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EX-32.1 - EXHIBIT 32.1 - Shire plcex321.htm
EX-31.2 - EXHIBIT 31.2 - Shire plcex312.htm
EX-31.1 - EXHIBIT 31.1 - Shire plcex311.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended June 30, 2018

Commission file number 0-29630 
shirelogobluergba34.jpg
SHIRE PLC
(Exact name of registrant as specified in its charter)
Jersey (Channel Islands)
(State or other jurisdiction of incorporation or organization) 
98-0601486
(I.R.S. Employer Identification No.) 
 
 
Block 2, Miesian Plaza, 50-58 Baggot Street Lower, Dublin 2, Republic of Ireland 
(Address of principal executive offices and zip code)

+353 1 609 6000
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x    No o 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x    No o 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x                                Accelerated filer o    
Non-accelerated filer o    (Do not check if a smaller reporting company)         Smaller reporting company o
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o     No x
As of July 27, 2018, the number of outstanding ordinary shares of the Registrant was 914,397,895.


1


SHIRE PLC
Form 10-Q for the Quarterly Period Ended June 30, 2018
Table of Contents
 
Page
 
 
 


2


THE “SAFE HARBOR” STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Statements included herein that are not historical facts, including without limitation statements concerning future strategy, plans, objectives, expectations and intentions, projected revenues, the anticipated timing of clinical trials and approvals for, and the commercial potential of, inline or pipeline products, are forward-looking statements. Such forward-looking statements involve a number of risks and uncertainties and are subject to change at any time. In the event such risks or uncertainties materialize, Shire’s results could be materially adversely affected. The risks and uncertainties include, but are not limited to, the following:

Shire’s products may not be a commercial success;
increased pricing pressures and limits on patient access as a result of governmental regulations and market developments may affect Shire’s future revenues, financial condition and results of operations;
Shire depends on third parties to supply certain inputs and services critical to its operations including certain inputs, services and ingredients critical to its manufacturing processes. Any disruption to the supply chain for any of Shire’s products may result in Shire being unable to continue marketing or developing a product or may result in Shire being unable to do so on a commercially viable basis for some period of time;
the manufacture of Shire’s products is subject to extensive oversight by various regulatory agencies. Regulatory approvals or interventions associated with changes to manufacturing sites, ingredients or manufacturing processes could lead to, among other things, significant delays, an increase in operating costs, lost product sales, an interruption of research activities or the delay of new product launches;
the nature of producing plasma-based therapies may prevent Shire from timely responding to market forces and effectively managing its production capacity;
Shire has a portfolio of products in various stages of research and development. The successful development of these products is highly uncertain and requires significant expenditures and time, and there is no guarantee that these products will receive regulatory approval;
the actions of certain customers could affect Shire’s ability to sell or market products profitably. Fluctuations in buying or distribution patterns by such customers can adversely affect Shire’s revenues, financial conditions or results of operations;
failure to comply with laws and regulations governing the sales and marketing of its products could materially impact Shire’s revenues and profitability;
Shire’s products and product candidates face substantial competition in the product markets in which it operates, including competition from generics;
Shire’s patented products are subject to significant competition from generics;
adverse outcomes in legal matters, tax audits and other disputes, including Shire’s ability to enforce and defend patents and other intellectual property rights required for its business, could have a material adverse effect on Shire’s revenues, financial condition or results of operations;
Shire may fail to obtain, maintain, enforce or defend the intellectual property rights required to conduct its business;
Shire faces intense competition for highly qualified personnel from other companies and organizations;
failure to successfully execute or attain strategic objectives from Shire’s acquisitions and growth strategy may adversely affect Shire’s financial condition and results of operations;
Shire’s growth strategy depends in part upon its ability to expand its product portfolio through external collaborations, which, if unsuccessful, may adversely affect the development and sale of its products;
a slowdown of global economic growth, or economic instability of countries in which Shire does business, could have negative consequences for Shire’s business and increase the risk of non-payment by Shire’s customers;
changes in foreign currency exchange rates and interest rates could have a material adverse effect on Shire’s operating results and liquidity;
Shire is subject to evolving and complex tax laws, which may result in additional liabilities that may adversely affect Shire’s financial condition or results of operations;
if a marketed product fails to work effectively or causes adverse side effects, this could result in damage to Shire’s reputation, the withdrawal of the product and legal action against Shire;
Shire is dependent on information technology and its systems and infrastructure face certain risks, including from service disruptions, the loss of sensitive or confidential information, cyber-attacks and other security breaches or data leakages that could have a material adverse effect on Shire’s revenues, financial condition or results of operations;
Shire faces risks relating to the expected exit of the United Kingdom from the European Union;
Shire incurred substantial additional indebtedness to finance the Baxalta acquisition, which has increased its borrowing costs and may decrease its business flexibility;

3


the potential uncertainty among our employees, customers, suppliers, and other business partners resulting from the announcement by Takeda Pharmaceutical Company Limited on May 8, 2018 of a recommended offer for Shire under the U.K. Takeover Code; and

a further list and description of risks, uncertainties and other matters can be found in Shire's most recent Annual Report on Form 10-K and in Shire’s subsequent Quarterly Reports on Form 10-Q, in each case including those risks outlined in “ITEM 1A: Risk Factors”, and in Shire’s subsequent reports on Form 8-K and other Securities and Exchange Commission filings, all of which are available on Shire’s website.

All forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by this cautionary statement. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof. Except to the extent otherwise required by applicable law, we do not undertake any obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.

Trademarks

The Company owns or has rights to trademarks, service marks, or trade names that are used in connection with the operation of its business. In addition, its names, logos, and website names and addresses are owned by the Company or licensed by the Company. The Company also owns or has the rights to copyrights that protect the content of its solutions. Solely for convenience, the trademarks, service marks, trade names, and copyrights referred to in this Quarterly Report on Form 10-Q are listed without the ©, ®, and ™ symbols, but the Company will assert, to the fullest extent under applicable law, its rights or the rights of the applicable licensors to these trademarks, service marks, trade names, and copyrights.

This Quarterly Report on Form 10-Q may include trademarks, service marks, or trade names of other companies. The Company's use or display of other parties’ trademarks, service marks, trade names, or products is not intended to, and does not imply a relationship with, or endorsement or sponsorship of the Company by, the trademark, service mark, or trade name.



4


PART I: Financial Information

Item 1. Financial Statements
SHIRE PLC
CONSOLIDATED BALANCE SHEETS 
(Unaudited, in millions, except par value of shares)
 
June 30, 2018
 
December 31, 2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
259.7

 
$
472.4

Restricted cash
35.0

 
39.4

Accounts receivable, net
3,005.1

 
3,009.8

Inventories
3,353.3

 
3,291.5

Held for sale and other current assets
3,135.3

 
795.3

Total current assets
9,788.4

 
7,608.4

Investments
527.8

 
241.1

Property, plant and equipment (PP&E), net
6,426.6

 
6,635.4

Goodwill
19,043.7

 
19,831.7

Intangible assets, net
30,110.5

 
33,046.1

Deferred tax asset
158.3

 
188.8

Other non-current assets
166.8

 
205.4

Total assets
$
66,222.1

 
$
67,756.9

LIABILITIES AND EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued expenses
$
3,888.5

 
$
4,184.5

Short term borrowings and capital leases
1,192.9

 
2,788.7

Other current liabilities
1,225.9

 
908.8

Total current liabilities
6,307.3

 
7,882.0

Long term borrowings and capital leases
16,722.0

 
16,752.4

Deferred tax liability
4,367.3

 
4,748.2

Other non-current liabilities
2,065.1

 
2,197.9

Total liabilities
29,461.7

 
31,580.5

Commitments and contingencies


 


Equity:
 
 
 
Common stock of 5p par value; 1,500 shares authorized; and 921.4 shares issued and outstanding (2017: 1,500 shares authorized; and 917.1 shares issued and outstanding)
81.9

 
81.6

Additional paid-in capital
25,296.4

 
25,082.2

Treasury stock: 8.1 shares (2017: 8.4 shares)
(275.1
)
 
(283.0
)
Accumulated other comprehensive income
727.6

 
1,375.0

Retained earnings
10,929.6

 
9,920.6

Total equity
36,760.4

 
36,176.4

Total liabilities and equity
$
66,222.1

 
$
67,756.9

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.


5


SHIRE PLC
CONSOLIDATED STATEMENTS OF OPERATIONS 
(Unaudited, in millions, except per share amounts)
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Product sales
$
3,808.6

 
$
3,591.8

 
$
7,445.7

 
$
7,004.1

Royalties and other revenues
110.9

 
154.0

 
239.5

 
314.0

Total revenues
3,919.5

 
3,745.8

 
7,685.2

 
7,318.1

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales
1,108.3

 
1,108.9

 
2,240.7

 
2,435.9

Research and development
427.6

 
542.4

 
832.8

 
921.7

Selling, general and administrative
907.7

 
899.1

 
1,712.5

 
1,788.0

Amortization of acquired intangible assets
457.6

 
434.1

 
941.6

 
798.1

Integration and acquisition costs
179.3

 
343.7

 
419.0

 
459.7

Reorganization costs
8.8

 
13.6

 
14.1

 
19.1

Loss/(gain) on sale of product rights

 
4.8

 

 
(0.7
)
Total operating expenses
3,089.3

 
3,346.6

 
6,160.7

 
6,421.8

 
 
 
 
 
 
 
 
Operating income from continuing operations
830.2

 
399.2

 
1,524.5

 
896.3

 
 
 
 
 
 
 
 
Interest income
0.9

 
1.1

 
3.5

 
4.2

Interest expense
(125.9
)
 
(141.3
)
 
(252.9
)
 
(283.6
)
Other income, net
29.0

 
2.5

 
52.2

 
7.0

Total other expense, net
(96.0
)
 
(137.7
)
 
(197.2
)
 
(272.4
)
 
 
 
 
 
 
 
 
Income from continuing operations before income taxes and equity in earnings of equity method investees
734.2

 
261.5

 
1,327.3

 
623.9

Income taxes
(124.4
)
 
(24.3
)
 
(167.7
)
 
(31.1
)
Equity in earnings of equity method investees, net of taxes
5.7

 
4.3

 
6.5

 
3.5

Income from continuing operations, net of taxes
615.5

 
241.5

 
1,166.1

 
596.3

(Loss)/gain from discontinued operations, net of taxes

 
(1.2
)
 

 
19.0

Net income
$
615.5

 
$
240.3

 
$
1,166.1

 
$
615.3

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.



6


SHIRE PLC
CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
(Unaudited, in millions, except per share amounts)
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Earnings per Ordinary Share – basic
 
 
 
 
 
 
 
Earnings from continuing operations  
$
0.67

 
$
0.27

 
$
1.28

 
$
0.66

Earnings from discontinued operations

 

 

 
0.02

Earnings per Ordinary Share – basic
$
0.67

 
$
0.27

 
$
1.28

 
$
0.68

 
 
 
 
 
 
 
 
Earnings per Ordinary Share – diluted
 
 
 
 
 
 
 
Earnings from continuing operations  
$
0.67

 
$
0.26

 
$
1.27

 
$
0.65

Earnings from discontinued operations

 

 

 
0.02

Earnings per Ordinary Share – diluted
$
0.67

 
$
0.26

 
$
1.27

 
$
0.67

 
 
 
 
 
 
 
 
Weighted average number of shares:
 
 
 
 
 
 
 
Basic  
912.6

 
906.4

 
911.0

 
905.3

Diluted
917.5

 
912.7

 
914.8

 
912.3

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.


7


SHIRE PLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 
(Unaudited, in millions)
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
615.5

 
$
240.3

 
$
1,166.1

 
$
615.3

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(1,118.0
)
 
1,431.0

 
(578.5
)
 
1,696.5

Pension and other employee benefits (net of tax expense of $nil for the three and six months ended June 30, 2018 and $1.3 and $0.9 for the three and six months ended June 30, 2017, respectively)
(0.5
)
 
3.2

 
(1.0
)
 
10.6

Unrealized loss on available-for-sale securities (net of tax benefit of $nil for the three and six months ended June 30, 2018 and net of tax benefit of $0.5 and tax expense of $1.7 for the three and six months ended June 30, 2017, respectively)

 
(5.6
)
 
(67.9
)
 
(3.5
)
Hedging activities (net of tax benefit of $nil for the three and six months ended June 30, 2018 and $0.5 and $3.2 for the three and six months ended June 30, 2017, respectively)

 
(1.4
)
 

 
(5.9
)
Comprehensive (loss)/income
$
(503.0
)
 
$
1,667.5

 
$
518.7

 
$
2,313.0


The components of Accumulated other comprehensive income as of June 30, 2018 and December 31, 2017 are as follows:
 
June 30, 2018
 
December 31, 2017
Foreign currency translation adjustments
$
701.1

 
$
1,279.6

Pension and other employee benefits, net of taxes
26.5

 
27.5

Unrealized holding gain on available-for-sale securities, net of taxes

 
67.9

Accumulated other comprehensive income
$
727.6

 
$
1,375.0

 

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.



8


SHIRE PLC
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Unaudited, in millions)
 
Common stock number of shares
 
Common stock
 
Additional paid-in capital
 
Treasury stock
 
Accumulated other comprehensive income
 
Retained earnings
 
Total equity
As of January 1, 2018
917.1

 
$
81.6

 
$
25,082.2

 
$
(283.0
)
 
$
1,375.0

 
$
9,920.6

 
$
36,176.4

Net income

 

 

 

 

 
1,166.1

 
1,166.1

Other comprehensive loss, net of tax

 

 

 

 
(647.4
)
 

 
(647.4
)
Shares issued under employee benefit plans and other
4.3

 
0.3

 
127.3

 

 

 

 
127.6

Cumulative-effect adjustment from adoption of ASU 2014-09, Revenue from Contracts with Customers

 

 

 

 

 
52.0

 
52.0

Cumulative-effect adjustment from adoption of ASU 2016-01, Financial Instruments - Overall

 

 

 

 

 
67.9

 
67.9

Cumulative-effect adjustment from adoption of ASU 2016-16, Income Taxes

 

 

 

 

 
7.5

 
7.5

Share-based compensation

 

 
86.9

 

 

 

 
86.9

Shares released by employee benefit trust to satisfy exercise of stock options

 

 

 
7.9

 

 
(7.9
)
 

Dividends

 

 

 

 

 
(276.6
)
 
(276.6
)
As of June 30, 2018
921.4

 
$
81.9

 
$
25,296.4

 
$
(275.1
)
 
$
727.6

 
$
10,929.6

 
$
36,760.4


Dividends per share

During the six months ended June 30, 2018, Shire plc declared and paid dividends of $0.2979 U.S. per ordinary share (equivalent of $0.8937 U.S. per ADS) totaling $276.6 million. During the six months ended June 30, 2017, Shire plc declared and paid dividends of $0.257 U.S. per ordinary share (equivalent to $0.771 U.S. per ADS) totaling $234.7 million.

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.


9


SHIRE PLC 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
 
Six months ended June 30,
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 

 
 

Net income
$
1,166.1

 
$
615.3

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
1,216.8

 
1,041.7

Share based compensation
86.9

 
106.4

Expense related to the unwind of inventory fair value adjustments
39.3

 
625.4

Change in deferred taxes
(204.9
)
 
(293.3
)
Change in fair value of contingent consideration
45.9

 
147.7

Impairment of PP&E and intangible assets
153.3

 
53.6

Other, net
(47.1
)
 
21.6

Changes in operating assets and liabilities:
 
 
 
Increase in accounts receivable
(126.3
)
 
(181.5
)
Increase in sales deduction accrual
37.5

 
57.1

Increase in inventory
(169.8
)
 
(171.6
)
(Increase)/decrease in prepayments and other assets
(61.5
)
 
104.6

Decrease in accounts payable and other liabilities
(186.3
)
 
(445.1
)
Net cash provided by operating activities
1,949.9

 
1,681.9

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of PP&E
(361.3
)
 
(391.1
)
Proceeds from sale of investments

 
40.6

Other, net
(35.6
)
 
3.2

Net cash used in investing activities
(396.9
)
 
(347.3
)


10


SHIRE PLC 
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited, in millions)
 
Six months ended June 30,
 
2018
 
2017
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from revolving line of credit, long term and short term borrowings
2,650.3

 
2,111.9

Repayment of revolving line of credit, long term and short term borrowings
(4,262.3
)
 
(3,527.9
)
Payment of dividend
(276.6
)
 
(234.7
)
Proceeds from issuance of stock for share-based compensation arrangements
133.7

 
79.5

Other, net
(6.9
)
 
(24.0
)
Net cash used in financing activities
(1,761.8
)
 
(1,595.2
)
 
 
 
 
Effect of foreign exchange rate changes on cash and cash equivalents
(8.3
)
 
4.1

 
 
 
 
Net decrease in cash, cash equivalents, and restricted cash
(217.1
)
 
(256.5
)
Cash, cash equivalents, and restricted cash at beginning of period
511.8

 
554.4

Cash, cash equivalents, and restricted cash at end of period
$
294.7

 
$
297.9

 
 
 
 
Supplemental information:
 
 
 
Interest paid
$
242.4

 
$
267.0

Income taxes paid, net
$
424.5

 
$
176.0

 
 
 
 
Cash, cash equivalents, and restricted cash information:
 
 
 
Cash and cash equivalents
$
259.7

 
$
263.7

Restricted cash
35.0

 
34.2

Cash, cash equivalents, and restricted cash at end of period
$
294.7

 
$
297.9

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.


11


SHIRE PLC
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
1.    Description of Operations

Shire plc and its subsidiaries (collectively referred to as either “Shire” or the “Company”) is the leading global biotechnology company focused on serving people with rare diseases.

Some of the Company's marketed products include GAMMAGARD, HYQVIA, and CINRYZE for Immunology, ADVATE/ADYNOVATE, VONVENDI, and FEIBA for Hematology, ELAPRASE and REPLAGAL for Genetic Diseases, VYVANSE, ADDERALL XR, and MYDAYIS for Neuroscience, GATTEX/REVESTIVE, and NATPARA/NATPAR for Internal Medicine, XIIDRA for Ophthalmics, and ONCASPAR and ONYVIDE for Oncology.

