Annual Report — Form 10-K Filing Table of Contents
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(Exact
name of
registrant as specified in its charter)
England
and Wales
(State
or
other jurisdiction of incorporation or
organization)
98-0484822
(I.R.S.
Employer Identification No.)
Hampshire
International Business Park, Chineham,
Basingstoke,
Hampshire, England, RG24 8EP
(Address
of
principal executive offices and zip code)
+44
1256 894 000
(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
Market
Securities
registered pursuant to Section 12(g) of the
Act:
None
(Title
of class)
1
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 o
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
o
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 o
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
Indicate
by check
mark whether the Registrant is a shell company (as defined in Rule 12b-2 of
the
Exchange Act).
Yes
o
No x
As
at June 30,2006, 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 $6,806 million.
This was computed using the average bid and asked price at the above
date.
THE
“SAFE
HARBOR” STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Statements
included
herein that are not historical facts are forward-looking statements. Such
forward looking statements involve a number of risks and uncertainties and
are
subject to change at any time. In the event such risks or uncertainties
materialise, Shire’s results could be materially affected. The risks and
uncertainties include, but are not limited to: risks associated with the
inherent uncertainty of pharmaceutical research, product development,
manufacturing and commercialisation; the impact of competitive products,
including, but not limited to the impact of those on Shire’s ADHD franchise;
patents, including but not limited to, legal challenges relating to Shire’s ADHD
franchise; government regulation and approval, including but not limited to
the
expected product approval dates of SPD503 (guanfacine extended release) (ADHD)
and SPD465 (extended release of mixed amphetamine salts) (ADHD); Shire’s ability
to complete, and achieve anticipated benefits from, the acquisition of New
River
Pharmaceuticals, Inc.; Shire’s ability to secure new products for
commercialisation and/or development; and other risks and uncertainties detailed
from time to time in Shire’s filings with the Securities and Exchange
Commission.
The
following are trademarks of Shire or companies within the Shire Group, which
are
the subject of trademark registrations in certain
territories.
ADDERALL
XR®
(mixed salts of a
single entity amphetamine)
ADDERALL®
(mixed salts of a
single entity amphetamine)
AGRYLIN®
(anagrelide
hydrochloride)
CALCICHEW®
range (calcium
carbonate with or without vitamin D3)
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND
RELATED STOCKHOLDER MATTERS
99
ITEM
13.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
100
ITEM
14.
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
101
PART
IV
ITEM
15.
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
102
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 pharmaceutical company that focuses on meeting the needs
of
the specialist physician.
Shire
plc was
incorporated under the laws of England and Wales on June 27, 2005 and is a
public limited company. Following the implementation of a Scheme of Arrangement,
on November 25, 2005 Shire plc replaced Shire Pharmaceuticals Group plc (SPG)
as
the holding company for Shire plc and its subsidiaries.
Historically,
the
Company has grown through acquisition, completing seven major mergers or
acquisitions in a twelve-year period from 1994 to 2006. Divestments of non-core
assets over the past three years have streamlined the Company’s operations. The
Company will continue to evaluate companies, products and project opportunities
that offer a good strategic fit and enhance shareholder value in the
future.
Strategy
Shire’s
strategic
goal is to become the leading specialty pharmaceutical company that focuses
on
meeting the needs of the specialist physician. Shire focuses its business on
attention deficit and hyperactivity disorder (ADHD), human genetic therapies
(HGT), gastrointestinal (GI) and renal diseases. The structure is sufficiently
flexible to allow Shire to target new therapeutic areas to the extent
opportunities arise through acquisitions. Shire believes that a carefully
selected portfolio of products with strategically aligned and relatively
small-scale sales forces will deliver strong results.
Shire’s
focused
strategy is to develop and market products for specialty physicians. Shire’s
in-licensing, merger and acquisition efforts are focused on products in niche
markets with strong intellectual property protection either in the US or
Europe.
In
accordance with
this strategy, Shire completed the acquisition of Transkaryotic Therapies,
Inc.
(TKT) on July 27, 2005. TKT was renamed Shire Human Genetic Therapies, Inc.
(Shire HGT) with effect from January 17, 2006.
On
February 20,2007, consistent with its stated focus on the growing ADHD market, Shire
announced that it had agreed to acquire New River Pharmaceuticals Inc. allowing
Shire to progress and benefit from its successful strategy of acquiring,
developing and marketing specialty pharmaceutical products. For further
information see Item 1: Business - Recent Developments in this Form
10-K.
2006
Product and Pipeline Highlights
·
DAYTRANA:
On
April 6, 2006 the FDA approved DAYTRANA and it was launched in the
US in
June 2006.
·
ELAPRASE:
The
US Food and Drug Administration (FDA) approved ELAPRASE in the US on
July24, 2006 and it was launched in the US in August 2006. By December31, 2006 over 110 patients in the US had received treatment. The
EU
pre-approval process commenced in July 2006 and by December 31, 2006
over
100 patients were receiving treatment on a named-patient
basis.
·
SPD465:
On
July 21, 2006the Company submitted a New Drug Application (NDA)
to the
FDA for SPD465 for the treatment of ADHD in the adult population.
The
Prescription Drug User Fee Act (PDUFA) date for the FDA to issue
a formal
response to this application is May 21,2007.
·
SPD503:
The
Company filed a NDA with the FDA on August 24, 2006 for the use of
SPD503
as a treatment of ADHD in children and adolescents. The PDUFA date
for the
FDA to issue a formal response to this application is June 24,2007.
·
GA-GCB:
The
Phase 3 clinical program was initiated in January 2007.
·
Enzyme
Replacement Therapies: The Company has completed proof of concept
studies
and has advanced into pre-clinical development three projects for
the
treatment of lysosomal storage disorders; namely enzyme replacement
therapies for Sanfilippo syndrome (Mucopolysaccharidosis IIIA),
metachromatic leukodystrophy and intrathecal delivery of ELAPRASE
for
Hunter syndrome patients with significant central nervous system
symptoms
(Hunter CNS)
·
SPD491
- A
once-a-day, non opiate, transdermal analgesic being developed with
the
goal of non-scheduled labeling to treat moderate to severe pain,
will
enter Phase 1 testing in the first quarter of 2007.
6
·
SPD535
-
Pre-clinical evaluation has begun for development of a novel
platelet-lowering agent.
In
addition Shire
in-licensed:
·
Rights
to the
transvaginal ring technology of Duramed in a number of markets
outside of North America, including the larger European markets in
August
2006, together with a license in the same countries to Duramed’s oral
contraceptive, SEASONIQUE (levonorgestrel/ethinyl
estradiol).
·
Global
rights
to SPD500 (Tissue Protective Cytokine technology), from Warren
Pharmaceuticals, Inc. (Warren) in September 2006. SPD500 is being
developed pre-clinically in non-nervous system indications, including
renal and genetic disease areas.
·
Global
rights
to SPD493 (Valrocemide) and other related compounds, from Yissum
Research
and Development Company in July 2006. SPD493 is being developed at
Phase 1
for the treatment of a number of central nervous system disorders.
2006
Business Highlights
ADDERALL
XR –
Settlement of Barr Laboratories, Inc. (Barr) Litigation
On
August 14, 2006
Shire and Barr announced that all pending litigation in connection with Barr’s
Abbreviated New Drug Application (ANDA) and its attempt to market generic
versions of Shire’s ADDERALL XR had been settled. As part of the settlement,
Barr entered into consent judgments and agreed to permanent injunctions
confirming the validity and enforceability of Shire’s US Patents Nos. 6,322,819
(the ‘819 Patent), 6,601,300 (the ‘300 Patent) and 6,913,768 (the ‘768 Patent).
Barr has also admitted that any generic product made under its ANDA would
infringe the ‘768 patent. Under the terms of the settlement, Barr will not be
permitted to market a generic version of ADDERALL XR in the US until April1,2009, except in certain limited circumstances, such as the launch of another
party’s generic version of ADDERALL XR. No payments to Barr are involved in the
settlement agreement.
Sale
of
ADDERALL IR to Duramed
In
September 2006,
Duramed Pharmaceuticals, Inc. (Duramed) purchased the product rights to Shire's
ADDERALL product for $63.0 million.
ID
Biomedical
Corporation (IDB) loan repayment
On
February 10,2006 Shire received notice from IDB that it intended to repay in full all of
its
loan drawings for injectable flu development of $70.6 million, together with
accrued and capitalized interest of $8.1 million (see Note 6
to the Company’s
consolidated financial statements contained in Part IV of this Annual report).
The Company received the $78.7 million outstanding on February 14, 2006. The
amounts outstanding in respect of IDB’s drawings for pipeline development
(principal drawings of $29.4 million) are unaffected by this
repayment.
FOSRENOL
In
December 2006
the Company entered into an agreement with Abbott Laboratories (Abbott) for
the
co-promotion of FOSRENOL in the US. Abbott's US renal care sales team will
co-promote FOSRENOL with its own renal product ZEMPLAR. The Company’s US renal
sales force will also continue to promote FOSRENOL. This agreement began
in the first quarter of 2007 and will continue for a term of five
years.
Recent
developments
Acquisition
of
New River
On
February 20,2007 Shire announced that it has agreed to acquire New River Pharmaceuticals
Inc. (New River) for $64 per New River share, or approximately $2.6 billion
for
the fully diluted equity interest, in an all cash transaction unanimously
recommended by the Boards of both companies. The acquisition is structured
as a
tender offer for all outstanding shares of New River followed by a merger.
The
acquisition is subject to the approval of Shire plc’s shareholders as well as
the satisfaction of certain customary conditions, including the tender of a
majority of the outstanding New River shares on a fully-diluted basis and the
expiration or earlier termination of the Hart-Scott-Rodino waiting period.
For
accounting purposes, the acquisition of New River will be accounted for as
a
purchase business combination in accordance with Statement of Financial
Accounting Standards (SFAS) No. 141 “Accounting for Business Combinations” (SFAS
No. 141).
The
total
consideration for the acquisition of New River amounts to approximately $2.6
billion in cash. Shire has entered into new bank facilities of $2.3 billion
to
provide part of the financing for the acquisition. This new facility is
conditional upon, amongst other things, approval being given by Shire plc’s
shareholders at an Extraordinary General Meeting for Shire plc to exceed the
current limit on its aggregate borrowings set out in Shire plc’s Articles of
Association.
7
Shire
plc has also
raised approximately $900 million through the private placement
of 42,883,721 new
ordinary shares to certain institutional investors at a price of 1075 pence
per
share. The newly issued shares represent approximately 8.4 per cent of Shire
plc's issued ordinary share capital prior to the placing.
For
further
information see Exhibit 99.2 to the 8-K filed on February 23, 2007.
VYVANSE
(previously known as NRP104)
On
February 23,2007 the FDA
approved VYVANSE,
indicated for the treatment of ADHD. The FDA has proposed that VYVANSE be
classified as a Schedule II controlled substance. This proposal was submitted
to
and accepted by the US Drug Enforcement Administration (DEA). A final scheduling
decision is expected from the DEA following a 30-day period for public comment.
Pending final scheduling designation, product launch is anticipated in the
second quarter of 2007.
ELAPRASE
On
January 8, 2007
the European Medicines Agency (EMEA) granted marketing authorization for the
use
of ELAPRASE for the long-term treatment of patients with Hunter syndrome.
Pricing
and
reimbursement procedures are already underway for ELAPRASE in many European
countries and it will be launched across the majority of European countries
in
2007.
LIALDA/MEZAVANT
On
January 16, 2007
the FDA approved LIALDA, indicated for the induction of remission in patients
with active, mild to moderate ulcerative colitis. LIALDAis
the first and
only FDA-approved once-daily oral formulation of mesalamine. Once-daily
LIALDA
contains the highest mesalamine dose per tablet (1.2g), so patients can take
as
few as two tablets once daily. The Company anticipates launching LIALDA in
the
US during the first quarter of 2007.
In
Europe, Shire
has received core labelling information approval for MEZAVANT in 15 EU countries
(including UK, Germany, France and Spain) following the decentralised
registration procedure. Associated national approvals should follow in the
first
quarter of 2007 and have already been received in Austria, Denmark and the
UK.
SPD754
Shire
licensed the
US and Canadian rights for the investigational HIV compound, SPD754 (also known
as apricitabine), to the Australian biotechnology company Avexa Limited (Avexa)
on January 23, 2007. Shire received an up-front cash payment of US$10 million,
8
million additional Avexa shares (taking its shareholding in Avexa to just over
8%) and may receive further milestones and royalties.
8
Financial
information about operating segments
Substantially
all of the Company’s revenues, operating profits or losses and net assets are
attributable to the research and development (R&D), manufacture, sale and
distribution of pharmaceutical products within two operating segments:
Pharmaceutical products and Royalties. Segment revenues, profits or losses
and
assets for 2006, 2005 and 2004 are presented in Note 25
to the Company’s consolidated financial statements contained in Part IV of this
Annual Report.
At
December 31,2006, the Company employed 1,260 sales and marketing staff to service its
operations throughout the world, which included its major markets in the US,
Europe and Canada.
Currently
marketed products
The
table below
lists the Company’s key currently marketed products as at December 31, 2006,
indicating the owner, licensor and the key territories in which Shire markets
the product.
Products
Disease
area
Owner/licensor
Key
territory
Treatments
for central nervous system (CNS) disorders
ADDERALL
XR
(mixed salts
of a single-entity
amphetamine product)
Treatments
for diseases in the general products (GP) area
AGRYLIN
(anagrelide
hydrochloride)
Thrombocythemia
secondary to a myeloproliferative disorder
Shire
US
and Canada
(3)
XAGRID
(anagrelide
hydrochloride)
Elevated
platelet counts in at risk essential thrombocythemia
patients
Shire
Europe
(3)
FOSRENOL
(lanthanum
carbonate)
Hyperphosphatemia
in end stage renal disease
Shire
(6)
US
and Europe
(2)(4)
REMINYL/REMINYL
XL (galantamine hydrobromide)
Alzheimer’s
disease
Synaptech,
Inc.
UK
and
Republic of Ireland(5)
9
CALCICHEW
(calcium carbonate range)
Adjunct
in
osteoporosis
Nycomed
Pharma AS
UK
and
Republic of Ireland
LODINE
(etodolac)
Rheumatoid
arthritis and osteoarthritis
Shire
UK
and
Republic of Ireland
SOLARAZE
(diclofenac sodium 3% gel)
Actinic
keratosis
Jagotec
A.G.
Europe(1)
VANIQA
(eflornithine 11.5% cream)
Facial
hirsutism in women
Skinmedica,
Inc.
Europe(2)
(1)
Marketed in certain European markets by distributors
(2)
Marketed in certain European and other markets by distributors
(3)
AGRYLIN/XAGRID is marketed in certain European and other markets by distributors
(4)
Sold
as FOZNOL in the Republic of Ireland
(5)
Marketed in ROW under license from Shire by Janssen Pharmaceutica N.V. (part
of
the Johnson & Johnson group of companies)
(6)
Shire
has the right to acquire the patents in Japan
Treatments
for CNS disorders
ADDERALL
XR
ADDERALL
XR is a
treatment for ADHD. ADHD is estimated to affect 7.8% of US children aged 4
to
17. Symptoms present themselves as impulsivity/hyperactivity, inattention or
both. In up to 65% of children affected by this disorder, symptoms will persist
into adulthood, with estimates of up to 9.9 million adults in the United States
having ADHD. According to IMS Health (IMS), a leading global provider of
business intelligence for the pharmaceutical and healthcare industries, the
US
market for ADHD treatments was approximately $3.3 billion for the year to
December 31, 2006.
ADDERALL
XR is a
patented formulation which uses MICROTROL drug delivery technology and is
designed to provide an all-day treatment with one morning dose. It is available
in 5mg, 10mg, 15mg, 20mg, 25mg and 30mg capsules and can be administered as
a
capsule or sprinkled on soft food. In the ADHD market, a once-a-day formulation
provides the following important patient benefits:
·
all-day
control of symptoms;
·
avoids
the
need for medication to be taken at
school;
·
reduces
the
risk of diversion;
·
allows
parental control of medication; and
·
offers
potential for improved patient
compliance.
The
FDA approved
ADDERALL XR as a once-daily treatment for children with ADHD in October 2001,
for adults in August 2004 and for adolescents (aged 13 to 17) in July
2005.
During
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 requiring extensive review and analysis
by the FDA's officials, a decision cannot yet be reached by the FDA. The FDA
did
not provide any guidance as to when that decision may be reached.
On
January 19, 2006the Company and Impax Laboratories, Inc. (Impax) announced that all pending
litigation in connection with Impax's ANDA had been settled. As part of the
settlement, Impax confirmed that its proposed generic products infringe Shire's
819, 300 and 768 Patents.
On
August 14, 2006
Shire and Barr announced that all pending litigation in connection with Barr's
ANDA and its attempt to market generic versions of Shire's ADDERALL XR had
been
settled. As part of the settlement, Barr entered into consent judgments and
agreed to permanent injunctions confirming the validity and enforceability
of
Shire's 819, 300 and 768 Patents. Barr has also admitted that any generic
product made under its ANDA would infringe the 768 patent.
Under
the terms of
the settlement, Barr is not permitted to market a generic version of ADDERALL
XR
in the United States until April 1, 2009, except for certain limited
circumstances (such as the launch of another party's generic version of ADDERALL
XR).
10
Litigation
proceedings relating to the Company’s ADDERALL XR patents are in progress. For
further information see ITEM 3: Legal Proceedings.
DAYTRANA
DAYTRANA
is a
methylphenidate transdermal delivery system for the once daily treatment of
ADHD. DAYTRANA is the first and only patch medication approved by the FDA to
treat the symptoms of paediatric 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 (two hours) through the 12-hour time point.
In
February 2003
the Company in-licensed from Noven Pharmacuticals, Inc. (Noven) the worldwide
royalty-free sales and marketing rights to DAYTRANA. DAYTRANA was approved
by
the FDA on April 6, 2006 and was launched in the US in June 2006.
CARBATROL
CARBATROL
is a
treatment for epilepsy. Approximately 2.7 million people in the United States
suffer from epilepsy, a disorder that is characterised by a propensity for
recurrent seizures and is defined by two or more unprovoked seizures.
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 as a capsule or sprinkled on food and delivers consistent blood
levels of the drug over 24 hours, when taken twice daily. When administered
in
an immediate release formulation, carbamazepine requires dosing three to four
times a day. CARBATROL's extended release formulation therefore provides
potential compliance advantages for patients. Carbamazepine is one of the most
widely prescribed anti-epileptic drugs.
The
FDA approved
CARBATROL in September 1997 for marketing in the US and it was launched in
the
US in June 1998. A promotional services agreement for CARBATROL for the US
market was signed with Impax in January 2006. This took effect from July
2006.
Patent
litigation
proceedings relating to CARBATROL are in progress. For further information
see
ITEM 3: Legal Proceedings.
Treatments
for GI diseases
PENTASA
PENTASA
controlled
release capsules are indicated for the induction of remission and for the
treatment of patients with mild to moderately active ulcerative colitis.
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 diarrhoea, bleeding and abdominal pain. Once diagnosis is confirmed,
patients are usually treated for life. The worldwide diagnosed population for
ulcerative colitis is expected to reach 1.4 million by 2015. The first line
treatment for inflammatory bowel disease is with mesalamine (5-aminosalicylic
acid 5-ASA) based products
PENTASA
is an
ethylcellulose-coated, controlled release capsule formulation designed to
release therapeutic quantities of mesalamine throughout the gastrointestinal
tract. In the US, PENTASA is available in 250mg and 500mg capsules.
Pursuant
to an
agreement with Ferring A/S, the Company has in-licensed the exclusive
royalty-bearing rights to PENTASA in the US. The co-promotion agreement with
Solvay Pharmaceuticals, Inc. ended with effect from January 1, 2006 and PENTASA
has since been exclusively promoted by the Company.
COLAZIDE
COLAZIDE
is
indicated for the treatment of mild to moderately active ulcerative colitis
and
maintenance of remission. It is a mesalamine derivative in which mesalamine
is
linked to an inactive carrier. The link is cleaved by colonic bacteria,
delivering 99% of the mesalamine dose to the colon.
Treatments
for human genetic diseases
REPLAGAL
REPLAGAL
is a
treatment for Fabry disease. Fabry disease is a rare, inherited genetic disorder
resulting from a deficiency in the activity of the lysosomal enzyme
alpha-galactosidase A, which is involved in the breakdown of fats. Although
the
signs and symptoms of Fabry disease vary widely from patient to patient, the
most common include severe pain of the extremities, impaired kidney function
often progressing to full kidney failure, early heart disease,
11
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 stop or ameliorate the clinical
manifestations of Fabry disease. In August 2001, REPLAGAL was granted marketing
authorization and co-exclusive orphan drug status in the European Union (EU)
with up to 10 years market exclusivity.
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 on July 24, 2006 and launched in the US during August.
On
January 8, 2007
the EMEA granted marketing authorization for the use of ELAPRASE for the
long-term treatment of patients with Hunter syndrome. Pricing
and
reimbursement procedures are already underway for ELAPRASE in many European
countries and it will be launched across the majority of European countries
in
2007.
Prior
to the grant
of marketing authorization in the EU, early access was granted to patients
with
Hunter syndrome in a number of European countries that have mechanisms for
pre-approval access including Italy, Germany, Spain, France, Sweden, Denmark
and
Norway.
ELAPRASE
has been
granted orphan drug status 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.
Treatments
for diseases in the GP area
AGRYLIN/XAGRID
Myeloproliferative
disorders (MPDs), including essential thrombocythemia (ET) and polycythemia
vera, are a group of diseases in which one or more blood cell types are
overproduced. In the case of platelets, which are involved in the blood clotting
process, excess numbers 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.
Anagrelide
hydrochloride is marketed in the US (under the trade name AGRYLIN) for the
treatment of thrombocythemia secondary to a MPD. AGRYLIN's paediatric marketing
exclusivity expired in September 2004 in the US. The FDA subsequently approved
several generic versions of AGRYLIN, which, as expected, adversely affected
the
Company's sales of this product in North America in 2005 and 2006.
In
Europe
anagrelide hydrochloride is marketed as XAGRID 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 also been granted orphan drug status
in
the EU, providing it with up to 10 years market exclusivity from November
2004.
FOSRENOL
FOSRENOL
is a
phosphate binder for use in end-stage renal failure patients receiving dialysis.
It is estimated that there are around 1.8 million patients worldwide with
end-stage renal disease. In this condition the kidneys are unable to regulate
the balance of phosphate in the body. If untreated, the resultant retention
and
elevated blood phosphate levels (hyperphosphatemia) can combine with other
biochemical disturbances and result in bone disorders described as renal
osteodystrophy. Research also suggests that hyperphosphatemia is associated
with
the development of cardiovascular disease which accounts for nearly 50% of
deaths in dialysis patients.
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 convenient chewable
tablet, FOSRENOL received FDA approval for the 250mg and 500mg dosage strengths
in the US in October 2004 and was launched in the US in January 2005. In
November 2005, the Company received FDA approval for the higher dose strengths
of 750mg and 1000mg.
In
December 2006
the Company entered into an agreement with Abbott for the co-promotion of
FOSRENOL in the US. Abbott's US renal care sales team will co-promote
FOSRENOL with its own renal product ZEMPLAR. The Company’s US sales force will
also continue to promote FOSRENOL. This agreement began in the first
quarter of 2007 and will continue for a term of 5 years. FOSRENOL has been
approved in a number of European countries in 2006 and has now been launched
in
Germany, France, the UK and a number of other European countries. Launches
will
continue throughout 2007 in Europe including, Italy and Spain, subject to the
finalization of national licensing and conclusion of pricing and re-imbursement
negotiations.
12
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 that approximately 500,000
people in the UK suffer from Alzheimer's disease (AD), which affects the ability
to carry out normal daily activities and affects memory, language and behaviour.
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 licence from Synaptech Inc. (Sypnaptech). In the rest of the
world, it is marketed by Janssen Pharmaceutica N.V. (Janssen), an affiliate
of
Johnson & Johnson (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 the Company
in
the UK and Republic of Ireland in June 2005 and by Janssen in the US in May
2005
as RAZADYNE ER.
In
May 2006, the
National Institute for Health and Clinical Excellence (NICE) in England and
Wales issued its Final Appraisal Determination (FAD) which recommended that
REMINYL and REMINYL XL, together with other drugs in the same class, be
reimbursed by the National Health Service (NHS) when used for the treatment
of
either (i) patients with existing AD already being treated with one of these
drugs; or (ii) newly diagnosed patients once their disease has progressed to
a
moderate stage. The FAD confirmed that the NHS would not reimburse treatment
of
patients newly diagnosed with mild AD. The Company and other consultees to
the
NICE process appealed against the FAD, but the appeals were unsuccessful. A
pharmaceutical company with a product in this class has given notice of its
intention to apply for a judicial review of the decision of NICE's Appeal Panel.
The Company intends to participate in the judicial review proceedings as an
interested party.
In
June 2006
Janssen and Synaptech filed a law suit against Barr for infringement of their
patent rights relating to RAZADYNE ER as a result of Barr filing an ANDA with
the FDA for a generic version of RAZADYNE ER. No court date has been
set.
Barr
and other
companies have filed ANDAs with the FDA for generic versions of RAZADYNE
and
Janssen and Synaptech have filed law suits against some of those ANDA filers.
The court date for the first of these proceedings is May
2007.
CALCICHEW
range
The
Company is
licensed by Nycomed Pharma AS (Nycomed) until December 31, 2007 to distribute
the CALCICHEW range of calcium and calcium/vitamin D3 supplements for the
adjunctive treatment of osteoporosis in the UK and Republic of Ireland. The
Company is negotiating an extension of this license with Nycomed.
Osteoporosis
is
characterised by a progressive loss of bone mass that renders bone fragile
and
liable to fracture. More than 4.5 million people in the UK are estimated to
suffer from this condition.
LODINE
LODINE
SR contains
etodolac 600mg in a sustained release formulation and is indicated for use
in
the treatment of rheumatoid arthritis and osteoarthritis in the UK and Republic
of Ireland. More than seven million adults in the UK have long-term health
problems associated with arthritis and related conditions.
The
Company has
exclusive UK sales and marketing rights to LODINE. In November 2006, a generic
company was granted a marketing authorization for a 600mg etolodac tablet in
the
UK and launched the product shortly after approval.
SOLARAZE
SOLARAZE
is a
topical preparation for the treatment of Actinic Keratosis (AK). AK is a common
form of pre-malignant skin tumor. AK is caused primarily by long-tem exposure
to
the sun (UV radiation) and may progress to squamous cell carcinoma in up to
10%
of cases. The reported incidence of AK is up to 25% in the northern hemisphere
increasing to 60% in Australian adults.
On
November 29,2006 the Australian Government Department of Health and Ageing Therapeutic
Goods
Administration approved the registration of Solaraze for the management of
AK.
VANIQA
VANIQA
Cream is a
novel topical prescription-only medicine indicated for the treatment of facial
hirsutism (also known as unwanted facial hair) in women. Approximately 1 in
10
women remove unwanted facial hair on a weekly basis.
13
Royalties
received from 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. The table below lists these products, indicating
the principal indications, marketer of the product and the territory in which
the product is being marketed.
Products
Principal
indications
Marketed
by/relevant territory
3TC/EPIVIR
HIV
Shire
&
GSK / Canada; GSK / RoW
COMBIVIR
HIV
Shire
&
GSK / Canada; GSK / RoW
TRIZIVIR
HIV
Shire
&
GSK / Canada; GSK / RoW
EPZICOM/KIVEXA
HIV
Shire
&
GSK / Canada; GSK / RoW
ZEFFIX/EPIVIR-HBV/
HEPTOVIR(1)
Hepatitis
B
infection
Shire
&
GSK / Canada; GSK / RoW
(1) This
is not a comprehensive list of trademarks for this product. The product is
marketed under other trademarks in some markets.
HIV/AIDS
HIV
is a retrovirus
that has been isolated and 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 2006 there were 39.5 million people
worldwide living with HIV/AIDS, including 17.7 million women and 2.3 million
children under the age of 15. In 2006 4.3 million people became newly infected
with HIV, including 0.6 million children. Of these, 2.8 million new infections
occurred in Sub-Saharan Africa. In an effort to combat the AIDS epidemic in
Africa and reduce the cost of medicines used to treat AIDS in sub-Saharan
Africa, the Company has waived a significant proportion of its royalty
entitlements on sales of products containing lamivudine in this
region.
According
to IMS
the World-Wide antiretroviral (anti-HIV) market reached $8.2 billion in annual
sales in the year to November 2006, with nucleotide/nucleoside transcriptase
inhibitors (such as 3TC) representing 51.7% of the market ($4.22 billion).
The
vast majority of sales were generated in North America and Western Europe.
Lamivudine
was
originally discovered by Shire BioChem Inc. (BioChem), a wholly-owned subsidiary
of the Company. Since 1990, the Company has licensed to GSK the worldwide
rights, with the exception of Canada, to develop manufacture and sell lamivudine
(now marketed in various single and combination formulations including
3TC/EPIVIR, COMBIVIR, TRIZIVIR and EPZICOM). In Canada 3TC is sold by the
Company in partnership with GSK.
3TC/EPIVIR
3TC
(lamivudine) is
indicated for the treatment of HIV infection and AIDS and was first approved
in
the US in November 1995. It is now marketed in the US as EPIVIR. Approval in
Canada followed shortly after in December 1995 and in the EU in August 1996.
The
safety and
efficacy of 3TC together with 3TC’s ease of administration has successfully
established 3TC as the cornerstone of combination therapy in HIV infection.
In
combination with other anti-retrovirals, 3TC is used in the majority of triple
and quadruple combination therapies with other nucleoside analog, protease
inhibitors and non-nucleoside reverse transcriptase inhibitors (NNRTI). It
was
also part of the pivotal clinical trials used as the basis for approval of
five
other HIV anti-retroviral agents: the nucleoside analog abacavir, the NNRTI
efavirenz, and the protease inhibitors indinavir, nelfinavir and
amprenavir.
COMBIVIR
In
September 1997,
the FDA authorized the marketing of COMBIVIR, the first product to combine
two
anti-retroviral drugs in a single tablet formulation. Each tablet of COMBIVIR
contains 3TC and zidovudine (AZT) and can be taken twice daily, offering the
advantage of reducing significantly the number of tablets a person on a 3TC/AZT
based treatment regimen needs to take. 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. Each tablet of TRIZIVIR
contains 3TC, AZT and abacavir (ABC) and can be taken twice daily. TRIZIVIR
was
the first tablet to combine three anti-HIV agents. TRIZIVIR was approved for
use
in the EU in January 2001 and in Canada in October 2001.
14
EPZICOM/KIVEXA
In
August 2004, the
FDA authorized the marketing of EPZICOM in the US. Each tablet of EPZICOM
contains 3TC and ABC and can be taken once a day. EPZICOM, in combination with
other antiretroviral agents, is indicated for the treatment of HIV-1 infection
in adults. In December 2004, EPZICOM was granted a marketing authorization
in
the EU.
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.
Two billion people worldwide have been infected with HBV. Of those infected,
over 350 million people are chronically infected. 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
(lamivudine)
is an orally available treatment for chronic hepatitis B infection and for
the
prevention of liver graft reinfection.
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.
Products
under development
The
Company focuses
its development resources on projects within its core therapeutic areas of
CNS,
GI, HGT and GP.
The
table below
lists the Company’s key products under development by therapeutic area, at
December 31, 2006, indicating the most advanced development status reached
in
any market for each and the Company’s territorial rights.
Product
Principal
indications
Most
advanced
development
status
The
Company’s
territorial
rights
Treatments
for CNS disorders
VYVANSE
(lisdexamfetamine dimesylate)
Paediatric
and adult ADHD
US:
FDA
Approval on February 23, 2007 for paediatric ADHD. Adult ADHD
in Phase
3.
Global(1)
SPD503
(extended release guanfacine)
ADHD
US:
Registration
US
SPD465
(extended release of mixed amphetamine salts)
ADHD
US:
Registration
Global
SPD493
(Valrocemide)
Various
Phase
1
Global
SPD491
Pain
Phase
1 from
Q1 2007
Global
Treatments
for GI diseases
LIALDA
(mesalamine) / MEZAVANT (mesalazine) with MMX Technology (previously
known
as MESAVANCE)
Ulcerative
colitis
US:
FDA
approved the NDA for ulcerative colitis on January 17, 2007.
Canada:
Registration
EU:
Agreed
core labelling information on December 14, 2006 for ulcerative
colitis
through EU consensus (decentralized procedure).
Key
major
markets worldwide
Treatments
for Human Genetic diseases
Gene-activated
glucocerebrosidase (GA-GCB)
Gaucher
disease
Phase
1/2
completed
Phase
3 from
Q1 2007
Global
15
Enzyme
replacement therapies
Sanfilippo
Syndrome (Mucopoly-saccharidosis IIIA), Metachromatic Leukodystrophy
and
Hunter CNS
Pre-clinical
Global
Treatments
for diseases in the GP area
DYNEPO
(epoetin delta)
Anemia
related to chronic renal failure
Approved
EU
Global
(excluding US)
SPD500
(Tissue protective cytokine technology)
Various(2)
Pre-clinical
Global
SPD535
Disorder
of
platelet level
Pre-clinical
Global
SEASONIQUE
Woman’s
health
Pre-registration
Key
European
markets
Transvaginal
Ring Technology
Woman’s
health
Various
Key
European
markets
(1)
In
collaboration with New River
(2)
Non-nervous system indications only.
Treatments
for CNS disorders
VYVANSE
(previously known as NRP104)
The
Company signed
a collaborative agreement (the “Collaborative Agreement”) with New River on
January 31, 2005, for the new chemical entity NRP104, which is being developed
for the treatment of ADHD. VYVANSE is an amphetamine pro-drug where lysine
is
linked to d-amphetamine. VYVANSE is therapeutically inactive until metabolised
in the body.
On
February 23,2007, the FDA approved
VYVANSE,
indicated for the treatment of ADHD. The FDA has proposed that VYVANSE be
classified as a Schedule II controlled substance. This proposal was submitted
to
and accepted by the DEA. A final scheduling decision is expected from the DEA
following a 30-day period for public comment. Pending final scheduling
designation, product launch is anticipated in the second quarter of 2007.
VYVANSE will be available in three dosage strengths: 30 mg, 50 mg and 70 mg,
all
indicated for once-daily dosing.
New
River has
completed enrolment for its Phase 3 clinical trial examining the safety and
efficacy of VYVANSE as a treatment for ADHD in the adult population (ages
18-52). Studies for the treatment of ADHD in adolescents (ages 13-18) will
commence after the adult ADHD studies are completed.
Under
the terms of
the Collaborative Agreement, the Company will collaborate with New River to
develop, manufacture, market and sell VYVANSE in the US. In the rest of the
world, the Company has an exclusive royalty-bearing license to develop and
commercialize VYVANSE.
On
February 20,2007the Company announced that it had agreed to acquire New River for $2.6
billion in cash. For further information see Item 1: Business - Recent
Developments in this Form 10-K.
SPD503
SPD503
is a
non-stimulant “non-scheduled'' compound for use in ADHD. The Company filed a NDA
with the FDA on August 24, 2006 for the use of SPD503 as a treatment of ADHD
in
children and adolescents. The PDUFA date for the FDA to issue a formal response
to this application is June 24, 2007.
SPD465
On
July 21, 2006the Company submitted a NDA to the FDA for SPD465 for the treatment of ADHD
in
the adult population. The PDUFA date for the FDA to issue a formal response
to
this application is May 21, 2007. SPD465 has the same active ingredient as
ADDERALL XR, but is designed to provide ADHD symptom control for up to 16
hours.
SPD493
The
Company intends
to study SPD493 (Valrocemide) in a number of CNS disorders and efficacy as
an
anti-epileptic agent has been demonstrated in a small proof of concept clinical
study.
SPD491
SPD491,
a
once-a-day, non-opiate, transdermal analgesic being developed with the goal
of
non-scheduled labelling to treat moderate to severe pain, will enter Phase
1
testing in Q1 2007.
16
Treatments
for GI diseases
LIALDA/MEZAVANT
with MMX Technology (previously known as MESAVANCE)
On
January 16, 2007
the FDA approved LIALDA, indicated for the induction of remission in patients
with active, mild to moderate ulcerative colitis. LIALDAis
the first and
only FDA-approved once-daily oral formulation of mesalamine. Once-daily
LIALDA
contains the highest mesalamine dose per tablet (1.2g), so patients can take
as
few as two tablets once daily. The Company anticipates launch of LIALDA in
the
US during the first quarter 2007.
In
2006, the
Company submitted applications for this product to a number of European
regulatory agencies (to be called MEZAVANT) and filed a New Drug Submission
with
Health Canada. On
December 14,2006the Company announced
that core
labelling information, part of Shire’s Marketing Authorization Application for
MEZAVANT, had been agreed by the regulatory agencies for the 15 EU countries
(including UK, Germany, France and Spain) participating in the decentralised
registration procedure. Following completion of the decentralised procedure,
associated national approvals should follow in the first quarter of 2007,
enabling the Company to start a phased launch of MEZAVANT in Europe. Marketing
authorizations have been granted in the UK, Denmark and Austria in the first
quarter of 2007.
The
Company has
in-licensed the exclusive royalty-bearing rights to LIALDA/MEZAVANT in the
US,
Canada, Europe (excluding Italy) and the Pacific Rim from Giuliani
S.p.A.
Treatments
for human genetic diseases
Gene-Activated
Glucocerebrosidase
Gene-Activated
Glucocerebrosidase (GA-GCB) is being developed for the treatment of Gaucher
disease. Gaucher disease is the most common of the inherited lysosomal storage
diseases and is caused by a deficiency of the enzyme glucocerebrosidase. As
a
result of this deficiency, certain lipids accumulate in specific cells of the
liver, spleen and bone marrow causing significant clinical symptoms in the
patient, including enlargement of the liver and spleen, hematological
abnormalities and bone disease.
In
April 2004, TKT
(which was acquired by the Company on July 27, 2005) initiated a clinical trial
to evaluate the safety and clinical efficacy of GA-GCB, its enzyme replacement
therapy for the treatment of Gaucher disease. Results from this study were
announced during the last quarter of 2005 and based upon these positive results
the Company has commenced a Phase 3 clinical program in 2007.
Patent
litigation
proceedings in Israel with Genzyme Corporation (Genzyme) relating to GA-GCB
were
dismissed in January 2006. For further information see ITEM 3: Legal
Proceedings.
Enzyme
Replacement Therapies
The
Company has
completed proof of concept studies and has advanced into pre-clinical
development on three projects for the treatment of lysosomal storage disorders;
namely enzyme replacement therapies for Sanfilippo syndrome
(Mucopolysaccharidosis IIIA), metachromatic leukodystrophy and intrathecal
delivery of ELAPRASE for Hunter syndrome patients with significant central
nervous system symptoms (Hunter CNS).
Treatments
for other diseases in the GP area
DYNEPO
DYNEPO
was approved
in the EU in March 2002 and is indicated for the treatment of anemia in patients
with chronic renal failure. It may be used in patients on dialysis as well
as
patients not on dialysis. The Company is preparing for commercial manufacture
in
Europe and expects to commence a staged launch in Europe of the product in
the
first half of 2007.
The
Company has
in-licensed the exclusive royalty-bearing global (excluding US) rights to DYNEPO
from Sanofi-Aventis.
Patent
litigation
proceedings relating to DYNEPO are in progress in the US. For further
information see ITEM 3: Legal Proceedings.
SPD500
Global
rights to
SPD500 (Tissue Protective Cytokine Technology) were in-licensed from Warren
Pharmaceuticals, Inc. (Warren) in September 2006. SPD500 is being developed
pre-clinically in non-nervous systems indications, including renal and genetic
disease areas.
SPD535
Pre-clinical
evaluation has commenced for development of a novel platelet lowering
agent.
SEASONIQUE
17
Shire
has been
granted a license to Duramed’s oral contraceptive, SEASONIQUE
(levonorgestrel/ethinyl estradiol tablets 0.15 mg/0.03 mg and ethinyl estradiol
tablets 0.01 mg). Duramed recently launched SEASONIQUE in the US. Shire has
the
rights to market this product in a number of markets outside of North America,
including the larger European markets. Shire is currently assessing Duramed’s
FDA registration package relating to SEASONIQUE for suitability for regulatory
filing in the EU.
ADDERALL
XR:
Boehringer-Ingelheim Chemicals, Inc. is currently the sole supplier of
amphetamine salts from two separate facilities in Virginia, US.
CARBATROL:
Orgamol
SA (part of BASF) is currently the sole supplier of carbamazepine from two
separate facilities located in Switzerland and in France.
DAYTRANA:
Mallinkrodt, Inc. is the current sole supplier of methylphenidate. A second
source is in development and should be available in 2007.
PENTASA:
Bayer
HealthCare AG is currently the sole supplier of mesalamine from a single site
in
Germany. The Company protects supply by carrying significant
inventories.
AGRYLIN/XAGRID:
Cambridge Major Laboratories, Inc. is currently the sole supplier of anagrelide
from its facility in Wisconsin, US. The Company protects supply by carrying
significant inventories.
FOSRENOL:
Farchemia
S.R.L is the worldwide supplier of lanthanum carbonate for FOSRENOL. A second
source is in development.
REMINYL/REMINYL
XL:
The active pharmaceutical ingredient is solely supplied by Janssen, from its
European based facility.
REPLAGAL:
The sole
source of agalsidase alpha is the Company’s protein manufacturing plant in
Cambridge, Massachusetts, US. The Company protects its supply by carrying
significant inventories.
ELAPRASE:
The sole
source of idursulfase is the Company’s protein manufacturing plant in Cambridge,
Massachusetts, US. The Company protects its supply by carrying significant
inventories.
Manufacturing
ADDERALL
XR: DSM
Pharmaceuticals, Inc. (DSM) is the primary manufacturer of ADDERALL XR, with
Shire’s Owings Mills manufacturing facility (Owings Mills) being the secondary
manufacturer.
CARBATROL:
Owings
Mills is the sole manufacturer of the beads used in the delivery of CARBATROL
and the primary manufacturer for encapsulation with DSM being the secondary
manufacturer for encapsulation and packaging.
DAYTRANA:
Noven is
currently the sole finished product supplier of DAYTRANA. A back up site is
in
early development. The Company protects its supply by carrying significant
inventories.
PENTASA:
Owings
Mills is the primary manufacturer of PENTASA, with Aventis approved as a backup
manufacturer.
AGRYLIN/XAGRID:
Tyco is the sole supplier of AGRYLIN/XAGRID. The Company protects its supply
by
carrying significant inventories.
FOSRENOL:
DSM
provides finished product for the US. Reckitt-Benckiser based in Europe, is
currently approved to supply finished product to the US and Owings Mills is
in
the process of being approved as a finished product manufacturing site for
the
US. Finished product for Europe and the rest of the world is currently supplied
by Reckitt-Benckiser. DSM is also approved to supply Europe and
Canada.
REMINYL:
Finished
product is supplied by Janssen, from its European based facility. It is the
sole
supplier of the product.
REPLAGAL:
Finished
drug product is supplied by two contract manufacturers.
ELAPRASE:
Finished
product is currently single sourced from a contract manufacturer. As the market
matures, there are plans to dual source.
18
Other:
The
Company’s other products marketed in the US and Canada are manufactured and
packaged by third party contract manufacturers.
All
products
marketed by the international sales and marketing operation are either
manufactured and supplied by the licensor of the product under supply
arrangements or are manufactured for Shire by third parties under
contract.
Distribution
The
Company’s US
distribution center, which includes a large vault to house DEA-regulated
Schedule II products, is located in Kentucky. From there, the Company
distributes its CNS, GI and GP products to all the wholesale distribution
centers and the three major warehousing pharmacy chains that stock Schedule
II
drugs in the US, providing access to nearly all pharmacies in the US.
The
distribution
and warehousing of certain HGT products are contracted out to specialist third
party contractors in the US and Europe. Distribution agreements are in
place for other export territories where the Company does not have local
operations.
Physical
distribution in the UK, Spain, Italy, France, Germany and the Republic of
Ireland is contracted out to third parties and distribution agreements are
in
place for certain other export territories where the Company does not have
local
operations.
Material
customers
The
Company’s three
largest trade customers are Cardinal Health Inc., McKesson Corp., and
Amerisource Bergen Corp., all of which are in the US. In 2006, these wholesale
customers accounted for approximately 43%, 29%, and 11% of total product sales,
respectively.
During
2005, the
Company entered into ‘fee for service’ agreements with two of its three
significant wholesale customers. These agreements, which are commonplace in
the
US pharmaceutical industry, change the way wholesalers are compensated. Under
the agreements, the wholesalers receive a distribution fee from pharmaceutical
suppliers. These ‘fee for service’ agreements eliminate wholesalers' incentives
to acquire and hold excess inventories. The Company believes this will reduce
the significant impact of wholesaler stocking and de-stocking on its product
sales. Further, each wholesaler will provide data regarding its inventories
of
the Company's products that it has on hand. The Company is negotiating a ‘fee
for service’ agreement with its remaining significant wholesale customer. ‘Fees
for service’ are treated as a sales deduction, thus affecting
revenues.
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 applications by its licensors.
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.
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 grant 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 the Company’s key
currently marketed products, material products from which the Company receives
a
royalty and major products under development, or technology relating to those
products, which are owned by or licensed to the Company and that are material
to
an understanding of the Company’s business taken as a whole.The
Company also
holds patents in other jurisdictions, such as Canada and Japan and has patent
applications pending in such jurisdictions, as well as in the US and the
EU.
The
EP patents
listed above do not necessarily have a corresponding national patent
registered in each EU member state. In some cases, national patents
were
obtained in only a limited number of EU member states. The rights
granted
to an EP patent are enforceable in any EU member state where the
EP patent
has been registered as a national
patent.
·
The
EP patents
listed above do not reflect term extensions afforded by supplementary
protection certificates (SPC’s) 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.
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.
ADHD
market
Competition
in the
US ADHD market has continued to increase as several products that do or will
compete with the Company’s products have been launched in recent years. Among
the new entrants to the market in 2006 was DAYTRANA, the Company’s
methylphenidate product.
Many
of these
products contain methylphenidate. In 2000, Johnson & Johnson (in conjunction
with ALZA) launched CONCERTA, a once-daily formulation of methylphenidate.
At
December 31, 2006, CONCERTA had a 22.2% share of the US ADHD market. In 2001,
UCB Pharma launched METADATE CD, a once-daily formulation of methylphenidate.
At
December 31, 2006, METADATE CD had a 3.1% share of the US ADHD market. In 2002,
Novartis (in conjunction with Elan) launched RITALIN LA, an extended release
formulation of methylphenidate, and in 2005 Novartis launched FOCALIN XR in
conjunction with Celgene Corporation, a long-acting formulation of
dexmethylphenidate, the active ingredient of traditional methylphenidate
preparations. At December 31, 2006 RITALIN LA and FOCALIN XR had a 2.8% and
5.2%
share, respectively, of the US ADHD market.
22
In
2002, Barr
launched a generic version of ADDERALL. Subsequently, five additional generic
companies have launched generic versions. Total ADDERALL generic prescriptions
accounted for about 12.2% of the market as at December 31, 2006. In September
2006, Duramed (a subsidiary of Barr) purchased the product rights to the
Company's ADDERALL product for $63 million. For further information see ITEM
7:
Management’s Discussion and Analysis.
In
2003, Eli Lilly
launched STRATTERA, a non-stimulant, non-scheduled treatment for ADHD. At
December 31, 2006, STRATTERA had a 10.7% share of the US ADHD market.
The
Company’s
non-stimulant product, SPD503 is in registration in the US.
The
Company is also
aware of clinical development efforts by GSK, Gliatech Inc., Cortex
Pharmaceuticals Inc., Boehringer-Ingelheim, Eisai Inc., Bristol-Myers Squibb
(in
collaboration with Elan) and Abbott to develop additional indications and new
non-stimulant treatment options for ADHD.
Generic
and other
possible competition to the Company’s ADHD franchise is separately discussed in
“Intellectual Property” above.
Market
for the treatment of rare genetic diseases
The
Company
believes that in general rare genetic diseases have markets that are too small
to attract the resources of most larger pharmaceutical and biotechnology
companies. As a result, 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., and Genzyme. Specifically, REPLAGAL
competes with Genzyme’s FABRAZYME, and, if approved, GA-GCB would compete with
Genzyme’s CEREZYME. Shire does not know of any party developing an enzyme
replacement therapy for the treatment of Hunter syndrome.
The
markets for
some of the potential products for rare genetic diseases caused by protein
deficiencies are quite small. As a result, if competitive products exist, the
Company may not be able to successfully commercialize its products. Some
jurisdictions, including EU and the United States, 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 10 years
in the EU and for a period of seven years in the United States.
Both
REPLAGAL and
FABRAZYME were granted co-exclusive orphan drug status in the EU for up to
10 years. Genzyme has orphan drug exclusivity for FABRAZYME in the United
States until April 2010. ELAPRASE has orphan drug designation in the United
States and the EU.
HIV
Market
The
HIV competitive
landscape is becoming more crowded and complicated as treatment trends evolve.
3TC/EPIVIR
In
the
Nucleoside/Nucleotide Reverse Transcriptase Inhibitor (NRTI) market of which
3TC/EPIVIR is a part, there are a number of anti-HIV drugs which are currently
sold.
Of
the branded
drugs available, TRUVADA (tenofovir/emtricitabine), VIREAD (tenofovir) and
EMTRIVA (emtricitabine) all sold by Gilead Sciences Inc. (Gilead), ZIAGEN
(abacavir) and RETROVIR (zidovudine) each sold by GSK, ZERIT (stavudine, d4T)
and VIDEX (didanosine) sold by Bristol-Myers Squibb (BMS) and HIVID
(zalcitabine) sold by Roche represent the most direct competition.
TRIZIVIR/COMBIVIR/EPZICOM
In
the Combined
NRTI market of which TRIZIVIR, COMBIVIR and EPZICOM are a part, there is one
major competitor - TRUVADA sold by Gilead.
Other
HIV
competition
In
addition to the
two NRTI HIV markets in which Shire operates, there is competition
from:
·
Non-Nucleoside/Nucleotide
Reverse Transcriptase Inhibitors (NNRTIs).
Of the
branded NNRTIs available, SUSTIVA (efavirenz) sold by BMS and VIRAMUNE
(nevirapine) sold by Boehringer-Ingelheim represent the most significant
competition.
·
Protease
Inhibitors (PIs).
Of the
branded PIs available, AGENERASE (amprenavir) sold by GSK, REYATAZ
(atazanavir) sold by BMS, CRIXIVAN (indinavir sulfate) sold by Merck,
KALETRA (Iopinavir/ritanaovir) and NORVIR (ritonovir) sold by Abbott,
VIRACEPT (nelfinavir) sold by Pfizer, FORTOVASE (saquinavir) sold
by Roche
and APTIVUS (Tipranavir) sold by Boehringer-Ingelheim represent the
most
significant competition.
23
·
Fusion
or
entry inhibitors.
Of the
branded drugs available, FUZEON (enfuvirtide), an injectable integrase
inhibitor sold by Roche/Trimeris, represents the most significant
competition.
Generic
HIV
competitors
BMS’s
VIDEX EC
(didanosine) became the first generic HIV product in the United States in 2004.
GSK’s RETROVIR (AZT) came off patent in the US in September 2005 and in Europe
in March 2006. Although in September 2005 several generic formulations of
zidovudine were approved by the FDA, these generic competitors have yet to
fully
ramp-up production and distribution. As a result, the full effect of this on
the
overall market for HIV products is unknown, but price decreases for all HIV
products may result.
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.
Regulatory
approval
is required in all markets in which Shire, or its licensees, seek to test or
market products. At a minimum, such approval requires the evaluation of data
relating to the quality, safety and efficacy of a product for its proposed
use.
The specific types of data required and the regulations relating to this data
will differ depending on the territory, the drug involved, the proposed
indication and the stage of development.
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 to evaluate
more fully clinical outcomes.
It
is the Company’s
responsibility to ensure that it conducts its business in accordance with the
regulations of each relevant territory.
Information
generated in this process is susceptible to varying interpretations that could
delay, limit or prevent regulatory approval at any stage of the approval
process. The failure to demonstrate adequately the quality, safety and efficacy
of a therapeutic drug under development could delay or prevent regulatory
approval of the product.
There
can be no
assurance that, if clinical trials are completed, either the Company or its
collaborative partners will submit applications for required authorizations
to
manufacture and/or market potential products (including a marketing
authorization application or NDA) or that any such application will be reviewed
and approved by the appropriate regulatory authorities in a timely manner,
if at
all.
In
order to gain
marketing approval the Company must submit a dossier to the relevant regulatory
authority for review. The format is usually specific and laid out by each
authority, although in general it will include 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 members of the Committee for Medicinal
Products for Human Use (CHMP) on behalf of the EMEA as part of a centralized
procedure or by an individual country's 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. Under medicines legislation a third
option in now available with the introduction of the decentralized procedure
enacted in November 2005. The new procedure provides 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. The agency may conduct an inspection of relevant
facilities or review manufacturing procedures, operating systems and personnel
qualifications. In addition to obtaining approval for each product, in many
cases each drug manufacturing facility must be approved. Further inspections
may
occur over the life of the product. An inspection of the clinical investigation
sites by a competent authority may be required as part of the regulatory
approval procedure. As a condition of approval, the regulatory agency may
require post-marketing surveillance to monitor for adverse effects, or 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.
