Shire delivers record quarterly revenues

Press Release www.shire.com NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION (IN WHOLE OR IN PART)IN, INTO OR FROM ANY JURISDICTION WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OF SUCH JURISDICTION. Shire delivers record quarterly revenues and Non GAAP diluted earnings per ADSup 42%. Increases Non GAAP diluted earnings per ADS guidance to low-to-mid thirtypercent growth in 2014. July 18, 2014 - Shire (LSE: SHP, NASDAQ: SHPG) announces unaudited results forthe three months to June 30, 2014. Financial Highlights Q2 2014 Growth(1) $1,470Product sales million +22%(2) $1,502Total revenues million +20% Non GAAP operating income $630 million +32%US GAAP operating income from continuing operations $338 million -14% Non GAAP EBITDA margin (excluding royalties & otherrevenues)(3) 44% n/aUS GAAP net income margin(4) 35% n/a Non GAAP diluted earnings per ADS $2.67 +42%US GAAP diluted earnings per ADS $2.66 +96% Non GAAP cash generation $659 million +76%Non GAAP free cash flow $830 million +245%US GAAP net cash provided by operating activities $834 million +223% (1) Percentages compare to equivalent 2013 period. The 2013 comparatives inthis release have been recast to exclude the DERMAGRAFT® business fromcontinuing operations following its divestment on January 17, 2014. (2) Product sales from continuing operations, including ViroPharma Inc.acquired January 24, 2014, and excluding DERMAGRAFT. (3) Non GAAP earnings before interest, tax, depreciation and amortization("EBITDA") as a percentage of product sales, excluding royalties and otherrevenues. (4) US GAAP net income as a percentage of total revenues. The Non GAAP financial measures included within this release are explained onpage 29, and are reconciled to the most directly comparable financial measuresprepared in accordance with US GAAP on pages 21 - 26. Flemming Ornskov, M.D., Shire's Chief Executive Officer, commented: "We have again delivered record quarterly results, with product sales growingby 22%, Non GAAP diluted earnings per ADS growth of 42% and Non GAAP cashgeneration of $659 million. We have also again increased our expectations forearnings growth in 2014. These results and our increased guidance highlight the benefits of ourstrategic focus on high-growth areas. This performance is a testament to the value AbbVie sees in our company.Today, in a separate announcement, the Boards of Directors of AbbVie and Shirehave reached an agreement on the terms of a recommended combination of our twocompanies. We have driven strong sustainable growth in our Rare Diseases, Neuroscienceand GI business units. CINRYZE, which came to us from our recent ViroPharmaacquisition, performed very strongly this quarter generating product sales of$130 million and we believe shows our ability to integrate assets whiledriving growth. Our 2014 performance to date means that we are taking an important earlystride towards meeting our target of $10 billion in product sales by 2020 - atarget which excludes revenues from our two latest acquisitions, Lumena andFibrotech. Our confidence in our plan is reinforced by raising our 2014 NonGAAP diluted earnings per ADS guidance to growth in the low-to-mid thirtypercent range." FINANCIAL SUMMARY Second Quarter 2014 Unaudited Results Q2 2014 Q2 2013 US GAAP Adjustments Non GAAP US GAAP Adjustments Non GAAP $M $M $M $M $M $MTotal revenues 1,502 - 1,502 1,252 - 1,252Operating income 338 292 630 391 88 479 Diluted earningsper ADS $2.66 $0.01 $2.67 $1.36 $0.52 $1.88 - Product sales grew strongly in Q2 2014 (up 22% to $1,470 million from $1,208million in Q2 2013). Product sales in Q2 2014 included $141 million forproducts acquired with ViroPharma Incorporated ("ViroPharma"), primarily $130million from CINRYZE®. The inclusion of ViroPharma contributed 12% to reportedproduct sales growth in the quarter. Excluding products acquired with ViroPharma, product sales grew 10%, primarilydriven by VYVANSE® (up 20% to $360 million), REPLAGAL® (up 14% to $131million) and FIRAZYR® (up 80% to $89 million). - Total revenues were up 20% to $1,502 million (Q2 2013: $1,252 million), withthe strong product sales growth being only modestly offset by lower royaltiesand other revenues (down 27%). - On a Non GAAP basis: Operating income grew strongly in Q2 2014, up 32% to $630 million (Q2 2013:$479 million) as combined Research and Development ("R&D") and Selling,General and Administrative ("SG&A") costs increased at a much lower rate (up2%) than total revenues (up 20%). On a Non GAAP basis: EBITDA margin (excluding royalties and other revenues)([1]) was 44%, up 6percentage points compared to Q2 2013 (Q2 2013: 38%), as a result of continuedoperating leverage. EBITDA