replacement RSUs	3,294,150		39.28
Forfeited	(302,314	)	48.47
Outstanding as of end of period	3,976,657		41.31	3.8
Exercisable as of end of period	—		—	N/A

Excluded from the table above are replacement RSUs issued to Baxter employees as part of the acquisition of Baxalta. The Company issued 0.5 million RSUs to Baxter employees on June 3, 2016, out of which 0.3 million were outstanding as of December 31, 2016.

Exercises of share-based awards

The total intrinsic values of share-based awards exercised, including those held by Baxter employees, for the years ended December 31, 2016, 2015 and 2014 were $214.6 million, $198.8 million and $200.8 million, respectively. The total cash received as a result of share option exercises for the period ended December 31, 2016, 2015 and 2014 was approximately $129.0 million, $16.6 million and $17.4 million, respectively. In connection with these exercises, the tax benefit credited to additional paid-in capital for the years ended December 31, 2016, 2015 and 2014 was $8.8 million, $31.6 million and $39.6 million, respectively.

The Company will settle future awards with either newly listed ordinary shares or with shares held in the EBT. The number of shares that the EBT will purchase in 2017 is dependent on the number of awards granted and exercised during the year and Shire plc’s share price. As of December 31, 2016, the EBT held 0.5 million ordinary shares and 0.2 million ADSs.

Valuation methodologies

The Company estimates the fair value of its share-based awards using a Black-Scholes valuation model. Key input assumptions used to estimate the fair value of share-based awards include the grant price of the award, the expected stock-based award term, volatility of the Company’s share price, the risk-free rate and the Company’s dividend yield. The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in estimating the fair values of Shire’s stock-based awards. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive equity awards, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by the Company.

The fair value of share awards granted was estimated using the following assumptions:



	Years ended December 31,
	2016	2015	2014
Risk-free interest rate	0.29-1.6%	0.6-1.8%	0.3-1.8%
Expected dividend yield	0.3-0.5%	0.2-0.4%	0.2-0.4%
Expected life	1-4 years	1-4 years	1-4 years
Volatility	26-29%	23-26%	23-27%
Forfeiture rate	5-7%	5-7%	5-7%

The following assumptions were used to value share-based awards:


•	risk-free interest rate - for awards granted over ADSs, the U.S. Federal Reserve treasury constant maturities rate with a term consistent with the expected life of the award is used. For awards granted over ordinary shares, the yield on UK government bonds with a term consistent with the expected life of the award is used;


•	expected dividend yield - measured as the average annualized dividend estimated to be paid by the Company over the expected life of the award as a percentage of the share price at the grant date;


•	expected life - estimated based on the contractual term of the awards and the effects of employees’ expected exercise and post-vesting employment termination behavior;


•	expected volatility - measured using historical daily price changes of the Company’s share price over the respective expected life of the share-based awards at the date of the award; and


•	forfeiture rate - estimated using historical trends of the number of awards forfeited prior to vesting.