10th Aug 2012 17:31
Half Yearly Report
August 10, 2012 - In order to meet its obligations under the Disclosure Rules and Transparency Rules of the United Kingdom Financial Services Authority, Shire plc ("Shire" or the "Group") is publishing today its Half Yearly Report for the six months ended June 30, 2012.
It should be noted that on August 1, 2012 Shire previously announced its results in respect of the same period.
For further information please contact:
Investor RelationsEric Rojas [email protected] +1 781 482 0999Sarah Elton-Farr [email protected] +44 1256 894157MediaJessica Mann (Corporate) [email protected] +44 1256 894 280Notes to editors
Shire enables people with life-altering conditions to lead better lives.
Through our deep understanding of patients' needs, we develop and provide healthcare in the areas of:
- Behavioral health and Gastro Intestinal conditions
- Rare Diseases
- Regenerative Medicine
as well as other symptomatic conditions treated by specialist physicians.
We aspire to imagine and lead the future of healthcare, creating value for patients, physicians, policymakers, payors and our shareholders.
For further information on Shire, please visit the Group's website:www.shire.com. Shire plc Half Yearly Report 2012Registered in Jersey, No. 99854, 22 Grenville Street, St Helier, Jersey JE48PXContents Page
The "safe harbor" statement under the Private Securities Litigation Reform Act 2 of 1995
Chief Executive Officer's review
3
Business overview for the six months to June 30, 2012
4
Results of operations for the six months to June 30, 2012 and June 30, 2011
10
Principal risks and uncertainties
18
Directors' responsibility statement
19
Unaudited consolidated balance sheets at June 30, 2012 and December 31, 2011 20
Unaudited consolidated statements of income for the six months to June 30, 2012 22 and June 30, 2011
Unaudited consolidated statement of comprehensive income for the six months to 24 June 30, 2012 and June 30, 2011
Unaudited consolidated statement of changes in equity for the six months to
25
June 30, 2012
Unaudited consolidated statement of cash flows for the six months to June 30, 26 2012 and June 30, 2011
Notes to the unaudited consolidated financial statements
28
Independent review report to Shire plc
50
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Statements included herein that are not historical facts are forward-lookingstatements. Such forward-looking statements involve a number of risks anduncertainties and are subject to change at any time. In the event such risksor uncertainties materialize, the Company's results could be materiallyadversely affected. The risks and uncertainties include, but are not limitedto, risks associated with: the inherent uncertainty of research, development,approval, reimbursement, manufacturing and commercialization of the Company'sSpecialty Pharmaceuticals, Human Genetic Therapies and Regenerative Medicineproducts, as well as the ability to secure new products for commercializationand/or development; government regulation of the Company's products; theCompany's ability to manufacture its products in sufficient quantities to meetdemand; the impact of competitive therapies on the Company's products; theCompany's ability to register, maintain and enforce patents and otherintellectual property rights relating to its products; the Company's abilityto obtain and maintain government and other third-party reimbursement for itsproducts; and other risks and uncertainties detailed from time to time in theCompany's filings with the Securities and Exchange Commission.
The following are trademarks either owned or licensed by Shire plc or its subsidiaries, which are the subject of trademark registrations in certain territories, or which are owned by third-parties as indicated and referred to in this Half Yearly Report:
ADDERALL XR® (mixed salts of a single entity amphetamine)
CEREZYME® (trademark of Genzyme Corporation ("Genzyme"))
CONCERTA® (trademark of Alza Corporation ("Alza"))
DAYTRANA® (trademark of Noven Pharmaceutical Inc. ("Noven"))
DERMAGRAFT® (human fibroblast-derived dermal substitute)
ELAPRASE® (idursulfase)
EQUASYM® (methylphenidate hydrochloride)
FABRAZYME® (trademark of Genzyme)
FIRAZYR® (icatibant)
FOSRENOL® (lanthanum carbonate)
INTUNIV® (guanfacine extended release)
LIALDA® (trademark of Giuliani International Limited ("Guiliani"))
MEZAVANT® (trademark of Guiliani)
MMX® (mesalamine)
PENTASA® (trademark of Ferring B.V. Corp ("Ferring"))
REPLAGAL® (agalsidase alfa)
RESOLOR® (prucalopride)
VASCUGEL® (human aortic endothelial cells on a porcine gelatin sponge)
VPRIV® (velaglucerase alfa)
VYVANSE® (lisdexamfetamine dimesylate)
XAGRID® (anagrelide hydrochloride)
ZEFFIX® (trademark of GlaxoSmithKline ("GSK"))
3TC® (trademark of GSK)
Chief Executive Officer's review
We are pleased to enclose our financial results for the six-month period ended June 30, 2012. This Half Yearly Report includes condensed consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP").
Shire delivered strong results in the first six months of 2012, with product sales up 20% and Non GAAP operating income up 21%.
The Attention Deficit Hyperactivity Disorder ("ADHD") market in the US is maintaining healthy growth; our lead products VYVANSE and INTUNIV both increased share and we're advancing our plans for the continued international rollout of both of these products. Although of decreasing importance in our ADHD portfolio, we are confident that branded ADDERALL XR will remain competitive in the US marketplace despite the approval of a new generic product.
We are delighted with the continued adoption of FIRAZYR by patients in the US, which is driving strong sales growth. We also continue to see new patient demand for all our enzyme replacement therapies ELAPRASE, REPLAGAL and VPRIV.
We benefited from sales of DERMAGRAFT in the first six months of 2012, compared to the same period last year, and we have announced our plans to invest in a new campus in the San Diego area, including a second manufacturing facility for our Regenerative Medicine business.
Our diversified and increasingly global business generated higher cash flowduring the first six months of 2012 and we're continuing our disciplinedapproach to invest in a growing range of exciting late stage opportunities inour pipeline, as well as business development opportunities, to bring furthervaluable treatments to patients. We're building on our lead positions in ourmain franchise areas of behavioral health, gastro-intestinal, HGT andregenerative medicine as well as forging alliances and investments in noveltechnology platforms. We look forward to continued growth across our business.Based on the market dynamics we are anticipating and the actions we havetaken, Shire is on track to deliver double digit full year earnings growth in2012. Our objective is to deliver sound earnings growth in 2013, and increasedgrowth beyond that, driven by our young and diversified product portfolio andthe significant market opportunities we have identified.
Angus Russell
Chief Executive Officer
Business overview for the six months to June 30, 2012
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Half Yearly Report for Shire plc and its subsidiaries (collectively "Shire" or "the Group").
Significant events in the six months to June 30, 2012 and recent developments
VPRIV - for the treatment of Type 1 Gaucher disease
- On February 22, 2012 Shire announced that the European Medicines Agency's("EMA") Committee for Medicinal Products for Human Use had approved theproduction of VPRIV in its new biologics manufacturing facility in Lexington,Massachusetts and this decision was adopted by the European Commission onMarch 26, 2012. Shire now has two EMA approved facilities - Alewife inCambridge, Massachusetts, as well as the new Lexington facility - in which tomanufacture VPRIV drug substance.
Shire has received a complete response letter from the US Food and Drug Administration ("FDA") regarding production of VPRIV drug substance at Lexington. Shire continues to work closely with the FDA to address their questions and resolve any outstanding issues to their satisfaction.
Notwithstanding the ongoing discussions with the FDA, Shire continues to supply VPRIV to US patients through its existing approved US manufacturing facilities and has the capacity to meet the anticipated demand for VPRIV from existing and new patients both in the US and globally.
VYVANSE - for the treatment of ADHD
- On March 6, 2012 Shire announced that it is initiating two Phase 4 clinicaltrials to compare VYVANSE Capsules to CONCERTA Extended-Release Tablets. Theseprospectively designed head-to-head clinical trials will provide importantinformation for physicians, patients, caregivers, and payors to make informedchoices, and have been designed to explore differences in efficacy betweenVYVANSE and CONCERTA in adolescents aged 13 to 17 with ADHD. Together the twotrials will enroll approximately 1,000 patients, and results are expected inthe second half of 2013.
FOSRENOL - for the treatment of Hyperphosphatemia in end stage renal disease
- On March 8, 2012 Shire announced that it has received approval through theEuropean Decentralised Procedure for an oral powder formulation of FOSRENOL.The oral powder formulation was developed by Shire to give patients morechoice in how they take their phosphate binder. Submissions for nationalmarketing authorisations of FOSRENOL in oral powder form have been made toSweden and the other 27 European markets.
ADDERALL XR - for the treatment of ADHD
- On June 22, 2012, the FDA responded to Shire's ADDERALL XR citizen petition. The FDA's response requires that all abbreviated new drug applications ("ANDAs") must establish bioequivalence using partial area under the curve measurements at five hours and beyond five hours, for both d- and l- amphetamine.
The FDA also approved the ANDA for generic ADDERALL XR filed by Actavis Elizabeth LLC ("Actavis"). Shire is not aware of the FDA having approved any other ADDERALL XR ANDAs.
The approval of Actavis' ANDA has resulted in a significantreduction to the royalty rate payable on sales of authorized generic ADDERALLXR by Impax Laboratories Inc. ("Impax"). This reduction will be partiallyoffset by a small royalty payable by Actavis, and Shire now expects lowerADDERALL XR royalty income in future periods. There are other variables whichcould also affect the future revenue stream from ADDERALL XR, including, butnot limited to, the amount of finished product each party can manufacture (asdetermined by the US Drug Enforcement Agency), any increase or decrease inmarket share and / or product discounts on branded and non-branded versions ofADDERALL XR. Whilst there is one generic entrant Shire believes that it willremain competitive in the ADDERALL XR marketplace through the distribution ofbranded ADDERALL XR and through its two authorized generic partners, TevaPharmaceuticals Industries Ltd and Impax.
Pipeline
REPLAGAL for the treatment of Fabry disease
- On March 14, 2012 Shire announced that it had withdrawn its BiologicsLicense Application ("BLA") for REPLAGAL with the FDA. In 2009, and again in2011, the FDA encouraged Shire to submit an application for the approval ofREPLAGAL in the US. These discussions led Shire to file a BLA in November 2011in anticipation of a quick review process and eventual approval. Recentinteractions with the FDA in the first quarter of 2012 led Shire to believethat the FDA would require additional controlled trials for approval. Noconcerns over the product's safety profile were raised by the FDA. Shire hasconcluded that the likely additional studies would cause a significant delay,and an approval of REPLAGAL for US patients would only be possible in thedistant future. Shire therefore decided to withdraw its BLA and to transitionpatients treated with REPLAGAL in the US under treatment access programs offREPLAGAL therapy. As at June 30, 2012, all patients have been transitioned offthe treatment access programs and onto alternative treatment.
SPD476, MMX mesalamine for the treatment of diverticular disease
- On March 30, 2012 Shire announced top-line results of the PREVENT2 trial, aPhase 3 investigational study of once-daily SPD476, MMX mesalamine in patientswith a history of diverticulitis. The study did not meet the primary endpointin reducing the rate of recurrence of diverticulitis over a two year treatmentperiod. Shire will continue to analyze these data and those of the secondstudy, PREVENT1, which was similar in design to PREVENT2 and will report laterin the year. Although the results of the second trial are pending, the currentintention is not to pursue a regulatory filing for this indication for MMXmesalamine.
Lisdexamfetamine dimesylate ("LDX") (currently marketed as VYVANSE in the US for the treatment of ADHD) for the treatment of Binge Eating Disorder ("BED")
- On April 26, 2012 Shire announced Phase 2 results from an efficacy andsafety clinical study of LDX for the treatment of BED. In this study treatmentof adults with 50 and 70 mg doses of LDX resulted in a statisticallysignificant reduction in binge eating behavior compared to placebo, thepre-defined primary end-point. Additionally, treatment with 30, 50 and 70 mgdoses of LDX resulted in a statistically significant increase in remissionrates from binge eating compared to placebo. There is currently no approvedpharmacologic treatment for patients struggling with BED, a serious and commoneating disorder. The preliminary safety data suggests a profile generallyconsistent with the known profile of studies of VYVANSE in adults with ADHD.
LDX (currently marketed as VYVANSE in the US for the treatment of ADHD) for the treatment of ADHD
- On May 23, 2012 Shire announced the results of a Phase 3 study which demonstrated the long-term maintenance of efficacy of LDX in children and adolescents aged 6 to 17 years with ADHD. Results showed maintenance of efficacy in children and adolescents who continued to receive LDX, as demonstrated by a significantly lower proportion of ADHD treatment failures (15.8%) in this group, compared with placebo (67.5%). The majority of placebo-treated subjects who met protocol-defined ADHD symptom relapse criteria did so within two weeks following randomization. Long-term maintenance therapy plays an important role in the treatment of ADHD. There are however, few long-term controlled studies in children and adolescents assessing the maintenance of efficacy and long-term safety of stimulant
medication versus placebo. The study is a central element to the EU submission package for LDX. A European Marketing Authorisation Application ("MAA") for LDX was accepted for review in January 2012.
Other developments
Acquisition of the US rights to prucalopride (marketed in certain countries in Europe as RESOLOR) - for the symptomatic treatment of chronic constipation
- On January 10, 2012 Shire announced that it had acquired the rights to develop and market prucalopride (marketed in certain countries in Europe as RESOLOR) in the US in an agreement with Janssen Pharmaceutica N.V., part of the Johnson & Johnson Group.
Collaboration and license agreement with Sangamo BioSciences, Inc ("Sangamo") to develop therapeutics for the treatment of hemophilia and other monogenic diseases
- On February 1, 2012 Shire announced that it had entered into a collaborationand license agreement with Sangamo to develop therapeutics for hemophilia andother monogenic diseases based on Sangamo's zinc finger DNA-binding protein("ZFP") technology.
Acquisition of FerroKin BioSciences, Inc. ("FerroKin")
- On April 2, 2012 Shire completed the acquisition of FerroKin and with it SPD602 (formally referred to as FBS0701), FerroKin's iron chelator treatment inPhase 2 development. SPD 602 serves a chronic patient need for treatment ofiron overload following numerous blood transfusions. Together with ourcollaboration with Sangamo, the acquisition of FerroKin represents a strategicstep in building Shire's hematology business, which already includes XAGRIDand a growing development pipeline, including SPD 535. Cash consideration paidon closing amounted to $94.5 million. Further contingent cash consideration ofup to $225 million may be payable by Shire in future periods, dependent uponthe achievement of certain clinical development, regulatory and net salesmilestones.
