13th Sep 2007 12:00
IFRS Information - First half of 2007
Basingstoke, UK - 13 September 2007 - In order to meet its obligations underthe Listing Rules of the Financial Services Authority, Shire plc ("Shire") is publishing today its interim results forthe six months ended 30 June 2007 in accordance with International FinancialReporting Standards (IFRS).
It should be noted that on 26 July 2007, Shire announced its results in respect of the same period in accordance with US GAAP.
For further information please contact:
Investor Relations Clĩa Rosenfeld (Rest of the World) +44 1256 894 160 Eric Rojas (North America) +1 484 595 8252 Notes to editorsShire plcShire's strategic goal is to become the leading specialty pharmaceuticalcompany that focuses on meeting the needs of the specialist physician. Shirefocuses its business on attention deficit and hyperactivity disorder (ADHD),human genetic therapies (HGT), gastrointestinal (GI) and renal diseases. Thestructure is sufficiently flexible to allow Shire to target new therapeuticareas to the extent opportunities arise through acquisitions. Shire'sin-licensing, merger and acquisition efforts are focused on products in nichemarkets with strong intellectual property protection either in the US orEurope. Shire believes that a carefully selected portfolio of products with astrategically aligned and relatively small-scale sales force will deliverstrong results.
For further information on Shire, please visit the Company's website: www.shire.com.
Should any shareholder wish to receive a hard copy of the Interim Report, please email Investor Relations on [email protected].
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 risks oruncertainties materialize, Shire results could be materially affected. Therisks and uncertainties include, but are not limited to, risks associated with:the inherent uncertainty of pharmaceutical research, product development,manufacturing and commercialization; the impact of competitive products,including, but not limited to the impact of those on Shire's Attention Deficitand Hyperactivity Disorder ("ADHD") franchise; patents, including but notlimited to, legal challenges relating to Shire's ADHD franchise; governmentregulation and approval, including but not limited to the expected productapproval date of INTUNIV¢â€ž¢ (guanfacine) extended release (ADHD); Shire's abilityto secure new products for commercialization and/or development; Shire'sability to benefit from its acquisition of New River Pharmaceuticals Inc.; thesuccessful development of JUVISTA‚® (Human TGF¯¢3) and other risks anduncertainties detailed from time to time in Shire plc's filings with theSecurities and Exchange Commission, particularly Shire plc's Annual Report onForm 10-K for the year ended December 31, 2006.
The following are trademarks of Shire plc or companies within the Shire Group, which are the subject of trademark registrations in certain territories.
ADDERALL XR‚® (mixed salts of a single entity amphetamine)
ADDERALL‚® (mixed salts of a single entity amphetamine)
CALCICHEW‚® range (calcium carbonate with or without vitamin D3)
CARBATROL‚® (carbamazepine extended-release capsules)
DAYTRANA¢â€ž¢ (methylphenidate transdermal system)
ELAPRASE¢â€ž¢ (idursulfase)
FOSRENOL‚® (lanthanum carbonate)
GENE-ACTIVATED¢â€ž¢
INTUNIV¢â€ž¢ (guanfacine extended release)
LIALDA¢â€ž¢ (mesalamine)
MEZAVANT‚® (mesalazine)
REMINYL‚® (galantamine hydrobromide) (UK and Republic of Ireland)
REMINYL XL¢â€ž¢ (galantamine hydrobromide) (UK and Republic of Ireland)
REPLAGAL‚® (agalsidase alfa)
VYVANSE¢â€ž¢ (lisdexamfetamine dimesylate)
XAGRID‚® (anagrelide hydrochloride)
The following are trademarks of third parties referred to in this filing.
3TC (trademark of GlaxoSmithKline ("GSK"))
DYNEPO (trademark of Sanofi-Aventis)
JUVISTA (trademark of Renovo)
PENTASA (trademark of Ferring)
RAZADYNE (trademark of Johnson & Johnson)
REMINYL (trademark of Johnson & Johnson, excluding UK and Republic of Ireland)
SEASONIQUE (trademark of Barr Laboratories, Inc.)
ZEFFIX (trademark of GSK) SHIRE PLC
RESULTS OF OPERATIONS FOR THE SIX MONTHS TO JUNE 30, 2007 AND 2006 UNDER IFRS
Total revenues
The following table provides an analysis of Shire's total revenues by source: 6 months to 6 months to Change June 30, June 30, 2007 2006 $'M $'M % __________________ __________________ __________________ Product sales 965.7 722.0 +34 Royalties 123.5 121.4 +2 Other 13.9 6.7 +107 __________________ __________________ __________________ Total 1,103.1 850.1 +30 __________________ __________________ __________________Product sales
The following table provides an analysis of Shire's key product sales:
6 months to 6 months to Product sales US growth prescription June 30, June 30, growth % 2007 2006 % $'M $'M 1. Specialty Pharmaceuticals 2. ADHD ADDERALL XR 504.2 426.8 +18 +7 ADDERALL - 18.9 N/A N/A DAYTRANA 31.8 - N/A N/A 3. GI PENTASA 84.0 62.6 +34 +6 LIALDA 5.0 - N/A N/A 4. RENAL FOSRENOL 47.3 13.9 N/A +12 DYNEPO 1.9 - N/A N/A 6. GP CALCICHEW 25.6 22.1 +16 N/A CARBATROL 33.4 30.3 +10 -5 REMINYL/REMINYL XL 14.6 9.3 +57 N/A XAGRID 31.6 26.2 +21 N/A Other product sales 52.6 57.8 -9 __________________ __________________ __________________ 832.0 667.9 +25 __________________ __________________ __________________ Human Genetic Therapies REPLAGAL 64.4 54.1 +19 N/A ELAPRASE 69.3 - N/A N/A __________________ __________________ __________________ 133.7 54.1 N/A __________________ __________________ __________________ Total product sales 965.7 722.0 +34 __________________ __________________ __________________ The following discussion includes references to prescription and market sharedata for Shire's key products. The source of this data is IMS Health, June2007. IMS Health is a leading global provider of business intelligence for thepharmaceutical and healthcare industries.
ADDERALL XR
ADDERALL XR is the leading brand in the US ADHD market with an average marketshare of 26% during the six months to June 30, 2007 (2006: 26%). US ADHD marketgrowth of 6% resulted in a 7% increase in US prescriptions for ADDERALL XR forthe six months to June 30, 2007 compared to the same period in 2006.Sales of ADDERALL XR for the six months to June 30, 2007 were $504.2 million,an increase of 18% compared to the same period in 2006 (2006: $426.8 million).Product sales growth was higher than prescription growth due primarily to aprice increase in January 2007.As previously disclosed, the United States Federal Trade Commission ("FTC")informed Shire on October 3, 2006 that it was reviewing the ADDERALL XR patentlitigation settlement agreement between Shire and Barr Laboratories, Inc.("Barr"). On June 22, 2007, Shire received a civil investigative demandrequesting that it provide information to the FTC relating to its settlementwith Barr and its earlier settlement with Impax Laboratories, Inc. Shire iscooperating fully with this investigation and believes that the settlements arein compliance with all applicable laws.
VYVANSE
VYVANSE was launched in the US in June 2007. Launch stocks of $55.9 million(before sales deductions) were shipped to wholesalers during June 2007. Inaccordance with IFRS, sales of these launch stocks have been deferred pendingsatisfaction of revenue recognition criteria. All launch stocks are expected tobe recognized into revenue by the end of 2007.
DAYTRANA
Following its launch in June 2006, DAYTRANA achieved an average market shareduring the six months to June 30, 2007 of 2%. Net sales for the six months toJune 30, 2007 were $31.8 million.The DAYTRANA and ADDERALL XR market share has helped Shire grow its total shareof the US ADHD market to 28% at June 30, 2007 compared to 27% at June 30, 2006(which included a 1% share relating to ADDERALL which Shire has subsequentlydivested).PENTASAPENTASA's average share of the US oral mesalamine prescription market remainedstable at 17% for the six months to June 30, 2007 compared to the same periodin 2006. US prescriptions for the six months to June 30, 2007 were up 6%compared to the same period in 2006 due to increased prescriptions generated bythe GI sales force and a 4% increase in the US oral mesalamine prescriptionmarket.
Sales of PENTASA for the six months to June 30, 2007 were $84.0 million, an increase of 34% compared to the same period in 2006 (2006: $62.6 million). Sales growth is higher than prescription growth due to an increasing shift to the 500mg strength units and the impact of a price increase in November 2006.
