Fair Value Measurement

3 Months Ended

Mar. 31, 2013

Fair Value Disclosures [Abstract]

Fair Value Disclosures

15.       Fair value measurement

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

As at March 31, 2013 and December 31, 2012 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).

		Carrying	Fair value
		value
			Total	Level 1	Level 2	Level 3
At March 31, 2013		$'M	$'M	$'M	$'M	$'M
		____________	____________	___________	___________	___________
Financial assets:
Available-for-sale securities(1)		12.0	12.0	12.0	-	-
Contingent consideration receivable (2)		37.7	37.7	-	-	37.7
Foreign exchange contracts		4.9	4.9	-	4.9	-
Financial liabilities:
Foreign exchange contracts		0.9	0.9	-	0.9	-
Contingent consideration payable(3)		366.2	366.2	-	-	366.2
		____________	____________	___________	___________	___________
			Total	Level 1	Level 2	Level 3
At December 31, 2012		$'M	$'M	$'M	$'M	$'M
		____________	____________	___________	___________	___________
Financial assets:
Available-for-sale securities(1)		14.2	14.2	14.2	-	-
Contingent consideration receivable (2)		38.3	38.3	-	-	38.3
Foreign exchange contracts		1.3	1.3	-	1.3	-
Financial liabilities:
Foreign exchange contracts		3.0	3.0	-	3.0	-
Contingent consideration payable(3)	1	136.4	136.4	-	-	136.4
		____________	____________	___________	___________	___________

(1)Available-for-sale securities are included within Investments in the consolidated balance sheet.

(2)Contingent consideration receivable is included within Prepaid expenses and other current assets and Other non-current assets in the consolidated balance sheet.

(3)Contingent consideration payableis included within Other current liabilities and Other non-current liabilities in the consolidated balance sheet.

Certain estimates and judgments were required to develop the fair value amounts. The 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:

• Available-for-sale securities – the fair values of available-for-sale securities are estimated based on quoted market prices for those investments.
• 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).
• Foreign exchange contracts – the fair values of the swap and forward foreign exchange contracts have been determined using an income approach based on current market expectations about the future cash flows.
• 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 change in the fair value of the Company's contingent consideration receivable and payables, which are measured at fair value on a recurring basis using significant unobservable inputs (Level 3),are as follows:

Contingent consideration receivable
	2013	2012
	$'M	$'M
	____________	____________
Balance at January 1,	38.3	37.8
Gain recognized in the income statement (within Gain on sale of product rights) due to change in fair value during the period	5.4	7.2
Reclassification of amounts to Other receivables within Other current assets	(5.0)	(5.6)
Amounts recorded to other comprehensive income (within foreign currency translation adjustments)	(1.0)	0.8
Balance at March 31,	37.7	40.2
Contingent consideration payable
	2013	2012
	$'M	$'M
	____________	____________
Balance at January 1,	136.4	-
Initial recognition of contingent consideration payable	233.8	-
Loss recognized in the income statement (within Integration and acquisition costs) due to change in fair value during the period	1.8	-
Reclassification of amounts to Other current liabilities	(5.8)	-
Balance at March 31,	366.2	-

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
At March 31, 2013	Fair value	Valuation Technique	Significant unobservable Inputs	Range
	$'M
	____________	___________	___________	___________
Contingent consideration receivable ("CCR")	37.7	Income approach (probability weighted discounted cash flow)	• Probability weightings applied to different sales scenarios • Future forecast royalties receivable at relevant contractual royalty rates • Assumed market participant discount rate	• 10 to 35% • $14 million to $176 million • 5.7%
	____________	____________	____________	____________
Financial liabilities:	Fair Value at the Measurement Date
At March 31, 2013	Fair value	Valuation Technique	Significant unobservable Inputs	Range
	$'M
	____________	___________	___________	___________
Contingent consideration payable	366.2	Income approach (probability weighted discounted cash flow)	• Cumulative probability of milestones being achieved • Assumed market participant discount rate • Periods in which milestones are expected to be achieved • Forecast quarterly royalties payable on net sales of relevant products	• 18 to 57% (Weighted average) • 2.3 to 8.7% (Weighted average) • 2013 to 2028 • $1.7 to $7.6 million
	____________	____________	____________	____________

The Company re-measures the CCR (relating to contingent consideration due to the Company following divestment of one of the Company's products) at fair value at each balance sheet date,with the fair value measurement based on forecast cash flows, over a number of scenarios which vary depending on the expected performance outcome of the product following divestment. The forecast cash flows under each of these differing outcomes have been included in probability weighted estimates used by the Company in determining the fair value of the CCR.

Contingent consideration payable represents future milestones the Company may be required to pay in conjunction with various business combinations (see Note 2) and future royalties payable as a result of certain business combinations and license acquisitions. The amount of contingent consideration which may ultimately be payable by Shire in relation to business combinations is dependent upon the achievement of specified future milestones, such as the achievement of certain future development, regulatory and sales milestones. The Company assesses the probability, and estimated timing, of these milestones being achieved and re-measures the related contingent consideration to fair value each balance sheet date. The amount of contingent consideration which may ultimately be payable by Shire in relation to future royalties is dependent upon future net sales of the relevant products over the life of the royalty term. The Company assesses the present value of forecast future net sales of the relevant products and re-measures the related contingent consideration to fair value each balance sheet date.

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 and milestones are specific to the individual contingent consideration receivable or payable. The assumptions include, among other things, the probability and expected timing of certain milestones being achieved, the forecast future net sales of the relevant products and related future royalties payable, the probability weightings applied to different sales scenarios of one of the Company's divested products and forecast future royalties receivable under scenarios developed by the Company, and the discount rates used to determine the present value of contingent future cash flows. The Company regularly reviews these assumptions, and makes adjustments to the fair value measurements as required by facts and circumstances.

Financial assets and liabilities that are not measured at fair value on a recurring basis

The carrying amounts and estimated fair values as at March 31, 2013 and December 31, 2012 of the Company's financial assets and liabilities which are not measured at fair value on a recurring basis are as follows:

	March 31, 2013		December 31, 2012
	Carrying		Carrying
	amount	Fair value	amount	Fair value
	$’M	$’M	$’M	$’M
	____________	____________	____________	___________
Financial liabilities:
Convertible bonds (Level 1)	1,100.0	1,201.2	1,100.0	1,228.2
Building financing obligation (Level 3)	7.9	11.2	8.0	10.3
	____________	____________	____________	___________

Certain estimates and judgments were required to develop the fair value amounts. The 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:

• Convertible bonds – the fair value of Shire's $1,100 million 2.75% convertible bonds due 2014 is determined by reference to the market price of the instrument as the convertible bonds are publicly traded.
• Building finance obligations - the fair value of building finance obligations are estimated based on the present value of future cash flows, and an estimate of the residual value of the underlying property at the end of the lease term, associated with these obligations.

The carrying amounts of other financial assets and liabilities materially approximate to their fair value because of the short-term maturity of these amounts.