IFRS Information

26th Sep 2005 06:00

IFRS Information - H1 2005Basingstoke, UK - 26th September 2005 - In order to meet its obligations underthe Listing Rules of the UK Listing Authority, Shire Pharmaceuticals Group plc(the "Company") (LSE: SHP, NASDAQ: SHPGY, TSX: SHQ) is today making availableits interim results for the six months ended 30 June 2005 in accordance withInternational Financial Accounting Standards (IFRS). Shire's IFRS accountingpolicies, IFRS restatements of previously published results, andreconciliations to previously published results as required by IFRS1,First-time adoption of International Financial Reporting Standards, are alsoincluded.It should be noted that on 28 July 2005, the Company announced its results inrespect of the same period in accordance with US GAAP. In future years, it isanticipated that the Company will make a simultaneous announcement of US GAAPand IFRS financial information in respect of the first six months of itsfinancial year.For further information please contact:Investor Relations Clƒ©a Rosenfeld (Rest of the World) +44 1256 894 160 Brian Piper (North America) +1 484 595 8252 Notes to editorsShire Pharmaceuticals Group plcShire Pharmaceuticals Group plc (Shire) is a global specialty pharmaceuticalcompany with a strategic focus on meeting the needs of the specialist physicianand currently focuses on developing and marketing products in the areas ofcentral nervous system (CNS), gastrointestinal (GI), renal diseases and humangenetics. Shire has operations in the world's key pharmaceutical markets (US,Canada, UK, France, Italy, Spain and Germany) as well as a specialist drugdelivery unit in the US.For further information on Shire, please visit the Company's website: www.shire.com.THE "SAFE HARBOR" STATEMENTUNDERTHE PRIVATE SECURITIES LITIGATION REFORM ACT OF1995Statements 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's 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 dates of MTS (METHYPATCH) (ADHD), SPD503 (ADHD), SPD465 (ADHD), SPD476(ulcerative colitis), I2S (iduronate-2-sulfatase) (Hunter syndrome), and NRP104(ADHD), including its scheduling classification by the Drug Enforcement Agencyin the United States; Shire's ability to benefit from its acquisition ofTranskaryotic Therapies, Inc.; Shire's ability to secure new products forcommercialization and/or development; and other risks and uncertaintiesdetailed from time to time in Shire's filings with the Securities and ExchangeCommission, including its Annual Report on Form 10-K for the year to December31, 2004.The following are trademarks of Shire Pharmaceuticals Group plc or itssubsidiaries, which are the subject of trademark registrations in certaincountries.ADDERALL XR‚® (mixed salts of a single-entity amphetamine product)ADDERALL‚® (mixed salts of a single-entity amphetamine product)AGRYLIN‚® (anagrelide hydrochloride)CALCICHEW‚® (range (calcium carbonate with or without vitamin D3))CARBATROL‚® (carbamazepine)COLAZIDE‚® (balsalazide)EQUETRO¢â€ž¢ (carbamazepine)FOSRENOL‚® (lanthanum carbonate)REMINYL‚® (galantamine hydrobromide) (UK and Republic of Ireland)SOLARAZE‚® (3%, gel diclofenac sodium (3%w/w))XAGRID‚® (anagrelide hydrochloride)The following are trademarks of third parties referred to in this filing.3TC‚® (lamivudine) (trademark of Glaxo Group Limited)AMARYL‚® (glimepiride) (trademark of Sanofi-Aventis)METHYPATCH‚® (methylphenidate) (trademark of Noven Pharmaceuticals Inc. (Noven))PENTASA‚® (mesalamine) (trademark of Ferring AS)RAZADYNE¢â€ž¢ (galantamine hydrobromide) (trademark of Johnson & Johnson)REMINYL‚® (galantamine hydrobromide) (trademark of Johnson & Johnson, excludingUK and Republic of Ireland)ZEFFIX‚® (lamivudine) (trademark of Glaxo Group Limited) SHIRE PHARMACEUTICALS PLC RESULTS OF OPERATIONS FOR THE SIX MONTHS TO JUNE 30, 2005 AND 2004 UNDER IFRS Total revenuesThe following table provides an analysis of the Group's total revenues bysource: 6 months to 6 months to June 30, June 30, 2005 2004 Change $'000 $'000 % __________ __________ __________ Product sales 620,999 519,874 +19 Royalties 120,887 113,802 +6 Licensing and development 6,583 7,397 -11 Other 9,820 3,487 +182 __________ __________ __________ Total 758,289 644,560 +18 __________ __________ __________Product salesFor the six months to June 30, 2005, product sales increased 19% ($101.1million) to $621.0 million(2004: $519.9 million) and represented 82% of total revenues (2004: 81%). Thefollowing table provides an analysis of the Group's key product sales: 6 months 6 months to Product US to June June 30, sales prescription 30, 2005 2004 growth growth $'000 $'000 % % __________ __________ __________ __________ CNS ADDERALL XR 350,960 282,946 +24 +15 ADDERALL 21,462 10,675 +101 n/a CARBATROL 38,694 27,648 +40 -2 GI PENTASA 57,209 53,680 +7 +8 COLAZIDE 4,232 3,818 +11 n/a GP AGRYLIN and XAGRID* 61,617 72,274 -15 -15 FOSRENOL 14,762 - n/a n/a CALCICHEW 18,229 17,975 +1 n/a SOLARAZE 5,433 3,770 +44 n/a REMINYL/RAZADYNE 5,833 5,374 +9 n/a Other product sales 42,568 41,714 +2 __________ __________ __________ 620,999 519,874 +19 __________ __________ __________ *XAGRID is not included in US prescription growthThe following discussion includes references to prescription and market sharedata for the Group's key products. The source of this data is IMS Health, June2005. IMS Health is a leading global provider of business intelligence for thepharmaceutical and healthcare industries.ADDERALL XRUS prescriptions for the six months to June 30, 2005 were up 15%, compared tothe same period in 2004, due to a 1% increase in ADDERALL XR's total share ofthe US ADHD market, from 23% in June 2004 to 24% in June 2005 and a 7% increasein the total US ADHD market.Product sales growth of 24% was higher than US prescription growth of 15% forthe six months due to the impact of price increases in June 2004 and December2004 offset by modest destocking and modest increases in sales deductions.On February 9, 2005, Health Canada suspended the marketing authorization ofADDERALL XR in Canada. Shire strongly disagreed with this action and filed anappeal with Health Canada to reconsider its decision. On August 24, 2005, Shireannounced that Health Canada would reinstate the marketing authorization ofADDERALL XR in Canada effective August 26, 2005. This reinstatement follows theacceptance by Health Canada of the recommendations from the New Drug Committee(NDC), which was appointed by Health Canada at Shire's request to review thesuspension in Canada of ADDERALL XR. The NDC, comprised of three highlyqualified, independent experts in the fields of pediatric cardiology, pediatricdevelopment and behavioral problems, and pharmacoepidemiology, examined thescientific evidence made available to them by both Shire and Health Canada andrecommended that Health Canada reinstate ADDERALL XR.ADDERALL XR's pediatric marketing exclusivity in the US under the Hatch-Waxmanregulations expired on April 11, 2005.Litigation proceedings relating to the Group's ADDERALL XR patents are inprogress. Any decrease in the sales of ADDERALL XR could significantly reducerevenues and earnings.CARBATROLUS prescriptions for the six months to June 30, 2005 were down 2% compared tothe same period in 2004. This was due primarily to limited promotion of thisproduct by Shire during first six months of 2005 as promotional resources werediverted to other products.Product sales increased by 40%. The difference between sales growth and thelower level of prescriptions is due to significant wholesaler re-stocking inorder to replenish a previously low pipeline, a price increase in August 2004and significantly lower sales deductions.CARBATROL had a 43% share of the total US extended release carbamazepineprescription market in June 2005 (June 2004: 45%).Patent litigation proceedings relating to CARBATROL are in progress.PENTASAUS prescriptions for the six months to June 30, 2005 were up 8%, compared tothe same period in 2004. The increase was largely due to the success of theco-promotional agreement with Solvay Pharmaceuticals Inc. and the impact of the500mg dosage form launched in the third quarter of 2004.Product sales for the six months to June 30, 2005 were up 7% mainly due to theincrease in prescriptions and a price increase in September 2004 offset bywholesaler destocking and increased sales deductions.PENTASA had a 19% share of the total US oral mesalamine prescription market inJune 2005 (June 2004: 17%).AGRYLIN and XAGRIDAGRYLIN and XAGRID sales worldwide for the six months to June 30, 2005 were$61.6 million, down 15%, compared to the same period in 2004.US sales were down 31% due to the impact of generic versions of AGRYLIN beingapproved in the US market in April, after the FDA rejected Shire's Citizens'Petition.International Sales (all sales outside the US) reported in US dollars were up20%, primarily due to the successful launch of XAGRID in the UK, Germany andFrance in the first quarter of 2005. In accordance with current orphan druglegislation in the EU, XAGRID will have up to 10 years of marketing exclusivityin the EU.FOSRENOLFOSRENOL was launched in the US in January 2005 and had achieved an 8% share ofthe total US phosphate binding market in June 2005.Product sales for the six months to June 30, 2005 were $14.8 million.Shire continues its discussions relating to FOSRENOL with regulatoryauthorities across Europe and other regions. Launches will begin in Europeduring 2005, subject to obtaining national approvals and pricing and concludingreimbursement negotiations.RoyaltiesRoyalty revenue increased 6% to $120.9 million for the six months to June 30,2005 (2004: $113.8 million). The following table provides an analysis ofShire's royalty income: 6 months to 6 months to June 30, June 30, 2005 2004 Change $'000 $'000 % __________ __________ __________ 3TC 79,868 77,802 +3 ZEFFIX 14,237 13,140 +8 Other 26,782 22,860 +17 __________ __________ __________ Total 120,887 113,802 +6 __________ __________ __________3TCRoyalties from 3TC for the six months to June 30, 2005 were $79.9 million, anincrease of 3% compared to the six months to June 30, 2004 ($77.8 million).This was due to the positive impact of foreign exchange movements.Shire receives royalties from GSK on 3TC worldwide sales. GSK's worldwide salesof 3TC for the six months to June 30, 2005 were $606 million (2004: $587million).ZEFFIXRoyalties from ZEFFIX for the six months to June 30, 2005 were $14.2 million,an increase of 8% compared to the six months to June 30, 2004 ($13.1 million).This was due to strong growth in the Japanese market and the positive impact offoreign exchange movements.Shire receives ZEFFIX royalties from GSK on worldwide sales. GSK's worldwidesales of ZEFFIX for the six months to June 30, 2005 were $124 million (2004:$115 million).OtherOther royalties are primarily in respect of REMINYL (now marketed as RAZADYNEin the US), a product marketed worldwide by Janssen, with the exception of theUnited Kingdom and the Republic of Ireland where Shire acquired the exclusivemarketing rights from May 2004.Sales of REMINYL/RAZADYNE, a product for the symptomatic treatment of mild tomoderately severe dementia of the Alzheimer's type, are growing well in theAlzheimer's market.Cost of product salesFor the six months to June 30, 2005, the cost of product sales was 12% ofproduct sales (2004: 12%).Research and development (R&D)R&D expenditure increased from $86.0 million in the six months to June 30, 2004to $127.0 million in the six months to June 30, 2005. Expressed as a percentageof total revenues, R&D expenditure was 17% for the six months to June 30, 2005(2004: 13%). The level of expenditure in the six months to June 30, 2004 wasbelow normal levels partially due to the phasing of project spend. Shire'spipeline is now well advanced with five projects in late stage development orregistration.Selling, general and administrative (SG&A)Total SG&A costs increased from $248.2 million in the six months to June 30,2004 to $355.6 million in the six months to June 30, 2005, an increase of 43%.As a percentage of product sales, total SG&A costs were 57% (2004: 48%). 