LIALDA
LIALDA's average market share of the US oral mesalamine market from the launchof LIALDA in March 2007 through to June 30, 2007 was 2.5%. Net sales of $5.0million for the six months to June 30, 2007 were impacted by $2.1 million insales deductions, primarily stocking discounts and coupons.The initial launch stock of $34.3 million (before sales deductions) continuesto be worked through the wholesaler pipeline. In accordance with IFRS, sales ofLIALDA are being recognized as the conditions for revenue recognition are met.All launch stock is expected to be recognized into revenue by the end of theyear.FOSRENOL
In Europe, FOSRENOL has now been launched in Germany, France, UK, Italy and anumber of other countries. Launches will continue throughout 2007 in the EU,including Spain, subject to finalization of national marketing authorizationsand the conclusion of pricing and reimbursement negotiations. European sales ofFOSRENOL for the six months to June 30, 2007 were $15.6 million (2006: $0.9million).US sales of FOSRENOL for the six months to June 30, 2007 were $31.7 million(2006: $13.0 million) giving worldwide FOSRENOL sales of $47.3 million for theperiod (2006: $13.9 million). US IMS Retail Audit prescriptions for the sixmonths to June 30, 2007 were up 12% compared to the same period in 2006 due toFOSRENOL increasing its average market share to 8.6% during the six months toJune 30, 2007 (2006: 8.1%) and market growth of 5% over the same period. Theincrease in net sales is significantly higher than retail audit prescriptiongrowth due to a combination of a price increase in July 2006, growth in use ofthe higher strengths (launched in early 2006), lower sales deductions,wholesaler de-stocking in 2006 of initial launch stocks and the growth ofnon-retail business.
CARBATROL
US prescriptions of CARBATROL for the six months ending June 30, 2007 were down5% compared to the same period in 2006. This was primarily due to a comparabledecline in the US extended release carbamazepine prescription market.
Sales of CARBATROL for the six months to June 30, 2007 were $33.4 million, an increase of 10% compared to the same period in 2006 (2006: $30.3 million). Although there was a decrease in US prescriptions, sales rose due to price increases in July 2006 and April 2007.
XAGRID
Sales for the six months to June 30, 2007 were $31.6 million, an increase of21% compared to the same period in 2006 (2006: $26.2 million). Expressed intransaction currencies (XAGRID is primarily sold in Euros), sales increased by11% due to growth in many of Shire's markets. In addition there was a 10%benefit from favorable exchange rate movements against the US dollar.
REPLAGAL
Sales for the six months to June 30, 2007 were $64.4 million (2006: $54.1 million). This increase of 19% is primarily due to higher unit sales in Europe and Canada, with 8% accounted by the impact of favorable exchange rates.
ELAPRASE
ELAPRASE was launched in the US in August 2006 and in Canada and several major European markets during the first half of 2007. ELAPRASE is now sold in 25 countries. Sales for the six months to June 30, 2007 were $69.3 million.
Foreign exchange effect
As many of Shire's sales revenues are denominated in currencies other than USdollars (primarily Canadian dollars, Euros and Pounds sterling), revenue growthreported in US dollars includes the impact of translating the sales made in alocal currency into US dollars. The table below shows the effect of foreignexchange translations on the revenue growth of the key affected products aswell as the underlying performance of three key products in their localcurrency: 6 months to 6 months to 6 months to Impact of June 30, June 30, June 30, translation 2007 sales 2007 sales 2007 sales to US growth in growth in dollars $'M local US dollars currency % % % ___________ ___________ ___________ ___________ XAGRID sales in Euros 20.0 +17 +27 +10 REPLAGAL sales in Euros 32.1 +5 +13 +8
XAGRID sales in Pounds sterling 11.6 +2 +11
+9 CALCICHEW sales in Pounds 23.0 +5 +16 +11sterling
REMINYL and REMINYL XL sales in 13.3 +44 +58
+14Pounds sterling REPLAGAL sales in Pounds 6.0 +2 +9 +7sterling ___________ ___________ ___________ ___________RoyaltiesRoyalty revenue increased by 2% to $123.5 million for the six months to June30, 2007 (2006: $121.4 million). The following table provides an analysis ofShire's royalty income: 6 months to 6 months to change June 30, June 30, 2007 2006 $'M $'M % ____________ ___________ ___________ 3TC 74.5 77.8 -4 ZEFFIX 19.4 16.1 +20 Others 29.6 27.5 +8 ____________ ____________ __________ Total 123.5 121.4 +2 ________ ________ _______3TC
Royalties from sales of 3TC for the six months to June 30, 2007 were $74.5million (2006: $77.8 million), a decrease of 4% compared to the same period in2006. The impact of foreign exchange movements has contributed 4% to thereported growth. Excluding foreign exchange movements the royalty income hasdeclined 8% compared to the same period in 2006.Shire receives royalties from GSK on worldwide 3TC sales. GSK's worldwide salesof 3TC for the six months to June 30, 2007 were $554 million, a decrease of 7%compared to the same period in 2006 (2006: $595 million). The nucleosideanalogue market for HIV has continued to grow, however competitive pressureswithin the market have increased, leading to a decline in 3TC sales.
ZEFFIX
Royalties from sales of ZEFFIX for the six months to June 30, 2007 were $19.4million (2006: $16.1 million), an increase of 20% compared to the same periodin 2006. The impact of foreign exchange movements has contributed 10% to thereported growth. Excluding foreign exchange movements there has been anincrease of 10% compared to the same period in 2006.Shire receives royalties from GSK on worldwide ZEFFIX sales. GSK's worldwidesales of ZEFFIX for the six months to June 30, 2007 were $167 million, anincrease of 19% compared to the same period in 2006 (2006: $140 million). Thisincrease was primarily due to strong growth in the Chinese, Japanese and Koreanmarkets.OtherOther royalties are primarily in respect of REMINYL and REMINYL XL (marketed asRAZADYNE and RAZADYNE ER in the US), a product marketed worldwide by Janssen,an affiliate of Johnson and Johnson, with the exception of the United Kingdomand the Republic of Ireland where Shire has the exclusive marketing rights.
Sales of the REMINYL/RAZADYNE range, for the symptomatic treatment of mild to moderately severe dementia of the Alzheimer's type, continue to grow in the Alzheimer's market.
Barr and other companies have filed an Abbreviated New Drug Application("ANDA") with the US Food and Drug Administration ("FDA") for generic versionsof RAZADYNE and Janssen and Synaptech have filed lawsuits against some of thoseANDA filers. A trial was held during the week of May 21, 2007. No decisionfrom the court has been issued at this time.In June 2006 Janssen and Synaptech filed a lawsuit against Barr forinfringement of their patent rights relating to RAZADYNE ER as a result of Barrfiling an ANDA with the FDA for a generic version of RAZADYNE ER. Janssen andSynaptech also filed suit against Sandoz Inc. in May 2007. No court date hasbeen set in either proceedings.
Cost of product sales
For the six months to June 30, 2007 the cost of product sales was 14% ofproduct sales (2006: 17%). The cost of product sales for REPLAGAL in 2006included a $40.3 million adjustment in respect of inventories acquired throughthe acquisition of Transkaryotic Therapies Inc. ("TKT"). This fair valueadjustment increased Shire's cost of product sales as a percentage of productsales for the six months to June 30, 2006 by 5%. Excluding the impact of thisfair value adjustment in 2006, cost of product sales as a percentage of productsales in the six months to June 30, 2007 was 2% higher than for the six monthsto June 30, 2006 due to changes in the product sales mix and inventorywrite-offs.
For the six months to June 30, 2007 the cost of product sales included a charge of $1.8 million for share based compensation under IFRS 2, Share Based Payments, (2006: $1.5 million).
Research and development (R&D)
R&D expenditure increased from $150.0 million in the six months to June 30, 2006 to $277.1 million in the six months to June 30, 2007.
The increase in R&D expenditure during the six months to June 2007 primarilyresults from a non-cash charge of $100.0 million recognized on the effectivesettlement of Shire's pre-existing relationship with New River. This chargerepresents the write-off of capitalized up-front and milestone payments made byShire prior to the acquisition of New River. This charge is presented within R&D as at the time of the New River acquisition VYVANSE, although approved by theFDA, had not yet received the final scheduling classification from the DrugEnforcement Agency ("DEA") and was therefore not available for commercial sale.Further details in respect of this charge are included in Note 3 to these IFRSinterim financial statements.Excluding this charge of $100 million on the effective settlement of thepre-existing relationship with New River, R&D expenditure in the six months toJune 30, 2007 was $177.1 million, (2006: $150.0 million), an increase of $27.1million, (18%). In 2007, R&D expenditure includes costs associated with Phase 3(b) and Phase 4 studies to support new product launches and the continuation ofPhase 3 trials on GA-GCB, the development of the Women's Health and the NewRiver franchises, pre-clinical development of three HGT projects, two new Phase1 projects and two further pre-clinical projects.
For the six months to June 30, 2007 R&D expenditure included a charge of $5.4 million (2006: $2.8 million) in respect of share based compensation.
Selling, general and administrative (SG&A) expenses
SG&A expenses increased from $435.2 million in the six months to June 30, 2006to $633.6 million in the six months to June 30, 2007, an increase of 46%. As apercentage of product sales, SG&A expenses were 66% (2006: 60%).6 months to June 30, 2007 2006(1) Change $'M $'M % ____________ ____________ ___________ Sales costs 154.2 108.5 +42 Marketing costs 195.6 175.4 +12 Other SG&A costs 122.3 103.1 +19 ___________ ____________ ___________ 472.1 387.0 +22
Depreciation, amortization and goodwill 161.5 48.2
n/aimpairment(2) ___________ ____________ ___________ Total SG&A costs 633.6 435.2 +46 ____________ ____________ ___________
(1) 2006 amounts have been reclassified to conform to the 2007 presentation.