24
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 obtained by filing an ANDA.
As a substitute for conducting full-scale pre-clinical and clinical studies,
the
FDA will 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.
European guidelines also allow for the submission of abridged applications
using
bioeqivalence criteria.
For
both currently
marketed and future products, failure to comply with applicable regulatory
requirements after obtaining regulatory approval can, among other things, result
in the suspension of regulatory approval, as well as possible civil and criminal
sanctions. Periodic marketing authorization renewals in Europe may require
additional data, which, if unfavorable, may result in an authorization being
withdrawn. In the US, the FDA has the authority to revoke or suspend approvals
of previously approved products, to prevent companies and individuals from
participating in the drug-approval process, to request recalls, to seize
violative products, to obtain injunctions to close manufacturing plants not
operating in conformity with regulatory requirements and to stop shipments
of
violative products. 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. Changes in government regulation could have a material
adverse effect on the Company’s financial condition and results of operation.
In
recent years, 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 or patient access constraints on 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 pertaining to drug re-importation.
In
the US, federal
legislation has created substantial changes in the Medicare program, including
the December 2003 enactment of the Medicare Prescription Drug Improvement and
Modernization Act. Beginning in 2006, Medicare beneficiaries were able to
purchase prescription drug coverage from a private sector provider. It is
difficult to predict the long-term impact of this legislation 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.
Additionally,
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.
Similar
regulatory
and legislative issues are encountered in Europe and other international markets
where governments regulate pharmaceutical prices and patient reimbursement
levels. The differing approach to price regulation has led to some parallel
trade within the EU where Shire’s products are imported into markets with higher
prices from markets with lower prices. Exploitation of price differences between
countries in this way can impact sales in those markets with higher
prices.
The
US DEA also
controls the national production and distribution in the US 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 sale of Shire’s ADHD products are strictly controlled.
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 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.
Third
party
reimbursement
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, or the
25
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.
In the US, several factors outside Shire’s control could significantly influence
the sale prices of pharmaceutical products, including: 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. For
example, revisions or clarification from the Centers for Medicare and Medicaid
Services (CMS) related to Medicaid and other government reimbursement programs
may have retroactive application which may result in changes to management’s
estimated rebate liability reported in a prior period. At the time of sale,
revenues from the Company’s products are reasonably estimable with the aid of
historical trend analysis and consideration of any current period changes in
pricing practices. The rebates can be reasonably determinable at the time of
sale to the initial customers. These factors would not impact our revenue
recognition policy under generally accepted accounting principles.
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 prescription drug coverage from January 2006
onwards. Medicare Part B establishes new rules to lower Medicare’s reimbursement
rate for physician administered drugs. Shire has not seen a material financial
impact from the Medicare Part D or Medicare Part B coverage to date. However,
since the programs are new, the impact and rules could change as a result of
further government rule-making or competitive practices. Shire cannot predict
the impact of those policies but Shire’s drugs, with the exception of Fosrenol,
are generally not prevalently used by the elderly who qualify for
Medicare.
Similar
developments may take place in the EU markets, where the emphasis will likely
be
on price controls and non-reimbursement for new and highly priced medicines
for
which the economic as well as the therapeutic rationales are not established.
Significant uncertainty exists about the reimbursement status of newly approved
pharmaceutical products in the EU. There can be no assurance that reimbursement
will be available for any of Shire’s future product launches or that
reimbursement won’t change for currently commercialized products. Limits on
reimbursement available from third party payers may reduce the demand for the
Company’s products. Price applications in Europe have delayed product launches
in some countries for up to two years and, as a consequence, dates for product
launches and associated recognition of revenue cannot be predicted with
accuracy.
The
Company
continues to develop its approach to CR; the Shire CR Committee guides the
overall direction and sets and monitors objectives. Members of the
Committee include representatives from R&D, HR, Environment Health &
Safety, Compliance, Risk Management, Facilties, Marketing, Community Relations
and Communications. The Chairman of the Committee is Shire’s Chief Financial
Officer, Angus Russell. The Committee meets at least three times a year to
discuss and monitor progress. An annual CR report is published in hard copy
and
is also available on the Company’s website in June.
In
the
pharmaceutical industry, the Company’s employees are vital to its success. The
Company believes that it has a good relationship with its employees. As at
December 31, 2006the Company had 2,868 employees.
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 SEC. Shire's reports filed with, or furnished
to, the SEC are also available on the SEC's website at www.sec.gov. The
information on the Company’s website is neither part of nor incorporated by
reference in this Annual Report on Form 10-K.
26
ITEM
1A:
Risk Factors
The
Company has
adopted a risk management strategy that enables it 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. These risk factors apply
equally to the Company and, therefore, they should all be carefully considered
before any investment is made in Shire.
Any
decrease in the sales of ADDERALL XR will significantly reduce revenues and
earnings
In
2006, sales of
ADDERALL XR were $863.6 million, representing approximately 48% of the Company's
revenues. Any factors that decrease sales of ADDERALL XR could significantly
reduce revenue and earnings and have a material adverse effect on the Company's
financial condition and results of operations. These include:
·
issues
impacting the production of ADDERALL XR or the supply of amphetamine
salts;
·
development
and marketing of competitive pharmaceuticals, including generic
versions;
·
technological
advances (including the approval of new competing products for ADHD
treatments);
·
loss
of
patent protection or ability of competitors to challenge or circumvent
the
Company's patents (See ITEM 3 of this Form 10-K for details of current
patent litigation);
·
changes
in
reimbursement policies of third-party
payers;
·
government
action/intervention;
·
marketing
or
pricing actions by competitors;
·
public
opinion towards ADHD treatments;
·
any
change in
the label or other such regulatory
intervention;
·
product
liability claims; or
·
changes
in
prescription-writing practices.
Any
decrease in the sales of 3TC could significantly reduce revenues and
earnings
The
Company
receives royalties from GlaxoSmithKline plc (GSK) on the worldwide sales of
3TC.
In 2006, the Company's royalty income relating to 3TC sales was $150.9 million,
representing approximately 8% of total revenues. This income stream generates
a
larger proportion of net income relative to the Company's own product sales
as
there are minimal costs associated with this income.
Any
factors that
decrease sales of 3TC by GSK could significantly reduce the Company's revenues
and earnings. These include:
·
reduction
in
production of 3TC;
·
development
and marketing of competitive
pharmaceuticals;
·
technological
advances;
·
loss
of
patent protection or ability of competitors to challenge or circumvent
patents;
·
government
action/intervention;
·
marketing
or
pricing actions by GSK's
competitors;
·
any
change in
the label or other such regulatory
intervention;
·
public
opinion towards AIDS treatments; or
·
product
liability claims.
VYVANSE
and the Company’s other new products may not be a commercial
success.
The
commercial
success of the Company’s new products will depend on their approval and
acceptance by physicians, patients and other key decision-makers, as well as
the
timing of the receipt of marketing approvals, the scope of marketing approval
as
reflected in the product’s label, the countries in which such approvals are
obtained,
27
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.
In
particular, the
Company may not be able to transition patients successfully from ADDERALL XR
to
VYVANSE, especially if any or all of the following occur:
·
if
physicians
who are comfortable with an existing product are unwilling to prescribe
a
new product in its place;
·
if
patients
who are comfortable with an existing product do not wish to take
a new
product in its place;
·
if
parents or
caregivers who are comfortable with an existing product do not want
their
children to take a new product in its
place;
·
if
third-party payors are unwilling to pay for a new
product;
·
if
the sales
and marketing efforts behind VYVANSE are not effective in positioning
VYVANSE and differentiating it from ADDERALL
XR;
·
if
the FDA
approved label for VYVANSE is not seen as significantly differentiating
VYVANSE from currently marketed treatments for ADHD;
or
·
if
competitive products are genericised and the impact on the market
negatively affects the prescribing of branded treatments for
ADHD.
Further,
if VYVANSE
is not a commercial success, Shire will not experience the anticipated economic
benefits from VYVANSE or from Shire’s proposed acquisition of New
River.
If
the Company is
unable to commercialize VYVANSE or any other new product successfully, there
may
be an adverse effect on the Company’s revenues, financial condition and results
of operations.
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 commercialisation. Further, they may also have an improved
likelihood of obtaining approval of drugs that may compete with those marketed
or under development by the Company. 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 characterised 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
failure to obtain and maintain reimbursement, or an adequate level of
reimbursement, by third-party payers in a timely manner for certain of the
Company's products may impact future revenues
The
prices for
certain of the Company's products when commercialised, including, in particular,
products for the treatment of rare genetic diseases, may be high compared to
other pharmaceutical products. The Company may encounter particular difficulty
in obtaining satisfactory pricing and reimbursement for its products, including
those that are likely to have a high annual cost of therapy. The failure to
obtain and maintain pricing and reimbursement at satisfactory levels for such
products may adversely affect revenues.
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 has its
own manufacturing capability for certain products and has also entered into
supply agreements with third party contract manufacturers. 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 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, there
is
currently reliance on a single source for production of the final drug product
for each of CARBATROL, AGRYLIN, XAGRID, REMINYL, DYNEPO, DAYTRANA and ELAPRASE
and reliance on a single active ingredient source for each of PENTASA, REPLAGAL,
FOSRENOL, AGRYLIN, XAGRID, DAYTRANA, DYNEPO, ELAPRASE and REMINYL.
In
the event of
financial failure of a third party contract manufacturer, 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.
28
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
Company has its
own warehousing and distribution capability for certain products and has entered
into distribution agreements with third party distributors for certain services.
The failure of either the Company's or a third party's service could result
in
the Company being unable to continue to distribute its products.
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
commercialisation efforts.
The
Company uses
bovine-derived serum sourced from New Zealand and North America in some of
its
manufacturing processes. 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 certain of the Company's products, or prohibit the Company
from
using its products at all in such countries.
Fluctuations
in wholesale buying patterns may influence net sales and growth
comparisons
A
significant
portion of the Company’s product sales are made to major pharmaceutical
wholesale distributors as well as to large pharmacies in both the United States
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
the
event of financial failure of certain customers, the Company may suffer
financial loss and a decline in revenues
For
the fiscal year
to December 31, 2006, the three largest trade customers, McKesson Corp.,
Cardinal Health Inc., and Amerisource Bergen Corp., accounted for approximately
43%, 29%, and 11% of the Company's product sales, respectively. The financial
failure of any one of these customers could have a material adverse effect
on
the Company's financial condition and results of operations.
The
actions of certain customers can affect the Company's ability to sell or market
products profitably
A
small number of
large wholesale distributors control a significant share of the United States
and European markets. In 2006, for example, approximately 83% of the Company's
product sales were attributable to three customers. 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 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 financial condition and results of operations.
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, which are made in any country
in which the Company conducts its business, may adversely impact the Company's
sales, 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. Changes in the general economic
conditions in any of the Company's major markets may also affect the Company's
sales, financial condition and results of operations.
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
sales, financial condition and results of operations. In addition, the cost
of
treatment established by health care providers, private health insurers and
other organisations, such as health maintenance organisations and managed care
organisations are under downward pressure and this, in turn, could impact on
the
prices at which the Company can sell its products.
The
market for
pharmaceutical products could be significantly influenced by the following,
which could result in lower prices for the Company's products and/or a reduced
demand for the Company's products:
·
the
ongoing
trend toward managed health care, particularly in the United
States;
29
·
legislative
proposals to reform health care and government insurance programs
in many
of the Company's markets; or
·
price
controls and non-reimbursement of new and highly priced medicines
for
which the economic and therapeutic rationales are not
established.
Parallel
importation occurs when an importer finds a cheaper price for a product or
equivalent product on the world market and imports that product from the lower
price jurisdiction to the higher price jurisdiction. If the parallel importation
of lower priced drugs is permitted in the United States, it could have the
effect of reducing sales of equivalent drugs in the United States. To the extent
that parallel importation increases, the Company may receive less revenue from
its commercialised products.
The
parallel
importation of prescription drugs is relatively common within the
EU.
If
the
Company's projects or clinical trials for the development of products are
unsuccessful, its products will not receive authorisation for manufacture and
sale
Due
to the
complexity of the formulation and development of pharmaceuticals, the Company
cannot be certain that it will successfully complete the development of new
products, or, if successful, that such products will be commercially
viable.
Before
obtaining
regulatory approvals for the commercial sale of each product under development,
the Company must demonstrate through clinical and other studies that the product
is of appropriate quality and is safe and effective for the claimed use.
Clinical trials of any product under development may not demonstrate the
quality, safety and efficacy required to result in an approvable or a marketable
product. Failure to demonstrate adequately the quality, safety and efficacy
of a
therapeutic drug under development would delay or prevent regulatory approval
of
the product. In addition, regulatory authorities in Europe, the United States,
Canada and other countries may require additional studies, which could result
in
(a) increased costs and significant development delays, or (b) termination
of a
project if it would no longer be economically viable. The completion rate of
clinical trials is dependent upon, among other factors, obtaining adequate
clinical supplies and recruiting patients. Delays in patient enrolment in
clinical trials may also result in increased costs and program delays.
Additional delays can occur in instances in which the Company shares control
over the planning and execution of product development with collaborative
partners. The Company cannot be certain that, if clinical trials are completed,
either the Company or its collaborative partners will file for, or receive,
required authorisations to manufacture and/or market potential products in
a
timely manner.
If
the
Company is unable to meet the requirements of regulators in relation to a
particular product, it may be unable to develop the product or obtain or retain
the necessary marketing approvals
Drug
companies are
required to obtain regulatory approval before manufacturing and marketing most
drug products. Regulatory approval is generally based on the results
of:
·
quality
testing (chemistry, manufacturing and
controls);
·
non-clinical
testing; and
·
clinical
testing.
The
clinical
development, manufacture, marketing and sale of pharmaceutical products is
subject to extensive regulation, including separate regulation by each member
state of the EU, the EMEA itself and federal, state and local regulation in
the
United States. Unanticipated legislative and other regulatory actions and
developments concerning various aspects of the Company's operations and products
may restrict its ability to sell one or more of its products or to sell those
products at a profit. The generation of data is regulated and any generated
data
is susceptible to varying interpretations that could delay, limit or prevent
regulatory approval. Required regulatory approvals may not be obtained in a
timely manner, if at all. In addition, other regulatory requirements for any
such proposed products may not be met.
Even
if the Company
obtains regulatory approvals, the terms of any product approval, including
labelling, may be more restrictive than desired and could affect the
marketability of its products. Regulatory authorities have the power amongst
other things, to:
·
revoke
or
suspend approvals of previously approved
products;
·
require
the
recall of products that fail to meet regulatory requirements;
and
·
close
manufacturing plants that do not operate in conformity with cGMP
and/or
other regulatory requirements or
approvals.
Such
delays or
actions could affect the Company's ability to manufacture and sell its
products.
30
The
failure of a strategic partner to develop and commercialise 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
dependent on its partner to deliver results. While these partnerships are
supported by contracts, the Company does 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 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 position. The
Company also expends significant resources on research and development. 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 United States, 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 commercialising products that are similar or functionally equivalent
to
the Company's products or technologies or processes for formulating or
manufacturing similar or functionally equivalent products. The Company's patent
rights may be successfully challenged in the future or laws providing such
rights may be changed or withdrawn. The Company cannot assure investors that
its
patents and patent applications or those of its third party manufacturers will
provide valid patent protection sufficiently broad to protect the Company's
products and technology or that such patents will not be challenged, revoked,
invalidated, infringed or circumvented by third parties. In the regular course
of business, the Company is party to litigation or other proceedings relating
to
intellectual property rights. (See ITEM 3 of this Form 10-K 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 licences for intellectual property
rights from others to develop, manufacture and market commercially viable
products and may not be able to obtain these licences 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 unauthorised 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 United States 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
31
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
The
Company's
ability to sell pharmaceutical products after the receipt of regulatory approval
will depend on the acceptance of those products by physicians and patients.
Unanticipated side effects or unfavourable publicity 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. Future results of operations will also depend on continued
market acceptance of current products and the lack of substitutes that are
cheaper or more effective.
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 defence 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, 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
commercialisation of other products.
Monitoring
or enforcement action by regulatory authorities or law enforcement agencies
in
the highly regulated markets in which the Company 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 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 and substantial monetary penalties.
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 commercialisation 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.
Loss
of
highly qualified management and scientific personnel could cause the Company
subsequent financial loss
The
Company faces
intense competition for highly qualified management and scientific personnel
from other companies, academic institutions, government entities and other
organisations. 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.
In
the
event of breakdown, failure or breach of security on any of the Company's IT
systems, the Company may be unable to maintain its business
operations
The
Company
operates several complex information systems upon which it is dependent. The
Company has back-up procedures and disaster recovery plans in place to enable
the business to continue its normal operations and to mitigate any loss in
the
event of a failure. However, in the event of breakdown, failure or breach of
security of any of these systems or the associated suppliers, the Company may
be
unable to maintain its business operations.
32
This
could lead to
loss of revenue and delay in product development. In addition, the Company
is in
the process of installing enterprise-wide information systems in its operations
throughout the world. Any failure in the operation of these systems could have
an adverse effect on the Company's business operations.
The
Company may incur unexpected expenditure in order to comply with US
environmental laws
The
Company's
manufacturing sites are situated in the United States and are subject to
national, state and local environmental laws. Compliance with environmental
laws
requires ongoing expenditure and any spillage or contamination found to be
caused by the Company may result in clean up costs and financial penalties
for
the Company which could adversely affect the Company's revenues, financial
condition and results of operations.
Contracts
are used in all areas of operation of the business. They may contain provisions
that do not protect the Company's position or with which it cannot
comply
Contracts
form the
basis of agreement in many key activities such as mergers and acquisitions,
arrangements with suppliers, outsourcing, product licensing and marketing.
These
contracts may contain provisions that impose duties on the parties involved
or
may fail to contain adequate conditions to protect the Company's position.
The
Company may be unable to meet its obligations under a contract or may be unable
to require other parties to comply with their obligations and, therefore, may
suffer financial loss or penalty.
Office
accommodation (Shire Human Genetic Therapies Headquarters) and
laboratories
181,000
Leased
Cambridge,
Massachusetts,
USA
Office
accommodation, laboratories and manufacturing facility
44,000
Leased
Cambridge,
Massachusetts,
USA
Office
accommodation
16,000
Leased
Belmont,
Massachusetts,
USA
Warehousing
facility
16,000
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, 2006 all the above sites
were
utilized by the Company. In addition, Shire has properties at Newport, Kentucky;
Rockville, Maryland; and Randolph, Massachusetts which are not fully
utilized.
The
Company
accounts for litigation losses and insurance claims and provisions in accordance
with SFAS No. 5, "Accounting for Contingencies" (SFAS No. 5). Under SFAS No.
5,
loss contingency provisions are recorded for probable losses when management
is
able to reasonably estimate the loss. Where the estimated loss lies within
a
range and no particular amount within that range is a better estimate than
any
other amount, the minimum amount is recorded. In other cases management's best
estimate of the loss is recorded. These estimates are developed substantially
before the ultimate loss is known and the estimates are refined in each
accounting period in light of additional information becoming known. In
instances where the Company is unable to develop a reasonable estimate of loss,
no litigation loss is recorded at that time. As information becomes known a
loss
provision is set up when a reasonable estimate can be made. The estimates are
reviewed quarterly and the estimates are changed when expectations are revised.
Any outcome upon settlement that deviates from the Company’s estimate may result
in an additional expense in a future accounting period.
ADDERALL
XR
(i)
Barr
Laboratories, Inc.
Shire’s
extended
release "once daily" version of ADDERALL, ADDERALL XR is covered by the ‘819
Patent and the ‘300 Patent. In January 2003 the Company was notified that Barr
had submitted an ANDA under the Hatch-Waxman Act seeking permission to market
its generic versions of the 5mg, 10mg, 15mg, 20mg, 25mg and 30mg strengths
of
ADDERALL XR (Barr’s ANDA products) prior to the expiration date of the Company’s
‘819 Patent, and alleging that the ‘819 Patent is not infringed by Barr's ANDA
products. In August 2003 Shire was notified that Barr also was seeking
permission to market its ANDA products prior to the expiration date of the
‘300
Patent and alleging that the ‘300 Patent is invalid. Shire Laboratories, Inc,
(Shire Laboratories) filed suit against Barr for infringement of the ‘819 Patent
in February 2003 and for infringement of the ‘300 Patent in September 2003. The
schedules for the lawsuits against Barr with respect to the ‘819 and ‘300
Patents were consolidated in December 2003. The Company sought a ruling that
Barr’s ANDA and ANDA products infringe the ‘819 and ‘300 Patents and that its
ANDA should not be approved before the expiration date of the patents. The
Company also sought injunctions to prevent Barr from commercializing its ANDA
products before the expiration of the ‘819 and ‘300 Patents, damages in the
event that Barr should engage in such commercialization, and its attorneys’ fees
and costs. On September 27, 2004 Barr filed an amended Answer, Affirmative
Defense and Counterclaim in which Barr added the following counterclaims:
invalidity of the ‘819 patent, non-infringement of the ‘300 Patent and
unenforceability of the ‘819 and ‘300 Patents due to inequitable conduct. Shire
asserted affirmative defenses, alleging, among other things, that Barr has
waived its right to assert the counterclaims set forth in its September 27,2004
amended Answer. Under the Court’s schedule summary judgment motions were to be
filed and fully briefed by October 14, 2005. Neither Shire nor Barr filed
summary judgment motions. On December 9, 2005, the Court continued the final
pre-trial conference to March 10, 2006.
Shire’s
lawsuits
triggered stays of final FDA approval of Barr’s ANDA of up to 30 months from the
date of the Company’s receipt of Barr’s notice letters. The second and final 30
month stay related to the lawsuit regarding the ‘300 Patent expired on February18, 2006. As the stay has expired, the FDA may approve Barr's ANDA, subject
to
satisfaction by Barr of the FDA's requirements. The FDA has not approved Barr’s
ANDA at this time.
On
October 19, 2005
Shire brought another lawsuit against Barr in the Southern District of New
York
alleging infringement of US Patent No. 6,913,768 (the ‘768 Patent), which issued
on July 5, 2005. The Company sought an injunction to prevent Barr from
infringing the ‘768 Patent, damages in the event that Barr should commercialize
its ANDA products, attorneys’ fees and costs. Barr moved to dismiss this action
asserting that there was no subject matter jurisdiction. A hearing on this
motion was held on February 17, 2006. The Court never ruled on this motion.
During
October 2005
Shire 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.
Shire believes that these requested criteria will ensure that generic
formulations of ADDERALL XR or follow-on drug products will be clinically
effective and safe. In January 2006 Shire filed a supplemental amendment to
its
original Citizen Petition, which included additional clinical data in support
of
the original filing. On April 20, 2006 Shire received correspondence from the
FDA informing Shire that the FDA has not yet resolved the issues raised in
Shire’s pending ADDERALL XR Citizen Petition. The correspondence states that,
due to the complex issues raised requiring extensive review and analysis by
the
FDA’s officials, a decision cannot be reached at this time. The FDA’s interim
response is in accordance with FDA regulations concerning Citizen
Petitions.
On
August 14, 2006,
Shire and Barr announced that all pending litigation in connection with Barr’s
ANDA and its attempt to market generic versions of Shire’s ADDERALL XR had been
settled. As part of the settlement agreement, Barr entered into consent
judgments and agreed to permanent injunctions confirming the validity and
enforceability of Shire’s ‘819, ‘300 and ‘768 Patents. Barr has also admitted
that any generic product made under its
35
ANDA
would infringe
the ‘768 patent. Under the terms of the settlement, Barr will not be permitted
to market a generic version of ADDERALL XR in the United States until April1,2009, except for certain limited circumstances, such as the launch of another
party’s generic version of ADDERALL XR. No payments to Barr are involved in the
settlement agreement.
Shire
and Duramed,
a subsidiary of Barr entered into an agreement related to Duramed’s transvaginal
ring technology that will be applied to at least five women’s health products,
as well as a license to Duramed’s currently marketed oral contraceptive,
SEASONIQUE (levonorgestrel/ethinyl estradiol tablets 0.15 mg/0.03 mg and ethinyl
estradiol tablets 0.01 mg) (the product development and license agreement).
Shire was granted exclusive rights to market these products on a royalty-free
basis in a number of markets excluding US and Canada (including Japan and the
major European Countries). Duramed will market these products in North America.
SEASONIQUE is already marketed in the United States by Duramed but Shire will
need to obtain appropriate regulatory authorisations to commence marketing
this
product in Europe. Under this agreement, Shire made an initial payment of $25
million to Duramed on September 13, 2006 for previously incurred product
development expenses, and will reimburse Duramed for development expenses
incurred going forward up to a maximum of $140 million over eight years, with
the amount capped at $30 million per annum.
The
settlement
agreement and the product development and license agreement became effective
upon the Courts signing the last of the consent judgments for the litigations
on
September 6, 2006.
Duramed
agreed to
purchase Shire’s ADDERALL (immediate-release mixed amphetamine salts) product
for $63 million. Shire reported the transaction to the FTC and the DOJ under
the
Hart Scott Rodino (HSR) Act on August 28, 2006. The HSR Act’s 30-day waiting
period expired on September 27, 2006 and the transaction closed on September29,2006.
As
required by law,
Shire submitted to the FTC and the DOJ all of the agreements with Barr and
it
subsidiaries that were entered into on August 14, 2006. On October 3, 2006,
the
FTC notified Shire that it is reviewing the settlement agreement with
Barr. While the Company has not received any requests for
information regarding the settlement agreement, Shire intends on
cooperating with the FTC should it receive any such requests. The
FTC's review should not be considered to be an indication that Shire or any
other company violated any law, and Shire believes that the settlement agreement
is in compliance with all applicable laws.
(ii)
Impax
In
November 2003,
Shire was notified that Impax had submitted an ANDA under the Hatch-Waxman
Act
seeking permission to market its generic version of the 30mg strength of
ADDERALL XR (Impax’s ANDA product) prior to the expiration date of the ‘819 and
‘300 Patents. In December 2003, Shire Laboratories filed suit against Impax
for
infringement of the ‘819 and ‘300 Patents.
In
December 2004,
Shire received an additional notification from Impax advising of the filing
of
an amendment to its ANDA for a generic version of the 5mg, 10mg, 15mg, 20mg
and
25mg strengths of ADDERALL XR in addition to the 30mg strength, the subject
of
Impax’s initial ANDA submission. In January 2005, Shire Laboratories filed suit
against Impax for infringement of the ‘819 and ‘300 Patents by these lower
strength dosage forms; this suit was consolidated with the earlier case against
Impax.
As
part of the
October 19, 2005 lawsuit against Barr, Shire also brought suit in the Southern
District of New York against Impax for infringing the ‘768 Patent. Impax filed a
declaratory judgment action in Delaware alleging that the ‘768 Patent was
invalid and that its ANDA did not infringe the ‘768 Patent.
On
January 19,2006, Shire and Impax announced that all pending litigation in connection with
Impax’s ANDA had been settled. As part of the settlement, Impax confirmed that
its proposed generic products infringe Shire’s ‘819, ‘300 and ‘768 Patents and
that the three patents are valid and enforceable.
Under
the terms of
the settlement agreement, Impax will be permitted to market generic versions
of
ADDERALL XR in the United States no later than January 1, 2010 and will pay
Shire a royalty from those sales. In certain situations, such as the launch
of
another generic version of ADDERALL XR, Impax may be permitted to enter the
market as Shire’s authorized generic. No payments to Impax are involved in the
settlement agreement. The settlement agreement, which was effective immediately,
has been submitted to the United States Federal Trade Commission for its review,
as required by law.
(iii)
Colony
Pharmaceuticals, Inc.
In
December 2004,
Shire was notified that Colony Pharmaceuticals, Inc. (Colony) had submitted
an
ANDA under the Hatch-Waxman Act seeking permission to market its generic
versions of the 5mg, 10mg, 15mg, 20mg, 25mg and 30mg strengths of ADDERALL
XR
prior to the expiration date of the Company’s ‘819 and ‘300 Patents. Shire has
chosen not to sue Colony.
36
(iv)
Teva
Pharmaceuticals USA, Inc.
In
February 2005,
Shire was notified that Teva Pharmaceuticals, Inc. (Teva Pharmaceuticals) had
submitted an ANDA under the Hatch-Waxman Act seeking permission to market its
generic versions of the 10mg and 30mg strengths of ADDERALL XR prior to the
expiration date of the Company’s ‘819 and ‘300 Patents. In June 2005, Shire was
notified that Teva Pharmaceuticals had amended its ANDA to seek permission
to
market additional strengths of 5mg, 15mg and 20mg of its generic ADDERALL XR
prior to the expiration of the '819 and '300 Patents. In January 2006, Shire
received a third notice letter that Teva Pharmaceuticals had further amended
its
ANDA to seek permission to market the 25mg strength generic version of ADDERALL
XR prior to the expiration of the ‘819 and ‘300 Patents. On March 2, 2006 Shire
filed a lawsuit in the Eastern District of Pennsylvania against Teva
Pharmaceuticals Industries Ltd. (Teva Israel) and Teva Pharmaceuticals USA,
Inc.
(Teva USA) (collectively Teva) alleging that all of Teva’s ANDA products
infringe both the ‘819 and the ‘300 Patents. The lawsuit triggered a stay of FDA
approval of Teva’s 25 mg strength product for 30 months from the date of the
Company’s receipt of Teva’s third notice letter. There is no such stay with
respect to Teva’s 5mg, 10mg, 15mg, 20mg and 30 mg strengths versions of ADDERALL
XR. On January 30, 2007, the case was transferred to the civil suspense docket
with an Order requiring the parties to notify the Court of the status of the
case on the first business day of every month. No trial date has been
set.
(v)
Andrx
Pharmaceuticals, LLC
In
September 2006,
Shire was notified that Andrx Pharmaceuticals, LLC (Andrx) had submitted a
ANDA
under the Hatch-Waxman Act seeking permission to market its generic versions
of
the 5mg, 10mg, 15mg, 20mg, 25mg and 30mg strengths of ADDERALL XR prior to
the
expiration date of the Company’s ‘819 and ‘300 patents. Shire
Laboratories
and Shire LLC. have filed lawsuits in the US District Court for the District
of
New Jersey and the Southern District of Florida against Andrx Pharmaceuticals,
LLC. and Andrx Corporation (collectively “Andrx”) for infringement of the
Company’s ‘819 and ‘300 Patents. Watson Pharmaceuticals, Inc., the recent
acquiror of Andrx, is also named in the lawsuits. The lawsuits allege that
all of Andrx’s generic strengths infringe the patents in suit. Pursuant to
Hatch-Waxman legislation, there will be a 30-month stay with respect to Andrx’s
proposed generic products.
(vi)
Sandoz
Inc.
In
December 2006,
Shire was notified that Sandoz Inc. (Sandoz) had submitted an ANDA under the
Hatch-Waxman Act seeking permission to market its generic versions of the 5mg,
10mg, 15mg, 20mg, 25mg, 30mg strengths of ADDERALL XR prior to the expiration
of
the Company’s ‘819 and ‘300 patents. On January 26, 2007, Shire filed suit in
the US District Court for the District of Colorado for infringement of the
‘819
and ‘300 patents. The lawsuit triggers a stay of FDA approval of up to 30 months
from the Company’s receipt of Sandoz’s notice. The court has ordered a
scheduling and planning conference for March 21, 2007. No trial date has been
set.
None
of Colony,
Andrx, Teva or Sandoz may launch their generic versions of ADDERALL XR before
they receive final FDA approval of their respective ANDAs and before the
expiration of the first to file’s exclusivity rights.
CARBATROL
(i)
Nostrum
Pharmaceuticals, Inc.
In
August 2003, the
Company was notified that Nostrum Pharmaceuticals, Inc. (Nostrum) had submitted
an ANDA under the Hatch-Waxman Act seeking permission to market its generic
version of the 300mg strength of CARBATROL (Nostrum’s ANDA product) prior to the
expiration date of the Company’s US patents for CARBATROL, US patent No.
5,912,013 (the ‘013 Patent) and US patent No. 5,326,570 (the ‘570 Patent). The
notification alleges that the ‘013 and ‘570 Patents are not infringed by
Nostrum’s ANDA product. On September 18, 2003, Shire filed suit against Nostrum
in the United States District Court for the District of New Jersey alleging
infringement of these two patents by Nostrum’s ANDA and ANDA product. The
Company was seeking a ruling that Nostrum’s ANDA infringes the ‘013 and ‘570
Patents and should not be approved before the expiration date of the ‘013 and
‘570 Patents. The Company was also seeking an injunction to prevent Nostrum
from
commercializing its ANDA product before the expiration of the ‘013 and ‘570
Patents, damages in the event that Nostrum should engage in such
commercialization, as well as its attorneys’ fees and costs. On January 23,2004, the Company amended the complaint to drop the allegations with respect
to
the ‘013 Patent while maintaining the suit with respect to the ‘570 Patent. By
way of counterclaims Nostrum is seeking a declaration that the ‘570 and ‘013
Patents are not infringed by Nostrum’s ANDA product. Nostrum also was seeking
actual and punitive damages for alleged abuse of process by Shire. On July12,2004, the Court dismissed Nostrum’s abuse of process counterclaim for failure to
state a claim upon which relief can be granted. On December 10, 2004, Nostrum
filed a summary judgment motion seeking a declaration of non-infringement of
the
‘570 Patent, which Shire opposed. The Court heard arguments with respect to
Nostrum’s motion on July 15, 2005. At the conclusion of the hearing the Court
denied Nostrum's motion for summary judgment of non-infringement. On July 17,2006 the Court entered an order staying discovery in this case until and through
September 15, 2006. The parties requested, and the Court granted, an extension
of the stay
37
of
discovery until
and through December 29, 2006. On January 8, 2007 the parties requested a
further stay discovery until March 30, 2007, which has not yet been granted
by
the Court. No trial date has been set.
Nostrum
may not
launch a generic version of CARBATROL before it receives final approval of
its
ANDA from the FDA. The lawsuit triggered a stay of FDA approval of up to 30
months from Shire’s receipt of Nostrum’s notice letter. The 30 month stay
expired on February 6, 2006. Following expiry of the stay, Nostrum could be
in a
position to market its 300mg extended-release carbamazepine product upon FDA
final approval of its ANDA.
(ii)
Corepharma
LLC
On
March 30, 2006the Company was notified that Corepharma LLC (Corepharma) had filed an ANDA
under the Hatch-Waxman Act seeking permission to market its generic version
of
carbamazepine extended release products in 100mg, 200mg and 300mg strengths
prior to the expiration date of the ‘013 and the ‘570 Patents. On May 17, 2006,
Shire filed suit against Corepharma in the United States District Court for
the
District of New Jersey alleging infringement of these two patents by
Corepharma’s ANDA and ANDA products. The Company was seeking a ruling that
Corepharma’s ANDA infringes the ‘013 and ‘570 Patents and should not be approved
before their expiration dates. The Company was also seeking an injunction to
prevent Corepharma from commercializing its ANDA products before the expiration
of the ‘013 and ‘570 Patents, damages in the event that Corepharma should engage
in such commercialization, as well as its attorneys’ fees and costs. On
September 1, 2006, the Company amended the complaint to drop the allegations
with respect to the ‘013 Patent while maintaining the suit with respect to the
‘570 Patent. By way of counterclaims, Corepharma is alleging noninfringement
and
invalidity of the ‘570 Patent, noninfrngement of the ‘013 Patent and federal and
state antitrust violations. The parties have agreed to, and the court has
accepted, a dismissal without prejudice of the antitrust counterclaims until
a
final judgment has been entered in the patent case. Corepharma has also filed
a
motion for a judgment on the pleadings of noninfringement of the ‘013 Patent,
which Shire has opposed, including moving to dismiss the ‘013 Patent
noninfringement counterclaim for lack of subject matter jurisdiction. The Court
heard oral argument on these two motions on February 26, 2007, immediately
after
which the Court granted Shire’s motion to dismiss for lack of subject matter
jurisdiction, rendering moot Corepharma’s motion for noninfringement of the ‘013
Patent.
The
parties
exchanged written discovery on January 26, 2007, and will appear before the
Court for a status conference on March 13, 2007. No further discovery schedule
or trial date has been set.
Corepharma
may not
launch a generic version of CARBATROL before it receives final approval of
its
ANDA from the FDA. The lawsuit triggered a stay of FDA approval of up to 30
months from Shire’s receipt of Corepharma’s notice letter.
GENE
ACTIVATION
In
1996, Applied
Research Systems Holding N.V., a wholly-owned subsidiary of Serono S.A. (Serono)
and Cell Genesys became involved in a patent interference involving Serono’s US
Patent No. 5,272,071 (the '071 Patent), which purportedly covers certain methods
of gene activation. In June 2004, the Board of Patent Appeals and
Interferences of the US Patent and Trademark Office (PTO) held that both Serono
and Cell Genesys were entitled to certain claims in their respective patent
and
patent application, and Serono and Cell Genesys each appealed the decision
of
the interference to the US District Court of Massachusetts and the US District
Court of the District Court of Columbia, respectively. Shire HGT (formerly
known as TKT) was not a party to this interference. The District of Columbia
action was subsequently transferred and consolidated with the District of
Massachusetts action (the Appeal).
In
August 2004,
Serono served Shire HGT with an amended complaint in the Appeal. The
amended complaint alleges that Shire HGT infringes Serono’s 071 Patent. In
August 2005, the US District Court of Massachusetts severed and stayed the
infringement action pending resolution of the interference claim of the Appeal
at the District Court level.
Pre-trial
proceedings concerning the Appeal between Serono and Cell Genesys are ongoing
and Serono’s infringement action against the Company remains stayed pending
resolution of those proceedings. In view of the stay, the Company has not yet
answered Serono’s complaint.
GA-GCB
In
January 2005,
Genzyme Corporation (Genzyme) filed suit against Shire HGT in the District
Court
of Tel Aviv-Jaffa, Israel, claiming that Shire HGT's Phase 1/2 clinical trial
in
Israel evaluating GA-GCB for the treatment of Gaucher disease infringes one
or
more claims of Genzyme’s Israeli Patent No. 100,715. In addition, Genzyme filed
a motion for preliminary injunction, including a request for an ex parte hearing
and relief on the merits, to immediately seize and destroy all GA-GCB being
used
to treat patients and to prevent Shire HGT from submitting data generated from
the clinical trial to regulatory agencies. In March 2005 the District Court
refused to grant Genzyme's motion for a preliminary injunction. The lawsuit
was
dismissed in January 2006.
38
DYNEPO
Since
1997, Shire
HGT and Sanofi-Aventis have been involved in ongoing patent litigation regarding
Amgen’s allegations that DYNEPO infringes claims of five of Amgen’s patents. In
2001, the United States District Court of Massachusetts concluded that DYNEPO
infringed certain claims of the patents that Amgen had asserted. This decision
was appealed to the United States Court of Appeals for the Federal Circuit
(the
Federal Circuit) which affirmed in part, reversed in part, and remanded the
action to the United States District Court of Massachusetts for further
proceedings.
In
2004, the United
States District Court of Massachusetts issued a decision on the remanded issues,
finding that certain claims related to four of the patents asserted by Amgen
are
infringed by Shire HGT and Sanofi-Aventis. This decision was subsequently
appealed to the Federal Circuit which affirmed in part, reversed in part, and
once again remanded certain issues to the District Court. Recently, Amgen has
filed a request for an extension of time to file a petition for certiorari
with
the Supreme Court.
Under
the most
recent Federal Circuit decision, the Company and Sanofi-Aventis would be
precluded from making, using and selling DYNEPO in the United States until
the
expiration of the relevant patents. The Company is required to reimburse
Sanofi-Aventis, which controls the litigation and is paying the litigation
expenses, for 50% of the expenses incurred in connection with the litigation
from and after March 26, 2004. This litigation has no impact on Shire’s ability
to make, use and sell DYNEPO outside of the United States.
Appraisal
Rights
In
connection with
Shire’s merger with TKT, former holders of approximately 11.7 million shares of
TKT common stock submitted written demands to the Delaware Court of Chancery
for
appraisal of these shares and, as a result, elected not to accept the $37 per
share merger consideration. On October 10, 2005, at the request of one of
the holders to tender 365,000 shares at the merger price of $37 per share,
TKT
filed a motion to dismiss the holder’s demand. On October 12, 2005, the Delaware
Court of Chancery granted this motion, and the holder tendered the shares at
the
merger consideration of $37 per share. Therefore, as at December 31, 2006,
former holders of approximately 11.3 million shares of TKT common stock
maintained written demands for appraisal of these shares and have elected not
to
accept the $37 merger consideration. In November 2005, the Delaware Court of
Chancery approved a consolidation order filed by Shire HGT whereby actions
brought by all petitioners have been consolidated as one case. In April 2006,
Shire filed a motion for partial summary judgment in respect of approximately
8
million shares, claiming that the petitioners were not entitled to assert
appraisal rights in connection with such shares.
To
the extent that
petitioners’ demands were validly asserted in accordance with the applicable
requirements of Delaware law and the former holders perfect their rights
thereunder, such former holders will be entitled to receive the fair value
of
these shares as determined by the Delaware Court of Chancery. The determination
of fair value will be made excluding any element of value arising from the
transaction, such as cost savings or business synergies. The Delaware Court
of
Chancery may ascribe a valuation to the shares that is greater than, less than
or equal to $37 per share and may award interest on the amount determined in
the
appraisal process.
The
total
consideration for the acquisition of TKT, including amounts payable in respect
of stock options and convertible securities, is approximately $1.6 billion
at
the merger price of $37 per share. This could change if Shire is required to
pay
a different amount of consideration in respect of the approximately 11.3 million
shares for which holders have asserted appraisal rights. For every dollar
increase/decrease in the merger consideration applicable to those TKT
shareholders who have asserted appraisal rights, the total estimated purchase
price would increase/decrease by approximately $11.3 million. Until such time
as
the appraisal process is complete, the Company is unable to determine the extent
of its liability. The trial date has been set for April 23, 2007.
Class
Action Shareholder Suit
In
January and
February 2003, various parties filed purported securities fraud class action
lawsuits against TKT and Richard Selden, TKT's former Chief Executive Officer,
in the United States District Court for the District of Massachusetts. In April
2003, the Court appointed a Lead Plaintiff and Lead Counsel and consolidated
the
various matters under one matter: In re Transkaryotic Therapies, Inc.,
Securities Litigation, C.A. No. 03-10165-RWZ.
In
July 2003, the
plaintiffs filed a Consolidated and Amended Class Action Complaint (the Amended
Complaint) against TKT; Dr Selden; Daniel Geffken, TKT's former Chief Financial
Officer; Walter Gilbert, Jonathan S. Leff, Rodman W. Moorhead, III, and Wayne
P.
Yetter, then members of TKT's board of directors; William R. Miller and James
E.
Thomas, former members of TKT's board of directors; and SG Cowen Securities
Corporation, Deutsche Bank Securities Inc., Pacific Growth Equities, Inc. and
Leerink Swann & Company, underwriters of TKT’s common stock in prior public
offerings.
The
Amended
Complaint alleges that the defendants made false and misleading statements
and
failed to disclose material information concerning the status and progress
for
obtaining United States marketing approval of REPLAGAL during the period between
January 4, 2001 and January 10, 2003. The Amended Complaint asserts claims
against Dr. Selden and TKT under Section 10(b) of the Securities Exchange Act
of
1934 and Rule 10b-5 promulgated thereunder; and against Dr. Selden under Section
20(a) of the Exchange Act. The Amended Complaint also asserts claims based
on
TKT's public offerings of June 29, 2001, December 18, 2001 and December 26,2001
39
against
each of the
defendants under Section 11 of the Securities Act of 1933 and against Dr. Selden
under Section 15 of the Securities Act; and against SG Cowen Securities
Corporation, Deutsche Bank Securities Inc., Pacific Growth Equities, Inc.,
and
Leerink Swann & Company under Section 12(a)(2) of the Securities Act. The
plaintiffs seek equitable and monetary relief, an unspecified amount of damages,
with interest, and attorneys' fees and costs.
In
May 2004, the
Court granted in part and denied in part TKT's motion to dismiss In particular,
the Court dismissed allegations against TKT to the extent they arose out of
certain forward-looking statements protected by the "safe harbor" provisions
of
the Private Securities Litigation Reform Act of 1995 and dismissed claims based
on the public offerings of June 29, 2001 and December 18, 2001. The Court
allowed all other allegations to remain. In July 2004, the plaintiffs
voluntarily dismissed all claims based on the third public offering dated
December 26, 2001.
In
November 2005,
the court granted the plaintiffs’ motion for class certification. On May 23,2005, the court entered judgment on all claims alleged against SG Cowen
Securities Corporation, Deutsche Bank Securities Inc., Pacific Growth Equities,
Inc., and Leerink Swann & Company. On June 5, 2006, the court entered
judgment on all claims alleged against Messrs. Gilbert, Leff, Moorhead, Yetter,
Miller, and Thomas. On November 9, 2006, Mr. Geffken filed an Agreement for
Judgment on all claims alleged against him. The Company is obligated to
indemnify Dr Selden for his costs incurred in connection with the SEC Action.
Shire
plc’s
ordinary shares are traded on the London Stock Exchange (LSE). On November25,2005 a Scheme of Arrangement, approved by the High Court of Justice in England
and Wales, became effective. Under the terms of the Scheme, holders of ordinary
shares of SPG received one ordinary share of Shire plc for each ordinary share
of SPG held at 5.30pm (GMT) on November 24, 2005.
Ordinary
shares of
Shire plc were admitted to the Official List and to trading on the LSE at 8.00am
(GMT) on November 25, 2005. The listing of ordinary shares of SPG was cancelled
at the same time.
The
following table
presents the per share closing mid-market quotation for ordinary shares of
Shire
plc (or, as applicable, prior to November 25, 2005, ordinary shares of SPG)
as
quoted in the Daily Official List of the LSE for the periods
indicated.
The
total number of
record holders of ordinary shares of Shire plc as at February 21, 2007 was
5,927. Since certain of the ordinary shares are held by broker nominees, the
number of holders of record 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 Morgan Guaranty
Trust Company of New York as depositary, and is quoted on the NASDAQ National
Market. As at February 21, 2006 the proportion of ordinary shares represented
by
ADRs was 32% of the outstanding ordinary shares.
In
consequence of
the implementation of the Scheme of Arrangement, ADSs representing ordinary
shares of SPG were replaced by ADSs representing ordinary shares of Shire plc
on
a one-for-one basis. Dealings in ADSs representing ordinary shares of Shire
plc
on NASDAQ commenced at 9.30am (EST) on November 25, 2005. ADSs representing
ordinary shares of SPG were cancelled at the same time.
42
The
following table
presents the high and low market quotations for ADSs quoted on the NASDAQ
National Market for the periods indicated (prior to November 25, 2005, the
ADSs
represented ordinary shares of SPG).
The
number of
record holders of ADSs in the United States as at February 21, 2006 was 369.
Since certain of the ADRs are held by broker nominees, the number of record
holders may not be representative of the number of beneficial
owners.
Dividend
policy
A
first interim
dividend for the first half of 2006 of 1.9346 US cents (1.0475 pence) per
ordinary share, equivalent to 5.804 US cents per ADS and 6.584 Canadian cents
per exchangeable share, was paid in October 2006. The Board has resolved to
pay
a second interim dividend of 5.2455 US cents (2.6933 pence) per ordinary share
equivalent to 15.736 US cents per ADS and 18.4086 Canadian cents per
exchangeable share for the six months to December 31, 2006.
A
first interim
dividend for the first half of 2005 of 1.8246 US cents (1.0475 pence) per
ordinary share equivalent to 5.4738 US cents per ADS and 6.7629 Canadian cents
per exchangeable share was paid in October 2005. A second interim dividend
for
the second half of 2005 of 4.419 US cents (2.5356 pence) per ordinary share
equivalent to 13.257 US cents per ADS and 15.2217 Canadian cents per
exchangeable share was paid in April 2006.
This
is consistent
with Shire plc’s stated policy of paying a dividend semi-annually, set in US
cents per share / ADS, with the first interim payment in each year being
maintained at a consistent level. Any growth will come through increasing the
second interim dividend in a financial year. Shire intends to pursue a
progressive dividend policy.
As
a matter of
English law, Shire plc may pay dividends only out of its distributable profits,
which are the accumulated realized profits under generally accepted accounting
principles in the United Kingdom (including reserves arising from a reduction
of
share capital), of Shire plc 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 duly made. At December 31, 2006, Shire plc had distributable profits
of
$2,899 million. Future dividend policy will be dependent upon distributable
profits, financial condition, the terms of any then existing debt facilities
and
other relevant factors existing at that time.
NASDAQ
Corporate Governance Exemption
NASDAQ
has granted
Shire plc an exemption from the quorum requirement of its corporate governance
standards in Marketplace Rule 4350 as Shire complies with the relevant quorum
standards applicable to companies in the UK.
The
selected
consolidated financial data presented below as at December 31, 2006 and 2005
and
for each of the three years in the period ended December 31, 2006 were derived
from the audited consolidated financial statements of the Company, included
herein. The selected consolidated financial data presented below as at December31, 2004, 2003 and 2002 and for each of the two years in the period ended
December 31, 2003 were derived from the audited financial statements of the
Company, which are not included herein. Certain amounts reported in previous
years have been reclassified to conform to the 2006 presentation.
The
consolidated
financial data in respect of the year ended December 31, 2005 has been restated
in respect of the value ascribed to in-process research and development
(IPR&D) acquired with the acquisition of TKT. For further information, see
note 3(a) to the Consolidated Financial Statements contained in Part
IV 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.
Year
to
December 31,
(1)(2)
Adjusted and restated
(1)
Adjusted
(1)
Adjusted
(1)
Adjusted
2006
2005
2004
2003
2002
$’M
$’M
$’M
$’M
$’M
Statement
of
Operations:
Total
revenues
1,796.5
1,599.3
1,363.2
1,211.6
1,023.3
Total
operating expenses (3)
(4)
(1,513.3
)
(2,124.2
)
(950.3
)
(824.6
)
(698.4
)
Operating
income/(loss)
283.2
(524.9
)
412.9
387.0
324.9
Total
other
income/(expense), net (5)
33.6
33.2
13.5
(13.2
)
(2.2
)
Income/(loss)
from continuing operations before income taxes, equity in
earnings/(losses) of equity method investees and discontinued
operations
316.8
(491.7
)
426.4
373.8
322.7
Income
taxes
(84.9
)
(88.8
)
(128.3
)
(106.8
)
(88.4
)
Equity
in
earnings/(losses) of equity method investees
5.7
(1.0
)
2.5
(1.1
)
1.7
Income/(loss)
from continuing operations
237.6
(581.5
)
300.6
266.0
236.0
Gain/(loss)
from discontinued operations, net of tax
40.6
-
(20.1
)
(21.9
)
(11.7
)
Gain/(loss)
on disposition of discontinued operations, net of tax
-
3.1
(44.2
)
-
2.1
Net
income/(loss)(3)
278.2
(578.4
)
236.3
244.1
226.4
44
ITEM
6:
Selected financial data (continued)
Year
to December 31,
(1)(2)Adjusted
and restated
(1)
Adjusted
(1)
Adjusted
(1)
Adjusted
2006
2005
2004
2003
2002
Earnings
per
share - basic
Income/(loss)
from continuing operations
47.2c
(116.2c
)
60.6c
53.4c
47.1c
Loss
from
discontinued operations
-
-
(4.1c
)
(4.4c
)
(2.3c
)
Gain/(loss)
on disposition of discontinued operations
8.1c
0.6c
(8.9c
)
-
0.4c
55.3c
(115.6c
)
47.6c
49.0c
45.2c
Earnings
per
share - diluted
Income/(loss)
from continuing operations
46.6c
(116.2c
)
59.4c
52.2c
46.2c
Loss
from
discontinued operations
-
-
(3.9c
)
(4.2c
)
(2.2c
)
Gain/(loss)
on disposition of discontinued operations
8.0c
0.6c
(8.6c
)
-
0.4
54.6c
(115.6c
)
46.9c
48.0c
44.4c
Weighted
average number of
Shares
(millions):
Basic
503.4
500.2
496.3
498.2
500.7
Diluted
509.3
500.2
511.3
519.0
522.4
Cash
dividends declared and paid per ordinary share
Retrospectively
adjusted following the adoption of SFAS No.123(R); see notes 3
and
31 to
the
Company’s consolidated financial statements contained in Part IV of this
Annual Report for
additional information.
(2)
Restated
for
a correction to the value of IPR&D acquired with the acquisition of
TKT; see note 3(a) to
the
Company’s consolidated financial statements contained in Part
IV of
this Annual Report.
(3)
Total
operating expenses include an in-process research and development
(IPR&D) write-off of $815 million (restated) resulting from the
acquisition of TKT in 2005, integration costs of $5.6 million and
$9.7
million in 2006 and 2005 respectively, and reorganization costs of
$9.4 million, $48.5 million and $23.9 million in 2005, 2004 and 2003,
respectively. These reorganization costs were in respect of the
implementation of the new business model in 2005 and 2004 and the
closure
of Lead Optimization together with the exit of certain properties
in
2003.
(4)
Total
operating expenses in 2006 include a gain on sale of product rights
of
$63.0 million. See note 7 to the consolidated financial statements
in Part
IV of this Annual Report.