6 months to 6 months to Change June 30, June 30, 2005 2004 $M $M % _______ ________ ________ Sales costs 97.5 73.3 +33 Marketing costs 130.8 95.5 +37 Other SG&A costs 91.3 50.5 +81 _______ ________ ________ 319.6 219.3 +46 Depreciation and amortisation1 36.0 28.9 +25 _______ ________ ________ Total SG&A costs 355.6 248.2 +43 _______ ________ ________1 Excludes depreciation from manufacturing plants of $1.7 million (2004: $1.3million) which is included in cost of product sales.Sales, marketing and other SG&A costs in the six months to June 30, 2005increased 46% to $319.6 million (2004: $219.3 million). This increase wasexpected with additional costs in the six months to June 30, 2005 attributableto four product launches in the first half of 2005. In addition there is anincremental cost in 2005 associated with the FOSRENOL and EQUETRO sales forces.The depreciation charge for the six months to June 30, 2005 was $11.2 million(2004: $9.7 million), which includes a write-down of property, plant andequipment of $5.9 million (2004: $1.2 million). Amortization charges were $24.8million for the six months to June 30, 2005 (2004: $19.2 million).Intangible asset impairmentThe intangible asset impairment charge for the six months to June 30, 2005 was$3.0 million (2004: $3.9 million). The impairment charge arose as a result ofthe economic value and strategic worth of the product concerned being less thanits carrying value.Reorganization costs 6 months to 6 months to June 30, June 30, 2005 2004 $M $M ________ ________ Employee severance 1.6 9.9 Relocation costs - 7.9 Consultancy costs 0.5 - Duplicate facilities 0.7 - Other costs 0.1 4.2 ________ ________ 2.9 22.0 ________ ________There are expected remaining costs of approximately $2.3 million in respect ofthe reorganization, which are expected to be incurred by the end of 2005.Interest incomeFor the six months to June 30, 2005, the Group received interest income of$21.0 million (2004: $8.4 million). This increase in interest income isprimarily due to higher interest rates on the Group's US cash deposits.Interest expense and similar chargesFor the six months to June 30, 2005, the Group had interest expense of $1.4million, which primarily related to costs of a bridging loan to finance the TKTtransaction (2004: $4.4 million, primarily interest on convertible loan notes).Share of post tax profit from associates and joint venturesProfits of $0.7 million were recorded for the six months to June 30, 2005(2004: $2.2 million). Profits of $2.7 million, representing a 50% share ofprofits from the antiviral commercialization partnership with GSK in Canada(2004: $2.2 million) were offset by the share of losses in the GeneChem and EGSHealthcare Funds of $2.0 million (2004: $nil).TaxationThe effective tax rate for the six months to June 30, 2005 was (11)% (2004:32%). The reduction in rate is due primarily to transactions in the first halfof 2005, which led to a difference between tax and book value of assets, whichunder IAS 12 `Income Taxes' is recognized.At June 30, 2005, net deferred tax assets of $158.4m were recognized (June2004: $77.1m). Deferred tax assets for deductible temporary differences arerecognized to the extent that it is probable that taxable profit will beavailable against which the deductible temporary difference can be utilized.Discontinued operationsDuring the period a provision for $3.1 million, recorded in 2004 as part of thesale of the vaccines business to IDB, was released and this positively impactednet income for the year to date. This adjustment arose from the finalization ofthe working capital agreement with IDB. interim IFRS Consolidated income statements (UNAUDITED) 6 months to 6 months to June 30, June 30, 2005 2004 Note $'000 $'000 ____________ ____________ Continuing operations: Revenue 758,289 644,560 Cost of sales (75,278) (61,077) ____________ ____________ Gross profit 683,011 583,483 Research and development (126,989) (86,001) Selling, general and administrative (355,599) (248,243) Intangible asset impairment (3,000) (3,916) Reorganization (2,878) (21,980) ____________ ____________ Operating profit 5 194,545 223,343 Interest income 20,992 8,404 Interest expense and similar charges (1,385) (4,387) Share of post tax profit from associates and joint 719 2,218ventures ____________ ____________ Profit before income tax 214,871 229,578 Taxation 6 23,711 (73,666) ____________ ____________ Profit for the period from continuing operations 238,582 155,912 Discontinued operations: Gain/(loss) for the period from discontinued 3,125 (64,292)operations ____________ ____________ Profit for the period 241,707 91,620 ____________ ____________ Earnings per share (cents per ordinary share) 8 Basic 48.4c 18.5c Diluted 48.0c 18.2c Earnings per share from continuing operations (cents per ordinary share) Basic 47.8c 31.4c Diluted 47.4c 30.6c ____________ ____________ Dividends Paid 19,057 - ____________ ____________The accompanying notes are an integral part of these consolidated incomestatements. interim IFRS Consolidated statements of total recognised income and expense (UNAUDITED) 6 months to June 30, 6 months to 6 months to June30, 2005 June 30, 200 4 Note $'000 $'000 ____________ ____________ Profit for the period 241,707 91,620 Revaluation of available for sale securities (8,906) - Foreign currency translation (27,093) (9,084) ____________ ____________ Net losses recognized directly in equity (35,999) (9,084) ____________ ____________ ____________ ____________ Total recognized income for the period 9 205,708 82,536 ____________ ____________The accompanying notes are an integral part of these consolidated statements oftotal recognized income and expense. interim IFRS Consolidated balance sheets (UNAUDITED) June 30, December 31, June 30, 2005 2004 2004 Note $'000 $'000 $'000 _________________ _________________ ______________ ASSETS Non-current assets Goodwill 2,243,522 2,246,220 2,375,997 Intangible assets 356,058 322,258 330,174 Property, plant and equipment 137,754 128,202 96,380 Deferred tax assets 158,411 85,041 77,137 Investments accounted for 29,329 30,848 7,962using equity method Financial assets 27,506 76,550 44,436 Other receivables 39,567 38,895 10,359 _________________ _________________ ______________ 2,992,147 2,928,014 2,942,445 Current assets Inventories 47,677 41,230 50,236 Trade and other receivables 311,887 299,817 224,280 Financial assets 76,486 324,845 272,157 Cash, cash equivalents and 1,524,122 1,133,104 1,355,374restricted cash Assets in discontinued - - 64,969operations _________________ _________________ ______________ 1,960,172 1,798,996 1,967,016 _________________ _________________ ______________ Total assets 4,952,319 4,727,010 4,909,461 _________________ _________________ ______________ LIABILITIES AND SHAREHOLDERS' EQUITY Non-current liabilities Borrowings 4,453 4,242 8,508 Other payables 16,222 12,963 35,524 Provisions for other 23,204 26,232 8,698liabilities and charges _________________ _________________ ______________ 43,879 43,437 52,730 Current liabilities Borrowings 2,739 2,420 372,477 Trade and other payables 331,263 344,367 258,353 Income tax liabilities 86,678 46,757 22,356 Provisions for other 13,252 45,097 -liabilities and charges Liabilities in discontinued - - 14,971operations _________________ _________________ ______________ 433,932 438,641 668,157 _________________ _________________ ______________ Total liabilities 477,811 482,078 720,887 _________________ _________________ ______________ interim IFRS Consolidated balance sheets (continued) (UNAUDITED) June 30, December 31, June 30, 2005 2004 2004 Note $'000 $'000 $'000 _________________ _________________ ______________ Shareholders' equity Share capital 36,685 36,083 35,847 Share premium 4,985,678 4,883,219 4,838,945 Treasury shares (182) (264) - Exchangeable shares 111,233 195,830 231,830 Capital reserve 4,729 4,729 4,729 Other reserves 36,121 36,121 36,121 Retained earnings (699,756) (910,786) (958,898) _________________ _________________ ______________ Total shareholders' equity 9 4,474,508 4,244,932 4,188,574 _________________ _________________ ______________ Total liabilities and 4,952,319 4,727,010 4,909,461shareholders' equity _________________ _________________ ______________The accompanying notes are an integral part of these consolidated balancesheets. interim IFRS Consolidated cash flow statements (UNAUDITED) 6 months to June 6 months to 30, 2005 June 30, 2005 Note $'000 $'000 ________________ _______________ CASH FLOWS FROM OPERATING ACTIVITIES 10 231,290 284,240 Interest paid (1,385) (4,387) Income tax paid (10,494) (71,425) ________________ _______________ Net cash generated from operating 219,411 208,428activities ________________ _______________ Cash flows from investing activities Movement in restricted cash (316) (1,770) Loan made to ID Biomedical Corporation (29,910) -(IDB) Purchases of property, plant and (27,183) (14,214)equipment Purchases of intangible assets (89,106) (12,000) Purchases of financial assets (7,538) (5,514) Net increase in current financial assets - 31,972 Proceeds from sale of property, plant and 233 498equipment Proceeds from sale of intangible assets - - Proceeds from sale of financial assets 303,989 26,733 Proceeds from assets held for sale - 7,659 Proceeds from sale of a discontinued 2,236 -business Interest received 20,992 8,404 Dividends received 2,420 3,036 Investing activities of discontinued - (12,715)business ________________ _______________ Net cash generated from investing 175,817 32,089activities ________________ _______________ Cash flows from financing activities Proceeds from issuance of ordinary - 326shares, net Proceeds from exercise of share options 18,464 5,351 Purchase of treasury shares - - Repayments of 2% guaranteed convertible - (135)loan notes 2011 Net repayment of finance leases 529 (1,001) Dividends paid (19,057) - ________________ _______________ Net cash (used in)/generated from (64) 4,541financing activities ________________ _______________ Net increase in cash and cash equivalents 395,164 245,058 Cash and cash equivalents at beginning of 1,111,477 1,063,362the period Effect of foreign currency translation (4,462) (1,290) ________________ _______________ Cash and cash equivalents at end of the 1,502,179 1,307,130period ________________ _______________The accompanying notes are an integral part of these interim financialstatements. NOTES TO THE interim IFRS CONSOLIDATED FINANCIAL STATEMENTS 1. General Information Shire Pharmaceuticals Group plc (the "Company") and its subsidiaries (togetherthe "Group" or "Shire") researches, develops and markets prescriptionmedicines. The group focuses on four therapeutic areas: central nervous system,gastro-intestinal, general products and genetic 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,United Kingdom.The Company has its primary listing on the London Stock Exchange and itssecondary listing on the NASDAQ National Market in the United States ofAmerica.These accounts are presented in US Dollars as this is the currency of theprimary economic environment in which the Group operates. 1. Summary of Significant Accounting Policies The principal accounting policies adopted in the preparation of theseconsolidated interim financial statements are set out below. a. Basis of preparation These interim financial statements have been prepared in accordance with theaccounting policies the Group expects to adopt in its 2005 Annual Report. Theseaccounting policies are based on the EU-adopted IFRS and IFRIC (InternationalFinancial Reporting Interpretations Committee) interpretations that the Groupexpects to be applicable at that time. The IFRS and IFRIC interpretations thatwill be applicable at December 31, 2005, including those that will beapplicable on an optional basis, are not known with certainty at the time ofpreparing these interim financial statements.The policies set out below have been consistently applied to all the periodspresented except for those relating to the classification and measurement offinancial instruments. The Group has made use of the exemption available underIFRS 1 `First Time Adoption of International Financial Reporting Standards' toonly apply IAS 32 ` Financial Instruments: Disclosure and Presentation' and IAS39 `Financial Instruments: Recognition and Measurement' from January 1, 2005.The policies applied to financial instruments for 2004 and 2005 are disclosedseparately below.The Group's consolidated financial statements were prepared in accordance withUK GAAP until December 31, 2004. The Group has applied the same accountingpolicies and methods of computation in these interim financial statements asthose published by the Group on March 24, 2005 within its 2004 Annual Report,except as explained in note 12, where the effects of changes in accountingpolicies arising as a result of the adoption of IFRS are set out.Reconciliations between previously reported financial statements prepared underUK GAAP and the IFRS equivalents are presented for profit for the year endedDecember 31, 2004 and the six months ended June 30, 2004 and equity as atDecember 31, 2004, June 30, 2004 and January 1, 2004. Further disclosuresrequired by IFRS 1 concerning the transition from UK GAAP to IFRS are alsogiven in note 12.At the same time as converting from UK GAAP to IFRS, the Group has changed itsreporting currency to the US Dollar, which is the main economic currency of theGroup's cash flows. Previously, the Group used Pounds Sterling as its reportingcurrency for UK GAAP reporting purposes.These interim financial statements have been prepared under the historical costconvention as modified by the revaluation of available-for-sale investments andderivative instruments.The preparation of financial statements requires the use of certain criticalaccounting estimates. It also requires management to exercise its judgment inthe process of applying the Group's accounting policies. The areas involving ahigher degree of judgment or complexity, or areas where assumptions andestimates are significant to the consolidated financial information, aredisclosed in the critical accounting estimates and judgments section. b. Consolidation SubsidiariesSubsidiaries are all entities over which the Group has the power to govern thefinancial and operating policies, generally accompanying a shareholding of morethan one half of the voting rights. Subsidiaries are fully consolidated fromthe date on which control is transferred to the Group. They are de-consolidatedfrom the date on which control ceases.The purchase method