The Company has grown both organically and through acquisition, completing a series of major transactions that have brought therapeutic, geographic, and pipeline growth and diversification. The Company will continue to conduct its own research and development (R&D) focused on rare diseases, as well as evaluate companies, products and pipeline opportunities that offer a strategic fit and have the potential to deliver value to all of the Company’s stakeholders: patients, physicians, policy makers, payers, partners, investors, and employees.

On April 16, 2018, Shire entered into a definitive agreement with Servier S.A.S. (Servier) to sell its Oncology franchise for $2.4 billion.

On May 8, 2018, the boards of Takeda Pharmaceutical Company Limited (Takeda) and Shire announced that they have reached agreement on the terms of a recommended offer pursuant to which Takeda will acquire the entire issued and to be issued ordinary share capital of Shire (the "Acquisition"). Shire shareholders will be entitled to receive $30.33 in cash for each Shire ordinary share and either 0.839 of a new share in Takeda (as proposed to be issued in connection with the Acquisition) (each a "New Takeda Share") or 1.678 ADSs in Takeda (one ADS equals 0.5 New Takeda Share).

2.    Summary of Significant Accounting Policies

Basis of Presentation 

These interim financial statements of Shire plc and its subsidiaries are unaudited. They have been prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP).

The Consolidated Balance Sheet as of December 31, 2017 was derived from the Audited Consolidated Financial Statements as of that date.

These interim Unaudited Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on February 20, 2018.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted from these interim financial statements. However, these interim financial statements include all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary to fairly state the results of the interim period and the Company believes that the disclosures are adequate to make the information presented not misleading. Interim results are not necessarily indicative of results to be expected for the full year.

Use of Estimates

The preparation of Financial Statements, in conformity with U.S. GAAP and SEC regulations, requires management to make estimates, judgments, and assumptions that affect the reported and disclosed amounts of assets, liabilities, and equity at the date of the Unaudited Consolidated Financial Statements and reported amounts of revenues and expenses during the period. On an on-going basis, the Company evaluates its estimates, judgments, and methodologies. Estimates are based on historical experience, current conditions, and on various other assumptions that are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets, liabilities, and equity and the amounts of revenues and expenses. Actual results may differ from these estimates under different assumptions or conditions.

12



New Accounting Pronouncements 

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies that the Company adopts as of the specified effective date. Unless otherwise discussed below, the Company does not believe that the impact of recently issued standards that are not yet effective will have a material impact on the Company’s financial position or results of operations upon adoption.

Adopted during the current period 

Revenue from Contracts with Customers

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The FASB subsequently issued several additional ASUs amending the guidance and deferred effective date to January 1, 2018. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements, and financial instruments. Under this accounting standard, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. The Company adopted this new standard on January 1, 2018, using the modified retrospective transition method. Under this method, the Company recognized the cumulative-effect of initially applying the standard as an adjustment to the opening balance of retained earnings. As a result, the Company recorded a cumulative-effect adjustment to increase Retained earnings by $52.0 million, net of tax of $15.6 million. The modified retrospective transition method was applied only to the contracts that were not completed as of the adoption date.

For a complete discussion of accounting for revenue with customers, refer to Note 3, Revenue Recognition, to these Unaudited Consolidated Financial Statements.

Impact of adoption

As a result of adopting the new accounting for revenue with customers on January 1, 2018, the following financial statement line items as of and for the three and six months ended June 30, 2018 were affected. The following tables provide the amounts as reported in these Unaudited Consolidated Financial Statements and as if the previous accounting guidance was in effect.

Unaudited Consolidated Balance Sheets
 
As of June 30, 2018
(In millions)
As reported
 
Before Adoption of Topic 606
Held for sale and other current assets
$
3,135.3

 
$
3,079.3

Other current liabilities
1,225.9

 
1,226.9

Other non-current liabilities
2,065.1

 
2,067.2

Retained earnings
10,929.6

 
10,926.4



13


Unaudited Consolidated Statements of Operations
 
Three months ended June 30, 2018
 
Six months ended June 30, 2018
(In millions, except per share)
As reported
 
Before Adoption of Topic 606
 
As reported
 
Before Adoption of Topic 606
Product sales
$
3,808.6

 
$
3,809.6

 
$
7,445.7

 
$
7,452.1

Royalties and other revenues
110.9

 
144.9

 
239.5

 
296.3

Net income
615.5

 
642.5

 
1,166.1

 
1,214.9

Net income per share applicable to common shareholders - basic
0.67

 
0.70

 
1.28

 
1.33

Net income per share applicable to common shareholders - diluted
0.67

 
0.70

 
1.27

 
1.33


Unaudited Consolidated Statements of Cash Flows
 
Six months ended June 30, 2018
(In millions)
As reported
 
Before Adoption of Topic 606
Net income
$
1,166.1

 
$
1,214.9

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
    Increase in prepayments and other assets
(61.5
)
 
(5.5
)
    Decrease in accounts payable and other liabilities
(186.3
)
 
(183.2
)

Financial Instrument Accounting

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new standard amends certain aspects of accounting and disclosure requirements of financial instruments, including the requirement that equity investments with readily determinable fair values be measured at fair value with changes in fair value recognized in the results of operations. The new standard was effective January 1, 2018. The Company adopted ASU No. 2016-01 in the first quarter of 2018. As a result of the adoption, the Company recorded a cumulative-effect adjustment to Retained earnings of $67.9 million to reclassify unrealized gains from available-for-sale equity securities previously recognized in the Other comprehensive income.

Statement of Cash Flows

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The new standard clarifies certain aspects of the statement of cash flows, and aims to reduce diversity in practice regarding how certain transactions are classified in the statement of cash flows. This standard was effective January 1, 2018. The Company adopted ASU No. 2016-15 in the first quarter of 2018. The adoption of this guidance did not have a material impact on the Company's financial position and results of operations.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The new guidance is intended to reduce diversity in the presentation of restricted cash and restricted cash equivalents in the statement. The guidance requires that restricted cash and restricted cash equivalents be included as components of total cash and cash equivalents as presented on the statement of cash flows. This standard was effective January 1, 2018. The Company adopted ASU No. 2016-18 in the first quarter of 2018 and amended the presentation of its statements of cash flows for the six months ended June 30, 2018 and 2017 accordingly. The adoption of this guidance did not have a material impact on the Company's financial position and results of operations.


14


Income Taxes

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers Other than Inventory. This standard removes the current exception in U.S. GAAP prohibiting entities from recognizing current and deferred income tax expenses or benefits related to transfer of assets, other than inventory, within the consolidated entity. The current exception to defer the recognition of any tax impact on the transfer of inventory within the consolidated entity until it is sold to a third party remains unaffected. The standard was effective January 1, 2018. The Company adopted the new standard in the first quarter of 2018 using a modified retrospective approach with a cumulative-effect adjustment to opening retained earnings. The adoption of this guidance did not have a material impact on the Company's financial position and results of operations.

Retirement Benefits Income Statement Presentation

In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The standard amends the income statement presentation of the components of net periodic benefit cost for defined benefit pension and other postretirement plans. The standard requires entities to (1) disaggregate the current-service-cost component from the other components of net benefit cost (the “other components”) and present it with other current compensation costs for related employees in the income statement and (2) present the other components elsewhere in the income statement and outside of income from operations if such a subtotal is presented. It also requires entities to disclose the income statement lines that contain the other components if they are not presented on appropriately described separate lines. The standard was effective January 1, 2018. The Company adopted ASU No. 2017-07 in the first quarter of 2018. Adoption of this standard did not have a material impact on the Company’s financial position and results of operations.

Share-Based Payment Accounting
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope Modification Accounting. The new standard clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. This standard was effective January 1, 2018. The Company adopted ASU No. 2017-09 in the first quarter of 2018. Adoption of this standard did not have a material impact on the Company’s financial position and results of operations.

Simplifying the Test for Goodwill Impairment

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test of Goodwill Impairment. This new standard simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The Company adopted ASU No. 2017-04 in the first quarter of 2018. Adoption of this standard did not have a material impact on the Company’s financial position and results of operations.

To be adopted in future periods 

Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new accounting guidance will require the recognition of all long-term lease assets and lease liabilities by lessees and sets forth new disclosure requirements for those lease assets and liabilities. The standard requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements. This standard will be effective for the Company on January 1, 2019. Early adoption is permitted. The Company is currently evaluating the potential impact on its financial position and results of operations of adopting this guidance. The Company expects the adoption of this new standard may have a material impact on total assets and total liabilities within the Company's Consolidated Balance Sheets, with no material impact to its Consolidated Statements of Operations.


15


Derivatives and Hedging

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The standard amends its hedge accounting model to enable entities to better portray the economics of their risk management activities in the financial statements. The new guidance also expands an entity's ability to hedge non-financial and financial risk components and reduces complexity in fair value hedges of interest rate risk. Additionally, it eliminates the requirement to separately measure and report hedge ineffectiveness, eases certain assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. This standard will be effective for the Company on January 1, 2019. Early adoption is permitted. The Company is currently evaluating the method of adoption and the potential impact on its financial position and results of operations of adopting this guidance.

3. Revenue Recognition

Product Revenue, Net

The Company sells its products to major pharmaceutical wholesalers, distributors, and retail pharmacy chains (collectively, its "Customers"). These Customers subsequently resell the Company’s products to healthcare providers and patients. In addition to distribution agreements with Customers, the Company enters into arrangements with healthcare providers and payors that provide for government-mandated and/or privately-negotiated rebates, chargebacks, and discounts with respect to the purchase of the Company’s products. 

Revenues from Product sales are recognized when the Customer obtains control, typically upon delivery. When the terms of the contract include customer acceptance provisions, the Company defers revenue recognition until the customer has accepted the goods, unless the acceptance provision relates only to objective specifications which the Company can determine will be met upon shipment. Customer acceptance provisions include temperature checks, government inspections, and other quality control tests. Shipping and handling and fulfillment costs are accrued for when the related revenue is recognized. Taxes collected from Customers relating to product sales and remitted to governmental authorities are excluded from revenues.

Estimates of Variable Consideration

Revenues from Product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for reserves related to statutory rebates to State Medicaid and other government agencies; Medicare Part D rebates; commercial rebates and fees to Managed Care Organizations (MCOs), Group Purchasing Organizations (GPOs), distributors, and specialty pharmacies; product returns; sales discounts (including trade discounts); distribution service fees; wholesaler chargebacks; and allowances for coupon and patient assistance programs relating to the Company’s sales of its products.

These reserves are based on estimates of the amounts earned or to be claimed on the related sales. Management's estimates take into consideration historical experience, current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the contract. The amount of variable consideration included in the net sales price is limited to the amount that is probable not to result in a significant reversal in the amount of the cumulative revenue recognized in a future period. If actual results vary, the Company may adjust these estimates, which could have an effect on earnings in the period of adjustment.
Trade discounts are generally credits granted to wholesalers, specialty pharmacies, and other customers for remitting payment on their purchases within established incentive periods and are classified as a reduction of accounts receivable, offset by revenue in the same period that the related revenue is recognized.
Chargebacks are credits or payments issued to wholesalers and other distributors who provide products to qualified healthcare providers at prices lower than the list prices charged to the wholesalers or other distributors. Reserves are estimated based on expected purchases by those qualified healthcare providers. Chargeback reserves are classified as a reduction of accounts receivable in the same period that the related revenue is recognized.

16


Distribution service fees are credits or payments issued to wholesalers, distributors, and specialty pharmacies for compliance with various contractually-defined inventory management practices or services provided to support patient access to a product. These fees are generally based on a percentage of gross purchases but can also be based on additional services these entities provide. Most of these costs are reflected as a reduction of gross sales; however, to the extent benefit from services can be separately identified and the fair value determined, costs are classified as Selling, general and administrative expenses. Distribution service fees reserves are estimated based on the terms of each individual contract and are classified within accrued expenses.
Medicaid rebates are payments to States under statutory and voluntary reimbursement arrangements. Reserves for these rebates are generally based on an estimate of expected product usage by Medicaid patients and expected rebate rates. Statutory rates are generally based on a percentage of selling price adjusted upwards for price increases in excess of published inflation indices. As a result, rebates generally increase as a percentage of the selling price over the life of the product (as prices increase). Medicaid rebate reserves are estimated based on individual product purchase volumes and are classified within accrued expenses.
Managed care rebates are payments to third parties, primarily pharmacy benefit managers, and other health insurance providers. The reserve for these rebates is based on an estimate of customer buying patterns and applicable contractual rebate rates to be earned over each period. Managed care rebates reserves are estimated based on the terms of each individual contract and purchase volumes and are classified within accrued expenses.
Incentive rebates are generally credits or payments issued to specialty pharmacies, distributors, or Group Purchasing Organizations for qualified purchases of certain products. Incentive rebate reserves are estimated based on the terms of each individual contract and purchase volumes and are classified within accrued expenses.
Other discounts and allowances include Medicare rebates, coupon, and patient co-pay assistance. Medicare rebates are payments to health insurance providers of Medicare Part D coverage to qualified patients. Reserve estimates are based on customer buying patterns and applicable contractual rebate rates to be earned over each period. Coupon and co-pay assistance programs provide discounts to qualified patients. Reserve estimates are based on expected claim volumes under these programs and estimated cost per claim that the Company expects to pay. Reserves for Medicare and coupon and patient co-pay programs are classified within accrued expenses.
Product Returns: The Company typically accepts customer product returns in the following circumstances: (a) expiration of shelf life on certain products; (b) product damaged while in the Company’s possession; (c) under sales terms that allow for unconditional return (guaranteed sales); or (d) following product recalls or product withdrawals. Generally, returns for expired product are accepted three months before and up to one year after the expiration date of the related product and the related product is destroyed after it is returned. Depending on the product and the Company’s return policy with respect to that product, the Company may either refund the sales price paid by the customer by issuance of a credit, or exchange the returned product with replacement inventory. The Company typically does not provide cash refunds. The Company estimates the proportion of recorded revenue that will result in a return by considering relevant factors, including but not limited to:
historical returns experience;
the duration of time taken for products to be returned;
the estimated level of inventory in the distribution channel;
product recalls and discontinuances;
the shelf life of products;
the launch of new drugs or new formulations; and
the loss of patent protection, exclusivity or new competition.

The estimation process for product returns involves, in each case, a number of interrelating assumptions, which vary for each combination of product and customer. The Company estimates the amount of its product sales that may be returned by its Customers and records this estimate as a reduction of revenue from Product sales in the period the related revenue is recognized.


17


Royalties and other revenues

The Company enters into agreements, where it licenses certain rights to its products to customers. The terms of these arrangements typically include payment to the Company of one or more of the following: non-refundable, up-front license fees; development, regulatory and commercial milestone payments; payments for manufacturing supply services the Company provides; and royalties on net sales of licensed products. Each of these payments is recognized as Royalties and other revenues.

As part of the accounting for these arrangements, the Company must develop estimates that require judgment to determine the stand-alone selling price for each performance obligation, identified in the contract. Performance obligations are promises in a contract to transfer a distinct good or service to the customer. The Company uses key assumptions to determine the stand-alone selling price, which may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical, regulatory and commercial success.

Licenses of intellectual property: If the license to the Company’s intellectual property is distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from non-refundable, up-front fees when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. If the performance obligation is satisfied over time, the Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition. Measures of progress for revenue recognition vary depending on the nature of the performance obligation.

Milestone Payments: At the inception of each arrangement that includes milestone payments, the Company evaluates the recognition of milestone payments. Typically, milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are included in the transaction price upon achievement of the milestone. Milestone payments included in transaction price are recognized when or as the performance obligations are satisfied. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price.

Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, the Company recognizes revenue at the later of (i) when the related sales occur or (ii) when the license is transferred.

The Company receives payments from its customers based on billing schedules established in each contract, which vary across Shire's locations, but generally range between 30 to 90 days. Amounts are recorded as accounts receivable when the Company’s right to consideration is unconditional. The Company does not assess whether a contract has a significant financing component if the expectation is that customer will pay for the product or services in one year or less of receiving those products or services.

The following table presents changes in the Company’s contract assets and liabilities during the six months ended June 30, 2018:
(In millions)
As of January 1, 2018
 
Increase, net
 
As of June 30, 2018
Contract assets:
 
 
 
 
 
Unbilled receivables
$
42.7

 
$
13.3

 
$
56.0

Contract liabilities:
 
 
 
 
 
Deferred revenue

 
5.9

 
5.9


Contract assets consist of unbilled receivables typically resulting from sales under contracts when revenue recognized exceeds the amount billed to the customer. The contract assets are included in Held for sale and other current assets in these Unaudited Consolidated Balance Sheets. Contract liabilities consist of advance payments from customers for future performance obligations. Contract liabilities are included in Other current liabilities in these Unaudited Consolidated Balance Sheets.


18


4. Dispositions and Assets Held for Sale

On April 16, 2018, the Company entered into a definitive agreement with Servier to sell its Oncology franchise. Under the terms of the agreement, Servier has agreed to acquire Shire’s Oncology franchise for a total consideration of $2.4 billion, in cash, upon completion. The transaction covers the transfer of Shire’s Oncology franchise including marketed products and IPR&D, which were classified as held for sale and included within Held for sale and other current assets in these Unaudited Consolidated Financial Statements. The transaction is expected to close in the third quarter of 2018.

The assets and liabilities of the Oncology franchise classified as held for sale were as follows:

(In millions)
As of June 30, 2018
Intangible assets
$
1,571.8

Goodwill
565.1

Other
12.0

Current assets
$
2,148.9

 
 
Current liabilities
$
116.8


During the six months ended June 30, 2018, the Company determined it would divest certain facilities as part of its integration efforts. As of June 30, 2018, the Company classified $123.2 million of assets as held for sale and included within Held for sale and other current assets in these Unaudited Consolidated Financial Statements. The $123.2 million of held for sale assets consisted primarily of property, plant and equipment and was net of $137.5 million of impairment charges recorded during the six months ended June 30, 2018. The impairment charges were reported in Integration and acquisition costs in these Unaudited Consolidated Financial Statements.

5.    Collaborative and Other Licensing Arrangements

The Company is party to certain collaborative and licensing arrangements. In some of these arrangements, Shire and the licensee are both actively involved in the development and commercialization of the licensed product and have exposure to risks and rewards dependent on its commercial success.