(2) Excludes depreciation from manufacturing plants of $2.6 million (2006: $2.2 million) which is included in cost of product sales.
The increase in sales and marketing costs included the impact of the following:
* An increase in the ADHD sales force to promote VYVANSE; * The cost of the new GI sales force in the US; and * The launches of DYNEPO, LIALDA and VYVANSE.
For the six months to June 30, 2007 SG&A expenses included a charge of $15.2 million in respect of share based compensation (2006: $12.4 million), representing 2% of product sales (2006: 2%).
Depreciation, amortization and goodwill impairment (included in selling, general and administrative expenses)
The depreciation charge for the six months to June 30, 2007 was $22.2 million (2006: $16.3 million). The increase in depreciation follows investment in Shire's infrastructure to support the continuing growth of Shire.
Amortization charges, including the amortization on acquired products, were$58.4 million for the six months to June 30, 2007 (2006: $31.9 million)including intangible asset impairment charges of $0.4m (2006: $0.1 million).The increase in amortization is primarily due to the commencement ofamortization of capitalized intangibles for DAYTRANA, ELAPRASE and DYNEPOfollowing their launches in June 2006, July 2006 and March 2007 respectively.The intangible asset impairment charge arose as a result of the economic valueand strategic worth of the product concerned being less than its carryingvalue.The goodwill impairment charge for the six months to June 30, 2007 was $80.9million, (2006: $nil). The impairment charge on goodwill arising on theacquisition of BioChem Pharma Inc, primarily reflects the after tax value of3TC and Zeffix royalty income received over the six months ended June 30, 2007.
Integration costs (included in selling, general and administrative expenses)
For the six months to June 30, 2007 Shire incurred $2.7 million of costs associated with the integration of the New River business (2006: $3.9 million relating to the TKT acquisition). New River is now fully integrated and no further integration costs are anticipated.
Gain on sale of product rights
For the six months to June 30, 2007 Shire recognized a gain on the disposal of certain non-core product rights of $5.0 million (2006: $nil).
Investment revenue
For the six months to June 30, 2007 Shire received investment revenue of $34.7million (2006: $24.2 million). Investment revenue primarily related to interestreceived on cash balances. Investment revenue for the six months to June 30,2007 is significantly higher than for the six months ending June 30, 2006 dueto increases in the US dollar interest rate and higher average cash balances.
Finance costs
For the six months to June 30, 2007 Shire incurred finance costs of $42.0million (2006: $12.2 million). The increase in finance costs in 2007 over 2006follows the acquisition of New River which was partly funded by $1.3 billion ofterm loans, utilized under Shire's $2.3 billion banking facility. These termloans were subsequently partially repaid using the proceeds from Shire's 2.75%convertible bond issued in May 2007. The remaining $200 million of the termloans was also repaid during the six months to June 30, 2007. Finance costs forthe six months to June 30, 2007 include a $7.9 million write-off of deferredfinancing costs following the repayment of these term loans. Finance costsrelating to the convertible bonds, representing interest expense, amortizeddiscount and issue costs totaled $10.8 million for the six months to June 30,2007.In the six months to June 30, 2007 and 2006 finance costs included a provisionfor interest, which may be awarded by the Court in respect of amounts due tothose ex-TKT shareholders who have requested appraisal of the acquisitionconsideration payable for their TKT shares. The original trial date for theappraisal rights litigation was set for April 23, 2007, but this trial date hassince been postponed to May 2008.
Share of post tax profits from associates and joint ventures
Profits of $1.2 million were recorded for the six months to June 30, 2007(2006: $4.3 million). This comprised profits of $3.1 million from the 50% shareof the antiviral commercialization partnership with GSK in Canada (2006: $3.2million), offset by losses of $1.9 million being Shire's share of losses in theGeneChem and EGS Healthcare Funds (2006: profit of $1.1 million).
Taxation
The effective rate of tax for the six months to June 30, 2007 was 77% (2006:32%). The effective rate of tax in the six months to June 30, 2007 hasincreased over the six months to June 30, 2006 as a result of the inclusion in2007 of non-deductible goodwill impairment charges totaling $80.9 million(2006: $nil). Excluding goodwill impairment charges, the effective rate of taxfor the six months to June 30, 2007 was 33% (2006: 32%).At June 30, 2007 net deferred tax liabilities of $1,163.9 million wererecognized (December 31, 2006: $27.2 million). The increase in net deferred taxliabilities at June 30, 2007 as compared to December 31, 2006 has primarilyresulted from the recognition of net deferred tax liabilities totaling $1,150.7million following the acquisition of New River.
Principal Differences: IFRS and US GAAP Net Income for the six months to June 30, 2007 and 2006.
The principal differences between IFRS net income and the US GAAP net loss forthe six months ending June 30, 2007 resulted from the acquisition of New River.The primary differences arising from the New River acquisition relate to:
(a) In-process research and development ("IPR&D")
IPR&D totaling $1,943.3 million in respect of VYVANSE indicated fornon-pediatric patients in the US and VYVANSE in the rest of the world ("RoW")has been capitalized as an intangible asset under IFRS. As required under USGAAP the value ascribed to these IPR&D assets ($1,896.0 million) has beencharged to research and development expense as of the acquisition date.
(b) Effective settlement of pre-existing relationship with New River
Prior to the acquisition of New River Shire had entered into a collaborationagreement with New River which governed the development, manufacture andcommercialization of VYVANSE in the US and RoW territories. As a result of theexistence of this collaboration agreement, Shire's acquisition of New River hasbeen accounted for as a multiple element transaction under both IFRS and USGAAP, with one element being the business combination and the other elementbeing the effective settlement of the pre-existing relationship.Under both US GAAP and IFRS the pre-existing relationship was effectivelysettled at no incremental cost to Shire. No charge has been recognized on theeffective settlement of the pre-existing relationship under US GAAP, howeverunder IFRS a pre-tax charge of $100.0 million, together with related taxeffects of $32.7 million, has been recognized as of the acquisition date.A charge has arisen under IFRS as up-front and milestone payments made in 2005and 2006 in respect of the collaboration totaling $100.0 million wereclassified as intangible assets: these assets have been written-off oneffective settlement of the pre-existing relationship. Under US GAAP theseup-front and milestone payments had, prior to the acquisition of New River,been expensed by Shire as research and development costs. Accordingly no chargeon effective settlement of the pre-existing relationship has been recordedunder US GAAP.Other significant differences between net income under IFRS and the net (loss)/ income as reported under US GAAP for the six months ended June 30, 2007 and2006 related to:Goodwill Impairment
An impairment under IFRS of the goodwill that arose on the acquisition of Biochem Pharma Inc. of $80.9 million (2006: $nil). The US GAAP treatment of the combination as a pooling of interests resulted in no goodwill arising and therefore no impairment charge is recorded under US GAAP.
Capitalisation of product milestone payments
Product milestone payments of $5.9 million (2006: $50.0 million) were capitalized as intangible assets under IFRS but expensed as research and development costs under US GAAP. Capitalized milestone payments in 2006 related to a milestone paid in respect of the New River collaboration.
