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(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.)
5
Riverwalk, Citywest Business Campus, Dublin 24, Republic of
Ireland
(Address of
principal executive offices and zip code)
+353
1 429 7700
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
Name
of exchange on which registered
American
Depositary Shares, each representing three Ordinary Shares 5 pence par
value per share
NASDAQ Global
Select Market
Securities
registered pursuant to Section 12(g) of the Act:
None
(Title
of class)
Indicate by check
mark whether the Registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act
Yes [X] No [ ]
Indicate by check
mark if the Registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act
Yes [ ] No [X]
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 [ ]
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of the
Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference to Part III of this Form 10-K or any amendment to this
Form 10-K.
[X]
Indicate by check
mark whether the Registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer and
large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated
filer [X] Accelerated
filer Non-accelerated
filer Smaller reporting company
Indicate by check
mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes [
] No [X]
Indicate by check
mark whether the Registrant has submitted electronically and posted on its
corporate website, 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 [
]
As at June 30,2009, the last business day of the Registrant’s most recently completed second
quarter, the aggregate market value of the ordinary shares, £0.05 par value per
share of the Registrant held by non-affiliates was approximately
$7,709 million. This was computed using the average bid and asked
price at the above date.
THE
“SAFE HARBOR” STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Statements included
herein that are not historical facts 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, the Company’s results could be materially adversely affected. The
risks and uncertainties include, but are not limited to, risks associated with:
the inherent uncertainty of research, development, approval, reimbursement,
manufacturing and commercialization of the Company’s Specialty Pharmaceutical
and Human Genetic Therapies products, as well as the ability to secure and
integrate new products for commercialization and/or development; government
regulation of the Company’s products; the Company’s ability to manufacture its
products in sufficient quantities to meet demand; the impact of competitive
therapies on the Company’s products; the Company’s ability to register, maintain
and enforce patents and other intellectual property rights relating to its
products; the Company’s ability to obtain and maintain government and other
third-party reimbursement for its products; and other risks and uncertainties
detailed from time to time in the Company’s filings with the Securities and
Exchange Commission.
The
following are trademarks either owned or licensed by Shire plc or its
subsidiaries, which are the subject of trademark registrations in certain
territories, or which are owned by third parties as indicated and referred to in
this Form 10-K:
ADDERALL XR® (mixed
salts of a single entity amphetamine)
ADDERALL® (mixed
salts of a single entity amphetamine)
AGRYLIN®
(anagrelide hydrochloride)
AMIGAL®
(trademark of Amicus Therapeutics, Inc. (“Amicus”))
ASACOL®
(trademark of Medeva Phama Suisse AG (used under license by Proctor and
Gamble))
ATRIPLA®
(trademark of Bristol Myers Squibb Company (“BMS”) and Gilead Sciences
(“Gilead”))
BERINERT P®
(trademark of Aventis Behring GmbH)
CALCICHEW® range
(calcium carbonate with or without vitamin D3)
Shire plc and its
subsidiaries (collectively referred to as either “Shire” or the “Company”) is a
leading specialty biopharmaceutical company that focuses on meeting the needs of
the specialist physician.
Shire plc (formerly
known as Shire Limited) was incorporated under the laws of Jersey (Channel
Islands) on January 28, 2008 and is a public limited company. Following the
implementation of a court sanctioned Scheme of Arrangement, on May 23, 2008
Shire plc (formerly known as Shire Limited) replaced the former Shire plc, which
was a public limited company incorporated in England and Wales, as the new
holding company for Shire.
The Company has
grown through acquisition, completing a series of major mergers or acquisitions
that have brought therapeutic, geographic and pipeline growth and
diversification. The Company will continue to evaluate companies, products and
pipeline opportunities that offer a good strategic fit and enhance shareholder
value.
Shire’s mission is
to be the most valuable specialty biopharmaceutical company in the world that
focuses on enabling people with life altering conditions to lead better
lives. Shire focuses its business on attention deficit and hyperactivity
disorder (“ADHD”), human genetic therapies (“HGT”), and gastrointestinal (“GI”)
diseases as well as opportunities in other specialty therapeutic areas to the
extent they fit our strategy and/or arise through in-licensing or acquisition
opportunities. Shire’s in-licensing, merger and acquisition efforts are focused
on products in specialist markets with strong intellectual property protection
and global rights. Shire believes that a carefully selected and balanced
portfolio of products with strategically aligned and relatively small-scale
sales forces will deliver strong results.
For a full
discussion of the 2009 Product, pipeline and business highlights,
including:
·
the agreement in March 2009 with
GSK for the co-promotion of VYVANSE for the treatment of ADHD in adults in
the US;
·
the acquisition of EQUASYM IR and
XL from UCB in March 2009;
·
the US
approval of INTUNIV for the treatment of ADHD in children and adolescents
in September 2009;
·
the
submission of a New Drug Application (“NDA”) in the US in September 2009,
and of a marketing authorization application to the European Medicines
Agency (“EMEA”) in November 2009, for VPRIV (formerly referred to as
velaglucerase alfa) for the treatment of Type 1 Gaucher
disease; and
·
the
submission in December 2009 of a Biologics License Application (“BLA”)
with the US Food and Drug Administration (“FDA”) for REPLAGAL for the
treatment of Fabry disease. In February 2010, the FDA requested additional
pharmacokinetic comparability data. As a result, Shire withdrew its
December BLA filing, and, at the suggestion of the FDA, requested and
received Fast Track designation. Shire immediately initiated a rolling BLA
submission in February.
See “Currently
marketed products” and “Products under development” below.
Substantially all
of the Company’s revenues, expenditures and net assets are attributable to the
research and development (“R&D”), manufacture, sale and distribution of
pharmaceutical products within two reportable segments: Specialty
Pharmaceuticals and HGT. The Company also earns royalties (where Shire has
out-licensed products to third parties) which are recorded as revenues. Segment
revenues, profits or losses and assets for 2009, 2008 and 2007 are presented in
Note 26 to the Company’s consolidated financial statements contained in ITEM 15:
Exhibits and Financial Statement Schedules of this Annual Report.
At December 31,2009, the Company employed 1,777 (2008: 1,596) sales and marketing staff to
service its operations throughout the world, which included its major markets in
the US, Europe and Canada.
The table below
lists the Company’s material marketed products at December 31, 2009 indicating
the owner/licensor, disease area and the key territories in which Shire markets
the product.
Specialty
Pharmaceuticals
Products
Disease
area
Owner/licensor
Key
territories
Treatments
for ADHD
VYVANSE
(lisdexamfetamine dimesylate)
ADHD
Shire
US and
Canada
INTUNIV
(extended release guanfacine)
ADHD
Shire
US
EQUASYM
(methylphenidate hydrochloride) immediate release (IR) and modified
release (XL)
ADHD
Shire
Europe
DAYTRANA
(methylphenidate transdermal system)
ADHD
Noven
Pharmaceuticals, Inc. (“Noven”)
(1)
US
ADDERALL XR
(mixed salts of a single-entity amphetamine)
ADHD
Shire
US and
Canada
Treatments
for GI diseases
PENTASA
(mesalamine)
Ulcerative
colitis
Shire
US
LIALDA
(mesalamine)/ MEZAVANT(mesalazine)
Ulcerative
colitis
Giuliani
SpA
US and Europe
(2)
Treatments
for diseases in other therapeutic areas
(1) In
August 2009 Hisamitsu Pharmaceutical Co., Inc. acquired Noven
(2)
Marketed in US as LIALDA and Europe as MEZAVANT XL, MEZAVANT or MEZAVANT
LP
(3)
Marketed in Japan under license by Bayer Yakuhin Limited
(“Bayer”)
(4)
Marketed in rest of world (“RoW”) under license from Shire by Janssen
Pharmaceutica N.V. (“Janssen”) (part of the J & J group of
companies)
(5)
Marketed by distributors in certain markets
(6)
Marketed in Japan under license from Shire by Dainippon Sumitomo Pharma
Co., Ltd. (“DSP”)
(7)
Marketed in Asia Pacific by Genzyme under license from
Shire
Specialty
Pharmaceuticals
Treatments
for ADHD
ADHD is one of the
most common psychiatric disorders in children and adolescents (J Am Acad Child
Adolesc Psychiatry, 2007). Worldwide prevalence of ADHD is estimated at 5.3
percent (Am J Psych. 2007). In the US, approximately 7.8 percent of all
school-aged children, or about 4.4 million children aged 4 to 17 years, have
been diagnosed with ADHD at some point in their lives (CDC, 2005). According to
the Results from the National Comorbidity Survey Replication (Am J Psychiatry,
2006), the disorder is also estimated to affect 4.4 percent of US adults aged 18
to 44. When this percentage is extrapolated to the full US population aged 18
and over, Shire estimates that approximately 9.8 million adults have ADHD (based
on US Census 2000 – 2005).
According to IMS, a
leading global provider of business intelligence for the pharmaceutical and
healthcare industries, the US market for ADHD treatments was valued at
approximately $4.7 billion for the year to December 31, 2009, an increase of 10%
from the year to December 31, 2008.
VYVANSE
VYVANSE is a new
chemical entity and is the first pro-drug stimulant for the treatment of ADHD,
where the amino acid l-lysine is linked to d-amphetamine, which is
therapeutically inactive until metabolized in the body.
VYVANSE for the treatment of ADHD in pediatric
patients aged 6 to 12 years was approved in 2007 and is available in the US in six dosage
strengths: 20mg, 30mg, 40mg, 50mg, 60mg and 70mg, all indicated for once-daily
dosing.
In April 2008 the
FDA approved the adult
indication for VYVANSE, making it
the first and only once-daily pro-drug stimulant approved to treat adults aged
over 18 years with ADHD. Shire launched VYVANSE in the
US for adults with ADHD in June
2008.
In February 2009
Health Canada approved VYVANSE for the treatment of ADHD in pediatric patients
aged 6 to 12 years in Canada. Shire launched VYVANSE in Canada in February
2010.
In May 2009 Shire
and GSK commenced working together on the co-promotion of VYVANSE for the
treatment of ADHD in adults with the aim of improving recognition and treatment
of adult ADHD in the US.
In October 2009 the
FDA affirmed its decision to grant new chemical entity exclusivity to VYVANSE
and refused to accept an Abbreviated New Drug Application (“ANDA”) submitted by
Actavis Elizabeth, LLC in January 2009 for generic lisdexamfetamine dimesylate.
VYVANSE has new chemical exclusivity through to February 23, 2012 and is also
covered by US patents which remain in effect until June 29, 2023.
Litigation
proceedings relating to the VYVANSE are in progress. For further information see
ITEM 3: Legal Proceedings and Note 23(d), “Commitments and Contingencies,
Legal proceedings” to the consolidated financial
statements listed under ITEM 15:
Exhibits and Financial Statement Schedules of this Annual
Report.
INTUNIV
INTUNIV is the
first in a new class of approved ADHD medications, a selective alpha-2A receptor
agonist indicated for the treatment of ADHD. Alpha-2A-adrenoceptors strengthen
working memory networks by inhibiting cAMP-HCN channel signalling in the
prefrontal cortex (Cell. 2007;129:397-410).
INTUNIV is non-scheduled and has no known potential for abuse or
dependence.
The FDA approved
INTUNIV in September 2009 as a once daily treatment for children and adolescents
aged 6 – 17 years. Shire launched INTUNIV in November 2009.
EQUASYM
In March 2009,
Shire acquired from UCB the worldwide rights (excluding the US, Canada and
Barbados) to EQUASYM (methylphenidate hydrochloride) IR and XL for the treatment
of ADHD in children and adolescents aged 6 – 18 years. Due to the
inherent advantages of longer acting formulations in meeting the needs of
children and adolescent patients, Shire intends to focus exclusively on the XL
form. EQUASYM XL is commercially available in ten countries in 10mg, 20mg and
30mg strengths. EQUASYM is marketed in Mexico and South Korea under the trade
name METADATE CD.
DAYTRANA
DAYTRANA is a
methylphenidate transdermal delivery system for the once daily treatment of
ADHD. DAYTRANA, launched in the US in June 2006, is the first and only patch
medication approved by the FDA to treat the symptoms of pediatric ADHD. It is
available in four dosage strengths of 10mg, 15mg, 20mg and 30mg, all designed
for once-daily use. When worn for the recommended nine hours, efficacy has been
demonstrated from the first time point measured (at two hours) through the
12-hour time point. Shire in-licensed the worldwide royalty-free sales and
marketing rights to DAYTRANA from Noven in 2003.
In 2009 and January
2010 Shire voluntarily recalled limited lots of DAYTRANA patches because certain
patches did not meet their release liner removal specifications which may have
resulted in some patients and caregivers having difficulties removing the
liners. The voluntary recall was not due to safety issues. Shire and Noven
continue to pursue enhancements to the product and to work closely with the FDA
to implement changes that may improve the usability of DAYTRANA. There has been
no interruption in the production of DAYTRANA.
On January 9, 2008
the FDA issued a Warning Letter to Noven which related to Noven’s manufacture of
DAYTRANA. FDA conducted a follow-up inspection of Noven in January
2009. On May 14, 2009, Noven met with the FDA to discuss the progress
and completion of corrective actions. A follow-up FDA inspection is anticipated
in 2010 to verify that the items identified in the Warning Letter have been
addressed and the site meets Current Good Manufacturing Standards (“GMP”)
requirements.
ADDERALL
XR
ADDERALL XR is an
extended release treatment for ADHD, which uses MICROTROL drug delivery
technology and is designed to provide once daily dosing. It is available in 5mg,
10mg, 15mg, 20mg, 25mg and 30mg capsules and can be administered either as a
capsule or sprinkled on soft food.
The FDA approved
ADDERALL XR as a once-daily treatment for children aged 6 to 12 with ADHD in
October 2001, for adults in August 2004 and for adolescents aged 13 to 17 in
July 2005.
Teva Pharmaceutical
Industries, Ltd. (“Teva”) and Impax Laboratories, Inc. (“Impax”) commenced
commercial shipment of their authorized generic versions of ADDERALL XR in April
and October 2009, respectively. Shire receives revenues from the supply of
authorized generic ADDERALL XR to Teva and Impax. Shire also receives royalties
from Impax’s sales of authorized generic ADDERALL XR and, until October 2009,
received royalties from Teva’s sales of authorized generic ADDERALL XR. The
launch of authorized generic versions has resulted in a decline in Shire’s
product sales of branded ADDERALL XR in 2009. For further information see ITEM
7: Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
In October 2005 the
Company filed a Citizen Petition with the FDA requesting that the FDA require
more rigorous bioequivalence testing or additional clinical testing for generic
or follow-on drug products that reference ADDERALL XR before they can be
approved. The Company received correspondence from the FDA in April 2006 stating
that, due to the complex issues raised, which require extensive review and
analysis by the FDA’s officials, a decision cannot yet be reached by the FDA.
The FDA has not yet reached a decision on this Citizen Petition and did not
provide any guidance as to when that decision may be reached.
Ulcerative Colitis
was estimated to affect approximately 1.2 million patients worldwide in 2007
according to Decision Resources, Immune and Inflammatory Disorders Study #4,
Ulcerative Colitis (August 2008). Ulcerative colitis is a serious chronic
inflammatory disease of the colon in which part, or all, of the large intestine
becomes inflamed and often ulcerated. Typically, patients go through periods of
relapse and remission and can suffer from diarrhea, bleeding and abdominal pain.
Once diagnosis is confirmed, patients are usually treated for life. The first
line treatment for inflammatory bowel disease is with mesalamine
(5-aminosalicylic acid (“5-ASA”)) based products.
PENTASA
PENTASA controlled
release capsules are approved in the US and indicated for the induction of
remission and for the treatment of patients with mild to moderately active
ulcerative colitis.
PENTASA is an
ethylcellulose-coated, controlled release capsule formulation designed to
release therapeutic quantities of mesalamine throughout the gastrointestinal
tract. PENTASA is available in the US in 250mg and 500mg capsules.
In September 2008
the Company filed a Citizen Petition with the FDA requesting that the FDA
require more rigorous bioequivalence testing for generic or follow-on drug
products that reference PENTASA before they can be approved. To date the FDA has
not reached a decision on this Citizen Petition.
LIALDA/MEZAVANT
LIALDA is indicated in the US for the induction of remission in
patients with mild to moderately active ulcerative colitis. LIALDA is the first and only FDA-approved
once-daily oral formulation of mesalamine for induction of
remission. Once-daily LIALDA contains the highest commercially
available mesalamine dose per tablet (1.2g), so patients can take as few as two
tablets once daily.
LIALDA was approved
by the FDA in January 2007 and was launched in the US in March 2007. Following
approvals in 2007 in the European Union (“EU”) and Canada, LIALDA/MEZAVANT is
now commercially available in a total of nine countries. Further launches of
MEZAVANT are planned in other countries throughout 2010, subject to the
successful conclusion of pricing and reimbursement negotiations.
In April 2008 TAP
Pharmaceutical Products Inc commenced co-promotion of LIALDA in the US in
accordance with the co-promotion agreement entered into in March 2008. This
agreement was terminated in the first quarter of 2009.
Treatments
for diseases in other therapeutic areas
FOSRENOL
FOSRENOL is a
phosphate binder that is indicated for use in chronic kidney disease patients
(“CKD”) stage 5 patients receiving dialysis and, from October 2009, is also
indicated in the EU for the treatment of adult patients with CKD not on dialysis
with serum phosphate > 1.78 mmol/L (5.5 mg/dL) in which a low phosphate diet
alone is insufficient to control serum phosphate levels. It is estimated that
there are approximately 1.5 million patients worldwide with end-stage renal
disease on dialysis (Nephrol Dial Transplant, 2005). In this condition the
kidneys are unable to regulate the balance of phosphate in the body. If
untreated, the blood phosphate levels can become elevated (hyperphosphatemia).
The recently published Kidney Disease Improving Global Outcomes (KDIGO)
guidelines recommend that serum phosphate levels in CKD patients should be
managed toward normal (Kidney International, 2009). FOSRENOL binds dietary
phosphate in the gastrointestinal tract to prevent it from passing through the
gut lining and, based upon this mechanism of action, phosphate absorption from
the diet is decreased.
Formulated as a
chewable tablet, FOSRENOL is available in 500mg, 750mg and 1,000mg dosage
strengths. The FDA approved the 500mg dosage strength in 2004 and 750mg and
1,000 mg dosage strength was approved in 2005. In March 2009 FOSRENOL was
launched in Japan by Shire’s licensee Bayer. At December 31, 2009 FOSRENOL was
commercially available in 38 countries worldwide.
Litigation
proceedings relating to the Company’s FOSRENOL patents are in progress. For
further information see ITEM 3: Legal Proceedings and Note 23(d), “Commitments and Contingencies,
Legal proceedings” to the consolidated financial statements listed under
ITEM 15: Exhibits and Financial Statement Schedules of this Annual
Report.
CALCICHEW
range
The CALCICHEW range
of calcium and calcium/vitamin D3 supplements are indicated for the adjunctive
treatment of osteoporosis in the UK and Republic of Ireland. Osteoporosis is
characterized by a progressive loss of bone mass that renders bone fragile and
liable to fracture. Nearly 3 million people in the UK were estimated to suffer
from this condition (Bone, 2000).
Shire has licensed
from Nycomed Pharma AS the exclusive rights to distribute the CALCICHEW range of
products in the UK and Republic of Ireland until December 31, 2012.
CARBATROL
CARBATROL is an
anti-convulsant for individuals with epilepsy. Approximately 2.7 million people
in the US suffer from epilepsy, a disorder that is characterized by a propensity
for recurrent seizures and is defined by two or more unprovoked seizures (CDC,
2010; Epilepsy Foundation, 2010).
CARBATROL is an
extended release formulation of carbamazepine that uses MICROTROL drug delivery
technology. It is available in 100mg, 200mg and 300mg capsules and can be
administered either as a capsule or sprinkled on food and delivers consistent
blood levels of the drug over 24 hours, when taken twice daily. Carbamazepine is
one of the most widely prescribed anti-epileptic drugs.
The FDA approved
CARBATROL in September 1997 and it was launched in the US in June 1998. Pursuant
to a promotional services agreement, Impax has promoted CARBATROL for the
Company in the US since July 2006.
In October 2008 the
Company filed a Citizen Petition with the FDA requesting that the FDA require
more rigorous bioequivalence testing for generic or follow-on drug products that
reference CARBATROL before they can be approved. To date, there has been no
substantive action on this Citizen Petition by the FDA.
Litigation
proceedings relating to the Company’s CARBATROL patents are in progress. For
further information see ITEM 3: Legal Proceedings and Note 23(d), “Commitments and Contingencies,
Legal proceedings” to the consolidated financial statements listed under
ITEM 15: Exhibits and Financial Statement Schedules of this Annual
Report.
REMINYL
and REMINYL XL
REMINYL and REMINYL
XL are indicated for the symptomatic treatment of mild to moderately severe
dementia of the Alzheimer type. It is estimated in a report produced by King’s
College London and the London School of Economics (2007) that approximately 0.4
million people in the UK suffer from Alzheimer's disease, which affects the
ability to carry out normal daily activities and affects memory, language and
behavior. The disease is progressive, with death usually occurring within eight
to ten years following the onset of symptoms.
REMINYL and REMINYL
XL are marketed by the Company in the UK and Republic of Ireland under a
royalty-bearing license from Synaptech. In the rest of the world, they are
marketed by Janssen, an affiliate of J & J and the Company receives
royalties on Janssen's sales. REMINYL XL is a once-daily prolonged release
formulation of REMINYL, launched by the Company in the UK and Republic of
Ireland in June 2005.
Litigation
proceedings relating to REMINYL are in progress. For further information see
ITEM 3: Legal Proceedings and Note 23(d), “Commitments and Contingencies,
Legal proceedings” to the consolidated financial statements listed under
ITEM 15: Exhibits and Financial Statement Schedules of this Annual
Report.
XAGRID
Myeloproliferative
disorders (“MPDs”), including essential thrombocythemia (“ET”), are a group of
diseases in which one or more blood cell types are overproduced. In the case of
ET, excess numbers of platelets, which are involved in the blood clotting
process, can result in abnormal blood clot formation giving rise to events such
as heart attack and stroke. Excessive platelet production can also lead to the
formation of abnormal platelets, which may not be as effective in the clotting
process. This can lead to events such as gastrointestinal bleeding.
XAGRID (anagrelide hydrochloride)
is marketed in Europe for the reduction of elevated platelet counts in at risk
ET patients. It was granted a marketing authorization in the EU in November
2004. XAGRID has been granted orphan drug status in the EU, providing it with up
to ten years market exclusivity from November 2004.
In the US
anagrelide hydrochloride is sold under the trade name AGRYLIN for the treatment
of thrombocythemia secondary to a MPD. Generic versions of AGRYLIN have been
available in the US market since expiration of marketing exclusivity in
2005.
Human Genetic
Therapies
REPLAGAL
REPLAGAL is a
treatment for Fabry disease. Fabry disease is a rare, inherited genetic disorder
resulting from a deficiency in the activity of the lysosomal enzyme
alpha-galactosidase A, which is involved in the breakdown of fats. Although the
signs and symptoms of Fabry disease vary widely from patient to patient, the
most common include severe
pain of the
extremities, impaired kidney function often progressing to full kidney failure,
early heart disease, stroke and disabling gastrointestinal symptoms. The disease
is estimated to affect 1 in 40,000 males and is less frequent in
females.
REPLAGAL is a fully
human alpha-galactosidase A protein that replaces the deficient
alpha-galactosidase A with an active enzyme to ameliorate the clinical
manifestations of Fabry disease. In August 2001, REPLAGAL was granted marketing
authorization and co-exclusive orphan drug status in the EU with up to ten years
market exclusivity.
REPLAGAL was
launched in Japan in February 2007. As part of an agreement with DSP, DSP will
manage the sale and distribution of REPLAGAL in Japan. At December 31, 2009
REPLAGAL was approved in 45 countries.
ELAPRASE
ELAPRASE is a
treatment for Hunter syndrome (also known as Mucopolysaccharidosis Type II or
MPS II). Hunter syndrome is a rare, inherited genetic disorder mainly affecting
males that interferes with the body's ability to break down and recycle waste
substances called mucopolysaccharides, also known as glycosaminoglycans or GAGs.
Hunter syndrome is one of several related lysosomal storage diseases. In
patients with Hunter syndrome, cumulative buildup of GAGs in cells throughout
the body interferes with the way certain tissues and organs function, leading to
severe clinical complications and early mortality.
ELAPRASE was
approved by the FDA in July 2006 and launched in the US during August
2006.
The European
Commission granted marketing authorization for the use of ELAPRASE for the
long-term treatment of patients with Hunter syndrome in the EU in January
2007.
ELAPRASE received approval from the
Ministry of Health, Labour and Welfare in Japan in October 2007. As part of an agreement with Genzyme,
Genzyme will manage the sales and distribution of ELAPRASE in Japan as well as certain other countries in
the Asia Pacific region.
At December 31,2009 ELAPRASE was approved in 44 countries. ELAPRASE has been granted orphan
drug exclusivity by both the FDA and the EMEA, providing it with up to seven and
ten years market exclusivity in the US and EU, respectively, from the date of
the grant of the relevant marketing authorization.
FIRAZYR
FIRAZYR is a first-in-class
peptide-based therapeutic developed for the symptomatic treatment of acute
attacks of HAE. HAE is a debilitating and potentially life-threatening genetic
disease characterized by unpredictable recurring swelling attacks in the hands,
feet, face, larynx, or abdomen.
In July 2008 the European Commission granted marketing authorization for the
use of FIRAZYR for the symptomatic treatment of acute attacks of
HAE. FIRAZYR has been granted orphan drug exclusivity by the EMEA,
providing it with up to ten years market exclusivity in the
EU. FIRAZYR is the first HAE product to receive approval throughout
the EU. FIRAZYR is approved in 33 countries globally.
The Company
receives royalties on antiviral products based on certain of the Company’s
patents licensed to GSK. These antiviral products are for Human
Immunodeficiency Virus (“HIV”) and Hepatitis B virus. The table below lists
these products, indicating the principal indications, the company responsible
for marketing the product and the relevant territory. In 2009, GSK established a
partnership with Pfizer Inc. called ViiV Healthcare that brought together the
HIV portfolios of GSK and Pfizer. ViiV Healthcare markets the HIV
products licensed to GSK by the Company.
(1)
This is not a comprehensive list of trademarks for this product. The
product is also marketed under other trademarks in some markets.
(2)
In 1996 Shire formed a commercialization partnership with GSK to
market 3TC and Zeffix in Canada. In 2009 GSK assigned its interest in
the partnership to ViiV Healthcare.
HIV/AIDS
HIV is a retrovirus
that has been recognized as the causative agent of Acquired Immunodeficiency
Syndrome (“AIDS”). There are many strains of HIV throughout the world, although
they all exhibit the same disease mechanism.
According to UNAIDS
(a joint United Nations program on AIDS), in 2008 there were an estimated 33.4
million people worldwide living with HIV/AIDS, including 15.7 million women and
2.1 million children under the age of 15. In 2008 an estimated 2.7 million
people became newly infected with HIV and there were 2 million AIDS related
deaths. Of the new
infections in 2008, 1.9 million occurred in sub-Saharan Africa, and this region
accounted for 1.4 million of the deaths.
Shire has licensed
to GSK the worldwide rights, with the exception of Canada, to develop,
manufacture and sell lamivudine-containing anti-retroviral products (ARVs)
(3TC/EPIVIR, COMBIVIR, TRIZIVIR and EPZICOM/KIVEXA). These products are now
marketed by ViiV Healthcare. In Canada lamivudine is sold by Shire in
partnership with ViiV Healthcare.
In an effort to
combat the AIDS epidemic in sub-Saharan Africa and reduce the cost of medicines
used to treat AIDS in that region, the Company agreed in 2003 to permit GSK to
enter into voluntary sub-licences in sub-Saharan Africa with generic
manufacturers to make and sell the ARVs and also agreed to waive the majority of
its royalty entitlements on sales of products by GSK's sub-licensees in that
region. In July 2009 these sub-licenses were made royalty free. In support of
Canada’s Access to Medicines Regime, the Company has also enabled a Canadian
company, Apotex, to manufacture a generic fixed-dose triple combination ARV that
contains lamivudine for the treatment of HIV/AIDS in Rwanda.
Generic drug
companies have filed ANDAs seeking approval for COMBIVIR in the US. GSK
has filed lawsuits against both Teva and Lupin Ltd. ("Lupin"), each of whom have
filed ANDAs and Paragraph IV certifications for generic versions of COMBIVIR.
The lawsuit against Lupin has been stayed pending resolution of the Teva
lawsuit. Neither Teva nor Lupin have challenged the patents licensed by
Shire to GSK. The thirty month stay of approval for Teva's ANDA expires in March
2010. No trial date has been set.
3TC/EPIVIR
EPIVIR is indicated
in combination with other anti-retrovirals for the treatment of HIV-1 infection
and was approved in the US in November 1995. Approval in Canada followed shortly
after in December 1995 and in the EU in August 1996. In combination with other
anti-retrovirals 3TC is used in triple and quadruple combination therapies with
other nucleoside analog, protease inhibitors and non-nucleoside reverse
transcriptase inhibitors (“NNRTI”).
In September 1997,
the FDA authorized the marketing of COMBIVIR in the US in combination with other
antiretrovirals in the treatment of HIV-1 infection. COMBIVIR was
approved for use in Europe in March 1998 and in Canada in December
1998.
TRIZIVIR
In November 2000,
the FDA authorized the marketing of TRIZIVIR in the US in combination with other
antiretrovirals or alone in the treatment of HIV-1 infection. TRIZIVIR was
approved for use in the EU in December 2000 and in Canada in October
2001.
EPZICOM/KIVEXA
In August 2004, the
FDA approved EPZICOM in the US for the use in combination with other
antiretroviral agents, for the treatment of HIV-1 infection in adults. In
December 2004, KIVEXA was granted a marketing authorization for adults and
adolescents in the EU. KIVEXA was approved in Canada in July 2005.
Hepatitis
B infection
Hepatitis B virus
(“HBV”) is the causative agent of both acute and chronic forms of Hepatitis B, a
liver disease that is a major cause of death and disease throughout the world.
According to the WHO, in 2008 two billion people worldwide were infected with
HBV. Of those infected, 350 million people are chronically infected. An
estimated 600,000 persons die each year due to the acute or chronic consequences
of HBV. Although vaccines to prevent infection by HBV are currently
available, they have not been shown to be effective in those already infected
with the virus.
ZEFFIX/EPIVIR-HBV/HEPTOVIR
ZEFFIX is an oral
available treatment for chronic HBV infection associated with evidence of HBV
viral replication and active liver inflammation. Use of lamivudine in HBV was
approved in Canada in November 1998, followed by US approval in December 1998
and EU approval in July 1999.
The Company has
licensed to GSK the worldwide rights, with the exception of Canada, to develop
manufacture and sell ZEFFIX, EPIVIR-HBV and HEPTOVIR. In Canada HEPTOVIR is sold
by the Company in partnership with GSK.
ADHD
ADDERALL
XR
Teva and Impax
commenced commercial shipment of their authorized generic versions of ADDERALL
XR in April 2009 and October 2009, respectively. Shire derives revenues from the
supply of authorized generic ADDERALL XR to Teva and Impax. Shire also receives
royalties from the sale of authorized generic versions of ADDERALL XR. From
April 2009 Shire received royalties from Teva’s sales of authorized generic
versions of ADDERALL XR (these royalties ceased in September 2009) and from
October 2009 Shire received royalties from Impax’s sales of authorized generic
ADDERALL XR.
Dementia
REMINYL
and REMINYL XL
REMINYL and REMINYL
XL are indicated for the symptomatic treatment of mild to moderately severe
dementia of the Alzheimer type and are sold by Shire in the UK and Republic of
Ireland. In the rest of the world, they are marketed by Janssen (under the name
RAZADYNE and RAZADYNE ER in the US). The Company receives royalties on Janssen's
sales. REMINYL XL is a once-daily prolonged release formulation of REMINYL,
which was launched by Janssen in the US in May 2005 as RAZADYNE ER. Following
patent litigation in the US in respect of RAZADYNE and RAZADYNE ER, generic
versions of both drugs were permitted to enter the US market in
2008.
Generic versions
have also launched in Argentina, Colombia, and Poland and various extended
release (XL/ER) generic versions were approved in European countries where data
exclusivity has expired and patent protection expired or did not exist. There is
current ongoing litigation against generic products in Greece and
Spain.
The Company focuses
its development resources on projects within its core therapeutic areas of ADHD,
GI and HGT. Total R&D expenditures of $638.3 million, $494.3 million and
$544.6 million were incurred in the years to December 31, 2009, 2008 and 2007
respectively.
The table below
lists the Company’s key products under development as of December 31, 2009 by
disease areas indicating the most advanced development status reached in markets
and the Company’s territorial rights in respect of each key
product.
Hunter
Syndrome with central nervous system symptoms,
idursulfase-IT
Pre-clinical
Global (3)
HGT-1410
Sanfilippo
Syndrome (Mucopolysaccharidosis IIIA)
Pre-clinical
Global
HGT-2610
Globoid Cell
Leukodystrophy (GLD, Krabbe Disease)
Pre-clinical
Global
(1)
Mochida
Pharmaceutical Co., Ltd has rights to develop and sell LIALDA in Japan
under license with Shire.
(2)
Marketed in
Japan under license from Shire by
DSP.
(3)
Genzyme has
rights to manage marketing and distribution in Japan and certain other
Asia Pacific countries under licenses with
Shire.
SPECIALTY
PHARMACEUTICALS
Treatments
for ADHD
VYVANSE
for ADHD in EU
VYVANSE for the
treatment of ADHD in children aged 6 to 17 in the EU is in Phase 3 development.
Shire anticipates submission of
the regulatory filing for VYVANSE in Europe in 2011.
INTUNIV
for use in combination with other ADHD treatments
Phase 3 trials in
the US are ongoing to support the efficacy and safety of INTUNIV when combined
with other approved ADHD treatments.
Treatments
for GI diseases
LIALDA
for the maintenance of remission in ulcerative colitis in the US
Phase 3 trials
investigating the use of the product to maintain remission in patients who have
ulcerative colitis were initiated in 2006 for the US market and continued
through 2009. The product was indicated for the maintenance of remission in
patients who have ulcerative colitis on approval in the EU.
LIALDA/MEZAVANT
for the treatment of diverticulitis
Diverticulosis is
among the most common diseases in developed countries and manifests as
weaknesses or out-pouches of the bowel wall primarily in elderly populations.
Approximately 15-20% of people with diverticulosis go on to develop
diverticulitis which is an acute inflammation, infection and micro or
macro-perforation of these out-pouches. The current standard of care requires
treatment with antibiotics and depending on the frequency or severity of
attacks, may require surgery. LIALDA/MEZAVANT is being investigated as a
treatment to prevent recurrent attacks of diverticulitis.
Phase 3 worldwide
clinical trials investigating the use of the product for the treatment of
diverticulitis were initiated in 2007 and are ongoing.
Treatments
for diseases in other therapeutic areas
FOSRENOL
for the treatment of pre-dialysis CKD
Shire is continuing
to explore the regulatory pathway required to secure a label extension for
FOSRENOL to treat hyperphosphataemia in pre-dialysis CKD in the US.
JUVISTA
for the improvement of scar appearance
Renovo initiated
its first pivotal European Phase 3 trial in scar revision in the fourth quarter
of 2008 to support the filing of a European regulatory dossier. If the outcome
from Renovo’s multi centre, EU Phase 3 study is suitably positive, the data will
be used to inform the strategy and design of Shire’s US development
plan.
VYVANSE
for the treatment of non ADHD indications in adults
Shire is conducting
Phase 2 pilot clinical trials to assess the efficacy and safety of VYVANSE as
adjunctive therapy in depression, for the treatment of negative symptoms and
cognitive impairment in schizophrenia, and for the treatment of cognitive
impairment in depression.
SPD
535 for the treatment of arteriovenous grafts in hemodialysis
patients
SPD 535 is in
development as a novel molecule with platelet lowering ability and without
phosphodiesterase type III inhibition. The initial proof-of-concept program will
target prevention of thrombotic complications associated with arteriovenous
grafts in hemodialysis patients. Phase 1 development was initiated in
the third quarter of 2009.
Projects
in pre-clinical development
A number of
additional projects are underway in the early stages of pre-clinical development
for the Specialty Pharmaceuticals area, including potential programs leveraging
CarrierWave technology primarily focused in the areas of pain and
ADHD. More data on these programs is expected in the second half of
2010.
HUMAN
GENETIC THERAPIES
Treatments
for Angioedema
FIRAZYR
in HAE in the US
Prior to its
acquisition by Shire, Jerini AG (“Jerini”) received a not approvable letter for
FIRAZYR for use in the US from the FDA in April 2008. In December
2008 Shire met with FDA to discuss the development of FIRAZYR. It was agreed
that an additional clinical study would be required before approval could be
considered and that a complete response to the not approvable letter would be
filed after completion of this study.
In June 2009 Shire
initiated a Phase 3 study in patients with acute attacks of HAE, known as the
FAST-3 trial, which is designed to support filing of a NDA for FIRAZYR in the
US. This trial is ongoing.
ERT
REPLAGAL
– for the treatment of Fabry disease
Shire has worked
closely with the FDA to establish an early access program in response to the
ongoing shortage of the currently marketed treatment for Fabry disease in the
US. REPLAGAL is currently available to US Fabry patients under an FDA-approved
treatment protocol, and the Company is also supporting emergency Investigational
New Drug (“IND”) requests. REPLAGAL first received marketing authorization in
the EU in 2001 and is approved for the treatment of Fabry disease in 45
countries.
On
December 22, 2009, Shire submitted a BLA with the FDA for REPLAGAL, its enzyme
replacement therapy for Fabry disease. In February 2010, the FDA requested
additional pharmacokinetic comparability data. As a result, Shire withdrew its
December BLA filing, and, at the suggestion of the FDA, requested and received
Fast Track designation. Shire immediately initiated a rolling BLA submission in
February.
VPRIV
– for the treatment of Type 1 Gaucher Disease
VPRIV is an enzyme
replacement therapy being developed for the treatment of Type 1 Gaucher disease.
Gaucher disease is the most common of the inherited lysosomal storage diseases
and is caused by a deficiency of the enzyme glucocerebrosidase.
On September 1,2009 Shire completed its NDA submission to the FDA for VPRIV. On November 4, 2009 Shire announced that
the FDA granted Priority Review of this application, and issued an action
date of February 28, 2010. On November 24, 2009 Shire submitted a European
Marketing Authorization Application (“MAA”) to the EMEA. The submission has been
granted accelerated review by EMEA.
VPRIV is available
ahead of its commercial launch in the US via an FDA-accepted treatment protocol
and elsewhere on a pre-approval basis using the fastest mechanisms available in
each jurisdiction, in response to the ongoing shortage of a currently marketed
treatment for Gaucher disease.
HGT-1111
and HGT-1110 - for the treatment of Metachromatic Leukodystrophy
(“MLD”)
MLD is a lysosomal
storage disorder that results from a deficiency in the enzyme arylsulfatase-A.
HGT-1111 has completed a Phase 1b clinical trial in 12 MLD patients in Europe
and an extension to this study is ongoing. Based on additional long term
clinical data from the ongoing Phase 1b study in MLD, in the first quarter of
2010, Shire decided to suspend further development of an intravenous formulation
of arylsulfatase-A derived from Chinese Hamster Ovary (“CHO”)
cells, also known as HGT-1111. Development of a formulation of HGT-1110,
expressed from Shire’s human cell platform and suitable for direct delivery to
the CNS, is ongoing, and preclinical studies are planned for 2010. The Shire
platform for direct delivery of proteins to the CNS was advanced in the first
quarter of 2010 with the initiation of intrathecal delivery of idursulfase in
the Phase I/II study in Hunter Syndrome.
HGT-2310
- Hunter syndrome with central nervous system symptoms, idursulfase-IT
(intrathecal delivery)
HGT 2310 is in
development as an enzyme replacement therapy delivered intrathecally for Hunter
syndrome for patients with central nervous system symptoms. The Company
initiated a Phase I/II clinical trial in the first quarter of 2010. This product
has been granted orphan designation in the US.
HGT-1410
for Sanfilippo Syndrome (Mucopolysaccharidosis IIIA)
HGT-1410 is in
development as an enzyme replacement therapy for the treatment of Sanfilippo
Syndrome (Mucopolysaccharidosis IIIA), a lysosomal storage disorder. Sanfilippo
is an autosomal recessive genetic disease caused by a deficiency of
heparan-N-sulfatase, an enzyme that degrades heparan sulfate. The accumulation
of heparan sulfate in tissues causes a neurodegenerative disorder in children in
which the central nervous system is primarily affected. The product has been
granted orphan drug designation in the US and in the EU. The Company plans to
initiate a Phase 1 clinical trial in mid-2010.
HGT-2610
for the treatment of GLD
HGT 2610 is an
enzyme replacement therapy for the treatment of GLD, a lysosomal storage
disorder. GLD is a rare, inherited lysosomal disorder resulting from a
deficiency in the enzyme galactosylcerebrosidase. This neurodegenerative disease
primarily affects infants, but can occur in adolescents and adults. GLD is
caused by degradation of the myelin sheath that normally covers nerve fibers,
which leads to rapid degeneration of mental and motor function in these
patients. This program is in early development and preclinical
studies.
Early
Research Products
A number of
additional projects are underway in the early stages of development for the HGT
business area.
DEVELOPMENT
PROJECTS DISCONTINUED DURING 2009
During 2009 the
Company discontinued the following development projects, which were included
within “Products under development” in the Company’s previous Annual Reports on
Form 10-K:
DAYTRANA for ADHD in EU and
Canada
In March 2009 and
November 2009, Shire withdrew the MAA and Canadian New Drug Submission (“NDS”),
respectively for DAYTRANA for the treatment of ADHD. The withdrawal of the
European MAA and Canadian NDS does not impact Shire’s commitment to DAYTRANA in
the US where the product has been used as a pediatric treatment for ADHD since
2006.
SPD
550 for the treatment of Celiac disease
In December 2007
Shire acquired the worldwide rights to SPD550 in markets outside of the US and
Japan from Alba Therapeutics Corporation (“Alba”). Shire terminated the collaboration
agreement with effect from November 15, 2009 and Shire returned all
rights to Alba.
Pharmacological
Chaperone Technology
In November 2007 Shire entered into a
license agreement with Amicus under which it received the rights to three
compounds, PLICERA
(HGT-3410) for the treatment of Gaucher disease, AMIGAL (HGT-3310) for the
treatment Fabry disease and AT2220
(HGT-3510) for the treatment of Pompe disease, in markets outside the US. On October 29, 2009 Shire and
Amicus mutually agreed to terminate the collaboration, with all rights returned
to Amicus.
The Company sources
most of its specialty Pharmaceutical products from third party contract
manufacturers. Most of Shire’s HGT products are manufactured in Shire’s own
manufacturing facilities.
The Company
currently has dual sources for VYVANSE, ELAPRASE and REPLAGAL and is developing
a second source of manufacture for LIALDA. The Company sources ADDERALL XR,
FOSRENOL, FIRAZYR, INTUNIV, DAYTRANA, CARBATROL, PENTASA and XAGRID from a
single contract manufacturer for each product. The Company manages the risks
associated with reliance on single sources of production by carrying additional
inventories or developing second sources of supply.
During 2009,
following a comprehensive evaluation of its operations and strategic focus,
Shire decided to phase out operations at its Specialty Pharmaceuticals
manufacturing facility at Owings Mills, Maryland. Over the next three
years, all products currently manufactured by Shire at this site will transition
to a contract manufacturer and operations and employee numbers will wind down
over this period.
Active
pharmaceutical ingredient (“API”) sourcing
The Company sources
API from third party suppliers for its Specialty Pharmaceuticals products and
the HGT product FIRAZYR. Shire has manufacturing capability for agalsidase alfa,
idursulfase and velaglucerase alfa at its protein manufacturing plant in
Cambridge, Massachusetts, US for its HGT products, REPLAGAL, ELAPRASE and
VPRIV.
The Company
currently has a dual source of API for VYVANSE, DAYTRANA, ADDERALL XR, PENTASA
and is developing one for LIALDA. The Company manages the risks associated with
reliance on single sources of API by carrying additional inventories or
developing second sources of supply.
In order to support
the rapid growth of ELAPRASE, additional idursulfase manufacturing capacity is
currently being added to a new Shire facility in Lexington, Massachusetts, US.
Approval of the facility was granted in January 2010 from the EMEA, and is
anticipated from the FDA during the first half of 2010. Shire’s supply of
ELAPRASE is sufficient to support all existing patients and allow for forecasted
growth.
Distribution
The Company’s US
distribution center for Specialty Pharmaceuticals products, which includes a
large vault to house US Drug Enforcement Administration (“DEA”) regulated
Schedule II products, is located in Kentucky. From there, the Company primarily
distributes its Specialty Pharmaceuticals products through the three major
wholesalers who have a hub or distribution centers that stock Schedule II drugs
in the US, providing access to nearly all pharmacies in the US.
The distribution
and warehousing of HGT products for the US market is contracted out to
specialist third party contractors.
Outside of the US
physical distribution of Specialty Pharmaceuticals and HGT products is either
contracted out to third parties (where the Company has local operations) or
facilitated via distribution agreements (where the Company does not have local
operations).
Material
customers
The Company’s two
largest trade customers are Cardinal Health Inc. and McKesson Corp., both of
which are in the US. In 2009, these wholesale customers accounted for
approximately 30% and 21% of product sales, respectively.
An important part
of the Company’s business strategy is to protect its products and technologies
through the use of patents and trademarks, to the extent available. The Company
also relies on trade secrets, unpatented know-how, technological innovations and
contractual arrangements with third parties to maintain and enhance its
competitive position where it is unable to obtain patent protection or where
marketed products are not covered by specific patents. The Company’s commercial
success will depend, in part, upon its ability to obtain and enforce strong
patents, to maintain trade secret protection, to operate without infringing the
proprietary rights of others and to comply with the terms of licenses granted to
it. The Company’s policy is to seek patent protection for proprietary technology
whenever possible in the US, Canada, major European countries and Japan. Where
practicable, the Company seeks patent protection in other countries on a
selective basis. In all cases the Company endeavors to either obtain patent
protection itself or support patent applications by its licensors. The markets
for some of the potential products for rare genetic diseases caused by protein
deficiencies are small, and, where possible, the Company has sought orphan drug
designation for products directed to these markets. See “Government Regulation”
below.
In the regular
course of business, the Company’s patents may be challenged by third parties.
The Company is a party to litigation or other proceedings relating to
intellectual property rights. Details of ongoing litigation are provided in ITEM
3: Legal Proceedings and
Note 23(d), “Commitments and Contingencies, Legal proceedings” to the
consolidated financial statements listed under ITEM 15: Exhibits and
Financial Statement Schedules of this Annual Report.
The degree of
patent protection afforded to pharmaceutical inventions around the world is
uncertain. If patents are granted to other parties that contain claims having a
scope that is interpreted by the relevant authorities to cover any of the
Company’s products or technologies, there can be no guarantee that the Company
will be able to obtain licenses to such patents or make other arrangements at
reasonable cost, if at all.
The existence,
scope and duration of patent protection varies among the Company’s products and
among the different countries where the Company’s products may be sold. It may
also change over the course of time as patents are granted or expire, or become
extended, modified or revoked. The following non-exhaustive list sets forth
details of the granted US and EU patents pertaining to certain of the Company’s
products and certain products from which the Company receives a royalty, which
are owned by or licensed to the Company and that are material to an
understanding of the Company's business taken as a whole. The Company also holds
patents in other jurisdictions, such as Canada and Japan and has patent
applications pending in such jurisdictions, as well as in the US and the
EU.
The EP
patents listed above do not necessarily have a corresponding national
patent registered in each EU member state. In some cases, national patents
were obtained in only a limited number of EU member states. The rights
granted to an EP patent are enforceable in any EU member state where the
EP patent has been registered as a national
patent.
·
The EP
patents listed above do not reflect term extensions afforded by
supplementary protection certificates (SPCs) which are available in many
EU member states.
The loss of patent
protection following a legal challenge may result in third parties commencing
commercial sales of their own versions of the Company’s products before the
expiry of the patents. The Company’s sales of such product(s) may decrease in
consequence. In many cases, however, the Company’s products have more than one
patent pertaining to them. In such cases, or where the Company enjoys trade
secrets, manufacturing expertise, patient preference or regulatory exclusivity,
the Company may continue to market its own products without its commercial sales
of those products being adversely affected by the loss of any given
patent.
Shire believes that
competition in its markets is based on, among other things, product safety,
efficacy, convenience of dosing, reliability, availability and price. Companies
with more resources and larger R&D expenditures than Shire have a greater
ability to fund the research and clinical trials necessary for regulatory
applications, and consequently may have a better chance of obtaining approval of
drugs that would then compete with Shire’s products. Other products now in use
or being developed by others may be more effective or have fewer side effects
than the Company’s current or future products. The market share data provided
below is sourced from IMS Health.
ADHD
market
Competition in the
US ADHD market has increased with the launch of competing products in recent
years, including the launch of authorized generic versions of ADDERALL XR by
Teva and Impax in 2009. This generization has resulted in a decline in sales of
ADDERALL XR and in December 2009 authorized generic versions of ADDERALL XR had
a 12% share of the US ADHD market. Shire’s share of the US ADHD market in
December 2009 was 25.9% (2008: 32.7%)
Shire has four
products within the US ADHD market:
·
ADDERALL XR,
an extended release treatment for ADHD designed to provide once daily
dosing, launched in 2001;
·
DAYTRANA, a
methylphenidate transdermal product for the treatment of ADHD, launched in
2006;
·
VYVANSE, a
stimulant pro-drug product for the treatment of ADHD, launched in 2007;
and
·
INTUNIV, a
non-stimulant, non-scheduled treatment for ADHD, launched in November
2009.
Many products which compete with the
Company’s ADHD products in the US contain methylphenidate, including the
following once-daily formulations: CONCERTA, launched in 2000 by J &
J (in conjunction with Alza): METADATE CD, launched in 2001 by UCB; RITALIN
LA, which is an extended release formulation of methylphenidate, launched by
Novartis (in conjunction with Elan) in 2002; and FOCALIN XR, which is a
long-acting formulation of dexmethylphenidate, the active ingredient of
traditional methylphenidate preparations, launched by Novartis (in conjunction
with Celgene Corporation) in 2005. In December 2009, CONCERTA, METADATE CD,
RITALIN LA and FOCALIN XR had a 17.9%, 1.9%, 1.4% and 6.0% share of the US ADHD
market, respectively. In 2003, Eli Lilly launched STRATTERA, a
non-stimulant, non-scheduled treatment for ADHD. In December 2009, STRATTERA had
a 6.3% share of the US ADHD market.
Key competitors in
the European ADHD market are CONCERTA (Janssen-Cilag), RITALIN LA (Novartis),
and MEDIKINET (Medice) depending upon the country.
The Company is also
aware of clinical development efforts by GSK (in collaboration with
Neurosearch), Cortex Pharmaceuticals Inc., Eisai Inc., BMS (in collaboration
with Otsuka), AstraZeneca (in collaboration with Targacept), CoMentis,
Shionogi/Sciele (in collaboration with Addrenex), Eli Lilly, J&J, Pfizer,
Merck, Schering-Plough/Organon, PsychoGenics, Supernus and Abbott to develop
additional treatment options for ADHD.