margin (excluding royalties and other revenues)(1)this quarter was slightly held back by inventory write offs (representingapproximately 2% of product sales). R&D costs were 10% lower compared to Q22013, and SG&A costs increased by 10%, due in part to the inclusion ofViroPharma's operating costs, which were not incurred in Q2 2013. On a US GAAP basis (from continuing operations): Operating income was down 14% to $338 million (Q2 2013: $391 million) as aresult of higher charges from the change in fair value of contingentconsideration liabilities, higher One Shire reorganization costs and increasedintangible asset amortization, together with the unwind of the fair valuestep-up on acquired ViroPharma inventories. Combined R&D and SG&A was up 10%,with R&D down 8% and SG&A up 21% as compared with Q2 2013. Net income marginin Q2 2014 was up 14 percentage points to 35% (Q2 2013: 21%). - Non GAAP diluted earnings per American Depository Share ("ADS") increased42% to $2.67 (Q2 2013: $1.88) as a result of higher Non GAAP operating incomeand a lower Non GAAP effective tax rate of 16% in Q2 2014 (Q2 2013: 23%). On a US GAAP basis, diluted earnings per ADS increased 96% to $2.66 (Q2 2013:$1.36). The significant increase in US GAAP diluted earnings per ADS wasprimarily due to a negative effective tax rate on US GAAP income, driven bythe recognition in Q2 2014 of a net credit to income taxes of $216 millionfollowing the settlement of certain tax positions with the Canadian revenueauthorities in June 2014. - Cash generation, a Non GAAP measure, was up 76% to $659 million (Q2 2013:$374 million). The growth in cash generation in 2014 resulted from the strongoperating income, and lower cash generation in Q2 2013 due to delayed receiptslast year from certain large distributors in the US. Free cash flow, also a Non GAAP measure, was up 245% to $830 million (Q2 2013:$241 million) due to higher cash generation and net cash tax receipts in Q22014, principally as a result of the $248 million refund received from theCanadian revenue authorities in the quarter. On a US GAAP basis, net cash provided by operating activities was up 223% to$834 million (Q2 2013: $259 million). - Net debt, also a Non GAAP measure, was $920 million at June 30, 2014(December 31, 2013: net cash of $2,231 million). On a US GAAP basis, cash and cash equivalents were $154 million at June 30,2014 (December 31, 2013: $2,239 million). OUTLOOK We have again delivered record quarterly results and following our strongperformance in the first half of 2014, we are increasing our guidance for NonGAAP diluted earnings per ADS to low-to-mid thirty percent growth for the fullyear 2014 (previous guidance: mid-to-high twenty percent growth). After a strong first half product sales performance, we now expect to see highteens product sales growth for the full year 2014 (previous guidance:mid-to-high teens). We continue to expect royalties and other revenues to be 10-15% lower than2013. We continue to anticipate that our Non GAAP gross margin will be approximately1 percentage point lower than in 2013. We expect our operating costs to continue to benefit from our reorganizationefforts and focus on operational discipline shown in the first half of theyear. As a result, we now anticipate Combined Non GAAP R&D and SG&A to grow by2-4% compared to 2013 (previous guidance: 4-6% higher). We are expecting higher Combined Non GAAP R&D and SG&A in the second half thanthe first half of 2014, as we continue to invest behind our innovative andexciting pipeline, which now includes programs acquired with FibrotechTherapeutics Pty Ltd. ("Fibrotech") and Lumena Pharmaceuticals Inc.("Lumena"). The second half will also see commercial spending on theanticipated launch of SHP465 in the US and XAGRID® in Japan, Binge EatingDisorder disease awareness investments and the continued internationalexpansion of VYVANSE. Following the cash refunds received and expected from the Canadian revenueauthorities, and stronger operational cash flows, we now expect Non GAAP netinterest expense to be approximately $10 million lower than in 2013 (previousguidance: at a similar level to 2013). Our core effective tax rate on Non GAAP income is now expected to be in therange of 17-19% (previous guidance: range of 18-20%). Taken together, our upgraded Non GAAP diluted earnings per ADS growth for thefull year 2014 is now expected to be in the low-to-mid thirty percent range. Recommended combination of Shire and AbbVie Inc. ("AbbVie") AbbVie and Shire earlier today announced that they had agreed the terms of arecommended combination of Shire and AbbVie. Under the terms of thecombination, shareholders will be entitled to receive £24.44 in cash and0.8960 shares