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Shire plc · 10-K · For 12/31/09

Filed On 2/26/10, 12:40pm ET   ·   Accession Number 950103-10-520   ·   SEC File 0-29630

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  As Of                Filer                Filing    For/On/As Docs:Size              Issuer               Agent

 2/26/10  Shire plc                         10-K       12/31/09   62:8.1M                                   Davis Polk &...LLP 01/FA

Annual Report   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

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10-K   —   Annual Report
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Table of Contents
"General
"Strategy
"2009 Highlights
"Financial information about operating segments
"Sales and marketing
"Manufacturing and distribution
"Intellectual property
"Competition
"Government regulation
"Third party reimbursement
"Corporate responsibility
"Employees
"Available information
"Item 1A. Risk Factors
"Item 1B. Unresolved Staff Comments
"Item 2. Properties
"Item 3. Legal Proceedings
"Item 4. [Reserved
"Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
"Item 6. Selected Financial Data
"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
"Item 7A. Quantitative and Qualitative Disclosures About Market Risk
"Item 8. Financial Statements and Supplementary Data
"Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
"Item 9A. Controls and Procedures
"Item 9B. Other Information
"Item 10. Directors, Executive Officers and Corporate Governance
"Item 11. Executive Compensation
"Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
"Item 13. Certain Relationships and Related Transactions, and Director Independence
"Item 14. Principal Accountant Fees and Services
"Item 15. Exhibits and Financial Statement Schedules
"Report of Independent Registered Public Accounting Firm
"F-3
"Consolidated Balance Sheets as at December 31, 2009 and 2008 (as restated)
"F-5
"Consolidated Statements of Operations
"For each of the three years in the period to December 31, 2009
"F-7
"Consolidated Statements of Changes in Equity
"For each of the three years in the period to December 31, 2009 (as restated)
"F-9
"Consolidated Statements of Comprehensive Income/(Loss)
"F-13
"Consolidated Statements of Cash Flows
"F-14
"Notes to the Consolidated Financial Statements
"F-16
"Schedule II -- Valuation and Qualifying Accounts
"S-1

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

 

 
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the fiscal year ended December 31, 2009
   
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
Commission file number 0-29630
SHIRE PLC
(Exact name of registrant as specified in its charter)
 
 
Jersey (Channel Islands)
(State or other jurisdiction of incorporation or organization)
98-0601486
(I.R.S. Employer Identification No.)
   
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.
 
As at February 18, 2010, the number of outstanding ordinary shares of the Registrant was 561,527,864.
 
 
 

 
 
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)
CARBATROL® (carbamazepine extended-release capsules)
CEREZYME® (trademark of Genzyme Corporation (“Genzyme”))
CLAVERSAL® (trademark of Merckle Recordati)
COLAZAL® (trademark of Salix Pharmaceuticals, Inc)
COMBIVIR® (trademark of GlaxoSmithKline (“GSK”))
CONCERTA® (trademark of Alza Corporation (“Alza”))
DAYTRANA® (methylphenidate transdermal system)
DIPENTUM® (trademark of UCB Pharma Ltd (“UCB”))
DYNEPO® (trademark of Sanofi-Aventis)
ELAPRASE® (idursulfase)
EPIVIR® (trademark of GSK)
EPIVIR-HBV® (trademark of GSK)
EPZICOM®/KIVEXA (EPZICOM) (trademark of GSK)
EQUASYM® IR (methylphenidate hydrochloride)
EQUASYM® XL (methylphenidate hydrochloride)
FIRAZYR® (icatibant)
FOSRENOL® (lanthanum carbonate)
FABRAZYME® (trademark of Genzyme)
FOCALIN XR® (trademark of Novartis Pharmaceuticals Corporation)
FUZEON® (trademark of Roche)
HEPTOVIR® (trademark of GSK)
INTUNIV™ (guanfacine extended release)
JUVISTA®
KALETRA® (trademark of Abbott Laboratories (“Abbott”))
LIALDA® (mesalamine)
METAZYM™ (arylsulfatase-A)
METADATE CD® (trademark of UCB)
MEZAVANT® (mesalazine)
MICROTROL® (trademark of Supernus Pharmaceuticals, Inc.)
PENTASA® (trademark of Ferring A/S Corp(“Ferring”))
PLICERA ® (trademark of Amicus)
RAZADYNE® (trademark of Johnson & Johnson (“J & J”))
RAZADYNE® ER (trademark of J & J)
REMINYL® (galantamine hydrobromide) (United Kingdom ("UK”) and Republic of Ireland) (trademark of J & J, excluding UK and Republic of Ireland)
REMINYL XL™ (galantamine hydrobromide) (UK and Republic of Ireland) (trademark of J & J, excluding UK and Republic of Ireland)
REPLAGAL® (agalsidase alfa)
 
