Business Combinations

3 Months Ended

Mar. 31, 2016

Business Combinations [Abstract]

Business Combination Disclosure

2.       Business Combinations

Proposed combination with Baxalta

On January 11, 2016 Shire announcedthe proposedcombination withBaxalta. Under the terms of the merger agreement, Baxalta shareholders will receive $18.00 in cash and 0.1482 Shire American Depository Shares(“ADSs”) per Baxalta share, or if they properly elect, 0.4446 Shire ordinary shares per Baxalta share. Based on Shire's closing ADS price on January 8, 2016, this implies a total value of $45.57 per Baxalta share, representing an aggregate consideration of approximately $32 billion.

Baxalta is a global biopharmaceutical company that focuses on developing, manufacturing and commercializing therapies for orphan diseases and underserved conditions in hematology, oncology and immunology.

Closing of the transaction is subject to approval by Shire and Baxalta shareholders, certain regulatory approvals, redelivery of tax opinions initially delivered at signing and other customary closing conditions and representations. The Company expects the transaction to close in early June 2016.

Acquisition of Dyax

On January 22, 2016 Shire acquired all of the outstanding common stock of Dyax for $37.30 per share in cash. Under the terms of the merger agreement,Dyax shareholders may receive additional value through a non-tradable contingent value right worth $4.00 per share, payable generally upon US Food and Drug Administration(“FDA”) approval of SHP643 (formerly DX-2930) in Hereditary Angioedema (“HAE”).

Dyax was a publicly-traded, Massachusetts-based rare disease biopharmaceutical company primarily focused on the development of plasma kallikrein (“pKal”) inhibitors for the treatment ofHAE. Dyax's most advanced clinical program is SHP643, a Phase 3 program with the potential for improved efficacy and convenience for HAE patients. SHP643 has received Fast Track, Breakthrough Therapy, and Orphan Drug designations by the FDA and has also received Orphan Drug status in the EU. Dyaxalso brings a marketed product, KALBITOR, a pKal inhibitor for the treatment of acute attacks of HAE in patients 12 years of age and older.

The acquisition of Dyaxwas accounted for as a business combination using the acquisition method. The preliminary acquisition-date fair value consideration is $6,330.0 million, comprising cash paid on closing of $5,934.0 million and the preliminary fair value of the contingent value right of $396.0 million (maximum payable $646.0 million). The assets acquired and the liabilities assumed from Dyax have been recorded at their preliminary fair value as of January 22, 2016, the date of acquisition. The Company's unaudited consolidated financial statements included the results of Dyaxas of January 22, 2016.

The amount of Dyax's post-acquisition revenues and pre-tax losses included in the Company's unaudited consolidated statement of income for the three monthsended March 31, 2016 were $10.6 million and $55.8 million respectively. The pre-tax loss includes charges on the unwind of inventory fair value adjustments of $1.1 million, intangible assets amortization of $5.8 million and integration costs of $21.0 million.

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

	Fair value
	$’M
ASSETS
Current assets:
Cash and cash equivalents	241.2
Accounts receivable, net	13.3
Inventories	20.2
Other current assets	8.1
	_______________
Total current assets	282.8
Non-current assets:
Property, plant and equipment, net	5.8
Goodwill	2,729.5
Other intangible assets, net
- Currently marketed products	135.0
- In-Process Research and Development (“IPR&D”)	4,100.0
-Contract based royalty arrangements	425.0
Other non-current assets	28.3
	_______________
Total assets	7,706.4
	_______________
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued expenses	30.0
Other current liabilities	1.7
Non-current liabilities:
Deferred tax liability	1,343.3
Other non-current liabilities	1.4
	_______________
Total liabilities	1,376.4
	_______________
Preliminary fair value of identifiable assets acquired and liabilities assumed	6,330.0
	_______________
Consideration
Preliminary fair value of purchase consideration	6,330.0

(a) Currently marketed product

Other intangible assets totaling $135.0 million relate to intellectual property rights acquired for Dyax's currently marketed product, KALBITOR. The fair value of the currently marketed product has been estimated using an income approach, based on the present value of incremental after tax cash flows attributable to KALBITOR.

The estimated useful life of the KALBITOR intangible asset is 18 years, with amortization being recorded on a straight-line basis.

(b) Other intangible assets – IPR&D

TheIPR&Dasset of $4,100.0 millionrelates toDyax's clinical program SHP643, a Phase 3 program with the potential for improved efficacy and convenience for HAE patients.Thefair value of this IPR&D assetwasestimated based on an income approach, using the present value of incremental after tax cash flows expected to be generatedby this development project. The estimated cash flows have been probability adjusted to take into account thestage of completion and the remaining risks anduncertainties surrounding thefuture development and commercialization.

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.

The estimated probability adjusted after tax cash flows used to estimate the fair value of other intangible assets have been discounted at 9%.

(c) Other intangible assets – Royalty rights

Other intangible assets totaling $425.0 million relate to royalty rights arising from licensing agreements of a portfolio of product candidates. This portfolio includes two approved products, marketed by Eli Lilly & Company, and various development-stage products. Multiple product candidates with other pharmaceutical companies are in various stages of clinical development for which the Company is eligible to receive future royalties and/or milestone payments.