Acquisition of certain assets & liabilities of Pervasis Therapeutics, Inc. ("Pervasis")
- On April 19, 2012 Shire acquired substantially all the assets and certain liabilities of Pervasis. This acquisition adds VASCUGEL to Shire's Regenerative Medicine business. VASCUGEL is currently in Phase 2 development for acute vascular repair, focused on improving hemodialysis access for patients with end-stage renal disease.
Regenerative Medicine campus
- On June 11, 2012 Shire announced that its Regenerative Medicine business hadentered into a lease agreement with BioMed Realty Trust, Inc. for a new campussite in Sorrento Mesa, CA, which will provide increased capacity forDERMAGRAFT and additional space and infrastructure to manufacture newregenerative medicine products. Shire expects to begin construction of the newcampus in 2013, with initial occupancy targeted for 2014. Shire plans tomaintain its current DERMAGRAFT manufacturing facility in La Jolla, CA.
Legal Proceedings
See Note 11 Commitments and contingencies of this Half Yearly Report for details of Shire's legal proceedings.
Dividend
In respect of the six months ended June 30, 2012, the Board resolved to pay aninterim dividend of 2.73 US cents per Ordinary Share (2011: 2.48 US cents perOrdinary share).Dividend payments will be made in Pounds Sterling to ordinary shareholders andin US Dollars to holders of American Depository Shares ("ADSs"). A dividend of1.74 pence per ordinary share (an increase of 14% compared to 2011: 1.52pence) and 8.19 US cents per ADSs (an increase of 10% compared to 2011: 7.44US cents) will be paid on October 4, 2012 to shareholders on the register asat the close of business on September 7, 2012.
Research and development
Products in registration as at June 30, 2012
LDX for the treatment of ADHD in the EU
In December 2011 Shire submitted a MAA seeking approval for LDX (marketed asVYVANSE in the US) for the treatment of ADHD in the EU in children aged 6 to17. In January 2012 the EMA accepted this MAA for review.
INTUNIV for ADHD in Canada
In October 2011 Shire submitted a New Drug Submission ("NDS") seeking the approval in Canada for INTUNIV for the treatment of ADHD in children and adolescents aged 6 to 17. In December 2011, Health Canada accepted the NDS for screening.
DERMAGRAFT for the treatment of Diabetic Foot Ulcers ("DFU")
On March 21, 2011, prior to its acquisition by the Group, Advanced BioHealing, Inc. ("ABH") filed a Class IV Medical Device Application to Health Canada seeking approval for DERMAGRAFT for the treatment of DFU.
Products in clinical development as at June 30, 2012
Phase 3
LDX (currently marketed as VYVANSE in the US for the treatment of ADHD) for the treatment of inadequate response in major depressive disorder ("MDD")
A Phase 3 clinical program to assess the efficacy and safety of LDX as adjunctive therapy in patients with MDD was initiated in the fourth quarter of 2011 and is ongoing.
INTUNIV for the treatment of ADHD in the EU
INTUNIV for the treatment of ADHD in children aged 6 to 17 in the EU is in Phase 3 development.
RESOLOR for the treatment of chronic constipation in males
A Phase 3 European clinical trial to further assess the efficacy of RESOLOR for the treatment of chronic constipation in males was initiated in 2010 and is ongoing.
SPD - 555 (prucalopride) for the treatment of chronic constipation in the US
On January 10, 2012 Shire announced that it had acquired the rights to developand market prucalopride (marketed in certain countries in Europe as RESOLOR)in the US in an agreement with Janssen Pharmaceutica N.V. This product isPhase 3-ready and definitive plans will be implemented following discussionswith regulatory authorities.
DERMAGRAFT for the treatment of Venous Leg Ulcers ("VLU")
On August 24, 2011 Shire announced its preliminary analysis of the top-lineresults from ABH's Phase 3 pivotal trial of DERMAGRAFT in subjects with VLU.The international pivotal trial was designed as a prospective, multicenter,randomized, controlled clinical study to assess the product's safety andefficacy in the promotion of healing VLU. The preliminary analysis of the datawas that the trial did not meet the primary endpoint mutually agreed with theFDA and EMA and a subsequent detailed analysis of the data set is ongoing.
XAGRID for the treatment of essential thrombocythaemia ("ET") in Japan
A Phase 3 clinical program has been initiated to assess the safety and efficacy of XAGRID in adult essential thrombocythaemia patients treated with cytoreductive therapy who have become intolerant to their current therapy or whose platelet counts have not been reduced to an acceptable level.
Phase 2
LDX (currently marketed as VYVANSE in the US for the treatment of ADHD) for the treatment of BED
Based on discussions with regulatory agencies regarding potential development pathways for LDX as a possible BED treatment option, Phase 3 studies could begin in 2012.
LDX (currently marketed as VYVANSE in the US for the treatment of ADHD) for the treatment of Negative Symptoms of Schizophrenia ("NSS")
Based on discussions with regulatory agencies regarding potential developmentpathways for LDX as a possible NSS treatment option, the next clinical studycould begin in the first half of 2013.
LDX (currently marketed as VYVANSE in the US for the treatment of ADHD) for the treatment of Excessive Daytime Sleepiness ("EDS")
This program has been de-prioritized as part of ongoing portfolio prioritization assessments and will not progress at this time.
SPD - 557 for the treatment of refractory gastroesophageal reflux disease ("rGERD")
SPD - 557 (M0003) is a selective 5-HT4 receptor agonist. An additional Phase2b clinical trial has been initiated to assess the efficacy of SPD - 557 as anadjunctive therapy for treatment of rGERD in patients with persistent symptomsof regurgitation with or without heartburn while on proton-pump inhibitortherapy.
SPD - 602 iron chelating agent for the treatment of iron overload secondary to chronic transfusion
SPD - 602 was acquired as part of the acquisition of FerroKin. A Phase 2 trial in adults and children with transfusional iron overload is ongoing. This product has received Orphan Drug designation by the EMA and the FDA for the treatment of chronic iron overload requiring chelation therapy.
HGT - 4510 for Duchenne Muscular Dystrophy ("DMD")
HGT- 4510 (also referred to as ACE-031) was added to the Shire HGT portfolioin 2010 through an exclusive license in markets outside of North America forthe ActRIIB class of molecules being developed by Acceleron. The lead ActRIIBdrug candidate, HGT- 4510 is in development for the treatment of patients withDMD. The Phase 2a trial is on hold. Additional preclinical toxicology workwill be conducted in 2012. This product has been granted orphan designation inthe US and the EU.
SRM - 003 (previously referred to as VASCUGEL) for improving hemodialysis access for patients with end-stage renal disease
SRM - 003, an endothelial cell-based technology, is currently in Phase 2development for acute vascular repair, focused on improving hemodialysisaccess for patients with end-stage renal disease. Since the acquisition ofthis asset as part of the acquisition of certain assets and liabilities fromPervasis, planning has been underway to initiate a Phase 2 developmentprogram. It is anticipated the first patient will be treated in this Phase 2program in the first half of 2013.
Phase 1
SPD - 554 (selective Ž±2A agonist) for the treatment of various CNS disorders
A lead candidate has been selected for development and a Phase 1 program hasbeen initiated to determine safety and tolerability of this compound. Theongoing Phase 1 program will be supportive of potentially three differentCNS-related indications: ADHD, hyperactivity in Autism Spectrum Disorder andPediatric Anxiety.
SPD - 535 for the treatment of improvement in potency of arteriovenous access in hemodialysis patients
SPD - 535 is in development as a novel molecule with plateletlowering ability and without phosphodiesterase type III inhibition apparent atclinically relevant doses. Data from Phase 1 clinical trials demonstratedpositive proof-of-principle. This program is Phase 2 ready; additional Phase 1work is being completed prior to the initiation of a Phase 2 proof-of-conceptprogram that will target prevention of thrombotic complications associatedwith arteriovenous access in hemodialysis patients.
HGT - 2310 for the treatment of Hunter syndrome with CNS symptoms, idursulfase-IT (intrathecal delivery)
HGT- 2310 is in development as an ERT delivered intrathecally for Hunter syndrome patients with CNS symptoms. The Group initiated a Phase 1/2 clinical trial in the first quarter of 2010. This trial is ongoing. This product has been granted orphan designation in the US.
HGT- 1410 for Sanfilippo A syndrome (Mucopolysaccharidosis IIIA)
HGT-1410 is in development as an ERT delivered intrathecally for the treatmentof Sanfilippo A syndrome (Mucopolysaccharidosis IIIA), a lysosomal storagedisorder. The product has been granted orphan drug designation in the US andin the EU. The Group initiated a Phase 1/2 clinical trial in August 2010. Thistrial is ongoing.
Products in pre-clinical development as at June 30, 2012
HGT- 1110 for the treatment of Metachromatic Leukodystrophy ("MLD")
HGT-1110 is in pre-clinical development as an ERT delivered intrathecally forthe treatment of Metachromatic Leukodystrophy. This product has been grantedorphan drug designation in the US and the EU.
HGT- 3010 for Sanfilippo B syndrome (Mucopolysaccharidosis IIIB)
HGT- 3010 is in pre-clinical development as an ERT delivered intrathecally for the treatment of Sanfilippo B syndrome (Mucopolysaccharidosis IIIB).
Other pre-clinical development projects
A number of additional projects are underway in various stages of pre-clinical development for the SP and HGT areas.
Development projects discontinued in the six months to June 30, 2012
The Group has discontinued the following SP development projects during the six months to June 30, 2012:
- LIALDA/MEZAVANT for the treatment of diverticulitis
Results of operations for the six months to June 30, 2012 and 2011
The financial information contained within the Half Yearly Report has been prepared under US GAAP, being the accounting principles under which the Group will prepare or prepared its annual financial statements for the years ended December 31, 2012 and 2011.
Total revenues
The following table provides an analysis of the Group's total revenues bysource: 6 months to 6 months to June 30, June 30, 2012 2011 Change $'M $'M % _________________ __________________ __________________Product sales 2,254.6 1,882.6 +20Royalties 112.6 137.0 -18Other revenues 12.4 15.5 -20 __________________ __________________ __________________Total 2,379.6 2,035.1 +17 __________________ __________________ __________________Product sales
The following table provides an analysis of the Group's key product sales:
6 months to June 6 months to June US 30, 30, Product sales
Non-GAAP CER prescription Exit market
2012 2011 growth growth growth1 share1 $'M $'M % % % %SPBehavioral HealthVYVANSE 526.2 388.2 +36 +36 +21 16ADDERALL XR 245.3 258.1 -5 -5 -5 6INTUNIV 137.6 101.5 +36 +36 +46 5EQUASYM 15.8 10.5 +50 +58 n/a3 n/a3 Gastro-intestinalLIALDA/MEZAVANT 184.1 186.3 -1 -1 +4 22PENTASA 129.7 130.3
__________________ __________________ ______________ 711.2 589.8 +21 __________________ __________________ ______________RMDERMAGRAFT 101.2 2.0 n/a n/a n/a2 n/a2 __________________ __________________ ______________ 101.2 2.0 n/a __________________ __________________ ______________Total product sales 2,254.6 1,882.6 +20 __________________ __________________ ______________
(1) Data provided by IMS NPA. Exit market share represents the average monthly US market share in the month ended June 30, 2012.
(2) IMS NPA Data not available.
(3) Not sold in the US in the six months to June 30, 2012.
Specialty Pharmaceuticals
VYVANSE - ADHD
VYVANSE product sales grew strongly in the first half of 2012, up 36% comparedto the same period in 2011, as a result of higher prescription demand due toan increase in VYVANSE's market share and growth in the US ADHD market, theeffect of a price increase taken since the first half of 2011 and lower salesdeductions as a percentage of gross product sales in the first half of 2012.Litigation proceedings regarding Shire's VYVANSE patents are ongoing. Furtherinformation about this litigation can be found in Note 11 of this Half YearlyReport.ADDERALL XR - ADHDADDERALL XR product sales decreased by 5% due to the effect of lowerprescription demand and lower stocking in the first half of 2012 compared tothe same period in 2011. These negative factors were partially offset by lowersales deductions as a percentage of gross product sales in the first half of2012 compared to the same period in 2011.
Litigation proceedings regarding Shire's ADDERALL XR patents are ongoing. Further information about this litigation can be found in Note 11 of this Half Yearly Report.
INTUNIV - ADHDINTUNIV product sales grew strongly in the first half of 2012, primarily dueto higher prescription demand due to an increase in INTUNIV's market share andgrowth in the US ADHD market, and price increases taken since the first halfof 2011. These positive factors were partially offset by higher salesdeductions in the first half of 2012 and the effect of de-stocking in thefirst half of 2012 compared to stocking in the first half of 2011.Litigation proceedings regarding Shire's INTUNIV patents are ongoing. Furtherinformation about this litigation can be found in Note 11 of this Half YearlyReport.
LIALDA/MEZAVANT - Ulcerative colitis
LIALDA/MEZAVANT product sales decreased slightly in the first half of 2012compared to the same period in 2011, primarily as a result of de-stocking andhigher sales deductions in the first half of 2012, offset by the effect of aprice increase taken since the first half of 2011 and higher US prescriptiondemand.Litigation proceedings regarding Shire's LIALDA patents are ongoing. Furtherinformation about this litigation can be found in Note 11 of this Half YearlyReport.PENTASA - Ulcerative colitisProduct sales of PENTASA slightly decreased as the benefit of price increasestaken since the first half of 2011 was offset by lower US prescription demandin the first half of 2012 and the effect of destocking in the first half of2012 compared to stocking in the first half of 2011.
FOSRENOL - Hyperphosphatemia
FOSRENOL product sales increased by 3% in the first half of 2012 compared tothe same period in 2011, primarily due to the effects of a price increasetaken since the first half of 2011 and lower sales deductions in the firsthalf of 2012 which more than offset lower US prescription demand and slightlylower sales outside of the US.Litigation proceedings regarding Shire's FOSRENOL patents are ongoing. Furtherinformation about this litigation can be found in Note 11 of this Half YearlyReport.Human Genetic TherapiesREPLAGAL - Fabry disease
The growth in REPLAGAL product sales was driven by the treatment of new patients being both na¯ve patients and switches from FABRAZYME. Reported REPLAGAL sales were impacted by unfavorable foreign exchange, due to the stronger US dollar in the first six months of 2012 compared to first six months of 2011.