in the new Abbvie holding company per Shire ordinary share. SECOND QUARTER 2014 AND RECENT PRODUCT AND PIPELINE DEVELOPMENTS Products VYVANSE - for the treatment of Attention Deficit Hyperactivity Disorder("ADHD") - Yesterday, July 17, 2014, Shire announced top-line results fromtwo Phase 4 efficacy and safety studies of VYVANSE compared with CONCERTA®(methylphenidate HCl) with a placebo reference arm in adolescents aged 13-17diagnosed with ADHD. In SPD489-406, the forced-dose titration study, VYVANSEwas found to be statistically superior to CONCERTA on the primary efficacyanalysis (p = 0.0013) with mean reductions on the ADHD RS-IV total score of25.4 and 22.1 points, respectively. In SPD489-405, the dose optimizationstudy, neither VYVANSE nor CONCERTA was found to be statistically superior tothe other on the primary efficacy analysis (p = 0.0717), with a larger meanimprovement found for VYVANSE than CONCERTA (mean reductions on the ADHD-RS-IVtotal score of 25.6 and 23.5 points, respectively). The primary efficacyendpoint for both studies was defined as the change from baseline inADHD-RS-IV total score at Week 6 and Week 8, respectively. In both studies,the types of adverse events appear to be generally consistent with the knownsafety profile for VYVANSE established in studies of adolescents with ADHD.Further evaluation of the data for both studies is under way. - On June 12, 2014 Shire announced that it had agreed to a writtenrequest by the US Food and Drug Administration ("FDA") to conduct pediatricclinical studies to investigate the potential use of VYVANSE for the treatmentof ADHD in preschool-age children, ages 4 to 5. Upon FDA confirmation of atimely submission and review of data that adheres to the requirements of thewritten request, Shire will be entitled to the benefits of the BestPharmaceuticals for Children Act, including a six-month extension to theexclusivity afforded by Shire's patents for VYVANSE, which expire in 2023. Pipeline SHP 606 lifitegrast - for the treatment of Dry Eye disease - Following a meeting with the FDA, on May 16, 2014 Shire announced that itintends to submit a New Drug Application ("NDA") for lifitegrast in Q1 2015 asa treatment for the signs and symptoms of Dry Eye disease in adults. Inparallel to preparing for the NDA submission, Shire is assessing the need tocollect additional clinical data to further strengthen the filing, marketingclaims and rest-of world-opportunity for lifitegrast. VASCUGEL® (SHP613) - for the treatment of Acute Vascular Repair - Shire made the decision in Q2 2014 to discontinue further development ofVASCUGEL, intended to enhance blood vessel repair in patients undergoinghemodialysis. This decision was made based on portfolio prioritization as wellas unexpected challenges and complexities with the development program. No newpatients will be enrolled in the two Phase 2 trials, but those currently inthe trials will be followed for at least 12 weeks for safety. In addition, the64 patients enrolled in the Arteriovenous Fistula study will be followed forsix months, per the study protocol. Once the studies are closed out Shire willanalyze available data then make any further decisions regarding VASCUGEL. Legal Proceedings VYVANSE patent litigation - On June 25, 2014 Shire announced that Judge Stanley R. Chesler of the USDistrict Court for the District of New Jersey granted Shire's summary judgmentmotion in a patent infringement lawsuit, holding that certain claims of thepatents protecting VYVANSE were both infringed and valid. The ruling prevents the five pharmaceutical manufacturers (the ANDA-defendants) who have filed Abbreviated New Drug Applications ("ANDA"s) from launchinggeneric versions of VYVANSE until the earlier of either a successful appeal tothe US Court of Appeals for the Federal Circuit, or the expiration of thesepatents in 2023. To appeal successfully, the ANDA-defendants must overturn theCourt's rulings for each of the 18 patent claims. The Court's summary judgment ruling concerning Shire's motion included 18patent claims from four of the FDA Orange Book-listed patents for VYVANSE,which cover VYVANSE's active ingredient, the lisdexamfetamine dimesylatecompound, and a method of using lisdexamfetamine dimesylate for the treatmentof ADHD. OTHER DEVELOPMENTS Completion of Lumena acquisition - On June 11, 2014 Shire completed its acquisition of Lumena, abiopharmaceutical company with late stage rare disease pipeline assets. Lumenabrings to Shire two new novel, once-daily, orally administered therapeuticcompounds: SHP625 (formerly LUM001), in Phase 2 clinical development with fourpotential orphan indications; and SHP626 (formerly LUM002), ready to enterPhase 2 clinical development later