On January 25, 2018, Shire entered into a licensing agreement with AB Biosciences Inc. (AB Biosciences). The license grants Shire exclusive worldwide rights to develop and commercialize a recombinant immunoglobulin product candidate. Under the terms of the agreement, AB Biosciences will grant Shire an exclusive, worldwide license to its intellectual property relating to its pan receptor interacting molecule program. The Company paid $10.0 million upfront license fee and AB Biosciences is eligible to receive contingent research, development, and commercialization milestone payments up to $282.5 million as well as tiered royalty payments.

6.    Integration and Acquisition Costs

For the three and six months ended June 30, 2018, Shire recorded Integration and acquisition costs of $179.3 million and $419.0 million, respectively. These costs relate to the continued integration of Baxalta Inc. (Baxalta), which was acquired in June 2016, Takeda’s proposed acquisition of Shire, the expected sale of Shire's Oncology franchise, and the change in fair value of contingent consideration, primarily related to lanadelumab (SHP643), which was acquired from Dyax in 2016.


19


The Company continues its activities to integrate Baxalta. The costs associated with the integration are primarily related to facility consolidation and professional consulting fees. The Company also drove savings through the continued re-prioritization of its research and development programs and consolidation of its commercial operations. For the three and six months ended June 30, 2018 these costs include $5.9 million and $143.4 million, respectively, of asset impairments, $21.2 million and $43.1 million, respectively, of third-party professional fees, $3.1 million and $14.8 million, respectively, of expenses associated with facility consolidations, and $9.2 million and $15.0 million, respectively, of employee severance and acceleration of stock compensation. The Company expects the majority of these expenses, except for certain costs related to facility consolidations, to be paid within 12 months from the date the related expenses were incurred. The integration of Baxalta is estimated to be completed by mid to late 2019.

The following table summarizes the reserve for the Baxalta integration costs for certain types of activities during the six months ended June 30, 2018:
(In millions)
Severance and employee benefits
 
Lease terminations
 
Total
As of January 1,
$
72.9

 
$
56.6

 
$
129.5

Amount charged to integration costs
8.4

 
2.1

 
10.5

Paid/utilized
(61.8
)
 
(11.1
)
 
(72.9
)
As of June 30,
$
19.5

 
$
47.6

 
$
67.1


On May 8, 2018, the Boards of Takeda and Shire announced that they had reached an agreement on the terms of a recommended offer pursuant to which Takeda will acquire the entire issued and to be issued ordinary share capital of Shire. The closing of the acquisition is expected in the first half of 2019, subject to shareholder approval of both companies as well as the receipt of regulatory approvals. Costs associated with this recommended offer include $64.0 million of third-party professional fees and $4.0 million of employee incentives for both the three and six months ended June 30, 2018. The Company expects the majority of these expenses to be paid within 12 months from the date the related expenses were incurred.

On April 16, 2018, the Company entered into a definitive agreement with Servier to sell its Oncology franchise. Activities to conclude the sale are on track and the closing of the transaction is expected to occur in the third quarter of 2018. Costs associated with this sale include $37.5 million of third-party professional fees and $2.2 million of employee incentives for both three and six months ended June 30, 2018. The Company expects the majority of these expenses to be paid within 12 months from the date the related expenses were incurred.

In the three and six months ended June 30, 2018$27.0 million and $45.9 million are included in Integration and acquisition costs relating to the change in fair value of contingent consideration payable mainly related to lanadelumab (SHP643).

For the three and six months ended June 30, 2017, Shire recorded Integration and acquisition costs of $343.7 million and $459.7 million, respectively, primarily related to the acquisition and integration of Baxalta and Dyax. In the three and six months ended June 30, 2017, $151.2 million and $147.7 million is included in Integration and acquisition costs relating to the change in fair value of contingent consideration payable mainly related to lanadelumab (SHP643). For the three and six months ended June 30, 2017, the Baxalta Integration and acquisition costs include $80.2 million and $117.1 million, respectively, of employee severance and acceleration of stock compensation, $50.4 million and $85.6 million, respectively, of third-party professional fees, and $17.2 million and $41.7 million, respectively, of expenses associated with facility consolidations.


20


7.    Results of Discontinued Operations

Following the divestment of the Company’s DERMAGRAFT business in January 2014, the operating results associated with the DERMAGRAFT business have been classified as discontinued operations in the Company’s Unaudited Consolidated Statements of Operations for all periods presented.

In January 2017, Shire entered into a final settlement agreement with the Department of Justice (DOJ) in the amount of $350.0 million, plus interest which was accrued in 2016 and paid during 2017.

After the civil settlement with the DOJ was finalized, Shire and Advanced BioHealing Inc.'s (ABH) equity holders entered into a settlement agreement and ABH’s equity holders released the $37.5 million escrow to Shire. Shire released its claims against ABH equity holders upon receiving the entire amount held in escrow.

For the three and six months ended June 30, 2017, the Company recorded a loss of $1.2 million and gain of $19.0 million (net of tax benefit of $0.6 million and expense of $10.9 million, respectively), primarily related to legal contingencies related to the divested DERMAGRAFT business and the release of escrow to Shire, respectively.

8.    Accounts Receivable, Net

Accounts receivable as of June 30, 2018 of $3,005.1 million (December 31, 2017: $3,009.8 million), are stated at the invoiced amount and net of reserve for discounts and doubtful accounts of $335.5 million (December 31, 2017: $271.5 million).

Reserve for discounts and doubtful accounts consists of the following:
(In millions)
2018
 
2017
As of January 1,
$
271.5

 
$
169.6

Provision charged to operations
1,204.4

 
600.3

Payments/credits
(1,140.4
)
 
(587.9
)
As of June 30,
$
335.5

 
$
182.0

 

Reserve for discounts and doubtful accounts increased for the six months ended June 30, 2018 compared to the corresponding period in 2017, primarily due to increased usage of biological distributors, higher invoice price to those distributors, and the resulting increase in chargebacks for the distribution of Shire’s Hematology and Immunology products.

As of June 30, 2018, accounts receivable included $47.6 million (December 31, 2017: $106.6 million) related to royalties receivable.

9.    Inventories

Inventories are stated at the lower of cost and net realizable value. The components of inventories are as follows:
(In millions)
June 30, 2018
 
December 31, 2017
Finished goods
$
951.0

 
$
926.1

Work-in-progress
1,601.8

 
1,574.0

Raw materials
800.5

 
791.4

 
$
3,353.3

 
$
3,291.5



21


10.    Property, Plant and Equipment, Net

Property, plant and equipment are recorded at historical cost, net of accumulated depreciation. Components of Property, plant and equipment, net are summarized as follows:
(In millions)
June 30, 2018
 
December 31, 2017
Land
$
301.1

 
$
332.3

Buildings and leasehold improvements
2,940.1

 
1,940.7

Machinery, equipment and other
3,803.2

 
3,106.3

Assets under construction
785.8

 
2,568.2

   Total property, plant and equipment at cost
7,830.2

 
7,947.5

Less: Accumulated depreciation
(1,403.6
)
 
(1,312.1
)
   Property, plant and equipment, net
$
6,426.6

 
$
6,635.4


Depreciation expense for the three and six months ended June 30, 2018 was $135.0 million and $275.2 million, respectively, and for the three and six months ended June 30, 2017 was $120.7 million and $243.6 million, respectively.

In the second quarter of 2018, the FDA approved a new plasma manufacturing facility near Covington, Georgia. Following the approval, $1,840.5 million of assets were reclassified from Asset under construction to Buildings and leasehold improvements and Machinery, equipment and other assets classes.

11.    Intangible assets

The following table summarizes the Company's intangible assets:
(In millions)
Currently marketed products
 
IPR&D
 
Other intangible assets
 
Total
June 30, 2018
 
 
 
 
 
 
 
Gross acquired intangible assets
$
29,731.9

 
$
5,112.9

 
$
825.7

 
$
35,670.5

Accumulated amortization
(5,167.8
)
 

 
(392.2
)
 
(5,560.0
)
Intangible assets, net
$
24,564.1

 
$
5,112.9

 
$
433.5

 
$
30,110.5

 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
Gross acquired intangible assets
$
31,973.5

 
$
5,113.9

 
$
835.9

 
$
37,923.3

Accumulated amortization
(4,549.2
)
 

 
(328.0
)
 
(4,877.2
)
Intangible assets, net
$
27,424.3


$
5,113.9


$
507.9


$
33,046.1


Other intangible assets are comprised primarily of royalty rights and other contract rights associated with Baxalta, Dyax Corp. (Dyax), and NPS Pharmaceuticals Inc. 


22


Activities in the net book value of intangible assets for the six months ended June 30, 2018 and 2017 are as follows: 
(In millions)
2018
 
2017
As of January 1,
$
33,046.1

 
$
34,697.5

Reclassification to assets held for sale
(1,598.5
)
 

Measurement period adjustments

 
(1,398.9
)
Amortization charged
(941.6
)
 
(798.1
)
Foreign currency translation
(256.7
)
 
953.8

Contribution to JV
(163.7
)
 

Impairment
(10.0
)
 
(20.0
)
Other
34.9

 

As of June 30,
$
30,110.5

 
$
33,434.3

 

Measurement period adjustments included in the six months ended June 30, 2017 related to the acquisition of Baxalta.

During the six months ended June 30, 2018, the Company contributed distributions rights for certain products to a joint venture formed by the Company. Upon the contribution, the net carrying value ($163.7 million) related to those products was recorded within Investments in these Unaudited Consolidated Balance Sheets.

For further details regarding the reclassification of Intangible assets to assets held for sale, refer to Note 4, Dispositions and Assets Held for Sale.

The Company reviews its amortized intangible assets for impairment whenever events or circumstances suggest that their carrying value may not be recoverable. Unamortized intangible assets are reviewed for impairment annually or whenever events or circumstances suggest that their carrying value may not be recoverable.

Estimated amortization expense can be affected by various factors including future acquisitions, disposals of product rights, regulatory approval and subsequent amortization of acquired IPR&D projects, foreign exchange movements and the technological advancement and regulatory approval of competitor products. The estimated future amortization of acquired intangible assets for the next five years is expected to be as follows:

(In millions)
Anticipated future amortization
2018 (remaining six months)
$
857.7

2019
1,734.8

2020
1,591.0

2021
1,527.8

2022
1,495.4

2023
1,457.1


12.    Goodwill

The following table provides a roll-forward of the Goodwill balance for the six months ended June 30, 2018 and 2017:
(In millions)
2018
 
2017
As of January 1,
$
19,831.7

 
$
17,888.2

Acquisitions

 
1,076.2

Reclassification to assets held for sale
(565.1
)
 

Foreign currency translation and other
(222.9
)
 
517.7

June 30,
$
19,043.7

 
$
19,482.1



23


The increase in Goodwill during the six months ended June 30, 2017 related to measurement period adjustments of the acquisition of Baxalta.

For further details regarding the reclassification of Goodwill to assets held for sale, refer to Note 4, Dispositions and Assets Held for Sale.

13.    Fair Value Measurement

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

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
(In millions)
Total
 
Level 1
 
Level 2
 
Level 3
As of June 30, 2018
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
Marketable equity securities
$
218.4

 
$
218.4

 
$

 
$

Marketable debt securities
17.3

 
3.7

 
13.6

 

Derivative instruments
17.7

 

 
17.7

 

Total assets
$
253.4

 
$
222.1

 
$
31.3

 
$

 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
Joint venture net written option
$
37.0

 
$

 
$

 
$
37.0

Derivative instruments
61.8

 

 
61.8

 

Contingent consideration payable
1,209.2

 

 

 
1,209.2

Total liabilities
$
1,308.0

 
$

 
$
61.8

 
$
1,246.2


 
Fair value
(In millions)
Total
 
Level 1
 
Level 2
 
Level 3
As of December 31, 2017
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
Marketable equity securities
$
89.7

 
$
89.7

 
$

 
$

Marketable debt securities
17.9

 
3.8

 
14.1

 

Derivative instruments
17.9

 

 
17.9

 

Total assets
$
125.5

 
$
93.5

 
$
32.0

 
$

 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
Joint venture net written option
$
40.0

 
$

 
$

 
$
40.0

Derivative instruments
14.2

 

 
14.2

 

Contingent consideration payable
1,168.2

 

 

 
1,168.2

Total liabilities
$
1,222.4

 
$

 
$
14.2

 
$
1,208.2


Marketable equity and debt securities are included within Investments in these Unaudited Consolidated Balance Sheets. Contingent consideration payable is included within Other current liabilities and Other non-current liabilities in these Unaudited Consolidated Balance Sheets. For information regarding the Company's derivative arrangements, refer to Note 14, Financial Instruments, to these Unaudited Consolidated Financial Statements.


24


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.
Derivative instruments: 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.
Joint venture net written option and contingent consideration payable: the fair values have been estimated using the income approach (using a probability weighted discounted cash flow method).

There were no changes in valuation techniques or inputs utilized or transfers between fair value measurement levels during the three and six months ended June 30, 2018 and 2017.

Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)

Contingent consideration payable
 
 
 
(In millions)
2018
 
2017
Balance as of January 1,
$
1,168.2

 
$
1,058.0

Acquisitions

 
(4.0
)
Change in fair value included in earnings
45.9

 
147.7

Other
(4.9
)
 
(11.4
)
Balance as of June 30,
$
1,209.2

 
$
1,190.3


Of the $1,209.2 million of contingent consideration payable as of June 30, 2018, $734.7 million is recorded within Other current liabilities and $474.5 million is recorded within Other non-current liabilities in these Unaudited Consolidated Balance Sheets.

Joint venture net written option

In March 2017, Shire executed option agreements related to a joint venture that provides Shire with a call option on the partner’s investment in joint venture equity and the partner with a put option on its investment in joint venture equity. The Company had a liability of $37.0 million for the net written option based on the estimated fair value of these options as of June 30, 2018 and the Company re-measures the instrument to fair value through the Unaudited Consolidated Statements of Operations.


25


Quantitative Information about Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)

Financial liabilities:
Fair value as of the measurement date
As of June 30, 2018
 
 
 
 
 
 
 
(In millions, except %)  
Fair value 
 
Valuation
 technique
 
Significant unobservable inputs
 
Range
Contingent consideration payable
$
1,209.2

 
Income approach (probability weighted discounted cash flow)
 
• Cumulative probability of milestones being achieved
 
• 10 to 95%
 
 
 
 
 
• Assumed market participant discount rate
 
• 2.3 to 8.9%
 
 
 
 
 
• Periods in which milestones are expected to be achieved
 
• 2018 to 2040
 
 
 
 
 
• Forecast quarterly royalties payable on net sales of relevant products
 
• $0.1 to $6.5
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 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 payable.

Financial liabilities:
Fair value as of the measurement date
As of June 30, 2018
 
 
 
 
 
 
 
(In millions, except %)  
Fair value 
 
Valuation
 technique
 
Significant unobservable inputs
 
Range
Joint venture net written option
$
37.0

 
Income approach (probability weighted discounted cash flow)
 
• Cash flow scenario probability weighting
 
• 100%
 
 
 
 
 
• Assumed market participant discount rate
 
• 14%

26



Financial assets and liabilities that are disclosed at fair value

The carrying amounts and estimated fair values of the Company’s financial assets and liabilities that are not measured at fair value on a recurring basis are as follows: 
 
June 30, 2018
 
December 31, 2017
(In millions)
Carrying amount
 
Fair value
 
Carrying amount
 
Fair value
Financial liabilities:
 
 
 
 
 
 
 
SAIIDAC notes
$
12,055.8

 
$
11,512.4

 
$
12,050.2

 
$
11,913.7

Baxalta notes
4,287.3

 
4,237.1

 
5,057.7

 
5,229.9

Capital lease obligation
347.1

 
347.1

 
349.2

 
349.2


The estimated fair values of long-term debt were based upon recent observable market prices and are considered Level 2 in the fair value hierarchy. 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.

14.    Financial Instruments

Foreign Currency Contracts

Due to the global nature of its operations, portions of the Company's revenues and operating expenses are recorded in currencies other than the U.S. dollar. The value of revenues and operating expenses measured in U.S. dollars is therefore subject to changes in foreign currency exchange rates. The main trading currencies of the Company are the U.S. dollar, Euro, British pound sterling, Swiss franc, Canadian dollar, and Japanese yen.

Transactional exposure arises where transactions occur in currencies different to the functional currency of the relevant subsidiary. It is the Company’s policy that these exposures are minimized to the extent practicable by denominating transactions in the subsidiary’s functional currency. Where significant exposures remain, the Company uses foreign exchange contracts (spot, forward, and swap contracts) to manage the exposure for balance sheet assets and liabilities that are denominated in currencies different to the functional currency of the relevant subsidiary.

The Company has master netting agreements with a number of counterparties to these foreign exchange contracts and on the occurrence of specified events, the Company has the ability to terminate contracts and settle them with a net payment by one party to the other. The Company has elected to present derivative assets and derivative liabilities on a gross basis in the Unaudited Consolidated Balance Sheets. The Company does not have credit risk related contingent features or collateral linked to the derivatives.

Undesignated Foreign Currency Derivatives

The Company uses forward contracts to mitigate the foreign currency risk related to certain balance sheet positions, including intercompany and third-party receivables and payables. The Company has not elected hedge accounting for these derivative instruments as the duration of these contracts is typically three months or less. The changes in fair value of these derivatives are reported in earnings.

The table below presents the notional amount, maximum duration, and fair value for the undesignated foreign currency derivatives:
(In millions, except duration)
June 30, 2018
 
December 31, 2017
Notional amount
$
2,104.0

 
$
1,672.3

Maximum duration
6 months

 
3 months

Fair value - net (liability)/asset
$
(13.8
)
 
$
11.4



27


The Company considers the impact of its and its counterparties’ credit risk on the fair value of the contracts as well as the ability of each party to execute its contractual obligations. As of June 30, 2018, credit risk did not materially change the fair value of the Company’s foreign currency contracts.

Interest Rate - Contracts

The Company is exposed to the risk that its earnings and cash flows could be adversely impacted by fluctuations in benchmark interest rates relating to its debt obligations on which interest is set at floating rates. The Company’s policy is to manage this risk to an acceptable level. The Company is principally exposed to interest rate risk on any borrowings under the Company’s various debt facilities. Interest on these facilities is set at floating rates, to the extent utilized. Shire’s exposure under these facilities is to changes in U.S. dollar interest rates. For further details related to interest rates on the Company’s various debt facilities, refer to Note 15, Borrowings and Capital Leases, to these Unaudited Consolidated Financial Statements.