of accounting is used to account for the acquisition ofsubsidiaries by the Group.The cost of an acquisition is measured as the fair value of the assetsexchanged, equity instruments issued and liabilities incurred or assumed at thedate of exchange, plus costs directly attributable to the acquisition.Identifiable assets acquired together with liabilities and contingentliabilities assumed in a business combination are measured initially at theirfair values at the acquisition date, irrespective of the extent of any minorityinterest. The excess of the cost of acquisition over the fair value of theidentifiable net assets acquired less minority interest is recorded asgoodwill.Intercompany transactions, balances and unrealized gains on transactionsbetween companies in the Group are eliminated on consolidation. Unrealizedlosses on transactions between companies in the Group are also eliminatedunless the transaction provides evidence of an impairment of the assettransferred.AssociatesAssociates are all entities over which the Group is in a position to exercisesignificant influence but not control. In general this would be a shareholdingin an entity entitling the Group to between 20% and 50% of the voting rights ofthat entity. Investments in associates are accounted for by the equity methodof accounting and are initially recognized at cost.The Group's share of its associates' post-acquisition profits or losses isrecognized in the income statement and its share of post-acquisition movementsin reserves is recognized in reserves. The cumulative post-acquisitionmovements are adjusted against the carrying amount of the investment. When theGroup's share of losses in an associate equals or exceeds its interest in theassociate, including any unsecured receivables due from that associate, theGroup does not recognize such excess losses, unless, and to the extent it hasincurred obligations or made payments on behalf of the associate.Unrealized gains on transactions between the Group and its associates areeliminated to the extent of the Group's interest in the associate. Unrealizedlosses between the Group and its associates are also eliminated unless thetransaction provides evidence of an impairment of the asset transferred.Joint venturesThe Group's interests in jointly controlled entities are accounted for by theequity method. c. Foreign currency translation Functional and presentation currencyItems included in the financial statements of each of the Group's entities aremeasured using the currency of the primary economic environment in which theentity operates (`the functional currency'). The consolidated financialstatements are presented in US dollars (rounded to the nearest thousand), whichis the Group's presentational currency.Transactions and balancesForeign currency transactions are translated into the functional currency usingthe exchange rates prevailing at the dates of the transactions. Foreignexchange gains and losses resulting from the settlement of such transactionsand from the translation at the year-end exchange rates of monetary assets andliabilities denominated in foreign currencies are recognized in the incomestatement.Group companiesThe results and balance sheet of all group entities that have a functionalcurrency different from the presentational currency are translated into thepresentational currency as follows: * Assets and liabilities are translated at the closing rate on the balance sheet date; * Income and expenses are translated at average exchange rates for the period of the income statement (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and * All resulting exchange differences are recognized as a separate component of equity. On consolidation, exchange differences arising from the translation of the netinvestment in companies in the Group are taken to shareholders' equity. When anoperation of the Group is sold, any such exchange differences are recognized inthe income statement as part of the gain or loss on sale.Goodwill and fair value adjustments arising on the acquisition of an operationare treated as assets and liabilities of the company in the Group andtranslated at the closing rate on the balance sheet date. d. Segment reporting A business segment is a group of assets and operations engaged in providingproducts or services that are subject to risks and returns that are differentfrom those of other business segments.A geographical segment is engaged in providing products or services within aparticular economic environment that are subject to risks and returns that aredifferent from those of components operating in other economic environments. e. Property, plant and equipment Property, plant and equipment is shown at cost, less subsequent depreciationand impairment, except for land, which is shown at cost. Cost includesexpenditure that is directly attributable to the acquisition of the assets.Subsequent costs are included in the asset's carrying amount or recognized as aseparate asset, as appropriate, only when it is probable that future economicbenefits associated with the item will flow to the Group and the cost of theitem can be measured reliably. Where the expenditure constitutes repairs andmaintenance, it is charged to the income statement during the financial periodin which it is incurred.Depreciation is calculated using the straight-line method to allocate thedifference between the cost of each asset and its residual value over itsestimated useful life as follows:Land n/aBuildings 20-50 yearsFurniture and fittings 4-10 yearsEquipment and other 4-10 yearsMotor vehicles 4-5 yearsResidual values and useful lives of assets are reviewed, and adjusted ifappropriate, at each balance sheet date.An asset's carrying amount is written down immediately to its recoverableamount if the asset's carrying amount is greater than its estimated recoverableamount.Gains and losses on disposals are determined by comparing the disposal proceedswith the carrying amount and are included in the income statement.Assets held under finance leases are depreciated over their expected usefullives on the same basis as owned assets, or where shorter, over the term of therelevant lease.Properties in the course of construction are carried at cost less anyrecognized impairment loss. Cost includes professional fees and, for qualifyingassets, borrowing costs capitalized in accordance with the Group's accountingpolicy. Depreciation of these assets commences when the assets are ready fortheir intended use. f. Intangible assets GoodwillGoodwill represents the excess of the cost of an acquisition over the fairvalue of the Group's share of the net identifiable assets of the acquiredsubsidiary/associate at the date of acquisition. Goodwill is tested annuallyfor impairment and carried at cost less accumulated impairment losses. Gainsand losses on the disposal of an entity include the carrying amount of goodwillrelating to the entity sold.Goodwill is allocated to cash-generating units for the purpose of impairmenttesting. Each of those cash-generating units represents the Group's investmentin operations by each primary reporting segment.Research and developmentResearch expenditure is recognized as an expense as incurred.Internal development costs are recognized as intangible assets when it isprobable that future economic benefits will flow to the Group and costs can bemeasured reliably. The Group considers that regulatory and other uncertaintiesinherent in the development of new products mean that such criteria are not metuntil the commercial launch of the product and therefore, pre-launch internaldevelopment costs are expensed as incurred. No significant direct developmentcosts are incurred post commercial launch.Where the recognition criteria are met, internal development costs arecapitalized and amortized on a straight-line basis over their useful economiclives from product launch. Payments to in-license products and compounds fromexternal third parties, generally taking the form of up-front payments andmilestones, are capitalized. Development costs previously recognized as anexpense are not recognized as an asset in subsequent periods.Intellectual propertyIntellectual property, including trademarks, is recognized at purchase cost andamortized in equal annual installments over the estimated useful life of theproduct post its launch (generally not exceeding 20 years). Intellectualproperty related to a marketed product can have a useful life exceeding 20years when the Group believes that the product is well established in itsmarket.Computer softwareThe costs of acquiring computer software licenses and to implementing thespecific software are capitalized. These costs are amortized over theirestimated useful lives (three to five years).Costs associated with maintaining computer software programs are recognized asan expense as incurred. g. Impairment of assets At each balance sheet date, the Group reviews the carrying amounts of itstangible and intangible assets to determine whether there is any indicationthat those assets have suffered an impairment loss. If any such indicationexists, the recoverable amount of the asset is estimated in order to determinethe extent of the impairment loss (if any). Where the asset does not generatecash flows that are independent from other assets, the Group estimates therecoverable amount of the cash-generating unit to which the asset belongs. Anintangible asset with an indefinite useful life is tested for impairmentannually and whenever there is an indication that the asset may be impaired.The recoverable amount is the higher of fair value less costs to sell and valuein use. In assessing value in use, the estimated future cash flows arediscounted to their present value using a pre-tax discount rate that reflectscurrent market assessments of the time value of money and the risks specific tothe asset for which the estimates of future cash flows have not been adjusted.If the recoverable amount of an asset (or cash-generating unit) is estimated tobe less than its carrying amount, the carrying amount of the asset (orcash-generating unit) is reduced to its recoverable amount. An impairment lossis recognised as an expense immediately, unless the relevant asset is carriedat a revalued amount, in which case the impairment loss is treated as arevaluation decrease to the extent that a revaluation surplus exists.Where an impairment loss subsequently reverses, the carrying amount of theasset (or cash-generating unit) is increased to the revised estimate of itsrecoverable amount, but only to the extent that the increased carrying amountdoes not exceed the carrying amount that would have been determined had noimpairment loss been recognized. A reversal of an impairment loss is recognizedas income immediately, unless the relevant asset is carried at a revaluedamount, in which case the reversal of the impairment loss is treated as arevaluation increase. h. Financial assets From January 1, 2004 to December 31, 2004:Financial assets include investments in companies other than subsidiaries,associates and joint ventures, financial receivables held for investmentpurposes, treasury stock and other securities. Financial assets are recorded atcost, including additional direct charges, less provision for any impairment.From January 1, 2005:From January 1, 2005 Shire will apply IAS 32 and IAS 39. Shire has chosen toapply these standards prospectively, which has resulted in the accountingpolicy described below:The Group classifies its investments in the following categories: financialassets at fair value through profit or loss, loans and receivables,held-to-maturity investments and available-for-sale financial assets. Theclassification depends on the purpose for which the investments were acquired.Management determines the classification of its investments at initialrecognition and re-evaluates this designation at every reporting date.Financial assets at fair value through profit or lossThis category has two sub-categories: financial assets held for trading, andthose designated at fair value through profit or loss at inception. A financialasset is classified in this category if acquired principally for the purpose ofselling in the short term or if so designated by management. Derivatives arealso categorized as held for trading unless they are designated as hedges.Assets in this category are classified as current assets if they are eitherheld for trading or are expected to be realized within 12 months of the balancesheet date. The Group allocates derivatives to this category.Loans and receivablesLoans and receivables are non-derivative financial assets with fixed ordeterminable payments that are not quoted in an active market. They arise whenthe Group provides money, goods or services directly to a debtor with nointention of trading the receivable. They are included in current assets,except for maturities greater than 12 months after the balance sheet date,which are classified as non-current assets.Held-to-maturity investmentsHeld-to-maturity investments are non-derivative financial assets with fixed ordeterminable payments and fixed maturities that the Group's management has thepositive intention and ability to hold to maturity. There are no investmentsallocated to this category.Available-for-sale financial assetsAvailable-for-sale financial assets