Business Combinations

9 Months Ended

Sep. 30, 2014

Business Combinations [Abstract]

Business Combination Disclosure

2.       Business combinations

Acquisition of ViroPharmaIncorporated (“ViroPharma”)

On January 24, 2014, Shire completed its acquisition of 100% of the outstanding share capital of ViroPharma. The acquisition-date fair value of cash consideration paid on closing was $3,997 million.

The acquisition of ViroPharma added CINRYZE (C1 esterase inhibitor [human]) to Shire's portfolio of currently marketed products. CINRYZE is a leading brand for the prophylactic treatment of Hereditary Angioedema (“HAE”) in adolescents and adults.

The acquisition of ViroPharma has been accounted for as a purchase business combination using the acquisition method. The assets acquired and the liabilities assumed from ViroPharma have been recorded at their preliminary fair values at the date of acquisition, being January 24, 2014. The Company's consolidated financial statements include the results of ViroPharma from January 24, 2014.

The amount of ViroPharma's post acquisition revenues and pre-tax losses included in the Company's consolidated statement of income for the three monthsto September 30, 2014 were $154.5million and $3.7 million, respectively. The pre-tax loss is stated after charges on the unwind of inventory fair value adjustments of $18.1 million, intangible asset amortization of $28.5 million and integration costs of $27.1 million.

The amount of ViroPharma's post acquisition revenues and pre-tax losses included in the Company's consolidated statement of income for the nine months to September 30, 2014 were $388.9 million and $82.9 million, respectively. The pre-tax loss is stated after charges on the unwind of inventory fair value adjustments of $90.6 million, intangible asset amortization of $78.6 million and integration costs of $87.8 million.

The Company's preliminary allocation of the purchase price to the assets acquired and liabilities assumed, including certain immaterial measurement period adjustments recorded in the second and third quarter of 2014, is outlined below:

	Preliminary
	Fair value
	$’M
Identifiable assets acquired and liabilities assumed
ASSETS
Current assets:
Cash and cash equivalents	232.6
Short term investments	57.8
Accounts receivable	52.2
Inventories	203.6
Deferred tax assets	100.2
Purchased call option	346.7
Other current assets	42.9
	_______________
Total current assets	1,036.0
Non-current assets:
Property, plant and equipment	24.7
Goodwill	1,528.8
Other intangible assets
- Currently marketed products	2,320.0
- In-Process Research and Development (“IPR&D”)	530.0
Other non-current assets	10.4
	_______________
Total assets	5,449.9
	_______________
LIABILITIES
Current liabilities:
Accounts payable and other current liabilities	109.5
Convertible bond	551.4
Non-current liabilities:
Deferred tax liabilities	695.9
Other non-current liabilities	96.1
	_______________
Total liabilities	1,452.9
	_______________
Fair value of identifiable assets acquired and liabilities assumed	3,997.0
	_______________
Consideration
Cash consideration paid	3,997.0
	_______________

The purchase price allocation is preliminary pending final determination of the fair values of certain assets and liabilities. The final determination of these fair values will be completed as soon as possible but no later than one year from the acquisition date.

(a) Other intangible assets – currently marketed products

Other intangible assets totaling $2,320.0 million relate to intellectual property rights acquired for ViroPharma's currently marketed products, primarily attributed to CINRYZE, for the routine prophylaxis against HAE attacks in adolescent and adult patients. Shire also obtained intellectual property rights to three other commercialized products, PLENADREN, an orphan drug for the treatment of adrenal insufficiency in adults, BUCCOLAM, an oromucosal solution for the treatment of prolonged, acute, and convulsive seizures in infants, toddlers, children and adolescents and VANCOCIN, an oral capsule formulation for the treatment of C. difficile-associated diarrhea (“CDAD”), which was divested by Shire in the third quarter of 2014 (see Note 3 for details). The preliminary fair value of 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 CINRYZE, PLENADREN and BUCCOLAM intangible assets range from 10to 23 years (weighted average 22 years), with amortization being recorded on a straight line basis.

(b) Other intangible assets – IPR&D

IPR&D relates to development projects acquired with ViroPharma, that have been initiated and have achieved material progress and whose fair value is estimable with reasonable certainty but (i) have not yet reached technological feasibility or have not yet received the relevant regulatory approval and (ii) have no alternative future use.

