11th Aug 2011 14:54
Half Yearly Report
August 11, 2011 - 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, 2011.
It should be noted that on July 28, 2011 Shire previously announced its results in respect of the same period.
For further information please contact:
Investor Relations Eric Rojas [email protected] +1 781 482 0999 Sarah Elton-Farr [email protected] +44 1256 894 157 Media Jessica Mann [email protected] +44 1256 894 280
Notes to editorsShire plcShire's strategic goal is to become the leading specialtybiopharmaceutical company that focuses on meeting the needs of the specialistphysician. Shire focuses its business on attention deficit hyperactivitydisorder ("ADHD"), human genetic therapies ("HGT") and gastrointestinal ("GI")diseases as well as opportunities in other therapeutic areas to the extentthey arise through acquisitions. Shire's in-licensing, merger and acquisitionefforts are focused on products in specialist markets with strong intellectualproperty protection and global rights. Shire believes that a carefullyselected and balanced portfolio of products with strategically aligned andrelatively small-scale sales forces will deliver strong results.
For further information on Shire, please visit the Company's website: www.shire.com.
Shire plc Half Yearly Report 2011Registered in Jersey, No. 99854, 22 Grenville Street, St Helier, Jersey JE4 8PXContents Page
The "safe harbor" statement under the Private Securities Litigation Reform Act 2of 1995Chief Executive Officer's review
3
Business overview for the six months to June 30, 2011
4
Results of operations for the six months to June 30, 2011 and 2010
9
Principal risks and uncertainties
16
Directors' responsibility statement
17
Unaudited consolidated balance sheets at June 30, 2011 and December 31, 2010 18Unaudited consolidated statements of income for the six months to June 30, 2011 20and June 30, 2010Unaudited consolidated statement of changes in equity for the six months to
22
June 30, 2011Unaudited consolidated statement of comprehensive income for the six months to 23June 30, 2011 and June 30, 2010Unaudited consolidated statement of cash flows for the six months to June 30, 242011 and June 30, 2010 Notes to the unaudited consolidated financial statements
26
Independent review report to Shire plc
48
The "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 Group'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 Group'sSpecialty Pharmaceutical and Human Genetic Therapies products, as well as theability to secure new products for commercialization and/or development;government regulation of the Group's products; the Group's ability tomanufacture its products in sufficient quantities to meet demand; the impactof competitive therapies on the Group's products; the Group's ability toregister, maintain and enforce patents and other intellectual property rightsrelating to its products; the Group's ability to obtain and maintaingovernment and other third-party reimbursement for its products; and otherrisks and uncertainties detailed from time to time in the Group's filings withthe 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)CARBATROL® (carbamazepine extended-release capsules)DAYTRANA® (trademark of Noven Pharmaceutical Inc. ("Noven"))DERMAGRAFT® (Human Fibroblast-Derived Dermal Substitute)ELAPRASE® (idursulfase)EQUASYM® IR (methylphenidate hydrochloride)EQUASYM® XL (methylphenidate hydrochloride)FIRAZYR® (icatibant)FOSRENOL® (lanthanum carbonate)INTUNIV® (guanfacine extended release)JUVISTA® (trademark of Renovo Limited ("Renovo"))LIALDA® (mesalamine)MEZAVANT® (mesalazine)PENTASA® (trademark of Ferring B.V. ("Ferring"))REPLAGAL® (agalsidase alfa)RESOLOR® (prucalopride)VENVANSE® (lisdexamfetamine dimesylate)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, 2011. This Half Yearly Report includes consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP").
It's been another strong half year with Shire continuing to perform very well.Total revenues were up 22% and exceeded $2 billion for the first six months of2011, and we have reported a 26% increase in Non GAAP diluted earnings perADS.Product sales increased by 27%. Our rare disease treatments are performingwell around the world; the FDA Advisory Committee recommended approval andself administration of FIRAZYR for acute attacks of Hereditary Angioedema andwe're now preparing for a US launch, in anticipation of what we hope will bean FDA approval in August. We're very pleased that the European MedicinesAgency has approved the purification of REPLAGAL for Fabry disease at our newfacility in Massachusetts, giving us increased manufacturing flexibility.Sales of our ADHD products increased significantly in the US market, driven byincreasing market share and further strong market growth. In our GI franchise,LIALDA performed well and we were pleased to receive US approval formaintenance of remission in patients with ulcerative colitis.
As well as growing our existing business, we're continuing to invest in our portfolio for the future. In our pipeline we're generating data for new indications and new markets, in addition to developing new proprietary technology platforms. During the first half of the year, we also completed our acquisition of Advanced BioHealing bringing us DERMAGRAFT, a US marketed product and the opportunity to build an important business in the promising field of regenerative medicine.
During the year we have seen market consensus for 2011 earnings increase. Ourperformance in the first six months of the year has further underpinned ourconfidence in meeting these increased expectations for 2011. We anticipatethat this will be another very good year for Shire as we deliver strong salesand continue our investment for sustained future growth.
Angus Russell
Chief Executive Officer
Business overview for the six months to June 30, 2011
The following discussion should be read in conjunction with Shire plc's and its subsidiaries (collectively "Shire" or "the Group") unaudited consolidated financial statements and related notes appearing elsewhere in this Half Yearly Report.
Significant events in the six months to June 30, 2011 and recent developments
Products
FIRAZYR - for the treatment of hereditary angioedema ("HAE")
- On March 3, 2011 Shire announced that the European Commission had approved FIRAZYR for self-administrated subcutaneous injections. FIRAZYR is the first and only treatment for acute Type I and Type II HAE attacks licensed for self-administration in Europe.
- On June 23, 2011 Shire announced that the Pulmonary-Allergy Drugs AdvisoryCommittee to the US Food and Drug Administration ("FDA") recommended, by avote of twelve to one, that the efficacy and safety data for FIRAZYR providessubstantial evidence to support approval of FIRAZYR for the treatment of acuteattacks of HAE in patients 18 years and older. In addition, by a vote ofeleven to one, with one abstention, the Committee recommendedself-administration of the drug by patients. Shire has been assigned an actiondate of August 25, 2011 under the Prescription Drug User Fee Act.
REPLAGAL - for the treatment of Fabry disease
- On June 24, 2011 Shire announced that the European Medicines Agency hasapproved the purification of REPLAGAL drug substance at its new manufacturingfacility in Lexington, Massachusetts. REPLAGAL is the first product that willbe made available to patients from the new facility. With this approval, Shirenow has two approved facilities for the production of HGT products - Alewife,which is located in Cambridge, Massachusetts, and the new Lexington facility.This provides increased manufacturing flexibility for REPLAGAL.
VPRIV - for the treatment of Type 1 Gaucher disease
- Shire's continuing priority is to ensure long-term, uninterrupted treatmentfor patients with Type I Gaucher disease with VPRIV at the approved dose andfrequency prescribed by their physician. Shire continues to meet all requesteddemand for VPRIV globally and continues to supply the product to new patients- either na¯ve to therapy or those switching from different therapies. Shirecan continue to meet all anticipated demand for VPRIV globally. We are workingto obtain approval of the new manufacturing facility in Lexington for VPRIVwhich will provide substantial additional manufacturing capacity. Processvalidation runs are currently ongoing.
VYVANSE/VENVANSE - for the treatment of ADHD
- On April 18, 2011 Shire launched VENVANSE for the treatment of ADHD in children in Brazil, the first launch of lisdexsamfetamine dimesylate (marketed as VYVANSE in the US) outside of North America.
INTUNIV - for the treatment of ADHD
- On April 4, 2011, following approval by the FDA on February 28, 2011, Shirelaunched once-daily INTUNIV extended-release tablets as adjunctive therapy tostimulants for the treatment of ADHD in children and adolescents aged 6 to 17as part of a total treatment program.
MEZAVANT - for the treatment of ulcerative colitis
- On June 7, 2011 following approval by Health Canada on February 10, 2011,Shire announced the launch of MEZAVANT for the new expanded indication toinclude maintenance of clinical and endoscopic remission (mucosal healing) inpatients with ulcerative colitis. MEZAVANT is the first and only once-dailytreatment indicated in Canada for this expanded indication, which was approvedfollowing MEZAVANT's demonstrated efficacy and long-term safety profile duringmaintenance clinical trials of up to 12 months.
LIALDA - for the treatment of ulcerative colitis
- On July 14, 2011 the FDA approved LIALDA for the maintenance of remission inpatients with ulcerative colitis. This approval is based on results from asix-month study demonstrating the safety and effectiveness of LIALDA inmaintaining endoscopic remission in adult patients. This approval follows theprevious indication of LIALDA approved by the FDA in 2007 for the induction ofremission in patients with active, mild to moderate ulcerative colitis.
DERMAGRAFT - for the treatment of diabetic foot ulcers ("DFU")
- On March 21, 2011, prior to acquisition by Shire, Advanced BioHealing, Inc("ABH") filed a Class IV Medical Device Application to Health Canada to seekapproval for DERMAGRAFT for the treatment of DFU.
Other developments
Acquisition of ABH
- On June 28, 2011 Shire announced that it had completed the acquisition ofABH for a cash purchase price of $739 million. A strong strategic fit forShire, this acquisition combines ABH's experience and commercial capability inregenerative medicine with Shire's strengths and expertise in human cellbiological manufacturing. It also creates a new strategic platform based ontissue regeneration using cell-based therapies and adds DERMAGRAFT, a leadingUS marketed product for DFU, to Shire's portfolio. There are also furthergrowth prospects for DERMAGRAFT through a potential expanded indication forvenous leg ulcers ("VLU").
Legal Proceedings
See Note 13 Commitments and contingencies of this Half Yearly Report for details of Shire's legal proceedings.
Board changes
On July 27, 2011, Shire announced that Susan Kilsby will join the Shire Boardof Directors from September 1, 2011. On joining the Board Susan will become amember of Shire's Audit, Compliance and Risk Committee. Susan has adistinguished global career in investment banking, most recently with CreditSuisse, where she was Chairman of the EMEA Mergers & Acquisitions team.
In addition, current Board Directors Bill Burns and David Stout will join the Nomination Committee and Remuneration Committee respectively with immediate effect.
Dividend
In respect of the six months ended June 30, 2011, the Board resolved to pay aninterim dividend of 2.48 US cents per Ordinary Share (2010: 2.25 US cents perOrdinary Share).Dividend payments will be made in Pounds Sterling to ordinary shareholders andin US dollars to holders of American Depository Shares (`ADS'). A dividend of1.52 pence per ordinary share (an increase of 8% compared to 2010: 1.41 pence)and 7.44 US cents per ADS (an increase of 10% compared to 2010: 6.75 US cents)will be paid on October 6, 2011 to persons whose names appear on the registerof members of Shire at the close of business on September 9, 2011.