are non-derivatives that are eitherdesignated in this category or not classified in any of the other categories.They are included in non-current assets unless management intends to dispose ofthe investment within 12 months of the balance sheet date. The Group allocatesall its equity investments (which are not investments in subsidiaries,associates or joint ventures) to this category.Purchases and sales of investments are recognized on trade-date - the date onwhich the Group commits to purchase or sell the asset. Investments areinitially recognized at fair value plus transaction costs for all financialassets not carried at fair value through profit or loss. Investments arederecognized when the rights to receive cash flows from the investments haveexpired or have been transferred and the Group has transferred substantiallyall risks and rewards of ownership. Available-for-sale financial assets andfinancial assets at fair value through profit or loss are subsequently carriedat fair value. Loans and receivables and held-to-maturity investments arecarried at amortized cost using the effective interest method. Realized andunrealized gains and losses arising from changes in the fair value of the`financial assets at fair value through profit or loss' category are includedin the income statement in the period in which they arise. Unrealized gains andlosses arising from changes in the fair value of non-monetary securitiesclassified as available-for-sale are recognized in equity. When securitiesclassified as available-for-sale are sold or impaired, the accumulated fairvalue adjustments are included in the income statement as gains and losses frominvestment securities.The fair values of quoted investments are based on current bid prices. If themarket for a financial asset is not active (and for unlisted securities), theGroup establishes fair value by using valuation techniques unless fair valuecannot be reliably measured. In this case such unquoted equity instruments aremeasured at cost.The Group assesses at each balance sheet date whether there is objectiveevidence that a financial asset or a group of financial assets is impaired. Inthe case of equity securities classified as available-for-sale, a significantor prolonged decline in the fair value of the security below its cost isconsidered in determining whether the securities are impaired. If any suchevidence exists for available-for-sale financial assets, the cumulative loss -measured as the difference between the acquisition cost and the current fairvalue, less any impairment loss on that financial asset previously recognizedin profit or loss - is removed from equity and recognized in the incomestatement. Impairment losses recognized in the income statement on equityinstruments are not reversed through the income statement. i. Leases Leases of property, plant and equipment where the Group has substantially allthe risks and rewards of ownership are classified as finance leases. Financeleases are capitalized at the lease's inception at the lower of the fair valueof the leased asset and the present value of the future minimum lease payments.Each lease payment is allocated between the underlying liability to the lessorand the associated finance charges so as to achieve a constant rate on thefinance balance outstanding. The corresponding rental obligations, net offinance charges, are included in Borrowings. The interest element of thefinance cost is charged to the income statement over the lease period so as toproduce a constant periodic rate of interest on the remaining balance of theliability for each period. The property, plant and equipment acquired underfinance leases is depreciated over the shorter of the asset's useful life andthe lease term.Leases where the lessor retains a significant portion of the risks and rewardsof ownership are classified as operating leases. Payments made under operatingleases (net of any incentives received from the lessor) are charged to theincome statement on a straight-line basis over the period of the lease. j. Inventories Inventories are stated at the lower of cost and net realizable value. Cost isdetermined using the first-in-first-out (FIFO) method. The cost of finishedgoods and work in progress comprises raw materials, direct labor, other directcosts and related production overheads (based on normal operating capacity).Net realizable value is the estimated selling price in the ordinary course ofbusiness, less all estimated costs of completion and costs to be incurred inmarketing, selling and distribution. k. Trade receivables Trade receivables do not carry any interest and are stated at their nominalvalue as reduced by appropriate allowances for estimated irrecoverable amounts. l. Cash, cash equivalents and restricted cash Cash and cash equivalents are carried in the balance sheet at cost. Cash andcash equivalents comprise cash on hand, deposits held at call with banks andother short-term, highly liquid investments with original maturities of threemonths or less.Restricted cash is carried in the balance sheet at cost. Restricted cashcomprises reserve funds required for financial guarantee contracts andcollateral against certain leased assets. m. Share capital Ordinary shares are classified as equity.Incremental costs directly attributable to the issue of new shares or optionsare shown in equity as a deduction, net of tax, from the proceeds other thanwhere the issue of new shares or options relates to the acquisition of abusiness in which case such incremental costs are included in the cost ofacquisition as part of the purchase consideration.Where any company in the Group purchases the Company's equity share capital(treasury shares), the consideration paid, including any directly attributableincremental costs (net of income taxes), is deducted from equity attributableto the Company's equity holders until the shares are cancelled, reissued ordisposed of. Where such shares are subsequently sold or reissued, anyconsideration received, net of any directly attributable incrementaltransaction costs and the related income tax effects, is included in equityattributable to the Company's equity holders. n. Borrowings From January 1, 2004 to December 31, 2004:Borrowings are stated at the amount of the net proceeds after deduction ofissue costs. The carrying amount is increased by the finance cost in respect ofthe accounting period and reduced by payments made in the period.From January 1, 2005:From January 1, 2005 Shire will apply IAS 32 and IAS 39. Shire has chosen toapply these standards prospectively, which has resulted in the accountingpolicy described below:Borrowings are recognized initially at fair value, net of transaction costsincurred. Borrowings are subsequently stated at amortized cost; any differencebetween proceeds (net of transaction costs) and the redemption value isrecognized in the income statement over the period of the borrowings using theeffective interest method. The fair value of the liability portion of aconvertible bond is determined using a market interest rate for an equivalentnon-convertible bond. This amount is recorded as a liability on an amortizedcost basis until extinguished on conversion or maturity of the bonds. Theremainder of the proceeds is allocated to the conversion option. This isrecognized and included in shareholders' equity, net of income tax effects.Borrowings are classified as current liabilities unless the Group has anunconditional right to defer settlement of the liability for at least 12 monthsafter the balance sheet date. o. Deferred tax Deferred tax is provided in full, using the liability method, on temporarydifferences arising between the tax bases of assets and liabilities and theircarrying amounts in the consolidated financial statements. Where the deferredtax arises from initial recognition of an asset or liability in a transaction,other than a business combination, that at the time of the transaction affectsneither accounting or taxable profit or loss it is prohibited under IAS 12`Income Taxes' from recognizing any deferred tax. Deferred tax is determinedusing tax rates (and laws) that have been enacted or substantially enacted bythe balance sheet date and are expected to apply when the related deferred taxasset is realized or the deferred tax liability is settled.Deferred tax assets are recognized to the extent that it is probable thatfuture taxable profit will be available against which the temporary differencescan be utilized.Deferred tax is provided on temporary differences arising on investments insubsidiaries and associates, except where the timing of the reversal of thetemporary difference is controlled by the Group, and it is probable that thetemporary difference will not reverse in the foreseeable future. p. Employee benefits Retirement obligations - defined contribution plansThe Group operates personal defined contribution plans for employees. A definedcontribution plan is a pension plan under which the Group pays fixedcontributions into a separate entity. The Group has no legal or constructiveobligations to pay further contributions if the fund does not hold sufficientassets to pay all employees the benefits relating to employee service in thecurrent and prior periods.The Group pays contributions to publicly or privately administered pensioninsurance plans on a mandatory, contractual or voluntary basis. The Group hasno further payment obligations once the contributions have been paid. Thecontributions are recognized as employee benefit expense when they are due.Prepaid contributions are recognized as an asset to the extent that a cashrefund or a reduction in future payments is available.Retirement obligations - defined benefit plansThe Group operates defined benefit plans for senior employees. The liabilityrecognized in the balance sheet in respect of these plans is the present valueof the defined benefit obligations at the balance sheet date. Assets relatingto a closed defined benefit plan are held in a Rabbi Trust, the legal form ofwhich is such that the assets held to cover the pension liabilities areavailable to the general creditors of the company on winding up and aretherefore shown on the balance sheet. Changes in the present value of thebenefit obligation are recognized in the income statement.Share-based compensationThe Group operates equity-settled, share-based compensation plans. The fairvalue of the employee services received in exchange for the grant of theoptions is calculated using the Black-Scholes model. In accordance with IFRS 2`Share-based Payments', the resulting cost is recognized as an expense on astraight-line basis over the vesting period of the options. The value of thecharge is adjusted to reflect expected and actual levels of options vesting.The Group also provides employees with the option to purchase the Company'sordinary shares: * Under the Shire Pharmaceuticals Sharesave Scheme at an exercise price equal to 80% of the mid-market price on the day before invitations are issued to employees; and * Under the Shire Pharmaceuticals Group plc Employee Share Purchase Plan at an exercise price equal to 85% of the fair market value of a share on the enrolment date (the first day of the offering period) or the exercise date (the last day of the offering period), whichever is the lower. The proceeds received, net of any directly attributable transaction costs, arecredited to share capital (nominal value) and share premium when the optionsare exercised.Termination benefitsTermination benefits are payable when employment is terminated before thenormal retirement date, or whenever an employee accepts voluntary redundancy inexchange for these benefits. The Group recognizes termination benefits when itis demonstrably committed to either: terminating the employment of employeesaccording to a detailed formal plan without possibility of withdrawal; orproviding termination benefits as a result of an offer made to encouragevoluntary redundancy. Benefits falling due more than 12 months after thebalance sheet date are discounted to present value. q. Provisions Provisions for restructuring costs and legal claims are recognized when theGroup has a present legal or constructive obligation as a result of pastevents; it is more likely than not that an outflow of resources will berequired to settle the obligation; the amount can be reliably estimated andwhen a detailed formal plan for the restructuring has been communicated toaffected parties.Restructuring provisions comprise lease termination penalties and employeetermination payments. Provisions are not recognized for future operatinglosses.Where there are a number of similar obligations, the likelihood that an outflowwill be required in settlement is determined by considering the class ofobligations as a whole. A provision is recognized even if the likelihood of anoutflow with respect to any one item included in the same class of obligationsmay be small. r. Revenue recognition Revenues are stated net of VAT and similar taxes, trade discounts andintra-Group transactions. The principal components of the Group's turnover andtheir respective accounting treatments are set out below: * Revenue from the sales of products is recognized upon shipment to customers or at the time of delivery depending on the terms of sale. Provisions for certain