Fair Value Measurement

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

As of June 30, 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 June 30, 2017
Financial assets:
Marketable equity securities	$	63.8	$	63.8	$	—	$	—
Marketable debt securities	15.9		3.5		12.4		—
Contingent consideration receivable	9.8		—		—		9.8
Derivative instruments	22.8		—		22.8		—
Total assets	$	112.3	$	67.3	$	35.2	$	9.8

Financial liabilities:
Joint venture net written option	$	25.0	$	—	$	—	$	25.0
Derivative instruments	9.5		—		9.5		—
Contingent consideration payable	1,190.3		—		—		1,190.3
Total liabilities	$	1,224.8	$	—	$	9.5	$	1,215.3



(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 instruments	18.0		—		18.0		—
Total assets	$	114.9	$	69.4	$	29.9	$	15.6

Financial liabilities:
Derivative instruments	$	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-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 12, 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 instruments: 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		)	2.1
Other	(3.5		)	1.6
Balance as of June 30,	$	9.8		$	17.5



Contingent consideration payable
(In millions)	2017			2016
Balance as of January 1,	$	1,058.0		$	475.9
Acquisitions	(4.0		)	562.5
Change in fair value included in earnings	147.7			(45.0		)
Other	(11.4		)	0.4
Balance as of June 30,	$	1,190.3		$	993.8

In 2017, the increase in contingent consideration payable was primarily related to the Company's change in fair value of contingent consideration resulting from positive topline data for SHP643. In 2016, the increase in contingent consideration payable was related to the Company’s acquisition of Dyax and Baxalta. Other contingent consideration payable primarily relates to foreign currency adjustments.

Of the $1,190.3 million of contingent consideration payable as of June 30, 2017, $67.4 million is recorded within Other current liabilities and $1,122.9 million is recorded within Other non-current liabilities in the Company’s Unaudited Consolidated Balance Sheets.

Joint venture net written option

During the six months ended June 30, 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 June 30, 2017 and in the future will re-measure the instrument to fair value through the Consolidated Statements of Operations.

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 as of the measurement date
As of June 30, 2017
(In millions, except %)	Fair value		Valuation technique	Significant unobservable inputs	Range
Contingent consideration receivable	$	9.8	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 $20.7 million
				• Assumed market participant discount rate	• 7.4%



Financial liabilities:	Fair value as of the measurement date
As of June 30, 2017
(In millions, except %)	Fair value		Valuation technique	Significant unobservable inputs	Range
Contingent consideration payable	$	1,190.3	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 $6.5 million



Financial liabilities:	Fair value as of the measurement date
As of June 30, 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. Contingent consideration receivable represents future royalties the Company may be entitled to receive in conjunction with sales and purchase 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 June 30, 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:



	June 30, 2017				December 31, 2016
(In millions)	Carrying amount		Fair value		Carrying amount		Fair value
Financial liabilities:
SAIIDAC notes	$	12,044.7	$	11,973.6	$	12,039.2	$	11,633.8
Baxalta notes	5,066.9		5,295.8		5,063.6		5,066.5
Capital lease obligation	350.6		350.6		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.