Research and development
Products in registration as at June 30, 2011
LIALDA for the maintenance of remission in ulcerative colitis in the US
On June 14, 2010 Shire submitted a supplemental New Drug Submission ("sNDA")to the FDA to seek approval for LIALDA for the maintenance of remission ofulcerative colitis. The product was indicated for the maintenance of remissionin patients who have ulcerative colitis on approval in the European Union(`EU') and has recently been approved in Canada. On July 14, 2011 the FDAapproved LIALDA for the maintenance of remission in patients with ulcerativecolitis. This approval is based on the demonstration of the safety andeffectiveness of LIALDA in maintaining endoscopic remission in adult patientsin a six-month clinical trial. This approval follows the previous indicationof LIALDA approved by the FDA in 2007 for the induction of remission inpatients with active, mild to moderate ulcerative colitis.
FIRAZYR in HAE in the US
Prior to its acquisition by Shire, Jerini received a not approvable letter forFIRAZYR for use in the US from the FDA in April 2008. Shire agreed with theFDA that an additional clinical study would be required before approval couldbe considered and that a complete response would be filed after completion ofthis study. Shire submitted a complete response to the not approvable letterfor FIRAZYR, and on March 21, 2011 Shire announced that the FDA has assigned aPrescription Drug User Fee Act date of August 25, 2011 for the review of theNew Drug Application ("NDA"). On June 23, 2011 Shire announced that thePulmonary-Allergy Drugs Advisory Committee to the FDA gave a recommendationthat the efficacy and safety data provides substantial evidence to supportapproval of FIRAZYR for the treatment of acute attacks of HAE in patients 18years and older. In addition, by a vote of eleven to one, with one abstention,the Committee recommended self-administration of the drug by patients.
DERMAGRAFT - for the treatment of DFU
On March 21, 2011, prior to acquisition by Shire, ABH filed a Class IV Medical Device Application to Health Canada to seek approval for DERMAGRAFT for the treatment of DFU.
Products in clinical development as at June 30, 2011
Phase 3
VYVANSE for the treatment of ADHD in the EU
VYVANSE for the treatment of ADHD in children aged 6 to 17 in the EU is inPhase 3 development. Shire anticipates submission of the filing of a MarketingAuthorization Approval ("MAA") for VYVANSE in certain countries in Europe in2011.
VYVANSE for the treatment of inadequate response in Major Depressive Disorder ("MDD")
Shire expects to initiate a Phase 3 program to assess the efficacy and safetyof VYVANSE as adjunctive therapy in patients with MDD in the second half of2011, following the completion of health authority meetings to establish thedevelopment program parameters.
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. Shire anticipates submission of the filing of an MAA for INTUNIV in certain countries in Europe in 2014.
LIALDA/MEZAVANT for the treatment of diverticulitis
Phase 3 worldwide clinical trials investigating the use of LIALDA/MEZAVANT to prevent recurrent attacks of diverticulitis were initiated in 2007 and are ongoing.
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.
RESOLOR for the treatment of opioid-induced constipation
A Phase 3 clinical program to assess the safety and efficacy of RESOLOR in thetreatment of opioid-induced constipation in patients with chronic, non-cancerpain was initiated in 2010 and is ongoing.
DERMAGRAFT - for the treatment of VLU
A pivotal Phase 3 clinical trial to assess the efficacy and safety of DERMAGRAFT in treating VLU is ongoing. If successful, submission of a supplement to the existing Pre-market Approval ("PMA") to the FDA is targeted for the first quarter of 2012.
XAGRID for the treatment of essential thrombocythaemia ("ET") in Japan
A Phase 3 clinical program has been initiated to assess the safety andefficacy of XAGRID in adult ET patients treated with cytoreductive therapy whohave become intolerant to their current therapy or whose platelet counts havenot been reduced to an acceptable level.
Phase 2
VYVANSE for the treatment of Negative Symptoms of Schizophrenia ("NSS")
Based on discussions with regulatory agencies regarding potential developmentpathways for VYVANSE as a possible NSS treatment option, Phase 3 studies couldbegin in 2012.
VYVANSE for the treatment of Excessive Daytime Sleepiness ("EDS")
Based on discussions with regulatory agencies regarding potential developmentpathways for VYVANSE as a possible EDS treatment option, Phase 3 studies couldbegin in 2012.
VYVANSE for the treatment of other non ADHD indications in adults
Shire is conducting Phase 2 pilot clinical trials to assess the efficacy andsafety of VYVANSE for the treatment of cognitive impairment in depression andBinge Eating Disorder.
SPD - 556 for the treatment of ascites
SPD - 556 (M0002) is a selective Vasopressin V2 receptor antagonist for the treatment of ascites. This compound is ready for Phase 2 clinical trials.
SPD - 557 for the treatment of refractory gastroesophageal reflux disease
SPD - 557 (M0003) is a selective 5-HT4 receptor agonist. An exploratory Phase 2 program to investigate the effect of the product on reflux episodes in patients currently treated with proton pump inhibitors was initiated in the fourth quarter of 2010.
HGT - 4510 for Duchenne muscular dystrophy ("DMD")
HGT- 4510 (also referred to as ACE-031) was added to the Shire HGTportfolio in 2010 through an exclusive license in markets outside of NorthAmerica for the ActRIIB class of molecules being developed by Acceleron. Thelead ActRIIB drug candidate, HGT- 4510 is in development for the treatment ofpatients with DMD. The Phase 2a trial is on hold and clinical safety is underreview. This product has been granted orphan designation in the US and the EU.
Phase 1
Guanfacine Carrier Wave, ("GCW") for the treatment of various central nervous system ("CNS") disorders
An improved lead candidate has been selected for development and a Phase 1 program has been initiated to determine safety and tolerability of this compound. The ongoing Phase 1 program will be supportive of potentially three different CNS-related indications: ADHD, hyperactivity in Autism Sprectrum Disorder and Pediatric 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 platelet lowering ability and without phosphodiesterase type III inhibition apparent at clinically relevant doses. Data from Phase 1 clinical trials demonstrated positive proof-of-principle with no safety concerns. Work is ongoing on additional Phase 1 studies to support progression to a Phase 2 proof-of-concept program that will target prevention of thrombotic complications associated with arteriovenous access in hemodialysis patients.
Carrier Wave molecules for the treatment of pain
Phase 1 clinical development of various molecules for the treatment of pain is ongoing.
HGT - 2310 for the treatment of Hunter syndrome with CNS symptoms, idursulfase-IT (intrathecal delivery)
HGT-2310 is in development as an enzyme replacement therapy ("ERT") deliveredintrathecally for Hunter syndrome patients with CNS symptoms. Shire initiateda Phase 1/2 clinical trial in the first quarter of 2010. This trial isongoing. 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. Shire initiated a Phase 1/2 clinical trial in August 2010. Thistrial is ongoing.
Products in pre-clinical development as at June 30, 2011
HGT-1110 - for the treatment of Metachromatic Leukodystrophy
Pre-clinical development of a formulation of HGT-1110, expressed from Shire'shuman cell platform and suitable for direct delivery to the CNS, is ongoing.Shire has submitted clinical trial applications to several European regulatoryauthorities. This product has been granted orphan drug designation in the USand the EU.
Other pre-clinical development projects
A number of additional projects are underway in various stages of pre-clinicaldevelopment for the Specialty Pharmaceuticals ("SP") and HGT areas, includingprograms using Carrier Wave technology, which are primarily focused in the CNSarea. More data on these programs is expected throughout 2011.
Development projects discontinued in 2011
Shire has discontinued the following development projects which were previously reported in Shire's Annual Report and Accounts for the year ended December 31, 2010:
FOSRENOL for the treatment of pre-dialysis chronic kidney disease ("CKD")
Shire has discontinued efforts to explore the regulatory pathway required to secure a label extension in the US for FOSRENOL to treat hyperphosphataemia in pre-dialysis CKD.
JUVISTA for the improvement of scar appearance
Renovo initiated its first pivotal European Phase 3 trial in scar revision in the fourth quarter of 2008 to support the filing of a European regulatory dossier. On February 11, 2011, Renovo announced its EU Phase 3 trial for JUVISTA in scar revision surgery did not meet its primary or secondary endpoints. On March 2, 2011, Shire terminated its agreement with Renovo.
Results of operations for the six months to June 30, 2011 and 2010
The financial information contained within the Half Yearly Report has been prepared under US GAAP, being the accounting policies under which Shire plc prepared or will prepare its annual financial statements for the years ended December 31, 2011 and 2010.
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, 2011 2010 change $'M $'M % _______________ _______________ ____________Product sales 1,882.6 1,482.4 +27Royalties 137.0 178.0 -23Other revenues 15.5 5.1 +204 _______________ _______________ ____________Total 2,035.1 1,665.5 +22 _______________ _______________ ____________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
2011 2010 growth growth growth1 share1 $'M $'M % % % %SpecialtyPharmaceuticalsADHDVYVANSE 388.2 302.4 +28 +28 +22 15ADDERALL XR 258.1 172.2 +50 +49 +14 8INTUNIV 101.5 85.7 +18 +18 +114 4EQUASYM 10.5 10.6 -1 -7 n/a n/a3DAYTRANA - 34.7 n/a n/a n/a n/a GILIALDA / MEZAVANT 186.3 133.2 +40 +39 +10 20PENTASA 130.3 118.8 +10 +10 -2 15RESOLOR 2.5 - n/a n/a n/a n/a3 RegenerativeMedicineDERMAGRAFT 2.0 - n/a n/a n/a2 n/a2 General ProductsFOSRENOL 86.5 92.1 -6 -9 -13 6XAGRID 45.9 45.0 +2 -4 n/a n/a2CARBATROL 33.3 43.1 -23 -23 -13 10Other product sales 47.7 54.8 -13 -18 n/a n/a __________________ __________________ ______________ 1,292.8 1,092.6 +18 __________________ __________________ ______________Human GeneticTherapiesELAPRASE 231.3 200.6 +15 +11 n/a2 n/a2REPLAGAL 225.3 149.9 +50 +42 n/a3 n/a3VPRIV 122.3 34.5 +254 +246 n/a2 n/a2FIRAZYR 10.9 4.8 +127 +111 n/a3 n/a3 __________________ __________________ ______________ 589.8 389.8 +51 __________________ __________________ ______________Total product sales 1,882.6 1,482.4 +27 __________________ __________________ ______________
(1) Data provided by IMS NPA. Exit market share represents the average monthly US market share in the month ended June 30, 2011.
(2) IMS NPA Data not available.
(3) Not sold in the US in the six months to June 30, 2011.