Finance costs in respect of convertible bonds
Finance costs recognized in respect of the $1,100.0 million 2.75% convertiblebonds due 2014 are $5.9 million (2006: $nil) higher under IFRS as compared toUS GAAP.Under both US GAAP and IFRS finance costs include the stated coupon on thebonds, together with amortization of the direct costs of issue. However, underIFRS, finance costs also include amortization of the discount arising fromseparate accounting for the equity conversion feature at inception: this equityconversion feature is not separately accounted for under US GAAP. Finance costsare higher under IFRS as compared to US GAAP as a result of the amortization ofthis discount. interim IFRS Consolidated income statement (UNAUDITED) 6 months to 6 months to June 30, June 30, 2007 2006 Notes $'M $'M ____________ ____________ Continuing operations: Revenue 1,103.1 850.1 Cost of sales (133.8) (123.6) ____________ ____________ Gross profit 969.3 726.5 Research and development expenses (277.1)
(150.0)
Selling, general and administrative expenses (633.6)
(435.2)
Gain on sale of product rights 5.0
- ____________ ____________ Operating profit 63.6 141.3 Investment revenue 34.7 24.2 Finance costs (42.0) (12.2) Other income / (expense) 2.3 (0.8)
Share of post tax profits from associates and 1.2
4.3joint ventures ____________ ____________ Profit before taxation 59.8 156.8 Taxation 4 (45.8) (49.9) ____________ ____________
Profit for the period from continuing 14.0
106.9operations Discontinued operations:
Gain on disposal of discontinued operations, -
40.6net of tax ____________ ____________ Profit for the period 14.0 147.5 ____________ ____________
Earnings per share (cents per ordinary share) 5
Basic 2.6c 29.3c Diluted 2.6c 28.9c
Earnings per share from continuing operations
(cents per ordinary share) Basic 2.6c 21.2c Diluted 2.6c 21.0c ____________ ____________ Dividends Paid 10 29.4 22.6 ____________ ____________
The profit for the period is all attributable to the equity holders of the Shire plc.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
interim IFRS Consolidated statement of recogniZed income and expense (UNAUDITED) 6 months to 6 months to June 30, 200 June 30, 7 2006 $'M $'M ____________ ____________ Profit for the period 14.0 147.5
Exchange differences on translation of foreign 3.6
86.7operations
Unrealized holding gain/(loss) on 0.2
(1.4)
available-for-sale securities
____________ ____________
Net profit recognized directly in equity 3.8
85.3 ____________ ____________ ____________ ____________
Total recognized income for the period 17.8
232.8 ____________ ____________
The total recognized income for the period is all attributable to the equity holders of the Shire plc.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
interim IFRS Consolidated balance sheet (UNAUDITED) June 30, December 31, June 30, 2007 2006 2006 Notes $'M $'M $'M _________________ _________________
_________________ _________________
ASSETS Non-current assets Goodwill 6 2,427.1 1,805.9 2,136.2 Other Intangible assets 7 4,728.9 1,747.8 1,721.3 Property, plant and 252.9 259.1 233.1equipment Deferred tax assets 191.4 120.0 85.9 Investments accounted for 27.9 24.2 29.3using equity method Available for sale 41.5 31.6 33.5investments Other receivables 16.1 12.3 10.1 _________________
_________________ _________________
7,685.8 4,000.9 4,249.4 Current assets Inventories 177.6 131.1 123.5 Trade and other 495.4 396.1 370.8receivables Current tax assets 8.3 11.8 2.2 Trading investments - - 1.5 Cash and cash equivalents 598.5 1,126.9 885.1 Restricted cash 39.5 29.8 29.5 __________________
__________________ __________________
1,319.3 1,695.7 1,412.6 _________________
_________________ _________________
Total assets 9,005.1 5,696.6 5,662.0 __________________
__________________ __________________
LIABILITIES AND SHAREHOLDERS' EQUITY Non-current liabilities Borrowings 9.0 6.9 5.9 Convertible bonds 8 892.5 - - Trade and other payables 31.8 24.6 12.3 Deferred tax liabilities 1,355.3 147.2 260.4 Long-term provisions 23.0 27.6 25.1 __________________
__________________ __________________
2,311.6 206.3 303.7 Current liabilities Borrowings 4.6 3.5 3.3 Trade and other payables 702.8 585.5 472.4 Liability to dissenting 465.6 452.3 439.2shareholders Current tax liabilities 348.9 295.3 117.8 Provisions 9.9 8.3 1.8 __________________
__________________ __________________
1,531.8 1,344.9 1,034.5 __________________
__________________ __________________
Total liabilities 3,843.4 1,551.2 1,338.2 __________________
__________________ __________________
The accompanying notes are an integral part of these unaudited consolidated financial statements.
interim IFRS Consolidated balance sheet (continued) (UNAUDITED) June 30, December 31, June 30, 2007 2006 2006 Notes $'M $'M $'M _____________ _____________ ______________ _____________ Shareholders' equity Share capital 48.2 43.7 43.0 Share premium 181.4 125.7 36.8 Treasury shares (194.5) (94.8) (4.7) Exchangeable shares 57.0 59.5 84.8
Capital reduction reserve 2,946.5 2,946.5
2,946.5 Other reserve 2,099.7 2,099.7 2,099.7 Equity component of 8 195.6 - -convertible debt Retained earnings (172.2) (1,034.9) (882.3) ______________ ______________ ______________
Total shareholders' equity 10 5,161.7 4,145.4
4,323.8 ______________ ______________ ______________ Total liabilities and 9,005.1 5,696.6 5,662.0shareholders' equity _____________ ______________ _____________The accompanying notes are an integral part of these consolidated financialstatements. interim IFRS Consolidated cash flow statement (UNAUDITED) 6 months to 6 months to June 30, 2007 June 30, 2006 Notes $'M $'M ____________ ______________ ______________
NET CASH FLOWS FROM OPERATING ACTIVITIES 11 254.8
296.2
Cash flows from investing activities
Movement in restricted cash (9.6) 1.1
Purchase of subsidiary undertaking, net (2,458.6)
(0.8)
of cash and cash equivalents (1) Expenses relating to the New River (60.4)
-acquisition
Loan repaid by ID Biomedical Corporation -
70.6(IDB)
Purchases of property, plant and (22.0)
(34.8)equipment
Purchases of intangible assets (49.4)
(120.7)
Purchases of financial assets (5.8)
(9.4)
Net increase in current financial assets 55.8
5.5
Deposits received from the sale of 10.5
-product rights
Proceeds from the sale of product rights 6.3
-
Proceeds from sale of property, plant -
2.2and equipment Interest received 36.1 18.0
Dividends received from associates 2.2
0.3 ______________ ______________
Net cash used in investing activities (2,494.9)
(68.0) ______________ ______________
Cash flows from financing activities Proceeds from issue of Shire 2.75% 1,100.0
-convertible bonds due 2014 Redemption of New River 3.75% (279.4) -convertible notes due 2013
Redemption of 2% guaranteed convertible -
(0.1)loan notes 2011
Payment of debt issuance costs (32.7)
-
Proceeds from drawings under bank 9 1,300.0
-facility
Repayment of drawings under bank 9 (1,300.0)
-facility
Proceeds from exercise of New River 141.8
-purchased call option
Proceeds from issue of common stock, net 877.3
-of issue costs
Proceeds from exercise of share options 24.1
17.7
Proceeds from exercise of warrants 7.0
-
Payments to acquire shares by ESOT (99.9)
(2.0)
Movement in finance lease obligations (1.8)
2.0 Dividends paid (29.4) (22.6) ______________ ______________
Net cash provided by / (used in) 1,707.0
(5.0)financing activities ______________ ______________
Net (decrease)/increase in cash and cash (533.1)
223.2equivalents
Cash and cash equivalents at beginning 1,126.9
656.5of the period
Effect of foreign currency translation 4.7
5.4 ______________ ______________
Cash and cash equivalents at end of the 598.5
885.1period ______________ ______________
1. Stated net of cash and cash equivalents acquired with New River of $74.9m.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
NOTES TO THE interim IFRS CONSOLIDATED FINANCIAL STATEMENTS
1. General Information
Shire plc ("the Company") and its subsidiaries (collectively referred to as the"Group" or "Shire") develop and market products for specialty physicians. TheGroup focuses on four therapeutic areas: ADHD, gastro-intestinal ("GI"), humangenetic therapies ("HGT") and renal diseases.The Company is a public limited company incorporated under the Companies Act,1985 and domiciled in the United Kingdom. The address of its registered officeis Hampshire International Business Park, Chineham, Basingstoke, Hampshire RG248EP, United Kingdom.
The Company has its primary listing on the London Stock Exchange and its secondary listing on the NASDAQ National Market in the United States of America.
These accounts are presented in US Dollars as this is the currency of the primary economic environment in which the Group operates.
1. Accounting Presentation and Policies
These unaudited interim financial statements for the six months to June 30,2007 have been prepared in accordance with International Accounting Standardsand International Financial Reporting Standards ("IFRS") as adopted by the EU.Other than noted below in respect of convertible bonds, the accounting policiesadopted are consistent with those followed in the preparation of the Group'sAnnual Report for the year ended December 31, 2006. The balance sheet atDecember 31, 2006 has been derived from the full Group accounts published inthe Annual Report for the year ended December 31, 2006, which have beendelivered to the Registrar of Companies and on which the report of theindependent auditors was unqualified and did not contain a statement undereither section 237(2) or 237(3) of the Companies Act 1985. The financialinformation for the year ended December 31, 2006 included in this report doesnot constitute statutory accounts as defined in section 240 of the CompaniesAct 1985.Convertible bondsOn issue the Company bifurcates convertible bonds into their debt and equitycomponents. The fair value of the debt component is estimated using the marketinterest rate for an equivalent non-convertible bond. The amount allocated tothe debt component is classified as a liability and measured on an amortizedcost basis until extinguished on conversion or redemption of the bonds. Theremainder of the proceeds of issuing the convertible bond is allocated to theequity component, (which represents the conversion option), and is classifiedin shareholders' equity, net of any income tax effects. The carrying amount ofthe equity component is not re-measured in subsequent periods.
2. Business Combinations
On April 19, 2007 Shire completed its acquisition of New River by way of ashort-form merger, in an all-cash transaction. The acquisition was effected bymerging Shuttle Corporation, an indirect wholly owned subsidiary of Shire, withand into New River, with New River continuing as the surviving corporation. Asconsideration, Shire paid to New River's shareholders $64 in cash for eachshare of New River common stock outstanding at the time of the acquisition.The acquisition of New River allows Shire to capture the full economic value ofVYVANSE, and gain control of the future development and commercialization ofthis product.
The pediatric indication of VYVANSE was approved by the FDA on February 23, 2007 and Shire received notification from the DEA of the final Schedule II classification for VYVANSE on May 3, 2007.