ELAPRASE - Hunter syndrome
The growth in sales of ELAPRASE was primarily driven by increased numbers of patients on therapy across all regions in which ELAPRASE is sold. Reported ELAPRASE sales were also impacted by unfavorable foreign exchange.
VPRIV - Gaucher disease
Growth in patients being treated with VPRIV continues, driven both by new na¯ve patients and those switching from CEREZYME. VPRIV sales were also impacted by unfavorable foreign exchange.
FIRAZYR - Hereditary Angioedema
The significant growth in FIRAZYR sales was driven primarily by the US market,following the launch in the fourth quarter of 2011, where the Group continuesto see both good growth in new patients starting treatment and promisinglevels of repeat usage by existing patients. The more established markets inEurope also continue to grow following the approval of self administration
inthe first quarter of 2011.Regenerative MedicineDERMAGRAFT -DFU
DERMAGRAFT product sales were up 12% compared to the first half of 2011(1) dueto the effect of price increases taken since the first half of 2011 and growthin the number of patients treated. Product sales in the second quarter of 2012were up 7% compared to the first quarter of 2012, a lower rate of growth thancompared to the second quarter of 2011, due to the effect of an on-goingrestructuring of the sales and marketing organization. The restructuring isexpected to position DERMAGRAFT for future sales growth.
(1) Shire acquired DERMAGRAFT through its acquisition of ABH on June 28, 2011 and reported revenues from DERMAGRAFT of $2 million relating to the post acquisition period in the first six months of 2011.
Royalties
The following table provides an analysis of Shire's royalty income:
6 months to 6 months to June 30, June 30, 2012 2011 Change $'M $'M % ____________ ____________ ___________ADDERALL XR 51.0 43.7 +173TC and ZEFFIX 24.2 46.8 -48FOSRENOL 23.0 20.5 +12Other 14.4 26.0 -45 ____________ ____________ __________Total 112.6 137.0 -18 ____________ ____________ __________
Royalty income decreased as lower royalties from 3TC, ZEFFIX and other products more than offset higher royalties from ADDERALL XR and FOSRENOL.
Royalty income from 3TC and ZEFFIX continues to be adverselyimpacted by increased competition from other products. Also since the secondquarter of 2011 Shire has not recognized royalty income for 3TC and ZEFFIX forcertain territories due to a disagreement between GSK and Shire about how therelevant royalty rates should be applied given the expiry dates of certainpatents. GSK and Shire are holding discussions in order to seek to resolve
thedisagreement.Cost of product salesCost of product sales increased to $310.9 million for the six months to June30, 2012 (14% of product sales), up from $268.2 million in the correspondingperiod in 2011 (2011: 14% of product sales). The cost of product sales as apercentage of product sales remained constant in the six months to June 30,2012 compared to the same period in 2011 as slightly higher gross margins forthe Group's behavioral health products were marginally diluted by theinclusion of lower margin DERMAGRAFT following the acquisition of ABH.
For the six months to June 30, 2012 cost of product sales included depreciation of $14.2 million (2011: $18.2 million) and amortization of $0.7 million (2011: $0.9 million).
Research and development ("R&D")
R&D expenditure increased to $458.9 million for the six months to June 30,2012 (20% of product sales), compared to $354.8 million in the correspondingperiod in 2011 (19% of product sales). In the six months to June 30, 2012 R&Dincluded up-front payments totaling $23.0 million made to Sangamo and onacquisition of the US rights for prucalopride, and impairment charges of $27.0million relating to certain in-process research and development ("IPR&D")intangible assets. Excluding these costs R&D increased by $54.1 million or 15%in the six months to June 30, 2012 against the corresponding period in 2011due to our continued investment in a number of targeted R&D programs,including the VYVANSE MDD program, new programs acquired with FerroKin andfrom Pervasis, and the inclusion of six months of R&D costs for ABH. R&Dexpenditure was also benefited from favorable foreign exchange ofapproximately $8.7 million in the first half of 2012 compared to the sameperiod in 2011.
R&D in the six months to June 30, 2012 included depreciation of $12.8 million (2011: $10.8 million), and an impairment charge in respect of certain IPR&D intangible assets of $27.0 million (2011: $nil).
Selling, general and administrative ("SG&A")
SG&A expenditure increased to $1,011.0 million (45% of product sales) for thesix months to June 30, 2012 from $843.2 million (45% of product sales) in thecorresponding period in 2011. SG&A increased in the first six months of 2012as the Group continued to support the growth of its existing products andincreased expenditure on product launches and on international expansion. SG&Ain the period also included a full six months SG&A costs for ABH, costs of$35.9 million related to the settlement of litigation and external legalcosts, and higher intangible amortization expense than the same period in2011.
For the six months to June 30, 2012 SG&A included depreciation of $28.1 million (2011: $29.7 million) and amortization of $96.6 million (2011: $72.7 million).
(Gain)/loss on sale of product rights
For the six months to June 30, 2012 Shire recorded a gain on sale of productrights of $10.8 million (2011: loss of $3.5 million) following re-measurementof the contingent consideration receivable from the divestment of DAYTRANA.
Integration and acquisition costs
For the six months to June 30, 2012 Shire recorded integration and acquisitioncosts of $12.4 million (2011: $2.6 million). In the six months to June 30,2012 integration and acquisitions costs included costs relating to acquisitionof FerroKin, certain assets and liabilities for Pervasis, the integration ofABH and changes to the fair value of contingent consideration payable for theFerroKin and Pervasis acquisitions. In the six months to June 30, 2011integration and acquisition costs comprised the integration costs for ABH andMovetis, offset by the release of the contingent consideration liability forEQUASYM.Interest expense
For the six months to June 30, 2012 the Group incurred interest expense of $19.8 million (2011: $19.1 million). Interest expense principally relates to the coupon and amortization of issue costs on Shire's $1,100 million 2.75% convertible bonds due 2014.
Taxation
For interim reporting purposes, the Group calculates its tax expense byestimating its global annual effective tax rate and applies that rate inproviding for income taxes on a year-to-date basis. The Group has calculatedan expected annual effective tax rate, excluding significant, unusual orextraordinary items, and the tax effect of jurisdictions with losses for whicha tax benefit cannot be recognized. In the six months to June 30, 2012 theeffective tax rate was 18% (2011: 22%).
The effective rate of tax in the six months to June 30, 2012 was lower than the six months to June 30, 2011 due primarily to favorable changes in profit mix.
Financial condition at June 30, 2012 and December 31, 2011
Cash and cash equivalents
Cash and cash equivalents increased by $492.7 million to $1,112.7 million(December 31, 2011: $620.0 million). Cash generated by operating activities of$722.8 million more than offset the cost of acquiring FerroKin, other capitalexpenditure, the dividend payment and the purchase of shares by the EmployeeBenefit Trust ("EBT").Accounts receivable, netAccounts receivable, net decreased by $29.6 million to $815.4 million(December 31, 2011: $845.0 million) and days sales outstanding reduced by oneday to 49 days (December 31, 2011: 50 days). The decrease in accountsreceivable, net, principally resulted from the significant cash receipts fromgovernment-supported healthcare providers in Spain in the second quarter of2012.
Inventories
Inventories increased by $71.7 million to $411.8 million (December 31, 2011: $340.1 million), due to higher inventory levels for a number of the Group's products, particularly in the HGT operating segment.
Goodwill
Goodwill increased by $43.4 million to $636.0 million (December 31, 2011: $592.6 million), principally due to goodwill arising on the acquisition of FerroKin.
Other intangible assets, net
Other intangible assets increased by $132.6 million to $2,625.6 million (December 31, 2011: $2,493.0 million), due to IPR&D assets acquired with FerroKin and from Pervasis, additions in respect of other intellectual property rights acquired in the period, offset by intangible asset amortization and IPR&D impairment charges.
Other non-current liabilities
Other non-current liabilities increased by $120.5 million to $264.8 million (December 31, 2011: $144.3 million) due to the recognition of non-current contingent consideration payable which the Group may be required to pay in conjunction with the FerroKin and Pervasis business combinations and the license agreement with Mt. Sinai School of Medicine of New York University. Please refer to Note 11 of this Half Yearly Report for further details.
Liquidity and capital resources
General
The Group's funding requirements depend on a number of factors, including thetiming and extent of its development programs; corporate, business and productacquisitions; the level of resources required for the expansion of certainmanufacturing and marketing capabilities as the product base expands;increases in accounts receivable and inventory which may arise with anyincrease in product sales; competitive and technological developments; thetiming and cost of obtaining required regulatory approvals for new products;the timing and quantum of milestone payments on collaborative projects; thetiming and quantum of tax and dividend payments; the timing and quantum ofpurchases by the EBT of Shire shares in the market to satisfy awards grantedunder Shire's employee share plans; and the amount of cash generated fromsales of Shire's products and royalty receipts.
An important part of Shire's business strategy is to protect its products and
technologies through the use of patents, proprietary technologies and trademarks, to the extent available. The Group intends to defend its intellectual property and as a result may need cash for funding the cost of litigation.
The Group finances its activities through cash generated from operating activities; credit facilities; private and public offerings of equity and debt securities; and the proceeds of asset or investment disposals.
Shire's balance sheet includes $1,112.7 million of cash and cash equivalentsat June 30, 2012. Substantially all of Shire's debt relates to its $1,100million 2.75% convertible bonds due 2014 (the "Bonds"). The Bonds werepotentially redeemable at the option of Bondholders at their principal amountincluding accrued and unpaid interest on May 9, 2012 (the "Put Option"), andremain redeemable following the occurrence of a change of control of Shire. OnApril 9, 2012 the deadline for Bondholders to choose to exercise the PutOption passed. No elections from the Bondholders were received by this dateand the Bonds are now due on the Final Maturity date. In addition, Shire has arevolving credit facility of $1,200 million which matures in 2015 (the "RCF"),which is currently undrawn.FinancingShire anticipates that its operating cash flow together with available cash,cash equivalents and the RCF will be sufficient to meet its anticipated futureoperating expenses, capital expenditures, tax and interest payments and leaseobligations as they become due over the next twelve months.
If the Group decides to acquire other businesses, it expects to fund these acquisitions from existing cash resources, the RCF and possibly through new borrowings and the issue of new equity if necessary.
Sources and uses of cash
The following table provides an analysis of the Group's gross and net debt (excluding restricted cash), as at June 30, 2012 and December 31, 2011:
June 30, December 31, 2012 2011 $'M $'M _________________ _________________Cash and cash equivalents1 1,112.7 620.0 _________________ _________________Convertible bonds 1,100.0 1,100.0Other 9.5 8.2 _________________ _________________Total debt 1,109.5 1,108.2 _________________ _________________Net cash/(debt) 3.2 (488.2) _________________ _________________
(1) Substantially all of the Group's cash and cash equivalents are held by foreign subsidiaries (i.e. those subsidiaries incorporated outside of Jersey, Channel Islands, the jurisdiction of incorporation of Shire plc, Shire's holding company). The amount of cash and cash equivalents held by foreign subsidiaries has not had, and is not expected to have, a material impact on the Group's liquidity and capital resources.
Cash flow activity
Net cash provided by operating activities for the six months to June 30, 2012increased by 49% or $237.3 million to $722.8 million (2011: $485.5 million),as higher cash receipts from product sales, including significant cashreceipts from government-supported healthcare providers in Spain in the secondquarter of 2012, and lower cash tax payments in the first six months of 2012more than offset higher operating expense payments, including the up-frontpayments for in-licensed and acquired products made in the first half of 2012.Net cash used in investing activities was $179.9 million in the six months toJune 30, 2012, relating to the payment of $97.0 million to acquire FerroKinand certain assets and liabilities from Pervasis, $43.5 million for thepurchase of intangible assets, and $64.4 million on the purchase of property,plant and equipment ("PP&E").Net cash used in investing activities was $805.9 million in the six months toJune 30, 2011, principally relating to the payment of $719.7 million toacquire ABH and expenditure on PP&E of $95.0 million. Capital expenditure onproperty, plant and equipment includes $55.7 million on construction work atLexington Technology Park.Net cash used in financing activities was $48.6 million for the six months toJune 30, 2012, principally the dividend payment and the purchase of shares bythe EBT, which more than offset the excess tax benefit associated with theexercise of stock options.Net cash used in financing activities was $88.3 million for the six months toJune 30, 2011, principally the dividend payment, the purchase of shares by theEBT and the repayment of debt acquired with ABH, offset by the drawing of theRCF and the tax benefit associated with the exercise of stock options.
Obligations and commitments
During the six months to June 30, 2012 there have been no material changes outside the ordinary course of the Group's business to the contractual obligations previously disclosed in the Financial review of Shire's Annual Report and Accounts for the year ended December 31, 2011.
Principal risks and uncertainties
The Group has adopted a risk management strategy designed to identify, assess and manage the significant risks it faces. Whilst the Group aims to identify and manage such risks, no risk management strategy can provide absolute assurance against loss.
The principal risks and uncertainties affecting the Group for the remaining six months of 2012 are those described under the headings below. It is not anticipated that the nature of the principal risks and uncertainties disclosed in the Annual Report and Accounts of Shire plc for the year ended December 31, 2011 will change in respect of the second half of 2012.
The Group's process for managing these risks is consistent with those processes as outlined in the Annual Report and Accounts of Shire plc for the year ended December 31, 2011. Some of these risks are specific to the Group and others are more generally applicable to the pharmaceutical and biotechnology industries in which the Group operates. The Annual Report and Accounts are available on the Group's website, www.shire.com.