Designated Interest Rate Derivatives

The Company has elected hedge accounting for interest rate swap contracts designated as fair value hedges. The effective portion of the changes in the fair value of interest rate swap contracts are recorded as a component of the underlying Baxalta Notes with the ineffective portion recorded in Interest expense. Any net interest payments made or received on the interest rate swap contracts are recognized as a component of Interest expense in the Unaudited Consolidated Statements of Operations.

The table below presents the notional amount, maturity, and fair value for the designated interest rate derivatives:
(In millions, except maturity)
June 30, 2018
 
December 31, 2017
Notional amount
$
1,000.0

 
$
1,000.0

Maturity
June 2020 and June 2025

 
June 2020 and June 2025

Fair value - net liability
$
(30.3
)
 
$
(7.7
)

Summary of Derivatives

The following tables summarize the effect of the derivative instruments in the Company's Unaudited Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017.

Designated Foreign exchange contracts
(In millions)
Loss recognized in OCI
 
 
 
Gain reclassified from AOCI into income
Cash flow hedges
2018
 
2017
 
Location
 
2018
 
2017
Three months ended June 30,
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$

 
$
(0.1
)
 
Cost of sales
 
$

 
$
1.7

Six months ended June 30,
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$

 
$
(0.7
)
 
Cost of sales
 
$

 
$
8.3


Undesignated foreign exchange contracts
(In millions)
 
 
(Loss)/gain recognized in income
 
Location
 
2018
 
2017
Three months ended June 30,
 
 
 
 
 
Foreign exchange contracts
Other income, net
 
$
(41.9
)
 
$
35.9

Six months ended June 30,
 
 
 
 
 
Foreign exchange contracts
Other income, net
 
$
(33.3
)
 
$
20.7



28


Designated Interest Rate Derivatives
(In millions)
 
 
Loss recognized in income
Fair value hedges
Location
 
2018
 
2017
Three months ended June 30,
 
 
 
 
 
Interest rate contracts, net
Interest expense
 
$
(1.3
)
 
$
(0.2
)
Six months ended June 30,
 
 
 
 
 
Interest rate contracts, net
Interest expense
 
$
(3.9
)
 
$
(1.4
)

Summary of Derivatives

The following table presents the classification and estimated fair value of derivative instruments on the Company's Unaudited Consolidated Balance Sheets:
 
Asset position
 
Liability position
 
 
 
Fair value
 
 
 
Fair value
(In millions)
Location
 
June 30, 2018
December 31, 2017
 
Location
 
June 30, 2018
December 31, 2017
Undesignated derivative instruments
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Held for sale and other current assets
 
$
17.7

$
17.9

 
Other current liabilities
 
$
31.5

$
6.5

 
 
 
$
17.7

$
17.9

 
 
 
$
31.5

$
6.5

 
 
 
 
 
 
 
 
 
 
Designated derivative Instruments
 
 
 
 
 
 
 
 
 
Interest rate contracts
Long term borrowings
 
$

$

 
Long term borrowings
 
$
30.3

$
7.7

 
 
 
$

$

 
 
 
$
30.3

$
7.7

Total derivative fair value
 
 
$
17.7

$
17.9

 
 
 
$
61.8

$
14.2

Potential effect of rights to offset
 
 
(5.4
)
(2.7
)
 
 
 
(5.4
)
(2.7
)
Net derivative
 
 
$
12.3

$
15.2

 
 
 
$
56.4

$
11.5



29


15.    Borrowings and Capital Leases
(In millions)
June 30, 2018
 
December 31, 2017
Short term borrowings and capital leases:
 
 
 
Baxalta Notes
$

 
$
748.8

Borrowings under the Revolving Credit Facilities Agreement
955.0

 
810.0

Borrowings under the November 2015 Facilities Agreement
199.9

 
1,196.3

Capital leases
8.3

 
7.5

Other borrowings
29.7

 
26.1

 
$
1,192.9

 
$
2,788.7

 
 
 
 
Long term borrowings and capital leases:
 
 
 
SAIIDAC Notes
$
12,055.8

 
$
12,050.2

Baxalta Notes
4,287.3

 
4,308.9

Capital leases
338.8

 
341.7

Other borrowings
40.1

 
51.6

 
$
16,722.0

 
$
16,752.4

 
 
 
 
Total borrowings and capital leases
$
17,914.9

 
$
19,541.1


For a more detailed description of the Company's financing agreements, refer below and to Note 17, Borrowings and Capital Leases, of Shire's Annual Report on Form 10-K for the year ended December 31, 2017.

SAIIDAC Notes

On September 23, 2016, Shire Acquisitions Investments Ireland Designated Activity Company (SAIIDAC), a wholly owned subsidiary of Shire plc, issued unsecured senior notes with a total aggregate principal value of $12.1 billion (SAIIDAC Notes), guaranteed by Shire plc and, as of December 1, 2016, by Baxalta. Below is a summary of the SAIIDAC Notes as of June 30, 2018:
(In millions, except %)
Aggregate amount
 
Coupon rate
 
Carrying amount as of June 30, 2018
Fixed-rate notes due 2019
$
3,300.0

 
1.900
%
 
$
3,294.1

Fixed-rate notes due 2021
3,300.0

 
2.400
%
 
3,288.1

Fixed-rate notes due 2023
2,500.0

 
2.875
%
 
2,490.3

Fixed-rate notes due 2026
3,000.0

 
3.200
%
 
2,983.3

 
$
12,100.0

 
 
 
$
12,055.8


As of June 30, 2018, there were $44.2 million of debt issuance costs and discounts recorded as a reduction of the carrying amount of debt. These costs will be amortized as additional interest expense using the effective interest rate method over the period from issuance through maturity.


30


Baxalta Notes

Shire plc guaranteed senior notes issued by Baxalta in connection with the acquisition of Baxalta (Baxalta Notes). Following repayment of the $375.0 million floating-rate notes and $375.0 million fixed-rate noted due June 2018, below is a summary of the remaining Baxalta Notes as of June 30, 2018:
(In millions, except %)
Aggregate principal
 
Coupon rate
 
Carrying amount as of June 30, 2018
Fixed-rate notes due 2020
$
1,000.0

 
2.875
%
 
$
996.4

Fixed-rate notes due 2022
500.0

 
3.600
%
 
506.1

Fixed-rate notes due 2025
1,750.0

 
4.000
%
 
1,754.7

Fixed-rate notes due 2045
1,000.0

 
5.250
%
 
1,030.1

Total assumed Senior Notes
$
4,250.0

 
 
 
$
4,287.3

 

The book values above include any premiums, discounts, and adjustments related to hedging instruments. For further details related to the interest rate derivative contracts, please see Note 14, Financial Instruments, to these Unaudited Consolidated Financial Statements.

Revolving Credit Facilities Agreement

On December 12, 2014, Shire entered into a $2.1 billion revolving credit facilities agreement (RCF) with a number of financial institutions. As of June 30, 2018, the Company utilized $955.0 million of the RCF. The RCF, which terminates on December 12, 2021, may be used for financing the general corporate purposes of Shire. The RCF incorporates a $250.0 million U.S. dollar and Euro swingline facility operating as a sub-limit thereof.

Term Loan Facilities Agreements

November 2015 Facilities Agreement

On November 2, 2015, Shire entered into a $5.6 billion facilities agreement (November 2015 Facilities Agreement), which comprised of three amortizing credit facilities with ultimate maturity on November 2, 2018. As of June 30, 2018, the total amount outstanding under the November 2015 Facilities Agreement was $199.9 million.

Short-term uncommitted lines of credit (Credit lines) 

Shire has access to various Credit lines from a number of banks which are available to be utilized from time to time to provide short-term cash management flexibility. These Credit lines can be withdrawn by the banks at any time. The Credit lines are not relied upon for core liquidity. As of June 30, 2018, these lines of credit were not utilized.

Capital Lease Obligations

The capital leases are primarily related to office and manufacturing facilities. As of June 30, 2018, the total capital lease obligations, including current portions, were $347.1 million.

16.    Retirement and Other Benefit Programs

The Company sponsors various pension and other post-employment benefit (OPEB) plans in the U.S. and other countries. Net periodic benefit cost for the three and six months ended June 30, 2018 and 2017 is as follows:


31


 
Three months ended June 30,
 
2018
 
2017
(In millions)
U.S. pensions
 
International pensions
 
OPEB (U.S.)
 
U.S. pensions
 
International pensions
 
OPEB (U.S.)
Net periodic benefit cost
 
 
 
 
 
 
 
 
 
 
 
Service cost
$

 
$
9.5

 
$

 
$
3.7

 
$
9.4

 
$
0.4

Interest cost
3.9

 
1.3

 
0.1

 
3.9

 
1.2

 
0.3

Expected return on plan assets
(4.3
)
 
(2.0
)
 

 
(4.0
)
 
(1.8
)
 

Amortization of net prior service cost

 

 
(0.2
)
 

 

 

Amortization of actuarial gain

 
(0.3
)
 

 

 

 

Net periodic benefit cost
$
(0.4
)
 
$
8.5

 
$
(0.1
)
 
$
3.6

 
$
8.8

 
$
0.7


 
Six months ended June 30,
 
2018
 
2017
(In millions)
U.S. pensions
 
International pensions
 
OPEB (U.S.)
 
U.S. pensions
 
International pensions
 
OPEB (U.S.)
Net periodic benefit cost
 
 
 
 
 
 
 
 
 
 
 
Service cost
$

 
$
19.0

 
$

 
$
7.4

 
$
18.8

 
$
0.8

Interest cost
7.8

 
2.6

 
0.2

 
7.8

 
2.4

 
0.6

Expected return on plan assets
(8.6
)
 
(4.0
)
 

 
(8.0
)
 
(3.6
)
 

Amortization of net prior service cost

 

 
(0.4
)
 

 

 

Amortization of actuarial (gain)/loss

 
(0.6
)
 

 

 
0.9

 

Net periodic benefit cost
$
(0.8
)
 
$
17.0

 
$
(0.2
)
 
$
7.2

 
$
18.5

 
$
1.4


The components of net periodic benefit cost other than the service cost component are included in the line item Other income, net in these Unaudited Consolidated Statement of Operations.

17.    Accumulated Other Comprehensive Income/(Loss)

The changes in Accumulated other comprehensive income/(loss) (AOCI), net of their related tax effects, for the six months ended June 30, 2018 and 2017 are as follows:
(In millions)
Foreign currency translation adjustment
 
Pension and other employee benefits
 
Unrealized
holding gain/(loss) on available-for-sale debt securities
 
Accumulated other comprehensive income/(loss)
As of January 1, 2018
$
1,279.6

 
$
27.5

 
$
67.9

 
$
1,375.0

Current period change:
 
 
 
 
 
 
 
Other comprehensive loss before reclassifications
(578.5
)
 

 

 
(578.5
)
Amounts reclassified from AOCI

 
(1.0
)
 
(67.9
)
 
(68.9
)
Net current period other comprehensive loss
(578.5
)
 
(1.0
)
 
(67.9
)
 
(647.4
)
As of June 30, 2018
$
701.1

 
$
26.5

 
$

 
$
727.6


On January 1, 2018, the Company adopted a new standard related to accounting for investments in equity securities. Upon adoption, the Company reclassified unrealized holding gain on available-for-sale equity securities totaling $67.9 million to Retained earnings. For further information, refer to Note 2, Summary of Significant Accounting Policies, to these Unaudited Consolidated Financial Statements.


32


(In millions)
Foreign currency translation adjustment
 
Pension and other employee benefits
 
Unrealized holding loss on available-for-sale securities
 
Hedging activities
 
Accumulated other comprehensive (loss)/income
As of January 1, 2017
$
(1,505.4
)
 
$
(5.2
)
 
$
6.6

 
$
6.4

 
$
(1,497.6
)
Current period change:
 
 
 
 
 
 
 
 
 
Other comprehensive income/(loss) before reclassifications
1,696.5

 
9.7

 
(2.3
)
 
(0.5
)
 
1,703.4

Amounts reclassified from AOCI

 
0.9

 
(1.2
)
 
(5.4
)
 
(5.7
)
Net current period other comprehensive income/(loss)
1,696.5

 
10.6

 
(3.5
)
 
(5.9
)
 
1,697.7

As of June 30, 2017
$
191.1

 
$
5.4

 
$
3.1

 
$
0.5

 
$
200.1


The following is a summary of the amounts reclassified from AOCI to the Unaudited Consolidated Statements of Operations during the six months ended June 30, 2018 and 2017.
 
Six months ended June 30,
 
(In millions)
2018
 
2017
Location of impact in the Unaudited Consolidated Statements of Operations
Pension and employee benefits
 
 
 
 
Amortization of net prior service credit
$
(0.4
)
 
$

Other income, net
Amortization of actuarial (gain)/loss
(0.6
)
 
0.9

Other income, net
 
(1.0
)
 
0.9

Total before tax
 

 

Tax expense
 
(1.0
)
 
0.9

Net of tax
Hedging activities
 
 
 
 
Gain on foreign exchange contracts

 
(8.3
)
Cost of sales
 

 
(8.3
)
Total before tax
 

 
2.9

Tax expense
 

 
(5.4
)
Net of tax
 
 
 
 
 
Available for sale securities
 
 
 
 
Available for sale securities gain

 
(1.2
)
Other income, net
 

 
(1.2
)
Total before tax
 

 

Tax expense
 

 
(1.2
)
Net of tax
 


 
 
 
Total reclassifications for the period
$
(1.0
)
 
$
(5.7
)
Total net of tax

18.    Taxation 

For the three and six months ended June 30, 2018, the effective tax rate on income from continuing operations was 17% (2017: 9%) and 13% (2017:5%), respectively.


33


The effective tax rate for the three and six months ended June 30, 2018 has been affected by certain provisions of the U.S. Tax Cuts and Jobs Act (Tax Act) passed in December 2017, which enacts a U.S. federal tax rate of 21% along with anti-deferral provisions and new limitations on certain deductions required under the Tax Act. Due to enactment late in the Company’s annual 2017 reporting period, the Company included provisional amounts in its annual financial statements for the year ended December 31, 2017. The Company continued to assess the impact of the Tax Act during the three and six months ended June 30, 2018 and recorded an adjustment of $22.0 million to its provisional estimates related to the remeasurement of deferred tax assets and liabilities. This remeasurement reduced the effective tax rate for the three and six months ended June 30, 2018 by nil and 1%, respectively.

It is expected that additional interpretive guidance will be issued that may change how the Company has computed the provisional amounts for the year ended December 31, 2017. The Company will continue to assess the impact of the Tax Act during the measurement period and will record any adjustments to its provisional estimates as needed during the remainder of 2018 and continues to assert that all amounts recorded and disclosed to date remain provisional.

The effective tax rate for the three and six months ended June 30, 2017 was affected by the combined impact of the
relative quantum of the profit before tax for the period by jurisdiction as well as significant acquisition and integration costs.

19.    Earnings Per Share

The following table reconciles net income and the weighted average ordinary shares outstanding for basic and diluted earnings per share (EPS) for the periods presented:
 
Three months ended June 30,
 
Six months ended June 30,
(In millions)
2018
 
2017
 
2018
 
2017
Income from continuing operations, net of taxes
$
615.5

 
$
241.5

 
$
1,166.1

 
$
596.3

(Loss)/Gain from discontinued operations, net of taxes

 
(1.2
)
 

 
19.0

Numerator for basic and diluted earnings per share
$
615.5

 
$
240.3

 
$
1,166.1

 
$
615.3

 
 
 
 
 
 
 
 
Weighted average number of shares:
 
 
 
 
 
 
 
Basic
912.6

 
906.4

 
911.0

 
905.3

Effect of dilutive shares:
 
 
 
 
 
 
 
Share-based awards to employees
4.9

 
6.3

 
3.8

 
7.0

Diluted
917.5

 
912.7

 
914.8

 
912.3


Weighted average number of basic shares excludes shares purchased by the Employee Benefit Trust and those under the shares buy-back program, which are both presented by Shire as treasury stock. Share-based awards to employees are calculated using the treasury method. 

The share equivalents not included in the calculation of the diluted weighted average number of shares are shown below:
 
Three months ended June 30,
 
Six months ended June 30,
(Number of shares in millions)
2018
 
2017
 
2018
 
2017
Share-based awards to employees
14.4

 
13.2

 
15.2

 
10.3


Certain stock options have been excluded from the calculation of diluted EPS for three and six months ended June 30, 2018 and 2017 because either their exercise prices exceeded Shire’s average share price during the calculation period, the required performance conditions were not satisfied as of the balance sheet date or their inclusion would have been antidilutive.


34


20.    Share-based Compensation Plans

Total share-based compensation recorded by the Company during the three and six months ended June 30, 2018 and 2017 by line item is as follows:
 
Three months ended June 30,
 
Six months ended June 30,
(In millions)
2018
 
2017
 
2018
 
2017
Cost of sales
$
7.0

 
$
6.1

 
$
14.9

 
$
12.7

Research and development
12.7

 
9.7

 
25.5

 
19.7

Selling, general and administrative
26.2

 
31.9

 
45.7

 
63.2

Integration and acquisition costs

 
6.0

 
0.8

 
10.8

Total
45.9

 
53.7

 
86.9

 
106.4

Less tax
(7.3
)
 
(29.6
)
 
(14.4
)
 
(42.7
)
 
$
38.6

 
$
24.1

 
$
72.5

 
$
63.7


For further details on existing share-based compensation plans, refer to Note 23, Share-based Compensation Plans, of Shire's Annual Report on Form 10-K for the year ended December 31, 2017.

The Company amended the mix of performance share units to include market condition, based on relative total shareholder return, commencing with the 2018 annual grant.

During the six months ended June 30, 2018, the Company made equity compensation grants to employees consisting of 10.8 million stock-settled share appreciation rights (SARs), 2.9 million restricted stock units (RSUs), and 0.9 million performance share units (PSUs) equivalent in ordinary shares.

21.    Commitments and Contingencies

Leases 

The Company leases land, facilities, motor vehicles, and certain equipment under operating leases expiring through 2032. For the three and six months ended June 30, 2018 lease and rental expense amounted to $35.6 million and $85.1 million (2017: $42.4 million and $85.0 million, respectively), which is predominately included within Cost of sales and SG&A expenses in these Unaudited Consolidated Statement of Operations.