The acquisition of New River has been accounted for as a purchase businesscombination in accordance with IFRS 3 "Business Combinations" ("IFRS 3"). Underthe purchase method of accounting, the assets and liabilities of New River arerecorded at their fair values at the acquisition date. The financial statementsand reported income statement of Shire issued after the completion of theacquisition reflect these fair values, with the results of New River beingincluded within the Consolidated Income Statement from April 19, 2007.Total consideration, including amounts payable in respect of stock options,share appreciation rights ("SARs"), warrants over New River's common stock andcosts directly attributable to the business combination was approximately $2.6billion at the price of $64 per share of New River's common stock, as analyzedbelow: $'M ______________
Cash consideration for 37.1 million outstanding shares of New 2,276.0 River common stock at $64 per share (net of 1.5 million of
common stock repurchased through a prepaid forward purchase
contract(1)) Cash cost of settling New River's stock options and SARs
124.5
Cash cost for settling sold warrants over 4.0 million shares 133.0of New River's common stock Direct acquisition costs 60.4 ______________ 2,593.9 ______________
(1) New River entered into this prepaid forward purchase contract with Merrill Lynch in July 2006.
Accounting for the New River Collaboration Agreement
Prior to the acquisition of New River, on January 31, 2005 Shire entered into acollaboration agreement with New River which governed the development,manufacture and commercialization of VYVANSE for the treatment of ADHD in theUS and RoW territories. In March 2005, this collaboration agreement was splitinto two separate agreements, the US Collaboration Agreement and the RoWTerritory License Agreement (together the "New River CollaborationAgreements").Under the terms of the New River Collaboration Agreements, the parties wererequired to collaborate on the development, manufacturing, marketing and salesof VYVANSE in the US. Profits from the collaboration arising in the US were tobe divided according to a predetermined formula, based on the scheduling ofVYVANSE by the DEA. Post-approval milestones were due under the New RiverCollaboration Agreements if the product received favorable scheduling (scheduleIII, IV or V or unscheduled) and on the achievement of certain salesmilestones.Through the New River Collaboration Agreements Shire also acquired the licensein the RoW territory to develop and commercialize VYVANSE, in consideration ofa low double-digit royalty.Shire paid an initial sum of $50 million to New River in January 2005 onsigning the original collaboration agreement and a further $50 million was paidby Shire to New River following acceptance of the filing of a New DrugApplication ("NDA") by the FDA in January 2006. These payments were capitalizedby the Company as intangible assets in accordance with IAS 38, "IntangibleAssets". As at the acquisition date, no amortization had been recorded inrespect of these intangible assets as they were not yet available for use asfinal DEA scheduling was yet to be received.As Shire has a pre-existing relationship with New River, Shire has accountedfor the acquisition of New River as a multiple element transaction, with oneelement being the business combination and one element being the effectivesettlement of Shire's pre-existing relationship with New River. As no specificguidance exists under IFRS 3 `Business Combinations' governing the accountingfor business combinations when a pre-existing relationship is present, Shirehas analogised the multiple element approach as outlined in IAS 18, "Revenue",together with specific guidance in US GAAP in respect of accounting forbusiness combinations when pre-existing relationships exist as outlined in EITF04-1, "Accounting for Pre-existing Relationships between the Parties to aBusiness Combination" ("EITF 04-1"). In accounting for the New Riveracquisition under IFRS, Shire has therefore applied the principles outlined inEITF 04-1 in accounting for the effective settlement of the New RiverCollaboration Agreements.In accordance with EITF 04-1, Shire has measured the effective settlement ofthe New River Collaboration Agreements resulting from its pre-existingrelationship with New River and has determined that, in respect of the USCollaboration Agreement, it was less favorable to the Company when comparedwith pricing for current market transactions for similar items. The RoWTerritory License Agreement was determined to be at current market rates. Thevaluation of the New River Collaboration Agreements and their current marketcomparators has been based upon information available at the time of theacquisition and using the expectations and assumptions that have been deemedreasonable by the Company's management.As the US Collaboration Agreement is deemed less favorable to the Company atthe time of the acquisition when compared with pricing for current markettransactions for similar items, the Company has recorded a charge of $100.0million, (together with related tax effects of $32.7 million), on the effectivesettlement of the pre-existing relationship in the Consolidated IncomeStatement. Although settlement provisions in the US Collaboration Agreementavailable to the Company would have enabled effective settlement of the NewRiver Collaboration Agreements at no incremental cost to the Company, existingintangible assets totaling $100.0 million, (representing up-front and milestonepayments in respect of the New River Collaboration Agreements), have beenwritten-off on effective settlement of the pre-existing relationship. No chargehas been recorded in respect of the RoW Territory License Agreement, as theCompany has determined that this agreement was stated at current market rates.
Purchase price allocation
Shire's cost of acquiring New River of approximately $2.6 billion has beenallocated on a preliminary basis to the assets acquired and liabilities assumedaccording to their estimated fair values at the date of acquisition. The finaldetermination of these fair values will be completed as soon as possible but nolater than one year from the acquisition date. To the extent that thesepreliminary estimates of the fair value of the assets acquired and theliabilities assumed need to be adjusted, Shire will do so in accordance withIFRS 3.The following table presents the Company's preliminary allocation of thepurchase price to the assets acquired and liabilities assumed, based on theirfair values. Book Value Fair Value Fair Value (1) Adjustments $'M $'M $'M _____________ _____________ _____________ Non-current assets: Other intangible assets, net - Intellectual property - developed - 1,133.3 1,133.3technology
- Favorable manufacturing contracts - 9.2
9.2
- In process research and development - 1,943.3
1,943.3
Property, plant and equipment, net 2.6 (1.8)
0.8
Deferred tax assets, non-current 1.1 51.7
52.8 Current assets: Inventories 4.8 1.5 6.3 Accounts receivable, net 0.3 - 0.3
Prepaid expenses and other current 2.4 (2.2)
0.2assets Purchased call option 141.8 - 141.8 Short-term investments 55.8 - 55.8 Cash and cash equivalents 74.9 - 74.9 Non-current liabilities: Sold warrants (133.0) 133.0 - Deferred income, non-current (59.5) 59.5 - Deferred tax liability, non-current (1.1) (1,202.4) (1,203.5) Current liabilities: Convertible loan notes (279.4) - (279.4) Accounts payable and accrued expenses (33.3) 1.6 (31.7) Deferred income, current (3.1) 3.1 -
Accrued share based payment liability (122.9) 122.9
- _____________ _____________ _____________ Net assets acquired at fair value (348.6) 2,252.7 1,904.1 Goodwill 689.8 _____________ _____________ _____________ 2,593.9
Total consideration satisfied by: Cash (including $60.4 million of
2,593.9
direct costs of acquisition)
_____________ _____________ _____________(1) Apart from the inclusion of the convertible loan notes, the purchased calloption and sold warrants according to IAS 32 "Financial Instruments:Presentation" and IAS 39 "Financial Instruments: Recognition and Measurement"in the book value of net liabilities acquired, the remaining book values aspresented above are stated as under US GAAP and have not been restated to IFRSon the grounds of materiality.
Fair value adjustments primarily relate to:
* the recognition of intangible assets totaling $3,085.8 million, primarily
represented by developed technology in respect of the pediatric indication
of VYVANSE in the US ($1,133.3 million) and in-process research and
development in respect of VYVANSE for non-pediatric patients in the US and
VYVANSE in the RoW ($1,943.3 million); * deferred tax liabilities of $1,202.4 million in respect of temporary differences relating to recognized intangible assets; and
* elimination of liabilities relating to deferred revenue in respect of the
New River Collaboration Agreements, ($62.6 million), sold warrants ($133.0
million) and share based payment liabilities relating to cash settled SARs
($122.9 million).
The goodwill arising on the acquisition of New River primarily results from anticipated operating synergies from the combination.
If the acquisition had been completed on the first day of 2007, Group revenuesfor the period to June 30, 2007 would have been $1,103.1 million, and theGroup's loss before tax from continuing operations would have been $156.6million. This reflects the results of the combined entity adjusted forfinancing costs, the amortization of intangible assets and share basedcompensation costs as if the acquisition completed on January 1, 2007. Theresults of New River for the six months to June 30, 2007 as included within thepro forma results of the combined entity include a non-recurring charge of$82.8 million relating to New River's cash settled SARs which were extinguishedas a result of the acquisition.
The results of the combined entity include the following adjustments:
i. an adjustment to eliminate the revenues recognized by New River of $3.0
million for the six months to June 30, 2007 in connection with the New
River Collaboration Agreements;
ii. an adjustment to increase interest expense by $25.3 million for the six
months to June 30, 2007, to reflect the interest expense and amortization
of deferred issue costs associated with the $1,300 million drawn down under
the Facilities Agreement which was entered into by Shire on February 21,
2007 for the purpose of financing the acquisition of New River;
iii. an adjustment to decrease interest income by $6.5 million for the six
months to June 30, 2007, to reflect the interest foregone on the Group's
cash resources used to part finance the acquisition of New River; and
iv. an adjustment to increase amortization expense based on the estimated fair
value of identifiable intangible assets from the purchase price allocation,
which are being amortized over their estimated useful lives over a range of
5 to 20 years, of $80.6 million for the six months to June 30, 2007. The pro forma information is presented for informational purposes only and isnot necessarily indicative of the results of operations that actually wouldhave been achieved had the acquisition been consummated as of that time, nor isit intended to be a projection of future results.