in 2014. SHP625 and SHP626 are bothinhibitors of the apical sodium-dependent bile acid transporter ("ASBT"),which is primarily responsible for recycling bile acids from the intestine tothe liver. SHP625 works by preventing recycling of bile acids back to theliver and is thought to reduce bile acid accumulation, improve liver functionand potentially relieve the extreme itching associated with cholestatic liverdisease and is in clinical trials in Alagille Syndrome, Progressive FamilialIntrahepatic Cholestasis, Primary Biliary Cirrhosis, and Primary SclerosingCholangitis. SHP626 is in development for the treatment of nonalcoholicsteatohepatitis, a common and often "silent" liver disease characterized byfat deposits in the liver and inflammation which can progress to significantfibrosis. Completion of Fibrotech acquisition - On July 4, 2014 Shire completed its acquisition of Fibrotech, an Australianbiopharmaceutical company developing a new class of orally available drugswith a novel mechanism of action which has the potential to address both theinflammatory and fibrotic components of disease processes. Shire willundertake the further development of Fibrotech's lead product candidate SHP627(formerly FT011), which has completed a Phase 1 study in healthy volunteersand a Phase 1B study in patients with renal impairment. The first Phase 2study is expected to be initiated to enroll Focal Segmental Glomerulosclerosis("FSGS") patients next year. In addition to the lead compound SHP627, Shirehas acquired Fibrotech's library of novel molecules including FT061, which isin pre-clinical development. Refunds of US$410 million from the Canadian revenue authorities - On June 30, 2014, Shire announced that it had received assessments from theCanadian revenue authorities which entitle its Canadian subsidiary, ShireCanada Inc. ("Shire Canada") to total cash refunds equivalent to US$410million (C$440 million). The assessments agreed with original positions adopted by Shire Canada in itsCanadian tax returns for the period 1999-2004. On June 24, 2014 Shire receivedcash refunds of US$248 million (C$266 million)(1). Shire Canada is entitled toreceive additional cash refunds of US$162 million (C$174 million)(1), expectedin late 2014. Following receipt of the assessments Shire recorded a net creditto income taxes of US$216 million in the second quarter of 2014. This incometax credit has been excluded from Non GAAP income, and will therefore notimpact Shire's Non GAAP core effective tax rate in 2014. The assessments do not impact Shire's current or future income tax profile. (1) Translated using a CAD:USD exchange rate of 1:0.93, being the exchangerate on the date of receipt. DIVIDEND In respect of the six months ended June 30, 2014 the Board resolved to pay aninterim dividend of 3.83 US cents per Ordinary Share (2013: 3.00 US cents perOrdinary Share). Dividend payments will be made in Pounds Sterling to holders of OrdinaryShares and in US Dollars to holders of ADSs. A dividend of 2.24(1) pence perOrdinary Share (an increase of 15% compared to 2013: 1.95 pence) and 11.49 UScents per ADS (an increase of 28% compared to 2013: 9.00 US cents) will bepaid on October 3, 2014 to shareholders on the register as at the close ofbusiness on September 5, 2014. (1) Translated using a GBP:USD exchange rate of 1.7093. ADDITIONAL INFORMATION The following additional information is included in this press release: PageOverview of Second Quarter 2014 Financial Results 8Financial Information 12Non GAAP Reconciliation 21Notes to Editors 26Safe Harbor Statement 28Explanation of Non GAAP Measures 29Trade Marks 30For further information please contact: Investor Relations - Jeff Poulton [email protected] +1 781 482 0945 - Sarah Elton-Farr [email protected] +44 1256 894 157 Media - Stephanie Fagan [email protected] +1 781 482 0460 - Gwen Fisher [email protected] +1 484 595 9836 OVERVIEW OF SECOND QUARTER 2014 FINANCIAL RESULTS 1. Product sales For the three months to June 30, 2014 product sales increased by 22%(1) to$1,470 million (Q2 2013: $1,208 million) and represented 98% of total revenues(Q2 2013: 96%). Year on year growth Non GAAPProduct sales(1) Sales $M Sales CER(2) VYVANSE(3) 359.5 +20% +20%ELAPRASE® 152.1 +2% +2%LIALDA®/MEZAVANT® 143.6 +4% +5%REPLAGAL 130.5 +14% +14%CINRYZE 129.9 n/a n/aINTUNIV® 100.0 +11% +11%ADDERALL XR® 99.8 -11% -11%VPRIV® 89.7 +9% +8%FIRAZYR 89.0 +80% +79%PENTASA® 63.2 -14% -14%OTHER 112.3 +14% +10%Total 1,469.6 +22% +21% (1) Product sales from continuing operations, including ViroPharmaInc. acquired January 24, 2014, and excluding DERMAGRAFT which has beentreated as discontinued operations following divestment on January 17, 2014. (2) On a Constant Exchange Rate ("CER") basis, which is a Non GAAPmeasure. (3) Lisdexamfetamine dimesylate ("LDX") currently marketed asVYVANSE in the US & Canada, VENVANSE® in Latin America and ELVANSE® in certainterritories in the EU for the treatment of ADHD. VYVANSE - ADHD VYVANSE product sales grew strongly in Q2 2014 (up 20% compared to Q2 2013)due to price increases taken since Q2 2013 and to a lesser extent higherprescription demand and good growth in international sales. ELAPRASE - Hunter syndrome ELAPRASE product sales in Q2 2014 were up 2% compared to Q2 2013 driven bycontinued growth in the number of treated patients, especially in emergingmarkets. Growth in Q2 2014 was held back due to the timing of shipments tocertain markets which order less frequently, which benefited sales in Q2 2013. LIALDA/MEZAVANT - Ulcerative Colitis Product sales for LIALDA/MEZAVANT in Q2 2014 were up 4%, primarily due tohigher US prescription demand (estimated to be up 27%), as LIALDA reached a USexit market share of approximately 31% at Q2 2014. Product sales grew at alower rate than the strong US prescription demand as a result of higher salesdeductions as a percentage of product sales and destocking in Q2 2014,compared to significant stocking in Q2 2013. REPLAGAL - Fabry disease REPLAGAL sales were up 14% compared to Q2 2013 as we continue to see goodgrowth in emerging markets and to a lesser extent higher volume demand inEurope. Q2 2014 also benefited from larger bulk orders for Asian marketscompared to Q2 2013. CINRYZE - for the prophylactic treatment of Hereditary Angioedema ("HAE") Shire acquired CINRYZE through its acquisition of ViroPharma in Q12014, and CINRYZE sales were $129.9 million in Q2 2014. CINRYZE grew 37% on Q22013(1) primarily driven by more patients on therapy, a return to standardlevels of inventory and to a lesser extent, a price increase in the US. (1) Q2 2013 recorded by ViroPharma, prior to the acquisition ofViroPharma by Shire. INTUNIV - ADHD The growth in INTUNIV product sales (up 11%) in Q2 2014 was drivenby price increases taken since Q2 2013, partially offset by higher salesdeductions as a percentage of product sales in Q2 2014. ADDERALL XR - ADHD ADDERALL XR product sales decreased (down 11%) in Q2 2014 primarilydue to lower stocking, lower shipments of product to authorised genericsuppliers and higher sales deductions in Q2 2014 as compared to Q2 2013. VPRIV - Gaucher disease VPRIV product sales in Q2 2014 were up 9% compared to Q2 2013 as wecontinue to add naïve patients and gain patients switching from othertherapies. FIRAZYR - for the treatment of acute HAE attacks FIRAZYR strong product sales growth (up 80%) was primarily due togrowth in patients on therapy, the effect of a price increase and a highernumber of treated attacks, particularly in the US market. PENTASA - Ulcerative Colitis PENTASA product sales decreased in Q2 2014 (down 14%) driven by a decrease inUS prescription demand and destocking in Q2 2014 as compared to stocking in Q22013, partially offset by price increases taken since Q2 2013. 2. Royalties Year on year growth Royalties toProduct Shire $M Royalties CER FOSRENOL® 1.00 9.4 -13% -13%3TC® and ZEFFIX® 1.00 8.3 -27% -25%ADDERALL XR 1.00 4.5 -8% -8%Other 1.00 7.0 -25% -28%Total 1.00 29.2 -20% -20% 3. Financial details Cost of product sales % of % of product product Q2 2014 sales Q2 2013 sales $M $MCost of product sales (US 277.0 19% 164.3 14%GAAP)Unwind of ViroPharmainventory fair valuestep-up (33.7) -Depreciation (17.8) (9.2)Cost of product sales (Non 225.5 15% 155.1 13%GAAP) Non GAAP cost of product sales as a percentage of product sales increased by 2percentage points in Q2 2014 compared to the same period in 2013. Cost ofproduct sales in Q2 2014 was impacted by inventory write offs (approximating2% of product sales) and the inclusion of lower margin CINRYZE acquired withViroPharma. US GAAP cost of product sales as a percentage of product sales was 5percentage points higher than the same period in 2013, as in addition to thefactors above, Q2 2014 also included charges of $33.7 million on the unwind ofthe fair value adjustment on acquired ViroPharma inventories. R&D % of % of product product Q2 2014 sales Q2 2013 sales $M $MR&D (US GAAP) 236.9 16% 256.5 21%Impairment of intangible (22.0) (19.9)assetsDepreciation (5.8) (4.3)R&D (Non GAAP) 209.1 14% 232.3 19% Non GAAP R&D decreased by $23.2 million, or 10% in Q2 2014, following thecompletion of several large Phase 3 programs since Q2 2013 including new usesfor LDX, the effect of portfolio prioritization decisions taken during 2013and lower overheads due to the One Shire reorganization, partially offset bythe inclusion of programs acquired with ViroPharma. US GAAP R&D decreased by $19.6 million, or 