(5)
Total
other
income/(expense), net includes interest income and expense, the gain
or
loss on the sale of assets, impairment of long-term investments and
transactional foreign exchange. In 2005 it includes $3.9 million
on the
sale of a portfolio investment and $3.6 million on the sale of the
drug
formulation business. In 2004 it includes $14.8 million on the sale
of a
portfolio investment. See note 26 to the consolidated financial statements
in Part IV of this Annual Report.
The
following
discussion should be read in conjunction with the Company’s consolidated
financial statements contained in Part IV of this Annual Report.
As
described in
Note 3(a) of Part IV of this Annual Report, the financial statements for the
year to December 31, 2005 have been restated in respect of the value ascribed
to
IPR&D, acquired as part of the TKT acquisition and subsequently written off
as required under US GAAP in the quarter ended September 30, 2005. IPR&D
represented those assets which, at the time of the acquisition, had not been
approved by the FDA or other regulatory authorities, including I2S (now known
as
ELAPRASE) and GA-GCB. The Company has determined that the value ascribed to
IPR&D acquired as a result of the TKT acquisition did not include the
benefit of tax amortization as required by the American Institute of Certified
Public Accountants (AICPA) Practice Aid, Assets
Acquired
in a Business Combination to Be Used in Research and Development Activities:
A
Focus on Software, Electronic Devices, and Pharmaceutical
Industries.
The effect of
this omission was to understate the value of IPR&D expensed in the year to
December 31, 2005 by $142 million, with a corresponding overstatement of
goodwill as at December 31, 2005.
Overview
Shire’s
strategic
goal is to become the leading specialty pharmaceutical company that focuses
on
meeting the needs of the specialist physician. Shire focuses its business on
ADHD, HGT, GI and renal diseases. The structure is sufficiently flexible to
allow Shire to target new therapeutic areas to the extent opportunities arise
through acquisitions. Shire believes that a carefully selected portfolio of
products with strategically aligned and relatively small-scale sales forces
will
deliver strong results.
Shire’s
focused
strategy is to develop and market products for specialist physicians. Shire’s
in-licensing, merger and acquisition efforts are focused on products in niche
markets with strong intellectual property protection either in the US or
Europe.
On
February 20,2007, consistent with its stated focus on the growing ADHD market, Shire
announced that it had agreed to acquire New River Pharmaceuticals Inc. allowing
Shire to progress and benefit from its successful strategy of acquiring,
developing and marketing specialty pharmaceutical products.
Substantially
all
of the Company’s revenues, expenditures, operating profits or losses and net
assets are attributable to the R&D, manufacture, sale and distribution of
pharmaceutical products within two operating segments: Pharmaceutical Products
and Royalties.
Revenues
are
derived primarily from two sources - sales of the Company’s own products and
royalties (where Shire has out-licensed products to third parties):
·
85%
(2005:
83%) of total revenues are derived from product sales, of which 48%
is
from ADDERALL XR (2005: 46%). All product sales fall within the
Pharmaceutical Products segment;
·
14%
of total
revenues are derived from royalties (2005: 15%). All royalty income
falls
within the Royalties segment.
Shire’s
strategic
objectives are set using a balanced scorecard approach. Objectives are also
set
at the functional, market and therapeutic area levels and are aligned with
the
Group-wide strategic objectives. The Company therefore takes a fully integrated
approach to strategic management. Key performance indicators (KPIs) are used
to
measure achievement of the objectives. Strategic objectives are categorized
into
fields - ‘financial’, ‘products & markets’, ‘people & capabilities’ and
‘operational excellence’. For 2006, Shire’s corporate objectives included:
defined levels of revenue growth; target sales and contributions for core
products and markets; execution of defined therapeutic area strategic and
operational plans; product in-licensing targets; drug application filing and
launch targets for new products; maintenance of a stable and effective supply
chain; implementation of an effective leadership development program;
implementation of defined IT systems; and maintenance of robust risk management
practices including internal controls.
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 clinical studies are typically larger and take longer
to
get approval from regulators;
·
challenges
to
existing patents from generic
manufacturers;
·
low
cost
generic drugs entering the market on expiration of patent protection;
and
·
higher
marketing costs due to the use of direct to consumer campaigns and
competition for market share.
Shire’s
strategy to
become the leading specialty pharmaceutical company has been developed to
address these industry-wide competitive pressures. This strategy has resulted
in
a series of initiatives in the following areas:
46
Markets
Historically,
Shire’s portfolio of approved products has been heavily weighted towards the
North American market. With the acquisition of TKT in 2005, Shire substantially
increased its presence in Europe and thereby diversified the risk associated
with being reliant on one geographic market. Through the TKT acquisition, Shire
acquired ELAPRASE (global rights), REPLAGAL (which is presently sold only
outside the US) and DYNEPO (to which the Company has exclusive marketing rights
outside the US). In addition, 2005 and 2006 saw the European launches of XAGRID
and FOSRENOL respectively. For 2006, sales outside North America represented
approximately 21% of total net product sales (2005: 17%) and Shire expects
this
upward trend to continue in 2007. Shire’s late stage development pipeline
contains a number of products with global rights, including GA-GCB (acquired
as
part of the TKT acquisition), DAYTRANA and VYVANSE. The Company intends to
launch these products in both the US and Europe, thus furthering the Company’s
European expansion.
Shire’s
continued
expansion in Europe will be driven by the development of products with patent
protection in both the North American and European markets wherever possible.
In
2007 and the first half of 2008, Europe should see:-
·
the
continued
roll out of FOSRENOL;
·
the
launch of
ELAPRASE;
·
the
launch of
DYNEPO;
·
the
launch of
MEZAVANT.
In
2007 and the
first half of 2008, the US should see:
·
the
continued
roll out of DAYTRANA and ELAPRASE;
·
the
launch of
LIALDA;
·
the
launch of
VYVANSE;
·
a
regulatory
response on the NDAs for SPD503 and SPD465, which were filed in
2006.
This
program of new
product launches will require significant investment in advertising, promotional
spend and in some cases, additional sales representatives leading to an increase
in overall SG&A costs for 2007. SG&A costs as a proportion of product
sales are expected to be similar to 2006.
The
specialist
nature of HGT products means that relatively low SG&A and infrastructure
investment is required, making them ideal products for Shire to launch into
new
markets. 2006 saw the expansion of REPLAGAL in Argentina. Shire will continue
to
consider launching products in new markets where entry barriers are low. In
markets outside North America and Europe where products require significant
SG&A and infrastructure investment, Shire will continue to seek
out-licensing partners. In 2004, the Company successfully out-licensed the
Japanese marketing and development rights for AGRYLIN and FOSRENOL to two
companies with an established presence in this market. Shire’s partner Dainippon
Sumitomo Pharma Co., Limited launched REPLAGAL in Japan in the first quarter
of
2007.
R&D
Over
the last three
years Shire has significantly refocused its R&D efforts on products in its
core therapeutic areas, which meet the needs of the specialist physician. The
Company has also concentrated its resources on obtaining regulatory approval
of
its later-stage pipeline products within its 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 three years. Since January 2004,
eight products have received regulatory approval in the US (including DAYTRANA
and ELAPRASE in 2006, LIALDA in January 2007 and VYVANSE in February 2007)
and
four in Europe (including ELAPRASE and MEZAVANT in January 2007), the Company
has another two products in registration in the US (SPD 503 and SPD 465).
Shire’s
strategy is
focused on the development of product candidates that have a lower risk profile.
Shire’s acquisition of TKT was driven, in part, by the comparatively low risk of
developing protein replacement therapies for genetic disease compared to other
drug discovery approaches.
R&D
costs in
2007 will be affected by Shire’s Phase 3(b) and Phase 4 studies to support new
product launches, development of new projects (including the Women’s Health
franchise), the continuation of Phase 3 trials on GA-GCB and pre-clinical
development of three new HGT projects.
Patents
and Market Exclusivity
The
loss or
expiration of patent protection or market exclusivity with respect to any of
the
Company’s major products could have a material adverse effect on future revenues
and net income as generic manufacturers may produce similar drugs and generally
be able to sell the Company’s drugs at a lower price as their costs of
development are
47
significantly
lower
than Shire’s. As ADDERALL XR is, in revenue terms, Shire’s most significant
product, representing 48% of total revenues (2005: 46%), the loss, expiration
or
circumvention of patent protection on this product in particular will be
material to the Company’s revenues and earnings.
Shire
is engaged in
various legal proceedings with generic manufacturers with respect to its
ADDERALL XR patents and the patents for certain other products. These are
discussed in more detail in ITEM 3: Legal Proceedings.
The
potential
impact of the introduction of generic products is illustrated by the approval
in
April 2005 of several generic versions of AGRYLIN, which as expected, adversely
affected Shire’s sales of this product from this date. US prescriptions for
AGRYLIN in 2006 were 91% less than in 2005.
In
consequence of
the issues associated with the loss or expiry of patent protection or market
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 market exclusivity.
Business
Development
The
Company remains
active in seeking out opportunities to acquire new products or companies that
fit its business strategy and existing therapeutic areas, as well as new
complementary therapeutic areas.
In
the therapeutic
area of CNS, Shire in-licensed the global rights to Valrocemide (SPD493) and
other related compounds from Yissum Research and Development Company in July
2006. SPD493 is being developed for the treatment of a number of CNS disorders.
In
the therapeutic
areas of renal and HGT, Shire in-licensed the global rights to Tissue Protective
Cytokines (SPD500) from Warren in September 2006. SPD500 is being developed
pre-clinically in non-nervous systems indications, including renal and genetic
disease areas.
In
August 2006,
Shire entered the Women’s Health therapeutic area with the acquisition of rights
to the transvaginal ring technology of Duramed, a subsidiary of Barr, in a
number of markets outside North America including the larger European markets
together with a license in the same countries to Duramed’s oral contraceptive,
SEASONIQUE. SEASONIQUE, which is in Phase 3 studies in Europe, is already
approved and marketed by Duramed in the US.
As
part of its
strategy of focusing on drugs with long term patent protection in its core
therapeutic areas, the Company continued its disposal program of non-core assets
with the sale to Duramed of ADDERALL for $63 million in August 2006. ADDERALL
was Shire’s immediate-release ADHD product which has been subject to generic
competition since 2002.
Shire
also licensed
the US and Canadian
rights for
the investigational HIV compound, SPD754 (also known as apricitabine), to the
Australian biotechnology company Avexa on January 23, 2007. Shire received
an
up-front cash payment of $10 million, 8 million additional Avexa shares (taking
its shareholding in Avexa to just over 8%) and may receive further milestones
and royalties.
Organization
and Structure
During
2006, Shire
completed the integration of TKT into the Company. Total integration costs
from
acquisition to December 31, 2006 totaled $15.3 million.
Recent
developments
Acquisition
of
New River
On
February 20,2007 Shire announced that it has agreed to acquire New River for $64 per New
River share, or approximately $2.6 billion for the fully diluted equity
interest, in an all cash transaction unanimously recommended by the Boards
of
both companies. The acquisition is structured as a tender offer for all
outstanding shares of New River followed by a merger. The acquisition is subject
to the approval of Shire plc’s shareholders as well as the satisfaction of
certain customary conditions, including the tender of a majority of the
outstanding New River shares on a fully-diluted basis and the expiration or
earlier termination of the Hart-Scott-Rodino waiting period. For accounting
purposes, the acquisition of New River will be accounted for as a purchase
business combination in accordance with SFAS No. 141.
The
total
consideration for the acquisition of New River amounts to approximately $2.6
billion in cash. Shire has entered into new bank facilities of $2.3 billion
to
provide part of the financing for the acquisition. This new facility is
conditional upon, amongst other things, approval being given by Shire plc’s
shareholders at an Extraordinary General Meeting for Shire plc to exceed the
limit on its aggregate borrowings set out in Shire plc’s Articles of
Association.
Shire
plc has also
raised approximately $900 million through the private placement
of 42,883,721 new
ordinary shares to certain institutional investors worldwide at a price of
1075
pence per share. The newly issued shares represent approximately 8.4 per cent
of
Shire plc's issued ordinary share capital prior to the placing.
For
further
information see Exhibit 99.2 to the 8-K filed on February 23, 2007.
48
VYVANSE
(previously known as NRP104)
On
February 23,2007, the US Food and Drug Administration (FDA)
approved VYVANSE,
indicated for the treatment of ADHD. The FDA has proposed that VYVANSE be
classified as a Schedule II controlled substance. This proposal was submitted
to
and accepted by the US Drug Enforcement Administration (DEA). A final scheduling
decision is expected from the DEA following a 30-day period for public comment.
Pending final scheduling designation, product launch is anticipated in Q2
2007.
ELAPRASE
On
January 8, 2007
the EMEA granted marketing authorization for the use of ELAPRASE for the
long-term treatment of patients with Hunter syndrome. Pricing
and
reimbursement procedures are already underway for ELAPRASE in many European
countries and it will be launched across the majority of European countries
in
2007.
LIALDA/MEZAVANT
On
January 16, 2007
the FDA approved LIALDA, indicated for the induction of remission in patients
with active, mild to moderate ulcerative colitis. LIALDAis
the first and
only FDA-approved once-daily oral formulation of mesalamine. Once-daily
LIALDA
contains the highest mesalamine dose per tablet (1.2g), so patients can take
as
few as two tablets once daily. The Company anticipates launching LIALDA in
the
US during the first quarter of 2007.
In
Europe, Shire
has received core labelling information approval for MEZAVANT in 15 EU countries
(including UK, Germany, France and Spain) following the decentralised
procedures. Associated national approvals should follow in the first quarter
of
2007 and have been received in Austria, Denmark and the UK.
SPD754
Shire
licensed the
US and Canadian rights for the investigational HIV compound, SPD754 (also known
as apricitabine), to the Australian biotechnology company Avexa on January23,2007. Shire received an up-front cash payment of $10 million, 8 million
additional Avexa shares (taking its shareholding in Avexa to just over 8%)
and
may receive further milestones and royalties.
ADDERALL
XR
Health
Canada
granted a marketing license application for the adult indication in February
2007.
FOSRENOL
Shire
launched
FOSRENOL in the UK in February 2007 following the product’s
authorisation.
REPLAGAL
Dainippon
Sumitomo
Pharma Co., Ltd.
launched REPLAGAL
in Japan on February 15, 2007.
2006
Pipeline highlights
Shire
focuses its
development resources on projects within its core therapeutic areas of CNS,
GI,
HGT and GP.
·
ELAPRASE:
The
US Food and Drug Administration (FDA) approved ELAPRASE in the US
on July24, 2006 and it was launched in the US in August 2006 and by December31,2006 over 110 patients in the US had received treatment.
·
SPD465:
On
July 21, 2006the Company submitted a NDA to the FDA for SPD465 for
the
treatment of ADHD in the adult population. The PDUFA date for the
FDA to
issue a formal response to this application is May 21,2007.
·
SPD503:
The
Company filed a NDA with the FDA on August 24, 2006 for the use of
SPD503
as a treatment of ADHD in children and adolescents. The PDUFA date
for the
FDA to issue a formal response to this application is June 24,2007.
·
GA-GCB:
The
Phase 3 clinical program was initiated in January 2007.
·
Enzyme
Replacement Therapies: The Company has completed proof of concept
studies
and has advanced into pre-clinical development three projects for
the
treatment of lysosomal storage disorders; namely enzyme replacement
therapies for Sanfilippo syndrome (Mucopolysaccharidosis IIIA),
metachromatic leukodystrophy and intrathecal delivery of ELAPRASE
for
Hunter syndrome patients with significant central nervous system
symptoms
(Hunter CNS)
·
SPD491
- A
once-a-day, non opiate, transdermal analgesic being developed with
the
goal of non-scheduled labeling to treat moderate to severe pain,
will
enter Phase 1 testing in Q1 2007.
·
SPD535
-
Pre-clinical evaluation for development of a novel platelet-lowering
agent.
49
In
addition Shire
in-licensed:
·
Rights
to the
transvaginal ring technology of Duramed in a number of markets outside
of
North America including the larger European markets, in August 2006
together with a license in the same countries to Duramed’s oral
contraceptive, SEASONIQUE (levonorgestrel/ethinyl
estradiol).
·
Global
rights
to SPD500 (Tissue Protective Cytokine technology), from Warren
Pharmaceuticals, Inc. (Warren) in September 2006. SPD500 is being
developed pre-clinically in non-nervous system indications, including
renal and genetic disease areas.
·
Global
rights
to SPD493 (Valrocemide) and other related compounds, from Yissum
Research
and Development Company in July 2006. SPD493 is being developed at
Phase 1
for the treatment of a number of central nervous system disorders.
For
the year to
December 31, 2006the Company’s total revenues increased by 12% to $1,796.5
million, compared to $1,599.3 million in 2005. Net income for the year to
December 31, 2006 was $278.2 million compared to a net loss of $578.4 million
(restated) in 2005. The Company’s net loss for 2005 was primarily attributable
to the IPR&D write-off of $815 million (restated) following the acquisition
of TKT.
Total
revenues
The
following table
provides an analysis of the Company’s total revenues by source:
*
In 2005 this
represents REPLAGAL sales for the five-month period since the acquisition of
TKT. Total sales including pre-acquisition sales of $53.3 million were $94.6
million for the year ending December 31, 2005.
The
following
discussion includes references to US prescription and US market share data
for
key products. The source of this data is IMS, December 2006.
ADDERALL
XR
ADDERALL
XR is the
leading brand in the US ADHD market with an average market share of 26% in
2006
(2005: 25%). US ADHD market growth of 4% and the 1% increase in average market
share contributed to an 8% increase in US prescriptions for ADDERALL XR for
year
to December 31, 2006 compared to the same period in 2005.
During
October 2005
Shire 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.
Shire received correspondence from the FDA in April 2006 stating that, due
to
the complex issues raised requiring extensive review and analysis by the FDA’s
officials, a decision cannot yet be reached by the FDA. The FDA did not provide
any guidance as to when that decision may be reached.
On
August 14, 2006
Shire and Barr announced that all pending litigation in connection with Barr’s
ANDA and its attempt to market generic versions of Shire’s ADDERALL XR had been
settled. As part of the settlement, Barr entered into consent judgments and
agreed to permanent injunctions confirming the validity and enforceability
of
Shire’s US Patents Nos. 6,322,819 (the “‘819 Patent”), 6,601,300 (the “‘300
Patent”) and 6,913,768 (the “‘768
51
Patent”).
Barr has
also admitted that any generic product made under its ANDA would infringe the
‘768 patent. Under the terms of the settlement, Barr will not be permitted to
market a generic version of ADDERALL XR in the US until April 1, 2009, except
in
certain limited circumstances, such as the launch of another party’s generic
version of ADDERALL XR. No payments to Barr are involved in the settlement
agreement.
In
January 2006,
Shire settled its ADDERALL XR patent infringement lawsuits with Impax. Under
the
terms of the settlement, Impax will be permitted to market generic versions
of
ADDERALL XR in the US no later than January 1, 2010 and will pay the Company
a
royalty from those sales. In certain situations, such as the launch of another
generic version of ADDERALL XR, Impax may be permitted to enter the market
as
the Company’s authorized generic. No payments to Impax are involved in the
settlement agreement.
Patent
litigation
proceedings relating to ADDERALL XR are in-progress. For further information
see
ITEM 3: Legal Proceedings.
ADDERALL
In
September 2006,
the Company sold to Duramed the product rights to ADDERALL for $63.0 million.
The sales in the year of $23.6 million occurred prior to the sale of the product
rights.
For
further
information see ITEM 3: Legal Proceedings.
DAYTRANA
Following
its
launch in June 2006, DAYTRANA achieved a 2% share of the US ADHD market by
December 31, 2006. Sales for the year to December 31, 2006 were $25.1 million,
a
level of sales which triggered the first of three potential $25.0 million sales
milestone payments to Noven. This milestone, which was paid on February 14,2007, has been capitalized and will be amortized over 10 years. Net sales for
2006 were impacted by the redemption of $14 million of coupons issued to support
the product launch.
The
addition of
DAYTRANA, combined with growth in ADDERALL XR’s market share has helped Shire
grow its total share of the US ADHD market to 28% at December 31, 2006 compared
to 26% (which included a 1% share relating to ADDERALL) at December 31,2005.
Shire
has received
reports concerning difficulty removing the release liner from a small percentage
of Daytrana patches. Although the product meets specifications, during the
first
quarter of 2007 Noven implemented manufacturing enhancements intended to
make
Daytrana easier to use.
CARBATROL
US
prescriptions
for the year ending December 31, 2006 were down 9% compared to the same period
in 2005. This was primarily due to a 6% decline in the US extended release
carbamazepine prescription market. CARBATROL’s US market share remained at
42%.
Sales
of CARBATROL
for the year ending December 31, 2006 were $68.3 million, a decrease of 5%
compared to the same period in 2005 (2005: $72.1 million). The fall in sales
is
due to the decrease in the extended release carbamezapine market and a reduction
of pipeline inventory in 2006 compared to stocking in 2005, offset by price
increases in October 2005 and July 2006.
In
July 2006 Impax
deployed a sales force to begin promotion of CARBATROL under a promotional
services agreement for the US market signed in January 2006.
Patent
litigation
proceedings with Nostrum and Corepharma relating to CARBATROL are in-progress.
For further information see ITEM 3: Legal Proceedings.
PENTASA
US
prescriptions
for the year ending December 31, 2006 were up 2% compared to the same period
in
2005 primarily due to a 4% increase in the US oral mesalamine prescription
market. PENTASA’s US market share remained at 18%.
Sales
of PENTASA
for the year ending December 31, 2006 were $137.8 million, an increase of 1%
compared to the same period in 2005 (2005: $136.1 million). Sales growth is
marginally lower than prescription growth due to the lower levels of pipeline
stocking in 2006, partly offset by the impact of price increases in January
2006
and November 2006.
XAGRID
Sales
for the year
ended December 31, 2006 were $53.3 million, an increase of 14% compared to
the
same period in 2005 (2005: $46.8 million). Expressed in transaction currencies
(XAGRID is primarily sold in Euros), sales increased by 13% due mainly to strong
growth in France and Spain. In addition there was a benefit of 1% from favorable
exchange rate movements against the US dollar.
AGRYLIN
sales in
North America (US and Canada) were $7.5 million for the year ended December31,2006 (2005: $46.0 million). This reduction was expected following the approval
of generic versions of AGRYLIN in the US market in April 2005.
52
FOSRENOL
US
prescriptions
for the year ending December 31, 2006 were up 34% compared to 2005 due to
FOSRENOL increasing its average share of the total US phosphate binding market
to 9% (2005: 7%) and market growth of 9% over the same period. FOSRENOL was
launched in the US in January 2005.
US
sales of
FOSRENOL for the year ending December 31, 2006 were $40.2 million (2005: $53.0
million). The decrease in net sales of 16% compared to prescription growth
of
34% is primarily due to destocking in 2006 compared to significant stocking
of
higher strength formulations at the end of 2005.
An
agreement with
Abbott was signed in December 2006 for the co-promotion of FOSRENOL in the
US. Abbott's US renal care sales team will co-promote FOSRENOL with its
own renal product ZEMPLAR. Shire’s US sales force will also continue to promote
FOSRENOL. This agreement began in Q1 2007 and will continue for a term of
five years.
European
sales of
FOSRENOL for the year ending December 31, 2006 were $4.6 million (2005: $0.5
million), giving total FOSRENOL sales worldwide of $44.8 million (2005: $53.5
million).
FOSRENOL
has now
been launched in Germany, France and a number of other European countries,
including the UK which launched in February 2007. Launches will continue
throughout 2007 in the EU including Italy and Spain, subject to finalization
of
national licensing and conclusion of pricing and re-imbursement negotiations.
On
October 18, 2006
Health Canada granted a marketing license application for FOSRENOL. The Canadian
launch is planned for Q2 2007.
REPLAGAL
Sales
for the year
ending December 31, 2006 were $117.7 million, of which 88% were in Europe and
12% in the rest of the world. Sales for REPLAGAL for the year ending December31, 2005 were $94.6 million, including pre-acquisition sales of $53.3 million.
This represents a like-for-like increase in sales of 24% which was due to
greater European coverage by an increased number of sales representatives and
strong growth in the rest of the world market (excluding the US).
ELAPRASE
ELAPRASE
was
launched in the US in August 2006 and has had a strong start with over 110
patients receiving treatment by the end of December 2006. In addition, through
the pre-approval process, over 100 patients were receiving treatment in Europe
by the end of the year. Sales reached $23.6 million by December 31,2006.
Foreign
exchange effect
As
many of the
Company’s sales revenues are earned in currencies other than US dollars
(primarily Canadian dollars, Pounds Sterling, Swedish Krona and Euros), revenue
growth reported in US dollars includes the impact of translating the sales
made
in the transaction currency into US dollars. With the US dollar weakening
against these currencies over the last 12 months, the translation of sales
made
in these currencies into US dollars has benefited reported growth rates. The
table below shows the effect of foreign exchange translations on the revenue
growth of the key affected products as well as the underlying performance of
key
products in their transaction currencies:
Revenue
growth
analysis does not include REPLAGAL sales of $104.3 million in Euros and Swedish
Krona. There is no comparative data for REPLAGAL as it was acquired with TKT
in
July 2005.
Royalties
Royalty
revenue
remained constant at $242.9 million for the year to December 31, 2006, (2005:
$242.9 million).
Royalties
from
sales of 3TC for the year to December 31, 2006 were $150.9 million, a decrease
of 6% compared to the prior year (2005: $159.8 million).
Shire
receives
royalties from GSK on worldwide 3TC sales. GSK’s worldwide sales of 3TC for the
year to December 31, 2006 were $1,138 million, a decrease of 6% compared to
prior year (2005: $1,211 million). The nucleoside analogue market for HIV has
continued to grow, however competitive pressures within the market have
increased, leading to a decline in 3TC sales.
ZEFFIX
Royalties
from
sales of ZEFFIX for the year to December 31, 2006 were $34.8 million, an
increase of 14% compared to the prior year (2005: $30.5 million).
Shire
receives
royalties from GSK on worldwide ZEFFIX sales. GSK’s worldwide sales of ZEFFIX
for the year to December 31, 2006 were $301 million, an increase of 13% compared
to prior year (2005: $266 million). This increase was mainly due to strong
growth in the Korean, Japanese and Chinese markets.
OTHER
Other
royalties are
primarily in respect of REMINYL and REMINYL ER (known as RAZADYNE and RAZADYNE
ER in the US), a product marketed worldwide (excluding the UK and the Republic
of Ireland) by Janssen Pharmaceutical N.V. (Janssen), an affiliate of Johnson
& Johnson. Shire has the exclusive marketing rights in the UK and the
Republic of Ireland.
Sales
of the
REMINYL/ RAZADYNE range, for the symptomatic treatment of mild to moderately
severe dementia of the Alzheimer’s type, continue to grow.
In
June 2006
Janssen and Synaptech filed a law suit against Barr for infringement of their
patent rights relating to RAZADYNE
ER
as
a
result of Barr filing an ANDA with the FDA for a generic version of RAZADYNE
ER.
No
court date has been set.
Barr
and other
companies have filed ANDAs with the FDA for generic versions of RAZADYNE
and
Janssen and Synaptech have filed law suits against some of those ANDA filers.
The court date for the first of these proceedings is May 2007.
Cost
of
product sales
For
the year to
December 31, 2006 the cost of product sales was 16% of product sales (2005:
16%). For the year to December 31, 2006 the cost of product sales for REPLAGAL
included a $47.0 million adjustment in respect of acquired inventories (2005:
$41.9 million). This fair value adjustment increased Shire’s cost of product
sales as a percentage of sales for the year ended December 31, 2006 by 3% (2005:
3%).
For
the year to
December 31, 2006 cost of product sales included a charge of $3.2 million for
stock based compensation under SFAS 123(R) (2005: $1.5 million).
Research
and development (R&D)
R&D
expenditure
increased from $339.1 million in the year to December 31, 2005 to $386.9 million
in the year to December 31, 2006, an increase of 14%. The increase was primarily
due to:
·
The
addition of two significant R&D projects following the acquisition of
TKT (ELAPRASE and GA-GCB); and
·
Upfront
payments made to Duramed and Warren of $25.0 million and $5.5 million,
respectively.
Expressed
as a
percentage of total revenues, R&D expenditure was 22% for the year to
December 31, 2006 (2005: 21%). In both periods payments were made to New River
of $50 million for in-licensing VYVANSE. These payments have both been expensed
in accordance with Shire’s accounting policy. The payments to New River, Duramed
and Warren in the year to December 31, 2006 totalled $80.5 million, equivalent
to 5% of total revenues. In the year to December 31, 2005 the $50.0 million
payment to New River was equivalent to 3% of total revenues.
54
For
the year to
December 31, 2006 R&D included a charge of $5.4 million for stock based
compensation under SFAS123(R) (2005: $2.9 million).
Selling,
general and administrative (SG&A) expenses
Total
SG&A
costs increased from $729.9 million in the year to December 31, 2005, to $935.0
million in the year to December 31, 2006, an increase of 28%. As a percentage
of
product sales, total SG&A costs were 61% (2005: 55%).
Year
to December 31,
Adjusted
2006
2005
Change
$’M
$M
%
Sales
costs
244.3
190.3
+28
Marketing
costs
343.4
255.3
+35
Other
SG&A costs
247.7
209.9
+18
835.4
655.5
+27
Depreciation
and amortization(1)
99.6
74.4
+35
Total
SG&A costs
935.0
729.9
+28
(1)
Excludes depreciation from manufacturing plants of $4.8 million (2005: $3.5
million) which is included in cost of product sales.
SG&A
expenses
increased from $655.5 million in the year to December 31, 2005 to $835.4 million
in the year to December 31, 2006, an increase of 27%. As a percentage of product
sales, SG&A expenses were 54% (2005: 49%).
The
increase in
SG&A expenses was expected, with additional expenditure required for:
·
The
promotion and
launch of DAYTRANA (including an increase in the ADHD sales force);
·
The
recruitment of
a new GI sales force in the US;
·
The
recruitment of
new US and European sales forces to launch ELAPRASE;
and
·
Pre-launch
activities relating to the 2007 launches of DYNEPO, LIALDA and VYVANSE.
For
the year to
December 31, 2006 SG&A included a charge of $34.4 million for stock based
compensation under SFAS123(R) (2005: $24.8 million), representing 2% of total
revenue (2005: 1%).
The
depreciation
charge for the year to December 31, 2006 was $43.3 million (2005: $29.2 million,
including $6.5 million for impairments of property, plant and equipment). The
amortization charge for the year to December 31, 2006 was $56.3 million (2005:
$45.2 million). The increase in both depreciation and amortization is primarily
due to the inclusion of a full year’s amortisation and depreciation charge in
respect of assets acquired through the TKT acquisition, together with the
amortization of capitalized milestone payments for DAYTRANA following its launch
in June 2006.
Intangible
asset impairments
The
charge for
intangible asset impairments for the year to December 31, 2006 was $1.1 million
(2005: $5.6 million). The impairment charge for the year to December 31, 2006
resulted from the decision to stop selling a non-core product.
The
impairment
charge for the year to December 31, 2005 resulted from the approval of generic
versions of AGRYLIN and the decision not to support and promote certain non-core
products.
Reorganization
costs
In
2005, the
Company recorded reorganization costs of $9.4 million as a result of a
consolidation of its North American sites. No reorganization costs were incurred
in 2006.
Integration
costs
For
the year to
December 31, 2006the Company incurred $5.6 million of costs associated with
the
integration of the TKT business into the Shire group (2005: $9.7 million).
This
included retention payments for key staff of $3.0 million, IT costs of $1.2
million and other costs of $1.4 million.
55
Gain
on
sale of product rights
For
the year to
December 31, 2006the Company recognized a pre-tax gain of $63.0 million (2005:
$nil) on the disposal of ADDERALL to Duramed for $63.0 million in
cash.
In-Process
Research and Development
During
the year to
December 31, 2005the Company wrote off the portion of the TKT purchase price
allocated to IPR&D of $815 million (restated). This amount represents the
value ascribed to those intangible assets acquired as part of the TKT
acquisition, which at the time of acquisition had not been approved by the
FDA
or other regulatory authorities, including ELAPRASE and GA-GCB.
Interest
income
For
the year to
December 31, 2006the Company received interest income of $50.5 million (2005:
$35.3 million). This income primarily related to interest received on Shire’s
cash balances. Interest income for the year ending December 31, 2006 is higher
than for the year ending December 31, 2005 primarily as a result of increases
in
US dollar interest rates.
In
both years this
expense primarily relates to a provision for interest, which may be awarded
by
the Court in respect of amounts due to those ex-TKT shareholders who have
requested appraisal of the acquisition consideration payable for their TKT
shares. The trial date for the appraisal rights litigation has been set for
April 23, 2007 (see ITEM 3: Legal Proceedings and Note 1
to the Company’s
consolidated financial statements contained in Part IV of this Annual Report).
Gain
on sale
of available-for-sale security (see Note 11)
-
3.9
Gain
on sale
of drug formulation business
-
3.6
Foreign
exchange
3.2
(1.4
)
Other
3.8
1.5
9.5
9.9
The
write-down of
non-current asset investments in 2006 and 2005 resulted from events and
circumstances that indicated there was an other-than-temporary impairment of
investments and, accordingly, management recorded an impairment based on its
assessment of fair value.
For
further details
see Note 26, Note 11 and Note 6 to the Company’s consolidated financial
statements contained in Part IV of this Annual Report.
Income
taxes
The
effective rate
of tax for the year to December 31, 2006 was 26.8% (2005: 27.5%, after excluding
the impact of the $815 million (restated) write-off of IPR&D in respect of
the TKT acquisition). The effective rate has fallen by 0.7% as a result of
an
increase in deferred tax assets, offset by an increase in current tax
liabilities. The increase in deferred tax assets was primarily due to the
reversal of valuation allowances following changes in estimates as to
realisation, and by the crystallisation of additional losses. The increase
in current tax liabilities was primarily a result of additional tax
contingencies of $187 million recognised in relation to ongoing tax
audits. Following this reversal of valuation allowances, the net deferred
tax asset has increased to $261.0 million at December 31, 2006 (2005: $116.2
million). Realization of deferred tax assets is dependent upon generating
sufficient taxable income to utilize such assets. Although realization of these
assets is not assured, it is more likely than not that the amount recognized
will be realized. See Note 29
to the Company’s
consolidated financial statements contained in Part IV of this Annual Report
for
expiry dates of these tax losses.
56
Equity
in earnings/(losses) of equity method investees
Net
earnings of
equity method investees of $5.7 million were recorded for the year to December31, 2006 (2005: net losses of $1.0 million). This comprised earnings of $6.2
million from the 50% share of the antiviral commercialization partnership with
GSK in Canada (2005: $5.3 million), offset by losses of $0.5 million being
the
Company’s share of losses in the GeneChem and EGS Healthcare Funds (2005: losses
of $6.3 million).
Discontinued
operations
During
the year to
December 31, 2006 the gains on disposition of discontinued operations totaled
$40.6 million (2005: $3.1 million). During 2006, IDB repaid $70.6 million,
being
the injectable flu development tranche of the $100.0 million development loan
facility provided to IDB as part of their acquisition of Shire’s vaccine
business. The repayment followed GSK’s acquisition of IDB, after which IDB was
provided with resources by GSK to fund the early repayment of the injectable
flu
tranche. The
$29.4 million
pipeline development tranche of the loan facility is still outstanding.
At
the time of the
disposal, a provision of $70.0 million was charged to discontinued operations
on
the basis that there was no certainty of recovery of this amount. The $70.0
million provision was allocated against all of the pipeline development tranche
($29.4 million) and against $40.6 million of the $70.6 million injectable flu
development tranche. Accordingly, a gain on disposition of discontinued
operations of $40.6 million (2005: $3.1 million) was recognized on repayment
of
the loan by IDB.
The
repayment of
the $70.6 million injectable flu tranche had no tax effect.
For
the year to
December 31, 2005, the Company’s total revenues increased by 17% to $1,599.3
million, compared to $1,363.2 million in 2004. Net loss for the year to December31, 2005 was $578.4 million (restated) compared to net income of $236.3 million
in 2004. The Company’s net loss for 2005 was primarily attributable to the
IPR&D write-off of $815.0 million (restated) following the acquisition of
TKT.
Total
revenues
The
following table
provides an analysis of the Company’s total revenues by source:
*
This represents
REPLAGAL sales for the five-month period since the acquisition of
TKT.
The
following
discussion includes references to prescription and market share data for key
products. The source of this data is IMS, December 2005.
During
2005, the
Company concluded new ‘fee for service’ agreements with two of its three
significant wholesale customers. These agreements, which are commonplace in
the
pharmaceutical industry, change the way wholesalers are compensated. Under
the
agreements, the wholesalers receive a distribution fee from pharmaceutical
suppliers. These ‘fee for service’ agreements eliminate wholesalers' incentives
to acquire and hold excess inventories. The Company believes this will reduce
the significant impact of wholesaler stocking and de-stocking on its product
sales. Further, the wholesalers will provide data regarding their inventories
of
the Company's products it has on hand. The Company is negotiating a ‘fee for
service’ agreement with its remaining significant wholesale customer. ‘Fees for
service’ are treated as a sales deduction, thus affecting revenues rather than
cost of sales.
ADDERALL
XR
US
prescriptions
for ADDERALL XR for the year to December 31, 2005, were up 12%. ADDERALL XR
further strengthened its position as the leading brand in the US ADHD market
with a 1% increase in market share to an all time high of 26% in December 2005
(December 2004: 25%). In addition, the US ADHD market grew 5% overall compared
to the same period in 2004.
Product
sales
growth was higher than prescription growth for the year due mainly to the impact
of price increases in December 2004 and August 2005, partially offset by a
decrease in pipeline inventory and higher sales deductions.
FDA
approval of the
adolescent indication for ADDERALL XR was received on July 22,2005.
On
February 12,2005, Shire announced that it had suspended sales of ADDERALL XR in Canada
at
the request of Health Canada. On August 24, 2005, Shire announced that Health
Canada would reinstate the marketing authorization of ADDERALL XR in Canada
effective August 26, 2005. This reinstatement follows the acceptance by Health
Canada of the recommendations from the New Drug Committee, which was appointed
by Health Canada at Shire’s request to review the suspension of ADDERALL XR in
Canada.
During
October
2005, Shire 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. Shire believes that these requested criteria will ensure that generic
formulations of ADDERALL XR or follow-on drug products will be clinically
effective and safe. In January 2006, Shire chose to file a supplemental
amendment to its original Citizen Petition, which included additional clinical
data in support of the original filing. The FDA has six months to respond to
Shire’s petition and while this petition is under review it will not grant final
approval of generic or follow-on drug products referencing ADDERALL XR.
On
February 9,2006, an FDA Advisory Committee recommended to the FDA that risk information
about cardiovascular events be included in a "black box warning" for all
stimulant medicines used to treat ADHD. In making its recommendation, the
Advisory Committee recognized that the reported incidence rates of the rare
serious cardiovascular adverse events that were discussed by the Committee
are
generally within the rates that would be expected from the untreated general
population. ADDERALL XR and ADDERALL already include a "black box warning"
in
their labels for safety concerns related to amphetamine abuse or misuse and
also
warn of the risk of sudden death in patients with structural cardiac
abnormalities. Shire stands behind the current labeling and believes that
further action is unwarranted. It is too early to tell at the time of filing
of
this Annual Report on Form 10-K what impact the actions of the FDA will have
on
consumer sentiment in the US ADHD market or on ADDERALL XR’s US market
share.
In
January 2006,
Shire settled its ADDERALL XR patent infringement lawsuits with Impax. The
litigations involved Shire US patents, Nos. 6,322,819 (the ‘819 Patent),
6,605,300 (the ‘300 Patent) and 6,913,768 (the ‘768 Patent). As part of the
settlement, Impax has confirmed that its proposed generic ADDERALL XR product
infringes Shire’s ‘819, ‘300 and ‘768 Patents and that the three patents are
valid and enforceable. Under the terms of the settlement, Impax will be
permitted to market generic versions of ADDERALL XR in the US no later than
January 1, 2010, and will pay Shire a royalty from those sales. In certain
situations, such as the launch of another generic version of ADDERALL XR, Impax
may be permitted to enter the market as Shire’s authorized generic.
Shire’s
ADDERALL XR
patent infringement lawsuits with Barr continue. Shire is seeking a ruling
that
Barr’s ANDA seeking permission to market its generic versions of ADDERALL XR
infringes the ‘819, ‘300 and ‘768 Patents. Barr’s 30-month stay under the
Hatch-Waxman Act expired on February 18, 2006. Following the expiry of the
30
month stay, the FDA may approve Barr’s ANDA. A final pre-trial conference in the
‘819 and ‘300 Patent cases is set for March 10, 2006. No trial date has been
set. Shire is continuing its discussions with Barr in connection with these
lawsuits and the discussions are progressing. For further information see ITEM
3: Legal Proceedings. If the Company does not prevail in the lawsuits, the
Company’s sales of ADDERALL XR will decrease. Any decrease in the sales of
ADDERALL XR would significantly reduce revenues and earnings.
59
CARBATROL
US
prescriptions
for the year to December 31, 2005, were down 8% compared to the previous year.
This was due primarily to supply constraints, a 4% decrease in Shire’s market
share of the total US extended release carbamazepine prescription market to
42%
in December 2005 (December 2004: 46%) and a 5% decrease in that market as a
whole. The supply constraints have now been resolved.
Product
sales for
the year to December 31, 2005 were up 33% compared to the previous year. The
difference between sales growth and the lower level of prescriptions is due
to
price increases in August 2004 and October 2005 and to lower sales deductions
than in 2004.
Patent
litigation
proceedings with Nostrum relating to CARBATROL are in-progress. For further
information see ITEM 3: Legal Proceedings.
PENTASA
US
prescriptions
for the year to December 31, 2005 were up 6% compared to the previous year.
The
increase was due to the success of the co-promotional agreement with Solvay
Pharmaceuticals Inc., the impact of the 500mg dosage form launched in the third
quarter of 2004 and a 2% increase in the total US oral mesalamine prescription
market.
Product
sales for
the year to December 31, 2005 were up 18%, compared to the previous year. The
difference between sales growth and prescription growth is due to the impact
of
the September 2004 price increase and a normalization of pipeline inventories
compared to lower levels in 2004.
PENTASA
had an 18%
share of the total US oral mesalamine prescription market in December 2005
(December 2004: 18%).
AGRYLIN/XAGRID
AGRYLIN/XAGRID
sales worldwide for the year to December 31, 2005 were $92.8 million, down
39%
compared to the previous year (2004: $152.5 million).
North
American
sales were $46.0 million, down 61% compared to the previous year (2004: $119.1
million). This reduction was expected following the approval of generic versions
of AGRYLIN in the US market in April 2005.
Rest
of the World
sales (all sales outside North America) were $46.8 million, up 40%, compared
to
the previous year (2004: $33.4 million). This was primarily due to the
successful launch of XAGRID in the UK, Germany and France in the first quarter
of 2005 and Spain in the third quarter of 2005. In accordance with current
orphan drug legislation in the EU, XAGRID will have up to 10 years of marketing
exclusivity in the EU.
FOSRENOL
FOSRENOL
was
launched in the US in January 2005. Product sales for the year to December31,2005 were $53.5 million, with US prescriptions for the year totaling
137,000.
FOSRENOL
had an 8%
share of the total US phosphate binding market in December 2005.
On
November 28,2005 the FDA approved new, higher dose formulations of FOSRENOL. New, higher
dose strengths of 750 milligrams and 1000 milligrams were shipped to wholesalers
in the US in December 2005. Higher dose strengths should help to reduce the
number of pills that end-stage renal disease patients need to take to achieve
target phosphorus levels.
Product
sales in Q4
2005 were $29.0 million compared with $9.7 million in Q3 2005. The variance
relates primarily to increased pipeline inventory sales to wholesalers of the
new higher dose formulation during December.
FOSRENOL
was
launched in Austria in December 2005. Shire continues its discussions relating
to FOSRENOL with regulatory authorities and reimbursement agencies across Europe
and other regions and further launches are expected in European markets over
the
next few months, subject to obtaining national approvals and concluding pricing
and reimbursement negotiations.
REPLAGAL
REPLAGAL
was
acquired by Shire as part of the TKT acquisition, which completed on July 27,2005. Product sales for the period since acquisition were $41.3 million. The
majority of REPLAGAL sales are in Europe. Total sales for the full year,
including pre-acquisition sales, were $94.6 million (2004: $77.4 million).
The
increase in sales (including pre-acquisition sales) is primarily due to greater
European coverage by an increased number of sales
representatives.
60
Foreign
exchange effect
As
many of the
Company’s sales revenues are earned in currencies other than US dollars
(primarily Canadian dollars, Pounds Sterling, Swedish Krona and Euros), revenue
growth reported in US dollars includes the impact of translating the sales
made
in a local currency, into US dollars. With the US dollar strengthening against
these currencies over the last 12 months, the translation of sales made in
these
currencies into US dollars has impacted on the reported growth rates. The table
below shows the effect of foreign exchange translations on the revenue growth
of
the key affected products as well as the underlying performance of key products
in their transaction currency:
Royalties
from
sales of 3TC for the year to December 31, 2005, were $159.8 million, an increase
of 3% compared to 2004 ($155.8 million). This was due to the continued growth
in
the nucleoside analog market for HIV and a small positive impact of foreign
exchange movements.
Shire
receives
royalties from GSK on worldwide 3TC sales. GSK’s worldwide sales of 3TC for the
year to December 31, 2005, were $1,211 million, an increase of 2% compared
to
prior year (2004: $1,184 million).
ZEFFIX
Royalties
from
sales of ZEFFIX for the year to December 31, 2005, were $30.5 million, an
increase of 11% compared to 2004 ($27.4 million), due to strong growth in the
Japanese market and a small positive impact of foreign exchange movements.
Shire
receives
royalties from GSK on worldwide ZEFFIX sales. GSK’s worldwide sales of ZEFFIX
for the year to December 31, 2005, were $266 million, an increase of 11%
compared to prior year (2004: $240 million).
OTHER
Other
royalties are
primarily in respect of REMINYL and REMINYL XL (now marketed as RAZADYNE and
RAZADYNE ER in the US), a product marketed worldwide by Janssen Pharmaceutica
N.V. (Janssen), an affiliate of
61
Johnson
and
Johnson, with the exception of the UK and the Republic of Ireland where Shire
acquired the exclusive marketing rights from May 2004.
Sales
of the
REMINYL/RAZADYNE range, for the symptomatic treatment of mild to moderately
severe dementia of the Alzheimer’s type, are growing well in the Alzheimer’s
market.
On
April 11, 2005,
Ortho-McNeil Neurologics Inc. (Janssen's US affiliate company) announced that
REMINYL would be marketed in the US under the new product name of RAZADYNE.
Subsequently, in the US, REMINYL XL was launched as RAZADYNE ER. Ortho-McNeil
Neurologics Inc. worked closely with the FDA on a name change following
dispensing errors in the US between REMINYL and the Type 2 diabetes mellitus
drug known as AMARYL. Shire is only aware of one similar dispensing error
outside the US.
On
March 1, 2005,
the National Institute for Health and Clinical Excellence (NICE) in England
and
Wales issued an Appraisal Consultation Document (ACD). This document included
a
recommendation that all existing approved products for the symptomatic treatment
of mild to moderate Alzheimer's disease in England and Wales should no longer
be
reimbursed by the NHS when used in the treatment of new patients. The
recommendation potentially affected sales of REMINYL and of REMINYL XL in
England and Wales. An amended ACD was issued by NICE on January 23, 2006. The
new ACD recommends that REMINYL and REMINYL XL, together with other drugs in
the
same class, be reimbursed by the NHS when used for the treatment of either
(i)
patients with existing Alzheimer's disease already being treated with one of
these drugs; or (ii) newly diagnosed patients once their disease has progressed
to a moderate stage. Therefore the current recommendation excludes the
reimbursement of treatment for patients presenting with mild symptoms of
Alzheimer’s disease for which REMINYL and REMINYL XL are approved. A final
appraisal document is expected from NICE in July 2006.
Cost
of
product sales
For
the year to
December 31, 2005, the cost of product sales amounted to 16% of product sales
(2004: 13%). The decrease in gross margin is primarily due to the addition
of
REPLAGAL to Shire’s product portfolio following the acquisition of TKT.
REPLAGAL’s cost of product sales relates entirely to the acquired inventories,
which in accordance with US generally accepted accounting principles (GAAP),
have been accounted for at fair value, estimated to be 97% of the expected
sales
price of REPLAGAL. Accordingly, little or no margin will be reflected for
REPLAGAL sales until all acquired finished goods have been sold (anticipated
Q3
2006). For the year to December 31, 2005 the cost of product sales for REPLAGAL
includes a $41.9 million adjustment in respect of the acquired inventory of
which $39.8 million related to sales of acquired finished goods and $2.1 million
was a write-off of damaged work-in-process. In 2005, this fair value adjustment
increased Shire’s cost of product sales by 3%.
Research
and development (R&D)
R&D
expenditure
increased from $199.6 million in the year to December 31, 2004, to $339.1
million in 2005. Expressed as a percentage of total revenues, R&D
expenditure was 21% for the year to December 31, 2005 (2004: 15%). The increase
was primarily due to:
·
The
initial
payment to New River of $50 million for in-licensing VYVANSE, which
has
been expensed in accordance with the Company’s accounting policy; and
·
The
addition
of two significant R&D projects following the acquisition of TKT
(ELAPRASE and GA-GCB).
The
New River
payment and the R&D expenditure on ELAPRASE and GA-GCB represented 5% of
R&D expenditure as a percentage of revenues.
Shire’s
pipeline is
now well advanced with seven projects in late stage development or
registration.
Selling,
general and administrative (SG&A) expenses
Total
SG&A
costs increased from $545.4 million in the year to December 31, 2004, to $730.0
million in the year to December 31, 2005, an increase of 34%. As a percentage
of
product sales, SG&A costs were 55% (2004: 49%).
62
Year
to December 31,
Adjusted
Adjusted
2005
$’M
2004
$’M
Change
%
Sales
costs
190.3
153.6
+24
Marketing
costs
255.3
176.0
+45
Other
SG&A costs
209.9
157.3
+33
655.5
486.9
+35
Depreciation
and amortization(1)
74.4
58.5
+27
Total
SG&A costs
729.9
545.4
+34
(1)
Excludes depreciation from manufacturing plants of $3.5 million (2004: $2.7
million) which is included in cost of product sales.
SG&A
expenses
increased from $486.9 million in the year to December 31, 2004, to $655.6
million in 2005, an increase of 35%. As a percentage of product sales, these
expenses were 49% (2004: 44%).
This
increase was
expected, with additional costs attributable to four product launches during
2005, together with incremental costs in 2005 associated with the new FOSRENOL
and EQUETRO sales forces, patent litigation and infrastructure, $24.5 million
of
SG&A costs related to the acquired TKT business and $4.5 million related to
the set up of the new listed holding company for the Shire Company.
The
depreciation
charge for the year to December 31, 2005, was $29.2 million (2004: $19.8
million), which in 2005 included property, plant and equipment write-downs
of
$6.5 million (2004: $1.6 million). Amortization charges, including the
amortization on acquired products, were $45.2 million for the year to December31, 2005 (2004: $38.7 million).
Intangible
asset impairments
The
charge for
intangible asset impairments for the year to December 31, 2005 was $5.6 million
(2004: $13.5 million).
The
approval of
generic versions of AGRYLIN in April 2005 and the decision not to support and
promote certain non-core products going forward resulted in changes to the
estimate of the Company’s future cash flows and, as a result, impairments were
required in both 2005 and 2004.
As
previously
disclosed, the Company began a consolidation of its North American sites in
2004, with the aim of decreasing the number of sites from 16 to four, including
the opening of a new US headquarters office in Wayne, Pennsylvania. The Company
recorded costs of $9.4 million in 2005 and $48.5 million in 2004 primarily
associated with:
·
severance
costs relating to 137 employees;
·
retention
payments to key employees;
·
relocation
costs relating to 85 employees who relocated to Wayne,
Pennsylvania;
·
costs
of
duplicate facilities (including lease exit costs);
and
63
·
other
incremental costs associated with the site closures, such as
legal,
consultancy, the write-down of property, plant and equipment
and
information technology costs.
Following
the
closure of the Newport site in July 2005, the site consolidation is now complete
and no further reorganization costs are expected.
Integration
costs
For
the year to
December 31, 2005, the Company incurred $9.7 million of costs associated
with
the integration of the TKT business into the Shire Company (2004: $nil).
This
included retention payments for key staff of $7.0 million, information
technology costs of $1.0 million and other costs of $1.7 million.
In-process
R&D write-off
During
the year to
December 31, 2005, as required by Financial Accounting Standards Board
Interpretation No 4, “Applicability of FASB Statement No 2 to Business
Combinations Accounted for by the Purchase Method” (FIN 4), the Company wrote
off the portion of the TKT purchase price allocated to IPR&D of $815.0
million (restated). This amount represents the value of those intangible assets
acquired as part of the TKT acquisition, which at the time of acquisition had
not been approved by the FDA or other regulatory authorities, including ELAPRASE
and GA-GCB. For the determination of the fair value of IPR&D see Critical
Accounting Estimates below.