 
3

 
 
RETROVIR® (trademark of GSK)
REYATAZ® (trademark of BMS)
RITALIN LA® (trademark of Novartis)
SALOFALK® (trademark of Dr Falk Pharma)
SEASONIQUE® (trademark of Barr Laboratories, Inc. (“Barr”))
SOLARAZE® (trademark of Laboratorios Almirall S.A (“Almirall”))
STRATTERA® (trademark of Eli Lilly)
SUSTIVA® (trademark co-owned DuPont Pharmaceuticals and BMS)
TRIZIVIR® (trademark of GSK)
TRUVADA® (trademark of Gilead)
VANIQA® (trademark of Almirall)
VIDEX® (trademark of BMS)
VIRAMUNE® (trademark of Boehringer-Ingelheim)
VIREAD® (trademark of Gilead)
VYVANSE® (lisdexamfetamine dimesylate)
VPRIVTM (velaglucerase alfa)
XAGRID® (anagrelide hydrochloride)
ZEFFIX® (trademark of GSK)
3TC® (trademark of GSK)
 
 
4

 
SHIRE PLC
2009 Form 10-K Annual Report
Table of contents

PART I
     
ITEM 1.    BUSINESS
     
   
  6
 
   
  6
 
   
  6
 
   
  6
 
   
  6
 
   
 19
 
  Intellectual property  
 20
 
   
  23
 
   
  25
 
   
  26
 
   
  27
 
   
  27
 
   
  27
 
 
  28
 
 
  34
 
 
  35
 
 
  36
 
 
36
 
       
PART II
     
 
  37
 
 
  40
 
 
  43
 
 
  72
 
 
  74
 
 
  74
 
 
  74
 
 
  74
 
       
PART III
     
 
  75
 
 
  80
 
 
  103
 
 
  104
 
 
  104
 
       
PART IV
     
 
  106
 
 
 
5

 
PART I
 
ITEM 1: Business
 
General
 
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.
 
Strategy
 
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.
 
2009 Highlights

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.
 
Financial information about operating segments
 
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.
 
Sales and marketing
 
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.
 
 
6

 
Currently marketed products
 
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
 
FOSRENOL (lanthanum carbonate)
 
Hyperphosphatemia in end stage renal disease
 
Shire
 
US, Europe and Japan(3)
             
CALCICHEW (calcium carbonate range)
 
Adjunct in osteoporosis
 
Nycomed Pharma AS
 
UK and Republic of Ireland
             
CARBATROL (carbamazepine extended-release capsules)
 
Epilepsy
 
Shire
 
US
             
REMINYL/REMINYL XL (galantamine hydrobromide)
 
Alzheimer’s disease
 
Synaptech, Inc. (“Synaptech”)
 
UK and Republic of Ireland (4)
             
XAGRID (anagrelide hydrochloride)
 
 
Elevated platelet counts in at risk essential thrombocythemia patients
 
Shire
 
Europe (5)
 
 
 
7


 
 