Letters of credit and guarantees 

As of June 30, 2018 and December 31, 2017, the Company had irrevocable standby letters of credit and guarantees with various banks and insurance companies totaling $229.3 million and $224.8 million (being the contractual amounts), respectively, providing security for the Company’s performance of various obligations. These obligations are primarily in respect of the recoverability of insurance claims, lease obligations, and supply commitments. 

Commitments

Clinical testing

As of June 30, 2018, the Company had committed to pay approximately $1,593.6 million (December 31, 2017: $1,409.9 million) to contract vendors for administering and executing clinical trials. The timing of these payments is dependent upon actual services performed by the organizations as determined by patient enrollment levels and related activities.

Contract manufacturing

As of June 30, 2018, the Company had committed to pay approximately $1,080.2 million (December 31, 2017: $467.2 million) in respect of contract manufacturing. The Company expects to pay $303.5 million of these commitments in 2018.


35


Other purchasing commitments

As of June 30, 2018, the Company had committed to pay approximately $1,563.9 million (December 31, 2017: $1,692.5 million) for future purchases of goods and services, predominantly relating to active pharmaceutical ingredients sourcing. The Company expects to pay $1,045.1 million of these commitments in 2018.

Investment commitments

As of June 30, 2018, the Company had outstanding commitments to purchase common stock and interests in companies and partnerships, respectively, for amounts totaling $49.4 million (December 31, 2017: $48.9 million), which may all be payable during 2018, depending on the timing of capital calls. The investment commitments include additional funding to certain variable interest entities (VIEs) for which Shire is not the primary beneficiary.

Capital commitments

As of June 30, 2018, the Company had committed to spend $409.3 million (December 31, 2017: $328.2 million) on capital projects.

Baxter related tax indemnification

Baxter International Inc. (Baxter) and Baxalta entered into a tax matters agreement, effective on the date of Baxalta’s separation from Baxter, which employs a direct tracing approach, or where direct tracing approach is not feasible, an allocation methodology, to determine which company is liable for pre-separation income tax items for U.S. federal, state, and foreign jurisdictions. With respect to tax liabilities that are directly traceable or allocated to Baxalta but for which Baxalta was not the primary obligor, Baxalta recorded a tax indemnification amount that would be due to Baxter upon Baxter discharging the associated tax liability to the taxing authority.

22.    Legal and Other Proceedings

The Company expenses legal costs when incurred.

The Company recognizes loss contingency provisions for probable losses when management is able to reasonably estimate the loss. When the estimated loss lies within a range, the Company records a loss contingency provision based on its best estimate of the probable loss. If no particular amount within that range is a better estimate than any other amount, the minimum amount is recorded. Estimates of losses may be developed before the ultimate loss is known, and are therefore refined each accounting period as additional information becomes known. An outcome that deviates from the Company’s estimate may result in an additional expense or release in a future accounting period. As of June 30, 2018, provision for litigation losses, insurance claims, and other disputes totaled $73.9 million (December 31, 2017: $76.2 million).

The Company’s principal pending legal and other proceedings are disclosed below. The outcomes of these proceedings are not always predictable and can be affected by various factors. For those legal and other proceedings for which it is considered at least reasonably possible that a loss has been incurred, the Company discloses the possible loss or range of possible loss in excess of the recorded loss contingency provision, if any, where such excess is both material and estimable.


36


MYDAYIS

On October 12, 2017, Shire was notified that Teva Pharmaceuticals USA, Inc. had submitted an abbreviated new drug application (ANDA) to the FDA seeking permission to market a generic version of MYDAYIS. Within the requisite 45-day period, Shire filed a lawsuit in the U.S. District Court for the District of Delaware against Teva Pharmaceuticals USA, Inc., Actavis Laboratories, Inc. and Teva Pharmaceutical Industries Limited (collectively the “Teva entities”). A Markman hearing is scheduled to take place on January 23, 2019.  A trial is scheduled to take place beginning on December 9, 2019.

On March 8, 2018, Shire was notified that Impax Laboratories, Inc. (Impax) had submitted an ANDA to the FDA seeking permission to market a generic version of MYDAYIS. Within the requisite 45-day period, Shire filed a lawsuit in the U.S. District Court for the District of Delaware against Impax. A Markman hearing is scheduled to take place on January 23, 2019.  A trial is scheduled to take place beginning on December 9, 2019.

On April 19, 2018, Shire was notified that SpecGX LLC (SpecGX) had submitted an ANDA to the FDA seeking permission to market a generic version of MYDAYIS. Shire is currently reviewing the contents of the notification. Within the requisite 45-day period, Shire filed a lawsuit in the U.S. District Court for the District of Delaware against SpecGx. No dates for a Markman hearing or trial have been set.

Petitions to institute inter partes reviews (IPRs) against U.S. Patent numbers 8,846,100 and 9,173,857 were filed by KVK Tech in January 2018 and the petitions were granted in July 2018. Both of these patents are listed in the Orange Book as covering MYDAYIS and are among the patents-in-suit in the infringement action brought against the Teva entities and Impax as noted above. A decision on the merits is expected on or before July 10, 2019.

VANCOCIN

On April 6, 2012, ViroPharma Incorporated (ViroPharma) received a notification that the United States Federal Trade Commission (FTC) was conducting an investigation into whether ViroPharma had engaged in unfair methods of competition with respect to VANCOCIN, which Shire acquired in January 2014. Following the divestiture of VANCOCIN in August 2014, Shire retained certain liabilities including any potential liabilities related to the VANCOCIN citizen petition.

On August 3, 2012, and September 8, 2014, ViroPharma and Shire respectively received Civil Investigative Demands from the FTC requesting additional information related to this matter. Shire has fully cooperated with the FTC’s investigation.

On February 7, 2017, the FTC filed a Complaint against Shire alleging that ViroPharma engaged in conduct in violation of U.S. antitrust laws arising from a citizen petition ViroPharma filed in 2006 related to Food & Drug Administration’s policy for evaluating bioequivalence for generic versions of VANCOCIN. The complaint seeks equitable relief, including an injunction and disgorgement. The Company filed a motion to dismiss on April 10, 2017. On March 20, 2018, the court granted the Company’s motion. On April 11, 2018, the FTC filed a Notice of Appeal. The FTC’s appeal is still pending.

At this time, Shire is unable to predict the outcome or duration of this case.

ELAPRASE

In 2014, Shire’s Brazilian affiliate, Shire Farmaceutica Brasil Ltda, was served with a lawsuit brought by the State of Sao Paulo and in which the Brazilian Public Attorney’s office has intervened alleging that Shire is obligated to provide certain medical care including ELAPRASE for an indefinite period at no cost to patients who participated in ELAPRASE clinical trials in Brazil, and seeking recoupment to the Brazilian government for amounts paid on behalf of these patients to date, and moral damages associated with these claims.

On May 6, 2016, the trial court judge ruled on the case and dismissed all the claims under the class action, which was appealed. On February 20, 2017, the Court of Appeals in Sao Paulo issued the final decision on merit in favor of Shire and dismissed all the claims under the class action. On July 12, 2017, the Public Prosecutor filed an appeal addressed to the Supreme Court. During the last quarter of 2017, the State of Sao Paulo filed appeals addressed to the Superior Court of Justice and to the Supreme Court.


37


23.    Segment Reporting

In the first quarter of 2018, the Company announced a change to its internal structure to create two distinct business segments within Shire: a Rare Disease division and a Neuroscience division. The change was based on the Board's conclusion that the Neuroscience business warranted additional focus and investment and that there was a strong business rationale for creating the two divisions.

In the second quarter of 2018, the Company returned to a single segment approach to managing its business. This decision was precipitated by Shire's Board acceptance of Takeda's offer to acquire the Company and reflects the Company’s focus on the performance of the entire business as it operates in this current environment. This step was taken to more closely align with how the financial information is viewed by the Executive Committee (Shire’s chief operating decision maker) for the purposes of making resource allocation decisions and assessing the performance of the business. Additionally, in the second quarter of 2018, the Company introduced a new product franchise called Established Brands to capture revenue for its non-promoted products that are facing or could face generic competition, such as LIALDA and PENTASA. Comparative financial information for 2017 was retrospectively restated herein.










38



In the periods set out below, U.S. and International Product sales by franchise were as follows:
 
Three months ended
 
June 30, 2018
 
June 30, 2017
(In millions)
U.S. Sales
 
International Sales
 
Total Sales
 
U.S. Sales
 
International Sales
 
Total Sales
Product sales by franchise
 
 
 
 
 
 
 
 
 
 
 
IMMUNOGLOBULIN THERAPIES
$
457.3

 
$
154.8

 
$
612.1

 
$
407.9

 
$
102.6

 
$
510.5

HEREDITARY ANGIOEDEMA
326.2

 
39.0

 
365.2

 
303.4

 
30.5

 
333.9

BIO THERAPEUTICS
80.4

 
91.8

 
172.2

 
75.9

 
96.3

 
172.2

Immunology
863.9

 
285.6

 
1,149.5

 
787.2

 
229.4

 
1,016.6

HEMOPHILIA
372.9

 
373.8

 
746.7

 
383.1

 
360.8

 
743.9

INHIBITOR THERAPIES
55.2

 
149.1

 
204.3

 
76.1

 
144.6

 
220.7

Hematology
428.1

 
522.9

 
951.0

 
459.2

 
505.4

 
964.6

VYVANSE
486.6

 
69.4

 
556.0

 
460.1

 
58.1

 
518.2

ADDERALL XR
75.7

 
4.1

 
79.8

 
67.2

 
4.2

 
71.4

MYDAYIS
16.6

 

 
16.6

 
15.7

 

 
15.7

Other Neuroscience(1)
4.3

 
37.0

 
41.3

 
5.2

 
24.9

 
30.1

Neuroscience
583.2

 
110.5

 
693.7

 
548.2

 
87.2

 
635.4

ELAPRASE
43.8

 
132.7

 
176.5

 
39.8

 
121.2

 
161.0

REPLAGAL

 
125.6

 
125.6

 

 
122.1

 
122.1

VPRIV
38.2

 
51.4

 
89.6

 
37.3

 
50.6

 
87.9

Genetic Diseases
82.0

 
309.7

 
391.7

 
77.1

 
293.9

 
371.0

GATTEX/REVESTIVE
117.6

 
15.9

 
133.5

 
63.7

 
11.6

 
75.3

NATPARA/NATPAR
62.4

 
2.4

 
64.8

 
34.5

 

 
34.5

Other Internal Medicine(2)
0.2

 
34.4

 
34.6

 
0.3

 
35.0

 
35.3

Internal Medicine
180.2

 
52.7

 
232.9

 
98.5

 
46.6

 
145.1

LIALDA/MEZAVANT
75.4

 
30.5

 
105.9

 
187.5

 
20.3

 
207.8

PENTASA
77.5

 

 
77.5

 
83.3

 

 
83.3

Other Established Brands(3)
12.8

 
22.3

 
35.1

 
30.9

 
17.2

 
48.1

Established Brands
165.7

 
52.8

 
218.5

 
301.7

 
37.5

 
339.2

Ophthalmics
99.2

 
1.1

 
100.3

 
57.4

 

 
57.4

Oncology
47.9

 
23.1

 
71.0

 
45.8

 
16.7

 
62.5

Total product sales
$
2,450.2

 
$
1,358.4

 
$
3,808.6

 
$
2,375.1

 
$
1,216.7

 
$
3,591.8

(1) Other Neuroscience includes INTUNIV, EQUASYM, and BUCCOLAM.
(2) Other Internal Medicine includes AGRYLIN, PLENADREN, and RESOLOR.
(3) Other Established Brands includes FOSRENOL and CARBATROL.

In the periods set out below, Royalties and other revenues were as follows:
 
Three months ended
(In millions)
June 30, 2018
 
June 30, 2017
Royalties
$
59.7

 
$
113.2

Other revenues
51.2

 
40.8

Royalties and other revenues
$
110.9

 
$
154.0



39


 
Six months ended
 
June 30, 2018
 
June 30, 2017
(In millions)
U.S. Sales
 
International Sales
 
Total Sales
 
U.S. Sales
 
International Sales
 
Total Sales
Product sales by franchise
 
 
 
 
 
 
 
 
 
 
 
IMMUNOGLOBULIN THERAPIES
$
878.9

 
$
291.1

 
$
1,170.0

 
$
813.3

 
$
195.5

 
$
1,008.8

HEREDITARY ANGIOEDEMA
658.6

 
75.4

 
734.0

 
643.1

 
56.9

 
700.0

BIO THERAPEUTICS
162.9

 
208.5

 
371.4

 
145.6

 
204.5

 
350.1

Immunology
1,700.4

 
575.0

 
2,275.4

 
1,602.0

 
456.9

 
2,058.9

HEMOPHILIA
766.0

 
723.5

 
1,489.5

 
724.6

 
669.7

 
1,394.3

INHIBITOR THERAPIES
115.8

 
298.3

 
414.1

 
146.8

 
294.4

 
441.2

Hematology
881.8

 
1,021.8

 
1,903.6

 
871.4

 
964.1

 
1,835.5

VYVANSE
1,043.8

 
141.0

 
1,184.8

 
968.6

 
113.3

 
1,081.9

ADDERALL XR
147.8

 
8.0

 
155.8

 
126.5

 
9.8

 
136.3

MYDAYIS
21.1

 

 
21.1

 
15.7

 

 
15.7

Other Neuroscience(1)
5.2

 
71.5

 
76.7

 
6.8

 
48.0

 
54.8

Neuroscience
1,217.9

 
220.5

 
1,438.4

 
1,117.6

 
171.1

 
1,288.7

ELAPRASE
84.8

 
210.1

 
294.9

 
78.0

 
223.6

 
301.6

REPLAGAL

 
249.8

 
249.8

 

 
231.8

 
231.8

VPRIV
74.9

 
104.6

 
179.5

 
72.8

 
94.9

 
167.7

Genetic Diseases
159.7

 
564.5

 
724.2

 
150.8

 
550.3

 
701.1

GATTEX/REVESTIVE
198.0

 
31.7

 
229.7

 
120.7

 
23.6

 
144.3

NATPARA/NATPAR
105.6

 
4.2

 
109.8

 
64.1

 
0.1

 
64.2

Other Internal Medicine(2)
0.8

 
71.5

 
72.3

 
0.6

 
68.0

 
68.6

Internal Medicine
304.4

 
107.4

 
411.8

 
185.4

 
91.7

 
277.1

LIALDA/MEZAVANT
105.9

 
62.0

 
167.9

 
340.6

 
42.3

 
382.9

PENTASA
149.9

 

 
149.9

 
152.4

 

 
152.4

Other Established Brands(3)
33.1

 
41.1

 
74.2

 
55.6

 
35.1

 
90.7

Established Brands
288.9

 
103.1

 
392.0

 
548.6

 
77.4

 
626.0

Ophthalmics
160.8

 
1.6

 
162.4

 
96.0

 

 
96.0

Oncology
91.3

 
46.6

 
137.9

 
88.1

 
32.7

 
120.8

Total product sales
$
4,805.2

 
$
2,640.5

 
$
7,445.7

 
$
4,659.9

 
$
2,344.2

 
$
7,004.1

(1) Other Neuroscience includes INTUNIV, EQUASYM, and BUCCOLAM.
(2) Other Internal Medicine includes AGRYLIN, PLENADREN, and RESOLOR.
(3) Other Established Brands includes FOSRENOL and CARBATROL.

In the periods set out below, Royalties and other revenues were as follows
 
Six months ended
(In millions)
June 30, 2018
 
June 30, 2017
Royalties
$
130.3

 
$
218.3

Other revenues
109.2

 
95.7

Royalties and other revenues
$
239.5

 
$
314.0



40


24.    Agreements and Transactions with Baxter

In connection with Baxalta’s separation from Baxter on July 1, 2015, Baxalta and Baxter entered into several separation-related agreements that provided a framework for Baxalta’s relationship with Baxter after the separation. These agreements, among others, included a manufacturing and supply agreement, a transition services agreement and a tax matters agreement. For further details on existing agreements with Baxter, refer to Note 28, Agreements and Transactions with Baxter, of Shire's Annual Report on Form 10-K for the year ended December 31, 2017.

During the three and six months ended June 30, 2018, the Company reported revenues associated with the manufacturing and supply agreement with Baxter of approximately $35.8 million and $84.9 million, respectively (2017: $30.4 million and $70.7 million, respectively) and Selling, general and administrative expense associated with the transition services agreement with Baxter of approximately $2.3 million and $9.9 million, respectively and (2017: $14.8 million and $33.7 million, respectively). Net tax-related indemnification liabilities as of June 30, 2018, associated with the tax matters agreement with Baxter are discussed in Note 21, Commitments and Contingencies, of these Unaudited Consolidated Financial Statements.


41


25.    Guarantor Financial Information

On June 3, 2016, Shire plc provided full and unconditional, joint and several guarantees of the floating rate senior notes due 2018, 2.0% senior notes due 2018 (repaid upon maturity in June 2018), 2.875% senior notes due 2020, 3.6% senior notes due 2022, 4.0% senior notes due 2025, and 5.25% senior notes due 2045 (collectively, "Baxalta Notes"), of Baxalta Inc., a 100% owned subsidiary of the Company. Amounts related to Baxalta Inc. and its subsidiaries are included in the condensed consolidating financial information for periods subsequent to June 3, 2016, the date of Baxalta Inc.'s acquisition.

On September 23, 2016, Shire plc provided full and unconditional, joint and several guarantees of the 1.90% senior notes due 2019, 2.40% senior notes due 2021, 2.875% senior notes due 2023, and 3.20% senior notes due 2026, of SAIIDAC (collectively, "SAIIDAC Notes"), a 100% owned subsidiary of the Company.

On December 1, 2016, Baxalta Inc. became a guarantor to the SAIIDAC Notes. Accordingly, both Baxalta Inc. and Shire plc are now co-guarantors of the SAIIDAC Notes.