Specialty Pharmaceuticals
VYVANSE - ADHD
The growth in VYVANSE product sales resulted from higher prescription demand,due to growth in the US ADHD market and increases to VYVANSE's share of thatmarket, in addition to the effect of price increases taken since the firsthalf of 2010. These positive effects were partially offset by higher salesdeductions in the first half of 2011, compared to the first half of 2010,including the effect of a change in the estimate of VYVANSE inventory in theUS retail pipeline which increased sales rebates in the first half of 2011.Litigation proceedings regarding Shire's VYVANSE patents are ongoing. Furtherinformation about this litigation can be found in Note 13 of this Half YearlyReport.ADDERALL XR - ADHD
Product sales grew at a faster rate than US prescription demand due to theeffect of a price increase taken early in the first half of 2011, the effectsof higher stocking in the first half of 2011, and lower sales deductions as apercentage of branded gross sales (61% in the first half of 2011 compared to69% in the same period in 2010).
Litigation proceedings regarding Shire's ADDERALL XR patents are ongoing. Further information about this litigation can be found in Note 13 of this Half Yearly Report.
INTUNIV - ADHDINTUNIV prescription demand continues to grow strongly, up 114%compared to the first half of 2010. The growth in product sales was less thanthe increase in prescription demand due to higher sales deductions in thefirst half of 2011 compared to the same period in 2010, and the inclusion infirst half 2010 product sales of previously deferred revenue relating toinitial stocking shipments made in 2009.Litigation proceedings regarding Shire's INTUNIV patents are ongoing. Furtherinformation about this litigation can be found in Note 13 of this Half YearlyReport.
LIALDA/MEZAVANT - Ulcerative colitis
LIALDA/MEZAVANT product sales continued to grow in the first half of 2011, driven primarily by increased US prescription demand due to higher US market share, the effect of price increases taken since the first half of 2010 and stocking in the second quarter of 2011.
Litigation proceedings regarding Shire's LIALDA patents are ongoing. Furtherinformation about this litigation can be found in Note 13 of this Half YearlyReport.
PENTASA - Ulcerative colitis
The growth in PENTASA product sales was driven by price increases taken sincethe first half of 2010, which more than offset the decline in US prescriptiondemand.
FOSRENOL - Hyperphosphatemia
Product sales of FOSRENOL in the EU decreased primarily due to mandatory pricereductions taken in the second quarter of 2010. Product sales of FOSRENOL inthe US decreased slightly due to lower US prescription demand and higher salesdeductions in the first half of 2011 compared to the first half of 2010.Litigation proceedings regarding Shire's FOSRENOL patents are ongoing. Furtherinformation about this litigation can be found in Note 13 of this Half YearlyReport.Human Genetic TherapiesELAPRASE - Hunter syndrome
The growth in sales of ELAPRASE was primarily driven by increased volumes across all regions in which ELAPRASE is sold. Reported ELAPRASE sales also benefited from favorable foreign exchange, due to the weaker US dollar in the first half of 2011 compared to the same period in 2010.
REPLAGAL - Fabry disease
The growth in REPLAGAL product sales was driven by the treatment of new patients being both na¯ve patients and switches from the competing ERT product. REPLAGAL sales also benefited from favorable foreign exchange, due to the weaker US dollar in first half of 2011 compared to the same period in 2010.
Litigation proceedings regarding REPLAGAL are ongoing. Further information about this litigation can be found in Note 13 of this Half Yearly Report.
VPRIV - Gaucher disease
VPRIV has seen significant growth since its approval in the US inthe first quarter of 2010 and in Europe in the third quarter of 2010. Growthin patients being treated with VPRIV continues and we are progressing with ourlaunch plans in countries across Europe. Reported VPRIV sales also benefitedfrom favorable foreign exchange, due to the weaker US dollar in the first halfof 2011 compared to the same period in 2010.
FIRAZYR - HAE
Product sales grew in line with increased volumes across markets in Europe as more patients are treated with FIRAZYR. FIRAZYR is the first new product for HAE in Europe in 30 years and has orphan exclusivity for acute attacks of HAE in adults in the EU until 2018.
Royalties
The following table provides an analysis of Shire's royalty income:
6 months to 6 months to June 30, June 30, 2011 2010 Change $'M $'M % ____________ ____________ ___________3TC and ZEFFIX 46.8 74.7 -37ADDERALL XR 43.7 68.3 -36FOSRENOL 20.5 11.1 +85Other 26.0 23.9 +9 ____________ ____________ __________Total 137.0 178.0 -23 ____________ ____________ __________Royalty income decreased in the first half of 2011 compared to the first halfof 2010 as lower royalties on ADDERALL XR and 3TC and ZEFFIX more than offsethigher royalty income from FOSRENOL.Royalty income from 3TC and Zeffix continues to be adversely impacted byincreased competition from other products. Additionally, for certainterritories in the second quarter of 2011 Shire did not recognize 3TCroyalties for that quarter, and reversed 3TC royalty income recognized in theprior two quarters, due to a difference of opinion between GSK and Shire abouthow the relevant royalty rate should be applied given the expiry dates ofcertain patents. GSK and Shire are holding discussions in order to clarifythis discrepancy.
FOSRENOL royalties increased in the first half of 2011 due to higher demand for the product by Shire's Japanese partner given supply issues of a competitor resulting from the earthquakes earlier in 2011.
Cost of product sales
Cost of product sales increased to $268.2 million for the six months to June30, 2011 (14% of product sales), up from $221.0 million in the correspondingperiod in 2010 (2010: 15% of product sales). The cost of product sales as apercentage of product sales decreased in the first half of 2011 compared tothe same period in 2010, due to product sales growth from higher marginproducts and lower costs incurred on the transfer of manufacturing from OwingsMills.
For the six months to June 30, 2011 cost of product sales included depreciation of $18.2 million (2010: $18.4 million) and amortization of $0.9 million (2010: $0.9 million).
Research and development ("R&D")
R&D expenditure increased to $354.8 million for the six months to June 30,2011 (19% of product sales), compared to $278.0 million in the correspondingperiod in 2010 (19% of product sales), due to increased investment in a numberof targeted R&D programs, including Sanfilippo A and other early stagedevelopment programs, continued investment in new uses for VYVANSE and theinclusion of spend on RESOLOR which was not included in the first half of2010. R&D expenditure was also impacted by adverse foreign exchange ofapproximately $8 million in the first half of 2011 compared to the same periodin 2010.
R&D in the six months to June 30, 2011 also included depreciation of $10.8 million (2010: $7.2 million).
Selling, general and administrative ("SG&A")
SG&A expenses increased to $843.2 million (45% of product sales) for the sixmonths to June 30, 2011 from $714.3 million (48% of product sales) in thecorresponding period in 2010, as the Group supported its continued productsales growth and planned product launches. Additionally, SG&A increased in2011 due to the inclusion of costs for Movetis NV (`Movetis') and theestablishment of Shire's international commercial hub in Switzerland whichwere not incurred in the first half of 2010. SG&A expenditure was alsoimpacted by adverse foreign exchange of approximately $23 million in the firsthalf of 2011 compared to the same period in 2010.
For the six months to June 30, 2011 SG&A included depreciation of $29.7 million (2010: $32.9 million) and amortization of $72.7 million (2010: $68.4 million).
Reorganization costsFor the six months to June 30, 2011 the Group recorded reorganization costs of$13.0 million (2010: $13.6 million) relating to the transfer of manufacturingfrom its Owings Mills facility and the establishment of an internationalcommercial hub in Switzerland.
Integration and acquisition costs
For the six months to June 30, 2011 Shire recorded integration and acquisitioncosts of $2.6 million (2010: $0.6 million), relating to the acquisition andintegration of ABH ($6.9 million), the integration of Movetis ($3.9 million),offset by an adjustment to contingent consideration payable for EQUASYM ($8.2million).Interest expense
For the six months to June 30, 2011 the Group incurred interest expense of $19.1 million (2010: $17.3 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. During the six months to June 30, 2011 theeffective tax rate was 22% (2010: 25%). The effective rate of tax in the firsthalf of 2011 was lower than the same period in 2010 due to favorable changesin profit mix, partially offset by the impact of a change in the effective taxrate for deferred tax liabilities for Movetis.
Financial condition at June 30, 2011 and December 31, 2010
Cash & Cash equivalents
Cash and cash equivalents decreased by $406.0 million to $144.6 million (December 31, 2010: $550.6 million). Cash generated by operating activities of $485.5 million was offset by the cost of acquiring ABH, other capital expenditure, the purchase of shares by the Employee Share Ownership Trust ("ESOT") and the dividend payment.
Accounts receivable, net
Accounts receivable, net increased by $104.7 million to $797.2 million (December 31, 2010: $692.5 million) due to increased total revenues in the six months to June 30, 2011, as days sales outstanding remained constant at 50 days (December 31, 2010: 50 days).
Goodwill
Goodwill has increased by $210.4 million to $612.9 million (December 31, 2010:$402.5 million), principally due to goodwill of $192.5 million arising on theacquisition of ABH and translational foreign exchange gains on non-US dollardenominated goodwill.Other Intangible assets, netOther intangible assets have increased by $700.5 million to $2,679.4 million(December 31, 2010: $1,978.9 million), principally due to intangible assetsfor DERMAGRAFT product technology of $710.0 million acquired with ABH andtranslational foreign exchange gains on non-US dollar denominated intangibleassets, which offset intangible asset amortization charges of $73.6 million.
Convertible bonds - current
Convertible bonds - current have increased by $1,100 million (December 31, 2010: $nil) due to the reclassification of Shire's $1,100 million 2.75% convertible bonds from non-current to current liabilities in the second quarter of 2011, as exercise of the Put Option could require Shire to redeem the Bonds within twelve months of the balance sheet date.
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 ESOT of Shire shares in the market to satisfy optionexercises; the timing and quantum of any amount that could be paid by theGroup if Centers for Medicare and Medicaid Services ("CMS") were to employ analternative interpretation of the Medicaid rebate legislation in respect ofADDERALL XR Medicaid rebates for periods prior to October 1, 2010; and theamount of cash generated from sales of Shire's products and royalty receipts.
An important part of Shire's business strategy is to protect its products and technologies through the use of patents, proprietary technologies and trademarks, to the extent available. The 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 $144.6 million of cash and cash equivalents atJune 30, 2011. Substantially all of Shire's debt relates to its $1,100 million2.75% convertible bond which matures in 2014, although these bonds include thePut Option which could require repayment of the bonds in 2012. The bonds arecurrently trading at above par. The Group does not currently consider itlikely that the Put Option will be exercised in 2012. However, as the Groupcould be required to repay the bonds within twelve months of the balance sheetdate, the bonds have been classified as a current liability at June 30, 2011in accordance with US GAAP. In addition, Shire has a revolving credit facility("RCF") of $1,200 million which matures in 2015, of which $30 million wasutilized at June 30, 2011 and repaid in July 2011.
Financing
Shire 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.The Group anticipates that its operating cash flow together with availabilityof the RCF would be sufficient to enable repayment of the bonds if the PutOption was exercised in 2012. In lieu of settling any such redemption whollyin cash, the terms of the bonds also permit the Group to deliver theunderlying ordinary shares and, if necessary, a cash top-up amount.