Interest
income
For
the year to
December 31, 2005the Company received interest income of $35.3 million (2004:
$21.9 million). The increase compared to 2004 is due to higher interest rates
on
the Company’s US cash deposits which were partially offset by the interest
foregone by the Company on the net payments of $1.1 billion made to date in
respect of the acquisition of TKT.
In
2005, this
expense included a $7.7 million provision for interest, which may be awarded
by
the court in respect of amounts due to former holders of approximately 11.3
million shares of TKT common stock who have submitted written demands for
appraisal of these shares (see ITEM 3: Legal Proceedings and Note 1
to the Company’s
consolidated financial statements contained in Part IV of this Annual Report).
In addition, interest expense includes $1.2 million, relating to the costs
of a
bridging loan to finance the TKT acquisition and other interest related expenses
of $3.1 million.
In
2004, interest
expense included the write-off of $7.4 million of deferred debt acquisition
costs arising on the issue of convertible loan notes in August 2001. The
write-off was required as a significant portion of the convertible loan notes
were redeemed. The $7.4 million represented the balance of these fees at the
date of redemption in August 2004. In addition, interest expense included a
$4.2
million interest charge incurred prior to the redemption and $0.1 million of
other interest related expenses.
For
further details
see Note 26 and Note 6 to the Company’s consolidated financial statements
contained in Part IV of this Annual Report.
The
write-down in
investments in 2005 and 2004 resulted from events and circumstances that
indicated there was an other-than-temporary impairment of investments and,
accordingly, management recorded an impairment based on its assessment of fair
value. Further details are disclosed in Note 11
to the Company’s
consolidated financial statements contained in Part IV of this Annual Report.
Investment
income
for 2005 included a $3.9 million realized gain on the sale of a portfolio
investment (2004: $14.8 million).
64
Income
taxes
The
Company’s
effective tax rate for 2005 was 18.1% (restated) (a tax charge of $88.8 million
on losses from continuing operations before income taxes and equity method
investees of $491.7 million (restated)). The significant difference from
the
prior year effective tax rate of 28% is due to the IPR&D write-off of $815
million (restated), which is not tax deductible.
As
at December 31,2005, the Company had deferred tax assets net of valuation allowances of
$116.2
million (2004: $78.1 million). The increase in deferred tax is primarily
attributable to the acquisition of TKT that resulted in a net deferred tax
asset
of $60.4 million being recorded in the opening day balance sheet, although
part
of the asset was subsequently realized in the post acquisition period.
Realization of deferred tax assets is dependent upon generating sufficient
taxable income to utilize such assets. Although realization of these assets
is
not assured, it is more likely than not that the amount recognized will be
realized. See Note 29 to the Company’s consolidated financial statements
contained in Part IV of this Annual Report for expiry dates of these tax
losses.
Equity
in earnings/(losses) of equity method investees
Net
losses of $1.0
million were recorded for the year to December 31, 2005 (2004: net earnings
of
$2.5 million). This comprised earnings of $5.3 million from the 50% share of
the
antiviral commercialization partnership with GSK in Canada (2004: $4.4 million),
offset by the Company’s share of losses in the GeneChem and EGS Healthcare Funds
of $6.3 million (2004: $1.9 million).
Discontinued
operations
During
the year to
December 31, 2005 gains on disposition of the discontinued operations totaled
$3.1 million. This resulted from the finalization of the working capital
agreement with IDB, which was part of the sale of Shire’s vaccines business to
IDB in 2004. As a result, a disputed amount, which had previously been provided
for, was received and the corresponding provision was released.
65
Liquidity
and capital resources
General
The
Company’s
funding requirements depend on a number of factors, including its development
programs; corporate, business and product acquisitions; the level of resources
required for the expansion of manufacturing and marketing capabilities as the
product base expands; increases in accounts receivable and inventory which
may
arise as sales levels increase; 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
of and quantum of tax and dividend payments; the timing and quantum of purchases
of Shire shares in the market to satisfy option exercises and the continuing
cash generated from sales of Shire’s key products.
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 litigation expenses incurred.
The
Company
ordinarily 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.
Credit
Facilities
In
connection with
the acquisition of TKT, Shire plc and certain subsidiary companies entered
into
a Multicurrency Revolving Facilities Agreement (the “Facilities Agreement”) with
ABN AMRO Bank N.V., Barclays Capital, Citigroup Global Markets Limited, HSBC
Bank plc and The Royal Bank of Scotland plc (the “Lenders”) on June 15, 2005.
The Facilities Agreement comprises two credit facilities: (i) a committed
multicurrency three year revolving loan facility in an aggregate amount of
$500
million (“Facility A”) and (ii) a committed 364 day revolving loan facility in
an aggregate amount of $300 million (“Facility B” and, together with Facility A,
the “Facilities”). Shire plc has agreed to act as guarantor for any of its
subsidiaries that borrow under the Facilities Agreement. In June 2006 Facility
B
was extended for a further 364 days to June 13, 2007. In October 2006, Facility
B was reduced to $200 million.
In
connection with
the acquisition of New River, Shire plc entered into a Multicurrency Term and
Revolving Facilities Agreement (the “New Facilities Agreement”) with ABN AMRO
Bank N.V., Barclays Capital, Citigroup Global Markets Limited and The Royal
Bank
of Scotland plc (the “Arrangers”) on February 20, 2007. The New Facilities
Agreement comprises three credit facilities: (i) a committed multicurrency
five
year term loan facility in an aggregate amount of $1,000 million (“Term Loan
A”), (ii) a committed multicurrency 364 day term (with a further 364 day
extension option) loan facility in an aggregate amount of $300 million (“Term
Loan B”) and (iii) a committed five year revolving loan facility in an aggregate
amount of $1,000 million (the “RCF” and, together with Term Loan A and Term Loan
B, the “New Facilities”). Shire plc has agreed to act as guarantor for any of
its subsidiaries that borrow under the New Facilities Agreement.
The
RCF, which
includes a $250 million swingline facility, may be used for general corporate
purposes. Term Loan A and Term Loan B may be used only for financing the
acquisition of New River (including related fees and transaction costs) and
refinancing any existing indebtedness of New River or its
subsidiaries.
The
RCF and Term
Loan A mature on February 20, 2012. Term Loan A is repaid in annual installments
on the anniversary of the New Facilities Agreement in the following amounts:
$150 million in 2008, $150 million in 2009, $200 million in 2010, $200 million
in 2011 and the balance on maturity. Term Loan B matures on February 19, 2008.
As noted above, at Shire’s request, the maturity date of Term Loan B may be
extended for a further 364 days.
The
availability of
loans under the New Facilities is subject to customary conditions, including
the
absence of any defaults thereunder and the accuracy (in all material respects)
of Shire’s representations and warranties contained therein.
The
New Facilities
include representations and warranties, covenants and events of default,
including (i) requirements that Shire’s ratio of Net Debt to EBITDA (as
defined in the New Facilities Agreement) does not exceed 3.50:1 for the 12
month
period ending December 31, 2007; 3.25:1 for the 12 month period ending 30 June
2008; and 3.00:1 for each 12 month period ending 31 December and 30 June
thereafter and (ii) that the ratio of EBITDA to Net Interest (as defined in
the New Facilities Agreement) must not be less than 4.0 to 1, for each 12 month
period ending 31 December or 30 June, and additional limitations on
the creation of liens, disposal of assets, incurrence of indebtedness, making
of
loans and giving of guarantees.
Interest
on loans
under the New Facilities will be payable on the last day of each interest
period, which period may be one week or one, two, three or six months at the
election of Shire (or as otherwise agreed with the Lenders). The interest rate
on each loan drawn under the RCF or Term Loan A for each interest period is
the
percentage rate per annum which is the aggregate of the applicable margin
(initially set at 0.80 per cent. per annum until delivery of
the
66
compliance
certificate for the year ending 31 December, 2007 and thereafter ranging
from 0.40 to 0.80 per cent per annum, depending on the ratio of Net Debt to
EBITDA), LIBOR, and mandatory cost, if any (as calculated in accordance with
Schedule 5 of the New Facilities Agreement). The interest rate on each loan
drawn under Term Loan B for each interest period is the percentage rate per
annum which is the aggregate of the applicable margin (being from 0.50 per
cent
for the first six months from the date of the New Facilities Agreement, 0.75
per
cent for the second six months and 1.00 per cent per annum thereafter), LIBOR,
and mandatory cost, if any (as calculated in accordance with Schedule 5 of
the
New Facilities Agreement).
Shire
shall also
pay fees equal to 35 per cent per annum of the applicable margin on available
commitments under the RCF for the availability period applicable to the RCF
and
20 per cent per annum of the applicable margin on available commitments under
Term Loan A and Term Loan B for the availability period applicable to Term
Loan
A and Term Loan B. Interest on overdue amounts under the New Facilities will
accrue at a rate, which is one percentage point higher than the rates otherwise
applicable to the loans under the New Facilities.
The
New Facilities
Agreement restricts (subject to certain carve-outs) Shire’s ability to incur
additional financial indebtedness, grant security over its assets or provide
or
guarantee loans. Further any lender may require mandatory prepayment of its
participation if there is a change in control of Shire. In addition, in certain
circumstances, the net proceeds of certain asset disposals by Shire must be
applied towards mandatory prepayment of the facilities, subject to certain
exceptions.
Upon
a change of
control of Shire or upon the occurrence of an event of default and the
expiration of any applicable cure period, the total commitments under the New
Facilities may be cancelled, all or part of the loans, (together with accrued
interest and all other amounts accrued or outstanding) may become immediately
due and payable. Events of default under the New Facilities Agreement include:
(i) non-payment of any amounts due under the New Facilities; (ii) failure
to satisfy any financial covenants; (iii) material misrepresentation in any
of
the finance documents; (iv) failure to pay, or certain other defaults under
other financial indebtedness; (v) certain insolvency events or proceedings;
(vi)
material adverse changes in the business, operations, assets or financial
condition of the group; (vii) certain ERISA breaches which would have a material
adverse effect; (viii) if it becomes illegal for Shire or any of its
subsidiaries that are parties to the New Facilities Agreement to perform their
obligations or (ix) if Shire or any subsidiary of Shire which is party to
the New Facilities Agreement repudiates the New Facilities Agreement or any
Finance Document (as defined in the New Facilities Agreement). The New
Facilities Agreement is governed by English law.
Equity
financing
Shire
also raised
approximately $900 million through the private placement of 42,883,721 new
ordinary shares to certain institutional investors at a price of 1075 pence
per
share. The newly issued shares represent approximately 8.4 per cent of Shire
plc's issued ordinary share capital prior to the placing.
Shire
anticipates
that its operating cash flow together with available cash, cash equivalents
and
short-term investments and the above mentioned New Facilities will be sufficient
to meet its anticipated future operating expenses, any costs arising as a result
of the acquisition of New River, outstanding costs related to the acquisition
of
TKT, capital expenditures, dividends, tax payments, share repurchases and debt
service and lease obligations as they become due over the next twelve
months.
If
the Company
decides to acquire other businesses, it expects to fund these acquisitions
from
existing cash resources, the New Facilities Agreement discussed above and
possibly through new borrowings and/or the issue of new equity if
necessary.
Sources
and uses of cash
The
following table
provides an analysis of the Company’s gross and net cash funds (excluding
restricted cash) as at December 31, 2006 and 2005:
Net
cash provided
by operating activities for the year to December 31, 2006, was $531.9 million,
an increase of $147.6 million compared to the previous year. The increase in
cash generation is primarily due to favorable
67
movements
in
working capital, in particular the timing of sales within the final quarter
of
2006 coupled with a reduction in the net tax paid of $48.5 million due to the
utilization of tax losses acquired as part of the TKT acquisition.
Net
cash used in
investing activities was $26.9 million in the year to December 31, 2006. This
included purchases of property, plant and equipment of $100.3 million,
intangibles of $58.8 million and long-term investments of $9.8 million
respectively, offset by proceeds from the sale of the ADDERALL product rights
for $63.0 million and proceeds from the loan repaid by IDB of $70.6 million
(see
Note 6
to the Company’s
consolidated financial statements contained in Part IV of this Annual Report).
Capital expenditure on property, plant and equipment included $32.2 million
on
IT projects at the Wayne, Pennsylvania US headquarters; $8.0 million on building
improvements and $12.5 million on IT at the Basingstoke, UK, headquarters;
$9.9
million on construction work at Shire’s manufacturing facility at Owings Mills,
Maryland; and $8.8 million and $13.1 on leasehold improvements and IT equipment,
respectively at Shire’s site in Cambridge, Massachusetts. Capital expenditure on
intangible assets included $50.0 million paid to Noven on the approval of
DAYTRANA.
Net
cash used in
financing activities was $42.6 million for the year to December 31, 2006. This
was primarily due to the cost to purchase treasury stock of $92.0 million and
dividend payments of $32.4 million, offset by inflows of $81.9 million from
the
exercise of employee stock options.
Outstanding
Letters of credit
As
at December 31,2006, the Company had irrevocable standby letters of credit with Barclays Bank
plc in the amount of $14.2 million providing security on the recoverability
of
insurance claims, and with Bank of America in the amount of $7.8 million,
providing security on the payment of lease obligations.
Other
long-term liabilities reflected on the Balance Sheet (iii)
500.7
481.6
10.9
1.8
6.4
Total
813.2
628.2
89.8
49.2
46.0
(i)
The
Company
leases certain properties, motor vehicles and equipment under operating
leases expiring through 2025.
(ii)
Purchase
obligations include agreements to purchase goods or services 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.
(iii)
Other
long-term liabilities include the liability to dissenting shareholders.
As
at December 31, 2006, appraisal rights had been asserted in respect
of
approximately 11.3 million shares of TKT common stock. For further
information see ITEM 3: Legal proceedings. As at December 31, 2006
the
Company recorded a liability of $419.9 million based on the merger
consideration of $37 per share for the 11.3 million shares outstanding
at
that time plus a provision for interest of $32.4 million that may
be
awarded by the Court (see Note 1).
Until such
time as the appraisal process is complete the Company is unable to
determine the extent of its liability. For every $1 increase/decrease
in
the merger consideration applicable to those TKT shareholders who
have
asserted appraisal rights, the total estimated purchase price would
increase/decrease by approximately $11.3 million.
68
The
contractual
obligations table above does not include payments yet to fall due upon the
occurrence of certain milestones and other contractual commitments. The most
significant payments are as follows:
(i) DAYTRANA
In
connection with
the Company’s acquisition in 2003 from Noven of the worldwide sales and
marketing rights to DAYTRANA, as at December 31, 2006 Shire has a remaining
obligation to pay Noven up to $50 million, contingent on future sales
performance.
DAYTRANA
received
final regulatory approval from the FDA on April 6, 2006 and as a result Shire
paid a $50 million milestone to Noven. During the year, the Company also reached
a sales milestone for DAYTRANA and as a result, Shire made a payment to Noven
of
$25 million in February 2007. Both amounts have been capitalized during the
year
to December 31, 2006 and amortization of these amounts, together with the
upfront milestone payment of $25 million made in 2003, will continue over the
estimated life of the product of approximately 10 years.
(ii) VYVANSE
In
January 2005,
Shire entered into an agreement with New River to collaborate in developing,
manufacturing, marketing and selling VYVANSE in the US. In the rest of the
world, Shire acquired the license to develop and commercialize VYVANSE, in
consideration of a low double-digit royalty.
Under
the terms of
the agreement, the parties will collaborate on VYVANSE development,
manufacturing, marketing and sales in the US. New River will be financially
and
operationally responsible for clinical and manufacturing development. Shire
will
book the product sales and New River will supply up to 25% of the sales effort
under a co-promotion right. Shire is obligated to give VYVANSE marketing and
promotional priority over its other oral ADHD stimulants should VYVANSE’s label
contain a claim that it has decreased potential for abuse or increased overdose
protection. Shire paid an initial sum of $50 million on signing and a further
$50 million was paid to New River following acceptance of the filing of a NDA
by
the FDA in January 2006.
If
VYVANSE is
approved with a Schedule III, IV or V classification or is unscheduled
("favorable scheduling"), Shire will pay New River a $300 million milestone
payment. US operating profit will be divided as follows: Shire will retain
75%
of profits for the first two years following launch, and the parties will share
the profits equally thereafter.
In
the event that
VYVANSE receives a final Schedule II classification, no milestone payment will
be payable by Shire to New River upon approval. Division of profits will be
calculated under an alternative profit sharing scheme. New River’s share of U.S.
product profits for the first two years will be at least 25%, though it may
increase to a value determined by a preset sales based formula; for following
years, it will be at least 50%, though it may increase to a value determined
by
a preset sales based formula thereafter. These formulas, which include yearly
threshold sales, were included in an 8-K filed with the SEC on October 10,2006. If VYVANSE is classified as Schedule II on approval and then
gets favorable scheduling within one year of the first commercial sale, Shire
will pay New River a $200 million milestone payment; if favorable scheduling
occurs by the third anniversary, the milestone payment will be $100 million.
Upon favorable scheduling being achieved under each of these scenarios, the
profit sharing formula reverts to that applicable to favorable scheduling.
In
addition, New River will be entitled to a $100 million milestone payment at
the
end of the first calendar year in which cumulative worldwide net sales of all
collaboration products during that calendar year exceed $1 billion. A $5 million
milestone payment is payable following the first commercial sale in specified
European countries. Shire intends to capitalize and amortize any milestone
payments over the life of the product.
Shire
is entitled
to terminate the agreement until 30 days following approval of VYVANSE. If
Shire
terminates before regulatory approval, no payment would be due to Shire. If
Shire terminates after approval and VYVANSE has received a favorable scheduling
assignment, no payment would be due to Shire. If the approved VYVANSE has
received a Schedule II classification, Shire would be entitled to a $50 million
termination payment, payable in cash, New River common stock, or an unsecured,
5-year promissory note, as will be agreed upon by Shire and New
River.
On
February 20,2007the Company announced that it had agreed to acquire New River for $2.6
billion in cash. On completion of the acquisition of New River, Shire will
terminate these commitments. For further information see note 32.
(iii) Women’s
Health
Products
Shire
and Duramed
entered into an agreement related to Duramed’s transvaginal ring technology that
will be applied to at least five women’s health products, as well as a license
in a number of markets outside of North America, including the larger European
markets to Duramed’s oral contraceptive, SEASONIQUE. This agreement became
effective on September 6, 2006.
Under
this
agreement, Shire will reimburse Duramed for US development expenses incurred
going forward up to a maximum of $140 million over eight years. US development
expenditure reimbursement for the year ended December 31, 2006, totalled $2.5
million, with $2.0 million due for reimbursement at December 31, 2006.
At
69
December31, 2006,
the maximum future reimbursement for Duramed incurred US development expenditure
is therefore $137.5 million. Shire will separately be responsible for
development costs in its licensed territories.
(iv)
Tissue
Protective
Cytokine (TPC) development rights
In
connection with
the Company’s licence of TPC rights in non-nervous system indications from
Warren, the Company is committed to making payments on achievement of certain
milestones. The Company is not required to make any payments to Warren upon
regulatory approval of the first product for the first indication. However,
it
is obligated to make milestone payments to Warren of $25 million upon regulatory
approval in up to five subsequent major indications.
(v)
Other
R&D
and sales milestones
In
addition to the
commitments set out in (i) to (iv) above, at December 31, 2006the Company
had
commitments payable on achievement of specified milestones and fees payable
for
products under development in-licensed from third parties of $75.6 million
(December 31, 2005: $18.0 million), of which $12.9 million could be paid in
2007.
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
operating units in the Company 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,
Pound Sterling, Euro and Swedish Krona. The accumulated foreign currency
translation differences of $80.4 million are reported within accumulated other
comprehensive income in the consolidated balance sheet and a $3.2 million gain
is reported in other income on the consolidated income statement.
As
at December 31,2006, the Company had 18 outstanding forward foreign exchange contracts with
a
total principal amount equivalent to $98.3 million to manage the currency risk
associated with certain inter-company loans. As at December 31, 2006 there
were
net unrealized losses of $8.1 million on these contracts.
Concentration
of credit risk
The
Company’s
revenues from product sales are mainly derived from agreements with major
pharmaceutical companies and relationships with pharmaceutical wholesale
distributors and retail pharmacy chains. For the year to December 31, 2006
there
were three customers in the US who accounted for 71% of the Company’s total
revenues. However, such clients 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.
Financial
instruments that potentially expose Shire to concentrations of credit risk
consist primarily of short-term cash investments and trade accounts receivable.
Excess cash is invested in short-term money market instruments, including bank
term deposits, money market and liquidity funds and other debt securities from
a
variety of financial institutions with strong credit ratings. These investments
typically bear minimal risk.
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.
70
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 provisions for litigation, valuation of intangible
assets (including those acquired through the acquisition of TKT), inventory
acquired through the acquisition of TKT, the valuation of IPR&D, the
valuation of equity investments, sales deductions, income taxes and share-based
payments. and the amount payable to former holders of TKT common stock of
approximately 11.3 million shares who have submitted written demands for
appraisal of these shares in relation to the Company’s acquisition of TKT on
July 27, 2005.
(i)
Litigation
The
Company has a
number of lawsuits pending that relate to product liability claims. Shire
accounts for litigation losses in accordance with SFAS No. 5 “Accounting for
Contingencies” (SFAS No 5). Under SFAS No. 5, loss contingency provisions are
recorded 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. There were no significant changes in
estimates in respect of product liability claim provisions in 2006.
(ii)
Valuation
of
intangible assets
(a)
General
The
Company has
acquired and continues to acquire significant intangible assets, recorded at
acquisition cost. As at December 31, 2006, the carrying value of such
intangibles was $762.4 million, which primarily related to the Company’s
DAYTRANA, DYNEPO, FOSRENOL, PENTASA, REMINYL, REPLAGAL, SOLARAZE
and XAGRID products. Those assets which do not yet have a defined revenue
stream and for which there are no alternative uses are expensed upon
acquisition, and those that do have a defined revenue stream (namely commercial
products or rights to products awaiting final regulatory approval) are
capitalized and amortized over their estimated useful life. Management’s
estimate of the useful life considers, inter alia, the following factors: the
expected use of the asset by the Company; any legal, regulatory, or contractual
provisions that may limit the useful life and the effects of demand;
competition; 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).
A
prolonged general
economic downturn, sustained government pressure on prices and, specifically,
competitive pricing, could create an imbalance of industry supply and demand,
or
otherwise diminish volumes or profits. Such events, combined with changes in
interest rates, could adversely affect Shire’s valuation of the estimated future
net cash flows generated by its long-lived assets. As a result, future operating
results could be materially and adversely affected by impairment charges
related to the recoverability of long-lived assets.
In
the year to
December 31, 2006, changes to the estimated future net cash flows from certain
products resulted in a $1.1 million impairment of intangible assets (2005:
$5.6
million, 2004: $13.5 million). In the year to December 31, 2005, the Company
decreased the estimated life of a product, which resulted in an additional
amortization charge of $1.7 million in the year to December 31, 2005 and $5.9
million in the year to December 2006.
The
Company reviews
intangible assets subject to amortization for impairment periodically using
an
undiscounted net cash flow approach whenever events or circumstances suggest
that the carrying value of the intangible asset is not recoverable. If the
undiscounted cash flows of an intangible asset are less than its carrying value,
the intangible asset is written down to its fair value, based on estimated
discounted cash flows. When cash flows cannot be identified for an individual
asset, the review is applied at the lowest group level for which cash flows
are
identifiable.
(b)
Intangible
assets acquired through the acquisition of
TKT
The
fair values of
all of the identifiable intangible assets acquired through the acquisition
of
TKT have been determined using an income approach on a project-by-project basis,
by independent valuation specialists. This method starts with a forecast of
all
of the expected future net cash flows either generated or saved as a result
of
ownership of the intellectual property, the customer relationships and the
other
intangible assets. These cash flows are then adjusted to present value by
applying an appropriate discount rate that reflects the risk factors associated
with the cash flow streams.
71
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
·
the
tax
amortisation benefit available to a market participant purchasing
the
assets piecemeal
The
valuations are
based on information at the time of the acquisition and the expectations and
assumptions that have been deemed reasonable by the Company’s management. 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.
The
Company reviews
intangible assets for impairment periodically using an undiscounted net cash
flow approach whenever events or circumstances suggest that the carrying value
of the intangible asset is not recoverable. If the discounted cash flows of
an
intangible asset are less than its carrying value, the intangible asset is
written down to its fair value, based on estimated discounted cash flows. When
cash flows cannot be identified for an individual asset, the review is applied
at the lowest group level for which cash flows are identifiable.
(iii)
Inventory
acquired through the acquisition of
TKT
Inventory
acquired
through the acquisition of TKT has been fair valued in accordance with SFAS
No.
141 as follows:
·
Finished
goods and merchandise at estimated selling prices less the sum of
(a)
costs of disposal and (b) a reasonable profit allowance for the selling
effort of the acquiring entity
·
Work
in
process at estimated selling prices of finished goods less the sum
of (a)
costs to complete, (b) costs of disposal, and (c) a reasonable profit
allowance for the completing and selling effort of the acquiring
entity
based on profit for similar finished
goods
The
Company’s
management assumed that a “reasonable profit allowance for the selling effort of
the acquiring entity” would be 3% of sales proceeds (expected at the acquisition
date). This is due to the minimal sales effort required by Shire as acquiror
to
realize sales of the acquired inventory, given the small size of the existing
prescription population to whom specialized physicians prescribe REPLAGAL,
the
frequency and duration of treatment required, and low levels of patient
switching, together with the low cost and complexity of distribution. The
relevance of this assumption is that it has an impact on the recorded cost
of
product sales for acquired REPLAGAL inventory. For every one percentage point
increase in the profit allowance percentage for the selling effort, our cost
of
product sales in the year to December 31, 2006 would have reduced by
approximately $0.6 million. All REPLAGAL inventories acquired as part of the
TKT
acquisition had been consumed by December 31, 2006.
The
valuation of
acquired work in process required the Company’s management to estimate the level
of completion reached at the acquisition date. This required the exercise of
judgment in ascribing value creation to different phases of a complex biological
manufacturing process. The relevance of this estimate is that it has an impact
on the recorded cost of product sales for acquired REPLAGAL inventory. For
every
one percentage point increase in the assumed percentage level of completion,
our
cost of product sales in the year to December 31, 2006 would have increased
by
$0.5 million. All REPLAGAL work in process acquired as part of the TKT
acquisition had been consumed by December 31, 2006.
The
fair value of
inventory is based on information at the date of acquisition and the
expectations and assumptions that have been deemed reasonable by the Company’s
management. No assurance can be given, however, that the underlying assumptions
or events associated with inventory will occur as projected. For these reasons,
among others, the actual completion costs, disposal costs and proceeds
associated with acquired inventory may vary from those forecasted. As each
estimate was made in the context of the conditions that existed at the TKT
acquisition date, they are not expected to change from period to period.
(iv)
In-process
R&D write-off
IPR&D
is
defined by FIN 4 as being a development project that has been initiated and
achieved material progress but has not yet resulted in a commercially viable
product.
As
required by FIN
4, the portion of the purchase price allocated to IPR&D of $815 million
(restated), acquired as part of the TKT transaction, was immediately expensed
in
the year to December 31, 2005. During the year to December 31, 2006the Company
determined that the value ascribed to IPR&D acquired as a result of the
TKT
72
acquisition
did not
include the benefit of tax amortization as required by the American Institute
of
Certified Public Accountants (AICPA) Practice Aid, Assets
Acquired
in a Business Combination to Be Used in Research and Development Activities:
A
Focus on Software, Electronic Devices, and Pharmaceutical
Industries.
Consequently the
financial statements for the year to December 31, 2005 have been restated in
respect of the value ascribed to IPR&D, acquired as part of the TKT
acquisition and subsequently written off as required under US GAAP in the
quarter ended September 30, 2005. See
note 3(a)
to
the
Company’s consolidated financial statements contained in Part
IV of this
Annual Report.
In
the
identification of intangible assets, consideration is given to whether any
technology that is identified is developed or in-process. The American Institute
of Certified Public Accountants Practice Aid "Assets Acquired in a Business
Combination to Be Used in Research and Development Activities: A Focus on
Software, Electronic Devices and Pharmaceutical Industries" gives guidance
on
the factors that should be considered when identifying IPR&D.
The
fair value of
IPR&D acquired with TKT was determined using the income approach on a
project-by-project basis. This method is based on the present value of earnings
attributable to the asset or costs avoided as a result of owning the assets.
This method includes risk factors, which include applying an appropriate
discount rate that reflects 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
·
The
tax
amortisation benefit available to a market participant purchasing
the
assets piecemeal
The
valuations are
based on information at the time of the acquisition and the expectations and
assumptions that have been deemed reasonable by the Company’s management. 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.
(v)
Valuation
of
Equity Investments
The
Company has
investments in certain public and private pharmaceutical and biotechnology
companies. The carrying values of these investments are periodically reviewed
for other-than-temporary impairments 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 impairments
include:
·
the
market
value of a quoted investment being below the carrying value of the
investment for an extended period
·
adverse
news
on a private company’s progress in scientific technology/development of
compounds
·
recent
stock
issuances at a price below the investment
price
If
the fair value
appears to be below the carrying value the Company considers all available
evidence in assessing whether there is an other-than-temporary impairment.
This
evidence would include:
·
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
·
the
overall
financial condition of the investee
In
instances when
the review indicates that there is an other-than-temporary impairment, the
Company writes down the investment to the fair value of the investment,
recording an impairment charge in the consolidated statements of operations.
During 2006, Shire recorded a charge for an other than temporary impairment
of
$0.3 million (2005: $0.4 million) to an investment in a public company. The
determination of the fair value of private company investments and the
determination of whether an unrealized loss on a publicly quoted investment
is
permanent requires
73
significant
judgment and can have a material impact on the reported results. During 2006,
Shire recorded impairments on long-term investments of $2.1 million (2005:
$2.0
million, 2004: $15.4 million).
(vi)
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 the coupon sampling program.
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.
The
Company
accounts for these sales deductions in accordance with EITF Issue No. 01-9,
Accounting
for
Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendor’s Products),
and SFAS
No. 48, Revenue
Recognition When Right of Return Exists,
as applicable.
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
HMO Rebates
Statutory
rebates
to state Medicaid agencies and contractual rebates to HMOs 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
discounts 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,
and the levels of inventory in the distribution channel.
Shire’s
estimates
of the level of inventory in the distribution channel are based on
product-by-product inventory data provided by wholesalers (including data
provided by wholesalers as part of the new ‘fee for service’ agreements -- see
Item 1: Business - Manufacturing and Distribution - Material Customers for
further information) and third-party prescription data (such as IMS Health
National Prescription Audit data).
Revisions
or
clarification of guidelines from Centers for Medicare and Medicaid Services
(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. However, since the prices
of
the Company’s products are fixed at the time of sale and the quantum of rebates
is therefore reasonably determinable at the outset of each transaction, these
factors would not impact the recording of revenues in accordance with generally
accepted accounting principles.
The
accrual
estimation process for Medicaid and HMO rebates involves in each case a number
of interrelating assumptions, which vary for each combination of product and
Medicaid agency or HMO. 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.
As
at the balance
sheet date, accruals for Medicaid and HMO rebates were $126.4 million in 2006,
$105.4 million in 2005 and $99.4 million in 2004, or 8%, 8%, and 9%,
respectively, of net product sales.
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,
or c) under sales terms that allow for unconditional return (guaranteed
sales).
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
74
·
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
for new
products are more difficult for the Company to estimate than for established
products. For shipments made to support the commercial launch of a new product
(which are typically guaranteed sales), the Company cannot reliably estimate
expected returns, and the Company’s policy is therefore to defer recognition of
the sales revenue until there is evidence of end-patient acceptance (primarily
third-party prescription data), in accordance with SAB No. 104, Revenue
Recognition.
For shipments
after launch under standard terms (ie not guaranteed sales), the Company’s
initial estimates of sales return accruals are primarily based on the historical
sales returns experience of similar products shortly after launch. Once
sufficient historical data on actual returns of the product are available,
the
returns provision is based on this data and any other relevant factors as noted
above.
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.
As
at the balance
sheet date, provisions for product returns were $36.5 million in 2006, $31.8
million in 2005 and $22.5 million in 2004, or 2%, 2% and 2%, respectively,
of
net product sales.
Sales
Coupon
accrual
For
certain
products, primarily ADDERALL XR and DAYTRANA, the Company uses coupons as a
form
of sales incentive. These coupons reimburse part or all of the cost of the
first
prescription. Each coupon can only be used once and coupons typically expire
three to 15 months after the date of issuance. The Company’s management
calculates an accrual for the estimated value of coupons that will be redeemed
against sold products, based on the rebate value per coupon, the timing and
volume of coupon distributions, the estimated level of inventory in the
distribution channel and expected coupon redemption rates, using historical
trends and experience.
Shire’s
estimate of
the level of inventory in the distribution channel is based on
product-by-product inventory data provided by wholesalers and third-party
prescription data.
Shire
believes that
historical redemption rates, adjusted for known changes in coupon programs
(such
as length of coupon life and redemption conditions) are an appropriate basis
for
predicting future redemption rates. For coupon programs open at December 31,2006 the redemption rates assumed by Shire range between 15% and 35% of coupons
distributed (depending on the life of the coupons). A one percentage point
increase in estimated coupon redemption rates would increase the provision
at
December 31, 2006 by $0.2 million.
At
December 31,2006 the accrual for coupon redemptions was $13.0 million (2005: $5.2 million,
2004: $15.9 million). The accrual levels in each year fluctuate according to
the
timing and volume of coupon distributions, in addition to changes in estimated
redemption rates.
For
rebates,
returns and sales coupons the actual experience and the level of these
deductions to revenue may deviate from the estimate. Shire reviews its estimates
every quarter and may be required to adjust the estimate in a subsequent period.
Historically, actual payments have not varied significantly from the reserves
provided.
(vii)
Income
Taxes
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 audit items is often very complex and subject to change and the amounts
at issue can be substantial. The Company uses internal expertise and
professional advisors to minimize audit adjustments where possible.
Shire
develops best
estimates of income taxes payable for probable liabilities using experience,
judgment and assistance from professional advisors. Estimates are refined as
additional information becomes known. Any outcome upon settlement that differs
from Shire’s best estimate may result in additional or lower tax expense in
future periods. Income taxes payable increased from $93.6 million in 2005 to
$294.5 million in 2006 primarily as a result of additional tax contingencies
recognized in relation to ongoing tax audits.
The
Company has
significant deferred tax assets due to net operating losses (NOLs) in the United
States, UK and other countries. The realization of these assets is not assured
and is dependent on the generation of sufficient taxable income in the future.
Management has exercised judgment in determining the extent of the realization
of these losses based upon estimates of future taxable income in the various
jurisdictions in which these NOLs exist. Where there is an expectation that
on
the balance of probabilities there will not be sufficient taxable profits to
utilize these NOLs a valuation allowance is held against these deferred tax
assets. If actual events differ from
75
management’s
estimates, or to the extent that these estimates are adjusted in the future,
any
changes to the valuation allowance could materially impact the Company’s
financial position and results.
At
December 31,2006, the Company had gross deferred tax assets of $568 million and had recorded
a valuation allowance of $110 million against this amount.
At
December 31,2005, the Company had gross deferred tax assets of $579 million and had recorded
a valuation allowance of $235 million against this amount.
At
December 31,2004, the Company had gross deferred tax assets of $268 million and had recorded
a valuation allowance of $153 million against this amount.
(viii)
Share
based
payments
Shire
plc has
historically granted options to the Company’s directors and employees over
ordinary shares under six stock option plans. On November 28, 2005 the ordinary
shareholders of Shire plc approved the adoption of the Shire Plc Portfolio
Share
Plan (Parts A and B), a new share-based compensation plan, which provides for
stock settled share appreciation rights and performance share awards to be
made
to the directors and employees over ordinary shares and American Depositary
Shares. Further details on these plans can be found in note 31 to the
consolidated financial statements contained in the Part IV of this Annual
Report.
Effective
January1, 2006the Company adopted the provisions of SFAS 123(R) which establishes
accounting for share based compensation for employees.
The
Company
measures share-based compensation cost for awards classified as equity at
the grant date, based on the estimated fair value of the award, and recognizes
the cost as an expense on a straight-line basis (net of estimated forfeitures)
over the employee requisite service period. The Company measures share-based
compensation cost for awards classified as liabilities at fair value, which
is
re-measured at the end of each reporting period. The Company estimates the
fair value of share-based awards without market-based performance conditions
using a Black-Scholes valuation model and awards with market-based performance
conditions are valued using a binomial valuation model.
Several
critical
assumptions are made in the determination of the Company’s share based
compensation cost. The Company believes that the most critical assumptions
are
the expected life of the award and the weighted average volatility of the
Company’s stock. Other assumptions made by the Company in respect of the
determination of share based compensation cost include the risk free rate,
the
expected dividend yield and the expected forfeiture rate.
The
Company’s
estimate of the expected life of the award is based on historical trends of
employee exercise behaviour. The Company reviews these trends at the time of
each new grant for equity classified awards, and at the end of each reporting
period for liability classified awards, to ensure that the estimated life of
the
award is consistent with historical exercise behaviour. The weighted average
volatility is based upon historical share price data of the Company’s stock for
the requisite expected life of the awards. Given the related nature of each
of
the assumptions underlying the valuation of share-based payment awards, it
would
not be meaningful to quantify the sensitivity to change for each individual
assumption.
The
Company
believes that the valuation technique and the approach utilized to develop
the
underlying assumptions are appropriate in estimating the fair values of Shire’s
stock-based awards. Estimates of fair value are not intended to predict actual
future events or the value ultimately realized by employees who receive equity
awards, and subsequent events are not indicative of the reasonableness of the
original estimates of fair value made by the Company under SFAS
123(R).
Recent
accounting pronouncements update
See
note 2(y) to
the consolidated financial statements contained in the Part IV 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.
76
ITEM
7A:
Quantitative and qualitative disclosures about market risk
The
Company’s
principal treasury operations are coordinated by its corporate treasury
function, which is based in the UK. All treasury operations are conducted within
a framework of policies and procedures approved by the Board. As a matter of
policy, the Company does not undertake speculative transactions that would
increase its currency or interest rate exposure.
The
Board reviews
and agrees policies for managing the risks in the following areas:
Interest
rate risk
As
at December 31,2006the Company had no material debt outstanding. Therefore, the Company’s
interest charge on its debt obligations is low and consequently the Company’s
interest expense charge has limited exposure to interest rate movements. The
Company is exposed to movements in interest rates affecting interest income.
This exposure is primarily to US Dollar interest rates. As the Company maintains
all of its investments on a short term basis for liquidity purposes this risk
is
not actively managed.
In
the year to
December 31, 2006 the average interest rate received on cash and liquid
investments was approximately 4.7% per annum. The largest proportion of
investments was in US Dollar money market and liquidity funds.
The
acquisition of
New River will change the financial profile of the Company and will
increase interest rate exposure, still primarily to US Dollar interest
rates. The Company’s Treasury Committee will review the impact of the change and
implement an appropriate policy to manage this risk.
Foreign
exchange risk
The
Company is
exposed to movements in foreign exchange rates against the US Dollar for trading
transactions and the translation of net assets, liabilities and earnings of
non-US subsidiaries. The main trading currencies of the Company are the US
Dollar, the Canadian Dollar, Pounds Sterling, the Euro andSwedish
Krona. The
consolidated financial statements of foreign entities are translated using
the
accounting policies described in Note 3(a)
to the Company’s
consolidated financial statements contained in Part IV of this Annual
Report.
The
exposure to
foreign exchange risk is managed and monitored by the treasury function.
Exposures are generally managed through natural hedging via the currency
denomination of cash balances. As at December 31, 2006the Company had 18
outstanding forward foreign exchange contracts with a total principal amount
of
$98.3 million equivalent to manage the currency risk associated with certain
inter-company loans. As at December 31, 2006 there were net unrealized losses
of
$8.1 million on these contracts.
Market
risk
of investments
As
at December 31,2006the Company has $55.8 million of investments comprising equity investment
funds ($24.2 million), private companies ($15.1 million) and publicly quoted
equities ($16.5 million). The investment in public quoted companies and equity
investment funds are exposed to market risk. No financial instruments or
derivatives have been employed to hedge this risk.
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.
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, as at December 31, 2006. 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 are effective at a reasonable
level of assurance 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.
77
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 13a-15(f) or 15d-15(f)
promulgated under the 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 as at December 31, 2006. 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, 2006, the Company’s
internal control over financial reporting is effective based on those
criteria.
Deloitte
&
Touche LLP, an independent registered public accounting firm, has issued an
audit report on management’s assessment of the Company’s internal control over
financial reporting. This report appears on page F-2 of the Company’s
consolidated financial statements contained in Part IV of this Annual
Report.
Changes
in
Internal Control Over Financial Reporting
In
2004, the
Company commenced the implementation of a new integrated information system
covering financial processes, production, logistics and quality management.
Further implementations were made in 2005 and 2006 and more are planned for
2007. The implementations have involved changes in the Company’s information
systems that included aspects of the Company’s internal control over financial
reporting and therefore changes to the Company’s internal control over financial
reporting. The Company has reviewed each system as it is being implemented
and
the controls affected by the implementation of the new systems and made
appropriate changes to affected internal controls as it implemented the new
systems. Management believes that the controls as modified are appropriate
and
functioning effectively.
In
connection with
the restatement of the Company’s consolidated financial statements for the year
ended December 31, 2005 contained in this report and as discussed under Item
7:
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations”, the Company, under the supervision and with the participation of
the Company’s management, including the Chief Executive Officer and the Chief
Financial Officer, reconsidered the adequacy of its assertions concerning the
effectiveness of its disclosure controls and procedures in its Annual Report
on
Form 10-K for the year ended December 31, 2005 and in its Quarterly Reports
for
the periods ended September 30, 2005 and March 31, June 30 and September 30,2006.
The
Company, and
its independent registered public accounting firm Deloitte & Touche LLP, had
concluded that the Company’s accounting treatment in respect of the value
ascribed to IPR&D acquired as part of the TKT acquisition was in accordance
with generally accepted accounting principles. However, following the
identification by the Company’s staff of the omission that resulted in the 2005
restatement, the Company’s management has concluded that the Company did not
identify and apply correctly generally accepted accounting principles as
they related to the original accounting for IPR&D because it did not have
adequate specialist internal accounting resources at the time of the original
accounting for IPR&D.
Recognizing
the
inherent limitations of a retrospective evaluation, the Company’s management
further concluded that, as a result of this resource inadequacy, a material
weakness had existed in its internal control over financial reporting with
respect to the identification and application of generally accepted accounting
principles as they related to the accounting for IPR&D acquired in a
business combination at the time of the original accounting for the IPR&D
and, as a result, its disclosure controls and procedures for the identification
and application of generally accepted accounting principles as they related
to
the accounting for IPR&D acquired in a business combination were not
effective in the periods covered by, and as asserted in, its reports for the
year ended December 31, 2005 and the periods ended September 30, 2005 and March
31, June 30 and September 30, 2006.
During
2006, as
part of the Company’s ongoing improvement of its internal control over financial
reporting, the Company recruited additional staff with appropriate expertise,
whose full time responsibility was to focus on selection and application of
generally accepted accounting principles and related financial reporting
matters. As a result of the improved controls implemented during 2006, the
omission that resulted in the 2005 restatement was identified and resolved.
Therefore, as of December 31, 2006, the Company’s management determined that the
inadequacy in its disclosure controls and procedures for the identification
and
application of generally accepted accounting principles as they related to
the
accounting for IPR&D acquired in a business combination had been
remedied.
General
Counsel and Executive Vice President Global Legal
Affairs
Dr
Eliseo
Salinas
51
Chief
Scientific Officer and Executive Vice President of Global
R&D
John
Lee
56
Executive
Vice President Global Supply Chain & Quality
Joseph
Rus
61
Executive
Vice Alliance Management & New Market Development
Anita
Graham
35
Executive
Vice President Global Human Resources
Barbara
Deptula
52
Executive
Vice President of Business Development
Caroline
West
49
Senior
Vice
President, Chief Compliance and Risk
Officer
For
the purposes of
the NASDAQ corporate governance rules, the independent directors are Dr James
Cavanaugh, Dr Barry Price, the Hon. James Grant, Robin Buchanan, David Kappler,
Patrick Langlois, Kate Nealon and Dr Jeffrey Leiden and Ronald Nordmann prior
to
his retirement in December 2006.
There
is no family
relationship between or among any of the directors or executive
officers.
The
Company’s
directors, including non-executive directors (NEDs), 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, a common practice for UK public companies.
79
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 (with the exception of Dr Barry Price who has a one year term and
Ronald Nordmann who had a one-year term), subject to invitation to serve further
terms at the discretion of the Board. At the expiration of the two-year term,
the NEDs are not required to be re-elected by shareholders (unless the
expiration of the term coincides with a particular NEDs turn to retire by
rotation), but may be re-appointed by the Board. NEDs 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 NEDs
are
as set out below:
Executive
officers
are appointed pursuant to service agreements, which are not limited in
term.
Biographical
details of directors and executive officers of the Company
Dr.
James Cavanaugh
Chairman
Dr.
Cavanaugh has
been a member of Shire’s Board since March 24, 1997 and Chairman since May 11,1999. He is a General Partner of HealthCare Partners, a Managing Director
of HealthCare Ventures, a venture capital fund devoted to healthcare,
Non-Executive Chairman of Diversa Corporation and Xanodyne Pharmaceuticals
Inc.
up to February 2007 after which he remained a Board member, and a Non-Executive
Director of MedImmune Inc. and Advancis Pharmaceutical Corporation. He is
a former President of SmithKline & French Laboratories, SmithKline Beecham
Corporation’s clinical laboratory business, and Allergan International, and
served as Deputy Assistant to the US President on the White House Staff.
Dr. Cavanaugh is also Chairman of Shire’s Nomination Committee.
Matthew
Emmens
Chief
Executive Officer
Mr.
Emmens has been
Shire’s Chief Executive Officer and a member of the Board since March 12, 2003.
He also serves as a non-executive director of Vertex Pharmaceuticals Inc and
Incyte Corporation. He 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 US prescription pharmaceutical business. He was
later promoted to President of Merck KGaA’s global prescription business, based
in Germany. Mr. Emmens holds a degree in Business Management from Fairleigh
Dickinson University. He is also Chairman of Shire’s Management and Senior Staff
Committees.
Angus
Russell
Chief
Financial Officer and Executive Vice President of Global
Finance
Mr.
Russell has
been Shire’s Chief Financial Officer and a member of the Board since December13, 1999. He also serves as a Non-Executive Director of the City of London
Investment Trust plc. Between 1980 and 1999, Mr. Russell 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 a fellow of the Association of Corporate Treasurers. He is
also a member of Shire’s Management and Senior Staff Committees and is Chairman
of Shire’s Corporate Responsibility Committee.
Dr.
Barry Price
Non-Executive
Director
Dr.
Price has been
a member of Shire’s Board since January 16, 1996 and is the Company’s Senior
Non-Executive Director. He also serves as Chairman of Antisoma plc, Biowisdom
Ltd and VASTox plc. Dr. Price worked for Glaxo for 28 years, where he held
positions of increasing responsibility with the company’s research group. Dr.
Price is also Chairman of Shire’s Remuneration Committee and a member of Shire’s
Audit, Compliance and Risk Committee and Nomination Committee.
Ronald
Nordmann
Non-Executive
Director
Mr.
Nordmann was a
member of Shire’s Board from December 23, 1999 until his retirement from the
Board and its Committees on December 22, 2006 and he previously served as a
Non-Executive Director of Roberts Pharmaceutical Corporation. He is also a
Director of Par Pharmaceuticals Companies Inc. Mr. Nordmann is Co-President
of
Global Health Associates. He has been a financial analyst in healthcare equities
since 1971, holding senior positions with Deerfield Management, PaineWebber,
Oppenheimer & Co., F Eberstadt & Co., and Warner-Chilcott Laboratories.
He holds a bachelor’s degree from Johns Hopkins University and an MBA from
Fairleigh Dickinson
University. During 2006, Mr. Nordmann was a member of Shire’s Audit, Compliance
and Risk, Nomination and Remuneration Committees.
80
The
Hon. James Grant, P.C., C.M., Q.C.
Non-Executive
Director
Mr.
Grant has been
a member of Shire’s Board since May 11, 2001 and previously served as a Director
of BioChem Pharma Inc. since 1986. He also sits on the boards of two Canadian
public corporations and the boards of a number of other private corporations
and
not-for-profit foundations and councils. He is a partner and Chair Emeritus
with
the law firm Stikeman Elliott in Montreal. Mr. Grant holds degrees in Arts
and
Law from McGill University. He is also a member of Shire’s Nomination
Committee.
Robin
Buchanan
Non-Executive
Director
Mr.
Buchanan has
been a member of Shire’s Board since July 30, 2003. He also serves as a
Non-Executive Director of Liberty International plc. Mr. Buchanan
is the Senior Partner of the UK operations and Director of the global
business consultancy, Bain & Company Inc. He has also recently been
appointed Dean of the London Business School and will commence his appointment
no later than 1 July 2007. He is a member of the Trilateral Commission. He
previously worked for American Express International Banking Corporation in
New
York, McKinsey & Company, and Deloitte & Touche, where he qualified as a
chartered accountant (FCA). Mr. Buchanan holds an MBA with High
Distinction (Baker Scholar) from Harvard Business School. He is also a
member of Shire’s Remuneration Committee.
David
Kappler
Non-Executive
Director
Mr.
Kappler has
been a member of Shire's Board since April 5, 2004. He also serves as the
Non-Executive Chairman of Premier Foods plc and as a Non-Executive Director
of
Intercontinental Hotels Group plc. In addition, he 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. He is also Chairman
of Shire's Audit, Compliance and Risk Committee and a member of the Nomination
Committee.
Patrick
Langlois
Non-Executive
Director
Mr.
Langlois has
been a member of Shire’s Board since November 11, 2005. He is also a
Non-Executive Director of Coley Pharmaceuticals Group, Inc. and Exonhit S.A..
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. He is also a member of Shire’s
Audit, Compliance and Risk Committee and Remuneration Committee.
Ms
Kate
Nealon
Non-executive
Director
Ms
Nealon was
appointed to Shire’s Board on July 27, 2006. She also holds Non Executive
Director positions with HBOS plc and Cable & Wireless 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. She is also a member of Shire’s Remuneration
Committee and Audit, Compliance and Risk Committee.
81
Dr
Jeffrey Leiden
Non-executive
Director
Dr
Leiden was
appointed to Shire’s Board on January 1, 2007. He served as President and Chief
Operating Officer, Pharmaceutical Products Group and Chief Scientific Officer
at
Abbott Laboratories from 2001-2006; 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. Prior to that, he was the Frederick H. Rawson Professor of
Medicine and Pathology and Chief of the Section of Cardiology at the University
of Chicago. His extensive business and consulting experience includes both
the
pharmaceutical and medical device areas. 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 Partner at Clarus Ventures LLC.
Dr
David D
Pendergast has
been with Shire
since July 2005 and was previously Chief Executive Officer of TKT until its
acquisition by Shire. He also worked as Vice President of Product Development
and Quality at Biogen, Inc., and held senior positions at Fisons Ltd.’s
Pharmaceutical Division and The Upjohn Company. He has over 30 years of
pharmaceutical and biotechnology experience. He is also a member of Shire’s
Management and Senior Staff Committees.
TatjanaMay
has been with
Shire since May 2001. She 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.
Dr
Eliseo
Salinas has
been with Shire
since June 2004. Dr. Salinas joined from Wyeth Research where he spent 11 years,
most recently as Head of Global Central Nervous Systems (CNS) and Vice President
for Regional Clinical Research & Development. Prior to that, he was
International Project Leader (CNS) with Synthélabo Recherche. He obtained his
Medical Degree from the University of Buenos Aires and performed his Residency
in Psychiatry and gained a Masters in Pharmacology in Paris.
John
Lee
has been with
Shire since April 2000. He was previously Vice President, Operations at Schwarz
Pharma, and also worked at Central Pharmaceuticals, The Vitarine Company (now
Eon), and Glenwood Laboratories. He has over 34 years of experience in the
pharmaceutical industry.
Joseph
Rus has
been with Shire
since 1999. Following the merger of Shire Pharmaceuticals and BioChem Pharma
in
May 2001, he was appointed President and CEO of Shire BioChem Inc. He has more
than 25 years of experience in the international pharmaceutical industry
including European country management with both Warner Lambert and Hoffmann
La
Roche.
Anita
Graham has
been with Shire
since January 2004. She 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 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 licensing and business development at US Bioscience, Schering-Plough,
American Cyanamid, and Genetics Institute.
Caroline
H.
West
has been with
Shire since May of 2005. She was previously Vice President, Global Legal
Compliance at Aventis. She also worked at Rhone-Poulenc Rorer in compliance,
commercial law and litigation capacities and prior to joining the pharmaceutical
industry practised law at Pepper Hamilton LLP.
Audit,
Compliance and Risk Committee Financial Expert
The
members of the
Audit, Compliance and Risk Committee as at December 31, 2006 were Mr David
Kappler, Dr. Barry Price and Mr Patrick Langlois. Mr Nordman was a member
of the Committee during 2006, until his retirement from the Board on December22, 2006. Ms Nealon was elected to the committee on February 22,2007.
The
Board of
Directors has determined that David Kappler is the serving member of the Audit
Committee who is an Audit Committee financial expert 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.