rebates, product returns and discounts to customers are provided for as reductions to revenue in the same period as the related sales are recorded; * Licensing and development fees represent revenues derived from license agreements and from collaborative research and development arrangements; * Initial license fees are not considered to be separable from the associated research and development activities, even where such fees are non-refundable and not creditable against research and development services to be rendered. Initial license fees are deferred and recognized over the period of the license term or the period of the associated research and development agreement. In circumstances where initial license fees are not for a defined period, revenues are deferred and recognized over the period to the expiration of the relevant patent to which the license relates; * During the term of certain research and development agreements, the Group receives non-refundable milestones as certain technical targets are achieved. Revenue is recognized on achievement of milestones; * The Group also receives non-refundable clinical milestones when certain targets are achieved during the clinical phases of development, such as the submission of clinical data to a regulatory authority. These clinical milestones are recognized when receivable. If milestone payments are creditable against future royalty payments, the milestones are deferred and released over the period in which the royalties are anticipated to be paid; and * No revenue is recognized for consideration, the value or receipt of which is dependent on future events, future performance, or refund obligations. Royalty incomeRoyalty income is recognized on an accruals basis in accordance with thesubstance of the relevant agreements.Interest incomeInterest income is recognized on a time-proportion basis using the effectiveinterest method.Dividend incomeDividend income is recognized when the right to receive payment is established. s. Dividend distribution Dividend distribution to the Company's shareholders is recognized as aliability in the Group's financial statements in the period in which thedividends are approved by the Company's shareholders, or in the case of aninterim dividend, when the dividend is paid. t. Non-current assets held for sale Non-current assets (and disposal groups) classified as held for sale aremeasured at the lower of carrying amount and fair value less costs to sell.Non-current assets and disposal groups are classified as held for sale if theircarrying amount will be recovered through a sale transaction rather thancontinuing use. This condition is considered met only when the sale is highlyprobable and the asset or disposal group is available for immediate sale in itspresent condition. Management must be committed to the sale, which should beexpected to qualify for recognition as a completed sale within one year fromthe date of classification. u. Government grants Government grants relating to property plant and equipment are treated asdeferred income and released to profit and loss over the expected useful livesof the assets concerned. 2. Financial risk management The Group's activities expose it to a variety of financial risks: market risk(including foreign exchange risk and price risk); cash flow and fair valueinterest rate risk; credit risk; and liquidity risk.The Group's overall risk management program focuses on the unpredictability offinancial markets and seeks to minimize potential adverse effects on theGroup's financial performance. The Group uses derivative financial instrumentsto hedge certain risk exposures.Risk management is carried out by a central treasury department (GroupTreasury) under policies approved by the Board of Directors. Group Treasuryidentifies, evaluates and hedges financial risks in close co-operation with theGroup's operating units. All Group Treasury operations are conducted within aframework of policies and procedures reviewed and approved by the Board. As amatter of policy, the Group does not undertake speculative transactions thatwould increase currency or interest rate exposure.(a) Market riskForeign exchange riskThe Group's net income and financial position, as expressed in US Dollars, areexposed to movements in foreign exchange rates against the US Dollar. The maintrading currencies of the Group are the US Dollar, Pounds Sterling, the Euroand the Canadian Dollar.Foreign exchange risk arises when future commercial transactions, recognizedassets, liabilities and net investments in foreign subsidiaries are denominatedin a currency that is not the subsidiary's functional currency. The exposure toforeign exchange is managed and monitored by Group Treasury. Exposures aregenerally managed through natural hedging via the currency denomination of cashbalances.Price riskAs of June 30, 2005 the Group has $104 million of financial assets comprisingprivate companies, publicly quoted equities, institutional and managed cashfunds and commercial paper. The publicly quoted assets are exposed to marketrisk. No financial instruments or derivatives have been employed to hedge thisrisk.(b) Cash flow and fair value interest rate riskThe Group's income and operating cash flows are substantially independent ofchanges in market interest rates. The majority of the Group's debt was repaidduring the year to December 31, 2004 and therefore the Group's interest chargeis low. Consequently the Group has limited exposure to interest rate movements.In the six months to June 30, 2005 the average interest rate received on cashand liquid investments was approximately 2.75% per annum. The largestproportion of investments was in US Dollar liquidity funds. No financialinstruments or derivatives have been employed to hedge this exposure.(c) Credit riskThe Group's revenues are mainly derived from agreements with majorpharmaceutical companies and relationships with pharmaceutical wholesaledistributors and retail pharmacy chains. Such clients typically havesignificant cash resources and as such the risk is considered minimal. TheGroup has taken positive steps to manage any credit risk associated with thesetransactions. Shire operates clearly defined credit evaluation procedures. Forthe six months to June 30, 2005 there were four customers in the US whoaccounted for approximately 70% of the Group's total revenues.Financial instruments that potentially expose Shire to concentrations of creditrisk consist primarily of short-term cash investments and trade accountsreceivable. Excess cash is invested in short-term money market instruments,including bank and building society term deposits, commercial paper and otherdebt securities from a variety of companies with strong credit ratings. Theseinvestments typically bear minimal risk.(d) Liquidity riskPrudent liquidity risk management implies maintaining sufficient cash andmarketable securities, the availability of funding through an adequate amountof committed credit facilities, and the ability to close out market positions.The Group ordinarily finances its activities through cash generated fromoperating activities, private and public offerings of equity and debtsecurities and the proceeds of asset or investment disposals.Shire anticipates that its operating cash flow together with available cash,cash equivalents and short-term investments will be sufficient to meet itsanticipated future operating expenses, capital expenditures and debt serviceand lease obligations as they become due over the next twelve months.(e) Accounting for derivative financial instruments and hedging activitiesFrom January 1, 2004 to December 31, 2004:The Group uses derivative financial instruments to reduce exposure to foreignexchange risk and interest rate movements. The Group does not hold or issuederivative financial instruments for speculative purposes.For a forward foreign exchange contract to be treated as a hedge, theinstrument must be related to actual foreign currency assets or liabilities orto a probable commitment. It must involve the same currency or similarcurrencies as the hedged item and must also reduce the risk of foreign currencyexchange movements on the Group's operations. Gains and losses arising on thesecontracts are deferred and recognized in the income statement, or asadjustments to the carrying amount of fixed assets, only when the hedgedtransaction has itself been reflected in the Group's accounts.For an interest rate swap to be treated as a hedge the instrument must berelated to actual assets or liabilities or a probable commitment and mustchange the nature of the interest rate by converting a fixed rate to a variablerate or vice versa. Interest differentials under these swaps are recognized byadjusting net interest payable over the periods of the contracts.If an instrument ceases to be accounted for as a hedge, for example because theunderlying hedged position is eliminated, the instrument is marked to marketand any resulting profit or loss recognized at that time.From January 1, 2005 onwards:From January 1, 2005 Shire will apply IAS 32 and IAS 39. Shire has chosen toapply these standards prospectively, which has resulted in the accountingpolicy described below:Derivatives are initially recognized at fair value on the date on which aderivative contract is entered into and are subsequently re-measured at theirfair value. The method of recognizing the resulting gain or loss depends onwhether the derivative is designated as a hedging instrument, and if so, thenature of the item being hedged. Currently, the Group does not designate any ofits derivatives as a hedging instrument and which therefore do not qualify forhedge accounting. Changes in the fair value of any derivative instruments thatdo not qualify for hedge accounting are recognized immediately in the incomestatement. 3. Critical accounting estimates and judgments The preparation of consolidated financial statements, in conformity with IFRSaccounting principles, requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities, the disclosure ofcontingent assets and liabilities at the date of the consolidated financialstatements and reported amounts of revenues and expenses during the reportingperiod. Actual results could differ from those estimates. The estimates andassumptions that have a significant risk of causing a material adjustment tothe carrying amounts of assets and liabilities within the next financial yearare discussed below.(a) Estimated impairment of goodwillThe Group tests annually whether goodwill has suffered any impairment, inaccordance with the accounting policy stated in Note 2 (g). The recoverableamounts of cash-generating units have been determined based on value-in-usecalculations. These calculations require the use of estimates.The Group uses discounted cash flow models to value the recoverable amounts ofcash-generating units, which require assumptions about the timing and amount offuture cash inflows and outflows, risk, the cost of capital and terminalvalues. Each of these assumptions is significant to the value of the intangibleasset.A prolonged general economic downturn, sustained government pressure on pricesand, specifically, competitive pricing, could create an imbalance of industrysupply and demand, or otherwise diminish volumes or profits. Such events,combined with changes in interest rates, could adversely affect Shire'svaluation of the estimated future net cash flows generated by itscash-generating units. As a result, future operating results could bematerially and adversely affected by additional impairment charges related tothe recoverability of goodwill.(b) Valuation of Intangible AssetsThe Group has acquired and continues to acquire significant intangible assets,recorded at acquisition cost and amortized over the assets' useful economiclives. Management's estimate of the useful life considers, inter alia, thefollowing factors: the expected use of the asset by the Group; any legal,regulatory, or contractual provisions that may limit the useful life and theeffects of demand; competition; levels of maintenance expenditure required; andother economic factors (such as the stability of the industry, knowntechnological advances, legislative action that results in an uncertain orchanging regulatory environment, and expected changes in distributionchannels).There is a high occurrence of transactions involving the transfer of intangibleassets between companies in the health care field, and valuations are usuallybased on discounted cash flow analysis. The Group uses a discounted cash flowmodel to value intangible assets acquired, which requires assumptions about thetiming and amount of future cash inflows and outflows, risk, the cost ofcapital, and terminal values. Each of these assumptions is significant to thevalue of the intangible asset. The Group engages independent valuation expertswho review critical assumptions for significant acquisitions of intangibles.The Group reviews intangible assets for impairment periodically in accordancewith IAS 36 `Impairment of Assets'.A prolonged general economic downturn, sustained government pressure on pricesand, specifically, competitive pricing, could create an imbalance of industrysupply and demand, or otherwise diminish volumes or profits. Such events,combined with changes in interest rates, could adversely affect Shire'svaluation of the estimated future net cash flows generated by its intangibleassets. As a result, future operating results could be materially and adverselyaffected by additional impairment charges related to the recoverability ofintangible assets.