IPR&D, totaling $530.0 million, principally relates to Maribavir (now SHP620), an investigational antiviral product for cytomegalovirus and VP20621, a non-toxigenic strain of C.difficile for the treatment and prevention of CDAD. The preliminary fair value of these IPR&D assets has been estimated based on an income approach, using the present value of incremental after tax cash flows expected to be generated by these development projects after the deduction of contributory asset charges for other assets employed in these projects. The estimated cash flows have been probability adjusted to take into account their stage of completion and the remaining risks and uncertainties surrounding their future development and commercialization.

The major risks and uncertainties associated with the timely completion of the acquired IPR&D projects include the ability to confirm the efficacy of the technology based on the data from clinical trials, and obtaining the relevant regulatory approvals as well as other risks as described in the Company's annual report on Form 10-K. The valuation of IPR&D has been based on information available at the time of the acquisition and on expectations and assumptions that (i) have been deemed reasonable by the Company's management and (ii) are based on information, expectations and assumptions that would be available to a market participant. However, no assurance can be given that the assumptions and events associated with such assets will occur as projected. For these reasons, the actual cash flows may vary from forecast future cash flows.

The estimated probability adjusted after tax cash flows used in fair valuing other intangible assets have been discounted at rates ranging from 9.5% to 10.0%.

(c) Goodwill

Goodwill arising of $1,528.8 million, which is not deductible for tax purposes, includes the expected operational synergies that will result from combining the operations of ViroPharma with the operations of Shire; other synergies expected to be realized due to Shire's structure; intangible assets that do not qualify for separate recognition at the time of the acquisition; and the value of the assembled workforce.

In the three months and nine months to September 30, 2014 the Company expensed costs of $27.1 million (2013: $nil) and $122.1 million (2013: $nil) relating to the acquisition and post-acquisition integration of ViroPharma, which have been recorded within Integration and acquisition costs in the Company's consolidated statement of income.

Supplemental disclosure of proforma information

The following unaudited pro forma financial information presents the combined results of the operations of Shire and ViroPharma as if the acquisition of ViroPharma had occurred as at January 1, 2013. The unaudited pro forma financial information is not necessarily indicative of what the consolidated results of operations actually would have been had the acquisition 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.

	9 months to	9 months to
	September 30,	September 30,
	2014	2013
	$’M	$’M
	_______________	_______________
Revenues	4,477.8	3,932.2
Net income from continuing operations	1,297.0	642.2
	_______________	_______________
Per share amounts:
Net income from continuing operations per share - basic	221.4c	116.8c
Net income from continuing operations per share - diluted	218.6c	109.3c
	_______________	_______________

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

• an adjustment to decrease net income by $33.8 million for the period to September 30,2013 to reflect acquisition costs incurred by Shire, and increase net income by $23.2 million for the period to September 30,2014 to eliminate acquisition costs incurred;
• an adjustment to decrease net income by $57.8 million for the period to September 30, 2013,to reflect charges on the unwind of inventory fair value adjustments as acquisition date inventory is sold, and a corresponding increase in net income for the period to September 30, 2014;
• an adjustment of $36.1 million in the period to September 30, 2013 to reflect additional interest expense associated with the drawdown of debt to partially finance the acquisition of ViroPharma and the amortization of related deferred debt issuance costs;
• an adjustment to increase amortization expense by approximately $7.3 million in the period to September 30, 2014 and $58.4 million in the period to September 30, 2013, related to amortization of the fair value of identifiable intangible assets acquired and the elimination of ViroPharma's historical intangible asset amortization expense;
• an adjustment to reflect the additional depreciation expense ($0.1million and $0.4 million in the period to September 30, 2014 and September 30, 2013 respectively) related to the fair value adjustment to property, plant and equipment acquired;
• adjustments to reflect the tax effects of the above adjustments, where applicable.

Acquisition of Lumena Pharmaceuticals, Inc. (“Lumena”)

On June 11, 2014 Shire completed the acquisition of 100% of the outstanding share capital of Lumena. The acquisition date fair value of the consideration totaled $464.3 million, comprising cash consideration paid on closing of $300.3 million and the fair value of contingent consideration payable of $164 million. The maximum amount of contingent cash consideration which may be payable by Shire in future periods is $265 million dependent upon achievement of certain clinical development milestones.

This acquisition brings two novel, orally active therapeutic compounds SHP625 (formerly LUM001), in Phase 2 clinical development and SHP626 (formerly LUM002), ready to enter Phase 2 clinical development later in 2014. Both compounds are inhibitors of the apical sodium-dependent bile acid transport (“ASBT”), which is primarily responsible for recycling bile acids from the intestine to the liver. SHP625 is being investigated for the potential relief of the extreme itching associated with cholestatic liver disease. SHP626 is in development for the treatment of nonalcoholicsteatohepatitis.