In
respect of the
financial year to December 31, 2006, the total compensation paid to the
Company’s directors and executive officers as a group for the periods during
which they served in any capacity was $14.9 million. The total amounts set
aside
or accrued by the Company to provide pension, retirement or similar benefits
for
this group was $1.3 million. During 2006, members of the group were granted
options over ordinary shares 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 Part IV 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
in
the UK in accordance with the requirements of the UK Companies Act 1985. 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 the conclusion of certain audit procedures in relation to the audit
of the Company’s statutory financial statements to be filed in the UK and to
approval of Shire plc’s shareholders at the Annual General Meeting.
Directors’
Remuneration Report
Introduction
This
report has
been prepared in accordance with Schedule 7A to the Companies Act 1985 (‘the
Act’) and complies with the Combined Code on Corporate Governance. The report
also meets the relevant requirements of the Listing Rules of the Financial
Services Authority and describes how the Board has applied the principles
relating to Directors’ remuneration under the Directors’ Remuneration Report
Regulations 2002. As required by the Act, a resolution to approve the report
will be proposed at the Annual General Meeting of Shire plc at which the
financial statements will be approved. The Act requires the auditors to report
to Shire plc’s members on certain parts of the Director’s Remuneration Report
and to state whether in their opinion these parts of the report have been
properly prepared in accordance with the Companies Act 1985.
Dear
Shareholder,
Directors’
remuneration
During
the year
ended December 31, 2006 the Remuneration Committee continued its work, on
behalf of the Board, on Directors’ remuneration.
In
2006, the
Company continued to implement a focused business strategy for identifying,
developing and marketing pharmaceuticals in targeted therapeutic areas for
diseases treated by specialist physicians. The Company focused its business
on
ADHD, HGT, GI and renal diseases. Each of these businesses achieved significant
successes in the development, approval and promotion of new and existing
products in 2006.
The
Company
operates in a competitive multi-national environment. In 2006, approximately
90%
of the Company’s revenues were generated, and 85% of its employees were based,
outside the UK. Indeed most of the Company’s revenues are generated in the US
and the majority of its employees and most of its senior executives are based
in
the US. Over the past two years, the Committee has been in dialogue and
consultation with shareholders regarding the challenges it faces with key
elements of the remuneration package. In the fall of 2005, Shire plc
replaced older equity schemes with a new share plan and made amendments to
the
annual incentive plan.
During
2006 the
Remuneration Committee conducted a regular review of executive remuneration
levels relative to competitive data and is satisfied that the elements of the
remuneration package as well as remuneration values are well positioned relative
to the competitive market and that awards are commensurate with corporate
performance.
The
Remuneration
Committee is committed to a continuing dialogue with shareholders and we take
account of your views. We hope that this report provides helpful context and
explanation about the policies and practical considerations that influence
our
decisions.
Dr.
Barry
Price
Chairman
of
the Remuneration Committee
83
The
Remuneration Committee
The
Remuneration
Committee is responsible for all elements of the Executive Directors’
remuneration, as well as the management of their performance.
The
constitution of
the Committee was reviewed in 2004 and changes were made to ensure compliance
with the Combined Code. The Company considers all members of the Remuneration
Committee to be independent. During 2006 the Committee also reviewed and updated
its charter to effectively reflect its responsibilities.
The
Chief Executive
Officer and the Chief Financial Officer attend meetings of the Remuneration
Committee at its invitation, but neither is involved in any decisions relating
to their own remuneration.
The
members of the
Remuneration Committee during 2006 were:
·
Dr.
Barry
Price, the Senior Independent Director of the Company and Chairman
of the
Committee;
·
Mr
Robin
Buchanan, an Independent Non-Executive Director;
·
Mr
Ronald
Nordmann, an Independent Non-Executive Director;
and
·
Ms
Kate
Nealon, an Independent Non-Executive
Director.
Mr
Nordmann retired
as a Non-Executive Director of the Company effective December 22, 2006 and
stepped down as a member of the Remuneration Committee as of the same date.
In
addition, Mr Patrick Langlois was appointed to the Remuneration Committee
effective December 12, 2006.
The
Remuneration
Committee was materially assisted in 2006 by Mrs Anita Graham, EVP Global Human
Resources. The following external advisers were appointed by and materially
assisted the Remuneration Committee:
·
Towers
Perrin, who provided data in relation to Executive Directors’
remuneration;
·
Deloitte
& Touche LLP (who also provided audit and tax services to the
Company), who provided data and advice on general issues around the
design and operation of the Company’s incentive schemes;
and
·
Slaughter
and
May, who provided general legal advice to the
Company.
Executive
remuneration policy
The
Remuneration
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 high calibre
executives who deliver sustained value to shareholders and build the Company
for
long-term success.
The
Remuneration
Committee is responsible for developing, reviewing and overseeing the
implementation of the Company’s compensation and benefits policy. The
Remuneration Committee regularly monitors the effectiveness of the policy and
reviews this policy based on independent analysis and advice, an understanding
of the business drivers and competitive environment in which the Company
operates and on-going dialogue with shareholders.
The
Company’s
executive compensation and benefits policy is based on the following
principles:
·
Base
pay is
market and performance driven, with reference to a blended US/UK market
comparison. It is targeted at or around the median relative to the
comparison, based on individual performance.
·
The
Annual
Incentive Plan is performance-based and is linked to the achievement
of an
appropriate mix of corporate and individual performance targets. The
Annual Incentive Plan allows the Company to measure and reward progress
against its strategic goals and is closely tied to delivery of sustained
shareholder value.
·
Share-based
compensation is a key element of the Company’s remuneration policy as it
aligns the interests of the Company’s executives with the interests of its
shareholders. This element of compensation also utilises a blended
US/UK
market comparison to determine the face value of awards to Executive
Directors.
·
Benefits
programs are locally competitive and provide for the welfare and
well-being of the Company's employees and their
families.
·
The
Remuneration Committee currently aims for variable compensation to
represent over 2/3rds of total remuneration.
·
The
Remuneration Committee believes that Executive Directors should be
encouraged to own shares in the Company in order to ensure the alignment
of their interests with those of the Company’s shareholders. Share
ownership guidelines became effective in 2006.
84
The
remuneration package
The
main elements
of the remuneration package for Executive Directors and senior management
are:
·
Salary
·
Annual
Incentive Plan
(a)
Cash
Component
(b)
Share
Component
·
Long
Term
Incentives
(a)
Portfolio
Share Plan
(b)
Share
Options
(c)
Long
Term
Incentive Plan
·
Pension
and
other benefits
1)
Salary
The
Remuneration
Committee reviews salaries annually. In late 2004 and early 2005 the
Remuneration Committee undertook a competitive review of the Company’s executive
remuneration programs and practices, including base salary benchmarks and
levels. Based on the competitive analysis the Remuneration Committee determined
that the correct comparator group is a blend of US and UK companies with sector,
size, complexity and international characteristics similar to those of the
Company. Where appropriate, the competitive review included a detailed analysis
to align these characteristics to best represent the Company’s operating
position.
As
part of its
normal annual salary review process, the Remuneration Committee conducts a
review of a range of factors such as competitive market data provided by
independent external consultants, US and UK market conditions,
performance-related pay increases across the Company and individual skills,
performance and results achieved. The Remuneration Committee’s policy is for
salary to be targeted at or around the median of the blend of US/UK comparators,
with appropriate differentiation based upon skills and experience as well as
individual performance. Based on this review, and on corporate and individual
performance results, salaries for the CEO and CFO were increased 5% each
effective January 1, 2007, respectively, to $1,158,167 (denominated in $) and
£390,726 ($722,843 equivalent based on the average exchange rates prevailing
in
2006). These increases are in line with increases provided to the Company’s
employees.
2)
Annual
Incentive Plan
Shire
operates an
Annual Incentive Plan which rewards Executive Director performance based on
achievement of pre-defined, Board-approved corporate objectives and
Committee-approved individual objectives. The Company implemented the Balanced
Scorecard in 2005 and utilized it to set corporate objectives in 2006. The
Scorecard organises corporate objectives into all areas that drive the success
of the business: financial, products and markets, people and capabilities,
and
operational effectiveness.
At
the start of the
year corporate objectives are set by the Board for each area of the Scorecard.
These objectives apply to all employees participating in the Company’s Annual
Incentive Plan and include a description of the objective and key performance
indicators (KPI), including targets and deadlines. Awards under the Plan are
made only when exacting levels of performance specified by the KPI have been
achieved. Objectives measured by the Company’s financial performance are
assessed on the Company’s results, as reported in the Company’s Form 10-K under
US GAAP.
The
detailed
objectives and performance standards contain commercially sensitive information
and therefore are not detailed here. However, some of the objectives are
summarised below according to the four Scorecard areas for 2006:
· Financial
o
Growth
in
revenue;
o
Revenue
growth tied to key products, including Adderall
XR;
o
Revenue
generation related to new product launches;
and
o
Business
Development targets.
· Products/Markets
o
Successful
product launches;
o
Key
R&D
milestones such as submissions and approvals;
and
o
Product
pipeline growth - progression and
in-licensing/acquisition.
85
· People
and
Capabilities
o
Development
of capabilities to support the operating model and the businesses;
and
o
Talent
acquisition and leadership development of Shire's
people.
· Operational
Effectiveness
o
Systems
implementation;
o
Supply
chain
integrity; and
o
Risk
management, compliance initiatives and operational excellence
targets.
Personal
objectives
are also set at the beginning of the year and are aligned with individual
accountabilities for the development and execution of plans to achieve corporate
objectives in the current year and build for the future success of the
Company.
The
Remuneration
Committee assesses performance against objectives in the first quarter of the
following year. The target incentive is paid where Executive Directors have
fully achieved their individual objectives and the corporate objectives have
been met in full. The maximum incentive is paid when the Remuneration Committee
determines that individual and/or corporate performance has been exceptional.
Maximum incentive payments for 2006 were capped at 115% of salary in cash and
65% of salary in deferred shares for the Chief Executive Officer and 100% of
salary in cash and 55% of salary in deferred shares for the Chief Financial
Officer.
Target
incentive
Maximum
incentive
Weighting
of
target
incentive
objectives
(as
a % of
salary)
(as
a % of
salary)
Corporate
Individual
Mr
Matthew
Emmens
Chief
Executive Officer
65%
cash /
20% shares
115%
cash /
65% shares
80%
20%
Mr
Angus
Russell
Chief
Financial Officer
55%
cash /
15% shares
100%
cash /
55% shares
70%
30%
The
incentive
payments awarded to each Executive Director for 2006 reflect the corporate
and
individual achievements and amounted to 115% of salary in cash and 65% in
deferred shares for Mr Emmens and 76% of salary in cash and 51% in deferred
shares for Mr Russell.
These
incentive
awards are consistent with the overall performance of the Company in 2006,
which
included:
·
Total
revenue
growth of 12%;
·
Product
sales
up 16%;
·
Settlements
with Impax and Barr regarding ADDERALL XR.;
·
The
in-licensing/acquisition of four new products (SEASONIQUE, Transvaginal
Ring technology, Valrocemide, Tissue Protective
Cytokine technology);
·
The
successful launch of three new products (ELAPRASE, FOSRENOL in the
EU,
DAYTRANA);
·
Highly
successful achievement of R&D milestones including the filing and
approvable status for LIALDA and the subsequent US approval in January
2007; the approvable status of VYVANSE, the submissions of SPD465
and
SPD503, both for treatment for ADHD, and advancement of the HGT pipeline
with GA-GCB and three pre-clinical candidates, Hunter Syndrome CNS,
Sanfilippo Syndrome and Metachromatic Leukodystrophy; and
·
The
highly
successful implementation of other Scorecard objectives focused on
the
continuing growth of the Company.
3)
Long
term incentives
(a) The
Portfolio Share
Plan
The
Portfolio Share
Plan (the Plan), was adopted by Shire plc’s shareholders on October 28, 2005.
This plan replaced the 2000 Executive Share Option Scheme and the Long Term
Incentive Plan. Shire plc has made no awards in 2006 and will make no further
awards to Executive Directors or any other employee under the previous
plans.
86
The
purpose of the
Plan is to enable the Company to motivate and reward its workforce by reference
to share price performance, and to link the interests of participants with
those
of the Company's shareholders. The Plan is designed to align the
interests of selected employees of the Company with long-term value creation
for
shareholders. Participation in the Plan is discretionary. Under the Plan, 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 in the event of the participant’s employment terminating
early or on a change of control of the Company.
The
Plan is split
into two parts, which can be operated separately.
Under
Part A of the
Plan, Stock Appreciation Right (SAR) Awards can be granted. A SAR Award is
the
right to receive shares (or 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 until the fifth
anniversary of the date of grant.
Under
Part B of the
Plan, Performance Share (PSP) Awards can be granted. A PSP 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 PSP Award vests. Upon vesting of the PSP Award, shares will be released
to the participant automatically without any action on the part of the
participant.
The
Plan contains
individual grant limits set at six times base salary for SAR awards in any
one year and four times base salary for PSP awards in any one year. It is
the Company’s intention for awards granted under the Plan to Executive Directors
to be comprised of either or both a SAR Award and a PSP Award. Ordinarily,
it is
the Company’s intention to provide annual grants to the CEO and CFO with face
values (calculated by reference to the average share price over the prior twelve
month calendar period) as follows:
·
For
the CEO,
equivalent to approximately 4 times base salary in SARs and 3 times
base
salary in PSPs; and
·
For
the CFO,
equivalent to approximately 2.2 times base salary in SARs and 1.6
times
base salary in PSPs.
Performance
criteria
Awards
under the
Plan normally vest on the third anniversary of the date of grant. In the case
of
Executive Directors, awards will only vest if the Remuneration Committee
determines that the performance conditions have been satisfied and that, in
the
opinion of the Remuneration Committee, the underlying performance of the Company
is sufficient to justify the vesting of the award.
Performance
criteria are based on relative Total Shareholder Return (TSR) measured against
two comparator groups. Vesting of one-third 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 two-thirds 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:
·
Performance
below the median versus the comparator companies and the FTSE 100
- 0%
vesting;
·
Performance
at median versus the comparator companies and the FTSE 100 - 33 and
1/3%
vesting; and
·
Performance
between median and upper quartile versus the comparator companies
and the
FTSE 100 - straight-line vesting from 33 and 1/3% to 100% for at
or above
upper quartile performance.
The
comparator
group of international companies from the pharmaceutical sector currently
includes the following companies:
The
Remuneration
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 Remuneration
Committee, than it was or they were immediately before the circumstance in
question.
TSR
performance
will be measured using an averaging period of three months. In addition,
the Remuneration 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.
87
Awards
made under
the Plan in 2006 are set out below.
(b)
Share
options
No
awards were made
under the Company’s 2000 Executive Share Option Scheme in 2006.
In
2005,
discretionary grants of share options under this scheme were made to Executive
Directors to align their interests with those of shareholders and to promote
sustained long-term Company performance. The face value of annual option grants
under the Scheme was capped at three times salary. In order for options to
vest,
stretching performance targets must be met. For 2005 grants, the performance
target is based on real growth in diluted earnings per share (EPS) as reported
under US GAAP adjusted to ensure a consistent basis of measurement, as approved
by the Remuneration Committee, including the add back of significant one time
items.
The
minimum
performance required in order for Executive Directors’ options to vest is that
Shire’s EPS grows by 22.9% in the three years following the date of grant.
In the case of an annual grant of options worth three times salary, Shire’s EPS
must grow by 28.4% in the three years following the date of grant for all
the options to vest.
Options
with
a value on grant as a % of salary
Three-year
EPS growth
Up
to
100%
101%
to
200%
201%
to
300%
Over
301% of
salary
22.9%
(for
Executive Directors)
(16.9%
for
all other employees)
22.9%
28.4%
34.9%
The
2000 Executive
Share Option Scheme, which was approved by shareholders in 2000, contained
an
unlimited retesting feature from the date of grant. The Remuneration Committee
decided, after consultation with some of Shire plc’s major institutional
shareholders in 2003, that for options granted under the scheme from 2004
onwards, the performance condition should be retested once only, five years
after the grant and then only where Shire’s EPS growth has not met the minimum
level of performance over the first three years. The level of EPS growth over
the five-year period needs to be commensurately higher to meet the retest.
The
new Portfolio
Share Plan, which has replaced the 2000 Executive Share Option Scheme, does
not
allow re-testing.
Details
of the
Company’s share option schemes are set out in Note 31 to the Company's
consolidated financial statements contained in Part IV of this Annual Report.
(c) Long
Term Incentive
Plan
No
awards were made
under Shire plc’s Long Term Incentive Plan (LTIP) in 2006.
The
LTIP was
adopted at Shire plc’s 1998 Annual General Meeting and amended in 2000. Under
the LTIP, the Remuneration Committee has discretion to make awards of shares
subject to a maximum of 100% of salary a year.
The
performance
condition attached to the vesting of awards under the LTIP is Shire’s TSR
relative to the FTSE 100 Index over a three-year period. The Remuneration
Committee considers that this measure is a reliable and appropriate measure
of
the Company’s performance and that the FTSE 100 is an appropriate benchmark
given that Shire plc is a member of the Index.
Under
the
LTIP:
·
all
shares
vest if Shire’s TSR is in the top 10% of the FTSE
100;
·
20%
of the
shares vest if Shire’s TSR is at the median of the FTSE 100, with vesting
between these points on a linear basis;
and
·
no
shares
vest if Shire’s TSR is below the median of the FTSE
100.
The
Remuneration
Committee determines whether and to what extent the performance condition has
been met on the basis of data provided by an independent third party. To date,
all awards made under the LTIP have been made as a “conditional allocation”,
thereby allowing, at the Remuneration Committee’s discretion, for a cash
equivalent to be paid on maturity of the award. Whilst the performance period
is
measured over three years, an award is normally transferred after the fourth
anniversary of grant, to the extent the performance condition has been
met.
88
4)
The
implementation of share ownership
guidelines
The
Remuneration
Committee believes that Executive Directors and certain other members of senior
management should be encouraged to own shares in Shire plc in order to
ensure the alignment of their interests with those of the Shire plc’s
shareholders. The Remuneration Committee discussed this matter with shareholders
during its consultation process in 2005, and has developed share ownership
guidelines which came into effect in 2006.
The
Executive Share
Ownership Guidelines are administered by the Remuneration Committee and are
based on the following principles:
·
The
Remuneration Committee believes that share ownership is an important
element of an executive’s role in running the Company and represents both
a commitment by the executive as well as an alignment of the executive’s
interests with those of shareholders.
·
The
Remuneration Committee believes that share ownership by executives
should
be strongly encouraged, but not mandated.
·
The
Remuneration Committee understands that, depending on personal and
other
circumstances, an executive may not be able to achieve the desired
level of share ownership.
·
The
Remuneration Committee believes that executives should understand the
importance of share ownership in the stewardship of
the Company, and both appropriate time and latitude will be provided
to executives to achieve desired share ownership levels, where
possible.
·
Share
ownership levels will be reviewed annually for each
executive.
Executives
are
encouraged, within a five-year period following the later of either the
initiation of these guidelines, or their appointment or election, to attain
and
hold an investment position no less than the multiples of base salary set forth
below.
The
following are
the guideline share ownership levels for the Executive Directors:
·
Chief
Executive Officer: 2 x Base Salary
·
Chief
Financial Officer: 1.5 x Base Salary
All
shares
beneficially owned by an executive (excluding unexercised vested Stock Options
or SARs) count towards achieving these guidelines.
The
Remuneration
Committee will review share ownership levels for each executive on an annual
basis. The Committee will discuss with each Executive Director their plans
for
share ownership on a regular basis; the CEO will discuss with each of the
remaining executives their plans for share ownership on a regular
basis.
5)
Pension
and other benefits
The
Company’s
policy is to ensure that pension benefits are competitive in the markets in
which Shire operates. Shire contributes 30% of the CEO’s annual salary to a
Supplemental Employee Retirement Plan (SERP) and 401(k) Plan in the US. The
SERP
is an unfunded defined benefit scheme; the benefits are payable to certain
senior US employees as lump sums on leaving the Group’s employment or earlier
due to death, disability or termination. The amount of benefit is based on
the
value of notional contributions adjusted for “earned” investment returns as if
they were invested in investments of the employees’ choice.
In
the UK, Shire
operates a defined contribution scheme. The Company contributes 25% of salary
towards pension benefits for the CFO. In addition to salary, the Executive
Directors receive certain benefits in kind, principally a car or car allowance,
life insurance, private medical insurance and dental cover. These benefits
are
not pensionable.
The
Remuneration
Committee continues to believe that Executive Directors’ service contracts
should be for a rolling term and, for UK contracts, incorporate notice periods
of twelve months. The Remuneration Committee also believes that the Company
should retain the right to make a payment in lieu of notice to a Director.
The
contracts contain obligations on the Executive Directors in respect of
intellectual property, together with post-termination restrictions. The
Remuneration Committee’s view is that, in the event of early termination,
Executive Directors should be treated fairly but paid no more than is necessary.
Moreover, there should be no element of reward for failure.
The
Executive
Directors’ contracts of employment, which were revised following consultation
with some of the Company’s major shareholders in 2003, are dated March 10, 2004
in the case of Mr Russell and March 12, 2004 in the case of Mr Emmens. Both
agreements were revised on November 21, 2005 to provide for Shire plc being
established as the new holding company for the Shire group. Mr Russell’s
contract requires him to give the
89
Company twelve
months’ notice and expires on him reaching 65. Mr Emmens’ contract requires him
to give the Company, in certain circumstances, six months’ notice and no
age is specified for retirement. The Company is required to give Mr
Russell twelve months’ notice of termination, other than if termination is
for cause, whereas it is not obliged to give Mr Emmens any notice. If Mr Emmens’
contract is terminated without cause the Company is required to pay him one
year’s salary and the cash equivalent of one year’s pension, car and other
contractual benefits.
In
the event of
termination of employment within twelve months of a change of control, the
amount payable in respect of each of Mr Emmens and Mr Russell is one year’s
salary and the cash equivalent of one year’s pension, car and other contractual
benefits. Any incentive payable is at the discretion of the Remuneration
Committee and is capped at the contractual maximum incentive.
The
amount of
incentive payable upon termination of employment in any other circumstances,
other than for cause, is at the discretion of the Remuneration Committee and
is
capped at the contractual target incentive.
Non-Executive
Directors and the Chairman
Each
Non-Executive
Director is paid a fee for serving as a Director and additional fees are paid
for membership or chairmanship of the Audit, Remuneration and Nomination
Committees. The Chairman of the Company receives an inclusive fee. Fees are
determined by the Board, with the exception of the Chairman’s fee which is
determined by the Remuneration Committee and confirmed by the Board. Fees are
benchmarked against Non-Executive Director fees of comparable companies. The
fees paid to Non-Executive Directors are not performance-related. Details of
fees paid to the Chairman and Non-Executive Directors in 2006 are set out in
the
table below.
The
Non-Executive
Directors are not eligible to join the Company’s pension scheme.
Non-Executive
Directors do not participate in any of the Company share schemes or other
employee benefit schemes and no options have been granted to Non-Executive
Directors in their capacity as Non-Executive Directors of Shire plc. On the
merger of the Company with BioChem Pharma Inc in 2001, options were granted
to
The Hon James Grant in replacement for Mr Grant’s BioChem Pharma options. The
grant of these replacement options and the original BioChem Pharma option grant
were made on the same terms as applied to other employees at the time, including
that these options are not subject to any performance conditions.
Non-Executive
Directors are appointed ordinarily for a term of two years, subject to
shareholder approval. Non-Executive Directors who have served on the Board
for
nine years or more are appointed for one year terms and, in accordance with
the
Combined Code on Corporate Governance, are subject to annual re-election by
shareholders. Re-appointment of Non-Executive Directors following the expiry
of
their term of appointment is subject to Board approval. Non-Executive Directors
are not entitled to compensation for loss of office.
Details
of the
unexpired terms of the letters of appointment and notice periods are as
follows:
The
fee policy
structure for Non-Executive Directors, effective January 1, 2007, is presented
in the table below.
2007
Board membership annual basic fees (1)
Chairman
of
the Board (inclusive of all committees)
$
488,051
Senior
Non-Executive Director (inclusive of NED fee)
$
96,689
Non-Executive
Director
$
86,560
Committee
Membership Fees
Audit,
Compliance and Risk Committee Chair
$
36,834
Remuneration
Committee Chair
$
23,021
Nomination
Committee Chair
$
23,021
Audit,
Compliance and Risk Committee member
$
18,417
Remuneration
Committee member
$
13,813
Nomination
Committee member
$
9,209
(1)
Denominated in £ sterling and translated into $ at the average exchange rate
prevailing in 2006.
Related
party transactions
Details
of
transactions relating to Dr. James Cavanaugh, The Hon. James Grant, who is
a
partner of a Canadian law firm with which the Company incurred professional
fees
during the year and with Dr. Francesco Bellini, a former Non-Executive Director,
are given in Item 13: Certain relationships and related
transactions.
Performance
graph
The
graphs below
set out the TSR for the three and five years ending December 31, 2006. The
graphs compare the performance of a hypothetical £100 holding of Shire
plc’s shares with that of a holding of shares in the FTSE 100 index (excluding
financial institutions) and with a holding in a group comprised of the following
pharma companies: Novo Nordisk, Schering AG, Serono, Altana, UCB, Lundbeck,
Forest Labs, Allergan, Sepracor, Cephalon, Watson, Biovail, King, Valeant,
Medicis and Kos. This comparator group is a blend of US and UK companies with
sector, size, complexity and international characteristics similar to those
of
the Company. The
Company is a
member of the FTSE 100 Index and consequently, for the purpose of the graphs
which are set out below, we have selected the FTSE 100 Index (excluding
financial institutions) as the appropriate index.These
comparisons
will also be used to determine achievement of performance conditions relating
to
the Annual Incentive Plan and the Portfolio Share Plan.
The
three year
graph has been included as it tracks the TSR performance since the Company
started to implement its new strategic plan under new management.
91
92
Other
remuneration
The
Company
believes there are benefits to Executive Directors’ participation at the Board
level at other companies, including cross-industry and cross-company exposure
and the added perspective of outside views. It is therefore the Company’s policy
to allow Executive Directors to take up Non-Executive positions at other
companies and retain associated earnings as long as such appointments are
expressly permitted by the Board of Directors.
Mr
Emmens was
appointed as a Non-Executive Director of Vertex Pharmaceuticals Inc during
2004
and was appointed a Director of Incyte Corporation in 2006. In this capacity
he
was paid $42,000 and $16,107 respectively in 2006, which he will retain.
Mr
Russell is a
Non-Executive Director of The City of London Investment Trust plc (and its
associated companies, The City of London European Trust Limited, The City
of
London Investments Limited and The City of London Finance Company Limited).
In
this capacity, he was paid £17,500 ($32,230 equivalent) in 2006, which he will
retain.
Aggregate
Directors’ remuneration
The
total amounts
for Directors’ remuneration were as follows:
2006
$’000
2005
$’000
Emoluments
5,969
4,289
Money
purchase pension contributions
532
488
Gains
on
exercise of share options
390
194
6,891
4,971
93
Directors’
emoluments
Salary
$'000
Incentive
$'000
Fees
$'000
Cash
benefits
in
kind
$'000
Non-cash
benefits
in
kind
$'000
Total
2006
$'000
Total
2005
$'000
Executive
Mr
Matthew
Emmens(vi)
1,105
1,985
87
-
3,177
2,286
Mr
Angus
Russell(vii)
701
971
20
12
1,704
1,103
Total
Executive
1,806
2,956
107
12
4,881
3,389
Non-executive
Dr.
James
Cavanaugh (i)
-
-
423
-
-
423
364
Dr.
Barry
Price (iii)
-
-
134
-
-
134
132
The
Hon.
James Grant (i)
-
-
85
-
-
85
82
Mr
Ronald
Nordmann (i)
-
-
118
-
-
118
114
Mr
Robin
Buchanan (iii)
-
-
87
-
-
87
87
Mr
David
Kappler (iii)
-
-
111
-
-
111
109
Mr
Patrick
Langlois (iv)
-
-
94
-
-
94
12
Ms
Kate
Nealon (iii)
(v)
-
-
36
-
-
36
-
Total
Non-Executive
-
-
1,088
-
-
1,088
900
Total
1,806
2,956
1,088
107
12
5,969
4,289
Notes
(i)
Paid
in
US$.
(ii)
Salary
and
benefits in kind paid in £ Sterling and translated into $ at the average
exchange rates for the year. Incentive payable in £ Sterling and
translated at the exchange rate at the end of February
2007.
(iii)
Fees
paid in
£ Sterling and translated into $ at the average exchange rates for
the
year.
(iv)
Paid
in Euros
and translated into $ at the average exchange rate for the service
period.
(v)
Ms
Nealon was
appointed a Non-Executive Director on July 27,2006.
(vi)
Mr
Emmen’s
incentive was split 64% receivable in cash, 36% receivable in deferred
shares.
(vii)
Mr
Russell’s
incentive was split 61% receivable in cash, 39% receivable in deferred
shares.
Cash
benefits in
kind represent expense allowances (including dental costs). Non-cash benefits
in
kind consist of private medical insurance, life insurance and fuel
allowance.
Details
of the
exercise of share options are disclosed below. Non-Executive Director
remuneration is to/from the date of resignation/appointment.
Directors’
pension entitlements
The
following
Directors are members of money purchase schemes. Contributions made by the
Company (not included in emoluments above) in respect of 2006 were as
follows:
Name
of Director
2006
$’000
2005
$’000
Mr
Matthew
Emmens
361
323
Mr
Angus
Russell (i)
171
165
532
488
(i)
At
Mr
Russell’s request the Company deferred pension contributions of $59,000
earned in 2005, which were paid in 2006.
Directors’
shareholdings
Directors
who held
office at the end of the year had interests in the share capital of the Company
as follows (all interests are beneficial):
94
Name
of Director
2006:
number of ordinary shares
2005:
number
of ordinary shares
Dr.
James
Cavanaugh
412,849
412,849
Mr
Matthew
Emmens
18,938
18,938
Mr
Angus
Russell
1,882
1,882
Dr.
Barry
Price
31,350
31,350
The
Hon.
James Grant
100,128
68,269
Mr
Robin
Buchanan
7,500
7,500
Mr
David
Kappler
10,000
5,000
Mr
Patrick
Langlois
Nil
Nil
Ms
Kate
Nealon
2,251
Nil
Directors’
share options
Aggregate
emoluments disclosed above do not include any amounts for the value of options
to acquire ordinary shares in the Company granted to or held by the Directors.
Directors
and
employees have been granted options over ordinary shares under the Shire
Pharmaceuticals Group plc 2000 Executive Share Option Scheme (Parts A and
B)
(2000 Executive Scheme), the Shire Holdings Limited Share Option Scheme (SHL
Scheme), the Pharmavene 1991 Stock Option Plan (SLI Plan), the Shire
Pharmaceuticals Executive Share Option Scheme (Parts A and B) (Executive
Scheme), the Shire plc Sharesave Scheme (Sharesave Scheme), the Shire
Pharmaceuticals Group plc Employee Stock Purchase Plan (Stock Purchase Plan),
the Roberts Stock Option Plan (Roberts Plan) and the BioChem Stock Option
Plan
(BioChem Plan).
Details
of options
exercised during the year are as follows:
Director
Scheme
Number
of
options
Exercise
price
£
Market
price
at
exercise
date
£
Gains
on
exercise
2006
$'000
The
Hon.
James Grant
BioChem
Plan
31,859
6.26
7.85
94
Mr
Angus
Russell
Executive
Scheme B
45,819
7.175
10.56
296
Details
of the
options of Directors who served during the year are as follows:
95
Number
of ordinary shares
Exercise
dates
Director
Scheme
At
1
January
2006
Granted
Exercised
Lapsed
At
31 December
2006
Exercise
price
£
Earliest
Latest
Mr
Matthew
Emmens
2000 Executive
Scheme
B(iii)
945,010
-
-
-
945,010
3.68
18.03.06
17.03.13
315,777
-
-
-
315,777
5.26
25.03.07
24.03.14
295,000
-
-
-
295,000
5.59
11.05.08
10.05.15
Stock
Purchase Plan(v)
-
713
-
-
713
7.48
21.11.08
21.11.08
1,555,787
713
-
-
1,556,500
Mr
Angus
Russell
Executive Scheme A(i)
4,181
-
-
-
4,181
7.175
13.12.02
12.12.09
Executive Scheme
B
(i)
45,819
-
45,819
-
-
7.175
13.12.02
12.12.06
6,422
-
-
-
6,422
10.275
01.03.03
28.02.07
2000
Executive
Scheme
B(iii)
69,213
-
-
-
69,213
12.57
05.06.04
04.06.11
114,474
-
-
-
114,474
5.065
04.03.05
03.03.12
284,024
-
-
-
284,024
3.38
04.03.06
03.03.13
195,285
-
-
-
195,285
5.26
25.03.07
24.03.14
195,000
-
-
-
195,000
5.585
11.05.08
10.05.15
Sharesave(ii)
-
2,342
-
-
2,342
6.99
01.12.11
31.05.12
914,418
2,342
45,819
-
870,941
The
Hon James
Grant
BioChem(iv)
31,859
-
31,859
-
-
6.26
14.05.01
04.06.06
2,275
-
-
-
2,275
6.20
14.05.01
05.05.07
2,275
-
-
-
2,275
6.94
14.05.01
20.04.08
7,964
-
-
-
7,964
5.70
14.05.01
10.06.09
13,653
-
-
-
13,653
6.58
14.05.01
23.05.10
58,026
-
31,859
-
26,167
For
those options
which remain unexercised during the year, no payment was made by any Director
in
consideration of the grant award.
Details
of the SARs
of Directors who served during the year are as follows:
96
Number
of SARs - ADSs*
At
1
January
2006
At
31 December
2006*
Market
Price at the date of the award
Exercise
dates
Director
Scheme
Granted
Exercised
Lapsed
Earliest
Latest
Mr
Matthew
Emmens
PSP part A(vi)
-
126,831
-
-
126,831
$
49.36
17.08.09
17.08.11
PSP part B (vi)
-
92,671
-
-
92,671
$
49.36
17.08.09
17.08.09
-
219,502
-
-
219,502
Number
of SARs - Ordinary shares
Mr
Angus
Russell
PSP part A(vi)
-
128,542
-
-
128,542
£8.65
17.08.09
17.08.11
PSP
part B
(vi)
-
96,406
-
-
96,406
£8.65
17.08.09
17.08.09
-
224,948
-
-
224,948
*
1 ADS is equal to
3 ordinary shares.
Notes
(i)
Options
granted under this scheme are subject to performance criteria
and cannot
be exercised in full, unless Shire plc’s ordinary share price increases at
a compound rate of at least 20.5% per annum over a minimum three-year
measurement period. If Shire plc’s share price increases at a compound
rate of 14.5% per annum over a minimum three-year measurement
period, 60%
of the options may be exercised. If these conditions are not
met after the
initial three years, they are thereafter tested quarterly by
reference to
share price growth over the extended period. If the share price
does not
meet these conditions at any time, none of the options granted
become
exercisable.
On
February28, 2000, the Remuneration Committee of the Board exercised its
powers to
amend the terms of Part B of the Executive Share Option Scheme
so as to
include a cliff vesting provision. It is intended that no further
options
will be granted under the Executive Scheme.
(ii)
Options
granted under the Sharesave Scheme are granted with an exercise
price
equal to 80% of the mid-market price on the day before invitations
are
issued to employees. Employees may enter into three or five-year
savings
contracts.
(iii)
Options
granted under the 2000 Executive Scheme are exercisable subject
to certain
performance criteria. In respect of any option granted prior
to August
2002, if Shire plc’s ordinary share price increases at a compound rate of
at least 20.5% per annum over a minimum three-year measurement
period, the
option becomes exercisable in full. If it increases by at least
14.5% per
annum over the same three-year period, 60% of the options granted
become
exercisable. If these conditions are not met after the initial
three-year
measurement period, they will thereafter be tested quarterly
by reference
to compound annual share price growth over an extended
period.
The
performance criteria were reviewed in 2002 to ensure the criteria
reflected the market in which Shire operates. Given Shire’s development,
it was considered appropriate that an earnings per share based
measure
should be adopted in place of share price growth targets. The
performance
criteria are based on real growth in the diluted earnings per
share
reported in the Company’s Form 10-K under US GAAP, adjusted to ensure a
consistent basis of measurement, as approved by the Remuneration
Committee, including the add back of significant one time items
(option
EPS).
Therefore,
the performance criteria were amended so that an option would
become
exercisable in full if Shire plc’s option EPS growth over a three year
period from the date of award exceed the UK Retail Prices Index
(RPI) for
the following tranches of
grants:
Options
with
a grant value of up to 100% of salary
The
RPI based
earnings per share performance criteria applied to options granted
under
the 2000 Executive Scheme from August 2002. After consultation
with
certain of its institutional shareholders, the Company decided
that, for
options granted under the scheme from 2004 onwards, the retest
of the
performance condition, if Shire plc’s option EPS growth falls short of the
minimum annual average percentage increase over the three year
period from
grant, would be changed. The performance condition will be retested
once
only, therefore, at five years after the grant. Hence the level of
option EPS growth in the next two years needs to be consequentially
higher
to meet the test.
In
December
2006 the Remuneration Committee exercised its powers to amend the
performance conditions for options granted under the 2000 Executive
Scheme
which had not vested. The RPI based growth rate was replaced with
an
equivalent fixed growth rate based on historical and forecast inflation.
Under
Part B
of the scheme, six weeks prior to the expiration date, any options
that
have not become exercisable at an earlier date, automatically vest
without
reference to the performance criteria.
It
is
intended that no further options will be granted under the 2000
Executive
Scheme.
(iv)
Following
the
acquisition of BioChem Pharma Inc. on May 11, 2001, the BioChem
Stock
Option Plan was amended such that options over BioChem Pharma Inc.’s
common stock became options over ordinary shares of Shire plc.
All BioChem
Pharma Inc. options, which were not already exercisable, vested
and became
exercisable as a result of the acquisition. It is intended that
no further
options will be granted under the BioChem Stock Option
Plan.
97
(v)
Under
the
Stock Purchase Plan, options are granted with an exercise price
equal to
85% of the fair market value of a share on the enrolment date (the
first
day of the offering period) or the exercise date (the last day
of the
offering period), whichever is the lower. The offering period is
for 27
months.
(vi)
Details
of
the Portfolio Share Plan and vesting criteria are set out in Note
31 to
the consolidated financial statements included within Part IV of
this
Annual Report.
The
market price of
the ordinary shares at December 31, 2006 was £10.59 and the range during the
year was £7.00 to £10.80. The market price of the ADSs at December 31, 2006 was
$61.76 and the range during the year was $38.54 to $64.10.
Long
Term
Incentive Plan
The
following
award, granted under the Long Term Incentive Plan lapsed during the year
2006
and no payment was made under it as the performance criteria were not met
at the
maturity date:
The
performance criteria attaching to awards made under the Long Term
Incentive Plan are detailed above.
Approval
This
report was
approved by the Board of Directors on February 22, 2007 and signed on its
behalf
by:
Dr.
Barry
Price
Chairman
of
the Remuneration Committee
98
ITEM
12:
Security
ownership of certain beneficial owners and management and related stockholder
matters
Set
forth in the
following table is the beneficial ownership of ordinary shares as at February16, 2007 for (i) each person (or group of affiliated persons) known to the
Company to be the beneficial owner of more than 5% of ordinary shares, (ii)
all
current directors, (iii) certain of the Company’s named executive officers in
2006, where applicable, and (iv) all other current directors and executive
officers as a group. Except as indicated by the notes to the following table,
the holders listed below have sole voting power and investment power over
the
shares beneficially held by them. The address of each of Shire plc’s directors
and executive officers is that of Shire plc’s.
Name
Number
of ordinary shares beneficially owned as at
Fidelity
International Limited and its direct and indirect subsidiaries
(Pembrooke
Hall, 42 Crow Lane, Pembroke, HN19 Bermuda) (2)
26,759,374
5%
Management
Dr
James
Cavanaugh
412,849
*
Matthew
Emmens (3)
1,279,725
*
Angus
Russell
(4)
675,481
*
Dr
Barry
Price
31,350
*
Robin
Buchanan
7,500
*
The
Hon James
Grant (5)
126,295
*
David
Kappler
10,000
*
Patrick
Langlois
-
-
Jeffrey
Leiden
-
-
Kate
Nealon
2,251
-
Michael
Cola
-
-
David
Pendergast
-
-
Tatjana
May
(6)
407,693
*
Greg
Flexter (7)
57,500
*
All
Directors
and Executive Officers of the Company (19 persons) (8)
3,368,095
*
*
Less than
1%
(1)
For
the
purposes of this table, a person or a group of persons is deemed
to have
“beneficial ownership” as at a given date of any shares, which that person
has the right to acquire within 60 days after that date. For purposes
of
computing the percentage of outstanding shares held by each person
or a
group of persons named above on a given date, any shares which
that person
or persons has the right to acquire within 60 days after that date
are
deemed to be outstanding.
Includes
1,260,787 ordinary shares issuable upon exercise of
options.
(4)
Includes
673,599 ordinary shares issuable upon exercise of
options.
(5)
Includes
26,167 ordinary shares issuable upon exercise of
options.
(6)
Includes
405,
087 ordinary shares issuable upon exercise of options.
(7)
Mr
Flexter
resigned in 2006. All of Mr Flexter’s ordinary shares are issuable upon
exercise of options.
(8)
Includes
2,814,908 ordinary shares issuable upon exercise of
options.
99
Equity
Compensation Plan Information
Set
forth in the
following table are the details, for the year to December 31, 2006, in respect
of compensation plans (including individual compensation arrangements) under
which equity securities of the Company are authorized for issuance.
Plan
category
Number
of securities to be issued upon exercise of outstanding equity
awards
Weighted-average
price of outstanding equity awards
Number
of securities remaining available for future issuance under equity
compensation plans
Equity
compensation plans approved by security holders
32,032,919
$
12.87
8,870,700
Equity
compensation plans not approved by security holders
The
Company
incurred professional fees with Stikeman Elliott, a law firm in which the
Hon.
James Grant is a partner, totaling $0.6 million for the year to December31,2006 (2005: $0.5 million; 2004: $2.1 million).
In
April 2004, the
Company contributed cash of $3.7 million (CAN$5.0 million) and equipment
and
intellectual property to the start-up of a new Canadian-based pharmaceutical
research and development organization, ViroChem Pharma Inc. (ViroChem), in
return for an equity interest and royalties on the sale of certain products
subsequently launched by ViroChem. In April 2006 and April 2005, the Company
contributed cash of $8.0 million (CAN$9 million) and $4.1 million (CAN$5
million) respectively to ViroChem in return for an additional equity interest.
Dr Bellini, a non-executive director of BioChem and, until May 10, 2003,
a
non-executive director of Shire, had, at the time of the transaction, an
indirect substantial interest in a company, which is a co-investor of ViroChem.
The Company has undertaken to invest an additional $5.0 million (CAN$6.0
million) in ViroChem.
In
October 2005,
the Company sub-leased its office premises in Newport to Xanodyne
Pharmaceuticals Inc. Dr James Cavanaugh, the non-executive Chairman of the
Company, was the Chairman of the Board of Directors of Xanodyne Pharmaceuticals,
Inc. up to February 9, 2007 and he remains a Board Director. As a result
of the
transaction the Company will receive $7.8 million (net of inducements) in
lease
income over the sub-lease period from Xanodyne Pharmaceuticals Inc.
In
April 2004 Shire
BioChem Inc. (BioChem), a subsidiary of Shire, sold a Canadian property to
NeuroChem Inc. for $7.8 million (CAN$10.5 million). At the time of the
transaction, Dr Bellini, a non-executive director of Biochem and, until May10,2003 a non-executive director of Shire, and Mr Nordmann, a non-executive
director of Shire until December 2006, were both directors of NeuroChem Inc.
and
Dr Bellini had an indirect substantial interest in the issued share capital
of
Neurochem Inc. at the time of the transaction. Mr Nordmann stepped down as
a
director of Neurochem Inc. in August 2006.
100
ITEM
14:
Principal
accountant fees and services
The
Audit Committee
reviews the scope and results of the audit and non-audit services, including
tax
advisory and compliance services, provided by the Company’s Independent
Registered Public Accountants, Deloitte & Touche LLP, the cost effectiveness
and the independence and objectivity of the Registered Public Accountants.
In
recognition of the importance of maintaining the independence of Deloitte
&
Touche LLP, a process for pre-approval has been in place since July 1, 2002
and
has continued through to the end of the period covered by this
Report.
The
following table
provides an analysis of the amount paid to the Company’s Independent Registered
Public Accountants, Deloitte & Touche LLP, all fees having been pre-approved
by the Audit Committee.
Audit
fees
consisted of audit work only the Independent Registered Public
Accountant
can reasonably be expected to perform, such as statutory audits
and
included the audit of management’s assessment that the Company maintained
effective internal control over financial reporting and the audit
of the
effectiveness of the Company’s internal control over financial
reporting.
(2)
Audit
related
fees consist of work generally only the Independent Registered
Public
Accountant can reasonably be expected to perform, such as procedures
relating to regulatory filings.
(3)
Tax
fees
consisted principally of assistance with matters related to compliance,
planning and advice in various tax jurisdictions.
(4)
All
other fees
relate to assisting the remuneration committee and corporate
responsibility.
Policy
on
Audit Committee pre-approval of audit and permissable non-audit services
of
Independent Registered Public Accountant
Consistent
with SEC
policies regarding auditor independence, the Audit Committee has responsibility
for appointing, setting compensation and overseeing the work of the Independent
Registered Public Accountant. In recognition of this responsibility, the
Audit
Committee pre-approves all audit and permissible non-audit services provided
by
the Independent Registered Public Accountant.
Certain
services
have been pre-approved by the Audit Committee as part of its pre-approval
policy, including:
·
audit
services, such as audit work performed in the preparation of financial
statements, as well as work that generally only the Independent
Registered
Public Accountant can reasonably be expected to provide, including
comfort
letters, statutory audits and consultation regarding financial
accounting
and/or reporting standards;
·
audit-related
services, such as the audit of employee benefit plans, and special
procedures required to meet certain regulatory requirements;
and
·
tax
services,
such as tax compliance services and tax advice on employee remuneration
strategies.
Where
it is
necessary to engage the Independent Registered Public Accountant for services
not contemplated in the pre-approval policy, the Audit Committee must
pre-approve the proposed service before engaging the Independent Registered
Public Accountant. For this purpose, the Audit Committee has delegated
pre-approval authority to the Chairman of the Audit Committee. The pre-approval
policy is reviewed and updated periodically and was last updated on February21,2006. The Chairman must report any pre-approval decisions to the Audit Committee
at its next scheduled meeting.
101
PART
IV
ITEM
15:
Exhibits,
financial statement schedules
The
following documents are included as part of this Annual Report on Form
10-K
Index
to
the consolidated financial statements
Report
of
Independent Registered Public Accountants
Consolidated
Statements of Operations for each of the three years in the period ended
December 31, 2006
Consolidated
Statements of Changes in Shareholders’ Equity for each of the three years in the
period ended December31,2006
Consolidated
Statements of Comprehensive Income for each of the three years in the period
ended December31,2006
Consolidated
Statements of Cash Flows for each of the three years in the period ended
December 31, 2006
Notes
to the
Consolidated Financial Statements
Financial
statement schedule
The
following
schedule is filed as part of this Form 10-K:
Schedule
II -
Valuation and Qualifying Accounts for each of the three years in the period
ended December 31, 2006.
All
other schedules
are omitted as the information required is inapplicable or the information
is
presented in the consolidated financial statements or the related
notes.
Exhibits
Exhibit
number
Description
3.1
Articles
of
Association of Shire plc as adopted by special resolution on September19,2005(1)
.
10.1*
Settlement
Agreement, dated August 14, 2006 by and between Shire Laboratories
Inc.
and Barr Laboratories, Inc.(2)
10.2*
Product
Development and License Agreement, dated August 14, 2006 by and
between
Shire LLC and Duramed Pharmaceuticals, Inc.(2)
10.3*
Product
Acquisition and License Agreement, dated August 14, 2006 by and
among
Shire LLC, Shire plc and Duramed Pharmaceuticals, Inc.(2)
Certification
of Matthew Emmens pursuant to Rule 13a - 14 under The Exchange
Act.
31.2
Certification
of Angus Russell pursuant to Rule 13a - 14 under The Exchange
Act.
32
Certification
of Matthew Emmens and Angus Russell pursuant to Section 906 of
the
Sarbanes - Oxley Act of 2002
*
Certain
portions of this exhibit have been omitted intentionally, subject
to a
confidential treatment request. A complete version of this agreement
has
been filed separately with the Securities and Exchange
Commission.
(1)
Incorporated
by reference to Exhibit 3.01 to Shire’s Form 8-K filed on November 25,2005.
(2)
Incorporated
by reference to Shire’s
Form 10-Q filed on November 7,2006.
102
INDEX
TO
THE CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
SCHEDULE
Report
of
Independent Registered Public Accounting Firm
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of Shire plc,
Basingstoke,
England
We
have audited the
accompanying consolidated balance sheets of Shire plc and subsidiaries (the
Company) as at December 31, 2006 and 2005, and the related consolidated
statements of operations, stockholders’ equity, comprehensive income/(loss), and
cash flows for each of the three years in the period ended December 31, 2006.
Our audits also included the financial statement schedule listed in the Index
at
ITEM 15. We also have audited management’s assessment, included in the
accompanying Management Report on Internal Controls Over Financial Reporting,
that the Company maintained effective internal control over financial reporting
as of December 31, 2006, based oncriteria
established in Internal
Control—Integrated Framework issued
by the
Committee of Sponsoring Organizations of the Treadway Commission. The
Company’s management is responsible for these financial statements and the
financial statement schedule, for maintaining effective internal control
over
financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an
opinion on these financial statements and the financial statement schedule,
an
opinion on management’s assessment, and an opinion on the effectiveness of the
Company’s internal control over financial reporting based on our
audits.
We
conducted our
audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects.
Our audit of financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and
evaluating the overall financial statement presentation. Our audit of
internal control over financial reporting included obtaining an understanding
of
internal control over financial reporting, evaluating management’s assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered necessary
in the
circumstances. We believe that our audits provide a reasonable basis for
our opinions.
A
company’s
internal control over financial reporting is a process designed by, or under
the
supervision of, the company’s principal executive and principal financial
officers, or persons performing similar functions, and effected by the company’s
board of directors, management, and other personnel to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally accepted
accounting principles and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or
timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of the
inherent limitations of internal control over financial reporting, including
the
possibility of collusion or improper management override of controls, material
misstatements due to error or fraud may not be prevented or detected on a
timely
basis. Also, projections of any evaluation of the effectiveness of the
internal control over financial reporting to future periods are subject to
the
risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
F-2
In
our opinion, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31,2006
and 2005, and the results of its operations and its cash flows for each of
the
three years in the period ended December 31, 2006, in conformity with accounting
principles generally accepted in the United States of America. Also, in
our opinion, such financial statement schedule, when considered in relation
to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein. Also, in our
opinion, management’s assessment that the Company maintained effective internal
control over financial reporting as of December 31, 2006, is fairly stated,
in
all material respects, based on the criteria established in Internal
Control—Integrated Framework issued
by the
Committee of Sponsoring Organizations of the Treadway Commission.
Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2006,
based on the criteria established in Internal
Control—Integrated Framework issued
by the
Committee of Sponsoring Organizations of the Treadway Commission.
As
discussed in
Note 3(a) to the financial statements, the accompanying 2005 financial
statements have been restated.
As
discussed in
Notes 3 and 31 to the financial statements, in 2006 the Company changed its
method of accounting for share based compensation plans to conform to FASB
Statement No. 123(R), Share Based Payment and, retrospectively, adjusted
the
2005 and 2004 financial statements for the change.
Common
stock
of 5p par value; 750.0 million shares authorized; and 506.7 million
shares
issued and outstanding (2005: 750.0 million shares authorized;
and 495.7
million shares issued and outstanding)
2,
22
43.7
42.7
Exchangeable
shares: 1.3 million shares issued and outstanding (2005: 2.2
million)
59.4
101.2
Treasury
stock
22
(94.8
)
(2.8
)
Additional
paid-in capital
1,493.2
1,327.5
Accumulated
other comprehensive income
87.8
71.5
Retained
earnings
353.0
107.2
Total
shareholders’ equity
1,942.3
1,647.3
Total
liabilities and shareholders’ equity
3,326.4
2,656.2
(1)
Retrospectively
adjusted following the adoption of SFAS No.123(R); see notes 3and
31
for additional
information.
(2)Restated
for a
correction to the value ascribed to IPR&D acquired with the acquisition of
TKT; see note 3(a).
The
accompanying
notes are an integral part of these consolidated financial
statements.