Human Genetic Therapies
       
             
Products
 
Disease area
 
Owner/licensor
 
Key territory
             
REPLAGAL (agalsidase alfa)
 
Fabry disease
 
Shire
 
Europe, Latin America and Asia Pacific(6)
             
ELAPRASE (idursulfase)
 
Hunter syndrome (Mucopolysaccharidosis Type II)
 
Shire
 
US, Europe, Latin America and Asia Pacific(7)
             
FIRAZYR (icatibant)
 
Hereditary angioedema (“HAE”)
 
Shire
 
Europe
             
(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
 
 
8

 
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.
 
 
9

 
Treatments for GI diseases
 
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).
 
 
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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
 
 
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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.
 
 
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Royalties received from other products
 
Antiviral products
 
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.
 
Products
Principal indications
Relevant territory/marketed by
     
3TC/EPIVIR (lamivudine)
HIV
Canada / Shire & ViiV Healthcare (2); RoW / ViiV Healthcare
COMBIVIR (lamivudine and zidovudine)
HIV
Canada / Shire & ViiV Healthcare; RoW / ViiV Healthcare
TRIZIVIR (lamivudine, zidovudine and abacavir)
HIV
Canada / Shire & ViiV Healthcare; RoW / ViiV Healthcare
EPZICOM/KIVEXA (lamivudine and abacavir)
HIV
Canada / Shire & ViiV Healthcare; RoW / ViiV Healthcare
ZEFFIX/EPIVIR-HBV/ HEPTOVIR(1) (lamivudine)
Hepatitis B infection
Canada / Shire & GSK; RoW / GSK
(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”).

 
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COMBIVIR
 
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.
 

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Products under development
 
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.
 
Product
  Disease area  
Development status at
 
territorial rights
             
SPECIALTY PHARMACEUTICALS
             
Treatments for ADHD
           
             
VYVANSE (lisdexamfetamine dimesylate)
 
 
ADHD
 
Phase 3 in EU
 
Global
INTUNIV (extended release guanfacine)
 
For use in combination with other ADHD treatments
 
Phase 3
 
Global
             
Treatments for GI diseases
           
             
LIALDA (mesalamine)
 
Maintenance of remission in ulcerative colitis
 
Phase 3 in the US
 
Global (excluding Italy and Latin America) (1)
             
LIALDA (mesalamine)/MEZAVANT (mesalazine)
 
Diverticulitis
 
Phase 3
 
Global (excluding Italy and Latin America) (1)
             
Treatments for diseases in other therapeutic areas
           
             
FOSRENOL (lanthanum carbonate)
 
CKD in pre-dialysis patients
 
Pre-registration in the US
 
 
Global
JUVISTA
 
 
Improvement of scar appearance in connection with both cosmetic and therapeutic surgery
 
 
Phase 3 in EU
 
Global (excluding EU)
VYVANSE (lisdexamfetamine dimesylate)
 
Non ADHD indications in adults
 
Phase 2
 
Global
             
SPD 535
 
Arteriovenous grafts in hemodialysis patients
 
Phase 1
 
Global

HUMAN GENETIC THERAPIES
 
Treatment for Angioedema
       
             
FIRAZYR (icatibant)
 
Acute HAE
 
Phase 3 in the US
 
Global
         
Enzyme Replacement Therapies (“ERT”)
       
         
REPLAGAL (agalsidase alfa)
 
Fabry disease
 
Registration in US
 
Global(2)
             
VPRIV (velaglucerase alfa)
 
Gaucher disease Type 1
 
Registration in US and EU
 
Global
 
 
 
 
HGT-1111
 
Metachromatic Leukodystrophy (MLD)
 
Phase 1/2
 
Global
             
HGT-2310
 
 
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.
 
 
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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.
 
 
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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.
 
 
18


Manufacturing and distribution
 
Finished Product Manufacturing
 
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.
 