GI
/Ulcerative Colitis market
Ulcerative colitis is a type of
Inflammatory Bowel Disease. The primary treatments for patients with ulcerative
colitis are formulations containing 5-ASA. More than 88% of all
ulcerative colitis patients receive treatment with 5-ASA. In March 2009,
Salix launched APRISO and in
July 2009, Proctor and Gamble launched ASACOL HD. At December 31, 2009
APRISO and ASACOL HD had 2.6% and 2.5% market share, respectively. Shire defines the 5-ASA competitive set
as the non-sulfasalazine, oral mesalamine and mesalamine pro-drug products.
In December 2009, Shire’s share of the US ulcerative colitis market was 32%.
The US oral 5-ASA market is led by
Warner-Chilcott’s ASACOL.
In December 2009, ASACOL had a 52.3% share of the oral 5-ASA market,
declining from 58.9% in December 2008. In December 2009 Salix’s COLAZAL had a 3.7% market share, while
Alaven’s DIPENTUM had a 0.8% market
share.
The EU oral 5-ASA
market is somewhat more fragmented. Major competitors in the UK include Warner
Chilcott’s ASACOL which had a 56% share of the UK oral 5-ASA market and
Ferring’s PENTASA had a 23% UK market share in November 2009. The German oral
5-ASA market is led by Dr Falk’s SALOFALK, with 57% market share, followed by
Merkle’s CLAVERSAL with 17% share in November 2009. CLAVERSAL and Ferring's
PENTASA are the leaders in the oral 5-ASA market in Spain with 45% and 42%
market shares respectively in November 2009. Ferring's PENTASA is the market
leader in France with 74% market share of the oral 5-ASA market. Norgine’s
FIV-ASA had a 17% share of the French oral 5-ASA market. Overall, Warner
Chilcott’s ASACOL had a 27% share of the EU G5 oral
5-ASA market (UK, Germany, Spain, Italy, and France).
Mesalamine and balsalazide (mesalamine
pro-drug) products are generally protected by formulation patents only. In
December 2007, the FDA denied Salix’s Citizen Petition for COLAZAL and Salix
subsequently announced the
launch of an authorized generic version by Watson Laboratories. This was
followed by the introduction of three other generic versions of COLAZAL.
Generic versions of COLAZAL had a 7.5% share of the US oral 5-ASA market in
December 2009.
The Company is aware of other 5-ASA and
non-ASA biologic treatments in development for GI disorders by UCB,
Abbott and Centocor.
Market
for the treatment of rare genetic diseases
The Company believes that the primary
competition with respect to its products for rare genetic diseases is from
smaller pharmaceutical and biotechnology companies. Competitors for lysosomal
storage disorders include BioMarin Pharmaceutical Inc., Actelion Ltd.,
Protalix BioTherapeutics Inc, and Genzyme. For example, REPLAGAL
competes with Genzyme’s FABRAZYME, and if approved, VPRIV would compete with Genzyme’s CEREZYME.
Shire does not know of any party with an enzyme replacement therapy for the
treatment of Hunter syndrome in clinical development.
FIRAZYR competes in certain European
countries with CSL Behring’s BERINERT P, a human plasma-derived C1-esterase
inhibitor (C1-INH) product; CSL Behring is in the process of seeking regulatory
approval for Berinert P in additional European countries. In the US, Dyax
Corporation’s DX-88, a plasma kallikrein inhibitor, was approved in December
2009. Other competitive products in development for HAE include Pharming Group’s
RHUCIN, a recombinant version of C1-INH.
For more information on orphan drug
designation, see Government regulation below.
HIV
Market
The HIV competitive
landscape is becoming more crowded and complicated as treatment trends evolve.
The Company’s 3TC/lamivudine/EPIVIR (all licensed to GSK) is part of the
Nucleoside/Nucleotide Reverse Transcriptase Inhibitors (“NRTI”) market.
TRIZIVIR, COMBIVIR and EPZICOM/KIVEXA are part of the combined NRTI market.
TRUVADA (tenofovir/emtricitabine), sold by Gilead, is the market leader
combination NRTI. In addition to the two NRTI HIV markets in which
lamivudine operate, there is competition from NNRTIs, Protease Inhibitors (PIs)
and entry inhibitors.
TRUVADA and ATRIPLA
(efavirenz/emtricitabine/tenofovir), a cross-class fixed dose combination also
sold by Gilead, both represent the most direct competition to
lamivudine.
Several generic
drug companies have filed ANDAs seeking approval for EPIVIR, COMBIVIR, ZEFFIX
and EPZICOM in the US and several tentative approvals of generic lamivudine have
been issued by the FDA (see further information within “Royalties received from
other products” above).
The clinical
development, manufacturing and marketing of Shire’s products are subject to
governmental regulation in the US, the EU and other territories. The Federal
Food, Drug, and Cosmetic Act, the Prescription Drug Marketing Act and the Public
Health Service Act in the US, and numerous directives and guidelines in the EU,
govern the testing, manufacture, safety, efficacy, labeling, storage, record
keeping, approval, advertising and promotion of the Company’s products. Product
development and approval within these regulatory frameworks take a number of
years and involves the expenditure of substantial resources.
In general, for a
new chemical entity, the product needs to undergo rigorous preclinical testing.
Clinical trials for new products are typically conducted in three sequential
phases that may overlap. In Phase 1, the initial introduction of the
pharmaceutical compound into healthy human volunteers, the emphasis is on
testing for safety (adverse effects), dosage tolerance, metabolism,
distribution, excretion and clinical pharmacology. Phase 2 involves studies in a
limited patient population to determine the initial efficacy of the
pharmaceutical compound for specific targeted indications, to determine dosage
tolerance and optimal dosage and to identify possible adverse side effects and
safety risks. Once a compound is found to be effective and to have an acceptable
safety profile in Phase 2 evaluations, Phase 3 trials are undertaken with a
larger number of patients to provide enough data to statistically evaluate the
efficiency and safety of the product and to evaluate more fully clinical
outcomes. The failure to demonstrate adequately the quality, safety and efficacy
of a therapeutic drug under development can delay or prevent regulatory approval
of the product.
In order to gain
marketing approval the Company must submit to the relevant regulatory authority
for review information on the quality (chemistry, manufacturing and
pharmaceutical) aspects of the product as well as the non-clinical and clinical
data. The FDA undertakes the review for the US. In the EU the review may be
undertaken by the following: (i) members of the EMEA’s Committee for Medicinal
Products for Human Use (“CHMP”) as part of a centralized procedure; (ii) an
individual country's regulatory agency, followed by “mutual recognition” of this
review by a number of other countries' agencies, depending on the process
applicable to the drug in question; or (iii) a competent member state’s
regulatory agency through a decentralized procedure, an alternative
authorization procedure to the “mutual recognition” procedure for those drugs
that are ineligible for a “centralized” review.
Approval can take
from several months to several years, or be denied. The approval process can be
affected by a number of factors - for example additional studies or clinical
trials may be requested during the review and may delay marketing approval and
involve unbudgeted costs. As a condition of approval, the regulatory agency will
require post-marketing surveillance to monitor for adverse effects, and may
require other additional studies as deemed appropriate. After approval for the
initial indication, further clinical studies are usually necessary to gain
approval for any additional indications. The terms of any approval, including
labeling content, may be more restrictive than expected and could affect the
marketability of a product.
As a condition of
approval, the regulatory agency will require that the product continue to meet
regulatory requirements as to quality, safety and efficacy and will require
strict procedures to monitor and report any adverse effects. Where adverse
effects occur or may occur, the regulatory agency may require additional studies
or changes to the labeling. Compelling new “adverse” data may result in a
product approval being withdrawn at any stage following review by an agency and
discussion with the Company.
Some jurisdictions,
including the EU and the US, may designate drugs for relatively small patient
populations as “orphan drugs”. Generally, if a product that has an orphan drug
designation subsequently receives the first marketing approval for the
indication for which it has such designation, the product is entitled to orphan
drug exclusivity. Orphan drug exclusivity means that applications to market the
same drug for the same indication may not be approved, except in limited
circumstances, for a period of up to ten years in the EU and for up to
seven years in the US. These laws are particularly pertinent to Shire’s HGT
business unit.
In the US, the Drug
Price Competition and Patent Restoration Term Act of 1984, known as the US
Hatch-Waxman Act, established a period of marketing exclusivity for brand name
drugs as well as abbreviated application procedures for generic versions of
those drugs. Approval to manufacture these drugs is sought by filing an ANDA. As
a substitute for conducting full-scale pre-clinical and clinical studies, the
FDA can accept data establishing that the drug formulation, which is the subject
of an abbreviated application, is bio-equivalent and has the same therapeutic
effect as the previously approved drug, among other requirements. EU legislation
also contains data exclusivity provisions. All products will be subject to an
“8+2+1” exclusivity regime. A generic company may file a marketing authorization
application for that product with the health authorities referencing the
innovator's data eight years after the innovator has received its first
community authorization for a medicinal product. The generic company may not
commercialize the product until after either ten (8+2) or eleven years (8+2+1)
have elapsed from the date of grant of the initial marketing authorization. The
one-year extension is available if the innovator obtains an additional
indication during the first eight years of the marketing authorization that is
of significant advancement in clinical benefit.
In the US, the DEA
also regulates the national production and distribution of Scheduled drugs (i.e.
those drugs containing controlled substances) by allocating production quotas
based, in part, upon the DEA’s view of national demand. As Schedule II drugs,
the production and distribution of Shire’s ADHD products are strictly
controlled.
The branch of the
FDA responsible for drug marketing oversight routinely reviews company marketing
practices and also may impose pre-clearance requirements on materials intended
for use in marketing of approved products. Shire is also subject to various US
federal and state laws pertaining to healthcare fraud and abuse, including
anti-kickback and false claims laws. Similar review and regulation of
advertising and marketing practices exists in the other geographic areas where
the company operates.
Regulatory Developments
In
the US various
legislative proposals at the federal and state levels could bring about major
changes in the affected health care systems. Some states have passed such
legislation, and further federal and state proposals are possible. Such
proposals and legislation include, and future proposals could include, price
controls, patient access constraints to medicines and increases in required
rebates or discounts. Similar issues exist in the EU. The Company cannot predict
the outcome of such initiatives, but will work to maintain patient access to its
products and to oppose price constraints. Additionally, legislation is being
debated at the federal level in the US that could
allow patient access to drugs approved in other countries – most notably
Canada. This is generally
referred to as drug re-importation. Although there is substantial opposition to
this potential legislation within areas of the federal government, including the
FDA, the Company cannot predict the outcome of such legislative
activities.
Additionally, US
federal and state proposals have called for substantial changes in the Medicaid
program. US law requires
the Company to give rebates to state Medicaid agencies based on each state’s
reimbursement of pharmaceutical products under the Medicaid program. Rebates
potentially could be viewed as price discounts without appreciable increases in
Shire’s product sales volume as an offset. The Company must also give discounts
or rebates on purchases or reimbursements of pharmaceutical products by certain
other federal and state agencies and programs.
In September 2007 the Food and Drug Administration
Amendments Act of 2007 was signed into law. It contains a wide range of changes
affecting the pharmaceutical industry covering issues relating to fees
associated with application approval, drug safety and risk management, direct to
consumer advertising, clinical trial and clinical trial result disclosure.
Similar regulatory
and legislative issues are encountered in Europe and other
international markets where governments regulate pharmaceutical prices and
patient reimbursement levels. The differing approach to price regulation has led
to some parallel trade within the EU where Shire’s products are imported into
markets with higher prices from markets with lower prices. Exploitation of price
differences between countries in this way can impact sales in those markets with
higher prices.
The Company’s
revenue depends, in part, upon the price third parties, such as health care
providers and governmental organizations are willing to reimburse patients and
physicians for the cost of the Company’s products or the Company’s competitors’
similar products and related treatment. These third party payers are
increasingly challenging the pricing of pharmaceutical products and/or seeking
pharmaco-economic data to justify their negotiated reimbursement
prices.
The Medicare
Prescription Drug Improvement and Modernization Act of 2003 established a
voluntary drug benefit for Medicare beneficiaries and created the new Medicare
Part D and Medicare Part B. Medicare Part D gives elderly and disabled people,
already on Medicare, access to subsidized prescription drug coverage from
January 2006 onwards. Medicare Part B establishes new rules to lower Medicare’s
reimbursement rate for physician administered drugs. It is difficult to predict
the long-term impact of this expansion of Medicare on pharmaceutical companies.
Usage of pharmaceutical products may increase as the result of expanded access
to medications afforded by partial reimbursement under Medicare. However, such
potential sales increases may be offset by increased pricing pressures due to
enhanced purchasing power of the private sector that will negotiate on behalf of
Medicare beneficiaries.
In the US, several
factors outside Shire’s control could significantly influence the sale price of
pharmaceutical products, including: the continued push for major healthcare
reform in the US and the uncertainty that entails for pharmaceutical companies;
Medicare Part D prescription drug plans; new Medicare Part B reimbursement
rules; the increase in states seeking supplemental Medicaid rebates; the ongoing
trend toward managed healthcare; and the renewed focus on reducing costs and
reimbursement rates in Medicaid, Medicare and other government insurance
programs.
Similar
developments may take place in the EU markets, where the emphasis will likely be
on national price controls and non-reimbursement for new and highly priced
medicines for which the economic as well as the therapeutic rationales are not
yet established. Significant uncertainty exists about the reimbursement status
of newly approved pharmaceutical products in the EU. Limits on reimbursement
available from third party payers may reduce the demand for the Company’s
products. Price applications in Europe must be conducted on a country-by-country
basis. The slow pace of the process in some countries have delayed launches of
products otherwise approved for up to two years and, in occasional situations,
prevented launch. As a consequence the Company’s estimated dates for product
launches may be subject to change.
The Company
continues to develop its approach to corporate responsibility; the Shire
Responsibility Co-ordination Team (“the Team”) comprises representatives from,
among others, R&D, HR, Environment Health & Safety, Compliance &
Risk Management, Facilities, Marketing and Corporate Communications. The
Chairperson of the Team is Shire’s General Counsel, Tatjana May. The Team
determines the Company’s overall Corporate Responsibility strategy, which is
approved by its Board of Directors, and then works with the businesses and
functions to set and monitor objectives which support the strategy. The Team
meets at least three times a year to discuss and monitor progress. An annual
Corporate Responsibility highlights report is published in hard copy; Shire also
has a section on its website dedicated to providing information and ongoing
updates on the Team’s work, initiatives and achievements that illustrate how
committed Shire is to being responsible.
The Company
maintains a website on the World Wide Web at www.shire.com. The Company makes
available on its website its Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as soon as reasonably practicable after such reports are electronically
filed with, or furnished to, the Securities and Exchange Commission (“SEC”).
Shire's reports filed with, or furnished to, the SEC are also available on the
SEC's website at www.sec.gov
in a document, and for Annual Reports on Form 10-K for the year ended December31, 2009 and Quarterly Reports on Form 10-Q from the period ended June 30, 2009
in a XBRL (Extensible Business Reporting Language) format. XBRL is an electronic
coding language to create an interactive financial statement data over the
internet. The information on the Company’s website is neither part of nor
incorporated by reference in this Annual Report on Form 10-K.
The Company has
adopted a risk management strategy designed to identify, assess and manage the
significant risks that it faces. While the Company aims to identify and manage
such risks, no risk management strategy can provide absolute assurance against
loss.
Set out below are
the key risk factors, associated with the business, that have been identified
through the Company's approach to risk management. Some of these risk factors
are specific to the Company, and others are more generally applicable to the
pharmaceutical industry in which the Company operates. The Company considers
that these risk factors apply equally and therefore all should be carefully
considered before any investment is made in Shire.
RISK FACTORS RELATED TO THE
COMPANY’S BUSINESS
The
Company’s key products may not be a commercial success
The commercial
success of the Company’s key products - ELAPRASE, VYVANSE, LIALDA/MEZAVANT,
PENTASA, FOSRENOL, REPLAGAL, INTUNIV, as well as other new products that the
Company may launch in the future, including VPRIV, will depend on their approval
and acceptance by physicians, patients and other key decision-makers, as well as
the timing of the receipt of additional marketing approvals, the scope of
marketing approvals as reflected in the product’s label, the countries in which
such approvals are obtained, the authorization of price and reimbursement in
those countries where price and reimbursement is negotiated, and safety,
efficacy, convenience and cost-effectiveness of the product as compared to
competitive products.
The Company may not
be able to grow its product revenues as quickly as anticipated if any or all of
the following occur:
·
if
competitive products are genericized or if the prices of competitor
products are otherwise reduced significantly, the prescribing of
treatments for the indications that the Company’s products treat could be
adversely affected;
·
if there are
unanticipated adverse events experienced with the Company’s products not
seen in clinical trials that impact the physician’s willingness to
prescribe the Company’s products;
·
if issues
arise from clinical trials being conducted for post marketing purposes or
for registration in another country or if regulatory agencies in one
country act in a way that raises concerns for regulatory agencies or for
prescribers or patients in another
country;
·
if patients,
payors or physicians favor other treatments over the Company’s
products;
·
if government
regulation is stricter for the Company’s products than for other
treatments;
·
if the
Company’s products suffer a loss of patent protection or competitors
successfully challenge or circumvent the Company’s patents or regulatory
exclusivity (See ITEM 3: Legal Proceedings and Note 23(d), “Commitments and
Contingencies, Legal proceedings” to the consolidated financial statements
listed under ITEM 15: Exhibits and Financial Statement Schedules of
this Annual Report for details of current patent
litigation);
·
if planned
geographical expansion into emerging markets is not successful;
or
·
if the size
of the patient populations for the Company’s products are less than
expected or the Company fails to identify new patients for its
products.
If the Company is
unable to commercialize any of its key products successfully, there may be a
material adverse effect on the Company’s revenues, financial condition and
results of operations.
In addition, the
Company derives significant revenues and earnings from mature portfolio products
(whether or not promoted) including CARBATROL, DAYTRANA, CALCICHEW, REMINYL and
XAGRID. Sales of these products could decrease as a result of any or
all of the following:
·
if
competitive products are genericized or if the prices of competitor
products are otherwise reduced significantly, the prescribing of
treatments for the indications that the Company’s products treat could be
adversely affected;
·
if there are
unanticipated adverse events experienced with the Company’s products not
seen in clinical trials that impact the physician’s willingness to
prescribe the Company’s products;
·
if patients,
payers or physicians favor other treatments over the Company’s
products;
·
if the
Company’s products suffer a loss of patent protection or competitors
successfully challenge or circumvent the Company’s patents or regulatory
exclusivity (See ITEM 3 Legal Proceedings and Note 23(d), “Commitments
and
Contingencies, Legal proceedings” to the consolidated financial statements
listed under ITEM 15: Exhibits and Financial Statement Schedules of
this Annual Report for details of current patent litigation);
and
·
decreased
consumer demand or acceptance.
Unanticipated decreases in revenues
from ADDERALL XR could significantly reduce the Company’s revenues and
earnings.
In the year ended
December 31, 2008 sales of ADDERALL XR were $1,101.7 million, representing
approximately 36% of the Company’s total revenues. In the year to
December 31, 2009 sales of ADDERALL XR declined 43% to $626.5 million,
representing approximately 21% of the Company’s total revenues. This decline
resulted directly from the launch by Teva and Impax of authorized generic
versions of ADDERALL XR in April and October 2009, respectively. The Company
sells the authorized generic version of ADDERALL XR to Teva and Impax and
currently receives royalties from Impax on the sale of its authorized generic.
Shire continues to sell the branded version of ADDERALL XR.
Factors that could
negatively impact total revenue from ADDERALL XR include, but are not limited
to:
·
faster than
anticipated erosion of ADDERALL XR sales and elimination of the Impax
royalty as a result of FDA approval of additional generic
competitors;
·
issues
impacting the production of ADDERALL XR or the supply of amphetamine salts
including, but not limited to, the ability to get sufficient quota from
the US DEA;
·
changes in
reimbursement policies of third-party
payers;
·
changes to
the level of sales deductions for ADDERALL XR for private or public
payers; and
·
if the
Centers for Medicare and Medicaid Services, (“CMS”) disagree with the
Company's interpretation as to how shipments of authorized generic
ADDERALL XR should be included in the Medicaid rebate calculation and
require the Company to apply an alternative interpretation of the Medicaid
rebate legislation. For further details, see ITEM 7: Management’s
discussion and analysis of financial condition and results of
operations.
Any
decrease in royalties derived from the sales of 3TC and ZEFFIX could
significantly reduce earnings
The Company
receives royalties from GSK on the worldwide sales of 3TC and ZEFFIX. In 2009,
the Company's royalty income relating to 3TC and ZEFFIX sales was $164.0 million
(2008: $180.5 million; 2007: $186.3 million). Any factors that decrease sales of
3TC and ZEFFIX by GSK could significantly reduce the Company's royalty revenue,
and results of operations. These include:
·
loss of
patent protection or ability of competitors to challenge or circumvent
patents (See ITEM 3: Legal Proceedings and Note 23(d), “Commitments
and Contingencies, Legal proceedings” to the consolidated financial
statements listed under ITEM 15: Exhibits and Financial Statement
Schedules of this Annual Report for details of current patent
litigation);
·
reduction in
the production of 3TC and ZEFFIX;
·
technological
advances;
·
government
action/intervention;
·
public
opinion towards AIDS treatments;
and
·
product
liability claims.
The
failure to obtain and maintain reimbursement, or an adequate level of
reimbursement, by third-party payers in a timely manner for the Company's
products may impact future revenues and earnings
The Company's
revenues are partly dependent on the level of reimbursement provided to the
Company by governmental reimbursement schemes for pharmaceutical products.
Changes to governmental policy or practices could adversely affect the Company's
revenues, financial condition and results of operations. In addition, the
reimbursement of treatment established by health care providers, private health
insurers and other organizations, such as health maintenance organizations and
managed care organizations are under downward pressure and this, in turn, could
impact on the prices at which the Company can sell its products.
The market for
pharmaceutical products could be significantly influenced by the following,
which could result in lower prices for the Company's products and/or a reduced
demand for the Company's products:
the ongoing
trend toward managed health care, particularly in the
US;
·
legislative
proposals to reform health care and government insurance programs in many
of the Company's markets; and
·
price
controls and non-reimbursement of new and highly priced medicines for
which the economic and therapeutic rationales are not
established.
The prices for
certain of the Company's products when commercialized, in particular products
for the treatment of rare genetic diseases such as REPLAGAL, ELAPRASE and VPRIV,
may be high compared to other pharmaceutical products. The Company may encounter
particular difficulty in obtaining satisfactory pricing and reimbursement for
its products, particularly those with a high cost of treatment. The failure to
obtain and maintain pricing and reimbursement at satisfactory levels for such
products may adversely affect the Company’s revenues, financial
condition and results of operations.
A
disruption to the product supply chain may result in the Company being unable to
continue marketing or developing a product or may result in the Company being
unable to do so on a commercially viable basis
The Company sources
its products from third party contract manufacturers, and for certain products
has its own manufacturing capability. In the event of either the Company's
failure or the failure of any third party contract manufacturer to comply with
mandatory manufacturing standards (often referred to as ‘Current Good
Manufacturing Standards’ or cGMP) in the countries in which the Company sells or
intends to sell or have its products sold, the Company may experience a delay in
supply or be unable to market or develop its products.
The Company
dual-sources certain key products and/or active ingredients. However, the
Company currently relies on a single source for production of the final drug
product for each of DAYTRANA, FIRAZYR, LIALDA/MEZAVANT, PENTASA, REMINYL and
XAGRID and relies on a single active ingredient source for each of ELAPRASE,
FIRAZYR, FOSRENOL, REMINYL, REPLAGAL and XAGRID.
In the event of
financial failure of a third party contract manufacturer or the failure of the
third party manufacturer to comply with its contractual obligations, the
Company may experience a delay in supply or be unable to market or develop its
products. This could have a material adverse affect on the Company's financial
condition and results of operations.
There
is no assurance that suppliers will continue to supply on commercially viable
terms, or be able to supply components that meet regulatory requirements. The
Company is also subject to the risk that suppliers will not be able to meet the
quantities needed to meet market requirements
The development and
approval of the Company's products depends on the ability to procure active
ingredients and special packaging materials from sources approved by regulatory
authorities. As the marketing approval process requires manufacturers to specify
their own proposed suppliers of active ingredients and special packaging
materials in their applications, regulatory approval of a new supplier would be
required if active ingredients or such packaging materials were no longer
available from the supplier specified in the marketing approval. The need to
qualify a new supplier could delay the Company's development and
commercialization efforts.
The Company uses
bovine-derived serum sourced from New Zealand and North America in the
manufacturing process for ELAPRASE. The discovery of additional cattle in North
America or the discovery of cattle in New Zealand with bovine spongiform
encephalopathy, or mad cow disease, could cause the regulatory agencies in some
countries to impose restrictions on these products, or prohibit the Company from
using these products at all in such countries.
The
actions of certain customers can affect the Company's ability to sell or market
products profitably, as well as impact net sales and growth
comparisons
A small number of
large wholesale distributors control a significant share of the US and certain
European markets. In 2009, for example, approximately 51% of the Company's
product sales were attributable to two customers in the US; McKesson Corp. and
Cardinal Health, Inc. In the event of financial failure of any of these
customers, the Company may suffer financial loss and a decline in revenues and
earnings. In addition, the number of independent drug stores and small chains
has decreased as retail pharmacy consolidation has occurred. Consolidation or
financial difficulties could cause customers to reduce their inventory levels,
or otherwise reduce purchases of the Company's products. Such actions could have
an adverse effect on the Company's revenues, financial condition and results of
operations. A significant portion of the Company’s Specialty Pharmaceuticals
product sales are made to major pharmaceutical wholesale distributors as well as
to large pharmacies in both the US and Europe. Consequently, product sales and
growth comparisons may be affected by fluctuations in the buying patterns of
major distributors and other trade buyers. These fluctuations may result from
seasonality, pricing, wholesaler buying decisions, or other factors. In
addition, a significant portion of the Company's
revenues for
certain products for treatment of rare genetic diseases are concentrated with a
small number of customers. Changes in the buying patterns of those customers may
have an adverse effect on the Company's revenues, financial condition and
results of operations.
Investigations
or enforcement action by regulatory authorities or law enforcement agencies
relating to the Company’s activities in the highly regulated markets in which it
operates may result in the distraction of senior management, significant legal
costs and the payment of substantial compensation or fines
The Company engages
in various marketing, promotional and educational activities pertaining to, as
well as the sale of, pharmaceutical products in a number of jurisdictions around
the world. The promotion, marketing and sale of pharmaceutical products is
highly regulated and the operations of market participants, such as the Company,
are closely supervised by regulatory authorities and law enforcement agencies,
including the FDA, the US Department of Justice and the DEA in the US. Any
inquiries or investigations into the operations of, or enforcement or other
regulatory action against, the Company by such regulatory authorities could
result in the distraction of senior management for prolonged periods of time,
significant defence costs, substantial monetary penalties and require extensive
government monitoring of Company activities in the future. As an example on
September 23, 2009the Company received a subpoena from the US Department of
Health and Human Services Office of Inspector General in coordination with the
US Attorney for the Eastern District of Pennsylvania, seeking production of
documents related to the sales and marketing of ADDERALL XR, DAYTRANA and
VYVANSE. Shire is cooperating and responding to this subpoena.
The
outsourcing of services can create a significant dependency on third parties,
the failure of whom can affect the ability to operate the Company's business and
to develop and market products
The Company has
entered into many agreements with third parties for the provision of services to
enable it to operate its business. If the third party can no longer provide the
service on the agreed basis, the Company may not be able to continue the
development or commercialization of its products as planned or on a commercial
basis. Additionally, it may not be able to establish or maintain good
relationships with the suppliers.
The Company has
also entered into licensing and co-development agreements with a number of
parties. There is a risk that, upon expiration or termination of a third party
agreement, the Company may not be able to renew or extend the agreement with the
third party as commercial interests may no longer coincide. In such
circumstances, the Company may be unable to continue to develop or market its
products as planned and could be required to abandon or divest a product
line.
RISK FACTORS RELATED TO THE
PHARMACEUTICAL INDUSTRY IN GENERAL
The
actions of governments, industry regulators and the economic environments in
which the Company operates may adversely affect its ability to develop and
market its products profitably
Changes to laws or
regulations impacting the pharmaceutical industry, in any country in which the
Company conducts its business, may adversely impact the Company's revenues,
financial condition and results of operations. In particular, changes to the
regulations relating to orphan drug status may affect the exclusivity granted to
products with such designation.
The
introduction of new products by competitors may impact future
revenues
The manufacture and
sale of pharmaceuticals is highly competitive. Many of the Company's competitors
are large, well-known pharmaceutical, biotechnology, chemical and healthcare
companies with considerable resources. Companies with more resources and larger
R&D expenditures have a greater ability to fund clinical trials and other
development work necessary for regulatory applications. They may also be more
successful than the Company in acquiring or licensing new products for
development and commercialization. If any product that competes with one of the
Company's principal drugs is approved, the Company's sales of that drug could
fall.
The pharmaceutical
and biotechnology industries are also characterized by continuous product
development and technological change. The Company's products could, therefore,
be rendered obsolete or uneconomic, through the development of new products,
technological advances in manufacturing or production by its
competitors.
The
successful development of pharmaceutical products is highly uncertain and
requires significant expenditures and time
Products that
appear promising in research or development may be delayed or fail to reach
later stages of development or the market for several reasons,
including:
preclinical
or clinical tests may show the product to lack safety or
efficacy;
·
delays may be
caused by slow enrollment in clinical studies; additional clinical
supplies requirements; extended length of time to achieve study endpoints;
additional time requirements for data analysis or dossier preparation;
discussions with regulatory agencies, including regulatory agency requests
for additional preclinical or clinical data; delays at regulatory agencies
due to staffing or resource limitations; analysis of or changes to study
design; unexpected safety, efficacy, or manufacturing issues. Delays may
arise from shared control with collaborative partners in the planning and
execution of the product development, scaling of the manufacturing
process, or getting approval for
manufacturing;
·
manufacturing
issues, pricing, reimbursement issues, or other factors may render the
product economically unviable;
·
the
proprietary rights of others and their competing products and technologies
may prevent the product from being developed or commercialized;
and
·
failure to
receive necessary regulatory
approvals.
Success in
preclinical and early clinical trials does not ensure that large-scale clinical
trials will be successful. Clinical results are frequently susceptible to
varying interpretations that may delay, limit, or prevent regulatory approvals.
The length of time necessary to complete clinical trials and to submit an
application for marketing approval for a final decision by a regulatory
authority varies significantly and may be difficult to predict. If the Company’s
large-scale or late state clinical trials for a product are not successful, the
Company will not recover its substantial investments in that
product.
In addition, even
if the products receive regulatory approval, they remain subject to ongoing
regulatory requirements, including, for example, obligations to conduct
additional clinical trials or other non-clinical testing, changes to the product
label, new or revised requirements for manufacturing, written notifications to
physicians, or product recalls or withdrawals. Further, a number of the
Company’s products that treat ADHD contain controlled substances and are subject
to regulation by the US DEA and equivalent agencies in other
countries.
The
failure of a strategic partner to develop and commercialize products could
result in delays in approval or loss of revenue
The Company enters
into strategic partnerships with other companies in areas such as product
development and sales and marketing. In these partnerships, the Company is
sometimes dependent on its partner to deliver results. While these partnerships
are supported by contracts, the Company may not exercise direct control. If a
partner fails to perform or experiences financial difficulties, the Company may
suffer a delay in the development, a delay in the approval or a reduction in
sales or royalties of a product.
The
failure to secure new products or compounds for development, either through
in-licensing, acquisition or internal research and development efforts, may have
an adverse impact on the Company's future results
The Company's
future results will depend, to a significant extent, upon its ability to
in-license, acquire or develop new products or compounds. The Company also
expends significant resources on research and development. The failure to
in-license or acquire new products or compounds, on a commercially viable basis,
could have a material adverse effect on the Company's financial condition. The
failure of these efforts to result in the development of products appropriate
for testing in human clinical trials could have a material adverse effect on the
Company's revenues, financial condition and results of operations.
The
Company may fail to obtain, maintain, enforce or defend the intellectual
property rights required to conduct its business
The Company's
success depends upon its ability and the ability of its partners and licensors
to protect their intellectual property rights. Where possible, the Company's
strategy is to register intellectual property rights, such as patents and
trademarks. The Company also relies variously on trade secrets, unpatented
know-how and technological innovations and contractual arrangements with third
parties to maintain its competitive position.
Patents and patent
applications covering a number of the technologies and processes owned or
licensed to the Company have been granted, or are pending in various countries,
including the US, Canada, major European countries and Japan. The Company
intends to enforce vigorously its patent rights and believes that its partners
intend to enforce vigorously patent rights they have licensed to the Company.
However, patent rights may not prevent other entities from developing, using or
commercializing products that are similar or functionally equivalent to the
Company's products or technologies. The Company's patent rights may be
successfully challenged in the future or laws providing such rights may be
changed
or withdrawn. The
Company cannot assure investors that its patents and patent applications or
those of its third party manufacturers will provide valid patent protection
sufficiently broad to protect the Company's products and technology or that such
patents will not be challenged, revoked, invalidated, infringed or circumvented
by third parties. In the regular course of business, the Company is party to
litigation or other proceedings relating to intellectual property rights. (See
ITEM 3: Legal Proceedings and Note 23(d), “Commitments and Contingencies,
Legal proceedings” to the consolidated financial statements listed under
ITEM 15: Exhibits and Financial Statement Schedules of this Annual
Report for details of current patent litigation).
Additionally, the
Company's products, or the technologies or processes used to formulate or
manufacture those products may now, or in the future, infringe the patent rights
of third parties. It is also possible that third parties will obtain patent or
other proprietary rights that might be necessary or useful for the development,
manufacture or sale of the Company's products. If third parties are the first to
invent a particular product or technology, it is possible that those parties
will obtain patent rights that will be sufficiently broad to prevent the Company
or its strategic partners from developing, manufacturing or selling its
products. The Company may need to obtain licenses for intellectual property
rights from others to develop, manufacture and market commercially viable
products and may not be able to obtain these licenses on commercially reasonable
terms, if at all. In addition, any licensed patents or proprietary rights may
not be valid and enforceable.
The Company also
relies on trade secrets and other un-patented proprietary information, which it
generally seeks to protect by confidentiality and nondisclosure agreements with
its employees, consultants, advisors and partners. These agreements may not
effectively prevent disclosure of confidential information and may not provide
the Company with an adequate remedy in the event of unauthorized disclosure of
such information. If the Company's employees, scientific consultants or partners
develop inventions or processes that may be applicable to the Company's products
under development, such inventions and processes will not necessarily become the
Company's property, but may remain the property of those persons or their
employers. Protracted and costly litigation could be necessary to enforce and
determine the scope of the Company's proprietary rights. The failure to obtain
or maintain patent and trade secret protection, for any reason, could allow
other companies to make competing products and reduce the Company's product
sales.
The Company has
filed applications to register various trademarks for use in connection with its
products in various countries including the US and countries in Europe and Latin
America and intends to trademark new product names as new products are
developed. In addition, with respect to certain products, the Company relies on
the trademarks of third parties. These trademarks may not afford adequate
protection or the Company or the third parties may not have the financial
resources to enforce any rights under any of these trademarks. The Company's
inability or the inability of these third parties to protect their trademarks
because of successful third party claims to those trademarks could allow others
to use the Company's trademarks and dilute their value.
If
a marketed product fails to work effectively or causes adverse side effects,
this could result in damage to the Company's reputation, the withdrawal of the
product and legal action against the Company
Unanticipated side
effects or unfavorable publicity from complaints concerning any of the Company's
products, or those of its competitors, could have an adverse effect on the
Company's ability to obtain or maintain regulatory approvals or successfully
market its products. The testing, manufacturing, marketing and sales of
pharmaceutical products entails a risk of product liability claims, product
recalls, litigation and associated adverse publicity. The cost of defending
against such claims is expensive even when the claims are not merited. A
successful product liability claim against the Company could require the Company
to pay a substantial monetary award. If, in the absence of adequate insurance
coverage, the Company does not have sufficient financial resources to satisfy a
liability resulting from such a claim or to fund the legal defense of such a
claim, it could become insolvent. Product liability insurance coverage is
expensive, difficult to obtain and may not be available in the future on
acceptable terms. Although the Company carries product liability insurance when
available, this coverage may not be adequate. In addition, it cannot be certain
that insurance coverage for present or future products will be available.
Moreover, an adverse judgment in a product liability suit, even if insured or
eventually overturned on appeal, could generate substantial negative publicity
about the Company's products and business and inhibit or prevent
commercialization of other products.
Loss
of highly qualified management and scientific personnel could cause the Company
subsequent financial loss
The Company faces
competition for highly qualified management and scientific personnel from other
companies, academic institutions, government entities and other organizations.
It may not be able to successfully attract and retain such personnel. The
Company has agreements with a number of its key scientific and management
personnel for periods of one year or less. The loss of such personnel, or the
inability to attract and retain the additional, highly skilled employees
required for its activities could have an adverse effect on the Company's
business.
Office
accommodation (Shire HGT Headquarters) and laboratories
181,000
Leased
Cambridge,
Massachusetts, US
Laboratories
and manufacturing facility
29,000
Leased
Cambridge,
Massachusetts, US
Office
accommodation
34,000
Leased
Lexington,
Massachusetts, US
Office
accommodation, laboratories and manufacturing, warehousing and
distribution facility
244,000
Leased
Lexington,
Massachusetts, US
Manufacturing
facility and office accommodation
200,000
Owned
North
Reading, Massachusetts, US
Warehousing
facility
92,000
Leased
Belmont,
Massachusetts,
US
Warehousing
facility
16,000
Leased
Montreal,
Canada
Office
accommodation
35,000
Leased
Berlin,
Germany
Office
accommodation
16,500
Leased
Sao Paolo,
Brazil
Office
accommodation
14,000
Leased
The Company also
has other smaller locations in some of the countries listed above and in several
other countries around the world. At December 31, 2009 all the above sites were
utilized by the Company with the exception of part of the Company’s site at
Lexington, Massachusetts, which is undergoing significant alterations and
construction of additional facilities. In addition, Shire has properties at
Newport, Kentucky, Rockville, Maryland and Randolph, Massachusetts which are not
fully utilized.
The information required by this Item is
incorporated herein by reference to Note 23(d), “Commitments and
Contingencies, Legal proceedings” to the consolidated financial statements
listed under ITEM 15: Exhibits and Financial Statement Schedules of this
Annual Report.
In
addition, information on legal proceedings relating to products from which the
Company receives royalties (to which, the Company is not party) is included
within ITEM 1: Business of this Annual Report.
The Company’s
ordinary shares are traded on the London Stock Exchange (“LSE”).
The following table
presents the closing mid-market quotation per ordinary share of Shire plc as
quoted in the Daily Official List of the LSE for the periods
indicated.
The total number of
record holders of ordinary shares of Shire plc on February 18, 2010 was 5,123.
Since certain of the ordinary shares are held by broker nominees, the number of
record holders may not be representative of the number of beneficial
owners.
American
Depositary Shares
American Depositary
Shares (“ADSs”) each represent three ordinary shares of Shire plc. An ADS is
evidenced by an American Depositary Receipt (“ADR”) issued by JPMorgan Chase
Bank, N.A. as depositary, and is listed on the NASDAQ Global Select Market. On
February 18, 2010 the proportion of ordinary shares represented by ADRs was
9.76% of the outstanding ordinary shares.
The following table
presents the high and low market quotations for ADSs quoted on the NASDAQ Global
Select Market for the periods indicated.
The number of
record holders of ADSs in the US on February 18, 2010 was 1,054. Since certain
of the ADSs are held by broker nominees, the number of record holders may not be
representative of the number of beneficial owners.
(1)
On May23, 2008 a Scheme of Arrangement (the “Scheme”) became effective whereby Shire
plc became the holding company of the former holding company of the Shire group,
now called Shire Biopharmaceutical Holdings (“Old Shire”). Pursuant to the
Scheme, holders of ordinary shares of Old Shire received one ordinary share of
the Shire plc for each ordinary share of Old Shire held at 5.30pm (GMT) on May22, 2008. The ordinary shares of the Shire plc were admitted to the Official
List and to trading on the LSE at 8.00am (GMT) on May 23, 2008. The listing of
the ordinary shares of Old Shire was cancelled at the same time. ADSs
each represent three ordinary shares of Shire plc. As a result of the Scheme,
ADSs representing three ordinary shares of Old Shire were replaced by ADSs
representing three ordinary shares of Shire plc on a one-for-one basis. Dealings
in ADSs representing ordinary shares of Shire plc on NASDAQ Global Select Market
commenced at 9.30am (EST) on May 23, 2008. ADSs representing ordinary shares of
Old Shire were cancelled at the same time. The quotations given in
the tables in this Item 5 for the period prior to May 23, 2008 relate to,
respectively, ordinary shares of Old Shire and ADSs representing ordinary shares
of Old Shire.
Dividend
policy
A first interim
dividend for the first half of 2009 of 2.147 US cents (1.302 pence) per ordinary
share, equivalent to 6.441 US cents per ADS, was paid in October 2009. The Board
has resolved to pay a second interim dividend of 9.250 US cents (5.910 pence)
per ordinary share equivalent to 27.750 US cents per ADS for the six months to
December 31, 2009.
A first interim
dividend for the first half of 2008 of 2.147 US cents (1.085 pence) per ordinary
share, equivalent to 6.441 US cents per ADS, was paid in October 2008. A second
interim dividend for the second half of 2008 of 7.761 US cents (5.469 pence) per
ordinary share equivalent to 23.283 US cents per ADS was paid in April
2009.
This is consistent
with Shire’s stated policy of paying a dividend semi-annually, set in US cents
per ordinary share. It is intended that the first interim payment each year
should be the higher of the previous year’s first interim USD dividend and the
USD equivalent of the previous year’s first GBP interim dividend. Dividend
growth for the full year will be reviewed by the Board when the second interim
dividend is determined. Any dividend growth will come through increasing the
second interim dividend in a financial year.
Income
Access Share Arrangements (“IAS Trust”)
Shire has put into
place the IAS Trust which enables Shire ordinary shareholders, other than Shire
ADS holders, to elect to receive their dividends either from a company resident
for tax purposes in the Republic of Ireland or from a Shire group company
resident for tax purposes in the UK.
Old Shire has
issued one income access share to the IAS Trust which is held by the income
access share trustee. The mechanics of the arrangements are as
follows:
i)
If a dividend
is announced or declared by Shire plc on the Shire ordinary shares, an
amount is paid by Old Shire by way of a dividend on the income access
share to the income access share trustee, and such amount is paid by the
income access share trustee to the Shire ordinary shareholders who have
elected (or are deemed to have elected) to receive dividends under these
arrangements. The dividend which would otherwise be payable by Shire to
such Shire ordinary shareholders will be reduced by an amount equal to the
amount paid to such Shire ordinary shareholders by the income access share
trustee.
ii)
If the
dividend paid on the income access share and on-paid by the income access
share trustee to the Shire ordinary shareholders is less than the total
amount of the dividend announced or declared by Shire on the Shire
ordinary shares, Shire will be obliged to pay a dividend on the Shire
ordinary shares equivalent to the amount of the shortfall. In such a case,
any dividend paid on the Shire ordinary shares will generally be subject
to Irish withholding tax at the rate of 20% or such lower rate as may be
applicable under exemptions from withholding tax contained in Irish
law.
iii)
A Shire
ordinary shareholder is entitled to make an income access share election
such that he will receive his dividends (which would otherwise be payable
by Shire) under these arrangements from Old
Shire.
iv)
A Shire
ordinary shareholder who holds 25,000 or fewer Shire ordinary shares at
the first record date after he first becomes a Shire
ordinary shareholder, and who does not make a contrary
election, will be deemed to have made an election (pursuant to
the Shire articles of association) such that he will receive his dividends
under these arrangements from Old
Shire.
The ADS Depositary
has made an election on behalf of all holders of Shire ADSs such that they will
receive dividends from Old Shire under the income access share arrangements.
Dividends paid by Old Shire under the income access share arrangements will not,
under current legislation, be subject to any UK or Irish withholding taxes. If a
holder of Shire ADSs does not wish to receive dividends from Old Shire under the
income access share arrangements, he must withdraw his Shire ordinary shares
from the Shire ADS program prior to the dividend record date set by the
Depositary and request
delivery of the
Shire ordinary shares. This will enable him to receive dividends from Shire (if
necessary, by making an election to that effect).
It is the
expectation, although there can be no certainty, that Old Shire will distribute
dividends on the income access share to the income access share trustee for the
benefit of all Shire ordinary shareholders who make (or are deemed to make) an
income access share election in an amount equal to what would have been such
Shire ordinary shareholders’ entitlement to dividends from Shire in the absence
of the income access share election. If any dividend paid on the income access
share and or paid to the Shire ordinary shareholders is less than such ordinary
shareholders’ entitlement to dividends from Shire in the absence of the income
access share election, the dividend on the income access share will be allocated
pro rata among the Shire ordinary shareholders and Shire will pay the balance to
these Shire ordinary shareholders by way of dividend. In such circumstances,
there will be no grossing up by Shire in respect of, and Old Shire and Shire
will not compensate those Shire ordinary shareholders for, any adverse
consequences including any Irish withholding tax consequences.
Shire will be able
to suspend or terminate these arrangements at any time, in which case the full
Shire dividend will be paid directly by Shire to those Shire ordinary
shareholders (including the Depositary) who have made (or are deemed to have
made) an income access share election. In such circumstances, there will be no
grossing up by Shire in respect of, and Old Shire and Shire will not compensate
those Shire ordinary shareholders for, any adverse consequences including any
Irish withholding tax consequences.
In the year ended
December 31, 2009 Old Shire paid dividends totaling $45.9 million (2008: $7.2
million) on the income access share to the income access share trustee in an
amount equal to the dividend Shire ordinary shareholders would have received
from Shire.
Distributable
Reserves
The payment of
dividends by Shire plc is governed by Jersey law. Under Jersey law, Shire
plc is entitled to make payments of dividends from its accumulated profits
and other distributable reserves. Prior to making any dividend payment, the
Directors of Shire plc who authorize the payment of the dividend must make
a solvency statement to the effect that Shire plc will be able to continue
to carry on its business and discharge its debts as they fall due immediately
after the payment is made and for the twelve month period following the making
of the payment. Shire plc's future dividend policy will be dependent upon the
amount of its distributable reserves, its financial condition, the terms of its
then existing debt facilities and other relevant factors existing at the
time.
For dividends paid
by Old Shire on the income access share to the income access share trustee, the
ability of Old Shire to pay dividends is determined under English law. As a
matter of English law Old Shire can only pay dividends out of its distributable
profits, which are the accumulated realized profits of Old Shire and not the
consolidated group, so far as not previously utilized by distribution or
capitalization, less accumulated realized losses, so far as not previously
written off in a reduction or reorganization of capital.
Equity
Compensation Plan Information
Equity compensation
plan information is incorporated herein by reference to ITEM 12: Security
Ownership of Certain Beneficial Owners and Management and Related Stock Holder
Matters of this Annual Report.
Performance
Graph
For a graph
comparing the cumulative total return to our stockholders during the five years
ending December 31, 2009 to that of the Financial Times and the London Stock
Exchange 100 index and a comparator group of companies, please refer to ITEM 11:
Executive Compensation – Directors’ Remuneration Report.
The selected
consolidated financial data presented below at December 31, 2009 and 2008 and
for the three years to December 31, 2009, 2008 and 2007 were derived from the
audited consolidated financial statements of the Company, included herein.
Subject to the impact of the restatement discussed below, the selected
consolidated financial data presented below at December 31, 2007, 2006 and 2005
and for the two years ended December 31, 2006 and 2005 were derived from the
audited consolidated financial statements of the Company, which are not included
herein.
The consolidated
financial data at December 31, 2008, 2007, 2006 and 2005 has been restated. The
effect of this restatement for the years to December 31, 2008 and 2007 was to
reduce the Company’s non-current deferred tax liabilities and accumulated
deficit and for the years to December 31 2006 and 2005 was to increase the
Company’s non-current deferred tax assets and retained earnings by $29.0 million
at each period end (as the misstatement arose prior to January 1, 2005). The
restatement does not affect the Company’s net income or loss or cash flows in
any of the aforementioned years. For further information, see note 32 to
the consolidated financial statements contained in ITEM 15: Exhibits and
Financial Statement Schedules of this Annual Report.
The selected
consolidated financial data should be read in conjunction with ITEM 7:
Management’s Discussion and Analysis of Financial Condition and Results of
Operations and with the consolidated financial statements and related notes
appearing elsewhere in this report.
Income/(loss) from
continuing operations
before income taxes and equity in (losses)/earnings of equity method
investees
643.0
265.6
(1,398.1
)
316.8
(491.7
)
Income
taxes
(138.5
)
(98.0
)
(55.5
)
(84.9
)
(88.8
)
Equity in (losses)/earnings of
equity method investees, net of taxes
(0.7
)
2.4
1.8
5.7
(1.0
)
Income/(loss) from continuing
operations, net of taxes
503.8
170.0
(1,451.8
)
237.6
(581.5
)
(Loss)/gain from discontinued
operations, net of
tax
(12.4
)
(17.6
)
-
40.6
-
Gain on disposition of
discontinued operations, net of tax
-
-
-
-
3.1
Net
income/(loss)
491.4
152.4
(1,451.8
)
278.2
(578.4
)
Add: net loss
attributable to the noncontrolling interest in
subsidiaries
0.2
3.6
-
-
-
Net income/(loss) attributable to
Shire plc
491.6
156.0
(1,451.8
)
278.2
(578.4
)
Earnings per share – basic
Income/(loss) from continuing
operations
93.2c
32.1c
(268.7c
)
47.2c
(116.2c
)
(Loss)/gain from discontinued
operations
(2.3c
)
(3.3c
)
-
8.1c
0.6c
Earnings/(loss) per ordinary share
- basic
90.9c
28.8c
(268.7c
)
55.3c
(115.6c
)
Earnings/(loss) per share – diluted
Income/(loss) from continuing
operations
91.9c
31.8c
(268.7c
)
46.6c
(116.2c
)
(Loss)/gain from discontinued
operations
(2.2c
)
(3.2c
)
-
8.0c
0.6c
Earnings/(loss) per ordinary share
- diluted
89.7c
28.6c
(268.7c
)
54.6c
(115.6c
)
(1)
The following
items are included within Other operating
expenses:
·
Up-front and
milestone payments for in-licensed development projects, expensed to
R&D, of $43.4 million, $nil, $155.9 million, $80.5 million and $50.0
million in the years ended December 31, 2009, 2008, 2007, 2006 and 2005
respectively;
·
Costs of
$62.9 million associated with the termination of the Women’s Health
Development agreement with Duramed Pharmaceuticals, Inc (“Duramed”) in the
year to December 31, 2009; and
·
Costs of
$149.9 million on the cessation of commercialization of DYNEPO in the year
to December 31, 2008.
(2)
The following
items are included within Total other income/(expenses),
net:
Gains on sale
of non-current investments of $55.2 million, $9.4 million, $0.1 million,
$nil and $3.9 million in the years ended December 31, 2009, 2008, 2007,
2006 and 2005 respectively;
·
Other than
temporary impairment charges for available-for-sale investments of $0.8
million, $58.0 million, $3.0 million, $0.3 million and $0.4 million in the
years ended December 31, 2009, 2008, 2007, 2006 and 2005 respectively;
and
·
Interest
expense in respect of the Transkaryotic Therapies, Inc. (“TKT”) appraisal
rights litigation of $nil, $87.3 million, $28.0 million, $24.6 million and
$7.7 million in the years ended December 31, 2009, 2008, 2007, 2006 and
2005 respectively.