F-5
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
millions of US
dollars, except share and per share data)
(1)(2)
Adjusted and
Restated
(1)
Adjusted
Year
to December 31,
Notes
2006
2005
2004
$’M
$’M
$’M
Revenues:
Product
sales
1,535.8
1,327.7
1,112.5
Royalties
242.9
242.9
230.4
Other
revenues
17.8
28.7
20.3
Total
revenues
1,796.5
1,599.3
1,363.2
Costs
and
expenses:
Cost
of
product sales
247.7
215.5
143.3
Research
and
development
386.9
339.1
199.6
Selling,
general and administrative
935.0
729.9
545.4
Intangible
asset impairment
14
1.1
5.6
13.5
Reorganization
costs
6
-
9.4
48.5
Integration
costs
5
5.6
9.7
-
In-process
R&D write-off
4
-
815.0
-
Gain
on sale
of product rights
7
(63.0
)
-
-
Total
operating expenses
1,513.3
2,124.2
950.3
Operating
income/(loss)
283.2
(524.9
)
412.9
Interest
income
50.5
35.3
21.9
Interest
expense
26
(26.4
)
(12.0
)
(12.3
)
Other
income,
net
27
9.5
9.9
3.9
Total
other
income, net
33.6
33.2
13.5
Income/(loss)
from continuing operations before income taxes, equity in
earnings/(losses) of equity method investees and discontinued operations
316.8
(491.7
)
426.4
Income
taxes
29
(84.9
)
(88.8
)
(128.3
)
Equity
in
earnings/(losses) of equity method investees
30
5.7
(1.0
)
2.5
Income/(loss)
from continuing operations
237.6
(581.5
)
300.6
Loss
from
discontinued operations (net of income tax expense of $nil, $nil
and $nil
respectively)
6
-
-
(20.1
)
Gain/(loss)
on disposition of discontinued operations (net of income tax expense
of
$nil, $nil and $nil respectively)
6
40.6
3.1
(44.2
)
Net
income/(loss)
278.2
(578.4
)
236.3
(1)
Retrospectively
adjusted following the adoption of SFAS No.123(R); see notes 3and
31
for additional
information.
(2)
Restated
for a
correction to the value ascribed to IPR&D acquired with the acquisition of
TKT; see note 3(a).
F-6
CONSOLIDATED
STATEMENTS OF OPERATIONS (continued)
(In
millions of US
dollars, except share and per share data)
Year
to December 31,
(1)(2)
Adjusted and Restated
(1)
Adjusted
Notes
2006
2005
2004
Earnings
per
share - basic
24
Income/(loss)
from continuing operations
47.2c
(116.2c
)
60.6c
Loss
from
discontinued operations
-
-
(4.1c
)
Gain/(loss)
on disposition of discontinued operations
8.1c
0.6c
(8.9c
)
55.3c
(115.6c
)
47.6c
Earnings
per
share - diluted
24
Income/(loss)
from continuing operations
46.6c
(116.2c
)
59.4c
Loss
from
discontinued operations
-
-
(3.9c
)
Gain/(loss)
on disposition of discontinued operations
8.0c
0.6c
(8.6c
)
54.6c
(115.6c
)
46.9c
Weighted
average number of shares (millions):
Basic
503.4
500.2
496.3
Diluted
509.3
500.2
511.3
(1)
Retrospectively
adjusted following the adoption of SFAS No.123(R); see notes 3and
31
for additional
information.
(2)
Restated
for a
correction to the value ascribed to IPR&D acquired with the acquisition of
TKT; see note 3(a).
The
accompanying
notes are an integral part of these consolidated financial
statements.
F-7
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(1)
Retrospectively
adjusted following the adoption of SFAS No.123(R); see notes 3and
31
for additional
information.
Dividends
per share
During
the year to
December 31, 2004the Company declared dividends totaling 1.82 US cents per
ordinary share equivalent to 5.47 US cents per American Depositary Share,
and
7.27 Canadian cents per exchangeable share.
F-8
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (continued)
(1)
Retrospectively
adjusted following the adoption of SFAS No.123(R); see notes 3and
31
for additional
information.
(2)
Restated
for a
correction to the value ascribed to IPR&D acquired with the acquisition of
TKT; see note 3(a).
The
accompanying
notes are an integral part of these consolidated financial statements.
Dividends
per share
During
the year to
December 31, 2005the Company declared dividends totaling 5.67 cents per
ordinary share, equivalent to 17.02 cents per American Depositary Share,
and
21.09 Canadian cents per exchangeable share.
F-9
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (continued)
(1)Retrospectively
adjusted following the adoption of SFAS No.123(R); see notes 3and
31
for additional
information.
(2)
Restated
for a
correction to the value ascribed to IPR&D acquired with the acquisition of
TKT; see note 3(a).
The
accompanying
notes are an integral part of these consolidated financial
statements.
Dividends
per share
During
the year to
December 31, 2006the Company declared dividends totaling 6.35 US cents per
ordinary share, equivalent to 19.06 US cents per American Depositary Share,
and 21.81 Canadian cents per exchangeable share.
(1)Retrospectively
adjusted following the adoption of SFAS No.123(R); see notes 3and
31
for additional
information.
(2)
Restated
for a
correction to the value ascribed to IPR&D acquired with the acquisition of
TKT; see note 3(a).
The
accompanying
notes are an integral part of these consolidated financial
statements.
F-14
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
(In
millions of US
dollars, except where indicated)
1.
Description
of operations
Shire
plc and its
subsidiaries' (collectively referred to as “Shire” or the “Company”) strategic
goal is to become the leading specialty pharmaceutical company that focuses
on
meeting the needs of the specialist physician. The Company focuses its business
on attention deficit and hyperactivity disorder (ADHD), human genetic therapies
(HGT), gastrointestinal (GI) and renal diseases. The structure is sufficiently
flexible to allow Shire to target new therapeutic areas to the extent
opportunities arise through acquisitions. Shire believes that a carefully
selected portfolio of products with strategically aligned and relatively
small-scale sales forces will deliver strong results.
The
Company’s
focused strategy is to develop and market products for specialty physicians.
The
Company’s in-licensing, merger and acquisition efforts are focused on products
in niche markets with strong intellectual property protection either in the
US
or Europe.
In
accordance with
this strategy the Company completed the acquisition of Transkaryotic Therapies
Inc. (TKT) on July 27, 2005. This acquisition added HGT to the Company’s
existing business, which is complementary to, and consistent with, the Company’s
stated strategy of meeting the needs of the specialist physician using
small-scale sales forces. TKT was renamed Shire Human Genetic Therapies,
Inc.
with effect from January 17, 2006.
On
February 20,2007, consistent with its stated focus on the growing ADHD market, Shire
announced that it had agreed to acquire New River Pharmaceuticals Inc. allowing
Shire to progress and benefit from its successful strategy of acquiring,
developing and marketing specialty pharmaceutical products.
2.
Change
in reporting entity
On
November 25,2005, Shire plc, a public limited company incorporated in England and Wales,
became the holding company of Shire Pharmaceuticals Group plc (SPG) pursuant
to
a Scheme of Arrangement under Section 425 of the UK Companies Act 1985 that
was
approved by the High Court of Justice in England and Wales and the shareholders
of SPG (the Scheme of Arrangement). Pursuant to the Scheme of Arrangement,
ordinary shares, each having a nominal value of £3.50, of Shire plc (Shire
Ordinary Shares) were exchanged for ordinary shares, each having a nominal
value
of £0.05 of SPG (SPG Ordinary Shares), on a one-for-one basis. As a result of
the Scheme of Arrangement, SPG is now a wholly-owned subsidiary of Shire
plc and
was re-registered as a private company under the name Shire Pharmaceuticals
Group Limited. The Shire plc Ordinary Shares carry substantially the same
rights as did the SPG Ordinary Shares. The Scheme of Arrangement did not
involve
any payment for the new Shire plc Ordinary Shares.
Shire
plc’s Board
of Directors, management and corporate governance arrangements immediately
following the Scheme of Arrangement were the same as SPG immediately before
the
Scheme of Arrangement became effective. The consolidated assets and liabilities
of Shire immediately after the Scheme of Arrangement were the same as the
consolidated assets and liabilities of SPG immediately prior
thereto.
The
SPG Ordinary
Shares underlying the SPG American Depositary Shares (the SPG ADSs), each
representing three SPG Ordinary Shares, participated in the Scheme of
Arrangement like all other SPG Ordinary Shares. The
Scheme of
Arrangement did not involve any payment for the new Shire ADSs, which represent
three ordinary shares of Shire.
Shire
plc was
incorporated on June 27, 2005. Prior to November 25, 2005 Shire had not
commenced trading or made any profits or trading losses.
On
November 28,2005, the High Court of Justice in England and Wales approved a reduction
of
Shire plc share capital to take effect on November 29, 2005, when the nominal
value of each Shire plc ordinary share was reduced from £3.50 pence to
£0.05 pence. This reduction increased the distributable reserves potentially
available to Shire plc by approximately $2.95 billion, which the directors
of Shire plc can utilize for future dividend payments at their
discretion.
In
accordance with
Statement of Financial Accounting Standards (SFAS) No. 141 “Accounting for
Business Combinations” (SFAS No. 141), the corporate restructuring is accounted
for as a reorganization of entities under common control. Accordingly, the
historical financial statements prior to the reorganization are labeled as
those
of Shire, but continue to represent the operations of SPG. For periods prior
to
the corporate restructuring, the equity of Shire represents the historical
equity of SPG, restated to reflect the nominal value of shares received in
the
Scheme of Arrangement as adjusted by the reduction of capital. The difference
in
the nominal value of shares before and after the restatement relates to the
effect of foreign exchange movements and the offset is recorded in additional
paid-in capital.
Earnings
per share
were unaffected by the reorganization.
F-15
All
SPG stock
options granted to directors and employees under stock option plans that
were in
existence immediately prior to the Scheme of Arrangement were exchangeable
for
stock options in Shire on a one-for-one basis with no change in any of the
terms
or conditions. The number of stock options for which this exchange did not
take
place was not material.
For
periods
presented prior to the 2005 corporate restructuring, the equity of Shire
represents the historical equity of SPG, restated to reflect the change in
nominal value of shares resulting from the corporate restructuring.
3.
Summary
of significant accounting policies
(a)Restatement
of the financial statements for the year to December 31,2005
Subsequent
to the
issuance of the Company’s’ 2005 financial statements the Company discovered an
error in its valuation of in-process research and development (IPR&D).
Consequently the financial statements for the year to December 31, 2005 have
been restated in respect of the value ascribed to IPR&D, acquired as part of
the TKT acquisition and subsequently written off as required under US GAAP
in
the quarter ended September 30, 2005. IPR&D represented those assets which,
at the time of the acquisition, had not been approved by the FDA or other
regulatory authorities, including I2S (now known as ELAPRASE) and GA-GCB.
The
Company has determined that the value ascribed to IPR&D acquired as a result
of the TKT acquisition did not include the benefit of tax amortization as
required by the American Institute of Certified Public Accountants (AICPA)
Practice Aid, Assets
Acquired
in a Business Combination to Be Used in Research and Development Activities:
A
Focus on Software, Electronic Devices, and Pharmaceutical
Industries.
The effect of
this omission was to understate the value of IPR&D expensed in the year to
December 31, 2005 by $142 million, with a corresponding overstatement of
goodwill as at December 31, 2005.
As
a result of the restatement, certain amounts for the year to December 31,2005
presented in this Form 10-K have been restated. The impact of the
restatement is as follows:
Consolidated
Statement of Operations
As
restated
2005
$’M
As
previously reported
2005
$’M
In-process
R&D write-off
815.0
673.0
Total
operating expenses
2,124.2
1,982.2
Loss
from
continuing operations before income taxes, equity in losses of
equity
method investees
(491.7
)
(349.7
)
Net
loss
(578.4
)
(436.4
)
Per
share
amounts:
Loss
from
continuing operations per common share - basic and diluted
(116.2c
)
(87.8c
)
Net
loss -
basic and diluted
(115.6c
)
(87.2c
)
F-16
Consolidated
Balance Sheet
As
restated
2005
$’M
As
previously reported
2005
$’M
Goodwill
225.6
367.6
Total
assets
2,656.2
2,798.2
Retained
earnings
107.2
249.2
Total
shareholders’ equity
1,647.3
1,789.3
Total
liabilities and shareholders’ equity
2,656.2
2,798.2
Consolidated
Statement of Cashflows
As
restated
2005
$’M
As
previously reported
2005
$’M
Net
loss
(578.4
)
(436.4
)
Adjustments
to reconcile net income to net cash provided by operating
activities:
In-process
R&D write off
815.0
673.0
Net
cash
provided by operating activities
384.3
384.3
There
have been no
changes to any line-items or totals for cash flows from financing or investing
activities.
(b)Basis
of preparation
The
accompanying
consolidated financial statements include the accounts of Shire and all of
its
subsidiary undertakings after elimination of inter-company accounts and
transactions.
(c)Use
of
estimates in consolidated financial statements
The
preparation of
consolidated financial statements, in conformity with US generally accepted
accounting principles (GAAP) and Securities Exchange Commission (SEC)
regulations, requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent
assets
and liabilities at the date of the consolidated financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Estimates and assumptions are
primarily made in relation to provisions for litigation, valuation of intangible
assets (including those acquired through the acquisition of TKT), inventory
acquired through the acquisition of TKT, valuation of IPR&D, the valuation
of equity investments, sales deductions, income taxes and share-based payments
and the amount payable to former holders of TKT common stock of approximately
11.3 million shares who have submitted written demands for appraisal of these
shares in relation to the Company’s acquisition of TKT on July 27,2005.
(d)Revenue
recognition
The
Company
recognizes revenue when:
·
there
is
persuasive evidence of an agreement or
arrangement;
·
delivery
of
products has occurred or services have been
rendered;
·
the
seller’s
price to the buyer is fixed or determinable;
and
·
collectability
is reasonably assured.
Where
applicable,
all revenues are stated net of value added tax and similar taxes, and trade
discounts.
No
revenue is
recognized for consideration, the value or receipt of which is dependent
on
future events, future performance, or refund obligations.
The
Company’s
principal revenue streams and their respective accounting treatments are
discussed below:
F-17
Product
sales
Revenue
for the
sales of products is recognized upon shipment to customers or at the time
of
delivery depending on the terms of sale. Provisions for rebates, product
returns
and discounts to customers are provided for as reductions to revenue in the
same
period as the related sales are recorded. The Company monitors and tracks
the
amount of sales deductions based on historical experience to estimate the
amount
of reduction to revenue.
Licensing
and
development fees
Licensing
and
development fees represent revenues derived from product out-licensing
agreements and from contract research and development agreements.
Initial
license
fees received in connection with product out-licensing agreements, even where
such fees are non-refundable and not creditable against future royalty payments,
are deferred and recognized over the period of the license term, or the period
of the associated collaborative assistance if that period is reasonably
estimable. In circumstances where initial license fees are not for a defined
period, revenues are deferred until the period of associated collaborative
assistance is either reasonably estimable or any performance obligations
are
inconsequential: thereafter revenues are deferred and recognized over the
period
to the expiration of the relevant patent to which the license
relates.
Revenue
from
contract research and development agreements is recognized as the services
are
performed.
Royalty
income
Royalty
income
relating to licensed technology is recognized when the licensee sells the
underlying product. The Company receives sales information from the licensee
on
a monthly basis. For any period that the information is not available, the
Company estimates sales amounts based on the historical product
information.
Milestones
During
the term of
certain research and development agreements and licensing agreements, the
Company receives non-refundable milestones as certain technical targets are
achieved. Revenues are recognized on achievement of such
milestones.
The
Company also
receives non-refundable clinical milestones when certain targets are achieved
during the clinical phases of development, such as the submission of clinical
data to a regulatory authority. These clinical milestones are recognized
when
receivable (i.e. on completion of the relevant phase). If milestone payments
are
creditable against future royalty payments, the milestones are deferred and
released over the period in which the royalties are anticipated to be
paid.
(e)Sales
deductions
(i)
Rebates
Rebates
primarily
consist of statutory rebates to state Medicaid agencies and contractual rebates
with health-maintenance organizations. These rebates are based on price
differentials between a base price and the selling price. As a result, rebates
generally increase as a percentage of the selling price over the life of
the
product (as prices increase). Provisions for rebates are recorded as reductions
to revenue in the same period as the related sales, with estimates of future
utilization derived from historical trends.
(ii)
Returns
The
Company
estimates the proportion of recorded revenue that will result in a return,
based
on historical trends and when applicable, specific factors affecting certain
products at the balance sheet date. The accrual is recorded as a reduction
to
revenue in the same period as the related sales are recorded.
(iii)
Coupons
The
Company uses
coupons as a form of sales incentive. An accrual is established based on
the
Company's expectation of the level of coupon redemption, using historical
trends. The accrual is recorded as a reduction to revenue in the same period
as
the related sales are recorded.
(iv)
Discounts
The
Company offers
cash discounts to customers for the early payment of receivables. Those
discounts are recorded as reductions to revenue and accounts receivable
in the
same period that the related sale is recorded.
F-18
(v)
Wholesaler
chargebacks
The
Company has
contractual agreements whereby it supplies certain products to third parties
at
predetermined prices. Wholesalers acting as intermediaries in these transactions
are reimbursed by the Company if the predetermined prices are less than
the
prices paid by the wholesaler to the Company. Accruals for wholesaler
chargebacks, which are based on historical trends, are recorded as reductions
to
revenue in the same period as the related sales are recorded.
(f)Cost
of
product sales
Cost
of sales
includes the cost of purchasing finished product for sale, the cost of raw
materials and manufacturing for those products that are manufactured by the
Company and shipping and handling costs. Royalties that are payable on those
products that the Company does not own the rights to are also included in
cost
of sales.
(g)Leased
assets
The
costs of
operating leases are charged to operations on a straight-line basis over
the
lease term, even if rental payments are not made on such a basis.
Assets
acquired
under capital leases are included in the balance sheet as property, plant
and
equipment and are depreciated over the shorter of the period of the lease
or
their useful lives. The capital elements of future lease payments are recorded
as liabilities, while the interest element is charged to operations over
the
period of the lease to produce a level yield on the balance of the capital
lease
obligation.
(h)Advertising
expense
The
Company
expenses the cost of advertising as incurred. Advertising costs amounted
to
$91.6 million, $62.3 million, and $47.6 million for the years to December31,2006, 2005 and 2004 respectively and were included within selling, general
and
administrative expenses.
(i)Research
and development expense
Research
and
development costs are expensed as incurred. Upfront and milestone payments
made
to third parties for products that have not yet received marketing approval
and
for which no alternative future use has been identified, are also expensed
as
incurred.
Milestone
payments
made to third parties subsequent to regulatory approval are capitalized as
intangible assets, and amortized over the remaining useful life of the related
product.
(j)Valuation
and impairment of long-lived assets other than goodwill and
investments
The
Company
evaluates the carrying value of long-lived assets other than goodwill and
investments for impairment annually or whenever events or changes in
circumstances indicate that the carrying amounts of the assets may not be
recoverable. When such a determination is made, management’s estimate of
undiscounted cash flows to be generated by the assets is compared to the
carrying value of the assets to determine whether an impairment is indicated.
If
an impairment is indicated, the amount of the impairment recognized in the
consolidated financial statements is determined by estimating the fair value
of
the assets and recording a loss for the amount that the carrying value exceeds
the estimated fair value. This fair value is usually determined based on
estimated discounted cash flows.
(k)Finance
costs of debt
Finance
costs of
debt are recorded as a deferred asset and amortized to the statement of
operations over the term of the debt, using the effective interest rate method.
Deferred financing costs relating to debt extinguishments are written off
and
reflected in interest expense in the consolidated statements of
operations.
(l)Foreign
currency
Monetary
assets and
liabilities in foreign currencies are translated into the relevant functional
currency at the rate of exchange ruling at the balance sheet date. Transactions
in foreign currencies are translated into the relevant functional currency
at
the rate of exchange ruling at the date of the transaction. Transaction gains
and losses are recognized in arriving at operating net
(loss)/income.
The
results of
overseas operations, whose functional currency is not US Dollars, are translated
at the average rates of exchange during the period and their balance sheets
at
the rates ruling at the balance sheet date. The cumulative effect of exchange
rate movements is included in a separate component of other comprehensive
income.
F-19
Foreign
currency
exchange transaction gains and losses on an after-tax basis included in
consolidated net income in the years to December 31, 2006, 2005, and 2004,
amounted to a $3.2 million gain, $1.4 million loss and $2.5 million loss,
respectively.
(m)Income
taxes
The
Company
provides for income taxes in accordance with SFAS No.109, "Accounting for
Income
Taxes". Deferred tax assets and liabilities are provided for differences
between
the carrying amounts of assets and liabilities in the consolidated financial
statements and the tax bases of assets and liabilities that will result in
future taxable or deductible amounts. The deferred tax assets and liabilities
are measured using the enacted tax laws and rates applicable to the periods
in
which the differences are expected to affect taxable income. Income tax expense
is computed as the tax payable or refundable for the period, plus or minus
the
change during the period in deferred tax assets and liabilities.
Deferred
tax assets
are reduced by a valuation allowance when, in the opinion of management,
it is
more likely than not that some portion or all of the deferred tax assets
will
not be realized.
(n)Earnings
per share
Earnings
per share
is computed in accordance with SFAS No. 128, “Earnings per Share”. Basic
earnings per share is based upon net income/(loss) available to ordinary
shareholders divided by the weighted average number of ordinary shares
outstanding during the period. Diluted earnings per share is based upon net
income/(loss) available to ordinary shareholders divided by the weighted
average
number of ordinary share equivalents outstanding during the period, adjusted
for
the effect of all dilutive potential ordinary shares that were outstanding
during the year. Such potentially dilutive shares are excluded when the effect
would be to increase earnings per share or reduce a loss per share.
(o)Share-based
compensation
Share-based
compensation represents the cost of share-based awards granted to employees.
The
Company measures share-based compensation cost for awards classified as equity
at the grant date, based on the estimated fair value of the award, and
recognizes the cost as expense on a straight-line basis (net of estimated
forfeitures) over the employee requisite service period. The Company measures
share based compensation cost for awards classified as liabilities at fair
value, which is re-measured at the end of each reporting period. Changes
in the
fair value that occur during the requisite service period are recognized
as
compensation cost over the requisite service period. The Company estimates
the
fair value of share-based awards without market-based performance conditions
using a Black-Scholes valuation model and awards with market-based performance
conditions are valued using a binomial valuation model. The following
assumptions were used to value share based awards:
·
Risk-free
interest rate - For awards granted over ADSs, the US Federal Reserve
treasury constant maturities rate with a term consistent with the
expected
life of the award is used. For awards granted over ordinary shares,
the
yield on UK government bonds with a term consistent with the expected
life
of the award is used;
·
Expected
dividend yield - measured as the average annualised dividend estimated
to
be paid by the Company over the expected life of the award as a
percentage
of the share price at the grant date;
·
Expected
life
- the average of the vesting period and the expiration period from
the
date of issue of the award; and
·
Weighted
average expected volatility - measured using historical daily price
changes of the Company’s share price over the respective expected life of
the share-based awards at the date of the
award.
The
forfeiture rate
is estimated using historical trends of the number of awards forfeited prior
to
vesting.
The
expense is
recorded in cost of product sales; research and development; and selling,
general and administrative in the statement of operations based on the
employees’ respective functions.
The
Company records
deferred tax assets for awards that result in deductions on the Company’s income
tax returns, based on the amount of compensation cost recognized and the
Company’s statutory tax rate in the jurisdiction in which it will receive a
deduction. Differences between the deferred tax assets recognized for financial
reporting purposes and the actual tax deduction reported on the Company’s income
tax return are recorded in additional paid-in capital (if the tax deduction
exceeds the deferred tax asset) or in the statement of operations (if the
deferred tax asset exceeds the tax deduction and no additional paid-in capital
exists from previous awards).
As
at December 31,2006the Company had seven share-based employee compensation plans, which
are
described more fully in Note 31.
F-20
(p) Cash
and cash
equivalents
Cash
and cash
equivalents are defined as short-term highly liquid investments with original
maturities of ninety days or less.
(q)Short-term
investments
Short-term
investments consist of commercial paper and institutional and managed cash
funds. In accordance with SFAS No. 115 “Accounting for Certain Investments in
Debt and Equity Securities” (SFAS No. 115), and based on the Company’s
intentions regarding these instruments, the Company has classified all
short-term investments held at December 31, 2006 as available-for-sale.
Accordingly, the Company records these investments at their fair values with
unrealized gains and losses included in the consolidated statements of
comprehensive income, net of any related tax effect. Realized gains and losses
and declines in value judged to be other-than-temporary on available-for-sale
securities are included in other income, net (see Note 27).
Institutional
and
managed cash funds are short-term money market instruments, including bank
and
building society term deposits and other debt securities from a variety of
companies with strong credit ratings.
(r)Financial
instruments - derivatives
The
Company uses
derivative financial instruments to manage its exposure to foreign exchange
risk
associated with inter-company loan arrangements. These instruments consist
of
forward foreign exchange contracts and foreign exchange swaps. The Company
does
not adopt hedge accounting treatment for these instruments and movements
in
their fair values are recognized in the statement of operations. The fair
values
of these instruments are included on the balance sheet in current
assets/liabilities.
(s)Inventories
Inventories
are
stated at the lower of cost (including manufacturing overheads, where
appropriate) or net realizable value. Cost incurred in bringing each product
to
its present location and condition is based on purchase costs calculated
on a
first-in, first-out basis, including transport. Net realizable value is based
on
estimated normal selling price less further costs expected to be incurred
to
completion and disposal.
(t)Assets
held for sale
An
asset is
classified as held for sale when, amongst other things, the Company has
committed to a plan of disposition, the asset is available for immediate
sale,
and the plan is not expected to change significantly.
(u)Investments
The
Company has
certain investments in pharmaceutical and biotechnology companies.
Investments
are
accounted for using the equity method of accounting if the investment gives
the
Company the ability to exercise significant influence, but not control over,
the
investee. Significant influence is generally deemed to exist if the Company
has
an ownership interest in the voting stock of the investee between 20% and
50%,
although other factors, such as representation on the investee’s Board of
Directors and the impact of commercial arrangements, are considered in
determining whether the equity method of accounting is appropriate. Under
the
equity method of accounting, the Company records its investments in
equity-method investees in the consolidated balance sheet as investments
and its
share of the investees’ earnings or losses together with other-than-temporary
impairments in value as equity in earnings/(losses) of equity method investees
in the consolidated statement of operations.
All
other equity
investments, which consist of investments for which the Company does not
have
the ability to exercise significant influence, are accounted for under the
cost
method or at fair value. Investments in private companies are carried at cost,
less provisions for other-than-temporary impairment in value. For public
companies that have readily determinable fair values, the Company classifies
its
equity investments as available-for-sale and, accordingly, records these
investments at their fair values with unrealized gains and losses included
in
the consolidated statements of comprehensive income, net of any related tax
effect. Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in other
income, net (see Note 26).
The cost of
securities sold is based on the specific identification method. Interest
and
dividends on securities classified as available-for-sale are included as
interest income.
(v)Property,
plant and equipment
Property,
plant and
equipment is shown at cost, less accumulated depreciation and any impairment.
The cost of significant assets includes capitalized interest incurred during
the
construction period. Depreciation is provided on a straight-line basis at
rates
calculated to write off the cost less estimated residual value of each asset
over its estimated useful life as follows:
F-21
Buildings
20
to 50
years
Office
furniture, fittings and equipment
3
to 10
years
Warehouse,
laboratory and manufacturing equipment
3
to 10
years
The
cost
of land is not depreciated.
Expenditures
for
maintenance and repairs are charged to operations as incurred. The costs
of
major renewals and improvements are capitalized. At the time property, plant
and
equipment is retired or otherwise disposed of, the cost and accumulated
depreciation are eliminated from the asset and accumulated depreciation
accounts. The profit or loss on such disposition is reflected in operating
(loss)/income.
(w)Goodwill
and other intangible assets
(i)
Goodwill
In
a business
combination, goodwill represents the excess of the fair value of the
consideration given over the fair value of the identifiable assets and
liabilities acquired.
Goodwill
is not
amortized to operations, but instead is reviewed for impairment, at least
annually or whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Some factors the Company considers
important which could trigger an impairment review include the following:
(i)
significant underperformance of a reporting unit relative to expected historical
or projected future operating results; (ii) significant changes in the manner
of
the Company's use of acquired assets or the strategy for the overall business;
and (iii) significant negative industry or economic trends.
In
accordance with
SFAS No. 142 "Goodwill and Other Intangible Assets" (SFAS No. 142), goodwill
is
reviewed for impairment by comparing the carrying value of each reporting
unit's
net assets (including allocated goodwill) to the fair value of those net
assets.
If the reporting unit's carrying amount is greater than its fair value, then
a
second step is performed whereby the portion of the fair value that relates
to
the reporting unit's goodwill is compared to the carrying value of that
goodwill. The Company recognizes a goodwill impairment charge for the amount
the
carrying value of goodwill exceeds the fair value. The Company has determined
that there are no impairment losses for any of the reporting periods covered
by
these financial statements.
(ii)
Other
intangible assets
Other
intangible
assets, which comprise intellectual property including trademarks for products
with a defined revenue stream (namely commercial products or rights to products
awaiting final regulatory approval), are recorded at cost and amortized over
the
estimated useful life of the related product, which ranges from 5 to 35 years
(weighted average 13 years). Intellectual property with no defined revenue
stream, where the related product has not yet completed the necessary approval
process, is written off to operations on acquisition.
The
following
factors are considered in estimating useful lives. Where an intangible asset
is
a composite of a number of factors, the period of amortization is determined
from considering these factors together:
·
expected
use
of the asset;
·
regulatory,
legal or contractual provisions, including the regulatory approval
and
review process, patent issues and actions by government
agencies;
·
the
effects
of obsolescence, changes in demand, competing products and other
economic
factors, including the stability of the market, known technological
advances, development of competing drugs that are more effective
clinically or economically; and
·
actions
of
competitors, suppliers, regulatory agencies or others that may
eliminate
current competitive advantages.
(x)Non-monetary
transactions
The
Company enters
into certain non-monetary transactions that involve either the granting of
a
license over the Company’s patents or the disposal of an asset or group of
assets in exchange for a non-monetary asset, usually equity. The Company
accounts for these transactions at fair value if the Company is able to
determine the fair value within reasonable limits. To the extent that the
Company concludes that it is unable to determine the fair value of a
transaction, that transaction is accounted for at the recorded amounts of
the
assets exchanged. Management is required to exercise its judgment in determining
whether or not the fair value of the asset received or that given up can
be
determined.
F-22
(y) New
accounting
pronouncements
Adopted
in the
current year
SFAS
123(R)
On
January 1, 2006the Company adopted SFAS No. 123(R) which requires that the cost resulting
from
all share-based payment transactions be recognized in the financial statements
at fair value and that excess tax benefits be reported as a financing cash
inflow rather than as a reduction of taxes paid.
The
Company has
elected to adopt the modified-retrospective method which permits companies
to
retrospectively adjust, based on the amounts previously recognized under
SFAS
No. 123 for pro forma disclosure purposes, all prior periods presented. The
following table shows the total share-based compensation expense included
in the
Company’s statements of operations as a result of adopting SFAS No. 123(R):
2006
$’M
2005
$’M
2004
$’M
Cost
of
product sales
3.2
1.5
1.4
Research
and
development
5.4
2.9
3.5
Selling,
general and administrative
34.4
24.8
28.9
Total
operating expenses
43.0
29.2
33.8
Income
tax
credit
(6.5
)
(3.2
)
(0.8
)
Total
charge
to net income
36.5
26.0
33.0
As
previously
discussed, the Company elected to adopt SFAS No. 123(R) under the modified
retrospective application method. As a result, the financial statement
amounts for the period to December 31, 2005 presented in this Form 10-K
have been retrospectively adjusted to reflect the fair value method of expensing
prescribed by SFAS No. 123(R). The impact of this retrospective application
is
as follows:
2005
2004
Restated
Post
adoption
of SFAS 123(R)
$’M
Restated
Pre
adoption
of SFAS 123(R)
$’M
Post
adoption
of SFAS 123(R)
$’M
Pre
adoption
of SFAS 123(R)
$’M
(Loss)/Income
from continuing operations before income taxes, equity in losses
of equity
method investees
The
cumulative
effect of the change arising from the adoption of SFAS No. 123(R) on
shareholder’s equity as at January 1, 2005 increased additional paid in capital
to $1,167.3 million from $1,070.7 million as previously reported, and decreased
retained earnings to $714.1 million from $810.7 million pre adoption of SFAS
No.
123(R).
FSP
SFAS 123(R)-2
In
October 2005,
the Financial Accounting Standards Board (FASB) issued a FASB Staff Position
(FSP) SFAS No. 123(R)-2, “Practical Accommodation of Grant Date as Defined in
FASB Statement No. 123(R)” (FSP SFAS No. 123(R)-2). FSP SFAS No. 123(R)-2 is in
response to recent enquiries from constituents to provide guidance on the
application of grant date as defined in SFAS No. 123(R). One of the criteria
in
defining the grant date in SFAS No. 123(R) is a mutual understanding by the
employer and the employee of the key terms and conditions of a share-based
payment award. Practice has developed such that the grant date of an award
is
generally the date the award is approved in accordance with an entity’s
corporate governance provisions, so long as the approved grant is communicated
to employees within a relatively short period of time from the date of approval.
For many companies, the number and geographic dispersion of employees receiving
share-based awards limit the ability to communicate with each employee
immediately after the awards have been approved. As a practical accommodation,
a
mutual understanding of the key terms and conditions of an award to an
individual employee shall be presumed to exist at the date the award is approved
if the award is a unilateral grant and the key terms and conditions of the
award
are expected to be communicated to an individual recipient within a relatively
short time period from the date of approval. FSP SFAS No. 123(R)-2 is effective
for the Company from January 1, 2006. The adoption of FSP SFAS No. 123(R)-2
has
had no material impact on the consolidated financial position, results of
operations or cash flows of the Company.
FSP
SFAS 123(R)-3
In
November 2005,
the FASB issued a staff position FSP SFAS No. 123(R)-3, "Transition Election
Related to Accounting for the Tax Effects of Share-Based Payment Awards."
This
FSP provides a practical exception when a company transitions to the accounting
requirements in SFAS No. 123(R), which requires a company to calculate the
pool
of excess tax benefits available to absorb tax deficiencies recognized
subsequent to adopting SFAS No. 123(R) (termed the "APIC Pool"), assuming
the
company has been following the recognition provisions prescribed by SFAS
No.
123. The FASB learned that several companies do not have the necessary
historical information to calculate the APIC pool as envisioned by SFAS No.
123(R) and accordingly, the FASB decided to allow a practical exception as
documented in this FSP. FSP SFAS No. 123(R)-3 is effective for the Company
from
January 2006. The Company has used the practical exception of this FSP and
has
calculated its APIC Pool at transition.
FSP
SFAS 123(R)-4
In
February 2006,
the FASB issued a staff position FSP SFAS No. 123(R)-4 "Classification of
Options and Similar Instruments Issued as Employee Compensation that Allow
for
Cash Settlement upon Occurrence of a Contingent Event.” This position amends
SFAS No. 123(R) to incorporate that a cash settlement feature that can be
exercised only upon the occurrence of a contingent event that is outside
the
employee’s control does not meet certain conditions in Statement 123(R) until it
becomes probable that the event will occur. The guidance in this position
shall
be applied upon initial adoption of SFAS No. 123(R). The adoption of FSP
SFAS
No. 123(R)-4 did not have a material impact on the Company’s consolidated
financial position, results of operations or cash flows.
SFAS
151
In
November 2004,
the FASB issued SFAS No. 151, "Inventory Costs - an amendment of ARB No.
43,
Chapter 4" (SFAS No. 151). SFAS No. 151 clarifies that abnormal amounts of
idle
facility expense, freight, handling costs, and wasted materials (spoilage)
should be recognized as current-period charges and requires the allocation
of
fixed production overheads to inventory based on the normal capacity of the
production facilities. SFAS No. 151 is effective for fiscal years beginning
after June 15, 2005. The adoption of SFAS No. 151 has had no material impact
on
the consolidated financial position, results of operations or cash flows
of the
Company.
SFAS
154
In
May 2005, SFAS
No. 154, “Accounting Changes and Error Corrections - replacement of APB Opinion
No. 20 and FASB Statement No. 3,” (SFAS No. 154) was issued. SFAS No. 154
changes the accounting for and reporting of a change in accounting principle
by
requiring retrospective application to prior periods’ financial statements of
changes in accounting principle unless impracticable. SFAS No. 154 is effective
for accounting changes made in fiscal years beginning after December 15,2005.
The adoption of SFAS No. 154 required no adjustment or restatement of the
consolidated financial position, results of operations or cash flows of the
Company as there were no material misstatements which had not been
corrected.
FSP
SFAS 115-1 and SFAS No. 124-1
In
November 2005,
the FASB issued FSP FAS 115-1 and 124-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments." The guidance in this
FSP
addresses the determination of when an investment is considered impaired,
whether that impairment is other than temporary, and the
measurement
F-24
of
an impairment
loss. The FSP also includes accounting considerations subsequent to the
recognition of an other-than-temporary impairment and requires certain
disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. FSP SFAS No. 115-1 and SFAS 124-1 are
effective for the Company in the first quarter of fiscal year 2006. The adoption
of FSP SFAS No. 115-1 and SFAS 124-1 has had no material impact on the Company's
consolidated financial position, results of operations or cash
flows.
EITF
04-5
In
June 2005, the
Emerging Issues Task Force (EITF) reached a consensus regarding the issue,
“Investor's Accounting for an Investment in a Limited Partnership when the
Investor is the Sole General Partner and the Limited Partners have Certain
Rights” (Issue), on how to evaluate whether a partnership should be consolidated
by one of its partners. The scope of this Issue is limited to limited
partnerships or similar entities (such as limited liability companies that
have
governing provisions that are the functional equivalent of a limited
partnership) that are not variable interest entities under FASB Interpretation
46(R). The EITF concluded that a general partner or a group of general partners
of a limited partnership is presumed to control the limited partnership,
unless
either the limited partners have the substantive ability to dissolve the
limited
partnership or otherwise remove the general partner without cause or the
limited
partners have substantive participating rights. The guidance in this Issue
is
effective after June 29, 2005 for general partners of all new limited
partnerships formed and for existing limited partnerships for which the
partnership agreements are modified. For general partners in all other
pre-existing limited partnerships, the guidance in this Issue is effective
no
later than the beginning of the first reporting period in fiscal years beginning
after December 15, 2005. The adoption of EITF 04-5 has had no material impact
on
the Company's consolidated financial position, results of operations or cash
flows.
FSP
EITF 00-19-2
In
December 2006,
the FASB issued a staff position FSP EITF 00-19 - 2, “Accounting for
Registration Payment Arrangements”. The FSP clarifies that a registration
payment arrangement and the financial instrument(s) subject to that arrangement
should be separately measured and recognized. Specifically, the contingent
obligation to make future payments or otherwise transfer consideration under
a
registration payment arrangement shall be recognized and measured separately
in
accordance with Statement 5 and FASB Interpretation No. 14, Reasonable
Estimation of the Amount of a Loss.This
FSP’s
guidance is effective immediately for registration payment arrangements and
the
financial instruments subject to those arrangements that are entered into
or
modified after December 21, 2006. Otherwise, the guidance is effective for
financial statements issued for fiscal years beginning after December 15,2006,
and interim periods within those fiscal years. The adoption of this FSP did
not
and is not expected to have a material impact on the Company’s consolidated
financial position, results of operations or cash flows.
SFAS
158
In
September 2006
the FASB issued SFAS 158, “Employer’s Accounting for Defined Benefit Pension and
Other Post-Retirement Plans - an amendment of FASB Statements No. 87, 88,
106
and 132R”. SFAS 158 requires that the over funded or under funded status of
defined benefit pension plans and other post-retirement benefit plans be
measured in the balance sheet, with any changes in the funded status recognized
through other comprehensive income in the year that they occur. SFAS 158
does
not change the computation of benefit expense recognized in the income
statement.
SFAS
158 is
effective for fiscal years ending after December 15, 2006, therefore SFAS
158 is
effective for the Company in its current fiscal year ending December 31,2006.
The adoption of SFAS 158 has had no material impact on the Company's
consolidated financial position, results of operations or cash
flows.
SAB
108
In
September 2006,
the SEC staff issued the Staff Accounting Bulletin (SAB) Topic 1N, "Financial
Statements - Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements" (SAB 108).
This
bulletin provides guidance on how prior year misstatements should be taken
into
consideration when quantifying misstatements in current year financial
statements for purposes of determining whether the current year's financial
statements are materially misstated. In providing this guidance, the SEC
staff
references requires use of both the "iron curtain" and "rollover" approaches.
The iron curtain approach focuses on how the current year's balance sheet
would
be affected in correcting a misstatement without considering the year(s)
in
which the misstatement originated. The rollover approach focuses on the amount
of the misstatement that originated in the current year's income statement.
If a
registrant has historically been using either the iron curtain approach or
the
rollover approach and, upon application of the guidance in SAB 108, determines
that there is a material misstatement in its financial statements, the SEC
staff
will not require the registrant to restate its prior year financial statements
provided that: (a) management properly applied the approach it previously
used
as its accounting policy and (b) management considered all relevant qualitative
factors in its materiality assessment using the cumulative effect of applying
SAB 108 in the current year beginning balances of the affected assets and
liabilities with a corresponding adjustment to the current year opening balance
in retained earnings. SAB 108 is effective for fiscal years ending after
November 15, 2006. The adoption of SAB 108 required no adjustment
or
F-25
restatement
of the
consolidated financial position, results of operations or cash flows of the
Company as there were no material misstatements which had not been
corrected.
To
be adopted
in future periods
FIN
48
In
July 2006, the
FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109” (‘FIN 48’), which
clarifies the accounting for uncertainty in tax positions. The evaluation
of a
tax position under FIN 48 is a two-step process. The first step is recognition:
tax positions taken or expected to be taken in a tax return should be recognized
only if those positions are more likely than not of being sustained upon
examination, based on the technical merits of the position. In evaluating
whether a tax position has met the more likely than not recognition threshold,
it should be presumed that the position will be examined by the relevant
taxing
authority that would have full knowledge of all relevant information. The
second
step is measurement: tax positions that meet the recognition criteria are
measured at the largest amount of benefit that is greater than 50 percent
likely
of being recognized upon ultimate settlement.
FIN
48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 is effective
for fiscal years beginning after December 15, 2006 and is effective for the
Company in the first quarter of the year beginning January 1, 2007. The
Company’s analysis of FIN 48 is not yet complete, although it is not anticipated
that there will be a material impact on the Company's consolidated financial
position, results of operations or cash flows at the date from
adoption.
EITF
06-3
In
September 2006,
the EITF reached a consensus regarding the issue “How Sales Taxes Collected from
Customers and Remitted to Governmental Authorities should be presented in
the
Income Statement (That Is, Gross versus Net Presentation)”. The scope of the
issue includes any tax assessed by a governmental authority that is directly
imposed on a revenue producing transaction between a seller and a customer
and
may include, but is not limited to, sales, use, value added, and some excise
taxes. The EITF concluded that the presentation of taxes within the scope
of
EITF 06-3 as either gross (included within revenues and costs) or net (excluded
from revenues) is an accounting policy decision that should be disclosed.
In
addition, for any such taxes that are reported on a gross basis, a company
should disclose the amounts of those taxes in interim and annual financial
statements for each period for which an income statement is presented if
those
amounts are significant. The disclosure of those taxes can be done on an
aggregate basis. The guidance in this Issue should be applied to financial
reports for interim and annual reporting periods beginning after December15,2006. The adoption of EITF 06-03 will have no material impact on the Company's
consolidated financial position, results of operations or cash flows or
financial statement disclosure.
SFAS
157
In
September 2006
the FASB issued SFAS 157, “Fair Value Measurements”, which provides a single
definition of fair value, establishes a framework for the measurement of
fair
value and expands disclosure about the use of fair value to measure assets
and
liabilities. SFAS 157 is effective for fiscal years beginning after November15,2007, and for interim periods within those fiscal years; SFAS 157 will therefore
be applicable for the Company’s fiscal year commencing January 1, 2008. The
Company is currently reviewing the impact of the adoption of SFAS 157 on
its
financial statements.
EITF
06-6
In
November 2006,
the EITF reached a consensus on “Debtor's Accounting for a Modification (or
Exchange) of Convertible Debt Instruments.” The EITF concluded that the change
in the fair value of an embedded conversion option resulting from an exchange
of
debt instruments or a modification in the terms of an existing debt instrument
should not be included in the cash flow test of whether the terms of the
new
debt instrument are substantially different from the terms of the original
debt
instrument under Issue 96-19. However, a separate analysis must be performed
if
the cash flow test under Issue 96-19 does not result in a conclusion that
a
substantial modification or exchange has occurred. The EITF also reached
a
consensus that when a convertible debt instrument is modified or exchanged
in a
transaction that is not accounted for as an extinguishment, an increase in
the
fair value of the embedded conversion option should reduce the carrying amount
of the debt instrument with a corresponding increase in additional paid-in
capital. However, a decrease in the fair value of an embedded conversion
option
resulting from a modification or exchange should not be recognized.
The
guidance in
this Issue will be applicable to modifications or exchanges occurring in
the
first interim or annual reporting period beginning after November 29, 2006.
The
adoption of EIFT 06-6 is not expected to have a material impact on the Company’s
consolidated financial position, results of operations or cash
flows.
F-26
(z) Statutory
accounts
The
consolidated
financial statements as at December 31, 2006 and 2005, and for each of the
three
years in the period to December 31, 2006, do not comprise statutory accounts
within the meaning of Section 240 of the UK Companies Act 1985.
Statutory
accounts
prepared in accordance with International Financial Reporting Standards,
as
adopted for use in the EU for the year ended 31 December 2005 and statutory
accounts prepared in accordance with generally accepted accounting principles
in
the UK for the years to December 31, 2004, have been delivered to the Registrar
of Companies for England and Wales. The auditors’ reports on those accounts was
unqualified.
F-27
4.
Business
combinations:
TKT
acquisition
On
July 27, 2005
Shire completed its acquisition of TKT in an all-cash transaction. The
acquisition was effected by merging a wholly owned subsidiary of Shire with
and
into TKT, with TKT continuing as the surviving corporation. As consideration,
Shire paid to TKT’s stockholders $37 in cash for each share of TKT common stock
outstanding at the time of the acquisition, less any applicable withholding
taxes.
The
total cash
consideration for the acquisition of TKT is expected to be approximately
$1.6
billion, subject to change as may be required by the appraisal rights process.
As
at December 31,2006, shareholders owning approximately 24.8 million TKT shares (being 69%
of
the 36.2 million TKT shares outstanding at the acquisition date) had accepted
the offer and $917.9 million has been paid to them; $83.9 million was paid
in
connection with TKT stock options; and $170.1 million in connection with
convertible notes outstanding at the date of acquisition. These amounts were
paid in the year to December 31, 2005.
In
connection with
the acquisition, as at December 31, 2006, the former holders of approximately
11.3 million shares of TKT common stock submitted written demands for appraisal
of these shares and elected not to accept the $37 per share merger
consideration. To the extent that these demands were validly asserted in
accordance with the applicable requirements of Delaware law and these holders
perfect their rights thereunder, such holders will be entitled to receive
the
fair value of their shares as determined by the Delaware Court of Chancery.
The
determination of fair value of the TKT shares will be made excluding any
element
of value arising from the transaction, such as cost savings or business
synergies. The Delaware Court of Chancery may ascribe a valuation to the
shares
that is greater than, less than or equal to $37 per share and may award interest
on the amount determined in the appraisal process. Shire has recognized a
liability in respect of the fair value of the consideration in respect of
those
TKT shareholders who have asserted appraisal rights based on $37 per share.
As
at December 31, 2006, the liability in respect of those TKT shareholders
who
have asserted appraisal rights was $452.3 million, (including accrued interest
of $32.4 million). See note 21(d)
for further
information.
For
accounting
purposes, the acquisition of TKT has been accounted for as a purchase business
combination in accordance with SFAS No. 141. Under the purchase method of
accounting, the assets acquired and the liabilities assumed from TKT are
recorded at the date of acquisition at their respective fair values. Financial
statements and reported results of operations of Shire reflect these values,
with the results of TKT included from July 27, 2005 in the statement of
operations.
F-28
The
purchase price
for TKT is as follows:
$’M
Common
stock
Number
of
shares of TKT common stock - non-dissenting (Millions)
24.8
Price
per TKT
share ($)
$
37.0
917.9
Number
of
shares of TKT common stock - dissenting (Millions)
11.3
Price
per TKT
share ($)
$
37.0
419.9
Total
number
of shares of TKT common stock outstanding as at July 27, 2005
(Millions)
36.2
1,337.8
Stock
options
Cash
cost of
settling TKT stock options
83.9
Convertible
notes
Nominal
value
of convertible loan notes as at July 27, 2005 (Millions)
85.0
Conversion
ratio into TKT common stock
18.49
Total
shares
payable upon conversion (Millions)
4.6
Price
per TKT
share ($)
$
37.0
Cost
of
settling convertible notes
170.1
Direct
costs
of acquisition
37.5
Total
purchase price
1,629.3
The
purchase price
stated above has been allocated according to Shire’s estimate of the fair value
of assets acquired and liabilities assumed.
The
allocation of
the purchase price was completed in 2006, and has been allocated to assets
and
liabilities acquired as outlined below. Goodwill in respect of the TKT
acquisition increased by $5.9 million in 2006 from $24.4 million (restated)
as
provisionally determined as at December 31, 2005, to $30.3 million following
the
recognition of certain assets and liabilities, net of related deferred tax,
as
the fair values of these assets and liabilities became reasonably estimable
during the allocation period.
As
of the end of
the allocation period, the fair value of the pre-acquisition contingency
relating to the Purported Class Action Shareholder Suit had not been determined.
The fair value of this contingency continues to be subject to the expected
outcome of the Purported Class Action Shareholder Suit. As the allocation
period
has ended, the contingency will be recorded as a liability in accordance
with
the criteria in SFAS 5, Accounting
for
Contingencies,
with any loss
arising recognized in the statement of operations. See note 21(d)
for further
information.
F-29
The
final
allocation of the purchase price to assets and liabilities acquired is as
follows:
Restated
Restated
Book
value
Adjustments
Fair
value
Notes
$’M
$’M
$’M
ASSETS
Current
assets:
Cash
and cash
equivalents
56.8
-
56.8
Restricted
cash
8.2
-
8.2
Short-term
investments
46.9
-
46.9
Accounts
receivable, net
28.4
-
28.4
Inventories
(a)
12.9
88.9
101.8
Prepaid
expenses and other current assets
7.9
4.9
12.8
Total
current
assets
161.1
93.8
254.9
Property,
plant and equipment, net
57.3
-
57.3
Goodwill
39.0
(39.0
)
-
-
on TKT
acquisition
(c)
-
30.3
30.3
Other
intangible assets, net
(d)
20.2
460.8
481.0
In-process
research and development
(e)
-
815.0
815.0
Deferred
tax
asset
(b)
-
99.8
99.8
Other
non-current assets
3.4
-
3.4
Total
assets
281.0
1,460.7
1,741.7
LIABILITIES
Current
liabilities:
Accounts
payable and accrued expenses
(f)
35.4
0.4
35.8
Deferred
tax
liability
(b)
-
36.4
36.4
Other
current
liabilities
24.5
13.9
38.4
Total
current
liabilities
59.9
50.7
110.6
Other
long-term liabilities
1.8
-
1.8
Total
liabilities
61.7
50.7
112.4
Estimated
fair value of identifiable assets acquired and liabilities
assumed
219.3
1,410.0
1,629.3
F-30
(a) Inventory
Components
of the
increase in fair value for acquired inventory are as follows:
Book
value
Fair
value adjustment
Fair
value
$’M
$’M
$’M
Finished
goods
3.4
66.8
70.2
Work-in-process
7.0
22.1
29.1
Raw
materials
2.5
-
2.5
12.9
88.9
101.8
Finished
goods were
fair valued at estimated selling price less the sum of costs of disposal
and a
reasonable profit allowance for the selling effort of the Company. Work
in-process was fair valued on the same basis less costs to complete.
(b)Deferred
taxes
The
estimated tax
effects of the acquisition, including TKT trading losses and the effect of
the
fair value adjustments for inventory and other intangible assets are as follows:
$’M
Deferred
tax
asset on TKT losses carried forward and short term timing differences
(net
of valuation allowance of $60.3 million)
288.7
Deferred
tax
liability on other intangible assets
(188.9
)
Deferred
tax
asset, net
99.8
Deferred
tax
liability on inventory - current
(36.4
)
Deferred
tax,
net
63.4
The
following
estimates relating to deferred tax were adjusted for:
·
The
deferred
tax rate has been adjusted to reflect the US federal rate and state
tax
combined 41% rate that should apply to measure the deferred tax
liability.
·
The
deferred
tax asset on TKT losses, which increased as a result of the identification
of further tax deductible expenses in prior
years.
(c)Goodwill
In
accordance with
the requirements of SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS
No. 142), the goodwill associated with the TKT acquisition will not be amortized
but will be subject to the Company’s impairment review. Goodwill resulting from
this acquisition has been allocated to the Pharmaceutical Products
segment.
(d)Other
intangible assets
The
acquired
identifiable intangible assets are attributable to the following
categories:
Book
value
Fair
value adjustment
Fair
value
Asset
life
$’M
$’M
$’M
years
Intellectual
property (1)
-
335.0
335.0
14
to 20
Customer
relationships(2)
14.9
104.1
119.0
15
Other
(survey
data)(2)
5.3
21.7
27.0
7
20.2
460.8
481.0
(1)
Relates to
REPLAGAL (excluding US and Japan) and DYNEPO (for the treatment of anemia
associated with kidney disease).