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, 2011 and December 31, 2010:
June 30, December 31, 2011 2010 $'M $'M _________________ _________________Cash and cash equivalents(1) 144.6 550.6 _________________ _________________Convertible debt 1,100.0 1,100.0RCF 30.0 -Building financing obligation 8.4 8.4 _________________ _________________Total debt 1,138.4 1,108.4 _________________ _________________Net debt (993.8) (557.8) _________________ _________________
(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, 2011increased by $15.6 million to $485.5 million (2010: $469.9 million), as highercash receipts from product revenues and lower cash tax payments were offset bythe significantly higher payments for sales deductions, due to higher rebatelevels and timing delays for rebate payments in 2010 following HealthcareReform in the US, together with higher operating expense payments.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 property, plant and equipment of $95.0 million.Capital expenditure on property, plant and equipment includes $55.7 million onconstruction work at Lexington Technology Park ("LTP").Net cash used in investing activities was $202.7 million in the six months toJune 30, 2010. This included cash expenditure on property, plant and equipmentof $208.1 million. Capital expenditure on property, plant and equipmentincludes $121.8 million for the acquisition of new properties and propertiesoccupied under operating leases, and $46.9 million on construction work atLTP.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 theESOT 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.
Net cash used in financing activities was $89.7 million for the six months to June 30, 2010, including the dividend payment of $49.8 million and $43.1 million to extinguish building finance obligations.
Obligations and commitments
During the six months to June 30, 2011 there have been no material changes outside the ordinary course of Shire'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, 2010.
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 2011 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, 2010 will change in respect of the second half of 2011.
The Group's process for managing these risks is consistent withthose processes as outlined in the Annual Report and Accounts of Shire plc forthe year ended December 31, 2010. Some of these risks are specific to theGroup and others are more generally applicable to the pharmaceutical industryin which the Group operates. The Annual Report and Accounts are available onthe 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 key products may not be a commercial success
- Unanticipated decreases in revenues from ADDERALL XR could significantly reduce the Group's revenues and earnings
- Any decrease in royalties derived from the sales of 3TC and ZEFFIX could significantly reduce 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 the product 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
- The outsourcing of services 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 industry 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 market its products profitably
- The introduction of new products by competitors may impact future revenues
- The successful development of pharmaceutical 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 set of financial statements has been prepared in accordance with US GAAP and that the Half Yearly Report herein includes a fair review of the information required by 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, 2010.
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 11, 2011 August 11, 2011
Unaudited consolidated balance sheets
June 30, December 31, 2011 2010 Notes $'M $'M _________ _______________ _______________ASSETSCurrent assets:Cash and cash equivalents 144.6 550.6Restricted cash 21.9 26.8Accounts receivable, net 4 797.2 692.5Inventories 5 336.3 260.0Deferred tax asset 166.9 182.0
Prepaid expenses and other current assets 6 198.6
168.4 _______________ _______________Total current assets 1,665.5 1,880.3 Non-current assets:Investments 125.7 101.6
Property, plant and equipment, net 905.8
853.4
Goodwill 7 612.9
402.5
Other intangible assets, net 8 2,679.4
1,978.9Deferred tax asset 128.3 110.4Other non-current assets 48.0 60.5 _______________ _______________Total assets 6,165.6 5,387.6 _______________ _______________LIABILITIES AND EQUITYCurrent liabilities:
Accounts payable and accrued expenses 9 1,317.5
1,239.3Convertible bonds 10 1,100.0 -Deferred tax liability 4.4 4.4Other current liabilities 11 75.5 49.6 _______________ _______________Total current liabilities 2,497.4 1,293.3 Non-current liabilities:Convertible bonds - 1,100.0Deferred tax liability 579.0 352.1
Other non-current liabilities 12 173.6
190.8 _______________ _______________Total liabilities 3,250.0 2,936.2 _______________ _______________Commitments and contingencies 13
Unaudited consolidated balance sheets (continued)
June 30, December 31, 2011 2010 Notes $'M $'M ___________ _____________ _____________
Equity:
Common stock of 5p par value; 1,000 million shares authorized; and 562.3 million shares issued and outstanding (2010: 1,000 million shares authorized; and 562.2 million shares issued and outstanding)
55.7 55.7Additional paid-in capital 2,799.6 2,746.4Treasury stock: 11.5 million shares (2010: 14.0million shares) (253.4) (276.1)Accumulated other comprehensive income 204.3 85.7Retained earnings/(accumulated deficit)
109.4 (160.3)
________________ ________________Total equity
2,915.6 2,451.4
________________ ________________Total liabilities and equity
6,165.6 5,387.6
________________ ________________
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, 2011 2010 Notes $'M $'MRevenues: _______ _______________ _______________Product sales 1,882.6 1,482.4Royalties 137.0 178.0Other revenues 15.5 5.1 _______________ _______________Total revenues 2,035.1 1,665.5 _______________ _______________Costs and expenses:Cost of product sales (1) 268.2 221.0Research and development 354.8 278.0
Selling, general and administrative (1) 843.2
714.3
Loss/(gain) on sale of product rights 3.5
(4.1)
Reorganization costs 3 13.0
13.6
Integration and acquisition costs 2.6
0.6 _______________ _______________Total operating expenses 1,485.3 1,223.4 _______________ _______________ Operating income 549.8 442.1 Interest income 1.2 0.8Interest expense (19.1) (17.3)Other (expense)/income, net 0.3 8.2 _______________ _______________Total other expense, net (17.6) (8.3) _______________ _______________Income before income taxes and equity inearnings of equity method investees 532.2
433.8
Income taxes (117.8)
(108.1)
Equity in earnings of equity methodinvestees, net of taxes 2.4 0.5 _______________ _______________Net income 416.8 326.2 _______________ _______________(1) Cost of product sales includes amortization of intangible assets relatingto favorable manufacturing contracts of $0.9 million for the six months toJune 30, 2011 (2010: $0.9 million). Selling, general and administrative costsincludes amortization for intangible assets relating to intellectual propertyrights acquired of $72.7 million for the six months to June 30, 2011 (2010:$68.4 million).
Unaudited consolidated statements of income (continued)
6 months to 6 months to June 30, June 30, Notes 2011 2010 _________ _______________ _______________
Earning per ordinary share - basic
Earnings per ordinary share - basic 75.7c
59.8c
_______________
_______________
Earnings per ordinary share - diluted
Earnings per ordinary share - diluted 72.9c
58.2c
_______________
_______________
Weighted average number of shares(millions):Basic 16 551.1 545.7Diluted 16 594.8 589.1 _______________ _______________
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 Retained Additional other earnings/ Common Number of paid-in Treasury
comprehensive (accumulated Total
stock shares capital stock income deficit) equity $'M M's $'M $'M $'M $'M $'MAs at January 1,2011 55.7 562.2 2,746.4 (276.1) 85.7 (160.3) 2,451.4Net income - - - - - 416.8 416.8Foreign currencytranslation - - - - 100.2 - 100.2Options exercised - 0.1 0.8 -
- - 0.8Share-basedcompensation - - 35.9 - - - 35.9 Excess tax benefitassociated withexercise of stockoptions - - 16.5 - - - 16.5 1Shares purchasedby Employee ShareOwnership Trust("ESOT") - - - (63.9) - - (63.9) Shares released byESOT to satisfyexercise of stockoptions - - - 86.6 - (86.6) - Unrealized holdinggain onavailable-for-salesecurities, net oftaxes - - - - 16.0 - 16.0Other thantemporaryimpairment ofavailable-for-salesecurities - - - - 2.4 - 2.4Dividends - - - - - (60.5) (60.5)As at June 30,2011 55.7 562.3 2,799.6 (253.4) 204.3 109.4 2,915.6
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Dividends per share
During the six months to June 30, 2011 Shire plc declared and paid dividends of 10.85 US cents per ordinary share (equivalent to 32.55 US cents per ADS) totalling $60.5 million.
Unaudited consolidated statements of comprehensive income
6 months to 6 months to June 30, June 30, 2011 2010 $'M $'M
_______________ _______________
Net income 416.8 326.2
Other comprehensive income:
Foreign currency translation adjustments 100.2 (82.2) Unrealized holding gain/(loss) on available-for-sale securities (net of taxes of $3.4 million and $2.6 million) 16.0 (22.6) Other than temporary impairment of available-for-sale securities (net of taxes of $nil and $nil) 2.4 1.5 _______________ _______________Comprehensive income 535.4 222.9
_______________ _______________
The components of accumulated other comprehensive income as at June 30, 2011 and December 31, 2010 are as follows:
June 30, December 31, 2011 2010 $'M $'M _______________ _______________Foreign currency translation adjustments 185.6 85.4Unrealized holding gain on available-for-sale securities, netof taxes 18.7 0.3 ________________ ________________Accumulated other comprehensive income 204.3 85.7
________________ ________________
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Unaudited consolidated statements of cash flows
6 months to 6 months to June 30, June 30, 2011 2010 $'M $'M _____________ _____________CASH FLOWS FROM OPERATING ACTIVITIES:Net income
416.8 326.2 Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 132.3 129.1 Share based compensation 34.9 26.7 Gain on sale of non-current investments - (11.1) Loss/(gain) on sale of product rights 3.5 (4.1) Other (5.7) 11.0
Movement in deferred taxes 17.7 58.8Equity in earnings of equity method investees
(2.4) (0.5)
Changes in operating assets and liabilities:
Increase in accounts receivable (56.2) (43.9) Increase in sales deduction accrual 66.1 154.3 Increase in inventory (30.6) (50.1) Increase in prepayments and other assets (13.8) (83.3) Decrease in accounts payable and other liabilities (77.1) (43.2) ______________ ______________Net cash provided by operating activities (A)
485.5 469.9
______________ ______________
CASH FLOWS FROM INVESTING ACTIVITIES:Movements in restricted cash 4.8 6.0Purchases of subsidiary undertakings, net of cash acquired (719.7) -Purchases of non-current investments (4.5) -Purchases of property, plant and equipment ("PP&E") (95.0) (208.1)Purchases of intangible assets
- (2.7) Proceeds from disposal of non-current investments, PP&E and product rights
6.9 2.1Returns of equity investments and proceeds from short terminvestments 1.6 - _____________ _____________Net cash used in investing activities (B)
(805.9) (202.7)
_____________ _____________
Unaudited consolidated statements of cash flows (continued)
6 months to 6 months to June 30, June 30, 2011 2010 $'M $'M ____________ __________CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from drawings of revolving credit facility ("RCF") 30.0 -Repayment of debt acquired with ABH (13.1) -Payment under building finance obligation (0.4) (1.3)Extinguishment of building finance obligation - (43.1)Tax benefit of stock based compensation 18.8 4.4Proceeds from exercise of options 0.8 1.8Payment of dividend (60.5) (49.8)Payments to acquire shares by ESOT
(63.9) (1.7)
_____________ ___________Net cash used in financing activities (C)
(88.3) (89.7)
_____________ ___________ Effect of foreign exchange rate changes on cash and cash equivalents (D)
2.7 6.1 _____________ ___________Net (decrease)/increase in cash and cash equivalents (A+B+C+D) (406.0) 183.6Cash and cash equivalents at beginning of period
550.6 498.9
_____________ _____________Cash and cash equivalents at end of period
144.6 682.5
_____________ ___________Supplemental information associated with continuingoperations: 6 months to 6 months to June 30, June 30, 2011 2010 $'M $'M _____________ _____________ Interest paid (16.2) (13.0)Income taxes paid (147.7) (205.0)
Non cash investing and financing activities: Equity in Vertex Pharmaceuticals, Inc. ("Vertex") received as part consideration for disposal of non-current investment
- 9.1 _____________ _____________
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 of December 31, 2010 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, 2010.