In summary, these risks and uncertainties were as follows:
Risk factors related to Shire's business:
- The Group's products may not be a commercial success
- Unanticipated decreases in revenues from ADDERALL XR could significantly reduce the Group's revenues and earnings
- The failure to obtain and maintain reimbursement, or an adequate level of reimbursement, by third-party payors in a timely manner for the Group's products may impact future revenues and earnings
- A disruption to a product's supply chain may result in the Group being unable to continue marketing or developing a product, or may result in the Group being unable to do so on a commercially viable basis
- There is no assurance that suppliers will continue to supply on commerciallyviable terms, or be able to supply components that meet regulatoryrequirements. The Group is also subject to the risk that suppliers will not beable to meet the quantities needed to meet market requirements which mayresult in the shortage of product supplies in the market
- The actions of certain customers can affect the Group's ability to sell or market products profitably, as well as impact net sales and growth comparisons
- Investigations or enforcement action by regulatory authorities or law enforcement agencies relating to the Group's activities in the highly regulated markets in which it operates may result in the distraction of senior management, significant legal costs and the payment of substantial compensation or fines
- Adverse outcomes in legal matters could have a material adverse effect on our revenue, financial condition and results of operations
- Contractual relationships can create a significant dependency on third parties, the failure of whom can affect the ability to operate the Group's business and to develop and market products
Risk factors related to the pharmaceutical and biotechnology industries in general:
- The actions of governments, industry regulators and the economic environments in which the Group operates may adversely affect its ability to develop and profitably market its products
- A slowdown of global economic growth, or continued instability in the Eurozone, could have negative consequences for our business and increase the risk of non-payment by the Group's customers
- The introduction of new products by competitors may impact future revenues
- The successful development of products is highly uncertain and requires significant expenditures and time
- The failure of a strategic partner to develop and commercialize products could result in delays in approval or loss of revenue
- 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 Group's future results
- The Group may fail to obtain, maintain, enforce or defend the intellectual property rights required to conduct its business
- If a marketed product fails to work effectively or causes adverse side-effects, this could result in damage to the Group's reputation, the withdrawal of the product and legal action against the Group
- Loss of highly qualified management and scientific personnel could cause the Group subsequent financial loss
Directors' responsibility statement
The Directors confirm that this condensed consolidated set offinancial statements has been prepared in accordance with US GAAP and that theHalf Yearly Report herein includes a fair review of the information requiredby DTR 4.2.7R and DTR 4.2.8R.
The Directors of Shire plc are listed in Shire's Annual Report and Accounts for the year ended December 31, 2011.
Details of all current Directors are available on Shire's websiteat www.shire.com.On behalf of the Board:Angus Russell Graham HetheringtonChief Executive Chief FinancialOfficer Officer August 10, 2012 August 10, 2012
Unaudited consolidated balance sheets
June 30, December 31, 2012 2011 Notes $'M $'M _________ _______________ _______________ASSETSCurrent assets:Cash and cash equivalents 1,112.7 620.0Restricted cash 14.4 20.6Accounts receivable, net 3 815.4 845.0Inventories 4 411.8 340.1Deferred tax asset 214.1 207.6
Prepaid expenses and other current assets 5 135.1
174.9 _______________ _______________Total current assets 2,703.5 2,208.2 Non-current assets:Investments 34.6 29.9
Property, plant and equipment, net 925.7
932.1
Goodwill 636.0
592.6
Other intangible assets, net 6 2,625.6
2,493.0Deferred tax asset 44.7 50.7Other non-current assets 70.9 73.7 _______________ _______________Total assets 7,041.0 6,380.2 _______________ _______________LIABILITIES AND EQUITYCurrent liabilities:
Accounts payable and accrued expenses 7 1,415.3
1,370.5Convertible bonds 9 - 1,100.0Other current liabilities 8 105.5 63.8 _______________ _______________Total current liabilities 1,520.8 2,534.3 Non-current liabilities:Convertible bonds 9 1,100.0 -Deferred tax liability 538.3 516.6
Other non-current liabilities 10 264.8
144.3 _______________ _______________Total liabilities 3,423.9 3,195.2 _______________ _______________Commitments and contingencies 11
Unaudited consolidated balance sheets (continued)
June 30, December 31, 2012 2011 Notes $'M $'M ___________ _____________ _____________
Equity:
Common stock of 5p par value; 1,000 million shares authorized; and 562.5 million shares issued and outstanding (2011: 1,000 million shares authorized; and 562.5 million shares issued and outstanding)
55.7 55.7Additional paid-in capital 2,932.9 2,853.3Treasury stock: 6.8 million shares (2011: 11.8million shares) (188.8) (287.2)Accumulated other comprehensive income 48.6 60.3Retained earnings 768.7 502.9 ________________ ________________Total equity
3,617.1 3,185.0
________________ ________________Total liabilities and equity
7,041.0 6,380.2
________________ ________________
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Unaudited consolidated statements of income
6 months to 6 months to June 30, June 30, 2012 2011 Notes $'M $'MRevenues: _______ _______________ _______________Product sales 2,254.6 1,882.6Royalties 112.6 137.0Other revenues 12.4 15.5 _______________ _______________Total revenues 2,379.6 2,035.1 _______________ _______________Costs and expenses:Cost of product sales (1) 310.9 268.2Research and development(1) 458.9 354.8Selling, general and administrative("SG&A")(1) 1,011.0
843.2
(Gain)/loss on sale of product rights (10.8)
3.5
Reorganization costs -
13.0
Integration and acquisition costs 2 12.4
2.6 _______________ _______________Total operating expenses 1,782.4 1,485.3 _______________ _______________ Operating income 597.2 549.8 Interest income 1.4 1.2Interest expense (19.8) (19.1)Other income, net 0.1 0.3 _______________ _______________Total other expense, net (18.3) (17.6) _______________ _______________Income before income taxes and equity inearnings of equity method investees 578.9
532.2
Income taxes (103.0)
(117.8)
Equity in earnings of equity methodinvestees, net of taxes 0.3 2.4 _______________ _______________Net income 476.2 416.8 _______________ _______________(1) Cost of product sales includes amortization of intangible assets relatingto favorable manufacturing contracts of $0.7 million for the six months toJune 30, 2012 (2011: $0.9 million). Research and development costs includeintangible asset impairment charges of $27.0 million for the six months toJune 30, 2012 (2011: $nil). SG&A costs include amortization of intangibleassets relating to intellectual property rights acquired of $96.6 million forthe six months to June 30, 2012 (2011: $72.7 million).
Unaudited consolidated statements of income (continued)
6 months to 6 months to June 30, June 30, 2012 2011
Earnings per ordinary share - basic 85.8c
75.7c
_______________
_______________
Earnings per ordinary share - diluted 82.8c
72.9c
_______________
_______________
Weighted average number of shares (millions):Basic 15 555.2 551.1Diluted 15 594.8 594.8 _______________ _______________
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Unaudited consolidated statements of comprehensive income
6 months to 6 months to June 30, June 30, 2012 2011 $'M $'M
_______________ _______________
Net income 476.2 416.8
Other comprehensive income:
Foreign currency translation adjustments (17.7) 100.2 Unrealized holding gain on available-for-sale securities (net of taxes of $2.9 million and $3.4 million) 6.0 16.0 Other than temporary impairment of available-for-sale securities (net of taxes of $nil in all periods) - 2.4 _______________ _______________Comprehensive income 464.5 535.4
_______________ _______________
The components of accumulated other comprehensive income as at June 30, 2012 and December 31, 2011 are as follows:
June 30, December 31, 2012 2011 $'M $'M _______________ _______________Foreign currency translation adjustments 43.7 61.4
Unrealized holding gain/(loss) on available-for-sale securities, net of taxes
4.9 (1.1) ________________ ________________Accumulated other comprehensive income 48.6 60.3
________________ ________________
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Unaudited consolidated statements of changes in equity (In millions of US dollars except share data)
Shire plc shareholders' equity Common stock Accumulated Additional other Common Number of paid-in Treasury comprehensive Retained Total stock shares capital stock income earnings equity $'M M's $'M $'M $'M $'M $'MAs at January 1,2012 55.7 562.5 2,853.3 (287.2) 60.3 502.9 3,185.0Net income - - - - - 476.2 476.2Foreign currencytranslation - - - - (17.7) - (17.7)Options exercised - - 0.1 - - - 0.1Share-basedcompensation - - 44.3 - - - 44.3 Tax benefitassociated withexercise of stockoptions - - 35.2 - - - 35.2Shares purchasedby EmployeeBenefit Trust("EBT") - - - (41.7) - - (41.7) Shares released byEBT to satisfyexercise of stockoptions - - - 140.1 - (139.7) 0.4 Unrealized holdinggain onavailable-for-salesecurities, net oftaxes - - - - 6.0 - 6.0Dividends - - - - - (70.7) (70.7)As at June 30,2012 55.7 562.5 2,932.9 (188.8) 48.6 768.7 3,617.1
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Dividends per share
During the six months to June 30, 2012 Shire plc declared and paid dividends of 12.59 US cents per ordinary share (equivalent to 37.77 US cents per ADS) totaling $70.7 million.
Unaudited consolidated statements of cash flows
6 months to June 30, 2012 2011 $'M $'M _____________ _____________CASH FLOWS FROM OPERATING ACTIVITIES:Net income
476.2 416.8 Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 152.4 132.3 Share based compensation 43.4 34.9 Impairment of intangible assets1 27.0 - Other (6.5) (2.2)Movement in deferred taxes (24.1) 17.7Equity in earnings of equity method investees
(0.3) (2.4)
Changes in operating assets and liabilities:
Decrease/(increase) in accounts receivable 22.4 (56.2) Increase in sales deduction accrual 27.6 66.1 Increase in inventory (67.0) (30.6) Decrease/(increase) in prepayments and other assets 32.1 (13.8) Increase/(decrease) in accounts and notes payable and other 34.7 (77.1) liabilities
Returns on investment from joint venture 4.9 - ______________ ______________Net cash provided by operating activities (A)
722.8 485.5
______________ ______________
CASH FLOWS FROM INVESTING ACTIVITIES:Movements in restricted cash 6.2 4.8Purchases of subsidiary undertakings and businesses, net of cash (97.0) (719.7)acquiredPurchases of non-current investments (4.7) (4.5)Purchases of property, plant and equipment ("PP&E") (64.4) (95.0)Purchases of intangible assets (43.5) -Proceeds from disposal of non-current investments and PP&E 4.6 -Proceeds from capital expenditure grants 8.4 -Proceeds received on sale of product rights 10.4 6.9Returns of equity investments and proceeds from short term 0.1 1.6
investments
_____________ _____________Net cash used in investing activities (B)
(179.9) (805.9) _____________ _____________
Unaudited consolidated statements of cash flows (continued)
6 months to June 30, 2012 2011 $'M $'M ____________ __________CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from drawing of revolving credit facility ("RCF") -
30.0
Repayment of debt acquired through business combinations (3.0)
(13.1)
Excess tax benefit associated with exercise of stock options 35.2
18.8
Payment of dividend (70.7)
(60.5)
Payments to acquire shares by EBT (10.7)
(63.9)Other 0.6 0.4 _____________ ___________
Net cash used in financing activities(C) (48.6)
(88.3)
_____________
___________
Effect of foreign exchange rate changes on cash and cash (1.6)
2.7
equivalents (D)
_____________
___________
Net increase/(decrease) in cash and cash equivalents 492.7
(406.0)
(A+B+C+D)
Cash and cash equivalents at beginning of period 620.0
550.6
_____________
_____________
Cash and cash equivalents at end of period 1,112.7
144.6
_____________
___________
Supplemental information associated with continuingoperations: 6 months to June 30, 2012 2011 $'M $'M _____________ _____________ Interest paid (17.3) (16.2)Income taxes paid (68.3) (147.7) _____________ _____________
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Notes to the unaudited consolidated financial statements
1. Summary of Significant Accounting Policies
(a) Basis of preparation
These interim financial statements of Shire and other financial information included in this Half Yearly Report are unaudited. They have been prepared in accordance with US GAAP and US Securities and Exchange Commission ("SEC") regulations for interim reporting.
The balance sheet as at December 31, 2011 was derived from audited financial statements but does not include all disclosures required by US GAAP.
These interim financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in Shire's Annual Report and Accounts for the year to December 31, 2011.
Certain information and footnote disclosures normally included in financialstatements prepared in accordance with US GAAP have been condensed or omittedfrom these interim financial statements. However, these interim financialstatements include all adjustments, which are, in the opinion of management,necessary to fairly state the results of the interim period and the Groupbelieves that the disclosures are adequate to make the information presentednot misleading. Interim results are not necessarily indicative of results tobe expected for the full year.
The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the Half Yearly Report.
(b) Use of estimates in interim financial statements
The preparation of interim financial statements, in conformity with US GAAPand SEC regulations, requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities, disclosure ofcontingent assets and liabilities at the date of the consolidated financialstatements and reported amounts of revenues and expenses during the reportingperiod. Estimates and assumptions are primarily made in relation to thevaluation of intangible assets, the valuation of equity investments, salesdeductions, income taxes (including provisions for uncertain tax positions andthe realization of deferred tax assets), provisions for litigation and legalproceedings, contingent consideration receivable from product divestments andcontingent consideration payable in respect of business combinations and assetpurchases. If actual results differ from the Group's estimates, or to theextent these estimates are adjusted in future periods, the Group's results ofoperations could either benefit from, or be adversely affected by, any suchchange in estimate.
(c) New accounting pronouncements
Adopted during the period
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and International Financial Reporting Standards ("IFRS")
On January 1, 2012 the Group adopted new guidance issued by the FinancialAccounting Standard Board ("FASB") on fair value measurement and disclosure.The guidance amends the existing requirements and improves the comparabilityof fair value measurement and disclosure between US GAAP and IFRS. Some of theamendments clarify the application of existing fair value measurementrequirements and other amendments change a particular principle or requirementfor measuring fair value or for disclosing information about fair valuemeasurements. The guidance has been adopted prospectively from January 1,2012. The adoption of the guidance did not impact the Group's consolidatedfinancial position, results of operations or cash flows. Enhanced disclosureof fair value measurement as required by this guidance is included in Note 14.
Presentation of Comprehensive Income
On January 1, 2012 the Group adopted new guidance issued by FASB on thepresentation of comprehensive income, which revises the manner in whichentities present comprehensive income in their financial statements. Theguidance requires entities to report components of comprehensive income ineither: (i) a single, continuous statement of comprehensive income; or (ii)two separate but consecutive statements. The guidance does not change thoseitems which must be reported in other comprehensive income, and does notchange the definition of net income or the calculation of earnings per share.The requirement to present the effects of reclassifications out of accumulatedother comprehensive income on the components of net income and othercomprehensive income for all periods presented has currently been deferred.The adoption of the guidance did not impact the Group's consolidated financialposition, results of operations or cash flows. The Group has elected topresent the components of comprehensive income in two separate, butconsecutive statements. Enhanced disclosure of the components of comprehensiveincome is included in Note 12.