(c) Valuation of Financial Assets and Equity Accounted InvestmentsThe Group has investments in certain public and private pharmaceutical andbiotechnology companies and partnerships. These investments are valued at costunder the historical cost convention (increased or decreased to recognize theGroup's share of the post acquisition profit or loss of the investees in thecase of equity accounted investments). The carrying values of these investmentsare periodically reviewed for diminution in values that are expected to bepermanent. Indicators of permanent diminution in value include: the marketvalue of a quoted investment being below the carrying value of the investmentfor an extended period; adverse news on a private Company's progress inscientific technology/development of compounds; and recent stock issuances at aprice below the investment price.In instances when the review indicates that there is a permanent impairment,the Group writes down the investment to the fair value of the investment,recording an impairment charge in the consolidated statements of operations netof any tax related effect. The determination of the fair value of privatecompany investments and the determination of whether an unrealized loss on apublicly quoted investment is permanent requires significant judgment and canhave a material impact on the reported results.(d) Sales DeductionsSales deductions primarily consist of statutory rebates to state Medicaid andother government agencies, contractual rebates with health-maintenanceorganizations (HMOs), product returns, trade discounts, wholesaler chargebacksand allowances for the coupon sampling program. Statutory rebates to stateMedicaid agencies and contractual rebates with HMOs are based on pricedifferentials between a base price and the selling price. Rebates generallyincrease as a percentage of the selling price over the life of the product (asprices increase). Provisions for rebates are recorded as reductions to revenuein the same period as the related sales with estimates of future utilizationderived from historical trends. Revisions or clarification from Centers forMedicare and Medicaid Services (CMS) related to state Medicaid and othergovernment program reimbursement practices with retroactive application canresult in changes to management's estimates of the rebates reported in priorperiods. However, at the time of sale, the prices of the Group's products arefixed and consequently the rebates can be reasonably determinable at the outsetof each transaction it undertakes with its customers and, therefore, thesefactors would not impact the recording of revenues in accordance with IFRS.Provisions for product returns and trade discounts to customers are recorded asreductions to revenue in the same period as the related sales with estimatesbased upon past activity levels; the duration of time in the processing ofdeductions; and other factors such as the launch of a new drug, the loss ofpatent protection or new competition.Where such factors are relevant, Shire develops provisions for returns based onwholesaler customer channel checks for slow-moving product and a separatemanagement review of estimated customer inventory levels, by product. To theextent that Shire is unable to estimate returns, recognition of revenue isdeferred until either the product is sold to the pharmacy or until Shirereceives payment from the wholesaler.Shire's policy is to accept customer returns in the following circumstances: a)expiration of product, b) product damaged while in the possession of Shire, orc) specific sales terms, at product launch, that allow for unconditional returnof product (guaranteed sales). Customer return periods range from one to 24months with an average return period of six months.In addition, Shire monitors customer inventory levels, based on estimatedprescription demand, and limits the amount of product shipped to a customerwhen there appears to be a protracted pattern of customer ordering that exceedsShire's estimate of underlying demand. The practice of monitoring inventorylevels allows Shire to more accurately predict customer returns.The actual experience and the level of these deductions to revenue may deviatefrom the estimate. Shire revises its estimates every period and may be requiredto adjust the estimate in a subsequent period. There have been no materialadjustments to the estimates recognized related to Shire's provisions for salesrebates or returns, in the period presented.(e) Income TaxesShire operates in numerous countries where its income tax returns are subjectto audits and adjustments. Because Shire operates globally, the nature of theaudit items are often very complex. The Group employs internal and external taxprofessionals to minimize audit adjustment amounts where possible.The Group also has significant deferred assets due to net operating losses(NOLs) in the United States, Canada and other countries. The realization ofthese assets is not assured and is dependent on the generation of sufficienttaxable income in the future. Management has exercised judgment in determiningthe extent of the realization of these losses based upon estimates of futuretaxable income in the various jurisdictions in which these NOLs exist. Wherethere is an expectation that on the balance of probabilities there will not besufficient taxable profits to utilize these NOLs a valuation allowance has beenmade against these deferred tax assets. If actual events differ frommanagement's estimates, or to the extent that these estimates are adjusted inthe future, any changes to the valuation allowance could materially impact theGroup's financial position and results.(f) LitigationShire accounts for litigation losses in accordance with IAS 37 `Provisions,Contingent Liabilities and Contingent Assets'. Under IAS 37, provisions arerecorded for probable litigation losses when management is able to reliablyestimate the loss. The amount recognized as a provision is management's bestestimate of the expenditure required to settle the present obligation at thebalance sheet date; in other words the amount that an entity would rationallypay to settle the obligation at the balance sheet date or transfer it to athird party at that time. These estimates are developed substantially earlierthan the ultimate loss is known and the estimates are refined each accountingperiod, as additional information becomes known. In instances where there is acontinuous range of possible outcomes, and each point in that range is aslikely as any other, the mid-point of the range is recorded as a loss. The bestestimates are reviewed quarterly and the estimates are changed whenexpectations are revised. Any outcome upon settlement that deviates fromShire's best estimate may result in an additional expense in a futureaccounting period. 4. Operating profit The following items of a special nature have been charged to the operatingprofit during the interim period: 6 months to 6 months to June 30, 2005 June 30, 2004 $'000 $'000 _____________ _____________ Reorganization costs 2,878 21,980 _____________ _____________ 5. Taxation Taxation for the interim period to June 30, 2005 consists of UK tax expense of$5.0 million (2004: $1.0 million income) and overseas tax income of $28.7million (2004: $74.7 million expense). 6. Post Balance Sheet Event On July 27, 2005, Shire Pharmaceuticals Group plc completed its acquisition ofTranskaryotic Therapies Inc. (TKT) pursuant to the Agreement and Plan ofMerger, dated April 21, 2005 (the "Merger Agreement"), among Shire, SpartaAcquisition Corp., a Delaware corporation and wholly owned subsidiary of Shire("Merger Sub"), and TKT. Shire's acquisition of TKT was effected by mergingMerger Sub with and into TKT (the "Merger"), with TKT continuing as thesurviving corporation. As consideration for the Merger and pursuant to theterms of the Merger Agreement, Shire paid to TKT's stockholders $37.00 in cash,without interest, for each share of TKT common stock outstanding at the time ofthe Merger, less any applicable withholding taxes. In addition, eachoutstanding option to purchase TKT common stock that was granted or committedto be granted prior to the date of the Merger Agreement became the right toreceive the difference between $37.00 per share and the per share exerciseprice of such option, less any applicable withholding taxes, and eachoutstanding option to purchase TKT common stock that was granted pursuant to anoffer of employment made on or after the date of the Merger Agreement wascancelled and will be substituted with an option having equivalent value underan equity compensation plan of Shire.In connection with the merger, as at September 19, 2005 the holders ofapproximately 11.7 million shares of TKT common stock had requested appraisalof their shares and have, as a result, elected not to accept the $37.00 pershare merger consideration. To the extent that these requests were validlyasserted in accordance with the applicable requirements of Delaware law andthese holders perfect their rights thereunder, such holders will be entitled toreceive the fair value of their shares as determined by the Delaware Court ofChancery. The determination of fair value of the TKT shares will be madeexcluding any element of value arising from the transaction, such as costsavings or business synergies. The Delaware Court of Chancery may ascribe avaluation to the shares that is greater than, less than or equal to $37.00 pershare and may award interest on the amount determined in the appraisal process.TKT shareholders who have asserted appraisal rights may within 60 days afterthe effective time of the Merger withdraw their demand for appraisal and acceptthe $37.00 per share Merger consideration in cash.For accounting purposes, the acquisition of TKT will be accounted for as anacquisition in accordance with IFRS 3 `Business Combinations'.The total cost of the acquisition of approximately $1.6 billion will be fundedfrom Shire's existing cash resources and drawings from a $500 million generalpurpose bank facility.In connection with the acquisition, Shire and certain members of the ShireGroup entered into a Multicurrency Revolving Facilities Agreement (the"Facilities Agreement") with ABN AMRO Bank N.V., Barclays Capital, CitigroupGlobal Markets Ltd, HSBC Bank plc and The Royal Bank of Scotland plc (the"Lenders") on June 15, 2005. The Facilities Agreement comprises two creditfacilities: (i) a multicurrency three year revolving loan facility in anaggregate amount of $500 million ("Facility A") and (ii) a 364 day revolvingloan facility in an aggregate amount of $300 million ("Facility B" and togetherwith Facility A, the "Facilities"). Shire has agreed to act as guarantor forany of its subsidiaries that borrows under the Facilities Agreement.Facility A may be used for general corporate purposes, including financing thepurchase price and other costs with respect to the acquisition of TKT(including refinancing TKT's existing indebtedness). Facility B may be usedonly for financing certain milestone payments due under the agreement betweenShire, and inter alia, New River Pharmaceuticals Inc., dated January 31, 2005.Facility A terminates on June 15, 2008 and Facility B terminates on June 14,2006. At Shire's request, the Lenders may agree to successive annual extensionsof Facility B, but not beyond the maturity date of Facility A. Alternatively,Shire has the right to draw Facility B or convert existing loans under FacilityB into a term loan with the same maturity date as Facility A.The availability of loans under each of the Facilities is subject to customaryconditions, including the absence of any defaults thereunder and the accuracy(in all material respects) of Shire's representations and warranties containedtherein.The Facilities include representations and warranties, covenants and events ofdefault, including requirements that Shire's ratio of Net Debt to EBITDA (underUS GAAP, as defined in the Facilities Agreement) not exceed 3.0 to 1 and thatthe ratio of EBITDA to Net Interest be not less than 4.0 to 1, both in respectof the most recently ended fiscal year, and limitations on the creation ofliens, disposal of assets, incurrence of indebtedness, making of loans andgiving of guarantees.Interest on loans under the Facilities will be payable on the last day of eachinterest period, which period may be one, two, three or six months at theelection of Shire (or as otherwise agreed with the Lenders). The interest rateon each loan for each interest period is the percentage rate per annum, whichis the aggregate of the applicable margin (ranging from 0.35 to 0.65 per centper annum, depending on the ratio of US GAAP Net Debt to EBITDA), LIBOR, andmandatory cost, if any (as calculated in accordance with the FacilitiesAgreement). Shire shall also pay fees equal to 35 per cent per annum of theapplicable margin on available commitments under Facility A for theavailability period applicable to Facility A and 20 per cent per annum of theapplicable margin on available commitments under Facility B for theavailability period applicable to Facility B in respect of the period prior toJanuary 1, 2007, and 30 per cent per annum of the applicable margin thereafter.Interest on overdue amounts under the Facilities will accrue at a rate, whichis one percent higher than the rates otherwise applicable to the loans underthe Facilities.