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, and contingent consideration receivable from product divestments.If actual results differ from the Group's estimates, or to the extent theseestimates are adjusted in future periods, the Group's results of operationscould either benefit from, or be adversely affected by, any such change inestimate.
(c) New accounting pronouncements
Adopted during the period
Revenue Recognition in Multiple Deliverable Revenue Arrangements
On January 1, 2011 the Group adopted new guidance issued by the FinancialAccounting Standard Board ("FASB") on revenue recognition in multipledeliverable revenue arrangements. This amends the existing guidance onallocating consideration received between the elements in amultiple-deliverable arrangement and establishes a selling price hierarchy fordetermining the selling price of a deliverable. The selling price used foreach deliverable will be based on vendor specific objective evidence ("VSOE")if available, third party evidence if VSOE is not available, or estimatedselling price if neither VSOE nor third party evidence is available. Itreplaces the term "fair value" in the revenue allocation with "selling price"to clarify that the allocation of revenue is based on entity specificassumptions rather than the assumptions of a market place participant. Theguidance eliminates the residual method of allocation and requires thatarrangement consideration be allocated using the relative selling pricemethod. The guidance also significantly expands the disclosures related to avendor's multiple-deliverable revenue arrangements. The guidance has beenadopted prospectively from January 1, 2011 for new arrangements, or existingarrangements which have been materially modified subsequent to the date ofadoption. The adoption of the guidance did not impact the Group's consolidatedfinancial position, results of operations or cash flows.
Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades
On January 1, 2011 the Group adopted new guidance issued by the FASB on theeffect of denominating the exercise price of a share-based payment award inthe currency of the market in which the underlying equity security trades.This guidance clarifies that an employee share-based payment award with anexercise price denominated in the currency of a market in which a substantialportion of the entity's equity securities trades should not be considered tocontain a condition that is not a market, performance, or service condition.Therefore, an entity would not classify such an award as a liability if itotherwise qualifies as equity. The Group has historically accounted for sharebased payment awards in a manner consistent with the guidance, and thereforethe adoption of this guidance did not impact the Group's consolidatedfinancial position, results of operations or cash flows.
Milestone Method of Revenue Recognition
On January 1, 2011 the Group adopted new guidance issued by the FASB ondefining a milestone and determining when it may be appropriate to apply themilestone method of revenue recognition for research or developmenttransactions. This guidance clarifies that: (i) consideration that iscontingent on achievement of a milestone in its entirety may be recognized asrevenue in the period in which the milestone is achieved only if the milestoneis judged to meet certain criteria to be considered substantive; (ii)milestones should be considered substantive in their entirety and may not bebifurcated; (iii) an arrangement may contain both substantive and nonsubstantive milestones; and (iv) each milestone should be evaluatedindividually to determine if it is substantive. The adoption of the guidancedid not impact the Group's consolidated financial position, results ofoperations or cash flows.
Fees Paid to Federal Government by Pharmaceutical Manufacturers
On January 1, 2011 the Group adopted new guidance issued by the FASB on theaccounting for the annual fee paid by pharmaceutical manufacturers to the USTreasury in accordance with the Patient Protection and Affordable Care Act asamended by the Health Care and Education Reconciliation Act for each calendaryear beginning on or after January 1, 2011. The annual fee in 2011 is $2.5billion. A portion of the fee will be allocated to individual entities on thebasis of the amount of their branded prescription drug sales to certain USGovernment programs for the preceding year as a percentage of the industry'sbranded prescription drug sales for the same period to these same programs.This guidance specifies that the liability for the fee should be estimated andrecorded in full upon the first qualifying sale with a corresponding deferredcost that is amortized to expense using a straight-line method of allocationunless another method better allocates the fee over the calendar year that itis payable. The adoption of the guidance did not have a material impact on theGroup's consolidated financial position, results of operations or cash flows.Disclosure of Supplementary Pro Forma Information for Business CombinationsOn January 1, 2011 the Group adopted new guidance issued by the FASB whichclarifies the acquisition date that should be used for reporting pro formafinancial information disclosures in a business combination when comparativefinancial statements are presented. The guidance specifies that the entityshould disclose revenue and earnings of the combined entity as though thebusiness combination that occurred during the current year had occurred as ofthe beginning of the comparable prior annual reporting period. The guidancealso improves the usefulness of the pro forma revenue and earnings disclosuresby requiring a description of the nature and amount of material, nonrecurringpro forma adjustments that are directly attributable to the businesscombination. The guidance is effective prospectively for business combinationsfor which the acquisition date is on or after January 1, 2011. The Group hashistorically presented proforma business combination disclosures in accordancewith the guidance, and therefore the adoption of guidance did not impact theGroup's disclosure on business combinations.
To be adopted in future periods
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and International Financial Reporting standards ("IFRS")
In May 2011 the FASB issued guidance on fair value measurement and disclosure,which both amends existing requirements and improves the comparability of fairvalue 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 will be effective prospectively for interim andannual periods beginning after December 15, 2011. Early adoption is notpermitted. The Group is currently evaluating the impact of adopting thisguidance.
Presentation of Comprehensive Income
In June 2011 the FASB issued guidance on the presentation of comprehensiveincome which revises the manner in which entities present comprehensive incomein their financial statements. The guidance requires entities to reportcomponents of comprehensive income in either: (i) a single, continuousstatement of comprehensive income; or (ii) two separate but consecutivestatements. The guidance does not change those items which must be reported inother comprehensive income, and does not change the definition of net incomeor the calculation of earnings per share. The guidance will be effectiveretrospectively for interim and annual periods beginning after December 15,2011. Early adoption is not permitted. The Group is currently evaluating theimpact of adopting this guidance.
2. Business combinations
Acquisition of Advanced BioHealing, Inc ("ABH")
On May 17, 2011 the Group announced that it had entered into an Agreement andPlan of Merger, (the "Agreement") to acquire 100% of the outstanding sharesand other equity instruments of ABH. On June 28, 2011, in accordance with theterms of the Agreement, Shire completed its acquisition of ABH. Thepreliminary fair value of cash consideration payable by the Group is $739.2million, subject to certain customary post closing adjustments. The purchaseprice was funded by a combination of Shire's existing cash resources and a$30.0 million draw down of Shire's revolving credit facility.The acquisition of ABH adds the DERMAGRAFT product, a regenerativebio-engineered skin substitute, to Shire's portfolio. DERMAGRAFT is marketedin the US for the treatment of diabetic foot ulcers ("DFU") greater than sixweeks in duration, and brings future growth prospects through a potentialexpanded indication for venous leg ulcers ("VLU"). The acquisition combinesABH's expertise and commercial capability in regenerative medicine with theGroup's strengths and expertise in human cell biological manufacturing.The acquisition of ABH has been accounted for as a purchase businesscombination. The assets acquired and the liabilities assumed from ABH havebeen recorded at their preliminary fair values at the date of acquisition,being June 28, 2011. The Group's consolidated financial statements and resultsof operations include the results of ABH from June 28, 2011. In the six monthsto June 30, 2011 the Group included revenues of $2.0 million (2010: $nil) andpost tax losses of $0.6 million (2010: $nil) for ABH within its UnauditedConsolidated Statements of Income.
The Group's preliminary allocation of the purchase price to the assets acquired and liabilities assumed is outlined below:
Preliminary Fair value $'MIdentifiable assets acquired and liabilities assumed _______________ ASSETSCurrent assets:Cash and cash equivalents 14.6Accounts receivable 30.1Inventories 31.8Deferred tax assets 32.3Other current assets 7.9 _______________Total current assets 116.7 Non-current assets:Property, plant and equipment 16.5Goodwill 192.5Other intangible assets
- DERMAGRAFT product technology
710.0- other intangible assets 1.5Other non-current assets 0.1 _______________Total assets 1,037.3 _______________LIABILITIESCurrent liabilities:
Accounts payable and other current liabilities
49.3
Non-current liabilities:Long term debt, less current portion
9.1Deferred tax liabilities 238.7Other non-current liabilities 1.0 _______________Total liabilities 298.1 _______________
Fair value of identifiable assets acquired and liabilities assumed
739.2 _______________ ConsiderationCash consideration payable 739.2 _______________
The purchase price allocation is preliminary pending final determination ofthe cash consideration payable (which may be adjusted based on ABH's closingadjusted working capital) and the fair values of certain assets acquired andliabilities assumed. The final determination of these fair values will becompleted as soon as possible but no later than one year from the acquisitiondate.Other intangible assets include $710.0 million relating to DERMAGRAFT producttechnology, representing DFU and the potential expanded indication for VLU inthe US, the product brand name and related relationships. The fair value ofthis asset has been estimated using an income approach, using the excessearnings method. The estimated useful life of the technology is 18 years, andamortization expense will be recorded on a straight line basis.Goodwill arising of $192.5 million, which is not deductible for tax purposes,has been assigned to the Specialty Pharmaceuticals ("SP") operating segment.Goodwill includes the values of tax synergies, assembled workforce and futurepotential indications for the DERMAGRAFT product which do not meet thecriteria for recognition as separate intangible assets.
In the six months to June 30, 2011 the Group incurred acquisition-related costs of $6.9 million (2010: $nil), which have been charged to Integration and acquisition costs in the Group's income statement.
Supplemental disclosure of pro forma information
The following unaudited pro forma financial information presents the combinedresults of the operations of Shire and ABH as if the acquisition of ABH hadoccurred at January 1, 2010. The unaudited pro forma financial information isnot necessarily indicative of what the consolidated results of operationsactually would have been had the acquisition been completed at the dateindicated. In addition, the unaudited pro forma financial information does notpurport to project the future results of operations of the combined Group.