Goodwill Impairment Testing
On January 1, 2012 the Group adopted new guidance issued by FASB on thetesting of goodwill for impairment. The guidance permits an entity to firstassess the qualitative factors to determine whether the existence of events orcircumstances leads to a determination that it is more likely than not thatthe fair value of a reporting unit is less than its carrying amount. If, afterassessing the totality of events or circumstances, an entity determines it isnot more likely than not that the fair value of a reporting unit is less thanits carrying amount, then performing the two-step impairment test isunnecessary. The more-likely-than-not threshold is defined as having alikelihood of more than 50 percent. An entity also has the option to bypassthe qualitative assessment for any reporting unit in any period and proceeddirectly to performing the first step of the two-step goodwill impairment testand may resume performing the qualitative assessment in any subsequent period.The guidance has been adopted prospectively from January 1, 2012. The adoptionof the guidance did not impact the Group's consolidated financial position,results of operations or cash flows.
To be adopted in future periods
Indefinite-Lived Intangible Assets (Other than Goodwill) Impairment Testing
In July 2012 the FASB issued guidance on the testing of indefinite-livedintangible assets for impairment. The guidance permits an entity to firstassess qualitative factors to determine whether the existence of events orcircumstances leads to a determination that it is more likely than not thatthe fair value of an indefinite-lived intangible asset is less than itscarrying amount. If, after assessing the totality of events or circumstances,an entity determines it is not more likely than not that the fair value of anindefinite-lived intangible asset is less than its carrying amount, performingthe impairment test is unnecessary. The more-likely-than-not threshold isdefined as a likelihood of more than 50 percent. An entity also has the optionto bypass the qualitative assessment for any indefinite-lived intangible assetin any period and proceed directly to performing the impairment test and mayresume performing the qualitative assessment in any subsequent period. Theguidance will be effective for interim and annual impairment tests performedfor fiscal years beginning after September 15, 2012. Early adoption ispermitted. The Group does not expect the adoption of this guidance to have amaterial effect on its consolidated financial position, results of operationsand cash flows.2. Business combinationsAcquisition of FerroKin
On April 2, 2012 Shire completed the acquisition of 100% of the outstandingshare capital of FerroKin. The acquisition-date fair value of considerationtotaled $159.3 million, comprising cash consideration paid on closing of $94.5million and the fair value of contingent consideration payable of $64.8million. The maximum amount of contingent cash consideration which may bepayable by Shire in future periods is $225.0 million. The amount of contingentcash consideration ultimately payable by Shire is dependent upon theachievement of certain clinical development, regulatory and net salesmilestones.The acquisition of FerroKin adds global rights to a Phase 2 product, SPD 602(formerly referred to as FBS0701), to Shire's SP pipeline. SPD 602 is intendedto serve a chronic patient need for treatment of iron overload followingnumerous blood transfusions. Together with our collaboration with Sangamo,this acquisition is a strategic step in building Shire's hematology business,which already includes XAGRID and a growing development pipeline.
The acquisition of FerroKin has been accounted for as a purchase business combination. The assets acquired and the liabilities assumed from FerroKin have been recorded at their preliminary fair values at the date of acquisition, being April 2, 2012. The Group's consolidated financial statements and results of operations include the results of FerroKin from April 2, 2012. In the six months to June 30, 2012 the Group included pre tax losses of $2.4 million (2011: $nil) for FerroKin within its consolidated income statement.
The purchase price allocation is preliminary pending final determination ofthe fair values of certain assets acquired and liabilities assumed. Thepurchase price has been allocated to acquired IPR&D in respect of SPD602($166.0 million), net current liabilities assumed ($6.6 million), netnon-current liabilities assumed (including deferred tax liabilities) ($46.2million) and goodwill ($46.1 million). The final determination of these fairvalues will be completed as soon as possible but no later than one year fromthe acquisition date. Goodwill arising of $46.1 million, which is notdeductible for tax purposes, has been assigned to the SP operating segment.
In the six months to June 30, 2012 the Group expensed costs of $4.1 million (2011: $nil) relating to the FerroKin acquisition, which have been recorded within Integration and acquisition costs in the Group's consolidated income statement.
Acquisition of certain assets & liabilities of Pervasis
On April 19, 2012 Shire acquired substantially all the assets and certainliabilities of Pervasis. The acquisition date fair value of the considerationtotaled $26.1 million, comprising cash consideration paid on closing of $2.5million and the fair value of contingent consideration payable of $23.6million. The maximum amount of contingent cash consideration which may bepayable by Shire in future periods is up to $169.5 million. The amount ofcontingent cash consideration ultimately payable by Shire is dependent uponachievement of certain clinical development, regulatory and net salesmilestones. The acquisition adds VASCUGEL to Shire's Regenerative Medicinebusiness. VASCUGEL is currently in Phase 2 development for acute vascularrepair, focused on improving hemodialysis access for patients with end-stagerenal disease.The acquisition has been accounted for as a purchase business combination. Theassets acquired and the liabilities assumed from Pervasis have been recordedat their preliminary fair values at the date of acquisition, being April 19,2012. The Group's consolidated financial statements and results of operationsinclude the results of the assets acquired and the liabilities assumed fromPervasis from April 19, 2012. The purchase price has been allocated on apreliminary basis to acquired IPR&D (principally for VASCUGEL) ($24.3million), current liabilities assumed ($0.2 million) and goodwill ($2.0million). Goodwill, which is not deductible for tax purposes, has beenassigned to the RM operating segment.
Acquisition of ABH
On June 28, 2011 Shire completed its acquisition of 100% of the outstanding shares and other equity instruments of ABH. The fair value of cash consideration paid by the Group during 2011 was $739.6 million.
The acquisition of ABH was accounted for as a purchase business combination.The assets acquired and the liabilities assumed from ABH have been recorded attheir fair values at the date of acquisition, being June 28, 2011. Thedetermination of final fair values was completed on June 28, 2012. Thedetermination of final fair values did not result in any adjustments to thepreliminary purchase price allocation which was included in the Annual Reportand Accounts for the year ended December 31, 2011.The Group's consolidated financial statements and results ofoperations include the results of ABH from June 28, 2011. In the six months toJune 30, 2012 the Group included revenues for ABH of $101.2 million (2011:$2.0 million) and pre tax losses of $25.3 million (2011: $6.0 million) (afterintangible asset amortization of $19.8 million (2011: $0.2 million)) withinits consolidated income statements.
In the six months to June 30, 2012 the Group incurred acquisition and integration costs of $8.0 million (2011: $6.9 million) in respect of the acquisition and post-acquisition integration of ABH, which have been charged to Integration and acquisition costs in the Group's consolidated income statement.
3. Accounts receivable, net
Accounts receivable at June 30, 2012 of $815.4 million (December 31, 2011: $845.0 million), are stated net of a provision for discounts and doubtful accounts of $36.6 million (December 31, 2011: $31.1million).
Provision for discounts and doubtful accounts:
2012 2011 $'M $'M _____________ _____________As at January 1, 31.1 23.4Provision charged to operations 135.0 114.8Provision utilization (129.5) (109.4) _____________ _____________As at June 30, 36.6 28.8 _____________ _____________
At June 30, 2012 accounts receivable included $64.4 million (December 31, 2011: $73.3 million) related to royalty income.
4. Inventories
Inventories are stated at the lower of cost or market and comprise:
June 30, December 31, 2012 2011 $'M $'M ____________ ____________Finished goods 105.8 99.9Work-in-progress 206.9 162.6Raw materials 99.1 77.6 ____________ ____________ 411.8 340.1 ____________ ____________
At June 30, 2012 inventories included $nil (December 31, 2011: $22.7 million) of costs capitalized prior to regulatory approval of the relevant manufacturing facilities.
5. Prepaid expenses and other current assets
June 30, December 31, 2012 2011 $'M $'M ______________ ____________Prepaid expenses 45.3 46.9Income tax receivable 17.9 48.1Value added taxes receivable 17.5 18.9Other current assets 54.4 61.0 ______________ ______________ 135.1 174.9 ______________ ______________
6. Other intangible assets, net
June 30, December 31, 2012 2011 $'M $'M ________________ ________________Amortized intangible assets
Intellectual property rights acquired for currently
marketed products
2,548.1 2,500.7
Acquired product technology 710.0 710.0 Other intangible assets 45.1 23.2
________________ ________________
3,303.2 3,233.9Unamortized intangible assets Intellectual property rights acquired for IPR&D 277.9 119.8
________________ ________________
3,581.1 3,353.7
Less: Accumulated amortization
(955.5) (860.7)
________________ ________________
2,625.6 2,493.0
________________ ________________
As at June 30, 2012 the net book value of intangible assets allocated to theSP segment was $1,444.7 million (December 31, 2011: $1,348.3 million), to theHGT segment was $484.5 million (December 31, 2011: $453.2 million) and to theRM segment was $696.4 million (December 31, 2011: $691.5 million).
The change in the net book value of other intangible assets for the six months to June 30, 2012 and 2011 is shown in the table below:
Other intangible assets 2012 2011 $'M $'M ________________ ________________As at January 1, 2,493.0 1,978.9Acquisitions 272.5 711.5Amortization charged (97.3) (73.6)Impairment charges (27.0) -
Foreign currency translation (15.6)
62.6 ________________ ________________As at June 30, 2,625.6 2,679.4 ________________ ________________Management estimates that the annual amortization charge in respect ofintangible assets held at June 30, 2012 will be approximately $202.6 millionfor each of the five years to June 30, 2017. Estimated amortization expensecan be affected by various factors including future acquisitions, disposals ofproduct rights, regulatory approval and subsequent amortization of acquiredIPR&D projects, foreign exchange movements and the technological advancementand regulatory approval of competitor products.
7. Accounts payable and accrued expenses
June 30, December 31, 2012 2011 $'M $'M ________________ ________________
Trade accounts payable and accrued purchases 254.5
259.6
Accrued rebates - Medicaid 392.3
409.8
Accrued rebates - Managed care 231.5
202.8Sales return reserve 96.9 88.8Accrued bonuses 83.0 103.0
Accrued employee compensation and benefits payable 69.6
59.3R&D accruals 58.2 52.7Other accrued expenses 229.3 194.5 ________________ ________________ 1,415.3 1,370.5 ________________ ________________
8. Other current liabilities
June 30, December 31, 2012 2011 $'M $'M _____________ _____________Income taxes payable 16.4 27.7Value added taxes 18.8 13.3Contingent consideration payable 11.6 -Other current liabilities 58.7 22.8 _____________ _____________ 105.5 63.8 _____________ _____________9. Long-term debt
Shire 2.75% Convertible Bonds due 2014
On May 9, 2007 Shire issued $1,100 million in principal amount of 2.75%convertible bonds due 2014 and convertible into fully paid ordinary shares ofShire plc (the "Bonds"). The Bonds were issued at 100% of their principalamount, and will be redeemed on May 9, 2014 (the "Final Maturity Date") unlesspurchased and cancelled, redeemed (for example on the occurrence of a changeof control of Shire) or converted prior to that date, at their principalamount.On April 9, 2012 the deadline for Bondholders to choose to exercise their PutOption on May 9, 2012 passed. No elections from the Bondholders were receivedby this date and the Bonds are now due on the Final Maturity Date, subject tothe exceptions above. As the Group is no longer required to redeem the Bondswithin twelve months of the balance sheet date, the Bonds have been presentedas a non-current liability at June 30, 2012.
10. Other non-current liabilities
June 30, December 31, 2012 2011 $'M $'M ____________ ____________Income taxes payable 84.8 78.3Deferred revenue 12.4 12.2Deferred rent 12.0 14.0Insurance provisions 13.8 14.5Contingent consideration payable 115.6 -Other non-current liabilities 26.2 25.3 ____________ ____________ 264.8 144.3 ____________ ____________
11. Commitments and contingencies
(a) Leases
Future minimum lease payments under operating leases at June 30, 2012 arepresented below: Operating leases $'M _____________2012 1 20.22013 37.42014 33.02015 26.82016 20.02017 16.5Thereafter 95.1 _____________ 249.0 _____________
The Group leases land, facilities, motor vehicles and certain equipment under operating leases expiring through 2032. Lease and rental expense amounted to $21.5 million and $17.7 million for the six months to June 30, 2012 and 2011 respectively, which is predominately included in SG&A expenses in the Group's consolidated income statement.
(b) Letters of credit and guarantees
At June 30, 2012 the Group had irrevocable standby letters of credit and guarantees with various banks and insurance companies totaling $35.7 million, providing security for the Group's performance of various obligations. These obligations are primarily in respect of the recoverability of insurance claims, lease obligations and supply commitments.
(c) Collaborative arrangements
Details of significant updates in collaborative arrangements in the six months to June 30, 2012 are included below:
In-licensing arrangements
Collaboration and license agreement with Sangamo
On February 1, 2012 Shire and Sangamo announced that they hadentered into a collaboration and license agreement to develop therapeutics forhemophilia and other monogenic diseases based on Sangamo's zinc fingerDNA-binding protein ("ZFP") technology. Sangamo is responsible for allactivities through submission of Investigational New Drug Applications andEuropean Clinical Trial Applications for each product and Shire will reimburseSangamo for its internal and external research program-related costs. Shire isresponsible for clinical development and commercialization of products arisingfrom the collaboration. Shire paid Sangamo an up-front fee of $13.0 million inthe six months to June 30, 2012 (2011: $nil) and may be required to payresearch, regulatory, development and commercial milestone payments, androyalties on product sales.
Out-licensing arrangements
Shire has entered into various collaborative arrangements under which theGroup has out-licensed certain product or intellectual property rights forconsideration such as up-front payments, development milestones, salesmilestones and/or royalty payments. In some of these arrangements Shire andthe licensee are both actively involved in the development andcommercialization of the licensed product and have exposure to risks andrewards dependent on its commercial success. Under the terms of thesearrangements, the Group may receive development milestone payments up to anaggregate amount of $39.0 million and sales milestones up to an aggregateamount of $56.3 million. The receipt of these substantive milestones isuncertain and contingent on the achievement of certain development milestonesor the achievement of a specified level of annual net sales by the licensee.In the six months to June 30, 2012 Shire received up-front and milestonepayments totaling $6.0 million (2011: $6.8 million). In the six months to June30, 2012 Shire recognized milestone income of $6.0 million (2011: $8.6million) in other revenues and $38.0 million (2011: $27.6 million) in productsales for shipment of product to the relevant licensee.