In accordance with the requirements of SEC Regulation S-X Rule 3-10 “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered”, the following tables present Unaudited Condensed Consolidating Financial Statements of the two separate guarantee structures of the Baxalta Notes and SAIIDAC Notes, for:

Shire plc - Parent Guarantor;
SAIIDAC Subsidiary Issuer - issuer subsidiary of the SAIIDAC Notes; (a)
Baxalta Inc. - issuer subsidiary of the Baxalta Notes and guarantor subsidiary of the SAIIDAC Notes; (b)
Non-Guarantor Non-Issuer Subsidiaries - presents all other subsidiaries of the Parent Guarantor on a combined basis, none of which guarantee the Baxalta Notes or SAIIDAC Notes; (c)
Non-Guarantor Subsidiaries of Baxalta Notes - presents combined Non-Guarantor Non-Issuer Subsidiaries, including SAIIDAC, under the guarantee structure where Baxalta Inc. is the subsidiary issuer (a+c); and
Eliminations - primarily relate to eliminations of investments in subsidiaries and intercompany balances and transactions.

The Unaudited Condensed Consolidating Financial Statements present investments in subsidiaries using the equity method of accounting.

42


Condensed Consolidating Balance Sheets
(Unaudited, In millions)
As of June 30, 2018
Shire plc (Parent Guarantor)
 
SAIIDAC (SAIIDAC Notes Subsidiary Issuer)
 
Baxalta Inc. (Baxalta Notes Subsidiary Issuer and SAIIDAC Notes Subsidiary Guarantor)
 
Non-Guarantor Non-Issuer Subsidiaries
 
Non-Guarantor Subsidiaries of Baxalta Notes
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$

 
$

 
$
259.7

 
$
259.7

 
$

 
$
259.7

Restricted cash

 

 

 
35.0

 
35.0

 

 
35.0

Accounts receivable, net

 

 

 
3,005.1

 
3,005.1

 

 
3,005.1

Inventories

 

 

 
3,353.3

 
3,353.3

 

 
3,353.3

Held for sale and other current assets

 
1.5

 
78.9

 
3,054.9

 
3,056.4

 

 
3,135.3

Intercompany receivables

 
111.9

 

 
6,260.4

 
6,372.3

 
(6,372.3
)
 

Short term intercompany loan receivable

 
1,154.9

 

 

 
1,154.9

 
(1,154.9
)
 

Total current assets

 
1,268.3

 
78.9

 
15,968.4

 
17,236.7

 
(7,527.2
)
 
9,788.4

Investments
44,091.9

 

 
38,702.9

 
13,356.7

 
13,356.7

 
(95,623.7
)
 
527.8

Property, plant and equipment (PP&E), net

 

 
4.8

 
6,421.8

 
6,421.8

 

 
6,426.6

Goodwill

 

 

 
19,043.7

 
19,043.7

 

 
19,043.7

Intangible assets, net

 

 

 
30,110.5

 
30,110.5

 

 
30,110.5

Deferred tax asset

 

 
304.1

 
158.3

 
158.3

 
(304.1
)
 
158.3

Long term intercompany loan receivable

 
12,055.8

 
2,276.0

 

 
12,055.8

 
(14,331.8
)
 

Other non-current assets

 
2.1

 

 
164.7

 
166.8

 

 
166.8

Total assets
$
44,091.9

 
$
13,326.2

 
$
41,366.7

 
$
85,224.1

 
$
98,550.3

 
$
(117,786.8
)
 
$
66,222.1

LIABILITIES AND EQUITY
 

 
 
 
 
 
 
 
 

 
 

 
 

Current liabilities:
 

 
 
 
 
 
 
 
 

 
 

 
 

Accounts payable and accrued expenses
$
7.6

 
$
84.7

 
$
11.2

 
$
3,785.0

 
$
3,869.7

 
$

 
$
3,888.5

Short term borrowings and capital leases

 
1,154.9

 

 
38.0

 
1,192.9

 

 
1,192.9

Intercompany payables
3,691.3

 

 
2,681.0

 

 

 
(6,372.3
)
 

Short term intercompany loan payable

 

 

 
1,154.9

 
1,154.9

 
(1,154.9
)
 

Other current liabilities
611.4

 

 
11.9

 
602.6

 
602.6

 

 
1,225.9

Total current liabilities
4,310.3

 
1,239.6

 
2,704.1

 
5,580.5

 
6,820.1

 
(7,527.2
)
 
6,307.3

Long term borrowings and capital leases

 
12,055.8

 
4,287.3

 
378.9

 
12,434.7

 

 
16,722.0

Deferred tax liability

 

 

 
4,671.4

 
4,671.4

 
(304.1
)
 
4,367.3

Long term intercompany loan payable
3,021.2

 

 

 
11,310.6

 
11,310.6

 
(14,331.8
)
 

Other non-current liabilities

 

 
91.9

 
1,973.2

 
1,973.2

 

 
2,065.1

Total liabilities
7,331.5

 
13,295.4

 
7,083.3

 
23,914.6

 
37,210.0

 
(22,163.1
)
 
29,461.7

Total equity
36,760.4

 
30.8

 
34,283.4

 
61,309.5

 
61,340.3

 
(95,623.7
)
 
36,760.4

Total liabilities and equity
$
44,091.9

 
$
13,326.2

 
$
41,366.7

 
$
85,224.1

 
$
98,550.3

 
$
(117,786.8
)
 
$
66,222.1


43


Condensed Consolidating Balance Sheets
(Unaudited, In millions)
As of December 31, 2017
Shire plc (Parent Guarantor)
 
SAIIDAC (SAIIDAC Notes Subsidiary Issuer)
 
Baxalta Inc. (Baxalta Notes Subsidiary Issuer and SAIIDAC Notes Subsidiary Guarantor)
 
Non-Guarantor Non-Issuer Subsidiaries
 
Non-Guarantor Subsidiaries of Baxalta Notes
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$

 
$
0.5

 
$
471.9

 
$
471.9

 
$

 
$
472.4

Restricted cash

 

 

 
39.4

 
39.4

 

 
39.4

Accounts receivable, net

 

 

 
3,009.8

 
3,009.8

 

 
3,009.8

Inventories

 

 

 
3,291.5

 
3,291.5

 

 
3,291.5

Held for sale and other current assets

 
1.6

 
95.2

 
698.5

 
700.1

 

 
795.3

Intercompany receivables

 
120.2

 

 
4,682.3

 
4,802.5

 
(4,802.5
)
 

Short term intercompany loan receivable

 
2,006.3

 

 

 
2,006.3

 
(2,006.3
)
 

Total current assets

 
2,128.1

 
95.7

 
12,193.4

 
14,321.5

 
(6,808.8
)
 
7,608.4

Investments
43,204.3

 

 
38,924.6

 
13,059.4

 
13,059.4

 
(94,947.2
)
 
241.1

Property, plant and equipment (PP&E), net

 

 
7.6

 
6,627.8

 
6,627.8

 

 
6,635.4

Goodwill

 

 

 
19,831.7

 
19,831.7

 

 
19,831.7

Intangible assets, net

 

 

 
33,046.1

 
33,046.1

 

 
33,046.1

Deferred tax asset

 

 
304.1

 
188.8

 
188.8

 
(304.1
)
 
188.8

Long term intercompany loan receivable

 
12,050.2

 
1,609.3

 

 
12,050.2

 
(13,659.5
)
 

Other non-current assets

 
2.8

 

 
202.6

 
205.4

 

 
205.4

Total assets
$
43,204.3

 
$
14,181.1

 
$
40,941.3

 
$
85,149.8

 
$
99,330.9

 
$
(115,719.6
)
 
$
67,756.9

LIABILITIES AND EQUITY
 

 
 
 
 
 
 
 
 

 
 

 
 

Current liabilities:
 

 
 
 
 
 
 
 
 

 
 

 
 

Accounts payable and accrued expenses
$
0.2

 
$
85.9

 
$
18.1

 
$
4,080.3

 
$
4,166.2

 
$

 
$
4,184.5

Short term borrowings and capital leases

 
2,006.3

 
748.8

 
33.6

 
2,039.9

 

 
2,788.7

Intercompany payables
3,585.3

 

 
1,217.2

 

 

 
(4,802.5
)
 

Short term intercompany loan payable

 

 

 
2,006.3

 
2,006.3

 
(2,006.3
)
 

Other current liabilities
573.5

 

 
10.7

 
324.6

 
324.6

 

 
908.8

Total current liabilities
4,159.0

 
2,092.2

 
1,994.8

 
6,444.8

 
8,537.0

 
(6,808.8
)
 
7,882.0

Long term borrowings and capital leases

 
12,050.2

 
4,308.9

 
393.3

 
12,443.5

 

 
16,752.4

Deferred tax liability

 

 

 
5,052.3

 
5,052.3

 
(304.1
)
 
4,748.2

Long term intercompany loan payable
2,868.9

 

 

 
10,790.6

 
10,790.6

 
(13,659.5
)
 

Other non-current liabilities

 

 
70.0

 
2,127.9

 
2,127.9

 

 
2,197.9

Total liabilities
7,027.9

 
14,142.4

 
6,373.7

 
24,808.9

 
38,951.3

 
(20,772.4
)
 
31,580.5

Total equity
36,176.4

 
38.7

 
34,567.6

 
60,340.9

 
60,379.6

 
(94,947.2
)
 
36,176.4

Total liabilities and equity
$
43,204.3

 
$
14,181.1

 
$
40,941.3

 
$
85,149.8

 
$
99,330.9

 
$
(115,719.6
)
 
$
67,756.9


44


Condensed Consolidating Statements of Operations
(Unaudited, In millions)
Three months ended June 30, 2018
Shire plc (Parent Guarantor)
 
SAIIDAC (SAIIDAC Notes Subsidiary Issuer)
 
Baxalta Inc. (Baxalta Notes Subsidiary Issuer and SAIIDAC Notes Subsidiary Guarantor)
 
Non-Guarantor Non-Issuer Subsidiaries
 
Non-Guarantor Subsidiaries of Baxalta Notes
 
Eliminations
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
Product sales
$

 
$

 
$

 
$
3,808.6

 
$
3,808.6

 
$

 
$
3,808.6

Royalties and other revenues

 

 

 
110.9

 
110.9

 

 
110.9

Total revenues

 

 

 
3,919.5

 
3,919.5

 

 
3,919.5

Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales

 

 

 
1,108.3

 
1,108.3

 

 
1,108.3

Research and development

 

 

 
427.6

 
427.6

 

 
427.6

Selling, general and administrative
79.0

 

 
4.3

 
824.4

 
824.4

 

 
907.7

Amortization of acquired intangible assets

 

 

 
457.6

 
457.6

 

 
457.6

Integration and acquisition costs
93.3

 

 

 
86.0

 
86.0

 

 
179.3

Reorganization costs

 

 

 
8.8

 
8.8

 

 
8.8

Total operating expenses
172.3

 

 
4.3

 
2,912.7

 
2,912.7

 

 
3,089.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income/(loss) from continuing operations
(172.3
)
 

 
(4.3
)
 
1,006.8

 
1,006.8

 

 
830.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income/(expense), net
(34.4
)
 
(3.4
)
 
(33.2
)
 
(54.0
)
 
(57.4
)
 

 
(125.0
)
Other income/(expense), net
0.4

 

 
(1.1
)
 
29.7

 
29.7

 

 
29.0

Total other income/(expense), net
(34.0
)
 
(3.4
)
 
(34.3
)
 
(24.3
)
 
(27.7
)
 

 
(96.0
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income/(loss) from continuing operations before income taxes and equity in earnings/(losses) of equity method investees
(206.3
)
 
(3.4
)
 
(38.6
)
 
982.5

 
979.1

 

 
734.2

Income taxes
16.3

 
1.9

 
8.8

 
(151.4
)
 
(149.5
)
 

 
(124.4
)
Equity in earnings/(losses) of equity method investees, net of taxes
805.5

 

 
224.8

 
5.7

 
5.7

 
(1,030.3
)
 
5.7

Income/(loss) from continuing operations, net of taxes
615.5

 
(1.5
)
 
195.0

 
836.8

 
835.3

 
(1,030.3
)
 
615.5

Net income/(loss)
615.5

 
(1.5
)
 
195.0

 
836.8

 
835.3

 
(1,030.3
)
 
615.5

Comprehensive income/(loss)
$
(503.0
)
 
$
(1.5
)
 
$
(891.2
)
 
$
(281.7
)
 
$
(283.2
)
 
$
1,174.4

 
$
(503.0
)

45


Condensed Consolidating Statements of Operations
(Unaudited, In millions)
Six months ended June 30, 2018
Shire plc (Parent Guarantor)
 
SAIIDAC (SAIIDAC Notes Subsidiary Issuer)
 
Baxalta Inc. (Baxalta Notes Subsidiary Issuer and SAIIDAC Notes Subsidiary Guarantor)
 
Non-Guarantor Non-Issuer Subsidiaries
 
Non-Guarantor Subsidiaries of Baxalta Notes
 
Eliminations
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
Product sales
$

 
$

 
$

 
$
7,445.7

 
$
7,445.7

 
$

 
$
7,445.7

Royalties and other revenues

 

 

 
239.5

 
239.5

 

 
239.5

Total revenues

 

 

 
7,685.2

 
7,685.2

 

 
7,685.2

Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales

 

 

 
2,240.7

 
2,240.7

 

 
2,240.7

Research and development

 

 

 
832.8

 
832.8

 

 
832.8

Selling, general and administrative
90.9

 

 
7.2

 
1,614.4

 
1,614.4

 

 
1,712.5

Amortization of acquired intangible assets

 

 

 
941.6

 
941.6

 

 
941.6

Integration and acquisition costs
97.7

 

 
2.1

 
319.2

 
319.2

 

 
419.0

Reorganization costs

 

 

 
14.1

 
14.1

 

 
14.1

Total operating expenses
188.6

 

 
9.3

 
5,962.8

 
5,962.8

 

 
6,160.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income/(loss) from continuing operations
(188.6
)
 

 
(9.3
)
 
1,722.4

 
1,722.4

 

 
1,524.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income/(expense), net
(66.7
)
 
(7.8
)
 
(54.5
)
 
(120.4
)
 
(128.2
)
 

 
(249.4
)
Other income/(expense), net
(0.2
)
 

 
0.9

 
51.5

 
51.5

 

 
52.2

Total other income/(expense), net
(66.9
)
 
(7.8
)
 
(53.6
)
 
(68.9
)
 
(76.7
)
 

 
(197.2
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income/(loss) from continuing operations before income taxes and equity in earnings/(losses) of equity method investees
(255.5
)
 
(7.8
)
 
(62.9
)
 
1,653.5

 
1,645.7

 

 
1,327.3

Income taxes
17.2

 
3.0

 
13.2

 
(201.1
)
 
(198.1
)
 

 
(167.7
)
Equity in earnings/(losses) of equity method investees, net of taxes
1,404.4

 

 
317.4

 
6.5

 
6.5

 
(1,721.8
)
 
6.5

Income/(loss) from continuing operations, net of taxes
1,166.1

 
(4.8
)
 
267.7

 
1,458.9

 
1,454.1

 
(1,721.8
)
 
1,166.1

Net income/(loss)
1,166.1

 
(4.8
)
 
267.7

 
1,458.9

 
1,454.1

 
(1,721.8
)
 
1,166.1

Comprehensive income/(loss)
$
518.7

 
$
(4.8
)
 
$
(318.4
)
 
$
811.5

 
$
806.7

 
$
(488.3
)
 
$
518.7



46



Condensed Consolidating Statements of Operations
(Unaudited, In millions)
Three months ended June 30, 2017
Shire plc (Parent Guarantor)
 
SAIIDAC (SAIIDAC Notes Subsidiary Issuer)
 
Baxalta Inc. (Baxalta Notes Subsidiary Issuer and SAIIDAC Notes Subsidiary Guarantor)
 
Non-Guarantor Non-Issuer Subsidiaries
 
Non-Guarantor Subsidiaries of Baxalta Notes
 
Eliminations
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
Product sales
$

 
$

 
$

 
$
3,591.8

 
$
3,591.8

 
$

 
$
3,591.8

Royalties and other revenues

 

 

 
154.0

 
154.0

 

 
154.0

Total revenues

 

 

 
3,745.8

 
3,745.8

 

 
3,745.8

Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales

 

 
0.2

 
1,108.7

 
1,108.7

 

 
1,108.9

Research and development

 

 

 
542.4

 
542.4

 

 
542.4

Selling, general and administrative
8.7

 

 
4.2

 
886.2

 
886.2

 

 
899.1

Amortization of acquired intangible assets

 

 

 
434.1

 
434.1

 

 
434.1

Integration and acquisition costs
160.1

 

 
17.5

 
166.1

 
166.1

 

 
343.7

Reorganization costs

 

 

 
13.6

 
13.6

 

 
13.6

Loss on sale of product rights

 

 

 
4.8

 
4.8

 

 
4.8

Total operating expenses
168.8

 

 
21.9

 
3,155.9

 
3,155.9

 

 
3,346.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income/(loss) from continuing operations
(168.8
)
 

 
(21.9
)
 
589.9

 
589.9

 

 
399.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income/(expense), net
(30.8
)
 
6.1

 
(21.5
)
 
(94.0
)
 
(87.9
)
 

 
(140.2
)
Other income/(expense), net
1.8

 

 
(0.6
)
 
1.3

 
1.3

 

 
2.5

Total other income/(expense), net
(29.0
)
 
6.1

 
(22.1
)
 
(92.7
)
 
(86.6
)
 

 
(137.7
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income/(loss) from continuing operations before income taxes and equity in earnings/(losses) of equity method investees
(197.8
)
 
6.1

 
(44.0
)
 
497.2

 
503.3

 

 
261.5

Income taxes
(0.7
)
 
(2.9
)
 
(16.2
)
 
(4.5
)
 
(7.4
)
 

 
(24.3
)
Equity in earnings/(losses) of equity method investees, net of taxes
438.8

 

 
86.9

 
4.3

 
4.3

 
(525.7
)
 
4.3

Income/(loss) from continuing operations, net of taxes
240.3

 
3.2

 
26.7

 
497.0

 
500.2

 
(525.7
)
 
241.5

Loss from discontinued operations, net of taxes

 

 

 
(1.2
)
 
(1.2
)
 

 
(1.2
)
Net income/(loss)
240.3

 
3.2

 
26.7

 
495.8

 
499.0

 
(525.7
)
 
240.3

Comprehensive income/(loss)
$
1,667.5

 
$
3.2

 
$
1,401.8

 
$
1,923.0

 
$
1,926.2

 
$
(3,328.0
)
 
$
1,667.5


47


Condensed Consolidating Statements of Operations
(Unaudited, In millions)
Six months ended June 30, 2017
Shire plc (Parent Guarantor)
 