6 months to 6 months to June 30, June 30, 2011 2010 $'M $'M _______________ _______________Revenues
2,125.3 1,730.1
Net income attributable to Shire plc 401.6 313.6
_______________ _______________
Per share amounts:Net income per ordinary share attributable to Shire plc - basic 72.9c 57.5c
Net income per ordinary share attributable to Shire plc - diluted 70.3c
56.1c
_______________ _______________
The unaudited pro forma financial information above reflects the following pro forma adjustments:
(i) an adjustment to net income of $49.9 million and $9.8 million for the six months to June 30, 2011 and 2010 respectively, to eliminate the income statement effect of changes in the fair value of ABH's preferred stock warrants (which were extinguished on acquisition of ABH);
(ii) an adjustment to increase amortization expense by approximately $20.0 million for both the six months to June 30, 2011 and 2010, to reflect amortization of intangible assets, principally for DERMAGRAFT product technology, over their estimated useful lives;
(iii) an adjustment to decrease net income by $6.9 million for the six monthsto June 30, 2010 to reflect acquisition and integration costs incurred byShire, and increase net income by $23.9 million for the six months to June 30,2011 to eliminate the acquisition and integration costs incurred by ABH andShire;(iv) an adjustment of $1.4 million and $1.5 million in the six months to June30, 2011 and June 30, 2010 respectively to reflect interest income foregone onthe Group's cash resources used to fund the acquisition of ABH and interestexpense incurred as result of the partial funding of the acquisition of ABHthrough the Group's revolving credit facility; and
(v) adjustments to reflect the tax effects of the above adjustments, where applicable.
3. Reorganization costs
Establishment of an International Commercial Hub in Switzerland
In March 2010 the Group initiated plans to relocate certain research anddevelopment ("R&D") and commercial operations to Switzerland to support itsHuman Genetic Therapies ("HGT") and SP businesses outside the US. In the sixmonths to June 30, 2011, the Group incurred reorganization costs totaling $8.0million relating to employee involuntary termination benefits and otherreorganization costs. The transition to the international commercial hub inSwitzerland will be effected over the remainder of 2011. The totalreorganization costs incurred since March 2010 are $29.3 million.
Owings Mills
In March 2009 the Group initiated plans to phase out operations and close its SP manufacturing facility at Owings Mills, Maryland. Between 2009 and 2011, all products manufactured by Shire at this site will transition to DSM Pharmaceuticals, Inc., and operations and employee numbers at the site will wind down over this period. In the six months to June 30, 2011 the Group incurred reorganization costs of $5.0 million which relate to employee involuntary termination benefits and other costs. The total reorganization costs incurred since March 2009 are $30.7 million.
As a result of the decision to transfer manufacturing from the Owings Millssite the Group revised the useful life of property, plant and equipment in thefacility and in the six months to June 30, 2011 incurred accelerateddepreciation of $4.4 million, which has been charged to Cost of product sales.The reorganization costs and accelerated depreciation have been recordedwithin the SP operating segment.
The liability for reorganization costs arising on the establishment of the international commercial hub in Switzerland and transfer of manufacturing from Owings Mills at June 30, 2011 is as follows:
Closing Opening liability Amount liability at at January 1, charged to Paid/ June 30, 2011 reorganization Utilized 2011 $'M $'M $'M $'M ___________ ____________ ___________ ___________
Involuntary termination benefits 10.1 5.9 (3.7)
12.3Other reorganization costs 2.3 7.1 (9.1) 0.3 ___________ ____________ ___________ ___________ 12.4 13.0 (12.8) 12.6 ___________ ___________ ___________ ___________
At June 30, 2011 the closing liability for reorganization costs was recorded within accounts payable and accrued expenses.
4. Accounts receivable, net
Accounts receivable at June 30, 2011 of $797.2 million (December 31, 2010: $692.5 million), are stated net of a provision for discounts and doubtful accounts of $28.8 million (December 31, 2010: $23.4 million).
Provision for discounts and doubtful accounts:
2011 2010 $'M $'M _____________ _____________As at January 1, 23.4 20.8Provision charged to operations 114.8 85.2Provision utilization (109.4) (83.2) _____________ _____________As at June 30, 28.8 22.8 _____________ _____________
At June 30, 2011 accounts receivable included $63.4 million (December 31, 2010: $75.8 million) related to royalty income.
5. Inventories
Inventories are stated at the lower of cost or market value and comprise:
June 30, December 31, 2011 2010 $'M $'M ____________ ____________Finished goods 98.6 91.9Work-in-progress 162.4 113.9Raw materials 75.3 54.2 ____________ ____________ 336.3 260.0 ____________ ____________At June 30, 2011 inventories included $14.0 million (December 31, 2010: $4.1million) of costs capitalized prior to regulatory approval of the relatedproduct or relevant manufacturing process. At June 30, 2011 pre-approvalinventory relates solely to VPRIV manufactured at the Group's newmanufacturing facility at Lexington Technology Park ("LTP"), which has not yetreceived regulatory approval.
6. Prepaid expenses and other current assets
June 30, December 31, 2011 2010 $'M $'M ______________ ____________Prepaid expenses 41.9 45.1Income tax receivable 71.3 42.4
Value added taxes receivable 20.9 21.5
Other current assets 64.5 59.4 ______________ ______________ 198.6 168.4 ______________ ______________7. Goodwill June 30, December 31, 2011 2010 $'M $'M ____________ ____________Goodwill arising on businesses acquired 612.9 402.5 ____________ ____________
During the six months to June 30, 2011 the Group completed its acquisition of ABH for cash consideration payable of $739.2 million, which resulted in goodwill of $192.5 million (see Note 2). The goodwill has been assigned to the SP operating segment.
At June 30, 2011 goodwill of $444.5 million (December 31, 2010: $245.9 million) is held in the SP segment and $168.4 million (December 31, 2010: $156.6 million) in the HGT segment.
2011 2010 $'M $'M ____________ ____________As at January 1, 402.5 384.7Acquisitions 192.5 -Foreign currency translation 17.9 (29.0) ____________ ____________As at June 30, 612.9 355.7 ____________ ____________
8. Other intangible assets, net
June 30, December 31, 2011 2010 $'M $'M ________________ ________________Amortized intangible assets
Intellectual property rights acquired for currently
marketed products
2,562.2 2,516.4
Acquired product technology 710.0 - Other intangible assets 24.2 22.0
________________ ________________
3,296.4 2,538.4Unamortized intangible assets Intellectual property rights acquired for In-process 150.6 139.7
R&D ("IPR&D")
________________ ________________
3,447.0 2,678.1
Less: Accumulated amortization
(767.6) (699.2)
________________ ________________
2,679.4 1,978.9
________________ ________________
At June 30, 2011 the net book value of intangible assets allocated to the SP segment was $2,184.5 million (December 31, 2010: $1,482.9 million) and in the HGT segment was $494.9 million (December 31, 2010: $496.0 million).
The change in the net book value of other intangible assets for the six months to June 30, 2011 and 2010 is shown in the table below:
Other intangible assets 2011 2010 $'M $'M ________________ ________________As at January 1, 1,978.9 1,790.7Acquisitions 711.5 2.7Amortization charged (73.6) (69.3)
Foreign currency translation 62.6
(71.0) ________________ ________________As at June 30, 2,679.4 1,653.1 ________________ ________________
In the six months to June 30, 2011 the Group acquired intangible assets totaling $711.5 million, principally relating to DERMAGRAFT product technology acquired with ABH (see Note 2 for further details). The weighted average amortization period of acquired amortizable intangible assets is 18 years.
Management estimates that the annual amortization charge in respect ofintangible assets held at June 30, 2011 will be approximately $183 million foreach of the five years to June 30, 2016. Estimated amortization expense can beaffected by various factors including future acquisitions, disposals ofproduct rights, regulatory approval and subsequent amortization of theacquired IPR&D projects, foreign exchange movements and the technologicaladvancement and regulatory approval of competitor products.
9. Accounts payable and accrued expenses
June 30, December 31, 2011 2010 $'M $'M ________________ ________________
Trade accounts payable and accrued purchases 218.2
234.7
Accrued rebates - Medicaid 399.3
379.6
Accrued rebates - Managed care 210.0
170.3Sales return reserve 75.4 69.8Accrued bonuses 65.2 91.6
Accrued employee compensation and benefits payable 66.5
48.1R&D accruals 57.5 60.7Marketing accruals 25.0 26.5Deferred revenue 4.9 13.7Other accrued expenses 195.5 144.3 ________________ ________________ 1,317.5 1,239.3 ________________ ________________There are potentially different interpretations as to how shipmentsof authorized generic ADDERALL XR to Teva Pharmaceutical Industries, Ltd andImpax Laboratories, Inc. should be included in the Medicaid rebatecalculation. Since authorized generic launch in 2009 the Group has recordedits accrual for Medicaid rebates based on its best estimate of the rebatepayable, consistent with the Group's interpretation of the Medicaid rebatelegislation. Shire believes that its interpretation of the Medicaid rebatelegislation is reasonable and correct. Additionally, from October 1, 2010forward, provisions of the 2010 Affordable Care Act provide further clarity,in a manner consistent with the Group's interpretation, as to how shipments ofauthorized generics from that date should be included in the Medicaid rebatecalculation.However, the Centers for Medicare and Medicaid Services ("CMS")could disagree with Shire's interpretation of the Medicaid rebate legislationfor shipments of authorized generics prior to October 1, 2010. CMS couldrequire Shire to apply an alternative interpretation of the Medicaid rebatelegislation and request that Shire pays up to $210 million above the recordedliability. However, Shire believes it has a strong legal basis supporting itsinterpretation of the Medicaid rebate legislation, and that there would be astrong basis firstly to limit any additional payment to a level approximatingthe full, un-rebated cost to the States of ADDERALL XR (equivalent toapproximately $132 million above the recorded liability), and secondly toinitiate litigation to recover any amount paid in excess of the recordedliability. The result of any such litigation cannot be predicted.
10. Convertible Bonds
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 in 2014 and convertible into fully paid ordinary sharesof Shire plc (the "Bonds"). The Bonds were issued at 100% of their principalamount, and unless previously purchased and cancelled, redeemed or converted,will be redeemed on May 9, 2014 (the "Final Maturity Date") at their principalamount.The Bonds may be redeemed at the option of the Bond holders at their principalamount including accrued but unpaid interest on May 9, 2012 (the "PutOption"), or following the occurrence of a change of control of Shire. In lieuof settling any such redemption in cash, the terms of the Bonds also permitShire to deliver the underlying ordinary shares and, if necessary, a cashtop-up amount. In accordance with US GAAP, as the exercise of the Put Optioncould require Shire to redeem the Bonds within twelve months of the balancesheet date, the Bonds have been presented as a current liability at June 30,2011.11. Other current liabilities June 30, December 31, 2011 2010 $'M $'M _____________ _____________Income taxes payable 4.7 16.2Value added taxes 13.0 9.9Short-term debt 30.0 -Other current liabilities 27.8 23.5 _____________ _____________ 75.5 49.6 _____________ _____________
Shire has an RCF of $1,200 million which matures in 2015, of which $30 million was utilized at June 30, 2011.