19

 
Intellectual Property
 
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.
 
 
Granted US and EP Patents
Expiration Date
ADDERALL XR
 
US 6,322,819
US 6,605,300
US 6,913,768
CARBATROL
US 5,326,570
US 5,912,013
EP 0660705
ELAPRASE
US 5,728,381
US 5,798,239
US 5,932,211
US 6,153,188
US 6,541,254
 
 
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FOSRENOL
US 5,968,976
US 7,078,059
US 7,381,428
US 7,465,465
EP 0817639
LIALDA/MEZAVANT
 
US 6,773,720
EP 1198226
EP 1183014
EP 1287822
REPLAGAL
US 5,641,670
US 5,733,761
US 6,270,989
US 6,565,844
US 6,083,725
US 6,395,884
US 6,458,574
EP 0750044
EP 0935651
VYVANSE
US 7,105,486
US 7,223,735
 
 
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EPZICOM
US 5,047,407
US 5,693,787
US 5,663,320
US 5,696,254
US 6,180,639
EP 565 549
EP 515 157
LAMIVUDINE: EPIVIR/EPIVIR-ZEFFIX/3TC
 
US 5,047,407
US 5,693,787
US 5,663,320
US 5,696,254
US 6,180,639
RE 39155
EP 565 549
EP 515 157
TRIZIVIR
US 5,047,407
US 5,693,787
US 5,663,320
US 5,696,254
US 6,180,639
EP 382 526
EP 565 549
EP 515 157
Note:
 
·
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.
 
 
 
22

 
 
Competition
 
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, Shires 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 Salixs COLAZAL had a 3.7% market share, while Alavens 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).
 
23

 
Mesalamine and balsalazide (mesalamine pro-drug) products are generally protected by formulation patents only. In December 2007, the FDA denied Salixs 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).
 
24


Government regulation
 
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.
 
25

 
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.
 
Third party reimbursement and pricing
 
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.
 
26

 
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.
 
Corporate Responsibility
 
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.
 
Employees
 
In the pharmaceutical industry, the Company’s employees are vital to its success. At December 31, 2009 the Company had 3,875 employees.
 
Available information
 
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 December 31, 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.
 
27

 
ITEM 1A:  Risk Factors
 
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
 
 
28

 
    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:
 
29

 
 
 
·
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
 
30

 
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, 2009 the 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:
 
 
31

 
 
·
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
 
32

 
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.
 
33


ITEM 1B: Unresolved Staff Comments
 
None.
 
34


 
ITEM 2: Properties
 
The following are the principal premises of the Company, as of December 31, 2009:
 
 
Location
 
Use
Approximate Square Footage
 
Owned or Leased
Dublin, Ireland
 
Office accommodation
16,000
Leased
Basingstoke, Hampshire, UK
 
Office accommodation
 
148,000
Owned/Leased
Wayne, Pennsylvania, US
Office accommodation (Specialty Pharmaceuticals Headquarters)
 
375,000
Leased
Florence, Kentucky, US
Warehousing and distribution facility
 
96,000
Leased
Owings Mills, Maryland, US
 
Manufacturing facility and technology center
90,000
Owned
Cambridge, Massachusetts, US
 
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.
 

35

 
ITEM 3: Legal Proceedings
 
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.
 
ITEM 4: [Reserved]
 
 
36

 
PART II
 
ITEM 5: Market for Registrant’s common equity, related stockholder matters and issuer purchases of equity securities
 
Ordinary shares
 
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.
 

 
   
High £ per
ordinary share
   
Low £ per
ordinary share
 
           
1st Quarter
    10.65       7.80  
2nd Quarter
    9.19       8.03  
3rd Quarter
    10.93       8.23  
4th Quarter
    12.16       10.01  
                 
               
1st Quarter (1)
    11.94       8.60  
2nd Quarter (1)
    10.30       7.67  
3rd Quarter
    10.00       7.12  
4th Quarter
    10.34       6.91  

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.
 