For further
information, see ITEM 7: Management’s Discussion and Analysis of Financial
Condition and Results of Operations and ITEM 15: Exhibits and Financial
Statement Schedules.
Weighted average number
of
shares
(millions):
2009
2008
2007
2006
2005
Basic
540.7
541.6
540.3
503.4
500.2
Diluted
548.0
545.4
540.3
509.3
500.2
Cash dividends declared and paid
per ordinary share
9.908
c
8.616
c
7.3925
c
6.3536
c
5.6746
c
December
31,
Restated1
2009
2008
2007
2006
2005
$’M
$’M
$’M
$’M
$’M
Balance
sheets:
Total current
assets
1,570.2
1,044.4
1,696.8
1,810.3
1,312.2
Total
assets
4,617.5
3,933.7
4,330.1
3,355.4
2,685.2
Total current
liabilities
1,020.0
823.8
1,262.2
1,332.0
965.4
Non-current
liabilities
1,685.0
1,782.4
1,811.9
52.1
43.5
Total
liabilities
2,705.0
2,606.2
3,074.1
1,384.1
1,008.9
Total equity
1,912.5
1,327.5
1,256.0
1,971.3
1,676.3
(1)
Non current
liabilities and Total equity at December 31, 2008 and 2007 and Total
assets and Total equity at December 31, 2006 and 2005 have been restated
by $29.0 million. For further information, see Note 32 to the consolidated
financial statements contained in ITEM 15: Exhibits and Financial
Statement Schedules.
The following
discussion should be read in conjunction with the Company’s consolidated
financial statements contained in Part IV of this Annual Report.
Overview
Shire’s mission is
to be the most valuable specialty biopharmaceutical company in the world that
focuses on enabling people with life altering conditions to lead better lives.
Shire focuses its business on ADHD, HGT and GI diseases as well as opportunities
in other therapeutic areas to the extent they arise through acquisitions.
Shire’s in-licensing, merger and acquisition efforts are focused on products in
specialist markets with strong intellectual property protection and global
rights. Shire believes that a carefully selected and balanced portfolio of
products with strategically aligned and requiring relatively small-scale sales
forces will deliver strong results.
Substantially all
of the Company’s revenues, expenditures and net assets are attributable to the
development, manufacture, sale and distribution of pharmaceutical products
within two reporting segments: Specialty Pharmaceuticals and HGT. The Company
also earns royalties (where Shire has out-licensed products to third parties)
which are recorded as revenues.
Revenues are
derived primarily from two sources - sales of the Company’s own products and
royalties:
·
90% (2008:
91%) of total revenues are derived from product sales, of which 79% (2008:
83%) within Specialty Pharmaceuticals and 21% (2008: 17%) within HGT;
and
·
9% of total
revenues are derived from royalties (2008:
8%).
Shire’s strategic
objectives are set using a balanced scorecard approach. Strategic and
operational objectives are set at the corporate level and cascaded to the
segment (Specialty Pharmaceuticals / HGT), therapeutic area and functional
levels so that these objectives are aligned with the corporate objectives. The
Company therefore takes a fully integrated approach to strategic management and
uses key performance indicators (“KPIs”) to measure the achievement of these
objectives. For 2009, Shire’s corporate KPIs included certain financial and non
financial measures.
The markets in
which the Company conducts its business are highly competitive and highly
regulated. The health care industry is experiencing:
·
pressure from
governments and healthcare providers to keep prices low while increasing
access to drugs;
·
increased
R&D costs as development programs are typically larger and take longer
to get approval from regulators;
·
challenges to
existing patents from generic
manufacturers;
·
governments
and healthcare systems favoring earlier entry of low cost generic drugs;
and
·
higher
marketing costs due to competition for market
share.
Shire’s strategy to
become the leading specialty biopharmaceutical company has been developed to
address these industry-wide competitive pressures. This strategy has resulted in
a series of initiatives in the following areas:
Markets
Historically,
Shire’s portfolio of approved products has been heavily weighted towards the
North American market. The acquisition in 2005 of TKT (and the
consequent establishment of our HGT business) and the acquisition of EQUASYM in
2009 (which facilitated immediate access to the European ADHD market) provided
Shire with the platforms to increase its presence in Europe and RoW, thereby
working towards diversifying the risk associated with being reliant on one
geographic market. In 2009 the HGT business derived more than 75% of its
revenues from outside of the US. In addition to the marketed products
and products in development obtained through the acquisition of TKT (ELAPRASE,
REPLAGAL and VPRIV), Shire has made significant progress on a path to geographic
diversification with additional development and commercialization activities in
2009, including:
·
continued roll-out of ELAPRASE in
certain Latin American and RoW
countries;
·
continued roll-out of MEZAVANT,
FOSRENOL and FIRAZYR in Europe;
and
·
the entering into a licensing
arrangement for LIALDA/MEZAVANT in
Japan.
Shire’s long-term
mission is to increase the proportion of its product sales from outside of the
US and outside of the US, UK, Germany, France, Italy, Spain and Canada by 2015.
Shire has late stage development activities ongoing which are expected to
further supplement the diversification of revenues in the future,
including:
·
VYVANSE
launches in Canada and Latin American countries and the registration
program for approval in the EU;
·
VPRIV
launches in the EU and certain Latin American
countries;
·
the continued
roll out of FIRAZYR in certain European and Latin American
countries;
·
LIALDA/MEZAVANT
diverticulitis registration program;
and
·
the continued
roll-out of FOSRENOL, LIALDA/MEZAVANT and EQUASYM in EU and RoW
countries.
R&D
Over the last five
years Shire has focused its R&D efforts on products in its core therapeutic
areas, which meet the needs of the specialist physician, and has concentrated
its resources on obtaining regulatory approval for later-stage pipeline products
within these core therapeutic areas.
Evidence of the
successful execution of this strategy can be seen from the progression of the
Company’s development pipeline over the last five years. Since January 2005,
several products have received regulatory approval; in the US, DAYTRANA and
ELAPRASE in 2006, LIALDA and VYVANSE in 2007, and INTUNIV in 2009; in the
EU, FOSRENOL in 2005, ELAPRASE and MEZAVANT in 2007. The Company had VPRIV
in registration in the US and EU and filed a BLA for REPLAGAL in the US at
December 31, 2009. In February 2010, Shire withdrew its December BLA filing for
REPLAGAL and at the suggestion of the FDA, requested and received Fast Track
designation. Shire immediately initiated a rolling BLA submission in
February.
Shire’s strategy is
focused on the development of product candidates that have a lower risk profile.
R&D costs in 2010 will include expenditure on several pre-clinical to Phase
3 studies for products in development and Phase 3(b) and Phase 4 studies to
support recently launched products in the Specialty Pharmaceuticals and HGT
businesses, together with the development of new projects in both the Specialty
Pharmaceuticals and HGT businesses. For a discussion of the Company’s current
development projects see ITEM 1: Business.
Patents
and Market Exclusivity
The loss or
expiration of patent protection or regulatory exclusivity with respect to any of
the Company’s major products could have a material adverse effect on the
Company’s revenues, financial condition and results of operations as
generic manufacturers may enter the market. Generic manufacturers
often do not need to complete extensive clinical studies when they seek
registration of a copy product and accordingly, they are generally able to sell
the Company’s drugs at a much lower price.
As expected, in
2009 Teva and Impax commenced commercial shipments of their authorized generic
versions of ADDERALL XR. During the year to December 31, 2009the Company’s
sales of ADDERALL XR declined by 43% to $626.5 million, representing 21% of
total revenues in 2009 (2008: 36%). As discussed in ITEM 1: Business,
the FDA has not yet reached a decision on the Citizen’s Petition for ADDERALL XR
which was filed in October 2005. Any FDA decision which does not require generic
follow-on products to require bio-equivalence or additional clinical testing
could lead to additional generic competition for ADDERALL XR.
Shire is engaged in
various legal proceedings with generic manufacturers with respect to its
FOSRENOL and CARBATROL patents, as well as the patents for certain other
products. During 2009 Shire settled certain legal proceedings relating to
ADDERALL XR and CARBATROL. Shire has also intervened in a lawsuit brought by
Actavis Elizabeth LLC against the FDA concerning FDA’s decision to grant VYVANSE
new chemical entity regulatory exclusivity. For more detail of current patent
litigation, see ITEM 3: Legal Proceedings and Note 23(d), “Commitments and Contingencies,
Legal proceedings” to the consolidated financial statements listed under
ITEM 15: Exhibits and Financial Statement Schedules of this Annual
Report.
Business
Development
As a result of the
issues associated with the loss or expiry of patent protection or loss of data
exclusivity, Shire seeks to focus its business development activity on the
acquisition and in-licensing of products and projects which have the benefit of
long-term patent protection and/or data exclusivity.
During 2009, in
addition to acquiring the worldwide rights (excluding the US, Canada and
Barbados) to EQUASYM IR and XL from UCB and entering into a research
collaboration with Santaris for the development of its LNA drug platform
technology, Shire also acquired the remaining interests in Jerini AG (having
acquired more than 98% of the voting interests of Jerini in 2008). In 2008 Shire
also acquired the global rights to METAZYM, a clinical candidate
arylsulfatase-A, from Zymenex. In 2007 the Company acquired New River
and through the New
River acquisition obtained control of the commercialization of
VYVANSE.
Organization
and Structure
During 2008, the
Company undertook a court sanctioned Scheme of Arrangement, establishing Shire
plc, a Company incorporated in Jersey (Channel Islands) as the new Shire holding
company. For further details on the Scheme of Arrangement see Note 2 to the
Company’s consolidated financial statements in ITEM 15: Exhibits and Financial
Statement Schedules of this Annual Report.
Key financial
highlights for the year to December 31, 2009 are as follows:
·
product sales
excluding ADDERALL XR increased by 25% to $2,067.2 million (2008: $1,652.5
million) following continued strong growth from VYVANSE, LIALDA/MEZAVANT,
ELAPRASE and REPLAGAL;
·
product sales
including ADDERALL XR decreased by 2% to $2,693.7 million (2008: $2,754.2
million) due to the expected decline in ADDERALL XR products sales
following the launch of authorized generic versions by Teva and Impax,
with the strong performance in Shire's other products offsetting the
decrease;
·
total
revenues decreased marginally to $3,007.7 million in 2009 (2008: $3,022.2
million) as the increase in product sales excluding ADDERALL XR and
royalty income received on Teva and Impax’s sales of authorized generic
ADDERALL XR offset the decline in ADDERALL XR product
sales;
·
operating
income in 2009 increased by 51% to $620.2 million, (2008: $412.0 million);
and
·
net income
attributable to Shire plc increased by $335.6 million to $491.6 million
(2008: $156.0 million) and diluted earnings per ordinary share increased
to 89.7c in 2009 (2008: 28.6c).
Further detail on
the results of operations for the years to December 31, 2009 and 2008 is
provided below:
Total
revenues
The following table
provides an analysis of the Company’s total revenues by source:
US
prescription growth and market share data provided by IMS Health (“IMS”)
National Prescription Audit. Exit market share represents the US market
share in the last week of December
2009.
(2)
Not sold in
the US or awaiting approval in the
US.
(3)
IMS Data not
available.
(4)
Not approved
at December 31, 2009. Sales achieved under early access
programs.
The Company’s
management analyses product sales growth for certain products sold in markets
outside of the US on a constant exchange rate (“CER”) basis, so that product
sales growth can be considered excluding movements in foreign exchange rates.
Product sales growth on a CER basis is a non-GAAP financial measure, computed by
comparing 2009 product sales restated using 2008 average foreign exchange rates
to 2008 actual product sales. Average exchange rates for the year to December31, 2009 were $1.57:£1.00 and $1.39:€1.00 (2008: $1.85:£1.00 and
$1.47:€1.00).
The increase in
VYVANSE product sales was driven by higher US prescription demand in 2009
compared to 2008, 9% growth in the US ADHD market and price increases. Product
sales growth was lower than prescription growth due to lower stocking in 2009
compared to 2008.
Litigation
proceedings regarding VYVANSE are ongoing. Further information about this
litigation can be found in ITEM 3: Legal Proceedings and in Note 23(d), “Commitments and Contingencies,
Legal proceedings” to the consolidated financial statements
listed under ITEM 14: Exhibits and Financial Statement Schedules of this
Annual Report.
INTUNIV
– ADHD
INTUNIV was
launched in the US in November 2009. In line with Shire’s revenue recognition
policy for launch shipments, initial stocking shipments have been deferred and
are being recognized into revenue in line with end-user prescription demand. At
December 31, 2009 deferred revenues on the balance sheet represented gross sales
of $38.8 million.
ADDERALL
XR – ADHD
The launch by Teva
and Impax of their authorized generic versions of ADDERALL XR led to the
expected decline in 2009 of branded ADDERALL XR prescription demand, and
resulted in higher US sales deductions in 2009 compared to 2008. These factors
more than offset the positive impacts of price increases taken since the fourth
quarter of 2008, and the inclusion in product sales of shipments of authorized
generic ADDERALL XR to Teva and Impax in 2009.
Sales deductions
represented 47% of branded ADDERALL XR gross sales in the year to December 31,2009 compared to 25% in the same period in 2008, following higher Medicaid and
Managed Care rebates subsequent to the authorized generic launches.
As outlined in the
Critical Accounting Estimates section of this ITEM 7, there are potentially
different interpretations as to how shipments of authorized generic ADDERALL XR
to Teva and Impax should be included in the Medicaid rebate calculation pursuant
to Medicaid rebate legislation, including the Deficit Reduction Act of 2005
(“Medicaid rebate legislation”). As a result more than one unit rebate amount
(“URA”) is calculable for the purpose of determining the Company’s Medicaid
rebate liability to States after the authorized generic launch. During 2009 the
Company highlighted the different interpretations to the CMS and submitted data
to the CMS for the purpose of computing the URA, based on the Company’s
reasonable interpretation of the Medicaid rebate legislation and related
guidance. The State Medicaid agencies have invoiced the Company for Medicaid
rebates, and the Company has paid these Medicaid rebate invoices, based on this
URA. Despite this CMS has the ability to subsequently challenge the Company’s
interpretation of the Medicaid rebate legislation, and require an alternative
interpretation to be applied (both retrospectively and prospectively), which
could result in a significantly higher Medicaid liability.
Throughout 2009 the
Company’s management has recorded its accrual for Medicaid rebates based on its
best estimate of the rebate payable. For the first three quarters of 2009, the
Company’s management based this best estimate on an amount that the Company
could pay were CMS to challenge the Company’s interpretation and require an
alternative interpretation of the Medicaid rebate legislation to be applied. In
the fourth quarter of 2009, the Company’s management lowered its best estimate
of the Medicaid rebate payable down to be consistent with (i) the Company’s
interpretation of the Medicaid rebate legislation, (ii) the Company’s repeated
and consistent submission of price reporting to CMS using the Company’s
interpretation of the Medicaid rebate legislation, (iii) CMS calculating the URA
based on that interpretation, (iv) States submitting Medicaid rebate invoices
using this URA and (v) Shire paying these invoices. This change of estimate
increased ADDERALL XR product sales by $97.7 million in the fourth quarter of
2009 (of which $73.6 million related to ADDERALL XR product sales recognized
in the first three quarters of 2009).
In determining its
best estimate of the Medicaid rebate liability at December 31, 2009 the
Company’s management has considered a number of factors taken in combination
(including the receipt of a further quarter’s invoices from the States with a
URA based on the Company’s interpretation of the Medicaid rebate legislation and
related guidance, and the Company’s likely response were CMS to employ an
alternative interpretation of the Medicaid rebate legislation). Any future
change in the Company’s interpretation which results in a change of estimate
could significantly decrease sales of ADDERALL XR in the period of any such
change in estimate.
The Company
strongly believes that its interpretation of the Medicaid rebate legislation is
reasonable and correct. However, CMS could disagree with the Company’s
interpretation, and require the Company to apply an alternative interpretation
of the Medicaid rebate legislation and pay up to $210 million above the recorded
liability. This would
represent a URA
substantially in excess of the unit sales price of ADDERALL XR and accordingly
be in excess of the approximate amount of the full cost to the States of
reimbursement for Medicaid prescriptions of ADDERALL XR. Should CMS take
such an approach, the Company could seek to limit any additional payments to a
level approximating the full, un-rebated cost to the States of ADDERALL XR, or
$98 million above the recorded liability. Further, the Company believes it has a
strong legal basis supporting its interpretation of the Medicaid rebate
legislation, and that there would be a strong basis to initiate litigation to
recover any amount paid in excess of its recorded liability. The result of any
such litigation cannot be predicted and could result in additional rebate
liability above the Company’s current best estimate.
LIALDA/MEZAVANT
– Ulcerative colitis
Strong product
sales of LIALDA/MEZAVANT continued in the year to December 31, 2009 driven by an
increase in market share over 2008, growth in the US oral mesalamine
market and price increases taken during 2009.
PENTASA
– Ulcerative colitis
Product sales of
PENTASA continued to grow despite a decrease in US prescription demand in 2009
compared to 2008 due to the impact of price increases taken during
2009.
FOSRENOL
– Hyperphosphatemia
Product sales
increased as FOSRENOL entered new countries and grew in existing markets outside
the US. In the US, FOSRENOL sales grew despite lower prescriptions due to
a price increase in 2009.
Litigation
proceedings regarding Shire’s FOSRENOL patents are ongoing. Further information
about this litigation can be found in ITEM 3: Legal Proceedings and in Note 23(d), “Commitments and Contingencies,
Legal proceedings” to
the consolidated financial statements listed under ITEM 15: Exhibits and
Financial Statement Schedules of this Annual Report.
Human
Genetic Therapies
ELAPRASE – Hunter syndrome
The growth in sales
of ELAPRASE was driven by increased volumes across all regions where ELAPRASE is
sold. On a non-GAAP CER basis sales grew by 20% (66% of ELAPRASE sales are
made outside of the US).
REPLAGAL
– Fabry disease
The growth in
REPLAGAL product sales in 2009 over 2008 was driven by a significant increase in
demand in the fourth quarter of 2009 due to an acceleration of patients
switching to REPLAGAL in the EU, attributable in part to supply shortages of a
competitor product. Sales increased 16% on a non-GAAP CER basis (REPLAGAL
is sold primarily in Euros and Pounds sterling).
Royalties
Royalty revenue
increased by 19% to $292.5 million for the year to December 31, 2009 (2008:
$245.5 million). The following table provides an analysis of Shire’s royalty
income:
3TC
(HIV infection and AIDS) and ZEFFIX (Chronic hepatitis B infection)
Shire receives
royalties from GSK on worldwide 3TC and ZEFFIX sales, which have decreased
mainly due to competition from other HIV and hepatitis B
treatments.
Generic drug
companies have filed ANDAs seeking approval for COMBIVIR in the US. GSK
has filed lawsuits against both Teva and Lupin, each of whom have filed
ANDA's and Paragraph IV certifications for generic versions of Combivir. The
lawsuit against Lupin has been stayed pending resolution of the Teva
lawsuit. Neither Teva nor Lupin have challenged the patents licensed by
Shire to GSK. The thirty month stay of approval for Teva's ANDA expires in March
2010. No trial date has been set.
ADDERALL
XR – ADHD
Royalties were
received on Teva’s sales of an authorized generic version of ADDERALL XR
between April 2009 and September 2009, and on Impax’s sales of an authorized
generic version of ADDERALL XR from October 2009.
Other
Other royalties are
received primarily on worldwide (excluding UK and Republic of
Ireland) sales of REMINYL and REMINYL XL (known as RAZADYNE and RAZADYNE ER
in the US). Royalties on sales of these products decreased in the year to
December 31, 2009 to $47.7 million (2008: $63.5 million) due to generic
competition in the US from August 2008.
Cost of product
sales
Cost of product
sales decreased to $388.0 million for the year to December 31, 2009 (14% of
product sales), down from $408.0 million in the corresponding period in 2008
(2008: 15% of product sales). Cost of product sales in the year to December 31,2008 included charges relating to DYNEPO exit costs of $48.8 million (2% of
product sales). Excluding this item, cost of product sales as a percentage of
product sales in 2009 compared to 2008 has increased by 1% to 14%. This increase
primarily resulted from changes in product mix following the launch by Teva and
Impax of their authorized generic versions of ADDERALL XR in 2009. Higher sales
deductions on Shire’s sales of branded ADDERALL XR, together with lower margin
sales of the authorized generic version of ADDERALL XR to Teva and Impax have
both depressed gross margins in 2009.
For the year to
December 31, 2009 cost of product sales included depreciation of $21.8 million
(2008: $16.2 million). Depreciation charged in 2009 is higher than 2008 due to
accelerated depreciation of $12.0 million in 2009 following a change in the
estimate of the useful lives of the property, plant and equipment at Shire’s
Owings Mills facility as a result of the anticipated closure of the facility in
2011.
R&D expenditure
increased by 29% to $638.3 million in the year to December 31, 2009 (24% of
product sales), up from $494.3 million in the corresponding period in 2008 (18%
of product sales). R&D for the year to December 31, 2009 included a charge
of $36.9 million (1% of product sales) relating to the amendment of an INTUNIV
in-license agreement and costs of $62.9 million (2% of product sales) following
the agreement with Duramed to terminate the Women’s Health development
agreement. R&D in the year to December 31, 2008 included costs of $6.5
million for DYNEPO exit costs. Excluding these items, R&D increased in the
year to December 31, 2009 compared to the same period in 2008 due to continued
investment in R&D programs, including the acceleration of investment in
VPRIV and REPLAGAL in the US, and the inclusion within R&D of an up-front
payment of $6.5 million to Santaris for technology access and R&D
funding.
For the year to
December 31, 2009 R&D included depreciation of $15.5 million (2008: $12.5
million).
Selling,
general and administrative (“SG&A”)
SG&A expenses
decreased to $1,342.6 million (50% of product sales) for the year to December31, 2009 from $1,455.2 million (53% of product sales) in the corresponding
period in 2008. The decrease was due to the Company’s continued focus on cost
management, and lower intangible asset impairment charges in the year to
December 31, 2009 compared to the same period in 2008. SG&A in the year to
December 31, 2009 includes intangible asset amortization of $136.9 million
(2008: $126.2 million), the increase resulting from a full year amortization of
the FIRAZYR intangible asset. Intangible asset impairment charges in the year to
December 31, 2009 were $nil (2008: $97.1 million). Impairment charges in 2008
included $94.6 million related to DYNEPO which the Company ceased to
commercialize. Depreciation included in SG&A was $67.7 million in 2009
(2008: $48.5 million).
Gain
on sale of product rights
For the year to
December 31, 2009 Shire recorded gains of $6.3 million (2008: $20.7 million)
arising from the sale of non-core products to Almirall in 2007. These gains had
been deferred since 2007 pending obtaining the relevant consents to transfer
certain assets.
In-process
R&D (“IPR&D”) charge
During the year to
December 31, 2009the Company recorded an IPR&D charge of $1.6 million
(2008: $128.1 million), in respect of FIRAZYR in markets outside of the EU
which, have not been approved by the relevant regulatory authorities. Also
included in IPR&D in 2008 was a charge of $135.0 million relating to the
acquisition of METAZYM from Zymenex.
The IPR&D
charge in respect of FIRAZYR relates to the US ($64.9
million) and the RoW
($64.8
million) markets. In the US FIRAZYR received a not approvable letter from the
FDA in April 2008, and in certain ROW territories it has not been approved by
the regulatory authorities.
METAZYM (HGT-1111)
has completed a Phase 1b clinical trial in 12 MLD patients in Europe and an
extension to this study is ongoing. Based on additional long term clinical data
from the ongoing Phase 1b study in MLD, in the first quarter of 2010 Shire
decided to suspend further development of an intravenous formulation of
HGT-1111.
Reorganization
costs
For the year to
December 31, 2009 Shire recorded reorganization costs of $12.7 million (2008:
$nil) relating to the transfer of manufacturing from its Owings Mills
facility.
Integration
and acquisition costs
For the year to
December 31, 2009 Shire recorded integration and acquisition costs of $10.6
million (2008: $10.3 million) primarily relating to the integration of
Jerini.
Interest
income
For the year to
December 31, 2009 Shire received interest income of $1.9 million (2008: $25.5
million), primarily earned on cash and cash equivalents. Interest income for the
year to December 31, 2009 is lower than the same period in 2008 due to
significantly lower average interest rates in 2009 compared to 2008 and lower
average cash and cash equivalent balances.
For the year to
December 31, 2009the Company incurred interest expense of $39.8 million (2008:
$139.0 million). Interest expense in 2009 primarily related to interest expense
on the Company’s convertible bond totaling $33.3 million (2008: $33.3 million).
Interest expense in 2008 was higher than 2009 due to interest expense of $87.3
million recorded in respect of the TKT appraisal rights litigation, of which
$73.0 million was additional interest arising from the settlement of the
litigation in November 2008.
Other
income/(expense), net
For the year to
December 31, 2009the Company recognized Other income, net of $60.7 million.
Other income in 2009 includes a gain of $55.2 million on disposal of the
Company’s investment in Virochem Pharma Inc (“Virochem”) to Vertex
Pharmaceuticals Inc (“Vertex”) in a cash and
stock transaction. Shire received total consideration of $19.2 million in cash
and two million Vertex shares (valued at $50.8 million at the date these shares
were acquired). Other income, net in 2009 also includes a gain of $5.7 million
on the substantial modification of a property lease.
For the year ended
December 31, 2008, the Company recognized Other expenses, net of $32.9 million.
Other expenses, net includes other-than-temporary impairment charges of $58.0
million. Impairment charges in 2008 include $44.3 million relating to the
Company’s available-for-sale investment in Renovo Group plc. Offsetting this in
2008 is a gain of $9.4 million from the disposal of the Company’s
available-for-sale investment in Questcor Pharmaceutical Inc (“Questor”) for
cash consideration.
Taxation
In the year to
December 31, 2009 the effective tax rate was 22% (2008: 37%).
Excluding the impact of IPR&D charges of $263.1 million in 2008, which are
either not tax deductible or for which no tax benefit is currently recognized,
the effective tax rate in 2008 was 19%.
The effective rate
of tax in 2009 was higher than 2008 (excluding the impact of IPR&D charges)
due to increased profits in higher tax territories, and the recognition of
valuation allowances against EU and US deferred tax assets. These factors more
than offset reductions to the effective rate of tax in 2009 due to: the decrease
in valuation allowances relating to state tax credits and loss carry forwards
following Massachusetts State tax changes in 2009; the benefit of the effect of
the change in the effective state tax rate on the net state deferred tax
balance; and higher R&D tax credits in the US, principally the acceleration
of the VPRIV program.
As outlined in ITEM
6: Selected financial data, the consolidated financial statements for the year
ended December 31, 2008 have been restated. The restatement does not affect the
Company’s net income or loss in the year ended December 31, 2008. For
further information, see note 32 to the consolidated financial statements
contained in ITEM 15 of this Annual Report.
Discontinued
operations
The loss from
discontinued operations for the year to December 31, 2009 was $12.4 million
(2008: $17.6 million). The loss in 2009 related to net losses on discontinued
Jerini businesses which were either divested or closed during the second quarter
of 2009, the loss on disposal of Jerini’s Peptides business and the write-off of
assets previously classified as held for sale. The loss in 2008 related to
certain businesses acquired through the Jerini acquisition, including a charge
of $12.9 million arising on the re-measurement of assets held for sale to their
fair value less cost to sell.
For the year to
December 31, 2008the Company’s total revenues increased by 24% to $3,022.2
million, compared to $2,436.3 million in 2007. Net income attributable to the
shareholders of Shire plc for the year to December 31, 2008 was $156.0 million
compared to a net loss of $1,451.8 million in 2007.
Total
revenues
The following table
provides an analysis of the Company’s total revenues by source:
The above product
sales table and the following discussion include references to US prescription
and US market share data for key products. The source of this data is IMS Health
National Prescription Audit, December 2008.
Specialty
Pharmaceuticals
US
ADHD market share
The continued
growth in market share of VYVANSE helped Shire grow its average annual share of
the US ADHD market to 32.6% for the year to December 31, 2008 compared to 29.4%
in 2007. Shire has the leading portfolio of products in the US ADHD
market.
VYVANSE
VYVANSE was
launched in the US in July 2007 and product sales for the year to December 31,2008 were $318.9 million (2007: $76.5 million). Product sales growth was driven
by the increase in average share of the US ADHD market (8.2% for the year to
December 31, 2008 compared to 1.8% in 2007) and a price increase in April
2008.
ADDERALL
XR
ADDERALL XR’s
average share of the US ADHD market for 2008 fell to 22.6% (2007: 25.5%). US
prescriptions for ADDERALL XR for the year to December 31, 2008 decreased by 5%
compared to 2007 due to an 11% fall in average market share offset by a 7%
growth in the US ADHD market.
The United States
Federal Trade Commission (“FTC”) informed Shire on October 3, 2006 that it was
reviewing the ADDERALL XR patent litigation settlement agreement between Shire
and Barr. On June 22, 2007the Company received a civil investigative demand
requesting that it provide information to the FTC relating to its settlement
with Barr and its earlier settlement with Impax. The Company cooperated fully
with this investigation and believes that the settlements are in compliance with
all applicable laws.
DAYTRANA
Product sales for
the year to December 31, 2008 were $78.7 million (2007: $64.2 million).
DAYTRANA’s average annual share of the US ADHD market decreased to 1.8% in 2008
compared to 2.1% in 2007.
Despite the 11%
decrease in prescriptions compared to 2007, sales of DAYTRANA grew 23% compared
to the same period last year due to growth in the US ADHD market of 7% and lower
sales deductions in 2008 over 2007, primarily due to reduced coupon
expense.
During 2008 Shire announced two
voluntary market recalls of a limited portion of DAYTRANA patches because
certain patches did not meet their release liner removal specifications which
may have resulted in some patients and caregivers having difficulties removing
the liners. The voluntary recalls were not due to safety issues.
US
oral mesalamine market share
Shire’s average
annual market share of the US oral mesalamine market rose to 28.4% for the year
to December 31, 2008 (2007: 21.1%), driven by the growth of LIALDA since its
launch in March 2007.
PENTASA
US prescriptions of
PENTASA for the year to December 31, 2008 were down 1% compared to 2007
primarily due to a small decrease in PENTASA’s average annual market share from
17.2% in 2007 to 16.7% in 2008, offset by a 2% increase in the US oral
mesalamine prescription market.
Sales of PENTASA
for the year to December 31, 2008 were $185.5 million, an increase of 5%
compared to 2007 (2007: $176.4 million). Sales growth is higher than
prescription growth primarily due to the impact of price increases.
LIALDA/MEZAVANT
US prescriptions of
LIALDA for the year to December 31, 2008 were up 204% compared to the prior year
and LIALDA’s average market share for 2008 increased to 11.7% (2007: 3.9%).
LIALDA’s US product sales for the year to December 31, 2008 were $134.8 million
compared to $50.3 million in 2007.
Sales of MEZAVANT
outside the US for the year to December 31, 2008 were $5.6 million (2007: $0.2
million). By December 31, 2008 MEZAVANT was available in five EU
countries.
FOSRENOL
At December 31,2008 FOSRENOL was available in 30 countries and global sales grew by 52% to
$155.4 million for the year to December 31, 2008 (2007: $102.2 million). Sales
of FOSRENOL outside the US for the year to December 31, 2008 were $69.5 million
(2007: $40.1 million).
US sales of
FOSRENOL for the year to December 31, 2008 were up 38% to $85.9 million compared
to 2007 (2007: $62.1 million). FOSRENOL’s average prescription share of the US
phosphate binder retail market decreased to 8.1% for the year to December 31,2008 (2007: 8.6%). Product sales increased despite the decrease in prescriptions
due to price increases and a 34% increase in FOSRENOL’s share of the non retail
market resulting from Shire’s continued focus on specialist physicians, clinics
and dialysis centers.
Litigation
proceedings regarding Shire’s FOSRENOL patents are ongoing. Further information
about this litigation can be found in ITEM 3: Legal Proceedings and in Note 23(d), “Commitments and Contingencies,
Legal proceedings” to the consolidated financial statements listed under
ITEM 15: Exhibits and Financial Statement Schedules of this Annual Report.
XAGRID
Sales for the year
to December 31, 2008 were $78.7 million, an increase of 18% compared to the same
period in 2007 (2007: $66.8 million). Product sales on a non-GAAP CER basis
(XAGRID is primarily sold in Euros and Pounds sterling) increased by
16%.
DYNEPO
During 2008 Shire
ceased the commercialization of DYNEPO and recorded charges of $149.9 million to
cover intangible asset impairment, inventory write downs and other exit costs.
Sales for the year to December 31, 2008 were $20.9 million (2007: $14.2
million).
Human
Genetic Therapies
ELAPRASE
Sales for the year
to December 31, 2008 were $305.1 million, an increase of 68% compared to the
same period in 2007 (2007: $181.8 million). The sales growth was driven by
increased unit sales across all regions where ELAPRASE is sold: Europe, North
America, Latin America, and Asia Pacific. Product sales on a non-GAAP CER basis
(ELAPRASE is primarily sold in US dollars and Euros) increased by
64%.
REPLAGAL
Sales for the year
to December 31, 2008 were $176.1 million, an increase of 22% compared to the
same period in 2007 (2007: $143.9 million). The sales growth was primarily
driven by increased unit sales in Europe and Asia Pacific. Product sales on a
non-GAAP CER basis (REPLAGAL is primarily sold in Euros and Pounds sterling)
sales increased by 18%.
FIRAZYR
During the second
half of 2008 FIRAZYR was launched in some countries in Europe, and sales of $0.5
million were recognized (2007: $nil). Launches will continue across Europe
through 2009 as reimbursement negotiations successfully conclude.
Royalties
Royalty revenue
decreased by 1% to $245.5 million for the year to December 31, 2008 (2007:
$247.2 million).
Royalties from
sales of 3TC for the year to December 31, 2008 were $140.2 million, a decrease
of 4% compared to the same period in 2007 (2007: $145.3 million). Royalties from
sales of 3TC in 2008 declined by 6% on a non-GAAP CER basis compared to the same
period in 2007.
Shire receives
royalties from GSK on worldwide 3TC sales. GSK’s worldwide sales of 3TC for the
year to December 31, 2008 were $1,060 million, a decrease of 5% compared to the
same period in 2007 (2007: $1,110 million), but a decrease of approximately 7%
on a CER basis. While the nucleoside analogue market for HIV continued to grow,
competitive pressures within the market increased, leading to a decline in 3TC
sales.
Royalties from
sales of ZEFFIX for the year to December 31, 2008 were $40.3 million, a decrease
of 2% compared to the same period in 2007 (2007: $41.0 million). There has been
a decrease of 8% on a CER basis compared to the same period in
2007.
OTHER
Other royalties are
primarily in respect of REMINYL and REMINYL XL (known as RAZADYNE and RAZADYNE
ER in the US). REMINYL and REMINYL XL are indicated for the symptomatic
treatment of mild to moderately severe dementia of the Alzheimer type and are
marketed by the Company in the UK and Republic of Ireland. In the rest of the
world, they are marketed by Janssen, an affiliate of Johnson & Johnson
(under the name RAZADYNE and RAZADYNE ER in the US). The Company receives
royalties on Janssen's sales.
Sales of the
REMINYL/RAZADYNE range continue to grow in most countries, however the entry of
generic versions of RAZADYNE and RAZADYNE ER into the US market has
significantly decreased sales in that region.
Cost
of product sales
The cost of product
sales increased by 27% to $408.0 million for the year to December 31, 2008 (15%
of product sales), up from $320.3 million in the corresponding period in 2007
(2007: 15% of product sales). For the year to December 31, 2008 cost of product
sales included charges of $48.8 million (2% of product sales) (2007: $nil)
relating to the write down of inventory and other exit costs in respect of
DYNEPO which the Company has decided to stop commercializing, depreciation of
$16.2 million (2007: $11.8 million) and amortization of $1.7 million (2007: $1.2
million). Cost of product sales as a percentage of product sales benefited from
the impact of price increases on the Company’s product sales and favorable
changes in product mix in 2008 over 2007.
R&D
R&D expenditure
decreased to $494.3 million for the year to December 31, 2008 (18% of product
sales), from $544.6 million in the year to December 31, 2007 (25% of product
sales). For the year to December 31, 2007 R&D included upfront and milestone
payments totaling $155.9 million (Renovo $75.0 million, Amicus $50.0 million,
Alba $25.0 million and Noven $5.9 million) for the in-licensing of pipeline
products (7% of product sales). For the year to December 31, 2008 R&D
included $6.5 million (2007: $nil) relating to the cost of exiting post-approval
marketing commitments for DYNEPO, which the Company has decided to stop
commercializing. R&D also includes depreciation of $12.5 million (2007:
$11.3 million).
R&D in 2008
over 2007 included higher expenditure on projects in-licensed and acquired since
the second half of 2007 including SPD 550, PLICERA, AMIGAL, FIRAZYR and METAZYM
together with Phase 3(b) and Phase 4 studies to support new product
launches.
SG&A
expenses
SG&A expenses
increased 20% to $1,455.2 million in the year to December 31, 2008 from $1,210.6
million in the year to December 31, 2007. This increase in SG&A expenses was
less than the product sales increase of 27%, and as a percentage of product
sales SG&A expenses in 2008 compared to the same period in 2007 fell by
three percentage points to 53% (2007: 56%).
SG&A for the
year to December 31, 2008 included intangible asset impairment charges of $97.1
million (4% of product sales) (2007: $0.4 million) of which $94.6 million
related to DYNEPO which the Company has decided to stop commercializing.
Amortization of intangible assets in 2008 increased by $31.6 million to $126.2
million (2007: $94.6 million): this increase resulted from a full year’s
amortization in 2008 of the Company’s VYVANSE intangible asset, of $55.8 million
(2007: $28.9 million), and amortization in the second half of 2008 of the
FIRAZYR intangible asset acquired
through the Jerini
business combination. SG&A expenses also included depreciation charges of
$48.5 million (2007: $42.1 million).
The year to
December 31, 2008 also included costs associated with the introduction of a new
holding company in 2008 totaling $14.8 million (2007: $nil). Other increases in
SG&A expenses in 2008 over 2007 principally relate to the increase in
advertising, promotional and marketing spend to support commercialization of the
Company’s new products.
SG&A for the
year to December 31, 2007 included a net charge of $17.0 million in respect of
legal settlements, being a charge of $27.0 million for settlement of the TKT
purported securities fraud class action shareholder suit partially offset by a
$10.0 million release of existing legal provisions. SG&A expenses in the
year to December 31, 2007 further included a share-based compensation catch-up
charge of $22.5 million.
Gain
on sale of product rights
For the year to
December 31, 2008 Shire recognized gains of $20.7 million on the sale of
non-core products (2007: $127.8 million). For the year to December 31, 2008
these gains primarily relate to the sale of non core products, including the
dermatology products SOLARAZE and VANIQA, to Almirall in 2007, which were
deferred at December 31, 2007 pending the transfer of relevant
consents.
The gains of $127.8
million recognized in the year to December 31, 2007 comprise $114.8 million
arising from the sale of non-core products to Almirall and $13.0 million of
gains on the sale of other non-core products during 2007.
IPR&D
For the year to
December 31, 2008the Company recorded an IPR&D charge of $263.1 million:
this charge related to FIRAZYR in markets outside of the EU acquired through the
Jerini business combination ($128.1 million) and the acquisition from Zymenex of
the global rights to the clinical candidate arylsultatase–A currently known as
METAZYM (HGT–1111), being investigated for the treatment of MLD ($135.0
million).
During the year to
December 31, 2007 Shire expensed the portion of the New River purchase price
allocated to IPR&D totaling $1,866.4 million. This amount represented the
value of those acquired development projects which, at the acquisition date, had
not been approved by the FDA or other regulatory authorities, including the
adult indication of VYVANSE. In 2008 the FDA approved the adult indication of
VYVANSE and Shire launched VYVANSE for adult ADHD in the US in June 2008. In
March 2008 the Canadian new drug submission was accepted for filing for the
treatment of ADHD in children and was approved by Health Canada in February
2009. At December 31, 2009 management estimated that future R&D costs, until
regulatory approval for VYVANSE for ADHD in markets outside the US are
approximately $110 million. These estimates can be affected by various factors
and are, in part, based on management’s estimate and assumptions. For these
reasons, among others, the actual cash flows may vary from forecast future cash
flows.
Integration
and acquisition costs
For the year to
December 31, 2008 Shire incurred $10.3 million of costs associated with the
integration of Jerini into the Company and acquisition related advisory fees
incurred by Jerini
(2007: $1.3 million relating to the New River acquisition).
Interest
income
For the year to
December 31, 2008 Shire received interest income of $25.5 million (2007: $50.6
million). Interest income primarily relates to interest received on cash and
cash equivalents. Interest income for the year to December 31, 2008 is lower
than the same period in 2007 due to lower average cash balances and lower
average US dollar interest rates.
Interest
expense
For the year to
December 31, 2008 Shire incurred interest expense of $139.0 million (2007: $70.8
million).
Interest expense
for the year to December 31, 2008 includes $87.3 million (2007: $28.0 million)
in respect to the TKT appraisal rights litigation. On November 5, 2008 Shire
successfully settled all aspects of this litigation with all parties. Shire
paid the same price of $37 per share originally offered to all TKT shareholders
at the time of the July 2005 merger, plus interest. The Delaware Chancery
Court approved dismissal of the case and Shire made payment to the dissenting
shareholders on November 7, 2008. The settlement represented a total payment of
$567.5 million, representing consideration at $37 per share of $419.9 million
and an interest cost of $147.6 million.
Prior to reaching
this settlement, the Company accrued interest based on a reasonable estimate of
the amount that may be awarded by the Court to those former TKT shareholders who
requested appraisal. This estimate of interest was based
on Shire’s cost of
borrowing. Between the close of the merger and November 5, 2008the Company
applied this interest rate on a quarterly compounding basis to the $419.9
million of consideration to calculate its provision for interest.
Upon reaching
agreement in principle with all the dissenting shareholders, the Company
determined that settlement had become the probable manner through which the
appraisal rights litigation would be resolved. Under current law, (although not
applicable in this case because the merger was entered into before the relevant
amendment to the law became effective) the court presumptively awarded interest
in appraisal rights cases at a statutory rate that is 5 percentage points above
the Federal Reserve discount rate (as it varies over the duration of the case).
In connection with the settlement, the Company agreed to an interest rate that
approximates to this statutory rate. Based on the settlement, the Company
amended the method of determining its interest provision to reflect this revised
manner of resolution, and upon reaching settlement with the dissenting
shareholders recorded an additional interest expense of $73.0 million in its
consolidated financial statements for the year to December 31,2008.
(1)
Includes gains and losses arising on translation of foreign currency
transactions and balances and gains and losses on swap and forward foreign
exchange contracts.
Other (expense)/
income, net for the year to December 31, 2008 included impairment charges in
respect of available for sale securities totaling $58.0 million (2007: $3.0
million), including $44.3 million relating to the Company’s investment in Renovo
Group plc. The impairment of the investment in Renovo Group plc was recognized
at the end of the third quarter of 2008. These amounts reflect unrealized
holding losses that have been reclassified out of other comprehensive income
into earnings in the period, as management concluded that the impairment is
other than temporary.
The decline in the
market value of the Company’s investment in Renovo Group plc initially arose
from the results of clinical trials for JUVISTA announced over 2007 and 2008.
During the third quarter of 2008, in considering whether the decline in value
was temporary or “other than temporary”the Company considered the following
factors: the severity of the decline from historical cost (87%) and its duration
(eleven months); market analysts’ targets of Renovo Group plc’s share price for
the next 18-24 months; and the revised expected filing date for JUVISTA due to
the adoption of a sequential rather than parallel Phase 3 development
plan.
These factors,
together with the significant decline in global equity markets during the third
quarter of 2008 meant that the Company was unable to reasonably estimate the
period over which a full recovery in the value of its investment in Renovo Group
plc could occur. As such, the Company concluded that the decline in value was
“other than temporary”. Accordingly, the full difference between the book value
of the investment and the fair (market) value was recognized as an other than
temporary impairment and the Company recognized an impairment charge of $44.3
million for its investment in Renovo Group plc through the consolidated
statement of operations in the third quarter of 2008. For the purposes of
computing the impairment charge, fair value was assumed to be £0.26 per share,
representing the closing price of Renovo Group plc securities on the LSE on
September 30, 2008. If in the future JUVISTA’s Phase 3 trials report positively
and Renovo Group plc’s other products progress through development, Renovo Group
plc’s share price could react favorably and the Company may recover some or all
of this impairment loss. Any future potential increases in the value of Renovo
Group plc will be recognized through other comprehensive income. The closing
price of Renovo Group plc securities on the LSE on December 31, 2008 was £0.20,
and the carrying value of the Company’s investment in Renovo Group plc was $3.6
million.
Other
(expense)/income, net also includes a gain of $9.4 million arising from the sale
of Shire’s minority equity investment in Questcor. Shire received cash
consideration of $10.3 million in respect of the sale.
The effective tax
rate for the year to December 31, 2008 was 37% (2007: -4%). Excluding
IPR&D charges of $263.1 million (2007: $1,866.4 million) which are either
not tax deductible or for which no tax benefit is currently recognized, the
effective tax rate for the year to December 31, 2008 has increased by 7% to 19%
(2007: 12%). This increase in 2008 over 2007 is primarily due to the combined
effects of (a) in 2008, significant unfavorable rate impacts related to other
than temporary impairment charges on available-for-sale securities for which a
valuation allowance was recorded such that a net tax benefit was not recorded
and an increase in the valuation allowance and, (b) in 2007, favorable impacts
recognized related to non-taxable gains on the sale of non-core products rights
which were partially offset by an increase in the provision for uncertain tax
positions. The 2008 effective tax rate was also unfavorably impacted by exchange
losses recorded in continuing operations.
Discontinued
Operations
Losses from
discontinued operations in the year to December 31, 2008 totaled $17.6 million
(2007: $nil), relating to those businesses acquired through the Jerini business
combination that were deemed by Shire and Jerini to be non core to the
combined business. The loss from discontinued operations in the year to December31, 2008 included a charge of $12.9 million arising on the re-measurement of
assets held for sale to their fair value less costs to sell at December 31,2008. At December 31, 2008 these assets held-for-sale had a carrying value of
$14.9 million.
Cash and cash
equivalents have increased by $280.7 million to $498.9 million at December 31,2009 (2008: $218.2 million). Cash generated by operating activities in 2009 of
$626.9 million was partially offset by investment in property plant and
equipment, the cash cost of acquiring EQUASYM from UCB and the dividend
payment.
Accounts
receivable
Accounts receivable
have increased by $202.5 million to $597.5 million at December 31, 2009 (2008:
$395.0 million). Days sales outstanding on a monthly count back basis,
calculated using gross revenues (i.e., revenues before discounts, rebates and
other deductions), adjusted for deferred revenues to be consistent with reported
accounts receivable, were 51 days at December 31, 2009 (2008: 43
days).
The increase in
accounts receivable at December 31, 2009 compared to 2008 is due to: higher
gross product revenues in the fourth quarter of 2009 compared to 2008; the
timing of cash receipts; an increase in royalties receivable to $92.4 million at
December 31, 2009 (2008: $38.4 million), principally royalties on Impax’s sales
of authorized generic versions of ADDERALL XR which commenced in the fourth
quarter 2009; and receivables on INTUNIV launch shipments, the revenue from
which has been deferred and recognized into product sales based on prescription
demand.
Investments
Investments have
increased by $62.8 million to $105.7 million at December 31, 2009 (2008: $42.9
million) due to the acquisition and subsequent increase in fair value of the
Company’s available for sale investment in Vertex. In the year to
December 31, 2009the Company obtained its investment in Vertex (valued at $50.8
million at acquisition) in part consideration for the disposal of the
Company’s minority equity investment in Virochem to Vertex in a cash and stock
transaction.
Property,
plant and equipment
Property, plant and
equipment increased by $142.6 million in the year to December 31, 2009 to $676.8
million (2008: $534.2 million). The increase principally resulted from capital
investment at the Company’s HGT campus in Lexington in 2009.
Accounts
payable and accrued expenses
Accounts payable
and accrued expenses have increased by $220.5 million to $929.1 million (2008:
$708.6 million). This increase results from higher accrued Medicaid and
Managed Care rebates on ADDERALL XR subsequent to authorized generic launch, and
increases in deferred revenue following deferral of INTUNIV launch
shipments.
Liquidity
and capital resources
General
The Company’s
funding requirements depend on a number of factors, including the timing and
number of its development programs; corporate, business and product
acquisitions; the level of resources required for the expansion of
manufacturing and
marketing capabilities as the product base expands; increases in accounts
receivable and inventory which may arise with any increase in product sales;
competitive and technological developments; the timing and cost of obtaining
required regulatory approvals for new products; the timing and quantum of
milestone payments on collaborative projects; the timing and quantum of tax and
dividend payments; the timing and quantum of purchases by the Employee Share
Ownership Trust (“ESOT”) of Shire shares in the market to satisfy option
exercises; the timing and quantum of any additional amounts payable to
government bodies challenging previously settled liabilities, including CMS
applying an alternative interpretation of the Medicaid rebate legislation
inconsistent with the Company’s calculation of ADDERALL XR Medicaid rebates; and
the continuing 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.
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 balance
sheet includes $498.9 million of cash and cash equivalents at December 31, 2009.
Shire has no debt maturing in the next two years and substantially all of
Shire’s debt relates to its $1,100 million 2.75% convertible bond which matures
in 2014, although these bonds include a put option which could require repayment
of the bonds in 2012. In addition, Shire has a committed facility until 2012 of
$1,200 million, which is currently undrawn. The current financial situation affecting
the banking system and financial markets, together with the current uncertainty
in global economic conditions, has resulted in tighter credit markets and a
lower level of liquidity in many financial markets. As a result, the
Company may not be able to access new equity or debt finance at the same level
or cost as it has done previously.
Shire
2.75% Convertible Bonds due 2014
On May 9, 2007
Shire issued $1,100 million in principal amount of 2.75% convertible bonds due
2014 and convertible into fully paid ordinary shares of Shire plc (the “Bonds”).
The net proceeds of issuing the Bonds, after deducting the commissions and other
direct costs of issue, totaled $1,081.7 million. In connection with the Scheme
of arrangement the Trust Deed was amended and restated in 2008 in order to
provide that, following the substitution of Shire plc in place of Old Shire as
the principal obligor and issuer of the Convertible Bonds, the Bonds would be
convertible into ordinary shares of Shire plc.
The Bonds were
issued at 100% of their principal amount, and unless previously purchased and
cancelled, redeemed or converted, will be redeemed on May 9, 2014 (the “Final
Maturity Date”) at their principal amount.
The Bonds bear
interest at 2.75% per annum, payable semi-annually in arrears on November 9 and
May 9. The Bonds constitute direct, unconditional, unsubordinated and unsecured
obligations of the Company, and rank pari passu and ratably, without any
preference amongst themselves, and equally with all other existing and future
unsecured and unsubordinated obligations of the Company.
The Bonds may be
redeemed at the option of the Company, (the “Call Option”), at their principal
amount together with accrued and unpaid interest if: (i) at any time after May23, 2012 if on no less than 20 dealing days in any period of 30 consecutive
dealing days the value of Shire’s ordinary shares underlying each Bond in the
principal amount of $100,000 would exceed $130,000; or (ii) at any time
conversion rights shall have been exercised, and/or purchases and corresponding
cancellations, and/or redemptions effected in respect of 85% or more in
principal amount of Bonds originally issued. The Bonds may also be redeemed at
the option of the Bond holder at their principal amount including accrued but
unpaid interest on May 9, 2012 (the “Put Option”), or following the occurrence
of a change of control of Shire. The Bonds are repayable in US dollars, but also
contain provisions entitling the Company to settle redemption amounts in Pounds
sterling, or in the case of the Final Maturity Date and following exercise of
the Put Option, by delivery of the underlying ordinary shares and a cash top-up
amount.