SAIIDAC (SAIIDAC Notes Subsidiary Issuer)
 
Baxalta Inc. (Baxalta Notes Subsidiary Issuer and SAIIDAC Notes Subsidiary Guarantor)
 
Non-Guarantor Non-Issuer Subsidiaries
 
Non-Guarantor Subsidiaries of Baxalta Notes
 
Eliminations
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
Product sales
$

 
$

 
$

 
$
7,004.1

 
$
7,004.1

 
$

 
$
7,004.1

Royalties and other revenues

 

 

 
314.0

 
314.0

 

 
314.0

Total revenues

 

 

 
7,318.1

 
7,318.1

 

 
7,318.1

Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales

 

 
1.4

 
2,434.5

 
2,434.5

 

 
2,435.9

Research and development

 

 

 
921.7

 
921.7

 

 
921.7

Selling, general and administrative
18.1

 

 
9.9

 
1,760.0

 
1,760.0

 

 
1,788.0

Amortization of acquired intangible assets

 

 

 
798.1

 
798.1

 

 
798.1

Integration and acquisition costs
164.7

 

 
43.1

 
251.9

 
251.9

 

 
459.7

Reorganization costs

 

 

 
19.1

 
19.1

 

 
19.1

Gain on sale of product rights

 

 

 
(0.7
)
 
(0.7
)
 

 
(0.7
)
Total operating expenses
182.8

 

 
54.4

 
6,184.6

 
6,184.6

 

 
6,421.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income/(loss) from continuing operations
(182.8
)
 

 
(54.4
)
 
1,133.5

 
1,133.5

 

 
896.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income/(expense), net
(61.1
)
 
11.5

 
(42.9
)
 
(186.9
)
 
(175.4
)
 

 
(279.4
)
Other income/(expense), net
1.8

 

 
(0.1
)
 
5.3

 
5.3

 

 
7.0

Total other income/(expense), net
(59.3
)
 
11.5

 
(43.0
)
 
(181.6
)
 
(170.1
)
 

 
(272.4
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income/(loss) from continuing operations before income taxes and equity in earnings/(losses) of equity method investees
(242.1
)
 
11.5

 
(97.4
)
 
951.9

 
963.4

 

 
623.9

Income taxes
0.8

 
(4.2
)
 
(36.1
)
 
8.4

 
4.2

 

 
(31.1
)
Equity in earnings/(losses) of equity method investees, net of taxes
856.6

 

 
(39.9
)
 
3.5

 
3.5

 
(816.7
)
 
3.5

Income/(loss) from continuing operations, net of taxes
615.3

 
7.3

 
(173.4
)
 
963.8

 
971.1

 
(816.7
)
 
596.3

Gain from discontinued operations, net of taxes 

 

 

 
19.0

 
19.0

 

 
19.0

Net income/(loss)
615.3

 
7.3

 
(173.4
)
 
982.8

 
990.1

 
(816.7
)
 
615.3

Comprehensive income/(loss)
$
2,313.0

 
$
7.3

 
$
1,450.5

 
$
2,677.0

 
$
2,684.3

 
$
(4,134.8
)
 
$
2,313.0




48




Condensed Consolidating Statements of Cash Flows
(Unaudited, In millions)
Six months ended June 30, 2018
Shire plc (Parent Guarantor)
 
SAIIDAC (SAIIDAC Notes Subsidiary Issuer)
 
Baxalta Inc. (Baxalta Notes Subsidiary Issuer and SAIIDAC Notes Subsidiary Guarantor)
 
Non-Guarantor Non-Issuer Subsidiaries
 
Non-Guarantor Subsidiaries of Baxalta Notes
 
Eliminations
 
Consolidated
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by/(used in) operating activities
$
(4.5
)
 
$
10.2

 
$
(14.5
)
 
$
1,958.7

 
$
1,968.9

 
$

 
$
1,949.9

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
 
 
Transactions with subsidiaries
(103.8
)
 
(7,036.8
)
 
(1,351.4
)
 
(10,147.3
)
 
(17,184.1
)
 
18,639.3

 

Purchases of PP&E

 

 
1.8

 
(363.1
)
 
(363.1
)
 

 
(361.3
)
Other, net

 

 

 
(35.6
)
 
(35.6
)
 

 
(35.6
)
Net cash provided by/(used in) investing activities
(103.8
)
 
(7,036.8
)
 
(1,349.6
)
 
(10,546.0
)
 
(17,582.8
)
 
18,639.3

 
(396.9
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
 
 
Proceeds from revolving line of credit, long term and short term borrowings

 
1,770.0

 

 
880.3

 
2,650.3

 

 
2,650.3

Repayment of revolving line of credit, long term and short term borrowings

 
(2,625.0
)
 
(749.5
)
 
(887.8
)
 
(3,512.8
)
 

 
(4,262.3
)
Proceeds from/(to) intercompany borrowings
156.6

 
7,881.6

 
2,109.1

 
8,492.0

 
16,373.6

 
(18,639.3
)
 

Payment of dividend
(48.6
)
 

 

 
(228.0
)
 
(228.0
)
 

 
(276.6
)
Proceeds from exercise of options
0.3

 

 
4.0

 
129.4

 
129.4

 

 
133.7

Other, net

 

 

 
(6.9
)
 
(6.9
)
 

 
(6.9
)
Net cash provided by/(used in) financing activities
108.3

 
7,026.6

 
1,363.6

 
8,379.0

 
15,405.6

 
(18,639.3
)
 
(1,761.8
)
Effect of foreign exchange rate changes on cash and cash equivalents and restricted cash

 

 

 
(8.3
)
 
(8.3
)
 

 
(8.3
)
Net decrease in cash and cash equivalents and restricted cash

 

 
(0.5
)
 
(216.6
)
 
(216.6
)
 

 
(217.1
)
Cash, cash equivalents, and restricted cash
at beginning of period

 

 
0.5

 
511.3

 
511.3

 

 
511.8

Cash, cash equivalents, and restricted cash
at end of period
$

 
$

 
$

 
$
294.7

 
$
294.7

 
$

 
$
294.7



49


Condensed Consolidating Statements of Cash Flows
(Unaudited, In millions)
Six months ended June 30, 2017
Shire plc (Parent Guarantor)
 
SAIIDAC (SAIIDAC Notes Subsidiary Issuer)
 
Baxalta Inc. (Baxalta Notes Subsidiary Issuer and SAIIDAC Notes Subsidiary Guarantor)
 
Non-Guarantor Non-Issuer Subsidiaries
 
Non-Guarantor Subsidiaries of Baxalta Notes
 
Eliminations
 
Consolidated
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net cash provided/(used in) operating activities
$
(36.0
)
 
$
4.5

 
$
(1.8
)
 
$
1,715.2

 
$
1,719.7

 
$

 
$
1,681.9

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
 
 
Transactions with subsidiaries
(760.6
)
 

 
(343.5
)
 
(1,928.0
)
 
(1,928.0
)
 
3,032.1

 

Purchases of PP&E

 

 

 
(391.1
)
 
(391.1
)
 

 
(391.1
)
Other, net

 

 
(2.0
)
 
45.8

 
45.8

 

 
43.8

Net cash provided by/(used in) investing activities
(760.6
)
 

 
(345.5
)
 
(2,273.3
)
 
(2,273.3
)
 
3,032.1

 
(347.3
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
 
 
Proceeds from revolving line of credit, long term and short term borrowings
2,110.0

 

 

 
1.9

 
1.9

 

 
2,111.9

Repayment of revolving line of credit, long term and short term borrowings
(1,825.0
)
 
(1,700.0
)
 

 
(2.9
)
 
(1,702.9
)
 

 
(3,527.9
)
Proceeds from/(to) intercompany borrowings
539.0

 
1,695.5

 
303.7

 
493.9

 
2,189.4

 
(3,032.1
)
 

Payment of dividend
(27.6
)
 

 

 
(207.1
)
 
(207.1
)
 

 
(234.7
)
Proceeds from exercise of options
0.2

 

 
4.6

 
74.7

 
74.7

 

 
79.5

Other, net

 

 
(0.8
)
 
(23.2
)
 
(23.2
)
 

 
(24.0
)
Net cash provided by/(used in) financing activities
796.6

 
(4.5
)
 
307.5

 
337.3

 
332.8

 
(3,032.1
)
 
(1,595.2
)
Effect of foreign exchange rate changes on cash and cash equivalents and restricted cash

 

 

 
4.1

 
4.1

 

 
4.1

Net decrease in cash and cash equivalents and restricted cash

 

 
(39.8
)
 
(216.7
)
 
(216.7
)
 

 
(256.5
)
Cash, cash equivalents, and restricted cash
at beginning of period

 

 
41.7

 
512.7

 
512.7

 

 
554.4

Cash, cash equivalents, and restricted cash
at end of period
$

 
$

 
$
1.9

 
$
296.0

 
$
296.0

 
$

 
$
297.9




50


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with Shire’s Unaudited Consolidated Financial Statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the Company's Audited Consolidated Financial Statements and related notes included in the Annual Report on Form 10-K for the year ended December 31, 2017.

Significant Events in the three months ended June 30, 2018 and Recent Developments

Corporate

On May 8, 2018, the Boards of Takeda and Shire announced that they had reached agreement on the terms of a recommended offer pursuant to which Takeda will acquire the entire issued and to be issued ordinary share capital of Shire. The acquisition is expected to close in the first half of 2019, subject to a number of conditions, including receipt of regulatory clearances and approval by the shareholders of both companies.

Business Development

Sale of Oncology franchise
On April 16, 2018, Shire announced it had entered into a definitive agreement with Servier to sell its Oncology franchise for $2.4 billion. Activities to conclude the sale are on track and the closing of the transaction is expected to occur in the third quarter of 2018.

Products

VEYVONDI for adults with von Willebrand disease (VWD)
On July 2, 2018, Shire announced that the Committee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency (EMA) had issued a positive opinion recommending the granting of a marketing authorization in the European Union (EU) for VEYVONDI, for the treatment of bleeding events and treatment/prevention of surgical bleeding in adults (age 18 and older) with VWD.

CINRYZE for the prevention of attacks in pediatric hereditary angioedema (HAE) patients
On June 21, 2018, Shire announced that the U.S. Food and Drug Administration (FDA) had approved a label expansion for CINRYZE, making it available to help prevent angioedema attacks in children aged 6 years and older with HAE.

XIIDRA for the treatment of the signs and symptoms of dry eye disease
In June 2018, Shire withdrew from the decentralized procedure for XIIDRA’s European Marketing Authorization Application and is targeting the fourth quarter of 2018 for resubmission through a centralized procedure.

Pipeline
    
SHP626, an investigational treatment for adults with nonalcoholic steatohepatitis (NASH) with liver fibrosis
In June 2018, Shire announced that the phase 2 clinical study of SHP626 has been discontinued. Shire is evaluating other options for the program.

Facilities

On June 21, 2018, Shire announced that the FDA had approved its submission for the production of GAMMAGARD LIQUID at its new plasma manufacturing facility near Covington, Georgia. The facility will add approximately 30% capacity to Shire’s internal network once fully operational. Commercial production began in January 2018 and shipments commenced shortly after approval.

Dividend

In respect of the six months ended June 30, 2018, the Board resolved to pay an interim dividend of 0.0560 U.S. dollars per Ordinary Share (2017: 0.0509 U.S. dollars per Ordinary Share).


51


Dividend payments will be made in Pounds Sterling to holders of Ordinary Shares and in U.S. Dollars to holders of ADSs. A dividend of 0.0426(1) Pounds sterling per Ordinary Share (2017: 0.0385 Pounds sterling) and 0.1680 U.S. dollars per ADS (2017: 0.1527 U.S. dollars) will be paid on October 19, 2018, to shareholders on the register as of the close of business on September 7, 2018.

Holders of Ordinary Shares are notified that, in order to receive UK sourced dividends via Shire’s Income Access Share arrangements (IAS Arrangements), they need to have submitted a valid IAS Arrangements election form to the Company’s Registrar, Equiniti, by no later than 5pm (BST) on September 21, 2018. Holders of Ordinary Shares are advised that:

any previous elections made using versions of the IAS Arrangements election form in use prior to February 16, 2016, and any elections deemed to have been made prior to April 28, 2016, are no longer valid; and

if they do not elect, or have not elected using the newly formatted IAS Arrangements election forms published on or after February 16, 2016, to receive UK sourced dividends via Shire’s IAS Arrangements, their dividends will be Irish sourced and therefore incur Irish dividend withholding tax, subject to applicable exemptions.

Internet links to the newly formatted IAS Arrangements election forms can be found at:
http://investors.shire.com/shareholder-information/shareholder-forms.aspx.

(1) Translated using a GBP:USD exchange rate of 1.3147.  

Results of Operations for the Three and Six Months Ended June 30, 2018 and 2017

In the second quarter of 2018, the Company returned to a single segment approach to managing its business. This decision was precipitated by Shire's Board acceptance of Takeda's offer to acquire the Company and reflects the Company’s focus on the performance of the entire business as it operates in this current environment. This step was taken to more closely align with how the financial information is viewed by the Executive Committee (Shire’s chief operating decision maker) for the purposes of making resource allocation decisions and assessing the performance of the business. Additionally, in the second quarter of 2018, the Company introduced a new product franchise called Established Brands to capture revenue for its non-promoted products that are facing or could face generic competition, such as LIALDA and PENTASA.

Product sales

In the three months ended June 30, 2018, Product sales increased 6% to $3,808.6 million (2017: $3,591.8 million), driven by Immunology, up 13%, Internal Medicine, up 61%, and Ophthalmics, up 75%, off-setting the impact of generic competition on Established Brands.

In the six months ended June 30, 2018, Product sales increased 6% to $7,445.7 million (2017: $7,004.1 million), driven by Immunology, up 11%, Internal Medicine, up 49%, and Ophthalmics, up 69%, off-setting the impact of generic competition on Established Brands.


52


 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
Product Sales Growth
 
2018
 
2017
 
Product Sales Growth
Product sales by franchise
 

 
 

 
 
 
 

 
 

 
 
IMMUNOGLOBULIN THERAPIES
$
612.1

 
$
510.5

 
20
 %
 
$
1,170.0

 
$
1,008.8

 
16
 %
HEREDITARY ANGIOEDEMA
365.2

 
333.9

 
9
 %
 
734.0

 
700.0

 
5
 %
BIO THERAPEUTICS
172.2

 
172.2

 
 %
 
371.4

 
350.1

 
6
 %
Immunology
1,149.5

 
1,016.6

 
13
 %
 
2,275.4

 
2,058.9

 
11
 %
HEMOPHILIA
746.7

 
743.9

 
0
 %
 
1,489.5

 
1,394.3

 
7
 %
INHIBITOR THERAPIES
204.3

 
220.7

 
(7
)%
 
414.1

 
441.2

 
(6
)%
Hematology
951.0

 
964.6

 
(1
)%
 
1,903.6

 
1,835.5

 
4
 %
VYVANSE
556.0

 
518.2

 
7
 %
 
1,184.8

 
1,081.9

 
10
 %
ADDERALL XR
79.8

 
71.4

 
12
 %
 
155.8

 
136.3

 
14
 %
MYDAYIS
16.6

 
15.7

 
N/M

 
21.1

 
15.7

 
N/M

Other Neuroscience(1)
41.3

 
30.1

 
37
 %
 
76.7

 
54.8

 
40
 %
Neuroscience
693.7

 
635.4

 
9
 %
 
1,438.4

 
1,288.7

 
12
 %
ELAPRASE
176.5

 
161.0

 
10
 %
 
294.9

 
301.6

 
(2
)%
REPLAGAL
125.6

 
122.1

 
3
 %
 
249.8

 
231.8

 
8
 %
VPRIV
89.6

 
87.9

 
2
 %
 
179.5

 
167.7

 
7
 %
Genetic Diseases
391.7

 
371.0

 
6
 %
 
724.2

 
701.1

 
3
 %
GATTEX/REVESTIVE
133.5

 
75.3

 
77
 %
 
229.7

 
144.3

 
59
 %
NATPARA/NATPAR
64.8

 
34.5

 
88
 %
 
109.8

 
64.2

 
71
 %
Other Internal Medicine(2)
34.6

 
35.3

 
(2
)%
 
72.3

 
68.6

 
5
 %
Internal Medicine
232.9

 
145.1

 
61
 %
 
411.8

 
277.1

 
49
 %
LIALDA/MEZAVANT
105.9

 
207.8

 
(49
)%
 
167.9

 
382.9

 
(56
)%
PENTASA
77.5

 
83.3

 
(7
)%
 
149.9

 
152.4

 
(2
)%
Other Established Brands(3)
35.1

 
48.1

 
(27
)%
 
74.2

 
90.7

 
(18
)%
Established Brands
218.5

 
339.2

 
(36
)%
 
392.0

 
626.0

 
(37
)%
Ophthalmics
100.3

 
57.4

 
75
 %
 
162.4

 
96.0

 
69
 %
Oncology
71.0

 
62.5

 
14
 %
 
137.9

 
120.8

 
14
 %
Total product sales
$
3,808.6

 
$
3,591.8

 
6
 %
 
$
7,445.7

 
$
7,004.1

 
6
 %
N/M: Product sales growth as a percentage is not meaningful due to product being launched during the period.
(1) Other Neuroscience includes INTUNIV, EQUASYM, and BUCCOLAM.
(2) Other Internal Medicine includes AGRYLIN, PLENADREN, and RESOLOR.
(3) Other Established Brands includes FOSRENOL and CARBATROL.

Immunology
Immunology product sales were $1,149.5 million and $2,275.4 million in the three and six months ended June 30, 2018, respectively. Immunoglobulin therapies growth of 20% and 16% in the three and six months ended June 30, 2018, respectively, was primarily driven by increased demand for subcutaneous and intravenous brands and international sales growth.

HAE product sales were up 9% and 5% in the three and six months ended June 30, 2018, respectively, driven by stocking for both CINRYZE and FIRAZYR, and to a lesser extent a price increase taken for FIRAZYR, partially offset by a decline in CINRYZE demand due to a competitor launch.

Bio therapeutics sales were unchanged for the three months ended June 30, 2018 compared with the corresponding period in 2017 as increased demand was offset by large order phasing in international markets, whereas the six months ended June 30, 2018 growth of 6% over the corresponding period in 2017 was driven by demand and favorable foreign currency exchange.