   
High $
per ADS
   
Low $
per ADS
 
           
1st Quarter
    47.53       32.02  
2nd Quarter
    42.91       36.04  
3rd Quarter
    53.24       40.25  
4th Quarter
    59.80       48.89  
                 
               
1st Quarter (1)
    69.72       51.95  
2nd Quarter (1)
    60.60       45.12  
3rd Quarter
    55.50       43.63  
4th Quarter
    48.48       32.74  

 
37

 
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 May 23, 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 May 22, 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
 
38

 
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.
 

39

 
ITEM 6: Selected financial data
 
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.
 
40

 

 
Year to December 31,
     
2008
   
2007
   
2006
   
2005
 
      $’M       $’M       $’M       $’M       $’M  
Statement of Operations:
                                       
Total revenues
    3,007.7       3,022.2       2,436.3       1,796.5       1,599.3  
In-process R&D
    (1.6 )     (263.1 )     (1,866.4 )     -       (815.0 )
Gain on sale of product rights
    6.3       20.7       127.8       63.0       -  
Other operating expenses(1)
    (2,392.2 )     (2,367.8 )     (2,076.8 )     (1,576.3 )     (1,309.2 )
Operating income/(loss)
    620.2       412.0       (1,379.1 )     283.2       (524.9 )
Total other income/(expense), net(2)
    22.8       (146.4 )     (19.0 )     33.6       33.2  
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, 2009 the 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.
 
 

 
 
Results of operations for the years to December 31, 2009 and 2008
 
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:
 
Year to December 31,
     
2008
   
Change
 
   
$'M
   
$'M
   
%
 
Product sales
    2,693.7       2,754.2       -2  
Royalties
    292.5       245.5       +19  
Other revenues
    21.5       22.5       -4  
Total
    3,007.7       3,022.2       -  

 
 
Product sales
 
                                     
               
Product sales
   
Non-GAAP CER
   
US prescription
   
Exit market
 
Year to December 31,
     
2008
   
growth
   
growth
   
growth(1)
   
share (1)
 
   
$'M
   
$'M
   
%
   
%
   
%
   
%
 
Specialty Pharmaceuticals
                                   
ADHD
                                   
VYVANSE
    504.7       318.9       +58       +58       +65       13  
DAYTRANA
    71.0       78.7       -10       -10       -13       1  
EQUASYM
    22.8       -       n/a       n/a       n/a       n/a (2)
INTUNIV
    5.4       -       n/a       n/a       n/a       1 (3)
ADDERALL XR
    626.5       1,101.7       -43       -43       -42       8  
                                                 
GI
                                               
PENTASA
    214.8       185.5       +16       +16       -2       16  
LIALDA / MEZAVANT
    235.9       140.4       +68       +69       +43       18  
                                                 
General Products
                                               
FOSRENOL
    184.4       155.4       +19       +23       -2       8  
CALCICHEW
    43.7       52.8       -17       -3       n/a       n/a (3)
CARBATROL
    82.4       75.9       +9       +9       -4       55  
REMINYL/REMINYL XL
    42.4       34.4       +23       +42       n/a       n/a (3)
XAGRID
    84.8       78.7       +8       +16       n/a       n/a (2)
Other product sales
    19.4       50.1       -61       -59       n/a       n/a (3)
      2,138.2       2,272.5       -6                          
Human Genetic Therapies
                                               
ELAPRASE
    353.1       305.1       +16       +20       n/a       n/a (3)
REPLAGAL
    193.8       176.1       +10       +16       n/a       n/a (2)
FIRAZYR
    6.1       0.5       n/a       n/a       n/a       n/a (2)
VPRIV (4)
    2.5       -       n/a       n/a       n/a       n/a (2)
      555.5       481.7       +15                          
Total product sales
    2,693.7       2,754.2       -2                          

(1)
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 December 31, 2009 were $1.57:£1.00 and $1.39:€1.00 (2008: $1.85:£1.00 and $1.47:€1.00).