12. Other non-current liabilities
June 30, December 31, 2011 2010 $'M $'M ____________ ____________Income taxes payable 111.4 130.0Deferred revenue 14.2 14.1Deferred rent 11.8 12.8Insurance provisions 15.5 13.5Other non-current liabilities 20.7 20.4 ____________ ____________ 173.6 190.8 ____________ ____________
13. Commitments and contingencies
(a) Leases
Future minimum lease payments under operating leases at June 30, 2011 arepresented below: Operating leases $'M _____________2011 1 18.22012 1 31.62013 1 27.62014 1 24.72015 1 19.72016 1 17.1Thereafter 1 41.1 1 _____________ 1 180.0 _____________The Group leases land, facilities, motor vehicles and certain equipment underoperating leases expiring through 2021. Lease and rental expense amounted to$17.7 million and $16.6 million for the six months to June 30, 2011 and 2010respectively, which is predominately included in selling, general andadministrative ("SG&A") expenses in the Consolidated Statements of Income.
(b) Letters of credit and guarantees
At June 30, 2011 the Group had irrevocable standby letters of credit and guarantees with various banks totaling $30.4 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. The Group has restricted cash of $9.2 million, as required by these letters of credit.
(c) Collaborative arrangements
Details of significant updates in collaborative arrangements in the six months to June 30, 2011 are included below:
In-licensing arrangements
JUVISTA
On June 19, 2007 Shire signed an agreement with Renovo Limited ("Renovo") todevelop and commercialize JUVISTA. On February 11, 2011, Renovo announced itsPhase 3 trial for JUVISTA in scar revision surgery did not meet its primary orsecondary endpoints. On March 2, 2011, Shire terminated its agreement withRenovo.
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 certain 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. In the six months to June 30,2011 Shire received milestone payments totaling $6.8 million (2010: $nil). Inthe six months to June 30, 2011 Shire recognized milestone income of $8.6million (2010: $4.3 million) within other revenues and $27.6 million (2010:$22.8 million) within product sales for shipment of product to the relevant
licensee.(d) Commitments(i) Clinical testingAt June 30, 2011 the Group had committed to pay approximately $273.8 million(December 31, 2010: $156.2 million) to contract vendors for administering andexecuting clinical trials. The timing of these payments is dependent uponactual services performed by the organizations as determined by patientenrollment levels and related activities.
(ii) Contract manufacturing
At June 30, 2011 the Group had committed to pay approximately $117.2 million(December 31, 2010: $108.6 million) in respect of contract manufacturing. TheGroup expects to pay $67.2 million of these commitments in 2011.
(iii) Other purchasing commitments
At June 30, 2011 the Group had committed to pay approximately $150.6 million (December 31, 2010: $104.1 million) for future purchases of goods and services, predominantly relating to active pharmaceutical ingredients sourcing. The Group expects to pay $141.8 million of these commitments in 2011.
(iv) Investment commitments
At June 30, 2011 the Group had outstanding commitments to subscribe for interests in companies and partnerships for amounts totaling $8.3 million (December 31, 2010: $5.7 million) which may all be payable in 2011, depending on the timing of capital calls.
(v) Capital commitments
At June 30, 2011 the Group had committed to spend $76.0 million (December 31,2010: $76.0 million) on capital projects. This includes commitments for theexpansion and modification of its offices and manufacturing facilities at theHGT campus in Lexington, Massachusetts.
(e) Legal and other proceedings
General
The Group recognizes loss contingency provisions for probable losses whenmanagement is able to reasonably estimate the loss. Where the estimated losslies within a range the Group records a loss contingency provision based onits best estimate of the probable loss. Where no particular amount within thatrange is a better estimate than any other amount, the minimum amount isrecorded. These estimates are often developed substantially before theultimate loss is known, so estimates are refined each accounting period, asadditional information becomes known. In instances where the Group is unableto develop a reasonable estimate of loss, no litigation loss is recorded atthat time. As information becomes known a loss provision is set up when areasonable estimate can be made. The estimates are reviewed quarterly and theestimates are changed when expectations are revised. Any outcome uponsettlement that deviates from the Group's estimate may result in an additionalexpense or release in a future accounting period. At June 30, 2011 provisionsfor litigation losses, insurance claims and other disputes totaled $43.4million (December 31, 2010: $33.8 million).
Specific
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"). The filing of the lawsuits triggered a stay ofapproval of all six ANDAs for up to 30 months.
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. Thepreviously scheduled Markman hearing was cancelled by the Court and has notbeen rescheduled. No trial date has been set.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 has beenscheduled for May 2, 2012. No trial date has been set.In February 2011, Shire was notified that Mylan Pharmaceuticals, Inc hadsubmitted 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 June 7,2012. A trial is scheduled to start on September 16, 2013.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. No trial datehas been set.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 April 20,2010 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 proceedings inthe UK on December 8, 2010. Mt. Sinai has counterclaimed alleging infringementin the UK proceedings. A hearing date has not been set for the EPO oppositionor Swedish law suit. The UK hearing date is scheduled for May 2012.On January 18, 2011 the German Court found that REPLAGAL infringes Mt. Sinai'spatent, and granted Mt Sinai's request for an injunction. Shire has appealedthis decision, but no hearing date has been set. As a result of the supplyshortage for the only other ERT for Fabry Disease, Mt. Sinai had undertakennot to enforce the injunction in Germany prior to September 30, 2011 and onJune 30, 2011, as a result of the on-going supply shortage of the other ERT,Mt. Sinai has extended its undertaking until December 31, 2011.
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"). Within the requisite 45 day period, Shire filed lawsuits inthe US District Court for the Southern District of New York against each ofBarr, Mylan-Matrix and Natco for infringement of certain of Shire's FOSRENOLpatents. A Markman hearing was held on June 17, 2010. In April 2011, Shire andBarr reached a settlement which provides Barr with a license to market its owngeneric version of FOSRENOL in the US but only after October 1, 2021, orearlier under certain circumstances. No payments to Barr are involved with thesettlement. As a result of the settlement, the lawsuit against Barr wassubsequently dismissed. The lawsuit against Mylan-Matrix has been dismissed,and consequently, Mylan-Matrix may enter the market upon FDA approval of itsversion of generic FOSRENOL. No trial date has been set with respect to Natcoand a stay of approval of up to 30 months remains in effect.In December 2010, Shire was notified that an ANDA was submitted under theHatch-Waxman Act seeking permission to market generic versions of all approvedstrengths of FOSRENOL. The notice was from Alkem Laboratories Ltd. ("Alkem").Within the requisite 45 day period, Shire filed lawsuits in both the USDistrict Court for the Southern District of New York and the US District Courtfor the Northern District of Illinois against Alkem for infringement ofcertain of Shire's FOSRENOL patents. The filing of the lawsuits triggered astay of approval of this ANDA for up to 30 months. No trial date has been set.
LIALDA
In May 2010 Shire was notified that an ANDA was submitted under theHatch-Waxman Act seeking permission to market a generic version of LIALDA. Thenotice was received from Zydus Pharmaceuticals USA, Inc. ("Zydus"). Within therequisite 45 day period, Shire filed a lawsuit in the US District Court forthe District of Delaware against Zydus and Cadila Healthcare Limited, doingbusiness as Zydus Cadila. The filing of the lawsuit triggered a stay ofapproval of the ANDA for up to 30 months. A Markman hearing is scheduled forApril 26, 2012. A trial is scheduled for October 8, 2012.
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. A trial is scheduled for January 9, 2012.In February 2011, Shire was notified that an ANDA was submitted under theHatch-Waxman Act seeking permission to market a generic version of allapproved strengths of ADDERALL XR. The notice was received from WatsonLaboratories, Inc. ("Watson Laboratories"). This new ANDA is not covered underthe existing settlement agreements entered into in November 2007 between Shireand Watson Pharmaceuticals, Inc (the "Settlement Agreements"). The SettlementAgreements cover a different ANDA and do not provide any license for WatsonLaboratories to sell the products covered in Watson Laboratories' new ANDA.Within the requisite 45 day period, Shire filed a lawsuit in the U.S. DistrictCourt for the Southern District of New York against Watson Pharmaceuticals,Inc., Watson Laboratories, Inc.-Florida, Watson Pharm, Inc., AndrxCorporation, and Andrx Pharmaceuticals, L.L.C. for infringement of certain ofShire's ADDERALL XR patents and also for breach of contract in connection withthe Settlement Agreements. The filing of the lawsuit triggered a stay ofapproval of this ANDA for up to 30 months. 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.
14. Derivative 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, cashand cash equivalents, short-term debt and on foreign exchange contracts onwhich interest is at floating rates. This exposure is primarily to US dollar,Pounds Sterling, Euro and Canadian dollar interest rates. As the Groupmaintains all of its cash and liquid investments and foreign exchangecontracts on a short term basis for liquidity purposes, this risk is notactively managed. In the six months to June 30, 2011 the average interest ratereceived on cash and cash equivalents was less than 1% per annum. The largestproportion of these cash and cash equivalents were in US dollar money marketand liquidity funds.
The Group incurs interest at a fixed rate of 2.75% on the Group's $1,100 million principal amount of convertible bonds due 2014.
During the six months to June 30, 2011 the Group did not enter into any derivative instruments to manage interest rate exposure. The Group continues to review its interest rate risk and the policies in place to manage the risk.
Market risk of investmentsAt June 30, 2011 the Group had investments of $125.7 million,comprising available-for-sale investments being principally equity investmentsin publicly quoted companies ($107.5 million), equity method investments ($9.3million) and cost method investments in private companies ($8.9 million). Theinvestments in available-for-sale securities and equity method investments,for certain investment funds which contain a mixed portfolio of public andprivate investments, are exposed to market risk. No financial instruments orderivatives have been employed to hedge this 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 royalty receipts) and derivative contracts.Cash is invested in short-term money market instruments, including moneymarket and liquidity funds and bank term deposits. The money market andliquidity funds in which Shire invests are all triple A rated by both Standard& Poor's and by Moody's credit rating agencies.
The Group is exposed to the credit risk of the counterparties with which it enters into derivative contracts. The Group aims to limit this exposure through a system of internal credit limits which require counterparties to have a long term credit rating of A / A2 or better from the major rating agencies. The internal credit limits are approved by the Board and exposure against these limits is monitored by the corporate treasury function. The counterparties to the derivative contracts are major international financial institutions.