8% as compared to Q2 2013. SG&A % of % of product product Q2 2014 sales Q2 2013 sales $M $MSG&A (US GAAP) 496.2 34% 410.0 34%Intangible asset (61.2) (35.9)amortizationLegal and litigation costs (2.2) (1.8)Costs incurred inconnection with therecommended combination ofShire and AbbVie (19.1) -Depreciation (21.1) (15.6)SG&A (Non GAAP) 392.6 27% 356.7 30% Non GAAP SG&A increased by $35.9 million, or 10%. The inclusion of ViroPharmaSG&A in Q2 2014 and commercial spending in advance of anticipated productlaunches for certain products, offset lower overheads following the One Shirereorganization. Non GAAP SG&A as a percentage of product sales was 3percentage points lower than Q2 2013 as we continue to see benefits from theOne Shire reorganization and the focus on operational discipline in Q2 2014. US GAAP SG&A increased by $86.2 million, or 21%, as compared to Q2 2013,primarily due to higher intangible asset amortization as a result of newassets acquired with ViroPharma and costs incurred in connection with therecommended combination of Shire and AbbVie. Gain on sale of product rights For the three months to June 30, 2014 Shire recorded a net gain onsale of product rights of $3.8 million (2013: $4.5 million) following there-measurement of the contingent consideration receivable from the divestmentof DAYTRANA®. Reorganization costs For the three months to June 30, 2014 Shire recorded reorganizationcosts of $45.8 million (Q2 2013: $17.7 million), primarily related to the OneShire reorganization as we continue the implementation of our new operatingmodel. Integration and acquisition costs For the three months to June 30, 2014 Shire recorded integration andacquisition costs of $112.1 million, comprising $80.6 million relating to thechange in fair value of contingent consideration liabilities and $31.5 millionprimarily related to the acquisition and integration of ViroPharma. The change in fair value of contingent consideration liabilities principallyrelates to the acquisition of SARcode Biosciences Inc. ("SARcode"), and theincrease in these liabilities reflects Shire's increased confidence in thelifitegrast program and the intention to submit the NDA for lifitegrast in Q12015. In Q2 2013 integration and acquisition costs ($17.4 million) primarily relatedto the acquisition of SARcode and Lotus Tissue Repair Inc. ("Lotus"), inaddition to charges related to the change in fair values of contingentconsideration liabilities. Interest income For the three months to June 30, 2014 Shire recorded interestincome of $18.7 million (2013: $0.5 million), principally due to therecognition of interest income on cash deposited with the Canadian revenueauthorities prior to receipt of assessments and related tax refunds in Q2 2014($18.6 million). This interest income has been excluded from Non GAAP interestincome. Interest expense For the three months to June 30, 2014 Shire incurred interest expense of $11.1million (Q2 2013: $9.1 million). Interest expense in Q2 2014 primarily relatedto interest and the amortization of issue costs incurred on borrowings to fundthe ViroPharma acquisition. Interest expense in Q2 2013 principally related tothe coupon and amortization of costs on Shire's convertible bonds which werefully redeemed or converted in Q4 2013. Taxation The effective rate of tax on Non GAAP income in Q2 2014 was 16% (Q22013: 23%), and on a US GAAP basis the effective rate of tax was -51% (Q22013: 24%). The effective rate of tax on Non GAAP income in Q2 2014 is lowerthan the same period in 2013, primarily due to changes in profit mix,movements in uncertain tax positions relating to ongoing tax audits and theadverse tax impact in Q2 2013 of the finalisation of various tax returns. The negative effective rate of tax on US GAAP income fromcontinuing operations in Q2 2014 is due to the recognition of a net tax creditof $216.0 million following the settlement of certain tax positions with theCanadian revenue authorities. Discontinued operations The loss from discontinued operations for the three months to June 30, 2014was $5.2 million net of tax (2013: $32.8 million), primarily relating to costsassociated with the divestment of the DERMAGRAFT business. FINANCIAL INFORMATION TABLE OF CONTENTS Page Unaudited US GAAP Consolidated Balance Sheets 13 Unaudited US GAAP Consolidated Statements of Income 14 Unaudited US GAAP Consolidated Statements of CashFlows 16 Selected Notes to the Unaudited US GAAP FinancialStatements(1) Earnings per share 18(2) Analysis of revenues 19 Non GAAP reconciliation 21 Unaudited US GAAP financial position as of June 30, 2014Consolidated Balance Sheets June 30, December 31, 2014 2013 $M $MASSETSCurrent assets:Cash and cash equivalents 153.6 2,239.4Restricted