The Bonds are
convertible into ordinary shares during the conversion period, being the period
from June 18, 2007 until the earlier of: (i) the close of business on the date
falling fourteen days prior to the Final Maturity Date; (ii) if the Bonds have
been called for redemption by the Company, the close of business fourteen days
before the date fixed for redemption; (iii) the close of business on the day
prior to a Bond holder giving notice of redemption in accordance with the
conditions; and (iv) the giving of notice by the trustee that the Bonds are
accelerated by reason of the occurrence of an event of default.
Upon conversion,
the Bond holder is entitled to receive ordinary shares at the conversion price
of $33.17 per ordinary share, (subject to adjustment as outlined
below).
The conversion
price is subject to adjustment in respect of (i) any dividend or distribution by
the Company, (ii) a change of control and (iii) customary anti-dilution
adjustments for, inter alia, share consolidations, share splits, spin-off
events, rights issues, bonus issues and reorganizations. The initial conversion
price of $33.5879 was adjusted to $33.17 with effect from
March 11, 2009 as a
result of cumulative dividend payments during the period from October 2007 to
April 2009 inclusive The ordinary shares issued on conversion will be delivered
credited as fully paid, and will rank pari passu in all respects with all fully
paid ordinary shares in issue on the relevant conversion date.
Revolving
Credit Facilities Agreement
Shire has a
committed revolving credit facility (the “RCF”) in an aggregate amount of $1,200
million with ABN Amro Bank N.V.; Barclays Capital; Citigroup Global Markets
Limited; The Royal Bank of Scotland plc; Lloyds TSB Bank plc; Bank of America
N.A.; and Morgan Stanley Bank. The RCF, which includes a $250 million
swingline facility, may be used for general corporate purposes and matures on
February 20, 2012. There were no borrowings under the RCF as at December 31,2009.
The interest rate
on each loan drawn under the RCF for each interest period is the percentage
rate per annum which is the aggregate of the applicable margin (ranging from
0.40 to 0.80 per cent per annum) and LIBOR for the applicable currency and
interest period. Shire also pays a commitment fee on undrawn amounts at 35 per
cent per annum of the applicable margin.
Under the RCF it is
required that (i) Shire’s ratio of Net Debt to EBITDA (as defined within the
Multicurrency Term and Revolving Facilities Agreement (“the RCF Agreement”))
does not exceed 3.5 to 1 for either the 12 month period ending December 31 or
June 30 unless Shire has exercised its option (which is subject to certain
conditions) to increase it to 4.0 to 1 for two consecutive testing
dates; (ii) the ratio of EBITDA to Net Interest (as defined in the RCF
Agreement) must not be less than 4.0 to 1, for either the 12 month period ending
December 31 or June 30, and (iii) additional limitations on the creation of
liens, disposal of assets, incurrence of indebtedness, making of loans, giving
of guarantees and granting security over assets.
The availability of
loans under the RCF is subject to customary conditions. The full
terms are set out in Exhibit 10.02 and 10.03 to this Form 10-K.
Sources
and uses of cash
The following table
provides an analysis of the Company’s gross and net debt (excluding restricted
cash), as of December 31, 2009 and 2008:
2009
2008
December
31,
$’M
$’M
Cash and cash
equivalents
498.9
218.2
Shire 2.75% Convertible
bonds
1,100.0
1,100.0
Building financing
obligation
46.7
45.6
Total debt
1,146.7
1,145.6
Net debt
(647.8
)
(927.4
)
Cash
flow activity
Net cash provided
by operating activities for the year to December 31, 2009 decreased by 22% to
$626.9 million compared to $800.1 million for the year to December 31, 2008, a
decrease of $173.2 million. Net cash provided by operating activities was lower
in 2009 compared to 2008 due to lower net sales receipts and higher cash tax
payments in 2009 compared to 2008. Net cash provided by operating activities in
2008 also included cash inflows on forward foreign exchange contracts which were
not repeated in 2009. These factors more than offset the inclusion of interest
paid on settlement of the TKT appraisal rights cash flow from operating
activities in 2008.
Net cash flow from
operating activities for the year to December 31, 2008 increased by $325.4
million to $800.1 million (2007: $474.7 million). The increased cash flow from
operating activities primarily resulted from higher revenues and cash collection
in 2008 over 2007, together with cash inflows from forward foreign exchange
contracts in 2008. These cash inflows were partially offset by interest payments
to the TKT dissenting shareholders ($147.6 million), cash paid to Zymenex for
METAZYM ($135.0 million) and higher cash tax payments in 2008 over
2007.
Net cash used in
investing activities was $322.4 million in the year to December 31, 2009. This
included the cash cost of purchasing EQUASYM of $72.8 million and expenditure on
property, plant and equipment of $254.4 million. These cash outflows were
partially offset by receipts of $19.2 million from the sale of non-current
investments. Capital expenditure on
property, plant and
equipment included $127.0 million on construction work at the HGT campus in
Lexington, Massachusetts, $18.4 million on construction work at the UK office in
Basingstoke, Hampshire, and $19.9 million on infrastructure and capital
management projects in the US. This capital expenditure was funded from the
Company’s existing cash resources and operating cash flows, and the Company
expects to fund 2010 capital expenditure which is committed at December 31, 2009
from operational cash flows generated in 2010.
Net cash used in
investing activities was $1,154.5 million in the year to December 31, 2008 and
includes the cash outflows associated with purchasing over a 98% interest in
Jerini ($499.4 million, net of cash acquired); the payment of $419.9 million at
$37 per share on settlement of the TKT appraisal rights litigation; expenditure
on purchases of property, plant and equipment of $236.0 million; the final sales
milestone payment of $25.0 million for DAYTRANA to Noven; and purchases of
long-term investments of $2.2 million. These investing outflows which were
partially offset by receipts of $10.3 million from the sale of long term assets
and $5.0 million received from the sale of product rights. Capital expenditure
on property, plant and equipment included $136.0 million on construction work at
Shire’s office and manufacturing facilities in Lexington, Massachusetts and $4.7
million on construction work at the Basingstoke, UK Office.
Net cash used in
financing activities was $28.7 million for the year to December 31, 2009 which
relates to $54.4 million for the dividend payment partially offset by excess tax
benefits of stock based compensation of $16.8 million and proceeds from exercise
of options of $14.6 million.
Net cash used in
financing activities was $178.1 million for the year to December 31, 2008 of
which $146.6 million related to payments to acquire shares by the ESOT and $46.8
million to the dividend payment. During the year to December 31, 2008 the
Company additionally drew down $190.0 million of its revolving credit facility
to part fund the TKT appraisal rights settlement, this amount was subsequently
repaid during 2008.
Outstanding
Letters of credit
At December 31,2009, the Company had irrevocable standby letters of credit in the amount of
$9.6 million, including letters of credit with Barclays Bank plc in the amount
of $4.0 million providing security on the recoverability of insurance claims,
and with Citigroup in the amount of $5.6 million, providing security on the
payment of lease obligations.
Cash
Requirements
At December 31,2009the Company’s cash requirements for long-term liabilities and
other contractual obligations reflected on the Balance Sheet were as
follows:
Payments due by
period
Less than
More than
Total
1 year
1 – 3 years
3 – 5 years
5 years
$’M
$’M
$’M
$’M
$’M
Long-term debt obligations(i)
1,236.1
30.3
60.5
1,145.3
-
Building financing obligation(ii)
61.6
3.2
6.4
7.3
44.7
Operating leases obligation(iii)
213.3
31.1
43.2
37.8
101.2
Purchase obligations(iv)
405.9
243.8
135.3
26.8
-
Other long-term liabilities
reflected on the Balance Sheet(v)
245.0
17.0
228.0
-
-
Total
2,161.9
325.4
473.4
1,217.2
145.9
(i)
Shire’s $1,100 million
principal amount of 2.75% convertible bonds due 2014 issued in May
2007 and the interest on the convertible bonds has been included based on
the contractual payment dates. The principal amount of $1,100 million has
been included within payments due three
to five years
based on the Final Maturity Date of the convertible bonds. The bondholders
have the option to redeem the convertible bonds at the principal amount in
May 2012 and the Company has the option to call the bonds subject to
certain conditions after May 2012. Further details are included within
Liquidity and capital resources: Shire 2.75% Convertible Bonds due 2014
above.
The Company has entered into
building financing arrangements for certain laboratory and office space
for its HGT business unit in Massachusetts. For further information see
Note 19,
“Other long-term debt” in
the consolidated financial statements in ITEM
15: Exhibits and Financial Statement Schedules of
this Annual Report.
(iii)
The Company
leases certain land, facilities, motor vehicles and certain equipment
under operating leases expiring through
2027.
(iv)
Purchase
obligations include agreements to purchase goods, investments or services
(including clinical trials, contract manufacturing and capital equipment)
that are enforceable and legally binding and that specify all significant
terms, including open purchase orders. Shire expects to fund these
commitments with cash flows from
operations.
(v)
Unrecognized
tax benefits and associated interest and penalties of $17.0 million and
$174.6 million are included within payments due in less than one year and
payments due in one to three years,
respectively.
The contractual
obligations table above does not include certain milestones and other
contractual commitments where payment is contingent upon the occurrence of
events which are yet to occur (and therefore payment is not yet due). The most
significant such milestone and contractual commitments are as
follows:
(i)
Research
Collaboration with Santaris on LNA Drug
Platform
On August 24, 2009
Shire announced that it had entered into a research collaboration with Santaris,
to develop its proprietary LNA technology in a range of rare diseases. LNA
technology has the benefit of shortened target validation and proof of concept,
potentially increasing the speed and lowering the cost of development. As part
of the joint research project Santaris will design, develop and deliver
pre-clinical LNA oligonucleotides for Shire-selected orphan disease targets, and
Shire will have the exclusive right to further develop and commercialize these
candidate compounds on a worldwide basis.
In the year to
December 31, 2009 Shire made an upfront payment of $6.5 million to Santaris, for
technology access and R&D funding, which has been expensed to R&D. Shire
has remaining obligations to pay Santaris a further $13.5 million subject to
certain success criteria, and development and sales milestones up to a maximum
of $72 million for each indication. Shire will also pay single or double digit
tiered royalties on net sales of the product.
Shire and Santaris
have formed a joint research committee to monitor R&D activities through
preclinical Lead Candidate selection at which point all development and
commercialization costs will be the responsibility of Shire.
(ii)
JUVISTA
On June 19, 2007 Shire signed an
agreement with Renovo to develop and commercialize JUVISTA, Renovo’s novel drug
candidate being investigated for the reduction of scarring in connection with
surgery. Renovo has commenced its first pivotal Phase 3 clinical trial in
Europe. If the outcome from Renovo’s
multi-center, EU Phase 3 study is suitably positive, the data will be used to
inform the strategy and design of Shire’s US development plan. Under the terms of the agreement, Shire
has the exclusive right to commercialize JUVISTA worldwide, with the exception
of the EU member states.
Shire has remaining obligations to pay
Renovo $25 million on the filing of JUVISTA with the FDA; up to $150 million on
FDA approval; royalties on net sales of JUVISTA; and up to $525 million on the
achievement of very significant sales targets.
Shire will bear the
cost of clinical trials designed specifically for obtaining US regulatory
approval. Renovo will bear the costs of clinical trials designed
specifically for obtaining EU regulatory approval. Shire and Renovo will
share equally the costs of conducting global clinical trials that are designed
for obtaining both US and EU regulatory approvals.
Off-balance
sheet arrangements
There are no
off-balance sheet arrangements that have, or are reasonably likely to have, a
current or future effect on the Company’s financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources that are material to investors.
Foreign
currency fluctuations
A number of the
Company’s subsidiaries have functional currencies other than the US dollar. As
such, the consolidated financial results are subject to fluctuations in exchange
rates, particularly those between the US dollar, Canadian Dollar, Pounds
Sterling and the Euro. The accumulated foreign currency translation differences
at December 31, 2009 of $136.7 million are reported within accumulated other
comprehensive income in the consolidated balance sheet and foreign
exchange gains for
the year to December 31, 2009 of $2.3 million are reported in the consolidated
statement of operations.
At December 31,2009, the Company had outstanding swap and forward foreign exchange contracts to
manage the currency risk associated with intercompany transactions. For further
information, see ITEM 7A to this Annual Report. At December 31, 2009 the fair
value of these contracts was a net asset of $4.2 million.
Concentration
of credit risk
Financial
instruments that potentially expose Shire to concentrations of credit risk
consist primarily of short-term cash investments, trade accounts receivable
(from product sales and from third parties from which the Company receives
royalties) and derivative contracts. Cash is invested in short-term money market
instruments, including money market and liquidity funds and bank term deposits.
The money market and liquidity funds in which Shire invests are all triple A
rated by both Standard and Poor’s and by Moody’s credit rating
agencies.
The Company is
exposed to the credit risk of the counterparties with which it enters into
derivative instruments. The Company limits this exposure through a system of
internal credit limits which require counterparties to have a long term credit
rating of A / A2 or better from the major rating agencies. The internal credit
limits are approved by the Board and exposure against these limits is monitored
by the corporate treasury function. The counterparties to these derivatives
contracts are major international financial institutions.
The Company’s
revenues from product sales are mainly governed by agreements with major
pharmaceutical wholesalers and relationships with other pharmaceutical
distributors and retail pharmacy chains. For the year to December 31, 2009 there
were two customers in the US who accounted for 51% of the Company’s product
sales. However, such customers typically have significant cash resources
and as such the risk from concentration of credit is considered minimal. The
Company has taken positive steps to manage any credit risk associated with these
transactions and operates clearly defined credit evaluation
procedures.
Inflation
Although at reduced
levels in recent years, inflation continues to apply upward pressure on the cost
of goods and services which are used in the business. However, the Company
believes that the net effect of inflation on its operations has been minimal
during the past three years.
Critical
accounting estimates
The preparation of
consolidated financial statements, in conformity with US 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. Actual
results could differ from those estimates. Estimates and assumptions are
primarily made in relation to the valuation of intangible assets, the valuation
of equity investments, sales deductions, income taxes and provisions for
litigation.
(i)
Valuation of
intangible assets
(a)
Estimation of
amortization and impairment charges
At December 31,2009 the carrying value of intangible assets was $1,790.7 million, which
primarily related to the Company’s DAYTRANA ($116.1 million), EQUASYM, ($79.5
million) FIRAZYR ($276.4 million), PENTASA ($61.2 million), REPLAGAL ($275.5
million) and VYVANSE ($933.6 million) products.
Intangible assets
that have a defined revenue stream (namely commercial products) are capitalized
and amortized over their estimated useful life. IPR&D assets, either
acquired through business combinations which closed before January 1, 2009 or
through asset acquisitions, which do not yet have a defined revenue stream, and
for which no alternative future use exists, were expensed upon acquisition as a
research and development expense. IPR&D assets acquired through business
combinations which closed subsequent to January 1, 2009 have been capitalized as
indefinite lived intangible assets, even if these assets do not have an
alternative future use, subject to amortization on completion or impairment on
abandonment of the relevant project. At December 31, 2009 the carrying value of
capitalized IPR&D assets was $6.1 million.
Management’s
estimate of the useful life of its intangible assets considers, inter alia, the
following factors: the expected use of the asset by the Company; any legal,
regulatory, or contractual provisions that may limit or extend the useful life,
and the effects of demand; competition, including the launch of generic
products; and other economic factors (such as the stability of the industry,
known technological advances, legislative action that results in an uncertain or
changing regulatory environment, and expected changes in distribution channels).
The Company reviews the useful life of its
intangible assets
subject to amortization at each reporting period, and revises its estimate of
the useful life if events or circumstances warrant. Any future changes to the
useful life of the Company’s intangible assets could result in additional or
lesser amortization expense in future periods which could materially affect
operating results.
The Company reviews
its indefinite lived intangible assets for impairment annually, or more
frequently if events or changes in circumstances indicate that the asset might
be impaired. Indefinite lived assets are reviewed for impairment through a
“one-step” test, which compares the fair value of the asset with its carrying
amount, with an impairment loss recognized to the extent that the carrying value
exceeds fair value.
The Company reviews
its finite lived intangible assets for impairment, using a “two-step” approach,
whenever events or circumstances suggest that the carrying value of these assets
may not be recoverable. Under step one, if the undiscounted cash flows resulting
from the use and ultimate disposition of the intangible asset are less than its
carrying value, the intangible asset is considered impaired. The impairment loss
is determined under step two as the amount by which the carrying value of the
intangible asset exceeds its fair value.
Events or
circumstances that may suggest that its intangible assets may not be
recoverable, and which would lead to the Company evaluating its intangible
assets for impairment, include the following:
·
changes to a
product’s commercialization
strategy;
·
the loss of
patent protection, regulatory exclusivity or challenge or circumvention by
competitors of the Company’s regulatory exclusivity
patents;
·
the
development and marketing of competitive products, including generic
entrants into the marketplace;
·
changes to
the product labels, or other regulatory
intervention;
·
sustained
government pressure on prices and, specifically, competitive
pricing;
·
the
occurrence of significant adverse events in respect to the Company’s
products;
·
a significant
deterioration in a product’s operating performance compared to
expectations; and
·
adverse
changes to the technological or commercial viability of IPR&D
assets.
The occurrence of
any such events could adversely affect the Company’s estimates of the future net
cash flows generated by its intangible assets. Following the identification of
such events and the resultant impairment reviews, the Company recognized
intangible asset impairment charges of $nil in the year to December 31, 2009
(2008: $97.1 million, of which $94.6 million related to DYNEPO which the Company
stopped commercializing; 2007: $0.4 million). Dependent on the occurrence of
future events or circumstances, the Company’s operating results could be
materially and adversely affected by impairment charges related to the
recoverability of its long-lived assets.
(b)
Intangible
assets acquired through business
combinations
The fair values of
all the identifiable intangible assets for commercialized products acquired
through business combinations, (primarily the acquisitions of TKT in 2005, New
River in 2007 and the acquisition of Jerini in 2008) have been determined using
an income approach on a project-by-project basis using the multi-period excess
earnings method. This method starts with a forecast of all expected future net
cash flows which a market participant could have either generated or saved as a
result of ownership of the intellectual property, customer relationships and
other intangible assets. These cash flows are then adjusted to present value by
applying a market participant discount rate that reflects the risk factors that
a market participant would associate with the cash flows (to the extent the
underlying cash flows have not similarly been risk adjusted).
The forecast of
future cash flows requires various assumptions to be made,
including:
·
revenue that
is reasonably likely to result from the sale of products including the
estimated number of units to be sold, estimated selling prices, estimated
market penetration and estimated market share and year-over-year growth
rates over the product life cycles;
·
royalty or
license fees saved by owning the intellectual property associated with the
products;
·
cost of sales
for the products using historical data, industry data or other sources of
market data;
·
sales and
marketing expense using historical data, industry data or other sources of
market data;
the tax
amortization benefit available to a market participant purchasing the
relevant assets piecemeal.
The valuations are
based on information at the time of the acquisition and the expectations and
assumptions that (i) have been deemed reasonable by the Company’s management and
(ii) are based on information, expectations and assumptions that would be
available to and made by a market participant. No assurance can be given,
however, that the underlying assumptions or events associated with such assets
will occur as projected. For these reasons, among others, the actual cash flows
may vary from forecasts of future cash flows, and dependent on the outcome of
future events or circumstances impairment charges as outlined at (a) above may
result.
(c)
Valuation of
IPR&D acquired through business
combinations
IPR&D
represents the fair value assigned to incomplete technologies and development
projects that the Company has acquired through business combinations or asset
acquisitions, which at the date of the relevant acquisition have not reached
technological feasibility or have no alternative future use. Prior to January 1,2009, the fair value ascribed to such technologies or development projects was
immediately expensed to the consolidated statement of operations in the year of
acquisition. The Company has recorded IPR&D expense on the following
significant business combinations that closed prior to January 1, 2009: $128
million on acquisition of a majority voting interest in Jerini in 2008; $1,866
million on acquisition of New River in 2007; and $815 million on acquisition of
TKT in 2005. In 2008 the Company also recorded IPR&D charges of $135 million
following the asset acquisition of METAZYM from Zymenex. Additionally,
non-refundable fees paid on the in-licensing of products that have not yet
received regulatory approval and have no alternative future use have been
expensed and presented within R&D expense.
For business
combinations that closed subsequent to January 1, 2009 IPR&D is required to
be recorded as an indefinite lived intangible asset. During the year to December31, 2009the Company has recorded IPR&D assets of $6.1 million, following
the acquisition of EQUASYM from UCB.
The Company
considers that a technology or development project has an alternative future use
if it is probable that the Company will use the asset in its current, incomplete
state as it existed at the acquisition date, the asset will be used in another
development project that has not yet commenced, and future economic benefit is
expected from that use. The Company has determined that historically all such
acquired development projects did not have an alternative future
use.
The fair value of
IPR&D assets is determined using the income approach on a project-by-project
basis using the multi-period excess earnings method. The fair value of the
acquired IPR&D assets has been based on the present value of probability
adjusted incremental cash flows which a market participant would expect to be
generated by the IPR&D projects after the deduction of contributory asset
charges for other assets employed in these projects. This method incorporates an
evaluation of the risks associated with the development project, which include
applying an appropriate discount rate commensurate with the project's stage of
completion, the nature of the product, the scientific data associated with the
technology, the current patent situation and market competition.
The forecast of
future cash flows required the following assumptions to be made:
·
revenue that
is likely to result from specific IPR&D projects, including the
likelihood of approval of the product, estimated number of units to be
sold, estimated selling prices, estimated market penetration, estimated
market share and year-over-year growth rates over the product life
cycles;
·
cost of sales
related to the potential products using historical data, industry data or
other sources of market data;
·
sales and
marketing expense using historical data, industry data or other market
data;
·
general and
administrative expenses;
·
R&D
expenses to complete the development of the acquired products;
and
·
the tax
amortization benefit available to a market participant purchasing the
relevant assets piecemeal.
The major risks and
uncertainties associated with the timely completion of the acquired IPR&D
projects consist of the ability to confirm the safety and efficacy of the
technology based on the data from ongoing clinical trials, and obtaining the
necessary regulatory approvals. The use of different estimates and assumptions
to those used by the Company could result in materially different asset values
and IPR&D expense. However, as the valuation process for IPR&D involves
a number of inter-relating assumptions, the Company does not consider it
meaningful to quantify the sensitivity of the asset values or IPR&D expense
to changes in any individual assumption.
The valuation of
IPR&D has been based on information that existed at the time of the
acquisition and utilized expectations and assumptions that (i) have been deemed
reasonable by Shire’s management, and (ii) are based on information,
expectations and assumptions that would be available to and made by a market
participant. However, no assurance can be given that the underlying assumptions
or estimates associated with such IPR&D assets or expenses will occur as
projected. If
certain of the IPR&D projects fail during development, are abandoned, or do
not receive the relevant regulatory approvals, the Company may not realize the
future cash flows that it has estimated nor recover the value of the R&D
investment made subsequent to acquisition. If such circumstances occur, the
Company’s future operating results could be materially adversely
impacted.
(ii)
Valuation of
Equity Investments
At December 31,2009 the carrying value of the Company’s investments in certain public and
private pharmaceutical and biotechnology companies amounted to $105.7 million,
(principally represented by the Company’s available for sale investment in
Vertex). The carrying values of these investments are periodically reviewed for
other-than-temporary impairment whenever certain events or circumstances suggest
that the carrying value of an investment exceeds the fair market value of the
investment. Indicators of other-than-temporary impairment considered by the
Company, include, inter alia:
·
the market
value of a quoted investment being below the cost of the
investment;
·
adverse news
on a company’s progress in scientific technology/development of compounds;
and
·
recent stock
issuances at a price below the investment
price.
If the fair value
appears to be below the investment’s cost the Company considers all available
evidence in assessing whether there is an other-than-temporary impairment. This
evidence would include:
·
the length of
time and/or the extent to which the market value of the investee is less
than the cost of the investment;
·
the level of
progress in the investee’s scientific technology/development of
compounds;
·
ongoing
activity in collaborations with the
investee;
·
whether or
not other substantial investee-specific adverse events have occurred which
may cause a decline in value;
·
analysis and
valuation of comparable companies;
and
·
the overall
financial condition and near term prospects of the
investee.
In instances when
this review indicates that there is an other-than-temporary impairment of the
Company’s investment in private companies, the Company impairs the investment to
its current fair value. For the Company’s investments in public companies which
are accounted for as available-for-sale securities, if these investments are
deemed to be other-than-temporarily impaired, any unrealized holding loss is
reclassified from other comprehensive income by recording an other than
temporary impairment charge in the consolidated statement of
operations.
During 2009, 2008
and 2007 Shire did not record any impairment charges for its non-current
investments in private companies. During the year to December 31, 2009, the
Company recorded other-than-temporary impairment charges for its available for
sale securities of $0.8 million (2008: $58.0 million, 2007: $3.0 million), and
at December 31, 2009the Company has unrealized holding gains on its available
for sale securities of $15.0 million. At December 31, 2009 the
Company does not have any available for sale securities with unrealized holding
losses.
Other than
temporary impairment charges recorded in 2008 included $44.3 million for the
Company’s investment in Renovo Group plc. During the third quarter of 2008, the
Company considered the following factors in its determination of whether its
impairment in Renovo Group plc was temporary or other-than-temporary: the
severity of the decline from historical cost (87% decline) and its duration
(eleven months); market analysts’ targets of Renovo Group plc’s share price for
the next 18-24 months; and the revised expected filing date for JUVISTA due to
the adoption of a sequential rather than parallel Phase 3 development plan.
These factors, together with the significant decline in global equity markets
during the third quarter of 2008 meant that the Company was unable to reasonably
estimate the period over which a full recovery in the value of its investment in
Renovo Group plc could occur. As such, at the end of the third quarter of 2008
the Company concluded that the decline in value was
other-than-temporary.
The determination
of the fair value of private company investments and the determination of
whether an unrealized holding loss on a publicly quoted investment is
other-than-temporary requires significant management judgment. Any
future events or circumstances which could lead to the recognition of other than
temporary impairment charges, particularly in respect of the Company’s
investment in Vertex (carrying value at December 31, 2009 $74.4 million), could
have a material adverse impact on the Company’s financial condition and results
of operations.
Sales deductions
consist of statutory rebates to state Medicaid and other government agencies,
contractual rebates with health-maintenance organizations (“HMOs”), product
returns, sales discounts (including trade discounts and distribution service
fees), wholesaler chargebacks, and allowances for coupon sampling programs.
These deductions are recorded as reductions to revenue in the same period as the
related sales with estimates of future utilization derived from historical
experience adjusted to reflect known changes in the factors that impact such
reserves. On the balance sheet the Company records wholesaler chargebacks and
prompt payment discounts as a reserve against accounts receivable, whereas all
other sales deductions are recorded within current liabilities.
The Company has the
following significant categories of sales deductions, all of which involve
estimates and judgments which the Company considers to be critical accounting
estimates, and require the Company to use information from external
sources:
Medicaid
and Managed Care Rebates
Statutory rebates
to state Medicaid agencies and contractual rebates to Managed Care Organizations
(“MCO”) under managed care programs are based on statutory or negotiated
discounts to the selling price. Medicaid rebates generally increase as a
percentage of the selling price over the life of the product (if prices increase
faster than inflation).
As it can take up
to six months for information to reach the Company on actual usage of the
Company’s products in managed care and Medicaid programs and on the total
rebates to be reimbursed, the Company maintains reserves for amounts payable
under these programs relating to sold products.
The amount of the
reserve is based on historical experience of rebates, the timing of payments,
the level of reimbursement claims, changes in prices (both normal selling prices
and statutory or negotiated prices), changes in prescription demand patterns,
projected product returns and the levels of inventory in the distribution
channel. Adjustments are made for known changes in these factors,
such as how shipments of authorized generic ADDERALL XR to Teva and Impax should
be included in the Medicaid rebate calculation pursuant to Medicaid rebate
legislation.
Shire’s estimates
of the level of inventory in the distribution channel are based on
product-by-product inventory data provided by wholesalers; results of
independently commissioned retail inventory surveys and third-party prescription
data (such as IMS Health National Prescription Audit data).
Revisions or
clarification of guidelines from the CMS related to state Medicaid and other
government program reimbursement practices with retroactive application can
result in changes to management’s estimates of the rebates reported in prior
periods.
The accrual
estimation process for Medicaid and Managed Care rebates involves in each case a
number of interrelating assumptions, which vary for each combination of product
and Medicaid agency or MCO. Accordingly it would not be meaningful to quantify
the sensitivity to change for any individual assumption or uncertainty. However,
with the exception of the estimation of the Medicaid URA for ADDERALL XR (see
below), Shire does not believe that the effect of these uncertainties, as a
whole, significantly impacts the Company’s financial condition or results of
operations.
There are
potentially different interpretations as to how shipments of authorized generic
ADDERALL XR to Teva and Impax should be included in the Medicaid rebate
calculation pursuant to Medicaid rebate legislation. As a result more than one
URA is calculable for the purpose of determining the Company’s Medicaid rebate
liability to States after authorized generic launch. During 2009
the Company highlighted the different interpretations to CMS and submitted data
to CMS for the purpose of computing the URA, based on the Company’s reasonable
interpretation of the Medicaid rebate legislation and related guidance. The
State Medicaid agencies have invoiced the Company for Medicaid rebates, and the
Company has paid these Medicaid rebate invoices, based on this URA. Despite this
CMS has the ability to subsequently challenge the Company’s interpretation of
the Medicaid rebate legislation, and require an alternative interpretation to be
applied (both retrospectively and prospectively), which could result in a
significantly higher Medicaid liability.
Throughout 2009 the
Company’s management has recorded its accrual for Medicaid rebates based on its
best estimate of the rebate payable. The Company’s management has developed this
best estimate considering a number factors in combination, including: the level
of URA invoiced by, and paid by the Company to, the State Medicaid agencies; the
Company’s interpretation of the Medicaid rebate legislation; the Company’s
correspondence with CMS highlighting the potential different interpretations of
the Medicaid rebate legislation and related guidance; the likelihood of CMS
employing an alternative interpretation of the Medicaid rebate legislation; an
estimate of the amount the Company could be required to pay were CMS to employ
an alternate interpretation of the Medicaid rebate legislation; the Company’s
willingness to initiate litigation to recover any additional amounts which may
in the future be paid to CMS; and the Company’s view of the ultimate outcome of
any such litigation.
For the first three
quarters of 2009, the Company’s management based this best estimate on an amount
that the Company could pay were CMS to challenge the Company’s interpretation
and require an alternative interpretation of the Medicaid rebate legislation to
be applied. In the fourth quarter of 2009, the Company’s management lowered its
best estimate of the Medicaid rebate payable down to be consistent with (i) the
Company’s interpretation of the Medicaid rebate legislation, (ii) the Company’s
repeated and consistent submission of price reporting to CMS using the Company’s
interpretation of the Medicaid rebate legislation, (iii) CMS calculating the URA
based on that interpretation, (iv) States submitting Medicaid rebate invoices
using this URA and (v) Shire paying these invoices. This change of
estimate increased ADDERALL XR product sales by $97.7 million in the fourth
quarter of 2009 (of which $73.6 million related to ADDERALL XR product sales
recognized in the first three quarters of 2009).
In determining its
best estimate of the Medicaid rebate liability at December 31, 2009 the
Company’s management has considered a number of factors taken in combination
(including the receipt of a further quarter’s invoices from the States with a
URA based on the Company’s interpretation of the Medicaid rebate legislation and
related guidance, and the Company’s likely response were CMS to employ an
alternative interpretation of the Medicaid rebate legislation). Any future
change in the Company’s interpretation which results in a change of estimate
(both retrospectively and prospectively) could significantly decrease ADDERALL
XR product sales, which could have significant impact on the Company’s financial
condition and results of operations in the period of any such change in
estimate.
At December 31,2009the Company has recorded an ADDERALL XR Medicaid liability of $112.5
million. The Company strongly believes that its interpretation of the Medicaid
rebate legislation is reasonable and correct. However, CMS could
disagree with the Company’s interpretation, and require the Company to apply an
alternative interpretation of the Medicaid rebate legislation and pay up to $210
million above the recorded liability. This would represent a URA
substantially in excess of the unit sales price of ADDERALL XR and accordingly
be in excess of the approximate amount of the full cost to the States of
reimbursement for Medicaid prescriptions of ADDERALL XR. Should CMS take
such an approach, the Company could seek to limit any additional payments to a
level approximating the full, un-rebated cost to the States of ADDERALL XR, or
$98 million above the recorded liability. Further, the Company believes it has a
strong legal basis supporting its interpretation of the Medicaid rebate
legislation, and that there would be a strong basis to initiate litigation to
recover any amount paid in excess of its recorded liability. The result of any
such litigation cannot be predicted and could result in additional rebate
liability above the Company’s current best estimate.
Aggregate accruals
for Medicaid and MCO rebates at December 31, 2009, 2008 and 2007 were $341.6
million, $222.5 million and $146.6 million, or 13%, 8% and 7% respectively, of
net product sales. Historically, with the exception of ADDERALL XR noted above,
actual rebates have not varied significantly from the reserves
provided.
Product
Returns
The Company
typically accepts customer product returns in the following circumstances: a)
expiration of shelf life; b) product damaged while in the possession of Shire;
c) under sales terms that allow for unconditional return (guaranteed sales); or
(d) following product recalls or product withdrawals. Returns are generally
accepted up to one year after expiration date of the relevant product. The
Company typically refunds the agreed proportion of the sales price by the
issuance of a credit, rather than cash refund or exchanges from inventory, and
the returned product is destroyed.
Shire estimates the
proportion of recorded revenue that will result in a return by considering
relevant factors, including:
· past
product returns activity;
· 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 or new competition.
Shire’s estimate of
the level of inventory in the distribution channel is based on
product-by-product inventory data provided by wholesalers, third-party
prescription data and, for some product return provisions, market research of
retail pharmacies.
Returns reserves
for new products generally require a higher level of estimation than estimates
for established products. For shipments made to support the commercial launch of
a new product (which can include guaranteed sales) the Company’s policy is to
defer recognition of the sales revenue until there is evidence of end-patient
acceptance of the new product (primarily through third-party prescription data).
For shipments after launch under standard terms (i.e., not guaranteed sales),
the Company’s initial estimates of sales return accruals are primarily based on
the historical sales returns experience of similar products shortly after
launch. Once sufficient historical data on actual returns of the product
are available, the
returns provision is based on this data and any other relevant factors as noted
above. In the year to December 31, 2009the Company launched INTUNIV,
for the treatment of ADHD in children and adolescents in the US. The
Company recognized revenue of $5.4 million in 2009 and at December 31, 2009 had
recorded deferred revenue on the balance sheet representing gross sales of $38.8
million relating to launch shipments of INTUNIV.
The accrual
estimation process for product returns involves in each case a number of
interrelating assumptions, which vary for each combination of product and
customer. Accordingly, it would not be meaningful to quantify the sensitivity to
change for any individual assumption or uncertainty. However, Shire does not
believe that the effect of uncertainties, as a whole, significantly impacts the
Company’s financial condition or results of operations.
At the balance
sheet date, provisions for product returns were $62.7 million in 2009, $47.1
million in 2008 and $39.5 million in 2007, or 2%, 2% and 2%, respectively, of
net product sales. Historically, actual returns have not varied significantly
from the reserves provided.
(iv)
Income
Taxes
In accounting for
uncertainty in income taxes, management is required to develop estimates as to
whether a tax benefit should be recognized in the consolidated financial
statements, based on whether it is more likely than not that the technical
merits of the position will be sustained based on audit by the tax authorities.
The measurement of the tax benefit recognized in the consolidated financial
statements is based upon the largest amount of tax benefit that, in management’s
judgment, is greater than 50% likely to be realized based on a cumulative
probability assessment of the possible outcomes. In accounting for income tax
uncertainties, management is required to make judgments in the determination of
the unit of account, the evaluation of the facts, circumstances and information
in respect of the tax position taken, together with the estimates of amounts
that the Company may be required to pay in ultimate settlement with the tax
authority.
Shire operates in
numerous countries where its income tax returns are subject to audit and
adjustment by local tax authorities. Because Shire operates globally, the nature
of the uncertain tax positions is often very complex and subject to change and
the amounts at issue can be substantial. Shire develops its cumulative
probability assessment of the measurement of uncertain tax positions using
internal expertise, experience and judgment, together with the assistance from
professional advisors. Original estimates are refined as additional information
becomes known. For example, during the year to December 31, 2009the Company
recognized additional interest expense of $21.3 million on its provision for
uncertain tax positions following the receipt of new information on the amount
of interest that may be payable upon settlement of the relevant tax
position.
Any outcome upon
settlement that differs from the recorded provision for uncertain tax positions
may result in a materially higher or lower tax expense in future periods, which
could significantly impact the Company’s results of operations or financial
condition. However, we do not believe it possible to reasonably estimate the
potential impact of any such change in assumptions, estimates or judgments and
the resultant change, if any, in our provision for uncertain tax positions, as
any such change is dependent on factors such as changes in tax law or
administrative practice, the amount and nature of additional taxes which may be
asserted by the taxation authorities, and the willingness of the relevant tax
authorities to negotiate a settlement to any such position.
At December 31,2009the Company recognized a liability of $254.0 million for total unrecognized
tax benefits (2008: $228.7 million) and had accrued $111.5 million (2008: $76.2
million) for the payment of interest and penalties. The company is required in
certain tax jurisdictions to make advance deposits to tax authorities on receipt
of a tax assessment. These payments are offset against the income tax liability
but do not reduce the provision for unrecognised tax benefits.
The Company has
significant deferred tax assets due to various tax attributes including, net
operating losses (“NOLs”), tax credits (from Research and Development,
Investment Tax Credits and Alternative Minimum Tax) principally in the Republic
of Ireland, the US, Germany and the UK. The realization of these assets is not
assured and is dependent on the generation of sufficient taxable income in
future periods. Management is required to exercise judgment in determining
whether it is more likely than not that it would realize these deferred tax
assets, based upon the availability of prudent and feasible tax planning
strategies and estimates of future taxable income in the various jurisdictions
in which these NOLs and other tax attributes exist. Where there is an
expectation that on the balance of probabilities there will not be sufficient
taxable profits to utilize these tax attributes a valuation allowance
is held against these deferred tax assets. If actual events differ from
management’s estimates, or to the extent that these estimates are adjusted in
the future, any changes to the valuation allowance could significantly impact
the Company’s financial condition and results of
operations.
At December 31,2009, the Company had deferred tax liabilities of $448 million and gross
deferred tax assets of $515 million, against which the Company had recorded
valuation allowances of $149 million.
At December 31,2008, the Company had deferred tax liabilities of $504 million and gross
deferred tax assets of $472 million, against which the Company had recorded
valuation allowances of $119 million.
At December 31,2007, the Company had deferred tax liabilities of $510 million and gross
deferred tax assets of $587 million, against which the Company had recorded
valuation allowances of $105 million.
(v)
Litigation
and legal proceedings
The Company has a
number of lawsuits pending that relate to intellectual property infringement
claims, and in September 2009 the Company received a subpoena from the US
Department of Health and Human Services Office of the Inspector General seeking
production of documents related to the sales and marketing of ADDERALL XR,
DAYTRANA and VYVANSE, See ITEM 3: Legal Proceedings and Note 23(d), “Commitments and Contingencies,
Legal proceedings” to the consolidated financial statements listed under
ITEM 15: Exhibits and Financial Statement Schedules of this Annual Report
for further details. Shire records a loss contingency provision for
probable losses when management is able to reasonably estimate the loss. Where
the estimated loss lies within a range and no particular amount within that
range is a better estimate than any other amount, the minimum amount is
recorded. In other cases management's best estimate of the loss is recorded.
These estimates are developed substantially earlier than the ultimate loss is
known, and the estimates are refined each accounting period, as additional
information becomes known. Best estimates are reviewed quarterly and estimates
are changed when expectations are revised. Any outcome upon settlement that
deviates from Shire’s best estimate may result in an additional or lesser
expense in a future accounting period, which could materially impact the
Company’s financial condition and results of operations.
On November 5, 2008the Company announced that it had successfully settled all aspects of the TKT
appraisal rights litigation with all parties. Shire paid the same price of
$37 per share originally offered to all TKT shareholders at the time of the July
2005 merger, plus interest. The settlement represents a total payment of $567.5
million, representing consideration at $37 per share of $419.9 million and an
interest cost of $147.6 million. Prior to reaching this settlement, the Company
accrued interest based on a reasonable estimate of the amount that may be
awarded by the Court to those former TKT shareholders who requested appraisal.
This estimate of interest was based on Shire’s cost of borrowing. Between the
close of the merger and November 5, 2008the Company applied this interest rate
on a quarterly compounding basis to the $419.9 million of consideration to
calculate its provision for interest.
Upon reaching
agreement in principle with all the dissenting shareholders, the Company
determined that settlement had become the probable manner through which the
appraisal rights litigation would be resolved. Under current law, (although not
applicable in this case because the merger was entered into before the relevant
amendment to the law became effective) the court presumptively awards interest
in appraisal rights cases at a statutory rate that is 5 percentage points above
the Federal Reserve discount rate (as it varies over the duration of the case).
In connection with the settlement, the Company agreed to an interest rate that
approximates to this statutory rate. Based on the settlement, the Company
amended the method of determining its interest provision to reflect this revised
manner of resolution, and recorded additional interest expense of $73.0 million
in its consolidated financial statements for the year to December 31, 2008 on
reaching settlement with the dissenting shareholders.
Recent
accounting pronouncements update
See Note 2(y) to
the consolidated financial statements contained in ITEM 15: Exhibits and
Financial Statement Schedules of this Annual Report for a full description of
recent accounting pronouncements, including the expected dates of adoption and
effects on financial condition, results of operations and cash
flows.
Financial Information Relating to the Shire IAS
Trust
The results of
operations and the financial position of the IAS Trust are included in the
Consolidated Financial Statements of the Company. An explanation of the IAS
Trust is included in ITEM 5: Market for Registrant’s common equity, related
stockholder matters and issuer purchases of equity securities of this Annual
Report. Separate, audited financial statements of the IAS Trust are included in
ITEM 15: Exhibits and Financial Statement Schedules of this Annual
Report.
For the year to
December 31, 2009 the IAS Trust recorded income before tax of $45.9 million
(2008: $7.2 million). This income reflected dividends received on the Income
Access Share.
At December 31,2009 the IAS Trust had total equity of $nil. In future periods, to the extent
that dividends are unclaimed on the expiry of dividend checks, or to the extent
they are returned unpresented, the IAS Trust will record a liability for these
unclaimed dividends.
The movements in
cash and cash equivalents of the IAS Trust consist of dividends received on the
Income Access Share, (2009: $45.9 million, 2008: $7.2 million), and
distributions made on behalf of Shire to shareholders (2009: $45.9 million,
2008: $7.2 million).
The Company’s
principal treasury operations are coordinated by its corporate treasury
function. All treasury operations are conducted within a framework of policies
and procedures approved annually by the Board of Directors. As a matter of
policy, the Company does not undertake speculative transactions that would
increase its currency or interest rate exposure.
Interest
rate risk
The Company is
exposed to interest rate risk on restricted cash, cash and cash equivalents and
on foreign exchange contracts on which interest is at floating rates. This
exposure is primarily to US dollar, Euro and Canadian dollar interest rates. As
the Company maintains all of its investments and foreign exchange contracts on a
short term basis for liquidity purposes, this risk is not actively managed. In
the year to December 31, 2009 the average interest rate received on cash and
liquid investments was less than 1% per annum. The largest proportion of
investments was in US dollar money market and liquidity funds.
The Company incurs
interest at a fixed rate of 2.75% on Shire plc’s $1,100 million in principal
convertible bonds due 2014. The building financing obligation of $46.7 million
is also subject to a fixed interest rate over the lease term on the amount
outstanding.
No derivative
instruments were entered into during the year to December 31, 2009 to manage
interest rate exposure. The Company continues to review its interest rate risk
and the policies in place to manage the risk.
Foreign
exchange risk
The Company trades
in numerous countries and as a consequence has transactional and translational
foreign exchange exposure.
Transactional
exposure arises where transactions occur in currencies different to the
functional currency of the relevant subsidiary. The main trading currencies of
the Company are the US dollar, the Canadian dollar, Pounds Sterling and the
Euro. 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 (being spot,
forward and swap contracts) to manage the exposure in respect of balance sheet
assets and liabilities that are denominated in currencies different to the
functional currency of the relevant subsidiary. These assets and liabilities
relate predominantly to intercompany financing and accruals for royalty
receipts. The Company utilizes these derivative instruments to manage currency
risk on balance sheet foreign exchange exposures but the foreign exchange
contracts have not been designated as hedging instruments.
Translational
foreign exchange exposure arises on the translation into US dollars of the
financial statements of non-US dollar functional subsidiaries.
contingent features
or collateral linked to the derivatives. At December 31, 2009 the fair value of
these contracts was a net asset of $4.2 million. Further details are included
below.
Foreign
exchange risk sensitivity
The table below
provides information about the Company's swap and forward foreign exchange
contracts by currency pair. The table presents the net principal amounts and
weighted average exchange rates of all outstanding contracts. All contracts have
a maturity date of less than three months.
As at December 31,2009the Company has $105.7 million of investments comprising available-for-sale
investments in publicly quoted companies ($87.0 million), equity method
investments ($14.8 million) and cost method investments in private companies
($3.9 million). The investment in public quoted companies and equity investment
funds for certain investment funds which contain a mixed portfolio of public and
private investments are exposed to market risk. No financial instruments or
derivatives have been employed to hedge this risk.
Credit risk
Cash is invested in
short-term money market instruments, including money market and liquidity funds
and bank term deposits. The money market and liquidity funds in which Shire
invests are all triple A rated by both Standard and Poor’s and by Moody’s credit
rating agencies.
The Company is
exposed to the credit risk of the counterparties with which it enters into
derivative contracts. The Company limits this exposure through a system of
internal credit limits which require counterparties to have a long term credit
rating of A / A2 or better from the major rating agencies. The internal credit
limits are approved by the Board and exposure against these limits is monitored
by the corporate treasury function. The counterparties to the derivative
contracts are major international financial institutions.
The Company has
entered into many agreements with third parties for the provision of services to
enable it to operate its business. If the third party can no longer provide the
service on the agreed basis, the Company may not be able to continue the
development or commercialization of its products as planned or on a commercial
basis. Additionally, it may not be able to establish or maintain good
relationships with the suppliers.
The consolidated
financial statements and supplementary data called for by this item are
submitted as a separate section of this report. See ITEM 15: Exhibits and
financial statement schedules.
The Company, under
the supervision and with the participation of the Company’s management,
including the Chief Executive Officer and the Chief Financial Officer, has
performed an evaluation of the effectiveness of the Company’s disclosure
controls and procedures (including those applicable to the Income Access Share
Trust) (as defined in Exchange Act Rule 13a-15(e)), as of December 31,2009.
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
applicable to the Income Access Share Trust) are effective for gathering,
analyzing and disclosing the information that the Company is required to
disclose in the reports it files under the Securities Exchange Act of 1934,
within the time periods specified in the SEC’s rules and forms.
Management’s
Report on Internal Control Over Financial Reporting
The Company’s
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13(a)-15(f) or 15(d)-15(f)
promulgated under the US Securities Exchange Act of 1934.
Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
The Company’s
management assessed the effectiveness of the Company’s internal control over
financial reporting (including those applicable to the Income Access Share
Trust) as of December 31, 2009. In making this assessment, the Company’s
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control-Integrated
Framework.
Based on its
assessment, management believes that, as at December 31, 2009, the Company’s
internal control over financial reporting is effective based on those
criteria.
Deloitte LLP, an
independent registered public accounting firm, has issued an audit report on the
Company’s internal control over financial reporting, including those controls
applicable to the Income Access Share Trust. This report appears on page F-3 of
the Company’s consolidated financial statements contained in ITEM 15:
Exhibits and Financial Statement Schedules of this Annual
Report.
Changes
in Internal Control Over Financial Reporting
The Company has an
integrated information system covering financial processes, production,
logistics and quality management. Various upgrades and new implementations were
made to the information system during 2008 and 2009. The Company reviewed each
system change as it was implemented together with any internal controls
affected. Alterations were made to affected controls at the time the system
changes were implemented. Management believes that the controls as modified are
appropriate and functioning effectively.
Executive
Vice President Corporate Business Services and Chief Administrative
Officer
Barbara
Deptula
55
Executive
Vice President and Chief Corporate Development
Officer
For the purposes of
the NASDAQ corporate governance rules, the independent directors are David
Kappler, Patrick Langlois, Dr Jeffrey Leiden, Kate Nealon and David Stout. There
is no family relationship between or among any of the directors or executive
officers.
The Company’s
Directors, including Non-Executive Directors, are subject to the "retirement by
rotation" provisions of the Company’s Articles of Association. These are
designed to ensure that all directors are re-elected by shareholders at least
every three years.
In addition to the
requirements of the Articles of Association, the Non-Executive Directors are
appointed to office pursuant to individual letters of appointment for a term of
two years, subject to invitation to serve further terms at the discretion of the
Board. At the expiration of the two-year term, the Non-Executive Directors are
not required to be re-elected by shareholders (unless the expiration of the term
coincides with a particular Non-Executive Directors turn to retire by rotation),
but may be re-appointed by the Board. Non-Executive Directors who have served on
the Board for nine or more years are appointed to office for a term of one year,
subject to annual re-election by shareholders, and by invitation to serve
further terms at the discretion of the Board.
The current terms
of the Non-Executive Directors are as set out below:
Executive Directors
are appointed pursuant to service agreements, which are not limited in
term.
Matthew
Emmens
Chairman
Mr Emmens was
appointed Non-Executive Chairman on June 18, 2008 and has been a member of the
Board since March 12, 2003. He is also a member of the Company’s Nomination
Committee. He was Chief Executive Officer of the Company from March 2003 to June
2008. Mr Emmens brings to the Board, among other things, his operational
knowledge of Shire and his wealth of international sales, marketing, integration
and operational experience in the pharmaceutical sector. Mr Emmens
also serves as Chairman, President and Chief Executive Officer of Vertex
Pharmaceuticals Inc. He is a former board member of Incyte Corporation. Mr
Emmens began his career in international pharmaceuticals with Merck & Co,
Inc. in 1974, where he held a wide range of sales, marketing and administrative
positions. In 1992, he helped to establish Astra Merck, a joint venture between
Merck and Astra AB of Sweden, becoming President and Chief Executive Officer. In
1999, he joined Merck KGaA and established EMD Pharmaceuticals, the company’s
global prescription pharmaceutical business. He was later based in Darmstadt,
Germany as President of Merck KGaA's US prescription pharmaceutical business and
was a board member. Mr Emmens holds a degree in Business Management from
Fairleigh Dickinson University.
Angus
Russell
Chief
Executive Officer
Mr Russell was
appointed Chief Executive Officer on June 18, 2008 and has been a member of the
Board since December 13, 1999. He was the Company’s Chief Financial Officer from
December 1999 to June 2008. He is also the Chairman of the Company’s Leadership
Team. Mr Russell brings to his position, among other things, his operational
knowledge of Shire and his extensive finance, risk management, strategic and
operational experience in the pharmaceutical sector. Mr Russell is a former
Non-Executive Director of the City of London Investment Trust plc. Between 1980
and 1999, he held a number of positions of increasing responsibility at ICI,
Zeneca and AstraZeneca PLC, including Vice President, Corporate Finance at
AstraZeneca and Group Treasurer at Zeneca. Mr Russell is a Chartered Accountant,
having qualified with Coopers & Lybrand, and is a Fellow of the Association
of Corporate Treasurers.