The acquisition of Lumena has been accounted for as a business combination using the acquisition method. The assets and liabilities assumed from Lumena have been recorded at their preliminary fair values at the date of acquisition, being June 11, 2014. The Company's consolidated financial statements and results of operations include the results of Lumena from June 11, 2014.

The purchase price allocation is preliminary pending the determination of the fair values of certain assets and liabilities assumed. The purchase price has been allocated on a preliminary basis to acquired IPR&D ($467 million), net current assets assumed ($47.6 million, including cash of $46.3 million), net non-current liabilities assumed (including deferred tax liabilities) ($174.2 million) and goodwill ($123.9 million). The final determination of these fair values will be completed as soon as possible but no later than one year from the acquisition date. Goodwill arising of $123.9 million is not deductible for tax purposes.

In the three and nine months to September 30, 2014 the Company has expensed costs of $4.2 million and $5.7 millon (2013: $nil and $nil) relating to the Lumena acquisition, which have been recorded within Integration and acquisition costs in the Company's consolidated income statement. 

Unaudited pro forma financial information to present the combined results of operations of Shire and Lumena are not provided as the impact of this acquisition is not material to the Company's results of operations for any period presented.

Acquisition of Fibrotech Therapeutics Pty Ltd. (“Fibrotech”)

On July 4, 2014 Shire completed its acquisition of Fibrotech, an Australian biopharmaceutical company developing a new class of orally available drugs with a novel mechanism of action which has the potential to address both the inflammatory and fibrotic components of disease processes. The acquisition of Fibrotech is expected to strengthen the Company's growing and innovative portfolio targeting renal and fibrotic diseases, and leverage existing renal capabilities.

The acquisition date fair value of the consideration totaled $122.6 million, comprising cash consideration paid on closing of $75.6 million and the fair value of contingent consideration payable of $47 million. The maximum amount of contingent cash consideration which may be payable by Shire in future periods is $482.5 million dependent upon achievement of certain clinical development, regulatory and commercial milestones.

The acquisition of Fibrotech has been accounted for as a business combination using the acquisition method. The assets and liabilities assumed from Fibrotech have been recorded at their preliminary fair values at the date of acquisition being July 4, 2014. The Company's consolidated financial statements and results of operations include the results of Fibrotech from July 4, 2014.

The purchase price allocation is preliminary pending the determination of the fair values of certain assets and liabilities assumed. The purchase price has been allocated on a preliminary basis to acquired IPR&D ($11 million), net current assets ($1.4 million) and goodwill ($110.2 million). The final determination of these fair values will be completed as soon as possible but no later than one year from the acquisition date. Goodwill generated from the acquisition was primarily attributed to acquired scientific knowledge in fibrotic diseases and the potential to optimize the novel mechanism of action to other fibrotic conditions.

In the three and nine months to September 30, 2014 the Company has expensed costs of $1.3 million and $2.1 million (2013: $nil) relating to the Fibrotech acquisition, which have been recorded within Integration and acquisition costs in the Company's consolidated income statement.

Unaudited pro forma financial information to present the combined results of operations of Shire and Fibrotech are not provided as the impact of this acquisition is not material to the Company's results of operations for any period presented.

Other Acquisitions

In the third quarter of 2014 Shire acquiredBIKAM Pharmaceuticals, Inc. (“BIKAM”), a US-based biopharmaceutical company with pre-clinical compounds that could provide an innovative approach to treating autosomal dominant retinitis pigmentosa (adRP). Shire also acquired certain assets and employees related to the production of BUCCOLAM from its previous contract manufacturer SCM Pharma Limited (“SCM”). The aggregate acquisition date fair value of the consideration for these two acquisitions was $17.9 million, comprising cash paid on closing of $12.1 millionand the fair value of contingent consideration payable in respect of BIKAMof $5.8 million. In respect of BIKAM the maximum contingent consideration which may be payable by Shire in future periods is $92 million contingent upon the achievement of certain development, regulatory and commercial milestones.

In connection with these two acquisitions, Shire has preliminarily recorded $1 million in current assets, $4.8 million in non-current assets and $12.1 million in goodwill.

Unaudited pro forma financial information to present the combined results of operations of Shire, BIKAM and SCM are not provided as the impact of these acquisitions is not material to the Company's results of operations for any period presented.