53



Hematology
Hematology product sales were $951.0 million and $1,903.6 million in the three and six months ended June 30, 2018, respectively.

Hemophilia sales were flat in the three months ended June 30, 2018 and increased 7% in the six months ended June 30, 2018 with growth in both the U.S. and international markets driven by ADYNOVATE. Sales of inhibitor therapies declined 7% and 6% in the three and six months ended June 30, 2018, respectively, due to new competition.

Neuroscience
Neuroscience product sales were $693.7 million and $1,438.4 million in the three and six months ended June 30, 2018, respectively. VYVANSE product sales increased 7% and 10% in the three and six months ended June 30, 2018, respectively, due to a U.S. price increase and continued growth in the Company's international markets.

Genetic Diseases
Genetic Diseases product sales were $391.7 million and $724.2 million in the three and six months ended June 30, 2018, respectively. Genetic Diseases product sales for the three and six months ended June 30, 2018 increased 6% and 3%, respectively, compared to the corresponding periods in 2017. Product sales growth was primarily driven by favorable foreign exchange rates.

Internal Medicine
Internal Medicine product sales were $232.9 million and $411.8 million in the three and six months ended June 30, 2018, respectively. GATTEX/REVESTIVE and NATPARA/NATPAR reported increased product sales of 77% and 88% during the three months ended June 30, 2018 and 59% and 71% during the six months ended June 30, 2018, respectively, primarily due to an increase in the numbers of patients on therapy, and to a lesser extent, the benefit of price increases.

Established Brands
Established Brands product sales were $218.5 million and $392.0 million in the three and six months ended June 30, 2018, respectively. LIALDA/MEZAVANT product sales were down 49% and 56% in the three and six months ended June 30, 2018, respectively, due to generic competition which began in the second half of 2017.
 
Ophthalmics
Ophthalmics product sales increased 75% and 69% to $100.3 million and $162.4 million during the three and six months ended June 30, 2018, respectively, due to XIIDRA demand growth.

Oncology
Oncology product sales were $71.0 million and $137.9 million in the three and six months ended June 30, 2018, respectively. Oncology product sales increased 14% for both the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017, due to increased demand in the international markets.

Royalties and other revenues

The following table provides an analysis of Shire’s income from royalties and other revenues:
Royalties and other revenues
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
Change %
 
2018
 
2017
 
Change %
Royalties
$
59.7

 
$
113.2

 
(47
)%
 
$
130.3

 
$
218.3

 
(40
)%
Other revenues
51.2

 
40.8

 
25
 %
 
109.2

 
95.7

 
14
 %
Total royalties and other revenues
$
110.9

 
154.0

 
(28
)%
 
$
239.5

 
$
314.0

 
(24
)%

Royalties and other revenues decreased 28% and 24%, respectively, during the three and six months ended June 30, 2018 compared to the corresponding periods in 2017, primarily due to lower SENSIPAR royalties and the reclassification of ADDERALL XR from royalty revenue to product sales and other changes required under the new revenue accounting standard.


54


Cost of sales
 
Cost of sales as a percentage of Total revenues decreased to 28% for the three months ended June 30, 2018 and 29% for the six months ended June 30, 2018, compared to 30% and 33%, respectively, for the corresponding periods in 2017, primarily due to lower expense related to the unwind of inventory fair value adjustments.

For the three and six months ended June 30, 2018, Cost of sales included depreciation of $66.1 million and $138.8 million, respectively (2017: $67.0 million and $139.1 million, respectively).
 
R&D

In the three and six months ended June 30, 2018, Research and development expenses decreased by $114.8 million and $88.9 million, or 21% and 10%, respectively, compared to the corresponding periods in 2017, primarily due to significant milestone and upfront payments associated with license arrangements incurred in 2017 that did not recur in 2018.

For the three and six months ended June 30, 2018, Research and development expenses included depreciation of $9.7 million and $20.4 million, respectively (2017: $12.8 million and $26.2 million, respectively).

SG&A

In the three and six months ended June 30, 2018, Selling, general and administrative expenses increased by $8.6 million and decreased by $75.5 million, or up 1% and down 4% respectively, compared to the corresponding periods in 2017. The decrease in the six months ended June 2018, compared to the corresponding period in 2017, is primarily due to on-going cost reduction initiatives and operating synergies, as well as a reduction in marketing costs.

For the three and six months ended June 30, 2018, Selling, general and administrative expenses included depreciation of $59.2 million and $116.0 million, respectively (2017: $40.9 million and $78.3 million, respectively).
 
Amortization of acquired intangible assets

For the three and six months ended June 30, 2018, Shire recorded Amortization of acquired intangible assets of $457.6 million and $941.6 million, respectively, compared to $434.1 million and $798.1 million, respectively, in the corresponding periods in 2017. The increase is primarily related to the acceleration of CINRYZE amortization with the expected launch of lanadelumab (SHP643), subject to regulatory approval.

Integration and acquisition costs

In the three and six months ended June 30, 2018, Shire recorded Integration and acquisition costs of $179.3 million and $419.0 million, respectively, compared to $343.7 million and $459.7 million, respectively, in the corresponding periods in 2017.

In 2018, Integration and acquisition costs incurred related to the continued integration of Baxalta, which was acquired in June 2016, Takeda's proposed acquisition of Shire, the expected sale of Shire's Oncology franchise, and the change in fair value of contingent consideration, primarily related to lanadelumab (SHP643), which was acquired from Dyax in 2016.

The costs associated with the integration of Baxalta include $5.9 million and $143.4 million, respectively, of asset impairments, $21.2 million and $43.1 million, respectively, of third-party professional fees, $3.1 million and $14.8 million, respectively, of expenses associated with facility consolidations, and $9.2 million and $15.0 million, respectively, of employee severance and acceleration of stock compensation for the three and six months ended June 30, 2018.

The costs associated with Takeda’s proposed combination include $64.0 million of third-party professional fees and $4.0 million of employee incentives for both the three and six months ended June 30, 2018. The Company expects the majority of these expenses to be paid within 12 months from the date the related expenses were incurred.

Costs associated with the expected sale of the Oncology franchise include $37.5 million of third-party professional fees and $2.2 million of employee incentives for both the three and six months ended June 30, 2018.


55


In the three and six months ended June 30, 2017, Shire recorded Integration and acquisition costs of $343.7 million and $459.7 million, respectively, primarily due to the acquisition and integration of Baxalta and Dyax. In the three and six months ended June 30, 2017, $151.2 million and $147.7 million, respectively, is included in Integration and acquisition costs relating to the change in fair value of contingent consideration payable mainly related to lanadelumab (SHP643). For the three and six months ended June 30, 2017, the Baxalta integration and acquisition costs include $80.2 million and $117.1 million, respectively, of employee severance and acceleration of stock compensation, $50.4 million and $85.6 million, respectively, of third-party professional fees and $17.2 million and $41.7 million, respectively, of expenses associated with facility consolidations.
 
Other expense, net

For the three and six months ended June 30, 2018, Shire recorded Other expense, net of $96.0 million and $197.2 million, respectively, compared to $137.7 million and $272.4 million, respectively, in the corresponding periods in 2017. Other expense, net decreased primarily due to unrealized gains in equity investments and lower interest expense resulting from debt paydown, partially offset by net losses on foreign exchange revaluations on balance sheet exposures.
 
Taxation

For the three and six months ended June 30, 2018, the effective tax rate on income from continuing operations was 17% (2017: 9%) and 13% (2017:5%), respectively.

The effective tax rate for the three and six months ended June 30, 2018 has been affected by certain provisions of the U.S. Tax Cuts and Jobs Act (Tax Act) passed in December 2017, which enacts a U.S. federal tax rate of 21% along with anti-deferral provisions and new limitations on certain deductions required under the Tax Act. Due to enactment late in the Company’s annual 2017 reporting period, the Company included provisional amounts in its annual financial statements for the year ended December 31, 2017. The Company continued to assess the impact of the Tax Act during the three and six months ended June 30, 2018 and recorded an adjustment of $22.0 million to its provisional estimates related to the remeasurement of deferred tax assets and liabilities. This remeasurement reduced the effective tax rate for the three and six months ended June 30, 2018 by nil and 1%, respectively.

It is expected that additional interpretive guidance will be issued that may change how the Company has computed the provisional amounts for the year ended December 31, 2017. The Company will continue to assess the impact of the Tax Act during the measurement period and will record any adjustments to its provisional estimates as needed during the remainder of 2018 and continues to assert that all amounts recorded and disclosed to date remain provisional.

The effective tax rate for the three and six months ended June 30, 2017 was affected by the combined impact of the
relative quantum of the profit before tax for the period by jurisdiction as well as significant acquisition and integration costs.

Liquidity and Capital Resources

General

The Company’s funding requirements depend on a number of factors, including the timing and extent of its development programs; corporate, business, and product acquisitions; the level of resources required for the expansion of certain manufacturing and marketing capabilities as the product base expands; increases in accounts receivable and inventory which may arise with any increase in product sales; technological developments; the timing and cost of obtaining required regulatory approvals for new products; the timing and quantum of milestone payments on business combinations, in-licenses, and collaborative projects; the timing and quantum of tax and dividend payments; the timing and quantum of purchases by the Employee Benefit Trust of Shire shares in the market to satisfy awards granted under Shire’s employee share plans and the amount of cash generated from sales of Shire’s products and royalty receipts.

An important part of Shire’s business strategy is to protect its products and technologies through the use of patents, proprietary technologies, and trademarks, to the extent available. The Company intends to defend its intellectual property and as a result may need cash for funding the cost of litigation.


56


The Company finances its activities through cash generated from operating activities, credit facilities, private, and public offerings of equity and debt securities, and the proceeds of asset or investment disposals.

Shire’s Consolidated Balance Sheets include $259.7 million of Cash and cash equivalents as of June 30, 2018.

Shire has a revolving credit facility (RCF) of $2,100.0 million, which matures in 2021, $955.0 million of which was utilized as of June 30, 2018. The RCF incorporates a $250.0 million U.S. dollar and Euro swingline facility operating as a sub-limit thereof.

In connection with the acquisition of Dyax, Shire entered into a $5.6 billion amortizing term loan facility in November 2015. As of June 30, 2018, $199.9 million of this term loan facility was outstanding and the facility matures in November 2018.

In connection with the acquisition of Baxalta, Shire assumed $5.0 billion of unsecured senior notes previously issued by Baxalta. As of June 30, 2018, a total of $4.3 billion unsecured senior notes are outstanding, following repayment of the $375.0 million floating-rate notes and the $375.0 million fixed-rate notes due June 2018. In addition, in connection with the acquisition of Baxalta, Shire issued $12.1 billion of unsecured senior notes in September 2016. As of June 30, 2018, none of the unsecured senior notes are due for repayment in the next twelve months.

The details of these financing arrangements are included in Note 15, Borrowings and Capital Leases, to these Unaudited Consolidated Financial Statements.

In addition, Shire also has access to certain short-term uncommitted lines of credit which are available to utilize from time to time to provide short-term cash management flexibility. As of June 30, 2018, these lines of credit were not utilized.

The Company may also engage in financing activities from time to time, including accessing the debt or equity capital markets.

Financing

Shire anticipates that its operating cash flow together with available cash, cash equivalents, and the RCF will be sufficient to meet its anticipated future operating expenses, capital expenditures, tax and interest payments, lease obligations, repayment of borrowings, and milestone payments as they become due over the next twelve months.

If the Company decides to acquire other businesses, it expects to fund these acquisitions from cash resources, the RCF, and through new borrowings (including issuances of debt securities) or the issuance of new equity, if necessary.

Sources and uses of cash

The following table provides an analysis of the Company’s gross and net debt position (excluding restricted cash):
(In millions)
June 30, 2018
 
December 31, 2017
Cash and cash equivalents
$
259.7

 
$
472.4

 
 
 
 
Long term borrowings (excluding capital leases)
(16,383.2
)
 
(16,410.7
)
Short term borrowings (excluding capital leases)
(1,184.6
)
 
(2,781.2
)
Capital leases
(347.1
)
 
(349.2
)
Total debt
$
(17,914.9
)
 
$
(19,541.1
)
Net debt
$
(17,655.2
)
 
$
(19,068.7
)

Net debt is a non-GAAP measure. Net debt represents U.S. GAAP Cash and cash equivalents less U.S. GAAP short and long term borrowings and capital leases. The Company believes that Net debt is a useful measure as it indicates the level of borrowings after taking account of the Cash and cash equivalents that could be utilized to pay down the outstanding borrowings.


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Substantially all of the Company’s Cash and cash equivalents are held by foreign subsidiaries (i.e., those subsidiaries incorporated outside of Jersey, Channel Islands, the jurisdiction of incorporation of Shire plc). The amount of Cash and cash equivalents held by foreign subsidiaries has not had, and is not expected to have, a material impact on the Company’s liquidity and capital resources.

Cash flow activity

Net cash provided by operating activities increased by $268.0 million, or 16%, to $1,949.9 million (2017: $1,681.9 million) during the six months ended June 30, 2018, primarily due to increased cash generated from business operations and a favorable comparison period as the six month ended June 30, 2017 included a payment of $351.6 million associated with the settlement of the DERMAGRAFT litigation.

Net cash used in investing activities was $396.9 million during the six months ended June 30, 2018, primarily related to purchases of $361.3 million of PP&E due to continued investments in manufacturing operations. 

Net cash used in financing activities was $1,761.8 million during the six months ended June 30, 2018, principally due to $1.0 billion of repayments under the November 2015 Facility, repayment of the $375.0 million floating-rate Baxalta notes and the $375.0 million fixed-rate Baxalta notes, which was partially offset by $145.0 million of increased borrowings under the RCF and $133.7 million of cash proceeds from the exercise of options.

Obligations and commitments

There were no material changes to the Company’s contractual obligations previously disclosed in ITEM 7: Management’s Discussion and Analysis of Financial Condition and Results of Operation of Shire's Annual Report on Form 10-K for the year ended December 31, 2017.

Recent Accounting Pronouncements

A description of recently issued accounting standards is included under the heading “New Accounting Pronouncements” in Note 2, Summary of Significant Accounting Policies.

Critical Accounting Estimates

The preparation of Consolidated Financial Statements, in conformity with U.S. GAAP and SEC regulations, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates, including those related to the valuation of intangible assets (including goodwill), sales deductions, income taxes (including provisions for uncertain tax positions and the realization of deferred tax assets), provisions for litigation and legal proceedings, contingent consideration receivable from divestments of products or businesses and contingent consideration payable in respect of business combinations and asset purchases and pension costs. Estimates are based on historical experience, current conditions, and on various other assumptions that are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets, liabilities, and equity and the amounts of revenues and expenses. Actual results may differ from these estimates under different assumptions or conditions. Management’s Discussion and Analysis and Note 2, Summary of Significant Accounting Policies, of Shire's Annual Report on Form 10-K 2017 for the year ended December 31, 2017, describe the significant accounting estimates and policies used in preparation of the Consolidated Financial Statements. There have been no significant changes in the Company's critical accounting policies during the three months ended June 30, 2018.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in the Company's assessment of its sensitivity to market risk since its presentation set forth in PART II, ITEM 7A: Quantitative and Qualitative Disclosures about Market Risk in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.


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Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports that the Company file under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC.
 
As of June 30, 2018, the Company, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, performed an evaluation of the effectiveness of the Company’s disclosure controls and procedures, including those with respect to the Income Access Share (IAS) Trust. The Company’s management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which by their nature can provide only reasonable assurance regarding management’s control objectives. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures, including those with respect to the IAS Trust, are effective at the reasonable level of assurance to ensure that information required to be disclosed in reports that the Company files under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a–15(f) and 15d–15(f) under the Exchange Act) during the quarter ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II: Other Information

Item 1. Legal Proceedings
 
The information required by this Item is incorporated herein by reference to Note 22, Legal and Other Proceedings, to these Unaudited Consolidated Financial Statements included in Part I: Item 1. Financial Statements of this Form 10-Q.

Item 1A. Risk Factors

Below, we are providing, in supplemental form, the material changes to our risk factors that occurred during the period ended June 30, 2018. Our risk factors disclosed in PART I, ITEM 1A: Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, provide additional disclosure to this supplemental risk.

The recommended offer by Takeda Pharmaceutical Company Limited (Takeda) for Shire is subject to a number of conditions, including approval by shareholders and regulators.

On May 8, 2018, the Boards of Shire and Takeda announced that they had reached agreement on the terms of a recommended offer by Takeda for Shire (the “Acquisition”). Under the terms of the recommended combination, shareholders in Shire will be entitled to receive $30.33 in cash for each Shire ordinary share and either 0.839 New Takeda Shares or 1.678 ADSs in Takeda (one ADS equals 0.5 New Takeda Share). The completion of the Acquisition is subject to approval by the shareholders of Shire and Takeda and there can be no assurance that such approvals will be obtained. The completion of the Acquisition is also subject to certain other conditions, including as to certain regulatory approvals and anti-trust clearances, and there can be no certainty that such conditions will be satisfied so as to allow the Acquisition to be completed within the anticipated timeframe or at all.

The recommended combination has created and may continue to create uncertainty among our customers, suppliers, and other business partners. In addition, it has required and will continue to require the expenditure of significant time and resources by us and may be a significant distraction for our management and employees. The potential uncertainty due to these or other factors may undermine our business and have a material adverse effect on our results of operations, and may cause increased volatility and wide price fluctuations in our stock price.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.


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Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures
 
Not applicable.


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Item 5. Other Information
 
None


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Item 6. Exhibits

2.08

31.1

31.2

32.1

101.INS     XBRL Instance Document*

101.SCH     XBRL Taxonomy Extension Schema Document*

101.CAL     XBRL Taxonomy Extension Calculation Linkbase Document*

101.DEF     XBRL Taxonomy Definition Linkbase Document* 

101.LAB     XBRL Taxonomy Extension Label Linkbase Document*

101.PRE     XBRL Taxonomy Extension Presentation Linkbase Document*

*Filed herewith


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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934 (the “Exchange Act”) the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
Date: July 31, 2018
/s/ Dr. Flemming Ornskov
Dr. Flemming Ornskov
Chief Executive Officer
 
 
Date: July 31, 2018
/s/ Thomas Dittrich
Thomas Dittrich
Chief Financial Officer
 
 

 


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