Graham
Hetherington
Chief
Financial Officer
Mr Hetherington has
been the Company’s Chief Financial Officer and a member of the Board since July1, 2008. He is also a member of the Company’s Leadership Team. Mr Hetherington
brings to his position, among other things, a broad range of international
finance management & planning, audit, risk management and M&A
experience. Mr Hetherington most recently held positions as the Chief
Financial Officer of Bacardi in 2007 and Chief Financial Officer of Allied
Domecq plc from 1999-2005. Mr Hetherington is a Fellow of the Chartered
Institute of Management Accountants.
Deputy
Chairman and Senior Independent Non-Executive Director
Mr Kappler has been
a member of the Company's Board since April 5, 2004. He was appointed Deputy
Chairman in June 2008 and Senior Independent Non-Executive Director in July
2007. He is Chairman of the Company’s Nomination Committee and Audit, Compliance
& Risk Committee. Mr Kappler brings to the Board, among other
things, his extensive knowledge and experience in financial reporting, risk
management and internal financial controls. Mr Kappler also serves as
the Non-Executive Chairman of Premier Foods plc and as a Non-Executive Director
of Intercontinental Hotels Group plc. Mr Kappler was a Director of Camelot Group
plc from 1996-2002 and of HMV Group plc from 2002-2006. Mr Kappler retired from
Cadbury Schweppes plc in April 2004 after serving as Chief Financial Officer
since 1995. He worked for the Cadbury Schweppes group between 1965 and 1984 and
rejoined the company in 1989 following its acquisition of Trebor Group, where he
was Financial Director. Mr Kappler is a Fellow of the Chartered Institute of
Management Accountants.
Dr
Jeffrey Leiden
Vice
Chairman and Non-Executive Director
Dr Leiden has been
a member of the Company’s Board since January 1, 2007, and Deputy Chairman since
April 2009. He is a member of the Company’s Remuneration Committee and
Nomination Committee and Chairman of the Company’s Science & Technology
Committee. Dr Leiden brings to the Board, among other things, his extensive
operational experience in pharmaceutical companies and his operational and
scientific experience in clinical research, development and
registration. Dr. Leiden is also a Managing Director at Clarus
Ventures LLC, Chairman of the Board of Directors of TyRx Pharma, Inc., Lycera
Corporation and Variation Biotechnologies Inc., and a member of the Board of
Directors of Biolex Therapeutics Inc., and Vertex Pharmaceuticals Inc. Dr Leiden
served as President and Chief Operating Officer, Pharmaceutical Products Group
and Chief Scientific Officer at Abbott Laboratories from 2001 to 2006; during
this time he was also a member of the Boards of Directors of Abbott and TAP
Pharmaceutical Products, Inc. Prior to joining Abbott, Dr Leiden served as the
Elkan R. Blout Professor of Biological Sciences, Harvard School of Public Health
and Professor of Medicine, Harvard Medical School. Previously, he was the
Frederick H. Rawson Professor of Medicine and Pathology and Chief of the Section
of Cardiology at the University of Chicago. Dr Leiden was a founder of
Cardiogene, Inc., a biotechnology company specializing in cardiovascular gene
therapy. Dr Leiden earned a bachelor's degree in biological sciences, a
doctorate in virology and a medical degree, all from the University of Chicago.
He is a Fellow of the American Academy of Arts and Sciences and an elected
member of the Institute of Medicine of the National Academy of Sciences. Dr
Leiden is currently a Managing Director at Clarus Ventures LLC.
Patrick
Langlois
Non-Executive
Director
Mr Langlois has
been a member of the Company’s Board since November 11, 2005. He is also a
member of the Company’s Audit, Compliance & Risk Committee and Remuneration
Committee. Mr Langlois brings to the Board, among other things, his
extensive experience in financial reporting, audit and risk
management. Mr Langlois is a Non-Executive Director of Scynexis Inc.,
Nanobiotix S.A., Exonhit S.A. and Newron Spa. Mr Langlois previously served as
Vice Chairman of the Management Board of Aventis S.A., Strasbourg, having been
Group Executive Vice President and Chief Financial Officer for several years. He
also spent many years in senior financial roles with the Rhone-Poulenc Group,
including three years as a member of the Executive Committee and Chief Financial
Officer. Mr Langlois holds a PhD in Economics and a diploma in banking
studies.
Kate
Nealon
Non-Executive
Director
Ms Nealon has been
a member of the Company’s Board since July 27, 2006. She is Chair of the
Company’s Remuneration Committee and also a member of the Audit, Compliance
& Risk Committee. Ms Nealon brings to the Board, among other things, her
extensive global legal, compliance and risk management experience gained through
roles held in multinational companies. Ms Nealon is a Non-Executive
Director of Cable & Wireless plc and a former Non-Executive Director of HBOS
plc. She is also a Senior Associate at the Judge Business School at Cambridge
University. Ms Nealon was previously Group Head of Legal & Compliance at
Standard Chartered plc until 2004. She is a US qualified lawyer and spent
several years in her early career practising law in New York.
Dr
Barry Price
Non-Executive
Director
Dr Price was a
member of the Company’s Board from January 16, 1996 to January 24, 2010. He was
a member of the Company’s Nomination Committee and Science & Technology
Committee until October 2009 and January 2010 respectively. Dr Price brought to
the Board, among other things, his wealth of experience in the operational and
scientific aspects of clinical research and development. He serves as
Chairman of Antisoma plc and Summit Corporation plc. In recent years he has held
directorships at Chiroscience plc, Celltech Group plc and Pharmagene plc. Dr
Price worked for Glaxo for 28 years, where he held positions of increasing
responsibility with that company’s research group.
Mr David Stout
joined the Board as a Non-Executive Director with effect from October 31, 2009
and is a member of the Audit, Compliance & Risk Committee. Mr Stout brings
to the Board, among other things, extensive international sales, marketing,
operational and supply chain experience gained in the pharmaceutical
sector. Mr Stout also holds directorships at Allos Therapeutics, Inc,
Jabil Circuit, Inc. and Airgas Inc. Most recently he was President,
Pharmaceutical Operations at GSK. In this position he had responsibility for
pharmaceutical operations in the United States, Europe, Japan and all other
International Markets. Mr Stout was also responsible for global manufacturing
and global Biologics (vaccines) at GSK. Prior to that, he was President of GSK’s
US Pharmaceuticals Business and before that SmithKline Beecham’s North American
Pharmaceuticals Business. Before joining SmithKline Beecham, Mr Stout worked for
many years at Schering- Plough.
Executive
officers
Michael Cola has been with
Shire since July 2005. He is President of Specialty Pharmaceuticals and a member
of Shire’s Leadership Team. Mr Cola has over 20 years of international
biopharmaceutical industry experience. He was previously President of the Life
Sciences Group of Safeguard Scientifics, Inc. He also held progressively more
senior management positions in product development and commercialization at
AstraMerck/AstraZeneca. Mr Cola received his Master of Science degree in
biomedical engineering from Drexel University.
Dr Sylvie Grégoire joined
Shire in September 2007. She is President of Shire Human Genetic Therapies and a
member of Shire’s Leadership Team. Dr Gregoire has over 20 years of
pharmaceutical and biotechnology experience. She most recently served as
Executive Chairwoman of the Board of IDM Pharma, a biotechnology company in
California. Prior to this she was CEO of GlycoFi, and has also held numerous
leadership positions at Biogen Inc., in the United States and France. She also
worked for Merck & Co. in various positions in clinical research and in
European regulatory affairs both in the US and abroad. She received her Doctor
of Pharmacy degree from the State University of New York at Buffalo, and her
pharmacy degree from Université Laval, Québec City, Canada.
Tatjana May has been with Shire since
May 2001. She is General Counsel and Company Secretary and a member of Shire’s
Leadership Team. Ms May was previously Assistant General Counsel at the
corporate headquarters of AstraZeneca plc and prior to that she worked at the
law firm Slaughter and May.
Anita Graham has been with
Shire since January 2004. She is Executive Vice President Corporate
Business Services and Chief Administrative Officer and a member of Shire’s
Leadership Team. Ms Graham was previously Vice President of Human Resources at
Cytyc Corporation. She also held senior HR positions at Serono, Inc. and Scudder
Kemper Investments, Inc. (now part of Deutsche Bank) and has extensive
experience in all aspects of HR, both in Europe and the US.
Barbara Deptula has been with
Shire since September 2004. She is Executive Vice President and Chief Corporate
Development Officer and a member of Shire’s Leadership Team. Ms Deptula was
previously President of the biotechnology division of Sicor Inc. and Senior Vice
President for commercial and product development at Coley Pharmaceutical
Group. She also held senior management positions focused on marketing,
product development, licensing and business development at US Bioscience,
Schering-Plough, American Cyanamid, and Genetics Institute.
The members of the
Audit, Compliance & Risk Committee as at December 31, 2009 were Mr Kappler,
Mr Langlois, Ms Nealon and Mr Stout.
The Board of
Directors has determined that Mr Kappler is the serving financial expert on the
Audit, Compliance & Risk Committee and that he is independent as defined
under applicable SEC rules. A description of Mr Kappler’s relevant experience is
provided above.
Code
of Ethics
Shire’s Board of
Directors has adopted a Code of Ethics that applies to all its directors,
officers and employees, including its Chief Executive Officer, Chief Financial
Officer and Group Financial Controller. The Code of Ethics is posted on Shire’s
internet website at www.shire.com.
As a foreign
private issuer incorporated in Jersey with its principal listing on the London
Stock Exchange, Shire follows its “home country” corporate governance practices
in lieu of the provisions of The NASDAQ Stock Market’s Marketplace Rule 4350
that apply to the nomination of directors and the constitution of a quorum for
any meeting of shareholders.
The NASDAQ Stock
Market’s rules require that new directors are selected, or recommended for the
board’s selection, by a majority of independent directors or a nominations
committee comprised solely of independent directors. In compliance with Jersey
law and the provisions of the UK Combined Code on Corporate Governance June
2008 (the “Combined Code”), new directors at Shire are nominated by a nomination
committee comprised of three members. Mr Matthew Emmens, who is a member of the
committee, is not regarded as “independent” under The NASDAQ Stock Market’s
rules.
Shire also complies
with the laws of Jersey and the Combined Code in lieu of The NASDAQ Stock
Market’s rules regarding the constitution of a quorum for any meeting of
shareholders. The NASDAQ Stock Market’s rules provide for a quorum of no less
than 33 1/3% of Shire’s outstanding shares. However, Shire’s By-laws provide
that a quorum has been established when two members are present in person or by
proxy and entitled to vote except where the rights attached to any existing
class of shares are proposed to be varied, and then the quorum shall be two
persons entitled to vote and holding or representing by proxy not less than
one-third in nominal value of the issued shares of the class.
In respect of the financial year to
December 31, 2009, the total compensation paid to Shire plc’s directors and
executive officers as a group for the periods during which they served in any
capacity was $43.9 million. The total amounts set aside or accrued by the
Company to provide pension, retirement or similar benefits for this group was
$1.2 million. During 2009, members of the group were granted options over
ordinary shares and ADSs of the Company. All such holdings were issued pursuant
to the various executive share option plans described in Note 31 to the Company’s consolidated financial
statements contained in ITEM 15: Exhibits and financial statements schedules of
this Annual Report.
The Company provides information on the
individual compensation of its directors in the Directors’ Remuneration Report
included within its financial statements filed with the United Kingdom Listing
Authority (“UKLA”). As the remuneration report is made publicly available, it is
reproduced in full below. As at the time of filing this Form 10-K, the
Directors’ Remuneration Report is subject to approval by Shire plc’s
shareholders at the Annual General Meeting.
Introduction
This report meets the relevant
requirements of the Listing Rules of the Financial Services Authority and
describes how the Remuneration Committee has applied the principles relating to
Directors’ remuneration in
the Combined Code. The
Report complies with the Companies Act 2006 and related regulations.
Unaudited
Information
Dear Shareholder
I am pleased to present the Directors’
Remuneration Report for Shire plc.
2009 was a challenging and
transformational year for Shire. In his first full year as CEO, Angus
Russell led the Company in achieving excellent results, which reflected the
success of Shire’s focused strategy and business model.
Some key accomplishments in 2009
included significant growth in core products, an increasing international reach,
and a pro-active approach to cost management, all of which helped to offset the
loss of exclusivity for ADDERALL XR. Growth prospects remain
excellent and the Company’s core product portfolio currently has robust
exclusivity protection. The Company successfully launched INTUNIV in the US and
several product launches are planned, subject to regulatory approval, in the US,
EU, and ROW for 2010, including VPRIV in the US and EU.
To ensure the strategy and the
achievement of business objectives are supported by the Company’s reward
programs, the Remuneration Committee conducted a Total Rewards Effectiveness
Review at the end of 2008. This review resulted in a number of
changes being made to our reward policy and compensation plans for both
executive directors, senior leadership (i.e., Leadership Team members), and the
broader employee population. Shareholder views were also taken
into account in the re-design of compensation plans, as a number of changes are
aligned with shareholder feedback on best practice.
The Remuneration Committee has approved
a number of changes to reward policy and design of the Company’s compensation
plans for 2010. Where appropriate, this report includes detail on
plans in effect in 2009 as well as descriptions of planned arrangements for
2010. At the date of the publication of this report, however, the Remuneration
Committee is in the process of consulting with shareholders on the proposed
changes to the long-term incentive arrangements for the 2010 financial
year. Any material changes which result following this consultation
will be explained to shareholders in the Chairman’s letter accompanying the
Notice of the Company’s 2010 Annual General Meeting.
The Remuneration Committee believes the
changes to be implemented in 2010 will play a key role in helping the
Company deliver on its strategy in the coming years.
In addition to revising reward programs
we have also revised the Remuneration Report to improve its usefulness to
readers. For example, to ensure changes are transparent to
shareholders, we have included a comparison table in the Executive Remuneration
Package Section to provide an “at-a-glance” summary of key changes. The
Remuneration Report is grouped into four sections:
·
The
Remuneration Committee, which provides information on the
individuals making remuneration decisions and their activities for the
year 2009;
Remuneration
Policy, which
describes Shire’s guiding principles on remuneration for Executive
Directors, senior leadership, and the broader employee
population;
·
The Executive
Remuneration Package,
which explains the components of Shire’s 2009 executive compensation
packages and how they will change in 2010;
and
·
The Performance
Graph, to provide information on Shire’s
performance over a five-year period, compared to its
competitors.
The Remuneration Committee remains
committed to a continuing dialogue with shareholders and we take account of your
views. We hope that this report provides helpful context and
explanation of the policies and practical considerations that influence our
decisions.
The Remuneration Committee (the
’Committee’) is responsible for developing, reviewing and overseeing the
implementation of the Company’s compensation and benefits policy. The Committee
reviews and approves all elements of the Executive Directors’ remuneration, as
well as the broad policy for the remuneration of senior leadership (i.e.,
Leadership Team members) and the wider employee population.
The constitution of the Committee
complies with the Combined Code. In February 2010, the Committee reviewed its
Terms of Reference and confirmed that these effectively reflect its
responsibilities. The Terms of Reference are available on the
Company’s website at www.shire.com.
The Board considers all members of the
Committee to be independent. The following Directors served as
members of the Committee during the year:
The Chairman and the CEO attend meetings
of the Committee by invitation, but neither is involved in any decisions
relating to his own remuneration.
The Committee was materially assisted in
2009 by JoAnn Verderese, Vice President, Total Rewards.
PricewaterhouseCoopers LLP served as the
independent external advisor to the Committee. In addition,
PricewaterhouseCoopers LLP also provided a broad range of consultancy services
to Shire, primarily in respect of accounting and tax matters in 2009.
Remuneration Committee Activities for
2009
The Committee met five times in
2009. All members attended all meetings they were eligible to attend,
except for Dr Rosenblatt, who did not participate in the December 2009
meeting.
In 2009, the Committee discussed the
following key topics and standing agenda items:
Key
Topics
·
Remuneration Policy, including
Guiding Principles for Reward Programs and confirmation of compensation
philosophy
·
Changes to the Annual Incentive
Plan
·
Changes to the Executive Annual
Incentive Plan ("EAIP")
·
Changes to the Long-term Incentive
Plan ("LTIP")
·
Changes to performance measures
for awards to Executive Directors in the
LTIP
·
Tax and immigration impact of CEO
relocation to the US
Standing Agenda
Items
·
Final 2008 compensation
awards for the Leadership Team, including salary increases, bonuses, and
equity awards
·
Assessment of 2008 corporate
performance against the 2008 Corporate Scorecard and determination of the
Corporate Annual Incentive Modifier for all bonus-eligible
employees
·
2008 Directors’ Remuneration
Report
·
2009 Annual Equity
Grant
·
2009 Chairman’s
fees
·
CEO and CFO objectives for
2009
·
Annual offerings of Employee Stock
Purchase Plans ("ESPP") and
sub-plans
Determination of the vesting
percentage of 2006 Portfolio Share Plan for Executive
Directors
·
Market data review to determine
approach to 2010 salary increases for Executive
Directors
·
Compensation for CEO, CFO, and the
Leadership Team based on 2009
performance
·
Updates on regulatory
changes
In addition to impact of decisions on
the Executive Directors and the Leadership Team, a number of decisions made by
the Committee had significant impact on the wider employee
population. Examples of these include:
·
Approval of the new Annual
Incentive Plan to apply to all employees below senior
leadership
·
Approval of changes to equity
plans for employees below senior leadership which will be put to a
shareholder vote at the upcoming Annual General
Meeting
·
Review of the annual compensation
process for all employees, including review of overall performance levels,
range of salary increases, bonus payouts, and equity awards.
Remuneration Policy
The Committee considers that an
effective remuneration policy, aligned to the Company’s business needs, is
important to the Company’s success. It directly impacts the Company’s ability to
recruit, retain and motivate employees of the highest calibre who will be able
to deliver sustained value to shareholders, even in the most challenging
times.
In 2009 the Committee approved the Total
Rewards Guiding Principles for reward programs for all employees, including
Executive Directors, senior leadership, and the broader employee
population. The guiding principles are:
Guiding
Principle
Description
Simple and
Understandable
·
Each element of the package has a
clear purpose
·
Plan drivers are easily understood
by participants
·
Pay decisions are not
mechanistic
·
Plans are simple to
implement
·
Plans are transparent and easily
communicated
Competitive
·
Plans are competitive with the
external market
·
Plans help to attract and retain
talent
Strategically and Culturally
aligned
·
Incentive Plans, support success,
aligned with Company goals
·
Plan designs support Company
Culture
Performance
Oriented
·
Differentiate based on
performance
·
Maintain link to overall Company
Performance
Valued by
Employees
·
Employee perceived value is
aligned with cost to Company
·
Plans drive shareholder
value
·
Plans minimize accounting cost and
provide tax efficiencies where
possible
In addition, the Committee reconfirmed
the following compensation philosophy:
·
Pay should be targeted at the 50th
percentile for median level performance. However, compensation
plans should allow for the achievement of top quartile pay levels, if
appropriate, to recognize the highest levels of
performance.
·
Benchmarking should consider each
individual component of pay (base salary, annual incentive, and long-term
incentive targets). Additionally, market data for total cash
and total direct compensation will also be part of the pay
decision.
·
Percentage of pay at risk should
consider the external
market.
·
Further guidelines for Executive
Directors and other members of senior leadership
include:
Base pay and incentive targets are
determined with reference to a blended US/UK market comparison group. Pay
is targeted at or around the median relative to the comparison group and
actual amounts may be higher or lower than the median based on
performance;
·
The Committee currently aims for
variable compensation to represent over two-thirds of total remuneration;
and
·
Executive Directors and senior
leadership are encouraged to own shares in the Company in order to ensure
the alignment of their interests with those of the Company’s
shareholders.
The Remuneration policy, through the
Guiding Principles and compensation philosophy, is designed to balance the needs
of the Company, the shareholders, and employees. It recognizes the
importance for reward programs to link to Company strategy, with a focus on
performance and achieving shareholder value, while also providing programs that
are competitive, are valued by employees, and reward them for strong performance
in the achievement of Company and individual goals.
The Committee was also mindful of
achieving this balance in 2009, in light of the wider economic
downturn. The Committee recognized this external environment in
making decisions and was focused on ensuring that salary increases, plan payouts
for bonuses and long-term incentives were closely aligned to Company performance
and the creation of shareholder value.
The Executive Remuneration
Package
Following are the main elements of the
remuneration package, with specific details for each of the Executive
Directors:
1.
Salary
2.
EAIP
(a)
Cash
Component
(b)
Share
Component
3.
Long-term
incentives
(a)
Portfolio Share
Plan
i.
Stock Appreciation Rights
("SARs")
ii.
Performance Share Awards
("PSAs")
4.
Pension and other
benefits
An appropriate balance is maintained
between fixed and performance-related remuneration and between elements linked
to short-term financial performance and long-term shareholder value
creation. The EAIP and LTIPs are considered performance-related
elements, while base salary is essentially ‘fixed’, although performance is
considered when determining annual increases. Assuming on-target performance,
the CEO’s remuneration for 2010 is 27% fixed and 73% variable, and the CFO’s
remuneration is 30% fixed and 70% variable.
The Committee reviews salaries
annually. Salaries are targeted at or around the median of a
comparator group that is a blend of US and UK companies with sector, size,
complexity, and international characteristics similar to those of the
Company. Market data is provided by independent external consultants,
who also advise the Committee on overall external market
conditions.
Base salary levels and salary increase
decisions take into account the competitive market data, the Company’s budget
for performance-related pay increases, and the skills, performance and results
achieved by each individual. Salaries may be positioned below
median for those who are new to their role or under-performing, while salaries
for consistently strong performers may be positioned at median or higher. This
approach positions pay comparably to those companies with whom the Company
competes for talent, while also providing the flexibility to recognize
individual performance.
The following salaries for the CEO and
CFO were determined based on a review of competitive market data, and on
corporate and individual performance results:
·
When Mr. Russell was
appointed CEO effective June, 2008, the Remuneration Committee decided to
set his salary below median, recognizing that future salary growth would
be subject to performance in his new position. As was disclosed
in the 2008 Directors’ Remuneration Report, the Committee reported it
would review Mr Russell’s salary annually and that subject to continuing
satisfactory performance, it would look to bring it to the
median over
the course of two years. Consistent with this approach and on
the basis of actual performance, Mr Russell’s salary has been increased
for 2010 such that it is now at median compared to benchmark data.
His 2010 salary,
effective January 1, will be $1,200,000 (equivalent to £750,000 at the
exchange rate applied at the time of decision). Mr Russell’s
salary is now denominated in US Dollars to reflect his change in residency
to the US.
·
Mr Hetherington’s salary was
increased from £416,000 to £435,000 effective January 1,2010. This competitive salary reflects his performance since
joining the Company in July,
2008.
2. Executive Annual Incentive
Plan
Executive Directors and the Leadership
Team participate in the EAIP, which rewards participants based on achievement of
pre-defined, Committee-approved corporate objectives and individual objectives.
The EAIP is awarded in a combination of cash, which is delivered shortly after
the close of the fiscal year, and restricted shares, which are released on the
third anniversary of the date of the award. The EAIP is designed
to provide a strong performance/shareholder value orientation and reward
executives for the creation of shareholder value.
Corporate objectives are organized and
weighted in a scorecard format (the "Scorecard'), which focuses on all areas
that drive the success of the business: financial (40% weighting), customer (15%
weighting), people and capabilities (15% weighting), and operational excellence
(30% weighting). Each objective includes a description of the
objective and key performance measures, including targets and
deadlines.
The Committee assesses the level of
performance relative to the key performance measures, ensuring that both
non-financial and financial results are considered. Financial
objectives are assessed on the Company’s non GAAP financial results as reported
in the Company’s full year earnings release. These non GAAP measures
exclude the effect of certain cash and non-cash items, both recurring and
non-recurring, that Shire’s management believes are not related to the core
performance of Shire’s business.
The extent of awards under the EAIP
is determined by the Committee based on the level of achievement for all key
performance measures, as well as the Company’s response to external
opportunities and events that could not have been predicted at the beginning of
the year.
2009 EAIP
and Results
2009 key performance measures, as
provided in the Scorecard include:
·
Achieve target net product
sales
·
Achieve target Non-GAAP earnings
before interest tax depreciation and amortization
("EBITDA")
·
Improve ranking among peer
group for Non-GAAP
EBITDA
·
Achieve target proportion of net
sales from products that have launched within the last three
years
·
Achieve target proportion
of net product sales from markets outside of the
US
·
Achieve selling, general and
administrative ("SG&A") costs and research and development
("R&D") costs targets as a proportion of net product
sales
·
Achieve “best in class” ratings in
therapeutic areas
In addition, the Executive Directors
have individual objectives which are approved by the
Committee.
The Committee assesses performance
against annual objectives in the first quarter of the following year. The target
incentive is paid if Executive Directors have fully achieved their individual
objectives and the corporate objectives have been met. The maximum incentive is
paid when the Committee determines that individual and/or corporate performance
has been exceptional. The table below outlines the 2009 incentive opportunities
for each:
Target
incentive
(as a %
of salary)
Maximum
incentive
(as a %
of salary)
Weighting of
target
incentive
objectives
Corporate
Individual
Angus Russell
CEO
65% cash
20% restricted
shares
115% cash
65% restricted
shares
100%
Will be taken into account in
determining final award
Graham
Hetherington
CFO
55% cash
15% restricted
shares
100% cash
55% restricted
shares
70%
30%
For 2009, the Committee made award
determinations for Mr Russell and Mr Hetherington as
follows:
·
Mr Russell was awarded a cash
award of 81% of base salary and his share award was 46% of base
salary.
·
Mr Hetherington was awarded a cash
award of 64% of base salary and a share award of 44% of base
salary.
These incentive awards are consistent
with the overall performance of the Company in 2009, which
included:
·
Growth in core products of 25%
over 2008 and only a 2% decrease in total product sales, despite the loss
of exclusivity for ADDERALL
XR;
·
Non-GAAP EBITDA of $982 million,
ahead of target, as the marginally lower revenues and Shire’s increased
investment in R&D in 2009, were partially offset by
lower SG&A costs from Shire’s continued focus on cost
management;
·
Net product sales for ex-US
markets at 30% of total product sales, ahead of target;
and
·
A successful launch of INTUNIV,
and the acceleration of the VPRIV program in response to the ongoing
shortage of the currently marketed treatment for Type 1 Gaucher
disease.
Employees below senior leadership
participate in a cash-based annual incentive plan that applies the same
Scorecard format used for Executive Directors and the Leadership
Team. However, the percentage of bonus tied exclusively to Corporate
objectives gradually decreases based on each employee’s level of responsibility
within the Company. Personal objectives are developed for each
employee based on corporate objectives and individual awards are determined
based on achievement of individual and corporate objectives.
2010
EAIP
The 2010 EAIP will continue to use a
scorecard approach for setting and evaluating
objectives. The key performance measures for 2010 will be
broadly consistent with those used for 2009. While the four scorecard
dimensions are
unchanged, the weightings have been
adjusted to increase the impact of People and Capabilities (from 15% to 20%) and
decrease Operational Excellence (from 30% to 25%).
The most significant change to the EAIP
is the allocation of cash and shares. Under the previous plan design,
the cash award and the share award were calculated separately, each with its own
target, minimums and maximums. In 2010, participants will have one
bonus target, representing both cash and shares.
In the first quarter of the following
year, the bonus will be adjusted by a corporate bonus modifier, which will be
determined by the Committee based on the achievement of scorecard
goals. Each EAIP participant will be eligible to receive a bonus
based on the combination of achievement of these goals and individual
performance.
This bonus will be allocated 75% cash
and 25% restricted shares; the shares will be released on the third anniversary
of the date of the award. The maximum award will be 200% of
target.
Annual incentive targets for the CEO and
CFO and the maximum payment for the CFO have been adjusted slightly to align
with the new 200% maximum. The changes are supported by the blended
US/UK market data used for benchmarking these roles.
Incentive Target
(Percent of Base
Salary)
Incentive Maximum
(Percent of Base
Salary)
Incentive
Maximum
(Percent of
Target)
Angus Russell (CEO)
90%
180%
200%
Graham Hetherington
(CFO)
80%
160%
200%
3. Long-Term
Incentives
2009
LTIP
Long-term incentives in 2009 were
granted under the Portfolio Share Plan (the “PSP”). The purpose of the PSP is to enable the
Company to motivate and reward selected employees by reference to share price
performance, and to align the interests of these employees with long-term value
creation for shareholders. Participation in the Plan is
discretionary.
Under the PSP, awards granted to
Executive Directors will be subject to a performance target, which must, in
normal circumstances, be met before the award vests. Performance targets will
normally be measured over a period of not less than three years. Special rules
apply if the participant’s employment terminates early or on a change in control
of the Company.
The PSP is comprised of two parts, which
can be operated separately.
·
Part A - A SAR
Award is the right to receive shares or
American Depositary Shares ("ADSs") in Shire plc linked to the increase in
value of a specified number of shares over a period between three and five
years from the date of grant and, in the case of Executive Directors,
subject to the satisfaction of performance targets. SAR Awards will
normally vest three years after the date of grant, subject to the
satisfaction of performance targets in the case of Executive Directors,
and can be exercised up to the fifth anniversary of the date of
grant.
·
Part B - A PSA
Award is the right to receive a
specified number of shares or ADSs three years from the date of grant. In
the case of Executive Directors, performance targets must be satisfied
before a PSA Award vests. Upon vesting of the PSA Award, shares will be
released to the participant automatically without any action on the part
of the participant.
For 2009, the PSP contained individual
grant limits set at a face value of six times base salary for SAR Awards in any
one year and four times base salary for PSA Awards in any one
year. Annual grants to the CEO and CFO in 2009 had the following face
values (calculated by reference to the average share price over the prior
12-month calendar period):
·
for the CEO, equivalent to
approximately 4 times base salary in SARs and 3 times base salary in PSAs;
and
·
for the CFO, equivalent to
approximately 2.2 times base salary in SARs and 1.65 times base salary in
PSAs.
Performance
criteria
SAR and PSA Awards under
the PSP normally vest on the third anniversary of the date of grant. In the
case of Executive Directors, awards will only vest if the Committee determines
that the performance conditions have been satisfied and that, in the opinion of
the Committee, the underlying performance of the Company is sufficient to justify the vesting of
the award.
Performance criteria for 2008 and 2009 are based on relative Total Shareholder
Return (‘TSR’) measured against two comparator groups. Vesting of 33% of an Award will depend upon the
Company’s performance
relative to the TSR performance of FTSE 100 constituents, excluding financial
institutions. The vesting
of the remaining 67% of an
Award will depend upon the Company’s performance relative to the TSR
performance of a group of international companies from the pharmaceutical sector (see
below). Vesting will be as follows:
Percent
Vesting
Performance Level
Achieved
0% Vesting
Performance below the median
versus the comparator companies and the FTSE 100 (excluding financial
institutions)
33% Vesting
Performance at median versus the
comparator companies and the FTSE 100 (excluding financial
institutions)
100%
Vesting
Performance at or above upper
quartile performance versus the comparator companies and the FTSE
100 (excluding
financial institutions)
Performance between median and upper
quartile versus the comparator companies and the FTSE 100, excluding financial
institutions, is calculated
from 33% to 100% on a straight-line basis.
For 2008, the comparator group of
international companies from the pharmaceutical sector comprised the following
companies:
Allergan, Inc., Altana Aktiengesellschaft, Biovail Corporation (‘Biovail’), Cephalon
Inc. (‘Cephalon’), Forest Laboratories Inc. (‘Forest
Labs’), King Pharmaceuticals Inc.
(‘King’), Kos Pharmaceuticals Inc., H. Lundbeck A/S (‘Lundbeck’), Medicis Pharmaceutical Corporation, Novo Nordisk A/S (‘Novo Nordisk’), Schering AG, Sepracor Inc., Merck Serono S.A.
, UCB S.A. (‘UCB’), Valeant Pharmaceuticals
International, and Watson Pharmaceuticals
Inc..
The Committee has the discretion to
amend this group of companies to ensure that the group stays both relevant and
representative; however, the change must not have the effect of making the
performance criteria either materially easier or materially more difficult to
achieve, in the opinion of the Committee, than they were immediately before the
change.
For the 2009 award, the Committee has decided that the
comparator group will comprise the following international companies from the
pharmaceutical sector. These companies are peers identified by the
Company in 2008: Actelion Pharmaceuticals Ltd, Amgen Inc., Biogen
Idec Inc., BioMarin, Biovail, Celgene Corporation, Cephalon, Endo
Pharmaceuticals Holdings Inc., Forest Labs, Genzyme, Gilead, Ipsen Ltd, King,
Lundbeck, Novo Nordisk, UCB (the "2009 Comparator Group").
TSR performance will be measured using
an averaging period of three months. In addition, the Committee will have regard
to the same calculation using an averaging period of six months as part of a
fairness review to ensure that vesting properly reflects underlying
performance.
If the performance conditions are not
met, awards will lapse.
For the 2006 PSP award which vested in
August 2009, Shire’s TSR was 10.4% for the 3-month averaging period, which
placed it 20th among the FTSE 100 (excluding Financial
Institutions) and 4th among its pharmaceutical
competitors. This resulted in a vesting of 99% of the
award.
Awards made to Executive Directors under the PSP in
2009 are set out in the
audited information below.
2010
LTIP
For 2010, the PSP Award (as a percentage
of base salary) for the CEO will remain unchanged.
The PSP Award (as a percentage of base
salary) for the CFO has been increased slightly to reflect market
practice. Awards made under the 2010 plan will be SARs approximately
equivalent to 300% of base salary and PSAs approximately equivalent to 220% of
base salary.
The current performance condition under
the PSP is TSR against the two peer groups outlined above. However, the
Committee is, at the date of this report, consulting with shareholders on
potential changes to the performance metrics under the long-term incentive plan
for the 2010 financial year. Any material changes as a result of this
consultation will be explained to shareholders in the Chairman’s letter
accompanying the Notice of the Company’s 2010 Annual General
Meeting.
The Committee will review the
quantum each year to ensure this is still in line with the stated philosophy and
if any changes are proposed these will be included in the Directors’
Remuneration Report in the year ended prior to the awards being
made.
At-a-Glance Changes to Executive Director Remuneration
Arrangements – 2009 to
2010
Plan
2009
2010
Base Salary
Approach
Target median using a blend of
US/UK market data for comparable companies
No
change
Base Salary
Amounts
CEO - £682,000 (equivalent to
$1,091,000 based on the exchange rate at the time of the 2010
salary increase decision)
CFO -
£416,000
CEO - $1,200,000 US (equivalent to
£750,000 based on the exchange rate at time of the 2010 salary
increase decision)
CFO -
£435,000
Executive Annual Incentive
Plan
Cash and share components of plan
operated separately
Cash and share components
combined. Incentive amount (both cash and shares) based on
corporate and individual performance; determined based on a simplified
pool approach; amount is allocated 75% cash, 25%
shares
Executive Annual Incentive Plan
Targets and Maximums (as percentage of base salary)
Face Value of Long-Term Incentive
Targets and Maximums (as percentage of base salary)
CEO – SARs 400%, PSAs
300%;
CFO – SARs 220%; PSAs
165%
CEO – SARs 400%, PSAs
300%
CFO – SARs 300%; PSAs
220%
4. Share Ownership
Guidelines
The Committee believes that Executive
Directors and senior leadership (“Executives”) should be encouraged to own shares in
Shire plc in order to ensure the alignment of their interests with those of
Shire plc’s shareholders.
The Executive Share Ownership Guidelines
are administered by the Committee and are based on the following
principles:
·
the Committee believes that share
ownership is an important element of an Executive’s role in leading the
Company and
represents both a commitment by the Executive as well as an alignment
of the Executive’s interests with those of
shareholders.
·
the Committee believes that share
ownership by Executives should be strongly
encouraged, but not
mandated.
·
the Committee understands that,
depending on personal and other circumstances, an Executive may not be able to
achieve the desired level of share
ownership.
·
the Committee believes that
Executives should understand the
importance of share ownership in the stewardship of the Company, and both appropriate time and
latitude will be provided to Executives to achieve desired share
ownership levels, where
possible.
·
share ownership levels will be
reviewed annually for each Executive.
Executives are encouraged, within a
five-year period following the later of either the initiation of these
guidelines, or their appointment or election, to attain and hold an investment
position no less than the multiples of base salary set forth
below.
The following are the guideline share
ownership levels for the Executive Directors:
·
CEO: 2 x base
salary
·
CFO: 1.5 x base
salary
All shares beneficially owned by an
Executive count towards achieving these
guidelines.
The Committee reviews share ownership
levels for each Executive on an annual
basis.
5. Pension and other
benefits
The Company’s policy is to ensure that pension
benefits are competitive in the markets in which Shire
operates.
In 2009, the Company contributed 30% of salary towards pension benefits for
Mr Russell into a UK HM Revenue &
Customs registered defined contribution scheme, which Shire operates for
UK employees. Concurrent with
his move to the US, Mr Russell will participate in the
Supplemental Employee
Retirement Plan (‘SERP’) and 401(k) Plan in the US. The SERP is an unfunded defined
contribution scheme; the benefits are payable to certain senior US employees as
lump sums on leaving the Company’s
employment or earlier due to death,
disability or termination. The amount of benefit is based on the value of
notional contributions adjusted for ‘earned’ investment returns as if they were
invested in investments of the employees’ choice. Shire will contribute 30% of
Mr Russell’s annual salary to these plans.
Mr Hetherington participates in the
defined contribution scheme in the UK. The Company contributed
25% of Mr Hetherington’s salary towards pension benefits for
him in 2009, and will
continue to do so in 2010.
In addition to pension benefits, the
Executive Directors receive certain benefits in kind, principally a car or car
allowance, life insurance, private medical insurance and dental cover.
These benefits are not
pensionable.
For 2010, Mr Russell’s benefits will be
delivered under US benefits programs. The value
of these benefits is comparable to those that would have been delivered in the
UK and are not
pensionable.
The Executive Directors’ service contracts
are based on a rolling term. The contracts contain
obligations on the Executive Directors in respect of intellectual property,
together with post-termination restrictions. The Committee’s view is
that the Company should
retain the right to make a payment in lieu of notice to a
Director. In the
event of early termination, Executive Directors should be treated fairly but
paid no more than is necessary. Moreover, there should be no element of reward
for failure.
Mr Russell’s contract, which is dated July 2, 2008,
reflects his promotion to CEO in June, 2008 and
incorporates contract
provisions reflecting current best practice for Executive Directors’ contracts.
Effective January 1,2010, Mr Russell’s contract was amended to reflect his move to the US, including changes to benefits and
pension arrangements noted above. Otherwise, all terms remained the
same except for those required for the contract to be compliant with
US law.
Mr Hetherington’s contract is dated July2, 2008. Mr Russell’s and Mr Hetherington’s contracts require them to give
Shire 12 months’ notice. Shire is required to give Mr Russell and Mr
Hetherington 12 months’ notice of termination, other than if termination is for
cause.
The contracts contain phased payment
provisions which would entitle Shire to terminate an Executive Director’s
employment and make a severance payment not as a lump sum but in monthly
instalments over the length of the notice period. These provisions allow
the payments to be reduced, or eliminated entirely, by income obtained by the
director from a new post.
In the event of termination of
employment within 12 months of a change in control, the amount payable to Mr
Russell and Mr Hetherington is one year’s salary and the cash equivalent of one
year’s pension, car and other contractual benefits. Any annual bonus payable is
at the discretion of the Committee and is capped at the contractual maximum
level.
The amount of annual bonus payable upon
termination of employment in any other circumstances, other than for cause, is
at the discretion of the Committee and is capped at the contractual target
level.
Non-Executive Directors and the
Chairman
Each Non-Executive Director is paid a
fee for serving as a Director and additional fees are paid for membership or
chairmanship of the Audit, Compliance & Risk, Remuneration, Nomination and
Science & Technology Committees. The Chairman of the Company receives an
inclusive fee. Fees are determined by the Executive Directors and the Chairman,
with the exception of the Chairman’s fee which is determined by the Committee
and confirmed by the Board. Fees are benchmarked against Chairman and
Non-Executive Director fees of comparable companies. The fees paid to the
Chairman and Non-Executive Directors are not performance-related. Details of
fees paid to the Chairman and Non-Executive Directors in 2009 are set out in the
table below.
The Non-Executive Directors are not
eligible to join the Company’s pension scheme. Non-Executive
Directors do not participate in any of the Company share schemes or other
employee benefit schemes and no options have been granted to Non-Executive
Directors in their capacity as Non-Executive Directors of Shire
plc.
Non-Executive Directors are appointed by
the Board ordinarily for a term of two years. At the expiration of
the two year term Non-Executive Directors are not required to be re-elected by
shareholders (unless the expiration of the term coincides with a particular
Non-Executive Director's turn to retire by rotation), but may be re-appointed by
the Board. Non-Executive Directors who have served on the Board for
nine years or more are appointed by the Board for one year terms and, in
accordance with the Code, are subject to annual re-election by
shareholders. Non-Executive Directors are not entitled to
compensation for loss of office.
Details of the unexpired terms of the
letters of appointment are as follows:
Director(1)
Date of
appointment
Date of
term
expiry
Matthew
Emmens
06.18.08
06.17.10
David
Kappler
04.05.10
04.04.12
Patrick
Langlois
11.11.09
11.10.11
Kate Nealon
07.27.08
07.26.10
Dr Jeffrey
Leiden
01.01.09
12.31.10
David Stout
10.31.09
10.30.11
(1)
All Directors are subject to a three month notice period.
The fee policy structure and the fees
payable to for Non-Executive Directors, effective January 1, 2010
remain the same as for the
prior year and are
presented in the table below:
Annual
Fees(1)
£
Board
membership
Chairman of the Board (inclusive
of all committees)
340,000
Deputy Chairman and Senior
Independent Non-Executive Director (inclusive of Non-Executive Director
fee)
82,500
Non-Executive
Director
70,000
Committee
membership
Audit, Compliance & Risk
Committee Chair
20,000
Remuneration Committee
Chair
12,500
Nomination Committee
Chair
12,500
Science & Technology Committee
Chair
12,500
Audit, Compliance & Risk
Committee member
10,000
Remuneration Committee
member
7,500
Nomination Committee
member
5,000
Science & Technology Committee
member
7,500
(1)
Non-Executive
Directors receive a £5,000 travel allowance for each transatlantic
trip
made on Board
business.
Performance graph
The graphs below set out the TSR for the
three and five years ending December 31, 2009. The graphs compare the
performance of a hypothetical £100 holding of Shire plc’s shares with that of a
holding of shares in the FTSE 100 index (excluding financial institutions) and
with a holding in the 2009
Comparator Group. This
comparator group is a blend of US and UK companies with sector, size, complexity
and international characteristics similar to those of the Company. The Company
is a member of the FTSE 100 Index and consequently, for the purpose of the
graphs which are set out below, the FTSE 100 Index (excluding financial
institutions) was also selected as the appropriate index. These
comparisons will also be used to
Mr Russell was a Non-Executive Director of The City of
London Investment Trust plc (and its associated companies, The City of London
European Trust Limited, The City of London Investments Limited and The City of
London Finance Company Limited) until June 30, 2009 when he resigned from the board of
The City of London Investment Trust plc and its associated
companies. In this
capacity, he was paid £11,500 in 2009 (2008: £23,000), which he retained.
Mr Hetherington was appointed as a
Supervisory Board member of Jerini AG in 2008. He has assigned all rights to fees due to
Shire.
Audited
information
Summary of Executive Directors’
remuneration
The following table gives details of the
remuneration received in 2009 by each Executive Director individually, including
the value of options exercised, SAR Awards exercised, PSA Awards released and
LTIP Awards released.
Basic
salary
Incentive(1)
Car
allowance
Benefits in kind(2)
Total
Pension
contributions
Cash
element
Restricted
share
element
2009
£’000
2008
£’000
2009
£’000
2008
£’000
2009
£’000
2008
£’000
2009
£’000
2008
£’000
2009
£’000
2008
£’000
2009
£’000
2008
£’000
2009
£’000
2008
£’000
Angus
Russell(3)(4)(5)
684
524
552
572
314
323
18
16
1
11
1,569
1,446
188
223
Graham
Hetherington(6)(7)
416
200
267
139
183
77
12
6
2
1
880
423
243
51
(1)
Cash
element includes any amounts paid into pension arrangements as
supplemental pension contributions in return for an equivalent waiver in
the cash element.
(2)
Benefits
in kind are comprised of private medical insurance and tax return
preparation.
(3)
Mr
Russell received a long service award of £1,864.41 in 2009 which is
included in his basic
salary.
In
2008, Mr Russell contractually agreed with his employing company that
supplemental pension contributions amounting to £75,000 be made into his
pension arrangements in return for an equivalent waiver in the cash
element of his EAIP award for the 2007 performance
period.
(5)
Mr
Russell received a basic salary of £414,170 p.a. as CFO pro-rated for the
period January 2008 to June 2008 and a basic salary of £602,000
p.a. as CEO pro-rated for the period June 2008 to
December 2008.
(6)
In
2009, Mr Hetherington contractually agreed with his employing company that
supplemental pension contributions amounting to £139,000 be made into his
pension arrangements in return for an equivalent waiver in the cash
element of his EAIP award for the 2008 performance
period.
(7)
Mr
Hetherington was appointed CFO on July 2008 and received a basic
salary of £400,000 p.a. pro-rated for the period until
December 2008.
Summary of
Non-Executive Directors’ fees(1)
The following table gives the total fees
received in 2009 by each Non-Executive Director.
Fees
2009
£’000
2008
£’000
Matthew Emmens(2)
355
158
Dr Barry
Price
88
58
David
Kappler
129
90
Patrick
Langlois
97
70
Dr Jeffrey
Leiden
113
65
Kate Nealon
102
75
David Mott(3)
77
63
Dr Michael Rosenblatt(4)
98
36
David Stout(5)
12
-
(1)
The Non-Executive Directors’ fees
include travel
allowances paid
for each
transatlantic trip
made on Board
business.
The following share options over
Ordinary Shares under the Shire Pharmaceuticals Executive Share Option Scheme
(Parts A and B) (Executive Scheme), the Shire 2000 Executive Share Option Scheme
(Parts A and B) (2000 Executive Scheme) and the Shire Sharesave Scheme
(Sharesave Scheme) were outstanding, exercised or lapsed during
2009.
Options
granted under the 2000 Executive Scheme are exercisable subject to certain
performance criteria. The
performance criteria were reviewed in 2002 to ensure the criteria
reflected the market in which Shire operates. Given Shire’s development,
it was considered appropriate that an earnings per share-based measure
should be adopted in place of share price growth targets. The performance
criteria are based on real growth in the diluted earnings per share
reported in the Company’s Form 10-K under US GAAP, adjusted to ensure a
consistent basis of measurement, as approved by the Committee,
including the add back of significant one-time items (option EPS).
Therefore, the performance criteria were amended so that an option would
become exercisable in full if Shire plc’s option EPS growth over a
three-year period from the date of award exceed the UK Retail Prices Index
(RPI) for the following tranches of
grants:
Options
with a grant value of up to 100% of salary
RPI
plus 9% (Directors, RPI plus 15%)
Between
101% and 200% of salary
RPI
plus 15%
Between
201% and 300% of salary
RPI
plus 21%
Over
301% of salary
RPI
plus 27%
The
RPI-based
earnings per share performance criteria applied to options granted under the
2000 Executive Scheme from August 2002. After consultation with certain
institutional shareholders, the Company decided that, for options granted under
the scheme from 2004 onwards, the performance condition will be retested once
only, at five years after the grant, if Shire’s option EPS growth falls short of
the minimum annual average percentage increase over the three year period from
grant. Hence the level of option EPS growth in the next two years needs to be
consequentially higher to meet the test.
In
December 2006 the Committee exercised its powers to amend the performance
conditions for options granted under the 2000 Executive Scheme which had not
vested. The RPI based growth rate was replaced with an equivalent fixed growth
rate based on historical and forecast inflation.
Under
Part B of the scheme, six weeks prior to the expiration date, any options that
have not become exercisable at an earlier date, automatically vest without
reference to the performance criteria.
(2)
Mr
Russell’s approved option under the Executive Scheme did not meet the
performance conditions
and consequently they lapsed on December 13,2009.
(3)
Options
granted under the Sharesave scheme are granted with an exercise price
equal to 80% of the mid-market price on the day before invitations are
issued to employees. Employees may enter into three or five-year savings
contracts. Mr Russell’s options under the Sharesave scheme lapsed on
December 31,
2009
at which date he was no longer eligible to participate in the
scheme.
(4)
No
options were granted under the Executive
Scheme or the
2000 Executive Scheme in
2009.
Details of options exercised during the
year are as follows:
The
awards were subject to performance criteria as set out in
the non-audited section of this report and Note 31 to the consolidated
accounts.
(2)
In
accordance with the plan rules, the vested PSA Awards have been
increased to reflect the dividends paid by the Company in the period from
the date of grant to the vesting
date.
(3)
The
percentage of the awards that vested, based
on the performance criteria, was
99%.
(4)
The
gain has been calculated using the mid-market closing
price on the day the shares were
released.
The market price of the Ordinary Shares
at December 31, 2009 was £12.10 and the range during the year was £7.80 to
£12.16. The market price of the ADSs at December 31, 2009 was $58.70 and the
range during the year was $32.02 to $59.80.
EAIP
The following restricted awards were
outstanding or awarded during 2009.
The
awards vested on May 11, 2008 and were released on May 11,2009. The awards were subject to performance criteria measured
over the performance period 2005 to 2008. The percentage of the
awards that vested, based
on the performance criteria, was
88.54%.
(2)
The
value at date of release has been calculated using the mid-market
closing price on the date of
release.
Aggregate
Directors’ remuneration
The following table gives details of the
aggregate
remuneration paid to
Executive Directors and Non-Executive Directors including the value of the
exercise of options, SAR Awards and vesting of PSA Awards.
2009
$’000
2008
$’000
Emoluments
5,508
6,609
Money
purchase pension contributions
674
696
Sub-total of
annual emoluments
6,182
7,305
Other income
arising from release/exercise of long-term incentives(1)
Gains on
exercise of share options and SAR Awards and release of PSA
Awards
22,448
304
Gains on the
release of LTIP Awards
1,904
2,530
Total
Emoluments and other income arising from long-term
incentives
30,534
10,139
(1)
Includes the value of shares that were released under long-term plans and
the
gain realized in these years.
(2)
For the purposes of this table amounts denominated in Pound Sterling have
been converted to US dollar amounts at the average exchange rate for the
year ended December 31, 2009 of £1:$1.5647 and for 2008 of
£1:$1.8542.
Approval
This report was approved by the Board of
Directors on February 17,
2010 and signed on its behalf by:
Set forth in the
following table is the beneficial ownership of ordinary shares on February 18,2010 for (i) each person (or group of affiliated persons) known to the Company
to be the beneficial owner of more than 5% of ordinary shares, (ii) all current
directors, (iii) certain of the Company’s named executive officers in 2009,
where applicable, and (iv) all other current directors and executive officers as
a group. Except as indicated by the notes to the following table, the holders
listed below have sole voting power and investment power over the shares
beneficially held by them. The address of each of Shire plc’s directors and
executive officers is that of Shire plc.