cash 34.1 22.2Accounts receivable, net 1,051.5 961.2Inventories 585.0 455.3Assets held for sale - 31.6Deferred tax asset 370.2 315.6Prepaid expenses and other current assets 418.6 263.0 Total current assets 2,613.0 4,288.3 Non-current assets:Investments 40.1 31.8Property, plant and equipment ("PP&E"), net 852.5 891.8Goodwill 2,283.4 624.6Other intangible assets, net 5,325.5 2,312.6Deferred tax asset 145.7 141.1Other non-current assets 84.2 32.8 Total assets 11,344.4 8,323.0 LIABILITIES AND EQUITYCurrent liabilities:Accounts payable and accrued expenses 1,783.0 1,688.4Short term borrowings 210.8 -Other current liabilities 222.8 119.5 Total current liabilities 2,216.6 1,807.9 Non-current liabilities:Long term borrowings 850.0 -Deferred tax liability 1,403.6 560.6Other non-current liabilities 755.1 588.5 Total liabilities 5,225.3 2,957.0 Equity:Common stock of 5p par value; 1,000 millionshares authorized; and 598.3 million sharesissued and outstanding (2013: 1,000 millionshares authorized; and 597.5 million sharesissued and outstanding) 58.6 58.6Additional paid-in capital 4,271.1 4,186.3Treasury stock: 11.4 million shares (2013: 13.4million) (368.1) (450.6)Accumulated other comprehensive income 124.1 110.2Retained earnings 2,033.4 1,461.5 Total equity 6,119.1 5,366.0 Total liabilities and equity 11,344.4 8,323.0 Unaudited US GAAP results for the three months and six months to June 30, 2014Consolidated Statements of Income 3 months to June 30, 6 months to June 30, 2014 2013 2014 2013 $M $M $M $MRevenues:Product sales 1,469.6 1,207.9 2,777.7 2,306.1Royalties 29.2 36.3 61.5 74.8Other revenues 3.3 8.0 9.7 14.7Total revenues 1,502.1 1,252.2 2,848.9 2,395.6 Costs and expenses:Cost of product sales 277.0 164.3 506.5 311.7R&D(1) 236.9 256.5 597.4 477.1SG&A(1) 496.2 410.0 926.5 801.7Goodwill impairment charge - - - 7.1Gain on sale of productrights (3.8) (4.5) (40.2) (11.0)Reorganization costs 45.8 17.7 95.2 35.2Integration and acquisitioncosts 112.1 17.4 118.7 21.5Total operating expenses 1,164.2 861.4 2,204.1 1,643.3 Operating income fromcontinuing operations 337.9 390.8 644.8 752.3 Interest income 18.7 0.5 19.2 1.2Interest expense (11.1) (9.1) (18.9) (18.3)Other income/(expense), net 3.3 (1.3) 8.0 (2.3)Total otherincome/(expense), net 10.9 (9.9) 8.3 (19.4) Income from continuingoperations before incometaxes and equity in earningsof equity method investees 348.8 380.9 653.1 732.9Income taxes 176.5 (90.5) 125.9 (161.9)Equity in earnings of equitymethod investees, net oftaxes 3.0 0.5 2.4 0.9Income from continuingoperations, net of tax 528.3 290.9 781.4 571.9Loss from discontinuedoperations, net of taxes (5.2) (32.8) (27.9) (249.0)Net income 523.1 258.1 753.5 322.9 (1) R&D includes intangible asset impairment charges of $22.0 million for thethree months to June 30, 2014 (2013: $19.9 million) and $188.0 million for thesix months to June 30, 2014 (2013: $19.9 million). SG&A costs includeamortization charges of intangible assets relating to intellectual propertyrights acquired of $61.2 million for the three months to June 30, 2014 (2013:$35.9 million) and $119.0 million for the six months to June 30, 2014 (2013:$72.0 million). Unaudited US GAAP results for the three months and six months to June 30, 2014Consolidated Statements of Income (continued) 3 months to June 30, 6 months to June 30, 2014 2013 2014 2013Earnings per Ordinary Share- basicEarnings from continuingoperations 90.1c 52.9c 133.6c 103.9cLoss from discontinuedoperations (0.9c) (6.0c) (4.8c) (45.3c) Earnings per Ordinary Share- basic 89.2c 46.9c 128.8c 58.6c Earnings per ADS - basic 267.6c 140.7c 386.4c 175.8c Earnings per Ordinary Share- dilutedEarnings from continuingoperations 89.5c 50.9c 132.3c 99.9cLoss from discontinuedoperations (0.9c) (5.6c) (4.7c) (42.4c) Earnings per Ordinary Share- diluted 88.6c 45.3c 127.6c 57.5c Earnings per ADS - diluted 265.8c 135.9c 382.8c 172.5c Weighted average number ofshares: Millions Millions Millions Millions Basic 586.4 549.6 585.3 550.5Diluted 590.3 586.0 590.3 587.5 Unaudited US GAAP results for the three months and six months to June 30, 2014Consolidated Statements of Cash Flows 3 months to June 30, 6 months to June 30, 2014 2013 2014 2013 $M $M $M $MCASH FLOWS FROM OPERATING ACTIVITIES: Net income 523.1 258.1 753.5 322.9Adjustments to reconcile net income to net cashprovided by operating activities: Depreciation and amortization 108.3 76.2 204.8 151.2 Share based compensation 29.5 19.8 55.7 36.4 Change in fair value of contingent consideration 80.6 11.9 21.4 13.7 Impairment of intangible assets 22.0 19.9 188.0 19.9 Goodwill impairment charge - - - 198.9 Write down of assets 0.9 8.2 13.0 8.3 Gain on sale of product rights (3.8) (4.5) (40.2) (11.0) Unwind of