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 cancelled, all or part of the loans, together withaccrued interest and all other amounts accrued or outstanding may beimmediately due and payable and all or part of the loans may become payable ondemand. Events of default under the Facilities include: (i) non-payment of anyamounts due under the Facilities, (ii) failure to satisfy any financialcovenants, (iii) material misrepresentation in any of the finance documents,(iv) failure to pay, or certain other defaults under, other financialindebtedness, (v) certain insolvency events or proceedings, (vi) materialadverse changes in the business, operations, assets or financial condition ofthe group, (vii) certain ERISA breaches which would have a material adverseeffect, (viii) change of control of a subsidiary of Shire that is a party tothe Facilities Agreement, or (ix) if it becomes illegal for Shire or any of itssubsidiaries that are parties to the Facility Agreement to perform theirobligations or they repudiate the Facilities Agreement or any Finance Document(as defined in the Facilities Agreement).There is a 90 day grace period for events of default relating to TKT.The Facilities Agreement is governed by English law. 7. Earnings per share (EPS) Basic EPS is based upon the profit on ordinary activities after taxationdivided by the weighted-average number of ordinary shares outstanding duringthe period.Diluted EPS is based upon the profit on ordinary activities after taxationdivided by the weighted-average number of ordinary shares outstanding duringthe period and adjusted for the effect of all dilutive potential ordinaryshares that were outstanding during the period. 6 months to 6 months to June 30, 2005 June 30, 2004 $'000 $'000 _______________ _______________ Income from continuing operations 238,582 155,912 Gain/(loss) from discontinued operations, net of 3,125 (64,292)tax _______________ _______________ Profit for the period 241,707 91,620 _______________ _______________ Numerator for basic EPS 241,707 91,620 Interest charged on convertible debt, net of tax 1 2,666 _______________ _______________ Numerator for diluted EPS 241,708 94,286 _______________ _______________ Numerator for basic EPS from continuing operations 238,582 155,912 Interest charged on convertible debt, net of tax 1 2,666 _______________ _______________ Numerator for diluted EPS from continuing 238,583 158,578operations _______________ _______________ Number of shares Number of shares __________________ __________________ Weighted average number of shares: Basic 499,333,386 495,896,175 Effect of dilutive shares: Share options 4,287,982 3,460,629 Warrants 234,916 94,742 Convertible debt 5,756 18,370,564 __________________ __________________ Diluted 503,862,040 517,822,110 __________________ __________________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, are shown below: 6 months to June 6 months to June 30, 2005 30, 2004 Number of shares Number of shares __________________ __________________ Share options 6,907,099 14,566,902 __________________ __________________ 8. Condensed statement of changes in shareholders' equity 9. 2005 2004 $'000 $'000 _______________ _______________ Shareholders' equity at December 31, 2004 4,244,932 n/a Adjustment on adoption of IAS 32 and IAS 39 13,077 n/a _______________ _______________ Shareholders' equity at January 1, 4,258,009 4,093,875 Total recognized income for the period 205,708 82,536 Dividends (19,057) - Share option compensation 11,302 6,486 New shares issued - 326 Proceeds on exercise of employee share options 18,464 5,351 Re-issuance of treasury shares 82 - _______________ _______________ Shareholders' equity at June 30, 4,474,508 4,188,574 _______________ _______________ 9. Notes to the consolidated cash flow statement Reconciliation of operating loss to net cash inflow from operating activities: 6 months to 6 months to June 30, June 30, 2005 2004 $000 $000 ____________ ___________ Profit for the period 241,707 91,620 Adjustments for: (Gain)/loss on discontinued operations (3,125) 64,292 Taxation (23,711) 73,666 Interest expense and similar charges 1,385 4,387 Interest income (20,992) (8,404) Depreciation of property, plant and equipment 7,075 8,890 Amortization of intangibles 24,807 19,092 Impairment of property, plant and equipment 5,874 1,239 Impairment of intangibles 3,000 3,916 Impairment of goodwill - 125 Movement in financial assets 1,587 7,214 Increase in provision for sale deductions 20,441 25,342 Loss/(profit) on disposal of non financial assets 30 (37) Profit on disposal of financial assets - (14,805) Share option compensation 11,302 6,486 Share of post tax profit from associates and joint (719) (2,218)ventures Changes in working capital: Inventories (6,500) (6,754) Trade and other receivables (12,070) 10,299 Other assets (672) 12,155 Trade and other payables (9,936) 4,476 Deferred income (7,831) (551) Cash flow from discontinued operations (362) (16,190) ____________ ___________ Cash generated from operating activities 231,290 284,240 ____________ ___________10. Related party transactions The Group incurred professional fees with Stikeman Elliott LLC, a law firm inwhich the Hon. James A. Grant is a partner, totaling $0.3 million for the sixmonths to June 30, 2005 (2004: $1.6 million).In April 2005, Shire BioChem Inc. (BioChem) contributed cash of $4.1 million(CAN$5.0 million) to ViroChem Pharma Inc. in return for an additional equityinterest. Dr Bellini, a non-executive director of BioChem had an indirectsubstantial interest in a company, which is a co-investor of ViroChem PharmaInc.During the six months to June 30, 2005, The Group earned management fees of$2.1 million from the GeneChem Technology and Therapeutics Funds (2004:$2.0million), and earned $4.9 million royalty income from its Canadian jointventure with GSK (2004: $4.1 million).11. Explanation of transition to IFRS (a) Application of IFRS 1Shire's financial statements for the year ended December 31, 2005 will be thefirst annual financial statements that comply with IFRS. These interimfinancial statements have been prepared as described in note 2. Shire hasapplied IFRS 1 in preparing these consolidated interim financial statements.The last financial statements under UK GAAP were for the year ended December31, 2004 and the date of transition was therefore January 1, 2004.Presented below are the reconciliation of equity at January 1, 2004 (date oftransition to IFRS) and at December 31, 2004 (date of last UK GAAP financialstatements) and the reconciliation of profit for the year ended December 31,2004 as required by IFRS 1. In addition, the reconciliation of equity at June30, 2004 and the reconciliation of profit for the six months ended June 30,2004 have been included below as required by IFRS 1 to enable a comparison ofthe 2005 interim figures with the corresponding period of the previousfinancial year.In preparing these interim consolidated financial statements in accordance withIFRS 1, Shire has applied certain of the optional exemptions from fullretrospective application of IFRS. Shire has also applied the mandatoryexceptions.(b) Exemptions from full retrospective application - elected by ShireShire has elected to apply the following optional exemptions from fullretrospective application.Business combinations exemptionShire has applied the business combination exemption in IFRS 1. It has notrestated business combinations that took place prior to the January 1, 2004transition date in accordance with IFRS 3 `Business Combinations'.Cumulative translation differences exemptionShire has elected to set the previously accumulated cumulative translationdifferences arising on the translation and consolidation of results of foreignoperations and balance sheets denominated in foreign currencies to zero atJanuary 1, 2004. This exemption has been applied to all subsidiaries inaccordance with IFRS 1.Exemption from restatement of comparatives for IAS 32 and IAS 39Shire has elected to apply this exemption. It applies UK GAAP rules toderivatives, financial assets and financial liabilities and to hedgingrelationships for the 2004 comparative information. The adjustments requiredfor differences between UK GAAP and IAS 32 and IAS 39 are determined andrecognized at January 1, 2005.Designation of financial assets and financial liabilities exemptionShire reclassified various equity investments as available-for-saleinvestments. The adjustments relating to IAS 32 and IAS 39 are required anddetermined at the opening balance sheet date of January 1, 2005 - the IAS 32and IAS 39 transition date.Share-based payment transaction exemptionShire has elected to apply the share-based payment exemption. It applied IFRS 2from January 1, 2004 to those options that were issued after November 7, 2002but that have not vested by January 1, 2005.Fair value measurement of financial assets or liabilities at initialrecognitionShire has applied the exemption offered by the revision of IAS 39 on theinitial recognition of the financial instruments measured at fair value throughthe income statement where there is no active market.(c) Exceptions from full retrospective application followed by ShireShire has applied the following mandatory exceptions from retrospectiveapplication:De-recognition of financial assets and liabilities exceptionFinancial assets and liabilities de-recognized before January 1, 2004 are notre-recognized under IFRS. The application of the exemption from restatingcomparatives for IAS 32 and IAS 39 means that Shire should recognize fromJanuary 1, 2005 any financial assets and financial liabilities derecognizedsince January 1, 2004 that do not meet the IAS 39 de-recognition criteria.Management chose not to apply the IAS 39 de-recognition criteria to an earlierdate. No adjustment was required.Hedge accounting exceptionShire is able to claim hedge accounting from January 1, 2005, only if the hedgerelationship meets all the hedge accounting criteria under IAS 39. Noadjustment was required.Estimates exceptionEstimates under IFRS at January 1, 2004 should be consistent with estimatesmade for the same date under previous GAAP, unless there is evidence that thoseestimates were in error. No adjustment was required.Assets held for sale and discontinued operations exceptionShire elected to apply IFRS 5 `Non-Current Assets Held for Sale andDiscontinued Operations' retrospectively as all required information wasavailable at the time of disposal of the vaccines business. Only areclassification adjustment was required as at January 1, 2004.(d) Reconciliations between IFRS and UK GAAPReconciliation of equity at December 31, 2004, June 30, 2004 and January 1,2004 Notes At December 31, 2004 At June 30, 2004 At January 1, 2004 ______________________ ________________ ____________________ Equity under UK GAAP in ‚£ 2,232,211 2,312,380 2,308,500'000 ______________ ______________ ______________ $000 $000 $000 ______________ ______________ ______________ Equity under UK GAAP 4,285,625 4,193,503 4,132,445restated in US$'000 Goodwill restated to a (231,308) (95,714) (63,244)acquiree's functional currency Reverse goodwill b 298,058 67,465 -amortization and impairment in 2004 Goodwill impairment c (132,198) - -charge on restated basis Dividends not recognized d 19,107 9,000 -as a liability Intangible assets e 11,465 11,465 11,465recognized under IAS 38 Impairment of intangibles f (6,149) (3,916) -above in the year Adjustment to deferred g 332 6,771 13,209tax ______________ ______________ ______________ Equity restated under 8 4,244,932 4,188,574 4,093,875IFRS ______________ ______________ ______________Reconciliation of net income for the year and first half-year of 2004 Notes 12 months to 6 months to December 31, June 30, 2004 2004 ___________________ _________________ (Loss)/profit for the period under UK (13,431) 22,744GAAP ‚£'000 _______________ _______________ $000 $000 _______________ _______________ (Loss)/profit for the period under UK (34,861) 40,995GAAP restated in US$ million Reverse goodwill amortization and b 298,058 67,465impairment in 2004 Goodwill impairment charge on restated c (132,198) -basis Impairment of intangibles recognized f (6,149) (3,916)under IFRS Fair value of share based payments h (15,464) (6,486) Adjustment to deferred tax g (12,877) (6,438) _______________ _______________ Profit for the period restated under 96,509 91,620IFRS _______________ _______________Explanation of material adjustments to equity at December 31, 2004, June 30,2004 and January 1, 2004 and to profit for the year ended December 31, 2004 andfor the six months ended June 30, 2004.Note a: IAS 21 `The Effects of Changes in Foreign Exchange Rates'Under UK GAAP Shire capitalized and amortized goodwill and certain intangibleassets over the period of their expected useful lives. Goodwill and intangibleassets purchased prior to January 1, 1998, were written-off in the year ofacquisition as a movement in profits recognized directly in equity.As permitted under IFRS 1, Shire has elected to apply IAS 21 