Co-promotion agreements - VYVANSE
Shire terminated its co-promotion agreement for VYVANSE with GSK in 2010.Following Shire's termination, GSK filed a lawsuit against Shire in thePhiladelphia Court of Common Pleas relating to the co-promotion agreement. OnJune 29, 2012 Shire and GSK settled this dispute. The terms of the settlementare confidential.(d) Commitments(i) Clinical testingAt June 30, 2012 the Group had committed to pay approximately$370.8 million (December 31, 2011: $358.6 million) to contract vendors foradministering and executing clinical trials. The timing of these payments isdependent upon actual services performed by the organizations as determined bypatient enrollment levels and related activities.
(ii) Contract manufacturing
At June 30, 2012 the Group had committed to pay approximately $116.5 million (December 31, 2011: $86.4 million) in respect of contract manufacturing. The Group expects to pay $83.4 million of these commitments in 2012.
(iii) Other purchasing commitments
At June 30, 2012 the Group had committed to pay approximately $171.2 million (December 31, 2011: $190.1 million) for future purchases of goods and services, predominantly relating to active pharmaceutical ingredients sourcing. The Group expects to pay $162.9 million of these commitments in 2012.
(iv) Investment commitments
At June 30, 2012 the Group had outstanding commitments to subscribe for interests in companies and partnerships for amounts totaling $14.5 million (December 31, 2011: $9.4 million) which may all be payable in 2012, depending on the timing of capital calls.
(v) Capital commitments
At June 30, 2012 the Group had committed to spend $28.8 million (December 31, 2011: $25.4 million) on capital projects.
(e) Legal and other proceedings
The Group expenses legal costs as they are incurred.
The Group recognizes loss contingency provisions for probablelosses when management is able to reasonably estimate the loss. When theestimated loss lies within a range, the Group records a loss contingencyprovision based on its best estimate of the probable loss. If no particularamount within that range is a better estimate than any other amount, theminimum amount is recorded. Estimates of losses are often developedsubstantially before the ultimate loss is known, and are therefore refinedeach accounting period as additional information becomes known. In instanceswhere the Group is unable to develop a reasonable estimate of loss, no losscontingency provision is recorded at that time. As information becomes known aloss contingency provision is recorded when a reasonable estimate can be made.The estimates are reviewed quarterly and the estimates are changed whenexpectations are revised. An outcome that deviates from the Group's estimatemay result in an additional expense or release in a future accounting period.At June 30, 2012 provisions for litigation losses, insurance claims and otherdisputes totaled $85.0 million (December 31, 2011: $36.9 million).The Group's principal pending legal and other proceedings aredisclosed below. The outcomes of these proceedings are not always predictableand can be affected by various factors. For those legal and other proceedingsfor which it is considered at least reasonably possible that a loss has beenincurred, the Group discloses the possible loss or range of possible loss inexcess of the recorded loss contingency provision, if any, provided that suchexcess is both material and estimable.
VYVANSE
In May and June 2011, Shire was notified that six separate Abbreviated NewDrug Applications ("ANDAs") were submitted under the Hatch-Waxman Act seekingpermission to market generic versions of all approved strengths of VYVANSE.The notices were from Sandoz, Inc. ("Sandoz"); Amneal Pharmaceuticals LLC("Amneal"); Watson Laboratories, Inc.; Roxane Laboratories, Inc. ("Roxane");Mylan Pharmaceuticals, Inc.; and Actavis Elizabeth LLC and Actavis Inc.(collectively, "Actavis"). Within the requisite 45 day period, Shire filedlawsuits for infringement of certain of Shire's VYVANSE patents in the USDistrict Court for the District of New Jersey against each of Sandoz, Roxane,Amneal and Actavis; in the US District Court for the Central District ofCalifornia against Watson Laboratories, Inc.; and in the US District Court forthe Eastern District of New York against Mylan Pharmaceuticals, Inc. and MylanInc. (collectively "Mylan"). On December 9, 2011, the District Court of NewJersey consolidated the Sandoz, Roxane, Amneal and Actavis cases. On January5, 2012, the Watson case was transferred to the District Court of New Jersey,but not consolidated with the other cases. The filing of the lawsuitstriggered a stay of approval of all six ANDAs for up to 30 months from theexpiration of the new chemical entity exclusivity, which will expire August23, 2012. In December 2011 and February 2012, Shire received additionalnotifications that Mylan had filed further certifications challenging otherVYVANSE patents listed in the Orange Book. Within the requisite 45 day period,Shire filed a new lawsuit against Mylan, Johnson Matthey PharmaceuticalMaterials and Johnson Matthey Inc. in New Jersey. In May 2012, the Mylan casethat was filed in the Eastern District of New York was transferred andconsolidated with the Sandoz, Roxane, Amneal and Actavis cases in New Jersey.No trial dates have been set.
INTUNIV
In March and April 2010, Shire was notified that three separate ANDAs weresubmitted under the Hatch-Waxman Act seeking permission to market genericversions of all approved strengths of INTUNIV. The notices were from TevaPharmaceuticals USA, Inc. and Teva Pharmaceutical Industries Ltd.(collectively, "Teva"); Actavis; and Anchen Pharmaceuticals, Inc. and Anchen,Inc. (collectively, "Anchen"). Within the requisite 45 day period, Shire filedlawsuits in the US District Court for the District of Delaware against each ofTeva, Actavis and Anchen for infringement of certain of Shire's INTUNIVpatents. The filing of the lawsuits triggered a stay of approval of theseANDAs for up to 30 months. These lawsuits have been consolidated. A Markmanhearing was held on February 14, 2012, and a written Markman decision wasgiven by the court on March 22, 2012. A trial is scheduled to begin onSeptember 17, 2012.In October 2010, Shire was notified that two separate ANDAs were submittedunder the Hatch-Waxman Act seeking permission to market generic versions ofthe 4mg strength of INTUNIV. The notices were from Watson Pharmaceuticals,Inc. and from Impax Laboratories, Inc. ("Impax"). Shire was subsequentlyadvised that Impax amended its ANDA to include the 1mg, 2mg and 3mg strengthsof INTUNIV. Within the requisite 45 day period, Shire filed a lawsuit in theUS District Court for the Northern District of California against each ofWatson Pharmaceuticals, Inc., Watson Laboratories, Inc.-Florida, WatsonPharma, Inc., ANDA, Inc. (collectively "Watson") and Impax for infringement ofcertain of Shire's INTUNIV patents. The filing of the lawsuit triggered a stayof approval of these ANDAs for up to 30 months. A Markman hearing was held onMay 30, 2012, and a written Markman decision was given by the court on June 1,2012. A trial is scheduled to begin on July 8, 2013.In February 2011, Shire was notified that Mylan Pharmaceuticals, Inc.submitted an ANDA under the Hatch-Waxman Act seeking permission to market ageneric version of the 4mg strength of INTUNIV. Within the requisite 45 dayperiod, Shire filed a lawsuit in the US District Court for the SouthernDistrict of New York against Mylan for infringement of certain of Shire'sINTUNIV patents. In April 2011, Shire filed a lawsuit against Mylan in the USDistrict Court for the District of West Virginia for infringement of certainof Shire's INTUNIV patents and dismissed the lawsuit in the Southern Districtof New York. The filing of the lawsuit in West Virginia did not trigger a stayof approval of this ANDA. A Markman hearing has been scheduled for September6, 2012. A trial is scheduled to start on December 2, 2013. Shire wassubsequently advised that Mylan amended its ANDA to include the 1mg, 2mg and3mg strengths of INTUNIV. Within the requisite 45 day period, Shire filedanother lawsuit against Mylan in the US District Court for the District ofWest Virginia.In March 2011, Shire was notified that Sandoz had submitted an ANDA under theHatch-Waxman Act seeking permission to market a generic version of the 4mgstrength of INTUNIV. Within the requisite 45 day period, Shire filed a lawsuitin the US District Court for the District of Colorado against Sandoz forinfringement of certain of Shire's INTUNIV patents. The filing of the lawsuittriggered a stay of approval of this ANDA for up to 30 months. Shire wassubsequently advised that Sandoz amended its ANDA to include the 1mg, 2mg and3mg strengths of INTUNIV. Within the requisite 45 day period, Shire filedanother lawsuit against Sandoz in the US District Court for the District ofColorado. The filing of the lawsuit triggered a stay of approval of the 1mg,2mg and 3mg strengths for up to 30 months. A Markman hearing has beenscheduled for August 10, 2012. No trial date has been set.On March 22, 2012, US Patent No. 5,854,290, one of the patents-in-suitin allthe INTUNIV litigations referenced above was dedicated to the public by theinventors. Two other patents relating to formulations of guanfacine remain ineach of the lawsuits regarding INTUNIV. Those two patents expire on December20, 2020 and July 4, 2022.REPLAGAL
Mt. Sinai School of Medicine of New York University ("Mt. Sinai") initiatedlawsuits against Shire in Sweden on April 14, 2010, and in Germany on April20, 2010, alleging that Shire's enzyme replacement therapy ("ERT") for Fabrydisease, REPLAGAL, infringes Mt. Sinai's European Patent No. 1 942 189,granted April 14, 2010. Mt. Sinai sought injunctions against the use ofREPLAGAL in these jurisdictions until expiration of the patent. Mt. Sinai hasbeen granted Supplementary Protection Certificates ("SPC") in respect of thepatent in certain EU countries (including Sweden and Germany) which, wheregranted, extends the patent until August 2016. Where no SPC has been granted,the patent expires November 2013.Shire filed an opposition against Mt. Sinai's patent before the EuropeanPatent Office ("EPO") on July 23, 2010, and commenced invalidity proceedingsin the UK on December 8, 2010. Mt. Sinai counterclaimed alleging infringementin the UK proceedings.On May 9, 2012, Shire and Mt. Sinai agreed to settle all proceedings inconnection with the validity and infringement by REPLAGAL of Mt. Sinai'sEuropean Patent No. 1 942 189. The parties agreed to discontinue all court andrelated proceedings in this dispute, and Mt. Sinai has granted Shire anon-exclusive license to the patent in connection with the on-going sales ofREPLAGAL in the EU and in certain other non-EU territories. Shire has made anup-front cash payment to Mt.Sinai and will make additional cash payments basedon REPLAGAL sales over the license term.
FOSRENOL
In February 2009 Shire was notified that three separate ANDAs were submittedunder the Hatch-Waxman Act seeking permission to market generic versions ofall approved strengths of FOSRENOL. The notices were received from BarrLaboratories, Inc. ("Barr"); Mylan, Inc., Mylan Pharmaceuticals, Inc. andMatrix Laboratories, Inc. (collectively, "Mylan-Matrix"); and Natco PharmaLimited ("Natco"). In December 2010, Shire was notified that AlkemLaboratories Ltd. ("Alkem") submitted an ANDA under the Hatch-Waxman Actseeking permission to market generic versions of all approved strengths ofFOSRENOL. Within the requisite 45 day period, Shire filed lawsuits in the USDistrict Court for the Southern District of New York against each of Barr,Mylan-Matrix and Natco and in both the US District Court for the SouthernDistrict of New York and the US District Court for the Northern District ofIllinois against Alkem for infringement of certain of Shire's FOSRENOLpatents. In April 2011, Shire and Barr reached a settlement which providesBarr with a license to market its own generic version of FOSRENOL in the USbut only after October 1, 2021, or earlier under certain circumstances. Nopayments to Barr are involved with the settlement. As a result of thesettlement, the lawsuit against Barr was subsequently dismissed. The lawsuitsagainst both Mylan-Matrix and Alkem have been dismissed, and consequently,each of Mylan-Matrix and Alkem may enter the market upon FDA approval of theirrespective versions of generic FOSRENOL. In April 2012 the 30 month stay ofapproval with respect to Natco expired. No trial date has been set withrespect to Natco.
LIALDA
In May 2010 Shire was notified that Zydus Pharmaceuticals USA, Inc. ("Zydus")had submitted an ANDA under the Hatch-Waxman Act seeking permission to marketa generic version of LIALDA. Within the requisite 45 day period, Shire filed alawsuit in the US District Court for the District of Delaware against Zydusand Cadila Healthcare Limited, doing business as Zydus Cadila. The filing ofthe lawsuit triggered a stay of approval of the ANDA for up to 30 months.Allscheduled dates in the lawsuit have been vacated, including the Markmanhearing date originally scheduled for April 26, 2012 and the trial dateoriginally scheduled for October 8, 2012. No dates have been rescheduled.In February 2012, Shire was notified that Osmotica Pharmaceutical Corporation("Osmotica") had submitted an ANDA under the Hatch-Waxman Act seekingpermission to market a generic version of LIALDA. Within the requisite 45 dayperiod, Shire filed a lawsuit in the US District Court for the NorthernDistrict of Georgia against Osmotica. The filing of the lawsuit triggered astay of approval of the ANDA for up to 30 months.In March 2012, Shire was notified that Watson Laboratories Inc.-Florida hadsubmitted an ANDA under the Hatch-Waxman Act seeking permission to market ageneric version of LIALDA. Within the requisite 45 day period, Shire filed alawsuit in the US District Court for the Southern District of Florida againstWatson Laboratories Inc.-Florida and Watson Pharmaceuticals, Inc. The filingof the lawsuit triggered a stay of approval of the ANDA for up to 30 months.In August 2012, Shire filed an amended complaint adding Watson Pharma, Inc.and Watson Laboratories, Inc. as defendants. A trial is scheduled to begin onFebruary 11, 2013.In April 2012, Shire was notified that Mylan Pharmaceuticals, Inc. hadsubmitted an ANDA under the Hatch-Waxman Act seeking permission to market ageneric version of LIALDA. Within the requisite 45 day period, Shire filed alawsuit in the US District Court for the Middle District of Florida againstMylan. The filing of the lawsuit triggered a stay of approval of the ANDA forup to 30 months.ADDERALL XR
On November 1, 2010 Impax filed suit against Shire in the US District Courtfor the Southern District of New York claiming that Shire is in breach of itssupply contract for the authorized generic version of ADDERALL XR. Shire'sability to supply this product is limited by quota restrictions that the USDrug Enforcement Administration places on amphetamine, which is the product'sactive ingredient. Impax is seeking specific performance, equitable relief anddamages. Shire has filed a counterclaim against Impax seeking damages and adeclaratory judgment that Shire has satisfied its obligations under the supplycontract. The April 10, 2012 trial date has been postponed and a new trialdate has not yet been set.In February 2011, Shire was notified that Watson Laboratories, Inc.-Floridahad submitted an ANDA under the Hatch-Waxman Act seeking permission to marketa generic version of all approved strengths of ADDERALL XR. This new ANDA isnot covered under the existing settlement agreements entered into in November2007 between Shire and Watson Pharmaceuticals, Inc. (the "SettlementAgreements"). The Settlement Agreements cover a different ANDA and do notprovide any license for Watson Laboratories, Inc.-Florida to sell the productscovered in Watson Laboratories, Inc.-Florida's new ANDA. Within the requisite45 day period, Shire filed a lawsuit in the U.S. District Court for theSouthern District of New York against Watson Pharmaceuticals, Inc., WatsonLaboratories, Inc.-Florida, Watson Pharm, Inc., Andrx Corporation, and AndrxPharmaceuticals, L.L.C. for infringement of certain of Shire's ADDERALL XRpatents and also for breach of contract in connection with the SettlementAgreements. The filing of the lawsuit triggered a stay of approval of thisANDA for up to 30 months. A Markman hearing was held on June 13, 2012 but adecision has not yet been given. On August 6, 2012, the Court granted a 90-daystay of legal proceedings. No trial date has been set.