F-31
(2)
Relates to
REPLAGAL (excluding US and Japan).
Acquired
identifiable intangible assets have been allocated to the Pharmaceutical
Products reporting segment.
Acquired
identifiable intangible assets represent the value associated with developed
technology to which the Company has all associated rights. These rights can
include the right to develop, use, market, sell and/or offer for sale the
technical processes, intellectual property and institutional understanding
(including the way in which compounds react in the body, an understanding
of the
mechanisms of action which allow the compound to work and the knowledge related
to the associated clinical and marketing studies performed for these compounds)
that were acquired as part of the transaction with respect to products and/or
processes that have been developed.
The
fair value of
all of the identifiable intangible assets has been determined using an income
approach on a project-by-project basis. This method starts with a forecast
of
all of the expected future net cash flows either generated or saved as a
result
of ownership of the intellectual property, the customer relationships and
the
other intangible assets. These cash flows are then adjusted to present value
by
applying an appropriate discount rate that reflects the risk factors associated
with the cash flow streams.
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
·
the
tax
amortisation benefit available to a market participant purchasing
assets
piecemeal.
The
valuations are
based on information at the time of the acquisition and the expectations
and
assumptions that have been deemed reasonable by the Company’s management. 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 the forecast future cash
flows.
(e)In-process
research and development
As
required by FASB
Interpretation No. 4, "Applicability of FASB Statement No. 2 to Business
Combinations Accounted for by the Purchase Method", the portion of the purchase
price allocated to IPR&D of $815 million (restated) was immediately
expensed.
During
the year to
December 31, 2006the Company determined that the value ascribed to IPR&D
acquired as a result of the TKT acquisition did not include the benefit of
tax
amortization as required by the American Institute of Certified Public
Accountants (AICPA) Practice Aid, Assets
Acquired
in a Business Combination to Be Used in Research and Development Activities:
A
Focus on Software, Electronic Devices, and Pharmaceutical
Industries.
The financial
statements for the year ended December 31, 2005 and this note have been restated
to correct this omission. See
note 3(a) for
further information.
A
project-by-project valuation using the guidance in SFAS No. 141 and the American
Institute of Certified Public Accountants (AICPA) Practice Aid "Assets
Acquired in a Business Combination to Be Used In Research and Development
Activities: A Focus on Software, Electronic Devices and Pharmaceutical
Industries" has been performed by independent valuation specialists to
determine the fair value of research and development projects of TKT which
were
in-process, but not yet completed.
The
fair value was
determined using the income approach on a project-by-project basis. This
method
starts with a forecast of the expected future net cash flows. These cash
flows
are then adjusted to present value by applying an appropriate discount rate
that
reflects the project's stage of completion and other risk factors. These
other
risk factors can include 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 various assumptions to be made
including:
·
revenue
that
is likely to result from specific IPR&D projects, including 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;
F-32
·
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;
·
research
and
development expenses; and
·
the
tax
amortisation benefit available to a market participant purchasing
assets
piecemeal.
In
addition the
Company considered:
·
the
project’s
stage of completion;
·
the
costs
incurred to date;
·
the
projected
costs to complete;
·
the
contribution, if any, of the acquired identifiable intangible assets;
·
the
projected
launch date of the potential product;
and
·
the
estimated
life of the potential product.
To
the extent that
the IPR&D project is expected to utilize the acquired identified intangible
assets, the value of the IPR&D project has been reduced to reflect this
utilization. The acquired identified intangible assets include the technical
processes, intellectual property, and institutional understanding with respect
to products and processes that have been completed and that may aid in the
development of future products or processes.
(f)Accounts
payable and accrued expenses
Included
in
“Accounts payable and accrued expenses” are the following fair value
adjustments:
(i)
Restructuring
costs
An
estimate of
restructuring costs that impact goodwill, pursuant to EITF Issue No. 95-3,
“Recognition of Liabilities in Connection with Purchase Business Combinations”.
Such costs total $2.0 million and are associated with the involuntary
termination of 15 TKT employees all of whom had left the Company by December31,2005. As at December 31, 2005, $1.5 million had been paid and $0.5 million
was
paid in the period to December 31, 2006; and
(ii)
Deferred
revenue
A
fair value
adjustment of $1.6 million in respect of a deferred revenue stream relating
to
pre-acquisition activities of TKT.
Pro
forma
financial information
The
following
unaudited pro forma financial information presents the combined results of
the
operations of Shire and TKT as if the acquisition had occurred at the beginning
of the periods presented. The unaudited pro forma financial information is
not
necessarily indicative of what the consolidated results of operations actually
would have been had the acquisition been completed at the dates indicated.
In
addition, the unaudited pro forma financial information does not purport
to
project the future results of operations of the combined Company.
Income
before
extraordinary items and cumulative effect of change in accounting
principles
220.0
188.0
Net
income
220.0
188.0
Per
share
amounts:
Net
income
per common share - basic
44.0c
37.9c
Net
income
per common share - diluted
43.5c
37.4c
F-33
The
unaudited pro
forma financial information above reflects the following pro forma adjustments
applied using the principles of Article 11 of Regulation S-X under the
Securities Exchange Act of 1934:
(i)
elimination
of historical amortization expense recorded by legacy TKT for
definite-lived intangible assets;
(ii)
elimination
of interest expense recorded by legacy TKT on convertible loan
notes;
(iii)
an
adjustment
to increase interest expense by $6.0 million in the year to December31,2005, and $8.1 million in the year to December 31, 2004, to reflect
the
interest payable to dissenting
shareholders;
(iv)
an
adjustment
to decrease interest income by $15.0 million in the year to December31,2005, and $17.4 million in the year to December 31, 2004, to reflect
the
cash consideration paid to TKT shareholders, option holders and
convertible note holders; and
(v)
an
adjustment
to increase amortization expense based on the estimated fair value
of
identifiable intangible assets from the purchase price allocation,
which
are being amortized over their estimated useful lives over a range
of 7 to
20 years, of approximately $13.7 million in the year to December31, 2005,
and $23.4 million in the year to December 31,2004.
In
addition, the
unaudited pro forma financial information above excludes the following material,
non-recurring purchase accounting adjustments in the year to December 31,2005,
as follows:
·
an
IPR&D
charge of $815 million (restated);
·
a
$41.9
million charge relating to the use or sale of purchased inventory
that was
written up to fair value reported in cost of product sales; and
·
a
$17.2
million credit relating to the current deferred tax liability with
regard
to the purchased inventory charge in cost of product sales
above.
5.
Integration
costs
In
connection with
the acquisition of TKT, the Company’s management approved and initiated plans to
restructure the operations of the enlarged Company to eliminate duplicate
facilities and reduce costs.
Integration
costs
represent incremental costs incurred by the Company directly related to the
absorption of the TKT business into the Company, including expenditures for
consulting and systems integration. The charges have been presented as
integration costs in the statement of operations and are accounted for solely
within the Pharmaceutical Products reporting segment.
Employee
severance and retention payments for key TKT employees
7.0
(1.1
)
5.9
Information
technology costs
1.1
(1.1
)
-
Other
1.6
(1.4
)
0.2
9.7
(3.6
)
6.1
Included
within:
Current
liabilities
8.9
(3.6
)
5.3
Other
long-term liabilities
0.8
-
0.8
9.7
(3.6
)
6.1
6.
Reorganizations
Actions
commenced in 2005
Sale
of the
drug formulation business
On
December 22,2005, Shire sold its drug formulation business to Supernus Pharmaceuticals,
Inc.
(Supernus), a newly formed specialty pharmaceutical company funded by two
venture capital companies.
The
sale resulted
in:
·
a
profit on
sale of $3.6 million. Proceeds from the sale included an equity
interest
(of less than 10%) in Supernus, which has been included in investments
in
private companies (see Note 11)
at its fair
value of $3.9 million. The fair value was determined by reference
to the
cash invested in Supernus by the venture capital companies;
·
the
transfer
of the lease on the East Gude Drive, Rockville premises to Supernus,
with
Shire being released from all obligations under the lease by the
landlord;
·
an
ongoing
projects agreement relating to services that Supernus provided
to Shire
for a transitional period (ending in March 2006), on certain Shire
projects until the projects were moved to third party suppliers;
and
·
the
severance
of 28 employees. As at December 31, 2005, 16 had left the Company,
and the
remaining employees had left by March 31, 2006. Severance payments
were
made to the former employees over a 42 week period, as required
by local
regulations.
The
sale has been
reflected in the statement of operations in the period ended December 31,2005
as follows:
Other
income,
net
Research
and development expense
$’M
$’M
Gain
on
disposition
3.6
-
Employee
severance
-
(1.2
)
Other
costs
-
(0.2
)
3.6
(1.4
)
F-35
All
items are
recorded in the Pharmaceutical Products segment.
Actions
commenced in 2004
North
American
site consolidation
As
previously
disclosed, the Company began a consolidation of its North American sites
in
2004, with the aim of decreasing the number of sites from 16 to four, including
the opening of a new US headquarters office in Wayne, Pennsylvania. The Company
recorded reorganization costs of $9.4 million and $48.5 million in the year
to
December 31, 2005 and 2004 respectively. Following the closure of the Newport
site in July 2005, the site consolidation was completed and no further
reorganization costs have been incurred in the year ended December 31, 2006.
The
primary costs
associated with the site consolidation included:
·
severance
costs relating to 137 employees;
·
retention
payments to key employees;
·
relocation
costs relating to 85 employees who were moved to Wayne, Pennsylvania;
·
costs
of
duplicate facilities (including lease exit costs);
and
·
other
incremental costs associated with the site closures, such as legal,
consultancy, the write-down of property, plant and equipment and
information technology costs.
As
at December 31,2005 all 137 employees had left the Company. The cost of the employee severance
was ratably recognized over the period from the communication date to the
termination date. In addition, all 85 of those employees who had agreed to
relocate had relocated. The cost of relocation was recorded as it was
incurred.
The
following table
presents the cost of the reorganization recorded to date and the total costs
of
the reorganization.
These
charges have
been reflected within reorganization costs in the statement of operations
and
are accounted for solely within the Pharmaceutical Products reporting
segment.
As
noted above, the duplicate facilities costs will be paid over the remaining
life
of the relevant leases, which all expire before October 31, 2012.
The
following
provides a reconciliation of the liability as at December 31, 2006:
On
September 9,2004the Company completed the disposition of its vaccines business to IDB.
The
total consideration for the sale was $120 million comprising $30 million
of cash
received at completion, $30 million of cash held in escrow and due on the
first
anniversary of completion and $60 million received at completion in the form
of
4,931,864 subscription receipts of IDB. If, prior to January 10, 2005, IDB
were
to raise up to $60 million from equity related issuances, then it was required
under the terms of the sale agreement to redeem the subscription receipts
from
Shire for $60 million. Accordingly, following the completion of such a fund
raising on January 7, 2005, IDB redeemed the subscription receipts from Shire
for $60 million in cash. On the first anniversary of completion, Shire received
the $30 million of cash held in escrow.
As
part of the
transaction, Shire entered into an agreement to provide IDB with a loan facility
of up to $100 million, which could be drawn down over the four years following
completion. As at December 31, 2005, IDB had drawn down the entire $100 million
loan. It was required that this facility be used by IDB to fund the development
of injectable flu and pipeline products within the vaccines business acquired
from Shire. Drawings under the loan facility were segregated into two
components:
(i)
Drawings for
injectable flu development of $70.6 million repayable out of income generated
by
IDB on future non-Canadian injectable flu products, subject to minimum annual
repayments in respect of the first $30 million of the drawing, to be made
between 2007 and 2017; and
(ii)
Drawings for
pipeline development of $29.4 million repayable out of income generated by
IDB
on future pipeline products and have no fixed repayment schedule.
The
transaction
gave rise to an overall loss on disposition of the vaccines business of $41.1
million, recorded as a loss on disposition at completion in 2004 of $44.2
million and a subsequent provision release of $3.1 million being recognized
during the year to December 31, 2005. This net loss on disposition of $41.1
million comprised a gain on disposition of net assets of $28.9 million together
with a provision for a loss of $70 million out of the $100 million loan facility
available to IDB. This provision was made on the basis that those loan
repayments based solely on future sales of flu and pipeline products in
development provided no certainty of recovery.
The
historical
consolidated financial statements reflect the vaccines business as a
discontinued operation for all periods presented. The results of the
discontinued operation have been removed from all periods on a line-by-line
basis from product sales revenue to income from continuing operations. The
net
loss from the discontinued operation, together with the loss on disposition,
are
shown as separate line items.
Operating
results
of the discontinued operations are summarized below.
At
December 31,2004, the assets and liabilities of the discontinued vaccines operation were
$nil.
On
February 14,2006the Company received $78.7 million from IDB, being the full repayment
of
the $70.6 million injectable flu development drawings, together with accrued
interest of $8.1 million. The repayment followed GSK’s acquisition of IDB, after
which IDB was provided with resources by GSK to fund the early repayment
of the
injectable flu tranche. The $29.4 million pipeline development tranche of
the
loan facility is still outstanding and is fully provided against.
At
the time of the
disposal, a provision of $70.0 million was charged to discontinued operations
on
the basis that there was no certainty of recovery of this amount. The $70.0
million provision was allocated against all of the pipeline development tranche
($29.4 million) and against $40.6 million of the $70.6 million injectable
flu
development tranche.
Accordingly,
the
$78.7 million received was recorded as follows:
·
a
gain on
disposition of discontinued operations of $40.6 million (being
the amount
previously provided against the injectable flu development
tranche);
·
settlement
of
the loan receivable balance of $31.6 million (being the unprovided
component of the injectable flu development loan, plus recognised
and
accrued interest); and
·
interest
income of $6.5 million (being interest earned in the year of $1.0
million
and $5.5 million of interest earned but provided for in previous
periods).
The
repayment of
the $70.6 million injectable flu tranche had no tax effect. There were no
further developments in respect of the $29.4 million outstanding tranche
of the
IDB loan.
7.
Gain
on sale of product rights
During
the year,
the Company disposed of its ADDERALL (immediate-release mixed amphetamine
salts)
product to Duramed Pharmaceuticals Inc, (Duramed) a subsidiary of Barr
Pharmaceuticals, Inc., (Barr) for $63 million in cash. The sale completed
on
September 29, 2006. As a result the Company has recognised a pre-tax gain
of $63
million within income from continuing operations.
8.
Accounts
receivable, net
Trade
receivables
at December 31, 2006 of $310.8 million (December 31, 2005: $329.9 million),
are
stated net of a provision for doubtful accounts and sales discounts of $8.8
million (December 31, 2005: $9.7 million).
The
movement in the
provision for doubtful accounts and sales discounts is as follows:
F-38
2006
$’M
2005
$’M
2004
$’M
As
at January
1,
9.7
4.3
7.9
Charged
to
operations
47.1
51.1
38.2
Released
to
income
-
-
(3.4
)
Utilization
(48.0
)
(45.6
)
(38.4
)
As
at
December 31,
8.8
9.7
4.3
Revenues
are mainly
derived in the US (71% of total revenues) from agreements with major
pharmaceutical companies and relationships with pharmaceutical wholesale
distributors and retail pharmacy chains. Material customers are disclosed
in
Note 25.
Such clients have
significant cash resources and therefore any credit risk associated with
these
transactions is considered minimal.
The
Company
recorded impairments of $2.1 million on its investments during the year to
December 31, 2006 (2005: $2.0 million; 2004 $15.4 million). See Note 26.
All
impairments in the three years presented were recorded in the Pharmaceutical
Products segment.
F-39
(i)
Investments
in private companies
During
the year to
December 31, 2006 additions to investments in private companies included
$8.0
million (2005: $4.1 million) to ViroChem Pharma Inc. in return for an additional
equity interest.
During
the year to
December 31, 2005 additions to investments in private companies included
a $3.9
million investment in Supernus (less than 10% of total equity), as part
consideration for the sale of the drug formulation business. The fair value
of
the investment was determined by reference to cash invested in Supernus by
the
other investors.
During
the year to
December 31, 2006the Company recorded impairments of $1.8 million (2005:
$1.6
million) against its investments in private companies based on a decline
in the
estimates of their fair value that the Company believes are
other-than-temporary.
During
the year to
December 31, 2004the Company recorded impairments of $9.8 million against
these
investments based on changes in the estimates of their fair value. This amount
includes $4.2 million to reduce the value of an investment in a private company
that gained a listing on March 24, 2004; the initial listing price was below
the
anticipated flotation price used to value the investment at December 31,2003
and the Company believed the decline in value was other-than-temporary. After
the date of the listing the investment was reclassified to available-for-sale
securities and so any changes since the initial listing date have been recorded
in other comprehensive income.
The
changes in fair
market value, which resulted in the write-downs referred to above, were based
on
the Company’s estimates of fair value. These estimates were derived from
financial and other publicly available information such as press releases
and
recent capital raising activities.
(ii)
Available-for-sale
securities
During
2006, there
were no sales of available-for-sale securities. During the year to December31,2005the Company sold an investment in an available-for-sale security, valued
at
$6.0 million (2004: $11.9 million), realizing a gain on the sale of $3.9
million
(2004: $14.8 million). See Note 26.
The
Company
recorded other-than-temporary impairments of $0.3 million, $0.4 million and
$1.6
million against its available for sale securities in the years to December31,2006, 2005 and 2004 respectively. At December 31, 2006the Company had no
available-for-sale investments in a significant unrealized loss position
for
which other-than-temporary impairments have not been recognized.
The
Company has
accounted for its commercialization partnership with GSK (through which the
products 3TC and ZEFFIX are marketed in Canada), using the equity method
of
accounting. The Company’s 50% share of the partnership is included within
“Equity in earnings/(losses) of equity method investees”.
(b)GeneChem
Funds
The
GeneChem
Technologies Venture Fund and the GeneChem Therapeutics Venture Fund (“The
Funds”) are Canadian limited partnerships investing in healthcare research and
development companies, in which the Company owns 30% and 11% of the issued
shares respectively. At December 31, 2006, the Funds’ net assets totaled
approximately $72.0 million (2005: $71 million). The Company is involved
as a
limited partner and the general partner of the Funds; involvement in the
Funds
dates from between 1997 and 2000. The Company’s exposure to loss as a result of
its involvement with the Funds is limited to the carrying value of the
investment, $11.2 million at December 31, 2006 and its commitment to further
investment of $1.7 million.
F-40
During
the year to
December 31, 2004the Company recorded an impairment of $4.0 million against
the
investment in the Funds following reviews of the Funds’ investment portfolios
that identified other-than-temporary declines in the value of certain private
and publicly quoted securities held by the Funds.
Depreciation
expense for the years to December 31, 2006, 2005 and 2004 was $48.1 million,
$32.7 million, and $22.5 million respectively. The expense included a $0.5
million (2005: $6.5 million) impairment loss. In 2005, the impairment related
to
the plant and equipment of the drug formulation business. At the time of
the
impairment loss, the Company was expecting to close the business and, because
the carrying value of the assets exceeded the expected future cash flows
resulting from the closure, the assets were considered impaired.
The
increase in the
net book value of goodwill for the year to December 31, 2006 and 2005 is
shown
in the table below:
2006
Restated
2005
$’M
$’M
As
at January
1,
225.6
235.4
Acquisitions
0.6
24.4
Adjustments
relating to prior year acquisitions
7.6
-
Foreign
currency translation
3.6
(34.2
)
As
at
December 31,
237.4
225.6
During
the period
to December 31, 2006, the Company finalized the allocation of the purchase
price
in respect of the acquisition of TKT and as a result, goodwill in respect
of the
TKT acquisition increased by $5.9 million following the recognition of certain
assets and liabilities, net of related deferred tax, as the fair values of
these
assets and liabilities are now reasonably estimable.
In
accordance with
FASB
Statement 109, "Accounting for Income Taxes”,
the Company is
required to adjust goodwill for all changes in estimates related to tax
contingencies regardless of the time elapsed since the date of
F-41
acquisition.
In the
period to December 31, 2006, the goodwill in respect of the TKT acquisition
increased by $1.7 million due to a change in estimate of pre-acquisition
income
tax contingencies.
As
a result of
these adjustments goodwill in respect of the TKT acquisition increased to
$32.0
million (restated).
During
the year to
December 31, 2006the Company acquired a company for $0.8 million which resulted
in goodwill of $0.6 million. This goodwill is recorded in the Pharmaceutical
Products segment.
During
the period
to December 31, 2005the Company recognized $24.4 million (restated) as goodwill
on acquisition of TKT (see Note 4),
in accordance
with SFAS No. 141. This goodwill is recorded in the Pharmaceutical Products
segment.
Goodwill
by
operating segment
Shire’s
internal
management reporting structures show two operating segments: Pharmaceutical
Products and Royalties. The Pharmaceutical Products segment comprises four
therapeutic areas: CNS, GI, HGT and GP. The net book value of goodwill as
at
December 31, 2006 is all held in the Pharmaceutical Products
segment.
In
2006, the
Company acquired $82.3 million of identifiable intangible assets. The weighted
average amortization period of these assets is 10.1 years. These acquisitions
relate to milestone payments made to third parties subsequent to regulatory
approval which are capitalized as intangible assets, and amortized over the
remaining useful life of the related product.
Amortization
charged for the three years to December 31, 2006, 2005 and 2004 was $56.3
million, $45.3 million and $38.7 million, respectively.
The
estimated lives
of all intangible assets that continue to be amortized under SFAS No. 142
are
reviewed periodically by management. Management estimates that the annual
amortization charges in respect of intangible fixed assets held as at December31, 2006 will average approximately $51.6 million for each of the five years
to
December 31, 2011. Estimated amortization expense can be affected by various
factors including future acquisitions (including the agreed acquisition of
New
River, see note 32),
disposals of
product rights and the technological advancement and regulatory approval
of
competitor products.
During
2006, the
Company recorded impairments of $1.1 million. This impairment resulted from
the
decision not to support and promote certain non-core products going
forward.
During
2005, the
Company recorded impairments of $5.6 million. These impairments resulted
from
the approval of generic versions of AGRYLIN and the decision not to support
and
promote certain non-core products going forward.
F-42
During
2004, the
Company recorded impairments of $13.5 million. These impairments resulted
from a
change of operational management and their views of the economic value and
strategic worth of the products concerned, which decreased estimated future
cash
flows.
All
impairments in
the three years presented were recorded in the Pharmaceutical Products
segment.
Further
details of
the SERP investment are provided in Note 28.
The amount shown
above is the cash surrender value of life insurance policies, which is backed
by
short-term investments. A liability of $4.7 million is included within Notes
17
and 19
(2005: $4.6
million).
In
connection with
the acquisition of TKT, Shire plc and certain subsidiary companies entered
into
a Multicurrency Revolving Facilities Agreement (the “Facilities Agreement”) with
ABN AMRO Bank N.V., Barclays Capital, Citigroup Global Markets Limited, HSBC
Bank plc and The Royal Bank of Scotland plc (the “Lenders”) on June 15, 2005.
The Facilities Agreement comprises two credit facilities: (i) a committed
multicurrency three year revolving loan facility in an aggregate amount of
$500
million (“Facility A”) and (ii) a committed 364 day revolving loan facility in
an aggregate amount of $300 million (“Facility B” and, together with Facility A,
the “Facilities”). Shire plc has agreed to act as guarantor for any of its
subsidiaries that borrow under the Facilities Agreement. In June 2006 Facility
B
was extended for a further 364 days to June 13, 2007. In October 2006, Facility
B was reduced to $200 million.
In
connection with
the acquisition of New River, Shire plc entered into a Multicurrency Term
and
Revolving Facilities Agreement (the “New Facilities Agreement”) with ABN AMRO
Bank N.V., Barclays Capital, Citigroup Global Markets Limited and The Royal
Bank
of Scotland plc (the “Arrangers”) on February 20, 2007. The New Facilities
Agreement comprises three credit facilities: (i) a committed multicurrency
five
year term loan facility in an aggregate amount of $1,000 million (“Term Loan
A”), (ii) a committed multicurrency 364 day term (with a further 364 day
extension option) loan facility in an aggregate amount of $300 million (“Term
Loan B”) and (iii) a committed five year revolving loan facility in an aggregate
amount of $1,000 million (the “RCF” and, together with Term Loan A and Term Loan
B, the “Facilities”). Shire plc has agreed to act as guarantor for any of its
subsidiaries that borrow under the New Facilities Agreement.
The
RCF, which
includes a $250 million swingline facility, may be used for general corporate
purposes. Term Loan A and Term Loan B may be used only for financing the
acquisition of New River (including related fees and transaction costs) and
refinancing any existing indebtedness of New River or its
subsidiaries.
The
RCF and Term
Loan A mature on February 20, 2012. Term Loan A is repaid in annual installments
on the anniversary of the New Facilities Agreement in the following amounts:
$150 million in 2008, $150 million in 2009, $200 million in 2010, $200 million
in 2011 and the balance on maturity. Term Loan B matures on February 19,2008.
As noted above, at Shire’s request, the maturity date of Term Loan B may be
extended for a further 364 days.
The
availability of
loans under each of the Facilities is subject to customary conditions, including
the absence of any defaults thereunder and the accuracy (in all material
respects) of Shire’s representations and warranties contained
therein.
The
Facilities
include representations and warranties, covenants and events of default,
including (i) requirements that Shire’s ratio of Net Debt to EBITDA (as
defined in the Facilities Agreement) does not exceed 3.50:1 for the 12 month
period ending 31 December, 2007; 3.25:1 for the 12 month period ending 30
June
2008; and 3.00:1 for each 12 month period ending 31 December and 30 June
thereafter, and (ii) that the ratio of EBITDA to Net Interest (as defined
in the New Facilities Agreement) must not be less than 4.0 to 1, for each
12
month period ending 31 December or 30 June, and (iii) additional
limitations on the creation of liens, disposal of assets, incurrence of
indebtedness, making of loans and giving of guarantees.
Interest
on loans
under the Facilities will be payable on the last day of each interest period,
which period may be one week or one, two, three or six months at the election
of
Shire (or as otherwise agreed with the Lenders). The interest rate on each
loan
drawn under the RCF or Term Loan A for each interest period is the percentage
rate per annum which is the aggregate of the applicable margin (initially
set at
0.80 per cent per annum until delivery of the
F-44
compliance
certificate for the year ending 31 December, 2007 and thereafter ranging
from 0.40 to 0.80 per cent per annum, depending on the ratio of Net Debt
to
EBITDA), LIBOR, and mandatory cost, if any (as calculated in accordance with
Schedule 5 of the New Facilities Agreement). The interest rate on each loan
drawn under Term Loan B for each interest period is the percentage rate per
annum which is the aggregate of the applicable margin (being from 0.50 per
cent
for the first six months from the date of the New Facilities Agreement, 0.75
per
cent for the second six months and 1.00 per cent per annum thereafter), LIBOR,
and mandatory cost, if any (as calculated in accordance with Schedule 5 of
the
Facilities Agreement).
Shire
shall also
pay fees equal to 35 per cent per annum of the applicable margin on available
commitments under the RCF for the availability period applicable to the RCF
and
20 per cent per annum of the applicable margin on available commitments under
Term Loan A and Term Loan B for the availability period applicable to Term
Loan
A and Term Loan B. Interest on overdue amounts under the Facilities will
accrue
at a rate, which is one percentage point higher than the rates otherwise
applicable to the loans under the Facilities.
The
Facilities
Agreement restricts (subject to certain carve-outs) Shire’s ability to incur
additional financial indebtedness, grant security over its assets or provide
or
guarantee loans. Further, any lender may require mandatory prepayment of
its
participation if there is a change in control of Shire.
Upon
a change of
control of Shire or upon the occurrence of an event of default and the
expiration of any applicable cure period, the total commitments under the
Facilities may be cancelled, all or part of the loans, (together with accrued
interest and all other amounts accrued or outstanding) may become immediately
due and payable. Events of default under the New Facilities Agreement include:
(i) non-payment of any amounts due under the Facilities; (ii) failure to
satisfy any financial covenants; (iii) material misrepresentation in any
of the
finance documents; (iv) failure to pay, or certain other defaults under other
financial indebtedness; (v) certain insolvency events or proceedings; (vi)
material adverse changes in the business, operations, assets or financial
condition of the group; (vii) certain US Employee Retirement Income
Security Act (ERISA) breaches which would have a material adverse effect;
(viii) if it becomes illegal for Shire or any of its subsidiaries that are
parties to the New Facilities Agreement to perform their obligations or
(ix) if Shire or any subsidiary of Shire which is party to the New
Facilities Agreement repudiates the New Facilities Agreement or any Finance
Document (as defined in the Facilities Agreement). The New Facilities Agreement
is governed by English law.
Shire
anticipates
that its operating cash flow together with available cash, cash equivalents
and
short-term investments and the above mentioned debt facilities will be
sufficient to meet its anticipated future operating expenses, any costs arising
as a result of the acquisition of New River, outstanding costs related to
the
acquisition of TKT, capital expenditures, dividends, share repurchases and
debt
service and lease obligations as they become due over the next twelve
months.
If
the Company
decides to acquire other businesses, it expects to fund these acquisitions
from
existing cash resources, the Facilities Agreement discussed above and possibly
through new borrowings and/or the issue of new equity if necessary.
TKT
convertible loan notes
As
at December 31,2005 all of TKT’s 1.25% 2011 Convertible Notes had been converted and
redeemed.
Deferred
revenue relates
to amounts received from the out-licensing of AGRYLIN, FOSRENOL, ELAPRASE
and
REPLAGAL in Japan and the global out-licensing of TROXATYL.
F-45
The
onerous lease
provisions at December 31, 2006 include $2.6 million in respect of the North
American site consolidation (2005: $4.4 million).
20.
Financial
instruments
The
estimated fair
values of the Company’s financial instruments as at December 31, 2006 and
2005 are summarized below. Certain estimates and judgments were required to
develop the fair value amounts. The fair value amounts shown below are not
necessarily indicative of the amounts that the Company would realize upon
disposition, nor do they indicate the Company’s intent or ability to dispose of
the financial instrument.
The
following
methods and assumptions were used to estimate the fair value of each material
class of financial instrument:
·
Short-term
investments (commercial paper and institutional and managed cash
funds) -
the carrying value approximates fair value because of the short-term
nature of these instruments.
·
Restricted
cash - the carrying value either approximates fair value because
of the
short-term nature of the instruments or equals the fair value as
such
instruments are marked to market.
·
Investments
(available-for-sale securities) - the carrying value of non-current
investments with readily determinable market values equals the
fair value
as such instruments are marked to
market.
·
Long-term
debt - the fair value of long-term debt is estimated based on the
discounted future cash flows using currently available interest
rates or,
where the debt instrument is traded, by reference to the market
price.
·
Derivatives
-
derivative instruments comprise forward foreign exchange contracts.
As at
December 31, 2006the Company had 18 outstanding forward foreign
exchange
contracts with a total principal amount of $98.3 million equivalent
to
manage the currency risk associated with certain inter-company
loans. The
Company does not seek hedge accounting treatment for these hedges
and
therefore changes in the fair value of these derivatives are accounted
for
in the statement of operations. As at December 31, 2006 there were
net
unrealized losses of $8.1 million on these
contracts.
The
carrying
amounts and corresponding fair values of financial instruments are as
follows:
The
carrying
amounts of cash and cash equivalents, accounts receivable, accounts payable
and
accrued liabilities approximate fair value because of the short-term maturity
of
these amounts.
F-46
21.
Commitments
and contingencies
(a)Operating
Leases
Future
minimum
operating lease payments presented below include lease payments and other
fixed
executory fees under lease arrangements as at December 31, 2006
Operating
leases
$’M
2007
28.8
2008
27.5
2009
23.7
2010
23.1
2011
16.0
Thereafter
38.3
157.4
(i)
Operating
leases
The
Company leases
facilities, motor vehicles and certain equipment under operating leases expiring
through 2025. Lease and rental expense included in selling, general and
administrative expenses in the accompanying statements of operations amounted
to
$23.7 million, $20.6 million and $15.3 million for the years to December31,2006, 2005 and 2004 respectively.
During
the year to
December 31, 2004, Shire Inc., a wholly owned subsidiary of Shire, signed
two
eleven-year operating leases on properties in Wayne, Pennsylvania. Shire
US,
Inc., another wholly owned subsidiary, acts as guarantor in respect of these
leases. The future minimum lease payments under the lease agreements are
$52.6
million in aggregate.
(ii)
Restricted
cash in respect of leases
At
December 31,2006the Company had $6.7 million of restricted cash held as collateral for
certain equipment leases (2005: $5.5 million).
an
irrevocable standby letter of credit with Barclays Bank plc, in
the amount
of $14.2 million, providing security on the recoverability of insurance
claims. The Company has restricted cash of $15.3 million, as required
by
this letter of credit; and
(ii)
an
irrevocable standby letter of credit with Bank of America in the
amount of
$7.8 million, providing security on the payment of lease obligations.
The
Company has restricted cash of $7.8 million, as required by this
letter of
credit.
(c)Commitments
(i)
DAYTRANA
In
connection with
the Company’s acquisition in 2003 from Noven Pharmaceuticals, Inc. (Noven) of
the worldwide sales and marketing rights to DAYTRANA, Shire has a remaining
obligation to pay Noven up to $50 million, contingent on future sales
performance.
DAYTRANA
received
final regulatory approval from the US Food and Drug Administration (FDA)
on
April 6, 2006 and as a result Shire paid a $50 million milestone to Noven.
During the year, the Company also reached a sales milestone for DAYTRANA,
and,
as a result, Shire will make a payment to Noven of $25 million in 2007. Both
amounts have been capitalized and amortization of these amounts, together
with
the upfront milestone payment of $25 million made in 2003, will continue
over
the estimated life of the product of approximately 10 years.
F-47
(ii)
VYVANSE
In
January 2005, Shire entered into an agreement with New River to collaborate
in
developing, manufacturing, marketing and selling VYVANSE in the US. In
the
rest of the world, Shire acquired the license to develop and commercialize
VYVANSE, in consideration of a low double-digit royalty.
Under
the terms of
the agreement, the parties will collaborate on VYVANSE development,
manufacturing, marketing and sales in the US. New River will be financially
and
operationally responsible for clinical and manufacturing development. Shire
will
book the product sales and New River will supply up to 25% of the sales effort
under a co-promotion right. Shire is obligated to give VYVANSE marketing
and
promotional priority over its other oral ADHD stimulants should VYVANSE’s label
contain a claim that it has decreased potential for abuse or overdose
protection. Shire paid an initial sum of $50 million on signing and a further
$50 million was paid to New River following acceptance of the filing of a
New
Drug Application (NDA) by the FDA in January 2006.
If
VYVANSE is approved with a Schedule III, IV or V classification or is
unscheduled ("favorable scheduling"), Shire will pay New River a $300 million
milestone payment. US operating profit will be divided as follows: Shire
will
retain 75% of profits for the first two years following launch, and the parties
will share the profits equally thereafter.
In
the event that VYVANSE receives a final Schedule II classification, no milestone
payment will be payable by Shire to New River upon approval. Division of
profits
will be calculated under an alternative profit sharing scheme. New River’s share
of U.S. product profits for the first two years will be at least 25%, though
it
may increase to a value determined by a preset sales based formula; for
following years, it will be at least 50%, though it may increase to a value
determined by a preset sales based formula thereafter. These formulas, which
include yearly threshold sales, are
set out in
Exhibit 99.02 to the Company's Form 8-K filed on October 10, 2006. If
VYVANSE is classified as Schedule II on approval and then gets
favorable scheduling within one year of the first commercial sale, Shire
will
pay New River a $200 million milestone payment; if favorable scheduling occurs
by the third anniversary, the milestone payment will be $100 million. Upon
favorable scheduling being achieved under each of these scenarios, the profit
sharing formula reverts to that applicable to favorable scheduling.
In
addition, New River will be entitled to a $100 million milestone payment
at the
end of the first calendar year in which cumulative worldwide net sales of
all
collaboration products during that calendar year exceed $1 billion. A $5
million
milestone payment is payable following the first commercial sale in specified
European countries. Shire intends to capitalize and amortize any milestone
payments over the life of the product.
Shire
is entitled
to terminate the agreement until 30 days following approval of VYVANSE. If
Shire
terminates before regulatory approval, no payment would be due to Shire.
If
Shire terminates after approval and VYVANSE has received a favorable scheduling
assignment, no payment would be due to Shire. If the approved VYVANSE has
received a Schedule II classification, Shire would be entitled to a $50 million
termination payment, payable in cash, New River common stock, or an unsecured,
5-year promissory note, as will be agreed upon by Shire and New River.
On
February 20,2007the Company announced that it had agreed to acquire New River for $2.6
billion in cash. On completion of the acquisition of New River, Shire will
terminate these commitments. For further information see note 32.
(iii)
Women’s
Health Products
Shire
and Duramed
entered into an agreement related to Duramed’s transvaginal ring technology that
will be applied to at least five women’s health products, as well as a license
in a number of markets outside of North America, including the larger European
markets to Duramed’s oral contraceptive, SEASONIQUE. This agreement became
effective on September 6, 2006.
Under
this
agreement, Shire will reimburse Duramed for US development expenses incurred
going forward up to a maximum of $140 million over eight years. US Development
expenditure reimbursement for the year ended December 31, 2006 totalled $2.5
million, with $2.0 million due for reimbursement at December 31, 2006. At
December 31, 2006, the maximum future reimbursement for Duramed incurred
US
development expenditure is therefore $137.5 million. Shire will separately
be
responsible for development costs in its licensed territories.
(iv)
Tissue
Protective Cytokine (TPC) technology development rights
In
connection with
the Company’s licence of TPC rights in non-nervous system indications from
Warren, the Company is committed to making payments on achievement of certain
milestones. The Company is not required to make any payments to Warren upon
regulatory approval of the first product for the first indication. However,
it
is obligated to make milestone payments to Warren of $25 million upon regulatory
approval in up to five subsequent major indications.
F-48
(iv)
Other
R&D
and sales milestones
In
addition to the
commitments set out in (i) to (iv) at December 31, 2006the Company had
commitments payable on achievement of specified milestones and fees payable
for
products under development in-licensed from third parties of $75.6 million
(December 31, 2005: $18.0 million), of which $12.9 million could be paid
in
2007.
(v)
TKT
shareholders seeking appraisal
rights
As
at December 31,2006, appraisal rights had been asserted in respect of approximately 11.3
million shares of TKT common stock. For further information see section (d)
below. At December 31, 2006the Company recorded a liability of $419.9 million
based on the merger consideration of $37 per share for the 11.3 million shares
outstanding at that time plus a provision for interest of $32.4 million that
may
be awarded by the Court (see Note 4).
Until such time
as the appraisal process is complete the Company is unable to determine the
extent of its liability. For every $1 increase/decrease in the merger
consideration applicable to those TKT shareholders who have asserted appraisal
rights, the total estimated purchase price would increase/decrease by
approximately $11.3 million.
(vi)
Clinical
testing
As
at December 31,2006, the Company had committed to pay approximately $55.0 million to contract
vendors for administering and executing clinical trials. The Company expects
to
pay $36.1 million for these commitments throughout 2007. However, the timing
of
payments is not reasonably certain as payments are dependent upon actual
services performed by the organizations as determined by patient enrollment
levels and related activities.
As
at December 31,2006the Company had committed to pay approximately $83.4 million in respect
of
contract manufacturing, of which $64.5 million will be payable in 2007 and
a
further $18.9 million will be payable in 2008.
(viii)
Investment
commitments
As
at December 31,2006the Company had outstanding commitments to subscribe for interests in
companies and partnerships for amounts totaling $15.9 million (2005: $25.2
million) which could be payable in 2007, depending on the timing of capital
calls.
(ix)
Capital
commitments
At
December 31,2006, the Company has committed to spend $0.8 million in 2006 in respect
of
capital commitments. This relates to the expansion and modification of its
manufacturing facilities at Owings Mills, Maryland.
(d)Legal
proceedings
General
The
Company
accounts for litigation losses and insurance claims and provisions in accordance
with SFAS No. 5, "Accounting for Contingencies" (SFAS No. 5). Under SFAS
No. 5,
loss contingency provisions are recorded for probable losses when management
is
able to reasonably estimate the loss. Where the estimated loss lies within
a
range and no particular amount within that range is a better estimate than
any
other amount, the minimum amount is recorded. In other cases management's
best
estimate of the loss is recorded. These estimates are developed substantially
before the ultimate loss is known and the estimates are refined in each
accounting period in light of additional information becoming known. In
instances where the Company is unable to develop a reasonable estimate of
loss,
no litigation loss is recorded at that time. As information becomes known
a loss
provision is set up when a reasonable estimate can be made. The estimates
are
reviewed quarterly and the estimates are changed when expectations are revised.
Any outcome upon settlement that deviates from the Company’s estimate may result
in an additional expense in a future accounting period.
As
at December 31,2005 provisions for litigation losses, insurance claims and other disputes
totaled $35.7 million (2005: $27.8 million).
F-49
ADDERALL
XR
(i)
Barr
Laboratories, Inc.
Shire’s
extended
release "once daily" version of ADDERALL, ADDERALL XR, is covered by US Patent
No. 6,322,819 (the ‘819 Patent) and US Patent No. 6,605,300 (the ‘300 Patent).
In January 2003 the Company was notified that Barr had submitted an Abbreviated
New Drug Application (ANDA) under the Hatch-Waxman Act seeking
permission
to market its generic versions of the 5mg, 10mg, 15mg, 20mg, 25mg and 30mg
strengths of ADDERALL XR (Barr’s ANDA products) prior to the expiration date of
the Company’s ‘819 Patent, and alleging that the ‘819 Patent is not infringed by
Barr's ANDA products. In August 2003 Shire was notified that Barr also was
seeking permission to market its ANDA products prior to the expiration date
of
the ‘300 Patent and alleging that the ‘300 Patent is invalid. Shire
Laboratories, Inc, (Shire Laboratories) filed suit against Barr for infringement
of the ‘819 Patent in February 2003 and for infringement of the ‘300 Patent in
September 2003. The schedules for the lawsuits against Barr with respect
to the
‘819 and ‘300 Patents were consolidated in December 2003. The Company sought a
ruling that Barr’s ANDA and ANDA products infringe the ‘819 and ‘300 Patents and
that its ANDA should not be approved before the expiration date of the patents.
The Company also sought injunctions to prevent Barr from commercializing
its
ANDA products before the expiration of the ‘819 and ‘300 Patents, damages in the
event that Barr should engage in such commercialization, and its attorneys’ fees
and costs. On September 27, 2004 Barr filed an amended Answer, Affirmative
Defense and Counterclaim in which Barr added the following counterclaims:
invalidity of the ‘819 patent, non-infringement of the ‘300 Patent and
unenforceability of the ‘819 and ‘300 Patents due to inequitable conduct. Shire
asserted affirmative defenses, alleging, among other things, that Barr has
waived its right to assert the counterclaims set forth in its September 27,2004
amended Answer. Under the Court’s schedule summary judgment motions were to be
filed and fully briefed by October 14, 2005. Neither Shire nor Barr filed
summary judgment motions. On December 9, 2005, the Court continued the final
pre-trial conference to March 10, 2006.
Shire’s
lawsuits
triggered stays of final FDA approval of Barr’s ANDA of up to 30 months from the
date of the Company’s receipt of Barr’s notice letters. The second and final 30
month stay related to the lawsuit regarding the ‘300 Patent expired on February18, 2006. As the stay has expired, the FDA may approve Barr's ANDA, subject
to
satisfaction by Barr of the FDA's requirements. The FDA has not approved
Barr’s
ANDA at this time.
On
October 19, 2005
Shire brought another lawsuit against Barr in the Southern District of New
York
alleging infringement of US Patent No. 6,913,768 (the ‘768 Patent), which issued
on July 5, 2005. The Company sought an injunction to prevent Barr from
infringing the ‘768 Patent, damages in the event that Barr should commercialize
its ANDA products, attorneys’ fees and costs. Barr moved to dismiss this action
asserting that there was no subject matter jurisdiction. A hearing on this
motion was held on February 17, 2006. The Court never ruled on this motion.
During
October 2005
Shire 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.
Shire believes that these requested criteria will ensure that generic
formulations of ADDERALL XR or follow-on drug products will be clinically
effective and safe. In January 2006 Shire filed a supplemental amendment
to its
original Citizen Petition, which included additional clinical data in support
of
the original filing. On April 20, 2006 Shire received correspondence from
the
FDA informing Shire that the FDA has not yet resolved the issues raised in
Shire’s pending ADDERALL XR Citizen Petition. The correspondence states that,
due to the complex issues raised requiring extensive review and analysis
by the
FDA’s officials, a decision cannot be reached at this time. The FDA’s interim
response is in accordance with FDA regulations concerning Citizen
Petitions.
On
August 14, 2006,
Shire and Barr announced that all pending litigation in connection with Barr’s
ANDA and its attempt to market generic versions of Shire’s ADDERALL XR had been
settled. As part of the settlement agreement, Barr entered into consent
judgments and agreed to permanent injunctions confirming the validity and
enforceability of Shire’s ‘819, ‘300 and ‘768 Patents. Barr has also admitted
that any generic product made under its ANDA would infringe the ‘768 patent.
Under the terms of the settlement, Barr will not be permitted to market a
generic version of ADDERALL XR in the United States until April 1, 2009,
except
for certain limited circumstances, such as the launch of another party’s generic
version of ADDERALL XR. No payments to Barr are involved in the settlement
agreement.
Shire
and Duramed,
a subsidiary of Barr, entered into an agreement related to Duramed’s
transvaginal ring technology that will be applied to at least five women’s
health products, as well as a license to Duramed’s currently marketed oral
contraceptive, SEASONIQUE (levonorgestrel/ethinyl estradiol tablets 0.15
mg/0.03
mg and ethinyl estradiol tablets 0.01 mg) (the product development and license
agreement). Shire was granted exclusive rights to market these products on
a
royalty-free basis in a number of markets outside of North America, including
the larger European markets. Duramed will market these products in North
America. SEASONIQUE is already marketed in the United States by Duramed but
Shire will need to obtain appropriate regulatory authorisations to commence
marketing this product in Europe. Under this agreement, Shire made an initial
payment of $25 million to Duramed on September 13, 2006 for previously incurred
product development expenses, and will reimburse Duramed for
F-50
development
expenses incurred going forward up to a maximum of $140 million over eight
years, with the amount capped at $30 million per annum.
The
settlement
agreement and the product development and license agreement became effective
upon the Courts signing the last of the consent judgments for the litigations
on
September 6, 2006.
Duramed
agreed to
purchase Shire’s ADDERALL (immediate-release mixed amphetamine salts) product
for $63 million. Shire reported the transaction to the FTC and the DOJ under
the
Hart Scott Rodino (HSR) Act on August 28, 2006. The HSR Act’s 30-day waiting
period expired on September 27, 2006 and the transaction closed on September29,2006.
As
required by law,
Shire submitted to the FTC and the DOJ all of the agreements with Barr and
its
subsidiaries that were entered into on August 14, 2006. On October 3, 2006,
the
FTC notified Shire that it is reviewing the settlement agreement with
Barr. While the Company has not received any requests for information regarding
the settlement agreement, Shire intends on cooperating with the FTC
should it receive any such requests. The FTC's review should not
be considered to be an indication that Shire or any other company violated
any
law, and Shire believes that the settlement agreement is in compliance with
all
applicable laws.
(ii)
Impax
Laboratories, Inc.
In
November 2003,
Shire was notified that Impax had submitted an ANDA under the Hatch-Waxman
Act
seeking permission to market its generic version of the 30mg strength of
ADDERALL XR (Impax’s ANDA product) prior to the expiration date of the ‘819 and
‘300 Patents. In December 2003, Shire Laboratories filed suit against Impax
for
infringement of the ‘819 and ‘300 Patents.
In
December 2004,
Shire received an additional notification from Impax advising of the filing
of
an amendment to its ANDA for a generic version of the 5mg, 10mg, 15mg, 20mg
and
25mg strengths of ADDERALL XR in addition to the 30mg strength, the subject
of
Impax’s initial ANDA submission. In January 2005, Shire Laboratories filed suit
against Impax for infringement of the ‘819 and ‘300 Patents by these lower
strength dosage forms; this suit was consolidated with the earlier case against
Impax.
As
part of the
October 19, 2005 lawsuit against Barr, Shire also brought suit in the Southern
District of New York against Impax for infringing the ‘768 Patent. Impax filed a
declaratory judgment action in Delaware alleging that the ‘768 Patent was
invalid and that its ANDA did not infringe the ‘768 Patent.
On
January 19,2006, Shire and Impax announced that all pending litigation in connection
with
Impax’s ANDA had been settled. As part of the settlement, Impax confirmed that
its proposed generic products infringe Shire’s ‘819, ‘300 and ‘768 Patents and
that the three patents are valid and enforceable.
Under
the terms of
the settlement agreement, Impax will be permitted to market generic versions
of
ADDERALL XR in the United States no later than January 1, 2010 and will pay
Shire a royalty from those sales. In certain situations, such as the launch
of
another generic version of ADDERALL XR, Impax may be permitted to enter the
market as Shire’s authorized generic. No payments to Impax are involved in the
settlement agreement. The settlement agreement, which was effective immediately,
has been submitted to the United States Federal Trade Commission for its
review,
as required by law.
(iii)
Colony
Pharmaceuticals, Inc.
In
December 2004,
Shire was notified that Colony Pharmaceuticals, Inc. (Colony) had submitted
an
ANDA under the Hatch-Waxman Act seeking permission to market its generic
versions of the 5mg, 10mg, 15mg, 20mg, 25mg and 30mg strengths of ADDERALL
XR
prior to the expiration date of the Company’s ‘819 and ‘300 Patents. Shire has
chosen not to sue Colony.
(iv)
Teva
Pharmaceuticals USA, Inc.
In
February 2005,
Shire was notified that Teva Pharmaceuticals, Inc. (Teva Pharmaceuticals)
had
submitted an ANDA under the Hatch-Waxman Act seeking permission to market
its
generic versions of the 10mg and 30mg strengths of ADDERALL XR prior to the
expiration date of the Company’s ‘819 and ‘300 Patents. In June 2005, Shire was
notified that Teva Pharmaceuticals had amended its ANDA to seek permission
to
market additional strengths of 5mg, 15mg and 20mg of its generic ADDERALL
XR
prior to the expiration of the '819 and '300 Patents. In January 2006, Shire
received a third notice letter that Teva Pharmaceuticals had further amended
its
ANDA to seek permission to market the 25mg strength generic version of ADDERALL
XR prior to the expiration of the ‘819 and ‘300 Patents. On March 2, 2006 Shire
filed a lawsuit in the Eastern District of Pennsylvania against Teva
Pharmaceuticals Industries Ltd. (Teva Israel) and Teva Pharmaceuticals USA,
Inc.
(Teva USA) (collectively Teva) alleging that all of Teva’s ANDA products
infringe both the ‘819 and the ‘300 Patents. The lawsuit triggered a stay of FDA
approval of Teva’s 25 mg strength product for 30 months from the date of the
Company’s receipt of Teva’s third notice letter. There is no such stay with
respect to Teva’s 5mg, 10mg, 15mg, 20mg and 30 mg strengths versions of ADDERALL
XR. On January 30, 2007, the case was transferred to the civil suspense docket
with an
F-51
Order
requiring the
parties to notify the Court of the status of the case on the first business
day
of every month. No trial date has been set.
(v)
Andrx
Pharmaceuticals, LLC
In
September 2006,
Shire was notified that Andrx Pharmaceuticals, LLC (Andrx) had submitted
a ANDA
under the Hatch-Waxman Act seeking permission to market its generic versions
of
the 5mg, 10mg, 15mg, 20mg, 25mg and 30mg strengths of ADDERALL XR prior to
the
expiration date of the Company’s ‘819 and ‘300 patents. Shire
Laboratories and Shire LLC. have filed lawsuits in the US District Court
for the
District of New Jersey and the Southern District of Florida against Andrx
Pharmaceuticals, LLC. and Andrx Corporation (collectively “Andrx”) for
infringement of the Company’s ‘819 and ‘300 Patents. Watson
Pharmaceuticals, Inc., the recent acquiror of Andrx, is also named in the
lawsuits. The lawsuits allege that all of Andrx’s generic strengths
infringe the patents in suit. Pursuant to Hatch-Waxman legislation, there
will
be a 30-month stay with respect to Andrx’s proposed generic products.
(vi)
Sandoz
Inc.
In
December 2006,
Shire was notified that Sandoz Inc. (“Sandoz”) had submitted an ANDA under the
Hatch-Waxman Act seeking permission to market its generic versions of the
5mg,
10mg, 15mg, 20mg, 25mg, 30mg strengths of ADDERALL XR prior to the expiration
of
the Company’s ‘819 and ‘300 patents. On January 26, 2007, Shire filed suit in
the US District Court for the District of Colorado for infringement of the
‘819
and ‘300 patents. The lawsuit triggers a stay of FDA approval of up to 30 months
from the Company’s receipt of Sandoz’s notice. The court has ordered a
scheduling and planning conference for March 21, 2007. No trial date has
been
set.
None
of Colony,
Andrx, Teva or Sandoz may launch their generic versions of ADDERALL XR before
they receive final FDA approval of their respective ANDAs and before the
expiration of the first to file’s exclusivity rights.