The Group's revenues from product sales are mainly governed by agreements withmajor pharmaceutical wholesalers and relationships with other pharmaceuticaldistributors and retail pharmacy chains. For the year to December 31, 2010there were two customers in the US who accounted for 44% of the Group'sproduct sales. However, such customers typically have significant cashresources and as such the risk from concentration of credit is consideredminimal. The Group has taken steps to manage any credit risk associated withthese transactions and operates clearly defined credit evaluation procedures.
Foreign exchange risk
The Group trades in numerous countries and as a consequence has transactional and translational foreign exchange exposure.
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, Euro and Canadiandollar. 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 and accruals forroyalty receipts. The foreign exchange contracts have not been designated ashedging instruments.
Translational foreign exchange exposures arise on the translation into US dollars of the financial statements of non-US dollar functional subsidiaries.
At June 30, 2011 the Group had 22 swap and forward foreign exchangecontracts outstanding to manage currency risk. The swaps and forward contractsmature within 90 days. The Group did not have credit risk related contingentfeatures or collateral linked to the derivatives. These foreign exchangecontracts were classified in the consolidated balance sheet as follows: Fair value Fair value June 30, December 31, 2011 2010 $'M $'M _____________ _____________
Assets Prepaid expenses and other current assets 1.1
3.7
Liabilities Other current liabilities 4.1
2.7
_____________
_____________
Net losses/gains (both realized and unrealized) arising on foreign exchangecontracts have been classified in the consolidated statements of income asfollows: Location of net (loss)/gain Amount of net (loss)/gain recognized in income recognized in income __________________________________ ____________ ____________Six months to June 30, June 30, 2011 2010 $'M $'M _____________ _____________Foreign exchange contracts Other income, net (2.6) 38.5 _____________ _____________These net foreign exchange (losses)/gains are offset within Other income, netby net foreign exchange gains/(losses) arising on the balance sheet items thatthese contracts were put in place to manage.
15. Fair value measurement
Assets and liabilities that are measured at fair value on a recurring basis
At June 30, 2011 and December 31, 2010 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, 2011 $'M $'M $'M $'M $'M ____________ ____________ ___________
___________ ___________Financial assets:Available-for-salesecurities(1) 107.5 107.5 107.5 - -Contingent considerationreceivable (2) 53.1 53.1 - - 53.1Foreign exchange contracts 1.1 1.1 - 1.1 - Financial liabilities:Foreign exchange contracts 4.1 4.1 - 4.1 - ____________ ____________ ___________ ___________ ___________ Carrying Fair value value Total Level 1 Level 2 Level 3At December 31, 2010 $'M $'M $'M $'M $'M ____________ ____________ ___________ ___________ ___________Financial assets:Available-for-salesecurities(1) 83.9 83.9 83.9 - -Contingent considerationreceivable (2) 61.0 61.0 - - 61.0Foreign exchangecontracts 3.7 3.7 - 3.7 - Financial liabilities:Foreign exchangecontracts 2.7 2.7 - 2.7 - ____________ ____________ ___________ ___________ ___________
(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.
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:
- Available-for-sale securities - the fair values of available-for-sale securities are estimated based on quoted market prices for those investments.
- Contingent consideration receivable - the fair value of the contingentconsideration receivable has been estimated using the income approach (using adiscounted cash flow method). This discounted cash flow approach usessignificant unobservable inputs, such as future sales of the divested product,relevant contractual royalty rates, an appropriate discount rate and assumedweightings applied to scenarios used in deriving a probability weighted fairvalue.
- 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.
Assets 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, which is measured at fair value on a recurring basis using significant unobservable inputs (Level 3), is as follows:
Contingent consideration receivable 2011 $'M ____________ Balance at January 1, 61.0
Loss recognized in the income statement due to change in fair value during the period
(3.5)
Reclassification of amounts due from Noven to Other receivables within Other current assets
(9.2)
Foreign exchange translation recorded to other comprehensive income
4.8
Balance at June 30,
53.1
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, 2011 and December 31, 2010 of the Group's financial assets and liabilities which are not measured at fair value on a recurring basis are as follows:
June 30, 2011 December 31, 2010 Carrying Carrying amount Fair value amount Fair value $'M $'M $'M $'M ____________ ____________ ____________ ___________ Financial liabilities:Convertible bonds 1,100.0 1,283.9 1,100.0 1,139.8
Building financing obligation 8.4 9.4 8.4
8.2
____________ ____________ ____________
___________
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:
- 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.
- 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, accountsreceivable, accounts payable and accrued expenses and drawings under the RCFapproximate to fair value because of the short-term maturity of these amounts.
16. 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, 2011 2010 $'M $'M _________________ _________________Amounts attributable to Shire plc shareholdersNumerator for basic earnings per share 416.8
326.2
Interest on convertible bonds, net of tax 16.8
16.8
_________________
_________________
Numerator for diluted earnings per share 433.6
343.0
_________________
_________________
Weighted average number of shares:
Millions Millions _________________ _________________Basic(1) 551.1 545.7Effect of dilutive shares:
Share based awards to employees(2) 10.3
10.2
Convertible bonds 2.75% due 2014(3) 33.4
33.2 _________________ _________________Diluted 594.8 589.1 _________________ _________________
(1) Excludes shares purchased by the ESOT 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:
June 30, June 30, 2011 2010 No. of shares No. of shares Millions Millions _________________ _________________Share awards(1) 3.8 8.1 _________________ _________________(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) satisfaction of the requiredperformance/market conditions cannot be measured until the conclusion of theperformance period..17. Segmental reporting
Shire's internal financial reporting is in line with its business unit and management reporting structure and includes two segments: SP and HGT. The SP and HGT reportable segments represent the Group's revenues and costs for currently promoted and sold products, together with the costs of developing projects for future commercialization. `All Other' has been included in the table below in order to reconcile the two operating segments to the total consolidated figures.
The 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 All Other
Total
6 months to June 30, 2011 $'M $'M $'M
$'M ___________ ___________ ___________ ___________Product sales 1,292.8 589.8 - 1,882.6Royalties 89.3 - 47.7 137.0Other revenues 12.3 0.5 2.7 15.5 ___________ ____________ ___________ ___________Total revenues 1,394.4 590.3 50.4 2,035.1 ___________ ____________ ___________ ___________
Cost of product sales(1) 176.0 92.2 -
268.2
Research and development(1) 207.8 147.0 -
354.8
Selling, general andadministrative(1) 561.3 172.0 109.9
843.2
Loss on sale of product rights 3.5 - -
3.5
Reorganization costs 5.0 - 8.0
13.0
Integration and acquisition costs 2.6 - -
2.6 _____________ ____________ ___________ ___________Total operating expenses 956.2 411.2 117.9 1,485.3 _____________ ____________ ___________ ___________Operating income/(loss) 438.2 179.1 (67.5) 549.8 _____________ ____________ ___________ ___________ Total assets 3,555.3 1,875.9 734.4 6,165.6Long-lived assets(2) 174.9 691.1 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 charges ($102.4 million) is included in Selling,general and 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).
SP HGT All Other Total6 months to June 30, 2010 $'M $'M $'M $'M ___________ ___________ ___________ ___________Product sales 1,092.6 389.8 - 1,482.4Royalties 102.8 - 75.2 178.0Other revenues 1.2 1.3 2.6 5.1 ___________ ____________ ___________ ___________Total revenues 1,196.6 391.1 77.8 1,665.5 ___________ ____________ ___________ ___________ Cost of product sales(1) 165.0 56.0 - 221.0Research and development(1) 158.7 119.3 - 278.0Selling, general andadministrative(1) 486.1 124.7 103.5 714.3
Gain on sale of product rights (4.1) - -
(4.1)Reorganization costs 6.7 - 6.9 13.6Integration and acquisitioncosts 0.6 - - 0.6 _____________ ____________ ___________ ___________Total operating expenses 813.0 300.0 110.4 1,223.4 _____________ ____________ ___________ ___________Operating income/(loss) 383.6 91.1 (32.6) 442.1 _____________ ____________ ___________ ___________ Total assets 2,081.5 1,574.3 1,213.1 4,868.9Long-lived assets(2) 169.5 587.4 48.8 805.7Capital expenditure onlong-lived assets(2) 5.0 187.4 4.0 196.4 _____________ ___________ ___________ ___________
(1) Depreciation from manufacturing plants ($18.4 million) and amortization offavorable manufacturing contracts ($0.9 million) is included in Cost ofproduct sales; depreciation of research and development assets ($7.2 million)is included in Research and development; and all other depreciation andamortization ($101.3 million) is included in Selling, general andadministrative.
(2) Long-lived assets comprise all non-current assets (excluding goodwill and other intangible assets, deferred tax assets, investments, income tax receivable and financial instruments).
Non GAAP Measure
This Half Yearly Report contains a financial measure not prepared inaccordance with US GAAP which is: Non GAAP diluted earnings per ADS. This NonGAAP measure excludes the effect of certain cash and non-cash items thatShire's management believes are not related to the core performance of Shire'sbusiness.
This Non GAAP financial measure is used by Shire's management to make operating decisions because they facilitate 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 press release as Shire's managementbelieve that it will provide investors with a means of evaluating, and anunderstanding of how Shire's management evaluates, Shire's performance andresults 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 substitutes 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 2011 and 2010 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.
Depreciation, which is included in Cost of product sales, R&D and SG&A costsin our US GAAP results, has been separately disclosed for the presentation of2010 and 2011 Non GAAP earnings.
Sales growth at CER, which is a Non GAAP measure, is computed by restating 2011 results using average 2010 foreign exchange rates for the relevant period.
Average exchange rates for the six months to June 30, 2011 were $1.62:£1.00 and $1.40:€1.00 (2010: $1.53:£1.00 and $1.33:€1.00).
Independent review report to Shire plc
We have been engaged by Shire plc to review the consolidated condensed set of financial statements in the Half Yearly Report for the six months ended June 30, 2011 which comprises the consolidated balance sheet, consolidated statements of income, consolidated statement of changes in equity, consolidated statements of comprehensive income, the consolidated statements of cash flows and related notes 1 to 17. We have read the other information contained in the Half Yearly Report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.
This report is made solely to the company in accordance withInternational Standard on Review Engagements (UK and Ireland) 2410 "Review ofInterim Financial Information Performed by the Independent Auditor of theEntity" issued by the Auditing Practices Board. Our work has been undertakenso that we might state to Shire plc those matters we are required to state toit in an independent review report and for no other purpose. To the fullestextent permitted by law, we do not accept or assume responsibility to anyoneother than Shire plc, for our review work, for this report, or for theconclusions 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 consolidated condensed 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 Shire plc a conclusion on the consolidated condensed 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 causes us to believe that the condensed set of financial statements in the Half Yearly Report for the six months ended June 30, 2011 is not prepared, in all material respects, in accordance with US GAAP and with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.
Deloitte LLP
Chartered Accountants and Statutory Auditor
London, United Kingdom
August 11, 2011
XLONRelated Shares:
Shire