Capital Group
International, Inc. - 11100 Santa Monica Blvd, Los Angeles, CA90025
32,074,620
5.7%
BlackRock
Inc. - 40 East 52nd Street, New York
33,336,203
5.9%
Management
Matthew
Emmens (2)
1,770,239
*
Angus Russell
(3)
452,379
*
Graham
Hetherington
4,000
*
David
Kappler
10,000
*
Patrick
Langlois
-
-
Jeffrey
Leiden
-
-
Kate
Nealon
2,251
*
David
Stout
-
-
Tatjana May
(4)
457,362
*
Anita Graham
(5)
228,501
*
Barbara
Deputla (6)
163,310
*
All Directors
and Executive Officers of the Company (13 persons)
3,520,172
*
* Less than
1%
(1)
For the
purposes of this table, a person or a group of persons is deemed to have
“beneficial ownership” as at a given date of any shares, which that person
has the right to acquire within 60 days after that date. For purposes of
computing the percentage of outstanding shares held by each person or a
group of persons named above on a given date, any shares which that person
or persons has the right to acquire within 60 days after that date are
deemed to be outstanding.
(2)
Includes
1,460,180 ordinary shares issuable upon exercise of
options.
(3)
Includes
266,708 ordinary shares issuable upon exercise of
options.
(4)
Includes
402,134 ordinary shares issuable upon exercise of
options.
(5)
Includes
186,003 ordinary shares issuable upon exercise of
options.
(6)
Includes
105,003 ordinary shares issuable upon exercise of
options.
Set forth in the
following table are the details, for the year to December 31, 2009, in respect
of compensation plans (including individual compensation arrangements) under
which equity securities of the Company are authorized for issuance.
Plan
category
Number
of securities to be issued upon exercise of outstanding equity
awards
Weighted-average
price of outstanding equity awards
Number
of securities remaining available for future issuance under equity
compensation plans(1)
(a)
(b)
(c)
Equity
compensation plans approved by security holders
39,592,554
15.59
8,433,467
Equity
compensation plans not approved by security holders
-
-
-
Total
39,592,554
8,433,467
(1) This number
reflects the maximum number of ordinary shares remaining available for issuance
(excluding the number of ordinary shares reflected in column (a)) upon the
exercise of options that may be issued under the Company’s equity compensation
plans that have specific limits. However, certain of the Company’s plans do not
provide for a maximum amount of options or SARs that may be issued under those
plans. Consequently, it is not possible to calculate the maximum number of
ordinary shares that may be required to settle the exercise of any future
options or SARs issued under those plans. However, the Company follows the
Executive Remuneration - Association of British Insurers (“ABI”) Guidelines on
Policies and Practices that recommend that newly issued shares when aggregated
with awards under all of the company’s other equity compensation
plans, must not exceed 10% of the issued ordinary share capital in any
rolling 10 year period. As a result, the maximum number of ordinary shares
that the Company may issue to satisfy the option and SARs exercises under its
equity compensation plans in accordance with the ABI guidelines is 4,222,591.
Any requirement to settle option or SARs exercises in excess of such limits will
be met by the open market purchase of securities by the Shire Employee Share
Ownership Trust.
ITEM
13: Certain relationships and related transactions and director
independence
The Audit, Compliance & Risk Committee
reviews the scope and results of the audit and non-audit services, including tax
advisory and compliance services, provided by the Company’s Independent
Registered Public Accountants, Deloitte LLP, the cost effectiveness and the
independence and objectivity of the Registered Public Accountants. In
recognition of the importance of maintaining the independence of Deloitte LLP, a
process for pre-approval has been in place since July 1, 2002 and has continued
through to the end of the period covered by this Report.
The following table
provides an analysis of the amount paid to the Company’s Independent Registered
Public Accountants, Deloitte LLP, all fees having been pre-approved by the Audit, Compliance & Risk
Committee.
Audit fees
consisted of audit work only the Independent Registered Public Accountant
can reasonably be expected to perform, such as statutory
audits.
(2)
Audit related
fees consist of work generally only the Independent Registered Public
Accountant can reasonably be expected to perform, such as procedures
relating to regulatory
filings.
(3)
Tax fees
consisted principally of assistance with matters related to compliance,
planning and advice in various tax
jurisdictions.
(4)
All other fees
in 2008 principally relate to independent advice provided to the
Remuneration Committee on executive remuneration. Advice
provided to the Remuneration Committee related to the structure, form and
operation of incentives for employees, including the provision of
benchmark data against comparable companies. Neither this
assistance to the Remuneration Committee, nor any other non-audit work
performed by the Company’s Independent Registered Public Accountant,
Deloitte LLP, involved Deloitte LLP acting, temporarily or permanently, as
a director, officer, or employee of Shire, or performing any
decision-making, supervisory, or ongoing monitoring
functions.
Policy
on Audit, Compliance & Risk Committee
pre-approval of audit and permissible non-audit services of Independent
Registered Public Accountant
Consistent with SEC
policies regarding auditor independence, the Audit, Compliance & Risk Committee
has responsibility for appointing, setting compensation and overseeing the work
of the Independent Registered Public Accountant. In recognition of this
responsibility, the Audit, Compliance & Risk Committee
pre-approves all audit and permissible non-audit services provided by the
Independent Registered Public Accountant.
Certain services
have been pre-approved by the Audit, Compliance & Risk Committee
as part of its pre-approval policy, including:
·
audit
services, such as audit work performed in the preparation of consolidated
financial statements, as well as work that generally only the Independent
Registered Public Accountant can reasonably be expected to provide,
including comfort letters, statutory audits and consultation regarding
financial accounting and/or reporting
standards;
·
audit-related
services, such as the audit of employee benefit plans, and special
procedures required to meet certain regulatory requirements;
and
·
tax services,
such as tax compliance services and tax advice on employee remuneration
strategies.
Where it is
necessary to engage the Independent Registered Public Accountant for services
not contemplated in the pre-approval policy, the Audit, Compliance & Risk Committee
must pre-approve the proposed service before engaging the Independent Registered
Public Accountant. For this purpose, the Audit, Compliance & Risk Committee
has delegated pre-approval authority to the Chairman of the Audit, Compliance & Risk
Committee. The pre-approval policy is reviewed and updated periodically
and was last updated on April24, 2008. The Chairman must report any pre-approval decisions to the
Audit,
Compliance & Risk Committee at its next scheduled
meeting.
Notes to the
Shire Income Access Share Trust Financial Statements
Financial
statement schedule
The following
schedule is filed as part of this Form 10-K:
Schedule II –
Valuation and Qualifying Accounts for each of the three years in the period
ended December 31, 2009.
All other schedules
are omitted as the information required is inapplicable or the information is
presented in the consolidated financial statements or the related
notes.
Exhibits
Exhibit
number
Description
2.01
Agreement and
Plan of Merger by and among Shire Pharmaceuticals Group plc, Transkaryotic
Therapies, Inc. and Sparta Acquisition Corporation, dated as of April 21,2005.(1)
2.02
Agreement of
Merger dated as of February 20, 2007 among Shire plc, Shuttle Corporation
and New River Pharmaceuticals, Inc.(2)
2.03
Business
Combination Agreement dated as of July 3, 2008 between Maia Elfte
Vermögensverwaltungs GmbH and Jerini AG. (3)
Bank, N.A.
dated April 16, 2008 relating to the Deposit Agreement among Shire plc,
JPMorgan Chase Bank, N.A. as depositary and all holders from time to time
of ADRs issued thereunder dated November 21, 2005.(5)
4.02
Form of
Deposit Agreement among Shire plc, JPMorgan Chase Bank, N.A. as depositary
and all holders from time to time of ADRs issued thereunder dated November21, 2005.
(6)
4.03
Form of
Ordinary Share Certificate of Shire Limited.
(7)
4.04
Form of
American Depositary Receipt Certificate of Shire Limited.
(8)
4.05
Trust Deed
for the New Shire Income Access Trust, dated August 29, 2008.
(9)
10.01
Tender and
Support Agreement dated as of February 20, 2007 among Shire plc, Mr.
Randal J. Kirk and the other parties named therein.
(10)
10.02
Multicurrency
Term and Revolving Facilities Agreement as of February 20, 2007 by and
among Shire plc, ABN AMRO Bank N.V., Barclays Capital, Citigroup Global
Markets Limited, The Royal Bank of Scotland plc, and Barclays Bank
plc.
(11)
10.03
Accession and
Amendment Deed dated April 15, 2008 between Shire Limited, Shire plc,
certain subsidiaries of Shire plc and Barclays Bank PLC as Facility Agent
relating to a US $1,200,000,000 facility agreement dated February 20, 2007
(as amended by a syndication and amendment agreement dated July 19,2007).
(12)
10.04
Subscription
Agreement dated May 2, 2007 relating to the 2.75% Convertible Bonds due
2014 between Shire plc and ABN AMRO Bank N.V. and NM Rothschild & Sons
Limited (trading together as ABN AMRO Rothschild, an unincorporated equity
capital markets joint venture) and Barclays Bank PLC and Citigroup Global
Markets Limited and Goldman Sachs International and Morgan Stanley &
Co. International plc and others.
(13)
10.05
Amending
Subscription Agreement dated May 8, 2007 relating to the 2.75% Convertible
Bonds due 2014 between Shire plc and ABN AMRO Bank N.V. and NM Rothschild
& Sons Limited (trading together as ABN AMRO Rothschild, an
unincorporated equity capital markets joint venture) and Barclays Bank PLC
and Citigroup Global Markets Limited and Goldman Sachs International and
Morgan Stanley & Co. International plc and others.
(14)
10.06
Trust Deed
dated May 9, 2007 relating to the 2.75% Convertible Bonds due 2014 between
Shire plc and BNY Corporate Trustee Services Limited.
(15)
10.07
Supplemental
Trust Deed dated April 15, 2008 between Shire Limited, Shire plc and BNY
Corporate Trustee Services Limited relating to a trust deed dated May 9,2007 relating to US $1,100,000,000 2.75% Convertible Bonds due 2014.
(16)
10.08
Accession and
Amendment Agreement dated April 15, 2008 between Shire Limited, Shire plc,
BNY Corporate Trustee Services Limited and The Bank of New York relating
to a paying and conversion agency agreement dated May 9, 2007 relating to
US $1,100,000,000 2.75% Convertible Bonds due 2014.
(17)
10.09*
Revised and
Restated Master License Agreement dated November 20, 1995 among Shire
BioChem Inc (f/k/a BioChem Pharma Inc.), Glaxo Group Limited, Glaxo
Wellcome Inc. (formerly Glaxo Canada Inc.), Glaxo Wellcome Inc. (formerly
Glaxo Inc.), Tanaud Holdings (Barbados) Limited, Tanaud International B.V.
and Tanaud LLC.
(18)
10.10*
Settlement
Agreement, dated August 14, 2006 by and between Shire Laboratories Inc.
and Barr Laboratories, Inc.
(19)
10.11*
Product
Development and License Agreement, dated August 14, 2006 by and between
Shire LLC and Duramed Pharmaceuticals, Inc.
(20)
10.12*
Product
Acquisition and License Agreement, dated August 14, 2006 by and among
Shire LLC, Shire plc and Duramed Pharmaceuticals, Inc.
(21)
10.13
Service
Agreement between Shire plc and Mr Angus Russell, dated March 10,2004.
(22)
Form of
Amended and Restated Employment Agreement between Shire plc and Mr Matthew
Emmens, dated March 12, 2004.
(25)
10.17
Amendment
Agreement dated November 21, 2005 relating to the Amended and Restated
Employment Agreement of Matthew Emmens dated March 12, 2004.
(26)
10.18
Ratification
and Guaranty dated November 21, 2005 relating to the Amended and Restated
Employment Agreement of Matthew Emmens dated March 12, 2004.
(27)
10.19
Amendment
Agreement dated May 20, 2008 relating to the Amended and Restated
Employment Agreement of Matthew Emmens dated March 12, 2004, as amended on
November 21, 2005.
(28)
10.20
Ratification
and Guaranty dated May 20, 2008 relating to the Amended and Restated
Employment Agreement of Matthew Emmens dated March 12, 2004.
(29)
10.21
Form of
Indemnity Agreement for Directors of Shire Limited. (30)
10.22
Service
Agreement between Shire Limited and Mr Angus Russell, dated July 2, 2008.
(31)
10.23
Service
Agreement between Shire Limited and Mr Graham Hetherington, dated July 2,2008. (32)
10.24
Form of
Settlement Agreement and Mutual Release in re: Transkaryotic Therapies,
Inc., by and between Shire Human Genetic Therapies, Inc., Shire plc
and the parties set forth therein. (33)
Certification
of Angus Russell pursuant to Rule 13a – 14 under The Exchange
Act.
31.2
Certification
of Graham Hetherington pursuant to Rule 13a – 14 under The Exchange
Act.
32.1
Certification
of Angus Russell and Graham Hetherington pursuant to Section 906 of the
Sarbanes – Oxley Act of 2002.
* Certain
portions of this exhibit have been omitted intentionally, subject to a
confidential treatment request. A complete version of this agreement has been
filed separately with the Securities and Exchange Commission
(1)
Incorporated
by reference to Exhibit 99.02 to Shire’s Form 8-K filed on April 25,2005.
(2)
Incorporated
by reference to Exhibit 2.1 to Shire’s Form 8-K filed on February 23,2007.
(3)
Incorporated
by reference to Exhibit 2.1 to Shire’s Form 8-K filed on July 10,2008.
(4)
Incorporated
by reference to Exhibit 99.02 to Shire’s Form 8-K filed on October 1,2008.
(5)
Incorporated
by reference to Exhibit 4.01 to Shire’s Form 8-K filed on May 23,2008.
(6)
Incorporated
by reference to Exhibit 4.02 to Shire’s Form 8-K filed on May 23,2008.
(7)
Incorporated
by reference to Exhibit 4.03 to Shire’s Form 8-K filed on May 23,2008.
(8)
Incorporated
by reference to Exhibit 4.04 to Shire’s Form 8-K filed on May 23,2008.
(9)
Incorporated
by reference to Exhibit 4.05 to Shire’s Form 10-K filed on February 27,2009.
(10)
Incorporated
by reference to Exhibit 99.1 to Shire’s Form 8-K filed on February 23,2007.
(11)
Incorporated
by reference to Exhibit 10.2 to Shire’s Form 10-Q filed on May 1,2007.
(12)
Incorporated
by reference to Exhibit 10.01 to Shire’s Form 8-K filed on May 23,2008.
(13)
Incorporated
by reference to Exhibit 10.1 to Shire’s Form 10-Q filed on August 2,2007.
(14)
Incorporated
by reference to Exhibit 10.2 to Shire’s Form 10-Q filed on August 2,2007.
(15)
Incorporated
by reference to Exhibit 10.3 to Shire’s Form 10-Q filed on August 2,2007.
(16)
Incorporated
by reference to Exhibit 10.02 to Shire’s Form 8-K filed on May 23,2008.
(17)
Incorporated
by reference to Exhibit 10.03 to Shire’s Form 8-K filed on May 23,2008.
(18)
Incorporated
by reference to Exhibit 10.09 to Shire’s Form 10-K/A filed on May 30,2008.
(19)
Incorporated
by reference to Exhibit 10.1 to Shire’s Form 10-Q filed on November 7,2006.
(20)
Incorporated
by reference to Exhibit 10.2 to Shire’s Form 10-Q filed on November 7,2006.
(21)
Incorporated
by reference to Exhibit 10.3 to Shire’s Form 10-Q filed on November 7,2006.
(22)
Incorporated
by reference to Exhibit 10.11 to Shire’s Form 10-K filed on March 12,2004.
(23)
Incorporated
by reference to Exhibit 10.03 to Shire’s Form 8-K filed on November 25,2005.
(24)
Incorporated
by reference to Exhibit 10.06 to Shire’s Form 8-K filed on May 23,2008.
(25)
Incorporated
by reference to Exhibit 10.13 to Shire’s Form 10-K filed on March 12,2004.
(26)
Incorporated
by reference to Exhibit 10.01 to Shire’s Form 8-K filed on November 25,2005.
To the Board of Directors and
Stockholders of Shire plc
We have audited the
accompanying consolidated balance sheets of Shire plc and subsidiaries (the
"Company") as of December 31, 2009 and 2008, and the related consolidated
statements of operations, changes in equity, comprehensive income/(loss) and
cash flows for each of the three years in the period ended December 31, 2009.
Our audits also included the financial statement schedule listed in the Index at
ITEM 15. These consolidated financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and the
financial statement schedule based on our audits.
We conducted our
audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion,
such consolidated financial statements present fairly, in all material respects,
the financial position of Shire plc and subsidiaries as of December 31, 2009 and
2008, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2009, in conformity with accounting
principles generally accepted in the United States of America. Also, in our opinion, such financial
statement schedule, when considered in relation to the consolidated financial
statements take as a whole, presents fairly, in all material respects, the
information set forth
therein.
We have also
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company's internal control over financial
reporting as of December 31, 2009, based on the criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated February 26, 2010
expressed an unqualified opinion on the Company's internal control over
financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Shire plc
We have audited the internal control
over financial reporting of Shire plc and subsidiaries (the "Company") as of
December 31, 2009, based on criteria established in Internal Control —
Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
The Company's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company's internal control over
financial reporting, including those controls applicable to the Income Access
Share Trust (the “Trust”) based on our audits.
We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that
our audits provide a reasonable basis for our opinion.
A company's internal control over
financial reporting is a process designed by, or under the supervision of, the
company's principal executive and principal financial officers, or persons
performing similar functions, and effected by the company's board of directors,
management, and other personnel to provide reasonable assurance regarding the
reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's
internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company's assets that could have a material effect on the financial
statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud
may not be prevented or detected on a timely basis. Also, projections of
any evaluation of the effectiveness of the internal control over financial
reporting to future periods are subject to the risk that the controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting,
including those controls applicable to the Trust, as of December 31, 2009, based
on the criteria established in Internal Control —
Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with
the standards of the Public Company Accounting Oversight Board (United States),
the consolidated financial statements and financial statement schedule as
of and for the year ended December 31, 2009 of the Company and the Trust and our
reports dated February 26,
2010 expressed an unqualified opinion on those financial statements and
financial statement schedule.
Common stock of 5p par value;
1,000 million shares authorized; and 561.5 million shares issued and
outstanding (2008: 1,000 million shares authorized; and 560.2 million shares
issued and outstanding)
24
55.6
55.5
Additional paid-in
capital
2,677.6
2,594.6
Treasury stock: 17.8 million
shares (2008: 20.7 million shares)
Cost of
product sales includes amortization of intangible assets relating to
favorable manufacturing contracts of $1.7 million for year to December 31,2009 (2008: $1.7 million, 2007: $1.2 million). Selling, general and
administrative costs includes amortization and impairment charges of
intangible assets relating to intellectual property rights acquired of
$136.9 million including impairments of $nil for the year to December 31,2009 (2008: $223.3 million including impairments of $97.1 million, 2007:
$95.0 million including impairments of $0.4 million).
The accompanying
notes are an integral part of these consolidated financial
statements.
Dividends
per share
During the year to
December 31, 2007the Company paid dividends totaling 7.39 US cents per ordinary
share, equivalent to 22.18 US cents per ADS, and 25.32 Canadian cents per
exchangeable share.
During the year to
December 31, 2008the Company paid dividends of 8.62 US cents per ordinary share
(equivalent to 25.85 US cents per ADS), totaling $46.8 million.
During the year to
December 31, 2009 Shire plc paid a dividend of 9.91 US cents per ordinary share
(equivalent to 29.72 US cents per American Depositary Share) totaling $54.4
million.
Shire plc and its
subsidiaries (collectively referred to as either “Shire” or the “Company”) is a
leading specialty biopharmaceutical company that focuses on meeting the needs of
the specialist physician.
The Company has
grown through acquisition, completing a series of major mergers or acquisitions
that have brought therapeutic, geographic and pipeline capabilities, which are
in line with Shire’s strategy of specialist biopharmaceuticals. The Company will
continue to evaluate companies, products and project opportunities that offer a
good strategic fit and enhance shareholder value.
Shire’s
strategic goal is to become the leading specialty biopharmaceutical company that
focuses on meeting the needs of the specialist physician. Shire focuses its
business on attention deficit and hyperactivity disorder (“ADHD”), human genetic
therapies (“HGT”) and gastrointestinal (“GI”) diseases as well as opportunities
in other therapeutic areas to the extent they arise through
acquisitions. Shire’s in-licensing, merger and acquisition efforts are
focused on products in specialist markets with strong intellectual property
protection and global rights. Shire believes that a carefully selected and
balanced portfolio of products with strategically aligned and relatively
small-scale sales forces will deliver strong results.
The accompanying
consolidated financial statements include the accounts of Shire plc, all of its
subsidiary undertakings and the Income Access Share trust, after elimination of
inter-company accounts and transactions. Noncontrolling interests in the equity
and earnings or losses of a consolidated subsidiary are reflected in
“Noncontrolling interest in subsidiaries” in the Company’s consolidated balance
sheet and consolidated statement of operations. Noncontrolling interest adjusts
the Company’s consolidated results of operations to present the net income or
loss attributable to the Company exclusive of the earnings or losses
attributable to the noncontrolling interest.
(b)
Use
of estimates in consolidated financial
statements
The preparation of
consolidated financial statements, in conformity with accounting principles
generally accepted in the United States (“US GAAP”) and Securities and Exchange
Commission (“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. Actual results could differ from those estimates. Estimates
and assumptions are primarily made in relation to the valuation of intangible
assets, the valuation of equity investments, sales deductions, income taxes and
provisions for litigation.
there is
persuasive evidence of an agreement or
arrangement;
·
delivery of
products has occurred or services have been
rendered;
·
the seller’s
price to the buyer is fixed or determinable;
and
·
collectability
is reasonably assured.
Where applicable,
all revenues are stated net of value added and similar taxes, and trade
discounts. No revenue is recognized for consideration, the value or receipt of
which is dependent on future events or future performance.
The Company’s
principal revenue streams and their respective accounting treatments are
discussed below:
Product
sales
Revenue for the
sale of products is recognized upon shipment to customers or at the time of
delivery to the customer depending on the terms of sale. Provisions for rebates,
product returns and discounts to customers are provided for as reductions to
revenue in the same period as the related sales are recorded. The Company
monitors and tracks the amount of sales deductions based on historical
experience to estimate the reduction to revenues.
Royalty income
relating to licensed technology is recognized when the licensee sells the
underlying product, with the amount of royalty income recorded based on sales
information received from the relevant licensee. The Company estimates sales
amounts and related royalty income based on the historical product information
for any period that the information is not available from the relevant
licensee.
Licensing
revenues
Other revenue
includes revenues derived from product out-licensing
agreements. These arrangements typically consist of an initial
upfront payment on inception of the license and subsequent milestone payments
dependent on achieving certain clinical and sales milestones.
Initial license
fees received in connection with product out-licensing agreements, even where
such fees are non-refundable and not creditable against future royalty payments,
are deferred and recognized over the period in which the Company has continuing
substantive performance obligations.
Milestone payments
which are non-refundable, non creditable and contingent on achieving certain
clinical milestones are recognized as revenues either on achievement of such
milestones if the milestones are considered substantive or over the period the
Company has continuing substantive performance obligations, if the milestones
are not considered substantive. If milestone payments are creditable against
future royalty payments, the milestones are deferred and released over the
period in which the royalties are anticipated to be paid.
(d)
Sales
deductions
(i)
Rebates
Rebates primarily
consist of statutory rebates to state Medicaid agencies and contractual rebates
with health-maintenance organizations. These rebates are based on price
differentials between a base price and the selling price. As a result, rebates
generally increase as a percentage of the selling price over the life of the
product (as prices increase). Provisions for rebates are recorded as reductions
to revenue in the same period as the related sales are recorded, with the amount
of the rebate based on the Company’s best estimate if any uncertainty exists
over the unit rebate amount, and with estimates of future utilization derived
from historical trends.
(ii)
Returns
The Company
estimates the proportion of recorded revenue that will result in a return, based
on historical trends and when applicable, specific factors affecting certain
products at the balance sheet date. The accrual is recorded as a reduction to
revenue in the same period as the related sales are recorded.
(iii)
Coupons
The Company uses
coupons as a form of sales incentive. An accrual is established based on the
Company's expectation of the level of coupon redemption, using historical
trends. The accrual is recorded as a reduction to revenue in the same period as
the related sales are recorded or the date the coupon is offered, if later than
the date the related sales are recorded.
(iv)
Discounts
The Company offers
cash discounts to customers for the early payment of receivables. Those
discounts are recorded as reductions to revenue and accounts receivable in the
same period that the related sale is recorded.
(v)
Wholesaler
chargebacks
The Company has
contractual agreements whereby it supplies certain products to third parties at
predetermined prices. Wholesalers acting as intermediaries in these transactions
are reimbursed by the Company if the predetermined prices are less than the
prices paid by the wholesaler to the Company. Accruals for wholesaler
chargebacks, which are based on historical trends, are recorded as reductions to
revenue in the same period as the related sales are recorded.
(e)
Collaborative
arrangements
The Company enters
into collaborative arrangements to develop and commercialize drug candidates.
These collaborative arrangements often require up-front, milestone, royalty or
profit share payments, or a combination of these, with payments
often contingent
upon the success of the related development and commercialization efforts.
Collaboration agreements entered into by Shire may also include expense
reimbursements or other such payments to the collaborative partner.
Shire reports costs
incurred and revenue generated from transactions with third parties as well as
payments between parties to collaborative arrangements either on a gross or net
basis, depending on the characteristics of the collaborative
relationship.
(f)
Cost
of product sales
Cost of product
sales includes the cost of purchasing finished product for sale, the cost of raw
materials and manufacturing for those products that are manufactured by the
Company, shipping and handling costs, depreciation and amortization of
intangible assets in respect of favorable manufacturing contracts.
Royalties payable on products to which the Company does not
own the rights are also included in Cost of product sales.
(g)
Leased
assets
The costs of
operating leases are charged to operations on a straight-line basis over the
lease term, even if rental payments are not made on such a basis.
Assets acquired
under capital leases are included in the consolidated balance sheet as property,
plant and equipment and are depreciated over the shorter of the period of the
lease or their useful lives. The capital elements of future lease payments are
recorded as liabilities, while the interest element is charged to operations
over the period of the lease to produce a level yield on the balance of the
capital lease obligation.
(h)
Advertising
expense
The Company
expenses the cost of advertising as incurred. Advertising costs amounted to
$81.3 million, $134.5 million and $92.3 million for the years to December 31,2009, 2008 and 2007 respectively were included within Selling, general and
administrative expenses.
(i)
Research
and development (“R&D”) expense
R&D costs are
expensed as incurred. Upfront and milestone payments made to third parties for
in-licensed products that have not yet received marketing approval and for which
no alternative future use has been identified are also expensed as
incurred.
Milestone payments
made to third parties subsequent to regulatory approval are capitalized as
intangible assets, and amortized over the remaining useful life of the related
product.
(j)
Valuation
and impairment of long-lived assets other than goodwill and
investments
The Company
evaluates the carrying value of long-lived assets other than goodwill and
investments for impairment whenever events or changes in circumstances indicate
that the carrying amounts of the relevant assets may not be recoverable. When
such a determination is made, management’s estimate of undiscounted cash flows
to be generated by the use and ultimate disposition of these assets is compared
to the carrying value of the assets to determine whether the carrying value is
recoverable. If the carrying value is deemed not to be recoverable, the amount
of the impairment recognized in the consolidated financial statements is
determined by estimating the fair value of the assets and recording a loss for
the amount by which the carrying value exceeds the estimated fair value. This
fair value is usually determined based on estimated discounted cash
flows.
(k)
Finance
costs of debt
Finance costs
relating to debt issued are recorded as a deferred cost and amortized to the
consolidated statement of operations over the period to the earliest redemption
date of the debt, using the effective interest rate method. On extinguishment of
the related debt, any unamortized deferred financing costs are written off and
charged to interest expense in the consolidated statement of
operations.
(l)
Foreign
currency
Monetary assets and
liabilities in foreign currencies are translated into functional currency of the
relevant subsidiaries at the rate of exchange ruling at the balance sheet
date. Transactions in foreign currencies are translated into the relevant
functional currency at the rate of exchange ruling at the date of the
transaction. Transaction gains and losses, other than those related to current
and deferred tax assets and liabilities, are recognized in arriving at
income/(loss) from continuing operations before income taxes, equity in
(losses)/earnings of equity method investees and discontinued operations.
Transaction gains and losses arising on foreign currency denominated
current and deferred tax assets and liabilities are included within income taxes
in the consolidated statement of operations.
The results of
operations for subsidiaries, whose functional currency is not the US dollar, are
translated into the US dollar at the average rates of exchange during the
period, with the subsidiaries’ balance sheets translated at the rates ruling at
the balance sheet date. The cumulative effect of exchange rate movements is
included in a separate component of Other comprehensive income.
Foreign currency
exchange transaction gains and losses included in consolidated net income/(loss)
in the years to December 31, 2009, 2008 and 2007 amounted to a $2.3 million
gain, $4.6 million gain and $4.4 million gain, respectively.
(m)
Income
taxes
Uncertain tax
positions are recognized in the consolidated financial statements for positions
which are considered more likely than not of being sustained based on the
technical merits of the position on audit by the tax authorities. The
measurement of the tax benefit recognized in the consolidated financial
statements is based upon the largest amount of tax benefit that, in management’s
judgement, is greater than 50% likely of being realized based on a cumulative
probability assessment of the possible outcomes. The Company recognizes interest
relating to unrecognized tax benefits and penalties within income
taxes.
Deferred tax assets
and liabilities are recognized for differences between the carrying amounts of
assets and liabilities in the consolidated financial statements and the tax
bases of assets and liabilities that will result in future taxable or deductible
amounts. The deferred tax assets and liabilities are measured using the enacted
tax laws and rates applicable to the periods in which the differences are
expected to affect taxable income.
Deferred tax assets
are reduced by a valuation allowance when, in the opinion of management, it is
more likely than not that some portion or all of the deferred tax assets will
not be realized.
(n)
Earnings
per share
Basic earnings per
share is based upon net income/(loss) attributable to Shire plc divided by the
weighted average number of ordinary shares outstanding during the period.
Diluted earnings per share is based upon net income/(loss) attributable to Shire
plc adjusted for the impact of interest expense on convertible debt on an
“if-converted” basis (where dilutive) divided by the weighted average number of
ordinary share equivalents outstanding during the period, adjusted for the
effect of all dilutive potential ordinary shares that were outstanding during
the year. Such potentially dilutive shares are excluded when the effect would be
to increase earnings per share or reduce a loss per share.
(o)
Share-based
compensation
Share-based
compensation represents the cost of share-based awards granted to employees. The
Company measures share-based compensation cost for awards classified as equity
at the grant date, based on the estimated fair value of the award, and
recognizes the cost as an expense on a straight-line basis (net of estimated
forfeitures) over the employee requisite service period. Predominantly all of
the Company’s awards have service and/or performance conditions and the fair
values of these awards are estimated using a Black-Scholes valuation
model.
The share-based
compensation expense is recorded in Cost of product sales, R&D, and SG&A
in the consolidated statement of operations based on the employees’ respective
functions.
The Company records
deferred tax assets for awards that result in deductions on the Company’s income
tax returns, based on the amount of compensation cost recognized and the
Company’s statutory tax rate in the jurisdiction in which it will receive a
deduction. Differences between the deferred tax assets recognized for financial
reporting purposes and the actual tax deduction reported on the Company’s income
tax return are recorded in additional paid-in capital (if the tax deduction
exceeds the deferred tax asset) or in the consolidated statement of operations
(if the deferred tax asset exceeds the tax deduction and no additional paid-in
capital exists from previous awards).
The Company’s
share-based employee compensation plans are described more fully in Note
31.
(p)
Cash
and cash equivalents
Cash and cash
equivalents are defined as short-term highly liquid investments with original
maturities of ninety days or less.
(q)
Financial
instruments - derivatives
The Company uses
derivative financial instruments to manage its exposure to foreign exchange risk
associated with third party transactions and intercompany financing. These
instruments consist of swap and forward foreign exchange
contracts. The
Company does not apply hedge accounting for these instruments and accordingly
charges in the fair value of these instruments are recognized in the
consolidated statement of operations. The fair values of these instruments are
included on the balance sheet in Current assets/liabilities and the cash flows
relating to these instruments are presented within net cash provided by
operating activities in the consolidated statement of cash flows.
(r)
Inventories
Inventories are
stated at the lower of cost (including manufacturing overheads, where
appropriate) or market. Cost incurred in bringing each product to its present
location and condition is based on purchase costs calculated on a first-in,
first-out basis, including transportation costs.
Inventories include
costs relating to both marketed products and certain products prior to
regulatory approval. Inventories are capitalized prior to regulatory approval if
the Company considers that it is probable that the US Food and Drug Administration (“FDA”)
or another regulatory body will grant commercial and manufacturing
approval for the relevant product, and it is probable that the value of
capitalized inventories will be recovered through commercial sale.
Inventories are
written down for estimated obsolescence or unmarketable inventory equal to the
difference between the cost of inventory and estimated market value based upon
assumptions about future demand and market conditions. If actual market
conditions are less favorable than those anticipated, inventory adjustments may
be required.
(s)
Assets
held-for-sale
An asset is classified as held-for-sale
when, amongst other things, the Company has committed to a plan of disposition,
the asset is available for immediate sale, and the plan is not expected to
change significantly. Assets held-for-sale are carried at the lower of
their carrying amount or fair value less cost to sell.
Assets acquired in a business
combination that will be sold rather than held and used are classified as
held-for sale at the date of acquisition when it is probable that
the Company will dispose of the assets within one year. Newly acquired
assets held-for-sale are carried at their fair value less cost to sell at
the acquisition date. The Company does not record depreciation or
amortization on assets classified as held-for-sale.
(t)
Investments
The Company has
certain investments in pharmaceutical and biotechnology companies.
Investments are
accounted for using the equity method of accounting if the investment gives the
Company the ability to exercise significant influence, but not control over, the
investee. Significant influence is generally deemed to exist if the Company has
an ownership interest in the voting stock of the investee between 20% and 50%,
although other factors such as representation on the investee’s Board of
Directors and the nature of commercial arrangements, are considered in
determining whether the equity method of accounting is appropriate. Under the
equity method of accounting, the Company records its investments in
equity-method investees in the consolidated balance sheet under Investments and
its share of the investees’ earnings or losses together with
other-than-temporary impairments in value under equity in (losses)/earnings of
equity method investees in the consolidated statement of
operations.
All other equity
investments, which consist of investments for which the Company does not have
the ability to exercise significant influence, are accounted for under the cost
method or at fair value. Investments in private companies are carried at cost,
less provisions for other-than-temporary impairment in value. For public
companies that have readily determinable fair values, the Company classifies its
equity investments as available-for-sale and, accordingly, records these
investments at their fair values with unrealized holding gains and losses
included in the consolidated statement of comprehensive income/(loss), net of
any related tax effect. Realized gains and losses, and declines in value of
available-for-sale securities judged to be other-than-temporary are included in
Other income/(expense), net (see Note 28). The cost of securities sold is based
on the specific identification method. Interest and dividends on securities
classified as available-for-sale are included as interest income.
(u)
Property,
plant and equipment
Property, plant and
equipment is shown at cost reduced for impairment losses, less accumulated
depreciation. The cost of significant assets includes capitalized interest
incurred during the construction period. Depreciation is provided on a
straight-line basis at rates calculated to write off the cost less estimated
residual value of each asset over its estimated useful life as
follows:
The cost of land is
not depreciated. Assets under the course of construction are not depreciated
until the relevant assets are available and ready for their intended
use.
Expenditures for
maintenance and repairs are charged to the consolidated statement of operations
as incurred. The costs of major renewals and improvements are capitalized. At
the time property, plant and equipment is retired or otherwise disposed of, the
cost and accumulated depreciation are eliminated from the asset and accumulated
depreciation accounts. The profit or loss on such disposition is reflected in
operating income/(expense).
(v)
Goodwill
and other intangible assets
(i)
Goodwill
In business
combinations completed subsequent to January 1, 2009, goodwill represents the
excess of the fair value of the consideration given and the fair value of any
noncontrolling interest in the acquiree over the fair value of the identifiable
assets and liabilities acquired. For business combinations completed prior to
January 1, 2009 goodwill represents the excess of the fair value of the
consideration given over the fair value of the identifiable assets and
liabilities acquired.
Goodwill is not
amortized to operations, but instead is reviewed for impairment, at least
annually or whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Events or changes in circumstances which
could trigger an impairment review include: significant underperformance of a
reporting unit relative to expected historical or projected future operating
results; significant changes in the manner of the Company's use of acquired
assets or the strategy for the overall business; and significant negative
industry trends.
Goodwill is
reviewed for impairment by comparing the carrying value of each reporting unit's
net assets (including allocated goodwill) to the fair value of the reporting
unit. If the reporting unit's carrying amount is greater than its fair value, a
second step is performed whereby the portion of the reporting unit’s fair value
that relates to the reporting unit's goodwill is compared to the carrying value
of the reporting unit’s goodwill. The Company recognizes a goodwill impairment
charge for the amount by which the carrying value of goodwill exceeds the fair
value. The Company has determined that there are no impairment losses in respect
of goodwill for any of the reporting periods covered by these consolidated
financial statements.
(ii)
Other
intangible assets
Other intangible
assets principally comprise intellectual property rights for products with a
defined revenue stream, and for business combinations completed subsequent to
January 1, 2009 also includes acquired IPR&D. Intellectual
property rights for currently marketed products are recorded at cost and
amortized over the estimated useful life of the related product, which ranges
from 5 to 35 years (weighted average 18 years). IPR&D acquired through a
business combination which completed subsequent to January 1, 2009 is
capitalized as an indefinite lived intangible asset until the completion or
abandonment of the associated research and development efforts. Once the
research and development efforts are completed the useful life of the relevant
assets will be determined, and the IPR&D asset amortized over this useful
economic life.
The following
factors are considered in estimating the useful lives of Other intangible
assets:
·
expected use
of the asset;
·
regulatory,
legal or contractual provisions, including the regulatory approval and
review process, patent issues and actions by government
agencies;
·
the effects
of obsolescence, changes in demand, competing products and other economic
factors, including the stability of the market, known technological
advances, development of competing drugs that are more effective
clinically or economically;
·
actions of
competitors, suppliers, regulatory agencies or others that may eliminate
current competitive advantages; and
·
historical
experience of renewing or extending similar
arrangements.
When a number of
factors apply to an intangible asset, these factors are considered in
combination when determining the appropriate useful life for the relevant
asset.
(w)
Non-monetary
transactions
The Company enters
into certain non-monetary transactions that involve either the granting of a
license over the Company’s patents or the disposal of an asset or group of
assets in exchange for a non–monetary asset, usually equity. The Company
accounts for these transactions at fair value if the Company is able to
determine the fair value within reasonable limits. To the extent the Company
concludes that it is unable to determine the fair value of a transaction, that
transaction is
accounted for at the recorded amounts of the assets exchanged. Management is
required to exercise its judgment in determining whether or not the fair value
of the asset received or given up can be determined.
The Financial Accounting
Standards Board (“FASB”) Accounting Standards CodificationTM (the
“Codification”)
On July 1, 2009 the
FASB established the Codification as the single source of authoritative US GAAP
recognized by the FASB to be applied by nongovernmental entities. The
Codification is effective prospectively from July 1, 2009 and has superseded all
existing non-SEC accounting and reporting standards. From July 1, 2009 the FASB
has issued new guidance in the form of Accounting Standards Updates (“Updates”).
The Codification did not impact the Company’s financial position or results of
operations.
Subsequent
Events
On April 1, 2009the Company adopted new guidance issued by the FASB on subsequent events. This
guidance establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. Specifically, this guidance provides:
the period after the balance sheet date during which management should evaluate
events or transactions that may occur for potential recognition or disclosure in
the financial statements; the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements; and the disclosures that an entity should make about
events or transactions that occurred after the balance sheet date. The guidance
is effective prospectively from April 1, 2009. The adoption of the guidance did
not impact the Company’s consolidated financial position, results of operations
or cash flows. The Company has evaluated subsequent events to the date when the
financial statements were issued on February 26, 2010.
Disclosures about Derivative
Instruments and Hedging Activities
On January 1, 2009the Company adopted new guidance issued by the FASB on disclosures about
derivative instruments and hedging activities. This guidance requires enhanced
disclosures about an entity’s derivative instruments and hedging activities, and
these disclosures are included within Note 21.
Noncontrolling Interests in
Consolidated Financial Statements
On January 1, 2009the Company adopted new guidance issued by the FASB on noncontrolling interests
in consolidated financial statements. This guidance establishes
new accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. Specifically, this
guidance requires the recognition of a noncontrolling interest (formally known
as a minority interest) as equity in the consolidated financial statements,
separate from the parent's equity. In addition, the amount of net income or
losses attributable to noncontrolling interests is required to be included in
consolidated net income on the face of the income statement. This guidance also
includes expanded disclosure requirements regarding the interests of the parent
and its noncontrolling interest. As a consequence of the adoption of this
guidance, the balance of noncontrolling interests has been reclassified within
equity and net income attributable to Shire plc shareholders has been shown
separately from that attributable to noncontrolling interests in the
consolidated statements of operations and the consolidated statement of changes
in equity. The adoption of this guidance has not had an impact on the Company’s
consolidated cash flows.
Business
Combinations
On January 1, 2009the Company adopted new guidance issued by the FASB on business combinations.
The guidance significantly changed the accounting for business combinations.
Under the guidance, an acquiring entity is required to recognize all the assets
acquired, liabilities assumed and noncontrolling interests in a transaction at
the acquisition date fair value with limited exceptions. The guidance also
amended the accounting treatment for certain specific items including: the
expensing of acquisition costs; the capitalization of in-process research and
development; recording of contingent consideration at fair value with subsequent
changes in fair value being generally reflected in earnings; and the
introduction of a
substantial number of new disclosure requirements. The guidance has been applied
to those business combinations completed in the year to December 31,2009.
Determining whether an
Instrument (or Embedded Feature) is indexed to an Entity's Own
Stock
On January 1, 2009the Company adopted new guidance issued by the Emerging Issues Task Force
(“EITF”) on determining whether an instrument (or embedded feature) is indexed
to an entity's own stock. The guidance provides a new method to be applied in
determining whether a financial instrument or an embedded feature is indexed to
an issuer's own stock. The adoption of the guidance did not impact the Company’s
consolidated financial position, results of operations or cash
flows.
Accounting for Collaborative
Arrangements
On January 1, 2009the Company adopted new guidance issued by the EITF on accounting for
collaborative arrangements. This guidance defines collaborative
arrangements and establishes reporting requirements for transactions between
participants in a collaborative arrangement and between participants in the
arrangement and third parties. The adoption of this guidance did not have an
impact on the Company’s consolidated financial position, results of operations
or cash flows. The disclosures required by this guidance have been included in
Note 23.
Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement)
On January 1, 2009the Company adopted new guidance issued by the FASB on accounting for
convertible debt instruments that may be settled in cash upon conversion
(including partial cash settlement). This guidance clarified that convertible
debt instruments that may be settled in cash upon conversion (including partial
cash settlement) do not fall within the scope of the existing guidance on
accounting for convertible debt and debt issued with stock purchase warrants. It
requires issuers of such
instruments to separately account for the liability and equity components of
those instruments by allocating the proceeds from issuance of the instrument
between the liability component and the embedded conversion option (i.e., the
equity component). The adoption of this guidance did not have an impact on the
Company’s consolidated financial position, results of operations or cash
flows.
Fair Value
Measurements
On January 1, 2009the Company adopted new guidance on non-recurring fair value measurements for
non-financial assets and non-financial liabilities. The guidance has been
applied to the fair value measurement of non-financial assets and non-financial
liabilities in the year to December 31, 2009.
Determination of the Useful
Life of Intangible Assets
On January 1, 2009the Company adopted new guidance issued by the FASB on the determination of the
useful life of intangible assets. This guidance amended the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset. The adoption of the guidance
did not have an impact on the Company’s consolidated financial position, results
of operations or cash flows.
To
be adopted in future periods
Revenue Recognition in
Multiple Deliverable Revenue Arrangements
In September 2009,
the FASB issued an Update to the guidance on revenue recognition in multiple
deliverable revenue arrangements. The Update amends the existing guidance on
allocating consideration received between the elements in a multiple-deliverable
arrangement. The Update establishes a selling price hierarchy for determining
the selling price of a deliverable. The selling price used for each deliverable
will be based on vendor specific objective evidence (“VSOE”) if available, third
party evidence if VSOE is not available, or estimated selling price if neither
VSOE or third party evidence is available. It replaces the term fair value in
the revenue allocation with selling price to clarify that the allocation of
revenue is based on entity specific assumptions rather then the assumptions of a
market place participant. The Update will eliminate the residual method of
allocation and requires that arrangement consideration be allocated using the
relative selling price method. It will also significantly expand the disclosures
related to a vendor’s multiple-deliverable revenue arrangements. The Update will
be effective prospectively for revenue arrangements entered into or materially
modified for fiscal years beginning on or after June 15, 2010. Early adoption is
permitted. The Company is currently evaluating the impact of adopting this
Update.
Amendments to the Accounting
and Disclosure Requirements for the Consolidation of Variable Interest
Entities
In June 2009 the
FASB issued a revision to the existing guidance on the consolidation of variable
interest entities. This guidance changes how a reporting entity determines when
an entity that is insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. The determination of whether a
reporting entity is required to consolidate another entity is based on, among
other things, the other entity’s purpose and design and the reporting entity’s
ability to direct the activities of the other entity that most significantly
impact the other entity’s economic performance. The guidance will also require a
reporting entity to provide additional disclosures about its involvement with
variable interest entities and any significant changes in risk exposure due to
such involvement. The guidance is effective for financial statements issued for
fiscal years and interim periods within those fiscal years beginning after
November 15, 2009. Early adoption is not permitted. The Company does not expect
there to be an impact of adopting this guidance on the Company’s consolidated
financial position, results of operations or cash flows.
Accounting for Transfers of
Financial Assets
In June 2009 the FASB issued new
guidance on the accounting for transfers of financial assets. This guidance will
require more information about transfers of financial assets, including
securitization transactions, and where entities have continuing exposure to the
risks related to transferred financial assets. It eliminates the concept of a
“qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets, and requires additional disclosures. The guidance is effective
for financial statements issued for fiscal years and interim periods within
those fiscal years beginning after November 15, 2009. Early adoption is not
permitted. The Company does not expect there to be an impact of adopting this
guidance on the Company’s consolidated financial position, results of operations
or cash flows.
(z)
Scheme
of arrangement
Shire Limited (now
known as Shire plc) was incorporated under the laws of Jersey (Channel Islands)
on January 28, 2008, is a public company limited by shares, and is tax resident
in the Republic of Ireland. On May 23, 2008 Shire Limited became the holding
company of the former holding company of the Shire Group (“Old Shire”), now
called Shire Biopharmaceutical Holdings, pursuant to a scheme of arrangement
approved by the High Court of Justice in England and Wales and the shareholders
of Old Shire (the “Scheme”). Prior to May 23, 2008 Shire Limited had not
commenced trading or made any profits or trading losses. On October 1, 2008
Shire Limited changed its name to Shire plc following the approval of the change
of name by shareholders at the Company’s Annual General Meeting.
Pursuant to the
Scheme, ordinary shares, each having a nominal value of £0.05 of Old Shire
(“Shire Ordinary Shares”) were exchanged for ordinary shares, each having a
nominal value of £0.05, of Shire plc (“Shire plc Ordinary Shares”), on a one for
one basis.
Shire plc Ordinary
Shares carry substantially the same rights as did the Shire Ordinary Shares. The
Scheme did not involve any payment for the Shire plc Ordinary Shares.
Immediately after the Scheme became effective, Shire plc had the same Board of
Directors, management and corporate governance arrangements as Old Shire had
immediately prior thereto. The consolidated assets and liabilities of Shire plc
immediately after the effective time of the Scheme of Arrangement were
substantially the same as the consolidated assets and liabilities of Old Shire
immediately prior thereto.
The Shire Ordinary
Shares underlying the Shire American Depositary Shares (the “Shire ADSs”), each
representing three Shire Ordinary Shares, participated in the Scheme like all
other Shire Ordinary Shares. Upon the Scheme of Arrangement becoming effective,
the Shire ADSs remained outstanding but became Shire plc ADS’s, each
representing three Shire plc Ordinary Shares. The Scheme of Arrangement did not
involve any payment for the Shire plc ADSs.
The corporate
restructuring has been accounted for as a reorganization of entities under
common control. Accordingly, the historical consolidated financial statements
prior to the reorganization are labeled as those of Shire plc, but continue to
represent the operations of Old Shire.
Earnings per share
were unaffected by the reorganization.
(aa)
Statutory
accounts
The consolidated
financial statements as at December 31, 2009 and 2008, and for each of the three
years in the period to December 31, 2009 do not comprise statutory accounts
within the meaning of Section 240 of the UK Companies Act 1985 or
Article 104 of the Companies (Jersey) Law 1991.
Statutory accounts
prepared in accordance with International Financial Reporting Standards, as
adopted for use in the European Union (“EU”) for the year ended December 31,2007 have been delivered to the Registrar of Companies for England and Wales.
The auditors’ reports on those accounts were unqualified.
Statutory accounts
of Shire, consisting of the solus accounts of Shire plc for the period to
December 31, 2008 prepared under UK GAAP and in compliance with Jersey law have
delivered to the Registrar of Companies for Jersey. The
consolidated
accounts of the Company for the year ended December 31, 2008 prepared in
accordance with US GAAP, in fulfillment of the Company’s UKLA annual reporting
requirements were filed with the UKLA. The auditor’s reports on these accounts
were unqualified.
Statutory accounts
of Shire, consisting of the solus accounts of Shire plc for the year to December31, 2009 prepared under UK GAAP and in compliance with Jersey law will be
delivered to the Registrar of Companies in Jersey in 2010. The Company further
expects to file the consolidated accounts of the Company, prepared in accordance
with US GAAP, in fulfillment of the Company’s UKLA annual reporting requirements
with the UKLA in 2010.
3. Business
combinations
Business
combinations completed subsequent to January 1, 2009
EQUASYM
IR and XL
On March 31, 2009the Company acquired the worldwide rights (excluding the US, Canada and
Barbados) to EQUASYM IR and XL for the treatment of ADHD from UCB Pharma Limited
(“UCB”) for cash consideration of $72.8 million. Included within the recognized
purchase price for the acquisition is further consideration of $18.2 million,
which may become payable in 2010 and 2011 if certain sales targets are met. This
acquisition has broadened the scope of Shire’s ADHD portfolio and facilitated
immediate access to the European ADHD market as well as providing Shire the
opportunity to enter additional markets around the world.
The acquisition of
EQUASYM IR and XL has been accounted for as a business combination. The purchase
price has been allocated on a preliminary basis to the currently marketed
products acquired ($73.0 million), IPR&D ($5.5 million), other liabilities
($0.7 million) and goodwill ($13.2 million).
On July 3, 2008 the
Company announced that it was launching a voluntary public takeover offer for
all outstanding shares in Jerini, a German corporation, at a price of EUR 6.25
per share. By August 6, 2008the Company had acquired 80.1% of the voting
interests in Jerini for a cash consideration of $456.3 million. By December 31,2008the Company had acquired 98.6% of the voting interests in Jerini for a cash
consideration of $556.5 million, represented by Jerini shares, ($539.8 million),
the cash cost of cancelling Jerini stock options ($9.4 million) and direct costs
of acquisition ($7.3 million). By December 31, 2009the Company had acquired the
rights to the remaining 1.4% of the voting interests in Jerini for additional
cash consideration of $10.5 million including direct acquisition costs, such
that the company owned 100% of Jerini. The acquisition added Jerini’s hereditary
angioedema (“HAE”) product FIRAZYR to Shire’s portfolio.