 
Specialty Pharmaceuticals
 
VYVANSE – ADHD
 
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:
 
Year to December 31,
     
2008
   
Change
   
Non-GAAP CER
 
   
$'M
   
$'M
   
%
   
%
 
3TC and ZEFFIX
    164.0       180.5       -9       -6  
ADDERALL XR
    68.0       -       n/a       n/a  
Other
    60.5       65.0       -7       -3  
Total
    292.5       245.5       19       22  

 
 
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.
 
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Research and development (“R&D”)
 
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 December 31, 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, 2009 the 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.
 
51

 
Interest expense
 
For the year to December 31, 2009 the 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, 2009 the 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.

52

 
Results of operations for the years to December 31, 2008 and 2007
 
For the year to December 31, 2008 the 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:
 
Year to December 31,
     
2007
   
Change
 
   
$'M
   
$'M
   
%
 
Product sales
    2,754.2       2,170.2       27  
Royalties
    245.5       247.2       -1  
Other revenues
    22.5       18.9       19  
Total
    3,022.2       2,436.3       24  
 
Product sales
 
               
Product sales
   
US prescription
 
Year to December 31,
     
2007
   
growth
   
growth
 
   
$'M
   
$'M
 
 
%
   
%
 
Specialty Pharmaceuticals
                       
ADHD
                       
VYVANSE
    318.9       76.5       317       388  
ADDERALL XR
    1,101.7       1,030.9       7       -5  
DAYTRANA
    78.7       64.2       23       -11  
                                 
GI
                               
PENTASA
    185.5       176.4       5       -1  
LIALDA / MEZAVANT
    140.4       50.5       178       204  
                                 
General Products
                               
FOSRENOL
    155.4       102.2       52       -4  
CALCICHEW
    52.8       54.2       -3       n/a  
CARBATROL
    75.9       72.3       5       -4  
REMINYL/REMINYL XL
    34.4       31.2       10       n/a  
XAGRID
    78.7       66.8       18       n/a  
Other product sales
    50.1       119.3       -58          
      2,272.5       1,844.5       23          
Human Genetic Therapies
                               
ELAPRASE
    305.1       181.8       68       n/a  
REPLAGAL
    176.1       143.9       22       n/a  
FIRAZYR
    0.5       -       n/a       n/a  
      481.7       325.7       48          
Total product sales
    2,754.2       2,170.2       27          
 
 
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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.
 
Sales of ADDERALL XR for the year to December 31, 2008 were $1,101.7 million, an increase of 7% compared to the same period in 2007 (2007: $1,030.9 million), with the decline in prescriptions being more than offset by price increases.
 
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, 2007 the 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.
 
54

 
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).

Year to December 31,
 
$'M
   
2007
$'M
   
Change
%
 
3TC and ZEFFIX
    180.5       186.3       -3  
Others
    65.0       60.9       7  
Total
    245.5       247.2       -1  

55

 
3TC and ZEFFIX
 
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
 
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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, 2008 the 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
 
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on Shire’s cost of borrowing. Between the close of the merger and November 5, 2008 the 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.
 
 
Other (expense)/income, net
 
Year to December 31,
     
2007
 
      $’M       $’M  
Impairment of non-current investments
    (58.0 )     (3.0 )
Gain on sale of available-for-sale security
    9.4       0.1  
Foreign exchange(1)
    14.1       (0.8 )
Other
    1.6       4.9  
      (32.9 )     1.2  
(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.
 
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Income taxes
 
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 December 31, 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.
 
Financial condition at December 31, 2009 and 2008
 
Cash and cash equivalents
 
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, 2009 the 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
 
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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 May 23, 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
 
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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
 
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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, 2009 the 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.
 