retrospectively togoodwill arising in all business combinations that occurred before the date oftransition to IFRS. Under UK GAAP, goodwill was held in the functional currencyof the acquirer. Applying IAS 21 retrospectively expresses that goodwill in theacquiree's functional currency. The adjustment reflects the translation ofgoodwill from the acquirer's functional currency in to the acquiree'sfunctional currency.Note b: IFRS 3 `Business Combinations'Under IFRS 3, from January 1, 2004 Shire will no longer systematically amortizegoodwill, but will instead test these assets for impairment on at least anannual basis. The amortization charge under UK GAAP for goodwill in 2004 wasUS$298.1 million and consequently this amount needs to be reversed for IFRS. Ondisposal, goodwill acquired and written off on acquisition prior to January 1,1998 will no longer be reinstated as part of the profit or loss on disposal.Note c: IAS 36 `Impairment of Assets'Following the reversal of goodwill amortization as described in note (b) above,an adjustment is required to reduce the value of goodwill created on theacquisition of BioChem Pharma Inc., which was impaired, to its recoverableamount.Note d: IAS 10 `Events After the Balance Sheet Date'Under IFRS interim dividends declared but unpaid do not meet the definition ofa liability at the balance sheet date. Under UK GAAP, Shire accounted for suchdividends as a transaction in the accounting period in which the dividend wasdeclared, and a liability at the balance sheet date.The declared but unpaid interim dividends for 2004 amounted to 3.85c per 5pordinary share, totaling US$19.1 million. At January 1, 2004 there were nodeclared but unpaid dividends. The amount at December 31, 2004 has beenreclassified from current liabilities to retained profit.Note e: IAS 38 `Intangible Assets'Under IAS 38, when the recognition criteria are met intangible assets arecapitalized and amortized over their useful economic life from product launch.Payments to in-license products and compounds from external third parties,generally taking the form of up-front payments and milestones, are capitalized.Under UK GAAP, Shire policy was to capitalize only those intangible assets withan immediate defined revenue stream acquired for valuable consideration.Following a review of Shire's intangible purchases from external third parties,$11.5 million of payments to in-license products and compounds previouslyexpensed under UK GAAP, have been added to the balance sheet under IFRS.Note f: IAS 36 `Impairment of Assets'Following the addition to the balance sheet of the intangibles described innote (e) above, a review identified that following management decisions toterminate certain research and development projects in 2004, some of theseassets were being carried above their recoverable amount, requiring animpairment charge of $6.1 million.Note g: IAS 12 `Income Taxes'Under UK GAAP Shire recognized deferred tax only on timing differences thatarose from the inclusion of gains and losses in tax assessments in periodsdifferent from those in which they were recognized in the financial statements.Under IFRS deferred tax is recognized in respect of all taxable temporarydifferences arising between the tax base and the accounting base of balancesheet items. This means that deferred tax is recognized on certain temporarydifferences that would not have given rise to deferred tax under UK GAAP.The additional deferred tax included in the balance sheet under IFRS amountedto a net movement of US$13.2 million as at January 1, 2004 and US$0.3 millionas at December 31, 2004. Included in these amounts is $13.2 million at January1, 2004 in respect of internal transfer of assets and purchases to in-licenseproducts and compounds (previously expensed under UK GAAP, but added to thebalance sheet under IFRS), creating differences between the tax and accountingbase under IFRS.Note h: IFRS 2 `Share Based Payments'In accordance with IFRS 2, Shire has recognized a charge to income representingthe fair value of outstanding employee share options granted to employees. Thefair value has been calculated using the Black-Scholes options valuation modeland is charged to income over the relevant option vesting periods, adjusted toreflect actual and expected levels of vesting.Shire has adopted the IFRS 1 optional transitional arrangements, which allowcompanies that have previously disclosed the fair value charge, to apply IFRS 2fully retrospectively to all options granted after November 7, 2002 but notfully vested at the relevant reporting date. As a result, the share-basedpayment charge for 2004 includes all options granted after November 7, 2002 andnot fully vested at December 31, 2003.The operating profit (and profit for the year) impact in 2004 is a charge ofUS$15.5 million. For the six months ended June 30, 2004 there is a charge ofUS$6.5 million. The basis of calculation for deferred taxation is thedifference between the market price at the date of the financial statements andthe option exercise price; as a result the tax effect will not correlate to thecharge. The deferred tax impact of share-based payment has been included in theamounts described in note (g) above.(e) Other material adjustments affecting the balance sheet and income statementSoftwareUnder UK GAAP Shire classified capitalized costs incurred in purchasing anddeveloping software as tangible fixed assets. Under IFRS Shire will reclassifythese costs as intangible assets, in line with IAS 38. The net book value ofpurchased and internally developed software as at January 1, 2004 and atDecember 31, 2004 amounted to US$nil and US$9.7 million respectively.Joint ventures and AssociatesUnder UK GAAP associates were accounted for using the equity method, but withShire's share of associate operating profit presented separately in the incomestatement. Interest and tax of associates were included within the headings ofinterest and tax in the income statement. Under IFRS Shire will continue toaccount for associates under the equity method. The presentation of the resultsof associates will change however as IAS 1 `Presentation of FinancialStatements' requires that the share of profit or loss after tax from associatesis presented as a separate item on the face of the income statement as part ofprofit before tax but below operating profit. There is no impact on net profitas a result of this change.Under UK GAAP Shire accounted for its own share of the assets, liabilities andcash flows of the Canadian commercialization partnership with GSK. Under IFRSShire will account for this partnership as allowed by IAS 31 `Interests inJoint Ventures' using the equity method.IAS 17 `Leases'Shire is party to certain motor vehicle leases in the US that will beclassified as finance leases under IFRS, as the leases contain clauses thateffectively pass risks and rewards of ownership as defined by IAS 17 to thelessee (Shire). At December 31, 2004 the net book value of these vehicles nowrecorded on the balance sheet was $6.5 million, and a corresponding financelease creditor of $6.5 million was also recorded.IAS 21 `The Effects of Changes in Foreign Exchange Rates'Under IFRS cumulative foreign currency translation differences arising on thetranslation and consolidation of foreign operations' income statements andbalance sheets denominated in foreign currencies must be recorded as a separatecomponent of equity. Applying the exemption under IFRS 1, Shire will measureand record all cumulative foreign currency translation differences arisingafter the transition date of January 1, 2004. These differences will beclassified as a separate component of equity. On disposal of a foreignoperation the cumulative translation differences will be transferred to theincome statement as part of the gain or loss on disposal.All of the above changes have been implemented from January 1, 2004. FromJanuary 1, 2005 Shire has implemented the following additional changes inaccounting policies. These changes will be applied prospectively from January1, 2005 and will therefore not affect the 2004 comparative information in theAnnual Report and Accounts 2005.IAS 32 `Financial Instruments: Disclosure and Presentation' and IAS 39`Financial Instruments: Recognition and Measurement'From January 1, 2005 Shire will apply IAS 32 and IAS 39. These standards areapplied prospectively, and therefore no restatements are made to the incomestatement for the year ended December 31, 2004 and the balance sheets as atJanuary 1, 2004 and December 31, 2004. These standards have many detailedconsequences, however the key areas of impact for Shire are described below:Non-derivative financial assets and liabilitiesUnder UK GAAP Shire held most non-derivative financial assets on the balancesheet at fair value, with movements recognized in the income statement. Mostnon-derivative financial liabilities were held at cost. IAS 39 requires certainnon-derivative financial assets (those classified as `available-for-sale') tobe held at fair value with unrealized movements in fair value recognizeddirectly within equity. Non-derivative financial liabilities will continue tobe measured at amortized cost, unless they form part of a fair value hedgeaccounting relationship when they are measured at amortized cost plus the fairvalue of the hedged risk.Derivative financial instrumentsShire uses certain derivative financial instruments for the purposes of hedgingforeign exchange and interest rate risk. Under UK GAAP a form of hedgeaccounting was applied to these derivative financial instruments meaning thatsome derivatives were held off balance sheet for at least part of their lives.IAS 39 requires recognition of all derivative financial instruments on thebalance sheet and that they are measured at fair value. The standard alsoplaces significant restrictions on the use of hedge accounting and changes thehedge accounting methodology. As a result, from January 1, 2005, Shire willrecognize all derivative financial instruments on balance sheet at fair valueand will apply the new hedge accounting methodology to all qualifying hedgingrelationships.(f) Cash flowThe transition from UK GAAP to IFRS has no effect upon the cash flows generatedby Shire. The IFRS cash flow statement is presented in a different format fromthat required by UK GAAP with cash flows split into three categories ofactivities - operating activities, investing activities and financingactivities. The reconciling items between the UK GAAP presentation and the IFRSpresentation have no net impact on the cash flows generated. In preparing thecash flow statement under IFRS, cash and cash equivalents include cash at bankand in hand and highly liquid interest bearing securities with originalmaturities of three months or less, but excludes restricted cash. Under UKGAAP, the cash flow also recognized restricted cash within cash and cashequivalents.INDEPENDENT REVIEW REPORT TO SHIRE PHARMACEUTICALS GROUP PLCIntroductionWe have been instructed by the company to review the financial information forthe six months ended June 30, 2005, which comprises the income statements, thebalance sheets, the cash flow statement and related notes 1 to 12 on pages 32to 58. We have read the other information contained in the interim report andconsidered whether it contains any apparent misstatements or materialinconsistencies with the financial information.This 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' responsibilitiesThe 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 which require that the accountingpolicies and presentation applied to the interim figures are consistent withthose applied in preparing the preceding annual accounts except where anychanges, and the reasons for them, are disclosed.International Financial Reporting StandardsAs disclosed in note 2, the next annual financial statements of the group willbe prepared in accordance with International Financial Reporting Standards asadopted for use in the EU. Accordingly, the interim report has been prepared inaccordance with the recognition and measurement criteria of IFRS and thedisclosure requirements of the Listing Rules. The accounting policies areconsistent with those that the directors intend to use in the annual financialstatements. There is, however, a possibility that the directors may determinethat some changes to these policies are necessary when preparing the fullannual financial statements for the first time in accordance with IFRSs asadopted for use in the EU. This is because, as disclosed in note, the directorshave anticipated that certain standards, which have yet to be formally adoptedfor use in the EU, will be so adopted in time to be applicable to the nextannual financial statementsReview work performedWe 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 conclusionOn the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 June 2005.Deloitte & Touche LLPChartered AccountantsSeptember 23, 2005Neither 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 disseminationof financial information differs from legislation in other jurisdictions." Hampshire International Business Park Chineham Basingstoke Hampshire RG24 8EP United Kingdom Tel +44 (0)1256 894000 Fax +44 (0)1256 894708 www.shire.com Press Release ENDShire Pharmaceuticals Group PLC

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