The acquisition of
Jerini has been accounted for as a purchase business combination. The
assets acquired and the liabilities assumed from Jerini have been recorded at
the date of acquisition at their fair value. Consolidated financial statements
and reported results of operations of Shire issued after the acquisition of a
majority holding reflect these values, with the results of Jerini included from
August 1, 2008, for convenience purposes, in the consolidated statement of
operations. Between acquiring the Company’s controlling voting interest in early
August 2008 and December 31, 2009, the Company acquired the remaining voting
interests totaling 19.9% of Jerini’s issued share capital. The additional voting
interests have been accounted for as step-acquisitions using the purchase method
of accounting.
The purchase price
was allocated on a preliminary basis to the fair value of assets acquired and
liabilities assumed. The final fair values of assets acquired and liabilities
assumed was determined in July 2009, and the adjustment in the second quarter of
2009 to recognize assumed liabilities is detailed in section (c)
below.
The following table
presents the Company’s preliminary allocation of the purchase price to the
assets acquired and liabilities assumed at their fair values based on the
Company’s 80.1% voting interest acquired by August 6, 2008:
Estimated
fair value of identifiable assets acquired and liabilities
assumed
466.7
Noncontrolling
interest
(10.4
)
___________
Cost of 80.1%
voting interest acquired
456.3
(a)
Other intangible assets, currently marketed product
Other
intangible assets includes $320.2
million (being $257.6
million acquired as of August 6, 2008 and $62.6
million in the subsequent step acquisitions) relating to intellectual property
rights in respect of Jerini’s currently marketed product, FIRAZYR, which
received marketing authorization from the European Commission in July 2008 for
the treatment of acute HAE in the EU. These intellectual property rights include
the right to develop, use, market, sell and/or offer for sale the technical
processes, intellectual property and institutional understanding (including the
way in which FIRAZYR reacts in body, an understanding of the mechanisms of
action which allow FIRAZYR to work and the knowledge related to the associated
clinical and marketing studies performed to obtain approval of FIRAZYR). The
fair value of FIRAZYR in the EU has been determined using an income approach
applying the multi-period excess earnings method, based on the present value of
incremental after tax cash flows attributable to the asset after the deduction
of contributory asset charges for the assets employed (including working
capital, the assembled workforce and other fixed assets).
This intangible
asset has an estimated useful life of 17 years, will be amortized on a straight
line basis, and has been allocated to the HGT reporting segment.
(b)
Other intangible assets, IPR&D
IPR&D is
defined as being a development project that has been initiated and has achieved
material progress but (i) has not yet reached technological feasibility or has
not yet received the appropriate regulatory approval, (ii) has no alternative
future use, and (iii) the fair value is estimable with reasonable certainty. A
project-by-project valuation using business combination and intangible assets
guidance in the Codification and the American Institute of Certified Public
Accountants Practice Aid “Assets Acquired in a Business Combination to Be Used
In Research and Development Activities: A Focus
on Software,
Electronic Devices and Pharmaceutical Industries” has been performed to
determine the fair value of research and development projects of Jerini which
were in-process, but not yet completed as of the acquisition date.
The IPR&D
assets of $129.7
million (being $104.1
million acquired as of August 6, 2008 and $25.6
million in the subsequent step acquisitions) relate to FIRAZYR for the treatment
of acute HAE in the US ($64.9
million), and the rest of the world excluding the US and EU (“RoW”), ($64.8
million). These IPR&D assets have not yet received approval from the
relevant regulatory authorities at the acquisition date. In the US FIRAZYR
received a not approvable letter from the FDA in April 2008. The Company
considers that these IPR&D assets have no alternative future use outside of
their current development projects and the fair value of these IPR&D assets
has therefore been charged to the consolidated statement of operations (in
accordance with the US GAAP for business combinations which completed prior to
January 1, 2009).
The fair value of
the FIRAZYR IPR&D assets was determined using the income approach applying
the multi-period excess earnings method. The fair value of the IPR&D assets
has been based on the incremental cash flows expected to be generated by the
development projects after the deduction of contributory asset charges in
respect of other assets employed in these research projects (including working
capital, the assembled workforce and other fixed assets). These estimated future
cash flows were then probability adjusted to take into account the stage of
completion and the remaining risks and uncertainties surrounding the future
development and commercialization of FIRAZYR. These estimated probability
adjusted, after tax cash flows were then discounted at 17-18% to determine a
present, or fair, value.
The major risks and
uncertainties associated with the timely completion of the acquired IPR&D
projects consist of the ability to confirm the efficacy of the technology based
on data from the clinical trials, and obtaining the relevant regulatory
approvals. The valuations have been based on information at the time of the
acquisition and expectations and assumptions that (i) have been deemed
reasonable by the Company’s management, and (ii) are based on information,
expectations and assumptions that would be available to and be made by a market
participant. However, no assurance can be given that the underlying assumptions
or events associated with such assets will occur as projected. For these
reasons, among others, the actual cash flows may vary from forecast future cash
flows.
(c)
Goodwill
Goodwill of
$152.8
million (being $121.0
million acquired as of August 6, 2008 and $31.8
million in the subsequent step acquisitions) has been wholly allocated to the
HGT reporting segment and is not deductible for tax purposes.
(d)
Assets held-for-sale
On acquisition of
Jerini the Company and Jerini commenced a strategic review of the acquired
assets to identify which of the assets were non core to the newly combined
business. In October 2008 Jerini announced that its Supervisory and Management
Boards had concluded that it was in the best interests of Jerini to divest
Jerini Ophthalmic, Inc, (“JOI”), Jerini Peptide Technologies Gmbh (“JPT”) and
Jerini’s pre clinical projects. The Company presented the fair value less costs
to sell of JOI and JPT as assets held-for-sale at the acquisition date. These
held-for-sale assets were recorded at their aggregate fair value less costs to
sell of $27.8 million within the purchase price allocation, the carrying value
being primarily represented by the fair value of IPR&D.
In May 2009, JPT
was divested for cash consideration of $6.7 million, resulting in a loss on
disposal of $0.5 million.
For the years to
December 31, 2009 and 2008the Company has presented JOI and JPT as discontinued
operations, recording revenues and the pre-tax loss from these businesses within
discontinued operations for the year to December 31, 2009 of $2.3 million
and $12.4 million (2008: $3.6 million and $17.6 million, 2007: $nil and $nil)
respectively. The loss from discontinued operations for the year to December 31,2009 includes the $0.5 million loss on disposal of JPT and charges of $5.9
million relating to re-measurement of JOI assets to fair value, as a result of
the closure, rather than divestment of JOI. The loss from discontinued
operations in the year to December 31, 2008 also includes a charge of $12.9
million arising on the re-measurement of assets held for sale to their fair
value less costs to sell at December 31, 2008.
Further, in 2009,
the Company adjusted the preliminary purchase price allocation to recognize
assumed liabilities for onerous contract costs and employee involuntary
termination costs incurred on closure of JOI and the pre-clinical
projects totaling $9.1 million. These adjustments were
recognized as an increase in acquired goodwill.
METAZYM
acquisition
On June 4, 2008
Shire completed the acquisition of the global rights to METAZYM from Zymenex A/S
(“Zymenex”) for $135.0 million in cash, and recognized an IPR&D charge of
$135.0 million during 2008 for the acquired development project.
On April 19, 2007
Shire completed its acquisition of New River by way of a short-form merger, in
an all-cash transaction. The acquisition was effected by merging Shuttle
Corporation, an indirect wholly owned subsidiary of Shire, with and into New
River, with New River continuing as the surviving corporation. As consideration,
Shire paid to New River’s shareholders $64 in cash for each share of New River
common stock outstanding at the time of the acquisition.
The acquisition of New River allowed Shire to capture the full economic
value of VYVANSE, and gain control of the future development and
commercialization of this product. VYVANSE for ADHD in pediatric
populations was approved by the FDA on February 23, 2007 and the Company
received notification from the Drug Enforcement Administration (“DEA”) of the
final Schedule II classification for VYVANSE on May 3, 2007.
The acquisition of
New River was accounted for using the
purchase method. Under the purchase method of accounting, the assets and
liabilities of New River were recorded at their fair values at the acquisition
date. The consolidated financial statements and reported results of operations
of Shire issued after the completion of the acquisition reflect these fair
values, with the results of New River being included within the consolidated
statement of operations from April 19, 2007.
Total
consideration, was $2,594.5 million at the price of $64 per share of New River’s
common stock, including direct cash consideration of $2,276.0 million, the cost
of settling stock options and SARs of $124.5 million, the cost of settling
warrants over shares of New River common stock of $133.0 million and direct
acquisition costs of $61.0 million.
Accounting
for the Effective Settlement of the New River Collaboration
Agreement
Prior to the
acquisition of New River, on January 31, 2005 Shire entered into a collaboration
agreement with New River which governed the development, manufacture and
commercialization of VYVANSE for the treatment of ADHD in the US and RoW
territories. In March 2005, this collaboration agreement was split into two
separate agreements, the US Collaboration Agreement and the RoW Territory
Licence Agreement (together the “New River Collaboration
Agreements”).
Under the terms of
the New River Collaboration Agreements, the parties were required to collaborate
on the development, manufacturing, marketing and sales of VYVANSE in the US.
Profits from the collaboration arising in the US were to be divided according to
a predetermined formula, based on the scheduling of VYVANSE by the DEA.
Post-approval milestones were due under the New River Collaboration Agreements
if the product received favorable scheduling (schedule III, IV or V or
unscheduled) and on the achievement of certain sales milestones.
Through the New
River Collaboration Agreements Shire also acquired the license in the RoW
territory to develop and commercialize VYVANSE, in consideration of a low
double-digit royalty.
Shire paid an
initial sum of $50 million to New River in January 2005 on signing the original
collaboration agreement and a further $50 million was paid by Shire to New River
following acceptance of the filing of a New Drug Application (“NDA”) by the FDA
in January 2006.
As Shire had a
pre-existing relationship with New River, Shire accounted for the effective
settlement of this relationship as of the completion date of the New River
acquisition.
Shire measured the
effective settlement of the New River Collaboration Agreements resulting from
its pre-existing relationship with New River and determined that, in respect of
the US Collaboration Agreement, it was less favorable to the Company when
compared with pricing for current market transactions for similar items. The RoW
Territory License Agreement was determined to be at current market rates. The
valuation of the New River Collaboration Agreements and their current market
comparators was based upon information available at the time of the acquisition
and using the expectations and assumptions that were deemed reasonable by the
Company’s management.
Although the US
Collaboration Agreement was deemed less favorable to the Company at the time of
the acquisition when compared with pricing for current market transactions for
similar items, the Company did not record a loss on the effective settlement of
the pre-existing relationship in the consolidated statement of operations, nor
did the Company adjust its purchase price for New River to reflect any such loss
resulting from this effective settlement, as settlement provisions in the US
Collaboration Agreement available to the Company enabled effective settlement of
the New River Collaboration Agreements at no cost to the Company.
(a)
Purchase price allocation
Shire's cost of
acquiring New River of approximately $2.6 billion has been allocated to the
assets acquired and liabilities assumed according to their estimated fair values
at the date of acquisition. Based on this allocation, and at the end of the
allocation period, an excess of the fair value of assets acquired and
liabilities assumed over the cost of acquisition totaling $122.2 million had
arisen which was allocated as a pro rata reduction of amounts that would
otherwise have been
ascribed to
identifiable intangible assets and IPR&D, (such IPR&D being immediately
charged to expense, having no alternative future use). The value of other
intangible assets and IPR&D below are presented after this pro-rata
allocation.
During the second
half of 2008, after the end of the allocation period, the Company reduced the
values ascribed to other intangible assets by $24.1 million from amounts
previously assigned to these assets in the purchase price allocation. The change
to the values ascribed arose from changes to estimates of deferred taxes:
accordingly the excess of the fair value of net assets acquired and liabilities
assumed over the cost of the acquisition increased by $24.1 million. This excess
was allocated to intangible assets.
The following table presents the
Company’s allocation of the purchase price to the assets acquired and
liabilities assumed,
including the post-allocation period adjustment as outlined above, based on
their fair values.
A
project-by-project valuation was performed to determine the fair values of
research and development projects of New River which were in-process, but not
completed as of the completion of the acquisition.
IPR&D assets
totaling $1,866.4 million were identified relating to VYVANSE indicated for ADHD
in non-pediatric patients in the US ($1,786.8 million) and VYVANSE indicated for
ADHD in RoW, ($79.6 million). Both of these IPR&D assets had not received
approval, (either from the FDA or from the relevant regulators in the RoW) at
the acquisition date. The Company considered that these IPR&D assets have no
alternative future use outside of their current development
projects, and these
assets were therefore charged to expense in the consolidated statement of
operations as of the acquisition date.
The fair value of
the VYVANSE IPR&D assets was determined through the income approach using
the multi-period excess earnings method. The fair value of the acquired
IPR&D assets was based on the present value of the probability adjusted
incremental cash flows expected to be generated by the research and development
projects, after the deduction of contributory asset charges for other assets
employed in these projects (such other assets include working capital, the
assembled workforce, and the favorable manufacturing contract identified below).
The valuation assumed that the effective settlement of the pre-existing New
River Collaboration Agreements had occurred and Shire had purchased 100% of the
forecast future cash flows. Estimated future cash flows were probability
adjusted to take into account the stage of completion and the risks surrounding
the successful development and commercialization of the acquired projects. The
estimated after tax cash flows were discounted to present value using risk
adjusted discount rates between 10% and 12%.
The major risks and
uncertainties associated with the timely completion of the acquired IPR&D
projects consist of the ability to confirm the safety and efficacy of the
technology based on the data from ongoing clinical trials and obtaining the
necessary regulatory approvals. The valuations were based on information at the
time of the acquisition and expectations and assumptions that (i) were deemed
reasonable by Shire’s management, and (ii) were based on information,
expectations and assumptions that would have been available to and made by a
market participant. However, no assurance can be given that the underlying
assumptions or events associated with such assets will occur as projected. For
these reasons, among others, the actual cash flows may vary from forecast future
cash flows.
(c)
Identifiable intangible assets
The acquired
identifiable intangible assets were attributable to the following
categories:
Relates to
VYVANSE approved for the treatment of ADHD in pediatric patients in the
US.
(2)
The asset life
of 20 years represents the period over which management believe the asset
will contribute to the future cash flows of Shire, being the expected
commercial lifespan of VYVANSE (VYVANSE has patent protection in the US
until September 2023).
Acquired
identifiable intangible assets primarily represent the value ascribed to
developed technology, represented by VYVANSE for the treatment of ADHD in
pediatric populations in the US. These rights include the rights to develop,
use, market, sell and/or offer for sale the technical processes, intellectual
property and institutional understanding (including the way in which VYVANSE
reacts in body, an understanding of the mechanisms of action which allow VYVANSE
to work and the knowledge related to the associated clinical and marketing
studies performed for VYVANSE).
The fair value of
this intellectual property in respect of VYVANSE for the treatment of ADHD in
pediatric populations was determined through the income approach using the
multi-period excess earnings method. The valuation assumes that the effective
settlement of the pre-existing New River Collaboration Agreements has occurred
and Shire has purchased 100% of the cash flows of VYVANSE for the treatment of
ADHD in pediatric populations in the US. Using the multi-period excess earnings
method, the fair value of intellectual property in respect of VYVANSE for the
treatment of ADHD in pediatric populations in the US was based on the present
value of the incremental after-tax cash flows attributable to the asset, after
the deduction of contributory asset charges for other assets employed (including
working capital, the assembled workforce, and the favorable manufacturing
contract).
The valuations were
based on information available at the time of the acquisition and the
expectations and assumptions that (i) were deemed reasonable by Shire’s
management, and (ii) were based on information, expectations and assumptions
that would have been available to and made by a market participant. However, no
assurance can be given that the underlying assumptions or events associated with
such assets will occur as projected. For these reasons, among others, the actual
cash flows may vary from forecast future cash flows.
In July 2006, New
River issued $137.8 million of 3.5% Convertible Subordinated Notes due 2013 (the
“Notes”). On conversion of the Notes New River was obligated to pay the
principal amount of the Notes to the Note holders in cash, with any excess of
the fair value over their principal amount (the “Excess Conversion Value”) being
payable either in cash, shares of New River common stock or a combination of
shares of New River common stock and cash at the election of New
River.
On April 3, 2007
New River announced that it had elected to settle any Excess Conversion Value in
cash. Following the change of control of New River as a result of the business
combination, Note holders were entitled to a make-whole premium in the form of
an increase in the conversion rate if they tendered their Notes for conversion
prior to May 17, 2007.
The Notes were
included in the purchase price allocation at their fair value, being the present
value of the estimated future cash flows in respect of the Notes as of the date
of acquisition. All the outstanding Notes were tendered for conversion in the
period between the acquisition and May 17, 2007 and were therefore settled in
cash during the second quarter of 2007 at a value of $279.4 million, which
equates to the fair value of the Notes at the acquisition date including the
make-whole premium.
(e)
Purchased Call Option
Concurrent with the
issue of the Notes, New River also entered into a purchased call option with
Merrill Lynch at a cost to New River of $43.5 million, being a convertible note
hedge transaction for the Excess Conversion Value of the Notes. The purchased
call options covered, subject to customary anti-dilution adjustments,
4,005,811 shares of New River common stock at strike prices which
corresponded to the conversion price of the Notes. New River had recorded the
cost of acquiring the purchased call option to additional paid in
capital.
As a result of New
River’s election on April 3, 2007 to settle the Excess Conversion Value in cash,
Merrill Lynch was obligated to settle the purchased call option in cash. The
fair value of the purchased call option represents the Excess Conversion Value
of the Notes, including the make-whole premium. This fair value of $141.8
million was recorded by the Company as an asset within the purchase price
allocation.
Supplemental
disclosure of pro-forma information
The following
unaudited pro forma financial information presents the combined results of the
operations of Shire, Jerini and New River as if the acquisitions of New River
had occurred on at January 1, 2006 and the acquisition of Jerini at January 1,2007 based upon Shire’s ownership interest of 100% and 98.6% of New River and
Jerini respectively. The unaudited pro forma financial information is not
necessarily indicative of what the consolidated results of operations actually
would have been had the acquisition been completed at the dates indicated. In
addition, the unaudited pro forma financial information does not purport to
project the future results of operations of the combined Company.
Earnings per ordinary share from continuing
operations attributable to Shire plc shareholders – basic
21.2
c
37.0
c
Earnings per ordinary share attributable to
Shire plc shareholders – basic
18.0
c
37.0
c
Earnings per ordinary
share from continuing operations attributable to
Shire plc shareholders - diluted
21.0
c
36.4
c
Earnings per ordinary share attributable to
Shire plc shareholders– diluted
17.8
c
36.4
c
The unaudited pro
forma financial information above reflects the following pro forma
adjustments:
Jerini
(i)
an adjustment
to decrease interest income by $9.1 million and $29.0 million in the years
to December 31, 2008 and 2007 respectively, to reflect the interest
foregone on the Company’s cash resources used to fund the acquisition of a
majority voting interest in Jerini;
and
(ii)
an adjustment
to increase amortization expense by approximately $12.1 million and $18.2
million for the years to December 31, 2008 and 2007 respectively, to
reflect amortization of intangible assets relating to the currently
marketed product, over the estimated useful life of 17
years.
New River (all
adjustments relate to the year ended December 31, 2007)
(iii)
an adjustment
to eliminate revenues recognized by New River of $3.0
million;
(iv)
an adjustment
to increase interest expense by $25.3 million, to reflect the interest
expense and amortization of deferred issue costs associated with the
$1,300 million drawn down under the Facilities Agreement which was entered
into by Shire on February 21, 2007 for the purpose of financing the
acquisition of New River;
(v)
an adjustment
to decrease interest income by $6.5 million, to reflect the interest
foregone on the Company’s cash resources used to part fund the acquisition
of New River;
(vi)
an adjustment
to increase amortization expense based on the estimated fair value of
identifiable intangible assets from the purchase price allocation, which
are being amortized over their estimated useful lives over a range of 5 to
20 years, of approximately $28.1 million;
and
(vii)
an adjustment
to the weighted average number of shares used in the pro forma EPS
calculation to reflect the private placement of 42.9 million new ordinary
shares of Shire plc on February 20, 2007, the proceeds of which were used
to partially fund the acquisition of New River, as if the private
placement took place on January 1,2007.
The unaudited pro
forma financial information above does not include (i) in 2007 the New River
IPR&D charge of $1,866.4 million and (ii) in 2008 the IPR&D charge
of $128.1 million in respect of FIRAZYR outside of the EU, both of which formed
part of the preliminary purchase price allocations, because they are
non-recurring in nature. The unaudited pro forma financial information includes
a charge of $81.8 million for the year to December 31, 2007 in respect of New
River cash settled SARs which were extinguished as a result of the
acquisition.
4. Termination of Duramed Pharmasceuticals, Inc. (“Duramed”)
collaboration agreement
In August 2006,
Shire and Duramed, a subsidiary of Teva Pharmaceutical Industries Ltd, (“Teva”)
entered into an agreement related to SEASONIQUE, a number of products using
Duramed’s transvaginal ring technology and other oral products (the
“Collaboration Products”). Under this agreement, Shire was required to reimburse
Duramed for US development expenses incurred on Collaboration Products up to a
maximum of $140 million over eight years from September 2006, and Shire had the
right to commercialize these products in a number of markets outside of North
America, including the larger European markets.
On February 24,2009 Shire and Duramed amended this agreement such that it terminated on
December 31, 2009. Pursuant to this amendment, Shire agreed to return to Duramed
its rights under the agreement effective February 24, 2009. Shire also agreed to
reimburse Duramed for incurred US development expenditures in 2009 up to a
maximum of $30.0 million. Shire has no rights with respect to the products on
which such development expenditures are incurred. In addition, Shire agreed to a
one-time payment to Duramed of $10.0 million, (which was paid during the first
quarter of 2009), and to forego royalties receivable from Barr Laboratories,
Inc. (“Barr”) (a subsidiary of Teva) and cost of goods otherwise payable by Barr
to Shire in 2009 under the License Agreement between the parties for the supply
of authorized generic ADDERALL XR, up to a maximum of $25.0 million. During the
year to December 31, 2009the Company recorded a charge of $62.9 million to
research and development to reflect the cash payment made in the first quarter
of 2009 and other termination related costs.
A reconciliation of
the contract termination liability is presented
below:
During 2007 and
2008 the Company streamlined its operations through the divestment of certain
non-core products. In 2007 the Company received cash consideration of
$234.4 million on the disposal of non core products, which included $209.6
million from Laboratorios Almirall S.A (“Almirall”) on the transfer of product
licenses, including SOLARAZE and VANIQA, and in 2008 Shire received a further
$5.0 million in cash for the transfer of other non-core product
rights.
The Company
recognizes gains in respect of these divested product rights when the relevant
regulatory or other consents for the transfer of these product rights are
obtained. Accordingly Shire recognized gains of $6.3 million, $20.7 million and
$127.8 million in the years to December 31, 2009, 2008 and 2007 respectively on
disposal of these non-core assets. At December 31, 2009the Company recorded as
a deposit within Other current liabilities $5.8
million (2008: $12.5 million) of proceeds from the disposal of these products
where regulatory or other consents have yet to be obtained.
All assets disposed
of during 2009, 2008 and 2007 formed part of the Specialty Pharmaceuticals
segment.
In March 2009
Company’s
management approved and initiated plans to phase out operations and close the
Company’s Specialty Pharmaceuticals manufacturing facility at Owings Mills,
Maryland. Over the next three years, all products currently manufactured by
Shire at this site will transition to DSM Pharmaceutical Products, and
operations and employee numbers at the site will wind down over this period.
During the year to December 31, 2009the Company incurred reorganization costs
of $12.7 million (2008: $nil, 2007: $nil) which relate to employee involuntary
termination benefits, impairment charges for property, plant and equipment and
other costs.
As a result of the
decision to transfer manufacturing from the Owings Mills site the Company has
revised the life of property, plant and equipment in the facility, and in the
year to December 31, 2009 has incurred accelerated depreciation of $12.0
million, which has been charged to Cost of product sales. Consequently, the
Company estimates an annual accelerated depreciation charge, over the level
which would have been charged absent the wind down of operations, of $22.5
million in 2010. The reorganization costs and accelerated depreciation have been
recorded within the Specialty Pharmaceuticals reportable segment.
Jerini
non-core operations
As outlined in Note
3, the operations of JOI and certain other non-core pre-clinical operations
acquired with Jerini were closed down in the year to December 31, 2009. On
closure of these operations the Company recorded a liability for costs
associated with these closures of $9.1 million, relating to employee involuntary
termination benefits and other closure costs. This liability was recorded within
accounts payable and accrued expenses with a corresponding increase to goodwill
arising on the acquisition.
The aggregate
liability for reorganization costs arising on the Owings Mills and Jerini
closures at December 31, 2009 is as follows:
At December 31,2009 the closing reorganization cost liability was recorded within accounts
payable and accrued expenses ($3.9 million) and other non-current liabilities
($3.0 million).
Integration costs
of $7.7 million (2008: $10.3 million, 2007: $1.3 million), were incurred in the
year to December 31, 2009. Integration costs in 2009 and 2008 relate to the
integration of Jerini, and in 2007 relate to the integration of New River into
Shire.
Acquisition costs
of $2.9 million (2008: $nil, 2007: $nil), primarily relating to direct
acquisition costs and changes in the fair value of contingent consideration
recognized on the acquisition of EQUASYM, were incurred in the year to December31, 2009.
Accounts receivable
at December 31, 2009 of $597.5 million (December 31, 2008: $395.0 million), are
stated net of a provision for discounts and doubtful accounts of $20.8 million
(December 31, 2008: $20.2 million, 2007: $9.8 million).
At December 31,2009 assets held for sale had a carrying value of $1.7 million, represented by
intangible assets and attributed goodwill for certain products divested to
Almirall in 2007 (December 31, 2008: $16.6 million). The recognition of the
gains arising on the disposal of these products and the de-recognition of the
related assets have been deferred pending the completion of the transfer of the
relevant regulatory and other consents to the acquirer (see Note 5). These
assets divested to Almirall form part of the Specialty Pharmaceuticals operating
segment.
At December 31,2008 assets held for sale also included $14.9 million for the operations of JOI
and JPT. In May 2009, JPT was divested for cash consideration of $6.7
million, and a loss on disposal of $0.5 million has been recognized within
discontinued operations for the year to December 31, 2009. During the second
quarter of 2009 the Company closed JOI, and recorded a re-measurement
adjustment of $5.9 million to record the JOI assets at the lower of their fair
value and carrying value (see note 3).
On March 12, 2009the Company completed the disposal of its cost investment in Virochem to Vertex
in a cash and stock transaction. The disposal was part of a transaction entered
into by all the shareholders of Virochem with Vertex. The carrying amount of the
Company’s investment in Virochem on March 12, 2009 was $14.8 million. Shire
received total consideration of $19.2 million in cash and two million Vertex
shares (valued at $50.8 million) from the disposal, recognizing a gain on
disposal of $55.2 million which has been recognized in Other income/(expense),
net during the year to December 31, 2009.
Additional
consideration of $2.0 million in cash and 0.2 million Vertex shares is being
held in escrow until March 11, 2010 pending any warranty claims and breaches of
representations made by Virochem and by all selling shareholders, including
Shire. The escrow conditions are considered substantive and hence a gain has not
been recognized relating to these amounts in the year to December 31, 2009. The
Vertex stock received has been accounted for as an available-for-sale
investment.
Disposal
of Questcor Pharmaceutical Inc (“Questcor”)
For the year to
December 31, 2008 Other (expense)/income net includes a gain of $9.4 million
from the sale of Shire’s available-for-sale investment in Questcor, a specialty pharmaceutical company
focused on providing prescription drugs for central nervous system disorders.
Shire received cash consideration of $10.3 million on the sale of this
investment.
Other-than-temporary
impairment of available-for-sale securities
The Company
recorded other-than-temporary impairments of $0.8 million, $58.0 million and
$3.0 million against its available-for-sale securities in the years to December31, 2009, 2008 and 2007 respectively.
During the year to
December 31, 2008the Company recognized impairment charges of $44.3 million
relating to its investment in Renovo Group plc, representing unrealized holding
losses that were reclassified out of other comprehensive income into earnings in
2008, as management concluded that the impairment was other than temporary. The
decline in the market value of the Company’s investment in Renovo Group plc
initially arose from the results of clinical trials for JUVISTA which were
announced over 2007 and 2008. During the third quarter of 2008, in considering
whether the decline in value was temporary or “other than temporary”the Company
considered the following factors: the severity of the decline from historical
cost (87%) and its duration (eleven months); market analysts’ targets of Renovo
Group plc’s share price for the next 18-24 months; and the revised expected
filing date for JUVISTA due to the adoption of a sequential rather than parallel
Phase 3 development plan.
These factors,
together with the significant decline in global equity markets during the third
quarter of 2008 meant that the Company was unable to reasonably estimate the
period over which a full recovery in the value of its investment in Renovo Group
plc could occur. As such, the Company concluded that the decline in value was
“other than temporary”. Therefore the full difference between the book value of
the investment and the fair (market) value was recognized as an other than
temporary impairment. Accordingly the Company recognized an impairment charge of
$44.3 million for its investment in Renovo Group plc through the consolidated
statement of operations in the third quarter of 2008. For purposes of computing
the impairment charge fair value was assumed to be £0.26 per share, representing
the closing price of Renovo Group plc securities on the London Stock Exchange on
September 30, 2008.
During the year to
December 31, 2009the Company acquired the worldwide rights (excluding the US,
Canada and Barbados) to EQUASYM IR and XL for a total consideration of $91.0
million, which resulted in goodwill of $13.2 million (see note 3). The goodwill
has been assigned to the Specialty Pharmaceuticals segment.
During the year to
December 31, 2008the Company acquired a 98.6% voting interest in Jerini for
cash consideration of $556.5 million which resulted in goodwill of $148.0
million (see Note 3). This goodwill has been attributed to the HGT reporting
segment.
At December 31,2009 goodwill of $214.5 million (2008: $202.4 million) is held in the Specialty
Pharmaceuticals segment and $170.2 million (2008: $148.4 million) in the HGT
segment.
2009
2008
$’M
$’M
As of January
1,
350.8
219.4
Acquisition (including
finalization of
purchase price allocation)
At December 31,2009 the net book value of intangible assets allocated to the Specialty
Pharmaceuticals segment was $1,238.0 million (December 31, 2008: $1,244.9
million) and in the HGT segment was $552.7 million (December 31, 2008: $580.0
million).
The change in the
net book value of other intangible assets for the year to December 31, 2009 is
shown in the table below:
During the year to
December 31, 2009the Company acquired intangible assets totaling $84.0 million,
principally relating to $78.5 million for EQUASYM IR and XL for the treatment of
ADHD ($73.0 million for currently marketed products and $5.5 million for
IPR&D). The weighted average amortization period for acquired currently
marketed products is 13 years.
Amortization
charged for the years to December 31, 2009, 2008 and 2007 was $138.6 million,
$127.9 million and $95.8 million, respectively.
The Company
recorded impairments of $nil, $97.1 million and $0.4 million in the years to
December 31, 2009, 2008 and 2007 respectively, recorded within Selling, general
and administrative costs. In 2008 the Company recognized impairment charges of
$97.1 million, of which $94.6 million related to the write-down of its DYNEPO
intangible asset to its fair value ($nil). Changes in the external environment,
including the launch of several competing bio-similars at lower prices made
DYNEPO uneconomic for the Company. Accordingly Company has decided to stop
commercializing DYNEPO. Product sales were wound down over the second half of
2008 as all patients were transferred off DYNEPO by the end of 2008. The fair
value of DYNEPO was determined using an expected present value technique. The
impairment charges relate to the Specialty Pharmaceuticals reportable
segment.
Management
estimates that the annual amortization charge in respect of intangible assets
held at December 31, 2009 will be approximately $140 million for each of the
five years to December 31, 2014. Estimated amortization expense can be affected
by various factors including future acquisitions, disposals of product rights,
regulatory approval and subsequent amortization of the acquired IPR&D
projects, foreign exchange movements and the technological advancement and
regulatory approval of competitor products.
There are
potentially different interpretations as to how shipments of authorized generic
ADDERALL XR to Teva and Impax should be included in the Medicaid rebate
calculation pursuant to Medicaid rebate legislation. As a result more than one
unit rebate amount (“URA”) is calculable for the purpose of determining the
Company’s Medicaid rebate liability to States as a result of authorized generic
launch. During 2009 the Company highlighted the different interpretations to
Centre of Medicaid Services (“CMS”) and submitted data to CMS for the purpose of
computing the URA, based on the Company’s reasonable interpretation of the
Medicaid rebate legislation and related guidance. The State Medicaid agencies
have invoiced the Company for Medicaid rebates, and the Company has paid these
Medicaid rebate invoices, based on this URA. Despite this CMS has the ability to
subsequently challenge the Company’s interpretation of the Medicaid rebate
legislation, and require an alternative interpretation to be applied (both
retrospectively and prospectively), which could result in a significantly higher
Medicaid liability.
Throughout 2009 the
Company’s management has recorded its accrual for Medicaid rebates based on its
best estimate of the rebate payable. For the first three quarters of 2009, the
Company’s management based this best estimate on an amount that the Company
could pay were CMS to challenge the Company’s interpretation and require an
alternative interpretation of the Medicaid rebate legislation to be applied. In
the fourth quarter of 2009, the Company’s management lowered its best estimate
of the Medicaid rebate payable down to be consistent with (i) the Company’s
interpretation of the Medicaid rebate legislation, (ii) the Company’s repeated
and consistent submission of price reporting to CMS using the Company’s
interpretation of the Medicaid rebate legislation, (iii) CMS calculating the URA
based on that interpretation, (iv) States submitting Medicaid rebate invoices
using this URA and (v) Shire paying these invoices . This change of estimate
increased ADDERALL XR product sales by $97.7 million in the fourth quarter of
2009 (of which $73.6 million related to ADDERALL XR sales recognized in the
first three quarters of 2009).
In determining its
best estimate of the Medicaid rebate liability at December 31, 2009 the
Company’s management has considered a number of factors taken in combination
(including the receipt of a further quarter’s invoices from the States with a
URA based on the Company’s interpretation of the Medicaid rebate legislation and
related guidance, and the Company’s likely response were CMS to employ an
alternative interpretation of the Medicaid rebate legislation). Any future
change in the Company’s interpretation which results in a change of estimate
(both retrospectively and prospectively) could significantly decrease sales of
ADDERALL XR in the period of any such change in estimate.
The Company
strongly believes that its interpretation of the Medicaid rebate legislation is
reasonable and correct. However, CMS could disagree with the
Company’s interpretation, and require the Company to apply an alternative
interpretation of the Medicaid rebate legislation and pay up to $210 million
above the recorded liability. This would represent a URA substantially in
excess of the unit sales price of ADDERALL XR and accordingly be in excess of
the approximate amount of the full cost to the States of reimbursement for
Medicaid prescriptions of ADDERALL XR.
Should CMS take
such an approach, the Company could seek to limit any additional payments to a
level approximating the full, un-rebated cost to the States of ADDERALL XR, or
$98 million above the recorded liability. Further, the Company believes it has a
strong legal basis supporting its interpretation of the Medicaid rebate
legislation, and that there would be a strong basis to initiate litigation to
recover any amount paid in excess of its recorded liability. The result of any
such litigation cannot be predicted and could result in additional rebate
liability above the Company’s current best estimate.
Accrued Managed
Care rebates have increased by $93.5 million to $153.4 million (2008: $59.9
million), principally due to higher rebates on ADDERALL XR offered to Managed
Care Organizations from April 1, 2009.
On May 9, 2007
Shire issued $1,100 million in principal amount of 2.75% convertible bonds due
2014 and convertible into fully paid ordinary shares of Shire plc (the “Bonds”).
The net proceeds of issuing the Bonds, after deducting the commissions and other
direct costs of issue, totaled $1,081.7 million. In connection with the Scheme
of arrangement the Trust Deed was amended and restated in 2008 in order to
provide that, following the substitution of Shire plc in place of Old Shire as
the principal obligor and issuer of the Convertible Bonds, the Bonds would be
convertible into ordinary shares of Shire plc.
The Bonds were
issued at 100% of their principal amount, and unless previously purchased and
cancelled, redeemed or converted, will be redeemed on May 9, 2014 (the “Final
Maturity Date”) at their principal amount.
The Bonds bear
interest at 2.75% per annum, payable semi-annually in arrears on November 9 and
May 9. The Bonds constitute direct, unconditional, unsubordinated and unsecured
obligations of the Company, and rank pari passu and ratably, without any
preference amongst themselves, and equally with all other existing and future
unsecured and unsubordinated obligations of the Company.
The Bonds may be
redeemed at the option of the Company, (the “Call Option”), at their principal
amount together with accrued and unpaid interest if: (i) at any time after May23, 2012 if on no less than 20 dealing days in any period of 30 consecutive
dealing days the value of Shire’s Ordinary Shares underlying each Bond in the
principal amount of $100,000 would exceed $130,000; or (ii) at any time
conversion rights have been exercised, and/or purchases and corresponding
cancellations, and/or redemptions effected in respect of 85% or more in
principal amount of Bonds originally issued. The Bonds may also be redeemed at
the option of the Bond holder at their principal amount including accrued but
unpaid interest on May 9, 2012 (the “Put Option”), or following the occurrence
of a change of control. The Bonds are repayable in US dollars, but also contain
provisions entitling the Company to settle redemption amounts in Pounds
sterling, or in the case of the Final Maturity Date and following exercise of
the Put Option, by delivery of the underlying ordinary shares and a cash top-up
amount.
The Bonds are
convertible into ordinary shares during the conversion period, being the period
from June 18, 2007 until the earlier of: (i) the close of business on the date
falling fourteen days prior to the Final Maturity Date; (ii) if the Bonds have
been called for redemption by the Company, the close of business fourteen days
before the date fixed for redemption; (iii) the close of business on the day
prior to a Bond holder giving notice of redemption in accordance with the
conditions; and (iv) the giving of notice by the trustee that the Bonds are
accelerated by reason of the occurrence of an event of default.
Upon conversion,
the Bond holder is entitled to receive ordinary shares at the conversion price
of $33.17 per ordinary share, (subject to adjustment as outlined
below).
The conversion
price is subject to adjustment in respect of (i) any dividend or distribution by
the Company, (ii) a change of control and (iii) customary anti-dilution
adjustments for, inter alia, share consolidations, share splits, spin-off
events, rights
issues, bonus
issues and reorganizations. The initial conversion price of $33.5879 was
adjusted to $33.17 with effect from March 11, 2009 as a result of cumulative
dividend payments during the period from October 2007 to April 2009 inclusive.
The shares issued on conversion will be delivered credited as fully paid, and
will rank pari passu in all respects with all fully paid shares in issue on the
relevant conversion date.
The Bonds have been
recorded at their principal amount within Non-current
liabilities. Direct costs of issue of the Bonds paid in the year to
December 31, 2007 totalled $18.3 million. These costs are being amortized to
interest expense using the effective interest method over the five year period
to the Put Option date. At December 31, 2009 $8.8 million was deferred ($3.8
million within other current assets and $5.0 million within other non-current
assets).
Revolving
Credit Facilities Agreement
Shire has a
committed revolving credit facility (the “RCF”) in an aggregate amount of $1,200
million with ABN Amro Bank N.V.; Barclays Capital; Citigroup Global Markets
Limited; The Royal Bank of Scotland plc; Lloyds TSB Bank plc; Bank of America
N.A.; and Morgan Stanley Bank. The RCF, which includes a $250 million swingline
facility, may be used for general corporate purposes and matures on February 20,2012. There were no borrowings under the RCF as of December 31,2009.
The interest rate
on each loan drawn under the RCF for each interest period, as determined by the
Company, is the percentage rate per annum which is the aggregate of the
applicable margin (ranging from 0.40 to 0.80 per cent per annum) and LIBOR for
the applicable currency and interest period. Shire also pays a commitment fee on
undrawn amounts at 35 per cent per annum of the applicable margin.
Under the RCF it is
required that (i) Shire’s ratio of Net Debt to EBITDA (as defined within the
Multicurrency Term and Revolving Facilities Agreement (“the RCF Agreement”))
does not exceed 3.5 to 1 for either the 12 month period ending December 31 or
June 30 unless Shire has exercised its option (which is subject to certain
conditions) to increase it to 4.0 to 1 for two consecutive testing dates;
(ii) the ratio of EBITDA to Net Interest (as defined in the RCF Agreement)
must not be less than 4.0 to 1, for either the 12 month period ending December
31 or June 30 and (iii) additional limitations on the creation of liens,
disposal of assets, incurrence of indebtedness, making of loans, giving of
guarantees and granting security over assets.
During 2007 and 2009 Shire entered into
certain multi-year leases for its HGT business unit at North Reading and
Lexington, Massachusetts. As Shire is considered, in substance,
the owner of these properties over their construction period, Shire recorded an
asset (being the fair value of the building element at inception of the relevant
lease) of $7.1 million and $32.7 million in the year to December 31, 2009 and
2007 within Property, Plant and Equipment – Assets under construction and the
corresponding building financing obligation is recorded within other long term
debt. The land element of these leases has been accounted for as an operating
lease.
Concurrent with entering into a new
lease at its Lexington campus, Shire extended the term of
certain other existing leases at its Lexington site, such that the terms of these
existing leases become co-terminus with the expiration of the new Lexington lease. This lease extension has been
accounted for as a substantial modification of the existing building finance
obligation, whereby the existing liability ($45.1 million) was derecognized and
a building financing obligation based on the fair value of the liability under
the revised lease terms ($39.4 million) was recorded in its place. This
substantial modification resulted in a non-cash gain of $5.7 million in the year
to December 31, 2009 which has been recorded within Other
income/(expense), net.
The Company’s
principal treasury operations are coordinated by its corporate treasury
function. All treasury operations are conducted within a framework of policies
and procedures approved annually by the Board of Directors. As a matter of
policy, the Company does not undertake speculative transactions that would
increase its currency or interest rate exposure.
Interest
rate risk
The Company is
exposed to interest rate risk on restricted cash, cash and cash equivalents and
on foreign exchange contracts on which interest is at floating rates. This
exposure is primarily to US dollar, Euro and Canadian dollar interest rates. As
the Company maintains all of its investments and foreign exchange contracts on a
short term basis for liquidity purposes, this risk is not actively managed. In
the year to December 31, 2009 the average interest rate received on cash and
liquid investments was less than 1% per annum. The largest proportion of
investments was in US dollar money market and liquidity funds.
The Company incurs
interest at a fixed rate of 2.75% on Shire plc’s $1,100 million in principal
amount convertible bonds due 2014. The building financing obligation of $46.7
million is also subject to a fixed interest rate over the lease term on the
amount outstanding.
No derivative
instruments were entered into during the year to December 31, 2009 to manage
interest rate exposure. The Company continues to review its interest rate risk
and the policies in place to manage the risk.
Market
risk of investments
As at December 31,2009the Company has $105.7 million of investments comprising available-for-sale
investments in publicly quoted companies ($87.0 million), equity method
investments ($14.8 million) and cost method investments in private companies
($3.9 million). The investments in public quoted companies and equity method
investments, for certain investment funds which contain a mixed portfolio of
public and private investments, are exposed to market risk. No financial
instruments or derivatives have been employed to hedge this risk.
Credit risk
Financial
instruments that expose Shire to concentrations of credit risk consist primarily
of short-term cash investments, trade accounts receivable (from product sales
and from third parties from which the Company receives royalties) and derivative
contracts. Cash is invested in short-term money market instruments,
including money market and liquidity funds and bank term deposits. The money
market and liquidity funds in which Shire invests are all triple A rated
by both Standard & Poor's and by Moody's credit rating
agencies.
The Company is
exposed to the credit risk of the counterparties with which it enters into
derivative contracts. The Company aims to limit this exposure through a system
of internal credit limits which require counterparties to have a long term
credit rating of A / A2 or better from the major rating agencies. The internal
credit limits are approved by the Board of Directors and exposure against these
limits is monitored by the corporate treasury function. The counterparties to
the derivative contracts are major international financial
institutions.
The Company’s
revenues from product sales are mainly governed by agreements with major
pharmaceutical wholesalers and relationships with other pharmaceutical
distributors and retail pharmacy chains. For the year to December 31, 2009 there
were two customers in the US who accounted for 51% of the Company’s product
sales. However, such customers typically have significant cash resources and as
such the risk concentration of credit is considered minimal. The Company has
taken positive steps to manage any credit risk associated with these
transactions and operates clearly defined credit evaluation
procedures.
The Company trades
in numerous countries and as a consequence has transactional and translational
foreign exchange exposure.
Transactional
exposure arises where transactions occur in currencies different to the
functional currency of the relevant subsidiary. The main trading currencies of
the Company are the US dollar, the Canadian dollar, Pounds Sterling and the
Euro. 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 (being spot,
forward and swap contracts) to manage the exposure in respect of balance sheet
assets and liabilities that are denominated in currencies different to the
functional currency of the relevant subsidiary. These assets and liabilities
relate predominantly to intercompany financing and accruals for royalty
receipts. The Company utilizes these derivative instruments to manage currency
risk on balance sheet foreign exchange exposures but the foreign exchange
contracts have not been designated as hedging instruments.
Translational
foreign exchange exposure arises on the translation into US dollars of the
financial statements of non-US dollar functional subsidiaries.
At December 31,2009the Company had 26 swap and forward foreign exchange contracts outstanding
to manage currency risk. The swaps and forward contracts mature within 90 days.
The Company did not have credit risk related contingent features or collateral
linked to the derivatives. These foreign exchange contracts were classified in
the consolidated balance sheet as follows:
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).
Available-for-sale
securities are included within Investments in the consolidated balance
sheet.
Certain estimates
and judgments were required to develop the fair value amounts. The 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:
·
Available-for-sale
securities – the fair values of available-for-sale securities are
estimated based on quoted market prices for those
investments.
·
Foreign
exchange contracts – the fair value of the swap and forward foreign
exchange contracts has been determined using an income approach based on
current market expectations about the future cash
flows.
Assets
and liabilities that have been measured at fair value on a non-recurring basis
(after initial recognition)
As outlined in Note 19, the building financing obligation for
leased property in Lexington, Massachusetts was substantially modified in the year
to December 31, 2009, by extension of the term of the
relevant underlying lease on July 31, 2009. The existing liability of $45.1
million was derecognized, and a building financing obligation of $39.4 million
was recorded, such liability measured using the fair value of the liability
under the revised terms. This extension of the term of the building finance
obligation was treated as a substantial modification resulting in a gain of $5.7
million, which has been recorded within Other income/(expense),
net.
The fair value of the building financing
obligation was estimated based on the present value of the contractual cash
flows under the revised lease and the estimated residual value of the property
at the end of the lease term, such payments being discounted at a risk-free
interest rate adjusted for
Shire’s credit risk. The
fair value measurement falls within Level 3 of the fair value hierarchy because
the estimate of Shire’s credit risk was based on a significant unobservable
input.
The carrying
amounts and estimated fair values as at December 31, 2009 and 2008 of the
Company’s financial assets and liabilities which are not measured at fair value
on a recurring basis are as follows:
The carrying
amounts of cash and cash equivalents, accounts receivable, accounts payable and
accrued expenses approximate to fair value because of the short-term maturity of
these amounts.
The following
methods and assumptions were used to estimate the fair value of each material
class of financial instrument:
1.
Option over
Avexa shares - the fair values of the Avexa shares are based on quoted
market prices for the shares.
2.
Convertible
bonds – the fair value of Shire $1,100 million 2.75% convertible
bonds due 2014 is estimated by reference to the market price of the
instrument as the convertible bonds are publicly
traded.
3.
Building
financing obligations - the fair value of building financing obligations
are estimated based on the present value of future cash flows, and an
estimate of the residual value of the underlying property at the end of
the lease term, associated with these
obligations.
The Company leases
land, facilities, motor vehicles and certain equipment under operating leases
expiring through 2027. Lease and rental expense amounted to $35.5 million, $32.6
million and $28.0 million for the years to December 31, 2009, 2008 and 2007,
which is predominately included in Selling, general and administrative expenses
in the consolidated statements of operations.
(b)
Letters
of credit and guarantees
At December 31,2009the Company had irrevocable standby letters of credit and guarantees with
various banks in the amount of $15.1 million, 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. The Company has restricted cash of $9.2
million, as required by these letters of credit.
(c)
Collaborative
arrangements
In-licensing
arrangements
(i)
Research
Collaboration with Santaris Pharma A/S (“Santaris”) on Locked Nucleic Acid
(“LNA”) Drug Platform
On August 24, 2009
Shire announced that it had entered into a research collaboration with Santaris,
to develop its proprietary LNA technology in a range of rare diseases. LNA
technology has the benefit of shortened target validation and proof of concept,
potentially increasing the speed and lowering the cost of development. As part
of the joint research project Santaris will design, develop and deliver
pre-clinical LNA oligonucleotides for Shire-selected orphan disease targets, and
Shire will have the exclusive right to further develop and commercialize these
candidate compounds on a worldwide basis.
In the year to
December 31, 2009 Shire made an upfront payment of $6.5 million to Santaris, for
technology access and R&D funding, which has been expensed to R&D. Shire
has remaining obligations to pay Santaris a further $13.5 million subject to
certain success criteria, and development and sales milestones up to a maximum
of $72 million for each indication. Shire will also pay single or double digit
tiered royalties on net sales of the product.
Shire and Santaris
have formed a joint research committee to monitor R&D activities through
preclinical Lead Candidate selection at which point all development and
commercialization costs will be the responsibility of Shire.
(ii)
JUVISTA
On June 19, 2007 Shire signed an
agreement with Renovo Limited (“Renovo”) to develop and commercialize JUVISTA,
Renovo’s novel drug candidate being investigated for the reduction of scarring
in connection with surgery. Renovo has commenced its first pivotal Phase 3
clinical trial in Europe. Under the terms of the agreement,
Shire has the exclusive right to commercialize JUVISTA worldwide, with the
exception of the EU member states.
Shire has remaining obligations to pay
Renovo $25 million on the filing of JUVISTA with the FDA; up to $150 million on
FDA approval; royalties on net sales of JUVISTA; and up to $525 million on the
achievement of very significant sales targets.
Shire paid Renovo $75 million, which was
expensed as R&D in 2007, and made an equity investment in Renovo Group plc
of $50 million. Shire will
bear the cost of clinical trials designed specifically for obtaining
US regulatory approval. Renovo will
bear the costs of clinical trials designed specifically for obtaining EU
regulatory approval. Shire and Renovo will share equally the costs of
conducting clinical trials that are designed for obtaining both US and EU
regulatory approvals. In the year to December 31, 2009 Shire made payments to Renovo of $3.9
million (2008: $7.4 million, 2007: $1.9 million)
which has been charged by Shire to R&D.
(iii)
Alba
Therapeutics Corporation (“Alba”)
Shire acquired
worldwide rights from Alba to SPD 550, also known as AT-1001, in markets outside
of the US and Japan in December 2007. Shire paid an upfront fee of $25 million,
which was expensed to R&D in 2007. Alba funded all development until Proof
of Concept was completed, after which Shire and Alba equally shared development
costs under a joint development plan. In the year to December 31, 2009 Shire
paid $nil for reimbursement of shared development costs (2008: $0.5 million;
2007: $nil). On November 15, 2009 following the review of Phase 2 data, Shire
terminated the collaboration agreement and returned the rights to SPD 550 to
Alba.