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(ii)
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
 
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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
 
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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;
 
 
·
general and administrative expenses;
 
 
·
research and development expenses;
 
 
·
the estimated life of the products; and
 
 
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·
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 December 31, 2009 the 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
 
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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, 2009 the 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.
 
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(iii)
Sales Deductions
 
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.
 
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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, 2009 the 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
 
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are available, the returns provision is based on this data and any other relevant factors as noted above.  In the year to December 31, 2009 the 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, 2009 the 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, 2009 the 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.
 
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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, 2008 the 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, 2008 the 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.
 
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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).
 
ITEM 7A: Quantitative and qualitative disclosures about market risk
 
Treasury policies and organization
 
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.
 
At December 31, 2009 the 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
 
72

 
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.
 

 
 
             
     
Principal
Value of
Amount
Receivable
$’M
     
Weighted
Average
Exchange Rate
     
Fair
Value
$’M
 
Swap foreign exchange contracts
                     
Receive USD/Pay EUR
    286.8       1.46       5.0  
Receive GBP/Pay USD
    50.1       1.62       (0.2 )
Receive CAD/Pay USD
    141.3       1.05       (0.2 )
Receive USD/Pay SEK
    27.3       7.27       (0.4 )

 
Market risk of investments
 
As at December 31, 2009 the 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.
 

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ITEM 8: Financial statements and supplementary data
 
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.
 
ITEM 9: Changes in and disagreements with accountants on accounting and financial disclosure
 
Not applicable.
 
ITEM 9A: Controls and procedures
 
Disclosure Controls and Procedures
 
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.
 
ITEM 9B: Other Information
 
None
 

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PART III
 
 
ITEM 10: Directors, executive officers and corporate governance
 
Directors of the Company
 
Name
Age
Position
Matthew Emmens
58
Non-Executive Chairman
Angus Russell
54
Chief Executive Officer (“CEO”)
Graham Hetherington
51
Chief Financial Officer (“CFO”)
David Kappler
62
Deputy Chairman and Senior Independent Non-Executive Director
Dr Jeffrey Leiden
54
Vice Chairman and Non-Executive Director
Patrick Langlois
64
Non-Executive Director
Kate Nealon
56
Non-Executive Director
Dr Barry Price(1)
66
Non-Executive Director
David Stout(2)
 
55
Non-Executive Director

(1) Dr Barry Price stepped down as Non-Executive Director on January 24, 2010.
(2) David Stout was appointed as Non-Executive Director with effect from October 31, 2009.


 
 
Executive Officers of the Company
 
Name
Age
Position
Angus Russell
54
CEO
Graham Hetherington
51
CFO
Michael Cola
50
President of Specialty Pharmaceuticals
Dr Sylvie Grégoire
48
President of Shire Human Genetic Therapies
Tatjana May
44
General Counsel and Company Secretary
Anita Graham
38
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.
 
 
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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:
 
Name
Date of Term Expiration
Matthew Emmens
David Kappler
Patrick Langlois
Kate Nealon
Dr Jeffrey Leiden
David Stout
 
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 July 1, 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.


76



David Kappler
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.
 
77


 
David Stout
Non-Executive Director
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.
 
Audit, Compliance & Risk Committee Financial Expert
 
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.
 
78

 
NASDAQ Corporate Governance Exemption
 
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.
 

79

 
 
 
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.
 
 
Kate Nealon
Chairman of the Remuneration Committee
 
 

 
The Remuneration Committee

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:

Kate Nealon (Chairman)
Patrick Langlois
Dr Jeffrey Leiden
Dr Michael Rosenblatt (appointed on October 27, 2009 and stepped down on December 23, 2009, when he left the Board)

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.
 
 
 
 

 
 


1. Salary
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)
 
CEO – Target 85%; Maximum 180%
 
CFO – Target 70%; Maximum 155% 
 
 
CEO – Target 90%; Maximum 180%
 
CFO – Target 80%; Maximum