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 seven to nine years (weighted average eight years), with amortization being recorded on a straight-line basis.

(d) Goodwill

Goodwill of $2,729.5 million, which is not deductible for tax purposes, includes the expected synergies that will result from combining the operations of Dyax with 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;the value of the assembled workforce; and impacted by establishing a deferred tax liability for the acquired identifiable intangible assetswhich have no tax basis.

In the three months ended March 31, 2016 the Company expensed $51.7million relating to the acquisition and integration of Dyax, 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 Dyax as if the acquisition of Dyax had occurred as of January 1, 2015. 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 Ended March 31,
	2016	2015
	$’M	$’M
	_______________	_______________
Revenues	1,715.3	1,508.8
Net income from continuing operations	401.6	279.0
	_______________	_______________
Per share amounts:
Net income from continuing operations per share - basic	$0.68	$0.47
Net income from continuing operations per share - diluted	$0.68	$0.47
	_______________	_______________

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 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.

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

• an adjustment to decrease net income by $99.2 million for the three monthsended March 31, 2015to reflect acquisition costs incurred by Shire and Dyax, and increase net income by $99.2 million for the three monthsendedMarch 31, 2016 to eliminate acquisition costs incurred;
• an adjustment to decrease net income by $0.7 million for the three months ended March 31, 2015 to reflect amortization of the fair value adjustments for inventory as inventory is sold;
• an adjustment to increase amortization expense by approximately $1.3 million and $5.4 million for the three months ended March 31, 2016 and March 31, 2015, respectively, related to the identifiable intangible assets acquired; and
• an adjustment of $20.4 million in the three months ended March 31, 2015 to record interest expense associated with the debt incurred to partially fund the acquisition of Dyax and the amortization of related deferred debt issuance costs.

The adjustments above are stated net of their tax effects, where applicable.

Acquisition of NPS

On February 21, 2015 Shire completed its acquisition of all of the outstanding common stock of NPS. As of the acquisition date, fair value of the cash consideration paid on closing was $5,220 million.

The acquisition of NPS added GATTEX/REVESTIVE and NATPARA/NATPAR to Shire's portfolio of currently marketed products. GATTEX/REVESTIVE is approved in the US and EU for the treatment of adults with short bowel syndrome (“SBS”) who are dependent on parenteral support, a rare and potentially fatal gastrointestinal disorder. NATPARA/NATPAR is approved in the US and indicated as an adjunct to calcium and vitamin D to control hypocalcemia in patients withhypoparathyroidism (“HPT”), a rare endocrine disease.

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

The purchase price allocation for the acquisition of NPS was finalized in the fourth quarter of 2015. The Company's allocation of the purchase price to the estimated fair value of assets acquired and liabilities assumed is outlined below:

	Fair value
	$’M
ASSETS
Current assets:
Cash and cash equivalents	41.6
Short-term investments	67.0
Accounts receivable	33.4
Inventories	89.4
Other current assets	11.1
	_______________
Total current assets	242.5
Non-current assets:
Property, plant and equipment, net	4.8
Goodwill	1,551.0
Other intangible assets
- currently marketed products	4,640.0
- royalty rights (categorized as "Other amortized intangible assets" )	353.0
	_______________
Total assets	6,791.3
	_______________
LIABILITIES
Current liabilities:
Accounts payable and other current liabilities	75.7
Short-term debt	27.4
Non-current liabilities:
Long-term debt, less current portion	78.9
Deferred tax liabilities	1,385.2
Other non-current liabilities	4.5
	_______________
Total liabilities	1,571.7
	_______________
Fair value of identifiable assets acquired and liabilities assumed	5,219.6
Consideration	_______________
Cash consideration paid	5,219.6
	_______________

(a) Other intangible assets – Currently marketed products

Other intangible assets totaling $4,640.0 million relate to intellectual property rights of NATPARA/NATPAR and GATTEX/REVESTIVE. The estimated fair value of the 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 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 intangible assets totaling $353.0 million relate to the royalty rights arising from the collaboration agreements with Amgen Inc (“Amgen”), Janssen Pharmaceutica N.V. (“Janssen”) and Kyowa Hakko Kirin Co. Ltd (“Kyowa Hakko Kirin”). Amgen markets cinacalcetHCl as Sensipar in the US and as Mimpara in the EU; Janssen markets tapentadol as Nucynta in the US; and Kyowa Hakko Kirin markets cinacalcet HCI as Regpara in Japan, Hong Kong, Malaysia, Macau, Singapore, and Taiwan. NPS is entitled to royalties from the net sales of these products.

The fair value of these royalty rights 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 four to five years (weighted average four years) with amortization being recorded on a straight-line basis.

(c) Goodwill

Goodwill of $1,551.0 million, which is not deductible for tax purposes, includes the expected synergies that will result from combining the operations of NPS 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; the value of the assembled workforce; and impacted by establishing a deferred tax liability for the acquired identifiable intangible assets which have no tax basis.