Amicus
collaboration for the development of pharmacological
chaperones
On November 7, 2007
Shire licensed from Amicus the rights to three pharmacological chaperone
compounds in markets outside of the US: AMIGAL (HGT-3310) for Fabry disease,
PLICERA (HGT-3410) for Gaucher Disease and HGT-3510 (formerly referred to as
AT2220) for Pompe disease which were in clinical development. Shire paid Amicus
an upfront fee of $50 million, which was expensed to R&D in 2007. On October 29, 2009, Shire and Amicus mutually agreed
to terminate the collaboration and to return all rights for the three products
to Amicus. In the year to December 31, 2009 Shire paid $18.8
million to Amicus (2008: $18.5 million; 2007: $nil).
(v)
Women’s
Health Products
In August 2006,
Shire and Duramed entered into an agreement related to certain Collaboration
Products. Under this agreement, Shire was required to reimburse Duramed for US
development expenses incurred in respect of the Collaboration Products up to a
maximum of $140 million over eight years from September 2006, and Shire had the
right to commercialize these products in a number of markets outside of North
America, including the larger European markets. US development expenses
reimbursed in the year ended December 31, 2008 and 2007 totaled $30.0 million
and $15.9 million respectively.
On February 24,2009 Shire and Duramed amended this agreement and it terminated on December 31,2009. Pursuant to this amendment, Shire agreed to return to Duramed its rights
under the agreement effective February 24, 2009. For further information on this
amendment see Note 4.
Out-licensing
arrangements
Shire has entered
into various collaborative arrangements under which Shire has out-licensed
certain product or intellectual property rights for consideration such as
up-front payments, development milestones, sales milestones and/or royalty
payments. In certain 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. In the year to December 31, 2009 Shire received milestone payments
totaling $4.0 million (2008: $9.0 million, 2007: $10.0 million) and these
payments will be recognized in Other revenues. In the year to December 31, 2009
Shire also recognized milestone income of $8.8 million (2008: $4.2 million,
2007: $1.9 million) within Other revenues and Product sales of $29.4 million
(2008: $24.3 million, 2007: $2.3 million) for shipment of product to the
relevant licensee.
Co-promotion
agreements
(i)
VYVANSE
On March 31, 2009
Shire announced a co-promotion agreement with GSK for VYVANSE with the aim of
improving recognition and treatment of ADHD in adults. The three year agreement
covers the United States and will more than double the reach and frequency of
the current sales effort for VYVANSE. The agreement is based on profit sharing
above an agreed upon baseline and these profit share payments will be included
within Selling, general and administrative costs.
(ii)
LIALDA
In the first
quarter of 2009 Shire terminated the agreement with Takeda Pharmaceuticals North
America, Inc., successor to TAP Pharmaceutical Products, Inc., relating to the
co-promotion of LIALDA in the US.
(d)
Commitments
(i)
Clinical
testing
At December 31,2009the Company had committed to pay approximately $183.9 million (2008: $99.5
million) to contract vendors for administering and executing clinical trials.
The Company expects to pay $104.1 million of these commitments in 2010 (2008:
$40.7 million in 2009). However, the timing of these payments is dependent upon
actual services performed by the organizations as determined by patient
enrollment levels and related activities.
At December 31,2009the Company had committed to pay approximately $152.3 million (2008: $67.0
million) in respect of contract manufacturing. The Company expects to pay $77.3
million of these commitments in 2010 (2008: $66.9 million in 2009).
At December 31,2009the Company had committed to pay approximately $22.9 million (2008: $42.6
million) for future purchases and services, predominantly relating to active
pharmaceutical ingredients sourcing and IT outsourcing. The Company expects to
pay $21.0 million of these commitments in 2010 (2008: $42.4 million in
2009).
(iv)
Investment
commitments
At December 31,2009the Company had outstanding commitments to subscribe for interests in
companies and partnerships for amounts totaling $5.4 million (2008: $5.7
million) which may all be payable in 2010, depending on the timing of capital
calls.
(v)
Capital
commitments
At December 31,2009the Company had committed to spend $41.4 (2008: $95.4 million) on capital
projects. This includes commitments for the expansion and modification of its
offices in its HGT campus in Lexington, Massachusetts.
(vi)
Legal
proceedings
General
The Company
recognizes loss contingency provisions for probable losses when management is
able to reasonably estimate the loss. Where the estimated loss lies within a
range and no particular amount within that range is a better estimate than any
other amount, the minimum amount is recorded. In other cases management's best
estimate of the loss is recorded. These estimates are developed substantially
before the ultimate loss is known and the estimates are refined in each
accounting period in light of additional information becoming known. In
instances where the Company is unable to develop a reasonable estimate of loss,
no litigation loss is recorded at that time. As information becomes known a loss
provision is set up when a reasonable estimate can be made. The estimates are
reviewed quarterly and the estimates are changed when expectations are revised.
Any outcome upon settlement that deviates from the Company’s estimate may result
in an additional expense in a future accounting period. At December 31, 2009
provisions for litigation losses, insurance claims and other disputes totaled
$20.1 million (2008: $20.8 million).
Specific
CARBATROL
(i)
Nostrum
In August 2003, the
Company was notified that Nostrum Pharmaceuticals, Inc. (“Nostrum”) had
submitted an abbreviated new drug application (“ANDA”) under the Hatch-Waxman
Act seeking permission to market its generic version of the 300mg strength of
CARBATROL (Nostrum’s ANDA product) prior to the expiration date of the Company’s
Orange Book listed patents for CARBATROL, US patent No. 5,912,013 (“the ‘013
Patent”) and US patent No. 5,326,570 (“the ‘570 Patent”). On September 18, 2003,
Shire filed suit against Nostrum in the US District Court for the District of
New Jersey alleging infringement of these two patents by Nostrum’s ANDA and ANDA
product. Pursuant to the Hatch-Waxman Act, there was a 30 month stay of approval
of Nostrum’s ANDA product which expired in February 2006. Nostrum could be in a
position to market its 300mg extended-release carbamazepine product upon FDA
final approval of its ANDA. On January 23, 2004the Company amended the
complaint to drop the allegations with respect to the ‘013 Patent while
maintaining the suit with respect to the ‘570 Patent. On July 17, 2006 the court
entered an order staying discovery.
In May 2008, the
Company was notified that Nostrum had submitted an amendment to the above
referenced ANDA seeking permission to market its generic versions of the 100mg
and 200mg strengths of CARBATROL prior to the expiration date of the Company’s
‘013 and ‘570 Patents. On July 2, 2008 Shire filed suit against Nostrum in the
US District Court for the District of New Jersey alleging infringement of these
two patents by Nostrum’s ANDA and ANDA products. Pursuant to the Hatch-Waxman
Act, there is a 30 month stay with respect to Nostrum’s 100mg and 200mg ANDA
products which will expire in November 2010. This case was referenced as related
to the earlier filed case on Nostrum’s 300 mg product and has been assigned to
the same Judge as the earlier ongoing case. In a December 15, 2008 decision the
court decided that the two cases should proceed separately. No discovery
schedule or trial date has been set for either case.
(ii)
Corepharma
LLC, Teva, Apotex Corp. and Apotex Pharmaceutical Holdings, Inc.
(collectively “Apotex”) and Actavis South Atlantic
LLC
During the course
of 2009, Shire settled lawsuits with each of Corepharma, Teva, Apotex and
Actavis South Atlantic LLC relating to their respective ANDAs seeking approval
to market generic versions of CARBATROL. No payments to these
companies are
involved in the settlements. As required by law, the Company has submitted to
the US Federal Trade Commission and the US Department of Justice all of the
agreements entered into as part of these settlements.
ADDERALL
XR
(i)
Sandoz
During the course
of 2009, Shire settled its lawsuit with Sandoz relating to its ANDA seeking
approval to market generic versions of ADDERALL XR. No payments to
Sandoz are involved in the settlement. As required by law, the Company has
submitted to the US Federal Trade Commission and the US Department of Justice
all of the agreements entered into as part of this settlement.
(ii)
Teva
On October 19, 2009
Teva filed suit in the US District Court for the Southern District of New York
against Shire claiming that Shire was in breach of its supply contract for the
authorized generic version of ADDERALL XR. Shire has been supplying Teva
with authorized generic ADDERALL XR since April 1, 2009. Shire’s ability to
supply this product, however, is limited by quota restrictions that the US Drug
Enforcement Administration (“DEA”) places on amphetamine, which is the product’s
active ingredient. After the lawsuit was filed, DEA granted Shire
additional quota for 2009, allowing Shire to supply Teva with additional
product. On December 2, 2009 Shire announced that Teva has dismissed
its lawsuit, including Teva’s claims for monetary damages, specific performance
and equitable relief. No consideration was exchanged by the parties
as part of the settlement.
REMINYL
Generics UK Limited
(“Generics UK”) commenced an action in 2007 against the UK Medicines and
Healthcare products Regulatory Agency (“MHRA”) seeking judicial review of the
MHRA’s application of data exclusivity for REMINYL and the MHRA’s corresponding
refusal to grant Generics UK a marketing authorization for a generic version of
REMINYL. This case was referred to the European Court of Justice (“ECJ”) which
decided the case in favor of the MHRA and upheld data exclusivity for REMINYL
until March 2010.
In separate
proceedings, Generics UK commenced an action in the UK seeking a declaration to
nullify the Supplementary Protection Certificate (“SPC”) for EP 236684 (the
patent that claims the use of galantamine for the treatment of Alzheimer’s
disease). This case was heard in December 2008, and the court’s decision
upholding the SPC (which extends the patent’s term to January 2012) was handed
down on May 20, 2009. Generics UK’s appeal of that decision was heard on October14, 2009 the result of which was that the case was referred to the
ECJ.
FOSRENOL
In February 2009
Shire was notified that three separate ANDAs were submitted under the
Hatch-Waxman Act seeking permission to market generic versions of 500mg, 750mg
and 1,000mg strengths of FOSRENOL. The notices were received from Barr
Laboratories, Inc. (“Barr”), Mylan, Inc., Mylan Pharmaceuticals, Inc. and Matrix
Laboratories, Inc. (collectively “Mylan”) and Natco Pharma Limited (“Natco”) and
related to ANDAs for generic versions of 500mg, 750mg and 1,000mg FOSRENOL.
Within the requisite 45 day period, Shire filed lawsuits in the US District
Court of the Southern District of New York against each of Barr, Mylan and Natco
for infringement of certain of Shire’s FOSRENOL patents. The filing of the
lawsuits triggered a stay of approval of these ANDAs for up to 30 months. The
lawsuits have been consolidated into a single case. A Markman hearing is
scheduled to occur on May 5, 2010. No trial date has been
set.
VYVANSE
On February 24,2009 Actavis Elizabeth LLC brought a lawsuit against the FDA seeking to overturn
the FDA's decision granting new chemical entity exclusivity to VYVANSE. Shire
has intervened in the lawsuit. On October 23, 2009, following a period for
public comment, the FDA issued a letter setting forth its analysis of the legal
and regulatory issues and reaffirming its decision that VYVANSE is entitled to
new chemical entity exclusivity. A hearing on cross-motions for
summary judgment was held on February 17, 2010. No rulings on the cross-motions
were made at the hearing.
Subpoena
related to ADDERALL XR, DAYTRANA and VYVANSE
On
September 23, 2009the Company received a subpoena from the US Department
of Health and Human Services Office of Inspector General in coordination with
the US Attorney for the Eastern District of Pennsylvania seeking production
of documents related to the sales and marketing of ADDERALL XR, DAYTRANA and
VYVANSE. The Company is cooperating with this investigation.
The authorized
stock of Shire plc as at December 31, 2009 was 1,000,000,000 ordinary shares and
2 subscriber ordinary shares.
On February 20,2007the Company raised $877.3 million, net of associated issue costs, through
the private placement of 42.9 million new ordinary shares to certain
institutional investors at a price of 1075 pence per share. The newly issued
shares represented approximately 8.4 per cent of Shire plc’s issued ordinary
share capital prior to the placing.
Dividends
Under Jersey law,
Shire plc is entitled to make payments of dividends from its accumulated profits
and other distributable reserves. At December 31, 2009 Shire plc’s distributable
reserves were approximately $3.7 billion.
Treasury stock
The Company records
the purchase of its own shares by the ESOT as a reduction of shareholders’
equity based on the price paid for the shares. At December 31, 2009, the ESOT
held 5.8 million ordinary shares (2008: 7.3 million; 2007: 8.5 million) and 4.0
million ADSs (2008: 4.5 million; 2007: 1.8 million). During the year to December31, 2009 a total of 0.1 million (2008: 0.2 million; 2007: 3.0 million) ordinary
shares and 0.02 million (2008: 2.8 million; 2007: 1.8 million) ADSs had
been purchased for total consideration of $1.0 million (2008: $146.6 million;
2007: $186.0 million), including stamp duty and broker commission.
Income
Access Share Arrangements ("IAS Trust")
Shire has put into
place an IAS Trust which enables Shire ordinary shareholders, other
than Shire ADS holders, to elect to receive their dividends either from a
company resident for tax purposes in the Republic of Ireland from a Shire
group company resident for tax purposes in the UK.
Old Shire has
issued one income access share to the IAS trust which is held by the income
access share trustee. The mechanics of the arrangements are as
follows:
(i)
If a dividend
is announced or declared by Shire plc on the Shire ordinary shares, an
amount is paid by Old Shire by way of a dividend on the income access
share to the income access share trustee, and such amount is paid by the
income access share trustee to the Shire ordinary shareholders who have
elected (or are deemed to have elected) to receive dividends under these
arrangements. The dividend which would otherwise be payable by Shire to
such Shire ordinary shareholders will be reduced by an amount equal to the
amount paid to such Shire ordinary shareholders by the income access share
trustee.
(ii)
If the
dividend paid on the income access share and on-paid by the income access
share trustee to the Shire ordinary shareholders is less than the total
amount of the dividend announced or declared by Shire on the Shire
ordinary shares, Shire will be obliged to pay a dividend on the Shire
ordinary shares equivalent to the amount of the shortfall. In such a case,
any dividend paid on the Shire ordinary shares will generally be subject
to Irish withholding tax at the rate of 20% or such lower rate as may be
applicable under exemptions from withholding tax contained in Irish
law.
(iii)
A Shire
ordinary shareholder is entitled to make an income access share election
such that he will receive his dividends (which would otherwise be payable
by Shire) under these arrangements from Old
Shire.
(iv)
A Shire
ordinary shareholder who held 25,000 or fewer Shire ordinary shares at the
time he became a Shire ordinary shareholder pursuant to the court
sanctioned Scheme of Arrangement, and who did not make a contrary
election, is deemed to have made an election (pursuant to the Shire
articles of association) such that he will receive his dividends under
these arrangements from Old Shire.
The ADS Depositary
has made an election on behalf of all holders of Shire ADSs such that they will
receive dividends from Old Shire under the income access share arrangements.
Dividends paid by Old Shire under the income access share arrangements will not
under current legislation be subject to any UK or Irish withholding taxes. If a
holder of Shire ADSs does not wish to receive dividends from Old Shire under the
income access share arrangements, he must withdraw his Shire ordinary shares
from the Shire ADS program prior to the dividend record date set by the
Depositary and request delivery of the Shire ordinary shares. This will enable
him to receive dividends from Shire (if necessary, by making an election to that
effect).
It is the
expectation, although there can be no certainty, that Old Shire will distribute
dividends on the income access share to the income access share trustee for the
benefit of all Shire ordinary shareholders who make (or are deemed to make) an
income access share election in an amount equal to what would have been such
Shire ordinary shareholders’ entitlement to dividends from Shire in the absence
of the income access share election. If any dividend paid on the income access
share and or paid to the Shire ordinary shareholders is less than such ordinary
shareholders’ entitlement to dividends from Shire in the absence of the income
access share election, the dividend on the income access share will be allocated
pro rata among the Shire Ordinary shareholders and Shire will pay
the balance by way of dividend. In such circumstances, there will be no grossing
up by Shire in respect of, and Old Shire and Shire will not compensate those
Shire ordinary shareholders for, any adverse consequences including any Irish
withholding tax consequences.
Shire will be able
to suspend or terminate these arrangements at any time, in which case the full
Shire dividend will be paid directly by Shire to those Shire ordinary
shareholders (including the Depositary) who have made (or are deemed to have
made) an income access share election. In such circumstances, there will be no
grossing up by Shire in respect of, and Old Shire and Shire will not compensate
those Shire ordinary shareholders for, any adverse consequences including any
Irish withholding tax consequences.
In the year to
December 31, 2009 Old Shire paid dividends totaling $45.9 million (2008: $7.2
million) on the income access share to the income access share trustee in an
amount equal to the dividend Shire ordinary shareholders would have received
from Shire.
Exchangeable
shares
On February 12,2008 a subsidiary of Shire exercised a redemption call right and purchased all
remaining exchangeable shares of Shire Acquisition Inc. in public
ownership. Exchangeable shareholders received either three ordinary shares
of Shire plc or one Shire ADS representing three ordinary shares of Shire plc
for each Exchangeable Share held. Exchangeable Shares were issued to
Canadian resident shareholders of Biochem Pharma Inc. (now Shire Canada, Inc.)
in 2001 as consideration for the acquisition by the Shire group of Biochem
Pharma Inc. The Exchangeable Shares were delisted from the Toronto Stock
Exchange during 2008.
The following table
reconciles net income/(loss) attributable to Shire plc and the weighted average
ordinary shares outstanding for basic and diluted earnings per share for the
periods presented:
In 2007 all
share options, warrants and the number of ordinary shares underlying the
convertible bonds were excluded from the calculation of the diluted
weighted average number of shares, because the Company made a net loss
during the calculation period and the effect of their inclusion would be
anti-dilutive.
(2)
In 2009 and
2008 the convertible bonds were not included in the calculation of the
diluted weighted average number of shares, because their effect would be
anti-dilutive in the period.
(3)
In 2009 and
2008 certain stock options have been excluded from the calculation of
diluted EPS because their exercise prices exceeded Shire plc’s average
share price during the calculation
period.
Shire’s internal
financial reporting is in line with its business unit and management reporting
structure based on two segments: Specialty Pharmaceuticals (which aggregates
ADHD, GI and other Specialty Pharmaceutical products) and HGT. The Specialty
Pharmaceuticals and HGT reportable segments represent the Company’s revenues and
costs in respect of currently promoted and sold products, together with the
costs of developing projects for future commercialization. ‘All Other’ has been
included in the table below in order to reconcile the two operating segments to
the total consolidated figures.
The Company
evaluates performance based on revenue and operating income. The Company does
not have inter-segment transactions. Assets that are directly attributable or
allocable to the segments have been separately disclosed.
Stock-based
compensation of $65.7 million is included in: Cost of product sales ($4.4
million), Research and development ($20.1 million) and Selling, general
and administrative ($41.2
million).
(2)
Depreciation
from manufacturing plants ($21.8 million) and amortization of favorable
manufacturing contracts ($1.7 million) is included in Cost of product
sales; depreciation of research and development assets ($15.5 million) is
included in Research and development; and all other depreciation and
amortization ($204.7 million) is included in Selling, general and
administrative.
(3)
Long-lived
assets comprise all non-current assets, (excluding goodwill and other
intangible assets, deferred tax assets, investments, income tax receivable
and financial
instruments).
Stock-based
compensation of $65.2 million is included in: Cost of product sales ($3.9
million), Research and development ($18.9 million) and Selling, general
and administrative ($42.4
million).
(2)
Depreciation
from manufacturing plants ($16.2 million) and amortization of favorable
manufacturing contracts ($1.7 million) is included in Cost of product
sales; depreciation of research and development assets ($12.5 million) is
included in Research and development; and all other depreciation,
amortization and intangible asset impairment charges ($271.9 million) are
included in Selling, general and
administrative.
(3)
Long-lived
assets comprise all non-current assets, (excluding goodwill and other
intangible assets, deferred tax assets, investments and financial
instruments).
Stock-based
compensation of $75.2 million is included in: Cost of product sales ($5.5
million), Research and development ($17.0 million) and Selling, general
and administrative ($52.7
million).
(2)
Depreciation
from manufacturing plants ($11.8 million) and amortization of favorable
manufacturing contracts ($1.2 million) is included in Cost of product
sales; depreciation of research and development assets ($11.3 million) is
included in Research and development; and all other depreciation,
amortization and intangible asset impairment charges ($137.1 million) are
included in Selling, general and
administrative.
(3)
Long-lived
assets comprise all non-current assets, (excluding goodwill and other
intangible assets, deferred tax assets, investments and financial
instruments).
In the periods set
out below, certain customers, all within the Specialty Pharmaceuticals operating
segment, accounted for greater than 10% of the Company’s total
revenues:
2009
2009
2008
2008
2007
2007
Year to December
31,
$’M
% revenue
$’M
% revenue
$’M
% revenue
Cardinal Health
Inc.
797.0
27
888.7
29
666.1
27
McKesson Corp.
576.3
19
674.3
22
546.0
22
Amounts outstanding as at December
31, in respect of these material customers were as
follows:
Interest expense
for the years to December 31, 2009, 2008 and 2007 was $39.8 million, $139.0
million and $70.8 million respectively. Interest expense primarily includes
interest on Shire’s convertible bond of $33.3 million (2008: $33.3 million;
2007: $18.3 million).
Interest expense
for the year to December 31, 2008 included $87.3 million (2009: $nil and 2007:
$28.0 million) in respect to the TKT appraisal rights litigation. On
November 5, 2008 Shire successfully settled all aspects of this litigation with
all parties. Shire paid the same price of $37 per share originally offered
to all TKT shareholders at the time of the July 2005 merger, plus
interest. The Delaware Chancery Court approved dismissal of the case and
Shire made payment to the dissenting shareholders on November 7, 2008. The
settlement represented a total payment of $567.5 million, representing
consideration at $37 per share of $419.9 million and an interest cost of $147.6
million.
Prior to reaching
this settlement, the Company accrued interest based on a reasonable estimate of
the amount that may be awarded by the Court to those former TKT shareholders who
requested appraisal. This estimate of interest was based on Shire’s cost of
borrowing. Between the close of the merger and November 5, 2008the Company
applied this interest rate on a quarterly compounding basis to the $419.9
million of consideration to calculate its provision for interest.
Upon reaching
agreement in principle with all the dissenting shareholders, the Company
determined that settlement had become the probable manner through which the
appraisal rights litigation would be resolved. Under current law, (although not
applicable in this case because the merger was entered into before the relevant
amendment to the law became effective) the court presumptively awarded interest
in appraisal rights cases at a statutory rate that is 5 percentage points above
the Federal Reserve discount rate (as it varies over the duration of the case).
In connection with the settlement, the Company agreed to an interest rate that
approximates to this statutory rate. Based on the settlement, the Company
amended the method of determining its interest provision to reflect this revised
manner of resolution and upon reaching settlement with the dissenting
shareholders recorded an additional interest expense of $73.0 million in its
consolidated financial statements for the year to December 31, 2008.
The Company makes
contributions to defined contribution retirement plans that together cover
substantially all employees. The level of the Company’s contribution is fixed at
a set percentage of employee’s pay.
Company
contributions to personal defined contribution pension plans totaled $27.9
million, $26.3 million and $22.3 million for the years to December 31, 2009,
2008 and 2007, respectively, and were charged to operations as they became
payable.
The reconciliation
of income/(loss) from continuing operations before income taxes, noncontrolling
interests and equity in earnings of equity method investees at the statutory tax
rate to the provision for income taxes is shown in the table below:
Income/(loss) from continuing
operations before income taxes and equity in earnings of equity method
investees
643.0
265.6
(1,398.1
)
Statutory tax
rate(1)
(2)
25.0
%
25.0
%
30.0
%
Adjustments to derive effective
rate:
Non-deductible items:
IPR&D
-
12.1
%
(40.0
%)
Other permanent
differences:
US Research and development
credit
(5.2
%)
(9.1
%)
2.0
%
Effect of the convertible
bond
2.0
%
(5.0
%)
0.5
%
Intangible asset
amortization(3)
0.1
%
(6.5
%)
1.5
%
Disposals not subject to
tax
-
-
2.2
%
Intra-group items(4)
(11.8
%)
6.2
%
0.6
%
Other permanent
items
2.2
%
1.4
%
(0.2
%)
Other
items:
Change in valuation allowance
1.3
%
12.4
%
0.3
%
Difference in taxation rates
8.5
%
3.1
%
1.3
%
Change in provisions for uncertain
tax positions
2.3
%
1.9
%
(2.7
%)
Prior year adjustment
(2.7
%)
(9.2
%)
0.8
%
Change in tax rates
1.9
%
(0.2
%)
(0.5
%)
Other
(2.1
%)
4.8
%
0.2
%
Provision for income taxes on
continuing operations
21.5
%
36.9
%
(4.0
%)
(1)
In addition to being subject to the Irish Corporation tax rate of 25% (2007: UK
Corporation tax rate of 30%), in 2009 the Company is also subject to income tax
in other territories in which the Company operates, including: Canada (19.5%);
France (33.3%); Germany (15%); Italy (27.5%); Malta (35%); the Netherlands
(25.5%); Spain (30%); Sweden (28%); Switzerland (8.5%); United Kingdom (28.5%)
and the US (35%). The rates quoted represent the headline federal income tax
rates in each territory, and do not include any state taxes or equivalents or
surtaxes or other taxes charged in individual territories, and do not purport to
represent the effective tax rate for the Company in each
territory.
(2)
During 2008 Shire introduced a new holding company resident in the Republic of
Ireland, as a result the reconciliation of income from continuing operations
before income taxes, noncontrolling interests and equity in earnings of equity
method investees for the year to December 31, 2008 has been prepared using the
Irish non-trading corporation tax rate of 25% which is the rate applicable to
Shire plc. In 2007 the reconciliation of income from continuing operations
before income taxes, noncontrolling interests and equity in earnings of equity
method investees was prepared using the UK corporation tax rate of
30%.
(3)
The permanent difference results from tax deductible amortization available
following inter-company asset transfers for which the recognition of a deferred
tax asset is prohibited.
(4)
Intra-group items principally relate to the effect of inter-company dividends,
capital receipts (either taxable or non-taxable) and other intra-territory
eliminations, the pre-tax effect of which has been eliminated in arriving at the
Company’s consolidated income/(loss) from continuing operations before income
taxes, noncontrolling interests and equity in earnings of equity method
investees.
Provisions
for uncertain tax positions
The Company files
income tax returns in the Republic of Ireland, the UK, the US (both federal and
state) and various other jurisdictions (see footnote (1) to the table above for
major jurisdictions). With few exceptions, the Company is no longer subject to
income tax examinations by tax authorities for years before 1999. Tax
authorities in various jurisdictions are in the process of auditing the
Company’s tax returns for fiscal periods from 1999; these tax audits cover a
range of issues, including transfer pricing, potential restrictions on the
utilization of net operating losses, potential taxation of overseas dividends
and controlled foreign companies’ rules.
A reconciliation of
the beginning and ending amount of unrecognized tax benefits is as
follows:
(3)
The full amount of which would affect the effective rate if
recognized
The Company
considers it reasonably possible that the total amount of unrecognized tax
benefits recorded at December 31, 2009 could decrease by approximately $17
million in the next twelve months as a result of the conclusion of audits
currently being conducted by various tax authorities. While tax audits remain
open, the Company also considers it reasonably possible that issues may be
raised by tax authorities resulting in increases to the balance of unrecognized
tax benefits, however an estimate of such an increase cannot be made.
The Company is
required in certain tax jurisdictions to make advance deposits to tax
authorities on receipt of a tax assessment. These payments have been offset
against the income tax liability within the balance sheet but have not reduced
the provision for unrecognized tax benefits.
The Company
recognizes interest and penalties accrued related to unrecognized tax benefits
within income taxes. During the years ended December 31, 2009, 2008 and 2007,
the Company recognized $21.3 million, $26.1 million and $18.0 million in
interest and penalties and the Company had a liability of $111.5 million and
$76.2 million for the payment of interest and penalties accrued at December 31,2009 and 2008, respectively.
Deferred
taxes
The significant
components of deferred tax assets and liabilities and their balance sheet
classifications, as at December 31, are as follows:
At December 31,2009, the Company had a valuation allowance of $149.2 million (2008: $119.3
million) to reduce its deferred tax assets to estimated realizable value. These
valuation allowances related primarily to operating loss, capital loss and
tax-credit carry-forwards in Ireland (2009: $56.3 million, 2008 $42.0 million);
the US (2009: $40.6 million, 2008: $65.5 million); Germany (2009: $24.2 million,
2008: $nil); and other foreign tax jurisdictions (2009: $28.1 million, 2008:
$11.8 million).
The net increase in
valuation allowances of $29.9 million is principally due to an increase of $40.2
million and $20.7 million in respect of losses and other temporary differences
in European jurisdictions and US affiliates outside the Company’s US
consolidated tax group, respectively, as the Company’s management considers that
there is insufficient future taxable income, taxable temporary differences and
feasible tax-planning strategies to overcome cumulative losses and therefore it
is more likely than not that the relevant deferred tax assets would not be
realized. This increase is partially offset by a decrease in valuation
allowances relating to state tax credits and loss carry forwards of $31.2
million following Massachusetts state tax changes in 2009.
At December 31,2009, based upon a consideration in combination of the profit history of the
relevant affiliates, projections of future taxable income over the periods in
which temporary differences are anticipated to reverse, any restrictions on uses
of loss carryforwards and prudent and feasible tax-planning strategies,
management believes it is more likely than not that the Company will realize the
benefits of these deductible differences, net of the valuation allowances.
At December 31, 2009the Company had
not recorded deferred taxes
on approximately $6.2
billion (2008: $3.7 billion) of un-remitted earnings of the Company’s foreign subsidiaries. At December 31,2009 these earnings are expected to be permanently reinvested overseas. It is
not practical to compute the estimated deferred tax liability on
these earnings.
The Company measures share-based
compensation cost at the grant date, based on the fair value of the award, and
recognizes the expense over the employee requisite service period. The
following table shows the total share-based compensation expense (see below for
types of share-based awards) included in the consolidated statements of
operations:
At
December 31, 2009 $74.3 million (2008: $83.7 million) of total unrecognized
compensation cost relating to non-vested awards, is expected to be recognized
over a period of 5 years.
At
December 31, 2009 $52.5 million (2008: $40.7 million) of total unrecognized
compensation cost relating to non-vested in the money awards, is expected to be
recognized over a weighted average period of 1.9 years (2008: 1.9 years). The
total fair value of in the money share and share option awards at December 31,2009 was $24.9 million (2008: $34.4 million).
Share-based
compensation plans
The Company grants
stock-settled share appreciation rights (“SARS”) and performance share awards
over ordinary shares and ADSs to directors and employees under the Shire
Portfolio Share Plan (Parts A and B). Prior to 2005, awards were made
under legacy plans. The Company also operates an Employee Share
Purchase Plan and a Sharesave Scheme.
3 years, subject to performance
criteria for executive directors only
Sharesave
Scheme
Stock
options
345,614
6 months after
vesting
3 or 5
years
Stock Purchase
Plan
Stock
options
705,469
On vesting date
1 to 5
months
Legacy
Plans
Stock
options
4,226,803
7 to 10
years
3-10 years, subject to performance
criteria
Stock-settled SARs and stock
options
34,382,933
Portfolio Share Plan - Part
B
Performance share
awards
5,209,621
3 years
3 years, subject to performance
criteria for executive directors only
Performance share
awards
5,209,621
* Number of
awards are stated in terms of ordinary share
equivalents.
Stock
settled SARs and stock options
(a) Portfolio
Share Plan – Part A
Stock-settled share
appreciation rights granted under the Portfolio Share Plan – Part A are
exercisable subject to certain market and service criteria.
In respect of any
award made to executive directors market conditions will be based on relative
total shareholder return. Vesting of awards made to executive directors will
depend on relative total shareholder return performance against two comparator
groups. For one-third of the award, the comparator group will be the Financial
Times Stock Exchange 100 constituents (excluding financial institutions) and for
two-thirds of the award the comparator group will be a group of international
companies from the pharmaceutical sector. In addition, before awards granted to
executive directors will vest, the Remuneration Committee must be satisfied that
the underlying performance of the Company is sufficient to justify this. Where
median performance is achieved, 33 1/3 per cent of stock-settled share
appreciation rights will vest, rising on a straight-line basis to full vesting
at upper quartile performance.
Awards granted to
employees below executive director level are not subject to market conditions,
and are only subject to service conditions.
Once awards have
vested, participants will have until the fifth anniversary of the date of grant
to exercise their awards.
Options granted
under the Sharesave Scheme are granted with an exercise price equal to 80% of
the mid-market price on the day before invitations are issued to employees.
Employees may enter into three or five-year savings contracts. No performance
conditions apply.
(c) Shire
Employee Stock Purchase Plan (Stock Purchase Plan)
Under the Stock
Purchase Plan, options are granted with an exercise price equal to 85% of the
fair market value of a share on the enrolment date (the first day of the
offering period) or the exercise date (the last day of the offering period),
whichever is the lower. Employees agree to save for a period up to 27 months. No
performance conditions apply.
Options granted
under this scheme were subject to certain performance criteria, which were based
on the Company’s share price or diluted EPS growth compared to a fixed growth
rate. At December 31, 2009 all stock options outstanding under this
scheme had met the required conditions and were exercisable.
A summary of the
status of the Company’s SARs and stock options as at December 31, 2009 and of
the related transactions during the periods then ended is presented
below:
Weighted average exercise price of
options outstanding
Number of options
exercisable
Weighted average exercise price of
options exercisable
£
£
£
2,670,782
3.38-6.00
4.6
5.2
2,670,782
5.2
28,829,467
6.01-11.00
2.9
9.4
6,157,905
8.3
2,882,684
11.01-14.30
2.7
12.0
688,654
12.6
34,382,933
9,517,341
Performance
shares
Portfolio
Share Plan – Part B
Performance share
awards granted to executive directors under the Portfolio Share Plan – Part B
are exercisable subject to certain market and service criteria. In respect of
any award made to executive directors market conditions will be based on
relative total shareholder return. Vesting will depend on relative total
shareholder return performance against two comparator groups. For one-third of
an award, the comparator group will be the Financial Times Stock Exchange 100
constituents (excluding financial institutions) and for two-thirds of the award
the comparator group will be a group of international companies from the
pharmaceutical sector. In addition, before awards granted to executive directors
will vest, the Committee must be satisfied that the underlying performance of
the Company is sufficient to justify this. Where median performance is achieved,
33 1/3 per cent of performance shares will vest, rising on a straight-line basis
to full vesting at upper quartile performance.
Awards granted to
employees below executive director level are not subject to market conditions,
and are only subject to service conditions.
A summary of the
status of the Company’s performance share awards as at December 31, 2009 and of
the related transactions during the periods then ended is presented
below:
Performance share
awards
Number of
shares
Aggregate intrinsic value
£’M
Weighted average remaining
life
Outstanding as at beginning of
period
3,232,727
Granted
2,749,533
Exercised
(588,233
)
Expired
(184,406
)
Outstanding as at end of
period
5,209,621
50.4
1.6
Exercisable as at end of
period
-
N/A
N/A
The weighted-average grant date
fair value of performance share awards granted in the year to December 31,2009 is £8.83.
The total intrinsic
values of share-based awards exercised for the years to December 31, 2009, 2008
and 2007 were $43.8 million, $23.8 million and $67.9 million, respectively. The
total cash received from employees as a result of employee share option
exercises for the period to December 31, 2009, 2008 and 2007 was approximately
$14.6 million, $11.4 million and $30.4 million, respectively. In connection with
these exercises, the excess tax benefit/(deficit) credited/(charged) to
additional paid-in capital for the period to December 31, 2009, 2008 and 2007
was $16.8 million credit, $3.8 million charge and $nil
respectively.
The Company will
settle future employee share award exercises with either newly listed common
shares or with shares held in an ESOT. The number of shares to be purchased by
the ESOT during 2010 will be dependent on the number of employee share awards
granted and exercised during the year and Shire plc’s share price. At December31, 2009 the ESOT held 5.8 million ordinary shares and 4.0 million
ADSs.
Valuation
methodologies
The Company
estimates the fair value of its share-based awards using a Black-Scholes
valuation model. Key input assumptions used to estimate the fair value of
share–based awards include the grant price of the award, the expected
stock-based award term, volatility of the Company’s share, the risk-free rate
and the Company’s dividend yield. The Company believes that the valuation
technique and the approach utilized to develop the underlying assumptions are
appropriate in estimating the fair values of Shire’s stock-based awards.
Estimates of fair value are not intended to predict actual future events or the
value ultimately realized by employees who receive equity awards, and subsequent
events are not indicative of the reasonableness of the original estimates of
fair value made by the Company under guidance issued by the FASB on share based
payment transactions.
The fair value of
share awards granted was estimated using the following assumptions:
The following
assumptions were used to value share-based awards:
·
risk-free
interest rate – For awards granted over ADSs, the US Federal Reserve
treasury constant maturities rate with a term consistent with the expected
life of the award is used. For awards granted over ordinary shares, the
yield on UK government bonds with a term consistent with the expected life
of the award is used;
·
expected
dividend yield – measured as the average annualized dividend estimated to
be paid by the Company over the expected life of the award as a percentage
of the share price at the grant
date;
·
expected life
– estimated based on the contractual term of the
awards and the effects of
employees’ expected exercise and post-vesting employment
termination behaviour;
·
weighted
average expected volatility – measured using historical daily price
changes of the Company’s share price over the respective expected life of
the share-based awards at the date of the award;
and
·
the
forfeiture rate is estimated using historical trends of the number of
awards forfeited prior to vesting.
32. Restatement
of previously issued financial statements
Subsequent to the
issuance of the Company’s financial statements for the year ended December 31,2008, the Company’s management determined that its non-current deferred tax
liabilities were overstated by $29 million, following a
misstatement in computing the temporary difference between the tax and book
value of its other intangible assets. The Company has corrected this
misstatement by restating its previously issued financial statements for the
years ended December 31, 2008 and 2007.
This prior period
adjustment does not affect the Company’s net income/(loss) or earnings per share
for the years ended December 31, 2008 and 2007. The effect of correcting this
misstatement has increased retained earnings at January 1, 2007 by $29 million
and has reduced non-current deferred tax liabilities by a corresponding amount.
The restatement does not affect the Company’s net income/(loss) or cash flows in
either of the years to December 31, 2008 or 2007.
Quarterly
results of operations (unaudited)
The following table
presents summarized unaudited quarterly results for the years to December 31,2009 and 2008:
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To Lloyds TSB Offshore Trust Company
Limited, Trustee of the Shire Income Access Share Trust and the Board of
Directors and Stockholders of Shire plc
We have audited the
accompanying balance sheets of the Shire Income Access Share Trust (the “Trust”)
as of December 31, 2009 and 2008 and the related statements of income,
statements of changes in equity and statements of cash flows for the
year ended December 31, 2009 and the period from August 29, 2008 to
December 31, 2008. These financial statements are the responsibility of the
Trustee and Shire plc’s management. Our responsibility is to express an opinion
on these financial statements based on our audit.
We conducted our
audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Trust is not required to have
an audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the Trust’s internal control over
financial reporting. Accordingly, we express no such separate opinion. Our audit
of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the
financial statements referred to above present fairly, in all material respects,
the financial position of the Shire Income Access Share Trust at December 31,2009 and 2008, and the results of its operations and cash flows for the year to
December 31, 2009 and the period from August 29, 2008 to December 31, 2008, in
conformity with accounting principles generally accepted in the United States of
America.
NOTES TO THE SHIRE
INCOME ACCESS SHARE TRUST FINANCIAL
STATEMENTS
(a)
The
Trust
The Shire Income
Access Share Trust (the “Trust”) was established on August 29, 2008 by Shire
Biopharmaceuticals Holdings (formerly Shire plc) (“Old Shire”). The Trust is
governed by the applicable laws of England and Wales and is resident in Jersey.
The Trustee of the Trust is Lloyds TSB Offshore Trust Company Limited, 25 New
Street, St Helier, Jersey, JE4 8RG.
The Trust was
established as part of the Income Access Share mechanism, as outlined in ITEM 5:
Market for the Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities of this Annual Report on Form 10-K of
Shire plc and its subsidiaries (collectively referred to as either “Shire” or
the “Company”.
(b)
Basis
of preparation
The financial
statements of the Trust have been prepared in accordance with accounting
principles generally accepted in the (“US GAAP”). The financial statements have
been prepared under the historical cost convention.
The preparation of
financial statements in conformity with US GAAP requires the use of certain
accounting estimates. It also requires management to exercise its judgement in
the process of applying the Trust’s accounting policies. Actual results may
differ from these estimates.
The results of
operations, and the financial position and cash flows of the Trust are also
consolidated in the Company’s financial statements, as contained on pages F-75 to
F-76.
(c)
Summary
of significant accounting policies
i)
Functional
currency
The functional
currency of the Trust is US dollars.
ii)
Foreign
currency translation
Income and expense
items denominated in currencies other than the functional currency are
translated into the functional currency at the rate ruling on their transaction
date. Monetary assets and liabilities recorded in currencies other than the
functional currency have been expressed in the functional currency at the rates
of exchange ruling at the respective balance sheet dates. Differences on
translation are included in the statement of income.
iii)
Dividend
income
Interim dividends
declared on the Income Access Share are recognised on a paid basis unless the
dividend has been confirmed by a general meeting of Shire, in which case income
is recognised on the record date of the dividend by Shire on its ordinary
shares.
(d)
Capital
account
The Capital account
is represented by the Income Access Share of 5 pence settled in the Trust by Old
Shire.
(e)
Distributions
made
Distributions are
made to those shareholders of Shire who have elected to receive dividends from
the Trust in accordance with the Trust Deed. Unclaimed dividends are not
included in distributions made. There were no unclaimed dividends at December31, 2009. Amounts are recorded as distributed once a wire transfer or check is
issued. All checks are valid for one year from the date of issue. Any wire
transfers that are not completed are replaced by cheques. To the extent that
The Trust, in its
normal course of business, is not subject to market risk, credit risk or
liquidity risk. The Trustees do not consider that any foreign exchange exposure
will materially affect the operations of the Trust.
Accrued
rebates – Medicaid and Health Maintenance Organizations
(“HMOs”)
222.5
630.8
(511.7)
341.6
Sales returns
reserve
47.1
41.4
(25.8)
62.7
Accrued
coupons
4.0
38.6
(38.3)
3.8
273.6
710.8
(576.3)
408.1
2008 :
Accrued
rebates – Medicaid and HMOs
146.6
396.9
(321.0
)
222.5
Sales returns
reserve
39.5
38.2
(30.6
)
47.1
Accrued
coupons
9.0
32.5
(37.5
)
4.0
195.1
467.6
(389.1
)
273.6
2007 :
Accrued
rebates – Medicaid and HMOs
126.4
263.5
(243.3
)
146.6
Sales returns
reserve
36.5
46.0
(43.0
)
39.5
Accrued
coupons
13.0
50.2
(54.2
)
9.0
175.9
359.7
(340.5
)
195.1
(1) In the analysis
above, due to systems limitations, it is not practical and has not been
necessary to break out current versus prior year activity. When applicable,
Shire has performed general ledger reviews of sales deduction provisions charged
to income, and the utilization of these provisions in subsequent years. Shire
has determined that adjustments made in each year as a result of changes to
estimates that related to prior year sales, and adjustments made as a result of
differences between prior period provisions and actual payments, did not have a
material impact on the Company’s financial performance or position either in
each individual year, or in the Company’s performance over the reported
period.
Pursuant to the
requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the date indicated.
Agreement and
Plan of Merger by and among Shire Pharmaceuticals Group plc, Transkaryotic
Therapies, Inc. and Sparta Acquisition Corporation, dated as of April 21,2005.(1)
2.02
Agreement of
Merger dated as of February 20, 2007 among Shire plc, Shuttle Corporation
and New River Pharmaceuticals, Inc.(2)
2.03
Business
Combination Agreement dated as of July 3, 2008 between Maia Elfte
Vermögensverwaltungs GmbH and Jerini AG. (3)
Form of
Assignment and Novation Agreement between Shire Limited, Shire plc,
JPMorgan Chase Bank, N.A. dated April 16, 2008 relating to the Deposit
Agreement among Shire plc, JPMorgan Chase Bank, N.A. as depositary and all
holders from time to time of ADRs issued thereunder dated
November 21, 2005.(5)
4.02
Form of
Deposit Agreement among Shire plc, JPMorgan Chase Bank, N.A. as depositary
and all holders from time to time of ADRs issued thereunder dated November21, 2005.
(6)
4.03
Form of
Ordinary Share Certificate of Shire Limited.
(7)
4.04
Form of
American Depositary Receipt Certificate of Shire Limited.
(8)
4.05
Trust Deed
for the New Shire Income Access Trust, dated August 29, 2008.
(9)
10.01
Tender and
Support Agreement dated as of February 20, 2007 among Shire plc, Mr.
Randal J. Kirk and the other parties named therein.
(10)
10.02
Multicurrency
Term and Revolving Facilities Agreement as of February 20, 2007 by and
among Shire plc, ABN AMRO Bank N.V., Barclays Capital, Citigroup Global
Markets Limited, The Royal Bank of Scotland plc, and Barclays Bank
plc.
(11)
10.03
Accession and
Amendment Deed dated April 15, 2008 between Shire Limited, Shire plc,
certain subsidiaries of Shire plc and Barclays Bank PLC as Facility Agent
relating to a US $1,200,000,000 facility agreement dated February 20, 2007
(as amended by a syndication and amendment agreement dated July 19,2007).
(12)
10.04
Subscription
Agreement dated May 2, 2007 relating to the 2.75% Convertible Bonds due
2014 between Shire plc and ABN AMRO Bank N.V. and NM Rothschild & Sons
Limited (trading together as ABN AMRO Rothschild, an unincorporated equity
capital markets joint venture) and Barclays Bank PLC and Citigroup Global
Markets Limited and Goldman Sachs International and Morgan Stanley &
Co. International plc and others.
(13)
10.05
Amending
Subscription Agreement dated May 8, 2007 relating to the 2.75% Convertible
Bonds due 2014 between Shire plc and ABN AMRO Bank N.V. and NM Rothschild
& Sons Limited (trading together as ABN AMRO Rothschild, an
unincorporated equity capital markets joint venture) and Barclays Bank PLC
and Citigroup Global Markets Limited and Goldman Sachs International and
Morgan Stanley & Co. International plc and others.
(14)
10.06
Trust Deed
dated May 9, 2007 relating to the 2.75% Convertible Bonds due 2014 between
Shire plc and BNY Corporate Trustee Services Limited.
(15)
10.07
Supplemental
Trust Deed dated April 15, 2008 between Shire Limited, Shire plc and BNY
Corporate Trustee Services Limited relating to a trust deed dated May 9,2007 relating to US $1,100,000,000 2.75% Convertible Bonds due 2014.
(16)
10.08
Accession and
Amendment Agreement dated April 15, 2008 between Shire Limited, Shire plc,
BNY Corporate Trustee Services Limited and The Bank of New York relating
to a paying and conversion agency agreement dated May 9, 2007 relating to
US $1,100,000,000 2.75% Convertible Bonds due 2014.
(17)
10.09*
Revised and
Restated Master License Agreement dated November 20, 1995 among Shire
BioChem Inc (f/k/a BioChem Pharma Inc.), Glaxo Group Limited, Glaxo
Wellcome Inc. (formerly Glaxo Canada Inc.), Glaxo Wellcome Inc. (formerly
Glaxo Inc.), Tanaud Holdings (Barbados) Limited, Tanaud International B.V.
and Tanaud LLC.
(18)
10.10*
Settlement
Agreement, dated August 14, 2006 by and between Shire Laboratories Inc.
and Barr Laboratories, Inc.
(19)
10.11*
Product
Development and License Agreement, dated August 14, 2006 by and between
Shire LLC and Duramed Pharmaceuticals, Inc.
(20)
Form of
Amended and Restated Employment Agreement between Shire plc and Mr Matthew
Emmens, dated March 12, 2004.
(25)
10.17
Amendment
Agreement dated November 21, 2005 relating to the Amended and Restated
Employment Agreement of Matthew Emmens dated March 12, 2004.
(26)
10.18
Ratification
and Guaranty dated November 21, 2005 relating to the Amended and Restated
Employment Agreement of Matthew Emmens dated March 12, 2004.
(27)
10.19
Amendment
Agreement dated May 20, 2008 relating to the Amended and Restated
Employment Agreement of Matthew Emmens dated March 12, 2004, as amended on
November 21, 2005.
(28)
10.20
Ratification
and Guaranty dated May 20, 2008 relating to the Amended and Restated
Employment Agreement of Matthew Emmens dated March 12, 2004.
(29)
10.21
Form of
Indemnity Agreement for Directors of Shire Limited. (30)
10.22
Service
Agreement between Shire Limited and Mr Angus Russell, dated July 2, 2008.
(31)
10.23
Service
Agreement between Shire Limited and Mr Graham Hetherington, dated July 2,2008. (32)
10.24
Form of
Settlement Agreement and Mutual Release in re: Transkaryotic Therapies,
Inc., by and between Shire Human Genetic Therapies, Inc., Shire plc
and the parties set forth therein. (33)
Certification
of Angus Russell pursuant to Rule 13a – 14 under The Exchange
Act.
31.2
Certification
of Graham Hetherington pursuant to Rule 13a – 14 under The Exchange
Act.
32.1
Certification
of Angus Russell and Graham Hetherington pursuant to Section 906 of the
Sarbanes – Oxley Act of 2002.
* Certain
portions of this exhibit have been omitted intentionally, subject to a
confidential treatment request. A complete version of this agreement has been
filed separately with the Securities and Exchange Commission.
(1)
Incorporated
by reference to Exhibit 99.02 to Shire’s Form 8-K filed on April 25,2005.
(2)
Incorporated
by reference to Exhibit 2.1 to Shire’s Form 8-K filed on February 23,2007.
(3)
Incorporated
by reference to Exhibit 2.1 to Shire’s Form 8-K filed on July 10,2008.
(4)
Incorporated
by reference to Exhibit 99.02 to Shire’s Form 8-K filed on October 1,2008.
(5)
Incorporated
by reference to Exhibit 4.01 to Shire’s Form 8-K filed on May 23,2008.
(6)
Incorporated
by reference to Exhibit 4.02 to Shire’s Form 8-K filed on May 23,2008.
(7)
Incorporated
by reference to Exhibit 4.03 to Shire’s Form 8-K filed on May 23,2008.
(8)
Incorporated
by reference to Exhibit 4.04 to Shire’s Form 8-K filed on May 23,2008.
(9)
Incorporated
by reference to Exhibit 4.05 to Shire’s Form 10-K filed on February 27,2009.
(10)
Incorporated
by reference to Exhibit 99.1 to Shire’s Form 8-K filed on February 23,2007.
(11)
Incorporated
by reference to Exhibit 10.2 to Shire’s Form 10-Q filed on May 1,2007.
(12)
Incorporated
by reference to Exhibit 10.01 to Shire’s Form 8-K filed on May 23,2008.
(13)
Incorporated
by reference to Exhibit 10.1 to Shire’s Form 10-Q filed on August 2,2007.
(14)
Incorporated
by reference to Exhibit 10.2 to Shire’s Form 10-Q filed on August 2,2007.
(15)
Incorporated
by reference to Exhibit 10.3 to Shire’s Form 10-Q filed on August 2,2007.
(16)
Incorporated
by reference to Exhibit 10.02 to Shire’s Form 8-K filed on May 23,2008.