Subpoena related to ADDERALL XR, DAYTRANA and VYVANSE
On September 23, 2009 the Group received a civil subpoena from the USDepartment of Health and Human Services Office of Inspector General incoordination with the US Attorney for the Eastern District of Pennsylvaniaseeking production of documents related to the sales and marketing of ADDERALLXR, DAYTRANA and VYVANSE. The investigation covers whether Shire engaged inoff-label promotion and other conduct that may implicate the civil FalseClaims Act. Shire is cooperating fully with this investigation. At this time,Shire is unable to predict the outcome or duration of this investigation.
Investigation related to DERMAGRAFT
Shire understands that the Department of Justice, including the US Attorney'sOffice for the Middle District of Florida, Tampa Division and the USAttorney's Office for Washington, DC, is conducting civil and criminalinvestigations into the sales and marketing practices of ABH relating toDERMAGRAFT. Shire is cooperating fully with these investigations. Shire is notin a position at this time to predict the scope, duration or outcome of theseinvestigations.
Civil Investigative Demand for ADDERALL XR, ADDERALL XR Authorized Generics and VYVANSE
On April 5, 2012 Shire received a Civil Investigative Demand("CID") from the United States Federal Trade Commission ("FTC") requestingthat Shire provide it with certain information regarding the supply andreported shortages of ADDERALL XR and its authorized generics and themarketing and sale of ADDERALL XR, its authorized generics and VYVANSE. Shirebelieves the CID was triggered by reports of product shortages of ADDERALL XRand the authorized generic products in 2011. Shire is cooperating fully withthe FTC. At this time, Shire is unable to predict the outcome or duration ofthis investigation. Separately, members of the US Congress are reviewingindustry wide drug shortages which have been well publicized in the US mediaand Shire has responded to a specific inquiry relating to ADDERALL XR.
12. Accumulated Other Comprehensive Income
The changes in accumulated other comprehensive income, net of their related tax effects, in the six months to June 30, 2012 are included below:
Un-realized Foreign holding Accumulated currency gain/(loss) on other translation available for Comprehensive adjustment sale securities income $M $M $M As at January 1, 2012 61.4 (1.1) 60.3Current period change (17.7) 6.0 (11.7)As at June 30, 2012 43.7 4.9 48.6 13. Financial instruments
Treasury policies and organization
The Group's principal treasury operations are coordinated by its corporate treasury function. All treasury operations are conducted within a framework of policies and procedures approved annually by the Board. As a matter of policy, the Group does not undertake speculative transactions that would increase its currency or interest rate exposure.
Interest rate risk
The Group is exposed to interest rate risk on restricted cash, cash and cashequivalents and on foreign exchange contracts on which interest is at floatingrates. This exposure is primarily to US dollar, Pounds sterling and Eurointerest rates. As the Group maintains all of its cash, liquid investments andforeign exchange contracts on a short term basis for liquidity purposes, thisrisk is not actively managed. In the six months to June 30, 2012 the averageinterest rate received on cash and liquid investments was less than 1% perannum. The largest proportion of these cash and liquid investments was in USdollar money market and liquidity funds.
The Group incurs interest at a fixed rate of 2.75% on $1,100 million in principal amount convertible bonds due 2014. No derivative instruments were entered into during the six months to June 30, 2012 to manage interest rate exposure. The Group continues to review its interest rate risk and the policies in place to manage the risk.
Credit risk
Financial instruments that potentially expose Shire to concentrations ofcredit risk consist primarily of short-term cash investments, trade accountsreceivable (from product sales and from third parties from which the Groupreceives royalties) and derivative contracts. Cash is invested in short-termmoney market instruments, including money market and liquidity funds and bankterm deposits. The money market and liquidity funds in which Shire invests areall triple A rated by both Standard and Poor's and by Moody's credit ratingagencies.The Group is exposed to the credit risk of the counterparties with which itenters into derivative instruments. The Group limits this exposure through asystem of internal credit limits which require counterparties to have a longterm credit rating of A- / A3 or better from the major rating agencies. Theinternal credit limits are approved by the Board and exposure against theselimits is monitored by the corporate treasury function. The counterparties tothese derivatives contracts are major international financial institutions.The Group's revenues from product sales in the US are mainly governed byagreements with major pharmaceutical wholesalers and relationships with otherpharmaceutical distributors and retail pharmacy chains. For the year toDecember 31, 2011 there were three customers in the US that accounted for 49%of the Group's product sales. However, such customers typically havesignificant cash resources and as such the risk from concentration of creditis considered acceptable. The Group has taken positive steps to manage anycredit risk associated with these transactions and operates clearly definedcredit evaluation procedures. However, an inability of one or more of thesewholesalers to honor their debts to the Group could have an adverse effect onour financial condition and results of operations.A substantial portion of the Group's accounts receivable in countries outsideof the United States is derived from product sales to government-owned orgovernment-supported healthcare providers. The Group's recovery of theseaccounts receivable is therefore dependent upon the financial stability andcreditworthiness of the relevant governments. In recent years thecreditworthiness and general economic condition of a number of Eurozonecountries (including Greece, Ireland, Italy, Portugal and Spain (the "RelevantCountries")) has deteriorated. As a result, in some of these countries theGroup is experiencing delays in the remittance of receivables due fromgovernment-owned or government-supported healthcare providers. The Groupcontinues to receive remittances from government-owned or government-supportedhealthcare providers in the Relevant Countries and in the six months to June30, 2012 received $82.8 million and $52.2 million in respect of Spanish andItalian receivables, respectively.To date the Group has not incurred significant losses on accounts receivablein the Relevant Countries, and continues to consider that such accountsreceivable are recoverable. The Group will continue to evaluate all itsaccounts receivable for potential collection risks and has made provision foramounts where collection is considered to be doubtful. If the financialcondition of the Relevant Countries or other Eurozone countries suffersignificant deterioration, such that their ability to make payments becomesuncertain, or if one or more Eurozone member countries withdraws from theEuro, additional allowances for doubtful accounts may be required, and lossesmay be incurred, in future periods. Any such loss could have an adverse effecton the Group's financial condition and results of operations
Foreign exchange risk
The Group trades in numerous countries and as a consequence has transactional and translational foreign exchange exposures.
Transactional exposure arises where transactions occur in currencies differentto the functional currency of the relevant subsidiary. The main tradingcurrencies of the Group are the US dollar, Pounds Sterling, Swiss Franc andthe Euro. It is the Group's policy that these exposures are minimized to theextent practicable by denominating transactions in the subsidiary's functionalcurrency.Where significant exposures remain, the Group uses foreign exchange contracts(being spot, forward and swap contracts) to manage the exposure for balancesheet assets and liabilities that are denominated in currencies different tothe functional currency of the relevant subsidiary. These assets andliabilities relate predominantly to intercompany financing, accruals forroyalty receipts and specific external receivables. The foreign exchangecontracts have not been designated as hedging instruments. Cash flows fromderivative instruments are presented within net cash provided by operatingactivities in the consolidated cash flow statement, unless the derivativeinstruments are economically hedging specific investing or financingactivities.
Translational foreign exchange exposure arises on the translation into US dollars of the financial statements of non-US dollar functional subsidiaries.
At June 30, 2012 the Group had 30 swap and forward foreign exchange contractsoutstanding to manage currency risk. The swaps and forward contracts maturewithin 90 days. The Group did not have credit risk related contingent featuresor collateral linked to the derivatives. At June 30, 2012 the fair value ofthese contracts was a net liability of $1.3 million. Further details areincluded below: Fair value Fair value June 30, December 31, 2012 2011 $'M $'M _____________ _____________
Assets Prepaid expenses and other current assets 2.7
3.4
Liabilities Other current liabilities 4.0
0.4 _____________ _____________Net gains/losses (both realized and unrealized) arising on foreign exchangecontracts have been classified in the consolidated statements of income asfollows: Location of net gain/(loss) Amount of net gain/(loss) recognized in income recognized in income __________________________________ ____________ ____________Six months to June 30, June 30, 2012 2011 $'M $'M _____________ _____________Foreign exchange contracts Other income, net 6.9 (2.6) _____________ _____________These net foreign exchange losses are offset within Other income, net by netforeign exchange gains/(losses) arising on the balance sheet items that thesecontracts were put in place to manage.
14. Fair value measurement
Assets and liabilities that are measured at fair value on a recurring basis
As at June 30, 2012 and December 31, 2011 the following financial assets and liabilities are measured at fair value on a recurring basis using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3).
Carrying Fair value value Total Level 1 Level 2 Level 3At June 30, 2012 $'M $'M $'M $'M $'M ____________ ____________ ___________ ___________ ___________Financial assets:Available-for-salesecurities(1) 20.3 20.3 20.3 - -Contingentconsiderationreceivable (2) 37.9 37.9 - - 37.9Foreign exchangecontracts 2.7 2.7 - 2.7 - Financial liabilities:Foreign exchangecontracts 4.0 4.0 - 4.0 -Contingentconsiderationpayable(3) 127.2 127.2 - - 127.2 ____________ ____________ ___________ ___________ ___________ Total Level 1 Level 2 Level 3At December 31, 2011 $'M $'M $'M $'M $'M ____________ ____________ ___________ ___________ ___________Financial assets:Available-for-salesecurities(1) 7.4 7.4 7.4 - -Contingentconsiderationreceivable (2) 37.8 37.8 - - 37.8Foreign exchangecontracts 3.4 3.4 - 3.4 - Financial liabilities:Foreign exchangecontracts 0.4 0.4 - 0.4 - ____________ ____________ ___________ ___________ ___________
(1) Available-for-sale securities are included within Investments in the consolidated balance sheet.
(2) Contingent consideration receivable is included within Prepaid expenses and other current assets and Other non-current assets in the consolidated balance sheet.
(3) Contingent consideration payable is included within Other current liabilities and Other non-current liabilities in the consolidated balance sheet.
Certain estimates and judgments were required to develop the fair value amounts. The fair value amounts shown above are not necessarily indicative of the amounts that the Group would realize upon disposition, nor do they indicate the Group'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:
1. Available-for-sale securities - the fair values of available-for-sale securities are estimated based on quoted market prices for those investments.
2. Contingent consideration receivable - the fair value of the contingent consideration receivable has been estimated using the income approach (using a probability weighted discounted cash flow method).
3. Foreign exchange contracts - the fair values of the swap and forward foreign exchange contracts have been determined using an income approach based on current market expectations about the future cash flows.
4. Contingent consideration payable - the fair value of the contingent consideration payable has been estimated using the income approach (using a probability weighted discounted cash flow method).
Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
The change in the fair value of the Group's contingent consideration receivable and payables, which are measured at fair value on a recurring basis using significant unobservable inputs (Level 3), are as follows:
Contingent consideration receivable 2012 2011 $'M $'M ____________ ____________ Balance at January 1, 37.8 61.0
Gain/(loss) recognized in the income statement (within Gain/(loss) on sale of product rights) due to change in fair value during the period
10.8
(3.5)
Reclassification of amounts to Other receivables within Other current assets
(10.0)
(9.2)
Amounts recorded to other comprehensive income (within foreign currency translation adjustments)
(0.7) 4.8 Balance at June 30, 37.9 53.1 Contingent consideration payable 2012 2011 $'M $'M ____________ ____________ Balance at January 1,1 - -
Initial recognition of contingent consideration payable1 127.8
-
Loss recognized in the income statement (within Integration and acquisition costs) due to change in fair value during the period1
2.1
-
Reclassification of amounts to Other current liabilities1 (2.7)
-
Balance at June 30, 127.2
-
Quantitative Information about Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
Quantitative information about the Group's recurring Level 3 fair value measurements is included below:
Financial assets: Fair Value at the Measurement Date At June 30, 2012 Fair value Valuation Significant Range unobservable Technique Inputs $'M ____________ ___________ ___________ ___________Contingent consideration 37.9 Income - Probability - 10-40%receivable ("CCR") approach weightings (probability applied to weighted different discounted sales cash flow) scenarios -$10 million - Future to $143 forecast million royalties receivable at relevant contractual royalty rates - 6.1% - Assumed market participant discount rate ____________ ____________ ____________ ____________ Financial liabilities: Fair Value at the Measurement Date At June 30, 2012 Fair value Valuation Significant Range unobservable Technique Inputs $'M ____________ ___________ ___________ ___________Contingent consideration 127.2 Income - Cumulative - 19 to 45%payable approach probability (Weighted (probability of milestones average) weighted being discounted achieved cash flow) -7.4 to 9.1% (Weighted - Assumed average) market participant discount rate - 2013 to 2028 - Periods in which milestones are expected to be achieved -$2.7 to $3.4 - Forecast million quarterly royalties payable on net sales of relevant products ____________ ____________ ____________ ____________
The Group re-measures the CCR (relating to contingent consideration due to theGroup following divestment of one of the Group's products) at fair value ateach balance sheet date, with the fair value measurement based on forecastcash flows, over a number of scenarios which vary depending on the expectedperformance outcome of the product following divestment. The forecast cashflows under each of these differing outcomes have been included in probabilityweighted estimates used by the Group in determining the fair value of the CCR.Contingent consideration payable represents future amounts the Group may berequired to pay in conjunction with the FerroKin and Pervasis businesscombinations (see Note 2) and the license acquired following settlement ofproceedings with Mt. Sinai (see Note 11). The amount of contingentconsideration which may ultimately be payable by Shire in relation to theFerroKin and Pervasis business combinations is dependent upon the achievementof specified future milestones, such as the achievement of certain futuredevelopment, regulatory and sales milestones. The Group assesses theprobability, and estimated timing, of these milestones being achieved andre-measures the related contingent consideration to fair value each balancesheet date. The amount of contingent consideration which may ultimately bepayable by Shire in relation to the license acquired from Mt. Sinai isdependent upon future net sales of REPLAGAL in the relevant territories overthe life of the license. The Group assesses the present value of forecastfuture net sales of REPLAGAL and re-measures the related contingentconsideration to fair value each balance sheet date.The fair value of the Group's contingent consideration receivable and payablescould significantly increase or decrease due to changes in certain assumptionswhich underpin the fair value measurements. Each set of assumptions andmilestones are specific to the individual contingent consideration receivableor payable. The assumptions include, among other things, the probability andexpected timing of certain milestones being achieved, the forecast future netsales of REPLAGAL and related future royalties payable, the probabilityweightings applied to different sales scenarios of one of the Group's divestedproducts and forecast future royalties receivable under scenarios developed bythe Group, and the discount rates used to determine the present value ofcontingent future cash flows. The Group regularly reviews these assumptions,and makes adjustments to the fair value measurements as required by facts andcircumstances.
