Fair Value Measurement

6 Months Ended

Jun. 30, 2016

11. Fair Value Measurement

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

As of June 30, 2016 and December 31, 2015, 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

	Total	Level 1	Level 2	Level 3
At June 30, 2016	$'M	$'M	$'M	$'M
	____________	___________	___________	___________
Financial assets:
Marketable equity securities	54.4	54.4	-	-
Marketable debt securities	16.8	3.7	13.1
Contingent consideration receivable	17.5	-	-	17.5
Derivative instruments	65.3	-	65.3	-

Financial liabilities:
Derivative instruments	40.7	-	40.7	-
Contingent consideration payable	993.8	-	-	993.8
	____________	___________	___________	___________

	Total	Level 1	Level 2	Level 3
At December 31, 2015	$'M	$'M	$'M	$'M
	____________	___________	___________	___________
Financial assets:
Marketable equity securities	17.2	17.2	-	-
Contingent consideration receivable	13.8	-	-	13.8
Derivative contracts	1.9	-	1.9	-

Financial liabilities:
Derivative contracts	11.5	-	11.5	-
Contingent consideration payable	475.9	-	-	475.9
	____________	___________	___________	___________

Marketable equity 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 derivative see Note 12, Financial Instruments.

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 contracts – 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 our contingent consideration receivable and payables which include Level 3 measurements:

Contingent consideration receivable
	2016	2015
	$'M	$'M
	____________	____________

Balance at January 1,	13.8	15.9
Change in fair value included in earnings	2.1	8.6
Other	1.6	(7.8)

Balance at June 30,	17.5	16.7

Contingent consideration payable
	2016	2015
	$'M	$'M
	____________	____________

Balance at January 1,	475.9	629.9
Additions	562.5	92.1
Change in fair value included in earnings	(45.0)	(255.7)
Other	0.4	(1.6)

Balance at June 30,	993.8	464.7

The increase in contingent consideration payable is related to the Company's acquisition of Dyax as well as contingent consideration payable assumed in the acquisition of Baxalta. Other primarily includes foreign currency adjustments.

Of the $993.8 million of contingent consideration payable as of June 30, 2016, $49.2 million is recorded within Other current liabilities and $944.6 million is recorded within Other non-current liabilities in the Company's Unaudited Consolidated Balance Sheets.

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 at the Measurement Date

At June 30, 2016	Fair value	Valuation technique	Significant unobservable inputs	Range
	$'M
	____________	___________	___________	___________
Contingent consideration receivable	17.5	Income approach (probability weighted discounted cash flow)	• Probability weightings applied to different sales scenarios • Future forecast consideration receivable based on contractual terms with purchaser • Assumed market participant discount rate	• 10 to 90% • $0 to $25 million • 8.4%
	____________	____________	____________	____________

Financial liabilities:	Fair Value at the Measurement Date

At June 30, 2016	Fair value	Valuation technique	Significant unobservable inputs	Range
	$'M
	____________	___________	___________	___________
Contingent consideration payable	993.8	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	• 1 to 90% • 1.5 to 12.4% • 2016 to 2036 • $1.4 to $3.8 million
	____________	____________	____________	____________

Contingent consideration payable represents future milestones and royalties the Company may be required to pay in conjunction with various business combinations and license 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 not measured at fair value on a recurring basis

The carrying amounts and estimated fair values as at June 30, 2016 and December 31, 2015 of the Company's financial assets and liabilities which are not measured at fair value on a recurring basis are as follows:

	June 30, 2016		December 31, 2015
	Carrying		Carrying
	amount	Fair value	amount	Fair value
	$’M	$’M	$’M	$’M
	____________	____________	____________	___________

Financial liabilities:
Senior notes	5,114.0	5,114.0	-	-
Capital lease obligation	348.9	348.9	13.4	13.4
	____________	____________	____________	___________

The estimated fair values of long-term debt were computed by multiplying price by the notional amount of the respective debt instrument. Price is calculated using the stated terms of the respective debt instrument and yield curves commensurate with the company's credit risk. The discount factors used in the calculations reflect the non-performance risk of the company. 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.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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