Business Combinations

3 Months Ended

Mar. 31, 2015

Business Combinations [Abstract]

Business Combination Disclosure

2.       Business combinations

Acquisition of NPS Pharmaceuticals Inc.(“NPS Pharma”)

On February 21, 2015Shirecompleted its acquisition of 100% of the outstanding share capital of NPS Pharma. The acquisition-date fair value of cash consideration paid on closing was $5,218 million.

The acquisition of NPS Pharma added GATTEX/REVESTIVE, approved in the US and EU for the treatment of adults with short bowel syndrome (“SBS”), a rare and potentially fatal gastrointestinal disorder and NATPARA/NATPAR approved in the US for the treatment of hypoparathyroidism (“HPT”), a rare endocrine disease, to Shire's portfolio of currently marketed products.

The acquisition of NPS Pharmahas been accounted for as a business combination using the acquisition method. The assets acquired and the liabilities assumed from NPS Pharmahave been recorded at their preliminary fair values at the date of acquisition, being February 21, 2015. The Company's consolidated financial statements include the results of NPS Pharma from February 21, 2015.

The amount of NPS Pharma's post-acquisition revenues and pre-tax losses included in the Company's consolidated statement of income for the three months to March 31, 2015 were $26.2million and $51.2million respectively. The pre-tax loss includes charges on the unwind of inventory fair value adjustments of $9.9 million, intangible asset amortization of $30.1 million and integration costs of $17.4 million.

The Company's preliminary allocation of the purchase price to the assets acquired and liabilities assumed is outlined below:

	Preliminary
	Fair value
	$’M
ASSETS
Current assets:
Cash and cash equivalents	41.6
Short-term investments	67.0
Accounts receivable	31.7
Inventories	51.1
Deferred tax assets	151.5
Other current assets	10.1
	_______________
Total current assets	353.0
Non-current assets:
PPE	4.2
Goodwill	1,691.6
Other intangible assets
- currently marketed products	4,670.0
- royalty rights (categorized as "Other amortized intangible assets" )	353.0
	_______________
Total assets	7,071.8
	_______________
LIABILITIES
Current liabilities:
Accounts payable and other current liabilities	72.5
Short-term debt	27.4
Non-current liabilities:
Long-term debt, less current portion	78.9
Deferred tax liabilities	1,671.0
Other non-current liabilities	4.2
	_______________
Total liabilities	1,854.0
	_______________
Fair value of identifiable assets acquired and liabilities assumed	5,217.8
Consideration	_______________
Cash consideration paid	5,217.8
	_______________

The purchase price allocation is preliminary pending final determination of the fair values of certain assets and liabilities. In particular the fair values of inventories, intangible assets, assumed non-recourse debt obligations and current and deferred taxes are preliminary pending receipt of the final valuations for those items. 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 $4,670.0 million relate to intellectual property rights acquired for NPS Pharma's currently marketed products, primarily attributed to NATPARA/NATPAR, and GATTEX/REVESTIVE. The fair value of the currently marketed products is preliminary and 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 NATPARA/NATPAR and GATTEX/REVESTIVE intangible assets are 24 years, with amortization being recorded on a straight-line basis.

(b) Other intangible assets – Royalty rights

Other intangibles totaling $353.0 million relate to the royalty rights arising from the collaboration agreements with Amgen, Janssen and Kyowa Hakko Kirin. Amgen markets cinacalcetHCl as Sensipar in the US and as Mimpara in the EU; Janssen Pharmaceuticals markets tapentadol as Nucynta in theUS; and Kyowa Hakko Kirin markets cinacalcet HCI as Regpara in Japan, Hong Kong, Malaysia, Macau, Singapore, and Taiwan. NPS Pharma is entitled to royalties from the relevant net sales of these products.

The fair value of these royalty rights is preliminary and has been estimated using an income approach, based on the present value of incremental after tax cash flows attributable to each royalty right.

The estimated useful lives of these royalty rights range from 4 to 5 years (weighted average 4 years), with amortization being recorded on a straight-line basis.

(c) Goodwill

Goodwill arising of $1,691.6million, which is not deductible for tax purposes, includes the expected synergies that will result from combining the operations of NPS Pharma with the operations of Shire; particularly those 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 to March 31, 2015 the Company expensed costs of $69.9million relating to the acquisition and post-acquisition integration of NPS Pharma, which have been recorded within Integration and acquisition costs in the Company's consolidated statement of income.

Supplemental disclosure of pro forma information

The following unaudited pro forma financial information presents the combined results of the operations of Shire and NPS Pharma as if the acquisition of NPS Pharma had occurred as at January 1, 2014. 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.