3. Taxation
Taxation for the interim period to June 30, 2007 consists of UK tax expense of$17.4 million (2006: $11.0 million expense) and overseas tax expense of $28.4million (2006: $38.9 million expense).
4. Earnings per share (EPS)
Basic EPS is based upon the profit for the period divided by the weighted average number of ordinary shares outstanding during the period, excluding those held in the employee share trusts (which are treated as cancelled).
Diluted EPS is based upon the profit for the period divided by the weighted average number of ordinary shares outstanding during the period and adjusted for the effect of all dilutive potential ordinary shares.
6 months to 6 months to June 30, 2007 June 30, 2006 $'M $'M _______________ _______________
Profit for the period from continuing operations 14.0
106.9
(numerator for EPS from continuing operations) Gain from discontinued operations, net of tax -
40.6 ______________ ______________
Profit for the period (numerator for basic and 14.0
147.5diluted EPS) ______________ ______________ Number of Number of shares (M) shares (M) _______________ _______________
Weighted average number of shares:
Basic 535.0 503.7 Effect of dilutive shares: Share options 7.1 5.5 Warrants 0.6 0.6 _______________ _______________ Diluted 542.7 509.8 _______________ _______________The share options not included within the calculation of the diluted weightedaverage number of shares, because the exercise prices exceeded the Company'saverage share price during the calculation period and the convertible bonds astheir inclusion would be anti-dilutive, are shown below: 6 months to June 6 months to June 30, 2007 30, 2006 Number of shares Number of shares (M) (M) __________________ __________________
Share options out of the money 1.4
2.9 Convertible bonds 9.4 - __________________ __________________ 5. Goodwill impairment At June 30, 2007 an impairment charge of $80.9 million (2006: $nil) was made inrelation to goodwill arising on the acquisition of BioChem Pharma Inc. Therecoverable value of the business was calculated using value-in-use baseddiscounted cash flow modeling, and the impairment charge is included withinselling, general and administrative expenses in the Consolidated IncomeStatement. A range of pre-tax discount rates between 13%-15% was applied toprobability-adjusted forecasts. The impairment primarily reflected the aftertax value of 3TC and Zeffix royalty income received over the six months endedJune 30, 2007. 6. Other intangible assets
During the six months ended June 30, 2007 other intangible assets increased by$2,981.1 million. Included within additions to intangible assets are intangibleassets acquired through the acquisition of New River totaling $3,085.8 million,primarily developed technology in respect of the pediatric indication ofVYVANSE in the US ($1,133.3 million) and in-process research and development inrespect of VYVANSE indicated for non-pediatric patients in the US and VYVANSEin the RoW ($1,943.3 million).The increase in intangible assets is net of a charge of $100.0 million to writeoff the capitalized up-front and milestone payments previously made to NewRiver on the effective settlement of New River's pre-existing relationship
withShire. 7. Convertible bonds
Shire 2.75% Convertible Notes due 2014
On May 9, 2007 Shire plc issued a $1,100.0 million in principal amount of 2.75%convertible bonds due 2014 and convertible into fully paid ordinary shares ofShire plc of par value ‚£0.05 each (the "Bonds"). The net proceeds of issuingthe Bonds, after deducting the commissions and other direct costs of issue,totaled $1,081.7 million.The Bonds were issued at 100% of their principal amount, and unless previouslypurchased and cancelled, redeemed or converted, will be redeemed on May 9, 2014(the "Final Maturity Date") at their principal amount. The Bonds bear interestat 2.75% per annum, payable semi-annually in arrears on November 9 and May 9,commencing on November 9, 2007. The Bonds constitute direct, unconditional,unsubordinated and unsecured obligations of the Company, and rank pari passuand rateably, without any preference amongst themselves, and equally with allother existing and future unsecured and unsubordinated obligations of theCompany.The Bonds may be redeemed at the option of the Company, (the "Call Option"), attheir principal amount together with accrued and unpaid interest if: (i) at anytime after May 23, 2012 if on no less than 20 dealing days in any period of 30consecutive dealing days the value of Shire plc's ordinary shares underlyingeach Bond in the principal amount of $100,000 would exceed $130,000; or (ii) atany time conversion rights shall have been exercised, and/or purchases andcorresponding cancellations, and/or redemptions effected in respect of 85% ormore in principal amount of Bonds originally issued. The Bonds may also beredeemed at the option of the Bond holder at their principal amount includingaccrued but unpaid interest on May 9, 2012 (the "Put Option"), or following theoccurrence of change of control. The Bonds are repayable in US dollars, butalso contain provisions entitling the Company to settle redemption amounts inPounds sterling, or in the case of the Final Maturity Date and followingexercise of the Put Option, by delivery of the underlying Shire plc ordinaryshares and a cash top-up amount.The Bonds are convertible into Shire plc ordinary shares during the conversionperiod, being the period from June 18, 2007 until the earlier of: (i) the closeof business on the date falling fourteen days prior to the Final Maturity Date;(ii) if the Bonds have been called for redemption by the Company, the close ofbusiness fourteen days before the date fixed for redemption; (iii) the close ofbusiness on the day prior to a Bond holder giving notice of redemption inaccordance with the conditions; and (iv) the giving of notice by the trusteethat the Bonds are accelerated by reason of the occurrence of an event ofdefault.Upon conversion, the Bond holder is entitled to receive Shire plc ordinaryshares at the initial conversion price of $33.5879 per Shire plc ordinaryshare, (subject to adjustment as outlined below), being 2,977.26265 shares per$100,000 denomination. The initial conversion price is subject to adjustment inrespect of (i) any dividend or distribution by the Company, (ii) a change ofcontrol and (iii) customary anti-dilution adjustments for, inter alia, shareconsolidations, share splits, spin-off events, rights issues, bonus issues andreorganizations. The Shares issued on conversion will be delivered credited asfully paid, and will rank pari passu in all respects with all fully paid Sharesin issue on the relevant conversion date.The fair values of the liability component and the equity component weredetermined at issuance of the Bonds. The fair value of the liability componentwas calculated using a market rate for an equivalent non-convertible bond. Theresidual amount, representing the value of the equity conversion option, isincluded in shareholders' equity as a separate reserve.
The value of the Bonds as recognized in the balance sheet is as follows:
$'M
Nominal value of 2.75% convertible bonds due 2014 1,100.0 Direct costs of issue (18.3) Net proceeds received on issue of the convertible bonds 1,081.7 Equity component (195.6) Liability component at date of issue 886.1 Interest charged (1) 10.8 Interest paid - Liability component at June 30, 2007 896.9 Of which: Non-current liability 892.5 Current liability (2) 4.4 Liability component at June 30, 2007
896.9
1. Interest charged represents the accrued coupon and amortization of issue
costs and discount.
2. Interest payable represents the coupon of 2.75% on the bonds.
As at June 30, 2007 the fair value of the Bonds totaled $1,127.0 million.
8. Borrowings
Multicurrency Term and Revolving Facilities Agreement
In connection with the acquisition of New River, Shire plc entered into aMulticurrency Term and Revolving Facilities Agreement (the "FacilitiesAgreement") with ABN AMRO Bank N.V., Barclays Capital, Citigroup Global MarketsLimited and The Royal Bank of Scotland plc (the "Arrangers") on February 20,2007. The Facilities Agreement comprised three credit facilities: (i) acommitted multicurrency five year term loan facility in an aggregate amount of$1,000.0 million ("Term Loan A"), (ii) a committed multicurrency 364 day termloan facility (with a further 364 day extension option) in an aggregate amountof $300.0 million ("Term Loan B") and (iii) a committed five year revolvingloan facility in an aggregate amount of $1,000.0 million (the "RCF" and,together with Term Loan A and Term Loan B, the "Facilities"). Shire plc hasagreed to act as guarantor for any of its subsidiaries that borrow under theFacilities Agreement.On April 18, 2007 the Company fully utilized Term Loan A of $1,000.0 millionand Term Loan B of $300.0 million to partially fund the acquisition of NewRiver. In May 2007 Shire issued $1,100.0 million principal amount of the Bonds.The proceeds of the issue were used to repay and cancel $800.0 million of TermLoan A and all of Term Loan B in accordance with the terms of the FacilitiesAgreement. The remaining $200.0 million drawn down under Term Loan A was repaidon June 29, 2007. The RCF has not been utilized.
On July 19, 2007, the Company entered into a syndication and amendment agreement in relation to the Facilities Agreement (the "Amended Facilities Agreement"), which increased the RCF to an aggregate amount of $1,200.0 million, amended the covenant relating to the ratio of Net Debt to EBITDA and syndicated the RCF.