Assets Measured at Fair Value on a Non-Recurring Basis using Significant Unobservable Inputs (Level 3)
In the six months to June 30, 2012 the Group reviewed certain ofits indefinite lived IPR&D intangible assets ("IPR&D assets") for impairmentand recognized an impairment charge of $27.0 million, recorded within R&D inthe consolidated income statement, to write-down these IPR&D assets to theirfair value. The fair value of these IPR&D assets was determined using theincome approach, which used significant unobservable (Level 3) inputs. Theseunobservable inputs included, among other things, risk-adjusted forecastfuture cash flows to be generated by these IPR&D assets, contributory assetcharges for other assets employed in these IPR&D projects and thedetermination of an appropriate discount rate to be applied in calculating thepresent value of forecast future cash flows. The fair value of these IPR&Dassets, determined at the time of the impairment review, was $77.0 million.
Financial assets and liabilities that are not measured at fair value on a recurring basis
The carrying amounts and estimated fair values as at June 30, 2012 and December 31, 2011 of the Group's financial assets and liabilities which are not measured at fair value on a recurring basis are as follows:
June 30, 2012 December 31, 2011 Carrying Carrying amount Fair value amount Fair value $'M $'M $'M $'M ____________ ____________ ____________ ___________ Financial liabilities:Convertible bonds (Level 1) 1,100.0 1,248.2 1,100.0 1,309.7
Building financing obligation 8.3 8.3 8.2
9.7(Level 3) ____________ ____________ ____________ ___________
Certain estimates and judgments were required to develop the fair value amounts. The fair value amounts shown above are not necessarily indicative of the amounts that the Group would realize upon disposition, nor do they indicate the Group'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:
1. Convertible bonds - the fair value of Shire's $1,100 million 2.75% convertible bonds due 2014 is determined by reference to the market price of the instrument as the convertible bonds are publicly traded.
2. Building finance obligations - the fair value of building financeobligations are estimated based on the present value of future cash flows, andan estimate of the residual value of the underlying property at the end of thelease term, associated with these obligations.
The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses materially approximate to their fair value because of the short-term maturity of these amounts.
15. Earnings per share
The following table reconciles net income and the weighted average ordinaryshares outstanding for basic and diluted earnings per share for the periodspresented: 6 months to 6 months to June 30, June 30, 2012 2011 $'M $'M _________________ _________________
Numerator for basic earnings per share 476.2
416.8
Interest on convertible bonds, net of tax 16.2
16.8
_________________
_________________
Numerator for diluted earnings per share 492.4
433.6
_________________
_________________
Weighted average number of shares:
Millions Millions _________________ _________________ Basic 1 555.2 551.1 Effect of dilutive shares:
Share based awards to employees 2 6.1
10.3
Convertible bonds 2.75% due 2014 3 33.5
33.4 _________________ _________________ Diluted 594.8 594.8 _________________ _________________
1. Excludes shares purchased by the EBT and presented by the Group as treasury stock.
2. Calculated using the treasury stock method.
3. Calculated using the `if-converted' method.
The share equivalents not included in the calculation of the diluted weighted average number of shares are shown below:
6 months to 6 months to June 30, June 30, 2012 2011 No. of shares No. of shares Millions Millions _________________ _________________
Share based awards to employees1 4.5
3.8
_________________
_________________
1. Certain stock options have been excluded from the calculation of dilutedEPS because (a) their exercise prices exceeded Shire plc's average share priceduring the calculation period or (b) the required performance conditions werenot satisfied as at the balance sheet date..
16. Segmental reporting
Shire's internal financial reporting is in line with its business unit andmanagement reporting structure. The Group has three business units and threereportable segments: SP, HGT and RM. The SP, HGT and RM reportable segmentsrepresent the Group's revenues and costs for currently promoted and soldproducts, together with the costs of developing products for futurecommercialization. `All Other' has been included in the table below in orderto reconcile the three segments to the total consolidated figures.
The Group evaluates performance based on revenue and operating income. The Group does not have inter-segment transactions. Assets that are directly attributable or allocable to the segments have been separately disclosed.
SP HGT RM All Other Total6 months to June 30, 2012 $'M $'M $'M
$'M $'M
___________ ___________ ___________ ___________ ___________Product sales 1,442.2 711.2 101.2 - 2,254.6Royalties 87.8 - - 24.8 112.6Other revenues 11.9 0.5 - - 12.4 ___________ ____________ ____________ ___________ ___________Total revenues 1,541.9 711.7 101.2
24.8 2,379.6
___________ ____________ ____________
___________ ___________
Cost of product sales(1) 171.9 112.0 27.0 - 310.9Research and development(1) 289.3 162.3 7.3 - 458.9Selling, general andadministrative(1) 611.6 200.4 84.2 114.8 1,011.0Gain on sale of product rights (10.8) - - - (10.8)Integration and acquisition costs 4.4 - 8.0
- 12.4 _____________ ____________ ____________ ___________ ___________Total operating expenses 1,066.4 474.7 126.5 114.8 1,782.4 _____________ ____________ ____________ ___________ ___________Operating income/(loss) 475.5 237.0 (25.3) (90.0) 597.2 _____________ ____________ ____________ ___________ ___________ Total assets 2,534.6 1,931.1 980.5 1,594.8 7,041.0Long-lived assets(2) 130.1 707.9 25.0 64.2 927.2Capital expenditure on long-livedassets(2) 19.2 26.3 0.1 8.2 53.8 _____________ ___________ ___________ ___________ ___________
(1) Depreciation from manufacturing plants ($14.2 million) and amortization offavorable manufacturing contracts ($0.7 million) is included in Cost ofproduct sales; depreciation of research and development assets ($12.8 million)and impairment of IPR&D intangible assets in the SP reporting segment ($27.0million) is included in Research and development; and all other depreciationand amortization ($124.7 million) is included in Selling, general andadministrative.
(2) Long-lived assets comprise all non-current assets (excluding goodwill and other intangible assets, deferred contingent consideration assets, deferred tax assets, investments, income tax receivable and financial instruments).
SP HGT RM All Other Total6 months to June 30, 2011 $'M $'M $'M $'M $'M ___________ ___________ ___________ ___________ ___________Product sales 1,290.8 589.8 2.0 - 1,882.6Royalties 89.3 - - 47.7 137.0Other revenues 12.3 0.5 - 2.7 15.5 ___________ ____________ ____________ ___________ ___________Total revenues 1,392.4 590.3 2.0 50.4 2,035.1 ___________ ____________ ____________ ___________ ___________ Cost of product sales(1) 175.7 92.2 0.3 - 268.2Research and development(1) 207.7 147.0 0.1 - 354.8Selling, general andadministrative(1) 560.6 172.0 0.7 109.9 843.2
Loss on sale of product rights 3.5 - - - 3.5Reorganization costs 5.0 - - 8.0 13.0Integration and acquisition costs (4.3) - 6.9
- 2.6 _____________ ____________ ____________ ___________ ___________Total operating expenses 948.2 411.2 8.0 117.9 1,485.3 _____________ ____________ ____________ ___________ ___________Operating income/(loss) 444.2 179.1 (6.0) (67.5) 549.8 _____________ ____________ ____________ ___________ ___________ Total assets 2,513.9 1,875.9 1,041.4 734.4 6,165.6Long-lived assets(2) 158.1 691.1 16.8 42.9 908.9Capital expenditure on long-livedassets(2) 23.1 63.8 - 7.9 94.8 _____________ ___________ ___________ ___________ ___________
(1) Depreciation from manufacturing plants ($18.2 million) and amortization offavorable manufacturing contracts ($0.9 million) is included in Cost ofproduct sales; depreciation of research and development assets ($10.8 million)is included in Research and development; and all other depreciation,amortization and impairment ($102.4 million) is included in Selling, generaland administrative.
(2) Long-lived assets comprise all non-current assets (excluding goodwill and other intangible assets, deferred contingent consideration assets, deferred tax assets, investments, income tax receivable and financial instruments).
Non GAAP Measure
This Half Yearly Report contains a financial measure not prepared in accordance with US GAAP which is: Non GAAP operating income. This Non GAAP measure excludes the effect of certain cash and non-cash items that Shire's management believes are not related to the core performance of Shire's business.
This Non GAAP financial measure is used by Shire's management to make operating decisions because it facilitates internal comparisons of Shire's performance to historical results and to competitors' results. Shire's Remuneration Committee uses certain key Non GAAP measures when assessing the performance and compensation of employees, including Shire's executive directors.
The Non GAAP measure is presented in this Half Yearly Report as Shire'smanagement believe that it will provide investors with a means of evaluating,and an understanding of how Shire's management evaluates, Shire's performanceand results on a comparable basis that is not otherwise apparent on a US GAAPbasis, since many non-recurring, infrequent or non-cash items that Shire'smanagement believe are not indicative of the core performance of the businessmay not be excluded when preparing financial measures under US GAAP.
This Non GAAP measure should not be considered in isolation from, as substitute for, or superior to financial measures prepared in accordance with US GAAP.
Where applicable the following items, including their tax effect, have been excluded from both 2012 and 2011 Non GAAP earnings:
Amortization and asset impairments:
- Intangible asset amortization and impairment charges; and
- Other than temporary impairment of investments.
Acquisitions and integration activities:
- Upfront payments and milestones in respect of in-licensed and acquired products;
- Costs associated with acquisitions, including transaction costs, fair value adjustments on contingent consideration and acquired inventory;
- Costs associated with the integration of companies; and
- Noncontrolling interest in consolidated variable interest entities.
Divestments, re-organizations and discontinued operations:
- Gains and losses on the sale of non-core assets;
- Costs associated with restructuring and re-organization activities;
- Termination costs; and
- Income / (losses) from discontinued operations.
Legal and litigation costs:
- Net legal costs related to the settlement of litigation, government investigations and other disputes (excluding internal legal team costs).
Sales growth at CER, which is a Non GAAP measure, is computed by restating 2012 results using average 2011 foreign exchange rates for the relevant period.
Average exchange rates for the six months to June 30, 2012 were $1.58:£1.00 and $1.31:€1.00 (2011: $1.62:£1.00 and $1.40:€1.00).
Independent review report to Shire plc
We have been engaged by Shire plc (the "Company") to review thecondensed consolidated set of financial statements for the Company and itssubsidiaries (the "Group") in the Half Yearly Report for the six months endedJune 30, 2012 which comprises the consolidated balance sheet, consolidatedstatements of income, consolidated statements of comprehensive income,consolidated statements of changes in equity, the consolidated statements ofcash flows and related notes 1 to 16. We have read the other informationcontained in the Half Yearly Report and considered whether it contains anyapparent misstatements or material inconsistencies with the information in thecondensed set of financial statements. This report is made solely to theCompany in accordance with International Standard on Review Engagements (UKand Ireland) 2410 "Review of Interim Financial Information Performed by theIndependent Auditor of the Entity" issued by the Auditing Practices Board. Ourwork has been undertaken so that we might state to the Company those matterswe are required to state to it in an independent review report and for noother purpose. To the fullest extent permitted by law, we do not accept orassume responsibility to anyone other than the Company, for our review work,for this report, or for the conclusions we have formed.
Directors' responsibilities
The Half Yearly Report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the Half Yearly Report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.
As disclosed in Note 1, the annual financial statements of theGroup are prepared in accordance with accounting policies generally acceptedin the United States of America ("US GAAP"). The condensed consolidated set offinancial statements included in this Half Yearly Report have been prepared inaccordance with the accounting policies the Group intends to use in preparingits next annual financial statements.
Our responsibility
Our responsibility is to express to the Company a conclusion on the condensed consolidated set of financial statements in the Half Yearly Report based on our review.
Scope of ReviewWe conducted our review in accordance with International Standardon Review Engagements (UK and Ireland) 2410 "Review of Interim FinancialInformation Performed by the Independent Auditor of the Entity" issued by theAuditing Practices Board for use in the United Kingdom. A review of interimfinancial information consists of making inquiries, primarily of personsresponsible for financial and accounting matters, and applying analytical andother review procedures. A review is substantially less in scope than an auditconducted in accordance with International Standards on Auditing (UK andIreland) and consequently does not enable us to obtain assurance that we wouldbecome aware of all significant matters that might be identified in an audit.Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causesus to believe that the condensed consolidated set of financial statements inthe Half Yearly Report for the six months ended June 30, 2012 is not prepared,in all material respects, in accordance with US GAAP and with the Disclosureand Transparency Rules of the United Kingdom's Financial Services Authority.
Deloitte LLP
Chartered Accountants and Statutory Auditor
London, United Kingdom
August 10, 2012
XLONRelated Shares:
Shire