	3 months to	3 months to
	March 31,	March 31,
	2015	2014
	$’M	$’M
	_______________	_______________
Revenues	1,518.3	1,390.8
Net income from continuing operations	358.8	85.8
	_______________	_______________
Per share amounts:
Net income from continuing operations per share - basic	60.9c	14.7c
Net income from continuing operations per share - diluted	60.5c	14.6c
	_______________	_______________

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

• an adjustment to decrease net income by $106.8 million for the period to March 31, 2014 to reflect acquisition costs incurred by Shire and NPS Pharma, and increase net income by $106.8 million for the period to March 31, 2015, to eliminate acquisition costs incurred;
• an adjustment to decrease net income by $6.1 million for the period to March 31 2014, 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 March 31, 2015;
• an adjustment of $5.6 million in the period to March 31, 2014 to reflect additional interest expense associated with the drawdown of debt to partially finance the acquisition of NPS Pharma and the amortization of related deferred debt issuance costs;
• an adjustment to increase amortization expense by approximately $21.1 million in the period to March 31, 2015 and $42.3 million in the period March 31, 2014 related to amortization of the fair value of identifiable intangible assets acquired and the elimination of NPS Pharma's historical intangible asset amortization expense; and
• the tax effect of the above adjustments, where applicable.

Acquisition of Meritage Pharma Inc. (“Meritage”)

Prior to the acquisition of ViroPharmaby Shire (see below), ViroPharma had entered into an exclusive development and option agreement with Meritage, a privately owned US company focusing on developing oral budesonide suspension (“OBS”) as a treatment for eosinophilic esophagitis. Under the terms of this agreement Meritage controlled and conducted all related research up to achievement of pre-defined development success criteria at which point ViroPharma had the option to acquire Meritage.

On February 18, 2015, following the exercise of the purchase option, Shire acquired all the outstanding equity of Meritage. The acquisition date fair value of the consideration totaled $166.9 million, comprising cash consideration paid on closing of $74.8 million and the fair value of contingent consideration payable of $92.1 million. The maximum amount of contingent cash consideration which may be payable by Shire in future periods is $175.0 million dependent upon achievement of certain clinical development and regulatory milestones.

With the Meritageacquisition, Shire has acquired the global rights to Meritage's Phase 3-ready compound, OBS, for the treatment of adolescents and adults with eosinophilic esophagitis.

The acquisition of Meritage has been accounted for as a business combination using the acquisition method. The assets and liabilities assumed from Meritage have been recorded at their preliminary fair values at the date of acquisition, being February 18, 2015. The Company's consolidated financial statements and results of operations include the results of Meritage from February 18, 2015.

The purchase price allocation is preliminary pending the determination of the fair values of certain assets and liabilities. The purchase price has been allocated on a preliminary basis to the OBS IPR&D intangible asset ($175 million), net current assets assumed ($5.5 million), net non-current liabilities assumed (including deferred tax liabilities) ($54.7 million) and goodwill ($41.1 million). Goodwill arising of $41.1 million is not deductible for tax purposes.

Unaudited pro forma financial information to present the combined results of operations of Shire and Meritage 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 ViroPharma Incorporated

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 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 business combination using the acquisition method. The assets acquired and the liabilities assumed from ViroPharma have been recorded at their 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 purchase price allocation was finalized in the fourth quarter of 2014. The Company's allocation of the purchase price to the fair value of assets acquired and liabilities assumed is outlined below:

	Acquisition date 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	100.7
Purchased call option	346.7
Other current assets	50.9
	_______________
Total current assets	1,044.5
Non-current assets:
PPE	24.7
Goodwill	1,655.5
Other intangible assets
- Currently marketed products	2,320.0
- In-Process Research and Development (“IPR&D”)	315.0
Other non-current assets	10.4
	_______________
Total assets	5,370.1
	_______________
LIABILITIES
Current liabilities:
Accounts payable and other current liabilities	122.7
Convertible bond	551.4
Non-current liabilities:
Deferred tax liabilities	603.5
Other non-current liabilities	95.5
	_______________
Total liabilities	1,373.1
	_______________
Fair value of identifiable assets acquired and liabilities assumed	3,997.0
	_______________
Consideration
Cash consideration paid	3,997.0
	_______________

(a) Other intangible assets – currently marketed products

Other intangible assets totaled $2,320.0 million at the date of acquisition, relating to intellectual property rights acquired for ViroPharma'sthen 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. The 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

The IPR&D asset of $315.0 millionrelates to maribavir (now SHP620), an investigational antiviral product for cytomegalovirus. The fair value of this IPR&D assetwas estimated based on an income approach, using the present value of incremental after tax cash flows expected to be generated by this development project after the deduction of contributory asset charges for other assets employed in this project. The estimated cash flows have been probability adjusted to take into account the stage of completion and the remaining risks and uncertainties surrounding the future development and commercialization.

The major risks and uncertainties associated with the timely completion of the acquired IPR&D project 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 information obtained during the measurement period) 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 $1,655.5 million, which is not deductible for tax purposes, includes the expected operational synergies that will result from combining the commercial operations of ViroPharma with those of Shire (valued at approximately $400million); 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 to March 31, 2015 the Company expensed costs of $3.3 million (2014: $65.8 million) 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.