The RCF, which includes a $250.0 million swingline facility, may be used forgeneral corporate purposes and matures on February 20, 2012. The availabilityof loans under the RCF is subject to customary conditions, including theabsence of any defaults thereunder and the accuracy (in all material respects)of Shire's representations and warranties contained therein.The interest rate on each loan drawn under the RCF for each interest period, asdetermined by the Company, is the percentage rate per annum which is theaggregate of the applicable margin (initially set at 0.80 per cent per annumuntil delivery of the compliance certificate for the year ending December 31,2007 and thereafter ranging from 0.40 to 0.80 per cent per annum, depending onthe ratio of Net Debt to EBITDA) and LIBOR for the applicable interest period.Shire shall also pay a commitment fee on undrawn amounts at 35 per cent perannum of the applicable margin.The Amended Facilities Agreement includes requirements that (i) Shire's ratioof Net Debt to EBITDA (as defined in the Amended Facilities Agreement) does notexceed 3.5 to 1 for both the 12 month period ending December 31 and June 30unless Shire has exercised its option (which is subject to certain conditions)to increase it to 4.0 to 1 for two consecutive testing dates; and (ii) that theratio of EBITDA to Net Interest (as defined in the Facilities Agreement) mustnot be less than 4.0 to 1, for both the 12 month period ending December 31 andJune 30, and (iii) additional limitations on the creation of liens, disposal ofassets, incurrence of indebtedness, making of loans, giving of guarantees andgranting security over assets.Upon a change of control of Shire or upon the occurrence of an event of defaultand the expiration of any applicable cure period, the total commitments underthe Facilities may be canceled and/or all or part of the loans, (together withaccrued interest and all other amounts accrued or outstanding) may becomeimmediately due and payable. Events of default under the Amended FacilitiesAgreement include: (i) non-payment of any amounts due under the Facilities;(ii) failure to satisfy any financial covenants; (iii) materialmisrepresentation in any of the finance documents; (iv) failure to pay, orcertain other defaults under other financial indebtedness; (v) certaininsolvency events or proceedings; (vi) material adverse changes in thebusiness, operations, assets or financial condition of the group; (vii) certainUS Employee Retirement Income Security Act breaches which would have a materialadverse effect; (viii) if it becomes illegal for Shire or any of itssubsidiaries that are parties to the Amended Facility Agreement to performtheir obligations or (ix) if Shire or any subsidiary of Shire which is party tothe Amended Facility Agreement repudiates the Amended Facility Agreement or anyFinance Document (as defined in the Amended Facility Agreement).During the six months ended June 30, 2007 the Company paid $14.4 million inrelation to the arrangement of the Facilities of which $8.6 million has beenamortized in the six months to June 30, 2007 (including $7.9 million written offollowing repayment of Term Loan A and Term Loan B). The financing costsrelating to the RCF of $6.2 million have been deferred and are being amortizedover the estimated term of the facility. At June 30, 2007 $5.8 million had beendeferred ($1.2 million within other current assets and $4.6 million withinother non-current assets).
9. Condensed statement of changes in shareholders' equity
10. 2007 2006 $'M $'M _______________ _______________ Shareholders' equity at December 31, 4,145.4
4,081.3
Foreign currency translation differences 3.6
86.7
Unrealized gain/(loss) on available-for-sale 0.2
(1.4)securities Profit for the period 14.0 147.5 Dividends (29.4) (22.6)
Equity component of convertible bonds 195.6
- Employee share option scheme: - value of employee services 22.4 16.6 - proceeds from shares issued 24.1 17.7
New shares issued, net of issue costs 877.3
-
Proceeds from exercise of warrants 7.0
-
Tax benefit associated with exercise of stock 1.4
-options Purchase of shares by ESOT (99.9) (2.0) _______________ _______________ Shareholders' equity at June 30, 5,161.7 4,323.8 _______________ _______________In February 2007, the Company raised $877.3 million by means of an equityplacement to part fund the acquisition of New River. The funds were raisedusing a cash box structure with the cash box being a company establishedspecially for the purposes of the placing. A cash box placing is structured toenable a company to obtain merger relief on the issue of placing shares, whichrelieves the company from the requirement to credit any amount paid up on theshares in excess of the nominal value to the share premium account. Shire plctherefore transferred the excess over the nominal value totaling $873.0 millionfrom a merger reserve to retained earnings, and this amount is available fordistribution to shareholders.
10. Notes to the consolidated cash flow statement
Reconciliation of profit for the period to net cash inflow from operatingactivities: 6 months to 6 months to June 30, 200 June 30, 7 2006 $'M $'M ____________ ____________ Profit for the year 14.0 147.5 Profit for the year from discontinued operations - (40.6) Adjustments for: Taxation 45.8 49.9 Finance costs 42.0 12.2 Investment revenues (34.7) (24.2) Other (income)/expense (2.3) 0.8
Share of post tax profits from associates and joint (1.2)
(4.3)ventures
Depreciation of property, plant and equipment 25.0
18.5 Amortization of intangibles 58.0 31.9 Impairment of intangibles 0.4 0.1 Impairment of goodwill 80.9 -
Charge on effective settlement of pre-existing 100.0
-relationship Movement in financial assets - 1.8
Profit on disposal of non financial assets (0.3)
(0.1)
Gain on sale of product rights (5.0)
- Share based compensation 22.4 16.6 _______ _______
Operating cash flows before movements in working 345.0
210.1capital Changes in working capital:
(Increase) / decrease in inventories (39.9)
8.3
(Increase) / decrease in trade and other receivables (99.0) 58.7 Decrease in other assets 7.0 2.8 Decrease in trade and other payables (18.3) (13.2) Increase in deferred income 88.5 6.1 _______ _______
Cash generated from operations 283.3
272.8 Interest paid (8.9) (0.4)
Income tax (paid) / received (19.6)
23.8 ____________ ____________
Cash generated from operating activities 254.8
296.2 ____________ ____________11. Dividends During the six months to June 30, 2007 Shire plc declared and paid dividends of5.2455 US cents per ordinary share (equivalent to 15.7365 US cents per AmericanDepositary Share) and 18.6005 Canadian cents per exchangeable share totaling$29.4 million.
12. Related party transactions
There were no related party transactions in the year to June 30, 2007. In 2006Shire BioChem Inc., contributed cash of $8.1 million (CAN$ 5.0 million in April2006, and CAN$ 4.0 million in June 2006) to ViroChem Pharma in return for anadditional equity interest.13. Contingent liabilities
The Group is involved in various legal proceedings, including those set outbelow. Although there can be no assurance regarding the outcome of any of thelegal proceedings referred to below, Shire believes that they will not have amaterially adverse effect on the Group's reported financial position.The matters discussed below constitute the more significant developments sincethe Annual Report filed in respect of the fiscal year ended December 31, 2006and should be read in conjunction with the Annual Report and financialstatements included therein.
ADDERALL XR
i. Colony Pharmaceuticals, Inc.
As previously disclosed in the Annual Report, Shire was notified in December2004 that Colony Pharmaceuticals, Inc. ("Colony") had submitted an ANDA underthe Hatch-Waxman Act seeking permission to market its generic versions of the5mg, 10mg, 15mg, 20mg, 25mg and 30mg strengths of ADDERALL XR prior to theexpiration date of the Group's US Patent No. 6,322,819 (the `819 Patent) and USPatent No. 6,605,300 (the `300 Patent). Colony is a member of the Actavis Grouphf group of companies.On March 20, 2007, Shire filed a lawsuit in the U.S. District Court for theDistrict of Maryland against Colony, Actavis, Inc. and Actavis Group hf(collectively "Colony and Actavis") for infringement of the `819 Patent, the`300 Patent and also US Patent No. 6,913,768. The lawsuit alleges that all ofColony and Actavis' generic strengths infringe the three patents in suit. Inresponse, Colony and Actavis have alleged as affirmative defenses andcounterclaims non-infringement, invalidity and unenforceability of the threepatents. Because the case was not filed pursuant to the Hatch-Waxman Act, thereis no 30-month stay of approval of Colony and Actavis' ANDA products associatedwith this litigation.
On August 2, 2007, Colony filed a motion for partial summary judgement of non-infringement of the `819 and `300 Patents. Following a conference with the Court regarding a briefing schedule, the Court ordered a focused discovery period on the motion issues expiring on September 19, 2007 and that Shire's opposition and any Rule 56(f) affidavit be filed by October 3, 2007.
No trial date has been set.
ii. Andrx Pharmaceuticals, LLC
As previously disclosed in the Annual Report, Shire Laboratories and Shire LLC.have filed lawsuits in the US District Court for the District of New Jersey andthe Southern District of Florida against Andrx Pharmaceuticals, LLC. and AndrxCorporation (collectively "Andrx") for infringement of the Group's `819 and`300 Patents by Andrx's ANDA and ANDA products. In March 2007, Shire dismissedthe Florida lawsuit pending in the Southern District of Florida withoutprejudice. Subsequently, in July 2007, the New Jersey Court transferred theremaining case to Florida where it is pending. No trial date has been set.
iii. Sandoz Inc.