ViroPharma inventory fair value step-up 33.8 - 72.5 - Other, net 16.2 (1.1) 14.1 (1.1)Movement in deferred taxes 6.8 19.8 25.3 21.2Equity in earnings of equity method investees (3.0) (0.5) (2.4) (0.9)Changes in operating assets and liabilities: Decrease/(increase) in accounts receivable 40.0 (51.3) (37.3) (102.6) Increase/(decrease) in sales deduction accrual 35.2 (4.4) 106.0 40.0 Decrease/(increase) in inventory 6.9 (24.8) (11.7) (53.9) Increase in prepayments and other assets (62.9) (4.7) (137.5) (66.5) Increase/(decrease) in accounts payable and other liabilities 0.4 (67.2) (145.1) (160.7)Returns on investment from joint venture - 3.2 - 3.2Net cash provided by operating activities(A) 834.0 258.6 1,080.1 419.0 CASH FLOWS FROM INVESTING ACTIVITIES: Movements in restricted cash (1.8) 1.7 (11.9) (0.5)Purchases of subsidiary undertakings andbusinesses, net of cash acquired (253.9) (150.6) (4,018.3) (227.8)Purchases of non-current investments (2.8) (3.9) (3.1) (6.7)Purchases of PP&E (3.8) (17.7) (19.1) (65.0)Proceeds from short-term investments 9.5 - 56.3 -Proceeds from disposal of non-currentinvestments - 7.0 8.0 7.7Proceeds received on sale of productrights 4.8 5.5 52.8 10.3Other, net 0.1 - (2.8) 2.7Net cash used in investing activities(B) (247.9) (158.0) (3,938.1) (279.3) Unaudited US GAAP results for the three months and six months to June 30, 2014Consolidated Statements of Cash Flows (continued) 3 months to June 30, 6 months to June 30, 2014 2013 2014 2013 $M $M $M $M CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving line of credit,long term and short term borrowings 140.8 - 2,310.8 -Repayment of revolving line of credit (601.4) - (1,251.6) -Repayment of debt acquired throughbusiness combinations (17.6) - (551.5) -Proceeds from ViroPharma call options - - 346.7 -Payment of dividend (99.6) (79.2) (99.6) (79.2)Payments to acquire shares by theEmployee Benefit Trust ("EBT") - (50.0) - (50.0)Payments to acquire shares under theshare buy-back program - (107.1) - (177.7)Excess tax benefit associated withexercise of stock options 8.6 1.7 29.1 6.1Contingent consideration payments (2.5) (2.8) (10.3) (8.8)Other, net (0.5) (6.8) (0.3) (7.5)Net cash (used in)/provided by financingactivities(C) (572.2) (244.2) 773.3 (317.1)Effect of foreign exchange rate changeson cash and cash equivalents (D) 0.6 (5.2) (1.1) (2.9)Net increase/(decrease) in cash and cashequivalents(A) +(B) +(C) +(D) 14.5 (148.8) (2,085.8) (180.3)Cash and cash equivalents at beginning ofperiod 139.1 1,450.7 2,239.4 1,482.2Cash and cash equivalents at end ofperiod 153.6 1,301.9 153.6 1,301.9 Unaudited US GAAP results for the three months and six months to June 30, 2014 Selected Notes to the Financial Statements (1) Earnings Per Share ("EPS") 3 months to June 30, 6 months to June 30, 2014 2013 2014 2013 $M $M $M $M Income from continuingoperations 528.3 290.9 781.4 571.9Loss from discontinuedoperation (5.2) (32.8) (27.9) (249.0) Numerator for basic EPS 523.1 258.1 753.5 322.9Interest on convertiblebonds, net of tax - 7.5 - 15.1 Numerator for diluted EPS 523.1 265.6 753.5 338.0 Weighted average number ofshares: Millions Millions Millions MillionsBasic(1) 586.4 549.6 585.3 550.5Effect of dilutive shares:Share based awards toemployees(2) 3.9 2.6 5.0 3.3Convertible bonds(3) - 33.8 - 33.7 Diluted 590.3 586.0 590.3 587.5 (1) Excludes shares purchased by the EBT and under the share buy-back programand presented by Shire as treasury stock. (2) Calculated using the treasury stock method. (3) Calculated using the "if converted" method. The share equivalents not included in the calculation of the diluted weightedaverage number of shares are shown below: 3 months to June 30, 6 months to June 30, 2014 2013 2014 2013 Millions Millions Millions MillionsShare based awards toemployees(1) 0.3 11.0 1.2 9.1 (1) Certain stock options have been excluded from the calculationof diluted EPS because (a) their exercise prices exceeded Shire's averageshare price during the calculation period or (b) the required performanceconditions were not satisfied as at the balance sheet date. Unaudited US GAAP results for the three months to June 30, 2014 Selected Notes to the Financial Statements (2) Analysis of revenues 3 months to June 30, 2014 2013 2014 2014 % % of total $M $M change revenueNet product sales:VYVANSE 359.5 300.3 20% 24%ELAPRASE 152.1 149.2 2% 10%LIALDA/MEZAVANT 143.6 137.5 4% 10%REPLAGAL 130.5 114.1 14% 9%CINRYZE 129.9 - n/a 9%INTUNIV 100.0 90.4 11% 7%ADDERALL XR 99.8 112.3 -11% 7%VPRIV 89.7 82.5 9% 6%FIRAZYR 89.0 49.5 80% 6%PENTASA 63.2 73.6 -14% 4%FOSRENOL 46.7 42.1 11% 3%XAGRID 27.9 26.5 5% 2%Other product sales 37.7 29.9 26% 3%Total product sales 1,469.6 1,207.9 22% 98% Royalties:FOSRENOL 9.4 10.8 -13%