CARBATROL
(i)
Nostrum
Pharmaceuticals, Inc.
In
August 2003, the
Company was notified that Nostrum Pharmaceuticals, Inc. (Nostrum) had submitted
an ANDA under the Hatch-Waxman Act seeking permission to market its generic
version of the 300mg strength of CARBATROL (Nostrum’s ANDA product) prior to the
expiration date of the Company’s US patents for CARBATROL, US patent No.
5,912,013 (the ‘013 Patent) and US patent No. 5,326,570 (the ‘570 Patent). The
notification alleges that the ‘013 and ‘570 Patents are not infringed by
Nostrum’s ANDA product. On September 18, 2003, Shire filed suit against Nostrum
in the United States District Court for the District of New Jersey alleging
infringement of these two patents by Nostrum’s ANDA and ANDA product. The
Company was seeking a ruling that Nostrum’s ANDA infringes the ‘013 and ‘570
Patents and should not be approved before the expiration date of the ‘013 and
‘570 Patents. The Company was also seeking an injunction to prevent Nostrum
from
commercializing its ANDA product before the expiration of the ‘013 and ‘570
Patents, damages in the event that Nostrum should engage in such
commercialization, as well as its attorneys’ fees and costs. On January 23,2004, the Company amended the complaint to drop the allegations with respect
to
the ‘013 Patent while maintaining the suit with respect to the ‘570 Patent. By
way of counterclaims Nostrum is seeking a declaration that the ‘570 and ‘013
Patents are not infringed by Nostrum’s ANDA product. Nostrum also was seeking
actual and punitive damages for alleged abuse of process by Shire. On July12,2004, the Court dismissed Nostrum’s abuse of process counterclaim for failure to
state a claim upon which relief can be granted. On December 10, 2004, Nostrum
filed a summary judgment motion seeking a declaration of non-infringement
of the
‘570 Patent, which Shire opposed. The Court heard arguments with respect to
Nostrum’s motion on July 15, 2005. At the conclusion of the hearing the Court
denied Nostrum's motion for summary judgment of non-infringement. On July17,2006 the Court entered an order staying discovery in this case until and
through
September 15, 2006. The parties requested, and the Court granted, an extension
of the stay of discovery until and through December 29, 2006. On the January8,2007 the parties requested a further stay discovery until March 30, 2007,
which
has not yet been granted by the Court. No trial date has been set.
Nostrum
may not
launch a generic version of CARBATROL before it receives final approval of
its
ANDA from the FDA. The lawsuit triggered a stay of FDA approval of up to
30
months from Shire’s receipt of Nostrum’s notice letter. The 30 month stay
expired on February 6, 2006. Following expiry of the stay, Nostrum could
be in a
position to market its 300mg extended-release carbamazepine product upon
FDA
final approval of its ANDA.
(ii)
Corepharma
LLC
On
March 30, 2006the Company was notified that Corepharma LLC (Corepharma) had filed an ANDA
under the Hatch-Waxman Act seeking permission to market its generic version
of
carbamazepine extended release products in 100mg, 200mg and 300mg strengths
prior to the expiration date of the ‘013 and the ‘570 Patents. On May 17,
F-52
2006,
Shire filed
suit against Corepharma in the United States District Court for the District
of
New Jersey alleging infringement of these two patents by Corepharma’s ANDA and
ANDA products. The Company was seeking a ruling that Corepharma’s ANDA infringes
the ‘013 and ‘570 Patents and should not be approved before their expiration
dates. The Company was also seeking an injunction to prevent Corepharma from
commercializing its ANDA products before the expiration of the ‘013 and ‘570
Patents, damages in the event that Corepharma should engage in such
commercialization, as well as its attorneys’ fees and costs. On September 1,2006, the Company amended the complaint to drop the allegations with respect
to
the ‘013 Patent while maintaining the suit with respect to the ‘570 Patent. By
way of counterclaims, Corepharma is alleging noninfringement and invalidity
of
the ‘570 Patent, noninfringement of the ‘013 Patent and federal and state
antitrust violations. The parties have agreed to, and the court has accepted,
a
dismissal without prejudice of the antitrust counterclaims until a final
judgment has been entered in the patent case. Corepharma has also filed a
motion
for a judgment on the pleadings of noninfringement of the ‘013 Patent, which
Shire has opposed, including moving to dismiss the ‘013 Patent noninfringement
counterclaim for lack of subject matter jurisdiction. The Court heard oral
argument on these two motions on February 26, 2007, immediately after which
the
Court granted Shire’s motion to dismiss for lack of subject matter jurisdiction,
rendering moot Corepharma’s motion for noninfringement of the ‘013
Patent.
The
parties
exchanged written discovery on January 26, 2007, and will appear before the
Court for a status conference on March 13, 2007. No further discovery schedule
or trial date has been set.
Corepharma
may not
launch a generic version of CARBATROL before it receives final approval of
its
ANDA from the FDA. The lawsuit triggered a stay of FDA approval of up to
30
months from Shire’s receipt of Corepharma’s notice letter.
GENE
ACTIVATION
In
1996, Applied
Research Systems Holding N.V., a wholly-owned subsidiary of Serono S.A. (Serono)
and Cell Genesys became involved in a patent interference involving Serono’s US
Patent No. 5,272,071 (the '071 Patent), which purportedly covers certain
methods
of gene activation. In June 2004, the Board of Patent Appeals and
Interferences of the US Patent and Trademark Office (PTO) held that both
Serono
and Cell Genesys were entitled to certain claims in their respective patent
and
patent application, and Serono and Cell Genesys each appealed the decision
of
the interference to the US District Court of Massachusetts and the US District
Court of the District of Columbia, respectively. Shire HGT (formerly known
as TKT) was not a party to this interference. The District of Columbia action
was subsequently transferred and consolidated with the District of Massachusetts
action (the Appeal).
In
August 2004,
Serono served Shire HGT with an amended complaint in the Appeal. The
amended complaint alleges that Shire HGT infringes Serono’s '071 Patent.
In August 2005, the US District Court of Massachusetts severed and stayed
the
infringement action pending resolution of the interference claim of the Appeal
at the District Court level.
Pre-trial
proceedings concerning the Appeal between Serono and Cell Genesys are ongoing
and Serono’s infringement action against the Company remains stayed pending
resolution of those proceedings. In view of the stay, the Company has not
yet
answered Serono’s complaint.
GA-GCB
In
January 2005,
Genzyme Corporation (Genzyme) filed suit against Shire HGT in the District
Court
of Tel Aviv-Jaffa, Israel, claiming that Shire HGT's Phase 1/2 clinical trial
in
Israel evaluating GA-GCB for the treatment of Gaucher disease infringes one
or
more claims of Genzyme’s Israeli Patent No. 100,715. In addition, Genzyme filed
a motion for preliminary injunction, including a request for an ex parte
hearing
and relief on the merits, to immediately seize and destroy all GA-GCB being
used
to treat patients and to prevent Shire HGT from submitting data generated
from
the clinical trial to regulatory agencies. In March 2005 the District Court
refused to grant Genzyme's motion for a preliminary injunction. The lawsuit
was
dismissed in January 2006.
DYNEPO
Since
1997, Shire
HGT and Sanofi-Aventis have been involved in ongoing patent litigation regarding
Amgen’s allegations that DYNEPO infringes claims of five of Amgen’s patents. In
2001, the United States District Court of Massachusetts concluded that DYNEPO
infringed certain claims of the patents that Amgen had asserted. This decision
was appealed to the United States Court of Appeals for the Federal Circuit
(the
“Federal Circuit”) which affirmed in part, reversed in part, and remanded the
action to the United States District Court of Massachusetts for further
proceedings.
In
2004, the United
States District Court of Massachusetts issued a decision on the remanded
issues,
finding that certain claims related to four of the patents asserted by Amgen
are
infringed by Shire HGT and Sanofi-Aventis. This decision was subsequently
appealed to the Federal Circuit which affirmed in part, reversed in part,
and
once again remanded certain issues to the District Court. Recently, Amgen
has
filed a request for an extension of time to file a petition for certiorari
with
the Supreme Court.
F-53
Under
the most
recent Federal Circuit decision, the Company and Sanofi-Aventis would be
precluded from making, using and selling DYNEPO in the United States until
the
expiration of the relevant patents. The Company is required to reimburse
Sanofi-Aventis, which controls the litigation and is paying the litigation
expenses, for 50% of the expenses incurred in connection with the litigation
from and after March 26, 2004. This litigation has no impact on Shire’s ability
to make, use and sell DYNEPO outside of the United States.
Appraisal
Rights
In
connection with
Shire’s merger with TKT, former holders of approximately 11.7 million shares of
TKT common stock submitted written demands to the Delaware Court of Chancery
for
appraisal of these shares and, as a result, elected not to accept the $37
per
share merger consideration. On October 10, 2005, at the request of one of
the holders to tender 365,000 shares at the merger price of $37 per share,
TKT
filed a motion to dismiss the holder’s demand. On October 12, 2005, the Delaware
Court of Chancery granted this motion, and the holder tendered the shares
at the
merger consideration of $37 per share. Therefore, as at December 31, 2006,
former holders of approximately 11.3 million shares of TKT common stock
maintained written demands for appraisal of these shares and have elected
not to
accept the $37 merger consideration. In November 2005, the Delaware Court
of
Chancery approved a consolidation order filed by Shire HGT whereby actions
brought by all petitioners have been consolidated as one case. In April 2006,
Shire filed a motion for partial summary judgment in respect of approximately
8
million shares, claiming that the petitioners were not entitled to assert
appraisal rights in connection with such shares.
To
the extent that
petitioners’ demands were validly asserted in accordance with the applicable
requirements of Delaware law and the former holders perfect their rights
thereunder, such former holders will be entitled to receive the fair value
of
these shares as determined by the Delaware Court of Chancery. The determination
of fair value will be made excluding any element of value arising from the
transaction, such as cost savings or business synergies. The Delaware Court
of
Chancery may ascribe a valuation to the shares that is greater than, less
than
or equal to $37 per share and may award interest on the amount determined
in the
appraisal process.
The
total
consideration for the acquisition of TKT, including amounts payable in respect
of stock options and convertible securities, is approximately $1.6 billion
at
the merger price of $37 per share. This could change if Shire is required
to pay
a different amount of consideration in respect of the approximately 11.3
million
shares for which holders have asserted appraisal rights. For every dollar
increase/decrease in the merger consideration applicable to those TKT
shareholders who have asserted appraisal rights, the total estimated purchase
price would increase/decrease by approximately $11.3 million. Until such
time as
the appraisal process is complete, the Company is unable to determine the
extent
of its liability. The trial date has been set for April 23, 2007.
Class
Action Shareholder Suit
In
January and
February 2003, various parties filed purported securities fraud class action
lawsuits against TKT and Richard Selden, TKT's former Chief Executive Officer,
in the United States District Court for the District of Massachusetts. In
April
2003, the Court appointed a Lead Plaintiff and Lead Counsel and consolidated
the
various matters under one matter: In re Transkaryotic Therapies, Inc.,
Securities Litigation, C.A. No. 03-10165-RWZ.
In
July 2003, the
plaintiffs filed a Consolidated and Amended Class Action Complaint (the "Amended
Complaint") against TKT; Dr Selden; Daniel Geffken, TKT's former Chief Financial
Officer; Walter Gilbert, Jonathan S. Leff, Rodman W. Moorhead, III, and Wayne
P.
Yetter, then members of TKT's board of directors; William R. Miller and James
E.
Thomas, former members of TKT's board of directors; and SG Cowen Securities
Corporation, Deutsche Bank Securities Inc., Pacific Growth Equities, Inc.
and
Leerink Swann & Company, underwriters of TKT’s common stock in prior public
offerings.
The
Amended
Complaint alleges that the defendants made false and misleading statements
and
failed to disclose material information concerning the status and progress
for
obtaining United States marketing approval of REPLAGAL during the period
between
January 4, 2001 and January 10, 2003. The Amended Complaint asserts claims
against Dr. Selden and TKT under Section 10(b) of the Securities Exchange
Act of
1934 and Rule 10b-5 promulgated thereunder; and against Dr. Selden under
Section
20(a) of the Exchange Act. The Amended Complaint also asserts claims based
on
TKT's public offerings of June 29, 2001, December 18, 2001 and December 26,2001
against each of the defendants under Section 11 of the Securities Act of
1933
and against Dr. Selden under Section 15 of the Securities Act; and against
SG
Cowen Securities Corporation, Deutsche Bank Securities Inc., Pacific Growth
Equities, Inc., and Leerink Swann & Company under Section 12(a)(2) of the
Securities Act. The plaintiffs seek equitable and monetary relief, an
unspecified amount of damages, with interest, and attorneys' fees and
costs.
In
May 2004, the
Court granted in part and denied in part TKT's motion to dismiss. In particular,
the Court dismissed allegations against TKT to the extent they arose out
of
certain forward-looking statements protected by the "safe harbor" provisions
of
the Private Securities Litigation Reform Act of 1995 and dismissed claims
based
on the public offerings of June 29, 2001 and December 18, 2001.The Court
allowed
all other allegations to remain. In July 2004, the plaintiffs voluntarily
dismissed all claims based on the third public offering dated December 26,2001.
F-54
In
November 2005,
the court granted the plaintiffs’ motion for class certification. On May 23,2005, the court entered judgment on all claims alleged against SG Cowen
Securities Corporation, Deutsche Bank Securities Inc., Pacific Growth Equities,
Inc., and Leerink Swann & Company. On June 5, 2006, the court entered
judgment on all claims alleged against Messrs. Gilbert, Leff, Moorhead, Yetter,
Miller, and Thomas. On November 9, 2006, Mr. Geffken filed an Agreement for
Judgment on all claims alleged against him. The Company is obligated to
indemnify Dr Selden for his costs incurred in connection with the SEC Action.
22.
Shareholders’
equity
(i)
Authorised
common stock
The
authorized
stock of Shire plc as at December 31, 2006 was 750,000,000 ordinary shares,
10,000,000 special voting shares and 2 deferred ordinary shares.
The
special voting
shares are held by a Voting Trustee, providing the holders of exchangeable
shares in Shire Acquisition, Inc., with as nearly as practicable voting rights
equivalent to those attached to Shire’s ordinary shares. During 2006, 50,000
non-voting preference shares, which were authorized and issued for the purpose
of the Scheme of Arrangement only, have been redeemed.
(ii)
Dividends
Under
English law,
Shire can pay dividends only out of its distributable reserves, defined as
the
accumulated realized profits under UK generally accepted accounting principles
(including reserves arising from a reduction of share capital), of the parent
company, Shire plc (and not the consolidated Company), 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
duly made. Shire plc can make a distribution only if the distribution does
not
reduce its net assets below the aggregate of the called up share capital
and
undistributable reserves. Any dividends will be at the discretion of the
Board
of Directors, will be declared in US dollars and will be paid in Pounds Sterling
to Ordinary Shareholders, US Dollars to ADS holders and Canadian Dollars
to
Exchangeable Shareholders. At December 31, 2006 Shire plc’s distributable
reserves were $2,899 million.
(iii)
Treasury
stock
The
Company records
the purchase of its own shares as a reduction of shareholders’ equity based on
the price paid for the shares. During the period to December 31, 2006 a total
of
5.3 million ordinary shares and 0.1 million American Depository Shares had
been
purchased for total consideration of $92.0 million, including stamp duty
and
broker commission.
Equity
financing in 2007
On
February 20,2007 Shire also raised approximately $900 million through the private placement
of 42,883,721 new ordinary shares to certain institutional investors at a
price
of 1075 pence per share. The newly issued shares represent approximately
8.4 per
cent of Shire plc's issued ordinary share capital prior to the
placing.
23.
Related
parties
(i)
Professional
fees
The
Company
incurred professional fees with Stikeman Elliott, a law firm in which the
Hon.
James Grant, a non-executive director of Shire, is a partner, totaling $0.6
million for the year to December 31, 2006 (2005: $0.5 million; 2004: $2.1
million).
(ii)
NeuroChem
Inc.
In
April 2004 Shire
BioChem Inc. (BioChem), a subsidiary of Shire, sold a Canadian property to
NeuroChem Inc. for $7.8 million (CAN$10.5 million). At the time of the
transaction, Dr Bellini, a non-executive director of Biochem and, until May10,2003 a non-executive director of Shire, and Mr Nordmann, a non-executive
director of Shire were both directors of NeuroChem Inc. and Dr Bellini had
an
indirect substantial interest in the issued share capital of Neurochem Inc.
at
the time of the transaction. Mr Nordmann stepped down as a director of Neurochem
Inc. in August 2006.
(iii)
ViroChem
Pharma Inc.
In
April 2004, the
Company contributed cash of $3.7 million (CAN$5.0 million) and equipment
and
intellectual property to the start-up of a new Canadian-based pharmaceutical
research and development organization, ViroChem Pharma Inc. (ViroChem), in
return for an equity interest and royalties on the sale of certain products
subsequently launched by ViroChem. In April 2006 and April 2005, the Company
contributed cash of $8.0 million (CAN$9 million) and $4.1 million (CAN$5
million) respectively to ViroChem in return for an additional equity interest.
F-55
Dr
Bellini, a non-executive director of BioChem and, until May 10, 2003, a
non-executive director of Shire, had, at the time of the transaction, an
indirect substantial interest in a company, which is a co-investor of ViroChem.
The Company has undertaken to invest an additional $5.0 million (CAN$6.0
million) in ViroChem.
(iv)
Xanodyne
Pharmaceuticals Inc.
In
October 2005,
the Company sub-leased its office premises in Newport to Xanodyne
Pharmaceuticals Inc. Dr James Cavanaugh, the non-executive Chairman of
the
Company, was the Chairman of the Board of Directors of Xanodyne Pharmaceuticals,
Inc. up to February 9, 2007 and remains a Board Director. As a result of
the
transaction the Company will receive $7.8 million (net of inducements)
in lease
income over the sub-lease period from Xanodyne Pharmaceuticals
Inc.
24.
Earnings
per share
The
following table
reconciles income/(loss) from continuing operations and the weighted average
ordinary shares outstanding for basic and diluted earnings per share for
the
periods presented:
Year
to December 31,
Adjusted
and restated
Adjusted
2006
2005
2004
$’M
$’M
$’M
Income/(loss)
from continuing operations
237.6
(581.5
)
300.6
Loss
from
discontinued operations, net of tax
-
-
(20.1
)
Gain/(loss)
on disposition of discontinued operations, net of tax
Not
included
as the exercise price exceeded the Company’s average share price during
the calculation period.
2.
Not
included
as the Company made a loss during the reporting
period.
During
the year to
December 31, 2004the Company recorded a loss on redemption of the convertible
loan notes of $7.4 million, which resulted from the write-off of unamortized
debt issuance costs.
SFAS
No. 131
establishes standards for reporting information about operating segments
and
related disclosures, products and services, geographic areas and major
customers. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by
the
chief operating decision-maker in deciding how to allocate resources and
in
assessing performance.
Shire
sells a
number of pharmaceutical products in multiple geographic markets across the
world. The Company is continuously looking to develop and replenish the
pharmaceutical product pipeline and has continued to focus on meeting the
needs
of the specialist physician in targeting therapeutic areas within its pool
of
expertise.
Shire’s
internal
management reporting structures show two segments, Pharmaceutical Products
and
Royalties. The Pharmaceutical Products segment comprises four therapeutic
areas,
CNS, GI, HGT and GP and all products have been aggregated for reporting purposes
within this segment.
The
Company
evaluates performance based on revenue and operating income. The Company
does
not have inter-segment transactions.
The
Pharmaceutical
Products segment represents the Company’s commercial operations and costs in
respect of products currently promoted and sold together with costs of
developing projects for future commercialization. The Royalties segment
represents royalties earned from the out-licensing of projects to third parties.
These projects have been developed and commercialized by the third party
and
royalties are being received on the sale of the commercialized product. ‘All
Other’ has been included in the table below in order to reconcile the segments
to the
F-57
total
consolidated
figures. Costs have not been allocated to Royalties below as the magnitude
of
the costs incurred in respect of managing this segment is small and the internal
reporting consequently does not allocate costs to this segment. Assets that
are
directly attributable to the Royalty segment have been separately disclosed
from
the Pharmaceutical Products segment.
Included
in
depreciation and amortization is the write-down of property, plant
and
equipment of 0.5 million. Depreciation from manufacturing plants
of $4.8
million is included in cost of product
sales.
2.
Stock-based
compensation of $43.0 million is included in: cost of product sales
($3.2
million), research and development ($5.4 million) and selling, general and
administrative ($34.4 million).
Included
in
depreciation and amortization is the write-down of property, plant
and
equipment of $6.5 million. Depreciation from manufacturing plants
($3.5
million) is included in cost of product
sales.
2.
Stock-based
compensation of $29.2 million is included in: cost of product sales
($1.5
million), research and development ($2.9 million) and selling,
general and
administrative ($24.8 million).
Depreciation
from manufacturing plants ($2.7 million) is included in cost of
product
sales.
(2)
Stock-based
compensation of $33.8 million is included in: cost of product sales
($1.4
million), research and development ($3.5 million) and selling,
general and
administrative ($28.9 million).
Geographic
Information
Revenues
(based on
the geographic location from which the sale originated):
Long-lived
assets
(all non-current assets, excluding deferred tax assets, investments and
financial instruments based on the geographic location within which the economic
benefits arise):
In
the periods set
out below, certain customers, all within the Pharmaceutical Products operating
segment, accounted for greater than 10% of the Company’s total
revenues:
In
the periods set
out below, revenues by major product were as follows:
2006
$’M
2005
$’M
2004
$’M
ADDERALL
XR
863.6
730.8
606.7
PENTASA
137.8
136.1
115.0
REPLAGAL
117.7
41.3
-
CARBATROL
68.3
72.1
54.3
AGRYLIN/XAGRID
60.8
92.8
152.5
FOSRENOL
44.8
53.5
-
CALCICHEW
45.5
38.7
38.3
DAYTRANA
25.1
-
-
ELAPRASE
23.6
-
-
ADDERALL
23.6
43.1
34.5
Other
125.0
119.3
111.2
1,535.8
1,327.7
1,112.5
F-61
26.
Interest
expense
Interest
expense
for the year to December 31, 2006, 2005 and 2004 was $26.4 million, $12.0
million and $12.3 million respectively. Included in the amount for the year
to
December 31, 2006 was a $24.6 million (2005: $7.7 million) provision for
interest, which may be awarded by the court in respect of amounts due to
former
holders of approximately 11.3 million shares of TKT common stock who have
submitted written demands for appraisal of these shares. The provision was
based
on an estimate of Shire’s average marginal cost of borrowing from the
acquisition date.
In
the year to
December 31, 2005 Shire also incurred interest expense of $1.2 million relating
to the costs of a bridging loan to finance the TKT acquisition.
In
the year to
December 31, 2004 interest expense included the write-off of $7.4 million
of deferred financing costs following the redemption of $370.1 million of
convertible loan notes during 2004 and the interest expense prior to the
redemption of $4.2 million.
Gain
on sale
of available-for-sale security (see Note 11)
-
3.9
14.8
Gain
on sale
of drug formulation business
-
3.6
-
Foreign
exchange
3.2
(1.4
)
(2.5
)
Other
3.8
1.5
3.0
9.5
9.9
3.9
28.
Retirement
benefits
(a)Personal
defined contribution pension plans
The
Company makes
contributions to defined contribution retirement plans that together cover
substantially all employees. For the defined contribution retirement plans,
the
level of the Company’s contribution is fixed at a set percentage of employee’s
pay.
Company
contributions to personal defined contribution pension plans totaled $15.0
milllion, $14.1 million and $9.0 million for the years to December 31, 2006,
2005 and 2004, respectively, and were charged to operations as they became
payable.
(b)Defined
benefit pension plans
(i)
The
Roberts
SERP
The
Roberts SERP is
for some US employees of Roberts Pharmaceutical Corporation (Roberts) who
met
certain age and service requirements. Shire acquired Roberts in 1999, and
the
plan was discontinued in 2000. There were no contributions payable by the
Company in respect of 2006 and 2005. The Company paid a lump sum of $18.0
million into the Roberts SERP, which was accounted for as a fair value
adjustment, on the acquisition of Roberts to make good the deficit on this
scheme at the time of acquisition. This lump sum payment has led to the Company
having no future liability under the SERP, which is closed to new members
with
contributions no longer payable by existing members. Assets are set aside
to
fund these benefits in a “Rabbi Trust”. The legal form of the trust is such that
the assets held to cover the pension liabilities are available to the general
creditors of the Company on winding up. Accordingly, the assets held by the
trust are not plan assets and are recorded on the balance sheet.
In
accordance with
EITF 97-14, “Accounting for Deferred Compensation Arrangements Where Amounts
Earned Are Held in a Rabbi Trust and Invested” the assets and liabilities of
$8.3 million and $4.7 million, respectively, are shown on the balance sheet
within the categories “Other current assets”, “Other non-current assets”, “Other
current liabilities” and “Other non-current liabilities”.
(ii)
The
Shire
SERP
The
Shire SERP
defined benefit scheme is an unfunded arrangement; the benefits are payable
to
certain senior US employees as lump sums on leaving the Company’s employment or
earlier due to death, disability or termination.
F-62
The
amount of
benefit is based on the value of notional contributions increased with “earned”
investment returns as if they were invested in investments of the employees’
choice. The entire benefit liability has been recognised on the balance
sheet.
29.
Income
taxes
The
components of
pre tax income/(loss) from continuing operations are as follows:
Year
to December 31,
Adjusted
and restated
Adjusted
2006
2005
2004
$’M
$’M
$’M
UK
20.5
61.6
(80.1
)
US
(28.3
)
44.5
248.7
In-process
research and development
-
(815.0
)
-
Other
jurisdictions
324.6
217.2
257.8
316.8
(491.7
)
426.4
The
provision/(benefit) for income taxes by location of the taxing jurisdiction
for
the years to December 31, consisted of the following:
Year
to December 31,
Adjusted
Adjusted
2006
2005
2004
$’M
$’M
$’M
Current
income taxes:
UK
corporation tax
7.0
7.4
0.7
US
federal
tax
6.1
13.5
97.9
US
state and
local taxes
3.8
7.3
5.1
Other
210.0
39.1
36.4
Total
current
taxes
226.9
67.3
140.1
Deferred
taxes
UK
corporation tax
(81.0
)
5.4
(0.5
)
US
federal
tax
(57.8
)
(8.2
)
(12.1
)
US
state and
local taxes
0.2
(3.3
)
(0.1
)
Other
(3.4
)
27.6
0.9
Total
deferred taxes
(142.0
)
21.5
(11.8
)
Total
income
taxes attributable to continuing operations
84.9
88.8
128.3
Total
income
taxes attributable to discontinued operations
-
-
-
Total
income
taxes
84.9
88.8
128.3
F-63
The
reconciliation
of income from continuing operations before income taxes and earnings/(losses)
of equity method investees and discontinued operations to the provision for
income taxes is shown in the table below:
Year
to December 31,
Adjusted
and restated
Adjusted
2006
2005
2004
$’M
$’M
$’M
Income/(loss)
from continuing operations before income taxes and earnings/(losses)
of
equity method investees and discontinued operations
316.8
(491.7
)
426.4
UK
Corporation tax rate
30.0%
30.0%
30.0%
Adjustments
to derive effective rate:
Non-deductible
items:
Permanent
differences
(18.8%
)
6.2%
2.1%
In-process
research and development
-
(49.7%
)
-
Other
items:
Change
in
valuation allowance
(30.0%
)
(4.3%
)
3.6%
Difference
in
taxation rates
50.5%
(0.2%
)
0.7%
Prior
year
adjustment
(6.5%
)
0.7%
(4.8%
)
Change
in
prior year tax rates
-
0.5%
-
Other
1.6%
(1.3%
)
(1.5%
)
Provision
for
income taxes on continuing operations
26.8%
(18.1%
)
30.1%
The
effective rate
of tax for the year to December 31, 2006 was 26.8% (2005: 27.5%, after excluding
the impact of the $815 million (restated) write-off of IPR&D in respect of
the TKT acquisition). The effective
rate
has fallen by 0.7% as a result of an increase in deferred tax assets, offset
by
an increase in current tax liabilities. The increase in deferred tax assets
was
primarily due to the reversal of valuation allowances following changes in
estimates as to realisation, and by the crystallisation of additional losses
(included within prior year adjustments above). The increase in current tax
liabilities was primarily a result of additional tax contingencies of $187
million recognised in relation to ongoing tax audits (included in difference
in
taxation rates above). Following this reversal of valuation allowances
the net deferred tax asset has increased to $261.0 million at December 31,2006
(2005: $116.2 million). Realization of deferred tax assets is dependent upon
generating sufficient taxable income to utilize such assets. Although
realization of these assets is not assured, it is more likely than not that
the
amount recognized will be realized.
F-64
The
significant
components of deferred income tax assets and liabilities and their balance
sheet
classifications, as at December 31, are as follows:
Provisions
for product returns and doubtful accounts
30.3
28.3
Restructuring
50.3
50.3
Intangibles
21.5
19.4
Other
69.3
44.8
Gross
deferred tax assets
567.8
579.3
Less:
valuation allowance
(109.6
)
(235.1
)
458.2
344.2
Deferred
tax
liabilities:
Excess
of tax
value over book value of assets
(197.2
)
(228.0
)
Net
deferred
tax assets
261.0
116.2
Balance
sheet
classifications:
Deferred
tax
assets - current
105.7
54.2
Deferred
tax
assets - non-current
155.3
62.0
261.0
116.2
The
approximate
operating loss and tax credit carry-forwards as at December 31, are as
follows:
2006
2005
$’M
$’M
US
federal
tax NOLs
203.4
270.3
US
state tax
NOLs
66.6
99.4
UK
NOLs
152.3
227.8
Canadian
NOLs
84.7
153.2
Foreign
tax
jurisdictions
167.3
82.9
R&D
tax credits
318.2
301.9
F-65
The
operating loss
and tax credit carry-forwards shown above have the following expiration
dates:
December
31
2006
$’M
Within
1
year
13.1
Within
1 to 2
years
18.0
Within
2 to 3
years
22.6
Within
3 to 4
years
13.1
Within
4 to 5
years
17.3
Within
5 to 6
years
15.2
Within
6 to 7
years
16.5
After
7
years
518.3
Indefinitely
358.4
As
at December 31,2006, the Company had a valuation allowance of $109.6 million to reduce its
deferred tax assets to estimated realizable value. The valuation allowance
relates to the deferred tax assets arising from operating loss carry-forwards
and capital loss carry-forwards. The utilization of operating loss
carry-forwards is restricted to the taxable income of the subsidiary generating
the losses. In addition, capital loss carry-forwards can only be offset against
capital gains. As at December 31, 2006, based upon the level of historical
taxable income and projections for future taxable income over the periods
in
which the temporary differences are anticipated to reverse, and reasonable
and
feasible tax-planning strategies, management believes it is more likely than
not
that the Company will realize the benefits of these deductible differences,
net
of the valuation allowances. However, the amount of the deferred tax asset
considered realizable could be adjusted in the future if estimates of taxable
income are revised.
As at
December31, 2006, the Company had not made a tax provision on approximately
$2.1 billion of unremitted earnings of the Company's international
subsidiaries. As at December 31, 2006, these earnings are expected to be
reinvested overseas. Because of complexity, it is not practical to compute
the
estimated deferred tax liability on these earnings.
Effective
January 1, 2006the Company adopted the provisions of SFAS No. 123(R),
which establishes accounting for share-based compensation to employees. The
Company measures share-based compensation cost at the grant date, based on
the
fair value of the award, and recognizes the expense over the employee requisite
service period. The Company previously applied Accounting Principles Board
(APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and
related Interpretations and provided the required pro forma disclosures of
SFAS
No. 123, “Accounting for Stock-Based Compensation”. The Company has elected
to adopt the modified retrospective application method as provided by SFAS
No.
123(R) and accordingly, financial statement amounts for the prior period
presented in this Form 10-K have been retrospectively adjusted to reflect
the fair value method of expensing prescribed by SFAS No. 123(R).
The
following table
shows the total share-based compensation expense (see below for types of
share-based awards) included in the statements of operations:
F-66
2006
$’M
2005
$’M
2004
$’M
Cost
of
product sales
3.2
1.5
1.4
Research
and
development
5.4
2.9
3.4
Selling,
general and administrative
34.4
24.8
28.9
Total
operating expenses
43.0
29.2
33.7
Tax
benefit
(6.5
)
(3.2
)
(0.8
)
Total
charge
to net income
36.5
26.0
32.9
There
were no
capitalized share-based compensation costs at December 31, 2006 and
2005.
As
at December 31,2006 $80.6 million of total unrecognized compensation cost relating to
non-vested awards, is expected to be recognized over a weighted average period
of 4.2 years.
Share-based
compensation plans
Historically
the
Company has granted options to directors and employees over ordinary shares
under six stock option plans. On November 28, 2005 the ordinary shareholders
of
Shire approved the adoption of the Shire plc Portfolio Share Plan (Parts
A and
B), a new share based compensation plan, which provides for stock-settled
share
appreciation rights and performance share awards to be made to directors
and
employees over ordinary shares and American depositary shares. No further
awards
will be made under the previous stock option plans.
Stock-settled
share appreciation rights - ordinary shares
2,919,223
5
years
3
years,
subject to performance criteria for executive directors
only
Portfolio
Share Plan - Part A
Stock-settled
share appreciation rights - ADSs (1)
8,897,394
5
years
3
years,
subject to performance criteria for executive directors
only
Total
Portfolio Share Plan - Part A
11,816,617
Portfolio
Share Plan - Part B
Performance
share awards - ordinary shares
130,406
3
years
3
years,
subject to performance criteria for executive directors
only
Portfolio
Share Plan - Part B
Performance
share awards - ADSs(1)
526,023
3
years
3
years,
subject to performance criteria for executive directors
only
Total
Portfolio Share Plan - Part B
656,429
(1)
For
the purposes of
this table ADSs have been converted into ordinary shares. One ADS is equivalent
to three ordinary shares.
(a)Stock
option plans
(i)
Shire
Pharmaceuticals Executive Share Option Scheme - Parts A and B (Executive
Scheme)
Options
granted
under the Executive Scheme are subject to performance criteria and cannot
be
exercised in full, unless Shire’s ordinary share price increases at a compound
rate of at least 20.5% per annum over a minimum three-year measurement period.
If Shire’s ordinary share price increases at a compound rate of 14.5% per annum
over a minimum three-year measurement period, 60% of the options may be
exercised. If these conditions are not met after the initial three years,
they
are thereafter tested quarterly by reference to share price growth over the
extended period. If the share price does not meet these conditions at any
time,
none of the options will become exercisable.
On
February 28,2000, the Remuneration Committee of the Board exercised its powers to amend
the
terms of the Executive Share Option Scheme so as to include a cliff vesting
provision. It is intended that no further options will be granted under the
Executive Scheme.
Options
granted
under this scheme are exercisable subject to certain performance criteria.
In
respect of any option granted prior to August 2002, if Shire’s ordinary share
price increases at a compound rate of at least 20.5% per annum over a minimum
three-year measurement period, the option becomes exercisable in full. If
it
increases by at least 14.5% per annum over the same three-year period, 60%
of
the options granted become exercisable. If these
F-68
conditions
are not
met after the initial three-year measurement period, they will thereafter
be
tested quarterly by reference to compound annual share price growth over
an
extended period.
The
performance
criteria were reviewed in 2002 to ensure the criteria reflected the market
in
which Shire operates. Given Shire’s development, it was considered appropriate
that an earnings per share based measure should be adopted. The performance
criteria are based on real growth in the diluted earnings per share reported
in
the Company’s Form 10-K under US GAAP, adjusted to ensure a consistent basis of
measurement, as approved by the Remuneration Committee, including the add
back
of significant one time items (Option EPS).
Therefore, the
performance criteria were amended so that an option would become exercisable
in
full if Shire’s Option EPS growth over a three year period from the date of
award exceeds the UK Retail Prices Index (RPI) for the following tranches
of
grants:
Options
with
a grant value of up to 100% of salary
The
new earnings
per share performance criteria apply to options granted under the 2000 Executive
Scheme from August 2002. After consultation with certain of its institutional
shareholders, the Company has decided that for options granted under the
scheme
from 2004 onwards, the retest of the performance condition if Shire’s option EPS
growth has fallen short of the minimum annual average percentage increase
over
the three year period from grant, should be changed. The revised performance
condition will be retested once only, at five years after the grant.
Hence the level of option EPS growth in the next two years needs to be
consequentially higher to meet the test.
Six
weeks prior to
the expiration date, any options that have not become exercisable at an earlier
date, automatically vest without reference to the performance criteria.
In
December 2006,
the Remuneration Committee exercised its powers to amend the performance
criteria for options granted under the 2000 Executive Scheme which had not
vested. The RPI based growth rate was replaced with an equivalent fixed growth
rate based on historical and forecast inflation. The fair values of the awards
were unaffected by this change and no additional employee compensation cost
was
recorded as a result of the modification.
It
is intended that
no further options will be granted under the 2000 Executive Scheme.
Options
granted
under the Sharesave Scheme are granted with an exercise price equal to 80%
of
the mid-market price on the day before invitations are issued to employees.
Employees may enter into three or five-year savings contracts.
(iv)
Shire
plc
Employee Stock Purchase Plan (Stock Purchase
Plan)
Under
the Stock
Purchase Plan, options are granted with an exercise price equal to 85% of
the
fair market value of a share on the enrolment date (the first day of the
offering period) or the exercise date (the last day of the offering period),
whichever is the lower. The offering period is for 27 months.
(v)
Pharmavene
1991 Stock Option Plan (SLI Plan)
Options
issued
under the SLI Plan were originally granted over shares in SLI, formerly
Pharmavene Inc., a company acquired by the Company on March 23, 1997. Exercise
of these options results in the option holder receiving ordinary shares in
Shire. As a result of the acquisition of SLI, and in accordance with the
terms
of the original share option plan, all options granted under that plan became
immediately capable of exercise. It is intended that no further options will
be
granted under the SLI Plan.
(vi)
BioChem
Stock
Option Plan (BioChem Plan)
Following
the
acquisition of BioChem Pharma Inc. on May 11, 2001, the BioChem Stock Option
Plan was amended such that options over BioChem Pharma Inc.’s common stock
became options over ordinary shares of Shire. All BioChem Pharma Inc. options,
which were not already exercisable, vested and became exercisable as a result
of
the acquisition. It is intended that no further options will be granted under
the BioChem Stock Option Plan.
F-69
A
summary of the
status of the Company’s stock option plans as at December 31, 2006, 2005 and
2004 and of the related transactions during the periods then ended is presented
below:
0.1
million options
were granted under the Sharesave Scheme at a price of £6.99. These options were
granted with an exercise price equal to 80% of the mid-market price on the
day
before invitations were issued to employees. The weighted average fair value
of
options granted was £3.21.
0.3
million options
were granted under the Stock Purchase Plan at a price of £7.48. These options
were granted with an exercise price equal to 85% of the mid-market price
on the
day before invitations were issued to employees. The weighted average fair
value
of options granted was £3.71.
8.2
million options
were granted under the 2000 Executive Scheme. These options were granted
with
exercise prices equivalent to the market value on the date of grant. The
weighted average fair value of options granted was £3.08.
0.1
million options
were granted under the Sharesave Scheme at a price of £5.13. These options were
granted with an exercise price equal to 80% of the mid-market price on the
day
before invitations were issued to employees. The weighted average fair value
of
options granted was £3.24.
0.04
million and
0.4 million options were granted under the Stock Purchase Plan at a price
of
£5.86 and £5.85, respectively. These options were granted with an exercise price
equal to 85% of the mid-market price on the day before invitations were issued
to employees. The weighted average fair value of options granted was £2.00.
6.7
million options
were granted under the 2000 Executive Scheme. These options were granted
with
exercise prices equivalent to the market value on the date of grant. The
weighted average fair value of options granted was £2.78.
0.1
million options
were granted under the Sharesave Scheme at a price of £3.74. These options were
granted with an exercise price equal to 80% of the mid-market price on the
day
before invitations were issued to employees. The weighted average fair value
of
options granted was £2.31.
0.2
million options
were granted under the Stock Purchase Plan at a price of £3.92. These options
were granted with an exercise price equal to 85% of the mid-market price
on the
day before invitations were issued to employees. In relation to a grant under
the Stock Purchase Plan at a price of £8.06 in 2001, an additional 32,793
options were granted at a price of £4.58 on the 2004 maturity date. The weighted
average fair value of options granted was £1.28.
Options
outstanding
as at December 31, 2006 have the following characteristics:
Number
of options outstanding
Exercise
prices
£
Weighted
average
remaining
contractual
term
(years)
Weighted
average
exercise
price
of options outstanding
£
Number
of options exercisable
Weighted
average exercise price of options exercisable
£
2,518,812
0.01
-
4.00
6.0
3.51
2,387,588
3.50
11,981,596
4.01
-
6.00
7.4
5.39
773,918
4.45
3,323,340
6.01
-
10.00
5.7
7.02
920,110
7.39
1,736,125
10.01
-
13.00
3.0
11.82
1,660,490
11.87
19,559,873
5,742,106
(b)Stock-settled
share appreciation rights
Portfolio
Share
Plan - Part A
Stock-settled
share
appreciation rights granted under the Portfolio Share Plan - Part A are
exercisable subject to certain performance criteria. In respect of any award
made to executive directors performance conditions will be based on relative
total shareholder return. Vesting will depend on relative total shareholder
return performance against two comparator groups. For one-third of the award,
the comparator group will be the Financial
Times
Stock Exchange
100 constituents
(excluding financial institutions) and for two-thirds of the award the
comparator group will be a group of international companies from the
pharmaceutical sector. In addition, before awards granted to executive directors
will vest, the Committee must be satisfied that the underlying performance
of
the Company is sufficient to justify this. Where median performance is achieved,
33 1/3 per cent of stock-settled share appreciation rights will vest, rising
on
a straight-line basis to full vesting at upper quartile
performance.
Awards
granted to
employees below executive director level will not be subject to performance
conditions.
Once
awards have
vested, participants will have until the fifth anniversary of the date of
grant
to exercise their awards.
A
summary of the
status of the Company’s stock-settled share appreciation rights as at December31, 2006 and of the related transactions during the periods then ended is
presented below:
2.6
million
stock-settled share appreciation rights were granted over ordinary shares
under
the Portfolio Share Plan - Part A. These options were granted with exercise
prices equivalent to the market value on the date of grant. The weighted
average
fair value of options granted in the year to December 31, 2006 is £2.58.
A
summary of the
status of the Company’s stock-settled share appreciation rights as at December31, 2005 and of the related transactions during the periods then ended is
presented below:
0.4
million
stock-settled share appreciation rights were granted over ordinary shares
under
the Portfolio Share Plan - Part A. These options were granted with exercise
prices equivalent to the market value on the date of grant. The weighted
average
fair value of options granted in the year to December 31, 2006 was £2.58.
Stock-settled
share
appreciation rights over ordinary shares outstanding as at December 31, 2006
have the following characteristics:
Number
of options outstanding
Exercise
prices
Weighted
Average Remaining Contractual term
Weighted
average
exercise
price
of options outstanding
Number
of options exercisable
Weighted
average exercise price of options exercisable
2.1
million
stock-settled share appreciation rights were granted over American depositary
shares (equivalent to 6.3 million ordinary shares) under the Portfolio Share
Plan - Part A. These options were granted with exercise prices equivalent
to the
market value on the date of grant. The 3.0 million stock-settled share
appreciation rights over ADSs outstanding at December 31, 2006 are equivalent
to
9.0 million ordinary shares. The average fair value of options granted in
the
year to December 31, 2006 is $14.70.
0.9
million
stock-settled share appreciation rights were granted over American depositary
shares (equivalent to 2.8 million ordinary shares) under the Portfolio Share
Plan - Part A. These options were granted with exercise prices equivalent
to the
market value on the date of grant. The 0.9 million stock-settled share
appreciation rights over ADSs outstanding at December 31, 2006 are equivalent
to
2.8 million ordinary shares. The average fair value of options granted in
the
year to December 31, 2006 is $14.92.
Stock-settled
share
appreciation rights over American depositary shares outstanding as at December31, 2006 have the following characteristics:
Number
of options outstanding
Exercise
prices
$
Weighted
Average Remaining Contractual term
(years)
Weighted
average
exercise
price
of options outstanding
$
Number
of options exercisable
Weighted
average exercise price of options exercisable
2,965,798
35.01
-
50.00
4.4
46.48
-
-
(c)Performance
share plan
Portfolio
Share
Plan - Part B
Performance
share
awards granted under the Portfolio Share Plan - Part B are exercisable subject
to certain performance criteria. In respect of any award made to executive
directors performance conditions will be based on relative total shareholder
return. Vesting will depend on relative total shareholder return performance
against two comparator groups. For one-third of an award, the comparator
group
will be the Financial Times Stock Exchange 100 constituents (excluding financial
institutions) and for two-thirds of the award the comparator group will be
a
group of international companies from the pharmaceutical sector. In addition,
before awards granted to executive directors will vest, the Committee must
be
satisfied that the underlying performance of the Company is sufficient to
justify this. Where median performance is achieved, 33 1/3 per cent of
performance shares will vest, rising on a straight-line basis to full vesting
at
upper quartile performance.
A
summary of the
status of the Company’s stock-settled share awards as at December 31, 2006 and
of the related transactions during the periods then ended is presented
below:
F-73
Performance
share awards - Ordinary shares
Number
of
shares
Aggregate
intrinsic value
£’M
Weighted
average remaining life
Outstanding
as at beginning of period
-
Granted
130,406
Outstanding
as at end of period
130,406
1.4
2.6
Exercisable
as at end of period
-
N/A
N/A
Performance
share awards - American Depositary Shares
Number
of
ADSs
Aggregate
intrinsic value
$’M
Weighted
average remaining life
Outstanding
as at beginning of period
-
Granted
175,341
Outstanding
as at end of period
175,341
10.8
2.6
Exercisable
as at end of period
-
N/A
N/A
Exercises
of employee share-based awards
The
total intrinsic
value of share-based awards exercised for the period to December 31, 2006,
2005
and 2004 was $65.5 million, $14.9 million and $6.6 million, respectively.
The
total cash received from employees as a result of employee share option
exercises for the period to December 31, 2006, 2005 and 2004 was approximately
$82.0 million, $37.1 million and $13.4 million, respectively. In connection
with
these exercises, the excess tax benefits realized by the Company and charged
to
additional paid-in capital for the period to December 31, 2006, 2005 and
2004
were $nil, $0.2 million and $0.4million,
respectively.
The
Company will
settle future employee share award exercises with either newly listed common
shares or with shares held in an employee share ownership plan (ESOP). The
number of shares held in the ESOP at December 31, 2006 was 6.2
million.
Valuation
methodologies
The
Company
estimates the fair value of share based awards without market-based
performance conditions using a Black-Scholes valuation model and awards with
market-based performance conditions are valued using a binomial valuation.
This
is consistent with the provisions of SFAS No. 123(R), Securities and Exchange
Commission (SEC) Staff Accounting Bulletin No. 107 and the Company’s prior
period pro forma disclosures of net earnings, including stock-based compensation
(determined under a fair value method as prescribed by SFAS No. 123). Key
input
assumptions used to estimate the fair value of share-based awards include
the
grant price of the award, the expected stock-based award term, volatility
of the
Company’s share, the risk-free rate and the Company’s dividend yield. The
Company believes that the valuation technique and the approach utilized to
develop the underlying assumptions are appropriate in estimating the fair
values
of Shire’s stock-based awards. Estimates of fair value are not intended to
predict actual future events or the value ultimately realized by employees
who
receive equity awards, and subsequent events are not indicative of the
reasonableness of the original estimates of fair value made by the Company
under
SFAS No. 123(R).
The
fair value of
share awards granted was estimated using the following assumptions:
On
February 20,2007 Shire announced that it has agreed to acquire New River for $64 per
New
River share, or approximately $2.6 billion for the fully diluted equity
interest, in an all cash transaction unanimously recommended by the Boards
of
both companies. The acquisition is structured as a tender offer for all
outstanding shares of New River followed by a merger. The acquisition is
subject
to the approval of Shire plc’s shareholders as well as the satisfaction of
certain customary conditions, including the tender of a majority of the
outstanding New River shares on a fully-diluted basis and the expiration
or
earlier termination of the Hart-Scott-Rodino waiting period. For accounting
purposes, the acquisition of New River will be accounted for as a purchase
business combination in accordance with SFAS No. 141.
The
total
consideration for the acquisition of New River amounts to approximately $2.6
billion in cash. Shire has entered into new bank facilities of $2.3 billion
to
provide part of the financing for the acquisition. This new facility is
conditional upon, amongst other things, approval being given by Shire plc’s
shareholders at an Extraordinary General Meeting for Shire plc to exceed
the
limit on its aggregate borrowings set out in Shire’s Articles of
Association.
Shire
plc has also
raised approximately $900 million through the private placement
of
42,883,721 new ordinary shares to certain institutional investors worldwide
at a
price of 1075 pence per share. The newly issued shares represent approximately
8.4 per cent of Shire plc's issued ordinary share capital prior to the
placing.
F-75
Quarterly
results of operations (unaudited)
The
following table
presents summarized unaudited quarterly results for the years to December31,2006 and 2005.
2006
Q1
Q2
Q3
Q4
$’M
$’M
$’M
$’M
Total
revenues
411.0
439.1
449.4
497.0
Operating
income
14.4
82.2
106.2
80.3
Net
income
61.1
61.3
87.2
68.6
Earnings
per
share - basic
12.1c
12.2c
17.3c
13.6c
Earnings
per
share - diluted
12.0c
12.0c
17.1c
13.4c
2005
(1)Adjusted
(1)Adjusted
(1)
(2)Adjusted
and restated
(1)Adjusted
Q1
Q2
Q3
Q4
$’M
$’M
$’M
$’M
Total
revenues
333.7
424.6
376.1
465.0
Operating
income/(loss)
8.3
134.1
(762.1
)
94.9
Net
income/(loss)
15.4
109.8
(772.7
)
69.0
Earnings
per
share - basic
3.1c
22.0c
(154.4c
)
13.8c
Earnings
per
share - diluted
3.1c
22.0c
(154.4c
)
13.7c
(1)Retrospectively
adjusted following the adoption of SFAS No.123(R); see notes 3and
31
for additional
information.
(2)
Restated
for a
correction to the value ascribed to IPR&D acquired with the acquisition of
TKT; see note 3(a).
F-76
SCHEDULE
II
VALUATION
AND
QUALIFYING ACCOUNTS
Beginning
balance
Provision
charged to income(1)
Costs
incurred/ utilization(1)
Ending
balance
Provision
for sales rebates, returns and coupons
$’M
$’M
$’M
$’M
2006 :
Accrued
rebates - Medicaid and Health Maintenance Organizations
(HMOs)
105.4
263.3
(242.3
)
126.4
Sales
returns
reserve
31.8
34.1
(29.4
)
36.5
Accrued
coupons
5.2
8.8
(1.0
)
13.0
142.4
306.2
(272.7
)
175.9
2005 :
Accrued
rebates - Medicaid and Health Maintenance Organizations
(HMOs)
99.4
188.8
(182.8
)
105.4
Sales
returns
reserve
22.5
35.3
(26.0
)
31.8
Accrued
coupons
15.9
12.3
(23.0
)
5.2
137.8
236.4
(231.8
)
142.4
2004 :
Accrued
rebates - Medicaid and HMOs
59.2
136.6
(96.4
)
99.4
Sales
returns
reserve
8.3
35.6
(21.4
)
22.5
Accrued
coupons
4.1
29.0
(17.2
)
15.9
71.6
201.2
(135.0
)
137.8
(1) In
the analysis
above, due to systems limitations, it is not practical and has not been
necessary to break out current versus prior year activity. When applicable,
Shire has performed general ledger reviews of sales deduction provisions
charged
to income, and the utilization of these provisions in subsequent years. Shire
has determined that adjustments made in each year as a result of changes
to
estimates that related to prior year sales, and adjustments made as a result
of
differences between prior period provisions and actual payments, did not
have a
material impact on the Company’s financial performance or position either in
each individual year, or in the Company’s performance over the reported
period.
S-1
SIGNATURES
Pursuant
to the
requirements of Section 13 of 15(d) of the Securities and Exchange Act of
1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Pursuant
to the
requirements of the Securities Exchange Act of 1934, this report has been
signed
below by the following persons on behalf of the Registrant and in the capacities
and on the date indicated.
Certification
of Matthew Emmens pursuant to Rule 13a - 14 under The Exchange
Act.
31.2
Certification
of Angus Russell pursuant to Rule 13a - 14 under The Exchange
Act.
32
Certification
of Matthew Emmens and Angus Russell pursuant to Section 906 of
the
Sarbanes - Oxley Act of 2002.
*
Certain
portions of this exhibit have been omitted intentionally, subject
to a
confidential treatment request. A complete version of this agreement
has
been filed separately with the Securities and Exchange
Commission.
(1)
Incorporated
by reference to Exhibit 3.01 to Shire’s Form 8-K filed on November 25,2005.
(2)
Incorporated
by reference to Shire’s
Form 10-Q filed on November 7,2006.
Dates Referenced Herein and Documents Incorporated by Reference