As previously disclosed in the Annual Report, Shire filed suit on January 26,2007 against Sandoz Inc ("Sandoz") in the US District Court for the District ofColorado for infringement of the `819 and `300 patents by Sandoz's ANDA andANDA products. In response to Shire's complaint, Sandoz has alleged affirmativedefenses and counterclaims of non-infringement and invalidity. Sandoz has alsoalleged sham litigation and patent misuse, and Shire has filed a motion tostrike these two affirmative defenses. The Court has denied the motion withoutprejudice. Discovery is ongoing and affirmative expert reports are dueSeptember 21, 2007 and rebuttal reports are due October 12, 2007. No trial
datehas been set.CARBATROL
i. Nostrum Pharmaceuticals, Inc.
As previously disclosed in the Annual Report, Shire filed suit on September 18,2003 against Nostrum Pharmaceuticals, Inc. ("Nostrum") in the United StatesDistrict Court for the District of New Jersey alleging infringement of USpatent No. 5,912,013 (the `013 Patent) and US patent No. 5,326,570 (the `570Patent) by Nostrum's ANDA and ANDA product. The parties had requested, and theCourt had granted, an extension of the stay of discovery until December 29,2006. The stay of discovery has been extended until Nostrum's receipt of aresponse from the FDA regarding its major amendments of its ANDA or Nostrum'sreceipt of notice from the FDA regarding the status of its ANDA. The Court hasset a conference for September 12, 2007. No trial date has been set.
ii. Corepharma LLC
As previously disclosed in the Annual Report, Shire filed suit on May 17, 2006against Corepharma LLC ("Corepharma") in the United States District Court forthe District of New Jersey alleging infringement of the `013 and `570 Patentsby Corepharma's ANDA and ANDA products.The parties exchanged written discovery on January 26, 2007. The court hasdismissed Corepharma's counterclaim of non-infringement of the `013 patent. OnMay 4, 2007 Corepharma filed a motion for summary judgement of non-infringementof the `570 patent. Shire's opposition to the motion was filed on July 30,2007. Corepharma's reply was filed on August 23, 2007. The Court informed theparties on August 30, 2007 that Corepharma's motion was denied withoutprejudice and that the parties should work out a Markman briefing schedule. TheCourt has also set a discovery schedule with a pre-trial conference scheduledon May 6, 2008. No trial date has been set.
iii. Teva Pharmaceuticals USA, Inc.
On March 20, 2007 Shire was notified that Teva Pharmaceuticals USA, Inc. hadfiled an ANDA under the Hatch-Waxman Act seeking permission to market itsgeneric version of carbamazepine extended release products in 100mg, 200mg and300mg strengths prior to the expiration date of the `013 and the `570 patents.On May 2, 2007, Shire filed suit against Teva Pharmaceuticals USA, Inc. andTeva Pharmaceutical Industries, Ltd. in the US District Court for the SouthernDistrict of New York alleging infringement of the `013 and the `570 Patents byTeva's ANDA and ANDA products. Shire is seeking a ruling that Teva's ANDAinfringes the `013 and `570 Patents and should not be approved before theexpiration dates of the `013 and `570 Patents. Shire is also seeking aninjunction to prevent the Teva parties from commercializing its ANDA productsbefore the expiration of the `013 and `570 Patents, damages in the event thatthe Teva parties should engage in such commercialization, as well as itsattorneys' fees and costs.
On August 23, 2007 Shire amended the complaint to drop the allegations with respect to the `013 Patent while maintaining the suit with respect to the `570 Patent. The Teva parties were served with both the complaint and amended complaint and have not yet filed their answers. The court has set a status conference for October 16, 2007.
DYNEPO
As previously disclosed Shire HGT and Sanofi-Aventis have been involved in ongoing patent litigation regarding Amgen's allegations that DYNEPO infringes claims of five of Amgen's patents since 1997.
Amgen filed a petition for a writ of Certiorari with the Supreme Court in March2007, requesting review of the Federal Circuit's 2004 decision. Amgen'spetition was denied on May 14, 2007 and the case was remanded to the DistrictCourt.Appraisal RightsAs previously disclosed in the Annual Report, in connection with Shire's mergerwith TKT, former holders of approximately 11.7 million shares of TKT commonstock submitted written demands to the Delaware Court of Chancery for appraisalof these shares. On March 8, 2007 certain of the former TKT shareholders whohave asserted appraisal rights filed a second suit in the Delaware Court ofChancery.
The trial for the first action previously scheduled for April 23, 2007 was postponed as a result of the second action, and a consolidated trial for both actions has been scheduled for May 2008.
14. Events after the balance sheet date
Intangible assets held for sale
Subsequent to June 30, 2007 the Group has re-classified to assets held for salecertain other intangible assets with a carrying value of $40.2 million,representing non-core product licenses held for disposal which met the criteriafor classification as held for sale in accordance with IFRS 5 "Non-currentAssets Held for Sale and Discontinued Operations" after the balance sheet date.The disposal of these products is expected to complete in the second half of2007.JUVISTAOn June 19, 2007 Shire signed a development and license agreement (the"Agreement") with Renovo Limited ("Renovo") to develop and commercializeJUVISTA, Renovo's novel drug candidate in late Phase 2 development. JUVISTA isbeing studied for the prevention and reduction in scarring in connection withboth cosmetic and therapeutic surgery. Under the terms of the Agreement Shirehas the exclusive right to commercialise JUVISTA worldwide, with the exceptionof the EU member states. Phase 3 trials for JUVISTA are expected to commence inmid 2008.Following the expiration of the Hart-Scott-Rodino ("HSR") waiting period, theAgreement became effective on August 15, 2007 and Shire accordingly made anup-front payment of $75.0 million to Renovo in respect of the Agreement. Inaccordance with the Group's IFRS accounting policies the up-front payment inrespect of the Agreement will be accounted for as an intangible asset.
In addition, on August 20, 2007 Shire made an equity investment of $50.0 million for 12.4 million ordinary shares in Renovo Group plc, which represented approximately 6.5% of the total outstanding shares in Renovo Group plc immediately after the issue.
Lease Agreement for HGT Business Unit
On August 17, 2007 Shire entered into a multi-year lease for laboratory andoffice space for its HGT business unit in Lexington, Massachusetts, USA for arental of $3-4 million per annum, plus operating costs. Shire has the option toextend the term of the lease. Concurrent with entering into the lease, Shirealso entered into an Option Agreement, which provides Shire, inter alia, withthe option to purchase or lease additional manufacturing, laboratory and officespace in Lexington. While negotiations continue with state and local officialsin Massachusetts, Shire has not reached a final decision concerning thelocation of these additional facilities, and is also considering other sitesoutside the state of Massachusetts for its planned expansion. INDEPENDENT REVIEW REPORT TO SHIRE PLC IntroductionWe have been instructed by the Company to review the IFRS financial informationfor the six months ended June 30, 2007, which comprise the income statement,the balance sheet, the statement of recognized income and expense, the cashflow statement and related notes 1 to 15 ("the IFRS financial information"). Wehave read the other information contained in the interim report and consideredwhether it contains any apparent misstatements or material inconsistencies withthe financial informationThis report is made solely to the company in accordance with Bulletin 1999/4issued by the Auditing Practices Board. Our work has been undertaken so that wemight state to the company those matters we are required to state to them in anindependent review report and for no other purpose. To the fullest extentpermitted by law, we do not accept or assume responsibility to anyone otherthan the company, for our review work, for this report, or for the conclusionswe have formed.Directors' responsibilities
The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by, the directors. The directorsare responsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority (Listing Rules) which require thatthe accounting policies and presentation applied to the interim figures areconsistent with those applied in preparing the preceding annual accounts exceptwhere any changes, and the reasons for them, are disclosed.
Review work performed
We conducted our review in accordance with the guidance contained in Bulletin1999/4 issued by the Auditing Practices Board for use in the United Kingdom. Areview consists principally of making enquiries of group management andapplying analytical procedures to the financial information and underlyingfinancial data and, based thereon, assessing whether the accounting policiesand presentation have been consistently applied unless otherwise disclosed. Areview excludes audit procedures such as tests of controls and verification ofassets, liabilities and transactions. It is substantially less in scope than anaudit performed in accordance with International Standards on Auditing (UK andIreland) and therefore provides a lower level of assurance than an audit.Accordingly, we do not express an audit opinion on the financial information.
Review conclusion
On the basis of our review we are not aware of any material modifications that should be made to the IFRS financial information as presented for the six months ended June 30, 2007.
Deloitte & Touche LLPChartered AccountantsReading, UK11 September 2007
Notes: Neither an audit nor a review provides assurance on the maintenance andintegrity of the website, including controls used to achieve this, and inparticular whether any changes may have occurred to the financial informationsince first published. These matters are the responsibility of the directorsbut no control procedures can provide absolute assurance in this area.
Legislation in the United Kingdom governing the preparation and dissemination of financial information differs from legislation in other jurisdictions.
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